IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN WEDNESDAY, THE 28TH OCTOBER 2009 / 6TH KARTHIKA 1931 ITA.No. 103 of 2009() --------------------- ITA.787/COCH/2005 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT ----------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): --------------- EASTERN CONDIMENTS (P) LTD., EASTERN VALLEY, ADIMALI. ADV. SRI.P.BALAKRISHNAN (E) FOR R1 THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 28/10/2009, ALONG WITH ITA NO. 132 OF 2009 ITA NO. 196 OF 2009 AND ITA NO. 272 OF 2009 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C .N. RAMACHANDRAN NAIR & V.K. MOHANAN, JJ. -------------------------------------------------- I.T.A. Nos. 103,132,196 & 272 OF 2009 -------------------------------------------- Dated this the 28th day of October, 2009 JUDGMENT Ramachandran Nair, J. Even though several questions are raised by the revenue in the connected appeals filed against the very same assessee for the assessment years 2001-02 to 2004-05, we notice that there is only one question that could be treated as a substantial question of law, which is reframed by us as follows: Whether on the facts and in the circumstances of the case, was the Tribunal justified in cancelling the disallowance of excess over 5% discount given by the assessee to it's Managing Director towards sales commission? We have heard standing counsel appearing for the appellants and Sri. P. Balakrishnan, counsel appearing for the respondent-assessee. 2. The assessee-company is part of a group engaged in manufacture and export of spices, spices powder, curry powder, etc., under the common brand name "Eastern". Export is done by the proprietorship concern of the Managing Director which is located at 2 Okkal in Ernakulam Dist. whereas the assessee's manufacturing and packing unit is at Adimaly in Idukki Dist. Normal commission paid by the assessee for marketing it's products is 5%. However, for the sales effected to the proprietorship concern of the Managing Director the assessee paid higher discount of 10% which is double the normal rate. The Assessing Officer noticed that the purpose is to evade payment of tax in respect of 5% because the Managing Director's concern being engaged in export is entitled to deduction under Section 80HHC of the I.T. Act. Even though the assessee put forward a claim that sales to Managing Director was in bulk and the packing was done by the Managing Director, the assessing officer noticed that during assessment year 2001-02 export sales were made by the Managing Director from the very beginning of the previous year 2000-01 and he purchased certain machinery for packing only in December, 2000. Further it was established by him in the assessment order that goods immediately on receipt from the assessee were exported by the Managing Director. The assessing officer based on these findings disallowed 5% discount which was confirmed in first appeal. However, on second appeal, the 3 Tribunal allowed the appeal for the assessment year 2001-02 and for the remaining years also, following the said order, the Tribunal allowed the claim, against which these appeals are filed by the revenue. 3. On going through the Tribunal's order and after hearing both sides, we are unable to sustain the order of the Tribunal because the Tribunal assumed the claim of the assessee that the additional discount is attributable to the packing cost incurred by the Managing Director as true. In order to prove that the Managing Director was left with packing for export and sale of the commodity locally, it was for the assessee to prove that sales were in bulk quantity and the Managing Director was engaged in packing. In this case, the finding by the assessing officer is that the Managing Director purchased certain machinery only in December, 2000 whereas goods purchased from the respondent were from April, 2000 onwards. It is the further finding of the assessing officer that the goods while in transit from assessee to the Managing Director straightaway went to the export stream which is impossible unless the goods were in packed conditions. It is seen from the order of the Tribunal that Tribunal has not cared to consider any of 4 these findings, nor was there any finding by the Tribunal that the Managing Director maintained even a facility for packing. We notice that the Tribunal assumed certain facts which were contrary to the facts found by the assessing officer and confirmed in first appeal. We therefore allow the appeals by vacating the orders of the Tribunal. However, we feel that disallowance cannot be restored as such because the Managing Director was stated to be engaged in packing at least for subsequent years and if additional discount of 5% is attributable to packing cost incurred, certainly disallowance should not be made at least to the extent made by the assessing officer. It is for the assessee in co-ordination with the Managing Director to prove that sales were of bulk quantity and the export was made after sufficient time lag within which time, the Managing Director packed the commodity for export and for local sale. In fact, the accounts of the Managing Director would contain the employees' strength, purchase of packing materials, receipt of goods, etc., and the documents pertaining to despatch of goods for export and local sale which will clearly show whether Managing Director was engaged in packing. We therefore allow the 5 appeal by setting aside the order of the Income Tax Appellate Tribunal and remand the assessments to the assessing officer for giving an opportunity to the assessee as well as to the Managing Director to prove that packing was done by the Managing Director to justify additional discount granted and if the assessee fails to do so, disallowance can be made in the assessment. 4. As already stated, other issues pertaining to disallowance of small items of expenditure like vehicle expenditure, advertisement charges, do not give rise to any substantial question of law. We therefore decline to entertain the appeals on these issues. Appeals are allowed in part as above. (C.N.RAMACHANDRAN NAIR) Judge. (V.K. MOHANAN) Judge. kk 6