The Delhi bench of the Income Tax Appellate Tribunal (ITAT) in ITO v. Media Satellite & Telecom Ltd, held that Assessing Officer cannot make disallowance under Section 40A(2)(b) of the Income Tax Act for excess discount if he failed to prove that the goods dealt by the assessee was saleable without such discount.
The assessee is purchasing goods from a related party and also selling goods partly to the related party. While rejecting the claim for expenditure, the AO held that when the sale and purchase are with related parties and besides incurring the selling expenditure the assessee has also given the discount and thus incurring the loss on sale of games.
The assessee contended that it is with the Merchant Trend which is normal in wholesale trade and the discount is given out of commercial expediency and is allowable as a deduction.
On the first appeal, the Commissioner of Income Tax (Appeals) deleted the order.
Upholding the first appellate order, the Tribunal bench held that the ld AO could not show that the expenditure incurred by the assessee is excessive or unreasonable providing market comparative price with respect to the fair market value of the goods.
“The ld AO could not show that without offering the discount the goods are saleable and are not in accordance with the legitimate needs of the business of the assessee. In absence of these the ld AO could not have applied the provisions of Section 40A(2)(b) of the Act. In view of this we do not find any infirmity in the order of the ld CIT(A) in deleting the above disallowance.”
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