1. The questions referred in both these cases are identical and runs as follows:
'Whether, on the facts and in the circumstances of the case, the provisions of section 40A of the Income-tax Act, 1961, can be invoked to add back the discount allowed by the assessee to M/s. Somasundaram and Brothers?'
2. It is enough if we set out the facts relating to T.C. No. 28 of 1976 as in the relevant appellate order giving rise to the other reference, the Tribunal merely followed the appellate order annexed in T.C. No. 28 of 1976.
3. The assessee is a registered firm carrying on the business of manufacture and sale of silk cloth at Arni. There were five partners in this firm, namely, (i) Thiagarajan, (ii) Jagadeesan, (iii) Balasundaram, (iv) Alagesan and (v) Smt. Pattammal, each having an equal share. The first four are bothers and Srat. Pattammal is their mother. There was another firm known as M/s. SomasUndaram and Brothers at Ami consisting of Alagesan, one of the partners of the assessee-firm, one Manivannan and five minor sons of Jagadeesan, Thiagarajan and Balasundaram. The minors have been admitted to the benefits of the partnership. The assessee-firm had a substantial turnover in the sales of silk sarees. One of its customers was Somasunda-ram and Brothers. In the bills raised on Somasundaram & Brothers, the purchasing firm, after setting out the sale price, a discount of 6% was given and the actual price payable was only the net amount. This net amount was carried over to the sales account. As the sales account showed only the net figure, the total amount of discount in the several bills raised on Somasundaram & Brothers did not find a place either in the trading account or in the profit and loss account of the assessee-firm. In completing the assessment of the assessee-firm for the assessment year 1971-72, the year relevant for T.C. No. 28 of 1976, the ITO considered that the sum of Rs. 34,546 was the discount allowed to Somasundaram & Brothers and that it should be disallowed because of the close connection between the partners of the assessee-firm and the partners of the other firm. The assessee-claimed that by reason of the sale made to Somasundaram & Brothers it was able to effect savings on show room, salesmen's salary, etc. This claim was not accepted by the ITO. He found that there were savings only to the extent of Rs. 1,800 as a result of the sales to Somasundaram & Brothers as against the discount of Rs. 34,546. The assessee appealed to the AAC. He found that the sales to Somasundaram & Brothers were to the tune of more than Rs. 5 lakhs, that the rebate given to the firm was only a little higher than what had been granted to others and that the time for clearing the bills was also a little larger in this case than in the other cases. The Assistant Commissioner was of the opinion that considering the off-take by Somasundaram & Brothers, even the rebate of 9% could not be described as unreasonable or excessive. He, therefore, directed the allowance oi the claim made by the assessee. The Tribunal on appeal at the instance of the ITO came to the conclusion that the assessee was charged only on the basis of the net price realised from Somasundaram & Brothers and that the assumption that the entire sale proceeds were taxable subject to an allowance by way of a deduction of the discount was incorrect. It was, therefore, held that the provisions of Section 40A did not at all come into the picture in such a case. The result was that the order of the AAC was confirmed. It is this order which has given rise to the question extracted above. As men-tioned already, the facts relating to the assessment year 1972-73, relevant to T.C. No. 397 of 1976 are identical and do not need to be reproduced here.
4. Sub-section (2)(a) of Section 40A is the provision invoked here which runs as follows :
' Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this Sub-section, and the Income-tax Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction :......'
5. Clause (b) of Section 40A(2) refers to dealings between a firm and a partner, etc., and in respect of such dealings, the application of Section 40A(2)(a) would have to be considered. In the present case, having regard to the constitution of the two firms, it is clear that there is some kind of connection between the two firms and the partners of the assessee-firm are closely related to the partners of the other firm. Therefore, we can take it that Section 40A(2)(a)(2Xb) would apply here.
6. Section 40A(2)(a) contemplates an assessee incurring any expenditure in respect of which payment has been or is to be made to any person referred to in Clause (b) of Section 40A(2). If there were any such expenditure, and if the ITO was of opinion that such expenditure was excessive or unreasonable, then so much of the expenditure as was considered by him as exces-sive or unreasonable was not to be allowed as deduction. We have, therefore, to consider whether there was any expenditure in the present case. It is in this context that we have to refer to the findings of the Appellate Tribunal in its order.
7. In para. 7 of its order, the Tribunal has stated :
' What happened actually was that the assessee sold the goods to Somasundaram and Brothers at a discount. This means that so far as the sales to Somasundaram & Brothers were concerned, the assessee charged a lower sale rate in effect. '
8. Again, in para. 8, the Tribunal found :
' The present case is one where a certain portion of the normal sale price is given up, there is nothing which is paid out or away by the assessee from the sale price or the income that had accrued to it.'
9. The Tribunal has also referred to a decision of this court in Sri Rama-linga Choodambikai Mills Ltd. v. CIT : 28ITR952(Mad) . In that case it was pointed out that in the absence of evidence to show that either the sales were sham transactions or that the market prices were in fact not paid by the purchasers, the mere fact that the goods were sold at a concessional rate to benefit the purchasers at the expertse of the company would not entitle the income-tax department to assess the difference between the market price and the price paid by the purchasers as profit of the seller. The Tribunal has pointed out that that was exactly what happened in the present case. In other words, the Tribunal's finding on the facts was that the assessee had charged only the net price and that there was no discount or rebate given to the purchasers. The bona fides of the transaction are not in dispute. In these circumstances and in view of the finding of the Tribunal as to what happened between the seller and the purchaser in the present case, it has to be held that there was no expenditure which could be disallowed by reference to Section 40A(2)(a). In this view, it is unnecessary to go into the concept of commission or rebate discussed in Harihar Cotton Pressing Factory v. CIT : 39ITR594(Bom) . The result is that the question referred to this court in each of the years is answered in the negative and against the revenue. The assessee will be entitled to its costs. Counsel's fee Rs. 500 one set.