Concessional sales characterisation: discount cannot be treated as company income without purchaser records, so addition rejected.

On whether a concessional pricing element could be taxed as the company's income, the analysis identifies three legal characterisations: sham sales requiring turnover to be computed on benamidar realisations; genuine sales with subsequent misappropriation where income accrues to the company but needs proof from purchasers' accounts; and bona fide concessional sales to related parties in breach of fiduciary duty where the benefit accrues to purchasers, not the company. The Department failed to investigate purchasers' books and therefore could not lawfully treat the concessional element as the company's income; the addition was unjustified on the found facts.

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Issues: Whether, on the facts and circumstances of the case, the addition of Rs. 1,46,000 to the assessable income of the company for the relevant assessment year was correct.

Analysis: The books showed sales at concessional prices to parties closely connected with management and the Revenue rejected the assessee's oral-contracts explanation as not bona fide. Three legal possibilities arise: (i) sham sales where title did not pass and turnover for tax purposes must be computed on the basis of prices realised by the benamidars requiring examination of purchasers' books; (ii) sales at market rates with subsequent misappropriation by management, in which case the income accrued to the company and would be taxable irrespective of later misappropriation but would require proof in purchasers' books; and (iii) genuine concessional sales by the company to related parties in breach of fiduciary duty, where the benefit received by the purchasers is not the company's income. The authorities proceeded on the third view without conducting the investigations necessary to establish the first or second alternatives. Mere finding of want of bona fides does not determine which of these legal characterisations applies; without evidence from purchasers' accounts the Department could not legitimately treat the concessional element as the company's income.

Conclusion: The addition of Rs. 1,46,000 to the assessable income was unjustified. The correct view is that the transactions, as found, amounted to concessional sales in breach of fiduciary duty and did not convert the concessional element into the company's income. The reference is answered in favour of the assessee.

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