2004 (9) TMI 590 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of an addition of Rs. 1,94,622 on account of the trading account under section 145 of the IT Act.
2. Deletion of an addition of Rs. 11,05,000 under section 40A(2)(b) of the IT Act, 1961, on account of payment made to sister concerns.

Issue-wise Detailed Analysis:

1. Deletion of an addition of Rs. 1,94,622 on account of the trading account under section 145 of the IT Act:

The Revenue challenged the deletion of Rs. 1,94,622 by the CIT(A). The assessee, a firm engaged in manufacturing and fabrication, showed a significant drop in the gross profit rate for the assessment year 1995-96 compared to previous years. The Assessing Officer (AO) scrutinized the fabrication expenses and found discrepancies, including high expenses in the last quarter and untraceable fabricators. The AO rejected the books of account under section 145(2), citing non-genuine and fictitious expenses, suppression of sales, and incomplete records.

The CIT(A) upheld the rejection of the books but allowed a relief of Rs. 1,94,622, considering expenses not allowed by the AO and other income not considered. The Tribunal found the CIT(A)'s decision justified, noting that once the gross profit was worked out, related expenses should be deducted to compute net income. Thus, the deletion of Rs. 1,94,622 was upheld, and the Revenue's ground was dismissed.

2. Deletion of an addition of Rs. 11,05,000 under section 40A(2)(b) of the IT Act, 1961, on account of payment made to sister concerns:

The second issue involved the deletion of Rs. 11,05,000 related to the sale of solar systems to a sister concern at a loss. The AO disallowed the loss, citing it as a colourable device to reduce profit by understating the sale price. The CIT(A) deleted this addition, reasoning that since an addition was already made based on estimated gross profit, no separate addition for the solar system sale was warranted.

The Tribunal disagreed with the CIT(A), emphasizing that the sale of solar equipment was separately analyzed by the AO and involved deliberate profit diversion through understated sale prices. The Tribunal upheld the addition of Rs. 11,05,000, rejecting the CIT(A)'s reasoning and confirming that the assessee adopted a colourable device to reduce profits. The Tribunal also clarified that the applicability of section 40A(2) was not the primary issue; rather, it was the deliberate profit diversion through understated sales.

Conclusion:

The Tribunal upheld the CIT(A)'s decision on the deletion of Rs. 1,94,622 but reversed the CIT(A)'s decision on the deletion of Rs. 11,05,000. The appeal of the Revenue was partly allowed, sustaining the addition of Rs. 11,05,000 related to the sale of solar systems to the sister concern.