2003 (1) TMI 62 - HC - Income Tax

Whether on the facts and in the circumstances of the case the Income tax Appellate Tribunal was justified in law in deleting the addition of Rs. 12, 50, 000 made by the Assessing Officer under section 40(A)(2)(b) of the Income-tax Act 1961 ? - We accordingly set aside the order of the Tribunal as well as the order passed by the Commissioner of Income-tax (Appeals) and the original assessment order and restore the matter to the file of the Assessing Officer with a direction to pass appropriate assessment order pertaining to disallowance under section 40A(2)(b) of the Income-tax Act in accordance with law

Summary

Issues:
- Interpretation of section 40A(2)(b) of the Income-tax Act, 1961
- Justification of deletion of addition under section 40A(2)(b)
- Burden of proof on the assessee regarding excessive or unreasonable pricing
- Requirement of proper evidence in cases of transactions not at arm's length

Interpretation of section 40A(2)(b) of the Income-tax Act, 1961:
The case involved a tax appeal under section 260A of the Income-tax Act against an order by the Income-tax Appellate Tribunal regarding the addition of Rs. 12,50,000 made by the Assessing Officer under section 40A(2)(b) of the Act. The issue revolved around whether the Tribunal was justified in deleting the addition. The assessee, engaged in the diamond business, had imported rough diamonds from a substantially interested concern. The Assessing Officer disallowed the amount, citing excessive pricing compared to diamonds imported from other concerns.

Justification of deletion of addition under section 40A(2)(b):
The Commissioner of Income-tax (Appeals) and the Tribunal deleted the disallowance, following their earlier decisions without thoroughly examining whether the assessee proved that the price paid was not excessive. The Tribunal emphasized the lack of evidence proving the veracity of certificates provided by the assessee. The burden was on the assessee to establish that the price paid was reasonable, which the assessee failed to do adequately.

Burden of proof on the assessee regarding excessive or unreasonable pricing:
The court highlighted that the assessee did not file an affidavit or provide evidence to establish that the price paid was fair market value or in line with international prices. The burden of proof shifted to the assessee in cases under section 40A(2)(b), especially when dealing with transactions not at arm's length. The court emphasized the need for proper evidence and cross-examination to support the pricing.

Requirement of proper evidence in cases of transactions not at arm's length:
Given the intricacies of transactions with a sister concern located abroad, the court stressed the importance of explaining such transactions thoroughly. The court reframed the question to focus on whether the assessee had discharged its burden by providing cogent evidence that the pricing was not excessive. As the lower authorities did not adequately address this aspect, the court set aside their orders and remitted the matter back to the Assessing Officer for a fresh decision. The court outlined specific steps for the Assessing Officer to follow in reevaluating the disallowance under section 40A(2)(b).

This detailed analysis of the judgment provides insights into the interpretation of section 40A(2)(b), the burden of proof on the assessee, and the importance of proper evidence in cases involving transactions not at arm's length.