2012 (12) TMI 366 - AT - Income Tax

Disallowance u/s 40A(2)(b) Excess payment to related parties - Purchase of goods at higher prices then market price Held that - As the AO failed to consider that the purchases from related parties were of finished and semi-finished leather and whereas, the purchases from unrelated concerns were of raw leather. Moreover, the types and quality of skin purchased were also different. Without going into these details, the AO merely considered the average rate of purchases and reached a conclusion that the prices paid to the related parties were excessive for which there is no basis. Delete the addition. Appeal decides in favour of assessee

Summary

Issues:
- Disallowance under section 40A(2) towards differences in price of leather purchased from related parties and third parties.
- Violation of provisions of Rule 46A regarding examination of fresh evidence.

Issue 1: Disallowance under section 40A(2) towards differences in price of leather purchased from related parties and third parties:

The Revenue appealed against the Commissioner of Income Tax (Appeals) order deleting the disallowance made by the Assessing Officer under section 40A(2) for the assessment year 2008-09. The Assessing Officer disallowed Rs. 2,12,77,744/- as the cost of leather purchased from related parties was deemed excessive compared to purchases from unrelated parties. However, the Commissioner of Income Tax (Appeals) found no evidence of excess payment to related parties and deleted the disallowance. The Commissioner noted that the Assessing Officer failed to consider crucial factors such as the type and quality of leather purchased, leading to an incorrect conclusion. The Commissioner reviewed detailed comparisons of prices paid to related and unrelated parties for various types of leather, showing that the rates fell within a reasonable range. The Appellate Tribunal upheld the Commissioner's decision, emphasizing that the Assessing Officer's approach was flawed and there was no basis to conclude excessive payments to related parties. Thus, the disallowance under section 40A(2)(b) was deemed unjustified, and the Revenue's appeal was dismissed.

Issue 2: Violation of provisions of Rule 46A regarding examination of fresh evidence:

The Revenue contended that the Commissioner of Income Tax (Appeals) violated Rule 46A by not providing the Assessing Officer an opportunity to examine new evidence submitted by the assessee. However, the assessee argued that they had indeed filed a petition under Rule 46A, submitting invoices for leather purchases from related and unrelated parties. The Commissioner forwarded this information to the Assessing Officer, who submitted a remand report. The assessee maintained that all relevant details were shared, and the Commissioner's decision was based on a thorough review of the remand report and furnished information. The Appellate Tribunal found no violation of Rule 46A, as the Commissioner had appropriately involved the Assessing Officer in the examination of the fresh evidence. Therefore, the Tribunal upheld the Commissioner's decision, dismissing the Revenue's appeal on this ground as well.

This comprehensive analysis of the legal judgment highlights the key issues, arguments presented by both parties, decisions made by the lower authorities, and the final judgment by the Appellate Tribunal.