2013 (7) TMI 513 - AT - Income Tax

Addition u/s.40A(2) - unreasonable purchase price paid to its sister concern for purchase of scrap - Held that - CIT(A) observed that AO arrived at the cost of purchases by working out opening stock, generation, sales and the closing stock. While doing so AO adopted the opening stock of scrap at 117.985 MT and arrived at the closing stock at 124.50 MT. However, from the record, the opening stock should have been 5.2 MT as against 117.985 MT adopted by the AO. In case correct opening balance is adopted, the closing stock would have been worked out to 11.715 MT. The same closing stock was found to be accepted in M/s.Aarti Steel Industries for A.Y. 2006-07. In view of the above mistake by AO the cost of purchases worked out to be very high and the AO presumed that the assessee paid excessive and unreasonable price to M/s.Aarti Steel Industries, thus AO s conclusion was on account of wrong assumption of facts and figures which were contrary to the records. Even otherwise, the assessee filed details of rates paid to sister concern and also other outside/unrelated parties according to which rate paid to the sister concern was found reasonable after considering the transportation charges which the assessee would have to incur in case of purchases made from outside. Therefore, the CIT(A) rightly concluded that disallowance made by the AO u/s. 40A(2) was not justified. In favour of assessee.

Issues Involved:
1. Erroneous order of CIT(A) on grounds of law and fact.
2. Deletion of addition made by the Assessing Officer (AO) under Section 40A(2) of the Income Tax Act.
3. Overlooking detailed verification and discrepancies by the AO in the accounts of the assessee and its sister concern.
4. Failure of the assessee to furnish explanation or evidence for discrepancies noticed by the AO.

Detailed Analysis:

Issue 1: Erroneous Order of CIT(A) on Grounds of Law and Fact
The Revenue contended that the order of the CIT(A) was erroneous both in law and fact. The primary argument was that the CIT(A) failed to consider the detailed verification conducted by the AO, which revealed discrepancies in the accounts of the assessee and its sister concern.

Issue 2: Deletion of Addition Made by AO under Section 40A(2)
The AO had made an addition of Rs. 12,58,064/- under Section 40A(2) of the Income Tax Act, citing that the purchase price paid to the sister concern, M/s. Aarti Steel Industries, was unreasonable and inflated. The CIT(A) deleted this addition, which the Revenue opposed. The AO's addition was based on the belief that the purchases from the sister concern were excessive and unreasonable. The AO had verified the records of M/s. Aarti Steel Industries and concluded that the purchase price was inflated.

Issue 3: Overlooking Detailed Verification and Discrepancies by AO
The CIT(A) was criticized for overlooking the detailed verification of seized documents and books of accounts conducted by the AO. The AO had noted discrepancies in the accounts furnished by the assessee and its sister concern, which were not adequately explained by the assessee. The AO's assessment included a detailed analysis of the purchase transactions, including quantities and rates, which led to the conclusion that the purchase expenses were inflated.

Issue 4: Failure to Furnish Explanation or Evidence for Discrepancies
The AO had issued a show-cause notice to the assessee, asking for an explanation regarding the discrepancies in the purchase price. The assessee's explanation, based on entries in the excise register, was not accepted by the AO. The AO found substantial discrepancies in the stock at the time of search and concluded that the figures in the excise register were not reliable. The AO added Rs. 12,58,064/- to the total income under Section 40A(2), citing that the assessee failed to explain the discrepancies.

CIT(A)'s Findings:
The CIT(A) found that the AO had made errors in calculating the opening and closing stock of scrap. The correct opening stock should have been 5.2 MT instead of 117.985 MT, which would result in a closing stock of 11.715 MT. This correct closing stock was accepted in the accounts of M/s. Aarti Steel Industries for the same assessment year. The CIT(A) concluded that the AO's calculations were based on incorrect assumptions, leading to an unjustified addition.

The CIT(A) also noted that the rates paid to the sister concern were reasonable when compared to rates paid to other unrelated parties, especially after considering transportation charges. Therefore, the CIT(A) upheld the deletion of the addition made by the AO under Section 40A(2).

Conclusion:
The appeal filed by the Revenue was dismissed. The CIT(A)'s order to delete the addition of Rs. 12,58,064/- under Section 40A(2) was upheld, as the AO's conclusions were based on incorrect assumptions and calculations. The CIT(A) provided reasoned findings that the purchase price paid to the sister concern was reasonable and justified.

Pronouncement:
The judgment was pronounced in the open court on May 16, 2013.

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