2013 (9) TMI 77 - AT - Income Tax

Rejection of books of accounts - Sale made at lesser price - Held that - The primary condition for rejecting the book results as laid down under section 145 of the Income-tax Act, 1961 (the Act) is that the Assessing Officer should be satisfied that the books of account maintained by the assessee are not complete and correct. As can be seen from the findings given by the Assessing Officer in the order of assessment, the Assessing Officer has merely proceeded on a surmise that the profits of the assessee are sought to be reduced by selling its products to M/s. Pragathi Automation P. Ltd., the assessee s sister-concern at a lesser price. There is no instance of falsity or incompleteness of the books of account pointed out by the Assessing Officer in the order of assessment. The books of account reflect the true state of affairs of the assessee. The fact that the assessee has sold its products to its sister-concerns at a price lesser than the price at which the same product is sold to the third parties, in our opinion, would not be a sufficient ground to come to a conclusion that the books of account of the assessee are not complete and correct. There is no evidence brought on record that over and above the price shown in the books of account, the assessee received something more from M/s. Pragathi Automation P. Ltd. As rightly contended on behalf of the assessee it is for the businessman to decide the price at which he has to sell its products to its customers. The law is well-settled that the Revenue cannot insist on the way in which businessmen should conduct his business. The Revenue cannot compel a businessman to sell its products at a particular price, so that the assessee derives maximum profit. There is one allegation by the Assessing Officer in the order of assessment (point j) that the sale of raw materials, blackening sales and labour charges sales not tallying with the books and details furnished by the assessee before the Assessing Officer in the course of assessment proceedings. This is a very vague allegation. The Assessing Officer has ultimately concluded that there is no clarity in figures submitted by the assessee and the books of account - The Commissioner of Income-tax (Appeals) found that M/s. Pragathi Automation P. Ltd. was not claiming any tax exemption which necessitates the assessee shifting profits to M/s. Pragathi Automation P. Ltd. In the circumstances, when there is no evidence regarding incompleteness and incorrectness of books of account or facts sufficient to come to a conclusion that the assessee has attempted to defraud the Revenue, the conclusion drawn by the Commissioner of Income-tax (Appeals) are correct and do not call for any interference. Consequently, the appeal filed by the Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition to net profit by the Commissioner of Income-tax (Appeals).
2. Rejection of books of account by the Assessing Officer.
3. Estimation of profits by the Assessing Officer.
4. Validity of differential pricing between related and unrelated parties.

Detailed Analysis:

1. Deletion of Addition to Net Profit by the Commissioner of Income-tax (Appeals):
The Revenue contested the deletion of Rs. 54,39,297 from the net profit declared by the assessee by the Commissioner of Income-tax (Appeals). The Assessing Officer (AO) had rejected the books of account and estimated profits, arguing that the assessee sold products to its sister-concern, Pragathi Automation P. Ltd. (PAP), at prices lower than the cost. The Commissioner of Income-tax (Appeals) found that the differential pricing was in line with normal commercial practices, where bulk buyers receive better pricing. The Commissioner concluded that the AO's rejection of the books and profit estimation was unwarranted, as there was no evidence of suppressed sales or realization of unaccounted income.

2. Rejection of Books of Account by the Assessing Officer:
The AO rejected the books of account on the grounds that the assessee sold products to PAP at prices lower than those charged to third parties, suggesting an attempt to shift profits. The AO also noted discrepancies in the figures for raw material sales, blackening sales, and labor charges. The Commissioner of Income-tax (Appeals) and the Tribunal found that the AO's rejection was based on assumptions and lacked specific evidence of falsity or incompleteness in the books. The Tribunal emphasized that the AO did not provide sufficient grounds to conclude that the books were incorrect or incomplete.

3. Estimation of Profits by the Assessing Officer:
The AO estimated the assessee's profit at 11.96%, based on cost calculations and the profit percentage of PAP. The assessee argued that the AO overstepped by dictating the pricing strategy, which is a business decision. The Commissioner of Income-tax (Appeals) agreed, noting that the AO's action was based on suspicion without concrete evidence. The Tribunal upheld this view, stating that the AO's profit estimation was not justified and lacked a basis in the actual business practices and market dynamics.

4. Validity of Differential Pricing Between Related and Unrelated Parties:
The AO questioned the differential pricing, suspecting it aimed to divert profits to PAP. The assessee defended the pricing strategy as a standard business practice, offering higher discounts for bulk orders. The Commissioner of Income-tax (Appeals) found this explanation reasonable and aligned with industry norms. The Tribunal concurred, noting that the AO cannot dictate business pricing strategies and that the differential pricing did not imply incomplete or incorrect books. The Tribunal also highlighted that there was no evidence of tax evasion or profit shifting, as both companies were resident tax-paying entities.

Conclusion:
The Tribunal dismissed the Revenue's appeal, agreeing with the Commissioner of Income-tax (Appeals) that the AO's rejection of the books and profit estimation was unjustified. The Tribunal emphasized the lack of evidence for falsity or incompleteness in the books and upheld the legitimacy of the assessee's pricing strategy. The decision underscores that business decisions on pricing are beyond the AO's purview unless there is clear evidence of tax evasion or fraudulent intent.