2014 (12) TMI 1353 - AT - Income Tax

Addition on account of suppressed sales - GP on the suppressed sales - HELD THAT - The assessee had maintained regular books of account and the AO had not come across any unaccounted purchase or suppressed sales. Only on the basis of power consumption no addition could be made or sustained. It is a known fact that several factors affect the consumption of electricity-like loss of heat poor quality of raw material inputs poor workmanship/supervisory skills presence of moisture contents and fluctuation in the electricity supply. Most of the above factors are beyond management s control and explanation cannot be pinpointed to any single reason. It is also a fact that the assessee was not manufacturing one item. Therefore arithmetical formula should not have been applied for arriving at a conclusion. In our opinion the FAA was fully justified in holding that the assessee had explained the variation in power consumption citing cogent reasons. The cases referred by the AR also support the views taken by us - FAA does not suffer from any legal infirmity. Upholding his order we decide first ground of appeal against the AO. Disallowance u/s. 40A(2)(b) - HELD THAT - Selective study of the transactions in the year concerned is not appropriate for arriving at a definite conclusion. He should have considered the average price for the whole year before making the disallowance. FAA has given a categorical finding of fact that in certain months the average prices of goods/material purchased from the sister concern of the assessee was less or equal to the market rate. We have also taken note of the fact that the assessee has purchased the goods on credit from its sister concern. AO has not brought on record comparable cases to justify the disallowance. In our opinion the provisions of section 40A(2)(b) can be invoked in special circumstances where considering the market rate of goods/services the AO arrives at a conclusion that the price charged by the assessee was at variance to the market rate. In the case before us the AO has not brought on record any facts which prove that he had undertaken such an exercise. In the present case no evidence whatsoever was brought on record by the AO to prove that the justification assigned for making payment to the sister concern was false and the same was not proved to have been made for extra commercial considerations. For all the reasons mentioned above the impugned disallowance made on mere hypothetical estimations cannot be endorsed

Summary

Issues:
1. Addition of suppressed sales
2. Deletion of addition under section 40A(2)(b) of the IT Act, 1961

Analysis:

Issue 1: Addition of Suppressed Sales
The Assessing Officer (AO) raised grounds of appeal challenging the deletion of an addition of Rs. 7,27,874 made on account of suppressed sales. The AO noted a variation in power consumption and production of MS Ingots by the assessee, resulting in the addition. However, the First Appellate Authority (FAA) held that the AO's addition was unsubstantiated and made on hypothetical calculations. The FAA emphasized that the assessee maintained regular books of account, which were checked by Central Excise authorities, and no suppression in sales or purchases was detected. The FAA also cited legal precedents where disparity in electrical consumption alone cannot be the basis for rejecting accounts. The ITAT upheld the FAA's decision, stating that without positive evidence of additional production, no addition could be made solely based on power consumption variations.

Issue 2: Deletion of Addition under Section 40A(2)(b)
The AO disallowed Rs. 3,55,999 under section 40A(2)(b) of the Act, alleging that the assessee purchased goods from a sister concern at higher prices than the average market rate. However, the FAA found that the transactions were genuine, and the purchases were at par with prevailing market rates. The FAA concluded that the disallowance was made on presumptions and notional basis, lacking substantiating evidence. During the appeal, the ITAT noted that the AO's selective study of transactions for a few months was inappropriate and should have considered the average price for the entire year. The ITAT emphasized that the AO failed to justify the disallowance with comparable cases or evidence of price variance. Ultimately, the ITAT upheld the FAA's decision, ruling against the AO's disallowance under section 40A(2)(b).

In conclusion, the ITAT dismissed the appeal filed by the AO, upholding the decisions of the FAA on both issues.