2016 (4) TMI 1092 - AT - Income Tax

Disallowance under sec. 40A(2)(b) - whether assessee had unreasonably paid higher amount regarding purchase of guar gum from related parties? - Held that - Sec. 40A(2)(a) provides that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. We find that no material was brought on record by the Assessing Officer to show that on the date of purchases made by the assessee from the sister concern, the market price of the goods was lower than the amount paid by the assessee to its sister concerns. In absence of the same, we find that the addition made has righty deleted by the Commissioner of Income Tax (Appeals) and calls no interference from us. - Decided against revenue Disallowance of trading loss - Held that - No material was brought on record by the Departmental Representative to controvert the finding of the Commissioner of Income Tax (Appeals) that the Assessing Officer has accepted the profit of ₹ 7,96,81,577/- in respect of manufacturing activity and at the same time, has disallowed loss in respect of traded goods without bringing on record any material. All the purchases & sales were recorded in terms of quantity and value and were supported by bills and vouchers and no adverse material or evidence was noticed to show that the assessee firm has inflated any sales or purchases. Further, all the related parties, covered under sec. 40A(2)(b) are assessed to tax at the maximum rate of tax as that of assessee and as such the very presumption for diversion of income is erroneous and as such the addition made by working trading loss at ₹ 2,80,09,637/- is erroneous and is deleted. Therefore, we find no good reason to interfere with the order of the Commissioner of Income Tax (Appeals)- Decided against revenue Deduction under sec. 80IA without setting off of unabsorbed depreciation of eligible unit - Held that - The disallowance of deduction under sec. 80IA was made by the Assessing Officer in order to keep the issue alive as the department did not accept the order of the Tribunal and has filed appeal there against in the High Court. She admitted that the issue was covered in favour of the assessee by the order of this Tribunal in assessee s own case for the Assessment Year 2009-10.)- Decided against revenue

Summary

Issues Involved:
1. Deletion of disallowance under Section 40A(2)(b) for purchases from related parties.
2. Deletion of disallowance of trading loss in respect of transactions with related parties.
3. Allowing deduction under Section 80IA without setting off unabsorbed depreciation.

Detailed Analysis:

1. Deletion of Disallowance under Section 40A(2)(b) for Purchases from Related Parties:

The Revenue's appeal challenged the deletion of a disallowance of Rs. 82,61,424 made by the Assessing Officer (AO) under Section 40A(2)(b). The AO had concluded that the assessee paid higher amounts for guar gum purchased from related parties compared to market rates. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting that the AO did not provide evidence that the fair market value of the goods was lower than the prices paid to related parties. The CIT(A) emphasized that the AO should consider the quality of the material and market fluctuations. The CIT(A) cited several judicial precedents, including the Allahabad High Court's ruling in Abbas Wazir (P) Ltd. vs. CIT, which stated that the reasonableness of expenditure should be judged from a businessman's perspective. The Tribunal upheld the CIT(A)'s decision, finding no specific error in the CIT(A)'s order and noting the absence of evidence from the AO to show that the market price was lower than the amount paid.

2. Deletion of Disallowance of Trading Loss in Respect of Transactions with Related Parties:

The Revenue contested the deletion of a trading loss disallowance of Rs. 2,80,09,637 made by the AO. The AO had inferred that the trading loss was due to sales to related parties. The CIT(A) deleted the disallowance, noting that the assessee maintained day-to-day books of account and stock registers, which were accepted by the AO. The CIT(A) observed that the AO had accepted the profit from manufacturing activities but disallowed the loss from traded goods without any material evidence. The CIT(A) further noted that all related parties were assessed to tax at the maximum rate, negating the presumption of income diversion. The Tribunal upheld the CIT(A)'s decision, finding no material evidence from the Department to counter the CIT(A)'s findings.

3. Allowing Deduction under Section 80IA without Setting Off Unabsorbed Depreciation:

The Revenue appealed against the CIT(A)'s decision to allow a deduction under Section 80IA without setting off unabsorbed depreciation. The AO had disallowed the deduction, arguing that unabsorbed depreciation should first be set off against the profit of the eligible business. The CIT(A) allowed the deduction, citing judicial precedents, including CIT vs. Emerald Jewel Industries Pvt. Ltd., which held that losses or deductions already set off against previous years' income should not be reopened for computing current income under Section 80IA. The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered in favor of the assessee by the Tribunal's earlier order in the assessee's own case for Assessment Year 2009-10. The Departmental Representative admitted that the issue was covered by the Tribunal's earlier order, and the ground of appeal was dismissed.

Conclusion:

The Tribunal dismissed the Revenue's appeal on all grounds, upholding the CIT(A)'s decisions to delete the disallowances under Sections 40A(2)(b) and for trading loss, and to allow the deduction under Section 80IA without setting off unabsorbed depreciation. The Tribunal found no specific errors or material evidence from the Department to counter the CIT(A)'s findings.