2020 (2) TMI 571 - AT - Income Tax

Rejection of books u/s 145 - Addition on account of alleged under-invoicing of sales made - HELD THAT - The assessee was buying the milk powder at an average cost price of Rs. 168 to 173/- per kg. on various dates from GCMMF and selling the same at a price around Rs. 173/- to Rs. 175/- to customers barring JDB to whom assessee sold the product at rate of Rs. 135/- per kg. thereby suffering a loss of Rs. 38.40/- per kg. Question would arise why the assessee was suffering loss only in one case whereas in all other cases it was getting profit. The explanation of the assessee of alleged commitment to sell the products at lower price was not substantiated and hence not acceptable. CIT(A) has also observed that the said JDB is not even a related party and there are no other transactions with them. Therefore the Revenue authorities are rightly held that books of accounts did not reflect true picture and accordingly rejected under section 145. There is no evidence or explanation as to why it has sold the items less than the purchase price by making loss of Rs. 38.40 per kg which resulted in under invoicing sale by Rs. 20, 74, 752/-. Even before me also the assessee is unable to substantiate its claim with any evidence or valid explanation. Disallowance of interest of total bank interest - HELD THAT - No infirmity in the orders of the Revenue authorities on this issue because both have concurrently found that the assessee does not have sufficient interest free funds of his own to advance the sister concern at the lesser rate. The claim of the assessee was that loan was advanced to the party from surplus and/or accrual does not carry any force because no documentary evidence or material was furnished by the assessee even before me. It is pertinent to note that on one hand the assessee is opting to suffer loss due to sales at much lesser rate and incurring heavy interest expenditure to the extent for loans taken from bank at the rate of 10.72% on the other hand the assessee is advancing loan to sister concern at the rate of 2%. Therefore the disallowance made by the Assessing Officer and sustained by the Ld. CIT(A) is justified.

Summary

Issues Involved:
1. Rejection of books under section 145 of the Income Tax Act.
2. Addition of Rs. 21,93,618/- on account of alleged under-invoicing of sales.
3. Disallowance of interest of Rs. 5,58,821/- out of total bank interest of Rs. 15,23,823/-.

Issue-wise Detailed Analysis:

1. Rejection of Books under Section 145 of the Income Tax Act:
The assessee, a trader in milk powder and milk products, filed a return of income for the Assessment Year 2013-14, which was selected for scrutiny assessment. The Assessing Officer (AO) noticed discrepancies in the sales transactions, particularly with M/s. Jai Durga Bhandar (JDB), where the assessee sold milk powder at a loss of Rs. 38.40 per kg. The AO rejected the books of accounts under section 145, concluding that the accounts did not represent a correct picture. The assessee's explanation of committing to sell at a lower price due to anticipated price fluctuations was not supported by documentary evidence. The Tribunal upheld the rejection of the books, noting that the assessee was incurring losses only in transactions with JDB, indicating under-invoicing.

2. Addition of Rs. 21,93,618/- on Account of Alleged Under-Invoicing of Sales:
The AO added Rs. 21,93,618/- to the assessee's income, considering the difference between the sale price to JDB and the price at which the same product was sold to other parties. The AO calculated this addition based on a margin of Rs. 40.60 per kg for 54,030 kg of milk powder. The CIT(A) and the Tribunal upheld this addition, rejecting the assessee's argument of a business commitment to sell at a lower price. The Tribunal emphasized that the assessee failed to substantiate the claim of commitment with any evidence or valid explanation, and the sales to JDB were not justified.

3. Disallowance of Interest of Rs. 5,58,821/- out of Total Bank Interest of Rs. 15,23,823/-:
The AO disallowed Rs. 5,58,821/- out of the total bank interest, noting that the assessee had diverted borrowed funds to a related party, M/s. Prakash Associates, at a lower interest rate of 2%. The AO and the CIT(A) found that the assessee did not have sufficient interest-free funds to advance to the sister concern and that the explanation provided was not satisfactory. The Tribunal upheld the disallowance, agreeing that the assessee failed to establish a nexus between the interest paid on bank loans and the interest income earned. The Tribunal found no infirmity in the orders of the Revenue authorities on this issue.

Conclusion:
The appeal of the assessee was dismissed, with the Tribunal confirming the rejection of books under section 145, the addition of Rs. 21,93,618/- for under-invoicing of sales, and the disallowance of Rs. 5,58,821/- out of the total bank interest. The Tribunal found that the assessee failed to substantiate its claims with evidence and valid explanations.