2021 (8) TMI 429 - AT - Income Tax

Addition u/s 40A(2)(b) - purchases from related party - assessee failed to satisfy the AO as to whether the price paid for the goods purchased from M/s MSA Engineering Pvt. Ltd was at arms length or not? - genuineness of purchases was not established by the assessee - HELD THAT - When ld. CIT (A) has arrived at the factual finding that assessee himself has not transported the goods nor carried out loading and unloading, the findings returned by the AO that the transfers made by the assessee are merely book entries are not sustainable. AO is blowing hot and cold in the same breath because at one point of time he has observed that transactions made by the assessee are only book entries and not genuine business transactions but at the same time recalculated the net profit at 1.5% of the sales turnover by rejecting the books of account which is not permissible under law. AO also stated that since M/s. MSA Engineering Pvt. Ltd. was a related party the tax auditor should have pointed out it out in tax audit report u/s 40A(2)(b) of the Act but at the same time has resorted to section 40A(2)(b) to observe that the purchases from M/s. MSA Engineering Pvt. Ltd. were not made at arm s length. When the factual findings have come on record that assessee has not been transporting, inspecting, loading and unloading of goods, the findings given by AO are based upon conjectures and surmises. CIT (A) has rightly deleted the recalculated profit @ 1.5% and has allowed the salary of manager and a few executives and disallowed the remaining expenses - Decided against revenue.

Summary

Issues:
1. Rejection of books of account under section 145 of the Income-tax Act, 1961.
2. Recalculation of net profit at 1.5% of sales turnover.
3. Disallowance of expenses claimed under the head 'salary.'
4. Applicability of section 40A(2)(b) regarding purchases from related parties.

Issue 1: Rejection of books of account under section 145:
The Assessing Officer (AO) rejected the books of account of the assessee under section 145, concluding that the transactions were merely book entries and not genuine business transactions. The AO recalculated the net profit at 1.5% of the sales turnover. However, the ld. CIT (A) deleted the estimated profit and held that the rejection of books of accounts was uncalled-for and without any basis. The ld. CIT (A) found that the AO did not provide any incriminating facts justifying the rejection of the books of accounts. The Tribunal upheld the decision of the ld. CIT (A) and dismissed the Revenue's appeal.

Issue 2: Recalculation of net profit at 1.5% of sales turnover:
The AO recalculated the net profit at 1.5% of the sales turnover after rejecting the books of account. However, the ld. CIT (A) deleted the recalculated profit, stating that the rejection of books of accounts was unjustified and lacked any basis. The Tribunal concurred with the ld. CIT (A) and dismissed the Revenue's appeal, finding the AO's actions based on conjectures and surmises.

Issue 3: Disallowance of expenses claimed under the head 'salary':
The AO disallowed the expenses claimed under the head 'salary' of the assessee, stating that the assessee was not involved in physical activities related to the business and that the payment of salary was not for business purposes. The ld. CIT (A) allowed the salary of the manager and a few executives but disallowed the remaining expenses under the head 'salaries,' resulting in an addition to the income of the assessee. The Tribunal upheld this decision, finding the disallowance justified based on the facts of the case.

Issue 4: Applicability of section 40A(2)(b) regarding purchases from related parties:
The AO raised concerns about purchases made by the assessee from a related party, M/s. MSA Engineering Pvt. Ltd., under section 40A(2)(b) of the Income-tax Act, 1961. The ld. CIT (A) noted that the tax auditor should have pointed out the related party transaction in the tax audit report but observed that the AO did not establish that the purchases were not made at arm's length. The Tribunal found that the AO's conclusions were contradictory and not substantiated by facts, leading to the dismissal of the Revenue's appeal.

In conclusion, the judgment by the ITAT Delhi addressed various issues related to the rejection of books of account, recalculation of net profit, disallowance of expenses, and applicability of section 40A(2)(b) in the context of purchases from related parties. The Tribunal upheld the decisions of the ld. CIT (A) and dismissed the Revenue's appeal, emphasizing the lack of factual basis for the AO's actions and highlighting inconsistencies in the AO's reasoning.