2023 (8) TMI 1269 - AT - Income Tax

Disallowance of loss on trading in Mentha oil - unrelated party transactions - special auditor in his report observed that assessee incurred loss - HLD THAT - Under the provisions of the Act in section 40A(2), it has been provided that if transactions with related parties are carried out below the market price, then AO can substitute the market price of the products with the transacted price, however in case of unrelated party the AO cannot invoke section 40A(2) of the Act and substitute the transacted price with the market price unless books of accounts of the assessee are rejected invoking section 145(3) of the Act and profit or loss of the business is estimated/recasted by the AO. In this case, AO has neither pointed out any defects in the books of accounts of the assessee and nor rejected the books of accounts and thus AO is prohibited from rejecting such transactions although carried out below the market price. The assessee has to arrange his business affair keeping in view the best interest of the business including retaining of the customers and AO cannot doubt the business transactions merely on ground that same is below the market price, without bringing on record any malafide in transactions. We observed that sales by the assessee to Barabanki trading company and Sharp Mint Ltd which constitutes 48.31 percent of the total sales value of the Mentha oil, thus the contention of the assessee of carrying out transactions in the below market price for retaining the customer is having some basis which cannot be ignored. Respectfully, following the ratio laid down in the case of Flipkart India Private Limited 2018 (5) TMI 337 - ITAT BANGALORE we hold that in case of unrelated party transactions, AO cannot substitute the transaction price with the market price unless he invokes provisions of section 145 (3) of the Act and thus, we set aside the finding of the Ld. CIT(A) on the issue in dispute and delete disallowance of loss by the Assessing Officer. The ground No. 2 of the appeal of the assessee is accordingly allowed. Disallowance u/s 14A r.w.r. 8D - mandation of recording satisfaction - contention of the assessee that while making this disallowance AO has not recorded dissatisfaction with the correctness of the claim of the assessee having regard to its books of accounts - HELD THAT - As per the provisions of the section 14A of the Act, the Assessing Officer can invoke the rule 8D of the Rules for computing disallowance, if he s not satisfied with the correctness of the claim of the assessee in respect of expenditure for earning exempt income. AO did not record a specific satisfaction as why the claim of the assessee of disallowance in terms of the employee cost was not correct. AO only recorded that assessee cannot earn exempt income without any systematic management of its investments which being complex in nature require market research, data analysis and planning. Whereas the assessee has duly itself disallowed the various expenses out of the employee cost, auditor remuneration, communication, computer expenses, electricity expenses, office expenses etc, which according to the assessee were part of the expenses which ought to have been incurred as proposed by the Assessing Officer. AO has not fulfilled the requirement of the recording dissatisfaction under provisions of the section 14A and therefore invoking of the rule 8D is not in accordance with law. The second argument of considering Only the investment which has yielded exempted income, for the purpose of computation of disallowance under rule 8D(2), is rendered academic only and therefore we are not adjudicating the same. The finding of the Ld. CIT(A) on the issue in dispute is set aside and the disallowance made by the AO is deleted. The ground of the appeal of the assessee is accordingly allowed.

Summary

Issues Involved:
1. Disallowance of loss on sale of Mentha Oil.
2. Disallowance under section 14A read with Rule 8D of the Income Tax Rules, 1962.

Summary:

Issue 1: Disallowance of Loss on Sale of Mentha Oil

The assessee challenged the CIT(A)'s decision upholding the AO's disallowance of Rs. 4,34,79,702/- as a loss incurred on the sale of Mentha Oil at prices lower than the market rate to two parties, Barabanki Trading Co. Limited and Sharp Mint Limited. The AO considered this loss as artificially created. The Tribunal noted that the assessee's transactions were conducted in the normal course of business and the parties involved were not related under section 40A(2) of the Act. The AO did not reject the assessee's books of accounts nor demonstrated any malafide in the transactions. The Tribunal referenced the case of Flipkart India Private Limited, emphasizing that the AO cannot substitute the transaction price with the market price unless the books are rejected under section 145(3) of the Act. Consequently, the Tribunal set aside the CIT(A)'s findings and deleted the disallowance of the loss.

Issue 2: Disallowance under Section 14A Read with Rule 8D

The assessee contested the disallowance made under section 14A read with Rule 8D, arguing that the AO did not record dissatisfaction with the correctness of the claim regarding the expenditure incurred to earn exempt income. Additionally, the assessee claimed that only investments yielding exempt income should be considered for disallowance. The Tribunal found that the AO failed to record specific dissatisfaction with the assessee's claim of disallowance related to employee costs and other expenses. The Tribunal noted that the AO made a general assertion without detailed analysis. Consequently, the Tribunal held that invoking Rule 8D was not in accordance with the law and set aside the CIT(A)'s findings, deleting the disallowance made by the AO.

Conclusion:

The Tribunal allowed the appeal of the assessee, setting aside the disallowances made by the AO and upheld by the CIT(A) on both issues. The order was pronounced on 31/03/2023.