2023 (9) TMI 879 - AT - Income Tax

Undisclosed sales or suppressed income - Addition relating to lower price charged from HHPL as compared from the other parties - Assessee Company is engaged in manufacturing of thermoware products - As per AO assessee sold goods to HHPL at discount of 16.53% as compared to the price at which goods have been sold to others - contention of the assessee was that discounted sales was due to the fact that while making the sales to HHPL, assessee did not have to incur transportation cost, sales promotional activities or marketing of the product or any sales promotion expenses - HELD THAT - From the above, it can be seen that from A.Y. 2015-16, sales made to HHPL have been increased from 92% to practically 100%. In fact, in 2017-18 and 2018-19, only sales made arte to the employees at a discounted price. Once there was no MOU till A.Y. 2013-14, almost 80% of the sales were made to HHPL and when MOU was entered into, assessee became contract manufacturer for HHPL and the sales to HHPL have increased. In A.Y. 2013-14, ld. AO observed that there is no agreement between assessee and HHPL, whereas in A.Y. 2014-15, when onwards there is an agreement, AO is stating that it is an afterthought and he has rejected MOU on the ground that it is not on some stamp or legal document, which is not the requirement of the law. Nothing has been pointed out by the department that any MOU or agreement between the parties needs to be on some stamp paper which needs to be registered with any authority. Thus, this reason of the ld. AO is out rightly rejected. Here it is not a case where provision of 40A (2)(b) is applicable, because it is not a case where assessee has incurred any expenses, in respect of which payment has been made to any person specified in clause (b) of sub-section 2 of 40A. Here it is a case of sales made on a discounted price to one particular party which is a bulk sale. If assessee has stated the reasons and circumstances as to why bulk sale has been made to HHPL and later on HHPL was the only buyer of the assessee; and the assessee was running into heavy losses because of unabsorbed depreciation and brought forward losses and even matter was referred to BIFR, then on these circumstances if the assessee has sold at a discounted price, we fail to understand why such discounted sale price is doubted. If the assessee to survive its business had decided to be a contract manufacturer of HHPL in subsequent years and in this year had made major supply to HHPL on a thin profit margin and in order to save various costs like transportation cost, advertisement and sales promotion cost etc. which is there in the case of sales made to the third parties, we do not find any reason to compare the sale price with the other parties to hold that assessee has to charge same price with the party who is major purchaser of the goods, when there is no deeming provision to tax the sale price or any kind of statutory SAAR provision. Also any prudent businessman will give heavy discount to a party who has made bulk purchase which is almost ranging from 80%-98%. The department cannot force the assessee that it should have not give discount or should have sold on a higher profit. Decided against revenue. Disallowance u/s. 14A - HELD THAT - Admittedly, CIT(A) has restricted the disallowance to the exempt of income which issue now is covered by the following decisions of Ajit Ramakant Phatarpeka 2020 (11) TMI 70 - BOMBAY HIGH COURT and PV HSBC Invest Direct (India) Ltd. 2019 (2) TMI 731 - BOMBAY HIGH COURT

Summary

Issues Involved:
1. Deletion of addition relating to lower price charged from M/s. Hamilton Housewares Pvt. Ltd. (HHPL).
2. Disallowance under Section 14A read with Rule 8D.

Summary:

Issue 1: Deletion of Addition Relating to Lower Price Charged from HHPL

The main issue in these appeals concerns the deletion of additions made by the Assessing Officer (AO) relating to the lower price charged by the assessee from HHPL compared to other parties. The AO alleged that the assessee sold goods to HHPL, a related party, at a highly discounted rate, resulting in evaded taxation. The AO rejected the assessee's justification that the discounted sales were due to HHPL bearing transportation, sales promotion, and marketing costs, as there was no documentary evidence to support these claims. The AO added the difference in price, amounting to Rs. 7,51,44,441/- for AY 2013-14, to the total income of the assessee.

The Commissioner of Income Tax (Appeals) [CIT(A)], however, deleted the addition, citing the Tribunal's earlier decisions in favor of the assessee for similar issues in AY 2008-09 and 2009-10. The CIT(A) accepted the assessee's explanation that the lower price was justified due to HHPL bearing significant costs that the assessee could not afford due to its financial condition. The Tribunal upheld the CIT(A)'s decision, stating that the AO failed to provide evidence that the price charged was unreasonable or excessive. The Tribunal emphasized that the revenue authorities cannot dictate business decisions and that plausible explanations for lower prices should be viewed from a business perspective.

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

For AY 2013-14 and AY 2016-17, the Revenue challenged the CIT(A)'s deletion of disallowance under Section 14A read with Rule 8D. The CIT(A) had restricted the disallowance to the amount of exempt income, aligning with the decisions of the Hon'ble Jurisdictional High Court in the cases of Pr. CIT v Ajit Ramakant Phatarpekar and PV HSBC Invest Direct (India) Ltd. The Tribunal dismissed the Revenue's grounds on this issue, confirming the CIT(A)'s decision.

Conclusion:

The Tribunal dismissed all the appeals of the Revenue, confirming the deletion of additions relating to the lower price charged from HHPL and the restriction of disallowance under Section 14A to the amount of exempt income. The Tribunal reiterated that business decisions justified by plausible explanations and supported by earlier Tribunal decisions should not be interfered with by the revenue authorities.