2006 (11) TMI 244 - AT - Income Tax

Applicability of the provisions of s. 40A(2) - purchased the raw material from the two sister-concerns - converts the mild steel ingots into rolled products called the twisted deformed bars - notified as an industrially backward area for the purpose of s. 80-IA - Unaccounted investment - addition u/s 69 - HELD THAT - We find that there is no justification to apply the average purchase rate as the market rate of purchase keeps on fluctuating from time to time. The expression used in s. 40A(2) is any expenditure which means that each expenditure has to be judged in relation to its market rate on the date of expenditure. Thus it must be established before invoking s. 40A(2) that on the date the purchases were made payments by the assessee were in excess of the fair market price of goods purchased by the assessee. The claim of the assessee that sales by the said concerns to the parties other than assessee included sale of rejected ingots for which the rates were lower by more than Rs. 2, 000 per metric ton has not been disputed/rebutted by the Revenue. Therefore price for such material has to be on lower side. The Revenue has not compared the price of raw material purchased by the assessee with the prices charged for the same material by other parties in the open market other than these two concerns. The legitimate needs of the business of the assessee to buy bulk purchase from these concerns has not been properly appreciated by the authorities. The rates fixed for the raw material between the assessee and these two concerns even if it were on a bit higher side it would have satisfied the legitimate needs of the assessee in buying the raw material in bulk. It would appear that there is a marginal difference of Rs. 11 in payment made by the assessee and outside parties in the case of M/s MIL as worked by the AO. Besides the provision of s. 40A(2) is meant to check evasion of tax through excessive or unreasonable payments to relatives and the associate concerns. However in the instant case it is seen that the assessee is entitled to claim deductions u/s 80-IA of the Act whereas the parties from whom the purchases have been made are subject to high taxes therefore to invoke the provision of s. 40A(2) in the case of assessee would not be just and proper. Thus we are of the view that the AO has failed to prove that the expenditure is excessive or unreasonable having regard to the fair market value of goods or the legitimate needs of business of the assessee. Hence we are of the view that the AO is not justified to invoke the provisions of s. 40A(2) of the Act in the case of the assessee. Hence we direct to delete the same. Unaccounted investment - addition u/s 69 - HELD THAT - The fact that the consumption of electricity shown by the assessee was higher can give rise to a strong suspicion that the assessee might have suppressed its production and thereby might have understated its sales. But suspicion however strong it may be cannot take the place of positive material. It may be mentioned that the consumption of electricity by itself cannot form a reliable test for determining the production. Production depends upon various factors namely quality of raw material condition of machine etc. Therefore in view of decisions referred to above the impugned addition made only on account of variation in consumption of electricity is not legally sustainable. Therefore the addition made on account of sale of undisclosed production and unaccounted investment for the undisclosed production are directed to be deleted. In the result the appeal filed by the assessee is partly allowed.

Issues Involved:
1. Addition of Rs. 22,80,404 under section 40A(2)(b)(iv) of the IT Act.
2. Addition of Rs. 17,22,668 on account of suppression of production.
3. Addition of Rs. 43,06,669 for unaccounted investment in respect of suppressed production.
4. Disallowance of depreciation claim of Rs. 14,64,948.

Issue-wise Detailed Analysis:

1. Addition of Rs. 22,80,404 under section 40A(2)(b)(iv) of the IT Act:
The assessee company was found to have purchased raw materials at higher prices from two sister concerns, M/s Mittal Ispat Ltd. (MIL) and M/s Sharda Casting Ltd. (SCL), compared to the prices charged to other buyers. The Assessing Officer (AO) determined that the average purchase price paid by the assessee was higher and disallowed the excess payment of Rs. 22,80,404 under section 40A(2)(b)(iv), considering it unreasonable and excessive. The CIT(A) upheld this decision, noting that the appellant did not challenge the AO's findings regarding the control and management of the companies involved.

On appeal, the Tribunal found that the average purchase rate should not be applied due to market price fluctuations. The Tribunal emphasized that each expenditure should be judged based on the market rate on the date of expenditure. The Tribunal also noted that the Revenue did not dispute the assessee's claim regarding the sale of rejected ingots, which affected the average price. Furthermore, the Tribunal highlighted that the provision of section 40A(2) is meant to prevent tax evasion through excessive payments to related parties, which was not applicable here as the assessee was entitled to deductions under section 80-IA. Consequently, the Tribunal directed the deletion of the addition.

2. Addition of Rs. 17,22,668 on account of suppression of production:
The AO noticed an increase in power consumption per metric ton of production compared to the previous year and inferred that the excess power consumption indicated undisclosed production. The AO calculated the supposed undisclosed production and added Rs. 17,22,668 to the assessee's income as the gross profit from this production. The CIT(A) upheld this addition, noting the substantial increase in power consumption and the failure of the assessee to justify it adequately.

The Tribunal, however, noted that the assessee maintained regular books of account, which were fully vouched and supported by various registers and verified by the Excise Department. The Tribunal emphasized that high electricity consumption alone cannot justify the rejection of accounts without positive material evidence. It cited relevant case law to support the view that suspicion alone cannot replace concrete evidence. Thus, the Tribunal directed the deletion of the addition.

3. Addition of Rs. 43,06,669 for unaccounted investment in respect of suppressed production:
Following the same reasoning for the suppression of production, the AO added Rs. 43,06,669 as unaccounted investment required for the undisclosed production. The CIT(A) upheld this addition for the same reasons as the suppression of production.

The Tribunal, applying the same rationale as for the suppression of production, found the addition unsustainable. It reiterated that the mere variation in electricity consumption cannot form a reliable basis for determining production without concrete evidence. Therefore, the Tribunal directed the deletion of this addition as well.

4. Disallowance of depreciation claim of Rs. 14,64,948:
The AO disallowed the depreciation claim of Rs. 14,64,948 without providing reasons. The CIT(A) directed the AO to pass a speaking order regarding this claim.

During the hearing, the assessee did not make any submissions regarding this ground, leading the Tribunal to deem it as not pressed. Consequently, no specific relief was granted on this issue.

Conclusion:
The appeal filed by the assessee was partly allowed. The Tribunal directed the deletion of additions made under section 40A(2)(b)(iv) and on account of suppression of production and unaccounted investment. However, the issue regarding the disallowance of the depreciation claim was not pressed and thus not addressed.

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