2014 (5) TMI 925 - AT - Income Tax

Disallowance made u/s 40A(2)(b) of the Act Onus to prove the reasonableness of expenses Held that - There was no merit in the argument advanced by assessee that there was violation of Rule 46A - CIT(A) has given relief to the assessee by giving a categorical finding that assessee obtained orders of supply of aluminium chrolride which were in excess of its capacity to produce in its own plant and therefore he had to make certain purchases through sister concern - CIT(A) has also considered the fact that sister concern had allowed credit to the assessee was valuable consideration and has resulted in reducing its interest liability to the bank, had this amount was taken as loan from the bank - During the appellate proceedings assessee was asked whether in previous year and subsequent years also assessee was making purchases from its sister concern and whether similar addition has been made in those years - The reply of the assessee being that assessee has made purchases and no addition by invoking the provisions of section 40A(2)(b) was ever made the order of the CIT(A) is upheld Decided against Revenue. Deletion on account of Low GP Failure to explain reasons Held that - There was no merit in the arguments of revenue that there is any violation of rule 46A AO has estimated the GP of the assessee by rejecting the books of account by invoking the provisions of section 145A of the Act - CIT(A) held that AO was not justified in such rejection of books of account as he has not pointed out any defects in the books maintained by the assessee-company - there is no substance in the AO s contentions that assessee has shown lower GP in respect of its manufacturing activity or trading activity by demonstrating that in the case of manufacturing activities in fact there is increase in GP during the year and marginal decline in GP in trading activities is due to 300% increase in the turnover of the assessee - revenue has not challenged the finding of the CIT(A) that books of accounts were wrongly rejected by AO by taking any ground - GP addition cannot be defended the order of the CIT(A) is upheld Decided against Revenue.

Issues Involved:
1. Deletion of addition made under Section 40A(2)(b) of the Income Tax Act.
2. Deletion of addition made on account of low Gross Profit (GP).

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 40A(2)(b) of the Income Tax Act:
The revenue challenged the deletion of Rs. 23,95,470/- added under Section 40A(2)(b) for payments made to M/s. Synergy Overseas Ltd. (SOL). The Assessing Officer (AO) disallowed 10% of the sale price, deeming it excessive and unreasonable since the assessee, a manufacturer of aluminium chloride, purchased the same product from its sister concern, SOL.

The assessee argued that the payments were reasonable, highlighting that the accountant responsible for compiling the necessary data had left the job, and the new accountant was not well-versed with the transactions. The assessee provided a comparative chart showing the marginal price difference between purchases from SOL and GACL, justifying the higher prices due to extended credit terms offered by SOL, which saved interest costs. Additionally, the assessee mentioned that similar transactions in other years were accepted without disallowance.

The CIT(A) accepted the assessee's explanation, noting that the purchases from SOL were commercially motivated due to excess order fulfillment needs and credit terms offered by SOL. The CIT(A) concluded that there was no unreasonableness in the payments and deleted the disallowance.

On appeal, the Tribunal upheld the CIT(A)'s decision, finding no merit in the revenue's argument regarding the violation of Rule 46A. The Tribunal noted that the assessee had consistently made purchases from its sister concern in other years without disallowance and that the CIT(A) had rightly considered the commercial necessity and credit terms.

2. Deletion of Addition on Account of Low Gross Profit (GP):
The revenue also challenged the deletion of Rs. 66,87,215/- added due to a decline in the GP rate. The AO rejected the book results under Section 145A, citing an unexplained decline in GP from 18.5% to 8.5%. The AO attributed the decline to the inclusion of directors' remuneration and office staff expenses in the current year's GP calculation, which were excluded in the previous year.

The assessee explained that the apparent fall in GP was due to a presentation difference and that a proper comparison showed an actual rise in GP. The assessee also highlighted that the product mix differed between the years, making a direct comparison invalid.

The CIT(A) accepted the assessee's explanation, finding that the AO had not pointed out any specific defects in the books of account. The CIT(A) noted that the GP rates, when adjusted for comparable expenses, showed an increase in manufacturing activities and a marginal decline in trading activities due to a significant increase in turnover.

The Tribunal upheld the CIT(A)'s decision, noting that the AO had not justified the rejection of books under Section 145. The Tribunal emphasized that low profit alone does not warrant rejection of books, and the AO failed to demonstrate any incorrectness or incompleteness in the accounts. The Tribunal also noted that the revenue had not challenged the CIT(A)'s finding on the wrongful rejection of books, making it impossible to defend the GP addition.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s deletions of additions made under Section 40A(2)(b) and on account of low GP. The Tribunal found that the CIT(A) had rightly considered the commercial justifications and proper accounting practices, and the AO had not provided sufficient grounds for rejecting the books of account.

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