2018 (8) TMI 841 - AT - Income Tax

Disallowance u/s 40A(2)(a) - excessive payments made by the assessee to its sister concerns for purchase of gold ornaments - valuation of gold/silver jewellery for making payments to sister concerns. - adoption of the rate of Bombay Bullion Association - There is difference in rates of gold and silver in Jalgaon and Bombay - CIT(A) deleted the additions. Held that - Assessing Officer in the remand report has accepted that after applying local rates, the assessee has not made any excessive payments to the sister concerns for the purchase of ornaments. The local rates as published in the local Newspapers have been compared with the rates applied by the assessee and on verification it is found to be in order. Thus, the Assessing Officer accepted that no excessive payments were made by the assessee to its sister concerns. Under such circumstances disallowance u/s. 40A(2)(a) is uncalled for. Decided against the Revenue.

Summary

Issues Involved:
1. Deletion of disallowance made under Section 40A(2)(a) of the Income Tax Act, 1961.
2. Application of local Jalgaon rates versus Bombay Bullion Association rates for valuation of gold/silver jewellery.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance under Section 40A(2)(a):

The Revenue challenged the Commissioner of Income Tax (Appeals) [CIT(A)]'s decision to delete the disallowance made under Section 40A(2)(a) of the Income Tax Act, 1961. The Assessing Officer (AO) had made an addition/disallowance of ?1,37,06,504/- on the grounds of excessive payments made by the assessee to its sister concerns for the purchase of gold ornaments. The AO applied the Bombay Bullion Association rates, whereas the assessee used local Jalgaon rates. The CIT(A) deleted this addition based on a remand report and previous Tribunal decisions in similar cases involving the assessee’s sister concerns.

2. Application of Local Jalgaon Rates vs. Bombay Bullion Association Rates:

The assessee argued that the Jalgaon rates should be applied for the valuation of gold/silver jewellery, which was consistent with the Tribunal's decision in similar cases of the assessee’s sister concerns. The AO, however, used the Bombay Bullion Association rates, leading to discrepancies in the valuation. The Tribunal had previously ruled in favor of applying Jalgaon rates, which was supported by the remand report indicating no excessive payments when local rates were used.

Tribunal's Observations and Rulings:

- The Tribunal noted that the primary issue was the deletion of disallowance under Section 40A(2)(a). The AO made disallowances based on the difference between Jalgaon rates and Bombay Bullion Association rates. However, similar disallowances in the cases of the assessee’s sister concerns had been deleted by the Tribunal, which upheld the CIT(A)’s findings.

- The Tribunal referred to its previous judgment in the case of the assessee’s flagship concern, where it was established that the AO's method of using average rates without considering market fluctuations and trading practices was erroneous. The Tribunal emphasized that the AO did not account for variations in bullion prices and intra-day rate changes, leading to an incorrect assessment.

- The Tribunal highlighted that both the AO and CIT(A) had adopted an incorrect average price method, which did not reflect the actual market conditions. The Tribunal also pointed out that the AO failed to consider instances where the assessee paid less than the market rate, indicating a flawed approach.

- The Tribunal concluded that the method used by the authorities below was not appropriate for determining the reasonableness of payments under Section 40A(2)(a). It directed the AO to adopt a gross profit rate of 1.20% instead of the disclosed 1.13%, considering the overall transactions and market conditions.

- The Tribunal observed that the AO, in the remand report, accepted that no excessive payments were made when local Jalgaon rates were applied. This further validated the assessee's position and the CIT(A)’s decision to delete the disallowance.

Conclusion:

The Tribunal found no infirmity in the CIT(A)'s order and upheld the deletion of the disallowance under Section 40A(2)(a). The appeal by the Revenue was dismissed, affirming that the local Jalgaon rates were appropriate for the valuation of gold/silver jewellery, and no excessive payments were made by the assessee to its sister concerns. The Tribunal's decision was pronounced on August 8, 2018.