Whether when assessee commits to supply certain product more than plant capacity and finally resorts to purchases from sister unit and third party to meet obligations, any disallowance of part of sale price on ground of being excessive is warranted - NO: ITAT

THE issues before the Bench are - Whether when assessee commits to supply certain product more than its plant capacity and finally resorts to purchases from sister concern and a third party to meet its obligation, any disallowance of part of sale price on ground of being excessive is warranted and Whether AO is justified in rejecting books of account without pointing out any defects in the books maintained by the assessee. Ruled in favour of assessee.

Facts of the case

A) The assessee was a manufacturer of aluminium chloride. From form 3CD, Annexure D, AO noticed that payments of Rs. 2,39,54,709/- were made to Synergy Overseas Ltd. (SOL) towards purchase of aluminium chloride. It was found that SOL was a person specified u/s. 40A(2)(b). Since the assessee was a manufacturer of aluminium chloride, the AO saw no reasons for the assessee to purchase same product from its sister concern. Accordingly 10% of the sale price was held to be excessive and unreasonable and therefore disallowed and added to the income of the assessee.

In appeal, CIT(A) held that assessee had made purchase from SOL as well as GACL a public sector company manufacturing the same products. The assessee obtained orders for supply of aluminium chloride which were in excess of its capacity to produce in its own plant. Hence in order to fulfill its sales obligation, it had to resort to purchases from the market. The entire purchases could not be made from GACL since it was the main competitor of the assessee. Therefore certain purchases had to be routed through its sister concern, SOL. It was further held that there was no element of unreasonableness in the purchases made from the sister concern nor could the payments be said to be excessive and the transactions were motivated by commercial considerations. Therefore, the disallowance was deleted.

Revenue submitted that before AO no explanation whatsoever was given by the assessee when query in respect of purchases from sister concern were raised by the AO, therefore CIT(A) before giving relief to the assessee should have taken comments of the AO on the submissions of the assessee. It was submitted that matter may be restored back to the file of AO.

B) During the assessment proceedings AO found that there was decline in gross GP rate. The assessee was asked to explain the reason for such fall. The explanation of the assessee was that the company had two lines of business i.e. manufacturing activities and trading activities. The apparent fall in GP was on account of presentation difference. In the earlier years the assessee had excluded director’s remuneration and office staff expenses from the calculation of GP whereas in the current year such expenses were included. This resulted in fall in GP. If the said expenses were excluded from the calculation in order to make comparable it could be seen that there was in fact rise in GP. Similarly if the accounts were recast by including these expenses for both the years then the current year’s rate would be higher than in the earlier year. This explanation was not acceptable to the AO and book result shown by the assessee-company was rejected invoking the provisions of section 145A of the act and GP was worked out at 18.5% of the earlier year as compared to 8.5% of the current year. The additional GP (10.5%) was worked out at Rs. 66,87,215/- and added back to the total income of the assessee by invoking the provisions 145A of the Act.

In appeal, CIT(A) held that AO was not justified in this case to reject the books of account maintained by the assessee by invoking the provisions of section 145 as no specific defect as such was pointed out in the books of account maintained by assessee and deleted addition.

Revenue submitted that CIT(A) had given relief to the assessee simply accepting the submissions of the assessee made before him which were not before AO and without taking comments on them from the AO, thus violating the provisions of Rule 46A of the Income Tax Rules. Assessee on the other hand submitted that all the details on the basis of CIT(A) had given relief to the assessee were already there and no new details/evidence was produced in support of his explanation for low GP during the year under appeal.

Having heard the parties, the tribunal held that,

A) ++ 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. The CIT(A) also considered the fact that sister concern had allowed credit to the assessee amounting to Rs. 173.25 lakhs which 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 in earlier and subsequent years and no addition by invoking the provisions of section 40A(2)(b) was ever made, we are not inclined to interfere with the order passed by CIT(A) and the same is hereby upheld. This ground of revenue is dismissed;

B) ++ assessing officer 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) however 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. While doing so, he has placed reliance on various case laws on the issue. On merits also he found that 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 turn over of the assessee. We further find that revenue has not challenged the finding of the CIT(A) that books of accounts were wrongly rejected by AO by taking any ground in this respect while filing this appeal before us. Without challenging the same, GP addition cannot be defended. In view of above, we are not inclined to interfere with the order of CIT(A) and the same is hereby upheld. This ground of revenue is also dismissed.