TMI Blog2012 (6) TMI 287X X X X Extracts X X X X X X X X Extracts X X X X ..... other group companies but that cannot be a sole criteria to reject the assessee's books of account and then to invoke Section 40A(2)(a) for the purpose of disallowing expenses of purchases. - any estimation of gross profit at the rate of 13.73% is unwarranted. - Decided in favor of assessee. - IT APPEAL NO. 3491 (DELHI) OF 2007 - - - Dated:- 29-4-2011 - G.E. VEERABHADRAPPA, C.L. SETHI, JJ. C.S. Aggarwal and Vishal Kalra for the Appellant. Sanjay Puri for the Respondent. ORDER C.L. Sethi, Judicial Member The present appeal has been filed by the assessee against the order dated 9.3.2007 passed by learned CIT(A) in the matter of an assessment made u/s 143(3) of the Income-tax Act, 1961 dated 20.3.2006 by the Assessing Officer for the AY 2003-04. 2. The grounds of appeal raised by the assessee are as under:- "1. Based on the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals)-V, New Delhi ("Ld CIT(A)") has erred in law and in facts, in confirming the disallowance of Rs.64,649,000 from purchases made by the Appellant from PepsiCo India Holding Private Limited, under the provisions of section 40(A)(2)(a) of the Act. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the AO that the assessee company was not required to maintain separate accounts as per the provisions of Schedule VI of the Companies Act, the assessee recasted trading accounts for manufacturing and trading activities by allocating costs and revenues on a reasonable basis. The recasted trading account for manufacturing and trading business has been reproduced by the AO as under:- ('000) Particulars Rs. Traded Goods Rs. Mfd.Goods Particulars Rs. Traded Goods Rs. Mfd.Goods Material consumed 2001 Gross sales 457064 4057 Packing material consumed 140 Closing stock 52186 Purchase for resale 511144 Gross loss 1894 Excise duty 505 Gross profit 1411 511144 4057 511144 4057 5. On perusal of the recasted trading account, it was noticed by the AO that assessee declared gross profit of 34.78% on manufactured products but had shown a gross loss of 0.41% on trading item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another company of the same group involved in the same business of trading of beverages. In that case, it was found by the AO that assessee had shown gross profit on traded goods at 13.73%. The AO, therefore, took a view that same GP rate should be considered as reasonable in the case of the assessee. The AO, therefore, rejected the book results of the assessee and determined the gross profit by adopting the GP rate of 13.73% shown by Aradhana Soft Drinks Company. He then worked out the gross profit at Rs. 6,27,55,000/- as against the loss of Rs. 18,94,000/- declared by the assessee. The AO, therefore, made adjustment of Rs. 6,46,49,000/- to the purchases made by the assessee from sister concern by invoking the provisions of Section 40A(2)(a) of the Act. 8. Being aggrieved, the assessee preferred an appeal before the learned CIT(A). 9. Before the learned CIT(A), it was submitted by the assessee that Revenue authorities cannot decide the manner in which the business is required to be carried on by the assessee. It was further submitted that the reasonableness of the expenditure has to be seen from the point of view of the businessman and not that of the Revenue. In this conn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement [2002] 254 ITR 377 (Del.) do not deal with the subject of shell companies. There the vital difference was on facts and hence the philosophy of the courts as laid down in the said decision is totally alien to eloquent facts here. In fact the appellant has tried desperately to cling on to arguments which are unconvincing. The appellant's submission that the price of purchase is comparable is also not found convincing in view of the group companies own result in the same line of business where GP is shown at close to 14%. The appellant has tried desperately to differentiate the business but has failed miserably because business policies cannot be compared with the business as a whole. Therefore, considering the facts and circumstances of the case here as are undisputed by the appellant also I uphold the action of the AO in estimating the GP. Therefore this ground of appeal of the appellant is dismissed." 10. Being aggrieved with the CIT(A)'s order, the assessee has filed this appeal before us. 11. The learned counsel for the assessee has placed brief synopsis of his contentions before us. The learned counsel for the assessee contended that in response to the AO's query t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over of Rs. 45,70,64,000/-. The learned counsel for the assessee then submitted that the gross trading loss of Rs. 18,94,000/- had primarily arisen because of the fact that the assessee was mainly catering the market in metropolitan cities which due to severe competition was highly price sensitive. He further submitted that the assessee also furnished a comparative chart of price at which goods were being sold to PIH to the assessee and other unrelated parties in Gujarat location which are placed at pages 37 to 81 of the paper book. He thus contended that the purchases were made at the market rates and sales were also made at the market rate and thus, question of invoking the provisions of Section 40A(2)(a) did or could not arise. 13. The learned counsel for the assessee further contended that AO has erred in applying a gross profit of 13.73% to the assessee's case without pointing out any defect in the books of account maintained in the regular course of business by the assessee. The learned counsel for the assessee then pointed out that the AO has made the addition of Rs. 6,46,49,000/- by applying GP rate of 13.73% and, on the other hand, the AO has held that he was making th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the learned counsel for the assessee that since the purchase at market rate was made for the purpose of business, the expenses relating thereto are admissible as deduction u/s 37(1) of the Act and no disallowance u/s 40A(2)(a) is called for. He further submitted that AO has not been able to bring any adequate material or evidence on record to show and establish that the purchases made by the assessee from PIH were made with an attempt to evade payment of tax. He pointed out that the purchases made by the assessee from PIH were genuine procured at an arm's length price. He further submitted that the purchases made by the assessee from PIH were accepted by the excise authorities and assessable value of such goods has not been disputed by the excise authorities and, therefore, the question that the purchases made at a higher price did or could not arise. In support of his contentions, the learned counsel for the assessee has relied upon a number of decisions listed in the written synopsis filed by the assessee. 20. The learned DR, on the other hand, reiterated the very basis and reasons given by the AO as well as by the CIT(A) in sustaining the addition by way of disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered by him to be excessive or unreasonable shall not be allowed as a deduction. ( b ) ." 23. The opening words of Section 40A(1) indicate that the provisions of this Section shall have effect notwithstanding anything to the contrary contained in any other provisions of this Act relating to the computation of income under the head "profits and gains of business or profession". In other words, Section 40A is an overriding provision which operates inspite of anything to the contrary contained in any other provisions of the Act relating to the computation of income under the head profits and gains of business or profession. Sub-section 2(a) of Section 40A provides that where the assessee incurs any expenditure in respect of which payment has been made or is to be made to the persons specified in that Section and the AO is of opinion that such expenditure is excessive or unreasonable having regard to the market value of the goods, services or facilities for which the payment is made or the legitimate needs of business or profession of the assessee or the benefit derived by or accruing to the assessee therefrom, so much of the expenditure as is so considered by h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases of Rs. 50.83 crores were made from PIH. The closing stock during the year has been increased by Rs. 5,21,86,000/-. In the course of hearing of this appeal, the learned counsel for the assessee has invited our attention to the comparative chart of sales made by PIH to the assessee as well as to other unrelated parties which reads as under:- Sales made to assessee :- Particulars No. of cases Rate per case Invoice No. Dukes Mangola 460 127.01 9890 Dukes Lemon 1.5 lts. 264 296.11 9890 Duke Soda 512 63.04 10137 Dukes Tonik Water 320 63.04 Sales made to unrelated party M/s Vinayak Enterprises :- Particulars No. of cases Rate per case Invoice No. Dukes Mangola 224 127.01 9875 Dukes Lemon 1.5 lts. 330 296.11 9875 Duke Soda 352 63.04 11026 Dukes Tonik Water 199 63.04 11026 26. From the aforesaid comparative chart, it is clear that the same item of goods was sold at the same rate by PIH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n found to be false by the AO. The AO has also not been able to bring any material on record to show as to how and in what manner the assessee intended to avoid payment of tax before invoking the provisions of Section 40A(2)(a) of the Act. 27. Now, coming to the AO's action in rejecting the assessee's books of account, we find that the AO has rejected the assessee's books of account merely for the reason that assessee has declared loss during the year. The AO has not pointed out any defect or discrepancy in the books of account of the assessee maintained regularly by it before rejecting the same and applying the rate of GP of 13.73% which was shown by some other concern namely Aradhana Soft Drinks Co. The AO has also not examined as to whether the nature of business carried on by another concern was identical or similar to that of the assessee and whether the market condition of both the concerns was identical. The AO's view that purchase of products by the assessee from PIH was a colorable device to avoid payment of tax as the profit passed on by the assessee to PIH was not taxed is not based on any adequate or sufficient evidence. The AO has taken this view merely on his susp ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
