TMI Blog2014 (12) TMI 1353X X X X Extracts X X X X X X X X Extracts X X X X ..... olding his order, we decide first ground of appeal against the AO. Disallowance u/s. 40A(2)(b) - HELD THAT:- Selective study of the transactions in the year concerned is not appropriate for arriving at a definite conclusion. He should have considered the average price for the whole year before making the disallowance. FAA has given a categorical finding of fact that in certain months, the average prices of goods/material purchased from the sister concern of the assessee was less or equal to the market rate. We have also taken note of the fact that the assessee has purchased the goods on credit from its sister concern. AO has not brought on record comparable cases to justify the disallowance. In our opinion, the provisions of section 40A(2)(b) can be invoked in special circumstances where considering the market rate of goods/services, the AO arrives at a conclusion that the price charged by the assessee was at variance to the market rate. In the case before us, the AO has not brought on record any facts which prove that he had undertaken such an exercise. In the present case no evidence whatsoever was brought on record by the AO to prove that the justification assigned for m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for various reasons which are also not within the control of many sponge iron manufacturers, that sponge iron quality was not specific, that it varied from truck and plant, that Lower mentallization would cause higher slag generation and demanding more power, that recovery percentage also vary, that all these facts affected the power consumption, that in summer season supply of power was very poor in such duration and during peak hour demand power cut through CSEB occurred regularly. After consideration of the submissions of the assessee, the AO revised the calculation of power consumption for production of induction furnace. He noted that the assessee had used 1380. 32 units per ton for production of MS Ingots while such consumption in last year and year before last, was 1121. 95 units per ton and 1139 units per ton respectively and even if assessee s reply was considered and 8 to 10% variation in the power consumption was accepted as normal, then also, the AO noted variation of around 18. 13%. The variation was treated as suppression of production and this resulted in addition of ₹ 7, 27, 874/-. 2. 1. Against the above, in proceedings before the First Appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduction of finished goods depended on various factors, that no universal formula could be adopted for production, that the finished goods were subject to scrutiny of Central Excise authorities. The AR relied upon the following cases : (i). Rutvi Steel Alloys P. Ltd. vs. ITO(ITAT Ahmedabad) (ii). M/s. Priyanka Polyster vs. ACIT, Surat (iii). ACIT vs. Paras Agro Products, Palanpur (iv). N. Raju Pullaiah, 73 ITR 224 (AP) (v). Mittal Steel Castings vs. CIT (184 CTR 259) (vi). Pondy Metal and Rolling Mills vs. DCIT 2. 3. We have heard the rival submissions and perused the material before us. We find that the AO had made the addition as he noted that in the year under appeal the assessee had consumed more units of power as compared to the last two assessment years. In our opinion, the finding of higher consumption of power was good starting point for investigation, but in itself it was not an evidence to prove or disprove the production of finished goods. We find that in the cases of St. Teressa s Oil Mill(76 ITR 365)and Sulabh Marbles(P) Ltd. , (205CTR464), decided by the Hon ble Kerala and Rajasthan High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock exchange, that the overall purchase of material i. e. sponge iron from GR. Sponge Power Ltd. was cheaper by ₹ 45/- per ton during the year under review which proved that the material had been purchased at prevailing mark rate. The AO noted that the sales made by the sister concern to the assessee in April, May and June 2006 were at higher price as compared to average sale price. Invoking the provisions of section 40A(2)(b) of the Act, he made an addition of ₹ 3. 55 lakhs. 3. 1. In the appellate proceeding the assessee submitted that it had purchased the entire raw material from its sister concern, that the sister concern was only the supply of the raw material to the assessee. that purchases from the sister concern were made on credit, that the cash sales were certainly at cheaper rate than the credit sales and the credit sales made to the assessee by the sister concern were at the prevailing market rate of credit sales and since the questioned transactions were genuine, provisions of section 40A(2)(b) had no application to the transactions which were not proved as bogus and were not proved as accommodation entries. After considering the facts of the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Publishing House (P) Ltd. vs. CIT (117 ITR 569) 3. 3. We have heard the rival submissions and perused the material before us. We find that the assessee had purchased raw material from its sister concern amounting to ₹ 60. 59 crores, which is near about 50% of the total raw material purchased, that while making disallowance u/s. 40A(2) (b), the AO had taken the instances of a few months of the year. In our opinion, a selective study of the transactions in the year concerned is not appropriate for arriving at a definite conclusion. He should have considered the average price for the whole year before making the disallowance. The FAA has given a categorical finding of fact that in certain months, the average prices of goods/material purchased from the sister concern of the assessee was less or equal to the market rate. We have also taken note of the fact that the assessee has purchased the goods on credit from its sister concern. The AO has not brought on record comparable cases to justify the disallowance. In our opinion, the provisions of section 40A(2)(b) can be invoked in special circumstances where considering the market rate of goods/services, the AO arrives at a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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