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2023 (8) TMI 1269 - AT - Income TaxDisallowance of loss on trading in Mentha oil - unrelated party transactions - special auditor in his report observed that assessee incurred loss - HLD THAT:- Under the provisions of the Act in section 40A(2), it has been provided that if transactions with related parties are carried out below the market price, then AO can substitute the market price of the products with the transacted price, however in case of unrelated party the AO cannot invoke section 40A(2) of the Act and substitute the ‘transacted price’ with the ‘market price’ unless books of accounts of the assessee are rejected invoking section 145(3) of the Act and profit or loss of the business is estimated/recasted by the AO. In this case, AO has neither pointed out any defects in the books of accounts of the assessee and nor rejected the books of accounts and thus AO is prohibited from rejecting such transactions although carried out below the market price. The assessee has to arrange his business affair keeping in view the best interest of the business including retaining of the customers and AO cannot doubt the business transactions merely on ground that same is below the market price, without bringing on record any malafide in transactions. We observed that sales by the assessee to ‘Barabanki trading company’ and ‘Sharp Mint Ltd’ which constitutes 48.31 percent of the total sales value of the Mentha oil, thus the contention of the assessee of carrying out transactions in the below market price for retaining the customer is having some basis which cannot be ignored. Respectfully, following the ratio laid down in the case of Flipkart India Private Limited [2018 (5) TMI 337 - ITAT BANGALORE] we hold that in case of unrelated party transactions, AO cannot substitute the transaction price with the market price unless he invokes provisions of section 145 (3) of the Act and thus, we set aside the finding of the Ld. CIT(A) on the issue in dispute and delete disallowance of loss by the Assessing Officer. The ground No. 2 of the appeal of the assessee is accordingly allowed. Disallowance u/s 14A r.w.r. 8D - mandation of recording satisfaction - contention of the assessee that while making this disallowance AO has not recorded dissatisfaction with the correctness of the claim of the assessee having regard to its books of accounts - HELD THAT:- As per the provisions of the section 14A of the Act, the Assessing Officer can invoke the rule 8D of the Rules for computing disallowance, if he’s not satisfied with the correctness of the claim of the assessee in respect of expenditure for earning exempt income. AO did not record a specific satisfaction as why the claim of the assessee of disallowance in terms of the employee cost was not correct. AO only recorded that assessee cannot earn exempt income without any systematic management of its investments which being complex in nature require market research, data analysis and planning. Whereas the assessee has duly itself disallowed the various expenses out of the employee cost, auditor remuneration, communication, computer expenses, electricity expenses, office expenses etc, which according to the assessee were part of the expenses which ought to have been incurred as proposed by the Assessing Officer. AO has not fulfilled the requirement of the recording dissatisfaction under provisions of the section 14A and therefore invoking of the rule 8D is not in accordance with law. The second argument of considering Only the investment which has yielded exempted income, for the purpose of computation of disallowance under rule 8D(2), is rendered academic only and therefore we are not adjudicating the same. The finding of the Ld. CIT(A) on the issue in dispute is set aside and the disallowance made by the AO is deleted. The ground of the appeal of the assessee is accordingly allowed.
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