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2006 (11) TMI 244 - AT - Income TaxApplicability of the provisions of s. 40A(2) - purchased the raw material from the two sister-concerns - converts the mild steel ingots into rolled products called the twisted deformed bars - notified as an industrially backward area for the purpose of s. 80-IA - Unaccounted investment - addition u/s 69 - HELD THAT:- We find that there is no justification to apply the average purchase rate, as the market rate of purchase keeps on fluctuating from time to time. The expression used in s. 40A(2) is 'any expenditure' which means that each expenditure has to be judged in relation to its market rate on the date of expenditure. Thus, it must be established before invoking s. 40A(2) that on the date the purchases were made, payments by the assessee were in excess of the fair market price of goods purchased by the assessee. The claim of the assessee that sales by the said concerns to the parties other than assessee included sale of rejected ingots for which the rates were lower by more than Rs. 2,000 per metric ton has not been disputed/rebutted by the Revenue. Therefore, price for such material has to be on lower side. The Revenue has not compared the price of raw material purchased by the assessee with the prices charged for the same material by other parties in the open market other than these two concerns. The legitimate needs of the business of the assessee to buy bulk purchase from these concerns has not been properly appreciated by the authorities. The rates fixed for the raw material between the assessee and these two concerns even if it were on a bit higher side, it would have satisfied the legitimate needs of the assessee in buying the raw material in bulk. It would appear that there is a marginal difference of Rs. 11 in payment made by the assessee and outside parties in the case of M/s MIL, as worked by the AO. Besides, the provision of s. 40A(2) is meant to check evasion of tax through excessive or unreasonable payments to relatives and the associate concerns. However, in the instant case, it is seen that the assessee is entitled to claim deductions u/s 80-IA of the Act whereas the parties from whom the purchases have been made are subject to high taxes, therefore, to invoke the provision of s. 40A(2) in the case of assessee would not be just and proper. Thus, we are of the view that the AO has failed to prove that the expenditure is excessive or unreasonable having regard to the fair market value of goods or the legitimate needs of business of the assessee. Hence, we are of the view that the AO is not justified to invoke the provisions of s. 40A(2) of the Act in the case of the assessee. Hence, we direct to delete the same. Unaccounted investment - addition u/s 69 - HELD THAT:- The fact that the consumption of electricity shown by the assessee was higher can give rise to a strong suspicion that the assessee might have suppressed its production and thereby might have understated its sales. But suspicion, however, strong it may be, cannot take the place of positive material. It may be mentioned that the consumption of electricity by itself cannot form a reliable test for determining the production. Production depends upon various factors, namely quality of raw material, condition of machine, etc. Therefore, in view of decisions referred to above, the impugned addition made only on account of variation in consumption of electricity is not legally sustainable. Therefore the addition made on account of sale of undisclosed production and unaccounted investment for the undisclosed production are directed to be deleted. In the result, the appeal filed by the assessee is partly allowed.
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