TMI Blog2006 (11) TMI 244X X X X Extracts X X X X X X X X Extracts X X X X ..... an 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. In the course of verification of purchase of raw material which are steel ingots, it was found by the Assessing Officer that the entire purchase of raw material was made by the assessee from M/s Mittal Ispat Ltd. (MIL) and M/s. Sharda Casting Ltd. (SCL). It was found that the average purchase price from M/s MIL per metric ton was Rs. 10,478 while that from M/s SCL Rs. 11,784. However, the assessee subsequently submitted that there was a mistake and average purchase price from MIL was Rs. 11,651 per metric ton and from M/s SCL, it was Rs. 11,724. On the other hand, the Assessing Officer found that both the suppliers of raw material, namely, MIL and SCL had been selling their products to outsiders at a much lower price. While MIL was selling to outside buyers at an average price of Rs. 11,640 per metric ton and the selling price of SCL to outsiders was Rs. 11,586 per metric ton. Thus the assessee company on average paid Rs. 11 per metric ton extra to MIL and Rs. 138 to SCL. Keeping in view this fact, the Assessing Officer adopted Rs. 11,586 as the reasonable purchase price for the assessee company and the excess payment amounting to Rs. 22,80,404 was held to be payment not nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly the addition of Rs. 22,80,404 is confirmed. 4. Being aggrieved, the assessee company preferred an appeal before the Tribunal. The learned counsel for the assessee company has submitted that there is no justification to apply the average purchase rate, as the market rate of purchase keeps on fluctuating from time to time, therefore before an adverse inferences is drawn that the assessee had paid any extra amount, as alleged, it must have been established that on the date, purchases were made, the payments made by the assessee were in excess of the fair market price of the merchandise purchased. The prices paid to M/s MIL and M/s SCL were the same on the given date and the calculation of average price is just a mathematical absurdity. However, M/s MIL has sold M.S. ingots to other parties during the financial year and the average selling price (party-wise) varied from Rs. 9,000 per metric ton to Rs. 12,248 per metric ton depending upon market forces such as the quantity supplied to them, time of delivery, as the price of M.S. ingots varies from day-to-day basis, terms of payments. Similar is the case with M/s SCL. The learned counsel has further submitted that sales to part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in respect of which payment has been or is to be made to any person referred to clause (b) of the sub-section, and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him, therefrom, so much of the expenditure as is to be considered by him to be excessive or unreasonable and shall not be allowed as a deduction. 7. The scope of the section has been explained in the circular of CBDT No. 6P(LXXXVI-66) of 1968, dt. 6th July, 1968 in which in paras 72 and 74, it is stated thus : Para 72 : The Finance Act, 1968, has introduced a new section 40A in the IT Act w.e.f. 1st April, 1968. Under sub-section (2) of new section 40A, expenditure incurred in a business of profession for which payment has been or is to be made to the taxpayer's relatives or associate concerns is liable to be disallowed in computing the profits of the business or profession to the extent the expenditure is considered to be excessive or unreasonable. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the case of the Revenue is that the assessee has purchased the raw material from the two sister-concerns viz., M/s MIL and M/s SCL which are situated in the same premises, at a price higher than the prices charged by these concerns from the other parties by working out the average purchase rate of the raw material purchased by the assessee from time to time. 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 section 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 section 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 or 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 Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his wide variation in the power consumption. The assessee was also asked to explain as to why it should not be presumed that the excess power consumed was the power consumption for undisclosed production. The assessee in its response stated that the consumption of power was a variable of the following conditions : 1. Furnace conditions as power consumption increases with the age of furnace; 2. Quality of raw materials; 3. Labour productivity; 4. Incoming voltage; 5. Breakdown maintenance time; 6. Size of finished goods; 7. Climatic conditions. 11. The Assessing Officer examined the above submissions of the assessee company. He agreed that the power consumption may vary a little bit with the aging of the furnace. Regarding all other factors the Assessing Officer concluded that there was no abrupt change as compared to the preceding year. The Assessing Officer also examined and rejected the arguments of the appellant company regarding the checking by excise authorities and also regarding the installed capacity of the plant. Giving benefit of the furnace getting old and therefore consuming more power, average consumption of power per metric ton of production wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer in relation to furnance condition, quality of raw material used, labour productivity, incoming voltage, breakdown/meant time, size of finished goods rolled and climatical condition, etc. Due to the above reasons, monthly consumption of power varied between 141.41 units to 223.99 units in the instant year as compared to 117 units to 287 units in the immediately preceding year. He has submitted that the similar variation existed in the preceding year also, but no adverse inference had been drawn in those years. The learned counsel has further submitted that the assessee had maintained regular books of account and all sales/purchases were fully vouched, recorded and supported by raw material consumption register and production register and finished goods register and was also subjected to excise duty and its production declared for the instant year at 2089.098 mt had duly been accepted by the Excise Department after verification. He has further argued that merely because variation in consumption in electricity cannot be regarded as a ground to disregard the declared version of the assessee. A reliance in this regard has been placed upon the decision in the case of N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mental Representative relied upon the orders passed by the authorities below. He has further submitted that there is no material on record to show that there was breakdown in the electricity supply during the year under consideration. Thus, he has supported the order passed by the Assessing Officer. 16. We have heard the parties and have perused the material to which our attention was drawn. It is seen that the assessee has maintained its regular books of account and all the sale and purchase vouchers are duly vouched and supported by raw material register. The fact that the assessee has maintained regular books of account and the Assessing Officer has not pointed out any defect in the books of account of the assessee has, itself been admitted by the CIT(A) in the impugned order. The fact that all the sale and purchase vouchers were fully vouched/recorded and supported by the raw material consumption register, production register and finished goods register and also subjected to excise duty has also not been disputed by the Revenue Department. The fact that the consumption of electricity shown by the assessee was higher can give rise to a strong suspicion that the assessee might ..... 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