2008 (1) TMI 644 - AT - Income Tax

Tribunal Rules in Favor of Assessee: CIT's Jurisdiction Invocation u/s 263 Deemed Unjustified, Order Quashed.

The ITAT allowed the appeal, ruling in favor of the assessee. The tribunal found that the CIT's invocation of jurisdiction under section 263 was ... Validity of order passed by CIT u/s 263 - Disallowance u/s 40A - of orders prejudicial to interest of revenue - Profit is earned from the purchases made from a sister concern - HELD THAT:- In our opinion the ld. CIT has considered the fair market value of the purchases only by keeping in mind the purchases made from 2 outside parties, i.e., M/s. Tilak Holding and M/s. Mega Power Builders while the sales made by the assessee at the rate of Rs. 7,925 per MT should also be considered as the fair market price of the DoC. In this transaction the assessee is the seller and the party to whom the sale was made is the purchase and the transaction also exhibits price of the goods. This is the reason where a profit is earned from the purchases made from a sister concern, disallowance under section 40A(2)(b) is not justifiable. It is not the case that purchases were made in the past. The sale and purchase of DoC has taken place in a period of 2 months only. The assessee had earned the profit. The ld. CIT cannot expect that assessee should earn how much profit whether it is Rs. 25 or Rs. 725. AO might have not discussed this issue for this simple reason. We also find force in the other arguments raised before the ld. CIT also. The very basis of the enquiry is not available therefore, the ld. CIT is not justified in taking action u/s 263 of the Act. Thus, we allow the appeal and quash the order passed under section 263. In the result, the appeal is allowed. Issues:1. Jurisdiction under section 263 of the Act based on inflated purchase price.2. Application of section 40A(2)(b) regarding purchases from associate concern.3. Principles to judge CIT's action under section 263.4. Disallowance under section 40A(2)(b) based on fair market value.Analysis:Issue 1: Jurisdiction under section 263The ld. CIT invoked jurisdiction under section 263 of the Act based on the belief that the assessee inflated purchase prices from an associate concern, causing a fall in Gross Profit. The ld. CIT issued a show-cause notice to the assessee to explain why action under section 263 should not be taken.Issue 2: Application of section 40A(2)(b)The assessee contended that the purchase price from the associate concern was justified as the goods were sold at a higher rate, indicating a profit. However, the ld. Commissioner held that even if profits were made, overpayments above the fair market value should be disallowed under section 40A(2)(b). The ld. Commissioner compared the purchase prices from outside parties to determine the fair market value, disregarding the selling price by the assessee.Issue 3: Principles to judge CIT's actionThe ITAT referred to established principles to assess the CIT's action under section 263. Notably, the CIT must prove that the Assessing Officer's order is both erroneous and prejudicial to revenue. The CIT cannot correct every mistake but only erroneous orders. The CIT must have material to support his decision and cannot substitute his income estimate for that of the Assessing Officer if due diligence was followed.Issue 4: Disallowance under section 40A(2)(b) based on fair market valueThe ITAT analyzed the transaction period, profit earned, and the absence of detailed discussion in the assessment order regarding the disallowance under section 40A(2)(b). It was emphasized that the selling price by the assessee should also be considered the fair market value, especially when profits were made. The ITAT concluded that the ld. Commissioner's decision lacked a basis for enquiry, thus quashing the order under section 263.In conclusion, the ITAT allowed the appeal, ruling in favor of the assessee due to the lack of justification for the ld. Commissioner's action under section 263.