2012 (9) TMI 289 - AT - Income Tax

Tribunal Limits Tax Assessments, Stresses Evidence and Legal Compliance

The Tribunal partially allowed the appeal, deleting significant additions made by the Assessing Officer and upheld by the CIT(A). The Tribunal emphasized ... Best judgement assessment - rejection of books of account - rice mill - alleged lower yield on comparison with yield of other rice mills - undervaluation of closing stock of by product - Held that:- Simply because the yield has been marginally less in case of the assessee, the books of account could not have been rejected. The Assessing Officer has not brought any material on record to show that actual yield was higher in case of the assessee. Therefore, addition in this respect is directed to be deleted. As far as addition in respect of valuation of closing stock of husk is concerned, in our opinion, the correct value of stock has to be adopted even if books are not rejected. Since we have not upheld the rejection of books of account still addition on account of correct value of closing stock can be maintained and accordingly we confirm the order of the ld. CIT(A) in this regard. Addition u/s 40A(2) - goods sold to sister concern at lower value - Held that:- It is settled law that Section 40A(2) can not be applied for making addition for the difference in value of sales at which the goods are actually sold and the value which in the opinion of the Assessing Officer is correct value. Further, Supreme Court in case of CIT V. Glaxo Smithkline Asia (P) Ltd (2010 (10) TMI 21 - SUPREME COURT OF INDIA ) has itself agreed that certain amendments are required to be made in Section 40A(2) if Transfer Pricing Regulations were required to be applied to domestic transactions between related parties. In view of aforesaid, provisions of section 40A(2) cannot be attracted for making addition on account of difference in sale value effected by the assessee in comparison to the fair market value - Decided in favor of assessee. Undervaluation of closing stock - Held that:- Stock has to be valued at cost or market value whichever is lower and the sale value cannot be applied for valuation of closing stock - Decided in favor of assessee Issues Involved:1. Invoking provisions of section 145(3) by the Assessing Officer.2. Addition based on comparing average sales realization with others.3. Valuation of closing stock of husk.4. Sales to sister concern and their valuation.Detailed Analysis:Issue 1: Invoking Provisions of Section 145(3)The assessee contested the invocation of section 145(3) by the Assessing Officer (AO), arguing that no patent defect or positive material was shown to prove the unreliability of the books. The AO had noted a yield of 17.55% from the assessee's rice mill, compared to 18-19% from other mills, and questioned the valuation of closing stock of husk. The AO rejected the books of account, considering an 18% yield reasonable and added Rs. 14,682/- on trading results and Rs. 2,32,300/- for the lower value of husk. The Tribunal found that the Special Bench in the case of Shanker Rice Co. V. ITO held that books cannot be rejected for small yield variations. The AO did not provide material evidence to show higher actual yield. Consequently, the Tribunal set aside the CIT(A)'s order and deleted the addition of Rs. 14,682/-.Issue 2: Addition Based on Comparing Average Sales RealizationThe AO compared the assessee's sales realization with other entities and made additions based on higher average sale rates observed elsewhere. The Tribunal noted that law does not obligate a business to sell at maximum rates and that the quality of goods affects the sale price. The Tribunal cited the Madras High Court in CIT V. A.K. Subbaraya Chetty & Sons, which held that Section 40A(2) pertains to expenses, not revenue. The Supreme Court in CIT V. Glaxo Smithkline Asia (P) Ltd suggested that amendments are needed if Transfer Pricing Regulations are to apply to domestic transactions. The Tribunal concluded that Section 40A(2) cannot be used to make additions based on sales value differences. The Tribunal set aside the CIT(A)'s order and deleted the addition of Rs. 3,56,596/-.Issue 3: Valuation of Closing Stock of HuskThe AO valued the closing stock of husk at Rs. 98.54 per qtl, while the assessee valued it at Rs. 75/- per qtl. The CIT(A) directed the valuation at Rs. 80/- per qtl. The Tribunal agreed with the CIT(A), noting that the correct value of stock must be adopted even if the books are not rejected. The assessee failed to produce invoices showing sales at Rs. 75/- in March 2007. Thus, the Tribunal upheld the CIT(A)'s order valuing husk at Rs. 80/- per qtl.Issue 4: Sales to Sister Concern and Their ValuationThe AO observed that the assessee sold rice bran to a sister concern at Rs. 529.18 per qtl, lower than rates observed in other entities. The AO adopted an average rate of Rs. 668/- per qtl for additions. The Tribunal found that Section 40A(2) cannot be applied to sales transactions for making additions based on fair market value differences. The Tribunal emphasized that the value of closing stock should be at cost or market value, whichever is lower. The Tribunal set aside the CIT(A)'s order and deleted the addition of Rs. 3,56,596/- related to sales and closing stock valuation.Conclusion:The appeal was partly allowed, with significant deletions of additions made by the AO and upheld by the CIT(A), emphasizing the need for concrete evidence and proper legal provisions to justify such additions.