1976 (2) TMI 15 - HC - Income Tax

Court Rejects Tribunal Decision on Tobacco Price Disallowance

The Tribunal was found unjustified in disallowing a portion of the actual price paid for tobacco to the partners. The court held that the prices paid were ... Bona Fide, Total Income Issues Involved:1. Justification of the Tribunal in disallowing a part of the actual price of tobacco bought from the partners and their relatives.2. Legality of the Tribunal's conclusion that the partners and their relatives were paid a higher price.Summary:Issue 1: Justification of the Tribunal in Disallowing a Part of the Actual Price of Tobacco Bought from the Partners and Their RelativesThe assessee, a registered firm dealing in tobacco, was assessed for the years 1962-63 to 1965-66. The Income-tax Officer added back certain amounts to the firm's income, alleging that the purchase price of tobacco from the partners and their relatives was inflated. The officer compared the average purchase price from outside parties (Rs. 32 per 20 Kgs.) with that from the partners and their relatives (Rs. 41.40 per 20 Kgs.), concluding that the difference represented inflation. The assessee contended that the higher price was due to superior quality tobacco, but failed to provide evidence. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld the Income-tax Officer's decision, citing lack of evidence for the superior quality claim. The Tribunal also rejected an alternative submission to reduce the quantum of addition, as it was not raised earlier and lacked material support.Issue 2: Legality of the Tribunal's Conclusion that the Partners and Their Relatives Were Paid a Higher PriceThe court examined precedents, including *Ramalinga Choodambikai Mills Ltd. v. Commissioner of Income-tax* and *Commissioner of Income-tax v. Keshavlal Chandulal*, which established that unless a transaction is shown to be a sham or not bona fide, the taxing authorities cannot substitute market prices for the prices recorded in the books. The court found that the transactions in question were bona fide and the prices paid were as recorded in the books. The Income-tax Officer's method of averaging prices without considering market fluctuations and quality differences was deemed unscientific. The court concluded that the Tribunal was not justified in disallowing part of the actual price paid for tobacco.Conclusion:1. The Tribunal was not justified in disallowing a part of the actual price of tobacco paid to the partners. The answer to question No. (1) is in the negative, in favor of the assessee and against the revenue.2. The Tribunal's conclusion that the partners and their relatives were paid a higher price was erroneous in law. The answer to question No. (2) is in the affirmative, in favor of the assessee and against the revenue.The Commissioner is directed to pay the costs of this reference to the assessee.