2020 (2) TMI 421 - AT - Income Tax

Tax Tribunal Appeals: Sales to Sister Concerns, Profit Diversion, Cost Selling, Tax Reduction, Interest Dismissed

Shri R. Pratap, Shri R. Prakash, Smt. T.C. Usha, Shri Ravindranathan Nair And M/s. Vijayalaxmi Cashew Co., Versus The Assistant Commissioner of Income-tax, Circle-1, Kollam

Shri R. Pratap, Shri R. Prakash, Smt. T.C. Usha, Shri Ravindranathan Nair And M/s. Vijayalaxmi Cashew Co., Versus The Assistant Commissioner of ... Issues Involved:1. Sustaining arbitrary addition on sales to sister concerns.2. Failure to establish diversion of profit to sister concerns.3. Allegation of policy to sell below cost.4. Allegation of planned device to reduce tax incidence.5. Revenue neutrality of alleged underpricing.6. Acceptance of trading results by the Sales Tax Department.7. Charging of interest under section 244A of the Act.Detailed Analysis:1. Sustaining Arbitrary Addition on Sales to Sister Concerns:The assessees argued that the CIT(A) erred in sustaining the addition on sales to sister concerns, which was based on selective data and the difference between cost and selling price. The CIT(A) concluded that transactions with sister concerns were not genuine or bonafide, resulting in a loss on the sale of cashew kernels amounting to Rs. 89,76,885/-. The assessees contended that the transactions followed the Arms Length Price (ALP), with pricing corresponding to the weighted average market price of direct exports, which had been accepted by the Department in previous years.2. Failure to Establish Diversion of Profit to Sister Concerns:The CIT(A) concluded that the appellant failed to discharge the onus of proving no diversion of profit to sister concerns to enable them to enjoy tax exemptions. The CIT(A) observed that the onus to establish the genuineness of the transaction lies with the assessee, especially when the transactions result in a loss and involve sister concerns enjoying tax exemptions. The CIT(A) noted that the sale prices were much below the domestic rates and the assessee did not claim any export benefits on sales to sister concerns.3. Allegation of Policy to Sell Below Cost:The AO alleged that the assessee had a policy to sell below cost, which was not substantiated by any concrete evidence. The CIT(A) observed that the higher grades were sold to sister concerns at prices above cost, but the lower grades were sold below cost. The CIT(A) noted that the assessee had not satisfactorily explained the business expediency for the pricing policy to sell below cost.4. Allegation of Planned Device to Reduce Tax Incidence:The AO and CIT(A) alleged that the sales to sister concerns were a planned device to reduce tax incidence, which was not backed by any concrete evidence. The CIT(A) relied on the judgment of the Gujarat High Court in the case of Patel Chemical Works vs CIT (265 ITR 273), which held that a sale to a sister concern at a price below the market price was a device for tax avoidance.5. Revenue Neutrality of Alleged Underpricing:The assessees argued that any addition alleging underpricing to sister concerns should result in a corresponding addition in the purchase cost of the latter, making the whole exercise revenue neutral. The CIT(A) opined that the concept of revenue neutrality could not be applied as all the concerns were doing their business independently and the profit that the assessee would have earned was diverted to units entitled to deduction under section 80HHC of the Act.6. Acceptance of Trading Results by the Sales Tax Department:The assessees contended that the trading results filed by them were accepted by the Sales Tax Department, and no addition was made either on the assessee or sister concerns in any of these years. The CIT(A) did not find this argument sufficient to conclude that the transactions were genuine and bonafide.7. Charging of Interest under Section 244A of the Act:The AO brought to tax the interest on income tax refund amounting to Rs. 3,84,680/- received by the assessee for the AYs 2006-07 & 2007-08 under section 244A of the Act. The CIT(A) confirmed the AO’s action, stating that the interest on income tax refund is to be taxed in the year of actual receipt, as per the decision of the ITAT, Chennai in the case of DCIT vs. Seshasayee Papers and Bonds Ltd. (2 ITR (Trib.) 417).Conclusion:The Tribunal allowed the appeals of the assessees on the grounds of arbitrary addition on sales to sister concerns, failure to establish diversion of profit, allegations of policy to sell below cost, planned device to reduce tax incidence, and revenue neutrality of alleged underpricing. The Tribunal dismissed the appeal regarding the charging of interest under section 244A of the Act, confirming that it should be taxed in the year of actual receipt.