Related-party purchases priced at same discount and cash-deposit gifts evidence: s.40A(2)(b) disallowance deleted; 50% added.

Disallowance under s.40A(2)(b) for purchases from a related concern was held unsustainable because the AO failed to produce comparables or other material to show that the price paid was excessive or unreasonable; since the assessee bought goods at the same discounted price at which the related concern had acquired them, the disallowance was deleted. On addition for cash deposits claimed as accumulated cash gifts, the assessee could not fully substantiate the source; the CIT(A)'s estimation granting 50% relief on grounds of reasonableness was upheld and the balance 50% was sustained as unexplained. On denial of cost of improvement, additional evidence and bank-trail payments supported genuineness and sources, and the CIT(A)'s deletion of the addition was affirmed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether disallowance of purchases from a related concern as "excessive or unreasonable" under section 40A(2)(b) was sustainable when the payer produced documentary support and the Assessing Officer did not bring comparables to show excessiveness.

(ii) Whether cash deposits during the demonetization period were liable to be added as unexplained money under section 69A where the assessee demonstrated availability of cash from recorded sales/realisation from debtors, and the appellate authority partly accepted a claim of cash gifts on a reasonableness basis.

(iii) Whether deduction for "cost of improvement" while computing capital gains could be denied merely due to deficiencies noticed in some bills, when bank-channel payments and supporting confirmations/invoices were produced (including additional evidence admitted with remand), and the expenditure was found to have been actually incurred.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Disallowance under section 40A(2)(b) for related-party purchases

Legal framework (as discussed): The assessment invoked section 40A(2)(b) on the basis that purchases from a related concern were not shown to be reasonable and genuine, and were treated as excessive/unreasonable.

Interpretation and reasoning: The Court noted that documentary evidence supporting the purchases (including ledger, stock details, bank payments, and distributorship-related communications/records) was produced before the appellate authority and was sent to the Assessing Officer for remand. In the remand report, no adverse inference was drawn from those documents. The Court further held that mere related-party character of a purchase does not justify disallowance unless the Assessing Officer brings material, including comparable instances, to demonstrate that the consideration was excessive or unreasonable. The Court also accepted the factual finding that the purchase price matched the supplier's purchase price and was effectively at discounted rates, negating any allegation of excess payment.

Conclusion: The Court upheld deletion of the disallowance, holding that section 40A(2)(b) was incorrectly applied in the absence of comparables and in view of uncontroverted documentary evidence and pricing parity/discount.

Issue (ii): Addition of cash deposits under section 69A during demonetization

Legal framework (as applied): The Assessing Officer treated cash deposits as unexplained under section 69A on the ground that source was not proved.

Interpretation and reasoning: The Court accepted the appellate finding that cash deposits were explainable to the extent they were supported by the cash book and were attributable to cash sales and cash realisation from debtors, where the underlying sales were already recorded in accounts and reflected in the profit and loss account, and were not disputed by the revenue. The Court found no infirmity in treating such recovered cash as explained source for deposits. For the balance amount claimed as accumulated cash gifts over years, the Court noted lack of full evidentiary support, yet sustained the appellate authority's approach of allowing 50% on "reasonableness" and sustaining the remaining 50% as unexplained, considering it to meet the ends of justice. Since no challenge was before the Court against the sustained portion, the focus remained on whether the relief granted was justified.

Conclusion: The Court affirmed deletion of the addition to the extent supported by recorded cash realisation from sales/debtors and also affirmed partial, reasonableness-based relief for the claimed cash gifts, sustaining only the balance as unexplained.

Issue (iii): Allowability of "cost of improvement" in capital gains computation

Legal framework (as examined): The dispute concerned eligibility of deduction for cost of improvement claimed against capital gains, and whether the expenditure and its source were proved.

Interpretation and reasoning: The Court noted that, although the Assessing Officer disbelieved certain bills/vouchers (including for absence of delivery/transportation details and concentration of billing), the assessee produced further material before the appellate authority, including invoice summaries, confirmations, and bank statements evidencing payments through banking channels to multiple parties. This additional evidence was remanded to the Assessing Officer. The Court accepted the appellate finding that the expenditure was actually incurred and supported by documentary evidence, that payments were through regular banking channels, and that the property and improvement expenditure were in joint ownership with proportional contribution. The Court also noted that confirmations regarding unsecured loans used as source and confirmations from payees were on record.

Conclusion: The Court upheld the direction to allow deduction for the claimed cost of improvement, finding no infirmity where expenditure and payments were evidenced and not effectively rebutted in remand.

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