TaxTMI 
TaxTMI 
2012 (6) TMI 287
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.... CIT(A) has erred in law and in facts, in upholding the action of the Assessing Officer of arbitrarily applying a rate of Gross Profit while determining the income of the Appellant and rejecting the books. 3. Based on the facts and circumstances of the case, the Ld CIT(A) erred in facts in observing that transaction between the Appellant and its holding company cannot be treated at arms length and that the Appellant is a shell company." 3. All the aforesaid grounds raised by the assessee revolve around the addition of Rs. 6,46,49,000/- on account of purchases disallowed u/s 40A(2)(a) of the Act. 4. The assessee company was incorporated on 21.10.1993 under the provisions of the Companies Act, 1956. It is engaged in the business of manufacturing and trading in beverages and also provides loans to companies involved in the business of manufacturing of soft drink beverages. The assessee filed its return of income on 28.11.2003 declaring a loss of Rs. 16,81,33,590/-. The return was accompanied by annual audited accounts and tax audit report. The AO then framed the assessment u/s 143(3) of the Act vide his order dated 20.3.2006 whereby he determined the assessee's lo....
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....ase price but the gross loss arose primarily because of the fact that it was catering to market in metropolitan cities where due to severe competition, the assessee had to give trade discount in the form of extra cases, resulting in a gross trading loss. 6. The submissions of the assessee filed before the AO were considered by the AO. The AO stated that it was beyond comprehension that how the assessee engaged in the trading of a commodity, due to competition in the market, would sell it in such a way so as to incur a gross loss in the said activity. The AO further stated that it would have been understood if the commodity traded was assessee's own produce and initial loss was incurred to build a market for the product, which is not the case of the assessee inasmuch as the assessee was selling the product manufactured by a separate company. The AO then pointed out that the assessee made payment of Rs. 50.83 crores to PIH for purchase of goods. The said concern PIH is a concern specified u/s 40A(2)(b) of the Act. The AO, therefore, stated that almost 99% of the purchases were made by the assessee from its sister concern covered by Section 40A(2)(b) of the Act. The assessee's subm....
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....mn 706 as well as the decision of the Tribunal Delhi Bench in the case of Vishal International Productions (P.) Ltd. v. IAC [1987] 20 ITD 273 (Delhi). The assessee further submitted before the AO that the provisions of Section 40A(2)(b) of the Act are not applicable to the present case inasmuch as the AO has not been able to prove and establish that the assessee purchased the goods from sister concern not at a fair market value of the goods. After considering the assessee's submission and the AO's order, the learned CIT(A) decided the issue against the assessee by holding as under:- "3.7 I have considered the submissions of the appellant and also perused the detailed findings of the AO in the assessment order. Before I advert to deal with the various case laws cited by the appellant it is highlighted that the Income Tax Act is not based upon judicial pronouncements but rather on the facts of the case. The past precedence has to be read with only in the light of the facts of the appellant's own facts which are staring at the face in the instant case. First I deal with the objection raised by the appellant that the onus was on the AO to prove that provisions of section 40A(2) were....
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....eads as under:- "Gross loss has been incurred in the relevant assessment year in the normal course of business of the assessee. The primary reason for such loss is the price of the product sold by the assessee and depreciation cost of the plant. In order to survive and maintain its market share, the assessee is selling the product at a competitive price resulting in a loss. As you may be aware that the soft drink industry faced a severe price war between us and our competitors i.e. Coca Cola which led to aggressive pricing. However, the assessee envisages profits in coming years in view of a likely increase in the selling price of soft drinks and beverages and an increase in per capita consumption of aerated and non aerated drinks and beverages. We would like to bring to your notice that the Gross profit has improved over the previous year. The assessee is hopeful of achieving operating efficiency in the future to achieve break-even point. The business is also being carried on in order to recover a portion of fixed investments made by the assessee company in setting up and expanding its business operations, once the breakeven point has been attained." 12. The learned couns....
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....well established commercial practice that discounts are allowed to the customers on the purchases made by them by offering additional article(s) on each articles sold, for example, if one buys an article, then sale price of that article only is realized, and by way of incentive and in order to boost sales, another article is supplied free of cost or at a discount. He, therefore, submitted that the assessee had incurred losses because of allowing discounts to the customers on the purchases made by them. 15. The learned counsel for the assessee further contended that low profit shown by the assessee by itself cannot be a ground for rejection of book results. In support thereof, he relied upon various decisions listed in the written synopsis filed by the assessee. 16. The learned counsel for the assessee then submitted that in the instant case, all the purchases and sales made by the assessee were fully and wholly verifiable, there was a complete stock tally, the purchase and sales rates were verifiable, method of accounting was also the same as adopted in the preceding assessment years and in the light of these facts, the attempt of the AO to reject the book results and then to....
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....nt advanced by the learned counsel for the assessee was purely in the line under which the AO has made the addition and further confirmed by the learned CIT(A). 21. We have considered the rival contentions and gone through the orders of authorities below. We have also gone through the various documents cited at the time of hearing by the learned counsel for the assessee. 22. In this case, the AO has made a disallowance of Rs. 6,46,49,000/-out of the aggregate purchases made of Rs. 50.83 crores by the assessee from PIH, by invoking the provisions of Section 40A(2)(a) of the Act. The AO has also rejected the book results of the assessee and applied GP rate of 13.73% shown by another concern, namely, Aradhana Soft Drinks Co. and worked out the GP at Rs. 6,27,55,000/- as against the loss of Rs. 18,94,000/- declared by the assessee. The AO, therefore, made the addition to the extent of Rs. 6,46,49,000/- (Rs. 6,27,55,000 + Rs. 18,94,000) by way of adjustment to the purchases made by the assessee from its sister concern PIH. The disallowance of the purchases has been made by the assessee merely for the reason that the purchases were made from PIH covered by Section 40A(2) and the pu....
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....s considered by the AO to be of excessive or unreasonable, having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the assessee for business or profession or the benefit derived by the assessee or accruing to the assessee for payment, then so much of the expenditure as is so considered by the AO to be excessive or unreasonable shall not be allowed as a deduction. If the above conditions are fulfilled, the AO can disallow the expenditure to the extent he considers it excessive or unreasonable by the above objective standards or otherwise. The object, scope and effect of the introduction of Section 40A(2)(a) was explained by the Board in its Circular No.6P of 1968 dated 6.7.1968 and in that Circular at para 74, the Board has stated that where payment for any expenditure is found to have been made to a relative or associate concern falling within the specified categories, it will be necessary for the AO to scrutinize the reasonableness of the expenditure with reference to the criteria mentioned in the Section. It was further stated that the AO is expected to exercise his judgment in a reasonable and fair mann....
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....give benefit to PIH and book the loss in its own account. The assessee has also furnished copy of invoices for sales made by PIH to unrelated parties which are placed at pages 37 to 81 of the paper book. The rate at which goods were sold to PIH by the assessee are not found by the AO to be excessive in comparison to the rate at which the goods were sold by PIH to unrelated parties. In the trading account, the assessee had shown sales of goods made at the rate higher than the purchase rate. The assessee has explained that the loss has been incurred by the assessee not for the reason that the purchases were made at an excessive price than the fair market value or because the sales were made at rate below purchase price but the loss has been incurred because the assessee had offered to its customers extra cases of goods by way of trade discount. The fact that assessee had offered trade discount by way of giving extra cases has nowhere been disputed by the AO. The AO has also not disputed the sales made by the assessee to its customers. The AO has merely adopted the criteria of determining the GP at 13.73% which has been shown by another concern, namely, Aradhana Soft Drinks Co. The AO....