INCOME TAX APPELLATE TRIBUNAL- PUNE

I.T.A..No.802/PN/2010 (assessment year 2006-07).

Shri Shailendra Kumar Yadav And Shri R. K. Panda,JJ.

Smt.Deepa Khare For the Petitioner :
Shri Rajesh Dawot For the Respondent :

The judgment of the court was delivered by

Shailendra Kumar Yadav, JM:-This appeal has been filed by the Revenue against the order of the CIT(A) on following grounds:

1. The order of the learned CIT(A) is erroneous on ground of law and fact.

2. The learned CIT(A) erred in deleting the addition made by the Assessing Officer u/s.40A(2) of Rs. 12,58,064/- being the unreasonable purchase price paid to its sister concern M/s.Aarti Industries for purchase of scrap.

3. The learned CIT(A) erred in overlooking the fact that the addition made by the Assessing Officer was based on detailed verification of seized documents as well as books of accounts of the assessee and also that of its sister concern M/s.Aarti Steel Industries.

4. The learned CIT(A) erred in overlooking the fact that the assessee had failed to furnish any explanation or evidence with regard to discrepancy noticed by the Assessing Officer in the accounts furnished by the assessee along with the return of income in its own case and also that of the accounts furnished alongwith the return of income of its sister concern M/s.Aarti Steel Industries.

2. The assessee is a private limited company engaged in the business of steel trading. The Assessing Officer completed the assessment u/s.143(3) by making addition of Rs. 12,58,064/- u/s. 40A(2) of the Act being excess purchase price paid to sister concern. Matter was carried before the first appellate authority wherein CIT(A) deleted the addition in question. Same has been opposed before us, inter alia, submitted that the CIT(A) was not justified in deleting the addition made by the Assessing Officer by invoking provisions of section 40A(2) of Rs. 12,58,064/-. The CIT(A) erred in overlooking the fact that the addition made by the Assessing Officer was based on detailed verification of seized documents as well as books of accounts of the assessee and also that of its sister concern M/s.Aarti Steel Industries. The CIT(A) also erred in overlooking the fact that the assessee has failed to furnish any explanation or evidence with regard to discrepancy noticed by the Assessing Officer in the accounts furnished by the assessee along with the return of income in its own case and also that of the accounts furnished alongwith the return of income of its sister concern M/s.Aarti Steel Industries. On the other hand, Ld. Authorised Representative relied on the order of the CIT(A).

3. After going through the above submissions and material on record, we find that the Assessing Officer has made addition of Rs. 12,58,064/- u/s. 40A(2) being excess purchase price paid to sister concern M/s.Aarti Steel Industries. The Assessing Officer noticed that the assessee has made purchase of scrap from its sister concern M/s.Aarti Steel Industries. On verification of the record of M/s.Aarti Steel Industries and other relevant details, the Assessing Officer concluded that purchases made from said sister concern were unreasonable and inflated and made addition of Rs. 12,58,064/- under the provisions of section 40A(2) on this account. The relevant portion of the assessment order is extracted below:-

"As per books of accounts produced for verification for the year under consideration, it is seen that the assessee has made following purchases of scrap from its sister concern Aarti Steel Industries, Nashik.

Purchase L.F 1

Less Excise Duty borne by 'a' Rs. 216846
Basic purchase effected Rs. 1328713

On verification of the records of Aarti steel Industries for the year under consideration, it is seen that the sale of scrape to Rajrani Steel Casting Pvt. Ltd is shown at Rs. 1328713/-. On verification of the quantity trading account of scrap as per excise register (From IV), pertaining to Aarti Sell Industries, it is seen that the quantity of scrape sale to sister concern is worked out at 52.465 MT with Opening stock of scrap at 117.985, generation 58/980 MT and closing stock 124.500 MT. The valuation of closing stock of 124.500 MT is shown at Rs. 164010/- which gives the rate at Rs. 1317.34 per MT (164010/124.500 MT). The GP shown by Aarti Steel Industries is 2.22%. Therefore, the market rate of the scrap sold works out to Rs. 70649/- after including profit (52.465x1317.34 + 2.22% GP Rs. 1534.33). Therefore, the purchase expenses made by the assessee is found inflated by Rs.l258064/- (Rs.l32873- 70640). In view of the fact that the partners of Aarti Steel Industries are the director of the assessee company, the purchases claimed by the assessee on account of purchase of scrap form Aarti Steel Industries are found excessive and unreasonable in view of the provision of Sec. 40A(2).

A show cause notice was issued to the assessee on 08.10.2007 asking his explanation as to why the purchases expenses should not be disallowed. In response to the show cause notice the assessee submitted vide letter dated 24.10.2007 the following explanation.

"As regard excessive purchase expenses u/s.40A(2) as mention on page no.2, vide letter date 08.10.2007 for A.Y.2006-07 clarification is as follows.

The figure mention by your dose not appear in our Excise register (RG-1).
The Exact scrap account details as per our Excise register (RG-1).

The Excise register also shows the same balance only, thus there is no any difference in closing stock as mentioned by your honour in notice.

Hence there is no any requirement of addition of Rs. 1258064/- u/s40A(2) we have brought herewith Original register also for your verification Xerox copy enclosed."

I have gone through the explanation of the assessee carefully the explanation is not acceptable. The assessee has given a reply on the basis of entries in the excise register. The figures in excise registers regarding the stock position and the scrap generation and transfers are all made on approximate and random basis. It may be noted that there was substantial discrepancy found in stock at the time of search action for which the assessee has made separate declaration. Considering this aspect the assessee's contention based on the working of the Excise register R G-l for working of the figure of opening stock, generation and closing stock after crystalising the sale to sister concerns are not reliable evidence. The above issue regarding the discrepancy in quantity of scrap when cross verified sister concern has been observed form details of quantity as per books of accounts of the assessee and that of Aarti Steel Industries. The assessee has not given any explanation as to the discrepancy apparent in the accounts furnished with the return of income in its own case and the accounts furnished with the return of income of Aarti Steel Industries. Therefore the assessee has failed to explain the above discrepancy. It is therefore, a case of disallowance of excessive expenditure in the case of the assessee. The amount of Rs. 1255064/- is added to the total income u/s.40A(2). I am satisfied that this is a fit case for initiation of penalty proceedings under sec.271(l)(c)."

4. Matter was carried before the first appellate authority wherein Ld. Authorised Representative made submissions before the CIT(A), which are reproduced as under:-

"In our submission we have already given quantitative details from Excise Register (R.G.-l) of M/s Aarti Steel Industries as to the Opening Stock, Generation during the year, Transferred to sister concern (Sale) & closing stock of scrap.

In the Assessment Order it is mentioned that quantitative details are taken by A.O. from Excise Register (From IV) of M/s Aarti Steel Industries. However Excise register (From IV) does not contains any details as to the Opening & Closing Stock of Scrap. In the said register, only scrap generated out of the manufacturing is recorded. There is no any dispute with Learned A.O. as to the Quantity of Generation & Sales to the sister concern. Dispute is only about the Opening Stock & Closing Stock of Scrap.

Also we would like to bring to the notice of your honour that Learned A.O. in the Assessment order of M/s Aarti Steel had accepted Closing Stock of Scrap at 11.715 M.T. which was reflecting in Excise Register R,G. 1. (We are herewith enclosing the copy of Assessment Order of M/s Aarti Steel Industries)

Learned A.O. had gone through the Excise Register R.G. & had shown his acceptance to the following:-

In our case Learned A.O. had determined the Rate per M.T. as follows:
Closing Stock of Scrap as taken by A.O. 124.500 MT

Value of Closing Stock as per Books ofM/s Aarti Rs. 164010/- Steel Industries
Rate per M.T. (164000/124.500)
Rs. 1317.35
If while determining the rate, quantity taken as basis (i.e. 124.500 M.T. instead of 11.715M.T.) is wrong then the whole calculation will reflect wrong picture

On detailed verification of all purchase bills it seems that the rate per K.G. and /or Per M.T. is approximately more or less same to the rate at which the scrap is purchase from M/s Aarti Steel Industries.

How the rate per M.T. (Rs.1317.35) as determine by Learned A.O. is wrong we are herewith also given table showing the Rate of purchases from Aarti Steel & from other parties.

There is very slight difference in rate because of the following reasons:
1. Difference in type of material
2. Difference in Transportation cost
3. Difference in duties & taxes rate.
We are herewith enclosing the copy of above purchase bills for your perusal.

This fact is ignored by Learned A.O. while dealing with the matter. The rate quoted by M/s Aarti Steel is not at all unreasonable. So the question of disallowing an amount of Rs. 12,58,064/- on account of excessive purchases does not arise. Addition made by the A.O. u/s 40A(2) to the extent of Rs. 1258064/- is not justifiable & hence deletion should be made in respect of the same."

5. Having considered the submissions on behalf of the assessee, the CIT(A) observed that the Assessing Officer arrived at the cost of purchases by working out opening stock, generation, sales and the closing stock. While doing so, the Assessing Officer adopted the opening stock of scrap at 117.985 MT and arrived at the closing stock at 124.50 MT. However, from the record, the opening stock should have been 5.2 MT as against 117.985 MT adopted by the Assessing Officer. In case correct opening balance is adopted, the closing stock would have been worked out to 11.715 MT. The same closing stock was found to be accepted in M/s.Aarti Steel Industries for A.Y. 2006-07.

6. In view of the above mistake by the Assessing Officer, the cost of purchases worked out to be very high and the Assessing Officer presumed that the assessee paid excessive and unreasonable price to M/s.Aarti Steel Industries. The Assessing Officer's conclusion was on account of wrong assumption of facts and figures which were contrary to the records. Even otherwise, the assessee filed details of rates paid to sister concern and also other outside/unrelated parties according to which rate paid to the sister concern was found reasonable after considering the transportation charges which the assessee would have to incur in case of purchases made from outside. Therefore, the CIT(A) rightly concluded that disallowance made by the Assessing Officer u/s. 40A(2) of the Act was not justified and rightly allowed the same with reasoned findings. Same is upheld.

7. As a result, the appeal filed by the Revenue is dismissed.

The order pronounced in the open court on this the 16th day of May, 2013.