PRINCIPAL COMMISSIONER OF INCOME TAX 7 vs. SUNSHINE FASTENERS PVT LTD

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TAXAP/249/2018HC GujaratGJHC24017915201820 March 2018Author: HONOURABLE MR. JUSTICE AKIL KURESHI,HONOURABLE MR. JUSTICE B.N. KARIA3 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the entire issue was fact-based and no question of law arose. The Tribunal had compared the assessee's purchases from its sister concern (M/s. S.M.I.) with purchases from other correlated parties. The Tribunal's analysis, as presented in the judgment, indicated that the rates offered by M/s. S.M.I. were substantially lower than those from other parties. Specifically, purchases from M/s. S.M.I. averaged Rs. 95/kg (gross) and Rs. 84/kg (net), while purchases from others averaged Rs. 113/kg (gross) and Rs. 103/kg (net). Based on this comparison and the material on record, the Tribunal found no apparent justification for invoking Section 40A(2)(b) of the Act. Consequently, the High Court dismissed the Revenue's appeal.

What were the facts?

The Revenue, represented by the Principal Commissioner of Income Tax 7, is in appeal against an order of the Income Tax Appellate Tribunal (ITAT), Rajkot Bench, dated August 23, 2017. The appeal concerns an addition of Rs. 70,04,560 made by the Assessing Officer (AO) under Section 40A(2)(b) of the Income-tax Act, 1961. The AO noted that the assessee, Sunshine Fasteners Pvt Ltd, made purchases of raw materials from its sister concern, M/s. S.M.I. The total net cost of these purchases was Rs. 8.30 Crores. The AO found the average purchase rate from the sister concern to be Rs. 95 per kilogram (gross) and Rs. 84 per kilogram (net). The assessee contended that the grades of material differed. The AO, while accepting the principle, sustained an addition of Rs. 70.04 lacs.

What were the issues?

1. Whether the Appellate Tribunal is right in law and on facts in deleting the addition of Rs. 70,04,560/= made under Section 40A[2](b) of the Income-tax Act, 1961? Assessee's Contentions: The assessee argued that the grades of material purchased from the sister concern and sold to other purchasers were different, making a direct comparison of rates invalid. The judgment does not record specific arguments made by the assessee before the ITAT beyond this point. Revenue's Contentions: The Revenue's appeal is based on the question of law framed above, implying a challenge to the ITAT's deletion of the addition. The judgment does not explicitly detail the Revenue's arguments before the High Court, other than the framing of the question of law.

Which sections of the Income-tax Act were involved?

Section 40A(2)(b)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
C/TAXAP/249/2018 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL No. 249 of 2018 ============================================================== PRINCIPAL COMMISSIONER OF INCOME TAX 7 Versus SUNSHINE FASTENERS PVT LTD ============================================================== Appearance : Mrs MAUNA M BHATT, Advocate for the PETITIONER for the RESPONDENT(s) No. 1 ============================================================== CORAM: HONOURABLE Mr. JUSTICE AKIL KURESHI and HONOURABLE Mr. JUSTICE B.N. KARIA 20th March 2018 ORAL ORDER (PER : HONOURABLE Mr. JUSTICE AKIL KURESHI) Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal, Rajkot Bench dated 23rd August 2017 raising following question of law for our consideration : “Whether the Appellate Tribunal is right in law and on facts in deleting the addition of Rs. 70,04,560/= made under Section 40A[2](b) of the Income-tax Act, 1961 ?” Issue pertains to addition of Rs. 70.04 lacs [rounded off] made by the Assessing Officer under Section 40A[2](b) of the Income-tax Act, 1961 {“the Act” for short}. The Assessing Officer noted that the assessee had made purchases of certain raw Page 1 of 3

materials from its sister concern namely Messrs. S.M.I, the total cost of which net of taxes came to Rs. 8.30 Crores [rounded off] during the relevant period. The average rate of purchase at gross was Rs. 95.00 per kilogram of wire and the average rate of purchase [net] was Rs. 84/= per kilogram. The assessee pointed out that the grades of the material purchased by the assessee and sold by M/s. S.M.I to other purchasers were different, and therefore, the rates could not be compared. The Assessing Officer accepted the issue in principle and reduced the proposed tax, nevertheless, sustained the addition of Rs. 70.04 lacs.

The Tribunal carried out comparison of the assessee’s purchases of the same material from the sister concern-Messrs. S.M.I and from other co-related agencies and found that the rates offered by Messrs. S.M.I were substantially lower than the rate on which the assessee had purchased material from co-related parties.

The Tribunal’s comparison can be seen from the below table which we have taken from the judgment of the Tribunal itself.

Purchased from Gross Amount [in Rupees] Amount net of taxes [in Rupees] Quantity of wire purchased [in Kgs.] Average rate of purchase [Gross] Average Rate of purchase [Net] Sister concern-M/s.

Sun Shine Metal Indus. 9,35,46,017 8,30,75,489 9,89,044 95/= 84/= Others 5,95,16,355 5,32,68,462 5,27,853 113/= 103/= C/TAXAP/249/2018 ORDER From the above it can be seen that the Tribunal having due regard to the material on record found that there was no apparent justification for invoking the provision of Section 40A[2](b) of the Act.

Entire issue is fact base, no question of law arises. Tax Appeal is dismissed. {Akil Kureshi, J.} {B.N Karia, J.} Prakash

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