ITO 9(2)(3), MUMBAI vs. MERIT HEALTH CARE P. LTD, MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

A.Y.2004-05 “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.75,94,160/- made u/s.40(2)(a) of the I.T.Act, 1960 ignoring the fact that export profits are not taxable while profits from local sales are taxable, and overlooking the fact that the Assessing Officer had correctly found that the purchase relating to local sales were inflated.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the amount of Rs.3,08,992/- being the difference in freight expenses pertaining to M/s.Ronak Traders, despite the finding of the fact in the assessment order that there was no account of M/s.Ronak Traders in the books of the assessee.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.98,892/- being unexplained purchases, inspite of the finding by the Assessing Officer that the purchases and sales were in cash and the assessee had not discharged the onus of proving the genuineness with evidence.

4. The appellant prays that the order of the CIT(A) on the ground be set aside and that of the Assessing Officer be restored.”

3. The brief facts of the case are the assessee filed its return of income on 27.10.2004 declaring total income to the tune of Rs.44,800/-. The return was processed u/s.143(1) of the Income Tax Act, 1961 ( in short “the Act”) on 13.12.2004. Thereafter, the case was selected for scrutiny and notice u/s.143(2) of the Act dated 03.06.2005 was issued and duly served upon the assessee on 06.06.2005. Subsequently, notice u/s.142(1) of the Act was also issued and was duly served upon the assessee. The assessee company was a trader and exporter of pharmaceutical products. Under the year of consideration, the assessee showed the domestic sales of Rs.1,23,20,000/-, export sales of Rs.2,07,85,744/- and interest on fixed deposit of Rs.18,199/- The Assessing Officer disallowed the sale to the tune of Rs.75,94,160/- A.Y.2004-05 u/s.40A(2)(a) of the Act and disallowed the freight charges to the tune of Rs.3,08,992/- and added unsecured loan to the tune of Rs.2,00,000/- and also added unexplained purchased to the tune of Rs.98,892/- and disallowed the expenses to the tune of Rs.98,80,267 and assessed the income to the tune of Rs.99,24,870/-. Feeling aggrieved the assessee filed an appeal before the CIT(A) who allowed the said disallowance, therefore, the revenue has filed the present appeal before us.

ISSUE NO.1:- 4. Under this issue, the revenue has challenged the deletion of the disallowance of Rs.75,94,160/- in view of the provision u/s.40A(2)(a) of the Act. The appellant was a trader in pharma products who made domestic sale of Rs.1,23,20,000/- and export sales of Rs.2,07,85,744/-. The sale of goods includes the Erythromycin Stearate Tablets 250mg in various packing. The appellant bought these tablets from its sister concern, M/s. Merit Organic Limited (MOL) at the rate of Rs.1755 per kg for domestic sales and at the maximum rate of Rs.670.12 per kg for export sales. On noticing considerable difference in price, the Assessing Officer was of the view that the appellant had over invoiced the purchases made for local sales. Applying the rate of Rs.670.12 per kg, the Assessing Officer found that the cost of 7000 kg of Erythromycin Stearate purchased for domestic sales should have been only Rs.46,90,840/- as against Rs.1,22,85,000/- claimed by the appellant. Therefore, Assessing Officer disallowed the difference amount of Rs.75,94,160/- as excessive and unreasonable payment by invoking the provisions of section 40A(a) of the Act. The contention of the assessee is that the MOL has purchased Erythromycin A.Y.2004-05 Stearate of the same specification from M/s.BDH Industries Ltd. (BDH) @ Rs.1750 per kg which was comparable with the rate of Rs.1755 per kg at which it had purchased from MOL. The Assessing Officer also did not consider this fact that the assessee sold the purchase goods to BDH @ 1760 per kg. If the Assessing Officer considered the purchases as over invoiced he should have considered sales also over invoiced which it had credited to the P & L Account under domestic sales. Before going further, it is necessary to advert the finding of the CIT(A) on record:- “3.3 I have considered the dispute. Section 40(A)(2)(a) lays down that where a payment made to a related party as defined in clause (b) of the said section, is excessive or unreasonable in comparison to the fair market value of goods, services or facilities for which such payment is made, then so much of the expenditure as is considered unreasonable or excessive shall be disallowed by the Assessing Officer. The details culled above show that if the value at the rate of Rs.1750 per kg for the goods of same specification purchased by MOL from BDH is considered as the Fair Market Value then there is no excessive or unreasonable payment by the appellant for the purchases made at the rate of Rs.1755 per kg for the same specification of the goods. The AO has ignored this in his Remand Report dt. 19.02.2008. He has not doubted the cyclical transactions amongst MOL, the appellant and BDH. He has not disputed that the appellant sold the purchased items @ Rs.1760 per kg. If the purchases were over invoiced, ITA No.6833/M/2010 A.Y.2004-05 the sales also should have been adjusted in the like manner. The net result in that case would be revenue neutral. Besides, the AO has also not disputed that MOL bought the same items @ Rs.1750 per kg. In this situation it cannot be said that the appellant made excessive or unreasonable payment for the items purchased for domestic sales. I, therefore, delete the addition made of Rs.75,94,160/-. The issue is decided in favour of the appellant.” On appraisal of the above mentioned order, the sale and purchase has duly been explained by the CIT(A) which nowhere defaced at irregularity and assertion raised by the assessee. As per remand report dated 19.02.2008, the transaction among assessee and MOL and assessee and BDH were not doubted. In the said circumstances there is no reason to pay more for the purchase of the material. No distinguishable facts have been placed on record to which it can be assumed that the finding of the CIT(A) is wrong against law and facts. In view of the said circumstances we are of the view that the CIT(A) has decided the matter judiciously and correctly which is not require to be interfere with at this appellate stage. Accordingly, this issue is decided in favour of the assessee against the revenue. ISSUE NO.2:- 5. Under this issue the revenue has challenged the deletion of the disallowance of freight charges to the tune of Rs.3,08,992/-. The A.Y.2004-05 appellants claimed the deduction of freight charges of Rs.15,16,085/- paid to M/s. Three Roses Services. In the enquiry the Assessing Officer noticed that the said party had received on behalf of the appellant an amount of Rs.2,00,000/- from M/s. Ronak Traders which the appellant had not account for as income. It was also noticed that M/s.Three Roses Services debited to the appellants account freight bills aggregating to Rs.14,07,093/- as against Rs.15,16,085/- claimed by the appellant. The difference was not explained to the Assessing Officer of Rs.1,08,992/-. Therefore, the Assessing Officer added two sums aggregating to the tune of Rs.3,08,992/-. At the time of remand proceeding, the assessee explained that an amount of Rs.2,00,000/- was collected from M/s.Three Roses Services from M/s.Ronak Traders as advance against sale of DEPB License and the same was accounted for as income in the subsequent assessment year, 2005-06. Regarding the bill difference of Rs.1,08,992/- the appellant explained that M/s. Three Roses raised bill for the said amount in the subsequent year vide invoice no.121SF dated 02.04.2004 in respect of the goods shipped in the current year. The appellant, therefore, claimed that there was not billing difference but the Assessing Officer did not consider the same and disallowed the same. The finding of the CIT(A) is hereby reproduced as under:- “4.2 I have considered the issue. The AO has not disputed that the appellant has accounted the advance of ITA No.6833/M/2010 A.Y.2004-05 Rs.2,00,000/- against sale of DEPB license as income in the subsequent year. There is nothing wrong in accounting the same in the subsequent year when the license was sold in that year. Similarly the goods were shipped during the current year and it was in order to claim the freight expenses of Rs.1,08,992/- along with the value of goods in the current year. It is not the case of the AO that no such expenditure was incurred. Date of invoice in this case does not indicate the point of time of incurring of the liability of the impugned sum. The appellant is entitled to deduction of the entire freight expenses of Rs.15,16,085/-. I, therefore, delete the aggregate addition made of Rs.3,08,992/-. The issue is decided in favour of the appellant.” On appraisal of the above mentioned order, it came into the notice that the Assessing Officer did not dispute about the advance of Rs.2,00,000/- against sale of DEPB license as income in the subsequent year. There is nothing wrong in accounting the same in the subsequent year when the license was sold in that year. Similarly, the goods were shipped during the current year and it was in order to claim the freight expenses of Rs.1,08,992/- along with the value of goods in the current year. It is not in dispute that the expenditure was incurred in view of the said circumstances, the CIT(A) has rightly A.Y.2004-05 allowed the freight charges to the tune of Rs.15,16,085/-. The facts are as it is which has been discussed above. No doubt in view of the said circumstances it is quite clear that the CIT(A) has decided this matter judiciously and correctly which is not require to be interfere with at this appellate stage. ISSUE NO.3:- 6. Under this issue the revenue has challenged the deletion of the addition of Rs.23,31,358/- on account of unexplained purchases. The appellant recorded the purchases to the tune of Rs.23,31,358/- from M/s. Manor Pharmachem. Out of the same amounting to Rs.22,32,466/- were shown in the closing stock at the end of the year. The Assessing Officer tried to make enquiry with the aforesaid party but there was no response and the assessee also failed to produce the party. Therefore, the Assessing Officer treated the purchases as sham. However, disallowed only sum of Rs.98,892/- being the difference between the value of purchases and value of closing stock. However, assessee explained that the purchase worth Rs.98,892/- has already been sold and credited to the P&L Account, therefore, said purchases was not credited to the P&L Account. The said sale was not shown in the closing stock but the Assessing Officer was not satisfied and the difference was added to the income of the assessee. Before going further, the finding of the CIT(A) is adverted on record:-