Aradhana Beverages & Foods Co. Ltd, V. DCIT circle 2 (1),

ITA 3491/DEL/2007

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4090 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 8 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 07-04-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 03-08-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY PURI
• Assessee Lawyers: C S AGGARWAL
• Keywords: Business income; Depreciation; Transfer pricing; Fair market value
• Section: 143(3); 37(1); 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL DELHI DELHI DELHI DELHI BENCH BENCH BENCH BENCH A AA A : NEW DELHI : NEW DELHI : NEW DELHI : NEW DELHI BEFORE BEFORE BEFORE BEFORE SHRI G.E.VEERABHADRAPPA, VICE PRESIDENT AND SHRI G.E.VEERABHADRAPPA, VICE PRESIDENT AND SHRI G.E.VEERABHADRAPPA, VICE PRESIDENT AND SHRI G.E.VEERABHADRAPPA, VICE PRESIDENT AND SHRI C.L.SETHI, JUDICIAL MEMBER SHRI C.L.SETHI, JUDICIAL MEMBER SHRI C.L.SETHI, JUDICIAL MEMBER SHRI C.L.SETHI, JUDICIAL MEMBER ITA NO. ITA NO. ITA NO. ITA NO.3491/DEL/2007 3491/DEL/2007 3491/DEL/2007 3491/DEL/2007 ASSESSMENT YEAR : ASSESSMENT YEAR : ASSESSMENT YEAR : ASSESSMENT YEAR : 2003 2003 2003 2003- -- -04 0404 04 M/S ARADHANA BEVERAGES & M/S ARADHANA BEVERAGES & M/S ARADHANA BEVERAGES & M/S ARADHANA BEVERAGES & FOODS COMPANY PRIVATE FOODS COMPANY PRIVATE FOODS COMPANY PRIVATE FOODS COMPANY PRIVATE LIMITED, LIMITED, LIMITED, LIMITED, (NOW MERGED WITH PEPSICO (NOW MERGED WITH PEPSICO (NOW MERGED WITH PEPSICO (NOW MERGED WITH PEPSICO INDIA HOLDINGS PRIVATE INDIA HOLDINGS PRIVATE INDIA HOLDINGS PRIVATE INDIA HOLDINGS PRIVATE LIMITED), LIMITED), LIMITED), LIMITED), 13 1313 13 TH THTH TH FLOOR, FLOOR, FLOOR, FLOOR, MOHAN DEV BUILDING, MOHAN DEV BUILDING, MOHAN DEV BUILDING, MOHAN DEV BUILDING, 13, TOLSTOY MARG, 13, TOLSTOY MARG, 13, TOLSTOY MARG, 13, TOLSTOY MARG, NEW DELHI NEW DELHI NEW DELHI NEW DELHI 110 001. 110 001. 110 001. 110 001. PAN NO.AAACA0250D. PAN NO.AAACA0250D. PAN NO.AAACA0250D. PAN NO.AAACA0250D. VS. VS. VS. VS. DY.COMMISSIONER OF INCOME TAX, DY.COMMISSIONER OF INCOME TAX, DY.COMMISSIONER OF INCOME TAX, DY.COMMISSIONER OF INCOME TAX, CIRCLE CIRCLE CIRCLE CIRCLE- -- -2(1), 2(1), 2(1), 2(1), NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI C.S.AGGARWAL, SR.ADVOCATE AND SHRI VISHAL KALRA, AR. RESPONDENT BY : SHRI SANJAY PURI, CIT-DR ORDER ORDER ORDER ORDER PER C.L.SETHI PER C.L.SETHI PER C.L.SETHI PER C.L.SETHI, J , J, J , JM : M : M : M : THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER DATED 9.3.2007 PASSED BY LEARNED CIT(A) IN TH E MATTER OF AN ASSESSMENT MADE U/S 143(3) OF THE INCOME-TAX ACT, 1 961 DATED 20.3.2006 BY THE ASSESSING OFFICER FOR THE AY 2003- 04. 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE AS UNDER:- 1. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-V, NEW DELHI (LD CIT(A)) HAS ERRED IN LAW AND IN FACTS, IN CONFIRMING THE DISALLOWANCE OF RS.64,649,000 FROM PURCHASES MADE BY THE APPELLANT FROM PEPSICO INDIA HOLDING PRIVATE LIMITED, UNDER THE PROVISIONS OF SE CTION 40(A)(2)(A) OF THE ACT. ITA-3491/DEL/2007 2 2. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD CIT(A) HAS ERRED IN LAW AND IN FACTS, IN UPH OLDING THE ACTION OF THE ASSESSING OFFICER OF ARBITRARILY APPL YING 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 TRAN SACTION BETWEEN THE APPELLANT AND ITS HOLDING COMPANY CANNO T 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 `6,46,49,000/- ON ACCOUNT OF PURCHA SES DISALLOWED U/S 40A(2)(A) OF THE ACT. 4. THE ASSESSEE COMPANY WAS INCORPORATED ON 21.10.1 993 UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956. IT IS E NGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING IN BEVERAGES AND ALSO PROVIDES LOANS TO COMPANIES INVOLVED IN THE BUSINESS OF MANU FACTURING OF SOFT DRINK BEVERAGES. THE ASSESSEE FILED ITS RETURN OF INCOME ON 28.11.2003 DECLARING A LOSS OF `16,81,33,590/-. TH E RETURN WAS ACCOMPANIED BY ANNUAL AUDITED ACCOUNTS AND TAX AUDI T REPORT. THE AO THEN FRAMED THE ASSESSMENT U/S 143(3) OF THE ACT VI DE HIS ORDER DATED 20.3.2006 WHEREBY HE DETERMINED THE ASSESSEES LOSS AT `10,31,55,480/- AFTER DISALLOWING A SUM OF `6,46,49 ,000/- OUT OF THE AGGREGATE PURCHASES MADE OF `50.83 CRORES MADE BY T HE ASSESSEE FROM PEPSICO INDIA HOLDINGS PVT.LTD. (IN SHORT PIH) BY INVOKING THE PROVISIONS OF SECTION 40A(2)(A) OF THE ACT. IT WAS STATED BY THE AO IN THE ASSESSMENT ORDER THAT THE ASSESSEE HAS DECLARED TOTAL TURNOVER OF `45.07 CRORES ON WHICH NET LOSS OF `20.21 CRORES WA S DECLARED. ON PERUSAL OF ACCOUNTS, IT WAS OBSERVED BY THE AO THAT THE ASSESSEE HAD SHOWN PURCHASES FOR RESALE AT `51.11 CRORES. FURTH ER, RAW MATERIAL CONSUMED WAS SHOWN AT `20,01,000/- AND PACKING MATE RIAL CONSUMED WAS SHOWN AT `1,40,000/-. IT WAS THUS FOUND BY THE AO THAT 99% OF THE TOTAL SALES OF THE ASSESSEE PERTAINING TO TRADING O F GOODS, AND THE ITA-3491/DEL/2007 3 MANUFACTURING COMPONENTS WERE LESS THAN 1%. THE AO , THEREFORE, STATED THAT IT WAS NOT UNDERSTOOD BY HIM WHY THE AS SESSEE INCURRED GROSS LOSS ON THE TRADING ACTIVITY. THE AO, THEREF ORE, ASKED THE ASSESSEE TO FURNISH SEPARATE TRADING ACCOUNT FOR MA NUFACTURED AND TRADED PRODUCTS ALONGWITH THE REASONS FOR GROSS LOS S SHOWN IN THE TRADING ACCOUNT. THOUGH THE ASSESSEE STATED BEFORE THE AO THAT THE ASSESSEE COMPANY WAS NOT REQUIRED TO MAINTAIN SEPAR ATE ACCOUNTS AS PER THE PROVISIONS OF SCHEDULE VI OF THE COMPANIES ACT, THE ASSESSEE RECASTED TRADING ACCOUNTS FOR MANUFACTURING AND TRA DING ACTIVITIES BY ALLOCATING COSTS AND REVENUES ON A REASONABLE BASIS . THE RECASTED TRADING ACCOUNT FOR MANUFACTURING AND TRADING BUSIN ESS HAS BEEN REPRODUCED BY THE AO AS UNDER:- (000) PARTICULARS RS. TRADED GOODS RS. MFD.GOODS PARTICULARS RS. TRADED GOODS RS. MFD.GOODS MATERIAL CONSUMED 2001 GROSS SALES 457064 4057 PACKING MATERIAL CONSUMED 140 CLOSING STOCK 52186 PURCHASE FOR RESALE 511144 GROSS LOSS 1894 EXCISE DUTY 505 GROSS PROFIT 1411 511144 4057 511144 4057 5. ON PERUSAL OF THE RECASTED TRADING ACCOUNT, IT W AS NOTICED BY THE AO THAT ASSESSEE DECLARED GROSS PROFIT OF 34.78% ON MANUFACTURED PRODUCTS BUT HAD SHOWN A GROSS LOSS OF 0.41% ON TRA DING ITEMS. THE REASON FOR INCURRING LOSS IN TRADING PRODUCTS GIVEN BY THE ASSESSEE WAS THAT THOUGH GOODS WERE SOLD AT A PRICE HIGHER THAN THE PURCHASE PRICE BUT THE GROSS LOSS AROSE PRIMARILY BECAUSE OF THE F ACT THAT IT WAS CATERING TO MARKET IN METROPOLITAN CITIES WHERE DUE TO SEVERE COMPETITION, THE ASSESSEE HAD TO GIVE TRADE DISCOUN T IN THE FORM OF EXTRA CASES, RESULTING IN A GROSS TRADING LOSS. ITA-3491/DEL/2007 4 6. THE SUBMISSIONS OF THE ASSESSEE FILED BEFORE THE AO WERE CONSIDERED BY THE AO. THE AO STATED THAT IT WAS BE YOND 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 ACTIVIT Y. THE AO FURTHER STATED THAT IT WOULD HAVE BEEN UNDERSTOOD IF THE CO MMODITY TRADED WAS ASSESSEES OWN PRODUCE AND INITIAL LOSS WAS INC URRED TO BUILD A MARKET FOR THE PRODUCT, WHICH IS NOT THE CASE OF TH E ASSESSEE INASMUCH AS THE ASSESSEE WAS SELLING THE PRODUCT MANUFACTURE D BY A SEPARATE COMPANY. THE AO THEN POINTED OUT THAT THE ASSESSEE MADE PAYMENT OF `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 A SSESSEE FROM ITS SISTER CONCERN COVERED BY SECTION 40A(2)(B) OF THE ACT. THE ASSESSEES SUBMISSIONS WERE THEN CONSIDERED BY THE AO AND AO R EJECTED THE ASSESSEES CONTENTION ABOUT GIVING TRADE DISCOUNT T O THE PURCHASERS INASMUCH AS AO WAS OF THE OPINION THAT IT WAS UNHEA RD THAT TRADE DISCOUNTS WOULD BE GIVEN SO AS TO RESULT IN A TRADI NG LOSS TO THE ASSESSEE. THE AO FURTHER STATED THAT BY SELLING TH E PRODUCTS AT A GROSS LOSS BY THE ASSESSEE, THE ASSESSEE WAS ACTUALLY BEN EFITING PEPSI INDIA BY CREATING A MARKET FOR ITS PRODUCT AND, THEN, THE GROSS LOSS INCURRED BY THE ASSESSEE WAS NOT OUT OF NORMAL BUSINESS PRUD ENCE AND ONLY TO PASS ITS PROFIT TO PEPSI INDIA BY PURCHASING THE GO ODS AT PRICES HIGHER THAN THE ARMS LENGTH PRICE. THE AO THEN CITED THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF MCDOWELL & CO. VS. CTO 154 ITR 148 TO TAKE A VIEW THAT PURCHASE OF GOODS BY THE ASSESSEE FROM PEPSI INDIA AT A HIGHER PRICE RESULTING IN A BUSINESS LOSS WAS A C OLOURABLE DEVICE AND CANNOT BE ALLOWED. 7. THE AO THEN REFERRED THE ASSESSMENT PROCEEDINGS FOR THE AY 2003-04 IN THE CASE OF ARADHANA SOFT DRINKS COMPANY , ANOTHER COMPANY OF THE SAME GROUP INVOLVED IN THE SAME BUSI NESS OF TRADING ITA-3491/DEL/2007 5 OF BEVERAGES. IN THAT CASE, IT WAS FOUND BY THE AO THAT ASSESSEE HAD SHOWN GROSS PROFIT ON TRADED GOODS AT 13.73%. THE AO, THEREFORE, TOOK A VIEW THAT SAME GP RATE SHOULD BE CONSIDERED AS RE ASONABLE IN THE CASE OF THE ASSESSEE. THE AO, THEREFORE, REJECTED THE BOOK RESULTS OF THE ASSESSEE AND DETERMINED THE GROSS PROFIT BY ADO PTING THE GP RATE OF 13.73% SHOWN BY ARADHANA SOFT DRINKS COMPANY. H E THEN WORKED OUT THE GROSS PROFIT AT `6,27,55,000/- AS AGAINST T HE LOSS OF `18,94,000/- DECLARED BY THE ASSESSEE. THE AO, THE REFORE, MADE ADJUSTMENT OF `6,46,49,000/- TO THE PURCHASES MADE BY THE ASSESSEE FROM SISTER CONCERN BY INVOKING THE PROVISIONS OF S ECTION 40A(2)(A) OF THE ACT. 8. BEING AGGRIEVED, THE ASSESSEE PREFERRED AN APPEA L BEFORE THE LEARNED CIT(A). 9. BEFORE THE LEARNED CIT(A), IT WAS SUBMITTED BY T HE ASSESSEE THAT REVENUE AUTHORITIES CANNOT DECIDE THE MANNER IN WHI CH THE BUSINESS IS REQUIRED TO BE CARRIED ON BY THE ASSESSEE. IT WAS FURTHER SUBMITTED THAT THE REASONABLENESS OF THE EXPENDITURE HAS TO B E SEEN FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT THAT OF TH E REVENUE. IN THIS CONNECTION, THE ASSESSEE RELIED UPON THE DECISION O F HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. DALMIA CEMENT (2002) 254 ITR 377 (DEL) AS WELL AS THE DECISION OF THE TRIBUNAL DELHI BENCH IN THE CASE OF VISHAL INTERNATIONAL PRODUCTIONS (P) LTD. (1987) 20 ITD 273 (DEL). THE ASSESSEE FURTHER SUBMITTED BEFORE THE AO THAT THE P ROVISIONS 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 E STABLISH THAT THE ASSESSEE PURCHASED THE GOODS FROM SISTER CONCERN NO T AT A FAIR MARKET VALUE OF THE GOODS. AFTER CONSIDERING THE ASSESSEE S SUBMISSION AND THE AOS ORDER, THE LEARNED CIT(A) DECIDED THE ISSU E AGAINST THE ASSESSEE BY HOLDING AS UNDER:- ITA-3491/DEL/2007 6 3.7 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPEL LANT 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 PRONOUNCE MENTS BUT RATHER ON THE FACTS OF THE CASE. THE PAST PREC EDENCE HAS TO BE READ WITH ONLY IN THE LIGHT OF THE FACTS OF THE APPELLANTS OWN FACTS WHICH ARE STARING AT THE FACE IN THE INSTANT CASE. FIRST I DEAL WITH THE OBJECTION RAIS ED BY THE APPELLANT THAT THE ONUS WAS ON THE AO TO PROVE THAT PROVISIONS OF SECTION 40A(2) WERE APPLICABLE. A PE RUSAL OF THE ASSESSMENT ORDER WOULD REVEAL THAT THE AO HAS M ORE THAN DISCHARGED THE ONUS BY BRINGING INTO LIGHT CER TAIN GLARING AND ELOQUENT DISCREPANCY IN THE SUBMISSIONS OF THE APPELLANT. IT IS NOT UNDERSTOOD AS TO WHY PHPIL WA S ITSELF NOT SELLING THE PRODUCT WHEN THE SALE PRICE AND DIS COUNTS WERE FIXED. OBVIOUSLY THE APPELLANT FIRM HAS BEEN ROPED IN MERELY TO TRANSFER THE LOSSES OF THE HOLDING COMPAN Y. THE AO HAS ALSO BROUGHT OUT AN IMPORTANT ASPECT OF THE MATTER WHICH CANNOT BE TURNED BLIND EYE TO. THE APPELLANT S PURCHASES ARE ONLY FROM PIHPL. IN FACT THE APPELLA NT COMPANY HAS ONLY CARRIED OUT BUSINESS FOR PIHPL. MOREOVER, IT IS A SUBSIDIARY OF PIHPL. THESE FACTS CLEARLY AND UNFLINCHINGLY ESTABLISH THAT THE APPELLANT COMP ANY IS A MERE CONDUIT OR A SHELL COMPANY ESTABLISHED ONLY ON PAPER FOR RECORDING LOSSES. TRANSACTION WITH PIHPL BY NO STRETCH OF IMAGINATION CAN BE TREATED AT ARMS LENGTH. IT I S ALSO IMPORTANT TO MENTION THAT CERTAIN CASE LAWS RELIED UPON BY APPELLANT LIKE DELHI HIGH COURT IN CIT VS. DALMIA C EMENT [2002] 254 ITR 377 (DEL.) DO NOT DEAL WITH THE SUBJ ECT OF SHELL COMPANIES. THERE THE VITAL DIFFERENCE WAS ON FACTS AND HENCE THE PHILOSOPHY OF THE COURTS AS LAID DOWN IN THE SAID DECISION IS TOTALLY ALIEN TO ELOQUENT FACTS HE RE. IN FACT THE APPELLANT HAS TRIED DESPERATELY TO CLING ON TO ARGUMENTS WHICH ARE UNCONVINCING. THE APPELLANTS SUBMISSION THAT THE PRICE OF PURCHASE IS COMPARABLE IS ALSO NOT FOUND CONVINCING IN VIEW OF THE GROUP COMPANIES OWN RESULT IN THE SAME LINE OF BUSINESS WHERE GP IS SHO WN AT CLOSE TO 14%. THE APPELLANT HAS TRIED DESPERATELY TO DIFFERENTIATE THE BUSINESS BUT HAS FAILED MISERABLY BECAUSE BUSINESS POLICIES CANNOT BE COMPARED WITH THE BUSIN ESS AS A WHOLE. THEREFORE, CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE HERE AS ARE UNDISPUTED BY THE APPELLANT ALSO I UPHOLD THE ACTION OF THE AO IN EST IMATING THE GP. THEREFORE THIS GROUND OF APPEAL OF THE APP ELLANT IS DISMISSED. ITA-3491/DEL/2007 7 10. BEING AGGRIEVED WITH THE CIT(A)S ORDER, THE AS SESSEE HAS FILED THIS APPEAL BEFORE US. 11. THE LEARNED COUNSEL FOR THE ASSESSEE HAS PLACED BRIEF SYNOPSIS OF HIS CONTENTIONS BEFORE US. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT IN RESPONSE TO THE AOS QUERY TO SHO W THE REASON FOR INCURRING THE LOSS IN TRADING OF GOODS, THE ASSESSE E FURNISHED A NOTE STATING THEREIN THE REASON FOR INCURRING THE GROSS LOSS, WHICH READS AS UNDER:- GROSS LOSS HAS BEEN INCURRED IN THE RELEVANT ASSES SMENT YEAR IN THE NORMAL COURSE OF BUSINESS OF THE ASSESS EE. THE PRIMARY REASON FOR SUCH LOSS IS THE PRICE OF THE PR ODUCT 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 PR ICE RESULTING IN A LOSS. AS YOU MAY BE AWARE THAT THE SOFT DRINK INDUSTRY FACED A SEVERE PRICE WAR BETWEEN US AND OU R COMPETITORS I.E. COCA COLA WHICH LED TO AGGRESSIVE PRICING. HOWEVER, THE ASSESSEE ENVISAGES PROFITS IN COMING Y EARS IN VIEW OF A LIKELY INCREASE IN THE SELLING PRICE OF S OFT DRINKS AND BEVERAGES AND AN INCREASE IN PER CAPITA CONSUMP TION OF AERATED AND NON AERATED DRINKS AND BEVERAGES. W E WOULD LIKE TO BRING TO YOUR NOTICE THAT THE GROSS P ROFIT HAS IMPROVED OVER THE PREVIOUS YEAR. THE ASSESSEE IS HOPEFUL OF ACHIEVING OPERATING EFFI CIENCY IN THE FUTURE TO ACHIEVE BREAK-EVEN POINT. THE BUSINE SS 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 BRE AKEVEN POINT HAS BEEN ATTAINED. 12. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMI TTED THAT THE ASSESSEE HAD ALSO FURNISHED A COMPARATIVE CHART FOR THE PRICE AT WHICH THE GOODS WERE BEING SOLD BY PIH TO THE ASSESSEE AN D OTHER RELATED PARTIES WHICH IS PLACED AT PAGE 34 OF THE PAPER BOO K FILED BEFORE US. HE INVITED OUR ATTENTION TO THIS COMPARATIVE CHART OF THE PRICE AND THEN STATED THAT THE RATES AT WHICH GOODS WERE SOLD BY P IH TO THE ASSESSEE WERE AT THE SAME RATE AS WAS THE SALE PRICE TO THE UNRELATED ITA-3491/DEL/2007 8 DISTRIBUTORS AND THUS, THE PURCHASE CONSIDERATION B Y THE ASSESSEE IN RESPECT OF THE TRADED GOODS TO PIH WERE AT ARMS LE NGTH. THE ASSESSEE ALSO FURNISHED BEFORE THE AO SEPARATE TRADING ACCOU NT FOR MANUFACTURING AND TRADING ACTIVITIES ALONGWITH THE REASONS FOR THE GROSS LOSS IN TRADING BUSINESS, AND INVOICES FOR SA LE MADE BY THE ASSESSEE WOULD DEMONSTRATE THAT THE SALES WERE MADE AT A PRICE HIGHER THAN THE PRICE ON WHICH GOODS WERE BEING PUR CHASED. A SEPARATE TRADING ACCOUNT IN RESPECT OF TRADED GOODS PREPARED BY THE ASSESSEE SHOWED A GROSS TRADING LOSS OF `18,94,000/ - ON THE TURNOVER OF `45,70,64,000/-. THE LEARNED COUNSEL FOR THE AS SESSEE THEN SUBMITTED THAT THE GROSS TRADING LOSS OF `18,94,000 /- HAD PRIMARILY ARISEN BECAUSE OF THE FACT THAT THE ASSESSEE WAS MA INLY CATERING THE MARKET IN METROPOLITAN CITIES WHICH DUE TO SEVERE C OMPETITION WAS HIGHLY PRICE SENSITIVE. HE FURTHER SUBMITTED THAT THE ASSESSEE ALSO FURNISHED A COMPARATIVE CHART OF PRICE AT WHICH GOO DS WERE BEING SOLD TO PIH TO THE ASSESSEE AND OTHER UNRELATED PARTIES IN GUJARAT LOCATION WHICH ARE PLACED AT PAGES 37 TO 81 OF THE PAPER BOO K. HE THUS CONTENDED THAT THE PURCHASES WERE MADE AT THE MARKE T RATES AND SALES WERE ALSO MADE AT THE MARKET RATE AND THUS, Q UESTION OF INVOKING THE PROVISIONS OF SECTION 40A(2)(A) DID OR COULD NO T ARISE. 13. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER CO NTENDED THAT AO HAS ERRED IN APPLYING A GROSS PROFIT OF 13.73% TO T HE ASSESSEES CASE WITHOUT POINTING OUT ANY DEFECT IN THE BOOKS OF ACC OUNT MAINTAINED IN THE REGULAR COURSE OF BUSINESS BY THE ASSESSEE. TH E LEARNED COUNSEL FOR THE ASSESSEE THEN POINTED OUT THAT THE AO HAS M ADE THE ADDITION OF `6,46,49,000/- BY APPLYING GP RATE OF 13.73% AND, O N THE OTHER HAND, THE AO HAS HELD THAT HE WAS MAKING THE ADDITION BY INVOKING SECTION 40A(2)(A) OF THE ACT. 14. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER CO NTENDED THAT IT IS A WELL KNOWN FACT AND IS ALSO WELL ESTABLISHED COMM ERCIAL PRACTICE THAT ITA-3491/DEL/2007 9 DISCOUNTS ARE ALLOWED TO THE CUSTOMERS ON THE PURCH ASES MADE BY THEM BY OFFERING ADDITIONAL ARTICLE(S) ON EACH ARTI CLES 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 B OOST SALES, ANOTHER ARTICLE IS SUPPLIED FREE OF COST OR AT A DISCOUNT. HE, THEREFORE, SUBMITTED THAT THE ASSESSEE HAD INCURRED LOSSES BEC AUSE OF ALLOWING DISCOUNTS TO THE CUSTOMERS ON THE PURCHASES MADE BY THEM. 15. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER CO NTENDED THAT LOW PROFIT SHOWN BY THE ASSESSEE BY ITSELF CANNOT BE A GROUND FOR REJECTION OF BOOK RESULTS. IN SUPPORT THEREOF, HE RELIED UPO N VARIOUS DECISIONS LISTED IN THE WRITTEN SYNOPSIS FILED BY THE ASSESSE E. 16. THE LEARNED COUNSEL FOR THE ASSESSEE THEN SUBMI TTED THAT IN THE INSTANT CASE, ALL THE PURCHASES AND SALES MADE BY T HE ASSESSEE WERE FULLY AND WHOLLY VERIFIABLE, THERE WAS A COMPLETE S TOCK TALLY, THE PURCHASE AND SALES RATES WERE VERIFIABLE, METHOD OF ACCOUNTING WAS ALSO THE SAME AS ADOPTED IN THE PRECEDING ASSESSMEN T YEARS AND IN THE LIGHT OF THESE FACTS, THE ATTEMPT OF THE AO TO REJECT THE BOOK RESULTS AND THEN TO APPLY THE RATE OF GROSS PROFIT IS NOT O NLY TOTALLY UNJUSTIFIED BUT WAS DONE ONLY WITH A VIEW TO MAKE AN ADDITION A RBITRARILY. HE FURTHER SUBMITTED THAT AO HAS OVERLOOKED THE NATURE OF THE BUSINESS CARRIED ON BY THE OTHER CONCERN BEFORE APPLYING THE PROFIT RATE OF ALLEGED COMPARABLES TO THE ASSESSEES CASE. 17. HE FURTHER SUBMITTED THAT THE ORDER OF LEARNED CIT(A) IS ALSO NOT BASED ON CORRECT ASSUMPTION OF FACTS AND FACTUAL PO SITION AVAILABLE ON RECORD. 18. HE FURTHER SUBMITTED THAT ASSESSEE HAD BEEN MAK ING PURCHASES IN THE PAST FROM PIH SINCE RIGHT FROM AY 1996-97 AN D THAT PRACTICE HAS BEEN FOLLOWED IN THE YEAR UNDER CONSIDERATION ALSO. HE THUS CONTENDED ITA-3491/DEL/2007 10 THAT NOT A SINGLE INSTANCE WAS BROUGHT ON RECORD EI THER BY THE AO OR BY THE LEARNED CIT(A) WHEREIN SALES MADE TO PIH TO ANY OF THE INDEPENDENT DISTRIBUTORS OR TO ANY CUSTOMERS WAS AT A PRICE LOWER THAN THE PRICE AT WHICH THE ASSESSEE HAD MADE PURCHASES AND, THEREFORE, THE QUESTION OF DISALLOWANCE OF PURCHASES DID OR CO ULD NOT ARISE. 19. IT WAS FURTHER SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT SINCE THE PURCHASE AT MARKET RATE WAS MADE FOR THE PURPOSE OF BUSINESS, THE EXPENSES RELATING THERETO ARE ADMISSI BLE AS DEDUCTION U/S 37(1) OF THE ACT AND NO DISALLOWANCE U/S 40A(2) (A) IS CALLED FOR. HE FURTHER SUBMITTED THAT AO HAS NOT BEEN ABLE TO BRIN G ANY ADEQUATE MATERIAL OR EVIDENCE ON RECORD TO SHOW AND ESTABLIS H THAT THE PURCHASES MADE BY THE ASSESSEE FROM PIH WERE MADE W ITH AN ATTEMPT TO EVADE PAYMENT OF TAX. HE POINTED OUT THAT THE P URCHASES MADE BY THE ASSESSEE FROM PIH WERE GENUINE PROCURED AT AN A RMS LENGTH PRICE. HE FURTHER SUBMITTED THAT THE PURCHASES MADE BY THE ASSESSEE FROM PIH WERE ACCEPTED BY THE EXCISE AUTHORITIES AND ASS ESSABLE VALUE OF SUCH GOODS HAS NOT BEEN DISPUTED BY THE EXCISE AUTH ORITIES AND, THEREFORE, THE QUESTION THAT THE PURCHASES MADE AT A HIGHER PRICE DID OR COULD NOT ARISE. IN SUPPORT OF HIS CONTENTIONS, THE LEARNED COUNSEL FOR THE ASSESSEE HAS RELIED UPON A NUMBER OF DECISI ONS LISTED IN THE WRITTEN SYNOPSIS FILED BY THE ASSESSEE. 20. THE LEARNED DR, ON THE OTHER HAND, REITERATED T HE VERY BASIS AND REASONS GIVEN BY THE AO AS WELL AS BY THE CIT(A) IN SUSTAINING THE ADDITION BY WAY OF DISALLOWANCE OF PURCHASE PRICE O F GOODS TO THE EXTENT OF `6,46,49,000/- BY APPLYING THE GP RATE OF 13.73% SHOWN BY THE OTHER SISTER CONCERN OF THE ASSESSEE. THE LINE OF ARGUMENT ADVANCED BY THE LEARNED COUNSEL FOR THE ASSESSEE WA S PURELY IN THE LINE UNDER WHICH THE AO HAS MADE THE ADDITION AND F URTHER CONFIRMED BY THE LEARNED CIT(A). ITA-3491/DEL/2007 11 21. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND GO NE THROUGH THE ORDERS OF AUTHORITIES BELOW. WE HAVE ALSO GONE THR OUGH THE VARIOUS DOCUMENTS CITED AT THE TIME OF HEARING BY THE LEARN ED COUNSEL FOR THE ASSESSEE. 22. IN THIS CASE, THE AO HAS MADE A DISALLOWANCE OF `6,46,49,000/- OUT OF THE AGGREGATE PURCHASES MADE OF `50.83 CRORE S 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 AS SESSEE AND APPLIED GP RATE OF 13.73% SHOWN BY ANOTHER CONCERN, NAMELY, ARADHANA SOFT DRINKS CO. AND WORKED OUT THE GP AT `6,27,55,000/- AS AGAINST THE LOSS OF `18,94,000/- DECLARED BY THE ASSESSEE. THE AO, THEREFORE, MADE THE ADDITION TO THE EXTENT OF `6,46,49,000/- (`6,27,55, 000 + `18,94,000) BY WAY OF ADJUSTMENT TO THE PURCHASES MADE BY THE A SSESSEE FROM ITS SISTER CONCERN PIH. THE DISALLOWANCE OF THE PURCHA SES HAS BEEN MADE BY THE ASSESSEE MERELY FOR THE REASON THAT THE PURC HASES WERE MADE FROM PIH COVERED BY SECTION 40A(2) AND THE PURCHASE S SO MADE BY THE ASSESSEE FROM PIH WERE CONSIDERED TO BE ON HIGHER C OST IF PROFIT RATE OF 13.73% IS APPLIED TO THE TOTAL SALES MADE BY THE AS SESSEE. IT IS THUS NECESSARY TO REFER TO THE PROVISIONS OF SECTION 40A (2)(A) OF THE ACT WHICH READ AS UNDER:- 40A. (1) THE PROVISIONS OF THIS SECTION SHALL HAV E EFFECT NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISION OF THIS ACT RELATING TO THE COMPUTA TION OF INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINES S OR PROFESSION. (2)(A) WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CLAUSE (B) OF THIS SUB-SECTIO N, AND THE [ASSESSING] OFFICER IS OF OPINION THAT SUCH EXPENDI TURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHIC H THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSI NESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVE D BY OR ACCRUING TO HIM THEREFROM, SO MUCH OF THE EXPENDITU RE AS ITA-3491/DEL/2007 12 IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASON ABLE SHALL NOT BE ALLOWED AS A DEDUCTION. (B) . 23. THE OPENING WORDS OF SECTION 40A(1) INDICATE TH AT THE PROVISIONS OF THIS SECTION SHALL HAVE EFFECT NOTWITHSTANDING A NYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISIONS OF THIS ACT RELATING TO THE COMPUTATION OF INCOME UNDER THE HEAD PROFITS AND G AINS OF BUSINESS OR PROFESSION. IN OTHER WORDS, SECTION 40A IS AN OVERRIDING PROVISION WHICH OPERATES INSPITE OF ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISIONS OF THE ACT RELATING TO THE COMPUTA TION OF INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSIO N. SUB-SECTION 2(A) OF SECTION 40A PROVIDES THAT WHERE THE ASSESSEE INC URS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN MA DE OR IS TO BE MADE TO THE PERSONS SPECIFIED IN THAT SECTION AND T HE AO IS OF OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE MARKET VALUE OF THE GOODS, SERVICES OR FACILITI ES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO THE ASSESSEE THEREFROM, SO MUCH OF THE EXPENDITURE AS IS SO CONS IDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. IN OTHER WORDS, IF THE EXPENDITURE INCURRED BY THE ASS ESSEE IS CONSIDERED BY THE AO TO BE OF EXCESSIVE OR UNREASONABLE, HAVIN G REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES F OR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE ASSESSEE FOR BUSINESS OR PROFESSION OR THE BENEFIT DERIVED BY THE ASSESSEE O R ACCRUING TO THE ASSESSEE FOR PAYMENT, THEN SO MUCH OF THE EXPENDITU RE AS IS SO CONSIDERED BY THE AO TO BE EXCESSIVE OR UNREASONABL E SHALL NOT BE ALLOWED AS A DEDUCTION. IF THE ABOVE CONDITIONS AR E FULFILLED, THE AO CAN DISALLOW THE EXPENDITURE TO THE EXTENT HE CONSI DERS IT EXCESSIVE OR UNREASONABLE BY THE ABOVE OBJECTIVE STANDARDS OR OT HERWISE. THE OBJECT, SCOPE AND EFFECT OF THE INTRODUCTION OF SEC TION 40A(2)(A) WAS ITA-3491/DEL/2007 13 EXPLAINED BY THE BOARD IN ITS CIRCULAR NO.6P OF 196 8 DATED 6.7.1968 AND IN THAT CIRCULAR AT PARA 74, THE BOARD HAS STAT ED THAT WHERE PAYMENT FOR ANY EXPENDITURE IS FOUND TO HAVE BEEN M ADE TO A RELATIVE OR ASSOCIATE CONCERN FALLING WITHIN THE SPECIFIED C ATEGORIES, IT WILL BE NECESSARY FOR THE AO TO SCRUTINIZE THE REASONABLENE SS OF THE EXPENDITURE WITH REFERENCE TO THE CRITERIA MENTIONE D IN THE SECTION. IT WAS FURTHER STATED THAT THE AO IS EXPECTED TO EXERC ISE HIS JUDGMENT IN A REASONABLE AND FAIR MANNER, AND IT SHOULD BE BORN E IN MIND THAT THIS PROVISIONS IS MEANT TO CHECK EVASION OF TAX THROUGH EXCESSIVE OR UNREASONABLE PAYMENTS TO RELATIVES AND ASSOCIATE CO NCERNS AND SHOULD NOT BE APPLIED IN A MANNER, WHICH WILL CAUSE HARDSH IP IN BONA-FIDE CASES. 24. IN THE PRESENT CASE, IT IS NOT IN DISPUTE THAT THE ASSESSEE HAS MADE THE PAYMENT ON ACCOUNT OF PURCHASES OF GOODS T O PIH, WHICH FALLS WITHIN THE CATEGORIES OF PERSONS SPECIFIED IN SECTI ON 40A OF THE ACT. NOW, WE HAVE TO SEE AS TO WHETHER THE PAYMENT MADE BY THE ASSESSEE TO PIH TOWARDS PURCHASE OF GOODS WAS REASONABLE WIT H REFERENCE TO THE CRITERIA MENTIONED IN THE SECTION. WE HAVE TO SEE AS TO WHETHER THE ASSESSEE HAS PURCHASED THE GOODS AT THE FAIR MARKET VALUE PREVALENT AT THAT POINT OF TIME OR WHETHER THE SAME WAS MADE FOR THE LEGITIMATE NEEDS OF THE ASSESSEES BUSINESS. 25. THE ASSESSEE HAS MADE AGGREGATE PURCHASES OF `5 0.83 CRORES FROM PIH. THE ASSESSEE HAS DECLARED THE TOTAL TURN OVER OF `45.07 CRORES. THE ASSESSEE HAS MADE TOTAL PURCHASES OF ` 51.11 CRORES OUT OF WHICH, PURCHASES OF `50.83 CRORES WERE MADE FROM PI H. THE CLOSING STOCK DURING THE YEAR HAS BEEN INCREASED BY `5,21,8 6,000/-. IN THE COURSE OF HEARING OF THIS APPEAL, THE LEARNED COUNS EL FOR THE ASSESSEE HAS INVITED OUR ATTENTION TO THE COMPARATIVE CHART OF SALES MADE BY PIH TO THE ASSESSEE AS WELL AS TO OTHER UNRELATED PARTI ES WHICH READS AS UNDER:- ITA-3491/DEL/2007 14 SALES MADE TO ASSESSEE :- PARTICULARS NO. OF CASES RATE PER CASE INVOICE NO. DUKES MANGOLA 460 127.01 9890 DUKES LEMON 1.5 LTS. 264 296.11 9890 DUKE SODA 512 63.04 10137 DUKES TONIK WATER 320 63.04 SALES MADE TO UNRELATED PARTY M/S VINAYAK ENTERPRIS ES :- PARTICULARS NO. OF CASES RATE PER CASE INVOICE NO. DUKES MANGOLA 224 127.01 9875 DUKES LEMON 1.5 LTS. 330 296.11 9875 DUKE SODA 352 63.04 11026 DUKES TONIK WATER 199 63.04 11026 26. FROM THE AFORESAID COMPARATIVE CHART, IT IS CLE AR THAT THE SAME ITEM OF GOODS WAS SOLD AT THE SAME RATE BY PIH TO T HE ASSESSEE AS WELL AS TO THE UNRELATED PARTY. THIS COMPARATIVE CHART FILED BY THE ASSESSEE HAS NOT BEEN CONSIDERED EITHER BY THE AO OR BEFORE THE LEARNED CIT(A) BEFORE COMING TO THE CONCLUSION THAT ASSESSEE HAS M ADE EXCESSIVE PAYMENT OF PURCHASES TO THE EXTENT OF `6,46,49,000/ - TO PIH IN ORDER TO GIVE BENEFIT TO PIH AND BOOK THE LOSS IN ITS OWN AC COUNT. 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 P APER 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 WHI CH THE GOODS WERE SOLD BY PIH TO UNRELATED PARTIES. IN THE TRADING A CCOUNT, THE ASSESSEE HAD SHOWN SALES OF GOODS MADE AT THE RATE HIGHER TH AN 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 ITA-3491/DEL/2007 15 EXCESSIVE PRICE THAN THE FAIR MARKET VALUE OR BECAU SE THE SALES WERE MADE AT RATE BELOW PURCHASE PRICE BUT THE LOSS HAS BEEN INCURRED BECAUSE THE ASSESSEE HAD OFFERED TO ITS CUSTOMERS E XTRA CASES OF GOODS BY WAY OF TRADE DISCOUNT. THE FACT THAT ASSE SSEE HAD OFFERED TRADE DISCOUNT BY WAY OF GIVING EXTRA CASES HAS NOW HERE BEEN DISPUTED BY THE AO. THE AO HAS ALSO NOT DISPUTED T HE SALES MADE BY THE ASSESSEE TO ITS CUSTOMERS. THE AO HAS MERELY A DOPTED THE CRITERIA OF DETERMINING THE GP AT 13.73% WHICH HAS BEEN SHOW N BY ANOTHER CONCERN, NAMELY, ARADHANA SOFT DRINKS CO. THE AO H AS NOWHERE GIVEN A FINDING THAT THE PURCHASES MADE BY THE ASSESSEE W ERE EXCESSIVE HAVING REGARD TO THE FAIR MARKET VALUE OF GOODS OR SERVICES OR FACILITIES FOR WHICH THE PAYMENT WAS MADE OR HAVING REGARD TO THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO THE ASSESSEE. THE AO HAS MERELY ADOPTED THE CRITERIA OF GROSS PROFIT FOR THE PURPOSE OF DIS ALLOWING EXPENSES U/S 40A(2)(A) OF THE ACT WHICH BASIS, IN OUR CONSIDERED OPINION, IS NOT IN ACCORDANCE WITH THE CRITERIA LAID DOWN IN SECTION 4 0A(2)(A) OF THE ACT. THE AO HAS NOT POINTED OUT THAT THE PURCHASES MADE BY THE ASSESSEE FROM PIH WERE EXCESSIVE HAVING REGARD TO THE FAIR M ARKET VALUE OF THE GOODS. HE HAS ALSO NOT DISPUTED THE RATE AT WHICH THE SALES WERE MADE BY THE ASSESSEE. THE FACT THAT ASSESSEE PROVIDED D ISCOUNT BY WAY OF EXTRA CASES TO ITS CUSTOMERS HAS ALSO NOT BEEN FOUN D TO BE FALSE BY THE AO. THE AO HAS ALSO NOT BEEN ABLE TO BRING ANY MAT ERIAL ON RECORD TO SHOW AS TO HOW AND IN WHAT MANNER THE ASSESSEE INTE NDED TO AVOID PAYMENT OF TAX BEFORE INVOKING THE PROVISIONS OF SE CTION 40A(2)(A) OF THE ACT. 27. NOW, COMING TO THE AOS ACTION IN REJECTING THE ASSESSEES BOOKS OF ACCOUNT, WE FIND THAT THE AO HAS REJECTED THE AS SESSEES BOOKS OF ACCOUNT MERELY FOR THE REASON THAT ASSESSEE HAS DEC LARED LOSS DURING THE YEAR. THE AO HAS NOT POINTED OUT ANY DEFECT OR DISCREPANCY IN THE BOOKS OF ACCOUNT OF THE ASSESSEE MAINTAINED REGULAR LY BY IT BEFORE ITA-3491/DEL/2007 16 REJECTING THE SAME AND APPLYING THE RATE OF GP OF 1 3.73% WHICH WAS SHOWN BY SOME OTHER CONCERN NAMELY ARADHANA SOFT DR INKS CO. THE AO HAS ALSO NOT EXAMINED AS TO WHETHER THE NATURE O F BUSINESS CARRIED ON BY ANOTHER CONCERN WAS IDENTICAL OR SIMILAR TO T HAT OF THE ASSESSEE AND WHETHER THE MARKET CONDITION OF BOTH THE CONCER NS WAS IDENTICAL. THE AOS VIEW THAT PURCHASE OF PRODUCTS BY THE ASSE SSEE FROM PIH WAS A COLORABLE DEVICE TO AVOID PAYMENT OF TAX AS THE P ROFIT PASSED ON BY THE ASSESSEE TO PIH WAS NOT TAXED IS NOT BASED ON A NY ADEQUATE OR SUFFICIENT EVIDENCE. THE AO HAS TAKEN THIS VIEW ME RELY ON HIS SUSPICION. THE AO HAS TREATED THE TRANSACTION BETW EEN THE ASSESSEE AND PIH TO BE A COLORABLE DEVICE TO AVOID PAYMENT O F TAX BY OBSERVING THAT ASSESSEE HAS MADE THE PURCHASES AT PRICES HIGH ER THAN THE ARMS LENGTH PRICE BUT HE HAS FAILED TO TAKE INTO ACCOUNT THE FACT THAT GOODS WERE SOLD BY PIH TO OTHER UNRELATED PARTIES AT THE RATE AT WHICH GOODS WERE SOLD TO THE ASSESSEE. FURTHER, IN THE IMMEDIA TE TWO PRECEDING ASSESSMENT YEARS, I.E., AY 2001-02 & 2002-03, THE A SSESSMENT WAS COMPLETED U/S 143(3) BY THE AO BY DETERMINING TOTAL LOSS AT `3,27,84,725/- AND `4,99,49,520/- AS AGAINST `3,27, 84,725/- AND `5,00,42,670/- SHOWN BY THE ASSESSEE, WHICH MAKES I T CLEAR THAT THE LOSS DECLARED BY THE ASSESSEE IN THESE YEARS HAS BE EN ACCEPTED BY THE DEPARTMENT WITH LITTLE VARIATION IN AY 2002-03. 28. THE LEARNED CIT(A) HAS CONFIRMED THE AOS ACTIO N AS HE WAS OF THE VIEW THAT IT WAS NOT UNDERSTOOD BY HIM AS TO WH Y PIH WAS ITSELF NOT SELLING THE PRODUCT WHEN THE SALE PRICE AND DISCOUN TS WERE FIXED. IN OUR CONSIDERED OPINION, THIS CANNOT BE A REASON TO INVOKE SECTION 40A(2)(A). IT IS UPTO THE BUSINESSMAN TO ARRANGE H IS BUSINESS AFFAIRS IN A MORE SUITABLE MANNER. THE CONCLUSION ARRIVED AT BY THE LEARNED CIT(A) THAT THE ASSESSEE COMPANY HAS BEEN ROPED IN MERELY TO TRANSFER THE LOSSES OF THE HOLDING COMPANY IS NOT BASED ON A NY EVIDENCE OR MATERIAL. THE LEARNED CIT(A) FURTHER RELIED UPON T HE RATE OF PROFIT SHOWN BY OTHER GROUP COMPANIES BUT THAT CANNOT BE A SOLE CRITERIA TO ITA-3491/DEL/2007 17 REJECT THE ASSESSEES BOOKS OF ACCOUNT AND THEN TO INVOKE SECTION 40A(2)(A) FOR THE PURPOSE OF DISALLOWING EXPENSES O F PURCHASES. THE LEARNED CIT(A) HAS CONCLUDED IN HIS ORDER THAT HE A GREED WITH THE ACTION OF THE AO IN ESTIMATING THE GROSS PROFIT. B UT, IN OUR CONSIDERED OPINION, WE DO NOT FIND ANY BASIS OR REASON TO ESTI MATE THE GROSS PROFIT OF THE ASSESSEE UNLESS AND UNTIL THE ASSESSEES BOO KS OF ACCOUNT ARE FOUND TO BE DEFECTIVE AND UNLESS AND UNTIL IT IS FO UND AND ESTABLISHED THAT THE PURCHASES MADE BY THE ASSESSEE FROM PIH WE RE AT A RATE HIGHER THAN THE MARKET RATE. 29. IN THE LIGHT OF THE DISCUSSIONS MADE ABOVE, WE ARE OF THE CONSIDERED OPINION THAT NO DISALLOWANCE WITHIN THE MEANING OF SECTION 40A(2)(A) IS CALLED FOR NOR ANY ESTIMATION OF GROSS PROFIT AT THE RATE OF 13.73% IS WARRANTED. WE, THEREFORE, DELETE THE ADD ITION MADE BY THE AO. THE AO SHALL MODIFY THE ASSESSMENT ORDER ACCOR DINGLY. 30. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. DECISION PRONOUNCED IN THE OPEN COURT ON 29 TH APRIL, 2011. SD/- SD/- (G.E.VEERABHADRAPPA (G.E.VEERABHADRAPPA (G.E.VEERABHADRAPPA (G.E.VEERABHADRAPPA) )) ) (C.L.SETHI (C.L.SETHI (C.L.SETHI (C.L.SETHI) )) ) VICE PRESIDENT VICE PRESIDENT VICE PRESIDENT VICE PRESIDENT JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER DATED : 29.04.2011. VK. COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT ASSISTANT REGISTRAR