IN THE ITAT BANGALORE BENCH ‘C’
Deputy Commissioner of Income-tax
Versus
Sphoorti Machine Tools (P.) Ltd.
IT APPEAL NO. 928 (Bang.) of 2011
[ASSESSMENT YEAR 2007-08]
SEPTEMBER 28, 2012
ORDER
N. V. Vasudevan, Judicial Member
This is an appeal by the Revenue against the order dated July 11, 2011 of the Commissioner of Income-tax (Appeals)-III, Bangalore, relating to the assessment year 2007-08.
2. The grounds of appeal of the Revenue reads as follows :
“1. The order of the learned Commissioner of Income-tax (Appeals) is opposed to law and facts of the case.
2. The Commissioner of Income-tax (Appeals) erred in deleting addition of Rs. 54,39,297 to the net profit declared by the assessee, without appreciating that the Assessing Officer rejected the books of account and estimated the profits as pricing of some of the items products sold to Pragathi Automation P. Ltd., which is the sister-concern of the assessee, as discussed in the assessment order, was less than the cost to the assessee.
3. The Commissioner of Income-tax (Appeals) erred in not appreciating the fact that it was unusual that the assessee incurred loss on certain sales transactions with its related company and such loss not being genuine, the Assessing Officer was justified in rejecting the books of account and estimating the profits of the business.
4. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the Commissioner of Income-tax (Appeals) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.”
3. The assessee is a private limited company. It is engaged in the manufacture of CNC machine parts. For the assessment year 2007-08, the assessee filed return of income declaring taxable income of Rs. 20,72,668. In the course of assessment proceedings, the Assessing Officer noticed that the assessee sold to M/s. Pragathi Automation P. Ltd., (M/s. PAP), which is a sister-concern of the assessee, at a price which was much less than the price at which similar products were sold by the assessee to the third parties. The assessee submitted before the Assessing Officer that the assessee-company was promoted by ex-employees of M/s. Pragathi Automation P. Ltd. and they hold shares to the extent of 50 per cent. The assessee further submitted that since the major customer of the assessee was M/s. Pragathi Automation P. Ltd. they have to sell to them at a lower price. The assessee further submitted that as a businessman, the assessee is free to decide the price at which the products were to be sold to a particular customer. The assessee also submitted that it cannot be presumed that the price at which the assessee sells products to outsider is a standard price and that products which were sold to sister-concerns at a price less than the price at which the products were sold to outsider is done with an intention to suppress income. The assessee also gave detailed calculation of costs and demonstrated before the Assessing Officer that the price charged to M/s. Pragathi Automation P. Ltd. was also profitable to the assessee.
4. The Assessing Officer was of the view that he had the power to investigate and find whether the transaction have been arrived in such a way whereby, the assessee incurs notional loss. The Assessing Officer thereafter, found that 50 per cent. of the products manufactured by the assessee are exported and 70 per cent. of the 50 per cent. so exported is sold to M/s. Pragathi Automation P. Ltd. which in turn various products sold by the assessee to M/s. Pragathi Automation P. Ltd. and to outsiders. These are given in pages 5 to 7 of the assessment order. Thereafter, the Assessing Officer arrived at the following percentage of profits derived by the assessee on it various products generally and such products sold to outsider and to M/s. Pragathi Automation P. Ltd.
“However, on examination of ‘costing’ of the above products and sale price to Pragathi and others, one more startling fact came to the notice of the undersigned. The assessee-company before this office, furnished product-wise all inclusive cost on October 20, 2009. This is evident if we refer to the above chart. The assessee-company in its submission, besides, raw material and process cost, has apportioned per unit employee cost, administration cost along with interest and depreciation and arrived at total cost per unit and hence total cost to the items produced and sold thereafter. The product-wise sale price and profit thereon is also indicated by the chart above discussed. From the above, the following conclusions can be drawn.
