INCOME TAX ACT, 1961

--Business disallowance under section 40A(2)--Excessive and unreasonable paymentsNo comparable instances--The assessee-firm was in the business of manufacturing of pharmaceutical machinery. It was noted by AO that certain purchases were made from three sister-concerns; namely (i) Cadmach, (ii) Kevin and (iii) Kembert. AO made certain enquiries and on that basis he had noted that excessive payment was made by assessee to its sister-concern in comparison to the similar product purchased by assessee from other parties. Thereafter, AO had discussed the provisions of section 40A(2)(b) and inferred that the expenditure incurred to sister-concerns was excessive than the fair market value of the goods. In respect of three sister-concerns, AO had held that at least a margin of 33.3 per cent only could be granted and rest was held as excessive payment. AO had also mentioned that total purchases made from the sister-concerns were to the extent of Rs.9,89,40,649. Out of the said total amount of purchases, he was of the view that purchases to the extent of Rs.62,32,260 were comparable and the balance were unreasonable. Thereafter, he had discussed that the transaction with the said three parties was unreasonable to the extent of 24.49 per cent and the same was disallowed. In all, a total addition by invoking the provisions of section 40A(2)(b) of Rs. 2,42,32,149 was made and the same was challenged. When the matter was carried before Commissioner (Appeals), he had made a detailed discussion and primarily on the ground that AO's judgment was made on a presumption, held that it was not sustainable in the eyes of law. Commissioner (Appeals) was of the view that machines purchased for the purpose of export were of superior quality, therefore, higher price was fixed. Even after paying the higher price to the sister-concerns, Commissioner (Appeals) had noted that assessee had disclosed better results. Thus, he was of considered opinion that the addition made under section 40A(2)(b) was not justified. Hence, the addition made by AO was deleted. This ground of appeal was, therefore, allowed. Held: No mala fide should have been attributed in respect of the purchases made from the sister-concerns. Facts of the case have revealed that wherever there was a difference in the purchase price of those machineries, it was due to reason that those machineries were meant for export purpose, hence, the comparable instances drawn by AO, did not stand in the eyes of law. Therefore, the view taken by Commissioner (Appeals) was correct, hence, hereby affirmed.