Judgment:
2. The assessee is a partnership firm. Financial year is the previous year of the assessee. The assessee is a wholesale dealer in rubber. It procures rubber from agriculturists and retail traders and after grading the same, part of it is sold to M/s Dunlop India Ltd., and the rest to some north Indian firms exporting rubber out of the State. The Assessing Officer found that the assessee, after purchasing rubber from Chittarikkal, Nileshwar, Panathur, etc., incurred Rs. 15 per quintal in the transportation of its purchases to its business place at Kanhangad.
The classification in the purchase bills showed that the assessee purchased rubber sheets in RMA-5 grade, but the sale bills showed the classification as RMA-4 grade, in the case of sales to M/s Dunlop India Ltd., and as RMA-5 grade in the case of sales to north Indian parties.
He also noticed that RMA-4 grade is superior in quality to RMA-5 grade.
He further noticed that the difference in the sale price of RMA-4 grade and RMA-5 grade was Rs. 10 per quintal during the period from 1st April, 1990 to 10th December, 1990, and it was Rs. 15 per qtl. on 14th December, 1990. It was Rs. 20 per qtl. on 20th December, 1990. On 17th January, 1991, it was Rs. 30 per qtl. and so on. The assessee had sold 2,555 qtls of rubber to M/s Dunlop India Ltd. and 5,428 qtls. to north Indian parties. On the total sales of 7,983 qtls. the assessee admitted a gross profit of Rs. 2,53,245 which worked out to Rs. 31.72 pet qtl.
of 1.56% in terms of value. According to the Assessing Officer the gross profit disclosed was rather low. The assessee explained that it has maintained records for all its purchases and sales, there were adverse market fluctuations and there were also occasions during which it had to sell at below the cost. It was further contended that major portion was sold to M/s Dunlop India Ltd. Day-to-Day stock accounts were maintained and all purchases and sales were supported by bills, and the accounts were all subjected to audit. The Assessing Officer, however, held that the market fluctuations were not reflected in all the sale bills, but were reflected only in the purchase bills and on occasions the assessee had sold at below the cost. He opined that on 1st June, 1990, the assessee's average purchase rate was Rs. 2,233 and after taking into account the transport charges, the average purchase price came to Rs. 2,248 but the assessee had sold the rubber at the rate of Rs. 2,175 which was less than Rs. 73 per qtl. He held that the purchase price quoted by M/s Dunlop India Ltd., and M/s Madras Rubber Factory represented the ruling market price of rubber and there was no forward sale transactions and the purchases can be graded as to 80% of RMA-5 and 20% of RMA-5. In this view of the matter, he made an addition of Rs. 100 per qtl. on the sale of 5,428 qtls and thus made an addition of Rs. 5,42,880 to the income of the assessee. The assessee appealed.
The learned CIT(A) was of the view that during the months of July, August and September, the average sale price was less than the average purchase price and it is common knowledge that the period during June to October is an off-season for rubber and that did not mean that in the trading of rubber there should be loss in that period. According to him, in view of the limited supply of rubber in the off-season it could fetch higher price during that period and that indicated the possibility of suppression of the sale price. He also agreed with the Assessing Officer that there was a possibility of showing high grade rubber as low grade rubber and there could be underinvoicing of sale price as a result of collusive transactions between the assessee and the purchasers. However, he felt that the Assessing Officer has arrived at underinvoicing of Rs. 73 per qtl. in the earlier part of his order and at Rs. 50 per qtl. in the later part of his order and, therefore, his adoption of Rs. 100 per qtl. was not justified. In this view of the matter, he directed the Assessing Officer to make an addition at the rate of 100 per qtl. in respect of the sales shown at price lower than the purchase price in the months of July, August and October. In respect of sales in other months, the probable average underinvoicing can be estimated at Rs. 50 per qtl. Accordingly, he quantified the addition in a sum of Rs. 2,99,300 as against Rs. 5,42,800. The assessee is aggrieved.
3. We have heard rival submissions. The assessee has maintained day-to-day stock accounts. Its purchases are from agriculturists supported by bought notes. It is not the case of the Revenue that the assessee's purchase price is inflated or purchases are bogus. The assessee has furnished quantitative details and not part of it has been found to be incorrect or inaccurate. The sales are supported by sale bills. Price charged for sales effected to M/s Dunlop India Ltd., has been accepted. The price charged to the north Indian parties is alone questioned, but it is to be remembered that none of the north Indian parties was examined. It is also to be remembered that sales to north Indian parties are on credit. No instance of the assessee having received anything more than what has been stated in the sale bills has been pointed out. The accounts have not been impeached either for want of vouchers or for lack of information. Merely because in some months or on some dates the selling price is less than the purchase price, an adverse inference has been drawn against the assessee to the effect that it must have in collusion with its north Indian parties resorted to underinvoicing of its sales. There is not an iota of evidence on record except the suspicions or surmises based on a comparison of the selling price on certain dates or on a few occasions with the corresponding purchase price. There is no material for the presumption as made by the Assessing Officer that the assessee's products consisted of 80% superior grade rubber and 20% less superior grade rubber. There is also no evidence to show that the assessee must have deliberately understated the grade in the sale bills given to the north Indian buyers and must have underinvoiced its goods. Tax audit has not pointed out any discrepancy in the accounts. The learned CIT(A) entered into a realm of conjecture when he opined that in the off season consisting of July, August and October, there should be substantial margin of profit in view of the limited availability of supplies during that period.
Again he erred in agreeing with the Assessing Officer without any supporting material that "there was a possibility of showing high grade rubber as low grade rubber and underinvoicing of the sale price as a result of collusive transactions between the appellant and its purchasers." Neither the Assessing Officer nor the learned CIT(A) has shown any comparable case of a wholesale dealer in rubber showing higher margin of gross profits. Not an instance has been cited.
Therefore, the conclusion drawn by the Assessing Officer that the gross profit was low remains unsupported. For all these reasons, we delete the addition.
4. Another point in the appeal is against the disallowance of Rs. 18,400 out of the freight charges debited in the accounts. The disallowance was made by the Assessing Officer from out of the payments made to a sister concern at almost the rate double the normal rate. The contention of the assessee that higher rates were paid to the sister concern because of the enormous waiting involved in loading rubber from purchasing centres was not found satisfactory to explain the increase in rates. Further, there were two debits in a sum of Rs. 9,625 and Rs. 8,775 towards the close of the accounting year. These two factors, according to the authorities, pointed to the collusive transactions between the assessee and the sister concern. Thus, an amount of Rs. 18,400 was disallowed and the disallowance was sustained.
5. Having heard rival submissions, we uphold the disallowance on the ground that the payment made to the sister concern was higher than the normal rates in similar cases. Though the genuineness of the payment cannot be questioned the reasonableness of the amount can be always be gone into. It is for this reason that we sustain the disallowance.