The Rajasthan High Court has ruled that mere transaction of sale, purchase between two related persons is not covered under the expression ‘diversion’ of income.
The respondent-assessee, Ramdoot Prasad Sewa Samiti is a trust registered under Section 12AA of the Act and had claimed exemption under the Act for the assessment year 2012- 13. The return filed by the assessee-trust was taken under scrutiny by the assessing officer. During such assessment, the assessing officer noticed that the assessee had made total purchases of raw materials worth Rs.12.24 crores (rounded off) out of which purchases of Rs.9 crores were made from M/s Pawansut Trading Company Pvt. Ltd.
Upon further scrutiny, it was found that the one Kishorepuri Ji Maharaj was the main trustee of the assessee trust and also the director of the said company and from whom purchases worth 75% were made. The assessing officer was of the opinion that such substantial purchases made from a related party had to be at arm’s length.
The assessee carried the matter in appeal. The commissioner called for a remand report and thereafter deleted the disallowance by observing that the rates of purchase by the assessee from the related party were the same as with the unrelated party. Further, there were no findings in the assessment order on the basis of which additions were made except that purchases have been made from the related party. The appellant has also proved that such purchases were made at the same rate as paid to unrelated parties.
The department carried the matter on appeal before the Tribunal. The Tribunal confirmed the view of CIT (Appeals) observing that the assessing officer had not come to the conclusion that purchases made from the related party were on payment of an excess amount. There was no allegation that the assessee had paid a higher price to the related party as compared to the unrelated party. It was observed that merely because a transaction is done with the related party the same cannot be disallowed if it is done strictly as per normal terms and conditions and no undue benefit is given to the unrelated party.
The division bench headed by Chief Justice Akil Kureshi and Justice Sudesh Bansal has noted that the assessing officer never examined whether the transactions between the assessee and the said company were at arm’s length. He merely referred to statutory provisions and without further discussion came to the conclusion that disallowance had to be made. CIT (Appeals) not only criticised this approach of the assessing officer but also independently examined whether the transaction was at arm’s length. It was found that the rate paid to the related person was the same as paid to the unrelated party. The tribunal confirmed this view and in our opinion correctly so.
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