Addition under Sales Act Based Solely on Sister Concern’s Higher Profit Unjustified Without Rule 18-C Enquiry: Madras HC

The Madras High Court has ruled that a tax addition made to a company's income, based solely on the higher profit margin of its sister concern, is unjustified. The court held that such an addition cannot be made without a proper inquiry as per the relevant rules. The case involved a situation where the tax department had increased the taxable profit of the assessee simply because its sister company, which was in a similar business, was showing a higher profit rate. The High Court observed that the profitability of two different legal entities can vary for many genuine business reasons. It ruled that the department cannot make an addition based on a mere comparison, without conducting a detailed inquiry and proving that the assessee had artificially suppressed its profits.