COMMISSIONER OF INCOME TAX-1 LUDHIANA vs. M/S SAIMBI CYCLES LUDHIANA

This appeal been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 29.4.2013, Annexure A-III passed by the Income Tax Appellate Tribunal, Chandigarh Bench ‘A’ Chandigarh (in short, “the Tribunal”) in ITA No.34/CHD/2011, for the assessment year 2007-08, proposing to raise following substantial questions of law for determination of this Court:- “i) Whether on the facts and circumstances of the case, and in law, the Hon’ble Income Tax Appellate Tribunal was justified in confirming the action of the learned CIT(A) in deleting the GP addition on account of sales made to sister concern ignoring the fact that the assessee had sold goods to independent party charging GP rate of 10.20% as well as ignoring the fact that the GP rate declared by other assessee as referred in assessment integrity of this document High Court Chandigarh order was 20% which is much higher than the GP rate charged from the sister concern? ii) Whether on the facts and circumstances of the case and in law, the Hon’ble Income Tax Appellate Tribunal was justified in ignoring the fact that sales of sister concern were to the tune of ` 6,66,30,924/- whereas sales to independent party were to the tune of ` 1,62,13,092/- and thus the comparison was rightly made by the AO? iii) Whether on the facts and circumstances of the case and in law, the Hon’ble Income Tax Appellate Tribunal was justified in confirming the action of CIT(A), deleting the addition of ` 2,33,337/- on account of disallowance of deduction claimed under Section 80IB on income earned from job work carried out by the assessee which does not form part of income derived from the industrial undertaking? iv) Whether on the facts and circumstances of the case and in law, the Hon’ble Income Tax Appellate Tribunal was justified in confirming the action of CIT(A), deleting the addition of ` 2,33,337/- on account of disallowance of deduction claimed under section 80IB following the decision of Hon’ble Punjab and Haryana High Court in the case of Impel Forge Allied Industries Limited (2009) 183 Taxman 38, as the same was not accepted by department on merits but SLP was not filed as the tax effect was below the prescribed limit?”

A few facts relevant for the decision of the controversy involved as narrated in the appeal may be noticed. The respondent assessee is a firm. It is engaged in the business of manufacturing of cycle parts. It filed its return of income for the assessment year 2007-08 on 31.10.2007 declaring income of ` 6,39,890/-. The Assessing Officer completed the assessment under Section 143(3) of the Act on 29.12.2009, Annexure A.1 at an income of ` 52,50,004/- by making certain additions like ` 49,17,319/- on account of sales to sister concern M/s Darshan Udyog at lower rates as integrity of this document High Court Chandigarh compared to non related parties; ` 2,33,337/- on account of disallowance of deduction under Section 80IB of the Act on labour job carried out by the assessee which does not form part of income derived from industrial undertaking, ` 37,500/- on account of disallowance of additional depreciation and ` 7,13,812/- on account of disallowance of expenses in respect of payment of bonus and wages. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals)-I [CIT(A)]. Vide order dated 29.10.2010, Annexure A.II, the CIT(A) partly allowed the appeal, deleting the additions of ` 49,97,319/- on account of sales to the sister concern, ` 7,13,812/- on account of disallowance of expenses out of bonus and leave with wages and allowing the deduction under section 80IB of the Act claimed at ` 2,33,337/-. Aggrieved by the order, the revenue filed appeal before the Tribunal. Vide order dated 29.4.2013, Annexure A.3, the Tribunal dismissed the appeal. Hence the present appeal by the revenue.

We have heard learned counsel for the appellant-revenue and perused the record.

The two issues that arise for consideration in this appeal are:- (i) Whether the gross profit rate applied by the Assessing Officer at the rate of 20% was appropriate and the CIT (A) as well as the Tribunal were justified in deleting the same in respect of sales made to sister concern? (ii) Whether the assessee was entitled to deduction under Section 80IB of the Act on income earned from job work carried out by the assessee as it did not form part of income derived from industrial undertaking?

After hearing learned counsel for the appellant, we do not find any merit in the appeal.

Taking up Issue No.(i), the CIT(A) vide order dated 29.10.2010, Annexure A.II, while accepting the plea of the assessee held as under:- “3.2 I have considered the facts of the case and submissions made by the AR. The assessee partnership firm is engaged in the business of manufacturing of cycle parts. During the year out of total sales of ` 8,28,44,016/-, the assessee has made sales of ` 6,66,30,924/- to its sister concern M/s Darshana Udyog. In the course of assessment proceedings, the Assessing Officer noticed that the assessee has made sales to its sister concerns at lower rate than the rates at which the sales to other parties have been made. In this regard, the Assessing Officer has referred to some instances of sales made by the assessee firm to its sister concern and other parties as noted on page 5 of the assessment order and has come to the conclusion that the assessee has made sales to sister concerns at a less price than sales made to other parties. As noted in the assessment order of M/s Darshana Udyog has shown GP of 5.4% against the GP of more than 11% shown by the assessee. The Assessing officer has also rejected assessee’s contention that sales to sister concern are made in packing whereas sales to independent parties are made in loose form on the ground that the total expenditure on packing is only of ` 4,79,640/-. However, the AR has stated that there is a mistake in writing the assessment order in as much as sales are made to the sister concern in loose form and to the other parties in packed form. In any case total packing expenditure of the assessee is only ` 4,79,640/- which would not affect much the profit margin of the assessee. Regarding assessee’s contention about difference in purchase rates of raw material, the Assessing Officer has observed that around 50% of the nickel where the difference is shown has been sold by the assessee as trading sale. In view of the above and also relying on various judgments, the AO applied rate of 7.5% to the sales made to the sister concern and made the integrity of this document High Court Chandigarh addition of ` 49,97,319/-. While doing so, the AO has also referred to the case of Safari Bikes which has shown GP of 20.10%. However, the AR has in his submission reproduced about has countered various arguments of the Assessing Officer discussed above. After going through the facts discussed above, I intend to agree with the contentions raised by the AR against increasing the GP in respect of the sales made to sister concern. The Assessing Officer has referred to certain transactions where rates of sale made to sister concern are shown less than the rates of sale made to independent parties. However, the AR has submitted that sale rates made to the sister concern and the independent parties are comparable as noted in the chart given in the submission reproduced above. It appears that Assessing Officer has mislead himself in adopting the rates charged from sister concern during much earlier period and comparing the same with the sale rates of independent parties to whom the sales were made in the months of Feb and March, 2007. The AR has stated that almost all the sales have been made to sister concern from April 2006 to 14th February 2007 whereas the sales to other parties have been made during the period from 15th February 2007 to March 2007. No sales have been made to other parties during the period from 15th February 2007 to March 2007 except two bills No.33 dated 14.2.2007 and bill No.135 dated 31.3.2007. Bill No.33 is regarding sale of cycle rims at the rate of ` 76 per piece and same item has been sold to other parties on 15.2.2007 vide bill No.34 dated 15.2.2007 at the rate of ` 76.5 per piece and thus rates are comparable. The second bill No.135 relates to sale of cycle mudguards to the sister concern but the item has not been sold to other parties.

3 From the discussion made above, I intend to agree with the AR’s contention that the Assessing Officer has wrongly applied rates of the different parties to arrive at the conclusion that sales have been made at less rate to the sister concern. Moreover, prices of raw material have gone up from the month of April 2006 to March 2007 as per the details submitted by the integrity of this document High Court Chandigarh assessee on page 113-117 of the paper book. Though the Assessing Officer has observed that around 50% of the nickel has been sold as trading sale by the assessee the fact however cannot be ignored that the prices have gone up during the period which have affected the sale price at the later part of the year. The Assessing officer has not disputed this fact. Regarding GP shown by M/s Safari Bikes,the AR has stated that the Safari Bikes Company is dealing in manufacturing and sale of complete bicycle and not in manufacturing of rims. Otherwise also the Assessing Officer has not provided opportunity to the assessee while relying on rate of GP shown by Safari Bikes. Various case laws relied upon by the Assessing Officer are distinguishable as explained by the AR in his written submissions. Moreover, in this case, the assessee is eligible for deduction under Section 80IB as also noted in page 4 of the assessment order and, therefore, I see no reason for diverting the profit to the sister concern.

4 In view of the above and considering the detailed submissions of the AR, I am of the opinion that the Assessing Officer was not justified in making addition by adopting GP of 7.5% in respect of the sales made to the sister concern. Accordingly, the addition made on this account is deleted.”

The above findings were affirmed by the Tribunal vide order dated 29.4.2013, Annexure A.III with the following observations:- “8. We have considered the rival submissions carefully. We find that first of all the assessee is a concern wherein assessee was entitled to deduction under section 80IB of the Act @ 25% which would mean that effective tax rate would be 22.50% whereas the sister concern M/s Darshan Udyog is required to pay tax @ 30%, therefore, there was no incentive to make sales at lower rate. In any case, in the detailed submissions before the Assessing Officer and CIT(A) it demonstrated that practically no sales have been made to outside parties and therefore, comparison is not correct. In any case, the Hon’ble integrity of this document learned CIT(A) and we confirm the same.”

The CIT(A) as well as the Tribunal had recorded that the assessee concern was entitled for deduction under Section 80IB of the Act at the rate of 25% and therefore, the effective rate of taxation was 22.5%. It was further noticed that in the case of sister concern, the rate of taxation was 30%. It was also observed that in such circumstances, there was no incentive for the assessee to make sales to the sister concern M/s Darshan issue, it was noticed as under:- “5. Reference to section 80IB of the Act shows that only ‘gs’ Judge integrity of this document High Court Chandigarh