PRINCIPAL COMMISSIONER OF INCOME TAX 1 vs. ASIAN TILES LTD.

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TAXAP/585/2018HC GujaratGJHC24019658201811 June 2018Bench: HONOURABLE MR. JUSTICE AKIL KURESHI,HONOURABLE MR. JUSTICE B.N. KARIA5 pages
AI SummaryDismissed

What did the High Court hold?

The High Court dismissed all the Tax Appeals filed by the Revenue. The Court noted its prima facie disagreement with the ITAT's approach of balancing equities by reducing additions to 1% of disclosed sales, stating this exercise lacked a basis and co-relation. However, the Court chose not to examine the appeals further on merits. The primary ground for dismissal was that both the CIT(A) and the ITAT had directed that even the additions would qualify for deduction under Section 80IB of the Act. The Court reasoned that if the entire income of the assessee was exempt and there was no other source for the Revenue to trace such income to, the entire exercise of making additions would be revenue neutral, irrespective of whether the addition was 1% of sales, net profit, or gross profit. Therefore, the appeals were dismissed on this ground alone, making the entire exercise futile from a revenue perspective. The Court did not expressly leave any issue undecided.

What were the facts?

This group of appeals by the Revenue arises from a common judgment of the Income Tax Appellate Tribunal (ITAT) concerning two sets of assessees, Asian Tiles Ltd. The assessees were subjected to search and seizure operations. The Excise preventive team also found evidence of clandestine removal of goods. The Assessing Officer made additions based on estimated gross profit on clandestinely disposed goods and unexplained investments. The CIT(A) directed that net profit, not gross profit, be taxed and held that these additions were eligible for deduction under Section 80IB. The ITAT confirmed clandestine removal and suppressed profit but reduced the addition to 1% of disclosed sales and maintained the direction for deduction under Section 10B (sic, likely 80IB) on such additional income.

What were the issues?

1. Whether the ITAT erred in reducing the addition to 1% of disclosed sales when confirming clandestine removal of goods and suppressed profit, and whether this reduction had a basis in material on record? 2. Whether the ITAT erred in directing that additional income, even if sustained, would qualify for deduction under Section 80IB of the Income-tax Act, 1961, rendering the entire exercise revenue neutral? Assessee's Contentions: The judgment does not record specific contentions for the assessee regarding the issues decided by the Tribunal. However, the CIT(A)'s decision to tax net profit and allow 80IB deduction suggests the assessee argued for a lower addition and eligibility for deductions. Revenue's Contentions: The Revenue argued that the Assessing Officer relied on seized material and only incidentally referred to Excise Department material. They contended that the ITAT's reduction of additions to 1% of disclosed sales lacked basis and that the CIT(A)'s additions should have been confirmed. The Revenue also argued that the ITAT's direction for 80IB deduction on additional income made the appeals revenue neutral, but this was presented as a reason for dismissal rather than an argument against the deduction itself.

Which sections of the Income-tax Act were involved?

Section 80IB,Section 10B

AI-generated summary — verify with the full judgment below

C/TAXAP/576/2018 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL No. 576 of 2018 With R/TAX APPEAL No. 577 of 2018 With R/TAX APPEAL No. 578 of 2018 With R/TAX APPEAL No. 579 of 2018 With R/TAX APPEAL No. 580 of 2018 With R/TAX APPEAL No. 581 of 2018 With R/TAX APPEAL No. 582 of 2018 With R/TAX APPEAL No. 583 of 2018 With R/TAX APPEAL No. 584 of 2018 With R/TAX APPEAL No. 585 of 2018 With R/TAX APPEAL No. 586 of 2018 With R/TAX APPEAL No. 587 of 2018 With R/TAX APPEAL No. 588 of 2018 With R/TAX APPEAL No. 589 of 2018 With R/TAX APPEAL No. 590 of 2018 With R/TAX APPEAL No. 621 of 2018 With R/TAX APPEAL No. 622 of 2018 With R/TAX APPEAL No. 623 of 2018 With R/TAX APPEAL No. 624 of 2018 With R/TAX APPEAL No. 625 of 2018 Page 1 of 5

C/TAXAP/576/2018 ORDER With R/TAX APPEAL No. 626 of 2018 ============================================================== PRINCIPAL COMMISSIONER OF INCOME TAX 1 Versus ASIAN TILES LTD. ============================================================== Appearance : Mr MANISH BHATT, Sr Advocate with Mrs MAUNA M BHATT, Advocate for the PETITIONER Mr B S SOPARKAR, Advocate for the RESPONDENTS ============================================================== CORAM: HONOURABLE Mr. JUSTICE AKIL KURESHI and HONOURABLE Mr. JUSTICE B.N. KARIA 11th June 2018

COMMON ORDER (PER : HONOURABLE Mr. JUSTICE AKIL KURESHI) This group of appeals is filed by the Revenue and arises out of the common judgment of the Income Tax Appellate Tribunal, Ahmedabad [“Tribunal” for short] dated 5th May 2017 and concerns two sets of assesses identically positioned. These assesses were subjected to search and seizure operations by the Income-tax authorities. The Excise preventive team also had carried out inspection and found prima facie evidence of clandestine removal of goods to evade excise duty. The Assessing Officer completed the assessment at the stage where the show cause notice issued by the Excise Department was still pending. According to the learned counsel for the Revenue, the Assessing Officer placed reliance on material seized during the search and only incidentally referred to Page 2 of 5

C/TAXAP/576/2018 ORDER the material collected by the Excise Department which formed basis of the show cause notice. At the end of the assessment, the Assessing Officer made additions on the basis of estimated gross profit on the clandestinely disposed of goods manufactured by the assesses. He also made additions in the nature of unexplained investments. The assesses carried the matter in appeal. CIT [A] gave partial relief. Firstly, he held that not the gross profit but the net profit be brought to tax. While doing so, more significantly, he noticed that the assesses were eligible for deduction under Section 80IB of the Income-tax Act, 1961 and held that even the additional income would be eligible for such deduction. Both the sides carried the issue before the Tribunal. The Tribunal, by impugned judgment though confirmed clandestine removal of goods and suppressed profit, reduced the addition to 1% of the disclosed sales. The Tribunal maintained direction to the Assessing Officer for giving deduction under Section 10B of the Act to such additional income. Revenue has filed two sets of appeals before us which are arising out of the said judgment of the Tribunal. We have heard learned advocates for the parties at a considerable length. Prima facie, we are not in agreement with the Page 3 of 5

C/TAXAP/576/2018 ORDER approach adopted by the Tribunal. If for some reason, Tribunal was of the opinion that no additions could have been made in absence of reliable material on record, the Tribunal could have so stated. If on the other hand, the Tribunal believed that there was diversion of income by the assessee, the additions made by CIT [A] atleast ought to have been confirmed. The Tribunal, after recording factors for and against the assessees has, as if tried to balance the equities, reduced the additions to 1% of disclosed sales. In our prima facie view, this exercise of the Tribunal limiting the additions has no basis. There was no co-relation between the estimated undisclosed sales and the sales disclosed by the assesses. In the facts of the present case, however, we are not inclined to examine the appeals of the Revenue any further. This is so because the CIT [A] and the Tribunal have directed that even the additions would qualify for deduction under Section 80IB of the Act. If the entire income of the assessee is exempt and there is no other source which the Revenue could trace such income to, the entire exercise would be revenue neutral. Whether one per cent as directed by the Tribunal, or the net profit as held by the CIT [A], or even the gross profit; as desired by the Assessing Officer, would yield no tax to the revenue since whatever additions that may be made or sustained would qualify for deduction under Section 80-IB Page 4 of 5

C/TAXAP/576/2018 ORDER of the Act. Rest of the additions primarily are based on facts. CIT [A] has given elaborate reasons to that limited extent. CIT [A] has confirmed the additions and investments, which the Tribunal has subsumed the same in general directions. In the result, all these Tax Appeals are dismissed only on this ground. [Akil Kureshi, J.] [B.N Karia, J.] Prakash Page 5 of 5

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