BAGRRYS INDIA LTD.,NEW DELHI vs. PR.CIT- 2, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “A” NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI O.P. KANT, ACCOUNTANT MEMBER I.T.A. No. 3785/DEL/2018 Assessment Year: 2013-14 Bagrrys India Ltd., v. Pr.CIT-2, New Delhi. New Delhi TAN/PAN: AABCB 8144N (Appellant) (Respondent) Appellant by: Shri V.K. Bindal, Adv. & Ms. Sweety Kothari, CA Respondent by: Shri Sanjay Goel, CIT-D.R. Date of hearing: 17 01 2019 Date of pronouncement: 29 03 2019

O R D E R Per Amit Shukla, JM:

The aforesaid appeal has been filed by the assessee against the impugned order dated 27.03.2018, passed U/S 263 by Ld. Pr. CIT-II, New Delhi for Assessment Year 2013- 14. The assessee is aggrieved by order of the ld. Pr. CIT cancelling the assessment order dated 17.02.2016, passed u/s.143(3) holding that same is erroneous in so far as it is prejudicial to the interest of revenue. 2. The brief facts are that, in the case of assessee assessment u/s.143(3) was completed on 17.02.2016 on return income of Rs.2,72,05,210/- under the normal provisions of the Act and book profit u/s.115JB was computed at Rs.4,30,90,539/-. The Assessing Officer had

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allowed deduction u/s.80IC amounting to Rs.2,16,68,396/- which was claimed @ 30% of the profit for the instant year. The claim of deduction u/s.80IC was made with respect to the industrial unit at Baddi, Himachal Pradesh. The initial assessment year for the claim was Assessment Year 2008-09 and uptill 2012-13, the assessee had claimed deduction of 100%, which stood allowed to the assessee. Since assessment year 2013-14 was the sixth year of the claim on which deduction @ 30% was claimed and same was allowed by the Assessing Officer in the scrutiny proceedings u/s.143(3). The assessee is unlisted public company incorporated on 23rd October, 1996, which is mainly engaged in the business of food processing. The total revenue for the Assessment Year 2013-14 from its entire units was reported at Rs.45.09 crores. Its first unit was at Delhi, which was not a manufacturing unit but was mainly into trading and sale of oat based products like, whole oats, white oats, oats for atta, oats, poha, etc. Second unit was Baddi unit, (which availed deduction u/s.80IC) engaged in manufacturing of Muesli (ready to eat breakfast cereals), which is made of whole grains, nuts, fruits, berries, honey, etc., in various healthy and delicious combinations. The third unit was Newai unit which was restarted this year and basically is a flour mill producing Maida, Suji, atta, husk from wheat, which is altogether different sector from the other two units. These three units of the assessee were having independent functions, different products and risks undertaken were of their own. In this case, original return was filed u/s.139 of the Act on 28.09.2013 and revised return on 30.11.2013 alongwith Form

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3CEB. The assessee had declared that it has carried out mainly three activities, viz,:- (i) manufacturing of high fibre health foods and breakfast cereals, (ii) flour mill manufacturing of wheat products. (iii) trading of wheat Bran. 3. All the three units for their respective business were maintaining separate books of account and also separate audited accounts and have disclosed the entire transactions in detail in various audit report. 4. Ld. CIT in his revisionary jurisdiction u/s 263 had issued a show-cause notice dated 01.03.2018, wherein he has observed that:-  Firstly, the assessee had shown net profit from its unit, Baddi @ 37.33%, whereas net loss @ 14.51% has been shown from non eligible units.  Secondly, one non eligible unit was made operational only from the month of Feb, 2013, from where it had declared turnover of Rs.20,71,56,007, while turnover from Baddi Unit which was operational for full year has been shown at Rs.22,10,07,155/-; and apart from that, stock transfer of Rs.5,00,97,915/- has been booked as sales in Baddi Unit to increase the eligible profit for deduction u/s.80IC.  Thirdly, the Assessing Officer has failed to examine the material facts like; (i) huge profit in eligible unit as compared to loss declared in non -eligible unit; (ii)

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correctness of huge turnover shown from non-eligible unit in 2 months; (iii) genuineness of expenditure booked in eligible unit resulting in high profit; (iv) genuineness of expenditure claimed in non-eligible unit resulting in loss; (v) not conducting any enquiry to establish as to whether second unit was actually operational or not during the F.Y. 2012-13; (vi) stock transfer from eligible unit to non-eligible unit booked as sale during the F.Y. 2012-13; (vii) fall in Net Profit ratio from 20.79% in A. Y. 2012-13 to 10.39% in instant assessment year in the light of the fact of deduction @100% for A. Y. 2012-13 and deduction @30% in the instant assessment year; (viii) reason for downfall in gross profit ratio from 42.66% in A.Y. 12-13 to 38.17% in instant year for the unit in Baddi.  Lastly, the Assessing Officer has failed to invoke the provisions of Section 80IA (10) read with section 80lC(7). 5. In response to the show cause notice, assessee filed detailed submission vide reply dated 14.03.2018 along with voluminous supporting documents, the contents of the said reply has been incorporated in the impugned order from pages 3. In sum and substance, assessee submitted that:-  Firstly, it was pointed out that it would be incorrect to hold that this year net profit from eligible unit was shown @ 37.33%; and net loss @ 14.51% from non eligible unit, because the net profit and eligible unit was Rs.33.73% and correct information of unit turnover and profitability was given in the following manner:

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Consolidated Baddi Newai Other (Muesli Unit) (Wheat Flour Unit) (Oats & Other Units)

Revenue 42,81,63,162 22,10,07,155 64,33,722 20,07,22,285 5,26,45,050 7,45,36,216 -1,79,83,723 -39,07,443 - Net ProfitZ(Loss) before tax (a) 12.30% 33.73% -8.96% 60.73% 2,59,31,541 Exceptional loss on sale of Investments (b) 7,45,36,216 -39,07,443 79,47,818 Net Adjusted Profit/(Loss) (a) --(b) 33.73% -60.73% 3.96%

 Secondly, it would be incorrect that the non eligible unit, Newai Unit was made operational in February, 2013, rather it was re-started and the turnover was not Rs.20,71,56,007/-. In fact this was the turnover from Delhi Unit including depots which were working since long and this turnover was for entire 12 months; and from Newai Unit, the turnover was only 64,33,722/- which unit has restarted in February, 2013. It was stated that all these information were there in the annual report and necessary evidences to restart the unit was also produced before the Assessing Officer and was also produced before the Pr.CIT.  Thirdly, the assessee also said that it would be incorrect to assume that the stock transfer of Rs.5,00,97,915/- has been booked as sale in Baddi Unit to increase the eligible profit u/s.80IC and following facts were stated:-

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“Eligible Unit (Baddi Unit) has transferred Finished Goods i.e. Muesli to Delhi Depots and Hyderabad Depot for supplies to be made to customers in Delhi/NCR and Andhra Pradesh respectively. The company opened these two depots for better distribution of products of Baddi unit as the transportation is sometimes not convenient for remote area like Baddi. We also bring to your kind notice that in the next year Hyderabad Depot was closed as it was not feasible to operate. It is important to mention here that all the books of accounts, relevant documents including the bills, builties, etc were produced before learned A. 0. and which clearly shows the transfer of goods from Baddi to these depots from time to time. Both the depots were operated by third party and they were paid C&F charges to operate those depots. The assesse has maintained the complete books of accounts of both the depots and having separate bank accounts and VAT registration and FSSAI registration was obtained by the company to operate the depots. Separate nomination before the FSSAI was filed to run these depots. We want to bring to your kind notice also the important relevant fact before your Honor that Baddi unit (eligible unit) only manufactures Muesli and this product is not manufactured by company at other two units (non-eligible units) nor the company

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au/sources Muesli from third party. Therefore booking stock transfer as sales in Baddi unit to increase the eligible profit/or deduction u/s 80IC of the Act will not help the assesse at all. Sales from both these depots were made during the year from time to time to different parties including modern trades. We have duly received payment from these parties. The transporters who transport from Baddi to these depots are paid mainly by cheque only as far as possible from our side. The company used to file various VAT returns, Entry tax and excise return reflecting the above transfer of goods to these depots from time to time and on time. The transporter has to generate Form No. 26Afor each movement 0/ goods from Baddi to send it to VAT department and the same was generated for these stock transfers also.”  Fourthly, it would be completely erroneous to hold that Assessing Officer has failed to examine the material facts, because assessee from time to time had submitted all the documents, details of material facts before the Assessing Officer as and when required and by these documents were examined in detail which were flowing from the audited accounts and also tax year added u/s.92E VAT audited and audited u/s.80IC.  Fifthly, all the three units were completely independent having independent functions and risks. The Delhi Unit was running since long and was into production of oats

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it was stated that there are many International and National brands in this category viz Quaker, Horlicks, Kelloggs, Company has a major market share of these products in South India (Kerala, Tamilnadu). Quaker, Horlicks, Kelloggs and many other National and Regional players import finished Oats at port and only repack the same. No Value addition is done in Oats and it is more like a staple category FMCG. Margins in this category are wafer thin. Company has lost substantially market share of Oats to the above named big players. From Delhi Unit, Oats is also been sold in bulk which is like a B 2 B product with low margin. To keep market share and brand active in market, the assessee has to constantly give consumer and trade offers to the General and Modern Trade. Entry barrier in this category is hardly any. Anybody can import, repack and sell Oats. Newai Unit (Non Eligible Unit) was not running for a long time. The Assessee re-started this unit In February- 2013. This unit was operational for less than two months during the Financial Year. Baddi Unit (Eligible Unit) manufactures only Muesli a highly value added niche FMCG product. Assessee Company is first mover in this category and enjoys the benefit of first mover company. It has the biggest market share in this category. Recently, Kelloggs has introduced Muesli in competition with the Assessees Brand. Muesli is 100% B to C product and bulk sales from this unit are Zero. Assessee's Muesli is well accepted by Five Star

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Hotels and airlines and commands premium in the market. Muesli production requires lot of research and continuous R&D. Company with its constant improvement in production has mastered the art of producing high quality Muesli which is an entry barrier for new entrants.  Sixthly, the assessee also explained the increased in advertisement and promotional expenses due to competition in oats division, i.e., Delhi Unit and explained such an increase in the following manner: a) Company has to face a lot of cut throat competition in Oats Segment due to new entrance of big players like Saffola, Quaker, Kellogg, Horlicks, Euro Garden etc apart from regional competition and our marketing expenses also increased abnormally in addition to normal annual increase due to increase in retailers and Consumer Schemes. b) Though, we tried to pass on, a little part of the increase in the input cost to the consumer but looking to the circumstances we were forced to offer additional discounts, rebate, brokerage, commission and claims apart from other substantial sales promotion and conference expenses. c) In this connection please also please refer our written submission in reply to 14 points questionnaire by the then AO Smt Shivani Bansal, DCIT particularly vide page no 270, 271 to 311. Also please refer specific

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query and our written submission in reply to 10 points questionnaire by the then AO Smt. Shivani Bansal, DCIT particularly vide page no 189 d) In case of Newai Unit (wheat flour mill, a non- eligible unit), this unit was re-started from Feb-I3 and operated for only one and half months. Due to which there was significant production loss and Overhauling Expenditure incurred at initial phase which resulted into heavy loss in that year. e) There is a substantial loss on sale of investments which directly hit the profitability of non eligible units. f) Muesli is high margin product and the company commands substantial market share in the market. Thus gives better margin. The detailed explanation has been given above. g) Oat is very competitive product and no value addition thus has a very thin margin and during this period many company has entered in Oats market. Thus, resulting in substantial reduction in the company’s market share. The detailed explanation has been given above.  Seventhly, the assessee had also explained the genuineness of the expenditure booked in eligible unit and was stated that all the three units had different profitability business and Muesli is manufactured in Baddi Unit which from time to time in the market has due to the reason that the assessee was a first mover advantage in this category and has very few competitors.

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However, it was explained before the Assessing Officer that the profitability depends upon many other factors like product segment, demand and supply, competition and user etc. All these expenses relating to various units have been booked in the respective books.  It was stated that assessee has produced all the books of account and entire details of expenditure with regard to the electricity, salary of workers etc. were given before the Assessing Officer for which VAT returns etc were also filed.  Lastly, the reasons for fall in net profit ratio was explained in the following manner: 1. “There is a increase in the input cost mainly raw material cost, For example:- Increase in Major raw material (Oats. Dry Fruit & Flakes) cost. 2 Substantial increase in Manufacturing (e.g. Processing charges, Power & Fuel). 3 Increase in Advertisement and Promotional Expenses due to stiff competition. Company has to face a lot of cut throat competition due to new entrance of big players like Saffola, Quaker, Kellogg, Horlicks, Euro Garden, etc., apart from regional competition and our marketing expenses also increased abnormally in addition to normal annual increase due to increase in retailers and Consumer Schemes. Though, we tried 10 pass on, a little part of the increase in the input cost to the consumer but looking to the

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circumstances we were forced to offer additional discounts, rebate, brokerage, commission and claims apart from other substantial sales promotion and conference expenses. 4. Sales in volume of Oat products have dropped substantially in current financial year 2012-13 in comparison to previous year 2011-12. 5 Increase in Repair & Maintenance due to re-starting of Newai Flour Mill; 6 Reduction in Other Income in comparison to previous year (i.e. Rs. 2.27 Crores from 3.50 Crores). 7 There is a substantial loss on sale of investments.” And gross profit ratio was also explained in the following manner: “ The main reasons are furnished below for the fall in Gross Profit Ratio. i. There is a increase in the input cost mainly raw material cost, For examples-Increase in Major raw material (Oats, Dry Fruit & Flakes) cost. ii. Substantial increase in manufacturing (e.g. processing charges, Power & Fuel). iii. Increase in other direct expenses (i.e. Wages Cost, Repair & Maintenance of Plant & Machinery. etc iv. We like to further add that prices of oats which we import has increased in this year and processing charges we pay for processing of oats is also increased during the year due to increase in power and labour cost. This has

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resulted in lower GP ratio of the company and in particular substantially decreasing the total profit of Delhi unit (non-eligible). v. As explained herein above, Newai unit, wheat flour mill (non-eligible) re-started production in feb-20l3 (two months). This also impacted the overall GP ratio of the company. 4. It is therefore denied and is wrong that the Assessing Officer has failed to invoke the provisions of Section 80IA (10 read with section 80IC(7).”

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and there is no document to explain the modus operandi of the division of assessee company. Accordingly, after making these observations he held that following issues are required to be examined by the Assessing Officer:- i) Comparison of GPINP Rate of eligible and non eligible units to ascertain whether the NP Rate shown in eligible unit is reasonable or excessive, (ii) Whether the expenses shown in non-eligible unit are actually pertaining to that unit only, (iii) Whether the managerial expenses like salary of directors and finance division are debited only in non-eligible unit or they are apportioned on some basis between eligible and non-eligible units, (iv) Whether the expenses for marketing the products of eligible unit through branch offices or depots are debited in eligible unit, (v) Whether provisions. of sub-section (l0) of section 80IA were required to be invoked, Since these issues have not been examined by the Assessing Officer, therefore, in view of Explanation-2 to Section 263 it is deemed that Assessment Year passed by the Assessing Officer is erroneous in so far as prejudicial to the interest of revenue and accordingly he set aside the assessment order in the following manner: “8. In view of the discussion in paras 5 and 6, it is established beyond doubt that the assessment in the instant case was completed without proper enquiries into

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the claim of the assessee. By invoking the deeming provision in the Explanation 2 to section 263 of the Act, it is held that the order u/s 143(3) of the Act dated 17-02- 2016 is erroneous in so far as it is prejudicial to the interests of the revenue and is therefore cancelled. The Assessing Officer is directed to conduct proper enquiries in respect of the issues raised in this order and frame the assessment afresh.” 7. Before us, learned counsel for the assessee, Mr. Vinod Kumar Bindal, submitted that during the course of the assessment proceedings the assessee had filed voluminous information/documents before the Assessing Officer as and when required by the Assessing Officer which is evident from the following letters and the documents annexed in the paper book.:- A] Vide letter dated 15/09/2014 (P.B.38) documents at P.B. 39 to 144. B] Vide letter dated 06/05/2015 (P.B. 145) documents at P.B. 146 to 185.Kind reference to page 180 showing addresses of the premises used for factories are Rajasthan & H.P. Kindly refer to page 182 showing comparative GP/NP for the three years and reasons for fall explained. Page 185 is the Annexure to notice u/s 142(1) and a chart indicating page number of P .B. before the AO where by all the required details were submitted, is at pages 183 to 184 C] P.B.187 is reply to the AO dated 12/08/2015- mainly in respect of the 80lC deduction- P .B. pages 189 to 217

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filed- Details of eligible unit i.e. Unit- II Baddi, product manufactured, initial year, rate of deduction u/s 80lC were fully explained- Audit report in the FORM 10CCB was submitted in respect of the deduction u/s 80 lC- Kind reference invited to page 192 column 28 whereby related party transactions disclosed including branch transfers. Branch Audit report in respect of eligible unit on standalone basis is at P .B.189 to 214. D] Vide letter dated 0711 0/20 15 (P .B.218) -Details about the eligible unit-Total related party transactions are for Rs 6,71,86,955/-. Documents required as per the Rule 10D are at pages 222 to 263- Domestic transfer pricing Memorandum pages 257 to 263. E] Vide letters dated 26/11/2015 & 11/12/2015(P.B 264 & 265) - the reasons for high refund are at P.B. 269 and the reasons for fall in NP at page 270. F] Vide letter dated 23/12/2015 (P.B. 281) details of expenses, capital expenditure and form 26A details filed P.B. 282 to 297. G] Vide letter dated 01/02/2016 (P.B.298) capital gains, vehicle purchase, shareholding pattern etc filed P.B. 300 to 318. H] Vide letter dated 08/02/2016 (P.B.319) details of expenses filed. I] Vide letter dated 16/02/2016 (P.B.281)- BOOKS OF ACCOUNT PRODUCED- Unit wise details of sales, cost of material, gross profit and ratio thereof- P.B.323- Kindly refer to the notes on P.B.323- Newai unit is a

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wheat flour unit and different from muesli & oats- this Newai unit was restarted from Feb 13 and operated for one & half month etc. 8. He thus, submitted that, it is self-evident that the assessment proceeding which spanned over 18/19 months, in continuation, were in depth proceedings where voluminous details, documents and books of accounts filed by the assessee were examined by the AO. It is after receiving the details and the documents on several hearings and after perusing the same Assessing Officer called for further related details/documents in respect of issues examined earlier. He also informed us that after the passing of the assessment order on 17.10.2016, Assessing Officer vide letter dated 16.05.2016 informed that audit party has made certain observation that the net profit in eligible unit was shown at Rs.33.73%, while in non eligible unit has declared loss and the allocated expenses percentage was very high in non eligible units and accordingly assessee was required to explain the same. In response, the assessee has filed very detail reply and information which has been placed at paper book from pages 324 to 328. It was explained that the increase in the advertisement expenses was due to entry of many big companies / MNC like Kellog, Horlicks, Quaker etc in the Oats field. It was emphatically explained that the comparison of profit ratio of the eligible unit with non-eligible Newai unit is not possible on account of the products dissimilarity as eligible unit is in MUESLI production while non-eligible unit is wheat flour mill. Further, the Newai unit was closed since long being economically unviable and was

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restarted in Feb 2013. Exhaustive submissions were made on legal aspects that loss or lesser profit in the other non-eligible units has no relevance to compute deduction u/s 80IC. Legal provision in this regard mandating computations on standalone basis were also discussed. 9. He has also raised legal objection, that after the filing of revised return, no notice u/s. 143(2) has been issued and therefore, there could not be any variation in the return of income and in support, he has relied upon various judgments. Thereafter, he submitted that after the assessee has filed the reply to Assessing Officer on the audit objection no response was received from the Assessing Officer. It was after gap of 22 months, based on exactly same points raised in the audit objection; show cause notice u/s.263 has been issued by Pr.CIT. Since, Ld. Pr. CIT has observed that assessee has not filed explanations in response to various queries, therefore, assessee had sought information from the department under the RTI Act, as to whether all the documents furnished by the assessee before the Assessing Officer were there in the record or not. In response to RTI application, it has come to the surface that all the documents furnished by the assessee are there on the record and there is no document which is missing. Thus, Pr.CIT was incorrect to hold that the details and replies submitted along with documents before the Assessing Officer are not there on record or assessee has not furnished requisite information. This clearly goes to show that Pr. CIT has initiated the proceedings without application of his mind and has simply acquired revisionary jurisdiction to show disposal of the

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pending audit objection. Even when assessee had filed all the requisite documents once again before the Ld. Pr. CIT, he has not examined the same and has remanded back the matter to the Assessing Officer on a wrong finding of fact that Assessing Officer has not carried out any inquiry or verification. In case there was any inadequate inquiry by the Assessing Officer, then Ld. PCIT must record a finding based on fact that the inquiry made by the Assessing Officer is erroneous and this can be done only when Ld. PCIT himself has conducted some kind of inquiry or verification to point out the error or mistake made by the Assessing Officer. The matter cannot be remitted to the Assessing Officer for a fresh decision or to conduct further inquiry without finding that the assessment order is erroneous. In support he relied upon the following judgments:- (i) ITO vs. DG Housing Projects Ltd. 2012-TIOL-195-HC-DEL-IT (ii) PCIT Vs Modicare Ltd. 2017-TIOL-1946-HC-Del-IT (iii) CIT vs. Sunbeam Auto Ltd. (2011) 332 ITR 167 (Del) (iv) Amira Pure Foods Pvt. Ltd. – ITA No. 3205/Del/2017 dated 29.11.2017 10. On the other hand, learned Department Representative after referring to the various observations made in the impugned order submitted that in the instant case, Pr. CIT while conducting proceedings under section 263 has observed that AO had issued two questionnaires raising various queries. AO further raised few queries through note sheet entries. However, AO failed to raise even a single pertinent and pin pointed query on the most vital issue at hand, as to

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how the net profit rate of eligible unit could go drastically low in the sixth year of claiming deduction u/s 80IC, particularly since the rate of exemption allowable from sixth year was going to be 30% as against 100% in each of the five preceding years. AO also did not address/enquire about many other vital issues as to how assessee was earning profits only in unit eligible for deduction u/s 80IC while the non eligible units were incurring losses, similarly the issue as to how the non eligible unit which remained under operation just for about two months could achieve such a high turnover and still returning huge net loss. The natural outcome should have been to examine whether assessee was claiming / debiting the expenses pertaining to eligible unit in the P & L account of non eligible units thereby completely distorting the correct profit/loss amount earned in each unit. In the order, Pr CIT has established that AO has not done any worthwhile enquires to establish that assessee is not artificially inflating its profits of eligible units just because it is eligible for deduction u/s 80IC. The issue regarding downfall in G.P. as well as whether the stock transfer from eligible to non eligible unit was booked as sale, were also not examinee at all by AO. In order to establish that AO has failed to make any worthwhile enquiry, Pr.CIT in the order has even produced scanned copies of each and every query raised by AO during the course of assessment proceedings, by way of issuing two questionnaires and also few queries through note sheet entries, all these enquiries/queries clearly reflect that AO has hardly made any worthwhile enquiry, which was AO's onerous duty particularly since it was the sixth year of

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claiming exemption u/s 80lC where the rate of exemption goes down from 100% to 30%, in other words, for the first time in the span of first six years of claiming exemption u/s 801C, there is a tax liability imposed on the assessee where he is liable to be subjected to tax for 70% of the profits earned in eligible units, which gives huge inducement to the assessee to show substantially low net profit rate as compared to earlier five years. It is a fact that AO did not make any such enquiries in this regard. The inquiry made by the Assessing Officer was, no inquiry at all. The Assessing Officer has to discharge twin functions of adjudicator as well as investigator. Merely obtaining certain details or papers from the assessee and keeping it on record cannot amount to making a proper inquiry expected from an Assessing Officer. 10.1 He also referred to the judgment of Hon'ble Jurisdictional High Court in the case of Nagesh Network Pvt. Ltd., 345 ITR 135 and NIIT vs. CIT (2015) 60 taxmann.com 2013. During the course of proceedings u/s 263, this issue was considered and after considering the relevant material on record and giving due opportunity of being heard to the assessee, the CIT came to a logical and judicious conclusion that many vital issues were not considered and examined by the AO. 10.2 Again in his written submission he has referred to various judgments which are more on scope of 263. The list of such judgment reads as under: 1. “Hon'ble Supreme Court in the case of Deniel Merchants Pvt. Ltd. vs. ITO(Appeal No. 2396/2017) dated

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29.11.2017. (copy enclosed). In this group of cases, Hon'ble Supreme Court has dismissed SLPs in cases where AO did not make any proper inquiry while making the assessment and accepting the explanation of the assessee(s) in so far as receipt of share application money is concerned. On that basis the Commissioner of Income Tax had, after setting aside the order of the Assessing Officer, simply directed the Assessing Officer to carry thorough and detailed inquiry. The relevant judgement of Hon'ble Calcutta High Court in this case is also enclosed. 2. BSES Rajdhani Power Ltd. Vs PCIT [2017] 88 taxmann.com 25 (Delhi)/[2017] 399 ITR 228 (Delhi) (copy enclosed) Hon'ble Delhi High Court held that non-consideration of larger claim for Rs. 298.93 crores as depreciation and consideration of only a part of it being Rs. 6.45 crore by Assessing Officer, who did not go into issue with respect to whole amount, was an error, that could be corrected under section 263. Commissioner has power to consider all aspects which were subject matter of Assessing Officer's order, if in his opinion, they were erroneous, despite assessee's appeal on that or some other aspect. 3. Malabar Industrial Co. Ltd. Vs CIT [2000] 109 Taxman 66 (SC)/[2000] 243 ITR 83 (SC)/[2000] 159 CTR 1 (SC) (Copy Enclosed) where Hon'ble Supreme Court held that where Assessing Officer had accepted entry in statement of account filed by assessee, in absence of any supporting material without making any enquiry, exercise of

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jurisdiction by Commissioner under section 263(1) was justified. 4. Hon'ble jurisdictional High Court laid down in case of CIT Vs Nagesh Knitwears Pvt. Ltd. 345 ITR 135 ITA No. 2102/Del/2016 Assessment year: 2011-12 (Del) where it has been held that it is incumbent upon the AO investigate facts required to be examined and verified to compute the taxable income. If the AO fail to conduct the said investigation, he commits an error and the word 'erroneous' includes failure to make enquiry. 5. Hon'ble jurisdictional High Court laid down in case of Gee Vee Enterprises Vs Additional CIT 99 ITR 375(Dell that AO is having role of an investigator and it is Duty of the AO to ascertain the truth of the facts stated in the Return when circumstances would make such an enquiry prudent. It has clearly held that the order becomes 'erroneous' because such an enquiry has not been made. 6. NIIT Vs Commissioner of Income-tax (Central-II) [2015] 60 taxmann.com 313 (Delhi - Trib), Hon'ble E bench ITAT Delhi has analysed plethora of judgments on the issue and through order dated 27.03.2015, gave a ratio that the AO is required to conduct the inquiry in a manner whereby he places on record the material enough to reach the satisfaction, which a rational person, being informed of the nuances of tax laws would reach after due appreciation of such material. If this component is missing, it will always be a case of lack of inquiry and not inadequate inquiry.”

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Decision 11. We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as material placed on record. The facts in detail have already been discussed above. Here in this case, the assessee is having three units, one which is at Baddi, was carrying out manufacturing of Muesli; other Unit is at Delhi which is a trading Unit which carries out trading of oats along with various depots; and third is Nawai Unit which is a wheat flour unit. In so far as claim of deduction u/s.80IC of Baddi Unit is concerned in the earlier years same have been allowed. This was the sixth year of claim, wherein the assessee has claimed deduction of 30% which has been allowed by the Assessing Officer in the order passed u/s.143(3) vide order dated 17.02.2016. It appears that thereafter, there was certain audit objections raised by the audit party that net profit in the eligible unit was shown at 33.73% while non eligible there was a loss and also the allocated expenses percentage were shown from the high in non eligible unit. Based on this audit objection, it transpires that ld. Pr. CIT had issued show cause notice u/s 263 exactly on the same points despite the fact that assessee had filed a detailed reply before the Assessing Officer in response to the show cause notice post audit objection. Nowhere from the record it is borne out that such a reply filed by the assessee has been disposed of. Be that as it may, it is seen that the ld. Pr. CIT in his show cause notice has first of all presumed that assessee had shown huge profit in eligible unit as compared to non eligible units and has referred to certain figures of net profit rate and turnover

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figures which have been found to be incorrect. He also noted the turnover of Nawai Unit was at Rs.20.72 crore which in fact was 64.33 lacs. He also observed regarding stock transfer from non-eligible unit to book sales in eligible unit only to increase the profit in eligible unit; and Assessing Officer has failed to inquire either about fall in NP ratio or about the expenses claimed. Ld. Pr.CIT has also tried to demonstrate through various queries asked by the Assessing Officer by incorporating the show cause notices issued by the Assessing Officer as well as the order sheet entry to point out that Assessing Officer has framed the assessment without receiving all the requisite information/documents and without examining the records and verification of the assessee’s submission. 12. First of all, such an observation of the ld. Pr.CIT that Assessing Officer has framed the assessment without receiving any requisite reply or documents, has been found to be not correct, because all these documents and requisite details were there in the assessment records in wake of RTI application, wherein Department has clearly stated all the documents filed by the assessee are there on record. That apart, we find that assessee had filed four volumes of paper book which mostly contains the documents which were filed during the course of assessment proceedings in response to the various notices/queries raised by the Assessing Officer from time to time. Learned counsel has drawn our attention to those letters and documents placed in the paper book, the gist of which we have already incorporated while discussing the submission of the learned counsel. Main allegation of the

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ld. Pr.CIT that; firstly, Assessing Officer has failed to inquire about comparison of GP and NP ratio of eligible and non eligible range; secondly, whether expenses shown in all eligible units are actually pertaining to that unit or not; thirdly, whether the various expenses relating to managerial expenses are debited only in non eligible unit and same has been operated the same between eligible and non eligible unit; fourthly, marketing of products of eligible unit through branch office have been shifted to non eligible units; and lastly, whether u/s.80IA(10) and 80IC(7) were required to be invoked. On all these points, it is seen that, not only before the Assessing Officer but also before the ld. Pr.CIT, assessee has given very detailed submission and reasoning which though has been partly acknowledged and incorporated in the impugned order but instead of rebutting those submissions and replies, the ld. Pr.CIT has tried to hold that, since all these issues have not been properly examined by the Assessing Officer has been accepted and therefore, assessment order is erroneous in so far as prejudicial to the interest of revenue because of no proper inquiry had been made. First of all, we find that assessee has three units which are completely independent having independent functions and risks. The non eligible unit Delhi is into producing of oats for which it has various competitors of national and international brands like, Quaker Oats, Kellogs, Horlicks, etc. for which it has been explained that due to severe competition the margin is very less and Assessee Company has lost substantial market of oats to various big players. From Delhi unit assessee has sold the oats in bulk which is by product

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and has low margin and assessee has to consistently offer trade discounts and incentives to be in the market. In so far as Nawai unit is concerned, it was not running for a long and it has restarted this unit in this year for less than two months, which was wheat flour unit and had nothing to do with the Muesli Unit. The Baddi Unit, was into manufacturing of Muesli and is reckoned as high value added FMCG product and assessee being one of the first mover in this category, therefore it covers big market share. The assessee had also explained as to why as compared to other units the profit margin of Baddi Unit was high, i.e., 33.73% and having a revenue of Rs. 22.10 crores. Nawai Unit had shown huge loss, because of the reason it only work for less than two months and NP of Delhi Unit was less, i.e., 3.96%, because of the nature of the product. Further substantial loss was incurred in non-eligible units on account of sale of investment which hit the profitability. Regarding genuineness of the expenditure booked in eligible unit and non eligible unit, assessee had duly explained that all the three units are having different profitability business, like in eligible unit assessee’s product was a premium product in the market and one of the pioneers in India for launching such a product. Profitability depends upon products segment demand and number of competition and users, etc. and when all the units are working independently maintaining separate books of account and the expenditure relating to respective unit have been booked in their respective books, then it cannot be held that the expenses needs to be compared. Had there been similar products and market, then one can compare the profitability

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and margin, otherwise one has to benchmark with comparable third parties. Nowhere in the entire impugned order has Ld. PCIT identified that any particular nature or kind of expenditure pertaining to eligible unit has been shifted to non eligible unit and without such finding the assessee’s contention cannot be rejected. The assessee has also explained the overall fall in NP ratio and the comparative chart which is also there in the paper book. It has been explained that the overall decrease in the GP & NP ratio was due to increase in the cost of inputs/raw materials, increase in the manufacturing expenses, increase in the advertisement and promotional expenses due to stiff competition, substantial decrease in sales of oats, increase in repair and maintenance expenses due to restarting of the Newai Unit, reduction in other income, and sale of old investments in equity shares, etc. Apart from that, from the perusal of the replies filed before the Assessing Officer, we find that the assessee has explained the reasons before the Assessing Officer as to why no profit can be allocated according to eligible profit. The said reply filed before the Assessing Officer is placed from pages 324 to 328 of the paper book. Each and every points which have been raised in the impugned order is appearing in the various replies and documents filed before the Assessing Officer including reasons for fall in over all GP and NP ratio nature of expenditure and why the net profit has been decrease in the non eligible units. Regarding stock transfer, we find that all the 3 Units are completely independent units producing different products as discussed above. Thus, it cannot be said that there is any stock transfer

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from one unit to other unit. Baddi Unit has transferred finished goods, i.e., Muesli to Delhi Depot and Hyderabad Depot for supplies to be made to the customers for better distribution. Complete books of account and separate bank accounts were maintained for both the depots, having separate VAT registrations, etc. Thus, such an allegation is divorced from the facts on record. 13. Lastly, regarding applicability of section 80IA (10), same would not be applicable when assessee (not an eligible unit) has managed to inflate the profits of an eligible unit of another assessee owing to the close connection between the assessee carrying out eligible business to and any other person (not an eligible unit), i.e., some other entity and not other unit of the same assessee, which is not the case her. 14. If all the explanation and the documents as discussed above have been filed before the Assessing Officer, then there cannot be any presumption that Assessing Officer has not applied his mind and assessee has merely filed voluminous documents to compete formality on record. 15. Further from the perusal of the various show cause notice and order sheet entries as incorporated in the impugned order, we find that Assessing Officer has required the assessee to furnish details of various streams of revenue giving the details of manufacturing process and the modus operandi, details of purchases, details of various sundry creditors, justify the fall in net profit rate, justify the various expenses claimed in P&L account, asked the furnished the ledger and bills, vouchers bank statement, etc. In response to

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various proceedings which lasted for almost more than 22 months, if assessee had filed all the details, then it cannot be held that Assessing Officer has framed the assessment without any inquiry or examination of record. We have already observed above that the finding of the ld. Pr.CIT that these documents are not available on assessment record has been found to be incorrect. For sake of ready reference the details of replies and documents filed and submissions made by the Ld. Counsel before Ld. PCIT are reproduced herein below:- “AO conducted extensive enquiries, raised queries and examined the books of account, expenses, related party transactions, reason for fall in NP. a) The assessment proceedings spanned over continuous 18 or 19 months, where voluminous details / documents / books of account asked for and were examined by the AO. The AO on receiving details / documents in one hearing, perused and considered same and accordingly, called for further related details documents in respect of issues examined earlier. b) On perusal of the questionnaire dated 22/04/2015 (reiterated on page 16),it would be seen that a query was raised to furnish reasons and make disclosure in support of various claims made in the return of income, GP and NP ratio for three years and justification for any downfall, with supporting evidences. c) In the other questionnaire, queries were raised regarding income / loss on purchase or sale of shares,

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valuation of stock and its computation, purchases, creditors, repairs and maintenance expenses, justification for drastic fall in net profit rate, large other expenses claimed in the profit and loss account etc. . d) Perusal of the note sheet of the assessing officer as photocopied in the impugned order shows that the details like comparative unit-wise profit and loss account, ledger / bills / vouchers and bank statement showing payment of sales and promotion expenses and various other expenses, (Page 21), 10CCB report were called for and examined. Thus, various queries were raised by the assessing officer to examine unit-wise income and expenses claimed by the assessee and explanations were asked for fall in the net profit. The assessee submitted voluminous information and documents before the Assessing Officer: e) In response to various notices issued by the AO, voluminous information / documents were filed as under: i) Audited annual accounts, audit report under Companies Act, tax audit report, 3CEB report showing related party transactions, Audit report in form 10CCB for claiming deduction u/s 80lC which also disclosed the related party transactions. ii) Page 182 showing comparative GPINP for the three years and reasons for fall explained. iii) Page 187 -188 - reply to the AO in respect of 80-IC deduction. iv) Pages 189 -214 - Audit report in form 10CCB and

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audited financial statement of Baddi Unit. v) Page 216-217, 279, 280 - Working of Capital gain I loss on sale of investment. vi) Pages 221-263 information documents regarding Related party transactions. vii) Page 270 - Reasons for fall in NP ratio. vii) Page 371-318, 320-321-regarding expenses. xi) Page 322 - Letter dated 16102/2016 by which the books of account along with the flow chart of manufacturing process were produced. x) Page 323 - Unit wise sale, cost of material, gross profit and ratio thereof. f) Flow-charts of the manufacturing process were produced with the books of account and were returned after verification by the AO who did not mention in the assessment order or in the assessment proceedings note sheet that the same was not shown despite requisition. Detailed GP /NP ratio charts were submitted before the AO as above. After verification of the said charts, the assessing officer raised specific query regarding drastic fall in the net profit. The reasons for decrease in the net profit were explained to the AO as stated above who got satisfied with the reply filed by the assessee. g) The assessing officer raised specific query regarding related party transaction vide para 5 of the questionnaire dated 22/04/2015. The related

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party transactions were properly disclosed in the various audit reports. Details of related party transactions including the processing charges paid to the sister concern were submitted before the AO (Refer page 251-255 of the PB) which were accepted by her after verification. Importantly, the assessing officer examined and verified the books of account and it clearly means that she was satisfied on all counts which have been raised by the PCIT. Production of the books of account satisfies the entire possible queries. h) The AO raised various queries about the expenses and their justification. The assessee placed on record all the evidences regarding the same which shows her application of mind to the issues. The PCIT cannot decide the manner in which the queries need to be raised. i) Moreover, the PCIT has not said anywhere that the books of account so examined and accepted by the AO were not reliable or correct.” The aforesaid submissions which are also borne out from the record clearly clinches the issue that Assessing Officer did made proper inquiry and has applied his mind while allowing the claim of deduction u/s 80IC. 16. Even otherwise also, if assessee has explained and reply to each and every point raised in the show cause notice along with documents and reasons submitted before the Assessing Officer then it was incumbent upon ld. Pr. CIT, at

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least to examine those replies and records so as to prima facie come to a conclusion that such a reasoning given by the assessee is divorced from the facts and material on record which is not tenable. It is a well settled law that if ld. CIT is of the view that Assessing Officer has not carried out proper inquiry or there is inadequate inquiry, then he must give and record a finding that the order of inquiry made is erroneous. This can happen only if some kind of inquiry is conducted by the ld. PCIT and he is able to establish the error or mistake made by the Assessing Officer. It has been held by the Hon'ble Delhi High Court in the case of ITO vs. DS Housing Project Ltd. (supra), that ld. CIT himself had to undertake proper inquiry and give reason for coming to the conclusion that assessment order was erroneous and prejudicial to the interest of revenue. This has been further reiterated in the case of Pr. CIT vs. Modi care Ltd and CIT vs. Sun Beam Ltd. 17. Ld. DR as well as Pr.CIT has much harped upon Explanation 2, but the said explanation will only be applicable when the order of the Assessing Officer has been passed without making inquiry or verification which should have been made. Here the observation of the ld. Pr.CIT that Assessing Officer has not carried out any inquiry because replies and certain issue which was raised by him are not there in record, has already held found to be incorrect. Once Assessing Officer has carried out detailed inquiry and verification of the documents and was satisfied with the net profit shown by the eligible unit as well as the nature of expenses incurred by eligible and non eligible units and

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examined the entire details, then without there being any discrepancy or defect found by the Ld. Pr.CIT, he cannot simply set aside the assessment for passing a fresh assessment order. Thus, under these facts and circumstances, we hold that the impugned order passed u/s.263 cannot be sustained and same is quashed. Accordingly, assessment order passed by the Assessing Officer and the claim of deduction u/s.80IC is sustained and appeal of the assessee is allowed.

Order pronounced in the open Court on 29th March, 2019.

sd/- sd/- [O.P. KANT] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 29th March, 2019 PKK: Copy forwarded to: 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR Assistant Registrar

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Date 1. Draft dictated on (Direct on 18.03.2019 computer) 2. Draft placed before author 25.03.2019 3. Draft proposed & placed before the second member 4. Draft discussed/approved by Second Member. 5. Approved Draft comes to the Sr.PS/PS 6. Kept for pronouncement on 7. File comes back to PS/Sr. PS 8. Uploaded on 9. File sent to the Bench Clerk 10. Date on which file goes to the AR 11. Date on which file goes to the Head Clerk. 12. Date of dispatch of Order.