M/S PRAVEEN INDUSTRIES LTD.,,NEW DELHI vs. DCIT, NEW DELHI

2. The ld. CIT(A) has erred in law and on facts in allowing deduction u/s 10B of the Act whereas the assessee had no reasonable cause for justification for delay in filing its Income Tax Return.

4 The appellant craves to be allowed to add any fresh grounds of appeal and/or deleted or amend any of the grounds of appeal.”

3. The brief facts in the present appeals are that the assessee is a manufacturer of oil field equipments and one of the unit at Kundli is eligible for exemption u/s 10B of the I.T. Act, 1961. The assessee filed its return of income on 1.10.2009 declaring a total income of Rs. 32,33,15,220/-. Subsequently, a revised return was filed on 8.9.2010 at an income of Rs. 32,37,34,480/-. The assessee claimed 10B exemption of Rs. 11,97,02,143/- for its Kundli unit-II alone. The assessment order was completed on 29.12.2011 after disallowing 10B deduction of Rs. 11,97,02,143/-. The AO held that the assessee is not entitled for 10B deduction as the condition laid down as per the proviso to section 10B(1) is not satisfied since the return of income was not filed on or before the due date. The AO also made an alternative finding that certain expenses relating to the 10B unit at Kundli-II was debited in the other units of the appellant and therefore the AO has apportioned these expenses in the ratio of turnover of various units and concluded that profit of the 10B unit needs to be reduced by Rs. 98,75,934/-. The AO also disallowed Rs. 1,75,197/- u/s 43B as the per audit report Rs. 3,75,000/- was added back being donation and Rs. 24,000/- was disallowed u/s 40(a)(ia) of the Act, 1961. The ld. CIT(A) vide order dated 31.1.2013 allowed the claim of deduction u/s 10B of the Act and as regards the alternative disallowance made of Rs. 98,75,934/- u/s 10B of the Act restricted the same to Rs. 46,62,180/- by holding that even if 80IA(8) is not applicable, however 80IA(10) is applicable. Both assessee and revenue being aggrieved have preferred the instant appeals.

5. In Grounds 1 and 2 raised by the revenue relates to denial of deduction u/s 10B of the Act on the ground that the return was filed beyond the due date provided u/s 139(1) of the Act. It has been contended that 4th proviso to section 10B of the Act is mandatory and since assessee had no reasonable cause for delay in filing of return, claim of deduction ought to have been disallowed.

6 The CIT(A) while allowing the claim of deduction has held as under:

The assessment records and the order sheet entries gave no indication of any query being raised by the AO regarding the belated filing of return. From the evidence available the return of income must have been either filed on 30.09.2009 or on 01.10.2009 as the date of filing reflected in the efiling receipts is 01.10.2009. the possibility of any computer hitch happening around the midnight of 30.09.2009 cannot be ruled out completely. The likelihood of computer accepting the return filed by the appellant after midnight of 30.09.2009 and therefore giving the acknowledgement date as 01.10.2009 cannot be ruled out. There is nothing on record to indicate the time when the appellant started entering the details regarding the return of income in the department’s computer system and at what time this process was actually completed. The provisions relating to the filling of return envisages manual filing of return which usually corresponds with officer hours while e-filing can take place even after office hours. The e-filing is also a time consuming process and even if the return is filed before midnight the acceptance by the system and the generation of acknowledgement may have happened after midnight. Thus, the possibility of the appellant being denied the benefit of section 10B due to the improper functioning of department computer network cannot be ruled out in this case as the delay in this case may be couple of second or even hours. I am of the view that in such circumstances in the absence of any concrete evidence the benefit of doubt should be in favour of the appellant who had been denied 10B deduction amounting to Rs. 11,97,02,143/-.

In Exercise of the powers conferred upon it by section 119(2)(b) of the Income Tax Act, 1961( The Act) , the central Board of direct taxes hereby authorizes the assessing Officer to admit the return of income for Assessment Year 2009-10 filed by the assessee on 01.10.2009 as a return filed by the due date specified under section 139(1) of the Act and to deal with the return on merits as per the provision of law.

9. Ground 3 raised by the Revenue relates to deletion of disallowance of Rs. 24,000/- u/s 40(a))(ia) of the Act. The CIT(A) at page 14 in para 7 has held that since no sum was payable at the end of year, therefore expenditure incurred and claimed under the head legal expenses of Rs. 24,000/- could not be disallowed by invoking section 40(a)(ia) of the Act. However, during the course of hearing the learned counsel for the assessee fairly conceded that the issue is to be decided against the assessee in view of the judgment of the Hon'ble Apex Court in the case of Palam Gas Service v. CIT 394 ITR 300. In view of the above submission, disallowance made is upheld and, ground raised is allowed.

11. The CIT(A) while approving the allocation has relied on the provisions contained in section 80IA(10) of the Act. He has held as under: “Even if 801A(8) is not applicable, 80A(10) is clearly applicable in this case in view of 10B (7) and the relevant provisions of section 80A (10) is as follows:

Where it appears to the AO that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the AO shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived there from.” It is clear from the assessment order that more than ordinary profits have arisen to the eligible business and therefore the provisions of section 80A(10) are applicable in the case of the appellant.”

(10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.

7. This Court is unable to accept the aforesaid submissions. For the purposes of Section 80-IA (10) of the Act, it is not enough for the AO to show that there was a close connection between the Assessee carrying on the eligible business and the other person with whom it has transactions. The AO has to further show that the business between them is so arranged that it produces for the Assessee ‘more than the ordinary profits’ which might be expected to arise in such eligible business. Section 80-IA (10) of the Act further requires the AO to compute the profits and gains of the eligible business by taking the amount of profits “as may be reasonably deemed to have been derived therefrom . The adjective “reasonably” carries with it the responsibility of the AO to base his conclusion on some empirical data.

8. In the present case the AO’s conclusion that the profits of the Assessee were “more than ordinary” was based on surmises and conjectures. During the course of his submission, Mr Singh sought to suggest that a 40% GP ratio by itself should be taken to be “more than ordinary”. Neither the Court nor the CIT (A) or the ITAT can take judicial notice of what percentage of GP ratio should be considered to be ‘more than ordinary’. That decision will hinge upon a variety of factors including the line business, the market conditions, the geographical location, the standard practices peculiar to the line of business and so on. To be fair, Mr Singh pointed out that by a subsequent amendment with effect from 1st April 2013, the legislature has inserted a proviso to Section 80-IA (10) of the Act to acknowledge the complexity of the exercise.

“7 After considering the rival submissions we find that identical issue came up for consideration of the Tribunal for Assessment year 2007-08 and the same was decided against the revenue vide para 5 which reads as under:

“5 We find that similar issue arose before the Chandigarh Tribunal in the case of M/s Navkar Polyplast Company v. ITO in order dated 9.4.2010, relating to Assessment year 2004-05, wherein the Tribunal in turn relying on its earlier order in the case of ITO v. A.K. Impex in ITA No. 766/Chandi/2009 relating to assessment year 2004-05 vide order dated 26.11.2008 it had held as under:

“7 We have considered the rival submissions carefully. With regard to the dispute in hand, the case made out by the revenue is on the strength of section 80IA(10) which we reproduce hereinafter:

80IA(10) - Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.

A perusal of the said Section, in so far as it is necessary for the present case, reveals that in order to invoke some essential requirements are: a) That there must be close connection between the assessee and the other person; b) That the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits.

There are other requirements in the said Section with which we do not wish to detail in as much as the same are not relevant to the dispute on hand. Section 80IA(10) is applicable to Section 80IC also because of provisions of Section 80IC(7). As per Section 80IA(10), where the Assessing Officer finds that owing to a close connection between the assessee carrying on eligible business and any other person doing any other business, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which arises in such business, the Assessing Officer is empowered to compute the profits of such business as may be reasonably deemed to have been derived therefrom. The two requirements of the Section, which in our view are of relevance in this case, have been enumerated earlier by us. The first is that there must be a close connection between the assessee and such other person. The second is that there must be an arrangement whereby the "business transacted" between them produces to the assessee more than the ordinary profits. In the present case, the charge of Assessing Officer is that the assessee has not debited any expenditure on remuneration to its partners and interest on partners' capital contribution and therefore, such arrangement between the assessee and its partners have resulted in more than ordinary profits to the assessee. In so far as the first condition is concerned, regarding close connection ostensibly, the same stands fulfilled as the assessee and its partners can be said to have a close connection. The moot question is as to whether there can be said to be an arrangement of transaction of business between the assessee and its partners whereby the assessee earned more than the ordinary profits. A related question is as to whether payment of remuneration and interest on capital contribution to the partners can be said to be an activity falling within the scope of the expression "business transacted between them". In our view, the meaning of expression "business transacted between them" appearing in section 80IA(10) only refers to such transactions which relate to the trading activity of the assessee. Viewed in this light, the payment of remuneration and interest on capital contribution to partners cannot be said to be falling within the scope of trading activities of the assessee so as to fall within the expression "business transacted between them" for the purposes of Section 80IA(10) of the Act. Moreover, in the present case, there is no dispute to the fact position that the assessee has not actually incurred any liability on payment of remuneration or interest on capital contribution to the partners. The CIT(Appeals) has culled out the relevant clause of the Partnership Deed which authorizes the partners to reduce or waive the payment of remuneration and interest on capital contribution by a mutual agreement without execution of any fresh Deed. The factum of the partners having appended their signatures to the Profit and loss Account whereby no claim was made on remuneration and interest on partner's capital contribution, itself show their mutual agreement not to obtain such payments from the firm. Thus, the conduct of the partners show that they have not acted upon the clause of the Deed which otherwise authorizes them to take remuneration and interest on their capital contribution. Having factually observed that there was no such payments made and neither was there any liability for such amounts, in our view the Assessing Officer was not empowered to reduce the profits on this score for the purpose of Section 80IA(10) of the Act.

8. In view of the aforesaid discussion, we find that the Assessing Officer not only wrongly invoked the provisions of Section 80IA(10) but also erred in interpreting the Partnership Deed so as to hold the assessee liable for reducing its profits on account of remuneration and interest to the partners for the purposes of Section 80IC of the Act. The order of the CIT(Appeals), on this ground is hereby affirmed. Thus, the Revenue fails on Ground No. 1 and 2.

5. The facts of the present case are identical to the facts before Tribunal in M/s Navakar Polyplast Company v ITO (supra) and ITO Vs M/s A.K. Impex (ITA No. 766/Chandi/2008). Following the ratio laid down by Tribunal in ITO Vs M/s A.K. Impex (supra), we find no infirmity in the order of CIT(A) in deleting the disallowance of deduction u/s 80IC of the Act. Upholding the order of CIT(A), we dismiss the ground of appeal raised by the Revenue. "Following the above, we decide this issue against the Revenue.”

18 Furthermore, the Hon'ble Jurisdictional High Court in the case of CIT v. Delhi Press Patra Prakashan 355 ITR 1has held as under:

26. In the present case, there is no material to support the view that the job work charges charged by Unit No.4 from Unit No.1 were not at market rates. We are agreement with the view taken by the Tribunal that in absence of any defect or manipulation found by the Assessing Officer in the books maintained for Unit No.4 and in absence of any material to indicate that the amount charged by Unit No.4 from Unit No.1 was not at comparable market rates, it would not be open for the revenue to disregard the profits of Unit No.4 as disclosed by the assessee only on the basis that the profits were significantly higher than profits earned by the assessee from other undertakings.

19 Likewise the Hon’ble Allahabad High Court in the case of CIT v. Translam Ltd. 231 Taxman 901 following the above decision has held as under: “10. On the similar analogy, the Hon'ble Apex Court in the case of Arisudana Spinning Mills Ltd. v. CIT [2012] 348 ITR 385/210 Taxman 233/26 taxmann.com 39 held that benefit under Section- 80 IA is not applicable when the assessee had not maintained the accounts for manufacture of yarn actually produced as a part of the industrial undertaking.

20 In fact, the Delhi Bench of Tribunal in the case of ACIT v. Micro Turner (supra) in the context of salary paid to partners has held as under:

“4. Ld. DR submitted that the Commissioner of Income Tax(A) has grossly erred in law and on facts in deleting the addition made by the Assessing Officer pertaining to the salary paid to the partners. The DR further submitted that the Commissioner of Income Tax(A) wrongly observed that the Assessing Officer has not quoted any case law in support of the addition. Replying to the above submission, the assessee’s representative submitted a copy of the judgment of ITAT ‘F’ Bench Delhi in assessee’s own case in for AY 2005-06 wherein the disallowance of salary paid to the partners has been deleted. From the impugned order para 2, we also observe that the Commissioner of Income Tax(A) following the above judgment of ITAT Delhi ‘F’ Bench dated 17.9.2009 has deleted the disallowance of salary paid to the partners with the following observations:-

2. The appellant deriving income from manufacturing & job work of precision turned components and fasteners, returned total income of Rs.1,42,83,172/-. The appellant has five units in which two units are located in exempted area. The appellant firm has claimed salary to the partners amounting to Rs. 24.00 lacs. The AO allocated the salary paid to partners to exempt units and taxable units on the basis of turnover. The sales including job work of taxable units is Rs. 83,45,26,173/- and that of the exempted units is Rs. 54,88,14,641/-. The AO disallowed the salary allocable to exempt units of Rs.9,52,155/-, worked out on the basis of turnover. The above action of the AD was contested in ground no. 3 of appeal. Before me, the AR submitted that there was no material to conclude that part of salary paid to partners pertains to exempt units and as such the disallowance is based on surmises and conjectures. The AR submitted that the AD has no power to allocate expenses arbitrarily as held in the case of DCIT Vs Delhi Press Samachar Patra (P) Ltd. 296 ITR 210 (Del.). Further, in the case of the appellant itself, Hon'ble ITAT Delhi Bench 'F' in (Del.) 2009 for the AY 2005-06 vide order dated 17.09.2009, deleted the disallowance of salary paid to partners. Without prejudice to the above, the partners to whom the salary of Rs. 24.00 lacs was paid, are assessed to tax and paying tax at 30% and as such there is no loss to revenue.