ACIT, NEW DELHI vs. SH. SURINDER MALIK, NEW DELHI

O R D E R PER PRASHANT MAHARISHI, A. M. 1. This appeal is preferred by the revenue against the order of the ld CIT (A)-XXVI, new Delhi dated 28.06.2011 for the Assessment Year 2006-07. 2. The revenue has raised the following grounds of appeal:-

1. On the facts and circumstances of the case, the ld CIT(A) has erred in deleting the addition of Rs. 26513712/- made by the AO on account of disallowance u/s 80-IC ignoring ACIT , Circle 31(1) New Delhi V Shri Surinder Malik 2 the fact that sales made to sister concern of the assessee were found to be unverifiable and un-comparable with the third parties.”

3. The brief facts of the case are that assessee is an individual engaged in the business of manufacturing and sales of leather goods. Assessment In this case was completed under section 143 (3) of the act on 04/06/2008 determining the total income at Rs. 8229870/– being the same amount on which the return of income was filed by the assessee. The assessee is eligible to claim deduction under section 80 IC of the income tax act on its unit set up at Baddi H P . For the year assessee has claimed deduction of Rs. 26513712/–. In the original assessment, the claim of the assessee was allowed as it is fully. Subsequently, the Ld. CIT initiated proceedings under section 263 of the income tax act holding that order passed by the Ld. assessing officer is erroneous and prejudicial to the interest of revenue as ld. assessing officer did not verify the sales made by assessee to its related parties, namely M/s Orient express, M/s Sundaram enterprises and M/s fortune leather company. It was also the allegation of the Ld. CIT that Ld. assessing officer has not examined whether the sales were ACIT , Circle 31(1) New Delhi V Shri Surinder Malik 3 made at the prevailing market price or whether the profit in respect of the eligible unit was more than ordinary profit, which would accrue in such a business. Therefore Ld. CIT passed order dated 19/02/2010 under section 263 of the income tax act. The assessee challenged the same before the coordinate bench in ITA No. 1182/del/2010. The coordinate bench upheld the action of the Ld. CIT with respect to the objection No. 3 and 4, which are, related to sale to the sister concern. It is important to note the observation of coordinate bench in para No. 8.2 of its order as under:- “8.2 . This is an issue on which albeit investigation was started, but further investigation was required because of the attending facts suggesting a steep increase in the gross profit rate purportedly earned from the related concerns. Earning gross profit at more than 50% In this line of manufacturing does not inspire confidence of acceptance at the face value, more so, when the profit of such eligible unit is subject to full deduction. As sales to the related companies constituted roughly 80% of the total turnover and there was abnormal profit shown, it was incumbent upon the AO to investigate this ACIT , Circle 31(1) New Delhi V Shri Surinder Malik 4 aspect of the matter further, rather than stopping at the receipt of sales account. In our considered opinion, the Ld. CIT was justified in directing the AO to really examine this aspect of the assessee‟s claim for deduction under section 80 IC. We uphold this objection taken by the Ld. CIT.”

4. Consequent to this, the assessment under section 143 (3)/263 of the income tax act was passed by Ld. assessing officer on 31/12/2010 wherein the addition of Rs. 26513712/– was made disallowing the deduction under section 80 IC. During the course of assessment proceedings, the Ld. AO issued show cause notice to the assessee, which was replied. Issue raised by the Ld. AO was that assessee is gross profit has gone up to 51.2% from 40.7% shown in the 1st year. The assessing officer asked the assessee to produce invoices of third party and sister concern specifying the items sold and to give a comparison and rates supplied to sister concern vis-a-vis other parties on the sales made by the assessee. The assessee produced invoices in respect of sales made to the sister concern and sales made to an independent 3rd party and it was submitted that rates of sales are uniform and no discrimination was made while ACIT , Circle 31(1) New Delhi V Shri Surinder Malik 5 making sales to sister concern. However, the Ld. assessing officer was not satisfied with the submission of the assessee as according to him invoices filed in respect of sister concern were not matching with the description of invoices produced with respect to third-party. Therefore, according to the assessing officer, The description of goods does not denote the identity of the goods sold since the proceedings have gone through two stages. Therefore, it was held by the Ld. AO that the provisions of section 80 IA (8) is applicable to the facts of this case and the deduction claimed by the assessee does not hold good as assessee has failed to substantiate his claim that all the sales made by the assessee from the unit claiming exemption are at fair and at comparable rate since two third of the produce are sold to the sister concern and the sales are not verifiable in absence of proper description of goods sold to 3rd parties vis-a-vis sister concern. Therefore, the assessment was made at a total income of Rs. 34743580/– against returned income of Rs. 8229866/– disallowing the claim of the assessee of deduction under section 80 IC of the act of Rs. 26513712/–.

5. Aggrieved by the order of the Ld. assessing officer, the assessee preferred appeal before the Ld. CIT (A) – XXVI ACIT , Circle 31(1) New Delhi V Shri Surinder Malik 6 agitating that the disallowance is incorrectly made by the Ld. assessing officer considering the facts of the case. The Ld. CIT (A) allowed the claim of the assessee holding that provisions of section 80 IA (8) do not apply to the facts of the present case, but the provisions of section 80 IA (10) read with section 80 IC (7) applies to the facts of the case. It was further held by him that all the sales made to sister concerns are at fair and competitive rates as would have been done in the normal course of business and the rates charged are comparable with the third party. He further held that as there is no allegation of inflation of profit by the Ld. AO by way of any business arrangement with its sister concern no undue profit has been earned from these units and these units were selling the goods purchased from the assessee have made a gross profit of 40%. It was further held by him that the Ld. assessing officer has not been able to bring any evidence/ material whatsoever on record to indicate that the sister concerns have similar high- quality fashion leather goods as sold by the appellant at a price lower than that charged by the appellant. He further held that as in the past year, initial year the claim of the assessee has been accepted. Therefore, on the principle of consistency the ACIT , Circle 31(1) New Delhi V Shri Surinder Malik 7 disallowance cannot be made. Consequently he deleted the disallowance under section 80 IC of Rs. 26513712/–.

6. Revenue being aggrieved by the order of the Ld. CIT appeal has preferred this appeal before us raising the solitary ground that the 1st appellate authority has deleted the addition of Rs. 26513712/- ignoring the fact that sales made to sister concern of the assessee were found to be unverifiable and incomparable with the 3rd parties. The Ld. departmental representative vehemently supported the order of the Ld. assessing officer and submitted that sales made by the assessee to its sister concern is not at all comparable as the description in the bills given by the assessee while preparing bill to the sister concern and preparing bill to the third-party do not match and therefore the rates are not comparable at all. He therefore submitted that assessee is earning an unusual profit of approximately 50%, which is unheard in this kind of business. He further submitted that it is the duty of the assessee to show that the profit derived from the eligible industrial undertaking is proper and correct. He further submitted and referred to the various bills, which are submitted by the assessee in its paper book to show that the description in the bills raised on sister concern, as well as the ACIT , Circle 31(1) New Delhi V Shri Surinder Malik 8 bills raised on third party are not at all comparable, as the description do not match. Therefore, he submitted that the Ld. CIT (A) has deleted the disallowance without verifying any facts and therefore his order is grossly erroneous.

7. Against this, the Ld. authorized representative relied upon the orders of the Ld. CIT (A) and further referred to page No. 37 to 47 of paper book to demonstrate that the sales made by the assessee to the sister concern as well as to the third party is comparable. He further submitted that in assessment year 2005 – 06 and in assessment year 2009 -2010 the claim of the assessee is allowed. He referred to para No. 4.3 of the order of the Ld. assessing officer for assessment year 2009 – 2010, dated 18/10/2011 wherein it has been held that that sales made to sister concern as well as to third party is comparable and reasonable. He further submitted a chart to show that when the goods are purchased by sister concern from third parties they earn higher profit compared to the year in which they purchased goods from the appellant‟s eligible unit. He therefore submitted that that Ld. CIT appeal has correctly deleted the disallowance and therefore his order may be upheld.

ACIT , Circle 31(1) New Delhi V Shri Surinder Malik 9 8. We have carefully considered the rival contentions and perused the orders of the lower authorities. Though we fully agree with the views of the Ld. CIT (A) that the provisions of section 80 IA (8) do not apply to the facts of this case, but the provisions of section 80 IA (10) applies. The provisions of 80 IA (10) are as under:- (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 there from.