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Income Tax Appellate Tribunal, DELHI BENCH ‘E’ : NEW DELHI
Before: SHRI L.P. SAHU & SHRI KULDIP SINGH
Date of Hearing : 05.10.2016 Date of Order : 27.10.2016 O R D E R
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, Assistant Commissioner of Income-tax, Central Circle 2, New Delhi (hereinafter referred to as ‘the Revenue’) by filing the present appeal sought to set aside the impugned order dated 14.08.2012 passed by the Commissioner of Income-tax (Appeals)-III, New Delhi qua the assessment year 2009-10 on the grounds inter alia that :-
“1. On the facts and in the circumstances of the case, the CIT (A) has erred in deleting the disallowance of Rs.38,74,682/- made by the A.O. out of 80IC, by treating the same as income from other sources.
2. The order of the CIT (A) is erroneous and is not tenable on facts and in law.”
Briefly stated the facts of this case are : during the search and seizure operation under section 132 of the Income-tax Act, 1961 (for short ‘the Act’) in case of Gopal Zarda group on 15.01.2009 at the residential premises of Smt. Rachna Aggarwal, certain documents belonging to assessee were seized. After recording satisfaction, proceedings u/s 153C read with section 153A of the Act were initiated and the case of the assessee was put under scrutiny by issuing a notice u/s 143(2) and 142(1) along with questionnaire and in response thereto, ld. AR for the assessee attended assessment proceedings and furnished requisite details.
Assessee company is into the business of manufacturing and sale of tin containers and allied goods having business activities at Bantakheri, Uttarakhand. Assessing Officer noticed that during the year under assessment, the assessee declared sale of Rs.4,97,11,596/-, gross profit of Rs.1,52,70,202/- and net profit of Rs.75,44,628/- with GP ratio of 30.72% and net profit ratio of 15.18%. But, in the immediately preceding year, the assessee declared sale of Rs.1,65,57,752/- having GP of Rs.24,40,575/- and net profit of Rs.51,852/- giving GP ratio of 14.68% and NP ratio of 0.31% and the entire income of Rs.77,49,364/- has been claimed as deduction u/s 80IC as per audit report in Form No.10CCB along with certificate from the auditor.
AO noticed that assessee has made substantial business transaction with M/s. J.J. Enterprises, its sister concern, by making purchases of Rs.1,66,99,460/- and by making payment of printing charges to the tune of Rs.20,34,142/- and the assessee has made total purchase of Rs.3,17,06,551/- out of which 52.66% purchases have been made from the sister concerns which is part of the tin container. Assessee declared GP rate of 30.72% and NP rate of 15.18% as against NP rate of 1.67% of its sister concern, M/s. J.J.
Enterprises which is into the same line of business. AO came to the conclusion that the semi-finished container parts are being supplied by M/s. J.J. Enterprises and after carrying out the minor work, the same was sold by the assessee firm as finished products.
No work in progress is shown.
AO further noticed that power and fuel expenses is approximately 5% in case of M/s. J.J. Enterprises and 1.15% in case of assessee and likewise wages account for only 1.27% in case of assessee firm whereas it is 3% in case of sister concern carrying out similar activities and as such, the assessee has suppressed the expenditure to inflate income as the same is exempt u/s 80IC of the Act. AO concluded that as the assessee made purchases to the extent of approximately 50% from its sister concern, the profit earned to the extent of 50% are required to be treated as a result of arrangement made between assessee and its sister concern and computed the income and eligible deduction u/s 80IC of the assessee as under :-
Total Profit declared Rs.77,49,364/-
50% of the profit held to be income From other sources as discussed above Rs.38,74,682/-
Business income of the assessee from Rs.38,74,682/- eligible business
Deduction u/s 80IC restricted to business Rs.38,74,682/- income
Assessee carried the matter before the ld. CIT (A) by way of filing the appeal who has allowed the appeal. Feeling aggrieved, the Revenue has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
Ld. DR for the Revenue challenging the impugned order contended, inter alia, that the bare perusal of the trading results of the assessee company vis-à-vis M/s. J.J. Enterprises, its sister concern, similarly located and into the same business leads to the conclusion that the assessee company had made major purchases of semi-finished goods from its sister concerns, M/s. J.J. Enterprises, so the AO has rightly disallowed 50% of the deduction u/s 80IC by invoking the provisions contained u/s 80IA (10); that assessee’s gross profit increased from 14.68% to 30.72% with NP 0.3% to 15.18% during the year under consideration which is unreasonable and sufficient to invoke provisions contained u/s 80IA (10); that the assessee has not placed evidence of fair market value of the items purchased before AO but filed a cost sheet reflecting GP of Rs.6.4 lakhs in the hands of M/s. J.J. Enterprises on the sales of items of Rs.1.67 crores to the assessee and no application for additional evidence was entertained by ld. CIT (A); that low expenditure on wages and power consumption charges in case of assessee as compared to its sister concern, M/s. J.J. Enterprises leads to the conclusion that it is a case of backward and forward integration of profit in order to avail deductions u/s 80IC and as such, appeal is liable to be allowed.
However, on the other hand, the ld. AR for the assessee to repel the argument addressed by the ld. DR contended inter alia that the AO without demonstrating that the profit earned by assessee is more than reasonable leading to the suppression of profit at the other end invoked the provisions contained u/s 80IA (10); that the view taken by ld. CIT (A) that M/s. J.J. Enterprises has claimed full value of the goods/raw material supplied to the assessee has not been rebutted; that jump in the gross profit of the assessee from 14.68% to 30.72% is due to the fact that the trading result was for a half year for 2008-09 and full year for 2009-10; that less gross profit of M/s. J.J. Enterprises is due to the fact that it was using old technology whereas the assessee has purchased new technology by making investment of Rs.1.9 crores in the plant and machinery and the fact that the assessee has been making highly specialized product for big multi-national companies (MNC); that when the AO has accepted the purchases u/s 48(1)(ii), it was not open for him to question the same; that the AO has not brought on record any evidence to prove that since power consumption bill and wages bills are negligible, no business activities are being carried out by the assessee; that no such adjustment can be made u/s 153C as there was no incriminating material against the assessee.
Undisputedly, the AO has invoked the provisions contained u/s 80IA (10) of the Act merely on the basis of comparison made in the GP ratio of assessee which is a 80IC unit with its sister concern, a non-80IC unit though geographically located near to the assessee. Ld. CIT (A) deleted the addition made by the AO by returning the following findings :-
“5. Finding on Ground of Appeal:-
The short issue to be decided is whether the addition made for Rs.38,74,682/- on account of disallowance of eligible profit u/s 80IC by invoking provisions of section 80IC(10) of the IT Act is justifiable in the facts of the case. From the assessment order it is observed that the AO has taken into account the fact that there has been a increase in GP ratio and NP ratio of the assessee firm as compared to the previous financial year and that the entire income for the year has been claimed as deduction u/s 80IC. It has also been noted by the AO that the assessee has made around 52.66% of the total purchases of Rs.3,17,06,551/- from M/s JJ Enterprises, it's sister concern, which is' in similar line of business. That semi finished container parts are being supplied by M/s JJ Enterprises and after carrying out minor work the same are being sold by the assessee firm as finished product. Referring to the provision of section 80IC(10) of the Act, the o has concluded in his assessment order that the business has been so arranged by the assessee to maximize profit at the unit running business from special category state. That as the purchases to the extent of 50% have been made from sister concern therefore the profit earned to the extent of 50% are treated as result of such arrangement and held not representing business activities carried out by the assessee, but income from other sources.
As against the above finding of the AO the substance of the submission made by the appellant through his various replies is that the appellant firm is situated in an area specified in the 14th Schedule of the IT Act and satisfies all conditions as prescribed under section 80IC for claiming deduction therein. That the appellant has also submitted Form 10CCB duly certified by the Chartered Accountant, before the AO. That the transaction with M/s JJ Enterprises was entered as per the prevalent market rate and no concessional price was charged by M/s JJ Enterprises which results in more than ordinary profits to the appellant. That the appellant had also entered transactions with M/s JJ Enterprises in the financial year preceding to the present financial year and the GP rates of M/s JJ Enterprises for the financial year ending 31.03.08 and 31.03.09 has been 14.85% and 14.80% respectively. Further the appellant's percentages of transactions entered with M/s JJ Enterprises were similar in the above referred to financial years and therefore the increase in GP rate of the appellant from 14.68% (FY 2007-08) to 30.72% ( FY 2008-09) was not due to transactions entered with M/s JJ Enterprises. That it is due to introduction of latest machinery worth Rs.1,90,75,000/- that the profit of the assessee has improved and not because it is making purchases from its sister concern. It has also been submitted by the assessee that there is no sales from assessee to JJ Enterprises and that the assessee is not purchasing similar components and goods as has been purchased from JJ Enterprises and hence no comparison can be filed. It has also been argued by the assessee that packing charges for Rs.11,59,323/- is debited in the manufacturing account of the assessee and therefore the AO's finding that there is no packing charges paid by the assessee is not correct. It has been finally concluded by the appellant that it is making a highly specialized product for big MNC's for which it has imported machinery and installed specialization equipment worth Rs.1,93,17,740/- during the years. That the profit has been earned by the appellant mainly due to new equipment and high sales prices which they got from MNC. That had there been arrangement with M/s JJ Enterprises then there would have been fall in GP rate as well as Net profit in case of M/s JJ Enterprises, which is not the case when compared to financial year 2007-08.
I have carefully gone through the finding of the AO as well as the submissions of the appellant and it is noted that the entire basis of addition made by the AO is based on the presumption that the purchases from M/s JJ Enterprises has been at a concessional rate than the market rate. However for invoking the provisions of section 80IC (10) of the IT Act, it was required of the AO to bring out cogent and hard reasons to show that the course of business between two close connected parties produced more than ordinary profits in case of the appellant. There is no specific finding as to in what manner M/s JJ Enterprises has sold goods/items at a concessional rate to the appellant, as otherwise the GP rate of M/s JJ Enterprises would have fallen for the impugned financial year as compared to the previous financial year. The AO has hinted in his assessment order that semi finished container parts are being supplied by M/s JJ Enterprises and after carrying out minor work the same are being sold by the assessee firm as finished products. However there does not appear to be any basis for making such an observation. Rather from the copy of submission filed by the appellant before the AO it is noted that the assessee had submitted that it manufactures tin containers of various sizes as per requirement of buyer. The raw material used by us is tin plates of various sizes and thickness. There is no batch for manufacture of the product. The wastage and time of various sizes will be depending upon size, shape and height X and weight X broadness of the container and size of raw material of the tin plate available. There is no specific machine for specific product but the machines used are pressure machine, cutting machine, welding, locking etc.
Thus from the above details filed by the appellant it cannot be straight away inferred that the nature of manufacturing by the appellant is minor. Further the fact that the appellant had installed specialized equipment worth Rs. 1.93 Crores (during FY's 2007-08 & 2008-09) and was supplying specialized products to MNCs goes on to show that it is at the end of the appellant that the value addition to the final product was taking place and which ultimately resulted in earning of high profits by the assessee through better rates from the MNC's to whom these products were being sold. Thus taking into consideration the above facts in totality it is held that the finding the AO is based on presumption and surmise and there has not been any material on record to show that it the factum of arrangement between the assessee and MIs JJ Enterprises which has produced more than ordinary profits to the assessee which might be expected to arise in such eligible business. Accordingly, the appeal of the assessee is allowed and the addition made for Rs.38,74,682/- is directed to be deleted.”
In the backdrop of the aforesaid facts and circumstances of the case and the arguments addressed by ld. ARs for the parties, the sole question arises for determination in this case is :-
“as to whether ld. CIT (A) has earned in deleting the disallowance of Rs.38,74,682/- made by the AO by invoking provisions contained u/s 80IA(10) by restricting the deductions claimed by the assessee u/s 80IC to 50%?”
Scrutiny of the assessment order and impugned order passed by the ld. CIT (A) deleting the addition made by the AO in the light of the facts and circumstances of the case leads to the conclusion that AO has arbitrarily made the addition on the basis of conjectures and surmises without having an iota of evidence on the file, which has rightly been deleted by the ld. CIT (A) for the following reasons :-
(i) that the AO without demonstrating the fact and collecting any evidence that profit earned by the assessee is more than reasonable leading to the suppression of profits at the other end invoked the provisions contained u/s 80IA (10) which is not permissible except by complying with the provisions contained u/s 80IA (8), Explanation;
(ii) that when undisputedly the AO has not made any fair market value of the raw material/goods purchased by the assessee from its sister concern, M/s. J.J.
Enterprises nor the AO has come to the conclusion that M/s. J.J. Enterprises has not claimed full value of the raw material / goods supplied to the assessee company, there is no question of backward and forward integration of profit;
(iii) that ld. CIT (A) has rightly concluded at page 13 that the assessee has transacted with M/s. J.J. Enterprises at prevalent market rate and no concessional price was charged by M/s. J.J. Enterprises resulting into more than minor profit to the assessee and this fact remains un-rebutted on the file even during appellate proceedings;
(iv) that the assessee has also transacted with M/s. J.J.
Enterprises in the preceding financial years for which GP rate of M/s. J.J. Enterprises was 14.58% and 14.80% respectively, which has been accepted by the revenue and in the succeeding year, some adjustment was made but again deleted by ld. CIT (A). This fact goes to prove that the transaction between assessee and M/s. J.J. Enterprises for purchase of raw material was at market rate which cannot be questioned on the basis of conjectures and surmises;
(v) that the AO has lost sight of the fact that the assessee has purchased advanced technology by investing
Rs.1.93 crores during FY 2007-08 and 2008-09 and was supplying specialized projects to MNC leading to the value addition to the final products which ultimately yielded high profit which cannot be equated with M/s. J.J. Enterprises using old machinery, but straightaway jumped to make comparison of assessee with its sister concern, M/s. J.J. Enterprises which is not permissible without cogent evidence;
(vi) that CIT (A) has rightly pointed out that in order to invoke the provisions contained u/s 80IA(1), the AO was required to bring on record cogent reasons to show that the course of business between the two close connected parties produced more than ordinary profit in case of assessee. AO has neither brought on record any such evidence nor recorded any findings that M/s. J.J. Enterprises has sold goods / raw material at concessional rates in order to suppress the profit at the other end;
(vii) that the AO has neither made comparison of the goods/ raw material supplied to the assessee in the market nor has assessed the fair market value. So when the AO has accepted the purchases u/s 48 (1)(ii), it was not permissible for him to question the same by invoking provisions contained under section 80IA
(10);
(viii) that there is not an iota of material on file to prove that no business activity was being carried out in the assessee’s premises but he has merely proceeded on the basis of surmises that expenditure on power and fuel were very low in case of assessee as compared to M/s. J.J. Enterprises which may be due to the fact that the assessee has been using advanced technology and wages in certain cases are negotiable also (ix) that the AO without disputing the purchase of raw material, sale of the finished goods and without specifically pointing out that there was inter-unit transfer of finished goods jumped to the conclusion that the trading results are not reliable and thereby rejected the books of account, which is not sustainable in the eyes of law;
(x) that we are of the considered view that the gross profit of the assessee may vary even with its own gross profit of the preceding years and on the basis of which part of deduction cannot be disallowed, what to talk of making comparison of gross profit between the 80-IC unit and non 80-IC unit without cogent material on the file;
(xi) that even it is nowhere case of the AO that assessee has not maintained stock register or has inflated the figures of purchase of raw material or has inflated the figures of the sale but has proceeded to disallow part of the deduction merely on the basis of conjectures and surmises by adopting presumptive GP ratio on the ground that the books of account are not reliable.
Apart from what has been discussed above, we are also of the considered view that the addition made by the AO u/s 153C/143(3) of the Act is otherwise not sustainable because no incriminating material concerning the assessee has been brought on record and proved by the AO nor any satisfaction note has been recorded by the AO in this case before initiating the proceedings u/s 153C. Bare perusal of the assessment order goes to prove that there is no document having prima facie incriminating material to record the satisfaction note in order to proceed u/s 153C. Rather AO merely proceeded on the basis of difference in gross profit ratio between the assessee and its sister concern. So, the AO has apparently no jurisdiction to reopen the assessment. Consequently, present appeal filed by the revenue is hereby dismissed. Order pronounced in open court on this day 27th of October, 2016.