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Income Tax Appellate Tribunal, DELHI BENCH ‘D’ : NEW DELHI
Before: SHRI N.K. SAINI & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER :
Since identical question of fact and law has been raised in both the aforesaid appeals, the same are being disposed off by way of consolidated order to avoid repletion of discussion.
Appellant, Income Tax Officer, Ward 20 (4), New Delhi (hereinafter referred to as ‘the revenue’), by filing the present appeals sought to set aside the impugned order dated 10.11.2010 passed by the Commissioner of Income-tax (Appeals)-III, New Delhi and dated 27.01.2011 passed by the Commissioner of Income-tax (Appeals)-XXII, New Delhi qua the assessment years 2006-07 & 2007-08 respectively on the grounds inter alia that :-
The Ld. CIT (A) erred in law and on the facts and circumstances of the case in deleting the addition of Rs.1,44,97,282/- made by the A.O. on account of excess deduction claimed u/s 80-IC of Income Tax Act, 1961.
2. The Ld. CIT (A) erred in law and on the facts and circumstances of the case in deleting the addition of Rs.1,44,97,282/- made by the A.O. without appreciating the crucial fact that the assessee had indulged in substantial; inter-unit transactions with its related concerns particularly M/s. Sachet Agencies to whom the entire sales of the assessee’s unit at Baddi had been made.”
(AY 2007-08) 1. The Ld. CIT (A) erred in law and on the facts and circumstances of the case in deleting the addition of Rs.1,77,74,976/- made by the A.O. on account of excess deduction claimed u/s 80-IC of Income Tax Act, 1961.
2. The Ld. CIT (A) erred in law and on the facts and circumstances of the case in deleting the addition of Rs.1,77,74,976/- made by the A.O. without appreciating the crucial fact that the assessee has indulged in substantial inter-unit transactions with its related concerns particularly M/s. Suchet Agencies to whom the entire sales of the assessee’s unit at Baddi had been made.”
Briefly stated the facts of this case are : pursuant to the notices issued under section 143(2) and 142(1) of the Income-tax Act, 1961 (for short ‘the Act’) along with questionnaire, during the scrutiny proceedings, Shri H.K. Batra, Authorized Representative for the assessee put in appearance, filed necessary details and discussed the case. Assessee being proprietor of M/s. Vi-John International, Delhi (VJI) and M/s. Maja Personal Care, Baddi (HP) (MPC) is into the business of manufacturing of cosmetic goods and has declared business income from proprietorship concern and interest income under the head ‘Income from other sources’. Assessee claimed net profit of Rs.54,136/- from VJI and Rs.3,46,68,810/- from MPC and has declared total income at Rs.2,02,760/- after claiming deduction u/s 80-IC amounting to Rs.3,46,68,810/- from MPC on account of profit of MPC located at Baddi (HP), which is 100% of the total profit of MPC at Baddi.
AO noticed that GP ratio of MPC unit at Baddi at 38.05% which is higher than that of VJI at 28.57% and net profit ratio of MPC at 36.09% which is higher than that of VJI at 35.09%, though both the above manufacturing units are involved in production of similar cosmetic goods and utilized similar raw material and the only difference is of location of the unit. AO came to the conclusion that margin of profits of MPC as well as KHCD is irreconcilable when examined in the light of the trade logic and normal average existing in the industrial sector and as such, figures of profits of MPC has been artificially inflated for availing undue benefit of profit available u/s 80-IC and assessee was called upon to show cause as to why the net profit of MPC be not considered false.
AO also noticed from Form No.10CCB that out of total purchase of Rs.5,54,57,326/-, the assessee had made substantive purchases from his related concerns and has made all the sales of Rs.9,60,51,726/- to another of his related concern, namely, M/s.
Suchet Agencies on consignment basis and by invoking the provisions contained u/s 80-IC (7) read with section 80-IA (8) and (10) of the Act considered the same as inter-unit transfer with the related unit at Baddi (MPC) and Delhi. AO to arrive at average GP rate made comparison of the assessee with VJI as all the manufacturing units are managed and operated by the members of the family and after considering the average GP of comparables gave benefit of 23% to MPC as against 38.05% declared by the assessee. AO rejected the books of account of the assessee u/s 145 of the Act being not reliable.
AO also considered remaining GP at 15% being inappropriately inflated to claim unwarranted deduction u/s 80-IC and computed the net profit eligible for deduction u/s 80-IC at NP of 21% amounting to Rs.2,01,71,527/- and disallowed the difference of Rs.1,44,97,282/- in the net profit as declared by the assessee being not eligible for availing deduction u/s 80-IC and thereby made an addition of Rs.1,44,97,282/-.
ITA No.2081/Del/2011 (AY 2007-08)
Briefly stated the facts of this case are : during the scrutiny proceedings, pursuant to the notices issued under section 143(2) and 142(1) of the Income-tax Act, 1961 (for short ‘the Act’) along with questionnaire, Shri H.K. Batra, Authorized Representative for the assessee put in appearance, filed necessary details and discussed the case. Assessee being proprietor of M/s. Vi-John International, Delhi (VJI) and M/s. Maja Personal Care, Baddi (HP) (MPC) is into the business of manufacturing of cosmetic goods and has declared business income from proprietorship concern and interest income under the head ‘Income from other sources’.
During the year under assessment, assessee has claimed net loss of Rs.62,296/- from VJI and declared net profit of Rs.3,72,28,870/- from MPC and declared the total income at Rs.58,880/- after claiming deduction u/s 80-IC amounting to Rs.3,72,28,870/- on account of profit from MPC located at Solan (HP). AO after noticing that the net profit declared in respect of MPC unit on higher side as compared to assessee’s other unit located in Delhi viz. GP ratio of MPC, Solan at 43.07% as compared to the VJI, Delhi at 13.88% which is approximately 30% higher, despite the fact that both the units are involved in the same line of business and utilizing similar raw material and called upon the assessee to show cause as to why benefit of special deduction available u/s 80-IC be not disallowed.
After considering the reply filed by the assessee, AO came to the conclusion that due to inter-unit transfers between the related units at Baddi (MPC) and Delhi, provisions contained u/s 80-IC read with section 80-IA (8) & (10) of the Act are applicable and after rejecting the books of account u/s 145 of the Act being not reliable, AO computed the NP at 19.78% for the purpose of deduction u/s 80-IC amounting to Rs.1,94,53,893/- and out of total deduction claimed by the assessee u/s 80-IC i.e. Rs.3,72,28,870/-, AO disallowed a sum of Rs.1,77,74,976/- and thereby made an addition of Rs.1,77,74,976/-.
Assessee carried the matter before the ld. CIT (A) by challenging the assessment orders who has allowed the appeals.
Feeling aggrieved, the revenue has come up in appeal before the Tribunal by way of filing the present appeals.
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, challenging the impugned orders, contended inter alia that the AO has rightly rejected the books of account and computed the GP rate at 23% by making comparison with the similar units being run by the family members of the assessee; that AO has rightly invoked the provisions contained u/s 80IA (8) & (10) by considering the inter-unit transfers being run by the family members of the assessee.
However, on the other hand, ld. AR for the assessee to repel the argument addressed by the ld. DR contended inter alia that the AO has arbitrarily rejected the books of account without pointing out any entry being false and defective; that the provisions contained u/s 80-IC read with section 80-IA (8) & (10) are not applicable in this case as not even a single item has been transferred from eligible unit to ineligible unit to claim deduction u/s 80-IC and relied upon the judgments cited as CIT vs. Paradise Holidays 325 ITR 13 (Delhi), CIT vs. Smt. Poonam Rani 326 ITR 223 (Delhi), Pandit Bros. vs. CIT 26 ITR 159 (Punjab) and Aquila Software Services Hyderabad (P) Ltd. vs. DCIT (2015) 61 taxmann.com 106 (Hyderabad – Trib.).
Undisputedly, the AO has invoked the provisions contained u/s 80-IC red with section 80-IA (8) & (10) of the Act by rejecting the books of account u/s 145 of the Act merely on the basis of comparison made in the GP ratio of the assessee, which is a 80-IC unit with its non-80-IC unit being run by family member of the assessee.
Ld. CIT (A) deleted the addition made by the AO by returning the following findings :-
“5. I have carefully considered the submissions made on behalf of the appellant and also gone through the case laws relied upon by him. It is seen from the assessment order that the Assessing Officer has disallowed the exemption claimed u/s 80-IC in respect of part of profits of the Baddi unit on the ground that the gross profit shown by the assessee was abnormally high. On the other hand, the appellant has contended that the profit in Baddi unit was high because there were certain facilities and concessions granted by Himachal Pradesh Government in respect of appellant's Baddi Unit.
It has also been submitted by the appellant that he has been maintaining regular account books which were produced and checked by the Assessing Officer. The appellant has been following the same method of accounting from year to year. The same method of accounting was accepted by the Assessing Officer in his order dated 30.03.2007 under section 143(3) for the assessment year 2005-06. The Assessing Officer did not point out any discrepancies or infirmities either in the account books of the appellant for this year nor in respect of the opening stock, purchases, sales and the closing stock. There was no finding that the account books of the appellant were not correct and complete nor was the finding that the profits of Baddi unit could not be correctly deduced, to warrant the rejection of account books of the appellant of Baddi Unit and Delhi unit. The Assessing Officer did not dispute the certificate issued by the Chartered Accountant under sub-section (7) of section 80-IA for deduction u/s 80-IC of the Act. Merely, on the basis of comparing the G.P. Rate shown by the other companies of the same group like M/s Vi-John International, Delhi (VJI), M/s. Bio Skin Care (BSC), Delhi, M/s. Vi John Health Care Line (VJHCL), Delhi, M/s. Vi John Beauty Tech. (VJBT), the Assessing Officer has assumed that the appellant had claimed excessive G.P. rate and net profit. Moreover, the comparison made by the A.O. of the G.P. rate shown by the appellant from Baddi unit in Himachal Pradesh with the G.P. rate shown by other sister concerns of Delhi is not fair because the place of business makes a difference especially in view of the fact that the concessions available to appellant's business unit at Baddi were not available to the sister concerns at Delhi. The higher G.P. rate/ net profit shown by Baddi unit in comparison to sister concerns at Delhi was not abnormal in view of the concessions available to Baddi Unit in Himachal Pradesh.
After considering the explanation given by the assessee to justify the higher G.P. and net profit of Baddi Unit, I am of the view that the Assessing Officer was not justified in rejecting the trading results shown by the assessee summarily without pointing out either any mistake/deficiency in the accounts or disturbing the figures of sales or purchase as declared by the assessee. He was also not justified in comparing the trading results of assessee's business unit in Baddi (Himachal Pradesh) with the trading results shown by assessee's sister concerns in Delhi because there were considerable differences in business conditions of the two concerns.
In the facts and circumstances of the case, I hold that the Assessing Officer was not correct in holding that the G.P. of 23% only was allowable for deduction under section 80-IC in the case of MPC instead of 38.05% as declared by the assessee and disallowing the deduction for the remaining G.P. @ 15.05% and in the process making disallowance/addition of Rs.1,44,97,282/-. The disallowance of Rs.1,44,97,282/- made by the Assessing Officer is hereby deleted.”
In the backdrop of the aforesaid facts and circumstances of the case, the first question arises for determination in this case is :-
“as to whether AO has arbitrarily rejected the books of account without disputing the correctness and completeness of the accounts of the assessee?”
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 and ratio of the judgments cited as CIT vs. Paradise Holidays and CIT vs. Smt. Poonam Rani (supra), leads to the conclusion that AO has arbitrarily made the addition by rejecting the books of account, which has been rightly deleted by the ld. CIT (A) for the following reasons :-
(i) that the AO has arbitrarily based the assessment order on the basis of comparison made in the GP ratio and NP ratio of assessee unit, which is entitled for deduction u/s 80-IC, with other non 80-IC unit of assessee situated at Delhi, which could not be a ground in itself to reject the books of account;
(ii) that since the AO has neither disputed the correctness or completeness of the accounts of the assessee nor disputed the method of accounting, which has otherwise been admitted by the Assessing Officer assessee in the assessment order completed u/s 143(3) qua the AY 2005-06, he was not empowered to reject the books of account; (iii) that when the AO has not disputed trading account or opening stock or the purchases or the sales or the closing stock, which have otherwise been accepted by the excise and taxation department, summarily rejecting the account books without pointing out any defect is not permissible under law;
(iv) that the factum of allowing the deduction u/s 80-IC to the assessee to the extent of 23% for AY 2006-07 and to the extent of 19.78% qua AY 2007-08 itself goes to prove that the AO has categorically admitted the correctness of the books of account but preferred to disallow the deduction claimed u/s 80-IC on the basis of presumptive gross profit arrived at on the basis of comparison of the 80-IC unit with non 80-IC unit, which is self contradictory;
(v) that when the AO has not disputed certificate issued by the Chartered Accountant u/s 80-IC (7) for the purpose of deduction u/s 80-IC of the Act, he is estopped by his own act and conduct from rejecting the books of accounting merely on the basis of difference in the ratio of gross profit;
(vi) that even otherwise the difference in the gross profit ratio may be due to numerous reasons viz. easy and local availability of the raw material, degrees in demand and supply of the finished goods, increase in the cost of processing, the endeavour of the assessee to earn maximum profit from a unit attracting deduction u/s 80-IC etc. So, difference in the gross profit ratio cannot be a ground in itself to reduce the deductions claimed by the assessee u/s 80-IC;
(vii) 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;
(viii) that we are of the considered view that the gross profit of the assessee may vary even with his 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 which are undisputedly differently located and governed by different rules and regulations;
(ix) that even it is nowhere case of the AO that assessee has not maintained stock register or has inflated the figures of purchase or 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 and that the books of account are not reliable.
Now, the next question arises for determination in this case is :-
“as to whether the AO has arbitrarily invoked the provisions contained u/s 80-IC (7) read with section 80- IA(8) & (10) of the Act.
The AO has invoked the provisions contained u/s 80-IC read with section 80-IA (8) & (10) by returning the finding that there is inter-unit transfers between the related units at Baddi and Delhi which is clear from unnatural profit ratio of 80-IC unit and non 80- IC unit and is verifiable from the accounts of the assessee’s own related concern.
However, there is not an iota of material on the file to prove the inter-unit transfers between the related units of the assessee, one situated at Baddi, Himachal Pradesh, and another situated at Delhi. Moreover, when correctness and completeness of the audited books of account has not been disputed, merely disputing the trading result on the basis of higher gross profit ratio is not permissible under law. When AO has also not returned any specific findings that there was some arrangement between the assessee unit, an 80-IC unit and his non 80-IC unit situated at Delhi to carry out such transfer of goods, the question of invoking provisions contained u/s 80-IA (8) & (10) does not arise.
Identical issue has been dealt with by the coordinate Bench of the Tribunal in case cited as Aquila Software Services Hyderabad (P) Ltd. (supra) wherein the following findings have been returned in favour of the assessee :- “Section 10A, read with section 80-IA, of the Income-tax Act, 1961 - Free trade zone Computation of deduction) - Assessment year 2007-08 - Assessee-company exported software developed by it to its AEs - It had shown profit at 50 per cent and claimed deduction under section 10A - Since average margin of comparable companies in similar line of business was 15 per cent, departmental authorities had reduced deduction claimed under section 10A by restricting profit from eligible business of assessee invoking provisions of section 80-IA(10) - Whether since Assessing Officer had not conclusively proved fact that there was an arrangement between assessee and its AE by which transactions were so arranged as to produce more than ordinary profits in hands of assessee, disallowance of part deduction under section 10A by applying provisions of section 80-IA(10), was not justified - Held, yes.”
In view of what has been discussed above and the fact that identical issue has been settled by the coordinate Bench of the Tribunal, we are of the considered view that the AO has invoked the provisions contained u/s 80-IC read with section 80-IA (8) & (10) on the basis of conjectures and surmises only without having an iota of material on record and as such, the question is answered in favour of the assessee.
Consequently, we find no illegality or perversity in the findings returned by ld. CIT (A), hence both the appeals filed by the revenue are hereby dismissed.
Order pronounced in open court on this29th day of June, 2016.