DCIT, ROHTAK vs. M/S. MICRO TURNERS, ROHTAK

The present appeal has been filed by the assessee assailing the correctness of the order dated 5.2.2016 of CIT(A) Rohtak pertaining to 2012-13 assessment year on the following grounds :-

1. “The CIT(A) has erred in Law and facts in deleting the addition of Rs. 3,55,16,810/- made by the AO on account of disallowance of expenses of taxable unit after reallocation without considering the Low NP of taxable units as compared to the exempt ones also audit expenses were only debited in one taxable unit.

2. The CIT(A) has erred in Law and facts in deleting the addition of Rs. 9,71,51,832/- made by the AO on account of disallowance on restictiion the deduction u/s 80IC by not considering the latest decision of M/s. Hycron Electronics V/s ITO in the dated 29.05.2015 where in the case of M/s. Tirupati LPG Industries v/s DCIT had been already considered.”

3. Ld. CIT DR has sought time on the ground that paper book is required to be filed by the Revenue. Shri Gautam Jain, Advocate appearing on behalf of the assessee submitted that the issue is fully covered in favour of the assesee by decisions of the Apex court and the orders of the ITAT consistently, accordingly the departmental request for time was objected to. A pass over was given so that the Ld. CIT(A) DR may familiarize herself with the facts and consider the feasibility of the assessee’s objects to the grant of time. In the second round when the appeal came up for hearing the Ld. AR sought permission to elaborate the facts subject to the leave of the CIT(DR). The Ld. CIT DR posed no objection.

6. Ld. CIT(DR) confronted with the orders of the ITAT in the context of the facts as noted in the orders of the AO and the CIT(A) and the decision of the Apex Court in the case of CIT vs. Classic Binding Industries respectively submitted that reliance is placed upon the assessment order. However no infirmity on fact or position of law was cited. The request for time consequently was withdrawn and for the two departmental grounds she relied upon the assessment order. However, no contrary fact or argument was brought to the notice of the Bench.

Sr. Assessmen Disallowance Remarks No. t year made on account of allocation of expenses i) 2005-06 8,00,000 CIT(A) deleted the disallowance and upheld by the decision of Hon’ble Tribunal in (pages 67-69 of JPB) CIT(A) deleted the disallowance" and upheld by the ii) 2008-09 9,52,155 decision of Hon'ble Tribunal in ITA No. 4569/Del12011 at pages 2-4 of JPB following decision of Hon'ble Tribunal for Assessment year 2005-06 CIT(A) deleted the disallowance and upheld by the iii) 2009-10 26,88,182 decision of Hon'ble Tribunal in ITA No. 2134/Del/2012 at pages 9-11 of JPB following decision of Hon'ble Tribunal for Assessment year 2005-06 CIT(A) deleted the disallowance and upheld by the iv) 2010-11 10,04,37,872 decision of Hon'ble Tribunal in ITA No. 2369/D/2014 at pages 18-23 of JPB following decisions of Hon'ble Tribunal for Assessment years 2005-06 and 2009-10 CIT(A) deleted the disallowance and upheld by the v) 2011-12 7,44,41,172 decision of Hon'ble Tribunal in ITA No. 1194/D12015 at pages 50-56 of JPB following decisions of Hon'ble Tribunal for Assessment year 2010-110 7.1 It is seen that the said issue came up for consideration for the first time before the ITAT in wherein after detailed discussion in the order dated 9.8.2016 it is seen that the departmental appeal on similar issue was dismissed by the ITAT. We have seen that these specific paras and reasonings has been taken into consideration by the coordinate bench in ITA No. 1194/Del/2015 (copy filed in paper book pages 50 to 56 order dated 7.3.2018 in 2011-12 assessment years. These paras are extracted hereunder for the sake of completeness:-

“2. The facts of the case are that assessee-firm is dealing in manufacturing of precision turned parts at Rohtak and Branches at Gurgaon, Chakan, Barotiwala, Pantnagar and Haridwar and Units at Barotiwala, Pantnagar, Nalagarh and Haridwar are located in exempted zones. Bulk of purchases are made at Head office at Rohtak and after doing certain operations, the semi-finished items are sent to other units for further operations as all the operations are not practicable in any of the unit as different types of machines are installed in different units. A detailed note on the activities/operations undertaken at different units are placed in the paper book. Separate books of account are maintained in all the units which are also audited as per law. The A.O. calculated the income of exempted unit by calculating total turnover of all the units of assessee-firm and total profit declared by all the units and 3 ITA.No.1194/Del./2015 M/s. Micro Turners Rohtak. reduced the deduction under section 80IC of the Act by an amount of Rs.7,44,41,112/-.

4. The Learned Counsel for the Assessee submitted that in A.Y. 2010-2011, the Department on the same ground filed the appeal before the Tribunal in ITA.No.2369/Del./2014 which have been dismissed by the Tribunal vide order dated 9th August, 2016. The findings of the Tribunal in paras 7.1 to 9 are reproduced as under : “7.1 After going through the findings of the Ld. CIT(A), as aforesaid, we are of the view that the AO has reduced the deduction admissible u/s. 80 IC of the IT Act by Rs.10,04,37,557/- on the ground that out of the 3 exempted and 3 non-exempted units owned by the assessee in different states the maximum N.P. rate for a taxable unit was 6.90% while that for an exempted unit the minimum NP rate was 13.4%. We further find that the AO held that all units derive income from the same business activity and therefore, the gap between the profits of the taxable units and non exempted units "appears" to be unrealistic. Reference has also been made to transactions made in respect of purchases and job work expenses made with related concerns or units of the assessee's firms. Taking all these factors into account the AO has stated that no evidence in 5 ITA.No.1194/Del./2015 M/s. Micro Turners Rohtak. respect of manufacturing, trading and P&L a/c have been submitted during the assessment proceedings. However, the assessee has produced all the books of accounts and vouchers before the AO during the assessment proceedings. In fact, no show cause query was issued by the AO on this account during the assessment proceedings. The AO has not considered the fact that the units in exempted zones are mainly engaged in manufacturing on job work basis where there is either negligible or no input cost of raw material involved. It was noted that if the sales were made using their own raw material, there would be substantial difference in the GP rate insofar as, if the cost of raw material was excluded, the GP rate in all the units would remain the same. The fact that the exempted unit at Haridwar has shown a loss has not been referred to by the AO. Therefore, it is clear that no profit has been diverted to this unit. It was further noted that there has been no investigation or specific exercise to show that the amount claimed as deduction u/s 80-IC was wrong. We find considerable cogency in the finding of the Ld. CIT(A) that there is no ground for disallowing claim for job work expenses for the eligibility u/s 80-IC as the same is allowable as per the decision of his Predecessor in appeal no. 467 /RTK/2011-12 for the AY 2009-10. Therefore, the Ld. CIT(A) has rightly deleted the addition 10,04,37,872/-. We also note that the addition in dispute relevant to preceding assessment year 2009-10, the Tribunal also upheld the deletion of addition by holding as under, (as mentioned at page no. 4 of the impugned order passed by the Ld. CIT(A)). 6 ITA.No.1194/Del./2015 M/s. Micro Turners Rohtak. “The Ld. Commissioner of Income Tax (A), it is seen, Ld. CIT(A) has followed the principle of consistency in deleting the addition made by the AO. No changes in facts from the earlier years have been brought on record. Moreover, the ld. CIT(A) has followed the decision of Delhi Tribunal, Third Member, Delhi in the case of DCIT vs. Delhi Press Samachar Patra 103 TTJ (Del) 45 wherein it was held that apportionment of expenses between different units without any investigation and collection any material is arbitrary.” 7.2 We further note that ITAT, Delhi ‘F’ Bench in assessee’s own case for the assessment year 2005-06 in vide order dated 17.9.2009 has upheld the order of the Ld. CIT(A) by citing the exactly the same case law of the ITAT i.e. DCIT vs. Delhi Press Samachar Patra 103 TTJ (Del) 45 (Supra).

8. In the background of the aforesaid discussions and respectfully following the precedents of the Coordinate Bench in assessee’s own case relevant for the assessment year 2005-06 and 2009-10, we are of the considered view that the Ld. CIT(A) has passed a well reasoned order which does not need any interference on our part, hence, we uphold the same.

5. The Ld. D.R. also stated that the issue is covered in favour of the assessee by the order of the ITAT above.

7.2 In the facts as they stand we see that the issue raised in ground No. 1 stands covered in favour of the aassesee consistently on same set of facts and circumstances over the years. Accordingly in the absence of any infirmity on facts and law we find no good reason to interfere with the impugned order. The said ground accordingly is dismissed.

“21. We are conscious of our recent judgment rendered by this very Bench in Mahabir Industries v. Principal Commissioner of Income Tax (Civil Appeal Nos. 4765-4766 of 2018 decided on May 18, 2018). However, a fine distinction needs to be noted between the two sets of cases. In Mahabir Industries, the assessees had availed the initial deduction under a different provision, namely, Section 80-IA of the Act, i.e. by fulfilling the conditions mentioned in sub-section (4) of Section BO-IA. Those conditions are altogether different. Deduction in respect of profits and gains under the said provision is admissible when these profits and gains are from industrial undertakings or enterprises engaged in infrastructure development etc. Even this availment started at a time when Section BO-IC was not even on the statute book. As mentioned above, Section BO-IC was inserted by the Finance Act,] 2003 with effect from April 01, 2004. The assessees in those cases :lad started claiming and were allowed deductions from the Assessment Years 199B-99 and 1999-2000 under Section BO-IA and from the Assessment Year 2000-01 to Assessment Year 2005-06 under Section 80-1B of the Act. The deduction was, thus, claimed by the assessees in those appeals under the new provision i.e. Section 80-IC on fulfilling conditions contained in sub-section- (2) of Section 80-IC for the first time for the Assessment Year 2006-07. Thus, insofar as those cases are concerned, the initial Assessment Year under Section BO-IC started only from the Assessment Year 2006-07. In contrast, position here is altogether different. These assessees have availed deduction under Section 80-IC alone. Initially, they claimed the deduction on the ground that they had set up their units in the State of Himachal Pradesh and after availing the deduction @ 100% they want continuation of this rate of 100% for the next 5 years also under the same provision on the ground that they have made substantial expansion. As pointed out above, once the assessees had started claiming deduction under Section BO-IC and the initial Assessment Year has commenced within the aforesaid period of 10 years, there cannot be another initial Assessment Year thereby allowing 100% deduction for the next 5 years also when sub-section (3), in no uncertain terms, provides for deduction @ 25% only for the next 5 years. It may be asserted again that the assessees accept the legal position that they cannot claim deduction of more than 10 years in all under Section 80-IC.”

9. Ld. CIT(DR) on the other hand as noted had submitted that in accordance with the decision of law as appreciated by the Apex Court in the case of Mahabir Industries vs Pr. CIT and Classic Binding Industries she would not want to state anything further however whether substantial expansion has been carried on or not it was submitted is a fact which has not been examined. Accordingly, for the said purposes the issue may be remanded back. The said request for verification was not opposed by the learned AR.

“During the previous year, the assesee had shown the profit from the Barotiwala unit as Rs 12,95,35,776/- and claimed deduction u/s 80lC @100% on the same. Vide questionnaire dt 3.12.2014, the assessee was asked to justify the claim for 80IC for the units claiming deduction. Vide reply dt 22.12.2014, the assessee replied that same is as per evidences filed in earlier years. As per the Form no 10CCB filed .by the assessee, it is seen that the assessee unit had its initial year of claiming deduction as AY 2003-04 and from point no 25.d, it is seen that the assessee unit had not undertaken any substantial expansion in any of the year. This AY 2012-13 being the 10th & final year of claiming deduction, the rate of deduction should not be 100% wrt the initial year. Hence, vide ordersheet entry dt 11.03.2015, the assessee was showcaused as to Why the rate of deduction may not be restricted to 25% by taking the initial AY as 2003-04. The assessee stated that his unit started claiming deduction u/s 80lB @100%with initial year as AY 2003-04 and thereafter he carried out substantial expansion and started claiming deduction u/s 80lC @100%. On 18.03.2015, the assessee filed reply wherein he stated that the assessee is entitled to deduction @100% on substantial expansion and produced copy of the section 80lC with letter from CIT Shimla with clarification.”

10.1 On a perusal of the same it is seen that the assesee as per its claim on record claimed deduction u/s 80IB with initial year as 2003-04. The year under consideration is 2012-13 and it is claimed that substantial expansion has been carried out in terms of section 80IC. It is seen that again as to when the substantial expansion was carried out there is not discussion in the order .

“To sum up, it is noted that the assessee had substantially expanded its new business already claiming deduction u/s 80IB since AY 2003- 04 and refixed its initial AY for claiming deduction at higher rate which is not permissible as per law and the legislative intent. Thus, the deduction claimed by the assessee is restricted to 25% (Rs. 12,95,35,776 –@25% = Rs. 3,23,83,944/-) and accordingly addition of Rs. 9,71,51,832/- (=12,95,35,776 - Rs. 3,23,83,944/-) is being made to the total income.” 10.2. On perusal of the impugned order it is seen that the Ld. CIT(A) after carrying out a lengthy discussion on the position of law as it prevailed on 3.2.20016 granted relief to the assessee holding as under :- “Even the rate of deduction on Barotiwala unit has been reduced without actually differentiating the initial year in terms of expansion. There is actually no clarity in differentiating the two categories, viz initial business vis-à-vis expansion and isolation of the latter. The case is squarely covered by the decision of the Hon'ble Delhi ITAT in Tirupati LPG Industries Ltd. vs DCIT in dated 29.01.2014. The appellant has squarely distinguished its case from that of the case of the Hycron Electronics vs. ITO in ITA No. 798/Chd/2012 dated 29.5.2015. Deduction has been allowed in the previous years and cannot be disturbed in this year which is the fifth year of claim. The disallowance in the case of Hycron Electronics relates to the first year and therefore the facts in question are, therefore not similar to this case.” 10.3. Accordingly it is seen that admittedly on facts there is no discussion. Having so observed it is seen that the position of law as appreciated by the Apex Court in the decision rendered in the case of Mahabir Industries which was in the case of assesees manufacturing & job work of precision turned components and fasteners, the Hon’ble Court noticed the difference between the three types of deduction specified u/s 80-IA, 80-IB and 80-IC. In para 12 of this aforesaid decision in the following manner:-

“12. The matter can be looked into from another angle. Under Section 80-IA, deduction is provided to such industrial undertakings or enterprises which are engaged in infrastructure development etc. provided they fulfill the conditions mentioned in sub-section (4) thereof. Section 80-IS makes provisions for deduction in respect of those industrial undertakings, other than infrastructure development undertakings, which are enumerated in the said provision. On the other hand, the intention behind Section 80-IC is to grant deduction to the units making new investments in the State by establishing new manufacturing unit or even to the existing manufacturing unit which carried out substantial expansions. The purport behind the three types of deductions specified in Section 80-IA, Section 80-IB and Section 80-IC is, thus, different. Section 8t-C stipulates the period for which hundred per cent deduction is to be given and then deduction at reduced rates is to be given f the assessee had earlier availed deduction under Section 80-IA and Section 80-IS, that would be of no concern inasmuch s on carrying out substantial expansion, which was carried out and completed in the Assessment Year 2006- 07, the assessee became entitled to deduction under Section 80-IC from the initial year. The term' initial year is referable to the year in which substantial expansion has been completed, which legal position is stated by the High Court itself and even accepted by the Department as it has not challenged that part of the judgment. The inclusion of period for the deduction is availed under Section 80-IA and Section 80-IB, for the purpose of counting ten years, is provided in sub-section(6) of Section 80-IC and it is limited to those industrial undertakings or enterprises which are set-up in the North-Eastern Region. By making specific provision of this kind, the Legislature has shown its intent, namely, where the industry is not located in North- Eastern State, the period for which deduction is availed earlier by an assessee under Section 80-IA and Section 80-IB will not be reckoned for the purpose of availing benefit of deduction under Section 80-IC of the Act”

10.4. On a perusal of para 21 of the decision rendered in the case of CIT vs. Classic Binding Industries reproduced earlier it is seen that the said position of law has not been varied. Accordingly upholding the order to the extent as far as position of law is concerned the issue is restored back to the file of AO with a direction to grant relief after verification of facts in accordance with law. Needless to say that the assessee shall be granted a reasonable opportunity of being heard.

10.5 Accordingly the ground raised by the Revenue is allowed for statistical purposes.