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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI N.K. BILLAIYA & SHRI SANJAY GARG
आदेश / O R D E R
PER N.K. BILLAIYA, AM: These two appeals by the Revenue are preferred against two separate orders of the Ld. CIT(A)-13, Mumbai dated 22.10.2011 and 7.1.2012 pertaining to Assessment years 2007-08 & 2008-09 respectively. Both these appeals have common grievance, therefore they were heard together and disposed of by this common order for the sake of convenience.
At the very outset, representatives of both sides agreed that facts in issues are identical for both the years therefore we are considering the facts of A.Y. 2007-08 in ITA No. 1189/M/2012.
The first grievance relates to the deletion of the disallowance of excess rent u/s. 40A(2)(b) of the Act.
3.1. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has made rent payment to persons specified u/s. 40A(2)(b) of the Act. The details are as under:
S. No. Name Àmount Premises in lakhs 1. Ashadevi R. Poddar 4.41 Kamala Mill Compound 2. Avnish Pawan Poddar 4.41 Kamala Mill Compound 3. Rajiv A. Poddar 4.41 Kamala Mill Compound 4. Tribenidevi M. Poddar 4.41 Kamala Mill Compound 5. Ankit P. Poddar 4.41 Kamala Mill Compound Kamala Mill Compound 6. Shyamlata S. Poddar 4.41 3.2. The AO further noticed that all the properties are in ‘B’Wing of Trade World Building, Lower Parel, Mumbai having area of 1225 Sq. ft each. The AO further found that rent paid to M/s. S.P. Invest Trade (India) Ltd is only Rs. 1.47 lakhs for similar property in Kamla Mill Compound having the same area. On receiving no satisfactory explanation for the differential payment of rent in respect of properties situated in the same vicinity, the AO disallowed Rs. 23.52 lakhs u/s. 40A(2)(b) of the Act.
Before the Ld. CIT(A), the assessee strongly contended that the office of M/s. S.P Invest Trade (India) Ltd was not identical and did not have the proper space utilization. It was further brought to the notice of the Ld. CIT(A) that the assessee has taken interest free deposit which it has not taken from the other 8 licensor. Therefore, the comparison of the office rent is not on identical facts. Strong reliance was placed on the decision of the Bombay High Court in the case of CIT Vs Indo Saudi Services (Travel) Pvt. Ltd. 310 ITR 306.
4.1. After considering the facts and the decision of the Hon’ble High Court, the Ld. CIT(A) was convinced that the disallowance is unjustified and accordingly directed the AO to delete the addition of Rs. 23.52 lakhs.
Aggrieved by this, the assessee is before us.
The Ld. Departmental Representative strongly relied upon the findings of the AO.
The Ld. Counsel for the assessee reiterated what has been submitted before the lower authorities.
We have given a thoughtful consideration to the orders of the authorities below. For the disallowance made u/s. 40A(2), the CBDT has issued a Circular 6-P way back in July, 1968 wherein the CBDT has stated that no disallowance is to be made u/s. 40A(2) in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax. This Circular has been considered by the Hon’ble High Court of Bombay in the case of Indo Saudi Services (Travel) Pvt. Ltd (supra). The AO has simply disallowed the rent stating that for similar properties the assessee is paying different rent. However, there is not even a whisper of any tax evasion. Provisions of Sec. 40A(2)(b) have been applied in a mechanical manner. Drawing support from the decision of the Hon’ble High Court of Bombay (supra) in the light of the Circular of the CBDT (supra), we do not find any reason to interfere with the findings of the Ld. CIT(A). Ground No. 1 is accordingly dismissed.
Ground No. 2 is common ground in both the years under consideration and it relates to the allowance of deduction u/s. 80IB of the Act.
9.1. The facts relating to this grievance are that the assessee is having 6 Divisions viz., Fabric division, Garment division, Yarn division, Export division, furnishing division and retail division. These divisions are distinctly different from other and manufacturing different product. Each division has its own manufacturing, trading and marketing facility and the books of accounts are maintained separately. The following chart will give a bird’s eye view of various divisions and the claim/allowability of deduction u/s. 80IB. FABRIC Marketing Weaving Weaving Weaving Weaving Weaving HO Tarapur H Tarapur D- Saily-I, Saily-II Saily-III Mumbai 3/2 23 Silvassa Silvassa Silvassa No 80IB No 80IB No 80IB 30% 80IB 30% 80IB 100% 80IB since A.Y. since A.Y. since A.Y. 1998-99 2001-02 2003-04 GARMENTS 481/1-2, Dabhel, Daman 722, Dabhel, 481/1-2 Daman 100% 80 IB since A.Y. 2005-06 No 80 IB FURNISHINGS EXPORT FURNISHINGS RETAIL Marketing Vishal Furnishings MSD Division No 80IB No 80IB No 80IB YARN Tarapur G-1, No 80IB 10. During the course of the scrutiny assessment proceedings, the AO after scrutinizing the relevant details formed a belief that the percentage of profit of 80IB units is much higher than the overall profit percentage of the assessee. The AO was of the opinion that the assessee has inflated profit of the 80IB unit by transferring goods at inflated rates to non 80-IB units. Secondly the profits of 80IB units were inflated by not charging expenses to non 80IB units. The AO also noticed that the assessee has not debited interest to 80IB units. Considering all these factors in totality, the AO finally concluded by denying the claim of deduction of Rs. 12.16 crores u/s. 80IB of the Act.
The matter was strongly agitated before the Ld. CIT(A). It was explained that the overall business of the assessee consists of diverse activity which are completely different from each other and operate under different conditions. Therefore, the comparisons made by the AO are erroneous . It was brought to the notice of the Ld. CIT(A) that the AO’s allegation that the assessee has inflated its profits of the 80- IB units by transferring goods at inflated price to non 80-IB units is factually incorrect. The assessee substantiated its claim by furnishing the following details/chart:
Arm’s length transaction of Fabric Marketing unit (FMU):- FMU procures fabric from internal units as well as from the market to meet the demand. The prices paid for purchases from internal units are market driven. During the course of the assessment proceedings, we had enclosed copies of invoices showing the prices of internal & external procurement of comparable products. These amply demonstrate the parity between these prices & strongly support the Doctrine of Arm’s length. The AO has not considered this evidence and has made no mention of the same in his order. We reproduce below the annexure submitted at the time of assessment. The procurement of fabrics at market driven, which is comparable even with internally procured fabrics. This is evident from the table given below: Name of the party Invoice No. Fabric Rate charged & date procured /mtr Eshwar Synthetics 0705/06 Suiting – 69.50 dt. 16.3.07 Magneta Silvassa unit SSG 8230 Suiting – 70.35 dt. 23.3.07 Beamer Balaji Industries BO714 dt. Shirting 32.67 10.8.06 Silvassa Unit SSG 1291 Shirting 32.06 dt. 3.6.06
It was further brought to the notice of the Ld. CIT(A) that the eligible 80-IB unit manufacture grey fabrics and inter-mediate products which do not require marketing at all.
In so far as non-charging of interest is concerned, it was explained that the 80-IB eligible unit requires far less working capital. After considering the facts and the submissions, the Ld. CIT(A) was of the opinion that the profitability of the eligible unit has to be compared with similar divisions (manufacturing similar products/activities) and not with other units and by no stretch of imagination with the overall profit of the whole company.
The Ld. CIT(A) further observed the AO has erred in consolidating the overall profitability of all units together and also erred in applying the average profit of the whole company to all units without any adverse material on record. After making an elaborate comparison between the profitability of eligible and non eligible 80- IB units which is exhibited at page-19 of the order of the Ld. CIT(A). The Ld. CIT(A) deleted the reduction of deduction u/s. 80IB of the Act and allowed the grievance of the assessee.
Aggrieved by this, the Revenue is before us.
The Ld. Departmental Representative strongly supported the findings of the AO. It is the say of the Ld. DR that the assessee is showing profit of 38% in case of eligible 80-IB unit whereas in the case of non-eligible 890-IB unit, the assessee is showing profit @ 25%.
Per contra, the Ld. Counsel for the assessee reiterated what has been stated before the lower authorities, strongly relying upon the statement of facts furnished before the First Appellate authority.
Having heard the rival submissions, we have carefully gone through the orders of the authorities below. The sum and substance of the dispute between the Revenue and the assessee is that the assessee is showing higher profit in eligible 80-IB unit and at the same time it is showing lesser profit in non-eligible 80-IB unit. However, after considering the facts in totality, we find that the AO has been carried away by comparing the profitability of the entire company with the profitability of the eligible 80IB unit.
18.1. In so far as the allegation of expenses between various units is concerned, an identical dispute was considered by the Tribunal in assessee’s own case in A.Y. 1995-96 and 1997-987 in and 3866/M/2000. The Tribunal has given a finding that these units does not require any advertisement or publicity as they were manufacturing Grey cloth which were sold in open market and also to the assessee’s other units without any brand. The Tribunal further observed that since the Grey cloth does not have any brand name, the assessee does not require any publicity or sale promotion. The expenses incurred thereon could not be attached to these units. The Tribunal finally concluded by holding that since the Grey cloth were not required to be sold in open market, it is not justified to attribute any advertisement and sale promotion expenses towards these manufacturing units.
18.2. A perusal of the past history of the assessee shows that no disallowance/denial of deduction u/s. 80IB of the Act was made by the Revenue since assessment year 1999-2000 up to current year except for A.Y. 1997-98 and 1998-99. The denial in assessment year 1998-99 has been allowed by the Tribunal in ITA No. 5249/M/02.
18.3. Another allegation of the AO is that the assessee has shown higher profitability in eligible 80-IB units as compared to non 80-IB units. This allegation also does not hold any water and can be well understood from the following chart:
Grey Fabrics Mfg. Units. Readymade Garments Units. Saily Saily Saily Saily Daman Daman Unit.I Unit II Unit III Unit IV Unit I Unit II (eligible (eligible (eligible (non- (eligible (Non- 80IB) 80IB) 80IB) eligible 80IB) eligible Unit) unit) GP Rate Year 1994-95 - - - - - 24.55% 1995-96 - - - - - 33.07% 1996-97 - - - - - 31.98% 1997-98 26.04% - - - - 31.38% 1998-99 28.09% - - - - 35.57% 1999-00 28.96% - - - - 37.33% 2000-01 28.36% - - - - 37.25% 2001-02 24.67% 23.79% - - - 35.27% 2002-03 26.95% 27.07% 26.12% - - 33.89% 2003-04 22.80% 24.45% 23.95% - - 23.68% 2004-05 19.54 19.79% 19.46% 19.84% - 21.16% 2005-06 26.73% 26.73% 26.74% 26.61% 22.42% 21.19% 2006-07 26.13% 26.20% 26.11% 26.45% 34.98% 33.56% 2007-08 24.75% 25.50% 25. 40% 25.59% 38.13% 34.81%
Under these facts and circumstances without there being any material on record, we decline to interfere with the findings of the Ld. CIT(A). Ground No. 2 is accordingly dismissed.
Ground No. 3 reads as under:
“ On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing deduction of Rs. 12.16 crores u/s. 80IB ignoring the fact that total profit of 80IB units as per form 10CCB is Rs. 26.69 and section 80IB allows for deduction of profit and gains from gross total income and since the gross total income is only Rs. 22.69 crore, so the profit of 80IB units included in gross total income cannot exceed Rs. 22.69 crores.”
This allegation of the Revenue is against the facts of the case because for the year ending 31.3.2007, the total income as per the computation of income at page-8 of the Paper book is Rs. 22,69,29,102/- and the claim of deduction u/s. 80IB is Rs. 12,16,73,559/-. Thus the claim of deduction is less than the total profit for A.Y. 2007-08 and similarly in A.Y. 2008-09 the total income is at Rs. 6,48,06,681/- and the claim of deduction u/s. 80IB is Rs. 4,67,05,870/-. Therefore, the allegation of the Revenue is against the facts of the case calling for no interference with the findings of the Ld. CIT(A).
In the result, the appeals filed by the Revenue are dismissed.
Order pronounced in the open court on 14th October, 2015