Deepak Verma v. Commissioner Of Income Tax-Ii, Chandigarh

ITA No. 445 of 2014 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 445 of 2014 Date of Decision: 20.10.2015 Deepak Verma ....Appellant. Versus Commissioner of Income Tax-II, Chandigarh ...Respondent. 1.Whether the Reporters of the local papers may be allowed to see the judgment?the judgment? 2.To be referred to the Reporters or not? Yes 3.Whether the judgment should be reported in the Digest? CORAM:-HON'BLE MR. JUSTICE AJAY KUMAR MITTAL.HON'BLE MR. JUSTICE RAMENDRA JAIN. PRESENT: Mr. Ravi Shankar, Advocate and Mr. B.M. Monga, Advocate for the appellant. Ms. Urvashi Dhugga, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1.This appeal has been preferred by the assessee underSection 260A of the Income Tax Act, 1961 (in short “the Act”) against theorder dated 19.6.2014 (Annexure A-3) passed by the Income TaxAppellate Tribunal, Chandigarh Bench “B”, Chandigarh (hereinafterreferred to as “the Tribunal”) in ITA No. 1026/CHD/2013, for theassessment year 2010-11, claiming the following substantial questions of law:- i.Whether the ITAT is justified in reversing theorder of the CIT(A) while ignoring provisions of ii. iii. section 80IA(10) of the Income Tax Act, 1961,though there is no cogent and tangible material/evidence to show the 'business transacted'between the two units one at Mohali (Nonexempt) and another at Baddi (Exempt), whichis a 'sine qua non' for the application of section80IA(10) and relying upon the only ground ofhigher profit rate which would itself bepenalizing the efficient working of the Baddi unitand is illegal and unjustified in the light ofjudgment of Hon'ble Bombay High Court in thecase of Schmetz India (P) Ltd. (supra)? Whether the order of the ITAT is justified in notinterpreting the mandate of Section 80IA(10) inits strict sense in the light of catena ofjudgments of Hon'ble Supreme Court like CIT v.ACE Builders (P) Ltd. (Supra), as Section 80IA(10) being a deeming provision, whereby a legalfiction is created, and can only be invokedsubject to the fulfilment of all the ingredientsstated in the section, which has not been donein the instant case as the AO has failed todischarge its onus/burden of proof of provingthe twin conditions: 'business between them isso arranged' and the 'business transacted'between the two units?Whether the ITAT is justified in re-allocating the purchases by invoking section 80IA(10) byneither relying on the Account book resultswholly and nor pointing out any iota ofdiscrepancy in the Account books? iv. Whether the ITAT is justified in stating thatwhen the end product is same the cost wouldalso be same and thereby comparing the twounits, particularly when both the units aredrastically different working on differenttechnologies and having different 'modusoperandi' in view of the chart produced supra,and also cannot be said to have any connectionwithin the meaning of section 80IA(10)?when the end product is same the cost wouldalso be same and thereby comparing the twounits, particularly when both the units aredrastically different working on differenttechnologies and having different 'modusoperandi' in view of the chart produced supra,and also cannot be said to have any connectionwithin the meaning of section 80IA(10)? iv. Whether the ITAT is justified in stating thatwhen the end product is same the cost wouldalso be same and thereby comparing the twounits, particularly when both the units aredrastically different working on differenttechnologies and having different 'modusoperandi' in view of the chart produced supra,and also cannot be said to have any connectionwithin the meaning of section 80IA(10)?when the end product is same the cost wouldalso be same and thereby comparing the twounits, particularly when both the units aredrastically different working on differenttechnologies and having different 'modusoperandi' in view of the chart produced supra,and also cannot be said to have any connectionwithin the meaning of section 80IA(10)? 2.Put shortly, the facts necessary for adjudication of theinstant appeal as narrated therein may be noticed. The assessee filedreturn of income on 15.10.2010 for the assessment year 2010-11declaring an income of ` 43,95,630/- and claimed benefit of deductionunder Section 80IC of the Act at ` 76,85,061/-. The assessment wasframed by the Assessing Officer vide order dated 26.2.2013 (AnnexureA-1). The Assessing Officer instead of allowing 100% deduction underSection 80IC of the Act, re-allocated the purchases between exempt andnon-exempt units without following the mandate of Section 80IA(10) readwith Section 80IC(7) of the Act and made addition of ` 55,41,224/-.Feeling aggrieved, the assessee filed an appeal before theCommissioner of Income Tax (Appeals) [for brevity “the CIT(A)”]. Thesaid appeal was partly allowed by the CIT(A) vide order dated 21.8.2013(Annexure A-2) by deleting addition of ` 50,19,196/- made on account of ITA No. 445 of 2014 reallocation of purchases. Against the order, Annexure A-2, the revenuefiled an appeal before the Tribunal who vide order dated 19.6.2014(Annexure A-3) set aside the order of the CIT(A) and restored that of theAssessing Officer. Hence, the present appeal by the assessee. 3.We have heard learned counsel for the parties and perused the record. 4.The question that arises for consideration in this appeal iswhether the Assessing Officer and the Tribunal were justified in invokingSection 80IA(10) of the Act while denying benefit of Section 80IC of theAct? 5.Section 80IC of the Act provides for special provisions fordeduction of certain incomes in respect of certain undertakings orenterprises in certain special category States. Sub-section (7) of Section80IC of the Act makes the provisions of sub-section (5) and sub-sections(7) to (12) of Section 80IA of the Act applicable to eligible undertaking orenterprise under this Section. According to Section 80IA(10) of the Act,where profits in the eligible units have been inflated by an assessee, theAssessing Officer is empowered in terms of the aforesaid Section todetermine the reasonable profit. 6.In the present case, the Tribunal after analyzing the factualmatrix had recorded a finding that the assessee had shown net profitrate of 12.66% on sales of ` 3.36 crores in Mohali unit whereas in Baddiunit, net profit was 57.95% on the turnover of ` 1.53 crores which wasvery high. Further, the Mohali unit had machinery installed worth` 55,15,306/- and at Baddi unit it was only ` 6,60,972/- and the sameproducts were sold from both the units at the same price rangingbetween ` 5,25,000/- to ` 6,25,000/-. By mere installation of a machine 6.In the present case, the Tribunal after analyzing the factualmatrix had recorded a finding that the assessee had shown net profitrate of 12.66% on sales of ` 3.36 crores in Mohali unit whereas in Baddiunit, net profit was 57.95% on the turnover of ` 1.53 crores which wasvery high. Further, the Mohali unit had machinery installed worth` 55,15,306/- and at Baddi unit it was only ` 6,60,972/- and the sameproducts were sold from both the units at the same price rangingbetween ` 5,25,000/- to ` 6,25,000/-. By mere installation of a machine of ` 6 lacs, it could not be presumed that the assessee was achievingeconomy of scale or some other technological development. TheTribunal had concluded that it was a simple case of inflation of profits inthe eligible unit and as per Section 80IA(10) of the Act, the AssessingOfficer has powers to compute the reasonable profit and the CIT(A) haswrongly observed that the Assessing Officer had not pointed out anydiscrepancy whereas the assessee had accepted wrong allocation ofvarious expenses before the CIT(A). It was also noticed that theAssessing Officer has also given reasons showing that profits in exemptunit have been inflated. Accordingly, the Tribunal set aside the order ofthe CIT(A) and restored that of the Assessing Officer. The relevantfindings recorded by the Tribunal read thus:- “11.We have considered the rival submissionscarefully and find that sub-section (7) of Section 80ICunder which the assessee has claimed deductionreads as under:-carefully and find that sub-section (7) of Section 80ICunder which the assessee has claimed deductionreads as under:- “(7)The provisions contained in sub-section(5) and sub-sections (7) to (12) of section 80IAshall, so far as may be, apply to the eligibleundertaking or enterprise under this section.”(5) and sub-sections (7) to (12) of section 80IAshall, so far as may be, apply to the eligibleundertaking or enterprise under this section.” From the above, it becomes clear thatprovisions of sub-section (5) and sub-sections (7) to12 of Section 80IA are also applicable for consideringthe claim of deduction under this section. Section80IA(10) reads as under:- “(10) Where it appears to the Assessing Officerthat, owing to the close connection between thethat, owing to the close connection between the assessee carrying on the eligible business towhich this section applies and any other person,or for any other reason, the course of businessbetween them is so arranged that the businesstransacted between them produces to theassessee more than the ordinary profits whichmight be expected to arise in such eligiblebusiness, the Assessing Officer shall, incomputing the profits and gains of such eligiblebusiness for the purposes of the deductionunder this section, take the amount of profits asmay be reasonably deemed to have beenderived therefrom.” 12.The reading of the above provision clearlyshows that if Assessing Officer is of the opinion forany reason if the business is arranged so as to inflateprofits of an eligible unit, then the Assessing Officerhas the power to compute the profits of eligible unit onreasonable basis. Admittedly, in the case before us,the purchases are made from the common sources.Some of the customers are also common. Theproducts manufactured by the assessee are alsocommon. Even majority of the expenditure is alsocommon and in fact the assessee has alreadyconceded before the Ld. CIT(A) that expenses werenot properly allocated and has accepted thereallocation of expenditure. In addition to these facts, 12.The reading of the above provision clearlyshows that if Assessing Officer is of the opinion forany reason if the business is arranged so as to inflateprofits of an eligible unit, then the Assessing Officerhas the power to compute the profits of eligible unit onreasonable basis. Admittedly, in the case before us,the purchases are made from the common sources.Some of the customers are also common. Theproducts manufactured by the assessee are alsocommon. Even majority of the expenditure is alsocommon and in fact the assessee has alreadyconceded before the Ld. CIT(A) that expenses werenot properly allocated and has accepted thereallocation of expenditure. In addition to these facts, the assessee has shown net profit rate of 12.66% onsales of Rs.3.36 crores in Mohali unit whereas onturnover of Rs.1.53 crores, the net profit is 57.95% atBaddi unit which is very high. During the course ofhearing, we had asked the assessee to file copy ofthe invoices to find out it the products were of socalled better technology were sold at a higher priceand sale invoices for both the units were filed on22.5.2014. 13.The Assessing Officer in para 9 analyzed thereasons again before him for higher profits at Baddiunit. The first point mentioned is that according toAssessing Officer, the Mohali unit had machinery ofabout Rs.55,15,306/- whereas the machinery at Baddiunit was Rs.6,60,972/- and, therefore, technologycould not be better for Baddi unit. However, we agreewith the submissions of Ld. counsel for the assesseethat machinery at Mohali unit was consisted of onlytwo items, i.e., tools and equipments which had theopening WDV of Rs.4386.35 and machinery with aWDV of Rs.18,379.30. Thus, the total machinery isless than Rs.23,000/- which cannot be calledmachinery and it was admitted during hearing that thiswould consist of some screw drivers and drillingmachine. At the same time the machinery at Baddiunit is also stands at Rs.6,60,972/- and assesseecould not give exact details or how the better technology could be adopted through this smallmachine. The other reasons have been discussed atPoint-ii in para 9 which have already been reproducedabove. But ignoring even those points if we comparethe sales at both the places, we find no pricedifference. For example in case of Mohali unit out of39 invoices in 17 cases the assessee had sold “SoapWrapping Machine MDT-13K”. We are giving few instances below:- ITA No. 445 of 2014 and the details in few cases is as under:- 15.The above clearly shows that the sameproducts are being sold from both the units and at thesame price ranging between ` 5,25,000/- to` 6,25,000/- in both cases. How the machines werecosting less at Baddi was not explained. When theend product is same, the cost would also be thesame. By installing a machine of Rs.6 lakhs it cannotbe said that the assessee is achieving economy ofscale or some other technological development. It isa simple case of inflation of profits in the eligible unitand in such situation the Assessing Officer has clearpowers in terms of Section 80IA(10) to compute thereasonable profit. The Ld. CIT(A) has misdirectedhimself by observing that Assessing Officer has notpointed out any discrepancy because the AssessingOfficer has clearly pointed out wrong allocation ofvarious expenses which was accepted by the ITA No. 445 of 2014-10- ITA No. 445 of 2014-10- assessee before the CIT(A). Further, the AssessingOfficer has also given reasons showing that profits inexempt unit have been inflated. In Section 80IA(10),it is clearly provided that if Assessing Officer hasreasons that the business has been so arranged toshow inflated profits in eligible unit then AssessingOfficer has power to recompute the profits of sucheligible unit. As seen from the sale invoice there isdefinitely a reason to believe that assessee hasinflated the profits in eligible unit because the sameproduct is being sold from both the units for almostidentical price. In this background, we set aside theorder of CIT(A) and restore that of Assessing Officer.” 7.Learned counsel for the assessee was unable todemonstrate that the aforesaid findings of fact recorded by the Tribunalare erroneous or perverse in any manner. Thus, no substantial questionof law arises in this appeal. Accordingly, the instant appeal is dismissed. (AJAY KUMAR MITTAL) JUDGE October 20, 2015gbs (RAMENDRA JAIN) JUDGE