Pr. Commissioner Of Income Tax-12, New Delhi v. Harpreet Kaur L/H Of Virender Singh Kochar

$~15 & 16 *IN THE HIGH COURT OF DELHI AT NEW DELHI+ITA 141/2017 PR. COMMISSIONER OF INCOME TAX-12, NEW DELHI ..... Appellant ThroughMr. Asheesh Jain, Sr. StandingCounsel versus HARPREET KAUR L/H OF VIRENDER SINGH KOCHAR ..... RespondentThroughMr. Gautam Jain, Advocate + ITA 142/2017 PR. COMMISSIONER OF INCOME TAX-12, NEW DELHI ..... AppellantThrough:Mr. Asheesh Jain, Sr. StandingCounsel Versus HARPREET KAUR L/H OF VIRENDER SINGH KOCHAR ..... RespondentThrough:Mr. Gautam Jain, Advocate CORAM:JUSTICE S.MURALIDHARJUSTICE PRATHIBA M. SINGH % O R D E R24.07.2017 Dr. S. Muralidhar, J: 1. These are two appeals by the Revenue against the common order dated29th June 2016 passed by the Income Tax Appellate Tribunal (‘ITAT’) in ITA 141 and 142 of 2017 Page 1 of 6 ITA No. 844/Del/2011 and ITA No. 2081/Del/2011 for the AssessmentYears (‘AY’) 2006-07 and 2007-08, respectively. 2. While admitting these appeals on 21st February 2017 this Court framedthe following questions of law for consideration: “(i)Did the ITAT fall into error in holding that invocation ofSection 145 of the Income Tax Act, 1961 ('the Act') in thefacts of this case was not justified?Section 145 of the Income Tax Act, 1961 ('the Act') in thefacts of this case was not justified?(ii)Is the impugned order erroneous inasmuch as it interpretsSection 80IA (8) and (10) of the Act.”Section 80IA (8) and (10) of the Act.” 3. The facts in brief leading to the filing of these appeals are that theRespondent-Assessee was the Proprietor of M/s Vi-John International, Delhiand M/s Maja Personal Care, Baddi, Himachal Pradesh (H.P.) which areengaged in the manufacturing of cosmetic goods. 4. In relation to AY 2006-07, the Assessee filed a return income on 31stOctober 2006 declaring an income of Rs.2,02,760/-. During the course ofthe assessment, a questionnaire was issued by the Assessing Officer (‘AO’)following which the AO framed the assessment by order dated 26thDecember 2008 assessing the total income of the Assessee at Rs.1,47,00,040/-. The AO came to the conclusion that the gross profit (GP) ofthe units of the Assessee located at Baddi was abnormally high whencompared to the GP of the units located in Delhi; these units were selling theproducts through another related concern of the family, viz., M/s SuchetAgencies on consignment basis; “all of them have been in the same line ofbusiness for years, and all the relevant variables related to the business of ITA 141 and 142 of 2017 manufacturing of cosmetics are exactly similar in all of the above namedconcerns”. According to the AO, even after accounting for the advantagesthat accrued to the units at Baddi, at the highest an average GP to the extentof 23% may be allowed. Consequently, the GP of M/s Maja Personal Carewas taken at a maximum of 23% instead of 38.05% as declared by theAssessee. Consequently, the net profit (NP) ratio for the deduction underSection 80 IC of the Income Tax Act, 1961 (‘the Act’) was computed at21% and a difference was added back to the income of the assessee. 5. Likewise for AY 2007-08 the AO on similar basis, by the assessmentorder dated 31st December 2009, the AO added back the difference in theGP by taking it at a maximum of 25% instead of 43.07%. ITA 141 and 142 of 2017 manufacturing of cosmetics are exactly similar in all of the above namedconcerns”. According to the AO, even after accounting for the advantagesthat accrued to the units at Baddi, at the highest an average GP to the extentof 23% may be allowed. Consequently, the GP of M/s Maja Personal Carewas taken at a maximum of 23% instead of 38.05% as declared by theAssessee. Consequently, the net profit (NP) ratio for the deduction underSection 80 IC of the Income Tax Act, 1961 (‘the Act’) was computed at21% and a difference was added back to the income of the assessee. 5. Likewise for AY 2007-08 the AO on similar basis, by the assessmentorder dated 31st December 2009, the AO added back the difference in theGP by taking it at a maximum of 25% instead of 43.07%. 6. Aggrieved by the above assessment orders, appeals were filed by theAssessee before the Commissioner of Income Tax (Appeals) [CIT(A)]. Byorders dated 26th December 2008 (for AY 2006-07) and 10th November2010 for AY 2007-08 the CIT (A) allowed the appeals of the Assessee. TheCIT(A) held that “the AO was not justified in rejecting the trading resultsshown by the Assessee summarily without pointing out either anymistake/deficiency in the accounts or disturbing the figures of sales orpurchase as declared by the Assessee”. According to the CIT(A) there wereconsiderable differences in the business environment of the Assessee'sconcerns in Delhi and at Baddi in H.P. Consequently, the CIT(A) was of theview that the AO was not correct in slashing the GP rates in both the areasand substituting it by that determined by the AO. ITA 141 and 142 of 2017 7. Aggrieved by the orders passed by the CIT(A) for each of the AYs, theRevenue went in appeal before the ITAT which by the impugned commonorder dismissed the appeals. The ITAT concluded that the AO hadarbitrarily made the addition by rejecting the books of accounts and theadditions made by the AO were rightly deleted by the CIT(A). The ITATsummarized and affirmed the reasons given by the CIT(A) for reversing theAO. In addition, the ITAT observed as under: “20. However, there is not an iota of material on the file to provethe inter-unit transfers between the related units of the assessee,one situated at Baddi, Himachal Pradesh, and another situated atDelhi. Moreover, when correctness and completeness of theaudited books of account has not been disputed, merely disputingthe trading result on the basis of higher gross profit ratio is notpermissible under law. When AO has also not returned anyspecific findings that there was somearrangement between theassessee unit, an 80-IC unit and his non 80-IC unit situated atDelhi to carry out such, transfer of goods, the question of invokingprovisions contained u/s 80-IA (8) & (10) does not arise.” 8. The ITAT was of the view that the AO had invoked Section 80 IC readwith Section 80-IA (8) and (10) of the Act “on the basis of conjectures andsurmises only without having an iota of material on record and as such, thequestion is answered in favour of the assessee”. 9. Having heard Mr. Asheesh Jain, learned the Senior Standing counsel forthe Revenue and Mr. Gautam Jain, learned counsel for the Assessee, theCourt is of the view that the orders of the CIT(A) and the ITAT suffer fromno legal infirmity. The reasons for this conclusion follow. 10. Under Section 80-IA(8) of the Act, one of the pre-requisites for the AOto not grant the deduction as claimed by the Assessee in his return is wherethe AO finds that the consideration at which transfers were made of goodsand services of the eligible business as recorded in its accounts "does notcorrespond to the market values of such goods." The Proviso to Section 80-IA (8) further states: “that where, in the opinion of the Assessing Officer, thecomputation of the profits and gains of the eligible business in themanner hereinbefore specified presents exceptional difficulties, theAssessing Officer may compute such profits and gains on suchreasonable basis as he may deem fit.” (emphasis supplied) 10. Under Section 80-IA(8) of the Act, one of the pre-requisites for the AOto not grant the deduction as claimed by the Assessee in his return is wherethe AO finds that the consideration at which transfers were made of goodsand services of the eligible business as recorded in its accounts "does notcorrespond to the market values of such goods." The Proviso to Section 80-IA (8) further states: “that where, in the opinion of the Assessing Officer, thecomputation of the profits and gains of the eligible business in themanner hereinbefore specified presents exceptional difficulties, theAssessing Officer may compute such profits and gains on suchreasonable basis as he may deem fit.” (emphasis supplied) 11. The expression “such reasonable basis” pre-supposes that the AO has toexplain with sufficient clarity why the AO is rejecting the profit figures asput forth by the Assessee which emerges from the audited accounts of theAssessee. In the present case, for instance, the AO had to explain why hewas rejecting for AY 2006-07 the GP ratio of 38.05% and substituting itwith a rate of 23%. What the AO appears to have done in the present case isto reject an explanation given by an Assessee as to the difference in theselling price of the products manufactured by it at its Baddi unit compared tothat at Delhi unit. The AO proceeded on the basis that the sales were torelated parties thus giving an unfair advantage to the Assessee. 12. The above approach of the AO was rightly found by the CIT(A) to benot justified. Without pointing out the error, if any, in the accounts ordisturbing the figures of sales or purchases, to compare the trading results ofbusiness of two units and simply reject was clearly not a “reasonable basis”,as contemplated by the proviso to Section 80-IA (8) of the Act. The AO’s ITA 141 and 142 of 2017 Page 5 of 6 order does not explain the basis for determining the GP ratio of 23% insteadof 38.05% for AY 2006-07 and 25% instead of 43.07% for AY 2007-08.In the circumstances, the ITAT’s conclusion that the AO’s order was passedon conjectures and surmises cannot be said to be erroneous. 13. When there are audited accounts of an entity and the calculation of theGP ratios hinges upon their analysis, the AO should not lightly undertake anexercise that would amount to negating those accounts. 14. The questions framed by this Court are answered thus: Question (i) is answered in the negative by holding that the ITAT did not errin holding that invocation of Section 145 of the Act in the facts of this casewas not justified. Question no. (ii) is answered in the negative by holding that the impugnedorder of the ITAT in its interpretation of Section 80-IA (8) and (10) of theAct is not erroneous. Consequently, the questions are answered in favour ofthe Assessee and against the Revenue. 15. The appeals are dismissed. S.MURALIDHAR, J JULY 24, 2017nn PRATHIBA M. SINGH, J ITA 141 and 142 of 2017