Ramesh Kumar Dudani v. The Commissioner Of Income Tax, Mohali And Another

ITA No. 194 of 2010 and connected cases -|- IN THRE HIGH COURT OR PUNJAB AND HARYANA|WAT CHANDIGARH AT CHANDIGARHDate of Decision: 11.07.2018(1)ITA No. 194 of 2010Ramesh Kumar Dudani....... AppellantVersusThe Commissioner of Income Tax, Chandigarh.....Respondent(2)ITA No. 379 of 201Ramesh Kumar Dudan1........ AppellantVersusThe Commissioner of Income Tax, Chandigarh and another.....Respondents(3)ITA No. 384 of 2011Ramesh Kumar Dudan1........ AppellantVersusThe Commissioner of Income Tax, Chandigarh and another.....Respondents(4)ITA No. 223 of 2012Ramesh Kumar Dudani....... AppellantVersusThe Commissioner of Income Tax, Chandigarh and another.....Respondents (5)ITA No. 431 of 2015 Ramesh Kumar Dudani Versus ....... Appellant The Commissioner of Income Tax, Mohali and another ......Respondents ITA No. 194 of 2010 and connected cases CORAM: HON'BLE MR. JUSTICE AJAY KUMAR MITTAL.HON'BLE MR. JUSTICE AVNEESH JHINGAN.HON'BLE MR. JUSTICE AVNEESH JHINGAN. Present:Mrs. Radhika Suri, Senior Advocate withMr. Manpreet Singh Kanda, Advocatefor the appellant.Mr. Manpreet Singh Kanda, Advocatefor the appellant. Mrs. Urvashi Dhugga, Senior Standing counsel for the revenue-respondents. AVNEESH JHINGAN, J. This order shall dispose of five appeals filed by appellant-Ramesh Kumar Dudani, Proprietor of M/s Technical Products Corporation,Mohali as common questions of law and facts are involved in all theappeals. ?DThe appeals have been preferred by the assessee under Section260-A of the Income Tax Act, 1961 ( for short ‘the Act’) against the orderspassed by the Income Tax Appellate Tribunal, Chandigarh (hereinafterreferred to as “the Tribunal’) as per details given hereinunder, Assessment years involved in the appeals are tabulated below: 3For convenience sake facts of ITA No.194 of 2010 are being extracted. 4The appellant claimed that following substantial questions of law arise for consideration of this Court: (i)Whether in the facts and circumstances of the case the ITA No. 194 of 2010 and connected cases order passed by the Hon'ble Income Tax Appellate Tribunal isperverse as it has upheld the action of the Assessing Officer undersection 80IC(7) read with 80IA(10) contrary to the material onrecord and without application of mind?|(11)Whether in the facts and circumstances of the case theHon'ble Income Tax Appellate Tribunal was right in upholding theorder passed by the Assessing Officer on conjectures and surmisesdisallowing the expenditure of Rs.5 lacs claimed by TPC-I andattributing the same to T'PC-II when separate books of accounts habeen maintained by the TPC-I and TPC-II, the authenticity ofwhich has never been doubted by the Assessing Officer.(111)Whether the Assessing Officer could resort to the provisionsof Section 80IC(7) read with Section 80JA(10) after grantingbenefit to TPC-IlI under Section SOIC of the Income Tax Act (On 25.04.2011, the appeal was admitted for consideration ofquestion No.(il1) only. (On 25.04.2011, the appeal was admitted for consideration ofquestion No.(il1) only. 6 The brief facts necessary for adjudication of the present appealaS narrated in the appeal are that the assessee is a proprietorship concern. Ithas two manutacturing units-one at Mohali referred to as TPC-I and thesecond unit at Theog (Himachal Pardesh) described to as TPC-II. TPC-IIqualified for deduction under Section 80 IC of the Act. TPC-I manutactures172 products whereas JPC-II manufactures only 9 products. Only twoproducts manufactured at TPC-I and TPC-II are common. The assesseemaintained separate accounts of both the units. The accounts were dulyaudited. Assessment year 2005-06 was the first assessment year for claimingbenefit under Section 80 IC of the Act. The appellant filed return declaringthe total income as Rs.11,42,967/-. The return was taken up in scrutiny. TheA.O. issued show cause notice for huge variation of net profit rate in TPC-Iand TPC-II. The gross receipt in TPC-I was Rs.4 crores and gross profit wasRs.11,42,967/-. As regards TPC-II, the receipts were Rs.84,24,902/- and theprofit was Rs.16,84,726/-. The assessee filed the reply explaining theREEMA SAINI2018.09.20 10:09I attest to the accuracy andauthenticity of this documentHigh Court, Chandigarh reasons for difference in profit. The A.O. after making the comparativechart of depreciation; administrative expenses and manufacturing expensesexercised power under Section 80IC(7) read with Section 80IA(10) of theAct and added expenses of Rs. 5 lakh to TPC-II, reducing the income ofTPC-II. Consequently the profit of TPC-I was increased by Rs. 5 lakh. Theassessment was finalised vide order dated 28.12.2007. vaAggrieved of the assessment order the assessee filed an appeal.The Commissioner of Income Tax (Appeals), Chandigarh, |CIT(A)]dismissed the appeal vide order dated 19.03.2009. 8.Further appeal was filed before the Tribunal and the same wasalso dismissed vide order dated 30.07.2009. Hence, the present appeal(s) bythe assessee. Q We have heard learned counsel for the parties and perused thepaper book, 10,The issue involved in the present appeals is "whether theAssessing Authority was justified in resorting to Section SOIA(7/) read witSection SOIA(10) after granting benefit to TPC-I under Section SOIC of theActon 11.section 80IC of the Act provides for special provisions fordeduction of incomes in respect of certain undertakings or enterprises inspecial category States. Sub-section (7) of Section 80IC of the Act makesthe provisions of sub-section (5) and sub-sections (7) to (12) of SectionSOIA of the Act applicable to eligible undertaking or enterprise under thissection. According to Section 80IA(10) of the Act, where profits in theeligible units have been inflated by an assessee, the Assessing Officer isempowered in terms of the aforesaid Section to determine the reasonable ITA No. 194 of 2010 and connected cases profit. 12)The bone of contention of the entire controversy in the presentappeals is the difference in the percentage of profit shown by TPC-I andTPC-II. The revenue authorities proceeded on the basis that plants andmachinery of both the units were similar; the raw material used was thesame and the end user of products of both the units were same. MoreoverTPC-II is located at Theog (Himachal Pardesh) and being a new unit, theoperational over head expenses, depreciation expenses and administrativecosts were bound to be higher. The authorities had drawn a comparison ofconsumption of packing material, consumable store, telephone expenses,depreciation expenses and manufacturing expenses. Relying upon thecomparison, the A.O. concluded that the case was covered under SectionSOIA(10) and made an addition by disallowing expenses of Rs.5 lakh inTPC-II which has been sustained by CIT (A) and the Tribunal. 13,For ready reference Section 80IA (10) of the Act is reproducedbelow: 13,For ready reference Section 80IA (10) of the Act is reproducedbelow: "Where it appears to the Assessing Officer that owing to the closeconnection between the assessee carrying on the eligible businessto which this section applies and any other person, or for any otherreason, the course of business between them is so arranged that thebusiness transacted between them produces to the assessee morethan the ordinary profits which might be expected to arise in sucheligible business, the assessing officer shall, in computing theprofits and gains of such eligible business for the purposes of thededuction under this section, take the amount of profits as may bereasonably deemed to have been derived therefrom." 14)From a perusal of the aforesaid provision, it is evident that ithas to be established that the business between the two units was soarranged that more than ordinary profits were disclosed in the eligibleREEMA SAINIunit/business. The matter was required to be examined in extenso in view of2018.09.20 10:09I attest to the accuracy andauthenticity of this documentHigh Court, Chandigarh ITA No. 194 of 2010 and connected cases -6- various pleas raised by the assessee to substantiate the genuineness of itsactivities of the TPC-II. In our opinion, the Revenue Authorities have notdealt with the issue in right perspective as while adjudicating the matterthey failed to appreciate that separate audited books of account had beenmaintained by both the units. The said books of account had never beendoubted by the revenue nor any discrepancy was pointed out. Moreover,while comparing the various expenses, the facts in-totality are required to beconsidered. It needs special mention that TPC-I manufactures 172 productswhereas only 9 products are being manufactured by TPC-II. In order toinvoke Section 80IA(10) of the Act, in the facts of the present case, somelink between the products was required to be established. As per case of theassessee, there are just two common products between the two units.Moreover the production facility at TPC-II was never doubted. It is not clearfrom the orders passed by the authorities below whether any verificationwas undertaken by deputing a personnel at TPC-IIl. The difference inpercentage of profit calculated in two units by itself would not be sufficientto doubt the activities and take recourse to Section 8OIA(10) of the Act. Thefact that depreciation expenses at TPC-I were more as the land and buildingwas owned in TPC-I whereas the TPC-II was running on a leased buildingwas required to be kept in mind while adjudicating the issue. Furthergenerator sets, office equipments, vehicles, computer, visual equipments,EPBX and fax machine, have been installed in TPC-I which were not in TPC-ILI. 15,The comparison of utilization of packing material consumed bythe two units and then converting it into percentage was not sufficient toconclude as done by the authorities below. While examining the issue it ITA No. 194 of 2010 and connected cases had to be kept in mind that the sale in TPC-I was about Rs. 4 crores whereasin TPC-II, it was approximately Rs.84 Lakhs. Similarly the figures ofconsumption of consumable store items have been converted intopercentage. It is, thus, concluded that the comparative study of expensesand conclusion of the authorities below that TPC-I has a close connectionwith TPC-II as TPC-II does not have the requisite assets to run anindependent unit, are not based on legally justified conclusions. Moreover,the assessing officer had held TPC-II entitled to the benefit under SectionSOTA of the Act.. 16.Suffice it to notice, that resistance of learned counsel for therevenue that the issue of maintenance of separate books of account cannotbe considered as appeal was admitted only for consideration of questionNo.3 and not for question No.2 is not well founded. The substantialquestion of law has to be framed, not the arguments supporting the saidquestion. 16.Suffice it to notice, that resistance of learned counsel for therevenue that the issue of maintenance of separate books of account cannotbe considered as appeal was admitted only for consideration of questionNo.3 and not for question No.2 is not well founded. The substantialquestion of law has to be framed, not the arguments supporting the saidquestion. 17.From the facts which are required to be examined betweenTPC-I and TPC-II the assessing officer and appellate authorities havingfailed to appreciate in true legal perspective, it cannot be concluded that thebusiness of TPC-I had been so arranged in a manner to inflate the profit ofTPC-ITL. 18.Thus, without expressing any opinion on merit, the matter isremanded back to the A.O. to decide the issue afresh after givingopportunity to the assessee. The A.O. shall consider the facts in totality andpass fresh order in accordance with law. Needless to say that illustrationsnoticed hereinbefore are the examples of material which the assessingofficer 1s required to examine while adjudicating the issue of applicability of ITA No. 194 of 2010 and connected cases Section 80IA(10) of the Act and it shall not be taken to be any expression ofopinion on the merits of the controversy, 19,The appeals stand disposed of accordingly. (AJAY KUMAR MITTAL)JUDGE 11.07.2018TeeMa (AVNEESH JHINGAN) JUDGE Whether speaking/reasonedWhether Reportable: Yes/NoYes/No