Comparative net profit adjustment: average profit rate applied where inter unit profit suppression suggested, reducing assessed disallowance.

Disparity in net profit rates between co managed manufacturing units producing substantially the same product can indicate profit suppression and require comparative adjustment; where such suppression is evident, the appropriate remedy is to apply a reasonable comparative net profit rate-for example an average of the year under appeal and preceding years-to compute eligible unit profits for tax deduction purposes. Applying this approach here reduced the assessed disallowance: the net profit rate of 5.83% (average of three years) is to be used to recompute allowable deduction, and the appeal is partly allowed in favour of the assessee.

---

---

Issues: Whether the disallowance of deduction claimed under Section 80-IC of the Income-tax Act, 1961 to the extent of INR 43,00,753/- should be upheld on the ground that profits of the non-eligible new unit were suppressed and shifted to the eligible unit, and if so the appropriate net profit rate to be applied for computing eligible profits.

Analysis: The dispute concerns comparative profit ratios of two units manufacturing substantially the same product under common management where one unit claimed eligibility for deduction under Section 80-IC. Material on record showed a substantial rise in gross and net profit rates of the eligible unit in the year under appeal while the new unit exhibited markedly lower profit rates. The assertion that excise duty in sales from the new unit alone accounted for the difference was examined in light of the availability of CENVAT credit, the similarity of inputs and product quality, and the common management of purchases and operations. The assessment authority had applied the immediately preceding year's net profit rate of 3.64% to the eligible unit; the Tribunal reviewed profit rates for the year under appeal and the two preceding years and considered an average net profit rate to address apparent profit shifting between units.

Conclusion: The disallowance is not sustained to the full extent but a portion is justified. The AO is directed to apply a net profit rate of 5.83% (the average of the net profit rate of the year under appeal and the two preceding years) to compute profits of the eligible unit for Section 80-IC purposes and to recompute the allowable deduction; the appeal is therefore partly allowed in favour of the assessee.

Ratio Decidendi: Where common management and similar products exist and disparity in profit rates between eligible and non-eligible units suggests profit suppression, the appropriate remedy is to apply a reasonable comparative net profit rate (such as an average of relevant years) to compute eligible unit profits for deduction under Section 80-IC of the Income-tax Act, 1961.

---