AI Drafter 
TaxTMI 
TaxTMI 
2015 (1) TMI 1501
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....trarily applying the provisions of section 80IA(10) of Income Tax Act, 1961. 3. The Ld. CIT(A) is wrong in confirming addition of Rs. 1,80,000/- on account of non debiting of the partner's remuneration provided in the Partnership deed in the Profit & Loss account by ignoring the fact that the debiting of such remuneration will only result into reduction of manufacturing profits and no taxability will arise. 3. In ITA No. 510/Chd/2012, the Revenue has raised the following grounds:- 1. "On the facts and in the circumstances the CIT(A) has erred in allowing full deduction u/s 80IC of the act to the assessee as against a lesser deduction allowed by the A.O. by invoking the provisions of section 80IA(10). 2. The CIT(A) has erred in deleting the addition made by the A.O. on account of royalty for using the name of 'ADVANTA' by applying the provisions of section 80IA(10) of the act. 3. The CIT(A) has erred in deleting the addition made by the A.O. on a/c of royalty to sister concern M/s Shivam Industries, Delhi. 4. First we shall take up ground Nos.1 raised in both the appeals by Revenue as well as assessee. 5. Ground No.1 : After hearing both ....
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....ion. The assessee was issued a show cause notice that why provisions of section 80IA (10) read with section 80IC(7) should not be invoked and profits recomputed accordingly. In response, it was mainly submitted that one of the sister concern M/s Malhotra Plastic Products is in existence since 1984 and was having same GP rate since long and there was no effort or evidence that profits of M/s Malhotra Plastic Products was passed on to the assessee. It was further pointed out that average rate of gas stove bodies is Rs. 108/- as against Rs. 95/- stated in the show cause notice. The assessee also requested Assessing Officer to provide details of profits of M/s Triputi Food and Beverages and also the specifications of the gas stove bodies. It was pointed out that gas stove body itself is an input and constitute about 15% of the total value of the product. In this background it was stated that profit could not be compared for the whole equipment. It was also pointed out that assessee was selling complete appliance with B.I.S Quality Certification which generally have better profit. The assessee was informed regarding the details of M/s Triputi Food and Beverages, which is as under:- ....
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....espite the fact that cost of gas stove body consisted only 15% of the total appliance, the Assessing Officer had allocated 50% profits. Such allocation had resulted in unusual abnormal profits in the hands of sister concern. 9. The Ld. CIT(A) after examining the submissions found merit in the same and restricted the allocation of Rs. 13,92,321/-. The Revenue challenged this reduction and assessee has challenged through ground No.1 for partial confirmation of the allocation. 10. Before us Ld. DR carried us through the assessment order and submitted that assessee was showing much lower profit in the sister concern on purchases made from them which was not fair and, therefore, Assessing Officer is justified to reduce the part of profit relatable to the sister concern on which deduction u/s 80IC was rightly denied. 11. On the other hand the Ld. Counsel of the assessee submitted that in the earlier years Revenue has accepted the same results. In fact, GP was higher at 42.57% and the same was accepted u/s 143(3) and further allocation made by Assessing Officer would result in unusual abnormal profits in the hands of sister concern. He also submitted that there is no justificatio....
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..... refused to provide the requisite documents of the comparable case used by the A.O. by stating that the said documents were not being used as an evidence against the appellant, and on the other hand made addition on the basis of conjectures and surmises citing the same case as a bench mark. Appellate Findings 3.3 The rival submission have been carefully considered with reference to the facts of the case and the case laws relied upon. It is noted that the G.P. and N.P. rates returned by the appellant in the year under consideration are lower than those returned in the immediately preceding year which was also assessed u/s 143(3) of the Act. It is also noted that the Ld. A.O. has accepted that there is no change in the nature and place of business of the appellant as compared to the earlier year and, therefore, it is eligible for deduction u/s 80-IC of the Act. However, the Ld. A.O. was not satisfied with the rates at which the purchases of gas stove bodies were made by the appellant from its four sister concerns. The Ld.A.O. has recorded that the gross profit of the said sister concerns averages to about 6.4% as compared to 9.29% G.P. shown by one M/s. Shivam Ente....
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....so admitted that there may be some difference in the design and dimensions of the final products. The Ld. A.O. has further observed that all the complex processes are managed by the sister concerns of the appellant located at Delhi and that the appellant was merely engaged in the assembling and testing work and, therefore, could not have earned gross margin of 39%. However, this observation of the Ld. A.O stands in contradiction to the findings earlier given that the appellant was eligible for deduction u/s 80-IC and that the gas stove bodies purchased from sister concerns constituted only 15% of the complete appliance and the remaining 85% pertained to other inputs, raw material, expenses etc. Therefore, it is not justified on the part of the Ld. A.O. to consider the body component alone as the major manufacturing process. It is also noted that the appellant has shown the purchases from the sister concerns at rates ranging from Rs. 81/- to Rs. 125/-, and the Ld. A.O. has not responded to its plea that the prices depend upon the quality and specification of the material. The Ld. A.O. has also not satisfactorily addressed the fact highlighted by the appellant that one of its sister ....
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.... 21.2% of total sales of Rs. 37,27,69,177/- = 7,90,27,065/- (A) 39% G.P. shown by assessee on Rs. 7,90,27,065/- = 3,08,20,556/- (Profit shown by assessee on relevant purchases ) Total purchases made from sister concerns = 4,81,77,164/- (B) 6.4% G.P. shown by sister concerns &....
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....business concern, namely M/s. Shivam Enterprises. Therefore, at best, the Ld. A.O. could calculate 9.29% G.P. in the hands of sister concerns on the total sales effected by them to the appellant firm. But the calculation made by the Ld. A.O. has given rise to irrational results, as the same has resulted in a G.P. rate as high as 35.18% in the hands of the sister concerns which is far higher than the bench mark adopted by the Ld. A.O. herself. Applying the same bench mark of 9.29%, the total G.P. should have been Rs. 44,75,659/- in the hands of the sister concerns against Rs. 30,83,338/- shown by them. Thus the difference of Rs. 13,92,321/- could at best be treated as the inflated claim of he appellant u/s 80IC of the Act. It is noted that the case quoted by the appellant, namely Swastik Industries, Delhi has shown 7.88% G.P., which is also higher than the G.P. shown by the appellant's sister concerns. It is, therefore, considered reasonable that 9.29% G.P. rate returned by M/s Shivam Enterprises, Parwanoo be adopted as the benchmark to assess the fair G.P. rate in the hands of the appellant's sister concerns. Thus, the difference of Rs. 13,92,321/- is directed to be deducted from t....
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.... very low by the Assessing Officer. He further submitted that considering the fact that M/s Malbro Appliances Pvt Ltd had agreement with BPCL, the royalty estimate of 3% was justified. 18. On the other hand Ld. Counsel of the assessee reiterated the submissions made before the Assessing Officer and CIT(A) and pointed out that royalty was paid at a very low rate of Rs. 2/- per piece in the immediate preceding year which was accepted. He also submitted that apart from royalty, assessee had paid 10% commission to BPCL for effecting the sale and, therefore, sales were mainly because of the commission and not because of the trade name "Advanta". 19. After considering the rival submissions we find that Ld. CIT(A) adjudicated this issue vide para 4.3 which reads as under:- "4.3 The rival submissions have been carefully considered with referred to the facts of the case and the case laws relied upon. It is noted that the appellant had paid the royalty fee of Rs. 7,65,915/- during the year under consideration in accordance with an agreement duly reduced to writing. The Ld. A.O. has not pointed out any defect with the said agreement. She has simply proceeded on the basis of the....
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....hing wrong with the order of Ld. CIT(A) and we confirm the same. 31. Ground No. 3 of Revenue and Ground No.2 of assessee's appeal : After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that assessee has paid royalty to its sister concern during financial year 2004-05 for using the brand name 'Surya Flame' but no such royalty was paid during the year. A show cause notice was issued that why royalty at the rate of 3% should not be reduced for allowing deduction u/s 80IC. In response, it was stated that M/s Shivam Enterprises Delhi was proprietorship concern of M/s Rajiv Malhotra who was partner in the assessee firm. Since the brand name was owned by him and he was interested in the present business also, therefore, there was no logic of paying royalty. The Assessing Officer did not accept theses submissions and ultimately estimated 1% royalty calculated on sale price and reduced profits by 24,71,451/- for the purpose of computing deduction u/s 80IC. 32. On appeal the contention raised before Assessing Officer were reiterated. It was also pointed out that royalty of Rs. 50,000/- was paid in the immediately preceding year on the ....
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....y case partner and firm are different assessees for tax purposes. Therefore, we confirm the order of Ld. CIT(A). Accordingly, the ground raised by the Revenue as well as the assessee is dismissed. 38. Ground No.3 of assessee's appeal: After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that as per partnership deed the working partners were entitled to receive remuneration of Rs. 5000/- each but no such remuneration was added to the profit and loss account, therefore, the Assessing Officer in view of these clear terms of partnership deed reduced the profits by Rs. 1,80,000/- for the propose of computing deduction u/s 80IC. 39. On appeal, addition has been confirmed by Ld. CIT(A). 40. Before us, Ld. Counsel for the assessee submitted that provisions of section 80IA(10) cannot be invoked to reduce the profits for remuneration to be paid to the partners because this is not as collusive arrangement. 41. On the other hand Ld. DR strongly supported the order of CIT(A). He also relied on the decision of Tribunal in the case of ITO vs M/s GNG Enterprises in ITA No. 606/Chd/2013. 42. After considering the rival submissions we....
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.... or under any provision of this Chapter under the heading "C.-Deductions in respect of certain incomes", no deduction shall be allowed to him thereunder.] [(6) Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading "C-Deductions in respect of certain incomes", where any goods or services held for the purposes of the undertaking or unit or enterprise or eligible business are transferred to any other business carried on by the assessee or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the undertaking or unit or enterprise or eligible business and, the consideration, if any, for such transfer as recorded in the accounts of the undertaking or unit or enterprise or eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of any deduction under this Chapter, the profits and gains of such undertaking or unit or enterprise or eligible business shall be computed as if the transfer, in either case, had been made at the ma....
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....come computed in accordance with the provisions of this Act, before making any deduction under this Chapter [* * *] [* * *]; (6) [* * *] (7) [* * *] (8) [* * *] (9) [* * *].] 9 Reading of above provisions clearly shows that deduction under various provisions of this Chapter are allowable only if the income of the nature on which deduction is claimed has been included in the total income and further deduction has to be allowed on the basis of above gross total income. Gross total income has itself been defined in Sec 80B which clearly shows that deduction can be allowed on that income which is computed in accordance with the provisions of the Act before allowing deduction under Chapter VIA. Under Income-tax Act the income has to be computed under various heads as per the provisions of a particular head. The income under the head "business and profession" is to be computed as per Sec 29 which reads as under: " S e c 2 9 - Income from profits and gains of business or profession, how computed. The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to [43D]." Above c....
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....officer it was admitted that remuneration and interest has not been paid as per the partnership deed. Further there is no evidence for the same and in any case this will not make a difference. This type of situation came up for consideration of Hon'ble Bombay High Court in case Indian Rayon Corporation Ltd. V CIT, 261 ITR 98. In that case the deduction for industrial undertaking was claimed u/s 80HH because industry was located in a backward area. The deduction was claimed on the profits without claiming depreciation. The Assessing officer held that deduction was allowable only after allowing depreciation. This was challenged by the assessee and the matter traveled to the High Court. Hon'ble High Court made following observations: "261 ITR 98 - Income-tax is a charge on an assessee in respect of his total income computed in accordance with the provisions of the Act. However, in cases where the total taxable income comprises profits derived from newly established undertaking under section 80HH, then such profits have got to be computed separately as laid down by the Supreme Court in the case of Cambay Electric Supply Co. [1978] 113 ITR 84. There is a distinct dichot....
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....ced in this case, is that we are required to compute the total taxable income of the assessee who has claimed special deduction under Chapter VI-A. For that purpose, one has to keep in mind the provisions of sections 80B(5) and 80AB. Consequently, section 80HH, inter alia, lays down that if the gross total income includes profits from a newly established undertaking then 20 per cent. of such profits would be deductible from the gross total income in order to arrive at the total taxable income. That, in such a case, profits derived from a newly established undertaking shall be computed in accordance with the provisions of the Act, i.e., section 29 to section 43A. Therefore, net profit will have to be computed in accordance with the provisions of the Act. The argument of the assessee is that in view of the judgment of the Supreme Court in Mahendra Mills' case [2000] 243 ITR 56, it is open to the assessee not to claim depreciation allowance under section 32 and consequently it is argued that 20 per cent. rate of deduction should be applied to Rs. 100 in the above illustration, without taking into account the depreciation. We do not find any merit in this argument. The scheme of se....