TaxTMI 
TaxTMI 
2015 (1) TMI 1501
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....f 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 the parties we find that assessee is a partnership firm and is engaged in the busi....
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....uted 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:- i) The GP of M/s. Tirupati Food & Beverages, Parwanoo for the year under consideration is 26.35% as against GP of 39% declared by you. It will not be out of p....
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....normal 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 justification in part allocation made by Ld. CIT(A). 12. We have considered the rival submissions carefully and find that issue was adjudicated by Ld. CIT(A) vide paras 3.2 to 3.9 which are as un....
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....r 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 Enterprises, a sister concern of one M/s. Tirupati Food and Beverages, Parwanoo engaged in the same kind of business. The Ld. A.O. also noted that the G.P. of M/s. Tirupati Food & Beverages was 26.35% as again....
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....ant 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 concerns, namely M/s Malhotra Plastic Product was in existence since 1984 and was showing almost the same G.P. in earlier years. Thus the Ld. A.O. has failed to make out a case that there was a drastic fall in t....
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....; = 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 = 30,83,338/- (Profit shown by sister concerns on same transactions) ....
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....ed 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 the eligible profits and treated as the taxable profits of the appellant in the light of the provisions of section 80IA(10). Thus the appellant succeeds partly on this ground of appeal. 13. In our opinion the Ld. CIT(A) has correctly adjudicated the issue particularly because of the higher GP rate wa....
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.... 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 theoretical information culled from Wikipedia and concluded that the royalty fee @ 0.4% of the total sale price paid by the appellant is negligible. The Ld. A.O. has brushed aside the written agreement by simply observing that the rate of royalty mutually decided by way of an agreement is not relevant and the A.O. is em....
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.... 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 basis of lump sum agreement of two years which was accepted by the Department. 33. The Ld. CIT(A) after considering the submissions estimated the royalty at Rs. 2 /- per gas stove and restricted the reduction of profit of recomputing deduction u/s 80IC to Rs. 5,81,518. The Revenue has challenged the impugned order for restri....
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.... 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 find that identical issue came up for consideration before the Tribunal in the case of ITO vs M/s GNG Enterprises (supra) and the same was adjudicated vide paras 8 to 13 which are as under:- "8 We have considered the rival submissions carefully and find that before allowing deduction under chapter VIA basic provisions have to be kept in mind. Provis....
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....s 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 market value of such goods or services as on that date. Explanation.-For the purposes of this sub-section, the expression "market value",- (i) in relation to any goods or services sold or supplied, means the price that such goods or services would fetch if these were sold by the undertaking or unit or enterprise or eligible business in the open market, subject to statutory or regulatory res....
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....ove 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 clearly show that before allowing deduction u/s 80IC the income has to be computed as per the provisions of Sections 32 to 43 of the Act. 10 This position has been confirmed by the Hon'ble Supreme Court in case of CIT V. Kotagiri Industrial Co-operative Tea Factory Ltd. (supra). In that case the assessee society was carrying on the business of manufacturing of tea. The assessee had claimed deduction u/s 80P(2). There were some brought forward losses which was set off by the ITO before allowing ....
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....fficer 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 dichotomy between the cases of computation of normal income under the Act de hors Chapter VI-A and computation of taxable income where the assessee claims the benefit of deduction under Chapter VI-A. The Profits and gains of a newly established undertaking, therefore, have got to be computed as per the provisions of section 29 to section 43A and if the assessee claims relief under Chapter VI-A of the Act, then it is not open to the assessee to disclaim depreciation allowance. This is because Chapter VI-A is an independent code by itself for computin....
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....king 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 section 4 and section 5 of the Income-tax Act does indicate that income-tax is a tax in respect of income computed as per the provisions of the Act. There is a distinct dichotomy between cases of computation of normal income under the Act de hors Chapter VI-A and computation of taxable income where the. assessee claims the benefit of deduction under Chapter VI-A because the Legislature has intended that these special deductions should be restricted to the receipt of foreign exchange. If this object is kept in mind, then it is clear that the analogy of section ....