Income Tax Appellate Tribunal - Delhi
Surinder Malik, New Delhi vs Assessee on 8 April, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : G : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND SHRI C.M. GARG, JM
ITA No.1182/Del/2010
Assessment Year : 2006-07
Surinder Malik, Vs. CIT-XI,
E-12, Connaught Place, New Delhi.
New Delhi.
PAN: AAUPM0141Q
(Respondent)
(Appellant)
Assessee By : Shri S. Kumar, Advocate
Department By : Shri Ramesh Chandra, CIT, DR
Date of Hearing : 06.04.2015
Date of Pronouncement : 08.04.2015
ORDER
PER R.S. SYAL, AM:
This appeal by the assessee is directed against the order dated 19.02.2010 passed by the Commissioner of Income-tax (CIT) u/s 263 of ITA No.1182/Del/2010 the Income-tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2006-07.
2. Briefly stated, the facts of the case are that the assessment in this case was completed u/s 143(3) of the Act on 4.6.2008 determining total income at Rs.82,29,870/-, being the same amount at which the return of income was filed by the assessee. The assessee, inter alia, claimed deduction u/s 80IC. The ld. CIT, while exercising jurisdiction u/s 263, held the assessment order to be erroneous and prejudicial to the interest of the Revenue, on the following ten counts :-
(i) The audit report in Form No. 10CCB at serial number 25(d) clearly says that the business had not undertaken substantial expansion. Thus, the basic prerequisite as per provisions of section 80IC(2)(a) of the IT Act, 1961 was not satisfied for eligibility of deduction of Rs. 2,65,13,712/- claimed and allowed u/s 801C.
(ii) As per the provisions, new machinery to a minimum extent of 80% of the total machinery was to be used in the manufacturing activity by M/s. Fortune at Baddi, Himachal Pradesh. No 2 ITA No.1182/Del/2010 verification had been made that new machinery was used in the manufacturing process. Besides, it was also seen that as per the depreciation chart the value of machinery was only Rs. 69,274/-
which did not appear adequate to carry out the magnitude of manufacture as would appear appropriate vis-a-vis the high turnover declared at Rs. 5,62,51,944/-.
(iii) Manufacturing is done in the name of M/s Fortune a Baddi, Himachal Pradesh. Export is carried out in the name of M/s Da Milano, Gulmohar Park, New Delhi. Other related concerns involved in the trading process within the meaning of section 40A(2)(b) as per form No. 10CCB(column 28) were M/s Orient Express and M/s Sundaram Enterprises. Total sales to these parties ran into several crores of rupees. No attempt had been made by the AO to verify whether the sales were made at the prevailing market price or whether the profit shown in respect of the Baddi Unit was more than normal profits that would accrue in such business. Thus, violation of provisions of sec. 80IC(7) read with sec. 80IA(8) which 3 ITA No.1182/Del/2010 had to be necessarily verified in the circumstances of the case was not verified by the AO.
(iv) One of the trade creditors was M/s. Fortune Leather Co. No verification was made on the lines as cited at (iii) above as was needed to be done.
(v) Fabrication charges of Rs. 67.24 lakhs which was shown, as direct expenses were paid to M/s Kishan Enterprises and M/s Sandeep Leather Works as jobwork charges. As per the provisions of section 801C, manufacturing should have been carried out by the assessee itself-with the new machinery Installed by it. The manufacturing, if at all any, in this case was carried out by M/s. Kishan Enterprises and M/s Sandeep Leather Works with their machinery and not by the assessee. The agreements between the assessee and the above two parties had also not been examined to verify the nature of business and nexus between them.
(vi) From the copies of accounts relating to electricity expenses, it was not proved that the same were incurred by the assessee for 4 ITA No.1182/Del/2010 manufacturing purposes. The AO had not examined whether those were direct manufacturing expenses or amounts reimbursed to the parties who carried out the job work. The AO had not called for or verified the electricity bills to make the necessary verifications.
(vii) The assessee had one Unit of M/s Fortune at Baddi, Himachal Pradesh And another at Kapashera, DelhI. While In respect of the Kapashera Unit a loss of Rs. 65,326/-. was shown, in respect of the Baddi Unit substantial business profits claimed as exempt u/s 80IC were shown. The circumstances leading to loss in one unit and profit in another in the same line of business were not examined by the AO in the light of provisions of section 80IC to verify if there weas transfer of profits from one unit to other to avoid tax liability.
(viii) Purchase bills of machinery etc., should have been verified in respect of Kapashera Unit, M/s. Da Milano and other related parties{u/s 40A(2)(b)}, where possible, to see if there was any splitting up or reconstruction of any existing business. Magnitude of 5 ITA No.1182/Del/2010 manufacture, turnover, etc., of these parties should also have been verified where possible to find out if manufacturing activity carried out by any of them had been abandoned in favour of the Baddi Unit since in such a case it would mean that those existing business/businesses had been reconstructed at Baddi, Himachal Pradesh to avail tax benefit in violation of the provisions of section 80IC(4)(i).
(ix) No effort was made by the AO to verify the actual existence of manufacturing activity vis-a-vis factory, value of machinery, consumption of power for manufacture by the assessee, evidence of freight inward of raw materials/freight outwards of manufactured goods through transport bills showing the destinations etc. Neither had any effort been made to draw a comparison between infrastructure available and magnitude of manufacture leading to the massive turnover. Thus, existence of actual manufacture as mandatory u/s 80IC(2)(a) which necessarily merited thorough verification, had not been verified.
6 ITA No.1182/Del/2010
(x) The sales expenses of Rs. 7,08,974/- shown in the P&L a/c under the head 'indirect expenses' was salary paid to six persons as per the details filed. The direct expenses were the packing expenses and the fabrication expenses comprising only job work expenses. This led to the conclusion that no actual manufacturing activity had been carried out by the assessee on its own in violation of the basic pre-requisite of section 80IC(2)(a).
3. The assessee furnished point wise reply on the above ten objections of the ld. CIT, which has been reproduced in the impugned order. After considering the same, the ld. CIT observed that although in respect of some points, the reply of the assessee was satisfactory, but, the major issues relating to allowability of deduction u/s 80IC remained unexplained. The ld. CIT further observed that total sales during the preceding year were to the tune of Rs.1.11 crore giving gross profit of Rs.44.77 lac with the overall GP rate of 40.7%, in comparison with the current year's total sales of Rs.5.62 crore and gross profit of Rs.2.87 crore, giving GP rate of 51.02%. The ld. CIT further observed that 7 ITA No.1182/Del/2010 sales to two of the related concerns, namely, Orient Express and M/s Sundaram Enterprises increased from last year's 45% of the total sales to the current year's 79%. About Fabrication charges paid to M/s Kishan Enterprises and M/s Sandeep Leather Works, the ld. CIT observed that the AO did not examine the Memorandum of Understanding. In the ultimate para, the ld. CIT held that the claim of deduction u/s 80IC was not properly examined by the AO inasmuch as certain details which were required to be taken note of were not looked into. He, therefore, set aside the assessment order with the direction to the AO to verify the details and compute the correct amount of deduction u/s 80IC of the Act. The assessee is aggrieved against this order.
4. We have heard the rival submissions and perused the relevant material on record. We want to clarify that the mandate of section 263 is attracted only when the assessment order is found to be erroneous and prejudicial to the interest of the Revenue. These twin conditions have to be cumulatively satisfied for obtaining a valid jurisdiction under this 8 ITA No.1182/Del/2010 section. Merely because an assessment order is prejudicial to the interest of the revenue is not enough, unless it is shown that the same is erroneous too. An assessment order can be termed as erroneous in several circumstances. Non-investigation by the AO on the relevant issues, which are required to be properly looked into, makes an assessment order erroneous. However, non-examination of the trivial or insignificant issues cannot lead to making an assessment order erroneous. Making due investigation but thereafter taking a patently erroneous view, also makes an assessment order erroneous. A line of distinction should be drawn between patently erroneous view and accepting one of the possible views. Only the former makes an assessment order erroneous and not the later. In other words, if there is a debatable issue and the AO has taken one of the possible and legally sustainable views, then that aspect goes outside the realm of revision. Another situation of an erroneous order may be when investigation was made by the AO, but the circumstances suggest that further investigation was warranted, which the AO failed to make. This would also make the assessment order erroneous. But the mere fact that the AO chooses not 9 ITA No.1182/Del/2010 to incorporate certain issues in the assessment order on which he gets satisfied during the course of hearing after proper examination, cannot be lead to the passing of an erroneous assessment order. If material on record suggests that the AO did embark upon the investigation and got satisfied and further there is nothing to prompt further investigation, then the assessment order cannot be characterized as erroneous simply because there is no discussion in the assessment order on such aspects. If a view is taken that non-discussion of an issue in the assessment order on which the AO is satisfied, means the absence of application of mind by the AO, then probably all the assessment orders would become erroneous. It is so for the reason that the AO cannot be expected to discuss each and every, significant or insignificant aspect of assessment, in his order. The essence of the matter is that on the non-discussed relevant issues in the assessment order, so long as there is material to suggest that the AO conducted inquiry and the assessee did file reply on them, the assessment order cannot be held as erroneous, until it is shown that the circumstances required the AO to conduct further inquiry on such issues.
10ITA No.1182/Del/2010
5. Coming to the facts of the instant case, it is observed that the assessee claimed deduction u/s 80IC for the first time in the immediately preceding assessment year, namely, AY 2005-06 in respect of profit from the manufacturing unit established at Baddi in Himachal Pradesh. The assessment for the AY 2005-06 was taken up by the AO u/s 143(3) and the claim of deduction u/s 80IC was allowed as claimed. A copy of the assessment order for the AY 2005-06 is available on record. This shows that all the pre-requisites for the claim of deduction u/s 80IC were examined by the AO in finalizing the assessment for the earlier year and he got fully satisfied with the eligibility of deduction. The instant year is second year of the claim for deduction u/s 80IC. With the above background in mind, we will take up all the objections raised by the ld. CIT one by one and see if the assessment order can be held to be erroneous and prejudicial to the interest of the Revenue.
6. The first objection of the ld. CIT is that the assessee had not undertaken substantial expansion and, thus, the basic pre-requisite for deduction u/s 80IC was not satisfied. We cannot accept this objection of 11 ITA No.1182/Del/2010 the ld. CIT for the reason that the assessee claimed deduction under this section for the second year in line. Such deduction was claimed for the first time in the immediately preceding year and the AO duly allowed the same, which automatically implies that all the pre-requisite conditions for the claim of deduction u/s 80IC were duly examined by the AO and found to be satisfied. Once all the prerequisite conditions for availability of deduction u/s 80IC have been considered by the AO and found to be satisfied, then it is not open to any authority to reconsider such prerequisite conditions in the subsequent years as well. There is no dearth of judicial precedents for this proposition. In view of the fact that the pre-requisite conditions can be examined in the first year of the claim, which were duly found to have been fulfilled in the preceding year, we are of the considered opinion that this objection of the ld. CIT that the assessee did not undertake substantial expansion, is bereft of any force. The same is, therefore, dismissed.
7. The second objection of the ld. CIT is that new machinery to the minimum extent of 80% of total machinery was to be used in the 12 ITA No.1182/Del/2010 manufacturing activity by M/s Fortune at Baddi, Himachal Pradesh, being the eligible unit. Here again, we find that the ld. CIT is discussing about the eligibility conditions for claim of deduction u/s 80IC, which cannot be re-visited in the second year.
8.1. Objection nos. 3 and 4 of the ld. CIT are that the assessee made sales to its related concerns, namely, M/s Orient Express, M/s Sundaram Enterprises and M/s Fortune Leather Company and the AO did not verify whether the sales were made at the prevailing market price or whether the profit in respect of Baddi unit was more than normal profit which would accrue in such business. We find some force in this objection for the reason that the ld. CIT found that the assessee made sale to its two related companies depicting gross profit margin of more than 51% in this year in comparison with the preceding year's gross profit rate from sales to these companies at 40%. It can be observed from the material on record that no investigation was carried out to verify the price charged by the assessee from these companies. 13 ITA No.1182/Del/2010 8.2. This is an issue on which albeit investigation was started, but further investigation was required because of the attending facts suggesting a steep increase in the gross profit rate purportedly earned from the related concerns. Earning gross profit at more than 50% in this line of manufacturing does not inspire confidence of acceptance at the face value, more so, when the profit of such eligible unit is subject to full deduction. As sales to the related companies constituted roughly 80% of the total turnover and there was abnormal profit shown, it was incumbent upon the AO to investigate this aspect of the matter further rather than stopping at the receipt of sales account. In our considered opinion, the ld. CIT was justified in directing the AO to re-examine this aspect of the assessee's claim for deduction u/s 80IC. We uphold these objections taken by the ld.CIT.
9. Objection no. 5 of the ld. CIT is against payment for Fabrication charges amounting to Rs.67.24 lac made to M/s Kishan Enterprises and M/s Sandeep Leather Works as job work. It was explained to the ld. CIT that these labour contractors were rendering services in the 14 ITA No.1182/Del/2010 assessee's premises. In support of this contention, the assessee filed proof of its having made payment of ESI/PF, etc., in respect of payment made to the workers of these two contractors to whom such Fabrication charged were paid. This explanation has remained uncontroverted at the end of the ld. CIT. It is but natural that if the assessee gets the job work done in its own premises and under its own control after deducting employee's provident fund, etc. from the payment made to the labour, it can be construed as manufacturing activity undertaken by the assessee alone. This objection taken by the ld. CIT is not sustainable.
10. Objection no. 6 of the ld. CIT is about the payment of Electricity expenses. The ld. CIT observed that the AO did not examine whether the electricity charges were direct manufacturing expenses or the amounts reimbursed to the parties who carried out job work. The assessee tendered before the ld. CIT that there was no reimbursement of expenses incurred by any third party and all the expenses incurred and claimed were for self, inasmuch as the assessee had sanctioned load of 58 kw and the electricity charges paid were for the consumption of 15 ITA No.1182/Del/2010 electricity at the undertaking alone. Copies of bills were also enclosed to the ld. CIT. Since these details have not been refuted by the ld. CIT, the inference has to be drawn in favour of the assessee that the electricity expenses were in respect of its own unit and as such the AO was justified in accepting the assessee's claim on this aspect of the matter. 11.1. Objection no. 7 of the ld. CIT is that the assessee had eligible unit of M/s Fortune at Baddi, Himachal Pradesh and another at Kapashera, Delhi. He observed that in respect of Kapashera unit there was a loss of Rs.65,326/-, whereas in respect of Baddi unit, there was substantial business profit for which deduction was claimed u/s 80IC. The assessee contended before the ld. CIT that only the Baddi unit had undertaken manufacturing and selling activity, whereas Kapashera Delhi was simply its administrative office which was not undertaking any business activity. The ld. CIT did not controvert the argument of the assessee.
11.2. It is obvious that Kapashera Delhi office was not undertaking any income producing activity and the loss of Rs.65,326/- was only 16 ITA No.1182/Del/2010 towards administrative expenses incurred by it, As such, there can be no question of shifting profit from the eligible unit at Baddi to Kapashera Delhi. We, therefore, reject this objection taken by the ld. CIT.
12. The other objections taken at Sl. no. 8, 9 and 10, namely, examination of splitting up or re-construction of any existing business; examination of actual existence of manufacturing activity vis-à-vis factory; and no actual manufacturing activity having been carried out by the assessee on its own, are in the realm of pre-requisite conditions for the eligibility of deduction u/s 80IC, which can be examined when the claim of deduction is made for the first time. Since the assessee was allowed deduction u/s 80IC for the first time in the immediately preceding assessment year, we are of the considered opinion that there can be no logic in once again taking up such objections in the second year of claim of deduction u/s 80IC. These objections are dismissed as the assessment order cannot be held to be lacking on these aspects.
13. The sum and substance of the above discussion is that the order of the ld. CIT is sustainable on objection nos. 3 and 4 and not on the 17 ITA No.1182/Del/2010 remaining eight. In such a scenario, the entire order cannot be set aside. It goes without saying that if the order passed u/s 263 is sustainable on one of the various objections taken by the ld. CIT and not on others, the order is not vitiated. However, the direction to the AO by the ld. CIT gets restricted to the points on which the order is sustainable. As the impugned order is sustainable in respect of two objections only, we direct the AO to restrict himself only on these issues in the assessment to be finalized u/s 143(3) pursuant to the order u/s 263 of the Act.
14. In the result, the appeal is partly allowed.
The order pronounced in the open court on 08.04.2015.
Sd/- Sd/-
[C.M. GARG] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated, 08th April, 2015.
dk
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ITA No.1182/Del/2010
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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