Income Tax Appellate Tribunal - Mumbai
Malay N Sanghvi, Mumbai vs Department Of Income Tax on 11 December, 2013
ुं ई यायपीठ "बी" मब
आयकर अपील य अ धकरण, मब ुं ई
IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, MUMBAI
BEFORE S/SHRI B.R.MITTAL,(JM) AND RAJENDRA (AM)
सव ी बी.आर. म तल, या यक सद य एवं राजे , लेखा सद य के सम
आयकर अपील सं./I.T.A. No. 6265/Mum/2012
( नधारण वष / Assessment Year : 2009-10)
Income Tax Officer-8(3)(2), बनाम/ Shri Malay N Sanghvi,
201, Ayakar Bhavan, Vs. M/s M-1,
M.K.Road, Kalpita Enclave Co-op. Hsg. Society,
Mumbai-400020 Sahara Road,
Andheri (E),
Mumbai-400069
(अपीलाथ /Appellant) .. ( यथ / Respondent)
थायी ले ख ा सं . /जीआइआर सं . /PAN/GIR No. : AKEPS3301A
अपीलाथ ओर से / Appellant by : Shri R.K.Sahu
यथ क ओर से/Respondent by : Shri Kirit J Sheth
सन
ु वाई क तार ख / Date of Hearing : 11.12.2013
घोषणा क तार ख /Date of Pronouncement : 08.1.2014
आदे श / O R D E R
Per B.R.Mittal, JM:
The department has filed this appeal for assessment year 2009-10 against order of ld. Commissioner of Income Tax (A) dated 18.7.2012 on the following grounds :
"On the facts and in the circumstances of the case and in law, the CIT(A) erred in allowing deduction u/s. 801B(4) of Rs.41,65,688/- without appreciating the findings by the AO for restricting the same to Rs. 12,03,773/-."
"On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the AO to allow deduction u/s. 801B(4) fully as claimed by the assessee without appreciating the findings of the AO for invoking the provisions of sec.801A(8) and sec.801A(10) for the I.T. Act in restricting the deduction."
2. Relevant facts giving rise to this appeal are that the assessee is an individual and carries on business from two places (a) at Mumbai in the name of M/s Malay Sanghavi & Co. and (b) M/s Malay Sanghavi & Co. (Jammu). The nature of business from Mumbai is trading and whereas the nature of business from Jammu is manufacturing and sale. However, the AO has stated that assessee is having three 2 I.T.A. No. . 6265/Mum/2012 units, apart from above other two units, the AO has stated that M/s Umbergam industries at Umbergaon, Valsad. The assessee contended that the said third unit at Valsad belongs to his wife Mrs.Parul Parekh.
3. AO has stated that during the course of assessment proceedings, it was found that the net profit ratio shown by assessee of Unit at Jammu is 35% which is eligible for deduction u/s 80IB (Presently 80IA) of the Income Tax Act, 1961 (the Act) and whereas the profit of its sister concern, viz Unit at Valsad is showing net profit ratio of 5%. AO asked the assessee to explain why there is vast difference in the net profit ratio of both the concerns particularly when both units carrying on the similar business of manufacture of liquid soap materials. The assessee vide letter dated 24.8.2011 has stated as under :
"Justification of why the probability of Malay Sanghavi & Co. (Jammu) cannot be compared with the profitability of the Umbergam industries.
The Jammu Unit is basically set up for our fixed formulation and set market, because Jammu is very Jar from Mumbai and reliable technical And skilled manpower cannot be secured and the industry culture there is very different and all work is done through delegation to our team at Jammu. Hence Jammu unit is manufacturing only fixed and set products of entire single customer Kimberly Clark. Whereas the Umbergam Industries has own its own technical team & lab and factory and through The Umbergam Industries we are also trying to target different market, customize customers different formulation with our technical team and lab setup at factory. The Umbergam Industries are manufacturing product in different formulation to our existing customer and targeting new customers also. The major item sold by The Umbergam Industries to Kimberly clark is generic product where as major item sole from Jammu to Kimberly clark is customized product and both product has different formulation. Hence we cannot compare the profitability of both the unit. The Jammu unit is focusing only on Manufacturing of set product to existing customer whereas The Umbergam Industries always do different formulation for various customers. We are also submitting the customer wise & operation wise sales during year of both the company in support of our contention of not to compare the profitability on merely doing business in same nature of product. We are also presenting some factual of figure to support out above contention. During the year under consideration the Malay Sanghvani & Co. Jammu has sold Rs.11641131/- (GLC Pink) to Kimberly clark out of sales of Rs.11707731/- only the product whereas, The Umbergam Industries has sold Rs.4007539/- to Kimberly clark the same product and Rs. 1272569/- other product to Kimberly clark and Rs.8252556/- to other customers. The Umbergam Industries all other formulation to other customers and Kimberly clark are different than sold by Jammu Unit. The Umbergam Industries is also doing job work for product selling to their prospecting product setup to other customer which has very thin margin or sometime if the product is not accepted by customer, the whole product development tends to be in loss. Hence please accept our contention for not to compare the both concerns profitability merely on the basis of same nature of product."3 I.T.A. No. . 6265/Mum/2012
AO did not accept the said contention of the assessee and stated that on verification of the details of expenses in comparison to the sales of these two units, the following facts emerged from the P & L A/c of two units :
S,No. Particulars Malay Sanghvi The Umergaum Industries,
- Jammu Unit Valsad -- Prop. Smt. Parul Sanghvi 1 Sales 1,20,37,731/- 74,57,454/-
2 Other Income Nil 6,71,117/-
3 Cost of Material 63,41,488/- 63,25,625/-
4 Manufacturing 4,07,733/- 1,82,590/-
Expenses and Other Expenses 5 Administration, 10,00,694/- 11,23,458/-
Selling & Other
Expenses
6 Interest & Financial 3,419/- Nil
Charges
7 Depreciation 1,18,710/- 1,59,349/-
8 Net Profit 41,65,688/- 3,37,550/-
9 N.P. 35% 5%
4. AO stated that the assessee has been manufacturing products similar to that of its sister concern, M/s. The Umergaum Industries, at Jammu. The sales are made by both the concerns mainly to M/s. Kimberly Clark Hygiene Product Pvt. Ltd. where the rate is common for both the concerns. That the cost of material, administration, selling and other expenses , depreciation are very much in the same range. However, the assessee has purchased and sold the goods from the same places that of its sister concern but still could maintain the profit at 35% even after paying additional cost of transportation.
5. In view of above, AO was satisfied that the profit for the eligible unit at Jammu has been inflated to claim deduction u/s 80IB(4) (80IA) of the Act. AO after applying the provisions of sub-section (8) and (10) of section 80IA considering the net profit rate of unit at Jammu 5% over and above sister concern at Valsad and thus stated that net profit rate be adopted for Jammu unit at 10% and accordingly restricted the deduction of 10% of the total sales which comes to Rs.12,03,773/- as against 4 I.T.A. No. . 6265/Mum/2012 deduction of Rs.41,65,688/- claimed by assessee. Being aggrieved, the assessee filed appeal before the First Appellate Authority.
6. On behalf of the assessee, it was contended that the provisions of section 80IA(8) can be applied only in the case where the goods or services are transferred inter-se between the two units belonging to the same assessee, one of which is eligible for deduction under section 80IB and the other is not so eligible. It was contended that no such transfer of goods or services took place or found eligible by AO. It was contended that as per section 80IA (10) of the Act following two conditions are to be satisfied :
"(a) There should be "close connection between the assessee carrying on the eligible business to which this section applies and any other person"
(b) "the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business"
7. It was also contended that the unit Malay Sanghvi & Co. at Jammu belongs to assessee and whereas the unit M/s. The Umergaum Industries, Valsad belongs to his wife Smt.Parul Sanghavi and transaction of purchase of goods between the two units is worth Rs.66,845/- and barring with transaction there are no other transactions of goods or services between the two. It was also contended that there was nobody's case that some of the expenses pertaining to assessee's unit have been incurred by assessee's wife who is a proprietor of M/s. The Umergaum Industries, Valsad without getting it reimbursed against the expenses so incurred with regard to the assessee's unit. It was also contended that total sales by the assessee unit to Kimberly Clark Hygiene Products Pvt.Ltd. is Rs.1,16,41,130/- out to total sales of Rs.1,17,07,731/- which is about 99.43% and whereas in the case of wife of assessee's unit M/s. The Umergaum Industries, Valsad, the sales to Kimberly Clark Hygiene Product Pvt. Ltd is of Rs.52,93,751/- out of total sales of Rs.74,57,454/- which is about 70.98%. The ld. CIT(A) considering the submissions of the assessee and vide para 2.2 of the impugned order directed the AO to allow the deduction to the assessee as claimed by it u/s 80IA of the Act. The said para 2.2 of the order of ld. CIT(A) reads as under :
"2.2 I have considered the submissions of the ld. Counsel and in view of the facts brought on record- particularly that there is no arrangement between the two assessees and that it produces to the assessee more than ordinary profits or there has been a transfer of any goods or services below the market value of such goods or services- hence the provisions of section 80IA(8) and 80IA(10) are inapplicable on the given and undisputed facts of this case- hence, reliance 5 I.T.A. No. . 6265/Mum/2012 placed by AO on the provisions of section 80IA(8) and 80IA(10) in making the disallowance of Rs.29,61,915/- cannot be sustained- more particularly when the accounts are audited and no defect in the accounts-leading to any adverse inference has been brought on record by AO to warrant application of section 80IA(8) and 80IA(10). Therefore, the above disallowance is deleted and this ground of appeal is allowed."
Hence, this appeal by the department.
8. On behalf of the department, ld DR supported the order of AO and submitted that if the test of human probability is applied, the profit shown by the unit which is eligible for deduction u/s 80IA is very high i.e. 35% as compared to the profit of the other unit (belongs to his wife) only at the rate of 5%. He submitted that if there is an abnormal profit, the Hon'ble Bombay High Court has also held in the case of CIT V/s Schmetz India (P) Ltd in IT Appeal No.4508 of 2010, dated 4.9.2012 that the provisions of section 80IA(10) of the Act empowers the AO to redetermine the profits which may be reasonably deemed to have arisen from such eligible business, if the said undertaking has declared more than ordinary profit. Ld. DR submitted that both the units are making purchase and sales of goods from the same places that of sister concern but still unit eligible for deduction u/s 80IA and could maintain 35% even if taking additional cost of transportation which cannot be justified. Ld. DR referred para 4.2 of the order of Assessing Officer and stated that both the concerns carrying similar business of liquid soap material and most of the sales are made to the same concern viz M/s Kimberly Clark Hygiene Product Pvt Ltd where the rate is common for both the concerns. He submitted that AO rightly applied the provisions of section 80IA(10) of the Act to re-determine the profit . He submitted that AO is reasonable to consider the net profit rate of 10% of the eligible unit as against 5% net profit of the unit which is not eligible for deduction u/s 80IA. On the other hand, ld. AR supported the order of ld. CIT(A) and submitted that the purchaser is a multinational company. He submitted that products were manufactured by both the concerns are different. That the attention of ld. AR was drawn to the fact as stated by AO in paragraph 4.2 of the assessment order that both the units are carrying on the business of manufacturing liquid soap material and the purchase cost of material for both units more or less same and on the other hand the unit at Valsad (proprietor of which is wife of assessee) is also having similar administration, selling and other expenses how the net profit rate could be 35% in the case of unit at Jammu, which is eligible for deduction u/s 80IA. AR submitted that the matter may be remitted to AO to reconsider the facts and decide the issue afresh.
6 I.T.A. No. . 6265/Mum/20129. We have considered the submissions of the ld. Representatives of the parties and the facts placed on record. Since the AR could not controvert the facts as stated by AO and neither could controvert the submissions as made by ld. DR and /or query raised by the Bench at the time of hearing, we are of the considered view that the AO is justified to apply the provisions of sub-section (10) of section 80IA of the Act to re- determine the profit as the profit shown by eligible unit is abnormally high particularly when the cost of the material is the same, most of the sales are also made to the same party and both units are carrying on the similar business of manufacturing of liquid soap material. We are of the considered view that the AO is justified and reasonable to restrict deduction at Rs.12,03,773/- by taking the net profit rate of 10% of the total sales by the assessee of the Jammu unit inspite of the fact that the other unit i.e. M/s. The Umergaum Industries, Valsad whose proprietor is wife of assessee showing net profit rate of 5% only. In view of above fact, we uphold the action of AO by reversing the order of the ld. CIT(A). Hence, ground of appeal taken by department is allowed.
10. In the result, the appeal of the department is allowed.
Order pronounced in the open court on 8th Jan, 2014.
घोषणा खुले यायालय म दनांकः 8th Jan, 2014 को क गई ।
Sd sd
(राजे /RAJENDRA) (बी.आर. म तल/B.R.MITTAL)
लेखा सद य / ACCOUNTANT MEMBER या यक सद य / JUDICIAL MEMBER
मब
ुं ई Mumbai:
व. न.स./ SRL , Sr. PS
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु त(अपील) / The CIT(A)- concerned
4. आयकर आयु त / CIT concerned
5. वभागीय त न ध, आयकर अपील य अ धकरण, मब
ंु ई /
DR, ITAT, Mumbai concerned
6. गाड फाईल / Guard file.
आदे शानस
ु ार/ BY ORDER,
True copy
सहायक पंजीकार (Asstt. Registrar)
आयकर अपील य अ धकरण, मुंबई /ITAT, Mumbai