Income Tax Appellate Tribunal - Chandigarh
Shivam Industries, Solan vs Assessee on 13 January, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCHES 'A' CHANDIGARH
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND
SHRI T.R. SOOD, ACCOUNTANT MEMBER
ITA No. 510/Chd/2012
Assessment Year: 2008-09
The ITO, Vs. M/s Shivam Industries
Ward Parwanoo, Sector-2
Parwanoo Parwanoo
PAN No.ABBFS1448Q
&
ITA No. 616/Chd/2012
Assessment Year: 2008-09
M/s Shivam Industries Vs. The ITO
Parwanoo Parwanoo
PAN No. ABBFS1448
(Appellant) (Respondent)
Appellant By : Sh. Manjit Singh
Respondent By : Sh. Rakesh Gupta & Sh. Manoj Kumar
Date of hearing : 08/01/2015
Date of Pronouncement : 13/01/2015
ORDER
PER T.R.SOOD, A.M.
The appeals filed by the assessee and Revenue are directed against the order dated 23.2.2012 of C IT(A), Shimla.
2. In ITA No. 616/Chd/2012 the assessee has raised the following grounds:-
1. The Ld. CIT(A) is wrong in confirming the addition to extent of Rs. 13,92,931/- to taxable profits made by Ld. Assessing officer by arbitrarily applying the provisions of section 80IA(10) of Income Tax Act, 1961 and disallowing the deduction u/s 80IC by ignoring the fact that the assessee 2 firm has not earned any extra profits by making transactions with the sister concern.
2. The Ld.CIT(A) is wrong in confirming the disallowance of deduction u/s 80IC to the extent of Rs. 581518/- on account of royalty, by arbitrarily 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 the parties we find that assessee is a partnership firm and is engaged in the business of manufacturing gas stoves 3 which were sold to the LPG dealers of Indian Oil Corporation (IOC) and BPCL.
The assessee has shown GP @ 39% on turn over of Rs. 37,27,69,178/- and the net profit shown was 22.06%. During assessment proceedings, it was noticed that assessee has conducted substantial transactions with his sister concern. The gist of transactions given by the Assessing Officer in para 4 reads as under:-
Sl.No. Name of the Turnover Gross Transaction Freight out assessee and Profit/Percentage with the borne by nature of trade assessee these with assessee alongwith concerns %age thereof 1 Karan Malhotra, 14963298 1275639 / 8.53% 12616728 / 352979 Proprietor. M/s. 84.31% Malhotra Plastic Products, 50/52, West Punj abi Bagh, Delhi Purchase of gas stove bodies by assessee.
2 Varun Malhotra, 14970077 895720 / 5.98% 13385568 / 363894
Prop. M/s. Varun 89.41%
Steels, 50/52,
West Punj abi
Bagh, Delhi
3 Shivam Steels & 14919508 680563 / 4.56% 10157626 / 402720
Alloys, H-41, 68%
Udyog Nagar,
Delhi
Purchase of gas
stove bodies by
assessee.
4 Pankaj Brassco 14966294 992592/ 6.63% 12017242 / 358907
Pvt . Ltd.K -91, 80.29%
Udyog Nagar,
Delhi
Purchase of gas
stove bodies by
assessee.
Total 59819177 48177164 1478500
6. It was further noticed that assessee had made purchases of Rs. 4.81 cores out of the total purchase of Rs. 22.70 crores and therefore, purchases from sister concern constituted 22.2% of the total purchases. Further in the case of sister concern sales made to the assessee was of 80.53%. It was also noticed that GP shown by sister concern was between 4.5% to 8.6% giving an average of 6.4% 4 whereas assessee had disclosed GP rate of 39%. It was further seen that assessee has purchased gas stove body (mini / polish) at the rate of Rs. 95/- per piece whereas M/s Triputi Food and Beverages, Parwanno which was also selling the gas stoves to the same to Oil companies @ 140/- per piece.
Therefore, it was concluded that assessee was purchasing gas stove bodies at much below the market price and the sister concern had also borne the expenses of freight. Thus, assessee through this collusive transactions has increased profits to take benefit of deduction. 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 accordingl y. In response, it was mainl y 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 Qualit y Certification which generall y 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 place to mention here that M/s. Delton Industries, Parwanoo and M/s. Jain Industrial Corporation, Parwanoo, which are in the same line of business are disclosing GP rate of 29.9% and 27.1%.5
ii) As regards M/s. Shivam Enterprises, sister concern of M/s.
Tirupati Food & Beverages, Parwanoo, the comparison of the GP rate of this concern with that of your sister concerns is not pragmatic as it is getting the entire job work done including fabrication from outside parties whereas your sister concerns are manufacturing the entire gas stove bodies themselves. It will suffice to inform you that despite having job work done from outside parties and keeping in mind that these parties would also have earned profit in the range of 8 to 10% therefore, M/s. Shivam Enterprises has shown a GP of 9.29%.
iii) As regards specification of material used in gas stove bodies, neither your purchase bills nor the purchase bills of any other concern specifies the specification of material used. The fact remains that when the supplies are made through I.O.C, B.P.C.L or HPCL, the quality specification have to be adhered to by the suppliers which are normally also checked by these companies. So the question of their product been of different quality than yours does not arise.
Para 3.2 to 3.9 of CIT(A)
7. In response it was pointed out that there were various factors resulting in the variation of GP ratio like purchase price, sale price, manufacturing cost, trading cost, specification of product, qualit y of the product. Further details were sought in the case of M/s Triputi Food and Beverages such as the purchase / sale bills, material specification, size of the body, weight of the component etc. Thereafte,r Assessing Officer noticed the various specifications etc. and ultimatel y allocated 50% of the profits in relation to the purchases made form sister concern by the assessee and denied deduction u/s 80IC to that extent amounting to Rs. 1,38,68,609/-.
8. On appeal before Ld. CIT(A), it was mainl y submitted that facts of the case are similar to the immediate preceding assessment year wherein assessment was framed us/ 143(3) and GP rate of 41.5% as compared to 39% was accepted.
6It was also submitted that despite the fact that cost of gas stove body consisted onl y 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 rightl y 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. C IT(A).
12. We have considered the rival submissions carefull y and find that issue was adjudicated by Ld. C IT(A) vide paras 3.2 to 3.9 which are as under:-
3.2 It was submitted that the appellant is maintaining the complete books of account along with the supporting documents.
There is no change in the facts and circumstances of the case as compared to the immediately preceding assessment year which was also assessed u/s 143(3) without any such addition. The G.P. for immediately preceding assessment year was higher at 41.57% as compared to 39% of the year under consideration. It was argued that the provisions of section 92 to 92 F have been applied without 7 any jurisdiction as the intention of the said provisions is to curtail avoidance of taxes by shifting of profits outside India. Reliance was placed on the case of Philips Software Centre (P) Ltd. Vs ACIT (2008) 15 DTR 505 (Bang)(Trib.) and Circular No. 14 of 2001 of CBDT. It was further argued that the Ld. A.O. despite accepting that the gas stove bodies consisted of approx. 15% only of the sale price of the appliance, arbitrarily applied the rate of 50% without there being any relevant material to suggest the same. The appellant also agitated the application of Rule 10 B(1)(d) without there being any basis for the same. It was highlighted that the method adopted by the Ld. A.O. had resulted in an abnormal figure of profit at 35.18% for the sister concerns which is not at all possible in the given trade. The Ld. A.O. herself has quoted the G.P. rate of 9.29% of an independent undertaking in similar trade which is very much lower than 35.18%. The appellant also submitted the trading account of one M/s Swastik Industries, Delhi which is in the same trade and ha declared G.P. rate of 7.88%. It was argued that the Ld. A.O. has calculated and divided the combined gross profits between the appellant and its sister concerns arbitrarily and without commenting on the huge marketing expenditure of Rs. 5,49,54,335/- as well as expenditure incurred by the appellant on sales promotion and administrative heads. The Ld. A.O. also completely ignored the fact that the appellant's G.P. rate is high due to higher sales price because of huge marketing expenditure in the shape of commission, rebate, advertisement and royalty. It was vehemently argued that on the one hand the Ld. A.O. 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 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 against G.P. of 39% declared by the appellant. The Ld. A.O. also quoted the examples of M/s. Deltan Industries, Parwanoo and M/s. Jain Industrial Corporation, Parwanoo which had disclosed G.P. rate of 29.9% and 27.1% respectively in the same line of business. It was submitted by the appellant during the course of assessment proceedings that there were many factors resulting in the variation of G.P. , e.g. purchase price, sale price, manufacturing cost, trading cost, specification of products, quality of product and standard of material etc and 8 accordingly it requested to be provided with all these details and copies of the balance sheet, trading & P.L. A/c of M/s. Tirupati Food and Beverages, M/s. Shivam Enterprises, M/s. Deltan Industries and Jain Industrial Corporation. The appellant also explained to the Ld. A.O. that the IOC had not specified any design and weight and that the vendors were having their own standard and were marketing their product on various prices. Therefore, it was necessary to establish for the Ld. A.O. that the apples were being compared with apples only. In response to this request of the appellant the Ld. A.O. vide letter dated 24/12/2010 informed the appellant that the G.P. & the N.P. rate of the given four concerns were not being used against the appellant, but they simply showed that the appellant's profits were far higher thatn the profit that could be arrived at in the normal course of business. On this pretext, the Ld. A.O. refused to supply the documents desired by the appellant. Thus it is noted that the A.O. refused to provide the requisite information and documents to the appellant firm so as to enable it to study the nature of product and the book results of M/s Shivam Enterprises and of M/s Tirupati Food & Bev. Parwanoo. The plea taken by the Ld. A.O. was that the said results were not being used as evidence against the appellant firm. Since the very said book results of the given firm have ultimately been made the criterion to conclude that the gross profit returned by the sister concerns of the appellant firm was less, the Ld. A.O. should have provided the requisite documents to the appellant.
3.4 The Ld. A.O. also 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 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 the profits of M/s Malhotra Plastic Products because of sales on reduced prices to the appellant.
3.5 It is further noted that the appellant had argued that if at all the standard rate of 10% was proposed to be applied by the Ld. A.O. as per the show cause notice, the same could be applied only on purchases and not in respect of the total sales as the purchased gas stove bodies were sold after a great deal of value additions. In response to this plea, the Ld. A.O. simply chose to revise her earlier proposal and decided that out of the combined profits of the 9 appellant firm and its sister concerns, 50% was to be apportioned to the appellant firm. It was accepted by the Ld. A.O. that a significant amount of value addition was made by the assessee to the stove bodies purchased and therefore a higher amount of profit was attributable to the assessee.
3.6 The application of provisions of section 92 to 92F and of Rule 10B(1)(d) by the Ld. A.O. is not found to be in order on the given facts of the case it is not understood as to how the Ld. A.O. has imported these provisions while dealing with a case u/s 80IC. Not only do the said provisions have no applicability to the appellant's case, even the essential requirements mandatory under Rule 10B(1)(d) have not been taken care of by the Ld. A.O. while making the calculation of the gross profit in the hands of the appellant and its sister concerns. The entire case has been built up by the Ld. A.O. purely on conjectures and surmises without conducting any worthwhile investigation and without pointing out any defects with the books of account of the appellant firm.
3.7 It is noted that the Ld. A.O. has allocated the profits in the following manner:
Ratio of related party purchases = 21.2% 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 = 30,83,338/-
(Profit shown by sister concerns on same transactions) (Combined profit (A+B) = 3,39,03,894/-
(c) Profit allocated to assessee @ 50% of combined profit = 1,69,51,947/-
Difference (A)-(C) =1,38,68,609/-
3.8 However, the above mentioned working adopted by the Ld. A.O. is logically not correct. If the appellant firm has made 21.2% of its purchases from its sister concerns, it does not mean that 21.2% of the total sales of the appellant are attributable to the said purchases. As already discussed, and as also admitted by the Ld. A.O. a great deal of value addition is brought about in the final product sold by the appellant. This is evident from the fact that against the total purchases of Rs. 4,81,77,164/- fro the sister concerns, the appellant has made total sales amounting to Rs. 37,27,69,177/-.
3.9 Further, the AO's case is that the G.P. returned in the hands of the sister concerns at 6.4% is less than 9.29% shown in the case of an identical 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, 10 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. C IT(A) has correctl y adjudicated the issue particularl y because of the higher GP rate was accepted by Revenue in the earlier years. We find that Ld. C IT(A) was justified because she had restricted the disallowance by appl ying 9.29% GP rate returned by the sister concern known as M./s Shivam Enterprises. Therefore, we find nothing wrong with the order of Ld. CIT(A) and we confirm the same and hence ground No.1 of the Revenue as well as of the assessee is rejected.
14. Ground No.2 of Revenue appeal : After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that assessee has paid royalt y @ Rs. 3/- per gas stove amounting to Rs. 7,65,915/- to M/s Malbro Appliances Pvt Ltd. The said royalt y was paid for using the trade name "Advanta". Further, M/s Malbro Appliances Pvt Ltd had entered into an agreement with BPCL. The directors of M/s Malbro Appliances Pvt. Ltd were in the said line of business since late 70's and had experience and technical knowhow which enabled the assessee to make qualit y gas stoves. The goodwill generated by said company resulted in generation of huge readymade market to the assessee. Further, the sale price on each gas stove was Rs. 850/- per gas stove and royalt y of Rs. 3/- per gas stove worked out to 0.4% which was very low. Therefore, assessee was issued a show cause notice that why royalt y should not be taken @ 3% per piece. In response, it was mainl y stated that royalt y was paid vide agreement dated 1.4.2007. The Assessing Officer did not accept these 11 submissions and worked out the royalt y @ 3% and reduced the profits eligible for deduction us/ 80IC by Rs. 57,44,363/-.
15. On appeal, it was mainl y submitted that royalt y was paid @ Rs. 2/- per gas stove in the immediatel y preceding year which was accepted by the Revenue in the assessment framed u/s 143(3). Therefore, following the principle of consistency the royalty of Rs. 3/- per gas stove should have been accepted.
16. The Ld. CIT(A) found merit in these submissions and deleted the reduction of profits.
17. Before us, Ld. DR carried us through the assessment order and pointed out that royalt y of 0.4% was found to be 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 royalt y 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 royalt y 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 royalt y, assessee had paid 10% commission to BPCL for effecting the sale and, therefore, sales were mainl y because of the commission and not because of the trade name "Advanta".
19. After considering the rival submissions we find that Ld. C IT(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 12 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 empowered to make his own estimate of the reasonable arm's length royalty that should have been paid. However, the Ld. A.O. has not elaborated as to how a close connection existed between the appellant and Malbro Appliances Pvt. Ltd. And how the course of business was arranged between the said two parties. The Ld. A.O. has also wrongly invoked the principle of arm's length pricing on the given facts of the case. She has also completely ignored the previous history of the case and has failed to make a case as to how the appellant has manipulated its profits in an unusual manner by digressing from its previous conduct. The Ld. A.O. has also not paid any attention to the fact that the appellant had separately paid Annual Channels Acces fee to the owner of ADVANTA in addition to the commission of Rs. 2,23,27,903/- to the BPCL for effecting sales through BPCL. In case of Suryaflame brand on the contrary, Annual Channel Access fee was directly paid by the assessee to IOC. The appellant has also paid a hefty commission of Rs. 2,23,27,903/- to BPCL for effecting huge sales under the brand name 'ADVANTA'. Therefore, the Ld. AO's argument that it was not only the brand name ADVANTA which was used by the appellant but also the benefit of sales enjoyed on the strength of the MOU between BPCL and M/s Malbro appliances does not carry much weight. The vital fact to be considered is that the appellant has incurred a huge expenditure in the form of commission and annual channel access fee for effecting sales through BPCL. Thus the appellant has incurred expenditure corresponding to the gains made by it through M/s Malbro Appliances Pvt. Ltd. Thus the addition made by the Ld. A.O. is found to be without any cogent basis. The same is, therefore, not found sustainable and is directed to be deleted.
20. In our view Ld. C IT(A) had correctl y adjudicated the issue particularl y in the light of the fact that lower royalt y was accepted in the earlier years .
Further, the assessee had paid the huge commission of Rs. 2,23,27,903/- to M/s 13 BPCl, therefore, we find nothing 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 royalt y to its sister concern during financial year 2004-05 for using the brand name 'Surya Flame' but no such royalt y was paid during the year. A show cause notice was issued that why royalt y 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 royalt y. The Assessing Officer did not accept theses submissions and ultimatel y estimated 1% royalt y 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 royalt y of Rs. 50,000/- was paid in the immediatel y preceding year on the basis of lump sum agreement of two years which was accepted by the Department.
33. The Ld. C IT(A) after considering the submissions estimated the royalt y 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 restricting the above addition to Rs. 5,81,518/- and assessee has challenged through ground No.2 of the impugned order for confirming the disallowance to Rs. 5,81,518/-.
1434. Before us, Ld. DR supported the order of Assessing Officer.
35. On the other hand Ld. Counsel of the assessee reiterated the submission made before the Assessing Officer and CIT(A).
36. After considering the rival submissions awe find that this issue has been adjudicated vide para 5.3 of the Ld. C IT(A), which reads as under:-
"5.3 The rival submissions have been carefully considered with reference to the facts of the case and the case laws relied upon. It is noted that the appellant was paying royalty fee for the use of the brand name "Suryaflame" in earlier years, but no such royalty expenditure was debited in the year under consideration. The Ld. Assessing Officer has rightly observed that the firm and its partners are distinct entities under the income-tax Act and the avoidance of the booking of royalty expenditure serves the purpose of inflating profit to claim deduction u/s 80IC of the Act. There is no denying the fact that the brand name "Suryaflame had been used by the appellant, even though the agreement was entered into directly between the appellant and the IOC in respect of the sale under the given brand. It will meet the ends of natural justice if the royalty @ Rs. 2/- per gas stove as in the case of M/s Malbro Appliances Pvt Ltd is calculated as a fair and reasonable amount of expenditure for using the brand name of the sister concern. Accoardingly an addition of Rs. 5,81,518/- (270759 gas stoves @ Rs. 2/- each) is directed to be made to the taxable profits of the appellant after reducing an equivalent amount from the profits claimed as eligible for deduction u/s 80-IC. The remaining addition of Rs. 18,89,933/- (Rs. 24,71,451 - Rs. 5,81,518/-) is accordingly directed to be deleted."
37. In our opinion the Ld. C IT(A) has correctl y adjudicated the issue particularl y in the light of the fact that royalt y was paid in earliear years and in any case partner and firm are different assessees for tax purposes. Therefore, 15 we confirm the order of Ld. CIT(A). Accordingl y, 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. C IT(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 strongl y 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 cam e 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. Provisions of section 80A, 80AB and 80B are relevant which have been reproduced as under:16
" Section - 80A - 80A. (1) In computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in sections 80C to [80U].
(2) The aggregate amount of the deductions under this Chapter shall not, in any case, exceed the gross total income of the assessee.
[(3) Where, in computing the total income of an association of persons or a body of individuals, any deduction is admissible under section 80G or section 80GGA [or section 80GGC] or section 80HH or section 80HHA or section 80HHB or section 80HHC or section 80HHD or section 80-I or section 80-IA [or section 80-IB] [or section 80-IC] [or section 80-ID or section 80-IE] or section 80J or section 80JJ, no deduction under the same section shall be made in computing the total income of a member of the association of persons or body of individuals in relation to the share of such member in the income of the association of persons or body of individuals.] [(4) 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, in the case of an assessee, any amount of profits and gains of an undertaking or unit or enterprise or eligible business is claimed and allowed as a deduction under any of those provisions for any assessment year, deduction in respect of, and to the extent of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be.
(5) Where the assessee fails to make a claim in his return of income for any deduction under section 10A or section 10AA or section 10B or section 10BA 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 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 restrictions, if any; (ii) in relation to any goods or services acquired, means the price that such goods or services would cost if these were acquired by the undertaking or unit or enterprise or eligible business from the open market, subject to statutory or regulatory restrictions, if any;] [(iii) in relation to any goods or services sold, supplied or acquired means the arm's length price as defined in clause (ii) of section 92F of such goods or services, if it is a specified domestic transaction referred to in section 92BA.] [(7) Where a deduction under any provision of this Chapter under the heading "C.--Deductions in respect of certain incomes" is claimed and allowed in respect of profits of any of the specified business referred to in clause (c) of sub-section (8) of section 35AD for any assessment year, no deduction shall be allowed under the provisions of section 35AD in relation to such specified business for the same or any other assessment year.]."
8 0 A B - [ Ded uct ion s t o b e m ad e w it h r ef er en c e t o t h e in com e in clu ded i n t he g ro s s t ot al i nc o me . - W her e an y d e duc t io n is r e q u ir e d t o b e m ad e or a ll o we d un d er an y s ec t i on [* * * ] inc l ud e d in t his C ha p t er un d er t h e he a d in g " C .-- De d uc t i o ns i n r es p ec t of c er ta i n i nc om es " i n r es p ec t of an y i nc om e of th e na t ur e s p ec if i ed i n t ha t s ec t i on wh ic h is inc l u de d i n t he gr os s to ta l i nc om e of t he as s es s ee , th e n, n ot wi t hs t a nd i ng a n yt h i ng c o nt a i ne d i n th at s ec t i on , f or t h e pur p os e of c om put i n g th e d e duc t io n u n de r t ha t s ec t io n, th e am o u nt of inc om e of th at n at ur e as c om pu te d in ac c o r d a nc e wi t h t he pr o v is i o ns of t h is Ac t ( bef or e m ak in g a n y d ed uc t i o n u n d er t h is C h ap t er ) s h al l a l on e be d e e m ed to b e t h e 17 am oun t of i nc om e of th at n at ur e wh ic h is der i v e d o r r ec e i v ed b y t h e as s es s e e an d wh ic h is i nc l u d ed i n h is gr os s t o ta l inc o m e.] 8 0 B - 80B. In this Chapter--
(1) [* * *] (2) [* * *] (3) [* * *] (4) [* * *] (5) "gross total income" means the total income 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 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 deduction. This action was challenged by the assessee and ultimately the matter traveled to the Hon'ble Supreme Court. It was observed as under:
"In view of the express provision defining the expression "gross total income" in clause (5) of section 80B of the IT A ct for the 18 purpose of Chapter VIA of the Act, it is necessary for the purpose of making deduction u/s 80P of the Act to determine the gross total income in accordance with the other provisions of the Act. This means that the gross total income must be determined by setting off against he income the business losses of the earlier years as required u/s 72 of the Act, before allowing deduction u/s 80P."
On the basis of above observation it was held as under:
"Held - accordingly reversing the decision of the Hon'ble High Court that before considering the matter of deduction u/s 80P(2) the Income tax officer had rightly set off the carried forward losses of the earlier years in accordance with section 72 of the Act and finding that the said losses exceeded the income, had rightly not allowed any deduction u/s 80P(2)."
Above position has been followed later on in various decisions by the Hon'ble Supreme Court like H.H. Sir Rama Verma V CIT, 205 ITR 435 and Motilal Pesticides (I) Pvt Ltd. V CIT, 243 ITR 26 (S.C). Therefore it becomes clear that deduction could have been allowed only after computing the income under a particular head. In this case the income in the hands of the a firm was computed in terms of Sec 28 to 43D and Sec 40(b) in respect of allowance of interest and salary falls between these two provisions and therefore full effect has to be given to this provisions also.
11 There is another contentions that later on it was decided not to pay salary and interest to the partners. This does not seems to be correct because before the Assessing 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 a newly established undertaking u/s 80HH of the IT Act, 1961, then such profits have got to be 19 computed separately as laid down by the Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial Company. Ltd V CIT, 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 43 and if the assessee claims relief under Chapter VI-A of eh 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 computing these special types of deduction. In other words, one must first calculate the gross total income from which one must deduct a percentage of income contemplated under Chapter VI-A. Therefore one can not exclude depreciation allowance while computing profits derived from newly established undertaking for computing deductions under Chapter VI-A."
12 In this case a specific argument was taken that the Hon'ble Supreme Court has clearly held in case of CIT V. Mahendra Mills (supra) that if the assessee does not claim depreciation then same cannot be thrusted on the assessee by the Income-tax authorities. The Court dealt with this contentions in detail and observed at placitum G to H that the decision of Mahinda Mills (supra) is not decided in respect of allowability of deduction which reads as under:
"The point at issue is amply clear from the illustration given hereinabove under the caption "Point at issue". The illustration indicates that the a e has not disclaimed depreciation. The point therefore to be noted is that the assessee has also claimed depreciation, but at a later stage and therefore the judgment of Hon'ble Supreme Court in Mahendra Mills Case, 243 ITR 56 has no application. Accordingly to the assessee the profits derived from the unit was Rs. 100 because u/s 32(2) r.w.s 4 of the IT act, the chargeability was in respect of the total income and, therefore the rate of 20 per cent was applicable to the total income of Rs. 100 without deducting depreciation. Secondly in any event, the controversy in Mahendra Mills case, 243 ITR 56 was not concerning deductions under Chapter VI-A of the Income -tax Act. Therefore that judgment would not apply to this case. The important distinction which is required to be noticed 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 section 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 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 Hon'ble Supreme Court in Mahendra Mills' case, 243 ITR 56, it is open to the assessee not to claim depreciation allowance u/s 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 20 it is clear that the analogy of section 32(2) given by the assessee will not apply in cases where an assessee claims special deduction under Chapter VI-A. The matter can be looked at from another angle. While computing normal income, an assessee may set off depreciation against its gross income. In such cases, depreciation is like any other ordinary expense. However, such depreciation cannot be equated with special ed under Chapter VI-A. In any event, in this case on the facts, the assessee claims depreciation of Rs. 75 from the balance income of Rs. 80 and therefore the judgment of the Hon'ble Supreme Court in Mahendra Mills Case, 243 ITR 56 has no application."
The above observations very clearly shows that for making deduction under chapter VIA the profits has to be computed specifically as per a particular provision of a particular head of income because of the definition of gross total income u/s 80B(5).
13 In view of the above clear position the deduction u/s 80IC was allowable only after reducing the interest and remuneration payable to the partners. The Assessing officer has invoked the provisions of section 80IA which are not relevant and the Ld. CIT(A) has decided the issue only on this decision without looking at the specific provisions of the Act and the decision of Hon'ble Supreme Court which are binding on all authorities. Therefore we set aside the order of Ld. CIT(A) and restore that of the Assessing officer (though on a different reasoning)."
43. Following the above, we decide this issue against the assessee.
44. In the result, appeals of the Revenue as well as Assessee are dismissed.
Order pronounced in the Open Court on 13.01.2015
Sd/- Sd/-
(BHAVNESH SAINI) (T.R. SOOD)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 13 t h January, 2014
rkk
Copy to: The Appellant, The Respondent, The CIT, The CIT(A), The DR