Income Tax Appellate Tribunal - Mumbai
Ito vs Novel Consumer Products (P.) Ltd. on 25 July, 2005
Equivalent citations: [2006]7SOT615(MUM)
ORDER
K.P.T. Thangal, V.P. The revenue is in appeal and the assessee is also in cross appeal before us, against the same order of the learned Commissioner (Appeals) dated 16-10-2003, for the assessment year 1997-98.
2. For the sake of convenience and brevity, we are dealing with the above appeals separately as under,
3. ITA No. 568/Mum./2004:
When the matter was taken up for hearing, the learned Counsel for the assessee submitted that he is under instruction from his client not to press Ground Nos. 1 and 3 which are as under:
"1. The learned Commissioner (Appeals) erred in law and on facts in upholding the re-opening of the assessment made by the assessing officer without appreciating the fact that the assessment was re-opened without fulfilling the conditions laid down under the Income Tax Act, 1961, for re-opening of the assessment.
3. The learned Commissioner (Appeals) erred in upholding the action of the assessing officer in excluding the interest income of Rs. 13,09,782 from the profits of undertaking of the appellant for the purpose of deduction under section 80-IA of the Act."
4. In view of above, Ground Nos. 1 and 3 are dismissed as not pressed.
5. Ground No. 4 has nothing to do with the ground that the learned Commissioner (Appeals) erred in stating the name of the Proprietor of M/s. S.M.B. Corporation as Shri Rashiklal A. Shah instead of Shri Ratilal A. Shah.
6. The only effective ground, urged by the assessee, is directed against order of the learned Commissioner (Appeals) in upholding the invocation by the assessing officer of the provisions of sub-section (10) of section 80-IA. The facts, leading to the dispute, briefly are as under.
7. The assessee is engaged in the business of production of Copper T components and surgical sutures at Daman. The original return of income, declaring total income at NIL, was filed on 28-11-1997. The return was accompanied with Tax Audit Report, as required under section 44AB of the Income Tax Act, 1961, copies of the Profit & Loss Account, the balance sheet of the assessee alongwith its enclosures. The same was processed under section 143(1) of the Act. The assessment was reopened under section 147 of the Act and Notice dated 20-3-2002 under section 148 was issued to explain the reasons for the inaccurate claim of deductions under section 80-IA of the Act; the basis for inclusion of interest of Rs. 13,40,682 and receipt of labour charges of Rs. 8,51,000 in the total income which were not eligible for deduction under section 80-IA of the Act.
8. There was an action under section 133A on 7-1-1999 which was subsequently converted into a search under section 132(1) on 8-1-1999. Separate proceedings for the block assessment were completed. The learned Commissioner (Appeals) deleted the addition made for the block assessment.
9. During the course of re-opening of the regular assessment, which is before the Tribunal now, the assessee was asked to show-cause as to why the profit of the business should not be adopted at the rate of 22.5 per cent as worked out in the block assessment. The assessee, in reply, submitted that the learned Commissioner (Appeals) has already allowed the claim of the assessee under section 80-IA for earlier years and requested the assessing officer to allow the present claim under section 80-IA.
10. With regard to applicability of section 80-IA(10), the assessing officer asked the assessee to show-cause why the profit of the business shotild not be adopted at the rate of 22.5 per cent i.e., similar to that of the block assessment. In reply, the assessee submitted that the learned Commissioner (Appeals) has allowed the claim of the assessee. However, the assessing officer held that the assessee was selling almost its entire production Sutures and Copper T components to M/s. SMB Corporation a Proprietary concern of one of the Directors of the assessee, it was further noticed that the net profit shown in the case of assessee for the assessment year 1998-99 was approximately 70 per cent and the net profit in the case of M/s. SMB Corporation, for the same period, was as below as 1 per cent. In the assessment years 1996-97 to 1998-99 the assessee has shown net profit abnormally high i.e., 56.95 to 75.5 per cent whereas M/s. SMB Corporation has shown the net profit at the range of 0.36 per cent to 0.67 per cent. It was noticed that the fair market value of the same product manufactured by some other companies, was much lower than the price charged by the assessee from M/s. SMB Corporation. Therefore, the assessing officer held the reason for such disparity in the high profit disclosed by the assessee, would be that the assessee enjoyed deduction under section 80-IA whereas M/s. SMB Corporation was not entitled to claim such deduction. Hence the assessing officer came to the conclusion that the profit of M/s. SMB Corporation was shifted to the hands of the assessee.
11. While examining one of the Directors of the assessee, Shri Girish R. Shah, who was asked specific and direct questions. His statements were recorded under section 132(4). Shri Shah, in his statement, stated that he was not aware of such facts and, according to the assessing officer, he tried to evade the facts relating to higher profit of the assessee. The assessing officer noted that it was not properly explained as to how the profit declared by the assessee, was fair, reasonable and in accordance with accounts maintained by the assessee. The assessee was given opportunity to substantiate the claim under section 80-IA. It mainly contended that the conditions under which the components were manufactured, are only in assessee's favour and its Directors have vast experience in such manufacturing activities and that M/s. SMB Corporation purchased the same components from other unapproved supplier at much higher prices than charged by the assessee. The assessing officer held this explanation as unsatisfactory, irrelevant and unsubstantial to reflect the correct position. The assessing officer also held the submissions of the assessee that only the assessee was having 'Clean Air System', as not convincing because creation of such facility is not exclusively within the competence of the assessee only. This product is manufactured in the hygienic; suitable temperature and atmospheric conditions which were not practicable for any other manufacturer.
12. Coming to the claim of the assessee that M/s. SMB Corporation purchased the same components earlier from unapproved supplier at a higher price than the price now charged by the assessee, the assessing officer held as not acceptable because the assessee failed to furnish any evidence in this regard - either at the time of block assessment proceedings or assessment completed under section 143(3). The assessing officer held, even for the sake of arguments, if it is assumed, but not accepted, that the components purchased by M/s. SMB Corporation from unapproved suppliers, were at much higher price than the price charged by the assessee, one has to take into consideration various other factors like quality, quantity and other relevant cost of production to compare the price charged by some other suppliers with the assessee. The assessing officer also held that while deciding the issue, it needs to be considered whether other suppliers were also eligible for claiming deduction under section 80-IA like the assessee. The assessing officer found discrepancies in the documents, seized under search action, which revealed that there were differences in the figures of sale shown in the Excise and the Income Tax Returns. For the assessment year 1997-98, sales shown in the Income Tax Returns were higher by Rs. 59,83,000. The assessee was offered an opportunity to explain the same. The assessee explained that there were some errors in the pre-audited accounts on which basis the returns were filed and, in fact, the assessee was not liable for such Excise Returns. It was further submitted that the sales, shown in the Income Tax returns, were after audit and, in any case, the assessee had shown over all more sales in the Income Tax Returns than the Excise Returns. Some of the products, sold by the assessee, were not accepted and returned because of the quality problems for which no final bills were made. These facts were not considered at all in the Excise Returns. Thus it was submitted by the assessee that the Excise Returns were not correct and valid. The Income Tax Returns were on the basis of the audited figures showing higher sales. It was further submitted that the sales shown to M/s. SMB Corporation, were also confirmed from their accounts. The assessing officer held this explanation neither convincing nor correct for the following reasons :
(a) Firstly, sale is not an item of account which would significantly vary in the unaudited and audited account and that too in the year under consideration;
(b) Merely because the product is not liable to Excise Duty, it does not mean that the figures of sale, at variance with the books of account, should not be taken note of;
(c) The fact that the Income Tax Returns showed more sales, in the assessment years 1997-98 and 1998-99, were inflated just to show higher profit, on which less tax was to be paid in view of the provisions of section 80-IA. Inflating the figures of the assessee for purchases by M/s. SMB Corporation, goes to reduce the profit of the connected assessees whose profits are liable to be highly taxed;
(d) Regarding the discrepancy in the figures returned to the Excise and the Income Tax departments, for which no adjustments were made by the assessee in the books of account, the assessing officer held that the same was not supported by any evidence;
(e) Regarding the sales recorded in the books of account of M/s. SMB Corporation, the assessing officer held that these have to be shown because most of the entities are controlled by the same persons and accounts are made to reduce the profit of one of the concerns where there is higher incidence of tax.
The assessing officer held that the claim of the assessee was not correct observing as under :
"The percentage of profit attributable to the assessee's industrial undertaking eligible for deduction under section 80-IA is adopted @ 22.5% by the assessing officer in the block assessment considering the sale of assess ee-company and that of the Proprietary concern Mr. Ratilal Shah, M/s. SMB Corporation. The same is reproduced below:
A.Y. M/s. Novel Cons. P.P. Ltd. (NCPL) M/s SMB Corp.
Total Profit (Income) Sales Profit (Income) Sales Profit (income) NCPL+SMB Excluding Interest Income 1996-97 11,407,200 6,495,887 32,440,352 217,487 6,713,374 1997-98 19,930,812 13,254,485 34,057,527 171,793 13,426,278 1998-99 30,421,972 22,830,590 54,111,466 108,459 22,938,987 1999-2000 8,004,401 2,911,620 31,629,280 123,459 3,035,079 Total 152,238,625 46,113,718 The percentage of profit works out to about 3096, however as it include the profit of SMB Corpn. for assessment year 1996-97 whereas the assessee company began functioning with effect from September and also taking into account the turnover of SMB Corpn. include other purchases /sales, the percentage of profit on an average profit rate of 22.5% was considered fair and reasonable and the same was adopted on the basis of the provision of section 80-IA(10) of the Income Tax Act.
As can be seen from the above table, the sales of the assessee for the relevant year was Rs. 1,99,30,812 and that of SMB Corporation was Rs. 3,40,57,527 on which the assessee had earned profit of Rs. 1,32,54,485 and SMB Corporation earned a meagre profit of Rs. 1,71,793. The comparative figures of sales and the resultant profits of the assessee and that of SMB Corporation are not worthy of comparing. It is also to be placed on record that M/s. SMB Corporation is not an eligible unit for benefit under section 80-IA whereas the assessee is. Thus, it is evident from the figures of sales and the profits earned thereon that the profits are booked only in the eligible unit of the assessee and only a negligible profit is shown in the non 80-IA benefit unit i.e., SMB Corporation. Therefore, there is no doubt that owing to the close connection between the assessee carrying on the eligible business to which section 80-IA applies and the SMB Corporation, the course of business between the assessee and M/s. SMB Corporation is so arranged that the business transacted between them produces the assessee more than the ordinary prof it which might be expected to arise in such eligible business."
13. Aggrieved by this order, the assessee approached the learned Commissioner (Appeals). The Learned Commissioner (Appeals), vide para 4 of his order, records the past history and the present dispute of the assessee. The reasoning for invoking the provisions of section 80-IA (10) is that the Share Holders of Novel Consumers Products P. Ltd. are the Director of M/s. SMB Corporation, and his son and the manufacture of Copper T components is carried out through the assessee, having factory at Daman, an industrially backward area and under the provisions of section 80-IA, double fiscal incentive is available to the assessee which manufactures or produces goods, article or thing. First five year is tax holiday, followed by 30% deduction of profit in the next five years, The assessee was selling its entire production of surgical sutures and Copper T components to M/s. SMB Corporation.
14. On the basis of the evidence that came into possession of the revenue, as a result of search, the assessing officer noticed that there were discrepancies in the sale figures of unaudited and audited books of account of the assessee. Sales figures in the Income Tax Returns, were higher by Rs. 59.83 lakhs as compared to the Excise Returns filed which was explained to be unaudited accounts, was not relevant. The assessing officer noticed that the net profit, shown by the assessee, was abnormally high i.e., more than 50% whereas the net profit shown by M/s. SMB Corporation, was much lower. The assessing officer took note of the fact that both the units were controlled by the above two persons. He also noticed that even prior to production started by the assessee, M/s. SMB Corporation had shown a profit margin of 3.41 %, which was also accepted by the revenue while completing assessment under section 143(3) for the assessment year 1994-95. He held that this may not be much material affecting invocation of the provisions of section 80-IA. He also held that what is material, is from the assessment year 1995-96 onwards when the assessee started supplying components to M/s. SMB Corporation. The assessing officer further noticed that the assessee was making higher profit and M/s. SMB Corporation nominal profit. He noted that the assessee was showing profit in the range of 56 to 75% whereas M/s. SMB Corporation was showing 0.36 to 0.1%. This was an indirect arrangement so that the transactions, between the parties, may give more profit to the assessee than ordinary profit. In the earlier year the learned Commissioner (Appeals) held that there was no supporting document to come to such a conclusion. The Learned Commissioner (Appeals) further noted that Inter Plast sold the component at Rs. 11.10 per set to M/s. SMB Corporation whereas the price charged by the assessee, from M/s. SMB Corporation, was Rs. 11 per set. He further noted that the assessing officer has not made any attempt to obtain comparable sales or purchases of Copper Flanges from any other source. It was the case of the assessee that Copper T is considered as drug. Its sales and manufacture are considered as drug goods. There is strict supervision on the part of the Government so that such units maintain all hygienic conditions. Since the only other supplier was M/s. Hindustan Latex (Public Sector Undertaking), according to him, the assessee has monopoly in the market. Except the transactions between Inter Plast it was not dealing with any other third party. Hence the Learned Commissioner (Appeals) asked the assessee to submit the working of the profit objectively in the year in which full tax holiday was available to compare it with other years. Comparative figures of net profit varied from 35 to 39% or a little more. The Learned Commissioner (Appeals) held that the dealing with Inter Plast was not relevant because the stringent quality norms were not fulfilled. The party was supposed to continue this. Therefore, he held that section 80-IA(10) was rightly applied by the assessing officer. He further held that even on assuming that M/s. SMB Corporation was marketing the aforesaid equipment, its margin of profit was kept completely on the lower side merely because the appellant was enjoying tax holiday. In his view, the arrangements between the two i.e., Novel and M/s. SMB Corporation, were for no commercial purpose except to avoid tax. No doubt, considering the entire facts, the profit for the Manufacturing Unit at Daman, at 35%, would be fair and reasonable in the assessee's case for application of the provisions of section 80-IA(10). He further held that such an approach would also not suffer from any infirmity, which has been noted by the learned Commissioner (Appeals) in the earlier years. Being factually convincing in the assessee's own case, he held that it would afford the most reliable basis for suitably modifying its transactions for the purpose of section 80-IA(10) which reflected the true and fair picture of the profit. Therefore, the learned Commissioner (Appeals) directed the assessing officer to compute the net profit at 35% instead of 22.5% applied by him.
15. As stated above, the assessee is in appeal before us against invoking section 80-IA(10) whereas the revenue is in appeal for enhancing the profit rate to 35% by the Learned Commissioner (Appeals) against 22.5%, adopted by the assessing officer.
16. The learned Counsel for the assessee submitted that the learned Commissioner (Appeals) has compared the later year's profit ratio of the assessee but not compared with any other rate. He further submitted that for the assessment year 2000-01 the assessing officer has accepted the figures of the assessee. Objecting to the invocation of section 80-IA(10), he submitted that the reason given by the assessing officer is devoid of merit. First of all, the only available evidence i.e., Bills with the third party, is in assessee's favour.
17. The case of the revenue is that the assessee has inflated the price, sales and the quantity of its products, to show that the assessee's sales have boosted so as to claim double benefits. The learned Counsel for the assessee submitted that the facts on record show otherwise. M/s. SMB Corporation purchased components from Inter Plast @ Rs. 11. 10 per set whereas the assessee sold it at Rs. 11 per set. He submitted that the Copper 'T' is treated as drug. Its manufacture and sale are strictly controlled by Drugs & Cosmetics Rules. Therefore, the prices of these are fully controlled by the Government. He submitted, even according to the assessing officer, as noted by the Learned Commissioner (Appeals), prior to production of the components by the assessee, other parties margin of profit was as low as 3.41%. He further stated that the revenue Authorities failed to bring any comparative case to show that the assessee had committed anything unhealthy. He submitted that the price of the products sold by the other supplier, Hindustan Latex, Public Sector Undertaking, and its products at what price, was never verified. Merely stating by the revenue that the assessee has manipulated the sale figures, is not a fact. Hindustan Latex is a competitor.
18. Coming to the objection of the assessing officer that the assessee's Director was asked specific and direct questions as well as his statements were recorded, the learned Counsel for the assessee submitted that there was not a single question and he was not examined for invocation of the provisions of section 80-IA(10). The learned Counsel for the assessee submitted that Inter Plast is completely outsider. The revenue could have checked up the fact with some other parties also but they have failed to do so and invocation of section 80-IA(10) was made without any basis. He further submitted that there was no production outside the books and the revenue Authorities accepted the sales.
19. In the premises of the above facts, the learned Counsel for the Assessee, relied on the decision of the Tribunal, 'D' Bench, Mumbai, in the case of Income Tax Officer v. PCA Engineers Ltd. (1984) 8 ITD 518 (Mum) and submitted that the addition made by the assessing officer, resorting to section 80-IA, is to be deleted as section 80-IA cannot be invoked against the assessee.
20. Replying to the above, the learned Departmental Representative submitted that there were two suppliers. The assessee has not given any cause why all the sales were made to only one party. The other party who sold the same products, like the assessee exclusively, was a Public Sector Undertaking, Hindustan Latex. It shows the mindset of the parties concerned. Under the said circumstances, it can be presumed reasonably and held that there is monopoly of the assessee.
21. Regarding the difference in the purchase and sale figures, as shown in the Excise and Income Tax Returns, the learned Counsel for the assessee submitted that the assessee had no opportunity to manipulate the books. He submitted that the assessee has shown higher profit only to avail the tax benefit is not correct. Relying upon the decision of the Rajasthan High Court in the case of CIT v. Mayur Laminators (1995) 211 ITR 646 (Raj), the learned Departmental Representative submitted that it is the burden on the assessee to prove that it had fulfilled the conditions for claiming the tax benefit and not for the revenue to prove negative viz., the assessee was showing profit at the rate of 50 per cent for claiming the benefit under section 80-IA. The result shown was about 70 per cent which also shows the untrue nature of the declaration of the profit by the assessee.
22. The learned Departmental Representative, relying upon the decision of the Gujarat High Court in the case of Anil Starch Products Ltd. v. CIT (1966) 59 ITR 514 (Guj) which was dealing with section 15(c) of the Indian Income-tax Act, 1922, similar to section 80-IA of Income Tax Act, 1961, contended that while computing the profit for the purpose of exemption, the material supplied or sold by an Industrial Undertaking, should be valued at the market price and not at cost of production. This was the case where the assessee, a Pharmaceutical Co., manufactured and sold industrial starch but subsequently set up another plant for producing Dextrose for which starch is the raw material, held, "Starch" supplied by all the Industrial Undertakings, should be valued at the market price and not at its cost price of production".
23. Further relying on the decision of the Kerala High Court in the case of Padiniarekara Agencies (P) Ltd. v. CIT (1988) 173 ITR 637 (Ker) the learned Departmental Representative submitted that sales should be bona fide and intermediaries should not be dummies. It should not be stated for the purpose of sale or purchase and for the beneficial interest of the parties concerned etc. Hence, the learned Departmental Representative submitted that the order of the Learned Commissioner (Appeals), on the punt, is to be set aside.
24. We have heard the rival submissions, gone through the orders of the revenue authorities and the decisions cited. in the case of PCA Engineers Ltd. (supra) the Bombay Bench of the Tribunal held that denial of exemption under section 80HH was not justified because the business transactions for more than ordinary profit is liable to arise in case of Industrial Undertaking. In the instant case, it is the contention of the learned Counsel for the assessee that the revenue has not tried to bring any comparative case and for that matter, even a Public Undertaking (i.e., Central Government Undertaking, Hindustan Latex) has not been even considered. This is the reason for which it is held that the assessee had exclusive market control. The learned Counsel for the assessee has produced before us copies of the Bill of Inter Plast from 31-8-1994 to 31-7-1995 (which were before the revenue Authorities) to show that the purchase price of M/s. SMB Corporation of India from third party, was more than the assessee. The total purchase is about more than Rs. 3.15 lakhs itself. Therefore, one of the reasons for rejecting the contention of the assessee that purchases and quantity were not made available, is incorrect. This was made only for one year and for the subsequent year the purchases were not made because there was lack of hygienic conditions. At the same time, the price of the assessee is less than Rs. 11.10 per set. The revenue has not taken any step to ascertain what was the price by making enquiry from Hindustan Latex. As rightly noted by the learned Commissioner (Appeals) while dealing with the assessee's case of search for the block assessment, a copy of the order is placed before us at pages 22 to 52 in the paper book, reflects that the revenue has not done any worthwhile attempt to make enquiry to reject the assessee's explanation. The reasonings, given by the revenue authorities, are that while the assessee showed an extraordinary profit, other parties showed much less profit. Another reason given by the revenue authorities is that in the Income Tax Returns the assessee has shown more sales than the Excise Returns. In this regard, the explanation of the assessee is that some of the stocks sold were subsequently returned and corresponding changes were not made in the books. Though this explanation is not fully convincing, yet it is plausible. Considering the fact that the assessee had sold at a lesser price, as compared to other parties, and that the purchases made by other parties, from another supplier, were quite substantial and also considering that no attempt has been made as to ascertain the exact profit rate or the sale price from similar parties, i.e., Hindustan Latex, we are of the view that the conclusion arrived at by the assessing officer, is not justified. The decision of the Tribunal, in the case of PCA Engineers Ltd. (supra), supports this view. In this case, the Tribunal was considering in detail section 80HH and also similar clause 80HH(7) which is identical to clause 80-IA(10). In the light of the above facts, the appeal of the assessee on this ground stands allowed.
25. to 33. These paras are not reproduced here. As they involve minor issues.
34. In the result, the appeal of the revenue is dismissed and appeal of the assessee is allowed.