2005 (7) TMI 572 - AT - Income Tax

Summary

Issues Involved:
1. Re-opening of assessment.
2. Exclusion of interest income for the purpose of deduction under section 80-IA.
3. Invocation of provisions of section 80-IA(10) regarding profit calculation.
4. Discrepancies in sales figures between IT and Excise Returns.
5. Comparison of profit margins between the assessee and M/s. SMB Corporation.

Issue-wise Detailed Analysis:

1. Re-opening of assessment:
The assessee did not press Ground No. 1, which challenged the re-opening of the assessment by the Assessing Officer (AO). Consequently, this ground was dismissed as not pressed.

2. Exclusion of interest income for the purpose of deduction under section 80-IA:
Similarly, Ground No. 3, which dealt with the exclusion of interest income from the profits of the undertaking for the purpose of deduction under section 80-IA, was also not pressed by the assessee and was dismissed.

3. Invocation of provisions of section 80-IA(10) regarding profit calculation:
The primary issue was the AO's invocation of section 80-IA(10) to adjust the profits of the assessee. The AO observed that the assessee was selling its entire production to M/s. SMB Corporation, a proprietary concern of one of its directors, at higher prices, leading to abnormally high profits for the assessee and negligible profits for M/s. SMB Corporation. The AO concluded that this arrangement was made to shift profits to the assessee, which enjoyed tax benefits under section 80-IA.

The AO adopted a profit rate of 22.5% based on the block assessment, whereas the CIT(A) directed the AO to compute the net profit at 35%, considering it fair and reasonable. The CIT(A) noted that the assessee's dealings with M/s. SMB Corporation were arranged to produce more than ordinary profits due to the tax benefits under section 80-IA. The Tribunal, however, found that the Revenue failed to bring any comparative cases or verify prices from other suppliers like Hindustan Latex. The Tribunal concluded that the AO's decision was not justified and allowed the assessee's appeal on this ground.

4. Discrepancies in sales figures between IT and Excise Returns:
The AO found discrepancies in the sales figures reported in the IT and Excise Returns, with the IT Returns showing higher sales. The assessee explained that the discrepancies were due to errors in the pre-audited accounts and that the sales shown in the IT Returns were after audit. The AO rejected this explanation, citing lack of evidence and adjustments in the books of account. The Tribunal noted that while the explanation was not fully convincing, it was plausible, and the Revenue did not make any worthwhile attempt to reject the assessee's explanation.

5. Comparison of profit margins between the assessee and M/s. SMB Corporation:
The AO observed that the assessee showed abnormally high profits (56% to 75%) compared to M/s. SMB Corporation (0.36% to 0.67%). The CIT(A) noted that the profit margins of the assessee were higher due to the tax benefits under section 80-IA and that the transactions between the assessee and M/s. SMB Corporation were arranged to avoid tax. The Tribunal found that the Revenue did not provide any comparative cases or verify prices from other suppliers. The Tribunal concluded that the AO's decision to invoke section 80-IA(10) was not justified and allowed the assessee's appeal.

Conclusion:
The Tribunal allowed the appeal of the assessee regarding the invocation of section 80-IA(10) and dismissed the appeal of the Revenue. The Tribunal found that the Revenue failed to provide sufficient evidence to justify the invocation of section 80-IA(10) and did not make any worthwhile attempts to verify the assessee's explanations or compare prices with other suppliers.