2007 (3) TMI 414 - AT - Income Tax

Denial of deduction u/s 80-IB - No income derived - cold storage plant only for the purpose of storing its own goods - Percentage of profit derived from the cold storage activity - stages of processing involved and the involvement of cold storage facilities - Disallowance of purchases on Non-filing of a transaction confirmation - disallowance of the amount paid in excess u/s 40A(2)(b) - HELD THAT - We see no force in the stand of the revenue that the assessee is eligible for deduction u/s 80-IB only when he receives the money for use of cold storage by an outsider and not when he uses the cold storage himself. The scheme of the section 80-IB is that the deduction is available in respect of profits and gains derived from the business of operating a cold storage plant, and not the business of offering cold storage services to outsiders. As long as profit can be reasonably held to be from the business of operating cold storage plant, it is eligible for deduction u/s 80-IB - irrespective of whether or not the services are used by the assessee himself or by outsiders on payment of consideration. Ideally, it should be the amount that the assessee would have paid to an outside concern if he was to use these facilities from such a concern. However, since such an amount cannot be computed at this stage, and, having regard to the flow chart filed by the assessee which demonstrates various stages of processing and use of cold storage facilities in such processing, we consider it appropriate to hold that 30% of the profits of the assessee can be treated as derived from the business of operating the cold storage plant. We, accordingly, direct the Assessing Officer to compute deduction to the assessee in respect of 30% of the profits earned by the assessee from the business of processing frozen sea food. Ground No. 1 of the assessee is thus partly allowed in the terms indicated above. Our findings in the present case are based on the material produced before us as regards the various stages of processing involved and the involvement of cold storage facilities therein. This cannot, therefore, be taken as an authority for the proposition that the same ratio of profits can be said to be derived from operation of cold storage plant in all cases. Disallowance of purchases - Non-filing of a transaction confirmation enough for making or sustaining disallowance ? - HELD THAT - It is really difficult to reconcile between CIT(A) s agreeing with the assessee about the fact that the vendors are generally small fisherman of limited means, who are highly mobile depending on the availability of work, and yet, at the same time, his holding that the disallowance is to be confirmed because the assessee could not produce the confirmation from the vendor. Non-filing of a transaction confirmation, by itself, cannot be reason enough for making or sustaining disallowance. All the things are to be considered in totality. The observations made by the CIT(A), in our considered view, are quite justified and reasonable. We approve his stand to that extent. However, despite all these well-reasoned findings, which meet out approval, the CIT(A) has sustained the disallowance on account of purchases made by the assessee from GMP. Thus, CIT(A) indeed erred in sustaining this disallowance. We, therefore, direct the Assessing Officer to delete this disallowance. The assessee gets the relief accordingly. Ground No. 2 of the appeal filed by the assessee is, thus, allowed - In the result, the appeal filed by the assessee is partly allowed in the terms indicated above. Disallowable u/s 40A(2)(b) - Purchases made in excess of the prevailing market rates from its sister concerns - HELD THAT - It is also important to bear in mind that prices at which one concern has supplied will only be relevant for comparison of supplies by other persons only if supplies were made on the same day and the supplies are of the same grade. There is no mention that the grades of fish supplied by all the vendors, including the sister concerns, is the same. That is not possible also. We have also taken note of the fact that as per details filed by the assessee, which have been reproduced in the order of the CIT(A), there have been several instances in which the supplies by the sister concerns are at lower prices. Therefore, the kind of oversimplification that has been resorted to is indeed unsustainable in law and on facts. In this view of the matter, and for the reasons set out by the CIT(A) with which we are in considered agreement, we hold that the Assessing Officer was indeed unjustified in making the impugned disallowance. The CIT(A) rightly deleted the disallowance. We confirm and approve the action of the CIT(A) and decline to interfere in the matter. Ground No. 2 of the appeal filed by the Assessing Officer is also, therefore, dismissed.

Summary

Issues Involved:
1. Deduction under Section 80-IB of the Income-tax Act, 1961.
2. Disallowance of purchases made from M/s. God Gift Marine Products.
3. Treatment of interest income as business income.
4. Addition of Rs. 97,80,154 for purchases made in excess of prevailing market rates from sister concerns.
5. Treatment of sale of DEPB as export incentive.
6. Addition of Rs. 93,57,250 on account of bogus purchases.
7. Payment of Rs. 5,42,600 towards processing charges to Mr. Vinod Kumar.

Issue-wise Detailed Analysis:

1. Deduction under Section 80-IB:
The assessee's claim for deduction under Section 80-IB was denied by the Assessing Officer (AO) on the grounds that processing of sea food does not qualify as manufacturing and that the income derived from operating a cold storage plant was not substantiated. The CIT(A) upheld this view, referencing the Supreme Court's decision in CIT v. Relish Foods. However, the tribunal partially allowed the assessee's appeal, recognizing that a significant portion of the profits could be attributed to the operation of the cold storage plant. The tribunal directed the AO to compute the deduction based on 30% of the profits from the business of processing frozen sea food.

2. Disallowance of Purchases from M/s. God Gift Marine Products:
The AO disallowed purchases from GMP due to non-compliance with summons and immediate withdrawal of deposited cheques. The CIT(A) accepted the assessee's reconciliation statements but upheld the disallowance due to lack of transaction confirmation. The tribunal found the CIT(A)'s reasoning inconsistent and directed the AO to delete the disallowance of Rs. 15,92,585, recognizing the practical difficulties in obtaining confirmations from small, unorganized vendors.

3. Treatment of Interest Income as Business Income:
The AO categorized interest income from bank deposits as "Income from other sources," arguing it was derived from idle funds. The CIT(A) reversed this, accepting that deposits were made for business expediency. The tribunal upheld the CIT(A)'s decision, noting the nexus between the deposits and business operations, and confirming the interest income as business income.

4. Addition of Rs. 97,80,154 for Purchases from Sister Concerns:
The AO disallowed the excess amount paid over market rates for purchases from sister concerns. The CIT(A) deleted the disallowance, acknowledging the variability in fish prices and the lack of evidence for a uniform benchmark rate. The tribunal agreed, emphasizing the impracticality of using a single rate for the entire year and confirming the CIT(A)'s decision.

5. Treatment of Sale of DEPB as Export Incentive:
The AO contested the treatment of DEPB sales as an export incentive. The tribunal noted that this issue was resolved in favor of the assessee by a retrospective amendment in law, thus upholding the CIT(A)'s decision.

6. Addition of Rs. 93,57,250 on Account of Bogus Purchases:
The AO challenged the admission of additional evidence by the CIT(A). The tribunal found that the CIT(A) had appropriately confronted the AO with the additional evidence and justified its admission. On merits, the tribunal upheld the deletion of the addition, agreeing with the CIT(A)'s findings.

7. Payment of Rs. 5,42,600 towards Processing Charges to Mr. Vinod Kumar:
The AO disputed the genuineness of the payment due to lack of confirmation. The CIT(A) noted the death of Vinod Kumar and his relocation as reasons for non-compliance. The tribunal found no admission of additional evidence in this case and upheld the CIT(A)'s deletion of the addition, confirming the genuineness of the transaction.

Conclusion:
The assessee's appeal was partly allowed, providing relief on the deduction under Section 80-IB and disallowance of purchases from GMP. The AO's appeal was dismissed, upholding the CIT(A)'s decisions on interest income, purchases from sister concerns, DEPB sales, and processing charges. The cross objection filed by the assessee was dismissed as infructuous.