2010 (4) TMI 1056 - AT - Income Tax

Summary

Issues Involved:
1. Deduction u/s 80-IA for manufacturing activity.
2. Disallowance u/s 37 of the Act.
3. Addition on account of Gross Profit (GP).
4. Disallowance u/s 40A(2)(b) of the Act.

Summary:

1. Deduction u/s 80-IA for Manufacturing Activity:
The first issue in ITA No.782/Ahd/2006 concerns the CIT(A)'s decision to allow the deduction u/s 80-IA on the grounds that the assessee is a manufacturer of bidi, which qualifies as a manufacturing activity. The Revenue's appeal was dismissed as the issue was already decided in favor of the assessee by the Hon'ble jurisdictional High Court in CIT v. Prabhudas Kishordas Tobacco Products P. Ltd. (2006) 282 ITR 568 (Guj). The High Court held that tendu leaves and tobacco lose their independent identity after being processed into bidis, which are commercially distinct commodities. The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal.

2. Disallowance u/s 37 of the Act:
The next common issue in ITA No.782/Ahd/2006 and ITA No.2064/Ahd/2006 pertains to the CIT(A)'s restriction of disallowance claimed u/s 37 to Rs. 25,000/- and Rs. 65,000/- respectively. The Tribunal, following its earlier decision in the assessee's own case for the assessment year 2001-02, upheld the CIT(A)'s order allowing 1/3 of the expenses claimed by the assessee. The Revenue's appeal on this issue was dismissed.

3. Addition on Account of Gross Profit (GP):
In ITA No.782/Ahd/2006, the Revenue challenged the CIT(A)'s deletion of an addition of Rs. 1,14,00,920/- on account of GP. The AO had estimated the GP rate based on the previous year without rejecting the book results or pointing out defects. The Tribunal upheld the CIT(A)'s order, noting that the AO cannot estimate the GP rate without rejecting the book results and without pointing out defects. The Revenue's appeal on this issue was dismissed.

4. Disallowance u/s 40A(2)(b) of the Act:
The final common issue in ITA No.782/Ahd/2006 and ITA No.2064/Ahd/2006 involves the CIT(A)'s deletion of disallowance made by the AO u/s 40A(2)(b) for excess interest paid to related parties. The AO had disallowed the excess interest paid at 22% compared to the bank rate of 19.05%. The CIT(A) allowed the claim, noting that the loans were for business purposes, the interest rate was consistent with previous years, and the related parties were paying tax at the maximum marginal rate. The Tribunal upheld the CIT(A)'s order, finding the interest rate reasonable and the AO's comparison with secured bank loans incorrect. The Revenue's appeal on this issue was dismissed.

Conclusion:
In conclusion, the Tribunal dismissed both appeals of the Revenue, upholding the CIT(A)'s orders on all issues. The judgment was pronounced on 30th April 2010.