2010 (1) TMI 1174 - AT - Income Tax

Issues Involved:
1. Deduction under Section 10B of the Income Tax Act.
2. Addition on account of lower Gross Profit (G.P.).

Issue-wise Detailed Analysis:

1. Deduction under Section 10B of the Income Tax Act:

Facts: The assessee, engaged in the manufacture of 2.2-Dithio-di benzoic acid, claimed a deduction under Section 10B of the Income Tax Act for its export-oriented unit. The Assessing Officer (AO) denied this deduction, arguing that the assessee was not a new industrial undertaking and had previously claimed deductions under Section 80HHC. The AO contended that Section 10B benefits were only available to new undertakings and that the assessee's unit was a conversion of an existing unit, thus not qualifying for the deduction.

Assessee's Arguments: The assessee argued that all machinery and equipment were newly purchased and installed for manufacturing purposes. They further contended that the unit was approved by the government as a new export-oriented unit (EOU) and had not used any previously used machinery or plant. The assessee also highlighted that the letter of permission issued by the Ministry of Commerce & Industry was sufficient compliance for claiming the deduction under Section 10B.

Findings of CIT(A): The CIT(A) allowed the claim, stating that the unit was formed as a new unit in 1991 with new machinery and had not been formed by splitting up or reconstruction of an existing business. The CIT(A) further observed that the intention of the legislature was to provide benefits to EOUs similar to those in Free Trade Zones, and existing units availing benefits under Section 80HHC could also avail of Section 10B benefits if they obtained an EOU certificate. The CIT(A) concluded that the assessee's unit, being a new unit at the time of formation and obtaining EOU status later, was eligible for the deduction under Section 10B for the unexpired period of ten years from the date it started manufacturing.

Tribunal's Decision: The Tribunal upheld the CIT(A)'s findings, agreeing that the unit was new at the time of formation and had used only new machinery. The Tribunal noted that the legislative intention was to extend benefits to EOUs, and the assessee's unit, having obtained an EOU certificate, was entitled to the deduction under Section 10B for the unexpired period of ten years. The Tribunal dismissed the Revenue's appeal on this ground.

2. Addition on account of lower Gross Profit (G.P.):

Facts: The AO noticed a significant decline in the assessee's net profit percentage compared to previous years and questioned the valuation of closing stock and discrepancies in export sales. The AO suspected price rigging and siphoning off profits, leading to an addition based on an estimated net profit rate of 9% on sales.

Assessee's Arguments: The assessee explained that the financial year in question was a bad year for profitability due to factors such as exchange rate fluctuations, higher costs, and lower sales prices. The assessee provided detailed explanations and evidence, including a comparative chart and industry data, to support their claims.

Findings of CIT(A): The CIT(A) found that the AO did not provide specific findings on the discrepancies in closing stock and sales and accepted the assessee's explanations. The CIT(A) noted that the decline in profits was due to genuine factors such as exchange rate fluctuations, increased costs, and lower sales prices. The CIT(A) also observed that the AO did not point out any specific defects in the books of accounts and had based the addition on mere suspicion and estimation without concrete evidence. The CIT(A) deleted the addition, stating that the AO had not justified the rejection of the book results or the estimation of profits.

Tribunal's Decision: The Tribunal upheld the CIT(A)'s findings, agreeing that the AO had not provided sufficient evidence to justify the addition. The Tribunal noted that low profit in a particular year, by itself, does not justify an addition without supporting material. The Tribunal emphasized that the AO must provide specific reasons and evidence for rejecting the book results and making an estimated addition. The Tribunal dismissed the Revenue's appeal on this ground.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to allow the deduction under Section 10B and to delete the addition on account of lower gross profit. The Tribunal emphasized the importance of concrete evidence and specific findings in making additions and rejecting book results.

Order pronounced on this day of 29th January, 2010.

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