2011 (12) TMI 555 - AT - Income Tax

Summary

Issues Involved:
The judgment involves issues related to assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2003-04. The key issues include the correctness of the CIT(A)'s order, invoking provisions of section 145(3) of the IT Act, diversion of profits to a related party, deduction under section 80 HHC on labor charges, deduction under section 80 HHC on DEPB, and treatment of sales tax subsidy as a capital receipt.

Issue 1: Addition of Suppressed Sales

The Assessing Officer questioned the correctness of the CIT(A)'s order deleting the addition of Rs. 1,96,85,581, based on the difference in sale prices of marbles. The AO rejected the book results due to lack of evidence on varying invoice rates. The CIT(A) relied on previous Tribunal decisions and the High Court's affirmation, leading to the deletion of the disallowance. The Tribunal upheld the CIT(A)'s decision, citing lack of contrary evidence from the revenue department.

Issue 2: Diversion of Profits to Related Party

The AO added Rs. 12,65,917 as suppressed sales, alleging diversion of profits to a related party u/s.40A(2)(b) of the IT Act. The Tribunal found the sale and purchase transactions duly recorded in the books of account, supporting the director's earnings. The Tribunal upheld the CIT(A)'s decision, noting the absence of contradictory higher forum decisions presented by the revenue department.

Issue 3: Deduction under Section 80 HHC on Labor Charges

The AO contested the CIT(A)'s direction to allow deduction under section 80 HHC on labor charges, arguing lack of nexus with the export business. The Tribunal referred to the judgment in CIT vs. Bangalore Clothing Co., supporting the allowance of the deduction. The Tribunal dismissed the AO's grievance, aligning with the CIT(A)'s decision based on the High Court's ruling.

Issue 4: Deduction under Section 80 HHC on DEPB

The AO challenged the allowance of deduction under section 80 HHC on DEPB, citing the decision in the case of M/s. Kalpataru Colours and Chemicals Ltd. The Tribunal agreed with the AO, following the High Court's ruling that DEPB sale proceeds cannot be bifurcated and must be considered as profits for section 80 HHC.

Issue 5: Treatment of Sales Tax Subsidy

The AO disputed the deletion of Rs. 6,79,18,854 relating to sales tax subsidy, claiming it as a capital receipt exempt from tax. The Tribunal referred to the decision in DCIT vs. Reliance Industries, where it was held that such incentives are capital receipts. The Tribunal upheld the CIT(A)'s order, as no contradictory decision was presented by the department.

In conclusion, the appeal was partly allowed, with various issues being dismissed or allowed based on the Tribunal's analysis and alignment with relevant legal precedents.