2012 (12) TMI 1086 - AT - Income Tax

Deduction under section 80IC - Held that - CIT(A) was right in allowing deduction under section 80IC of the Act @ 100% of the profits and gains from manufacturing, including sale of Raddi .

Issues Involved:
1. Disallowance of deduction under section 80IC of the Income Tax Act, 1961.
2. Allegation of inflated sales prices and low production costs.
3. Sufficient infrastructure and manpower for manufacturing.
4. Evidence of movement of goods.
5. Comparison of profit rates with sister concerns.
6. Application of section 80IA(10).

Detailed Analysis:

1. Disallowance of Deduction Under Section 80IC:
The primary issue raised by the Revenue was the disallowance of the deduction under section 80IC of the Income Tax Act, 1961. The Revenue argued that the assessee did not have sufficient infrastructure and manpower to manufacture the entire products on its own and was getting it done as job work. The CIT(A) had allowed the deduction, which was contested by the Revenue. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had substantial investment in fixed assets and had provided evidence of manufacturing activities, including audited books of accounts and barrier receipts for the movement of goods.

2. Allegation of Inflated Sales Prices and Low Production Costs:
The AO alleged that the assessee was inflating its sales prices charged from its sister concerns and had low production costs, indicating low production. The AO compared the rates charged for printing books for outside parties and sister concerns, concluding that the assessee was diverting profits to itself. The Tribunal found that the AO's comparisons were flawed as they did not consider the differences in the nature, quality, and quantity of the books printed. The CIT(A) had rightly observed that the AO did not confront the assessee with the material used for comparison, violating the principles of natural justice.

3. Sufficient Infrastructure and Manpower for Manufacturing:
The AO contended that the assessee did not have sufficient infrastructure and manpower to manufacture the entire products on its own. The Tribunal noted that during a survey, it was found that the assessee had employed a large number of workers and incurred significant expenses on electricity, freight, and fuel/oil. The CIT(A) had observed that the AO's conclusion was based on incorrect comparisons and assumptions. The Tribunal upheld the CIT(A)'s finding that the assessee had sufficient infrastructure and manpower for manufacturing.

4. Evidence of Movement of Goods:
The AO held that there was no evidence of movement of paper from Punjab to Himachal Pradesh and of printed material/books from Himachal Pradesh to other states. The assessee had provided barrier receipts and other documentary evidence to show the movement of goods. The Tribunal found that the AO had not properly considered this evidence and had relied on statements from parties without confronting the assessee. The CIT(A) had correctly accepted the assessee's explanation and evidence.

5. Comparison of Profit Rates with Sister Concerns:
The AO compared the profit rates of the assessee with its sister concerns, concluding that the assessee had higher profits due to inflated sales prices. The Tribunal noted that the AO's comparison was flawed as it did not account for differences in the nature of business and expenses between the assessee and its sister concerns. The CIT(A) had observed that the AO's comparison was not based on accurate data and had rightly rejected the AO's findings.

6. Application of Section 80IA(10):
The AO invoked section 80IA(10), alleging that the assessee's higher profits were due to transactions with sister concerns. The CIT(A) found that the AO had not provided sufficient evidence to show that the higher profits were due to such transactions. The Tribunal upheld the CIT(A)'s finding that the AO had failed to satisfy the necessary conditions to invoke section 80IA(10). The Tribunal noted that the transactions with sister concerns were at arm's length prices and there was no evidence of any arrangement to inflate profits.

Conclusion:
The Tribunal dismissed the appeals of the Revenue and upheld the CIT(A)'s orders allowing the deduction under section 80IC. The Tribunal found that the AO's conclusions were based on flawed comparisons, incorrect assumptions, and a violation of the principles of natural justice. The assessee had provided sufficient evidence to show that it had the necessary infrastructure and manpower for manufacturing and that its transactions with sister concerns were at arm's length prices.

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