2016 (6) TMI 1224 - AT - Income Tax

Addition on account of excess deduction claimed u/s 80-IC - AO has invoked the provisions contained u/s 80-IC read with section 80-IA (8) & (10) by returning the finding that there is inter-unit transfers between the related units at Baddi and Delhi which is clear from unnatural profit ratio of 80-IC unit and non 80- IC unit and is verifiable from the accounts of the assessee s own related concern - Held that - There is not an iota of material on the file to prove the inter-unit transfers between the related units of the assessee, one situated at Baddi, Himachal Pradesh, and another situated at Delhi. Moreover, when correctness and completeness of the audited books of account has not been disputed, merely disputing the trading result on the basis of higher gross profit ratio is not permissible under law. When AO has also not returned any specific findings that there was some arrangement between the assessee unit, an 80-IC unit and his non 80-IC unit situated at Delhi to carry out such transfer of goods, the question of invoking provisions contained u/s 80-IA (8) & (10) does not arise. We are of the considered view that the AO has invoked the provisions contained u/s 80-IC read with section 80-IA (8) & (10) on the basis of conjectures and surmises only without having an iota of material on record and as such, the question is answered in favour of the assessee.

Summary

Issues Involved:
1. Deletion of addition made by AO on account of excess deduction claimed under section 80-IC of the Income Tax Act, 1961.
2. Rejection of books of account by AO under section 145 of the Income Tax Act, 1961.
3. Invocation of provisions under section 80-IC (7) read with section 80-IA (8) & (10) of the Income Tax Act, 1961 by AO.

Issue-wise Analysis:

1. Deletion of Addition on Account of Excess Deduction Claimed under Section 80-IC:
The AO made additions of ?1,44,97,282/- for AY 2006-07 and ?1,77,74,976/- for AY 2007-08, alleging that the assessee claimed excess deduction under section 80-IC by inflating profits of the Baddi unit. The AO compared the Gross Profit (GP) and Net Profit (NP) ratios of the Baddi unit with the Delhi unit, concluding that the profits were artificially inflated. However, the CIT (A) deleted these additions, stating that the AO did not point out any discrepancies in the books of account or the figures of sales, purchases, and closing stock. The CIT (A) noted that the higher profits at the Baddi unit were due to certain facilities and concessions granted by the Himachal Pradesh Government. The Tribunal upheld the CIT (A)'s decision, emphasizing that the AO's comparison was arbitrary and not justified without disputing the correctness of the books of account.

2. Rejection of Books of Account under Section 145:
The AO rejected the assessee's books of account under section 145, claiming they were unreliable. The CIT (A) overturned this decision, noting that the AO did not find any false or defective entries in the books. The Tribunal supported this view, highlighting that the AO's rejection was based solely on a comparison of GP and NP ratios between the Baddi and Delhi units, which was not a valid ground for rejection. The Tribunal pointed out that the AO had not disputed the method of accounting or the correctness and completeness of the accounts, and had accepted similar accounts in the previous assessment year (2005-06).

3. Invocation of Provisions under Section 80-IC (7) Read with Section 80-IA (8) & (10):
The AO invoked these provisions, alleging inter-unit transfers between the Baddi and Delhi units to artificially inflate profits. However, the CIT (A) found no evidence of such transfers and noted that the AO did not provide any material to support this claim. The Tribunal agreed, stating that the AO's findings were based on conjectures and surmises without any concrete evidence. The Tribunal referenced a similar case (Aquila Software Services Hyderabad (P) Ltd. vs. DCIT) where the disallowance of deductions based on alleged arrangements between related units was not justified without conclusive proof.

Conclusion:
The Tribunal dismissed the revenue's appeals, affirming the CIT (A)'s decisions to delete the additions made by the AO and to reject the invocation of provisions under section 80-IC (7) read with section 80-IA (8) & (10). The Tribunal concluded that the AO's actions were arbitrary and not supported by evidence, and that the assessee's books of account were correctly maintained and reliable.