2010 (1) TMI 741 - HC - Income Tax

Exemption under section 80HHC - sale to sister concerns at below cost of production - purpose was to defraud the revenue by permitting sister concerns to claim ineligible export profit under section 80HHC of the Income-tax Act - Held that sister concerns got ineligible tax exemption under section 80HHC which was only on account of assessee s manipulation in accounting the sale price at below even the cost of production.

Summary

Issues:
1. Assessment of income tax return for the appellant for the assessment year 2004-05.
2. Discrepancy in the sale price of cashew kernel produced by the appellant to sister concerns.
3. Allegation of tax evasion scheme by permitting sister concerns to claim ineligible export profit under section 80HHC of the Income-tax Act.
4. Appeal against the assessment before the CIT (Appeals) and subsequent challenges.
5. Determination of whether the addition made by the Assessing Officer was justified.

Issue 1: Assessment of income tax return
The appellant, engaged in the manufacture and sale of cashew kernel to sister concerns, reported a significantly lower income compared to the turnover. The Assessing Officer observed discrepancies in the sale price of cashew kernel, leading to suspicion of tax evasion.

Issue 2: Discrepancy in sale price
The appellant sold cashew kernel to sister concerns at a price below the cost of production, resulting in a substantial under-recovery amounting to Rs. 40,73,446.30. This raised concerns of manipulating prices to inflate tax exemptions under section 80HHC of the Income-tax Act.

Issue 3: Allegation of tax evasion scheme
The Assessing Officer alleged that the appellant's actions aimed to facilitate sister concerns in claiming ineligible tax benefits through artificial export profits under section 80HHC. This led to further additions to the appellant's assessment to counter the perceived tax fraud.

Issue 4: Appeal process
The appellant appealed before the CIT (Appeals) challenging the additions made by the Assessing Officer. The CIT (Appeals) granted conditional relief, linking the need for further additions to the sister concerns' accounting treatment of the price differentials.

Issue 5: Justification of the addition
The Tribunal upheld the CIT (Appeals) order, emphasizing the need to rectify the tax evasion scheme orchestrated by the appellant with sister concerns. The High Court concurred with the lower authorities, highlighting the appellant's failure to justify selling cashew kernels below market value and supporting the neutralization of undue tax exemptions claimed by sister concerns.

In the final judgment, the High Court dismissed the appellant's appeal, emphasizing the need to combat tax evasion schemes and uphold tax integrity. The Court found the Assessing Officer's addition justified, given the appellant's involvement in manipulating prices to benefit sister concerns. The Court underscored the importance of genuine transactions and accountability in preventing illegitimate tax exemptions, ultimately upholding the lower authorities' decisions to counter the tax evasion scheme orchestrated by the appellant.