2012 (4) TMI 397 - HC - Income Tax

Deduction u/s 80-I - denial of deduction u/s 80-I(9) - Close relations between the assessee - company and the foreign buyer - burden of proof - held that - there being no material to indicate that the course of business had been so arranged as to inflate profits, i.e. to show a. higher profit margin to the two export units of the assessee, we are unable to answer the question in favour of the Revenue, but the only answer can be that the Tribunal was justified in taking this view and therefore, the first question is answered in the affirmative and in favour of the assessee and against the Revenue. Deduction u/s 10A read with section 80-I(9) - maintenance of separate books - held that - the question basically arise because the Assessing Authority rejected the method of accounting followed by the assessee for the purpose of computing its profits in terms of the profit and loss account and the Appellate Commissioner as well as the Tribunal have found that there was no reason or justification for the Assessing Officer to have rejected the books of account as maintained by the assessee which was according to standard accounting practices. Assessing Officer is of the view that the assessee was not entitled for the deduction in terms of Section 43B of the Act as the actual payments had not been made good by placing before the Assessing Officer the commensurate material for the accounting period of excise duty and customs. - The second question posed for our answer is answered in the negative and against the assessee but after setting aside the orders of the Tribunal and the Appellate Commissioner on this aspect the matter is remanded to the Assessing Officer on this aspect i.e., regarding the claim of the assessee for reducing the claim of the MODVAT credit available to it at the end of the accounting period from the date of the closing stock and for such purpose, the Assessing Officer shall give an opportunity to the assessee to place material and pass orders afresh on this aspect of the matter. Appeals are allowed in part

Issues Involved:
1. Invocation of Section 80-I(9) of the Income Tax Act.
2. Compliance with Section 80-I(9) read with Section 10A(6) regarding maintenance of books.
3. Rejection of books under Section 145 of the Act.
4. Inclusion of MODVAT credit income and value of the closing stock.

Issue-wise Detailed Analysis:

1. Invocation of Section 80-I(9) of the Income Tax Act:
The primary issue was whether the Tribunal was correct in holding that the Assessing Officer (AO) must provide evidence and cogent reasons for invoking Section 80-I(9) instead of presuming the existence of a close connection or arrangement. The AO had disallowed the assessee's claim for exemption under Section 10A, applying the profit margin of the entire turnover to the export units due to the close relationship between the assessee and its foreign buyer. The court noted that while a close connection existed, there was no material evidence indicating an arrangement to inflate profits. The Tribunal's decision to uphold the assessee's profit margin as reasonable compared to similar units was justified. Thus, the first question was answered in favor of the assessee and against the Revenue.

2. Compliance with Section 80-I(9) read with Section 10A(6) regarding maintenance of books:
The second issue was whether the assessee and its supplier needed to maintain separate books or if deciphering the profit was sufficient compliance. The AO had rejected the assessee's method of accounting, but the Appellate Commissioner and Tribunal found no justification for this rejection, as the assessee followed standard accounting practices. The Tribunal's view that the AO should have accepted the accounts maintained by the assessee was upheld. The second question was answered in favor of the assessee.

3. Rejection of books under Section 145 of the Act:
The third issue was whether the AO was correct in rejecting the books under Section 145 instead of Section 80-I(9) read with Section 10A(6). The court observed that the AO's rejection of the books was based on the view that the assessee was not entitled to deductions under Section 43B due to the non-submission of material evidence for excise duty and customs payments. However, the court found that this aspect required further examination by the AO, particularly regarding the deduction claimed for MODVAT credit. Therefore, the matter was remanded to the AO for proper examination, and the third question was answered in the negative and against the assessee.

4. Inclusion of MODVAT credit income and value of the closing stock:
The final issue was whether the appellate authorities were correct in holding that the MODVAT credit income and the value of the closing stock should not be added back. The AO had added back the MODVAT credit to the closing stock, but the Appellate Commissioner and Tribunal set aside this addition. The court noted that the assessee had not provided sufficient evidence to justify the deduction of MODVAT credit from the closing stock value. Consequently, the matter was remanded to the AO for re-examination, allowing the assessee to present material evidence to support its claim. The fourth question was answered in the negative and against the assessee, with the matter remanded for further examination.

Conclusion:
The appeals were allowed in part. The first and second questions were answered in favor of the assessee, while the third and fourth questions were answered against the assessee, with the matter remanded to the AO for further examination. Each party was to bear its respective costs.

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