2013 (6) TMI 71 - HC - Income Tax

Deduction u/s 80-IA & 80-IB - AO found that whereas assessee had earned a profit margin of 62.31% in respect of Unit no. 4, the overall margin of the assessee was only 9.92%. The Assessing Officer concluded that this represented a serious inconsistency in drawing up the accounts. - publication and printing of newspapers and periodicals - Job work for other units - whether the expenses allocated to Unit No.1 are to be taken into account for determining the eligible profits from Unit No.1? - Held that - It is not in dispute that the printing charges charged by Unit No.4 to Unit No.1 were comparable to the market rates. It is a matter of record that during the period relevant to the assessment years 1997-1998 and 1999-2000 Unit No.4 was charging 77 paise per sheet for printing work done for third parties and 70 paise per sheet for printing done for Unit No.1. AO has also not found any manipulation or defect in the separate books maintained for Unit No.4. As there is no material to support the view that the job work charges charged by Unit No.4 from Unit No.1 were not at market rates it is in agreement with the view taken by the Tribunal that in absence of any defect or manipulation found by the AO in the books maintained for Unit No.4 and in absence of any material to indicate that the amount charged by Unit No.4 from Unit No.1 was not at comparable market rates, it would not be open for the revenue to disregard the profits of Unit No.4 as disclosed by the assessee only on the basis that the profits were significantly higher than profits earned by the assessee from other undertakings. Given the fact that Unit No.4 carries on job work of printing only, the expenses attributable to Unit No.1 which relate to the publishing business cannot be allocated to Unit No.4. Only those expenses which relate to the printing work carried on by the assessee in Unit No.4 are liable to be deducted from the job charges to arrive at the profits eligible for deduction under Section 80-IA of the Act or 80-IB of the Act as the case may be. Thus Tribunal was correct in relying upon the orders passed in the preceding years for disposing of the appeals relating to the assessment year 2004-2005 as attention has not been drawn on any material change that has occurred in this period. Thus assessee is entitled to deduction u/s 80-IA and 80-IB on the book profits of Unit No.4 as disclosed by the assessee - in favour of the assessee.

Issues Involved:
1. Eligibility for deduction under Section 80-IA and 80-IB of the Income Tax Act.
2. Computation of profits derived from Unit No. 4.
3. Allocation of expenses between Unit No. 1 and Unit No. 4.
4. Applicability of Sections 80-IA(8), 80-IA(9), and 80-IA(10) of the Act.
5. Assessment of job work charges and market rates.
6. Re-computation of profits by the Assessing Officer.
7. Tribunal's reliance on previous orders.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80-IA and 80-IB:
The appeals concern the deduction available to the assessee under Sections 80-IA and 80-IB of the Income Tax Act for the assessment years 1997-98, 1998-99, 1999-2000, 2003-04, and 2004-05. The controversy revolves around the computation of profits derived from Unit No. 4, which the assessee claims qualifies as a new industrial undertaking eligible for these deductions.

2. Computation of Profits Derived from Unit No. 4:
The assessee claimed deductions based on the profits and gains derived from Unit No. 4. The Assessing Officer noted a significant discrepancy between the profit margins of Unit No. 4 (62.31%) and the overall margin of the assessee (9.92%). The Assessing Officer concluded that this inconsistency warranted a re-computation of profits, leading to a reduced deduction under Section 80-IA.

3. Allocation of Expenses between Unit No. 1 and Unit No. 4:
The assessee maintained that Unit No. 4 should only account for expenses directly related to its printing activities. The Assessing Officer, however, argued that expenses related to raw materials, marketing, and distribution incurred by Unit No. 1 should also be allocated to Unit No. 4. This reallocation led to a significant reduction in the profits eligible for deduction.

4. Applicability of Sections 80-IA(8), 80-IA(9), and 80-IA(10):
The Assessing Officer invoked Sections 80-IA(8), 80-IA(9), and 80-IA(10) to justify the re-computation of profits. Section 80-IA(8) pertains to the transfer of goods between eligible and other businesses at market value, while Section 80-IA(10) addresses the arrangement of business transactions to produce higher profits. The Tribunal noted that no defects or manipulations were found in the separate books maintained for Unit No. 4, and job work charges were comparable to market rates.

5. Assessment of Job Work Charges and Market Rates:
The assessee charged 77 paise per sheet from third parties and 70 paise per sheet from Unit No. 1 for job work. The Assessing Officer did not find any manipulation in these charges. The Tribunal agreed that the job work charges were at market rates, and there was no basis to re-compute the profits of Unit No. 4.

6. Re-computation of Profits by the Assessing Officer:
The Assessing Officer reallocated expenses and re-computed the profits of Unit No. 4, leading to a lower deduction under Section 80-IA. The CIT (Appeals) and the Tribunal disagreed with this approach, noting that the Assessing Officer had not pointed out any specific defects or instances of profit inflation by the assessee.

7. Tribunal's Reliance on Previous Orders:
The Tribunal relied on its earlier decisions, which had settled similar issues in favor of the assessee. The High Court agreed with the Tribunal's approach, noting that the facts for the assessment years 2003-04 and 2004-05 were similar to those in earlier years, and no material changes justified a different view.

Conclusion:
The High Court upheld the decisions of the CIT (Appeals) and the Tribunal, affirming that the assessee was entitled to deductions under Sections 80-IA and 80-IB based on the book profits of Unit No. 4. The questions raised in the appeals were answered in favor of the assessee, and no costs were ordered.

← Previous Next →