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2014 (1) TMI 976 - AT - Income TaxDeduction u/s 80IB - Held that - Both the concerns carrying similar business of liquid soap material and most of the sales are made to the same concern where the rate is common for both the concerns - The profit shown by the unit which is eligible for deduction u/s 80IA is very high i.e. 35% as compared to the profit of the other unit (belongs to his wife) only at the rate of 5% - Following CIT V/s Schmetz India (P) Ltd 2012 (9) TMI 407 - BOMBAY HIGH COURT - As per section 80IA(10) of the Act - AO has been empowered to redetermine the profits which may be reasonably deemed to have arisen from such eligible business, if the said undertaking has declared more than ordinary profit - AO rightly applied the provisions of section 80IA(10) of the Act to re-determine the profit - AO is reasonable to consider the net profit rate of 10% of the eligible unit as against 5% net profit of the unit which is not eligible for deduction u/s 80IA. The assessee could not controvert the facts as stated by AO and neither could controvert the submissions as made by ld. DR and /or query raised by the Bench at the time of hearing - The AO is justified to apply the provisions of sub-section (10) of section 80IA of the Act to re- determine the profit as the profit shown by eligible unit is abnormally high particularly when the cost of the material is the same, most of the sales are also made to the same party and both units are carrying on the similar business of manufacturing of liquid soap material - The AO was justified and reasonable to restrict deduction by taking the net profit rate of 10% of the total sales by the assessee of the Jammu unit inspite of the fact that the other unit i.e. M/s. The Umergaum Industries, Valsad whose proprietor is wife of assessee showing net profit rate of 5% only - Decided in favour of Revenue.
Issues:
- Deduction u/s. 80IB(4) allowed by CIT(A) without appreciating AO's findings - Direction to AO to allow deduction u/s. 80IB(4) fully as claimed by assessee Analysis: Issue 1: Deduction u/s. 80IB(4) allowed by CIT(A) without appreciating AO's findings The department appealed against the order of the ld. Commissioner of Income Tax (A) for assessment year 2009-10, specifically challenging the allowance of deduction u/s. 80IB(4) by CIT(A) without considering the AO's findings. The AO raised concerns regarding the inflated profit ratio of the unit at Jammu, eligible for deduction, compared to the sister concern at Valsad. The AO questioned the significant difference in net profit ratios of both units engaged in similar businesses. The assessee argued that the units catered to different markets and had distinct product formulations, justifying the varying profit margins. However, the AO did not accept this explanation and concluded that the profit for the eligible unit was inflated to claim the deduction. Consequently, the AO invoked provisions of sec. 80IA(8) and sec. 80IA(10) to restrict the deduction claimed by the assessee. The CIT(A) intervened, directing the AO to allow the deduction as claimed by the assessee under sec. 80IA, emphasizing the lack of transfer of goods or services below market value between the units and the absence of arrangements producing extraordinary profits. The CIT(A) found no basis for invoking sec. 80IA(8) and sec. 80IA(10), deleting the disallowance made by the AO. The department contested this decision, arguing that the profit margin of the eligible unit was unreasonably high, warranting re-determination under sec. 80IA(10). Issue 2: Direction to AO to allow deduction u/s. 80IB(4) fully as claimed by assessee The second ground of appeal involved the direction by CIT(A) to the AO to allow the deduction u/s. 80IB(4) fully as claimed by the assessee. The department contended that the profit margin of the eligible unit was abnormal compared to the sister concern, indicating potential overstatement. The AO's application of sec. 80IA(10) to re-determine profits was supported by the department, highlighting the similarity in business operations and sales to the same party by both units. The department argued that the AO's decision to restrict the deduction based on a net profit rate of 10% for the eligible unit was reasonable, considering the circumstances. Conversely, the assessee's representative suggested a reconsideration of the facts by the AO, proposing a remittance of the matter for a fresh decision. Ultimately, the ITAT upheld the AO's action, reversing the CIT(A)'s order and allowing the department's appeal, emphasizing the justification for applying sec. 80IA(10) to re-determine profits based on abnormal profit margins and similar business operations between the units. In conclusion, the ITAT Mumbai upheld the department's appeal, emphasizing the reasonableness of the AO's decision to restrict the deduction claimed by the assessee under sec. 80IB(4) based on the abnormal profit margins and business similarities between the units. The judgment highlighted the importance of considering the provisions of sec. 80IA(10) in re-determining profits where extraordinary profits are declared, ultimately supporting the AO's actions in this case.
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