2014 (4) TMI 530 - AT - Income Tax

Deduction u/s 80IC of the Act Value of the machinery is less than the maximum prescribed Held that - There was no merit in the contention of the Revenue that the assessee was not eligible to claim deduction u/s 80IC as it has failed to fulfill all the conditions as the value of the old machinery exceeds the prescribed percentage as provided in Section 80IC of the Act - the CIT(A) was justified in not relying on the valuation report and allowing deduction u/s 80IC. Shifting of machines - Whether the assessee has shifted old machineries from its Delhi unit to Baddi unit and obtained accommodation entry for machinery Held that - The CIT(A) has examined the statements of accounts of these suppliers and he could identify same suppliers from whom accommodation bills have been taken by observing a peculiar pattern of payment - The payment for these suppliers were unduly delayed extending to more than two years, which CIT(A) has rightly held to be not normal feature of the business - some of the old plant and machinery from Delhi unit has been shifted to the Baddi unit and in lieu thereof the assessee has obtained accommodation bills the CIT(A) was justified in holding that some of the plant and machinery has been shifted from Delhi unit to the Baddi unit. Extent and value of old plant and machinery - Held that - CIT(A) rightly held that a general observation in a mechanical way has been made by the valuer that the condition of the machineries are more than three to five years old - From the inspection report, it does not come out on what basis the valuer has stated that the machines are more than three to five years old the inspection was carried out in the month of March, 2008 i.e. after a period of about three years when these machineries were acquired - Apparently these machineries cannot be said to be new at the time of inspection - CIT(A) has also taken note of the fact that the valuation report is not supported by any material, documents or evidence for estimating the value as on the date of the inspection - the correct approach would have been to find out the value of the machinery, the time of purchase and the date when assessee has acquired these machineries was relevant rather than valuing on a later date and then discounting back the same with wholesale price index - Assessee has carried out such exercise - The calculation of the same has not been disputed by the AO in its remand report - The revenue has failed to clarify the specific issues raised with regard to relevancy of the valuation report thus, the order of the CIT(A) upheld. Valuation of new plant and machinery Held that - The CIT(A) was correct in holding that the value of old plant and machineries is Rs.20,42,750 - Thus the value of the new machinery comes to Rs.2,04,41,510/- and the value of the old machineries shifted from Delhi unit to Baddi unit comes to Rs.20,42,750/- and total value of the machinery comes to Rs.2,24,84,260 - the value of the old machinery is less than 20% of the total value of the machinery thus, it cannot be said that the assessee has failed to comply with the condition laid down in section 80IC of the Act - the CIT(A) was justified in holding that the value of the old machinery is less than 20% and assessee is eligible for deduction u/s 80IC. Denial of deduction on discrepancies in Form 10CCB Held that - The law for claiming exemption u/s 80IC assessee is required to get the accounts audited and submit the report in the prescribed form - the assessee has got the accounts audited and submitted the report in the prescribed form - the deduction cannot be denied merely on the ground that during the course of the hearing, AO noticed certain errors or discrepancies in the audit report - Having complied the conditions of obtaining report and submitting along with returns, the deduction on this reasoning cannot be denied thus, the order of the CIT(A) allowing deduction u/s 80IC of the Act. Addition on account of accommodation bills Restriction of amount @ 2% on total bills Held that - The findings of the CIT(A) that assessee had taken accommodation bills to the extent of Rs.54 Lakh while deciding issue of 80IC claim - while taking accommodation bills, the assessee has first credited the bills in the books of account and thereafter he has made payment from the books of account to the accommodation entry providers - the assessee would not have made any actual payment - the AO was not right in making addition on account of the payment made for accommodation bills as these payments have been made from the regular books of account - the CIT(A) rightly held that the assessee would have definitely incurred certain expenditure in taking such accommodation bills - CIT (A) has estimated the same at 2% and the estimation as fair and reasonable thus, there is no reason to interfere with the order of the CIT (A). Deletion made on account of suppression of wages Held that - The CIT(A) has rightly observed that this is related to the assessment year 2008-09 and not to earlier assessment years - the AO has made a tabulated chart of the wages paid in Delhi and wages paid at Baddi in absolute terms but he has ignored the fact that the wages scale of Delhi and Baddi are not comparable - If the facts are taken into consideration the very basis for making the addition by the AO becomes unsustainable - the CIT(A) rightly that the assessee has submitted necessary documents relating to PF and ESIC in respect of the 96 workers who were found working during the course of the survey - The explanation given by the assessee has not been understood by the AO in the right perspective - the order of the CIT(A) is upheld. Deletion on account of suppression of production Held that - The assessee has explained its production process in detail and the wastage/loss arising in the process has been quantified at each level - During the course of the hearing, revenue could not point out any error or defect in the explanation given by the assessee - it is also a matter of fact that no adverse material or evidence was found during the course of search or survey that the assessee has suppressed any production nor any material was found with regard to any sale of such production outside the books of account the order of the CIT (A) is upheld. Denial of deduction u/s 80IC of the Act Job work income from manufacturing activity Held that - The assessee is engaged in the in the manufacturing activity at the Baddi unit and there is no dispute about this fact - assessee has carried out job work and necessary details about the same including name and address of the parties for whom these job works have been done were filed before the AO - The major work has been done by the assessee for a pharmaceutical company, CIPLA Ltd - The assessee has also submitted complete details of the process and the work starting from the conversion of power to tablets and capsules - Thus the assessee has done complete manufacturing process - Only raw material was supplied by the respective parties - This nature of job work is as good as manufacturing the order of the CIT(A) is upheld. Deletion of unexplained investment in plant and machinery Held that - The addition of the AO contradicts his own stand which he has taken while denying the benefit of deduction u/s 80IC on the ground that the machinery installed at the Baddi unit are old machineries - the valuation methodology adopted by the valuer is not a correct method - the CIT(A) rightly was of the view that there are several deficiencies in the valuation made by the department valuer - the same cannot be taken as correct and reliable for any addition that too when the bills for the purchase of plant and machinery installed at Baddi unit has been placed on record with evidences in support - each of these bills the value of the machinery, description has been mentioned the order of the CIT(A) upheld. Depreciation claim in baddi unit and at Delhi unit Held that - As per the AO the assessee has taken accommodation bills of Rs.54 Lakh - It is also the allegation of the AO that the old machineries from Delhi unit have been shifted to Baddi unit - The assessee having shifted the machinery from Delhi unit to Baddi unit, such machinery will be eligible for depreciation - The value of such machinery needs to be deducted while making disallowance - the CIT(A) was justified in restricting the disallowance to the net of the amount of accommodation bills i.e. Rs.54 Lakh - value of the machinery shifted to the Baddi unit. Deletion of unexplained investment and expenses Held that - The AO has referred the matter to the District Valuation Officer, who has valued the investment at Rs.48,75,092/- as against Rs.45,62,763/- as per the books of account - The difference in the value as per valuer s report and the value as per books of account is less than 6% - Valuation after all is not a science and this difference being less than 10% - the CIT(A) was justified in setting aside the addition. Deletion on account of income of Delhi unit Held that - The AO has made the addition without bringing any material or evidence to substantiate the net profit rate of 2.5% - On going through the assessment order we also note that except the allegation of shift of some of the machineries from Delhi unit to Baddi unit there is no other allegation so far as Delhi unit is concerned - There is no material and evidence against assessee for inflating the purchases or suppressing the sales - the CIT(A) was justified in deleting the addition. Deletion made on account of scrap sales Held that - Evidences were found during the assessment year 2008-09 to the extent of Rs.7,30,355 - it cannot be assumed that there was no scrap in the preceding two years i.e. 2006-07 and 2007-08 - The scrap having been generated, the assessee was duty bound to account for the same in the books of account - as regards estimation at Rs.12 Lakh each in the preceding two years, when the scrap value in the assessment year 2008-09 was Rs.7,30,355 it shall not be appropriate to estimate the value in preceding years at Rs.12 Lakh each the grounds in assessment years 2006-07 and 2007-08 in the Revenue appeal is partly allowed. Disallowance u/s 14A of the Act r.w Rule 8D of the Rules Held that - The assessee has got its own funds which are quite substantial as compared to the investment made - The fact has been recognized by the CIT(A) in the preceding assessment year where he has held that no disallowance is called for on account of interest - the computation of the investment needs to be done by excluding those investments whose income or loss shall be chargeable to tax - the AO is directed to verify the contention of the assessee and to exclude such investment while computing disallowances on account of administrative expenses under Rule 8D. Deletion on account of inflated income Held that - The addition has been made by the AO by indulging into surmises and without bringing any material or evidence in support of the addition - the assessee has made sales to various parties - All the sales are fully vouched and accounted for - During investigation nothing has been found to indicate that assessee has inflated its sales - the assessee has given detailed explanation regarding its profitability at Baddi unit and AO has not been able to point out any error or discrepancy in such explanation - the CIT(A) was justified in deleting the addition. Validity of assessment framed u/s 153A of the Act Held that - The addition has been made merely on the basis of a difference in valuation and that this difference is less than 10% - on a similar addition in assessment year 2006-07 where the difference was almost same, the CIT(A) has deleted the addition - the issue of valuation of the machinery was a different issue as compared to the issue of investment in the property and after going through the assessment order we could not find out any evidence found during the course of the search indicating any unexplained investment in this property - the difference in the valuation as per the DVO and as per the books of account is less than 10%.

Summary

Issues Involved:
1. Deduction under Section 80IC of the Income Tax Act.
2. Addition on account of accommodation bills for machinery.
3. Addition on account of suppression of wages.
4. Addition on account of suppression of production.
5. Deduction under Section 80IC on job work income.
6. Unexplained investment in plant and machinery.
7. Disallowance of depreciation on Baddi and Delhi Units.
8. Unexplained investment and expenses.
9. Addition on account of income of the Delhi Unit.
10. Addition on account of scrap sale.
11. Disallowance under Section 14A.
12. Addition on account of short-term capital gain.
13. Addition on account of inflated income.
14. Validity of assessment under Section 153A.

Detailed Analysis:

1. Deduction under Section 80IC of the Income Tax Act:
The primary issue was whether the assessee was eligible for deduction under Section 80IC. The Assessing Officer (AO) denied the deduction, citing that the assessee had shifted old machinery from its Delhi unit to the Baddi unit and obtained accommodation bills for machinery. The CIT(A) granted relief, noting that the value of old machinery was within permissible limits. The ITAT upheld the CIT(A)'s decision, confirming that the value of old machinery was less than 20% of the total value, thus complying with Section 80IC conditions.

2. Addition on account of accommodation bills for machinery:
The AO made additions for obtaining accommodation bills for machinery, estimating unaccounted cash receipts. The CIT(A) restricted the addition to 2% of the total value of accommodation bills. The ITAT upheld the CIT(A)'s decision, agreeing that the assessee would have incurred some expenditure for obtaining accommodation bills.

3. Addition on account of suppression of wages:
The AO made additions for suppressed wages based on statements from employees and discrepancies in wage-to-turnover ratios. The CIT(A) deleted the additions, noting no evidence of unaccounted wage payments for the years in question. The ITAT upheld the CIT(A)'s decision, finding no material evidence of unaccounted wage payments.

4. Addition on account of suppression of production:
The AO added amounts for suppressed production based on discrepancies in production records. The CIT(A) deleted the additions, noting that the production loss was within permissible limits and no evidence of unaccounted sales was found. The ITAT upheld the CIT(A)'s decision, agreeing with the assessment of production loss and the lack of evidence for unaccounted sales.

5. Deduction under Section 80IC on job work income:
The AO denied deduction on job work income, claiming it was not derived from manufacturing. The CIT(A) allowed the deduction, noting that the job work involved manufacturing processes. The ITAT upheld the CIT(A)'s decision, referencing case law supporting deduction eligibility for job work income.

6. Unexplained investment in plant and machinery:
The AO made additions based on a valuation report, which was disputed by the assessee. The CIT(A) deleted the additions, finding deficiencies in the valuation report and noting that actual purchase bills were provided. The ITAT upheld the CIT(A)'s decision, agreeing that the valuation report was unreliable.

7. Disallowance of depreciation on Baddi and Delhi Units:
The AO disallowed depreciation on machinery, alleging accommodation bills. The CIT(A) allowed partial relief, adjusting for machinery shifted from Delhi. The ITAT upheld the CIT(A)'s decision, agreeing with the adjusted depreciation calculation.

8. Unexplained investment and expenses:
The AO estimated unaccounted investment in building improvement and machinery erection. The CIT(A) deleted the addition, noting no evidence of unaccounted investment and minor differences in valuation. The ITAT upheld the CIT(A)'s decision, agreeing with the assessment of evidence and valuation differences.

9. Addition on account of income of the Delhi Unit:
The AO estimated income for the Delhi unit based on turnover, rejecting the book results. The CIT(A) deleted the addition, finding no basis for estimating income and no evidence of suppressed receipts or inflated expenses. The ITAT upheld the CIT(A)'s decision, agreeing with the assessment of book results.

10. Addition on account of scrap sale:
The AO estimated scrap sales based on seized documents. The CIT(A) deleted the additions for earlier years and sustained part addition for the current year. The ITAT adjusted the additions, estimating scrap sales at a lower amount for earlier years and upholding the sustained addition for the current year.

11. Disallowance under Section 14A:
The AO made disallowances applying Rule 8D. The CIT(A) reduced the disallowances, noting Rule 8D's non-applicability for earlier years and sufficient own funds for investments. The ITAT upheld the CIT(A)'s decision, agreeing with the assessment of own funds and administrative expenses.

12. Addition on account of short-term capital gain:
The AO made additions based on a valuation report for sold properties. The CIT(A) deleted the additions, noting minor differences in valuation and no evidence of additional consideration received. The ITAT upheld the CIT(A)'s decision, referencing case law against additions based solely on valuation reports.

13. Addition on account of inflated income:
The AO added amounts for inflated income at the Baddi unit. The CIT(A) deleted the additions, finding no evidence of inflated sales or profits. The ITAT upheld the CIT(A)'s decision, agreeing with the assessment of sales and profitability.

14. Validity of assessment under Section 153A:
The assessee challenged the jurisdiction and validity of assessments under Section 153A. The ITAT found no fault in the AO's assumption of jurisdiction and the procedure followed, dismissing the assessee's objections.

Conclusion:
The ITAT upheld the CIT(A)'s decisions on most issues, providing relief to the assessee on various grounds, including deductions under Section 80IC, adjustments for accommodation bills, suppression of wages and production, and unexplained investments. The ITAT also upheld the validity of assessments under Section 153A, dismissing the assessee's jurisdictional objections.