2015 (4) TMI 676 - AT - Income Tax

Revision of assessment order - Deduction u/s 80IC of Income Tax Act,1961 - Deduction already allowed in the immediately preceding assessment year - Sale to related companies at a high margin - Pre-requisite conditions of eligibility of deduction examined in first year itself - Held that - it is observed that the assessee claimed deduction u/s 80IC for the first time in the immediately preceding assessment year, namely, AY 2005-06 in respect of profit from the manufacturing unit established at Baddi in Himachal Pradesh. The assessment for the AY 2005-06 was taken up by the AO u/s 143(3) and the claim of deduction u/s 80IC was allowed as claimed. A copy of the assessment order for the AY 2005-06 is available on record. This shows that all the pre-requisites for the claim of deduction u/s 80IC were examined by the AO in finalizing the assessment for the earlier year and he got fully satisfied with the eligibility of deduction. The instant year is second year of the claim for deduction u/s 80IC. With the above background in mind, we will take up all the objections raised by the ld. CIT one by one and see if the assessment order can be held to be erroneous and prejudicial to the interest of the Revenue. The first objection of the ld. CIT is that the assessee had not undertaken substantial expansion and, thus, the basic pre-requisite for deduction u/s 80IC was not satisfied.In view of the fact that the pre-requisite conditions can be examined in the first year of the claim, which were duly found to have been fulfilled in the preceding year, we are of the considered opinion that this objection of the ld. CIT that the assessee did not undertake substantial expansion, is bereft of any force. The same is, therefore, dismissed. Objection nos. 3 and 4 of the ld. CIT are that the assessee made sales to its related concerns.As sales to the related companies constituted roughly 80% of the total turnover and there was abnormal profit shown, it was incumbent upon the AO to investigate this aspect of the matter further rather than stopping at the receipt of sales account. In our considered opinion, the ld. CIT was justified in directing the AO to re-examine this aspect of the assessee s claim for deduction u/s 80IC. We uphold these objections taken by the ld.CIT. Objection no. 7 of the ld. CIT, It is obvious that Kapashera Delhi office was not undertaking any income producing activity and the loss of ₹ 65,326/- was only towards administrative expenses incurred by it, As such, there can be no question of shifting profit from the eligible unit at Baddi to Kapashera Delhi. We, therefore, reject this objection taken by the ld. CIT. The sum and substance of the above discussion is that the order of the ld. CIT is sustainable on objection nos. 3 and 4 and not on the remaining eight. In such a scenario, the entire order cannot be set aside. It goes without saying that if the order passed u/s 263 is sustainable on one of the various objections taken by the ld. CIT and not on others, the order is not vitiated. However, the direction to the AO by the ld. CIT gets restricted to the points on which the order is sustainable. As the impugned order is sustainable in respect of two objections only, we direct the AO to restrict himself only on these issues in the assessment to be finalized u/s 143(3) pursuant to the order u/s 263 of the Act. - Partly allowed in favour of assessee.

Issues Involved:
1. Eligibility of deduction under section 80IC.
2. Verification of new machinery usage.
3. Sales to related concerns and profit verification.
4. Verification of trade creditors.
5. Fabrication charges and job work verification.
6. Electricity expenses verification.
7. Profit and loss comparison between units.
8. Examination of splitting up or reconstruction of existing business.
9. Verification of actual manufacturing activity.
10. Verification of sales expenses.

Detailed Analysis:

1. Eligibility of Deduction under Section 80IC:
The CIT held that the business had not undertaken substantial expansion, a prerequisite for deduction under section 80IC. However, the Tribunal dismissed this objection, noting that the deduction was claimed for the second consecutive year and was allowed in the previous year after thorough examination by the AO. The Tribunal emphasized that once eligibility conditions are examined and satisfied in the first year, they need not be revisited in subsequent years.

2. Verification of New Machinery Usage:
The CIT questioned whether new machinery, constituting at least 80% of the total, was used in the manufacturing process. The Tribunal dismissed this as well, reiterating that eligibility conditions, including machinery usage, were already examined and satisfied in the previous year.

3. Sales to Related Concerns and Profit Verification:
The CIT raised concerns about sales to related concerns, such as M/s Orient Express and M/s Sundaram Enterprises, and whether these sales were at market prices. The Tribunal found merit in this objection, noting that the AO did not verify the steep increase in gross profit rates from 40% to over 51%. The Tribunal upheld the CIT's direction to re-examine this aspect.

4. Verification of Trade Creditors:
The CIT noted no verification of trade creditors like M/s Fortune Leather Co. The Tribunal found this concern valid, as it related to verifying the sales prices and profit margins involving related parties.

5. Fabrication Charges and Job Work Verification:
The CIT objected to the payment of fabrication charges to M/s Kishan Enterprises and M/s Sandeep Leather Works, questioning whether the assessee itself conducted manufacturing. The Tribunal dismissed this objection, accepting the assessee's explanation that job work was done under its control and that it paid ESI/PF for the workers, indicating manufacturing activity by the assessee.

6. Electricity Expenses Verification:
The CIT questioned whether electricity expenses were for manufacturing or reimbursed to third parties. The Tribunal dismissed this, accepting the assessee's evidence that the expenses were for its own unit's consumption.

7. Profit and Loss Comparison between Units:
The CIT noted a loss in the Kapashera unit and substantial profit in the Baddi unit, suggesting possible profit shifting. The Tribunal dismissed this, accepting the assessee's explanation that the Kapashera unit was merely an administrative office, not engaged in income-producing activities.

8. Examination of Splitting Up or Reconstruction of Existing Business:
The CIT raised concerns about potential splitting up or reconstruction of existing businesses to avail tax benefits. The Tribunal dismissed this, stating that such eligibility conditions were already examined and satisfied in the first year of deduction.

9. Verification of Actual Manufacturing Activity:
The CIT questioned the actual existence of manufacturing activity, including factory, machinery value, and power consumption. The Tribunal dismissed this, reiterating that these conditions were examined and satisfied in the previous year.

10. Verification of Sales Expenses:
The CIT noted that sales expenses, including salaries and packing expenses, indicated no actual manufacturing by the assessee. The Tribunal dismissed this, stating that the AO had already verified these expenses.

Conclusion:
The Tribunal upheld the CIT's order on objections related to sales to related concerns and profit verification but dismissed the remaining objections. The AO was directed to re-examine only the upheld issues during the reassessment. The appeal was partly allowed.

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