2015 (12) TMI 976 - HC - Income Tax

Invoking Section 80IA(10) while denying benefit of Section 80IC - ITAT reversing the order of the CIT(A) - Held that - The same products are being sold from both the units and at the same price ranging between ₹ 5,25,000/- to ₹ 6,25,000/- in both cases. How the machines were costing less at Baddi was not explained. When the end product is same, the cost would also be the same. By installing a machine of ₹ 6 lakhs it cannot be said that the assessee is achieving economy of scale or some other technological development. It is a simple case of inflation of profits in the eligible unit and in such situation the Assessing Officer has clear powers in terms of Section 80IA(10) to compute the reasonable profit. The Ld. CIT(A) has misdirected himself by observing that Assessing Officer has not pointed out any discrepancy because the Assessing Officer has clearly pointed out wrong allocation of various expenses which was accepted by the assessee before the CIT(A). Further, the Assessing Officer has also given reasons showing that profits in exempt unit have been inflated. In Section 80IA(10), it is clearly provided that if Assessing Officer has reasons that the business has been so arranged to show inflated profits in eligible unit then Assessing Officer has power to recompute the profits of such eligible unit. As seen from the sale invoice there is definitely a reason to believe that assessee has inflated the profits in eligible unit because the same product is being sold from both the units for almost identical price. In this background, ITAT correctly set aside the order of CIT(A) and restore that of Assessing Officer - Decided against assessee

Summary

Issues Involved:
1. Justification of ITAT in reversing the order of CIT(A) concerning Section 80IA(10).
2. Interpretation of Section 80IA(10) in light of Supreme Court judgments.
3. Re-allocation of purchases by ITAT under Section 80IA(10).
4. Comparison of costs between units with different technologies and operations.

Detailed Analysis:

Issue 1: Justification of ITAT in reversing the order of CIT(A) concerning Section 80IA(10)
The primary issue is whether the Income Tax Appellate Tribunal (ITAT) was justified in reversing the Commissioner of Income Tax (Appeals) [CIT(A)]'s order, which ignored the provisions of Section 80IA(10) of the Income Tax Act, 1961. The assessee contended that there was no cogent evidence of 'business transacted' between the two units, which is essential for applying Section 80IA(10). The Tribunal found that the Mohali unit had a net profit rate of 12.66% on sales of Rs. 3.36 crores, whereas the Baddi unit had a net profit rate of 57.95% on a turnover of Rs. 1.53 crores, which was disproportionately high. The Tribunal concluded that this discrepancy indicated an inflation of profits in the Baddi unit, justifying the application of Section 80IA(10).

Issue 2: Interpretation of Section 80IA(10) in light of Supreme Court judgments
The assessee argued that Section 80IA(10), being a deeming provision, should be interpreted strictly, as per various Supreme Court judgments, including CIT v. ACE Builders (P) Ltd. The Tribunal noted that Section 80IA(10) empowers the Assessing Officer to determine reasonable profits if it appears that profits have been inflated due to the arrangement of business transactions. The Tribunal found that the CIT(A) had wrongly observed that the Assessing Officer had not pointed out discrepancies, whereas the assessee had accepted the reallocation of expenses before the CIT(A).

Issue 3: Re-allocation of purchases by ITAT under Section 80IA(10)
The Tribunal upheld the Assessing Officer's decision to reallocate purchases between the exempt and non-exempt units. The Tribunal observed that the purchases were made from common sources, some customers were common, and the products manufactured were also common. The assessee had conceded before the CIT(A) that expenses were not properly allocated. The Tribunal found that the same products were sold from both units at similar prices, indicating no significant technological advantage at the Baddi unit that could justify the higher profits.

Issue 4: Comparison of costs between units with different technologies and operations
The Tribunal addressed the assessee's argument that the two units operated on different technologies and had different 'modus operandi'. The Tribunal noted that the machinery at the Mohali unit was worth Rs. 55,15,306/-, while at the Baddi unit, it was only Rs. 6,60,972/-. Despite this, the same products were sold at similar prices from both units. The Tribunal concluded that the installation of a machine worth Rs. 6 lakhs at the Baddi unit did not justify the significantly higher profits, indicating an inflation of profits in the eligible unit.

Conclusion:
The Tribunal's findings were based on the factual matrix, and the assessee failed to demonstrate that these findings were erroneous or perverse. Consequently, the High Court dismissed the appeal, stating that no substantial question of law arose. The Tribunal's decision to restore the Assessing Officer's order was upheld, emphasizing the powers granted under Section 80IA(10) to compute reasonable profits when there is evidence of inflated profits in an eligible unit.