2020 (8) TMI 826 - AT - Income Tax

Deduction u/s 80IB - CIT-A restricted addition - HELD THAT - AO has not rejected the books of account u/s 145 of the Act and made the estimation of profit/disallowance of deduction under Section 80IB of the Act which appears to be incorrect and against the provision of law Assessee has sufficiently proved that the turnover of assessee having higher margin in the earlier years have reduced while the products where there is lower margin have increased substantially. There is not gross loss but a fall in gross profit of the assessee which has also been explained by stating that with the increase in excise duty margin of assessee has come down. The rate of excise duty earlier was 16.23% on MRP while after amendment the said rate was applied on MRP less abatement and thus the effective increase in duty is approximately 355% while on some other products percentage increase in excise duty was over 600%. Thus we do not find any reason to concur with the observations of the Assessing Officer. AO did not consider the fact that assessee has shifted product manufactured through other in earlier years to self-manufacturing unit at Jammu and this has also created the fallacious and misleading findings by the AO as to the Jammu profit on which deduction u/s 80IB has been denied. Finally we note that both the authorities below have failed to give a cogent and convincing reasons for reducing the claim of assessee u/s 80IB as various doubts and suspicion of the authorities below were duly addressed by the assessee by furnishing various details and information qua the various units. We are not in a position to sustain the order of CIT(A) wherein the order of Assessing Officer has been confirmed. Accordingly we set-aside the order of CIT(A) and direct the Assessing Officer to allow the deduction u/S 80IB of the Act as claimed by the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Restriction of deduction under Section 80IB of the Income Tax Act.
2. Rejection of books of accounts.
3. Alleged manipulation of raw material data.
4. Allocation of profits between taxable and non-taxable units.

Issue-wise Detailed Analysis:

1. Restriction of Deduction under Section 80IB:
The primary issue in this appeal is the restriction of the deduction under Section 80IB of the Income Tax Act to ?5,90,33,441/- as opposed to ?8,88,99,369/- claimed by the assessee. The assessee argued that the Assessing Officer (AO) did not reject the books of account under Section 145 of the Act before making the estimation of profit and disallowance of deduction, which is contrary to the provisions of law. The AO had previously accepted the profits and losses of the units in earlier years under similar facts, and there was no finding that the profit/loss shown was manipulated or non-genuine. The Tribunal found merit in the assessee's contentions and directed the AO to allow the deduction under Section 80IB as claimed by the assessee.

2. Rejection of Books of Accounts:
The assessee contended that the AO presumed the books of accounts were rejected merely on account of a show cause notice, without a clear finding in the assessment order. The CIT(A) confirmed the AO's action, suggesting that the AO examined and rejected the books based on various discrepancies. However, the Tribunal noted that the AO did not formally reject the books of account under Section 145 of the Act, and thus the consequent estimation of profit and resultant addition was not sustainable.

3. Alleged Manipulation of Raw Material Data:
The AO alleged that the assessee was manipulating raw material data, citing discrepancies in raw material costs and findings from a search. The assessee argued that no material was found during the search to prove manipulation and that each unit manufactured distinct products, making raw material consumption comparisons unfounded. The Tribunal found that the assessee provided sufficient explanations and evidence to counter the AO's allegations, and the AO's reliance on suspicion and conjecture was not justified.

4. Allocation of Profits Between Taxable and Non-Taxable Units:
The AO held that trading profits were shifted to tax-free units, requiring disallowance of losses to that extent. The CIT(A) supported the AO's view, citing various reasons such as raw material to sale price ratio and abnormal variations in raw material costs. However, the Tribunal found that the assessee sufficiently explained the reduction in gross profit due to increased excise duty and the shift of manufacturing to self-manufacturing units at Jammu. The Tribunal concluded that the reduction in gross profit was due to business expediency and commercial considerations, not profit diversion.

Conclusion:
The Tribunal set aside the order of CIT(A) and directed the AO to allow the deduction under Section 80IB as claimed by the assessee. The Tribunal also addressed the procedural issue regarding the delay in pronouncement of the order, extending the period due to the extraordinary circumstances of the Covid-19 pandemic. The appeal of the assessee was allowed, and the order was pronounced in the open court on 6th August 2020.