2015 (1) TMI 1501 - AT - Income Tax

Deduction u/s 80IC - recomputation of profits - assessee was purchasing gas stove bodies at much below the market price and the sister concern had also borne the expenses of freight - addition to taxable profits made by AO by applying the provisions of section 80IA(10) - as argued the assessee firm has not earned any extra profits by making transactions with the sister concern - HELD THAT - CIT(A) has correctly adjudicated the issue particularly because of the higher GP rate was accepted by Revenue in the earlier years. We find that Ld. CIT(A) was justified because she had restricted the disallowance by applying 9.29% GP rate returned by the sister concern known as M./s Shivam Enterprises. Therefore, we find nothing wrong with the order of Ld. CIT(A) and we confirm the same and hence ground No.1 of the Revenue as well as of the assessee is rejected. Deduction u/s 80IC on account of royalty - as mainly submitted that royalty was paid @ Rs. 2/- per gas stove in the immediately preceding year which was accepted by the Revenue in the assessment framed u/s 143(3) - as per CIT(A) addition made by the Ld. A.O. is found to be without any cogent basis - HELD THAT - CIT(A) had correctly adjudicated the issue particularly in the light of the fact that lower royalty was accepted in the earlier years . Further, the assessee had paid the huge commission of Rs. 2,23,27,903/- to M/s BPCl, therefore, we find nothing wrong with the order of Ld. CIT(A) and we confirm the same. Deduction u/s 80IC - Addition on account of non debiting of the partner s remuneration provided in the Partnership deed - As argued debiting of such remuneration will only result into reduction of manufacturing profits and no taxability will arise - HELD THAT - As decided in I.T.O. NAHAN VERSUS M/S GNG ENTERPRISES 2014 (11) TMI 1280 - ITAT CHANDIGARH before allowing deduction u/s 80IC the income has to be computed as per the provisions of Sections 32 to 43 of the Act. Deduction could have been allowed only after computing the income under a particular head. In this case the income in the hands of the a firm was computed in terms of Sec 28 to 43D and Sec 40(b) in respect of allowance of interest and salary falls between these two provisions and therefore full effect has to be given to this provisions also. As later on it was decided not to pay salary and interest to the partners. This does not seems to be correct because before the Assessing officer it was admitted that remuneration and interest has not been paid as per the partnership deed. Further there is no evidence for the same and in any case this will not make a difference - tHUS for making deduction under chapter VIA the profits has to be computed specifically as per a particular provision of a particular head of income because of the definition of gross total income u/s 80B(5). In view of the above clear position the deduction u/s 80IC was allowable only after reducing the interest and remuneration payable to the partners. we set aside the order of Ld. CIT(A) and restore that of the Assessing office - Decided against assessee.

Summary

Issues Involved:
1. Confirmation of addition to taxable profits under section 80IA(10) and disallowance of deduction under section 80IC.
2. Disallowance of deduction under section 80IC on account of royalty.
3. Addition on account of non-debiting of partner's remuneration in the Profit & Loss account.
4. Allowance of full deduction under section 80IC by CIT(A) against a lesser deduction by the Assessing Officer.
5. Deletion of addition made by the Assessing Officer on account of royalty for using the name 'ADVANTA'.
6. Deletion of addition made on account of royalty to sister concern M/s Shivam Industries, Delhi.

Issue-wise Detailed Analysis:

1. Confirmation of Addition to Taxable Profits under Section 80IA(10) and Disallowance of Deduction under Section 80IC:
The assessee, a partnership firm engaged in manufacturing gas stoves, conducted substantial transactions with its sister concern. The Assessing Officer (AO) noticed a significant difference in the Gross Profit (GP) rates between the assessee and its sister concerns, leading to the conclusion that the assessee was purchasing gas stove bodies below market price to inflate profits and claim higher deductions under section 80IC. The AO recomputed profits and denied deductions accordingly. The CIT(A) partially confirmed the AO's findings but reduced the addition. The Tribunal upheld the CIT(A)'s decision, noting that the higher GP rate was accepted in earlier years and the CIT(A) had reasonably applied a benchmark GP rate of 9.29% from a comparable business.

2. Disallowance of Deduction under Section 80IC on Account of Royalty:
The AO noticed that the assessee paid royalty at a low rate of Rs. 3/- per gas stove to M/s Malbro Appliances Pvt Ltd for using the trade name 'ADVANTA'. The AO deemed this rate too low and adjusted it to 3% per piece, reducing the profits eligible for deduction under section 80IC. The CIT(A) found merit in the assessee's argument that the royalty rate was consistent with the previous year and deleted the reduction of profits. The Tribunal agreed with the CIT(A), emphasizing that the lower royalty rate was accepted in earlier years and the assessee had paid significant commission to BPCL, supporting the deletion of the reduction.

3. Addition on Account of Non-Debiting of Partner's Remuneration in the Profit & Loss Account:
The AO reduced the profits by Rs. 1,80,000/- for computing deduction under section 80IC, based on the partnership deed's provision for partner remuneration, which was not debited in the Profit & Loss account. The CIT(A) confirmed this addition. The Tribunal upheld the decision, referencing the principle that deductions under Chapter VIA must be computed after considering all expenses, including partner remuneration, as per the provisions of the Act.

4. Allowance of Full Deduction under Section 80IC by CIT(A) Against a Lesser Deduction by the Assessing Officer:
The Revenue challenged the CIT(A)'s decision to allow full deduction under section 80IC. The Tribunal found that the CIT(A) had correctly adjudicated the issue by applying a reasonable GP rate from a comparable business and confirmed the CIT(A)'s order.

5. Deletion of Addition Made by the Assessing Officer on Account of Royalty for Using the Name 'ADVANTA':
The AO adjusted the royalty rate to 3% per piece, reducing the profits eligible for deduction under section 80IC. The CIT(A) found the AO's adjustment unjustified and deleted the reduction. The Tribunal upheld the CIT(A)'s decision, noting the consistency of the lower royalty rate with previous years and the significant commission paid to BPCL.

6. Deletion of Addition Made on Account of Royalty to Sister Concern M/s Shivam Industries, Delhi:
The AO estimated a 1% royalty on sales for using the brand name 'Surya Flame' and reduced profits by Rs. 24,71,451/- for computing deduction under section 80IC. The CIT(A) restricted this reduction to Rs. 5,81,518/- by estimating the royalty at Rs. 2/- per gas stove. The Tribunal upheld the CIT(A)'s decision, emphasizing the distinct tax treatment of the firm and its partners and the historical payment of royalty.

Conclusion:
The Tribunal dismissed the appeals of both the Revenue and the assessee, confirming the CIT(A)'s decisions on all issues. The judgment emphasized consistency with previous years' accepted practices, reasonable application of comparable benchmarks, and adherence to statutory provisions for computing deductions under Chapter VIA.