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2019 (2) TMI 1126 - AT - Income TaxRejection of books of accounts - abnormal profit in SEZ unit - Entitlement for exemption u/s 10AA - assessee was doing business activities outside the SEZ area - purchases made by the assessee firm from the proprietorship concern - Section 80-IA(8) applicability - HELD THAT - AO in the case of the proprietorship concern in the assessment order u/s 143(3) for assessment year under appeal i.e. 2009-10 accepted the trading results and did not doubt the transactions between the proprietorship concern and the assessee firm. The assessee firm explained the reasons why purchases have been made from the proprietorship concern. No specific defects have been pointed out in maintenance of the books of accounts by the assessee. The assessee also explained that it has purchased semi finished material from the proprietorship concern upon which improvements have been done by the assessee firm and rates are verifiable, which were according to the market rate. The assessee also explained that there is a difference in the activities of the proprietorship concern and the assessee firm. Therefore, their operation and activities are materially different and hence, two units are incomparable. The AO of the assessee firm in subsequent AY 2010-11 examining the same issue in the order u/s 143(3) of the Act accepted the trading results of the assessee, copy of the order is also placed on record. Therefore, Revenue- Department shall have to maintain Rule of consistency in their approach while accepting the book result of the assessee. It, therefore, appears that the AO without bringing any material on record made the addition merely on surmises and guess work. Therefore, there was no justification to reject the book results of the assessee. The Ld. CIT(A) rightly considered and appreciated the facts and material on record for the purpose of deleting the addition. Since, assessee is admittedly entitled for deduction u/s 10AA of the Act, the AO without any justification tried to make the addition considering the addition as income from non special economic zone business without bringing any evidence against the assessee as to how the assessee was doing business activities outside the SEZ area. The findings of the AO are without any basis and without bringing any evidence on record. No discrepancy has been pointed out in maintenance of the books of accounts of the assessee and the documents produced on record, therefore, there was no justification to make the aforesaid addition against the assessee. Considering the evidences and material on record in the light of findings or facts recorded by the Ld. CIT(A), we are of the view section 80IA(8)&(10) are not applicable to the facts and circumstances of the case. - Decided in favour of assessee.
Issues Involved:
1. Whether the CIT(A) erred in allowing relief on the point of extra profit worked by the AO on account of diversion of income from Non-SEZ unit to SEZ unit to avail tax benefit. 2. Whether the CIT(A) erred in not appreciating the abnormal profit margins between SEZ and Non-SEZ units. 3. Whether the CIT(A) erred in holding that the provisions of section 80IA(10) were not applicable. 4. Whether the order of the AO should be sustained based on the facts of the case. 5. Any other ground of appeal raised during the hearing. Detailed Analysis: 1. Relief on Extra Profit and Diversion of Income: The Revenue's appeal contested the CIT(A)'s decision to allow relief on the extra profit worked by the AO, alleging diversion of income from a Non-SEZ unit to an SEZ unit for tax benefits. The AO observed significant differences in profit margins between the SEZ unit and the Non-SEZ unit, both of which were closely connected through a common partner. The AO applied the gross profit rate of the Non-SEZ unit to the SEZ unit, resulting in a reduced profit figure, which was treated as income from non-SEZ business. The CIT(A), however, found that the SEZ unit's activities were under strict regulatory supervision, and the purchases and sales were genuine and verifiable. The CIT(A) concluded that the AO's findings were based on suspicion without substantial evidence, and hence, the addition was deleted. 2. Abnormal Profit Margins: The AO noted abnormal profit margins in the SEZ unit compared to the Non-SEZ unit, suggesting a diversion of income. The SEZ unit showed higher gross and net profit percentages compared to the Non-SEZ unit. However, the CIT(A) noted that the SEZ unit enjoyed certain benefits and privileges, such as duty-free purchases, which justified the higher profit margins. The CIT(A) also emphasized that the SEZ unit's operations were materially different from the Non-SEZ unit, making them incomparable. The AO's method of applying the Non-SEZ unit's profit rate to the SEZ unit was deemed inappropriate and without legal basis. 3. Applicability of Section 80IA(10): The AO invoked section 80IA(10), alleging that the SEZ unit's profits were artificially inflated to claim tax exemptions. The CIT(A) disagreed, stating that the AO misunderstood the provisions of section 80IA(8) and (10). The CIT(A) clarified that these sections apply to transactions between eligible and non-eligible businesses of the same assessee, which was not the case here. The CIT(A) found no evidence of any arrangement to evade taxes and noted that the trading results of the Non-SEZ unit had been accepted by the AO in the assessment order for the same year. 4. Sustaining the AO's Order: The Revenue argued that the AO's order should be sustained, citing differences in profit margins and the rejection of the SEZ unit's books of accounts. The CIT(A) found that the AO's rejection of the books was unjustified, as no specific defects were pointed out. The CIT(A) also noted that the AO accepted the trading results of the Non-SEZ unit and the SEZ unit in subsequent assessments, indicating a need for consistency. The Tribunal upheld the CIT(A)'s decision, finding no merit in the Revenue's appeal and dismissing it. 5. Other Grounds of Appeal: The Tribunal noted that no additional grounds of appeal were raised during the hearing. The Revenue's request to restore the matter to the AO for fresh assessment was denied, as no new material or specific allegations were presented against the CIT(A)'s findings. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition made by the AO. The Tribunal found that the AO's findings were based on suspicion without substantial evidence, and the differences in profit margins were justified by the SEZ unit's regulatory benefits and operational differences. The provisions of section 80IA(10) were deemed inapplicable, and the AO's rejection of the SEZ unit's books was found to be without basis.
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