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2006 (3) TMI 225 - AT - Income TaxDeduction u/s 80-IA - Profits And Gains From Industrial Undertaking - HELD THAT - As noted in the order of the AO as well as in the order of the learned CIT(A) the printing work was being done by unit 4 of the assessee-company for unit 1 at fixed rates and the claim of the assessee that the said rates were even lower than the market rates was not rebutted/refuted by the AO by bringing any material on record. As rightly contended by the learned counsel for the assessee before us the expenditure on marketing and distribution of the publications was entirely required to be done for the business of publishing house i.e. unit No. 1 and the same was not connected with the printing business of unit 4. It appears that all these material and relevant aspects however (were) simply brushed aside by the AO and he proceeded to reject the book results of unit 4 shown by the assessee merely on the basis that the profit margin shown by the assessee in respect of the said unit was higher at 62 per cent as against profit margin of 10 per cent shown in respect of other units of the assessee. In our opinion this action of the AO was not sustainable in law in the facts and circumstances of the present case including especially the fact that no material or specific defects were pointed out by him in the books of account maintained by the assessee in respect of unit 4 and there was nothing brought on record by him to show that the profit margin of 62 per cent shown in the said books was actually lower. On the other hand such higher profit margin in respect of unit 4 was satisfactorily explained by the assessee-company and having satisfied with such explanation the AO was directed by the learned CIT(A) to allow the deduction claimed by the assessee u/s 80-IA of the Act on the book results of unit 4. Thus we are of the view that the relief allowed by the learned CIT(A) on this issue to the assessee was fully justified and there being no infirmity in the impugned orders of the learned CIT(A) allowing such relief we uphold the same. In the result the appeals of the Revenue for AY 1998-99 and 1999-2000 are dismissed.
Issues:
- Challenge to the direction of CIT(A) to allow deduction under s. 80-IA of the IT Act based on book results of unit 4. - Application of sub-s. (10) of s. 80-IA in determining profit margin. - Justification for higher profit margin of unit 4 compared to other units. - Consideration of losses of earlier years of unit 4 for determining eligible profits under s. 80-IA(5). Analysis: Issue 1: Challenge to CIT(A) direction on deduction under s. 80-IA The Revenue challenged the CIT(A)'s direction to allow deduction under s. 80-IA based on the book results of unit 4. The AO had restricted the deduction, questioning the reliability of the income and expenditure statement of unit 4. The CIT(A) upheld the deduction, emphasizing that the higher profit margin of unit 4 was adequately justified due to factors like new machinery, low labor costs, and minimal consumables. She noted the differences in business nature between unit 1 and unit 4, rejecting the AO's application of an overall profit rate. The Tribunal upheld the CIT(A)'s decision, emphasizing the absence of defects in unit 4's books and the satisfactory explanations provided by the assessee. Issue 2: Application of sub-s. (10) of s. 80-IA The AO invoked sub-s. (10) of s. 80-IA to determine the profit margin of unit 4, leading to a restriction on the deduction claimed. The CIT(A) examined the reasons for the higher profit margin, including new machinery and lower costs, finding the AO's rejection unjustified. The Tribunal concurred, highlighting the lack of specific defects in unit 4's books and the failure to prove the profit margin discrepancy. The CIT(A) directed the AO to allow the deduction based on unit 4's book results, a decision upheld by the Tribunal. Issue 3: Justification for higher profit margin of unit 4 The Tribunal emphasized the adequate justification provided for the higher profit margin of unit 4, considering factors like machinery efficiency and cost-effectiveness. The Tribunal rejected the AO's comparison of profit margins between units without substantial evidence of manipulation by the assessee. The Tribunal upheld the CIT(A)'s decision to allow the deduction based on unit 4's book results, emphasizing the satisfactory explanations provided by the assessee. Issue 4: Consideration of losses of earlier years for eligible profits The Revenue raised the issue of considering losses of earlier years of unit 4 for determining eligible profits under s. 80-IA(5). The Tribunal, upon the assessee's submission that earlier losses had been absorbed, directed the AO to verify and adjust any unabsorbed losses against the profits of unit 4 for the relevant assessment year. The Tribunal restored this issue to the AO for necessary verification. In conclusion, the Tribunal dismissed the Revenue's appeals for certain assessment years while partly allowing one appeal for statistical purposes, upholding the CIT(A)'s decision to allow the deduction under s. 80-IA based on unit 4's book results. The Tribunal emphasized the justifications provided for the higher profit margin of unit 4 and directed the AO to consider any unabsorbed losses for determining eligible profits under s. 80-IA(5).
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