2014 (7) TMI 751 - AT - Income Tax

Application of section 10B(7) r.w. section 80IA(10) - claiming excess exemption by showing higher profit - AO concluded that by taking the services of employees of the sister concern, the assessee had shown more than ordinary profits. - Held that - For applying the provisions of section 10B(7) r.w.s 80IA(10), AO has first to show that cost of hiring employees by the assessee had resulted into more than ordinary profit - This could happen only if the assessee had paid less than the market value to the sister concern on account of hired employees - There is no material on record to show that sister concern had hired the employees at less than market price because only in that case it could be said that the assessee had paid less than the market price - it cannot be said that assessee had produced more than the ordinary profit because of close connection with the sister concern or that it had declared more profit in order to claim more exemption thus, the order of the CIT(A) is set aside Decided in favour of Assessee.

Summary

Issues:
Dispute over addition made by AO u/s 10B (7) read with section 80IA (10) regarding reimbursement to group company for cost of hired employees.

Analysis:
The appeal was against the order of CIT(A) for the assessment year 2008-09 concerning the addition made by the AO under sections 10B(7) and 80IA(10). The AO had added a sum to the total income based on the reimbursement made by the assessee to a group company for the cost of employees hired. The AO concluded that the assessee had shown more than ordinary profits due to the arrangement with the sister concern. The CIT(A) confirmed this addition, leading to the appeal before the Tribunal.

During the hearing, the AR for the assessee argued that the method used by the AO for applying section 80IA(10) was incorrect. It was contended that the revenue corresponding to the hired employees should not be treated as profit earned by the assessee without evidence that the payment was below market value. The AR highlighted that the profit rate before tax remained consistent with the previous year, indicating no abnormal profits. The DR, however, supported the lower authorities' decisions.

Upon review, the Tribunal analyzed the application of sections 10B(7) and 80IA(10) in the context of the case. It was observed that the AO had not demonstrated that the cost of hiring employees led to more than ordinary profits. The AO's assumption that the entire revenue was profit earned after deducting the cost of employees hired was deemed incorrect. The Tribunal emphasized that to establish more than ordinary profits, it must be shown that the assessee paid less than the market value for the hired employees. Since no evidence supported this, the Tribunal concluded that the lower authorities' approach to add proportionate revenue was incorrect. Consequently, the order of the CIT(A) was set aside, and the addition made by the AO was deleted.

In the final decision, the Tribunal allowed the appeal of the assessee, pronouncing the order on 7-8-2013.