2016 (2) TMI 197 - AT - Income Tax

Assessment under Section 153 A - Eligibility of deduction u/s 80IB and 80IC denied - Held that - None of the material seized during the search relates to the year under appeal.None of the material found relate to the goods transfer to one unit from other for the period. None of the material relates to the purchases from sister concerns.None of the material suggest that the material transferred to eligible undertaking is less than the market rate. None of the material suggest that the eligible units are not carrying out manufacturing activity, which is stated by assessee. None of the material shows that there is inflation of the profit by assessee of eligible undertakings. None of the material suggest that appropriation of profit made by the assessee to derive the income of eligible undertaking is incorrect. None of the material suggest that eligible units earns more than Ordinary profits‟. In view of above, we confirm that the material found during the course of search is not incriminating which even remotely suggest that assessee s claim of deduction u/s 80IC/80 IB is incorrect. - Decided in favour of assessee

Issues Involved:
1. Jurisdiction of AO under Section 153A.
2. Curtailment of profit eligible for deduction under Sections 80IB and 80IC.
3. Close connection with M/s. S.H. Kelkar & Co. (P) Ltd and M/s. Dharampal Satyapal Ltd.
4. Notional royalty reduction.
5. Attribution of only 5% of profits to manufacturing activities at Damowala/Agartala units.
6. Non-adjudication of ground of appeal no. 7 by CIT(A).

Detailed Analysis:

1. Jurisdiction of AO under Section 153A:
The assessee challenged the jurisdiction of the AO under Section 153A, arguing that the deduction allowed under Sections 80IB/80IC was not based on any documents seized during the search. The CIT(A) rejected this contention, stating that various annexures of the seized material contained details of material transfer challans and other relevant documents. However, the Tribunal found that none of the seized materials pertained to the assessment years under appeal (2005-06 to 2007-08). The Tribunal held that the assessment under Section 153A can only be interfered with if there is incriminating material unearthed during the search, which was not the case here. Therefore, the Tribunal allowed the ground, holding that no additions could be made to the income already assessed.

2. Curtailment of Profit Eligible for Deduction under Sections 80IB and 80IC:
The AO reduced the deduction under Sections 80IB/80IC, attributing only 5% of the profits to the eligible units, arguing that the transactions between units were not at "arm's length price" and that the profits were inflated. The CIT(A) upheld this view, stating that the assessee had not disclosed relevant transactions in Form 10CCB. However, the Tribunal found that all relevant details were available during the original assessment proceedings and that the AO's findings were not based on any incriminating material found during the search. Therefore, the Tribunal did not find merit in the AO's reduction of the deduction.

3. Close Connection with M/s. S.H. Kelkar & Co. (P) Ltd and M/s. Dharampal Satyapal Ltd:
The CIT(A) held that the appellant had a close connection with M/s. S.H. Kelkar & Co. (P) Ltd and M/s. Dharampal Satyapal Ltd, which led to more than ordinary profits for the eligible units. The Tribunal noted that the transactions with these companies were at market value and did not result in more than ordinary profits. The Tribunal found no evidence to support the CIT(A)'s conclusion that the profits were inflated due to these connections.

4. Notional Royalty Reduction:
The CIT(A) held that a reasonable value of notional royalty for the use of a secret formula should be reduced from the profits eligible for deduction under Sections 80IB/80IC. The Tribunal found that there was no requirement for reducing the profits on this account as the intellectual property was not charged by the owner, and there was no evidence of inflated profits due to this.

5. Attribution of Only 5% of Profits to Manufacturing Activities at Damowala/Agartala Units:
The AO attributed only 5% of the profits to the eligible units, arguing that only limited activities were carried out at these units. The Tribunal found that the manufacturing activities were indeed carried out at these units, and the allocation of profits was appropriately done. The Tribunal did not agree with the AO's arbitrary attribution of only 5% of the profits to the eligible units.

6. Non-Adjudication of Ground of Appeal No. 7 by CIT(A):
The assessee argued that the CIT(A) did not adjudicate on ground of appeal no. 7, which challenged the AO's attribution of only 5% of profits to the eligible units. The Tribunal found that the CIT(A) had indeed failed to address this ground, but since the primary ground regarding the jurisdiction under Section 153A was allowed, this issue became moot.

Conclusion:
The Tribunal allowed the appeals in part, holding that the AO did not have jurisdiction under Section 153A to disturb the completed assessments for the years 2005-06 to 2007-08 as no incriminating material was found during the search. Consequently, the Tribunal did not adjudicate on the merits of the deductions under Sections 80IB and 80IC, as the primary ground regarding jurisdiction was sufficient to dispose of the appeals.

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