2016 (5) TMI 314 - AT - Income Tax

Reduction of deduction u/s 80IB - whether CIT(A) has erred in law and on facts in not appreciating that where income from exempted unit in respect of eligible business was higher than the normal profit in case of existing units, a burden of proof of very high order was cast on assessee to prove correctness of such profit and assesee failed to discharge this onus? - Held that - The facts of the year under consideration are identical to those of earlier years. By following findings of earlier years assessment order, in the year under consideration also the AO has reallocated the expenses to all units and thereby recalculating the profits of all units by applying the net profit rate of 4.57% to all units. Such net profit rate of 4.57% was percentage of profits of business as a whole and not of individual division/unit. By applying this percentage of profit of 4.57% the AO has reworked profits of the eligible units u/ s 80-IB of the Actbby application of fixed net profit rate of 4.57% to all units by AO was on assumption basis only without pointing out any defect, error in the books of accounts of all units maintained separately. Without quoting any example, on assumption basis, the AO held that the transactions were not at arm s length between the associate enterprises. The AO has not explained as to how he was not satisfied about the correctness or completeness of the accounts of the appellant. The AO has also not given any finding that the method of accounting has not been regularly followed by the appellant. Since the AO did not point out any defect in the books of accounts, the AO was not justified in rejecting appellant s books of accounts by invoking provisions of section 145(3) of the Act. In my considered view, following the appeal orders of earlier years, there were no circumstances/facts attracting the application of provisions of section 145(3) of the Act. The AO s action of rejecting the books of accounts is therefore, disapproved. Considering the above facts and circumstances and also considering that the facts of the year under consideration are identical to those of earlier years, by following the appeal orders of earlier years, it is held that the AO was not justified in applying the net profit ratio of 4.57% to determine the profits of units eligible for deduction u / s 80-IB of the Act. The AO s action of reducing the appellant s claim of deduction u /s 80-18 is therefore, disapproved. - Decided in favour of assessee

Summary

Issues Involved:
- Disallowance of deduction u/s 80IB by the Assessing Officer
- Allocation of expenses and recalculating profits
- Application of net profit rate by the AO
- Rejection of books of accounts under section 145(3) of the Act
- CIT(A) decision on reduction of deduction u/s 80IB

Analysis:

1. Disallowance of deduction u/s 80IB by the Assessing Officer: The Assessing Officer (AO) made disallowances in the quantum of 80IB deduction and also made certain disallowances out of the claim of expenses and depreciation. The AO reworked the eligible deduction u/s 80IB claim, leading to a reduction in the appellant's claim. The appellant filed detailed replies and additional information during the assessment proceeding to justify their claim.

2. Allocation of expenses and recalculating profits: The AO reallocated expenses to all units and recalculated the profits by applying a fixed net profit rate of 4.57% to all units. This allocation was based on the assumption without pointing out any defects in the separate books of accounts maintained by the appellant. The AO's action of reducing the appellant's claim of deduction u/s 80IB was deemed unjustified by the CIT(A) as the method was based on conjectures and assumptions.

3. Application of net profit rate by the AO: The AO's application of a fixed net profit rate without concrete evidence or defects in the appellant's accounts was considered unwarranted. The CIT(A) disapproved the AO's action and deleted the disallowance made on the appellant's claim of deduction u/s 80IB. The CIT(A) emphasized that the AO's rejection of the books of accounts under section 145(3) was not justified as there were no material defects or irregularities found.

4. CIT(A) decision on reduction of deduction u/s 80IB: The CIT(A) extensively analyzed the appellant's different units, profits, and expenses allocation. Referring to earlier years' assessment orders, the CIT(A) found the facts of the case identical and held that the AO's actions were not maintainable. The CIT(A) upheld the appellant's claim of deduction u/s 80IB by dismissing the AO's method of applying a fixed profit percentage to all units without proper justification.

In conclusion, the Appellate Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal. The Tribunal found the CIT(A)'s findings well-reasoned and based on factual and legal points, hence no interference was necessary. Both appeals filed by the revenue were dismissed based on the consistent findings and decisions made in the assessment years 2009-10 and 2010-11.