2018 (4) TMI 327 - AT - Income Tax

Deduction u/s 80IE - maintenance of separate accounts - assessee stated that separate books of accounts were maintained and while preparing the audited balance sheet, both the accounts were merged. - CIT-A determining the net profit at 12% for manufacturing unit - Held that - AO, without any basis, had held that the profits of the manufacturing activity would have to be determined only at 12% of sales. This has got no rationale supported by proper workings. In addition to this, the ld AO further stated that the differential profit figure of ₹ 41,44,392/- needs to be added back to the trading profit of the assessee, without any basis. There is absolutely no connection between the trading activity and manufacturing activity of the assessee. Lot of common administrative expenses were in fact debited only in the manufacturing account as could be evident from the independent profit and loss account summarized supra, without making apportionment of common expenses between trading and manufacturing activity. If the same is done, then the assessee would be entitled for higher deduction u/s 80IE in view of increased profits in manufacturing activity. In this scenario, we hold that there is absolutely no basis for the conclusion of the AO that the differential profits figure of ₹ 41,44,392/- represents trading profit of the assessee. We hold that there is absolutely no case made out by the ld AO for shifting of profits from trading activity to manufacturing activity of the assessee and hence we have no hesitation in directing the ld AO to delete the addition of ₹ 41,44,392/- made in the assessment. - Decided in favour of assessee

Issues Involved:
1. Justification of the net profit determination at 12% for the manufacturing unit.
2. Restriction of the disallowance to ?41,44,392 under section 80IE of the Income Tax Act.
3. Maintenance and merger of separate books of accounts for trading and manufacturing activities.
4. The applicability of section 80IA(10) concerning transactions with associate concerns.
5. The addition of the disallowed amount to the trading division's income.

Issue-wise Detailed Analysis:

1. Justification of the Net Profit Determination at 12% for the Manufacturing Unit:
The Assessing Officer (AO) observed that the assessee claimed a deduction under section 80IE of the Income Tax Act for profits derived from manufacturing activities. The AO found the gross profit rate for trading activities abnormally low and for manufacturing activities abnormally high. The AO concluded that the assessee inflated the profit of the manufacturing unit to claim higher deductions under section 80IE and determined the net profit at 12% for the manufacturing unit, restricting the disallowance to ?41,44,392.

2. Restriction of the Disallowance to ?41,44,392 under Section 80IE:
The AO applied the provisions of section 80IA(10) of the Act, concluding that the transactions with Aristo Texcon Pvt Ltd were arranged to earn excess profits in the manufacturing unit, resulting in a higher claim of deduction under section 80IE. The AO held that the assessee could have earned a maximum net profit of ?45,34,956 (12% of the total turnover of manufactured goods) and disallowed the remaining amount of ?41,44,392, treating it as trading profit and adding it back to the returned income.

3. Maintenance and Merger of Separate Books of Accounts for Trading and Manufacturing Activities:
The assessee maintained separate books of accounts for trading and manufacturing activities but merged them in the consolidated trading and profit and loss account while filing the return. The AO found the explanation regarding the merger unsatisfactory as it was not mentioned in the tax audit report. The assessee argued that the deduction under section 80IE was claimed only for profits derived from manufacturing activities and that separate accounts were maintained, which were later merged.

4. The Applicability of Section 80IA(10) Concerning Transactions with Associate Concerns:
The AO observed that the assessee sold goods to its associate concern, Aristo Texcon Pvt Ltd, at higher prices than to Segmach Inc. The AO alleged that the assessee charged excess prices to Aristo Texcon Pvt Ltd to inflate the profits of the manufacturing unit. The assessee contended that the items sold to both concerns had different specifications and that the sales were duly recorded in the Central Excise and Central Sales Tax returns. The Tribunal found no variation in the selling price between the two concerns and held that the AO's application of section 80IA(10) was not justified.

5. The Addition of the Disallowed Amount to the Trading Division's Income:
The AO added the disallowed amount of ?41,44,392 to the trading division's income, alleging that the assessee shifted profits from trading to manufacturing activities. The Tribunal found that the books of accounts for both activities were produced before the AO and were not rejected. The Tribunal held that there was no basis for the AO's conclusion and directed the deletion of the addition.

Conclusion:
The Tribunal concluded that the AO's determination of net profit at 12% for the manufacturing unit and the restriction of the disallowance to ?41,44,392 under section 80IE were not justified. The Tribunal found that the assessee maintained proper accounts and that the AO's application of section 80IA(10) was not supported by evidence. The Tribunal directed the deletion of the addition of ?41,44,392 to the trading division's income and allowed the appeal of the assessee.

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