2020 (5) TMI 202 - AT - Income Tax

Deduction u/s 80IC - profits to the extent of 2% of sales (excluding sale of insulated copper wire) are not eligible for deduction - Excessive estimation of profit - HELD THAT - A.O. only on the basis of presumption made the disallowance by observing that the assessee might have inflated net profit rate by not paying the technical know how fee and declaring the higher net profit rate. However he ignored this explanation of the assessee that increase in the higher rate for the year under consideration was due to low expenses on account of interest and lesser amount of depreciation. Assessee also explained that one of the partner namely Shri Mohinder Sethi was experienced and that no expense on account of royalty / technical know how had been incurred by the assessee. The assessee that neither in the preceding year nor in the succeeding year such disallowance has been made in the similar circumstances has not been rebutted. Therefore, we are of the view that the impugned disallowance made by the A.O. and sustained by the CIT(A) was not justified, accordingly the same is deleted. Amount charged in excess from sister / related concern - HELD THAT - A.O. without pointing out any specific difference in the rates made the addition by taking the average rate although the variation was only 0.64% even the explanation of the assessee that different rates were prevailing at different point of time when sales were made to the outsider was not considered. Addition made by the A.O. and sustained by the Ld. CIT(A) was not justified, accordingly, the same is deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Denial of deduction under Section 80IC of the Income Tax Act.
3. Addition on account of alleged excess charges from sister/related concern.

Detailed Analysis:

Condonation of Delay in Filing the Appeal:
The appeal was filed by the Assessee against the order of the Ld. CIT(A), Palampur, and was delayed by one day. The Assessee filed an application for condonation of delay, explaining that the delay was due to the accountant's unexpected leave owing to his grandfather's illness. The Ld. Counsel for the Assessee reiterated these reasons during the hearing. The Ld. DR did not oppose the condonation, considering the delay was only one day. Consequently, the delay was condoned, and the appeal was admitted.

Denial of Deduction under Section 80IC:
The main grievance of the Assessee was the denial of deduction under Section 80IC amounting to ?16,41,874/-. The Assessee, engaged in manufacturing electric items, had declared a Net Profit (NP) rate of 35.14% for the relevant year, higher than the preceding year's 32.72%. The Assessing Officer (A.O.) observed that no expenses were debited for technical know-how, market/customer base, or goodwill, and concluded that the Assessee was not eligible for the deduction under Section 80IC for the profit amounting to ?16,41,874/-.

The Assessee argued that the A.O.'s presumption of technical know-how from a related concern was unfounded, as no such expenses were incurred. The Assessee also highlighted that similar deductions were allowed in previous years without such adjustments. The Ld. CIT(A) upheld the A.O.'s decision, reasoning that the Partnership Deed was deliberately designed to inflate profits from the eligible business and that the Assessee used the market/customer base and goodwill of its related concern.

Upon appeal, it was noted that the A.O. made the disallowance based on assumptions without concrete evidence. The Assessee's explanation regarding the increase in NP due to lower interest and depreciation expenses was ignored. Furthermore, similar disallowances were not made in preceding or succeeding years under similar circumstances. Therefore, the disallowance made by the A.O. and sustained by the Ld. CIT(A) was deemed unjustified and was deleted.

Addition on Account of Alleged Excess Charges from Sister/Related Concern:
The A.O. observed that the Assessee sold goods to its related/sister concern at higher rates compared to outsiders, resulting in an addition of ?1,68,593/- to the taxable income, which was not eligible for deduction under Section 80IC. The Assessee contended that the rate difference was negligible (0.64%) and that the A.O. selectively considered transactions without confronting the Assessee, violating principles of natural justice.

The Ld. CIT(A) sustained the addition, but upon further appeal, it was noted that the A.O. made the addition based on average rates without specifying any particular discrepancies. The Assessee's explanation that different rates prevailed at different times was not considered. Therefore, the addition made by the A.O. and sustained by the Ld. CIT(A) was deemed unjustified and was deleted.

Conclusion:
The appeal of the Assessee was allowed, with the delay in filing the appeal being condoned, and the disallowances under Section 80IC and the addition on account of alleged excess charges from the sister/related concern being deleted.