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TMI Blog2014 (6) TMI 910X X X X Extracts X X X X X X X X Extracts X X X X ..... is a proprietor of two business concerns namely M/s B.M. Packaging, Mohali and M/s B.M. Machines, Baddi. The assessee has claimed the income from M/s B.M. Machines, Baddi as exempt under the provisions of section 80IC of the Act. During assessment proceedings the Assessing Officer asked the assessee to produce supporting documentary evidence to justify the claim of deduction u/s 80IC. These documents were duly submitted. The assessee was further asked to file comparative chart in respect of expenses claimed, gross receipts, purchases and net profit etc. The assessee in response filed following chart: Particular Head M/s B.M. Packaging Mohali M/s B.M. Machines Baddi Sales 33621732 15355926 Other Income 351309 7508 Purchase & Consumables 26936764 4989773 Opening Stock 2617570 0 Closing Stock 3888510 15850 Expenses Freight & Cartage, Labour, Toll Tax 41063 122928 E.S.I 27092 Job Work/Labour 974169 323354 Wages & Salaries 864924 619828 Electricity & Water 10293 142667 Staff Welfare 36512 99684 Printing & Stationary 24225 2409 Telephone & Trunk- calls 112093 2323 Bank Charges & Interest 82006 205 Accounting Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Machines, Baddi is much improved and latest as comparative to B.M. Packaging, Mohali, hence the costing at B.M. Machines, Baddi is less than as comparative to B.M. Machines, Baddi is less than as comparative to B.M. Packaging , Mohali which is also one of the reason for the variation in the Gross Profit Rates and Net Profit Rates. As regards, the variation of expenses of the B.M. Packaging, Mohali and B.M. Machines, Baddi, the main reasons for such variation is the period of operation of such units. As the B.M. Machines, Baddi has started in the F.Y. 2009-10 only, and in such financial year, the unit was in operation for three months only, while the B.M. Packaging, Mohali was in operation for the full year. Hence, the expenses for the three months in the case of the B.M. Machines, Baddi cannot be comparing with the expenses for the full financial year in the case of the B.M. Packaging, Mohali." 4. Both these contentions raised in the above reply were not found correct and the Assessing Officer analyzed these contentions vide para 9(i) & (ii) and the relevant portions are as under: "9 (i) In the first para, the main contention given by the assessee justifying the variation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it of the unit which operates for a whole year. If a unit operates for three months in a year its expenses can be less than the unit operating throughout the year, but than the same would then also held true in the case of its production and sales. Hence, this contention of the assessee is also devoid of merits and can not be accepted as working for only three months in a year does in no way increase the productivity and efficiency of a unit. 5. The Assessing Officer also observed that Baddi unit was new where new machinery has been installed and therefore in the in the initial years the expenses would be more. Moreover unit was away from other places of business, therefore even the administrative expenses are little more. She also observed that units in the hilly area require more expenses due to lack of proper infrastructure, difficult terrain and lack of availability of skilled workers. However, in case of assessee profit shown at Baddi was almost four times higher than Mohali area. In the above background it was further observed that nature of business in both the units was identical because both the units were manufacturing packaging, labeling and packing machines. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of both the units are made from the same sources (it has been duly mentioned by Assessing Officer herself in para 10(iii) of the assessment order) and the Assessing Officer has not pointed out any discrepancy in the purchase bills or even in the sale bills. The profits and gains of the eligible business for the purposes of deduction u/s 80IC can be recomputed as provided in section 80IC(7) read with section 80IA(10) of the Act. This means that reallocation of purchases between exempt and non-exempt unit cannot be done except as provided in section 80IA(10) of the Act and certainly not without pointing out specific discrepancy in this regard. Hence, it is held that the addition of Rs. 50,19,196/- on account of reallocation of purchases has wrongly been made by the Assessing Officer and the addition made on this account is deleted. Ground of appeal taken in this regard is allowed." 9. Before us, the Ld. DR strongly supported the order of Assessing Officer 10. On the other hand, Ld. counsel for the assessee strongly supported the impugned order. He further submitted that machines manufactured at Baddi unit were technologically superior and cost less. It was also submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready conceded before the Ld. CIT(A) that expenses were not properly allocated and has accepted the reallocation of expenditure. In addition to these facts, the assessee has shown net profit rate of 12.66% on sales of Rs. 3.36 crores in Mohali unit whereas on turn over of Rs. 1.53 crores, the net profit is 57.95% at Baddi unit which is very high. During the course of hearing, we had asked the assessee to file copy of the invoices to find out if the products were of so called better technology were sold at a higher price and sale invoices for both the units were field on 22.5.2014. 13. The Assessing Officer in para 9 analyzed the reasons again before him for higher profits at Baddi units. The first point mentioned is that according to Assessing Officer, the Mohali unit had machinery of about Rs. 55,15,306/- whereas the machinery at Baddi unit was Rs. 6,60,972/- and therefore, technology could not be better for Baddi unit. However, we agree with the submissions of the Ld. counsel for the assessee that machinery at Mohali unit was consisted of only two items i.e. tools and equipments which had the opening WDV of Rs. 4386.35 and machinery with a WDV of Rs. 18,379.30. Thus the total m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end product is same, the cost would also be the same. By installing a machine of Rs. 6 lakhs it cannot be said that the assessee is achieving economy of scale or some other technological development. It is a simple case of inflation of profits in the eligible unit and in such situation the Assessing Officer has clear powers in terms of section 80IA(10) to compute the reasonable profit. The Ld. CIT(A) has misdirected himself by observing that Assessing Officer has not pointed out any discrepancy because the Assessing Officer has clearly pointed out wrong allocation of various expenses which was accepted by the assessee before the CIT(A). Further, the Assessing Officer has also given reasons showing that profits in exempt unit have been inflated. In Section 80IA(10), it is clearly provided that if Assessing Officer has reasons that the business has been so arranged to show inflated profits in eligible unit then Assessing Officer has power to recompute the profits of such eligible unit. As seen from the sale invoice there is definitely a reason to believe that assessee has inflated the profits in eligible unit because the same product is being sold form both the units for almost iden ..... X X X X Extracts X X X X X X X X Extracts X X X X
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