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TMI Blog2015 (1) TMI 1501X X X X Extracts X X X X X X X X Extracts X X X X ..... tove in the immediately preceding year which was accepted by the Revenue in the assessment framed u/s 143(3) - as per CIT(A) addition made by the Ld. A.O. is found to be without any cogent basis - HELD THAT:- CIT(A) had correctly adjudicated the issue particularly in the light of the fact that lower royalty was accepted in the earlier years . Further, the assessee had paid the huge commission of Rs. 2,23,27,903/- to M/s BPCl, therefore, we find nothing wrong with the order of Ld. CIT(A) and we confirm the same. Deduction u/s 80IC - Addition on account of non debiting of the partner s remuneration provided in the Partnership deed - As argued debiting of such remuneration will only result into reduction of manufacturing profits and no taxability will arise - HELD THAT:- As decided in I.T.O. NAHAN VERSUS M/S GNG ENTERPRISES [ 2014 (11) TMI 1280 - ITAT CHANDIGARH] before allowing deduction u/s 80IC the income has to be computed as per the provisions of Sections 32 to 43 of the Act. Deduction could have been allowed only after computing the income under a particular head. In this case the income in the hands of the a firm was computed in terms of Sec 28 to 43D and Sec 40(b) in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in allowing full deduction u/s 80IC of the act to the assessee as against a lesser deduction allowed by the A.O. by invoking the provisions of section 80IA(10). 2. The CIT(A) has erred in deleting the addition made by the A.O. on account of royalty for using the name of 'ADVANTA' by applying the provisions of section 80IA(10) of the act. 3. The CIT(A) has erred in deleting the addition made by the A.O. on a/c of royalty to sister concern M/s Shivam Industries, Delhi. 4. First we shall take up ground Nos.1 raised in both the appeals by Revenue as well as assessee. 5. Ground No.1 : After hearing both the parties we find that assessee is a partnership firm and is engaged in the business of manufacturing gas stoves which were sold to the LPG dealers of Indian Oil Corporation (IOC) and BPCL. The assessee has shown GP @ 39% on turn over of Rs. 37,27,69,178/- and the net profit shown was 22.06%. During assessment proceedings, it was noticed that assessee has conducted substantial transactions with his sister concern. The gist of transactions given by the Assessing Officer in para 4 reads as under:- Sl.No. Name of the assessee and nature of trade with assessee Turnover Gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Beverages and also the specifications of the gas stove bodies. It was pointed out that gas stove body itself is an input and constitute about 15% of the total value of the product. In this background it was stated that profit could not be compared for the whole equipment. It was also pointed out that assessee was selling complete appliance with B.I.S Quality Certification which generally have better profit. The assessee was informed regarding the details of M/s Triputi Food and Beverages, which is as under:- i) The GP of M/s. Tirupati Food & Beverages, Parwanoo for the year under consideration is 26.35% as against GP of 39% declared by you. It will not be out of place to mention here that M/s. Delton Industries, Parwanoo and M/s. Jain Industrial Corporation, Parwanoo, which are in the same line of business are disclosing GP rate of 29.9% and 27.1%. ii) As regards M/s. Shivam Enterprises, sister concern of M/s. Tirupati Food & Beverages, Parwanoo, the comparison of the GP rate of this concern with that of your sister concerns is not pragmatic as it is getting the entire job work done including fabrication from outside parties whereas your sister concerns are manufacturing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is justified to reduce the part of profit relatable to the sister concern on which deduction u/s 80IC was rightly denied. 11. On the other hand the Ld. Counsel of the assessee submitted that in the earlier years Revenue has accepted the same results. In fact, GP was higher at 42.57% and the same was accepted u/s 143(3) and further allocation made by Assessing Officer would result in unusual abnormal profits in the hands of sister concern. He also submitted that there is no justification in part allocation made by Ld. CIT(A). 12. We have considered the rival submissions carefully and find that issue was adjudicated by Ld. CIT(A) vide paras 3.2 to 3.9 which are as under:- 3.2 It was submitted that the appellant is maintaining the complete books of account along with the supporting documents. There is no change in the facts and circumstances of the case as compared to the immediately preceding assessment year which was also assessed u/s 143(3) without any such addition. The G.P. for immediately preceding assessment year was higher at 41.57% as compared to 39% of the year under consideration. It was argued that the provisions of section 92 to 92 F have been applied without any jur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no change in the nature and place of business of the appellant as compared to the earlier year and, therefore, it is eligible for deduction u/s 80-IC of the Act. However, the Ld. A.O. was not satisfied with the rates at which the purchases of gas stove bodies were made by the appellant from its four sister concerns. The Ld.A.O. has recorded that the gross profit of the said sister concerns averages to about 6.4% as compared to 9.29% G.P. shown by one M/s. Shivam Enterprises, a sister concern of one M/s. Tirupati Food and Beverages, Parwanoo engaged in the same kind of business. The Ld. A.O. also noted that the G.P. of M/s. Tirupati Food & Beverages was 26.35% as against G.P. of 39% declared by the appellant. The Ld. A.O. also quoted the examples of M/s. Deltan Industries, Parwanoo and M/s. Jain Industrial Corporation, Parwanoo which had disclosed G.P. rate of 29.9% and 27.1% respectively in the same line of business. It was submitted by the appellant during the course of assessment proceedings that there were many factors resulting in the variation of G.P. , e.g. purchase price, sale price, manufacturing cost, trading cost, specification of products, quality of product and standard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the part of the Ld. A.O. to consider the body component alone as the major manufacturing process. It is also noted that the appellant has shown the purchases from the sister concerns at rates ranging from Rs. 81/- to Rs. 125/-, and the Ld. A.O. has not responded to its plea that the prices depend upon the quality and specification of the material. The Ld. A.O. has also not satisfactorily addressed the fact highlighted by the appellant that one of its sister concerns, namely M/s Malhotra Plastic Product was in existence since 1984 and was showing almost the same G.P. in earlier years. Thus the Ld. A.O. has failed to make out a case that there was a drastic fall in the profits of M/s Malhotra Plastic Products because of sales on reduced prices to the appellant. 3.5 It is further noted that the appellant had argued that if at all the standard rate of 10% was proposed to be applied by the Ld. A.O. as per the show cause notice, the same could be applied only on purchases and not in respect of the total sales as the purchased gas stove bodies were sold after a great deal of value additions. In response to this plea, the Ld. A.O. simply chose to revise her earlier proposal and decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the G.P. returned in the hands of the sister concerns at 6.4% is less than 9.29% shown in the case of an identical business concern, namely M/s. Shivam Enterprises. Therefore, at best, the Ld. A.O. could calculate 9.29% G.P. in the hands of sister concerns on the total sales effected by them to the appellant firm. But the calculation made by the Ld. A.O. has given rise to irrational results, as the same has resulted in a G.P. rate as high as 35.18% in the hands of the sister concerns which is far higher than the bench mark adopted by the Ld. A.O. herself. Applying the same bench mark of 9.29%, the total G.P. should have been Rs. 44,75,659/- in the hands of the sister concerns against Rs. 30,83,338/- shown by them. Thus the difference of Rs. 13,92,321/- could at best be treated as the inflated claim of he appellant u/s 80IC of the Act. It is noted that the case quoted by the appellant, namely Swastik Industries, Delhi has shown 7.88% G.P., which is also higher than the G.P. shown by the appellant's sister concerns. It is, therefore, considered reasonable that 9.29% G.P. rate returned by M/s Shivam Enterprises, Parwanoo be adopted as the benchmark to assess the fair G.P. rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. Before us, Ld. DR carried us through the assessment order and pointed out that royalty of 0.4% was found to be very low by the Assessing Officer. He further submitted that considering the fact that M/s Malbro Appliances Pvt Ltd had agreement with BPCL, the royalty estimate of 3% was justified. 18. On the other hand Ld. Counsel of the assessee reiterated the submissions made before the Assessing Officer and CIT(A) and pointed out that royalty was paid at a very low rate of Rs. 2/- per piece in the immediate preceding year which was accepted. He also submitted that apart from royalty, assessee had paid 10% commission to BPCL for effecting the sale and, therefore, sales were mainly because of the commission and not because of the trade name "Advanta". 19. After considering the rival submissions we find that Ld. CIT(A) adjudicated this issue vide para 4.3 which reads as under:- "4.3 The rival submissions have been carefully considered with referred to the facts of the case and the case laws relied upon. It is noted that the appellant had paid the royalty fee of Rs. 7,65,915/- during the year under consideration in accordance with an agreement duly reduced to writing. The Ld. A.O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the assessee had paid the huge commission of Rs. 2,23,27,903/- to M/s BPCl, therefore, we find nothing wrong with the order of Ld. CIT(A) and we confirm the same. 31. Ground No. 3 of Revenue and Ground No.2 of assessee's appeal : After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that assessee has paid royalty to its sister concern during financial year 2004-05 for using the brand name 'Surya Flame' but no such royalty was paid during the year. A show cause notice was issued that why royalty at the rate of 3% should not be reduced for allowing deduction u/s 80IC. In response, it was stated that M/s Shivam Enterprises Delhi was proprietorship concern of M/s Rajiv Malhotra who was partner in the assessee firm. Since the brand name was owned by him and he was interested in the present business also, therefore, there was no logic of paying royalty. The Assessing Officer did not accept theses submissions and ultimately estimated 1% royalty calculated on sale price and reduced profits by 24,71,451/- for the purpose of computing deduction u/s 80IC. 32. On appeal the contention raised before Assessing Officer were reiterated. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... larly in the light of the fact that royalty was paid in earliear years and in any case partner and firm are different assessees for tax purposes. Therefore, we confirm the order of Ld. CIT(A). Accordingly, the ground raised by the Revenue as well as the assessee is dismissed. 38. Ground No.3 of assessee's appeal: After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that as per partnership deed the working partners were entitled to receive remuneration of Rs. 5000/- each but no such remuneration was added to the profit and loss account, therefore, the Assessing Officer in view of these clear terms of partnership deed reduced the profits by Rs. 1,80,000/- for the propose of computing deduction u/s 80IC. 39. On appeal, addition has been confirmed by Ld. CIT(A). 40. Before us, Ld. Counsel for the assessee submitted that provisions of section 80IA(10) cannot be invoked to reduce the profits for remuneration to be paid to the partners because this is not as collusive arrangement. 41. On the other hand Ld. DR strongly supported the order of CIT(A). He also relied on the decision of Tribunal in the case of ITO vs M/s GNG Enterprises in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0AA or section 10B or section 10BA or under any provision of this Chapter under the heading "C.--Deductions in respect of certain incomes", no deduction shall be allowed to him thereunder.] [(6) Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading "C--Deductions in respect of certain incomes", where any goods or services held for the purposes of the undertaking or unit or enterprise or eligible business are transferred to any other business carried on by the assessee or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the undertaking or unit or enterprise or eligible business and, the consideration, if any, for such transfer as recorded in the accounts of the undertaking or unit or enterprise or eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of any deduction under this Chapter, the profits and gains of such undertaking or unit or enterprise or eligible business shall be computed as if the transfer, in either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the provisions of this Act, before making any deduction under this Chapter [* * *] [* * *]; (6) [* * *] (7) [* * *] (8) [* * *] (9) [* * *].] 9 Reading of above provisions clearly shows that deduction under various provisions of this Chapter are allowable only if the income of the nature on which deduction is claimed has been included in the total income and further deduction has to be allowed on the basis of above gross total income. Gross total income has itself been defined in Sec 80B which clearly shows that deduction can be allowed on that income which is computed in accordance with the provisions of the Act before allowing deduction under Chapter VIA. Under Income-tax Act the income has to be computed under various heads as per the provisions of a particular head. The income under the head "business and profession" is to be computed as per Sec 29 which reads as under: " S e c 2 9 - Income from profits and gains of business or profession, how computed. The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to [43D]." Above clearly show that before allowing deduction u/s 80IC the income has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is no evidence for the same and in any case this will not make a difference. This type of situation came up for consideration of Hon'ble Bombay High Court in case Indian Rayon Corporation Ltd. V CIT, 261 ITR 98. In that case the deduction for industrial undertaking was claimed u/s 80HH because industry was located in a backward area. The deduction was claimed on the profits without claiming depreciation. The Assessing officer held that deduction was allowable only after allowing depreciation. This was challenged by the assessee and the matter traveled to the High Court. Hon'ble High Court made following observations: "261 ITR 98 - Income-tax is a charge on an assessee in respect of his total income computed in accordance with the provisions of the Act. However, in cases where the total taxable income comprises profits derived from newly established undertaking under section 80HH, then such profits have got to be computed separately as laid down by the Supreme Court in the case of Cambay Electric Supply Co. [1978] 113 ITR 84. There is a distinct dichotomy between the cases of computation of normal income under the Act de hors Chapter VI-A and computation of taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Chapter VI-A. For that purpose, one has to keep in mind the provisions of sections 80B(5) and 80AB. Consequently, section 80HH, inter alia, lays down that if the gross total income includes profits from a newly established undertaking then 20 per cent. of such profits would be deductible from the gross total income in order to arrive at the total taxable income. That, in such a case, profits derived from a newly established undertaking shall be computed in accordance with the provisions of the Act, i.e., section 29 to section 43A. Therefore, net profit will have to be computed in accordance with the provisions of the Act. The argument of the assessee is that in view of the judgment of the Supreme Court in Mahendra Mills' case [2000] 243 ITR 56, it is open to the assessee not to claim depreciation allowance under section 32 and consequently it is argued that 20 per cent. rate of deduction should be applied to Rs. 100 in the above illustration, without taking into account the depreciation. We do not find any merit in this argument. The scheme of section 4 and section 5 of the Income-tax Act does indicate that income-tax is a tax in respect of income computed as per the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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