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TMI Blog1983 (12) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax Act, 1961 (' the Act '). The assessee's contention is that borrowed capital should also be considered as capital employed. This contention has to be rejected in view of the retrospective amendment of section 80J. The second contention is the deduction claimed under section 80HH of the Act. It is an admitted position that there is no gross total income for the assessment year in view of the past losses. So, the claim for deduction under section 80HH is academic. 3. We will now take up the issues arising in the assessment year 1979-80. Here also, two issues have been raised by the company. The first issue is the computation of capital employed under section 80J. For the reasons stated in the above para, the assessee's claim has to be rejected. That leaves with the issue of section 80HH. The assessee-company has an industrial unit established in Hoshiarpur in Punjab. It is an admitted position that Hoshiarpur falls in a backward area and any new industrial undertaking established therein would be entitled to deduction under section 80HH. During the accounting year concerned, the assessee had shown a profit of Rs. 3,21,050. Most of the profits are referable to the Hoshiarpur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d been jacked up. The assessee attempted to justify the higher rates charged by them by showing certain reasons but the Commissioner (Appeals) did not find them acceptable. He, however, held that the entire denial of exemption was not justified. He directed the ITO to determine the profits assuming the rates charged by the assessee to be at the same level as charged by the TMI. 6. From the above finding, both the assessee and the department are on appeal before us. The departmental appeal appears to be misconceived. The ground raised by them is that the Commissioner (Appeals) could not direct the ITO to allow an unabsorbed relief under section 80HH to be carried forward since there is no such provision in the Act. A reading of the finding of the Commissioner (Appeals) shows that no such direction was given by him. What he has directed is that the deduction under section 80HH allowable to the limited extent should be granted and if there is profit to absorb it, the balance should be considered for the purpose of deduction under section 80J. This is a proper direction to be given. The statute provides that where the assessee is entitled to deduction under section 80HH as well as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rates quoted by the TMI and the rates quoted by the assessee. The TMI were not supplying separators. So, from the rates quoted by the assessee, a proportion referable to the separators has to be deducted. This would also account for part of the difference in the rates. 8. Shri Khare then pointed out that the assessee-company was supplying only one-third of the requirements of the holding company. With reference to the balance sheets, he pointed out that the holding company had manufactured 4,43,391 units during the accounting year. The profits earned by the holding company was Rs. 90.83 lakhs. The assessee had only supplied 1,42,090 units which would come to roughly one-third of the production, i. e., out of the profits of Rs. 90.83 lakhs, at best, the profits attributable to the production of the assessee would be Rs. 30 lakhs. The profits of the assessee-company for the accounting year is Rs. 3.21 lakhs. Now, if the department's case is correct, the proportionate profit earned by the holding company should be much more than Rs. 30 lakhs. He pointed out that the share capital of the holding company was Rs. 82 lakhs and reserves about Rs. 54 lakhs. On these figures, it cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sident is carrying on business with a resident and it appears to the ITO that owing to the close connection between them the course of business is so arranged that it produces either no profits or less than ordinary profits to the resident then the ITO could estimate the profit which the resident assessee could have earned from the transaction. This provision deals with a reduction in profit, whereas we are concerned with jacking up of profits. But the principles underlying therein are the same. It has been accepted by the Courts that the onus is on the department to bring the case within section 42(2). There are a number of decisions under the Excess Profits Tax Act which also deal with transfer of legitimate profits from one unit to another. Section 10A of the Excess Profits Tax Act dealt with transactions designed to avoid or reduce the liability to excess profits tax. The provisions, in substance are similar to section 80HH(7). In the case of V.N.M. Arunachala Nadar v. CEPT [1957] 32 ITR 222 the Madras High Court had analysed that section in the following manner : (1) The mere fact that a new business started at a time when by such starting there would be a reduction of liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 1979-80. At least a period of 2 to 3 years will have to be seen before one could give a clear finding. 14. It will be noticed that the transactions referred to in the sub-section should result in more than ordinary profits to the assessee. Now, since the earlier part of the section refers to the transaction between two persons, it naturally follows that if the assessee had earned an inflated profit, the person having dealings with the assessee must have an inflated expenditure. It must be shown clearly that the profits of the person having dealings with him have been reduced and also the expenditure incurred by him is inflated. This is a clear inference from the section. Now, having stated that the transaction over a period has to be looked into, we should not also rest content with a mere finding that there is an excess charged by the assessee. As the Madras High Court has pointed out in V.N.M. Arunachala Nadar's case, it is necessary to give a finding that the main motive for the transaction itself was to jack up the profits of the assessee. A mere incidental benefit is not sufficient. Now, since the question of motivation has been raised, it will be necessary for us to go i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Shri Khare that the TMI was not able to supply the full requirements and the holding company had to depend more and more on the assessee. So, this could hardly be consistent with the theory of the department that the dominant motive was to transfer profits of the holding company to the assessee-company. 15. We are also satisfied that the assessee had considerably reduced the rates charged as soon as they had received some expertise in the business. Shri Khare had made a reference to these rates. The figures given below would bear out that the rates charged are very competitive : -------------------------------------------------------------------------------------------------------------------------------------------------- PCA ENGINEERS LTD Item Effective 1st Percentage Effective 1st Percentage Effective 1 st June, 1976 as of December, of change July, 1976, per letter change 1977 as per over per letter dated letter dated previous dated letter 17-5-1916 12-6-1978 Rates 23-7-1979 Rs. Rs. Rs. S.B. 4 Litres 18.33 ---- 15.70 (-)14 per cent 10.80 5 Litres 18.83 ---- 16.50 (-)13 per cent 11.65 6.5 Litres 24.78 ---- 21.60 (-)13 per cent 13.70 8 Litres 31.12 -- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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