IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : G : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND SHRI C.M. GARG, JM
ITA No.1182/Del/2010
Assessment Year : 2006-07
Surinder Malik, Vs. CIT-XI,
E-12, Connaught Place, New Delhi.
New Delhi.
PAN: AAUPM0141Q
(Respondent)
(Appellant)
Assessee By : Shri S. Kumar, Advocate
Department By : Shri Ramesh Chandra, CIT, DR
Date of Hearing : 06.04.2015
Date of Pronouncement : 08.04.2015
ORDER
PER R.S. SYAL, AM:
This appeal by the assessee is directed against the order dated
19.02.2010 passed by the Commissioner of Income-tax (CIT) u/s 263 of
ITA No.1182/Del/2010
the Income-tax Act, 1961 (hereinafter also called `the Act') in relation to
the assessment year 2006-07.
2. Briefly stated, the facts of the case are that the assessment in this
case was completed u/s 143(3) of the Act on 4.6.2008 determining total
income at Rs.82,29,870/-, being the same amount at which the return of
income was filed by the assessee. The assessee, inter alia, claimed
deduction u/s 80IC. The ld. CIT, while exercising jurisdiction u/s 263,
held the assessment order to be erroneous and prejudicial to the interest
of the Revenue, on the following ten counts :-
(i) The audit report in Form No. 10CCB at serial number 25(d)
clearly says that the business had not undertaken substantial
expansion. Thus, the basic prerequisite as per provisions of section
80IC(2)(a) of the IT Act, 1961 was not satisfied for eligibility of
deduction of Rs. 2,65,13,712/- claimed and allowed u/s 801C.
(ii) As per the provisions, new machinery to a minimum extent
of 80% of the total machinery was to be used in the manufacturing
activity by M/s. Fortune at Baddi, Himachal Pradesh. No
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verification had been made that new machinery was used in the
manufacturing process. Besides, it was also seen that as per the
depreciation chart the value of machinery was only Rs. 69,274/-
which did not appear adequate to carry out the magnitude of
manufacture as would appear appropriate vis-a-vis the high turnover
declared at Rs. 5,62,51,944/-.
(iii) Manufacturing is done in the name of M/s Fortune a Baddi,
Himachal Pradesh. Export is carried out in the name of M/s Da
Milano, Gulmohar Park, New Delhi. Other related concerns
involved in the trading process within the meaning of section
40A(2)(b) as per form No. 10CCB(column 28) were M/s Orient
Express and M/s Sundaram Enterprises. Total sales to these parties
ran into several crores of rupees. No attempt had been made by the
AO to verify whether the sales were made at the prevailing market
price or whether the profit shown in respect of the Baddi Unit was
more than normal profits that would accrue in such business. Thus,
violation of provisions of sec. 80IC(7) read with sec. 80IA(8) which
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had to be necessarily verified in the circumstances of the case was
not verified by the AO.
(iv) One of the trade creditors was M/s. Fortune Leather Co. No
verification was made on the lines as cited at (iii) above as was
needed to be done.
(v) Fabrication charges of Rs. 67.24 lakhs which was shown, as
direct expenses were paid to M/s Kishan Enterprises and M/s
Sandeep Leather Works as jobwork charges. As per the provisions
of section 801C, manufacturing should have been carried out by the
assessee itself-with the new machinery Installed by it. The
manufacturing, if at all any, in this case was carried out by M/s.
Kishan Enterprises and M/s Sandeep Leather Works with their
machinery and not by the assessee. The agreements between the
assessee and the above two parties had also not been examined to
verify the nature of business and nexus between them.
(vi) From the copies of accounts relating to electricity expenses,
it was not proved that the same were incurred by the assessee for
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manufacturing purposes. The AO had not examined whether those
were direct manufacturing expenses or amounts reimbursed to the
parties who carried out the job work. The AO had not called for or
verified the electricity bills to make the necessary verifications.
(vii) The assessee had one Unit of M/s Fortune at Baddi,
Himachal Pradesh And another at Kapashera, DelhI. While In
respect of the Kapashera Unit a loss of Rs. 65,326/-. was shown, in
respect of the Baddi Unit substantial business profits claimed as
exempt u/s 80IC were shown. The circumstances leading to loss in
one unit and profit in another in the same line of business were not
examined by the AO in the light of provisions of section 80IC to
verify if there weas transfer of profits from one unit to other to
avoid tax liability.
(viii) Purchase bills of machinery etc., should have been verified in
respect of Kapashera Unit, M/s. Da Milano and other related
parties{u/s 40A(2)(b)}, where possible, to see if there was any
splitting up or reconstruction of any existing business. Magnitude of
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manufacture, turnover, etc., of these parties should also have been
verified where possible to find out if manufacturing activity carried
out by any of them had been abandoned in favour of the Baddi Unit
since in such a case it would mean that those existing
business/businesses had been reconstructed at Baddi, Himachal
Pradesh to avail tax benefit in violation of the provisions of section
80IC(4)(i).
(ix) No effort was made by the AO to verify the actual existence of
manufacturing activity vis-a-vis factory, value of machinery,
consumption of power for manufacture by the assessee, evidence of
freight inward of raw materials/freight outwards of manufactured
goods through transport bills showing the destinations etc. Neither
had any effort been made to draw a comparison between
infrastructure available and magnitude of manufacture leading to the
massive turnover. Thus, existence of actual manufacture as
mandatory u/s 80IC(2)(a) which necessarily merited thorough
verification, had not been verified.
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(x) The sales expenses of Rs. 7,08,974/- shown in the P&L a/c
under the head 'indirect expenses' was salary paid to six persons as
per the details filed. The direct expenses were the packing expenses
and the fabrication expenses comprising only job work expenses.
This led to the conclusion that no actual manufacturing activity had
been carried out by the assessee on its own in violation of the basic
pre-requisite of section 80IC(2)(a).
3. The assessee furnished point wise reply on the above ten
objections of the ld. CIT, which has been reproduced in the impugned
order. After considering the same, the ld. CIT observed that although in
respect of some points, the reply of the assessee was satisfactory, but,
the major issues relating to allowability of deduction u/s 80IC remained
unexplained. The ld. CIT further observed that total sales during the
preceding year were to the tune of Rs.1.11 crore giving gross profit of
Rs.44.77 lac with the overall GP rate of 40.7%, in comparison with the
current year's total sales of Rs.5.62 crore and gross profit of Rs.2.87
crore, giving GP rate of 51.02%. The ld. CIT further observed that
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sales to two of the related concerns, namely, Orient Express and M/s
Sundaram Enterprises increased from last year's 45% of the total sales
to the current year's 79%. About Fabrication charges paid to M/s
Kishan Enterprises and M/s Sandeep Leather Works, the ld. CIT
observed that the AO did not examine the Memorandum of
Understanding. In the ultimate para, the ld. CIT held that the claim of
deduction u/s 80IC was not properly examined by the AO inasmuch as
certain details which were required to be taken note of were not looked
into. He, therefore, set aside the assessment order with the direction to
the AO to verify the details and compute the correct amount of
deduction u/s 80IC of the Act. The assessee is aggrieved against this
order.
4. We have heard the rival submissions and perused the relevant
material on record. We want to clarify that the mandate of section 263
is attracted only when the assessment order is found to be erroneous and
prejudicial to the interest of the Revenue. These twin conditions have to
be cumulatively satisfied for obtaining a valid jurisdiction under this
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section. Merely because an assessment order is prejudicial to the interest
of the revenue is not enough, unless it is shown that the same is
erroneous too. An assessment order can be termed as erroneous in
several circumstances. Non-investigation by the AO on the relevant
issues, which are required to be properly looked into, makes an
assessment order erroneous. However, non-examination of the trivial or
insignificant issues cannot lead to making an assessment order
erroneous. Making due investigation but thereafter taking a patently
erroneous view, also makes an assessment order erroneous. A line of
distinction should be drawn between patently erroneous view and
accepting one of the possible views. Only the former makes an
assessment order erroneous and not the later. In other words, if there is
a debatable issue and the AO has taken one of the possible and legally
sustainable views, then that aspect goes outside the realm of revision.
Another situation of an erroneous order may be when investigation was
made by the AO, but the circumstances suggest that further investigation
was warranted, which the AO failed to make. This would also make the
assessment order erroneous. But the mere fact that the AO chooses not
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to incorporate certain issues in the assessment order on which he gets
satisfied during the course of hearing after proper examination, cannot
be lead to the passing of an erroneous assessment order. If material on
record suggests that the AO did embark upon the investigation and got
satisfied and further there is nothing to prompt further investigation,
then the assessment order cannot be characterized as erroneous simply
because there is no discussion in the assessment order on such aspects.
If a view is taken that non-discussion of an issue in the assessment order
on which the AO is satisfied, means the absence of application of mind
by the AO, then probably all the assessment orders would become
erroneous. It is so for the reason that the AO cannot be expected to
discuss each and every, significant or insignificant aspect of assessment,
in his order. The essence of the matter is that on the non-discussed
relevant issues in the assessment order, so long as there is material to
suggest that the AO conducted inquiry and the assessee did file reply on
them, the assessment order cannot be held as erroneous, until it is shown
that the circumstances required the AO to conduct further inquiry on
such issues.
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5. Coming to the facts of the instant case, it is observed that the
assessee claimed deduction u/s 80IC for the first time in the immediately
preceding assessment year, namely, AY 2005-06 in respect of profit
from the manufacturing unit established at Baddi in Himachal Pradesh.
The assessment for the AY 2005-06 was taken up by the AO u/s 143(3)
and the claim of deduction u/s 80IC was allowed as claimed. A copy of
the assessment order for the AY 2005-06 is available on record. This
shows that all the pre-requisites for the claim of deduction u/s 80IC were
examined by the AO in finalizing the assessment for the earlier year and
he got fully satisfied with the eligibility of deduction. The instant year is
second year of the claim for deduction u/s 80IC. With the above
background in mind, we will take up all the objections raised by the ld.
CIT one by one and see if the assessment order can be held to be
erroneous and prejudicial to the interest of the Revenue.
6. The first objection of the ld. CIT is that the assessee had not
undertaken substantial expansion and, thus, the basic pre-requisite for
deduction u/s 80IC was not satisfied. We cannot accept this objection of
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the ld. CIT for the reason that the assessee claimed deduction under this
section for the second year in line. Such deduction was claimed for the
first time in the immediately preceding year and the AO duly allowed
the same, which automatically implies that all the pre-requisite
conditions for the claim of deduction u/s 80IC were duly examined by
the AO and found to be satisfied. Once all the prerequisite conditions for
availability of deduction u/s 80IC have been considered by the AO and
found to be satisfied, then it is not open to any authority to reconsider
such prerequisite conditions in the subsequent years as well. There is no
dearth of judicial precedents for this proposition. In view of the fact that
the pre-requisite conditions can be examined in the first year of the
claim, which were duly found to have been fulfilled in the preceding
year, we are of the considered opinion that this objection of the ld. CIT
that the assessee did not undertake substantial expansion, is bereft of
any force. The same is, therefore, dismissed.
7. The second objection of the ld. CIT is that new machinery to the
minimum extent of 80% of total machinery was to be used in the
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manufacturing activity by M/s Fortune at Baddi, Himachal Pradesh,
being the eligible unit. Here again, we find that the ld. CIT is discussing
about the eligibility conditions for claim of deduction u/s 80IC, which
cannot be re-visited in the second year.
8.1. Objection nos. 3 and 4 of the ld. CIT are that the assessee made
sales to its related concerns, namely, M/s Orient Express, M/s Sundaram
Enterprises and M/s Fortune Leather Company and the AO did not
verify whether the sales were made at the prevailing market price or
whether the profit in respect of Baddi unit was more than normal profit
which would accrue in such business. We find some force in this
objection for the reason that the ld. CIT found that the assessee made
sale to its two related companies depicting gross profit margin of more
than 51% in this year in comparison with the preceding year's gross
profit rate from sales to these companies at 40%. It can be observed
from the material on record that no investigation was carried out to
verify the price charged by the assessee from these companies.
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8.2. This is an issue on which albeit investigation was started, but
further investigation was required because of the attending facts
suggesting a steep increase in the gross profit rate purportedly earned
from the related concerns. Earning gross profit at more than 50% in this
line of manufacturing does not inspire confidence of acceptance at the
face value, more so, when the profit of such eligible unit is subject to
full deduction. As sales to the related companies constituted roughly
80% of the total turnover and there was abnormal profit shown, it was
incumbent upon the AO to investigate this aspect of the matter further
rather than stopping at the receipt of sales account. In our considered
opinion, the ld. CIT was justified in directing the AO to re-examine this
aspect of the assessee's claim for deduction u/s 80IC. We uphold these
objections taken by the ld.CIT.
9. Objection no. 5 of the ld. CIT is against payment for Fabrication
charges amounting to Rs.67.24 lac made to M/s Kishan Enterprises and
M/s Sandeep Leather Works as job work. It was explained to the ld.
CIT that these labour contractors were rendering services in the
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assessee's premises. In support of this contention, the assessee filed
proof of its having made payment of ESI/PF, etc., in respect of payment
made to the workers of these two contractors to whom such Fabrication
charged were paid. This explanation has remained uncontroverted at the
end of the ld. CIT. It is but natural that if the assessee gets the job work
done in its own premises and under its own control after deducting
employee's provident fund, etc. from the payment made to the labour, it
can be construed as manufacturing activity undertaken by the assessee
alone. This objection taken by the ld. CIT is not sustainable.
10. Objection no. 6 of the ld. CIT is about the payment of Electricity
expenses. The ld. CIT observed that the AO did not examine whether
the electricity charges were direct manufacturing expenses or the
amounts reimbursed to the parties who carried out job work. The
assessee tendered before the ld. CIT that there was no reimbursement of
expenses incurred by any third party and all the expenses incurred and
claimed were for self, inasmuch as the assessee had sanctioned load of
58 kw and the electricity charges paid were for the consumption of
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electricity at the undertaking alone. Copies of bills were also enclosed to
the ld. CIT. Since these details have not been refuted by the ld. CIT, the
inference has to be drawn in favour of the assessee that the electricity
expenses were in respect of its own unit and as such the AO was
justified in accepting the assessee's claim on this aspect of the matter.
11.1. Objection no. 7 of the ld. CIT is that the assessee had eligible
unit of M/s Fortune at Baddi, Himachal Pradesh and another at
Kapashera, Delhi. He observed that in respect of Kapashera unit there
was a loss of Rs.65,326/-, whereas in respect of Baddi unit, there was
substantial business profit for which deduction was claimed u/s 80IC.
The assessee contended before the ld. CIT that only the Baddi unit had
undertaken manufacturing and selling activity, whereas Kapashera Delhi
was simply its administrative office which was not undertaking any
business activity. The ld. CIT did not controvert the argument of the
assessee.
11.2. It is obvious that Kapashera Delhi office was not undertaking
any income producing activity and the loss of Rs.65,326/- was only
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towards administrative expenses incurred by it, As such, there can be no
question of shifting profit from the eligible unit at Baddi to Kapashera
Delhi. We, therefore, reject this objection taken by the ld. CIT.
12. The other objections taken at Sl. no. 8, 9 and 10, namely,
examination of splitting up or re-construction of any existing business;
examination of actual existence of manufacturing activity vis-à-vis
factory; and no actual manufacturing activity having been carried out by
the assessee on its own, are in the realm of pre-requisite conditions for
the eligibility of deduction u/s 80IC, which can be examined when the
claim of deduction is made for the first time. Since the assessee was
allowed deduction u/s 80IC for the first time in the immediately
preceding assessment year, we are of the considered opinion that there
can be no logic in once again taking up such objections in the second
year of claim of deduction u/s 80IC. These objections are dismissed as
the assessment order cannot be held to be lacking on these aspects.
13. The sum and substance of the above discussion is that the order of
the ld. CIT is sustainable on objection nos. 3 and 4 and not on the
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remaining eight. In such a scenario, the entire order cannot be set aside.
It goes without saying that if the order passed u/s 263 is sustainable on
one of the various objections taken by the ld. CIT and not on others, the
order is not vitiated. However, the direction to the AO by the ld. CIT
gets restricted to the points on which the order is sustainable. As the
impugned order is sustainable in respect of two objections only, we
direct the AO to restrict himself only on these issues in the assessment to
be finalized u/s 143(3) pursuant to the order u/s 263 of the Act.
14. In the result, the appeal is partly allowed.
The order pronounced in the open court on 08.04.2015.
Sd/- Sd/-
[C.M. GARG] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated, 08th April, 2015.
dk
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Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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