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Surinder Malik, E-12, Connaught Place, New Delhi. Vs. CIT-XI, New Delhi.
April, 09th 2015
              DELHI BENCHES : G : NEW DELHI


                        ITA No.1182/Del/2010
                       Assessment Year : 2006-07

Surinder Malik,                    Vs. CIT-XI,
E-12, Connaught Place,                 New Delhi.
New Delhi.


               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

     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

                                                    ITA No.1182/Del/2010

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

                                                    ITA No.1182/Del/2010

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

                                                       ITA No.1182/Del/2010

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

                                                      ITA No.1182/Del/2010

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


(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.

                                                          ITA No.1182/Del/2010

     (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

                                                         ITA No.1182/Del/2010

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


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

                                                          ITA No.1182/Del/2010

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
                                                          ITA No.1182/Del/2010

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.
                                                            ITA No.1182/Del/2010

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

                                                           ITA No.1182/Del/2010

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

                                                          ITA No.1182/Del/2010

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.

                                                         ITA No.1182/Del/2010

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

                                                           ITA No.1182/Del/2010

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

                                                            ITA No.1182/Del/2010

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


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

                                                          ITA No.1182/Del/2010

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

                                                           ITA No.1182/Del/2010

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.

                                 ITA No.1182/Del/2010

Copy forwarded to:
  1.   Appellant
  2.   Respondent
  3.   CIT
  4.   CIT (A)
  5.   DR, ITAT

                          AR, ITAT, NEW DELHI.

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