2015 (12) TMI 1912 - AT - Income Tax

Eligibility for deduction u/s 80IC determination of the quantum of profits which are attributable to trading operation - HELD THAT - A perusal of the CIT(A) order reveals that the assessee was never confronted with the issue of valuation of closing stock. We therefore hold that the CIT(A) could not have suomoto presumed that the valuation of closing stock of the assessee was incorrect without even giving an opportunity to the assessee to offer his explanation and thus reject the gross profit shown by the assessee. Further we find that the assessee had explained that its indirect expenses being administrative and selling expenses constituted 4.75% of turnover and even if these expenses were allocated @ 1.25% to the trading operations the resultant would be a loss to the assessee. This explanation has neither been rebutted by the Revenue nor any infirmity pointed out in the same. We agree with the contention of the assessee that no profits had resulted from the trading operations of the assessee and the deduction claimed u/s 80IC related entirely to profits earned from manufacturing activities. Therefore we hold that deduction u/s 80IC was rightly claimed by the assessee. The disallowance of deduction u/s 80IC is therefore directed to be deleted. The appeal of the assessee is therefore allowed.

Summary

ISSUES:

Whether the net profit attributable to trading operations can be estimated by applying a fixed net profit rate of 2.5% on trading turnover without supporting basis or detailed computation.Whether the valuation of closing stock in the trading account, when not explained or confronted during appellate proceedings, can be questioned and used to reject the assessee's gross profit from trading operations.Whether profits from trading operations are eligible for deduction under section 80IC of the Income Tax Act.Whether the disallowance of deduction under section 80IC on profits attributed to trading operations is justified.

RULINGS / HOLDINGS:

The application of a net profit rate of 2.5% on trading turnover by the appellate authority was held to have "no basis at all" and was rejected as arbitrary and unsupported by any comparable instances or detailed working.The appellate authority could not "suomoto presume that the valuation of closing stock... was incorrect" without giving the assessee an opportunity to explain, and the rejection of the gross profit shown by the assessee on this ground was therefore improper and against the principles of natural justice.The assessee's submission that trading operations did not result in any profits, supported by detailed purchase and sale bills and expense allocations, was accepted as unrebutted and credible.The deduction claimed under section 80IC was rightly claimed on profits earned from manufacturing activities only, and the disallowance of Rs. 15,91,105/- on account of trading profits was directed to be deleted.

RATIONALE:

The Court applied the principle that estimation of profits must be based on reasonable and substantiated grounds rather than arbitrary percentages without supporting data.The principle of natural justice was emphasized, requiring that any adverse finding regarding valuation or accounting treatments must be preceded by an opportunity to explain, which was not afforded here.The Court relied on the detailed trading account and expense analysis submitted by the assessee, which showed that indirect expenses exceeded any gross profit from trading, resulting in no net profit from trading operations.The statutory framework under section 80IC allows deduction only on profits from eligible manufacturing activities, and profits attributable to trading operations are excluded from such deduction.No dissent or doctrinal shift was noted; the decision reaffirmed established principles regarding burden of proof, estimation of profits, and natural justice in tax proceedings.