1998 (6) TMI 118 - AT - Income Tax

Industrial Undertaking Profits And Gains Deductions Statutory Auditors Audit Report Prejudicial

Summary

Issues Involved:
1. Validity of the order under section 263 of the Income-tax Act, 1961.
2. Requirement of maintaining separate books of accounts for different units.
3. Compliance with provisions under sections 80-HH and 80-I of the Income-tax Act.
4. Direction to bifurcate profits in proportion to turnover.

Detailed Analysis:

1. Validity of the Order under Section 263:
The appeal was filed by the assessee-company against the order of CIT, N.E. Region, Shillong, passed under section 263 of the Income-tax Act, 1961. The CIT issued a show-cause notice proposing action under section 263 on the ground that the Assessing Officer allowed excess deduction under sections 80-HH and 80-I. The CIT found that the net profits were not properly bifurcated among the three units (Refinery, Petro-chemical, and PSF units) and that separate profit and loss accounts were not prepared for different units. The CIT set aside the assessment order and directed the Assessing Officer to work out the correct deduction by proportioning the profits based on the turnover of the units.

2. Requirement of Maintaining Separate Books of Accounts:
The assessee argued that as a company, it was not required to file separate audited accounts for each unit under sections 80-HH and 80-I. However, the Tribunal observed that the provisions under sections 80-HH(5), 80-I(7), and 80-J(6A) mandate that accounts of the industrial undertaking must be audited. The Tribunal referred to the Gujarat High Court's judgment in Zenith Processing Mills v. CIT, which emphasized the necessity of audited accounts for claiming deductions. The Tribunal concluded that the assessee-company was required to maintain separate books of accounts for the petrochemical unit and that these should be audited by statutory auditors under the Companies Act.

3. Compliance with Provisions under Sections 80-HH and 80-I:
The Tribunal noted that sections 80-HH(5), 80-I(7), and 80-J(6A) require audited accounts for claiming deductions. The assessee-company, being a company, was exempted from filing the audit report in prescribed forms (Form No. 10C and 10CCB) but was still required to maintain and audit separate books of accounts for each unit. The Tribunal emphasized that the company should have prepared a balance sheet and profit & loss account for the petrochemical unit for income tax purposes. The Tribunal rejected the assessee's contention that consolidated accounts were sufficient and held that separate audited accounts were necessary for claiming deductions under sections 80-HH and 80-I.

4. Direction to Bifurcate Profits in Proportion to Turnover:
The Tribunal found that the CIT's direction to bifurcate profits based on turnover was not supported by any provision under sections 80-HH and 80-I. The Tribunal set aside this part of the CIT's order and directed the CIT to modify the directions in accordance with the provisions of the Income-tax Act, after giving the assessee an opportunity to be heard. The Tribunal also allowed the assessee to file audited accounts of the petrochemical unit before the CIT for reconsideration.

Conclusion:
The Tribunal upheld the CIT's jurisdiction under section 263 but modified the directions regarding the bifurcation of profits. The appeal of the assessee-company was partly allowed for statistical purposes, with a direction to the CIT to reconsider the matter in accordance with the provisions of the Income-tax Act.