TMI Blog2015 (1) TMI 1501X X X X Extracts X X X X X X X X Extracts X X X X ..... stove in the immediately preceding year which was accepted by the Revenue in the assessment framed u/s 143(3) - as per CIT(A) addition made by the Ld. A.O. is found to be without any cogent basis - HELD THAT:- CIT(A) had correctly adjudicated the issue particularly in the light of the fact that lower royalty was accepted in the earlier years . Further, the assessee had paid the huge commission of Rs. 2,23,27,903/- to M/s BPCl, therefore, we find nothing wrong with the order of Ld. CIT(A) and we confirm the same. Deduction u/s 80IC - Addition on account of non debiting of the partner s remuneration provided in the Partnership deed - As argued debiting of such remuneration will only result into reduction of manufacturing profits and no taxability will arise - HELD THAT:- As decided in I.T.O. NAHAN VERSUS M/S GNG ENTERPRISES [ 2014 (11) TMI 1280 - ITAT CHANDIGARH] before allowing deduction u/s 80IC the income has to be computed as per the provisions of Sections 32 to 43 of the Act. Deduction could have been allowed only after computing the income under a particular head. In this case the income in the hands of the a firm was computed in terms of Sec 28 to 43D and Sec 40(b) in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and in the circumstances the CIT(A) has erred in allowing full deduction u/s 80IC of the act to the assessee as against a lesser deduction allowed by the A.O. by invoking the provisions of section 80IA(10). 2. The CIT(A) has erred in deleting the addition made by the A.O. on account of royalty for using the name of ADVANTA by applying the provisions of section 80IA(10) of the act. 3. The CIT(A) has erred in deleting the addition made by the A.O. on a/c of royalty to sister concern M/s Shivam Industries, Delhi. 4. First we shall take up ground Nos.1 raised in both the appeals by Revenue as well as assessee. 5. Ground No.1 : After hearing both the parties we find that assessee is a partnership firm and is engaged in the business of manufacturing gas stoves which were sold to the LPG dealers of Indian Oil Corporation (IOC) and BPCL. The assessee has shown GP @ 39% on turn over of Rs. 37,27,69,178/- and the net profit shown was 22.06%. During assessment proceedings, it was noticed that assessee has conducted substantial transactions with his sister concern. The gist of transactions given by the Assessing Officer in para 4 reads as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce that why provisions of section 80IA (10) read with section 80IC(7) should not be invoked and profits recomputed accordingly. In response, it was mainly submitted that one of the sister concern M/s Malhotra Plastic Products is in existence since 1984 and was having same GP rate since long and there was no effort or evidence that profits of M/s Malhotra Plastic Products was passed on to the assessee. It was further pointed out that average rate of gas stove bodies is Rs. 108/- as against Rs. 95/- stated in the show cause notice. The assessee also requested Assessing Officer to provide details of profits of M/s Triputi Food and Beverages and also the specifications of the gas stove bodies. It was pointed out that gas stove body itself is an input and constitute about 15% of the total value of the product. In this background it was stated that profit could not be compared for the whole equipment. It was also pointed out that assessee was selling complete appliance with B.I.S Quality Certification which generally have better profit. The assessee was informed regarding the details of M/s Triputi Food and Beverages, which is as under:- i) The GP of M/s. Tirupati Food Beverages, P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly 15% of the total appliance, the Assessing Officer had allocated 50% profits. Such allocation had resulted in unusual abnormal profits in the hands of sister concern. 9. The Ld. CIT(A) after examining the submissions found merit in the same and restricted the allocation of Rs. 13,92,321/-. The Revenue challenged this reduction and assessee has challenged through ground No.1 for partial confirmation of the allocation. 10. Before us Ld. DR carried us through the assessment order and submitted that assessee was showing much lower profit in the sister concern on purchases made from them which was not fair and, therefore, Assessing Officer is justified to reduce the part of profit relatable to the sister concern on which deduction u/s 80IC was rightly denied. 11. On the other hand the Ld. Counsel of the assessee submitted that in the earlier years Revenue has accepted the same results. In fact, GP was higher at 42.57% and the same was accepted u/s 143(3) and further allocation made by Assessing Officer would result in unusual abnormal profits in the hands of sister concern. He also submitted that there is no justification in part allocation made by Ld. CIT(A). 12. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le case used by the A.O. by stating that the said documents were not being used as an evidence against the appellant, and on the other hand made addition on the basis of conjectures and surmises citing the same case as a bench mark. Appellate Findings 3.3 The rival submission have been carefully considered with reference to the facts of the case and the case laws relied upon. It is noted that the G.P. and N.P. rates returned by the appellant in the year under consideration are lower than those returned in the immediately preceding year which was also assessed u/s 143(3) of the Act. It is also noted that the Ld. A.O. has accepted that there is no change in the nature and place of business of the appellant as compared to the earlier year and, therefore, it is eligible for deduction u/s 80-IC of the Act. However, the Ld. A.O. was not satisfied with the rates at which the purchases of gas stove bodies were made by the appellant from its four sister concerns. The Ld.A.O. has recorded that the gross profit of the said sister concerns averages to about 6.4% as compared to 9.29% G.P. shown by one M/s. Shivam Enterprises, a sister concern of one M/s. Tirupati Food and Beverages, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of the final products. The Ld. A.O. has further observed that all the complex processes are managed by the sister concerns of the appellant located at Delhi and that the appellant was merely engaged in the assembling and testing work and, therefore, could not have earned gross margin of 39%. However, this observation of the Ld. A.O stands in contradiction to the findings earlier given that the appellant was eligible for deduction u/s 80-IC and that the gas stove bodies purchased from sister concerns constituted only 15% of the complete appliance and the remaining 85% pertained to other inputs, raw material, expenses etc. Therefore, it is not justified on the part of the Ld. A.O. to consider the body component alone as the major manufacturing process. It is also noted that the appellant has shown the purchases from the sister concerns at rates ranging from Rs. 81/- to Rs. 125/-, and the Ld. A.O. has not responded to its plea that the prices depend upon the quality and specification of the material. The Ld. A.O. has also not satisfactorily addressed the fact highlighted by the appellant that one of its sister concerns, namely M/s Malhotra Plastic Product was in existence since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ister concerns = 30,83,338/- (Profit shown by sister concerns on same transactions) (Combined profit (A+B) = 3,39,03,894/- (c) Profit allocated to assessee @ 50% of combined profit = 1,69,51,947/- Difference (A)-(C) =1,38,68,609/- 3.8 However, the above mentioned working adopted by the Ld. A.O. is logically not correct. If the appellant firm has made 21.2% of its purchases from its sister concerns, it does not mean that 21.2% of the total sales of the appellant are attributable to the said purchases. As already discussed, and as also admitted by the Ld. A.O. a great deal of value addition is brought about in the final product sold by the appellant. This is evident from the fact that against the total purchases of Rs. 4,81,77,164/- fro the sister concerns, the appellant has made total sales amounting to Rs. 37,27,69,177/-. 3.9 Further, the AO's case is that the G.P. returned in the hands of the si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd were in the said line of business since late 70 s and had experience and technical knowhow which enabled the assessee to make quality gas stoves. The goodwill generated by said company resulted in generation of huge readymade market to the assessee. Further, the sale price on each gas stove was Rs. 850/- per gas stove and royalty of Rs. 3/- per gas stove worked out to 0.4% which was very low. Therefore, assessee was issued a show cause notice that why royalty should not be taken @ 3% per piece. In response, it was mainly stated that royalty was paid vide agreement dated 1.4.2007. The Assessing Officer did not accept these submissions and worked out the royalty @ 3% and reduced the profits eligible for deduction us/ 80IC by Rs. 57,44,363/-. 15. On appeal, it was mainly submitted that royalty was paid @ Rs. 2/- per gas stove in the immediately preceding year which was accepted by the Revenue in the assessment framed u/s 143(3). Therefore, following the principle of consistency the royalty of Rs. 3/- per gas stove should have been accepted. 16. The Ld. CIT(A) found merit in these submissions and deleted the reduction of profits. 17. Before us, Ld. DR carried us thro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,23,27,903/- to the BPCL for effecting sales through BPCL. In case of Suryaflame brand on the contrary, Annual Channel Access fee was directly paid by the assessee to IOC. The appellant has also paid a hefty commission of Rs. 2,23,27,903/- to BPCL for effecting huge sales under the brand name ADVANTA . Therefore, the Ld. AO's argument that it was not only the brand name ADVANTA which was used by the appellant but also the benefit of sales enjoyed on the strength of the MOU between BPCL and M/s Malbro appliances does not carry much weight. The vital fact to be considered is that the appellant has incurred a huge expenditure in the form of commission and annual channel access fee for effecting sales through BPCL. Thus the appellant has incurred expenditure corresponding to the gains made by it through M/s Malbro Appliances Pvt. Ltd. Thus the addition made by the Ld. A.O. is found to be without any cogent basis. The same is, therefore, not found sustainable and is directed to be deleted. 20. In our view Ld. CIT(A) had correctly adjudicated the issue particularly in the light of the fact that lower royalty was accepted in the earlier years . Further, the assessee had paid th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the year under consideration. The Ld. Assessing Officer has rightly observed that the firm and its partners are distinct entities under the income-tax Act and the avoidance of the booking of royalty expenditure serves the purpose of inflating profit to claim deduction u/s 80IC of the Act. There is no denying the fact that the brand name Suryaflame had been used by the appellant, even though the agreement was entered into directly between the appellant and the IOC in respect of the sale under the given brand. It will meet the ends of natural justice if the royalty @ Rs. 2/- per gas stove as in the case of M/s Malbro Appliances Pvt Ltd is calculated as a fair and reasonable amount of expenditure for using the brand name of the sister concern. Accoardingly an addition of Rs. 5,81,518/- (270759 gas stoves @ Rs. 2/- each) is directed to be made to the taxable profits of the appellant after reducing an equivalent amount from the profits claimed as eligible for deduction u/s 80-IC. The remaining addition of Rs. 18,89,933/- (Rs. 24,71,451 Rs. 5,81,518/-) is accordingly directed to be deleted. 37. In our opinion the Ld. CIT(A) has correctly adjudicated the issue particularly in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 80-IB] [or section 80-IC] [or section 80-ID or section 80-IE] or section 80J or section 80JJ, no deduction under the same section shall be made in computing the total income of a member of the association of persons or body of individuals in relation to the share of such member in the income of the association of persons or body of individuals.] [(4) Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading C Deductions in respect of certain incomes , where, in the case of an assessee, any amount of profits and gains of an undertaking or unit or enterprise or eligible business is claimed and allowed as a deduction under any of those provisions for any assessment year, deduction in respect of, and to the extent of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be. (5) Where the assessee fails to make a claim in his return of income for any deduction under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to in clause (c) of sub-section (8) of section 35AD for any assessment year, no deduction shall be allowed under the provisions of section 35AD in relation to such specified business for the same or any other assessment year.]. 8 0 A B - [Deductions to be made with reference to the income included in the gross total income. - W here any deduction is required to be made or allowed under any section [* * *] included in this Chapter under the heading C. Deductions in respect of certain incomes in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.] 8 0 B 80B. In this Chapter (1) [* * *] (2) [* * *] (3) [* * *] (4) [* * *] (5) gross total income mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above observation it was held as under: Held accordingly reversing the decision of the Hon'ble High Court that before considering the matter of deduction u/s 80P(2) the Income tax officer had rightly set off the carried forward losses of the earlier years in accordance with section 72 of the Act and finding that the said losses exceeded the income, had rightly not allowed any deduction u/s 80P(2). Above position has been followed later on in various decisions by the Hon'ble Supreme Court like H.H. Sir Rama Verma V CIT, 205 ITR 435 and Motilal Pesticides (I) Pvt Ltd. V CIT, 243 ITR 26 (S.C). Therefore it becomes clear that deduction could have been allowed only after computing the income under a particular head. In this case the income in the hands of the a firm was computed in terms of Sec 28 to 43D and Sec 40(b) in respect of allowance of interest and salary falls between these two provisions and therefore full effect has to be given to this provisions also. 11 There is another contentions that later on it was decided not to pay salary and interest to the partners. This does not seems to be correct because before the Assessing officer it was admitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at placitum G to H that the decision of Mahinda Mills (supra) is not decided in respect of allowability of deduction which reads as under: The point at issue is amply clear from the illustration given hereinabove under the caption Point at issue . The illustration indicates that the assessee has not disclaimed depreciation. The point, therefore, to be noted is that the assessee has also claimed depreciation, but at a later stage and, therefore, the judgment of the Supreme Court in Mahendra Mills' case [2000] 243 ITR 56 has no application. According to the assessee the profits derived from the unit was Rs. 100 because under section 32(2) read with section 4 of the Income-tax Act, the chargeability was in respect of the total income and, therefore, the rate of 20 per cent. was applicable to the total income of Rs. 100 without deducting depreciation. Secondly, in any event, the controversy in Mahendra Mills' case [2000] 243 ITR 56 (SC) was not concerning deductions under Chapter VI-A of the Income-tax Act. Therefore, that judgment would not apply to this case. The important distinction, which is required to be noticed in this case, is that we are required to compute ..... X X X X Extracts X X X X X X X X Extracts X X X X
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