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TMI Blog2024 (5) TMI 688X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Commissioner of Income Tax(Appeals) is legally sustainable in the wake of decision of the Hon'ble Jurisdictional High Court in the case of Commissioner of Income Tax-1 Vs. Abhishek Industries Limited, reported as [2006] 286 ITR 1 (P&H] ? 3. Whether the Commissioner of Income Tax (Appeals) is right in concluding that the Assessee has successfully explained the fall in GP rate while ignoring the material aspect that the Assessee devised a colorful mechanism to divert its profit to subsidiary entity for claiming a higher deduction under section 80IC of the Income tax Act, 1961? 4. Whether the Commissioner of Income Tax (Appeals) is right in recoding a finding that the Assessing Officer has neither controverted nor disproved the contentions of the Assessee in the remand report, whereas the Assessing Officer disputed the stance of the Assessee with cogent reasons and material? 5. Whether on the facts and in the circumstances of the case, the Commissioner of Income Tax(Appeals) misdirected itself in misconstruing the provisions of the Income Tax Act, 1961 resulting into delivering a perverse order contrary to the scheme of the statue and material on record? 3. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement to Sell". Copy of the correspondence exchanged with the owner of the property is also attached for your kind consideration alongwith the lease deed dated 4th April 12, which clearly suggest that the advance was given only for the Business Purpose of the assessee company. Further, it may be noted from the correspondence enclosed that the owner of the premises was also claiming interest @ 18% PA on the unpaid amount of the Rs. 3,65,00,000/- for 7 months, which on request was waived off by the owner of the premises. However, during the financial year 2013-14, the company had served notice on the said party for recovery of the said amount of Rs. 90,00,000/-subsequent to which it was agreed by the said party to refund, the said amount of advance given for purchase of land and accordingly, cancellation agreement was entered into between the parties which stated that the said party Mrs. Poonam Gupta, shall return the advance for purchase of property by monthly Installments of Rs. 2,50,000/- which was revised to Rs. 3,00,000/- pm w.e.f. March 14. Copy of the cancellation agreement is enclosed for your kind consideration. The copy of account of the party as on 11-12-2014 is also enc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that the assessee had further failed to prove that it did not have the resources to get the deal of the property registered within the time allowed. Hence, the Assessing Officer held that the advance of Rs. 90,00.000/- given to Smt. Poonam Gupta was not for business purpose. The Assessing Officer held that the assessee had taken interest-bearing loans from various financial institutions and from other parties and was paying interest on them, and on the other hand, it had made interest-free advances to Smt. Poonam Gupta, which was not for business purpose. Therefore, the payment of interest by the assessee company on its secured & unsecured loans, attributable to the amount advanced interest free to Poonam Gupta was disallowed, treating the same to be not incidental to the business purpose of the assessee company. The Assessing Officer placed reliance on the judgment dated 04.08.2006, of the Hon'ble Punjab & Haryana High Court in the case of 'CIT Vs Abhishek Industries Limited, Ludhiana', wherein, it was held that once it is borne out from the record that the assessee had borrowed certain funds on which, there was a liability to pay interest, whereas, on the other hand, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi on lease from Smt. Poonam Gupta, for its Corporate Office. The said Lease Agreement was renewed from time to time, upto 26.11.2015 (for the period from 01.12.2015 to 31.10.2016). The said premises was, thus, used by the assessee company as its corporate office from January, 2007 till 30.06.2017. The lease rent paid by the assessee for the said premises was always allowed by the AO, right from Financial Year 2006-07. The assessee company stated that it had insisted to purchase the said leased premises, for which, it entered into an agreement to sell with Smt. Poonam Gupta, for a total consideration of Rs. 4,55,00,000/-. It paid advance of Rs. 10 lacs on 02.09.2008 and Rs. 80 lacs on 12.09.2008, aggregating to Rs. 90 lacs. The balance amount of Rs. 3,65,00,000/- was to be paid by 30.11.2008. However, it could not be so paid, as there was a sudden worldwide recession in 2008, which adversely affected the automobile sector in India also, because of which, Tata Motors and Ashok Leyland, the main customers of the assessee company, cancelled their orders with the assessee. Due to the adverse market conditions, the production and sales of the assessee company were badly affected in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this notice was placed before the ld. CIT(A). Smt. Poonam Gupta, in response to the notice, vide Cancellation Agreement dated 16.05.2013, a copy whereof was also furnished by the assessee before the ld. CIT(A), agreed to refund to the assessee the amount of Rs. 90 lacs, by making upfront payment of Rs. 10.50,000/- and, thereafter, paying monthly instalments, of Rs. 2.30 lacs, subject to no interest being payable by her. The said monthly instalments were subsequently revised to Rs. 3 lacs per month, w.e.f. March, 2014 and to Rs. 3,30,000/- per month w.e.f. February, 2015. The amount of Rs. 90 lacs stood fully recovered from Smt. Poonam Gupta by the assessee, as on 10.10.2015. In this regard, a copy of the Ledger Account of Smt. Poonam Gupta, for the period from 01.04.2008 to 31.10.2015, was also placed by the assessee before the ld. CIT(A). 9. For assessment year 2014-15, the Assessing Officer made disallowance of a sum of Rs. 8,81,501/- u/s 36(1)(ii) of the Act, on account of interest payable/paid, attributable to the interest free advance of Rs. 59,50,000/- to Smt. Poonam Gupta, for non business purposes. The AO observed that the assessee's Schedule of Loans and Advances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vesting the company of its huge funds towards a project that did not materialize even after five years and finally got wound up; that no such justification had been brought on record; that thus, it appeared that the alleged transaction was not related to the actual intention of purchase of land and it was evident from the facts that finally, the alleged Agreement stood cancelled on 16.05.2013, and the instalments were being received w.e.f. 30.06.2013; that it appeared that the amount had been given as a certain kind of security against use/rental of the property to the assessee company and no interest whatsoever was charged on the basis of an un-written understanding between the two parties; that it could not be denied that Smt. Poonam Gupta had used the funds of Rs. 90 lacs for five years, without incurring any cost whatsoever. The AO placed reliance on the decision of the Hon'ble Punjab & Haryana High Court in the case of 'CIT Vs Abhishek Industries' 286 ITR 1 (P&H), observing that the advance of Rs. 90 lacs had been given by the assessee company to Smt. Poonam Gupta for purposes other than a business purpose. The proportionate disallowance on interest @ 12% was worked out by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made investments in other fixed assets to improve its manufacturing operations, and, on account of the assessee allegedly showing lack of urgency to get the Sale Deed registered, was also misplaced, because the Revenue cannot assume the role of the Board of Directors of the company and decide as to how the business decisions are to be taken; that thus, in the facts and circumstances of the case, the business purpose of the advance made stood satisfactorily established by the assessee and the reliance of the AO on the judgement of the Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries, 286 ITR 1 (P&H), was misplaced; and that therefore, no disallowance u/s 36(1)(iii) of the Act was called for on the account of the advance of Rs. 90 lacs made against the intended purchase of property for corporate office of the assessee company. 11. The department has remained unable to persuade us to differ from the view taken on the issue by the ld. CIT(A) for the earlier years as well as the subsequent years, i.e., assessment years 2010-11, 2011-12 and 2014-15, respectively. (copies at APB 39-101). There is no rebuttal to the finding of the ld. CIT(A) that the business exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Industries Ltd.) is engaged in the business of manufacturing and marketing of Spring and Spring Leaves. The Assessing Officer, during the course of the assessment proceedings, made an addition of Rs. 25,60,84,653/- on account of the fact that 4000.806 MTs of finished goods were the product of excess scrap. For the purpose of calculating the percentage (%) of scrap generated during the year, the assessment worked out to 7.2% and not 6.8% as had been worked out by the assessee. The average scrap generated during the earlier three years worked out to 6.8%. The assessee had produced 0.4% more scrap during the year under assessment. The excess scrap was utilized for production of 4000.806 MTs of finished goods. The average sale prices is taken as Rs. 64.008.26 per M.T. the working of the sale price of Rs. 25,60,84,653/- is detailed as under:- "Total sale consideration declared in the printed booklet exclusive of excise duty 45245.30000 less sales to the subsidiary company SFG 171224220 Sale of finished goods 4353305780 Quantity of finished goods 68011.619 Average sale price 64008.26 per MT" 4. The Assessing Officer observed that the finished goods wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Rs. 25,20,84,653 deleted Revenue's appeal dismissed. 2010-11 11,448 MT Nil vide assessment order u/s 143 (3) dated 28.01.2013 NA NA 2011-12 15,495 MT Nil vide assessment order u/s 143 (3) dated 28.04.2014 NA NA 2012-13 23,067 MT Nil vide assessment order u/s 143 (3) dated 25.03.2015 NA NA 2013-14 33,424 MT Nil vide assessment order u/s 143 (3) dated 29.02.2016 NA NA 2014-15 29,513 MT Nil vide assessment order u/s 143 (3) dated 3(5.12.2017 and also vide TPO order u/s 92CA (3) dated 12.10.2017 NA NA 7. A perusal of the above chart shows that the assessee has been selling semi-finished goods to its subsidiary entity namely M/s Jai Suspension System since the assessment year 2009-2010 till 2014-2015. The addition of Rs. 25,20,84,653/- was made by the Assessing Officer for the assessment year 2009-2010 and this was set aside by the CIT (Appeals). However, for the assessment years 2010-2011, 2011-2012, 2012-2013, 2013-2014 and 20142015, no addition was made qua the semi finished goods manufactured and sold outside the books of accounts. As per the above stated chart, in all the subsequent years, assessment orders have been passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year under consideration, the assessee had sold its semifinished products, amounting to Rs. 153 crore, to M/s Jai Suspension Systems, apart from doing job-work for it, for Rs. 16 crore; that after purchasing the semi finished products, the subsidiary entity further processed the same to convert them into its finished products and sold them to its customers; that the gross profit declared by the assessee company was lesser than that of its subsidiary entity; that for the year under consideration, the assessee company had shown gross profit of Rs. 101.55 crore (GP rate 10.50%), whereas in the earlier year, i.e., A.Y. 2011-12, the assessee had shown gross profit of Rs. 94.44 crore (GP rate 11.52%) and gross profit of Rs. 65.72 crore (GP rate 11.57%) had been shown in A.Y. 2010-11 also; that during the year under consideration, there had been a fall of 1.02% in the GP rate of the assessee, as compared to the earlier years; that it appeared that the assessee company was diverting the major part of its profits to its subsidiary entity M/s Jay Suspension Systems LLP, which claimed deduction under section 80IC to reduce its tax liability; that Jai Suspension Systems LLP, in its return f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in GP rate was that the rates of power and fuel had increased substantially, which had had its impact on the profit of the assessee during the year; that however, the assessee could not substantiate its claim with documentary evidence; that in fact, the main reason for the decline in the GP rate of the assessee company was the supply of the products made by the assessee company to its subsidiary entity at a lower profit margin, for the purpose of diverting its profit to its subsidiary entity, which was claiming deduction under section 80 IC of the IT Act; that keeping in view all the facts, it was fair and reasonable to apply the average GP rate of the last two assessment years, at 11.63%, especially with regard to the low rate of GP shown by the assessee company; and that accordingly, the GP rate of 11.63% was being applied on the total sales of Rs. 9,67,43,37,000/-. In this manner, the AO arrived at a gross profit of Rs. 11,251,25,393/-. The assessee had shown a GP of Rs. 1,01,55,48,000/-. The difference of profit came to Rs. 10,95,77,393/- and this difference was added to the total income of the assessee. 15. Before the ld. CIT (A), the assessee contended that the addition as m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... version of profit by the assessee to its subsidiary M/s Jai Suspension Systems LLP, which is claiming deduction u/s 80IC of the Act, action should have been taken u/s 80IC(7) read with Section 80IA(10) of the Act and corresponding addition should have been made in the hands of the subsidiary company, and that however, no such addition had been made in the hands of the subsidiary company by the AO, in the scrutiny assessment order dated 31.03.2015. It was on this legal basis itself, that the addition made by the AO was deleted by the ld. CIT(A). Further, the ld. CIT(A) took note of the assessee's contentions on the merits of the issue, as submitted before the ld. CIT(A) vide letter dated 12.04.2018. These contentions stand reproduced in para 6.1, at pages 11 to 21 of the ld. CIT(A)'s order. The additional evidence filed by the assessee, alongwith such submissions, were sent by the ld. CIT(A) to the AO, for his comments. The AO furnished Remand Report dated 19.09.2018. This Remand Report stands reproduced in para 6.2, at pages 21 to 25 of the impugned order. The assessee submitted Rejoinder dated 23.10.2018 to the AO's said Remand Report. This Rejoinder of the assessee has been r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee company constituted 7% high profit and 93% low profit margin products, M/s Jai Suspension Systems LLP had 55% high profit and 45% low profit margin products, that in such a scenario, naturally, M/s Jai Suspension Systems LLP was showing better GP/NP rates than those of the assessee company, and that since both the companies were dealing with different product markets and were operating in different market segments inter-se, their GP/NP rates were not comparable. 16.2 The ld. CIT(A) further took note of the assessee's contention that the low GP rate of the assessee was on account of the fact that it had received non-compete fees of Rs.5Cr +10Cr =Rs.15 Cr in assessment years 2009-10 and 2010-11 from M/s Jai Suspension Systems LLP, which prevented the assessee from selling its products to the principal customers of M/s Jai Suspension Systems LLP, namely, Tata Motors Ltd. and Ashok Leyland Ltd., at Rudrapur, and the replacement market all over the country, except Haryana. The assessee's contention in this regard stands reproduced by the ld. CIT(A) in para 6.8, at pages 4243 of the impugned order. The ld. CIT(A) observed that the assessee's contention was th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdinary profits which might be expected to arise in such eligible business, the AO shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this Section, take the amount of profits as may be reasonably deemed to have been derived therefrom. It is not disputed that the provisions of Section 80IA(10) apply. M/s Jai Suspension Systems LLP is claiming deduction u/s 80IC of the Act. The operative expression in Section 80IA(10) is "shall" . Therefore, there is a statutory mandate contained in the Section, as per which, all other requirements of the provisions of the Section remaining constant, the AO shall, in computing the profits and gains of the eligible business, for the purpose of deduction under the Section, take the amount of profits as may be reasonably deemed to have been derived therefrom. Meaning thereby, that addition, if any, needs must have been made in the hands of the other person, i.e., M/s Jai Suspension Systems LLP and not in the hands of the assessee company. Such statutory mandate of the provisions of Section 80IA(10) having undisputedly not been carried out in the present case, the addition made in the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had submitted a comparative chart of sales turnover, gross profit, GP rate, net profit and NP rate for assessment years 2010-11 to 2012-13. It had been submitted that during the year, the GP rate was slightly less as compared to the earlier year, since there had been a substantial increase in the rates of power and fuel, impacting the profits of the assessee during the year. Vide letter dated 18.03.2015, the assessee had filed a Note on the increase in power and fuel cost which had had its impact on the assessee's GP rate. In this Note (pages 15 to 17 of the impugned order), the assessee had contended that the main ingredient of the cost of production in the assessee's business is raw material and power and fuel cost, which accounts for approximately 78% of the sales; and that during the year under consideration, the power and fuel cost had sharply increased from Rs. 56.67 Cr to Rs. 79.83 Cr, i.e., from 6.95% of the sales to 8.23% thereof, meaning an increase of 18% over the immediately preceding assessment year, i.e. assessment year 2011-12. 17.4 It was also submitted that the fuel utilized in the Malanpur Plant of the assessee was mainly gas supplied by GAIL, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) Breakup of power & fuel for the AY 2011-12 (iv) Copies of ledger A/c of power of fuel for the AY 2011-12 (v) Comparative chart showing %age of increase in power & fuel for the assessment year 2012-13 in comparison to assessment year 2011-12 (vi) Comparative chart of rates per unit of power & fuel i.e. electricity, HSD, furnace oil and Gas etc. for the assessment year 2011-12 and 2012-13 (vii) Specimen copies of bills of electricity, HSD, furnace oil and Gas for each month for the assessment years 2011-12 and 2012-13. 19. All these evidences, it is not disputed, were furnished by the assessee before the ld. CIT(A) as additional evidence, though, in our considered opinion, these documents having been furnished before the AO, could well have been read in evidence as such only. 19.1 Further, the comparative charts filed by the assessee before the AO amply substantiated the stand of the assessee that the assessee and its subsidiary were operating substantially in different segments. 19.2 Further, still the assessee had contended that it had received non compete fees of Rs. 5 Cr in assessment year 2009-10, vide Non Compete Agreement dated 05.03.2009, and of Rs. 10 Cr in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incorrect and misleading, since the AO had neither stated that he was not satisfied with the reply furnished by the assessee concerning the lesser margin of profit of the assessee company as compared to that of its subsidiary, nor had the AO confronted the assessee with regard to the alleged diversion of profit by the assessee to its subsidiary, nor even was the quantum of addition proposed confronted to the assessee. 19.5 The ld. CIT(A) found, and correctly so, merit in the contention raised by the assessee. Nowhere has the AO been shown to have enquired these matters of the assessee and the addition has been made without confronting the assessee in this regard. Therefore, the conclusion of the ld. CIT(A) in this regard is found to be justified and not requiring any interference at our hands. 20. On merits, in the Remand Report, the AO merely brushed aside lightly the submissions made by the assessee, wherein, the assessee had contended that it had been submitted before the AO and reiterated later, that the fall in GP rate was on account of increase in the rates of power and fuel substantially. The AO neither controverted nor disproved such contention of the assessee, which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mall consideration, knowing that the other party will give 100% deduction of income u/s 80IC of the Income Tax Act; that this had been done by the assessee company for its subsidiary entity just to divert the profit to claim higher deduction u/s 80IC in the subsidiary entity, which was amply clear from the net profit rates shown by both the entities and that thus, it was a clear cut case of diversion of profit from a non-eligible unit to an eligible one, for claim of deduction u/s 80IC. As stated by the assessee in its Rejoinder, it remains unrebutted that the submissions made by the assessee with regard to the non compete fees of Rs. 15 Cr charged by the assessee company from its subsidiary, i.e., M/s Jai Suspension Systems LLP, in assessment years 2009-10 and 2010-11, were not controverted or disproved by the AO. The assessee had filed the following evidences in this regard : 1. Non Compete Fee agreements 2. Income Tax Return & Computation for the AY 2009-10 3. Extracts of the Balance Sheet, Profit & Loss A/c and Other Income for the FY 2008-09 (AY 2009-10) 4. Income Tax Return & Computation for the AY 2010-11 5. Extracts of the Balance Sheet, Profit & Loss A/c and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of GP rate could have been legally made by comparing such GP rates. 22.3 Too, the assessee's contention to the effect that it was always selling products to M/s Jai Suspension Systems LLP at a cost + 10% margin, which process had been duly accepted by the Department in scrutiny assessment proceedings in the earlier years, as above, has not been brought to challenge. As stated before the authorities below by the assessee and reiterated before us, the assessee has been selling semi-finished products to M/s Jai Suspension Systems LLP on a margin of 10% above cost consistently since 2009-10. In fact, as per the Excise Rules, which are applicable to the assessee, since it is registered under the Excise Act, the cost plus 10% margin method is the prescribed method of valuation for transfer of semi-finished goods to a related party. The assessee had also placed before the authorities below, the Guidance Note of the Institute of Cost & Work Accountants of India, at CAS-4. In this Guidance Note, it has been stated that Rule 9 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 deals with sales of a related person; that "related person" has be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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