CHAWLA AUTO CORPORATION,RUDRAPUR V. A C I T CIRCLE-2(1)(1), HALDWANI

ITA 140/DDN/2025

AI Insights

Chawla Auto Components, a partnership firm engaged in manufacturing sheet metal components, appealed against the order of the Commissioner of Income Tax (Appeals) which upheld the disallowance of INR 43,00,753 claimed under section 80-IC of the Income Tax Act. The disallowance was initially made by the Assessing Officer who suspected that the profits from the new unit (Unit-2) were deliberately shown lower to claim higher deductions from the old unit (Unit-1), which was eligible for deductions under section 80-IC since AY 2010-11. The Tribunal examined the profit ratios and other financial details of both units and found that while the profits from Unit-1 were consistent with previous years, the profits from Unit-2 were disproportionately low, leading to the suspicion of profit suppression to maximize deductions from the eligible unit.

• Counselvise Citation: [2026] 140 COUNSELVISE.COM (IT) 836580 (ITAT-DEHRADUN)
• Duration Of Justice: 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-02-2026
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Assessment Year: 2017-2018
• Appeal Filed On: 08-08-2025
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMAR PAL SINGH
• Assessee Lawyers: K. SAMPAT
• Keywords: Capital asset converted into stock in trade
• Section: 143(3)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL DEHRADUN “SMC” BENCH: DEHRADUN BEFORE SHRI YOGESH KUMAR U.S, JUDICIAL MEMBER & SHRI MANISH AGARWAL, ACCOUNTANT MEMBER [THROUGH VIRTUAL MODE] ITA No.140/DDN/2025 [Assessment Year : 2017-18] Chawla Auto Components Plot No.39, Sector-IIDC, IIE, Sidcul, Pantnagar, Rudrapur Uttarakhand-263153 PAN-AAGFC4301A vs ACIT Circle-2(1)(1) Haldwani Uttarakhand APPELLANT RESPONDENT Assessee by Shri K. Sampat, Adv. Revenue by Shri Amar Pal Singh, JCIT DR Date of Hearing 08.12.2025 Date of Pronouncement 13.02.2026 ORDER PER MANISH AGARWAL, AM : The present appeal is filed by the assessee against the order dated 10.07.2025 of Ld. Commissioner of Income Tax (A)/ADDL/ JCIT(A)-1, Chandigarh [“Ld. CIT(A)”] in Appeal No. CIT(A), Haldwani/ 10253/2019-20 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of the assessment order dated 22.12.2019 passed u/s 143(3) of the Act pertaining to Assessment Year 2017-18. 2. Brief facts of the case are that assessee is a partnership firm, engaged in manufacturing of sheet metal component for Air Conditioners/ Refrigerators/Four wheelers and e-filed its return of income on 28.10.2017, declaring total income of INR 2,35,34,290/- Printed from counselvise.com ITA No.140/DDN/2025 Page | 2 after claiming deduction under Chapter-VIA which mainly comprising of deduction u/s 80-IC of the Act of INR 64,87,054/-. The case of the assessee was selected for scrutiny for the reason “large deduction claimed u/s 80-IC in comparison to preceding year”. The AO observed that during the year under appeal, assessee has started one more Unit for manufacturing of the similar items which were manufactured at the old Unit and deduction u/s 80-IC has not been claimed on the new Unit. AO further observed that assessee stared claiming deduction u/s 80IC on the old unit (Unit-1) from AY 2010-11 and it is eighth year of claiming the deduction u/s 80-IC of the Act. The AO observed that assessee has claimed deduction of INR 64,87,054/- on the profits from Unit-1 where the G.P. rate of 14.93% and N.P. rate of 10.78% was declared whereas in the new Unit (Unit-2), G.P. rate of 5.80% and N.P. rate of 2.22% was declared. Therefore, the AO was of the opinion that assessee has deliberately shown lower profits in non-eligible and declared better results in Unit-1, profit of which are eligible for deduction u/s 80-IC of the Act and accordingly, he applied N.P. rate at 3.64% as declared in the immediately preceding year on the turnover of Unit-1 and disallowed the balance deduction of INR 43,00,753/- claimed u/s 80-IC of the Act. 3. Against the said order, assessee filed an appeal before Ld. CIT(A) who vide order dated 10.07.2025, dismissed the appeal of the assessee. 4. Aggrieved by the order of Ld. CIT(A), assessee is in appeal before the Tribunal by taking following grounds of appeal:- Printed from counselvise.com ITA No.140/DDN/2025 Page | 3 “On the facts and in the circumstances of the case and in law the Ld. Addl./JCIT(A) erred in confirming the action of the Assessing Officer in disallowing deduction claimed u/s 80IC of the Act to the extent of INR 43,00,753/- on assumptions and presumptions. The above action being arbitrary, fallacious, unwarranted and illegal must be quashed with directions for appropriate relief.” 5. The solitary issue in this appeal is with respect to the disallowance of deduction u/s 80-IC of the Act to the extent of INR 43,00,753/- on assumption and presumption. 6. Before us, Ld. AR for the assessee submits that assessee is regularly claiming deduction u/s 80-IC of the Act since Assessment Year 2010-11 from the income of Unit-1 which was never doubted. Merely because new production unit was started in the previous year, the AO alleged that the profits of new unit were diverted to the old unit o claim higher amount of deduction u/s 80IC of the Act. Ld. AR submits that new Unit was installed and the reasons for establishing new Unit was that assessee’s main buyer is Voltas Ltd., who insisted to provide the bills with excise duty so as to enable it to claim CENVAT credit. Accordingly, the assessee had installed new Unit from where the goods were sold to Voltas Ltd. after charging Central Excise Duty. 7. Ld. AR stated that upto August 2016, Unit-2 was not installed therefore, sales were made from Unit-1 to Voltas Ltd however, from September, 2016 onwards, since the production at Unit-2 had started, entire production was sold to M/s Voltas Ltd. after charging excise duty. Due to levy of Excise duty on the products manufactured from Printed from counselvise.com ITA No.140/DDN/2025 Page | 4 Unit-2 and sold to Voltas Ltd, the basic value of the products sold by the assessee had reduced since as the purchase order the value was including of excise duty. Ld. AR submits that before AO in the course of assessment proceedings, assessee filed comparative chart of sale price of both the units according to which difference was due to excise duty only. Further submits that AO has accepted the trading results declared of both the units and no discrepancies whatsoever was pointed out in the details so filed with respect to the manufacturing cost and expenses claimed by the assessee and had not invoked the provisions of section 145(2) before estimating the profits of both the units to reduce the amount of deduction claimed u/s 80-IC of the Act out of the profits of Unit-1. Ld. AR further submits that assessee has claimed deduction u/s 80-IC @ 25% of the profits of eligible business and therefore, there would not be much difference between the taxes paid on the profits of Unit-1 and Unit-2. It is thus prayed that the assessee has rightly claimed the deduction u/s 8-IC of the Act and requested to delete the disallowance made by the AO. 8. On the other hand, Ld. Sr. DR for the Revenue supported the orders of the lower authorities and requested for the confirmation of the same. 9. Heard the contentions of both the parties at length and perused the material available on record. The solitary issue in dispute is with respect to the quantum of profits earned from the Unit eligible for claiming deduction u/s 80-IC vis-a-vis profits from the non-eligible Unit. The AO alleges that assessee has shown higher profits from the Printed from counselvise.com ITA No.140/DDN/2025 Page | 5 eligible unit whereas comparatively lower profits were declared from other units though the product manufactured remained the same at both the units and the major buyer is also common in both the Units. 10. After considering the facts and looking to the profit ratio declared by the assessee in the preceding year and year under appeal for the eligible unit, we observed that the turnover of the eligible unit is ranging in the same range as were declared in preceding years however, the gross profit as well as net profit has increased substantially in the year under appeal. As against which Gross profit as well as Net profit from the new unit was very low. The claim of the assessee is that due to excise duty element, the basic cost of the goods sold is less in new unit as compared to old unit which could not be accepted due to the fact when the assessee charged Excise Duty on the products manufactured and sold, it is entitled to avail CENVAT credit on the input of raw material. Therefore, the element of Excise Duty is largely compensated through the adjustment of CENVAT credit on the inputs. The other reason for fall in G.P rate was stated as declined in the consumption of raw material in the eligible unit and the cost incurred on repair and maintenance was less in eligible unit which is also not acceptable since that both the units are managed and controlled by same management and therefore, the major raw material must be bought for both the units simultaneously and the cost would remain the same. Moreover undisputedly, there is no material difference in the quality of product manufactured in both the units. Further, Unit-2 i.e. non-eligible unit had started production in the year under appeal therefore, the expenses towards repair and Printed from counselvise.com ITA No.140/DDN/2025 Page | 6 maintenance would be comparatively lower as compared to old unit which was in production for past more than 08 years. 11. Thus, looking to the entirety of the facts and as discussed above, we are of the considered opinion that there must be some element of profit of Unit-2 which has been suppressed and assessee has shown better results in Unit-1 to claim higher amount of deduction u/s 80- IC of the Act. Accordingly, we direct the AO to apply Net profit rate of 5.83% i.e. average rate of net profit rate of year under appeal and of preceding two years as against the net profit rate of 3.64% of immediately preceding year applied by the AO to compute the amount of profits from eligible unit and further direct the AO to re-compute the amount of deduction u/s 80-IC from eligible unit by applying net profit rate of 5.83 % and disallowed the remaining amount. The Ground of appeal raised by the assessee is thus partly allowed. 12. In the result, appeal of the assessee is partly allowed. Order pronounced in the open Court on 13.02.2026. Sd/- Sd/- (YOGESH KUMAR U.S) JUDICIAL MEMBER Date:- 13.02.2026 *Amit Kumar, Sr.P.S* (MANISH AGARWAL) ACCOUNTANT MEMBER Printed from counselvise.com ITA No.140/DDN/2025 Page | 7 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT 6. Guard File ASSISTANT REGISTRAR ITAT Printed from counselvise.com "