M/s Subhkarma Electricals, Parwanoo V. ITO, Parwanoo

ITA 1005/CHANDI/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51456 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 24-08-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 27-10-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJAY SHARMA
• Keywords: Unexplained expenditure; Business income; Business expenditure; Onus to prove
• Section: 69C; 80IB; 145; 56; 28; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL: CHANDIGARH BENCH A BEFORE MS SUSHMA CHOWLA, HONBLE JM AND SHRI MEHAR SINGH, HONBLE AM ITAS NO. 1005 & 1006/CHANDI/2009 ASSESSMENT YEAR 2004-05 & 2005-06 SUBHKARMA ELECTRICALS V. I.T.O. PARWANOO PARWANOO (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI JASPAL SHARMA RESPONDENT BY: SHRI AJAY SHARMA DATE OF HEARING: 24.8.2011 DATE OF PRONOUNCEMENT: 30.8.2011 ORDER PER MEHAR SINGH, AM THE PRESENT APPEALS, FILED BY THE ASSESSEE FOR ASS ESSMENT YEAR 2004-05 & 2005-06 ARE DIRECTED AGAINST THE ORDER OF LD. CIT(A), SHIMLA DATED.18.9.2009 PASSED U/S 250(6) OF INCOME-TAX ACT (HEREIN AFTER REFERRED TO IN SHORT THE ACT). AS THE ISSUE INVOLVED IS ID ENTICAL, THESE WERE HEARD TOGETHER AND DISPOSED OFF BY THIS CONSOLIDATED ORDE R, 2. IN BOTH THE APPEALS THE ASSESSEE HAS RAISED THE SIMILAR FOLLOWING GROUNDS: 1 THE IMPUGNED ORDER IS BOTH AGAINST FACTS AND ERR ONEOUS IN LAW. 2 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE L D. CIT(A) HAS ERRED IN HAVING CONFIRMED THE ORDER OF AO RESTRICTI NG THE DEDUCTION U/S 80IB TO RS. 3,00,000 FOR A.Y 2004-05 AND RS. 3, 72,662/- FOR A.Y 2005-06 AS AGAINST THE DEDUCTION CLAIMED BY THE ASSESSEE AT RS. ITAS NO. 1005 & 1006/CHANDI/2009 SUBHKARMA ELECTRICALS V. ITO 2 8,22,850/0 FOR A.Y 2004-05 AND RS. 11,11,681/- FOR ASSESSMENT YEAR 2005-06 AND THUS TREATING THE DIFFERENCE OF RS . 5,22,850/- FOR A.Y 2004-05 AND RS. 7,39,019/- FOR A.Y 2005-06 AS I NCOME FROM UNDISCLOSED SOURCES MERELY ON FLIMSY GROUNDS. 3 ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE L D. CIT(A) HAS ERRED IN HAVING ACCEPTED THE NET PROFIT RATE AT 10% AS APPLIED BY THE AO WITHOUT ANY JUSTIFICATION AND WITHOUT POINTI NG OUT ANY DEFECT IN THE BOOKS MAINTAINED BY THE ASSESSEE, AS AGAINST THAT DECLARED BY THE ASSESSEE FIRM AT 27.4% FOR A.Y 2004 -05 AND AT 29.83% FOR A.Y 2005-06. 3. THE NEAT AND UNDISPUTED FACTS AS CULLED OUT FROM THE RELEVANT RECORDS AND SUBMISSIONS MADE BY THE PARTIES ARE THA T THE ASSESSEE IS ENGAGED IN MANUFACTURING OF ELECTRIC SWITCH PARTS A T PARWANOO. THE RETURN OF INCOME WAS FILED ON 21.3.2005 DECLARING I NCOME AT RS. 8,23,349/- U/S 80IB OF THE ACT. IN THE COURSE OF AS SESSMENT PROCEEDINGS THE ASSESSEE PRODUCED BOOKS OF ACCOUNT WITH BILLS A ND VOUCHERS AND THE SAME WERE PUT UNDER TEST SCRUTINY BY THE AO. THE ASSESSEE MADE TOTAL SALES OF RS. 30,73,000/- AND DISCLOSED NET PROFIT A T RS. 8,22,349/- SHOWING NET PROFIT AT 27.45%. THE AO OBSERVED THAT ONE PAR TNER SHRI MOHINDER SINGH CARRIED ON THE SAME BUSINESS, AT DELHI. IN T HAT MANUFACTURING CONCERN THE G.P WAS DISCLOSED AT 17.5% AGAINST SALE S OF RS. 9,80,411/-. THE AO FURTHER, OBSERVED THAT IN THE PRESENT CASE T HE ASSESSEE SHOWED G.P AT 42% IT BEING EXCESSIVE AS COMPARING TO THAT OF S .K. INDUSTRIES. THE ASSESSEE FILED A FEW BILLS AND VOUCHERS OF SUCH SAL E BILLS THAT NO COMPARISON OF SALE WAS POSSIBLE BECAUSE SUCH TYPE O F GOODS SOLD TO S.K. INDUSTRIES WERE NOT SOLD TO OTHER CONCERNS WITH DEF INITE PURPOSE TO AVOID COMPARISON. THEREFORE, SUCH SALE BILLS FILED ARE N OT COMPARABLE AS OBSERVED BY THE AO. ITAS NO. 1005 & 1006/CHANDI/2009 SUBHKARMA ELECTRICALS V. ITO 3 THE AO ALSO RECORDED THE STATEMENT OF SHRI MOHINDER SINGH IN RESPECT OF RESULTS SHOWN BY HIM IN THE CASE OF S.K. INDUSTRIES . THE AO OBSERVED THAT NO SALARY EXPENSES WERE CLAIMED BY THE ASSESSE E. THE AO OBSERVED AT PAGE 8 OF ASSESSMENT ORDER AS UNDER: THE INVESTIGATION CARRIED OUT IN SOME OF THE CASES REVEALED THAT THE UNDERTAKINGS HERE WERE SHOWING NET PROFIT SEVERAL T IMES HIGHER THAN WHAT THOSE WERE SHOWING AT THEIR ORIGINAL PLAC E OF BUSINESS OUTSIDE H.P. THIS ALL WAS MANAGED IN THE FOLLOWING WAY: A) SUPPRESSING THE PURCHASE OF RAW MATERIAL BY MAKI NG PURCHASE WITHOUT BILLS AND PURCHASE ON LOWER THAN T HE MARKET RATES. B) SUPPRESSING THE MANUFACTURING AND TRADING EXPENS ES BY NOT SHOWING AND CLAIMING MANY EXPENSES OR UNDER STATING THE EXPENDITURE, LIKE NOT PROVIDING FOR SALARY TO WORKI NG PARTNERS AND INTEREST ON THEIR CAPITAL. C) BY MAKING PURCHASE OF SEMI FURNISHED GOODS CARRY ING OUT NOMINAL WORK ON THE ASSEMBLY BUT SHOWING GROSS PROF IT SEVERAL TIMES MORE THAN THE VALUE ADDITION MADE IN SUCH INP UTS. THIS WAY THE BUSINESS OF TRADING OF FINISHED GOODS IS GIVEN THE COLOR THAT OF MANUFACTURING OF GOODS. D) BY MAKING SALES PARTLY OF GOODS MANUFACTURED OUT SIDE HP MANAGING TO SHOW SUCH GOODS AS MANUFACTURED IN HP B Y COMPLETING THE FORMALITIES WHICH ARE SO EASY TO COMPLETE. 3 (I) THE AO INVOKED THE PROVISIONS OF SECTION 80IA (10) OF THE ACT AND WORKED OUT THE PROFIT AFTER REJECTION OF BO OKS OF ACCOUNT. THE ITAS NO. 1005 & 1006/CHANDI/2009 SUBHKARMA ELECTRICALS V. ITO 4 AO DREW FOLLOWING CONCLUSION IN THE ASSESSMENT ORDE R AT PAGE 11 WHICH ARE REPRODUCED HEREUNDER: I HOLD THAT BECAUSE OF THE REASONS WELL EXPLAINED ABOVE THE ASSESSEE HAS SHOWN TO HAVE DERIVED MORE PROFIT THAN WHAT REASONABLY WOULD HAVE EXPECTED TO ARISE TO THE ASSE SSEE IN ITS BUSINESS. THEREFORE, THE REASONABLE PROFIT IS BEIN G ARRIVED AT AFTER DEDUCTING THE FOLLOWING EXPENSES WHICH THE ASSESSEE DELIBERATELY HAVE NOT PROVIDED AND ACCOUNTED FOR IN ITS BOOKS OF ACCOUNT:- A) IN THE CASE OF THE FIRM THE SALARY TO WORKING PARTN ERS IS ADMITTED BY THE INCOME TAX ACT, 1961 AS AN EXPENDIT URE WHICH NEED TO BE REDUCED BEFORE ARRIVING AT THE PRO FIT. THE PARTNERS HAD CREDIT BALANCES IN THEIR CAPITAL ACCOU NTS ON WHICH THEY SHOULD HAVE BEEN PROVIDED INTEREST BEFOR E ARRIVING AT NET PROFIT. SUCH EXPENDITURE IS ALSO AN ADMISSI BLE BUSINESS EXPENDITURE WITHOUT WHICH PROFIT DECLARED WOULD NOT BE CORRECT ONE. THE PARTNERSHIP DEED OF THE ASSESSEE ALSO CLEARLY STIPULATES THAT THE WORKING PARTNERS WILL BE PAID S ALARY, HOWEVER RESTRICTED ACCORDING TO THE PROVISIONS OF I NCOME-TAX ACT, 1961. THE EXTRACT OF RELEVANT PART OF THE PAR TNERSHIP DEED IS REPRODUCED HERE UNDER:- THAT THE ENTIRE CONTROL, MAINTENANCE AND SUPERVISI ON OF PARTNERSHIP FIRM SHALL VEST IN MR. MOHINDER SINGH A ND MR. HARDEEP SINGH INDIVIDUAL, WHO SHALL CONDUCT THE AFF AIRS IN THE BEST POSSIBLE MANNER AND SHALL BE ENTITLED TO ENTER INTO CONTRACTS, TAKE ON LEASE AND ALSO PURCHASE THE PROP ERTIES, MORTGAGE, OBTAIN LOANS ON BEHALF OF THE FIRM AND TO SIGN SUCH ITAS NO. 1005 & 1006/CHANDI/2009 SUBHKARMA ELECTRICALS V. ITO 5 DOCUMENTS. PROMISSORY NOTES. MORTGAGE DEEDS, ASSIG NMENTS, TRANSFER DEEDS. CONTRACT DEEDS AS MAY BE NECESSARY FOR THE FURTHERANCE OF THE INTEREST AND BUSINESS OF THE PAR TNERSHIP FIRM. THEY SHALL BE ENTITLED TO DEAL INDIVIDUALLY WITH FINANCIAL INSTITUTIONS, INDUSTRIES DEPARTMENT. GOVE RNMENT DEPARTMENTS, BANKS, INCOME TAX DEPARTMENT, SALES TA X DEPARTMENT. TELEPHONE DEPARTMENT AND SUCH OTHER PA RTIES ON BEHALF OF THE FIRM AS THEY MAY BE NECESSARY. IN CAS E THEY THINK PROPER, THEY MAY AUTHORIZE INDIVIDUAL ANY OUT SIDERS IN WRITING TO DO THE SAME IF IT WERE DONE BY THEM. TH US, THEY SHALL BE THE WORKING PARTNERS OF THE FIRM AND SHALL ACT ON BEHALF OF THE FIRM. THEY SHALL BE ENTITLED TO REMUN ERATION WHICH MAY BE DECIDED BETWEEN THE PARTNERS FROM TIME TO TIME AS AND WHEN THE PRODUCTION COMMENCES. IT IS A FACT THAT IN CASE THE PARTNERS HAD ALSO NO T WORKED IN THE FACTORY AND OFFICE OF THE ASSESSEE IT WOULD HAVE TO INCUR SUBSTANTIAL EXPENDITURE FOR ACQUIRING THE SER VICES OF SIMILARLY EXPERIENCED AND TECHNICALLY QUALIFIED PER SONS. I THEREFORE TAKE THE EXPENDITURE ON SALARY AND INT EREST AS UNDER: SALARY INTEREST ON CAPITAL @ 12% SH. MOHINDER SINGH @ 10000 PM 120000/- 86,303/- SH. SARVJIT SINGH @ 8000 PM 96,000/- 73,943/- SH. HARDEEP SINGH @ 5000 PM 60,000/- 76,103/- 2,76,000/- 2,36,250/- ITAS NO. 1005 & 1006/CHANDI/2009 SUBHKARMA ELECTRICALS V. ITO 6 SMT. SURINDER KAUR WAS NOT ALLOWED ANY PROFIT, THER EFORE NO EXPENDITURE ON ACCOUNT OF HER IS BEING TAKEN INTO A CCOUNT. THE NAME OF SHRI SARVJIT SINGH WAS NOT INCLUDED IN THE PARTNERSHIP DEED AS WORKING PARTNERS BUT SHRI MOHIN DER SINGH HAD ADMITTED IN HIS STATEMENT THAT HE WASS ALSO WOR KING IN THE FACTORY. THEREFORE, HE WAS ALSO ENTITLED TO SALARY . SALARY SO TAKEN INTO ACCOUNT OF ABOVE ALSO TAKES CA RE OF THE EXPENDITURE ON TECHNICAL KNOW HOW AND OTHER EXPENSE S NOT SHOWN ARE LESS CLAIMED INCLUDING MARKETING. THEREF ORE, NO EXPENDITURE ON THE SAME IS BEING TAKEN INTO ACCOUNT SEPARATELY. THE NET PROFIT RATE OF M/S S.K. INDUSTRIES WHICH WA S CARRYING ON THE SIMILAR BUSINESS IS ONLY 8.2% WHEREAS THE A SSESSEE HAS SHOWN 27.4% WHICH APPARENTLY IS HIGHLY INFLATED. T HE REPLY OF THE ASSESSEE IN THIS RESPECT IS NOT ACCEPTABLE B ECAUSE THERE HAVE BEEN ADVERSE BUSINESS CONDITIONS IN HP BECAUSE OF WHICH THERE HAVE BEEN NO INDUSTRIAL DEVELOPMENT HER E AND THE GOVT HAS TO ATTRACT THE INDUSTRIES BY ANNOUNCING IN CENTIVES. IT IS TRUE THAT THE BUSINESSMEN WILL SET UP THEIR I NDUSTRIES HERE ONLY IF THEY EARN MORE PROFITS THAN WHAT THEY WERE EARNING. BUT HOW MUCH CAN BE SUCH PROFIT. CERTAINLY IT CANN OT BE SEVERAL TIMES MORE THAN WHAT THEY HAVE EARLIER BEEN DERIVING. KEEPING IN VIEW THE ALL FACTS OF THE CASE AND ALSO REPLY FILED BY THE ASSESSEE ON THIS POINT, I FIND REASONABLE TO APPLY NET PROFIT RATE OF 10% AND ESTIMATE THE INCOME OF THE A SSESSEE AT RS. 3,00,000/-. THIS IS AFTER TAKING INTO ACCOUNT ALL THE ISSUES WHICH HAVE BEEN RAISED, DISCUSSED AND REPLIED BY TH E ASSESSEE ITAS NO. 1005 & 1006/CHANDI/2009 SUBHKARMA ELECTRICALS V. ITO 7 AS INCORPORATED IN THIS ORDER ABOVE. THEY EXCESS P ROFIT OF RS. 5,22,849/- IS TREATED AS INCOME OF THE ASSESSEE FRO M OTHER SOURCES AND CHARGED TO TAX. 4. SIMILARLY, THE AO ESTIMATED THE REASONABLE INCOM E FROM BUSINESS BY APPLYING NP AT 10% FOR THE ASSESSMENT YEAR 2005-06. THE EXCESS PROFIT OF RS. 7,39,019/- WAS TREATED AS INCOME FROM UNDISC LOSED SOURCES. THE LD. CIT(A), UPHELD THE FINDINGS OF THE AO IN BOTH THE A SSESSMENT YEARS. 5. THE LD. AR FOR THE ASSESSEE CLARIFIED THAT THE FACTS RELATING TO APPEAL FOR ASSESSMENT YEAR 2004-05 ARE ALMOST IDENT ICAL, THEREFORE THE SUBMISSIONS MADE BEFORE THE BENCH MAY BE TREATED FO R BOTH THE ASSESSMENT YEARS I.E. 2004-05 & 2005-06. IT WAS CON TENDED BY THE LD. AR FOR THE ASSESSEE THAT THE AO ON THE BASIS OF P URE SURMISES AND CONJECTURES REDUCED THE NET PROFIT OF THE ASSESSEE AND TREATED THE SAME AS INCOME FROM OTHER SOURCES AS PROVIDED U/S 56 OF T HE ACT. IT WAS CONTENDED THAT THE AO SUBSTITUTED THE BOOK VERSION WITHOUT PROPERLY APPRECIATING THE SUBMISSION FIELD BY THE ASSESSEE. IT IS FURTHER PLEADED THAT THE ASSESSEE DERIVES ELIGIBLE PROFIT FROM MANU FACTURING ACTIVITY. HE ALSO POINTED OUT THAT THE PROVISIONS OF SECTION 80I A(10) OF THE ACT ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE AS THE AO FAILED TO DEMONSTRATE THE ARRANGEMENTS, MADE BY THE ASSESSEE, WITHIN THE MEANING OF SEC 80IA(10) OF THE ACT, WITH A VIEW TO ARTIFICIALLY IN FLATING PROFIT, FOR THE PURPOSE OF CLAIMING U/S 80IA. IT WAS ALSO CONTENDE D THAT THE AO HAS NOT BROUGHT ANY MATERIAL ON RECORD TO INFER THAT THE AD DITION MADE BY WAY OF ADOPTING LOWER NP RERPRESENTS INCOME FROM OTHER SOU RCES AND NOT INCOME FROM INDUSTRIAL UNDERTAKING OF THE ASSESSEE. IT WAS ALSO VEHEMENTLY CONTENTED THAT THE AO ARBITRARILY MADE COMPARISON I N HASTE WITH A CONCERN ITAS NO. 1005 & 1006/CHANDI/2009 SUBHKARMA ELECTRICALS V. ITO 8 WHICH MANUFACTURED DIFFERENT COMMODITIES. CONSEQUEN TLY, HE PRAYED THAT THE IMPUGNED ADDITION BE QUASHED, AS IT REPRESENTS PROFITS DERIVED FROM MANUFACTURING ACTIVITIES OF THE ASSESSEE AND NOT FR OM OTHER SOURCES. LD. AR FOR THE ASSESSEE HAS SHOWN BY THE ASSESSEE IN ASSESSMENT YEAR 2003-04. 6. THE LD. DR, ON THE OTHER HAND, SUPPORTED THE ASSE SSMENT ORDER AND THE ORDER PASSED BY THE LD. CIT(A). HE WAS OF THE OPINION THAT THE AO HAS RIGHTLY REJECTED THE BOOKS OF ACCOUNT, IN VIEW OF T HE DEFECTS POINTED OUT, IN THE ASSESSMENT ORDER. THE LD. DR OBSERVED THA T THE AO ESTIMATED THE FAIR INCOME AFTER REJECTION OF BOOKS OF ACCOUNT. 7. WE HAVE CAREFULLY PERUSED AND CONSIDERED THE RE LEVANT RECORDS, RIVAL SUBMISSIONS AND THE IMPUGNED ASSESSMENT ORDER AS WELL AS APPELLATE ORDER PASSED BY THE LD. CIT(A). THE AO SUBSTITUTED THE N.P DISCLOSED BY THE ASSESSEE FOR BOTH THE ASSESSMENT YEARS AND THE DIFFERENCE WAS ADDED AS INCOME FROM OTHER SOURCES U/S 56 OF THE ACT. C ONSEQUENTLY, SUCH INCOME WAS HELD AS INELIGIBLE FOR DEDUCTION U/S 80I B OF THE ACT. IT IS EVIDENT THAT THE AO ADOPTED GROSSLY SIMPLISTIC APPR OACH, IN TREATING SUCH ELIGIBLE, PROFITS DERIVED FROM THE MANUFACTURING AC TIVITY CARRIED ON BY THE ASSESSEE, AS INCOME FROM OTHER SOURCES. NEEDLESS T O SAY THAT THE AO IS PURELY DRIVEN IN ARRIVING AT SUCH FINDING, BY HIS G ENERAL PERCEPTION OF INFLATION OF PROFIT BY THE ASSESSEE, IN TAX EXEMPTI ON AREA. IN THE PRESENT CASE, THE AO HAS FAILED TO BRING ON RECORD, ANY ITE M OF INCOME, WHICH FALLS UNDER THE HEAD INCOME FROM OTHER SOURCES U/S 56 OF THE ACT. 7.1 THE REJECTION OF BOOK-VERSION OF THE ASSESSEE A ND SUBSTITUTION THEREOF IS ALSO NOT FOUNDED ON RATIONAL AND OBJECTI VE REASONS. AO FAILED ITAS NO. 1005 & 1006/CHANDI/2009 SUBHKARMA ELECTRICALS V. ITO 9 TO BRING ON RECORD ANY CREDIBLE MATERIAL DEMONSTRAT ING MANIPULATION RESORTED TO BY THE ASSESSEE, WITH A VIEW TO INFLATI NG THE ELIGIBLE PROFIT, FOR THE PURPOSE OF CLAIMING HIGHER DEDUCTION U/S 80IB O F THE ACT. IT WAS CONTENDED BY THE ASSESSEE THAT ALL THE PURCHASE AND SALES ARE DULY VOUCHED AND ACCOUNTED FOR, IN ITS AUDITED REGULAR BOOKS OF ACCOUNT. NO SUPPRESSION OF MANUFACTURING EXPENSES AND INFLATION OF SALES WERE FOUND AND BROUGHT ON RECORD, BY THE AO. THE AO HAS NOT D OUBTED THE GENUINENESS OF THE SALES EFFECTED BY THE ASSESSEE. IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE BOOKED BOGUS SALES, WITH A VIEW TO INFLATING THE PROFIT, TO CLAIM HIGHER DEDUCTION U/S 80IB OF THE A CT. SIMILARLY, THE AO HAS NO DISPUTE ABOUT THE MANUFACTURING ACTIVITY CAR RIED ON BY THE ASSESSEE-APPELLANT. THE AO HAS NO DISPUTE ABOUT THE ELIGIBILITY OF THE ASSESSEES CLAIM U/S 80IB OF THE ACT . THE BOOK VERSION OF THE ASSESSEE CAN BE DISPLACED ON THE BASIS OF MANIPULATIVE DEVICE RE SORTED TO INFLATE THE PROFIT DISCOVERED BY THE AO. IN THE PRESENT CASE, THE AO MERELY ADOPTED THE THUMB RULE AND SUBSTITUTED HIS OWN SUBJECTIVE V ERSION IN PLACE OF BOOK VERSION DISCLOSED BY THE ASSESSEE. 7.2 THE REJECTION OF BOOKS OF ACCOUNT U/S 145(3) OF THE ACT AND SUBSEQUENTLY MAKING ASSESSMENT IN THE MANNER PROVID ED U/S 144 SUBSEQUENTLY MAKING ASSESSMENT IN THE MANNER PROVID ED U/S 144 OF THE ACT, ARE TWO DIFFERENT AND DISTINCT ASPECTS CONTEMP LATED U/S 145 OF THE ACT. THE AO IS REQUIRED TO ESTIMATE THE TRUE INCOM E OF THE ASSESSEE AFTER REJECTION OF BOOKS OF ACCOUNT JUDICIALLY AND NOT AR BITRARILY. THE ESTIMATE AND DETERMINATION OF INCOME OF THE ASSESSEE MUST BE FOUNDED ON AVAILABLE COGENT AND RELEVANT MATERIAL AND NOT ON PURE GUESS, SURMISES AND CONJECTURES. ITAS NO. 1005 & 1006/CHANDI/2009 SUBHKARMA ELECTRICALS V. ITO 10 7.3 FURTHER, THE AO FAILED TO BRING ON RECORD ANY C OGENT, CORROBORATIVE AND CREDIBLE EVIDENCE, TO SUGGEST CONTRARY TO THE B OOK VERSION AS SHOWN BY THE ASSESSEE AND TREATING PART OF ITS PROFIT INE LIGIBLE U/S 80IB MERELY ON THE BASIS OF SUBJECTIVE FINDING OF TREATING PART OF NP AS INCOME FROM OTHER SOURCES. LAST BUT NOT THE LEAST, IT IS ALSO NOT TH E CASE OF THE REVENUE THAT THE APPELLANT INDULGED IN INTRODUCING UNDISCLOSED C ASH IN ITS REGULAR BOOKS OF ACCOUNT WHICH LED THE AO, TO TREAT THE SAME AS U NDISCLOSED INCOME ASSESSABLE U/S 56 OF THE ACT. 7.4 IT IS UNDISPUTED FACT THAT THE ASSESSEE-APPELLA NT IS ENGAGED IN THE ACTIVITY OF MANUFACTURING OF ELECTRIC SWITCH PARTS. A PERUSAL OF THE IMPUGNED ASSESSMENT ORDER REVEALS THAT THE AO COMPL ETELY IGNORED THE SOURCE OF INCOME OF THE ASSESSEE, WHILE ADJUDICATIN G ON THE APPLICABILITY OF THE HEADS OF INCOME, AS PROVIDED U/S 14 OF THE A CT. INCOME WILL FALL UNDER THE RELEVANT HEAD, DEPENDING UPON ITS SOURCE. THE PROVISIONS OF SECTION 56 OF THE ACT APPLY ONLY IF NONE OF THE SPE CIFIED HEAD U/S 14 OF THE ACT IS APPLICABLE, AS SEC 56 OF THE ACT CONTAINS TH E RESIDUARY HEAD OF INCOME. THE HEADS OF INCOME AS ENVISAGED U/S 14 OF THE ACT ARE MANDATORY AND MUTUALLY EXCLUSIVE IN NATURE. IT IS OBLIGATORY ON THE PART OF THE AO TO STRICTLY OBSERVE THIS STATUTORY OBLIGA TION. THE HEADS OF INCOME CANNOT BE CHOSEN AT THE VOLITION OF THE ASSE SSEE OR THE REVENUE, TO SUIT ONES CONVENIENCE. IT IS IMPERATIVE AND OBLIG ATORY ON THE PART OF THE AO, TO CHARGE THE INCOME UNDER THE SPECIFIC HEAD, U NDER WHICH IT FALLS, SINCE THE STATUTORY PROVISIONS OF SECTION 14 OF THE ACT LEAVE NO OPTION IN THE MATTER. THE INCOME WHICH IS SPECIFICALLY MADE CHARGEABLE UNDER A DISTINCT AND SPECIFIC HEAD CANNOT BE BROUGHT TO CHA RGE UNDER A DIFFERENT HEAD IN LIEU OF OR IN ADDITION TO, BEING CHARGED UN DER ITS SPECIFIC HEAD. THE AO HAS NOT SPECIFIED AND QUANTIFIED VARIOUS ITE MS OF INCOME, ITAS NO. 1005 & 1006/CHANDI/2009 SUBHKARMA ELECTRICALS V. ITO 11 INDICATING THEIR SOURCES, WHICH COULD SUPPORT HIS F INDING OF TREATING SUCH ITEMS OF INCOME OF THE ASSESSEE, AS INCOME FROM OT HER SOURCE U/S 56 OF THE ACT. THE INCOME DERIVED BY THE ASSESSEE FROM I TS MANUFACTURING ACTIVITY CANNOT BE ASSESSED BY THE AO U/S 56 OF THE ACT, MERELY ON THE BASIS OF IRRELEVANT CONSIDERATION OF GENERAL NOTION . THE FINDINGS OF THE AO IN THE MATTER ARE NOT SUPPORTED BY ANY PRIMA-FAC IE EVIDENCE AND, HENCE, THE SAME CANNOT BE SUSTAINED. 7.5 IT IS SETTLED LEGAL PROPOSITION THAT THE ONUS OF PR OVING THAT THE APPARENT WAS NOT THE REAL WAS ON THE PARTY WHO CLAI MED IT TO BE SO. THUS, THE ONUS TO PROVE HIS FINDING IS ON THE AO. HOWEVER, THE AO FAILED TO DISCHARGE SUCH ONUS, IN ESTABLISHING HIS FINDINGS OF TREATING PROFIT OF THE ASSESSEE AS INCOME FROM OTHER SOURCES . HENCE, IN SUCH A FACT-SITUATION OF THE CASE, THE AO, BEING A QUASI-J UDICIAL AUTHORITY, CANNOT RESORT TO SUBSTITUTE THE BOOK VERSION OF THE ASSESS EE AND ABOVE ALL CHANGE THE COMPLEXION OF ELIGIBLE PROFIT DERIVED BY THE AS SESSEE, BY TREATING THE SAME AS INCOME FROM OTHER SOURCES U/S 56 OF THE A CT. 7.6 WE ARE OF THE CONSIDERED OPINION THAT BOTH THE AO AS WELL AS THE LD. CIT(A), FAILED TO APPRECIATE THE FACTUAL AND LEGAL POSITION OF THE CASE. THE AO MERELY APPLIED LOW NP RATE, WITHOUT SUPPORTING T HE SAME BY WAY OF TANGIBLE EVIDENCES. THE AO MADE COMPARISON OF BOOK- VERSION OF A CONCERN NOT PRODUCING IDENTICAL PRODUCTS. THE FINDI NGS OF THE LD. CIT(A), ARE CRYPTIC AND PATENTLY LACONIC IN NATURE. 7.7 FURTHER, THE ISSUE IN QUESTION IN THE PRESENT A PPEAL IS COVERED BY THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT I N THE CASE OF CIT V. ALLIED INDUSTRIES (2009) 31 DTR 323. THE RELEVANT PART OF THE DECISION IS REPRODUCED HEREUNDER: ITAS NO. 1005 & 1006/CHANDI/2009 SUBHKARMA ELECTRICALS V. ITO 12 7 IF THE ORDER OF THE AO QUOTED HEREINABOVE IS REA D IT IS APPARENT THAT THE ASSESSEE FIRM OFFERED A SUM OF RS . 2,50,000/- FOR TAXATION TO COVERED UP ALL TYPES OF DISCREPANCIES. IT WAS NOWHERE THE CASE OF THE ASSESSEE OR THE REVENUE THAT THIS W AS INCOME DERIVED FROM UNDISCLOSED SOURCE. SEC 69C HAS NO APPLICABIL ITY BECAUSE TO MAKE SEC 69C APPLICABLE IT HAS TO BE FIRST ESTABLIS HED THAT THERE IS SOME UNEXPLAINED EXPENDITURE. THERE IS NO FINDING OF UNEXPLAINED EXPENDITURE BEING MADE BY THE ASSESSEE. THE JUDGME NT CITED BY SHRI KUTHIALA, LD. COUNSEL FOR THE REVENUE, I.E. KE DAR NATH MODI V. CIT (1993) 200 ITR 685 (DEL) HAS NO APPLICABILITY T O THE PRESENT CASE SINCE IN THAT CASE THERE WAS UNEXPLAINED EXPEN DITURE WHICH IS NOT THERE IN THE PRESENT CASE. 8. THE ADDITION OF RS. 2,50,000/- WAS MADE TO THE I NCOME OF THE BUSINESS ITSELF. THEREFORE IT WILL HAVE TO BE DEEM ED TO BE INCOME FROM THE BUSINESS OF THE COMPANY. IF IT IS INCOME DERIVED FROM THE BUSINESS THEN SUCH INCOME IS TO BE CONSIDERED WHILE WORKING OUT THE DEDUCTION ALLOWABLE U/S 80IB OF THE ACT. THERE IS NO FINDING OF ANY AUTHORITY THAT THE INCOME WAS DERIVED FROM ANY OTHE R UNDISCLOSED SOURCE. THE ADDITION WAS MADE TO THE INCOME OF THE ASSESSEE AND HAD BEEN ASSESSED UNDER THE HEAD OF PROFITS AND GAI NS OF BUSINESS. SINCE THE ENTIRE PROFITS OF THE BUSINESS ARE ENTITL ED FOR 100 PER CENT DEDUCTION, THE ADDITION ON ACCOUNT OF SUCH DISCREP ANCY WILL ONLY RESULT IN THE ENHANCEMENT OF THE INCOME OF THE BUSI NESS AND WOULD BE ENTITLED FOR SUCH DEDUCTION. 9 WE MAY MAKE IT CLEAR THAT WE HAVE DECIDED THIS CA SE ON THE PECULIAR FACTS AND IF IN A GIVEN CASE THE DEPARTMEN T PROVES THAT THE INCOME WAS DERIVED NOT FROM THE BUSINESS BUT FROM S OME OTHER ITAS NO. 1005 & 1006/CHANDI/2009 SUBHKARMA ELECTRICALS V. ITO 13 SOURCES THEN SUCH A DEDUCTION MAY NOT BE PERMITTED. HOWEVER, IN THIS CASE NEITHER THE AO NOR ANY OTHER AUTHORITY HA S COME TO THE CONCLUSION THAT THE INCOME WAS FROM ANY OTHER SOURC ES. THEREFORE, THE QUESTION HAVE TO BE ANSWERED IN FAVOUR OF THE A SSESSEE AND AGAINST THE REVENUE. THE APPEAL IS ACCORDINGLY REJE CTED. 8. IT IS PERTINENT TO REPRODUCE THE TEXT OF THE PRO VISIONS OF SECTION 80IA(10) OF THE ACT, FOR THE PURPOSE OF PROPER APPR ECIATION OF THE SAME. 80IA(10) WHERE IT APPEARS TO THE AO THAT OWING T O THE CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON THE ELI GIBLE BUSINESS TO WHICH THIS SECTION APPLIES AND ANY OTHER PERSON, OR FOR ANY OTHER REASONS, THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE AS SESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED T O ARISE IN SUCH ELIGIBLE BUSINESS, THE AO SHALL IN COMPUTING THE PR OFITS AND GAINS OF SUCH ELIGIBLE BUSINESS FOR THE PURPOSE OF THE DEDUC TION UNDER THIS SECTION, TAKE THE AMOUNT OF PROFITS AS MAY BE REASO NABLY DEEMED TO HAVE BEEN DERIVED THEREFROM. 8 (I) A BARE PROVISION OF SECTION 80IA (10) OF THE ACT REVEALS THAT THE AO FAILED, TO BRING ON RECORD THE ARRANGEMENTS RESORTED TO BY THE APPELLANT, WITH A VIEW TO INFLATING PROFIT WITH THE MEANING OF SEC 80IA(10) OF THE ACT. HENCE, THERE IS NO MERIT IN TH E CONTENTION OF THE REVENUE AS REGARDS TO THE APPLICABILITY OF THE PROV ISIONS OF THE SAID SECTION. 9 WE ARE OF THE OPINION THAT MERELY ADOPTION OF LOW ER N.P WOULD NOT CHANGE THE ORIGINAL SOURCE AND CHARACTER OF INCOME VIZ. FROM BUSINESS INCOME TO INCOME FROM OTHER SOURCES. THUS, VARIA TION OF N.P UPWARD OR DOWNWARD BY THE AO WOULD NOT CHANGE THE NATURE, SOU RCE AND COMPLETION ITAS NO. 1005 & 1006/CHANDI/2009 SUBHKARMA ELECTRICALS V. ITO 14 OF SUCH INCOME. IN FACT, SUCH VARIATION OF N.P IS PURELY A CASE OF DETERMINATION OF BUSINESS INCOME ALONE. IT IS A CA SE, WHERE THE AO BASED HIS FINDINGS ON SURMISES AND CONJECTURES AND SUCH T ENDENCY HAS BEEN FROWNED UPON BY THE HON'BLE SUPREME COURT, IN A PLE THORA OF DECISIONS. NEEDLESS TO SAY THAT FINDINGS, INFERENCES AND CONCL USIONS OF ANY QUASI- JUDICIAL AUTHORITY, INCLUDING THAT OF AO MUST BE BA SED ON RELEVANT CREDIBLE AND COGENT MATERIAL DULY DISCERNIBLE FROM THE REASON BASED SPEAKING ORDER. IT IS IMPERATIVE TO STATE HERE THA T THE CORE OF ALL RULES IS FAIRNESS, IN DECISION MAKING PROCESS. SUCH FINDING S OF THE AO CANNOT BE JUSTIFIED, ON THE FOUNDATION OF POLICY EXPEDIENCY, IN THE MATTER OF MAKING ADDITION. THE AO MERELY PERCEIVED HIGHER PROFIT IN TAX-EXEMPT AREA AND, CONSEQUENTLY, ADOPTED LOWER N.P AND TREATED THE SAM E AS INCOME FROM OTHER SOURCES U/S 56 OF THE ACT. SUCH FINDINGS OF THE AO ARE INHERENTLY INCONSISTENT AND BASED ON NON-APPRECIATION AND NON- APPLICATION OF MIND, TO THE FACT-SITUATION OF THE PRESENT CASE AND INCOR RECT APPLICATION OF STATUTORY PROVISIONS OF SECTION 28 & 56 OF THE ACT. THE LD. CIT(A), MERELY UPHELD SUCH FINDINGS WITHOUT BRINGING ANY MA TERIAL ON RECORD, DESPITE THE FACT, THAT THE POWERS OF LD. CIT(A), AR E WIDE AND CO-TERMINUS WITH THAT OF THE POWERS OF THE AO. CONSEQUENTLY, S UCH FINDINGS OF THE LD. CIT(A), CANNOT BE SUSTAINED. 10. IN VIEW OF THE ABOVE DETAILED, FACTUAL AND LEGA L DISCUSSION, BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED. 11 IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED ON 30 .8.2011 SD/- SD/- (SUSHMA CHOWLA) (MEHAR SINGH) JUDICIAL MEMBER ACCOUNANT MEMBER CHANDIGARH, THE 30 .8.2011 SURESH COPY TO: THE APPELLANT.THE RESPONDENT.THE CIT.THE CIT(A)/THE DR ITAS NO. 1005 & 1006/CHANDI/2009 SUBHKARMA ELECTRICALS V. ITO 15