RENFRO INDIA (P) LTD, MUMBAI V. ASST CIT 10(3), MUMBAI

ITA 1170/MUM/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92834 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 3 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 12-03-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 21-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AKHILENDRA P YADAV
• Assessee Lawyers: NARESH JAIN
• Keywords: Business income; Depreciation
• Section: 14A; 10B

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI . . , , !' # $, % & BEFORE SHRI B.R. BASKARAN, AM AND SHRI AMIT SHUKLA, JM . / ITA NO.1170/MUM/2012 ( / ASSESSMENT YEAR : 2007-08 ) M/S. RENFRO INDIA (P) LTD. 609, MAHALAXMI CHAMBERS 22, BHULABHAI DESAI ROAD MAHALAXMI, MUMBAI 400 026 MUMBAI-400 026 .. / APPELLANT V/S ACIT CIRCLE - 10(3), MUMBAI .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AAACK2518C APPELLANT BY : SHRI NARESH JAIN (AR) REVENUE BY : SHRI AKHILENDRA P. YADAV (DR) ! ' # $% / DATE OF HEARING 25.03.2015 &' () # $% / DATE OF ORDER 10 .06.2015 # / ORDER . . , ' / PER B.R. BASKARAN , A.M. THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE O RDER DATED 19-12-2011PASSED BY LD CIT(A)-22, MUMBAI AND IT REL ATES TO THE ASSESSMENT YEAR 2007-08. RENFRO INDIA P. LTD. 2 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF M ANUFACTURE AND SALE OF KNITTED SOCKS. IT HAS GOT TWO UNITS LOCATED AT PUNE A ND NASHIK. ACCORDING TO THE ASSESSEE, BOTH THE UNITS ARE ELIGIBL E FOR DEDUCTION U/S 10B OF THE ACT. THE ASSESSEE DECLARED PROFIT IN THE PUNE UNIT AND CLAIMED DEDUCTION U/S 10B OF THE ACT. IT DECLARED LO SS IN NASHIK UNIT. IN THE ASSESSMENT PROCEEDINGS, THE AO DRASTICALLY REDU CED THE DEDUCTION CLAIMED BY THE ASSESSEE U/S 10B OF THE ACT FOR VARIOUS REASONS. THE AO ALSO REJECTED CLAIM OF LOSS INCURRE D IN NASHIK UNIT. THE LD CIT(A) ALSO CONFIRMED THE SAME. AGGRIEVED, T HE ASSESSEE HAS FILED THIS APPEAL BEFORE US. 3. THE FIRST ISSUE RELATES TO THE REJECTION OF GR OSS PROFIT DECLARED BY THE ASSESSEE FOR ITS NASHIK UNIT AND INSTEAD ESTIMATING THE SAME AT 10% OF THE SALES. THE ASSESSEE DECLARED SALES OF R S.56,38,296/- IN ITS NASHIK UNIT AND THE COST OF GOODS SOLD WAS SHOWN AT R S.94,51,030/-. ACCORDINGLY, THE GROSS LOSS WAS SHOWN AT RS.38,12,73 4/-. THE AO NOTICED THAT MOST OF THE EXPORTS WERE MADE TO ITS SIST ER CONCERN NAMED M/S RENFRO EUROPE AND RENFRO CORPORATION. SINC E THE ASSESSEE DID NOT JUSTIFY THE GROSS LOSS, THE AO REJECTED THE CLAI M OF GROSS LOSS AND INSTEAD ESTIMATED THE GROSS PROFIT AT RS.5,63,830/- , I.E. @ 10% OF THE SALES REPORTED BY THE ASSESSEE. THE LD CIT(A) ALS O CONFIRMED THE SAME. 4. THE LD A.R SUBMITTED THAT THE SALES MADE TO A SSOCIATED ENTERPRISES HAVE BEEN HELD TO BE AT ARMS LENGTH BY TH E TPO. HE FURTHER SUBMITTED THAT THE NASHIK UNIT HAS SUFFERED LOS S DUE TO HIGHER AMOUNT OF INTEREST AND DEPRECIATION. HOWEVER, THE LD D .R INVITED OUR ATTENTION TO PARAGRAPH 2.2 OF THE ORDER PASSED BY LD CIT (A) AND SUBMITTED THAT THE ASSESSEE HAD DECLARED GROSS PROFIT I N THE RENFRO INDIA P. LTD. 3 IMMEDIATELY PRECEDING PREVIOUS YEAR BY INCLUDING INTE REST AND DEPRECIATION. 5. WE HAVE HEARD THE PARTIES ON THIS ISSUE AND PE RUSED THE RECORD. WE NOTICE THAT THE ASSESSEE HAS FAILED TO FURNISH CONVIN CING EXPLANATIONS WITH REGARD TO THE GROSS LOSS DECLARED BY IT. EVEN THOUGH, IT IS CLAIMED THAT THE GROSS LOSS HAS OCCURR ED DUE TO HIGHER INTEREST AND DEPRECIATION, YET THE LD CIT(A) NOTICED THA T THE ASSESSEE HAS FOLLOWED IDENTICAL METHOD OF ACCOUNTING IN THE IMME DIATELY PRECEDING YEAR AND DECLARED PROFIT. IN THE ABSENCE O F ANY CONVINCING REASON FOR OCCURRING OF GROSS LOSS, WE ARE OF THE VI EW THAT THE LD CIT(A) WAS JUSTIFIED IN CONFIRMING THE REJECTION OF GR OSS LOSS DECLARED BY THE ASSESSEE. 6. WE HAVE EARLIER NOTICED THAT THE AO HAS ESTIMA TED THE GROSS PROFIT @ 10% OF THE GROSS SALES. WE NOTICE THAT THE AO HAS COMPARED THE GROSS PROFIT RATE DECLARED IN THE PUNE UNIT AND AC CORDINGLY DETERMINED THE RATE OF GP AT 10%. THE LD CIT(A) ALS O CONFIRMED THE SAME. BEFORE US, THOUGH THE ASSESSEE CONTENDED THAT I T WAS NOT CORRECT TO ESTIMATE THE GROSS PROFIT, YET NO MATERIAL WA S PLACED BEFORE US IN ORDER TO COMPEL US TO DISTURB THE ESTIMATE MADE B Y THE AO. ACCORDINGLY, WE CONFIRM THE ORDER OF LD CIT(A) ON TH IS ISSUE. 7. THE NEXT ISSUE RELATES TO THE COMPUTATION OF DED UCTION U/S 10B OF THE ACT IN RESPECT OF PUNE UNIT AND ALSO THE DISALLOW ANCE OF LOSS DECLARED BY THE NASHIK UNIT. THE FACTS RELATING TO TH E SAME ARE DISCUSSED IN BRIEF. THE ASSESSEE CLAIMED DEDUCTION U/S 10B OF THE ACT IN RESPECT OF ITS PUNE UNIT AT RS.90,86,520/-. THE AO NOTICED THAT THE PUNE UNIT HAS GIVE SUB-CONTRACT WORK TO NASHIK UNIT AND THE SUB- RENFRO INDIA P. LTD. 4 CONTRACT CHARGES PAID WAS RS.4,00,47,609/-. WE HAVE ALREADY NOTICED THAT THE NASHIK UNIT HAD DECLARED GROSS LOSS. THE NASH IK UNIT DECLARED LOSS OF RS.85,40,350/-. AFTER REDUCING THE GROSS LO SS REJECTED BY HIM, THE AO SCALED DOWN THE NET LOSS OF THE NASHIK UNIT AT RS.47,27,616/-. 8. THE AO PRESUMED THAT THE NASHIK UNIT WAS NON-10 B UNIT AND HENCE BY RECEIVING SUBCONTRACT CHARGES AT LOWER RAT E FROM PUNE UNIT, THE ASSESSEE HAS DECLARED LOSS IN NASHIK UNIT BY MAKI NG CORRESPONDING INCREASE OF PROFIT IN PUNE UNIT. ACCORDINGLY, HE TR ANSFERRED THE LOSS OF NASHIK UNIT TO PUNE UNIT. FURTHER THE PROFIT DECLARED BY THE PUNE UNIT INCLUDED INTEREST INCOME OF RS.5,40,312/-. THE AO HE LD THAT THE SAID INTEREST INCOME IS NOT ELIGIBLE FOR DEDUCTION U/S 1 0B, SINCE THE SAME WAS NOT DERIVED FROM EXPORT OF ARTICLES OR THINGS. A CCORDINGLY, THE AO RECOMPUTED THE BUSINESS PROFIT OF PUNE UNIT BY DEDUCTI NG THE LOSS OF RS.47,27,616 (SUPRA) OF NASHIK UNIT AND INTEREST INCOM E OF RS.5,40,312/-. ACCORDINGLY THE PROFIT OF PUNE UNIT WAS ARRIVED AT BY THE AO AT RS.39,22,420/-. 9. THE AO WENT A STEP FURTHER AND HELD THAT THE PROFI T ATTRIBUTABLE TO SUB-CONTRACTING WORKS IS NOT ELIGIBLE FOR DEDUCTION U/S 10B OF THE ACT, I.E., ACCORDING TO THE AO, THE ASSESSEE SHOULD GENER ATE PROFITS BY UNDERTAKING MANUFACTURING WORKS ON ITS OWN. ACCORDI NGLY, THE AO COMPUTED THE PROFIT RELATING TO MANUFACTURING ACTIVITY OF PUNE UNIT AT RS.16,36,483/- OUT OF THE PROFIT OF RS.39,22,420/-, R EFERRED IN THE IMMEDIATELY PRECEDING PARAGRAPH. AFTER REDUCING THE PROPORTIONATE PROFIT PERTAINING TO DOMESTIC SALES AT RS.17,822/-, TH E AO ALLOWED THE DEDUCTION U/S 10B OF THE ACT AT RS.16,18,661/-. 10. THE LD CIT(A) CONFIRMED ALL THE WORKINGS MA DE BY THE AO. RENFRO INDIA P. LTD. 5 11. THE FIRST REASON CITED BY THE AO TO REDUCE THE PROFIT OF PUNE UNIT IS THAT THE ASSESSEE HAS ENHANCED THE PROFIT IN PUNE UN IT THROUGH THE SUB-CONTRACT WORK BEING TO THE NASHIK UNIT, A NON-10B UNIT. ACCORDINGLY HE TRANSFERRED THE LOSS DECLARED IN THE NA SHIK UNIT TO PUNE UNIT. THE LD A.R SUBMITTED THAT THE NASHIK UNIT IS A LSO ELIGIBLE FOR DEDUCTION U/S 10B OF THE ACT DURING THE YEAR UNDER C ONSIDERATION AND HENCE THE AO WAS WRONG ON HIS VIEW. HE FURTHER SUBMI TTED THAT THE ASSESSING OFFICER HAS DOUBTED ABOUT THE MARKET RATE OF TRANSACTIONS ONLY ON SUSPICION AND SURMISES, I.E., HE HAS NOT BRO UGHT ANY MATERIAL ON RECORD TO SHOW THAT THE SUB-CONTRACT CHARGES PAID BY THE PUNE UNIT TO NASHIK UNIT WAS AT THE RATES LOWER THAN THE MARKET RAT ES. BY PLACING RELIANCE ON THE DECISION RENDERED BY THE CO -ORDINATE BENCH OF TRIBUNAL IN THE CASE OF ACIT VS. PYRAMID ENTEK PVT LT (2014)(7) TMI 798, THE LD A.R SUBMITTED THAT THE IMPUGNED ACTION OF THE AO IN TRANSFERRING THE LOSS OF NASHIK UNIT TO PUNE UNIT HAS T O BE CANCELLED IN THE ABSENCE OF ANY MATERIAL. ON THE CONTRARY, THE LD D.R STRONGLY SUPPORTED THE ORDER OF TAX AUTHORITIES ON THIS ISSUE. 12. IT IS AN UNDISPUTED FACT THAT THE ASSESSING OFF ICER HAS NOT BROUGHT ON RECORD ANY MATERIAL TO SHOW THAT THE SUB-CO NTRACT CHARGES PAID BY PUNE UNIT WAS LESS THAN THE MARKET RATES, MEAN ING THEREBY, THE ASSESSING OFFICER HAS REACHED SUCH A CONCLUSION ONLY ON SURMISES AND SUSPICION. FURTHER, ACCORDING TO LD A.R, THE NAS HIK UNIT IS ALSO ELIGIBLE FOR DEDUCTION U/S 10B OF THE ACT, WHERE AS T HE AO HAS OBSERVED THAT IT IS NON-10B UNIT. HENCE THE OBSERVATION OF THE AO IN THIS REGARD ALSO DOES NOT APPEAR TO BE CORRECT. UNDE R THESE SET OF FACTS, WE FIND MERIT IN THE SUBMISSIONS OF THE ASSESSE E. ACCORDINGLY, RENFRO INDIA P. LTD. 6 WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND DIRECT THE AO NOT TO TRANSFER THE LOSS DETERMINED FOR NASHIK UNIT TO PUN E UNIT. 13. THE NEXT CONTROVERSY IN THIS ISSUE RELATES TO REDUCTION OF INTEREST INCOME FROM THE PROFIT OF PUNE UNIT FOR COM PUTING DEDUCTION U/S 10B OF THE ACT. THE SAID ACTION, IN OUR VIEW, IS IN ACCORDANCE WITH THE DECISION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF PANDIAN CHEMICALS LTD (2003-TIOL-51-SC-IT) AND STERLI NG FOODS (2002-TIOL-222-SC-IT), SINCE THE INTEREST INCOME CA NNOT BE CONSIDERED TO THE PROFIT DERIVED FROM EXPORT OF GOODS OR ARTICLES. THE LD A.R PLACED RELIANCE ON THE DECISION RENDERED BY KOLKATTA BENCH OF TRIBUNAL IN THE CASE OF HINDUSTAN GUM & CHEMICALS (23 SOT 143). HOWEVER, THE SAID DECISION SHALL NOT BE APPLICABLE IN THE PRESENT CASE, SINCE THE AO, IN THE INSTANT CASE, HAS ASSESSED THE INTEREST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. ON THE CON TRARY, THE CO- ORDINATE BENCH OF MUMBAI TRIBUNAL, IN THE CASE OF LA RSEN & TOUBRO INFOTECH LTD (2012)(19 ITR(T) 361), HAS EXPRESSED TH E VIEW THAT THE OTHER INCOME HAVING NO DIRECT NEXUS WITH EXPORT OF ARTI CLES OR THINGS ARE NOT ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT. ACCORDINGLY, WE CONFIRM THE REDUCTION OF PROFIT ELIGIBLE FOR DEDUCTION U/S 10B OF THE ACT BY THE AMOUNT OF INTEREST INCOME. 14. THE NEXT CONTROVERSY IN THIS ISSUE RELATES TO T HE REJECTION OF DEDUCTION U/S 10-B OF THE ACT RELATING TO SUB-CONTRACT WO RKS. THE AO ENTERTAINED THE VIEW THAT THE ASSESSEE ITSELF SHOULD INDU LGE IN MANUFACTURING ACTIVITY. SINCE THE ASSESSEE HAD CARRI ED OUT MANUFACTURING WORKS BY SUB-CONTRACTING THE SAME, THE A O HELD THAT THE PROFIT ATTRIBUTABLE TO SUCH SUB-CONTRACT WORKS IS NOT ELIGIBLE FOR DEDUCTION U/S 10B OF THE ACT. ACCORDINGLY, THE AO TH E REDUCED THE RENFRO INDIA P. LTD. 7 DEDUCTION U/S 10B OF THE ACT TO THE EXTENT OF PROFIT ATTR IBUTABLE TO SUB- CONTRACTING WORKS. 15. HOWEVER, A PERUSAL OF THE PROVISIONS OF SEC. 10B(1) WOULD SHOW THAT THE DEDUCTION PRESCRIBED THEREIN IS ALLOWED TO PROF ITS AND GAINS AS ARE DERIVED BY A HUNDRED PER CENT EXPORT-ORIENTED UN DERTAKING FROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE., I .E., SECTION 10B NOWHERE PROVIDES ANYTHING ABOUT THE MODE OF MANUFACTUR E. ACCORDINGLY, WE ARE OF THE VIEW THAT THE ASSESSING OFF ICER WAS NOT RIGHT IN HOLDING THAT THE ASSESSEE WAS NOT ELIGIBLE FOR DED UCTION U/S 10B OF THE ACT IN RESPECT OF PROFIT ATTRIBUTABLE TO SUB-CONTRACT W ORKS. ACCORDINGLY, THE LD CIT(A) WAS NOT JUSTIFIED IN CONFI RMING THE SAME. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) AS WELL AS THE AO ON THIS ISSUE. 16. THE LAST ISSUE RELATES TO THE DISALLOWANCE MA DE U/S 14A OF THE ACT. IT IS TO BE NOTED THAT THE AO DID NOT MAKE ANY DIS ALLOWANCE U/S 14A OF THE ACT. THE LD CIT(A) ENHANCED THE ASSESSME NT BY DIRECTING THE AO TO COMPUTE THE DISALLOWANCE IN TERMS OF RULE 8D OF IT RULES, SINCE THE ASSESSEE HAD RECEIVED DIVIDEND INCOME OF R S.1,23,492/-. 17. THE LD A.R SUBMITTED THAT THE ASSESSEE HAS GOT SUFFICIENT OWN FUNDS AND HENCE THERE WAS NO REQUIREMENT OF MAKING A NY DISALLOWANCE OUT OF INTEREST EXPENDITURE. HOWEVER, SINCE THE YEAR UN DER CONSIDERATION IS AY 2007-08 TO WHICH THE PROVISIONS OF RULE 8D ARE NOT APPLICABLE AS PER THE DECISION OF HONBLE MUMBAI HI GH COURT RENDERED IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. (328 ITR 81), THE DISALLOWANCE U/S 14A IS REQUIRED TO BE COMPUTED IN A REASONABLE MANNER. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CI T(A) ON THIS ISSUE RENFRO INDIA P. LTD. 8 AND RESTORE THE SAME TO THE FILE OF THE AO WITH THE DIR ECTION TO EXAMINE THIS ISSUE AFRESH AND AFTER HEARING THE ASSES SEE, TAKE APPROPRIATE DECISION IN ACCORDANCE WITH THE LAW. 18. THE ASSESSEE HAS ALSO RAISED AN ADDITIONAL GROUND OF APPEAL, WHEREIN IT IS CONTESTED THAT THE LOSS INCURRED IN NA SHIK UNIT SHOULD NOT BE SET OFF AGAINST THE PUNE UNIT FOR COMPUTING DEDUC TION U/S 10B OF THE ACT IN RESPECT OF PUNE UNIT. THE ASSESSEE RELIED UP ON THE DECISION OF HONBLE BOMBAY HIGH COURT RENDERED IN THE CASE OF HI NDUSTAN UNILEVER LTD (325 ITR 102) AND CIT VS. BLACK & VEATCH CONSULTI NG PVT LTD (348 ITR 72). WE NOTICE THAT THE CO-ORDINATE BENCH OF ITA T IN THE CASE OF LARSEN & TOUBRO INFOTECH LTD (SUPRA) HAS TAKEN THE VI EW THAT THE DEDUCTION U/S 10B IS ALLOWABLE EACH UNDERTAKING WISE AND HENCE THE LOSS INCURRED IN ONE ELIGIBLE UNIT SHOULD NOT BE SE T OFF AGAINST THE INCOME FROM OTHER ELIGIBLE UNIT. FURTHER, FOLLOWING OBSERVATIONS MADE BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HINDU STAN UNILEVER LTD SUPPORT THE CASE OF THE ASSESSEE:- ALL THE FOUR UNITS OF THE ASSESSEE WERE ELIGIBLE UNDE R SECTION 10B. THREE UNITS HAD RETURNED A PROFIT DURING THE COURSE OF ASSESSMENT YEAR, WHILE THE CRAB STICK UNIT HAD RETURNED A LOSS. THE ASSESSEE WAS ENTITLED TO A DEDUCTION IN RESPECT OF THE PROFITS OF THE THREE ELIGIBLE UNITS WHILE THE LOSS SUSTAINED BY THE FOURTH UNIT COULD BE SET OFF AGAINST NORMAL BUSINESS INCOME. ACCORDINGLY WE ALLOW THE ADDITIONAL GROUND RAISED BY THE ASSESSEE AND DIRECT THE AO TO COMPUTE THE DEDUCTION U/S 10B ACCORDIN GLY. RENFRO INDIA P. LTD. 9 19. IN THE RESULT, THE APPEAL FILED BY THE ASSES SEE IS TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH DAY OF JUNE, 2015. SD/- SD/- SD SD/ - !' # $ % AMIT SHUKLA JUDICIAL MEMBER SD/ - . . B.R. BASKARAN ACCOUNTANT MEMBER MUMBAI, () DATED:10 .06.2015 PATEL &' # $*+ ,+$ / COPY OF THE ORDER FORWARDED TO : (1) -$ / THE ASSESSEE; (2) . / THE REVENUE; (3) ! /$( ) / THE CIT(A); (4) ! /$ / THE CIT, MUMBAI CITY CONCERNED; (5) +2 $3, % 3, ! ' / THE DR, ITAT, MUMBAI; (6) 2 5' / GUARD FILE. +$ $ / TRUE COPY &' ! / BY ORDER 6 / 7 . / (DY./ASSTT. REGISTRAR) % 3, ! ' / ITAT, MUMBAI