M/s Scott Edil Pharmacia Ltd., Chandigarh V. Addl. CIT, Chandigarh

ITA 284/CHANDI/2015

• Counselvise Citation: 28421514 RSA 2015
• Duration Of Justice: 9 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-12-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 14-10-2015
• Assessment Year: 2011-2012
• Appeal Filed On: 16-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH
• Assessee Lawyers: RICHA GUPTA
• Keywords: Principle of natural justice

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI H.L. KARWA, HONBLE VICE PRESIDENT AND MS. ANNAPURNA MEHROTRA, ACCOUNTANT MEMBER ITA NO. 284/CHD/2015 ASSESSMENT YEAR:2011-12 SCOTT EDIL PHARMACIA LTD. VS. THE ADDL. CIT PLOT NO. 54-55, INDUSTRIAL AREA, RANGE 1 PHASE II CHANDIGARH CHANDIGARH PAN NO. AAHCS1643K (APPELLANT) (RESPONDENT) APPELLANT BY : MS. RICHA GUPTA RESPONDENT BY : SH. MANJIT SINGH DATE OF HEARING : 14/10/2015 DATE OF PRONOUNCEMENT : 28/12/2015 ORDER PER ANNAPURNA MEHROTRA A.M. THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD. CIT (APPEALS)-1, CHANDIGARH DT. 09/01/2015. 2. THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS OF APPEAL: 2. THAT ON LAW, FACTS AND CIRCUMSTANCES OF THE CASE , THE WORTHY CIT(A) HAS ERRED IN ESTIMATING THE NET PROFIT FROM TRADING TUR NOVER OF RS. 2121.47 LACS @ 2.5% I.E. RS. 53,03,685/- BY ERRONEOUSLY HOLDING THAT VA LUATION OF CLOSING STOCK HAS NOT BEEN EXPLAINED EVEN WHEN THE VALUATION OF CLOSING S TOCK WAS PART OF TRADING ACCOUNT FURNISHED AND MORE-SO THE FINDING OF WORTHY CIT(A) IS ERRONEOUS SINCE NO EXPLANATION REGARDING THE VALUATION OF TRADING STOC K WAS EVER CALLED FOR DURING THE APPELLATE PROCEEDINGS. IN FACT, THE APPELLANT D ID NOT EARN INCOME DURING THE YEAR FROM TRADING TURNOVER. BY HOLDING THAT THE APP ELLANT HAD EARNED ESTIMATED INCOME OF RS. 53,03,685/- FROM TRADING TURNOVER AS AGAINST DECLARED BY THE APPELLANT AT NIL THE WORTHY CIT(A) HAS ERRED IN CON FIRMING THE RESTRICTION OF DEDUCTION US 80IC BY RS. 15,91,105/- I.E. 30% OF RS . 53,03,685/-, SINCE THE YEAR IN QUESTION WAS THE 6 TH YEAR OF THE UNIT AND ANY PROFIT FROM TRADING OPERA TIONS WAS PART OF TOTAL PROFITS DECLARED BY THE APPELLANT. TH E LD. AO AS WELL AS WORTHY CIT(A) HAVE ERRED IN MAKING WRONG COMPUTATION OF PR OFIT FROM TRADING ACTIVITIES EVEN WHEN COMPLETE DETAILS OF TRADING ACTIVITIES WE RE FILED AND IT WAS SHOWN THAT TRADING ACTIVITIES HAD NOT RESULTED INTO ANY PROFIT AND THE LD. AO AS WELL AS WORTHY CIT(A) DID NOT FIND ANY DEFECT IN THIS SUBMISSION. 3. BRIEF FACTS OF THE CASE ARE THAT FOR THE IMPUGNE D ASSESSMENT YEAR, THE ASSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 5,22,75,840/- 2 AFTER CLAIMING DEDUCTION U/S 80IC OF THE ACT AMOUNT ING TO RS. 1,76,85,555/-. DURING ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THE TURNOVER OF THE APPELLANT INCLUDED TURNOVER FROM MANUFACTURING AS WELL AS TRADING OPERATIONS, BUT THE ASSESSEE HAD CLAIMED DEDUCTION U/S 80IC IN RESPECT OF THE ENTIRE TURNOVER INCLUDING PROFITS FROM TRADING OPER ATIONS. THE ASSESSING OFFICER FOUND THAT THE TRADING RECEIPTS OF THE ASSESSEE WER E RS 21,21,47,421/- AND HE FURTHER CALCULATED PROFIT THEREON AT RS. 86,83,570/ - BY APPORTIONING THE TOTAL PROFIT OF THE ASSESSEE IN THE RATIO OF TRADING TURN OVER TO THE TOTAL TURNOVER OF THE ASSESSEE AND ACCORDINGLY DISALLOWED DEDUCTION U/S 8 0IC OF RS. 26,05,071/- I.E. 30% OF THE PROFITS FROM TRADING OPERATIONS OF RS. 8 6,83,570/-. 4. BEFORE THE LD. CIT(A) THE ASSESSEE PLEADED THAT THE AO HAD APPLIED THE NET PROFIT RATE OF MANUFACTURING ACTIVITY TO THE TR ADING OPERATIONS TO ARRIVE AT THE PROFITS EARNED FROM TRADING ACTIVITY. THE ASSESSEE FURTHER PLEADED THAT IN DOING SO THE AO HAD IGNORED THE SALE AND PURCHASE BILLS O F THE TRADING ACTIVITY AS PER WHICH THE G.P. FROM TRADING OPERATION WORKED OUT TO RS. 26,45,247/-. FURTHER THE ASSESSEE SUBMITTED THAT, IF EXPENSES FINANCIAL COST , R&D EXPENSES ARE IGNORED, ADMINISTRATIVE & SELLING EXPENSES ARE IN EXCESS OF 4.75% OF ITS TURNOVER AND IF INDIRECT EXPENSES ARE TAKEN AT 1.25% THE RESULTANT WOULD BE LOSS FROM TRADING OPERATION. THE ASSESSEE THEREFORE SUBMITTED THAT IT HAD NOT EARNED ANY PROFITS FROM TRADING OPERATIONS AND THE ENTIRE PROFITS RELA TED TO MANUFACTURING ACTIVITY WHICH WAS ELIGIBLE FOR DEDUCTION U/S 80IC. 5. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE REDUCED THE DISALLOWANCE MADE U/S 80IC TO RS. 15,91,105/- B Y HOLDING PARA 3.3.2 OF ITS ORDER AS FOLLOWS: 3.3.2 THE CONTENTION OF THE APPELLANT IS CORRECT AS PER DETAILS FILED, BUT IT IS SEEN THAT TH APPELLANT HAD VALUED THE CLOSING STOCK AT R S. 1,31,78,711/- IN THE TRADING ACCOUNT AND BASIS OF VALUATION OF THE SAME HAS NOT BEEN EXPLAINED. IN MY CONSIDERED VIEW IT WOULD BE APPROPRIATE TO APPLY NE T PROFIT RATE OF 2.50% ON TURNOVER OF RS. 21,21,47,421/-. THEREFORE NET PROFI T FROM TRADING OPERATIONS WORKS OUT TO RS. 53,03,685/- 30% OF WHICH IS RS. 15,91,10 5/-. HENCE DEDUCTION U/S 80IC IS TO BE REDUCED TO RS. 10,13,966/-. 3 6. AGGRIEVED BY THE SAME, THE ASSESSEE FILED THE PR ESENT APPEAL BEFORE US. 7. BEFORE US THE LD. AR REITERATED THE CONTENTIONS MADE BEFORE THE LD. CIT(A)AND STATED THAT IT HAD NOT EARNED ANY PROFITS FROM TRADING OPERATIONS AND THEREFORE THE DEDUCTION U/S 80IC HAD BEEN RIGHTLY C LAIMED ON ACCOUNT OF PROFITS EARNED FROM MANUFACTURING ACTIVITIES ONLY. LD. AR S TATED THAT IN ANY CASE THE GROSS PROFIT OF THE ASSESSEE FROM TRADING OPERATION S WAS ONLY RS. 26,45,247/- WHICH HAS BEEN ACCEPTED BY THE LD. CIT(A) ALSO, AND THEREFORE DISALLOWANCE IF ANY IS TO BE CALCULATED ON RS. 26,45,247/- AND NOT RS. 86,83,570/-. LD. AR FURTHER STATED THAT INDIRECT EXPENSES OF THE ASESSSEE EXCEE DED 4.75% OF THE TURNOVER OF THE ASSESSEE AND EVEN IF THE SAME WERE TAKEN AT 1.2 5% OF THE TURNOVER, IT WOULD RESULT IN LOSS IN TRADING OPERATION. THEREFORE, LD. AR SUBMITTED THAT THE ASSESSEE HAD NOT CLAIMED ANY DEDUCTION U/S 80IC ON ACCOUNT O F TRADING OPERATION LD. AR FURTHER PLEADED THAT THE LD. CIT(A) THOUGH HAD A CCEPTED THE CONTENTION OF THE ASSESSEE THAT ITS G.P. FROM TRADING OPERATION A S PER SALE, PURCHASE BILLS IS ONLY RS. 26,45,247/- HE HAD QUESTIONED THE VALUATION OF CLOSING STOCK WITHOUT EVEN CONFRONTING THE SAME TO THE ASSESSEE. THIS THE LD. AR ARGUED WAS AGAINST THE PRINCIPLES OF NATURAL JUSTICE AND THE DISALLOWANCE OUGHT TO BE DELETED ON THIS GROUND ALONE. LD. AR FURTHER STATED THAT THE LD. CI T(A) HAD ADOPTED AN ADHOC NET PROFIT RATE OF 2.5% ON TURNOVER FOR CALCULATING THE PROFIT FROM TRADING OPERATION, WHICH WAS WITHOUT ANY BASIS AT ALL. THUS , THE LD. AR PLEADED THAT THE DISALLOWANCE OF DEDUCTION U/S 80IC SUSTAINED TO THE EXTENT OF RS. 15,91,105/- OUGHT TO BE DELETED. 8. LD. DR ON THE OTHER HAND RELIED UPON THE ORDER O F THE LD. CIT(A). 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THE ISSUE BEFORE US IS THE DETERMINATION OF THE 4 QUANTUM OF PROFITS WHICH ARE ATTRIBUTABLE TO TRADIN G OPERATION AND HENCE NOT ELIGIBLE FOR DEDUCTION U/S 80IC OF THE ACT. 10. THE FACTS EMERGING IN THE PRESENT CASE ARE THAT THE TOTAL TURNOVER OF THE ASSESSEE FOR THE IMPUGNED YEAR WAS RS. 144,02,46,61 4/- WHICH INCLUDED TRADING TURNOVER OF RS. 21,21,47,421/-. THE TAXABLE PROFIT EARNED BY THE ASSESSEE FROM BUSINESS WAS RS. 5,89,51,892/-. WHILE THE ASSESSEE CLAIMS THAT THE ENTIRE PROFITS WERE ATTRIBUTABLE TO MANUFACTURING ACTIVITY AND HEN CE ELIGIBLE FOR DEDUCTION @ 30% U/S 80IC, THE CLAIM OF THE REVENUE IS THAT PROF ITS ATTRIBUTABLE TO TRADING OPERATIONS IS 2.5% OF THE TRADING TURNOVER AMOUNTIN G TO RS. 53,03,685/- AND ON THIS PROFIT DEDUCTION U/S 80IC @ 30% BEING RS. 15,9 1,105/- IS NOT ALLOWABLE. 11. WE FIND THAT THE NET PROFIT RATE OF 2.5% OF TUR NOVER, APPLIED BY THE LD. CIT(A) HAS NO BASIS AT ALL LD. CIT(A) HAS SIMPLY ST ATED THAT AT PARA 3.3.2 OF HIS ORDER THAT IN MY CONSIDERED VIEW IT IS APPROPRIATE TO APPLY N ET PROFIT RATE OF 2.5% ON TRADING TURNOVER OF RS. 21,21,47,421/-. THEREFORE, THE NET PROFIT FROM TRADING OPERATIONS WORKS OUT TO RS. 53,03,685/-. LD. CIT(A) HAS NOT MENTIONED AS TO WHY IN HIS CONSI DERED VIEW 2.5% IS AN APPROPRIATE RATE. NO COMPARABLE INSTANCES HAVE BEEN BROUGHT BEFORE US, NOR HAS ANY EFFORT BEEN MADE TO WORK OUT THE TRADING PR OFIT FROM THE DETAILS PROVIDED BY THE ASSESSEE. WE THEREFORE HOLD THAT TH ERE IS NO BASIS, LEAVE ASIDE REASONABLE BASIS, TO APPLY NET PROFIT RATE OF 2.5% ON THE TRADING INCOME OF THE ASSESSEE AND THE SAME IS THEREFORE REJECTED. ON THE OTHER HAND WE FIND THAT THE ASSESSEE HAD SUBMITTED A DETAIL SHOWING THE WORKING OF THE GROSS PROFIT FROM TRADING OPERATIONS FROM THE PURCHASE AND SALE BILLS FOR THE YEAR AT RS.26,45,247/-. LD. CIT(A) WE FIND HAS NOT DOUBTED THE FIGURES OF S ALES AND PURCHASE BUT HAS STATED THAT THE CLOSING STOCK VALUATION AT RS. 1,31 ,78,711/- HAS NOT BEEN EXPLAINED BY THE ASSESSEE AND THEREFORE THE G.P. OF RS. 26,45,247/- SHOWN BY THE ASSESSEE IS NOT ACCEPTABLE. BEFORE US LD. AR PLEADE D THAT THIS ISSUE WAS NEVER CONFRONTED TO THE ASSESSEE DURING APPELLATE PROCEED INGS. LD. DR ON THE OTHER 5 HAND DID NOT REBUT THIS ARGUMENT OF THE LD. AR. MOR EOVER A PERUSAL OF THE CIT(A) ORDER REVEALS THAT THE ASSESSEE WAS NEVER CONFRONTE D WITH THE ISSUE OF VALUATION OF CLOSING STOCK. WE THEREFORE HOLD THAT THE LD. CI T(A) COULD NOT HAVE SUOMOTO PRESUMED THAT THE VALUATION OF CLOSING STOCK OF THE ASSESSEE WAS INCORRECT WITHOUT EVEN GIVING AN OPPORTUNITY TO THE ASSESSEE TO OFFER HIS EXPLANATION AND THUS REJECT THE GROSS PROFIT SHOWN BY THE ASSESSEE. FURTHER WE FIND THAT THE ASSESSEE HAD EXPLAINED THA T ITS INDIRECT EXPENSES BEING ADMINISTRATIVE AND SELLING EXPENSES, CONSTITUTED 4. 75% OF TURNOVER AND EVEN IF THESE EXPENSES WERE ALLOCATED @ 1.25% TO THE TRADIN G OPERATIONS, THE RESULTANT WOULD BE A LOSS TO THE ASSESSEE. THIS EXPLANATION H AS NEITHER BEEN REBUTTED BY THE REVENUE NOR ANY INFIRMITY POINTED OUT IN THE SA ME. IN VIEW OF THE SAME, WE AGREE WITH THE CONTENTION OF THE ASSESSEE THAT NO P ROFITS HAD RESULTED FROM THE TRADING OPERATIONS OF THE ASSESSEE AND THE DEDUCTIO N CLAIMED U/S 80IC RELATED ENTIRELY TO PROFITS EARNED FROM MANUFACTURING ACTIV ITIES. THEREFORE WE HOLD THAT DEDUCTION U/S 80IC WAS RIGHTLY CLAIMED BY THE ASSES SEE. THE DISALLOWANCE OF DEDUCTION U/S 80IC AMOUNTING TO RS. 15,91,105/- IS THEREFORE DIRECTED TO BE DELETED. THE APPEAL OF THE ASSESSEE IS THEREFORE AL LOWED. 12. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 28/12/2015. SD/- SD/- (H.L. KARWA) (ANNAPURNA MEHROTRA) VICE PRESIDENT ACCOUNTANT MEMBER DATED : 28/12/2015 AG COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT, TH E CIT(A), THE DR