Sri R.Prakash, Kollam V. DCIT, Kollam

ITA 464/COCH/2007

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61459 (ITAT-COCHIN)
• Duration Of Justice: 4 year(s) 11 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2012
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 21-03-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 17-05-2007
• Court: TRIBUNAL
• Department Lawyers: VIJAYAPRABHA
• Assessee Lawyers: T V HARIHARAN
• Section: 80HHC; 80IB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A. NO. 464COCH/2007 ASSESSMENT YEAR : 2004-05 SHRI R. PRAKASH, PROP. PRAKASH EXPORTS, KOCHUPILAMMOODU, KOLLAM. [PAN:ABFPN 4424P] THE DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE, KOLLAM (ASSESSEE-APPELLANT) (REVENUE - RESPONDENT) ASSESSEE BY SHRI T.V. HARIHARAN, CA REVENUE BY SMT. VIJAYAPRABHA, SR. DR DATE OF HEARING 21/03/2012 DATE OF PRONOUNCEMENT 27/04/2012 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THE APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 27-02-2007 PASSED BY LD CIT(A)-I, KOCHI AND IT RELATES TO THE ASSESSMENT YEAR 2004-05. 2. THE GROUNDS URGED IN THIS APPEAL GIVE RISE TO THE FOLLOWING ISSUES:- (A) ASSESSMENT OF DEPB BENEFITS. (B) NETTING OF INTEREST FOR THE PURPOSE OF COMPUT ATION OF DEDUCTION U/S 80HHC. (C) EXCLUSION OF 90% PRIOR YEAR ADJUSTMENT FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 80HHC OF THE ACT. (D) ADDITION MADE U/S 40A(2)(B) IN RESPECT OF CAR TON BUSINESS. (E) DISALLOWANCE OF CLAIM OF DEDUCTION U/S 80IB O F THE ACT. ITA NO. 464COCH/2007 2 3. THE FACTS RELATING TO THE CASE ARE SET OUT IN BRIEF. THE ASSESSEE IS A MANUFACTURER AND EXPORT OF CASHEW KERNELS. HE IS A LSO HAVING A BUSINESS OF MANUFACTURE OF CARTON BOXES REQUIRED FOR PACKING TH E CASHEW KERNELS. THE ENTIRE SALES OF THE CARTON BOXES UNIT WERE MADE TO THE SISTER CO NCERNS OF THE ASSESSEE. THE ASSESSEE FILED HIS RETURN OF INCOME FOR THE YEAR UN DER CONSIDERATION DECLARING A TOTAL INCOME OF RS.6,67,102/-. HOWEVER, THE AO DETERMINE D THE TOTAL INCOME AT RS.26,50,580/- BY MAKING VARIOUS TYPES OF ADDITIONS . THE ASSESSEE COULD NOT SUCCEED IN HIS APPEAL FILED BEFORE LD CIT(A). HENCE THE AS SESSEE IS IN APPEAL BEFORE US. 4. THE FIRST ISSUE RELATES TO THE ASSESSMENT OF DEPB BENEFITS. THIS ISSUE HAS SINCE BEEN SETTLED BY HONBLE SUPREME COURT IN THE CASE O F TOPMAN EXPORTS VS. CIT REPORTED IN (2012)(247 CTR (SC) 353) AND ACCORDINGLY PRAYED THAT THIS ISSUE MAY BE SET ASIDE TO THE FILE OF AO FOR FRESH CONSIDERATION IN TERMS OF THE DECISION OF HONBLE SUPREME COURT REFERRED SUPRA. THE LD D.R ALSO DID NOT OBJECT TO THE SAID PLEA MADE BY LD A.R. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF AO WITH THE DIRECTION TO EXAMINE THE IS SUE OF TAXABILITY OF DEPB IN ACCORDANCE WITH THE DECISION OF HONBLE SUPREME COURT IN THE C ASE OF TOPMAN EXPORTS REFERRED SUPRA. 5. THE NEXT ISSUE RELATES TO THE NETTING OF INT EREST RECEIPTS AGAINST THE INTEREST PAYMENTS FOR THE PURPOSE OF EXCLUSION OF 90% OF INT EREST INCOME UNDER EXPLANATION (BAA) TO SEC. 80HHC OF THE ACT. THIS ISSUE IS ALSO SINCE SETTLED BY HONBLE SUPREME COURT IN THE CASE OF M/S ACG ASSOCIATED CAPSULES P LTD VS. CIT REPORTED IN 2012 SCCL.COM 75. ACCORDINGLY, WE SET ASIDE THE ORDER O F LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF AO WITH THE DIRECTI ON TO EXAMINE THIS ISSUE IN ACCORDANCE WITH THE DECISION OF HONBLE SUPREME COURT IN THE C ASE OF ASSOCIATED CAPSULES P LTD, REFERRED SUPRA. 6. THE NEXT ISSUE RELATES TO THE EXCLUSION OF 90% OF RECEIPTS SHOWN AS PRIOR YEAR ADJUSTMENTS AMOUNTING TO RS.14,70,000/- FROM THE P ROFITS OF BUSINESS UNDER ITA NO. 464COCH/2007 3 EXPLANATION (BAA) TO SEC. 80HHC. THE ASSESSEE HAS O FFERED FOLLOWING EXPLANATIONS BEFORE AO IN THIS REGARD REGARDING THE PRIOR CREDIT OF RS.14,70,000/- AS AP PEARING IN THE PROFIT & LOSS ACCOUNT, THE SAME AROSE OUT OF TAKING THE FIGURE OF SALES IN THE COURSE OF EXPORT TO PRATAP CASHEW COMPANY PRIVATE LIMITED WRONGLY AT RS.1,68,96,610/- AS AGAINST THE CORRECT FIGURE OF RS.1,54,26,610/- TAKE N BY THE LATTER DURING THE FINANCIAL YEAR 2001-02. THE MISTAKE HAPPENED BY OV ERSIGHT. FOR YOUR IMMEDIATE REFERENCE, WE ARE ALSO ENCLOSING THE LEDG ER ACCOUNT OF ONE SISTER CONCERN IN THE BOOKS OF OTHER SISTER CONCERNS AND V ICE-VERSA. THIS DISCREPANCY WAS NOTICED ONLY WHEN FINALIZING THE ACCOUNTS DURIN G THE FINANCIAL YEAR 2003-04. HENCE, IMMEDIATELY A CREDIT ENTRY WAS PASSED TO ACC OUNT AS A PRIOR YEAR INCOME. THE MISTAKE OCCURRED INADVERTENTLY AND WAS NEVER IN TENTIONAL. BOTH THE AO AND LD CIT(A) HELD THAT THE INCOME SHOW N AS PRIOR YEAR ADJUSTMENT HAS TO BE EXCLUDED UNDER EXPLANATION (BAA) OF SEC. 80HH C. 7. ACCORDING TO LD A.R, THE INCOME SHOWN UNDER PRIOR YEAR ADJUSTMENTS IS ALSO INCOME DERIVED IN THE COURSE OF CARRYING ON ORDINAR Y BUSINESS ACTIVITY AND HENCE IT SHOULD NOT EXCLUDED UNDER EXPLANATION (BAA) OF SEC. 80HHC OF THE ACT. ON THE OTHER HAND, THE LD D.R CONTENDED THAT THE DEDUCTION UNDER SECTION 80HHC OF THE ACT IS ALLOWED ONLY IN RESPECT OF CURRENT YEARS ELIGIBLE PROFIT. THE PRIOR YEARS ADJUSTMENT RELATES TO AND ALSO FROM THE RESULT OF THE ACTIVITI ES OF EARLIER YEARS AND HENCE IT CANNOT BE CONSIDERED AS CURRENT YEARS PROFITS. 8. WE HAVE HEARD RIVAL CONTENTIONS ON THIS ISSU E. ACCORDING TO THE EXPLANATION GIVEN BY THE ASSESSEE, HE HAS TAKEN THE SALES FIGURE AT R S.1.68 CRORES IN THE FINANCIAL YEAR 2001-02 INSTEAD OF CORRECT SALES FIGURE OF RS.1.54 CRORES. IF THE SALES FIGURE WAS TAKEN AT A HIGHER FIGURE, THE CORRECTION OF THE SAME WOUL D RESULT IN REDUCTION OF INCOME (DEBIT TO PROFIT AND LOSS ACCOUNT) OF THE CURRENT YEAR. H OWEVER, IT IS CLAIMED THAT THE ASSESSEE HAS CREDITED THE AMOUNT OF RS.14,70,000/- TO THE PROFIT AND LOSS ACCOUNT, WHICH WE ARE NOT ABLE TO UNDERSTAND. IN ANY CASE, THE PRIOR YEAR ADJUSTMENT IS THE INCOME RELATING TO THE EARLIER YEAR, I.E., FINANCIA L YEAR 2001-02. IN OUR VIEW, THE ASSESSEE CANNOT CLAIM THE SAME AS THE INCOME OF THE CURRENT YEAR. ACCORDINGLY, WE ITA NO. 464COCH/2007 4 UPHOLD THE ORDER OF LD CIT(A) IN HOLDING THAT THE S AME IS REQUIRED TO BE EXCLUDED UNDER EXPLANATION (BAA) OF SEC.80HHC OF THE ACT. 9. THE NEXT ISSUE RELATES TO THE ADDITION MADE U/S 40A(2)(B) OF THE ACT IN RESPECT OF CARTON BUSINESS. THE ASSESSEE IS RUNNING A CARTON BOXES MANUFACTURING UNIT. THE AO NOTICED THAT THE ENTIRE PRODUCTION WAS SOLD ONLY TO THE SISTER CONCERNS OF THE ASSESSEE. THE CARTON BOXES WERE SOLD AT AN AVERAGE RATE OF RS .13.30 PER CARTON AS AGAINST THE AVERAGE COST OF MANUFACTURING OF RS.17.27 PER CARTO N. DUE TO THIS UNDER PRICING, THE ASSESSEE LOST RS.3.97 PER CARTON. THE AO TOOK THE VIEW THAT THIS WAS A COLOURABLE DEVICE TO INCREASE THE INCOME OF THE SISTER CONCERN S AND REDUCE THE PROFIT OF THE ASSESSEE. ACCORDINGLY, THE AO RECOMPUTED THE INCOM E FROM CARTON BOX UNIT AND DETERMINED THE INCOME AT RS.18,41,881/- (RS.3.97 X 463950 CARTONS) AS AGAINST THE LOSS OF RS.18,30,096/- DISCLOSED BY THE ASSESSEE. THE LD CIT(A) CONFIRMED THE ADDITION MADE BY THE AO WITH THE FOLLOWING OBSERVATIONS:- I HAVE HEARD THE AUTHORIZED REPRESENTATIVE AND VER IFIED THE RECORDS PERTAINING TO THE ISSUE. IN ANY BUSINESS NO ONE WILL SELL THE PRODUCTS BELOW COST, WHATEVER MAY BE THE COMPELLING SITUATION. THE APPELLANT SHO ULD HAVE SOLD THE CARTONS AT A PRICE ATLEAST AT PART WITH ITS COST PRICE. ALSO T HE CLAIM OF THE APPELLANT THAT THE SALES AT FULL COST WOULD HAVE ATTRACTED THE PROVISI ONS OF SECTION 40A(2) APPEARS TO BE ILL-CONCEIVED. IT APPEARS THAT THE LOW SALE RATE WAS WITH AN INTENTION OF CLAIMING LOSS FROM THE CARTON UNIT AND A HIGHER EXP ORT INCENTIVE BY THE SISTER CONCERNS. FOR THE PURPOSE OF ASSESSMENT UNDER THE INCOME TAX ACT, EACH BUSINESS ACTIVITY, EVEN IF THAT BE A SISTER CONCERN, IS TREATED AS A S EPARATE UNIT OF ASSESSMENT, THE PROFIT OR LOSS(SIC) THAT IT IS NOT NECESSARY THAT THE SALE OF CARTONS HAS TO BE ABOVE THE COST OF PRODUCTION WHERE SUCH SALE IS TO A SISTER CONCERN CANNOT BE ACCEPTED. IT HAS BEEN HELD IN THE CASE OF PATEL CHEMICAL WORK S VS. CIT REPORTED IN 265 ITR 273 THAT A SALE TO A SISTER CONCERN AT PRICES MUCH BELOW THE MARKET RATES WAS A DEVICE FOR TAX AVOIDANCE. THEREFORE THE APPELLANT S CASE, WHEREIN THE SALE TO A SISTER CONCERN IS EVEN BELOW THE COST PRICE, HAS TO BE VIEWED MORE SERIOUSLY. IN VIEW OF THE ABOVE THE ADDITION OF INCOME MADE T O THE CARTON UNIT IS SUSTAINED. ITA NO. 464COCH/2007 5 10. BEFORE US, THE LD A.R REITERATED CONTENTION S MADE BEFORE THE TAX AUTHORITIES. THE UNDISPUTED FACT REMAINS THAT THE ASSESSEE HAS S OLD THE CARTON BOXES TO ITS SISTER CONCERNS AT A RATE WHICH WAS VERY MUCH BELOW THE CO ST OF PRODUCTION. IT IS NOT UNDERSTANDABLE AS TO HOW A PRUDENT BUSINESS MAN WOU LD SELL ANY PRODUCT AT LOSS. WHEN IT COMES TO THE TRANSACTIONS WITH SISTER CONCE RNS, THE NATURAL PRESUMPTION IS THAT THE SAID ARRANGEMENT IS ONLY TO SHIFT THE ASSESSEE S INCOME TO HIS SISTER CONCERNS. THE ASSESSEE HAS NOT GIVEN ANY CONVINCING EXPLANATION T O COUNTER THE PRESUMPTION STATED ABOVE. ACCORDINGLY, THE AO WAS RIGHT IN INVOKING T HE PROVISIONS OF SEC.40(A)(2)(B) OF THE ACT. ACCORDINGLY, WE UPHOLD THE ORDER OF LD CI T(A) ON THIS ISSUE. 11. THE LAST ISSUE RELATES TO THE DISALLOWANCE OF C LAIM OF DEDUCTION U/S 80IB OF THE ACT ON THE GROUND THAT THE ASSESSEE DID NOT MAINTAIN SE PARATE BOOKS OF ACCOUNT FOR THE ELIGIBLE UNIT. IT IS STATED THAT THIS ISSUE IS COV ERED BY THE DECISION OF CO-ORDINATE BENCH OF COCHIN ITAT IN THE CASE OF T.C. USHA VS.ACIT IN ITA NOS. 1268 TO 1270. IT WAS NOT SHOWN TO US THAT THE ABOVE SAID DECISION OF THE TRI BUNAL HAS BEEN REVERSED. ACCORDINGLY WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE TH IS ISSUE IN THE LIGHT OF PRINCIPLES GIVEN IN THE CASE OF T.C.USHA REFERRED SUPRA. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE I S TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED ACCORDINGLY O N 27-04-2012 SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 27TH APRIL, 2012 GJ ITA NO. 464COCH/2007 6 COPY TO: 1. SHRI R. PRAKASH, PROP. PRAKASH EXPORTS, KOCHUPIL AMMOODU, KOLLAM. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL C IRCLE , KOLLAM. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS-I, KOCHI. 4. THE COMMISSIONER OF INCOME-TAX, CENTRAL, KOCHI. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE . BY ORDER (ASSISTANT REGISTRAR) I.T.A.T, COCHIN