ITO 8(3)(2), MUMBAI V. MALAY N SANGHVI, MUMBAI

ITA 6265/MUM/2012

• Counselvise Citation: 626519914 RSA 2012
• Duration Of Justice: 1 year(s) 2 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-01-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 11-10-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: R K SAHU
• Assessee Lawyers: KIRIT J SHETH
• Keywords: Business income; Depreciation; Cost of acquisition
• Section: 80IB

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI BEFORE S/SHRI B.R.MITTAL,(JM) AND RAJENDRA (AM) . . , , ./I.T.A. NO. 6265/MUM/2012 ( / ASSESSMENT YEAR : 2009-10) INCOME TAX OFFICER - 8 ( 3 ) ( 2 ), 201, AYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 / VS. SHRI MALAY N SANGH V I, M/S M-1, KALPITA ENCLAVE CO-OP. HSG. SOCIETY, SAHARA ROAD, ANDHERI (E), MUMBAI-400069 ( & / APPELLANT) .. ( ' & / RESPONDENT) ./ ./PAN/GIR NO. : AKEPS3301A & / APPELLANT BY : SHRI R.K.SAHU ' & * /RESPONDENT BY : SHRI KIRIT J SHETH * - / DATE OF HEARING : 11.12.2013 * - /DATE OF PRONOUNCEMENT : 08.1.2014 / O R D E R PER B.R.MITTAL, JM: THE DEPARTMENT HAS FILED THIS APPEAL FOR ASSESSMENT YEAR 2009-10 AGAINST ORDER OF LD. COMMISSIONER OF INCOME TAX (A) DATED 18.7.2 012 ON THE FOLLOWING GROUNDS : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN ALLOWING DEDUCTION U/S. 801B(4) OF RS.41,65,688/ - WITHOUT APPRECIATING THE FINDINGS BY THE AO FOR RESTRICTING THE SAME TO RS. 12,03,773/-. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN DIRECTING THE AO TO ALLOW DEDUCTION U/S. 801B(4) FULLY AS CLAIMED BY THE ASSESSEE WITHOUT APPRECIATING THE FINDINGS OF THE A O FOR INVOKING THE PROVISIONS OF SEC.801A(8) AND SEC.801A(10) FOR THE I.T. ACT IN RESTRICTING THE DEDUCTION. 2. RELEVANT FACTS GIVING RISE TO THIS APPEAL ARE T HAT THE ASSESSEE IS AN INDIVIDUAL AND CARRIES ON BUSINESS FROM TWO PLACES (A) AT MUM BAI IN THE NAME OF M/S MALAY SANGHAVI & CO. AND (B) M/S MALAY SANGHAVI & CO. (JA MMU). THE NATURE OF BUSINESS FROM MUMBAI IS TRADING AND WHEREAS THE NATURE OF BU SINESS FROM JAMMU IS MANUFACTURING AND SALE. HOWEVER, THE AO HAS STAT ED THAT ASSESSEE IS HAVING THREE I.T.A. NO. . 6265/MUM/2012 2 UNITS, APART FROM ABOVE OTHER TWO UNITS, THE AO HAS STATED THAT M/S UMBERGAM INDUSTRIES AT UMBERGAON, VALSAD. THE ASSESSEE CO NTENDED THAT THE SAID THIRD UNIT AT VALSAD BELONGS TO HIS WIFE MRS.PARUL PAREKH. 3. AO HAS STATED THAT DURING THE COURSE OF ASSESSM ENT PROCEEDINGS, IT WAS FOUND THAT THE NET PROFIT RATIO SHOWN BY ASSESSEE OF UNI T AT JAMMU IS 35% WHICH IS ELIGIBLE FOR DEDUCTION U/S 80IB (PRESENTLY 80IA) OF THE INCOME TAX ACT, 1961 (THE ACT) AND WHEREAS THE PROFIT OF ITS SISTER CONCERN, VIZ UNIT AT VALSA D IS SHOWING NET PROFIT RATIO OF 5%. AO ASKED THE ASSESSEE TO EXPLAIN WHY THERE IS VAST DI FFERENCE IN THE NET PROFIT RATIO OF BOTH THE CONCERNS PARTICULARLY WHEN BOTH UNITS CARRYING ON THE SIMILAR BUSINESS OF MANUFACTURE OF LIQUID SOAP MATERIALS. THE ASSESSE E VIDE LETTER DATED 24.8.2011 HAS STATED AS UNDER : JUSTIFICATION OF WHY THE PROBABILITY OF MALAY SA NGHAVI & CO. (JAMMU) CANNOT BE COMPARED WITH THE PROFITABILITY OF THE UMBERGAM INDUSTRIES. THE JAMMU UNIT IS BASICALLY SET UP FOR OUR FIXED FORMULATION AND SET MARKET, BECAUSE JAMMU IS VERY JAR FROM MUMBAI AND RELIABLE TECHNICAL AND SKILLED MANPOWER CANNOT BE SECURED AND THE INDUSTRY CULTURE THERE IS VERY DIFFERENT AND ALL WORK IS DONE THROUGH DELEGATION TO OUR TEAM AT JAMMU. HENCE JAMMU UNIT IS MANUFACTURING ONLY FIXED AND SET PRODUCTS OF ENTIRE SINGLE CUSTOMER KIMBERLY CLARK. WHEREAS THE UMBERGAM INDUSTRIES HAS OWN ITS OWN TECHNICAL TEAM & LAB AND FACTORY AND THROUGH THE UMBERGAM INDUSTRIES WE ARE ALSO TRYING TO TARGET DIFFERENT MARKET, CUSTOMIZE CUSTOMERS DIFFERENT FORMULATION WITH OUR TECHNICAL TEAM AND LAB SETUP AT FACTORY. THE UMBERGAM INDUSTR IES ARE MANUFACTURING PRODUCT IN DIFFERENT FORMULATION TO OUR EXISTING CUSTOMER AND TARGETING NEW CUSTOMERS ALSO. THE MAJOR ITEM SOLD BY THE UMBERG AM INDUSTRIES TO KIMBERLY CLARK IS GENERIC PRODUCT WHERE AS MAJOR ITEM SOLE FROM JAMMU TO KIMBERLY CLARK IS CUSTOMIZED PRODUCT AND BOTH PRODUCT HAS DIFFER ENT FORMULATION. HENCE WE CANNOT COMPARE THE PROFITABILITY OF BOTH THE UNIT. THE JAMMU UNIT IS FOCUSING ONLY ON MANUFACTURING OF SET PRODUCT TO EXISTING C USTOMER WHEREAS THE UMBERGAM INDUSTRIES ALWAYS DO DIFFERENT FORMULATION FOR VARIOUS CUSTOMERS. WE ARE ALSO SUBMITTING THE CUSTOMER WISE & OPERATION W ISE SALES DURING YEAR OF BOTH THE COMPANY IN SUPPORT OF OUR CONTENTION OF NOT TO COMPARE THE PROFITABILITY ON MERELY DOING BUSINESS IN SAME NATURE OF PRODUCT. WE ARE ALSO PRESENTING SOME FACTUAL OF FIGURE TO SUPPORT OUT ABOVE CONTENTION. DURING THE YEAR UNDER CONSIDERATION THE MALAY SANGHVANI & CO. JAMMU HA S SOLD RS.11641131/- (GLC PINK) TO KIMBERLY CLARK OUT OF SALES OF RS.11707 731/- ONLY THE PRODUCT WHEREAS, THE UMBERGAM INDUSTRIES HAS SOLD RS.40075 39/- TO KIMBERLY CLARK THE SAME PRODUCT AND RS. 1272569/- OTHER PRODUCT TO KIM BERLY CLARK AND RS.8252556/- TO OTHER CUSTOMERS. THE UMBERGAM INDUS TRIES ALL OTHER FORMULATION TO OTHER CUSTOMERS AND KIMBERLY CLARK A RE DIFFERENT THAN SOLD BY JAMMU UNIT. THE UMBERGAM INDUSTRIES IS ALSO DOING JOB WORK FOR PRODUCT SELLING TO THEIR PROSPECTING PRODUCT SETUP TO OTHER CUSTOMER WHICH HAS VERY THIN MARGIN OR SOMETIME IF THE PRODUCT IS NOT ACCEPTED BY CUSTOMER, THE WHOLE PRODUCT DEVELOPMENT TENDS TO BE IN LOSS. HENCE PLEA SE ACCEPT OUR CONTENTION FOR NOT TO COMPARE THE BOTH CONCERNS PROFITABILITY MERE LY ON THE BASIS OF SAME NATURE OF PRODUCT. I.T.A. NO. . 6265/MUM/2012 3 AO DID NOT ACCEPT THE SAID CONTENTION OF THE ASSES SEE AND STATED THAT ON VERIFICATION OF THE DETAILS OF EXPENSES IN COMPARISON TO THE SALES OF THESE TWO UNITS, THE FOLLOWING FACTS EMERGED FROM THE P & L A/C OF TWO UNITS : S,NO. PARTICULARS MALAY SANGHVI - JAMMU UNIT THE UMERGAUM INDUSTRIES, VALSAD PROP. SMT. PARUL SANGHVI 1 SALES 1,20,37,731/ - 74,57,454/ - 2 OTHER INCOME NIL 6,71,117/ - 3 COST OF MATERIAL 63,41,488/ - 63,25,625/ - 4 MANUFACTURING EXPENSES AND OTHER EXPENSES 4,07,733/ - 1,82,590/ - 5 ADMINISTRATION, SELLING & OTHER EXPENSES 10,00,694/ - 11,23,458/ - 6 INTEREST & FINANCIAL CHARGES 3,419/ - NIL 7 DEPRECIATION 1,18,710/ - 1,59,349 / - 8 NET PROFIT 41,65,688/ - 3,37,550/ - 9 N.P. 35% 5% 4. AO STATED THAT THE ASSESSEE HAS BEEN MANUFACTURI NG PRODUCTS SIMILAR TO THAT OF ITS SISTER CONCERN, M/S. THE UMERGAUM INDUSTRIES, A T JAMMU. THE SALES ARE MADE BY BOTH THE CONCERNS MAINLY TO M/S. KIMBERLY CLARK HYG IENE PRODUCT PVT. LTD. WHERE THE RATE IS COMMON FOR BOTH THE CONCERNS. THAT THE C OST OF MATERIAL, ADMINISTRATION, SELLING AND OTHER EXPENSES , DEPRECIATION ARE VERY MUCH IN THE SAME RANGE. HOWEVER, THE ASSESSEE HAS PURCHASED AND SOLD THE GOODS FROM THE SAME PLACES THAT OF ITS SISTER CONCERN BUT STILL COULD MAINTAIN THE PROFIT AT 35% EVEN AFTER PAYING ADDITIONAL COST OF TRANSPORTATION. 5. IN VIEW OF ABOVE, AO WAS SATISFIED THAT THE PR OFIT FOR THE ELIGIBLE UNIT AT JAMMU HAS BEEN INFLATED TO CLAIM DEDUCTION U/S 80IB(4) (8 0IA) OF THE ACT. AO AFTER APPLYING THE PROVISIONS OF SUB-SECTION (8) AND (10) OF SEC TION 80IA CONSIDERING THE NET PROFIT RATE OF UNIT AT JAMMU 5% OVER AND ABOVE SISTER CONC ERN AT VALSAD AND THUS STATED THAT NET PROFIT RATE BE ADOPTED FOR JAMMU UNIT AT 10% AND ACCORDINGLY RESTRICTED THE DEDUCTION OF 10% OF THE TOTAL SALES WHICH COMES TO RS.12,03,773/- AS AGAINST I.T.A. NO. . 6265/MUM/2012 4 DEDUCTION OF RS.41,65,688/- CLAIMED BY ASSESSEE. BEING AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 6. ON BEHALF OF THE ASSESSEE, IT WAS CONTENDED THA T THE PROVISIONS OF SECTION 80IA(8) CAN BE APPLIED ONLY IN THE CASE WHERE THE G OODS OR SERVICES ARE TRANSFERRED INTER-SE BETWEEN THE TWO UNITS BELONGING TO THE SAM E ASSESSEE, ONE OF WHICH IS ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB AND THE OTHER IS NOT SO ELIGIBLE. IT WAS CONTENDED THAT NO SUCH TRANSFER OF GOODS OR SERVICES TOOK PLACE OR FOUND ELIGIBLE BY AO. IT WAS CONTENDED THAT AS PER SECTION 80IA (10) OF THE ACT FOLLOWING TWO CONDITIONS ARE TO BE SATISFIED : (A) THERE SHOULD BE CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON THE ELIGIBLE BUSINESS TO WHICH THIS SECTION APPLIES AN D ANY OTHER PERSON (B) THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRA NGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MO RE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH EL IGIBLE BUSINESS 7. IT WAS ALSO CONTENDED THAT THE UNIT MALAY SANGHV I & CO. AT JAMMU BELONGS TO ASSESSEE AND WHEREAS THE UNIT M/S. THE UMERGAUM IND USTRIES, VALSAD BELONGS TO HIS WIFE SMT.PARUL SANGHAVI AND TRANSACTION OF PURCHA SE OF GOODS BETWEEN THE TWO UNITS IS WORTH RS.66,845/- AND BARRING WITH TRANSACTION THERE ARE NO OTHER TRANSACTIONS OF GOODS OR SERVICES BETWEEN THE TWO. IT WAS ALSO CON TENDED THAT THERE WAS NOBODYS CASE THAT SOME OF THE EXPENSES PERTAINING TO ASSESSEES UNIT HAVE BEEN INCURRED BY ASSESSEES WIFE WHO IS A PROPRIETOR OF M/S. THE UMERGAUM INDU STRIES, VALSAD WITHOUT GETTING IT REIMBURSED AGAINST THE EXPENSES SO INCURRED WITH RE GARD TO THE ASSESSEES UNIT. IT WAS ALSO CONTENDED THAT TOTAL SALES BY THE ASSESSEE UN IT TO KIMBERLY CLARK HYGIENE PRODUCTS PVT.LTD. IS RS.1,16,41,130/- OUT TO TOTAL SALES OF RS.1,17,07,731/- WHICH IS ABOUT 99.43% AND WHEREAS IN THE CASE OF WIFE OF ASSESSEE S UNIT M/S. THE UMERGAUM INDUSTRIES, VALSAD, THE SALES TO KIMBERLY CLARK HYG IENE PRODUCT PVT. LTD IS OF RS.52,93,751/- OUT OF TOTAL SALES OF RS.74,57,454/- WHICH IS ABOUT 70.98%. THE LD. CIT(A) CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND VIDE PARA 2.2 OF THE IMPUGNED ORDER DIRECTED THE AO TO ALLOW THE DEDUCTION TO THE ASSESSEE AS CLAIMED BY IT U/S 80IA OF THE ACT. THE SAID PARA 2.2 OF THE ORDER OF LD. CIT( A) READS AS UNDER : 2.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE LD. COUNSEL AND IN VIEW OF THE FACTS BROUGHT ON RECORD- PARTICULARLY THAT THERE I S NO ARRANGEMENT BETWEEN THE TWO ASSESSEES AND THAT IT PRODUCES TO THE ASSESS EE MORE THAN ORDINARY PROFITS OR THERE HAS BEEN A TRANSFER OF ANY GOODS OR SERVIC ES BELOW THE MARKET VALUE OF SUCH GOODS OR SERVICES- HENCE THE PROVISIONS OF SE CTION 80IA(8) AND 80IA(10) ARE INAPPLICABLE ON THE GIVEN AND UNDISPUTED FACTS OF THIS CASE- HENCE, RELIANCE I.T.A. NO. . 6265/MUM/2012 5 PLACED BY AO ON THE PROVISIONS OF SECTION 80IA(8) AND 80IA(10) IN MAKING THE DISALLOWANCE OF RS.29,61,915/- CANNOT BE SUSTAINED- MORE PARTICULARLY WHEN THE ACCOUNTS ARE AUDITED AND NO DEFECT IN THE ACCOUNTS- LEADING TO ANY ADVERSE INFERENCE HAS BEEN BROUGHT ON RECORD BY AO TO WARRA NT APPLICATION OF SECTION 80IA(8) AND 80IA(10). THEREFORE, THE ABOVE DISALL OWANCE IS DELETED AND THIS GROUND OF APPEAL IS ALLOWED. HENCE, THIS APPEAL BY THE DEPARTMENT. 8. ON BEHALF OF THE DEPARTMENT, LD DR SUPPORTED TH E ORDER OF AO AND SUBMITTED THAT IF THE TEST OF HUMAN PROBABILITY IS APPLIED, T HE PROFIT SHOWN BY THE UNIT WHICH IS ELIGIBLE FOR DEDUCTION U/S 80IA IS VERY HIGH I.E. 3 5% AS COMPARED TO THE PROFIT OF THE OTHER UNIT (BELONGS TO HIS WIFE) ONLY AT THE RATE O F 5%. HE SUBMITTED THAT IF THERE IS AN ABNORMAL PROFIT, THE HONBLE BOMBAY HIGH COURT H AS ALSO HELD IN THE CASE OF CIT V/S SCHMETZ INDIA (P) LTD IN IT APPEAL NO.4508 OF 2 010, DATED 4.9.2012 THAT THE PROVISIONS OF SECTION 80IA(10) OF THE ACT EMPOWERS THE AO TO REDETERMINE THE PROFITS WHICH MAY BE REASONABLY DEEMED TO HAVE ARISEN FROM SUCH ELIGIBLE BUSINESS, IF THE SAID UNDERTAKING HAS DECLARED MORE THAN ORDINARY PROFI T. LD. DR SUBMITTED THAT BOTH THE UNITS ARE MAKING PURCHASE AND SALES OF GOODS FROM T HE SAME PLACES THAT OF SISTER CONCERN BUT STILL UNIT ELIGIBLE FOR DEDUCTION U/S 8 0IA AND COULD MAINTAIN 35% EVEN IF TAKING ADDITIONAL COST OF TRANSPORTATION WHICH CANN OT BE JUSTIFIED. LD. DR REFERRED PARA 4.2 OF THE ORDER OF ASSESSING OFFICER AND STATED TH AT BOTH THE CONCERNS CARRYING SIMILAR BUSINESS OF LIQUID SOAP MATERIAL AND MOST OF THE S ALES ARE MADE TO THE SAME CONCERN VIZ M/S KIMBERLY CLARK HYGIENE PRODUCT PVT LTD WHE RE THE RATE IS COMMON FOR BOTH THE CONCERNS. HE SUBMITTED THAT AO RIGHTLY APPLIED THE PROVISIONS OF SECTION 80IA(10) OF THE ACT TO RE-DETERMINE THE PROFIT . HE SUBMITTED THAT AO IS REASONABLE TO CONSIDER THE NET PROFIT RATE OF 10% OF THE ELIGIBLE UNIT AS AGAINST 5% NET PROFIT OF THE UNIT WHICH IS NOT ELIGIBLE FOR DEDUCTION U/S 80IA. ON THE OTHER HAND , LD. AR SUPPORTED THE ORDER OF LD. CIT(A) AND SUBMITTED THAT THE PURCHASER IS A MULTIN ATIONAL COMPANY. HE SUBMITTED THAT PRODUCTS WERE MANUFACTURED BY BOTH THE CONCERNS ARE DIFFERENT. THAT THE ATTENTION OF LD. AR WAS DRAWN TO THE FACT AS STATED BY AO IN PA RAGRAPH 4.2 OF THE ASSESSMENT ORDER THAT BOTH THE UNITS ARE CARRYING ON THE BUSINESS O F MANUFACTURING LIQUID SOAP MATERIAL AND THE PURCHASE COST OF MATERIAL FOR BOTH UNITS MORE OR LESS SAME AND ON THE OTHER HAND THE UNIT AT VALSAD (PROPRIETOR OF WHICH IS W IFE OF ASSESSEE) IS ALSO HAVING SIMILAR ADMINISTRATION, SELLING AND OTHER EXPENSES HOW THE NET PROFIT RATE COULD BE 35% IN THE CASE OF UNIT AT JAMMU, WHICH IS ELIGIBLE FOR DEDUC TION U/S 80IA. AR SUBMITTED THAT THE MATTER MAY BE REMITTED TO AO TO RECONSIDER THE FAC TS AND DECIDE THE ISSUE AFRESH. I.T.A. NO. . 6265/MUM/2012 6 9. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. RE PRESENTATIVES OF THE PARTIES AND THE FACTS PLACED ON RECORD. SINCE THE AR COULD NOT CONTROVERT THE FACTS AS STATED BY AO AND NEITHER COULD CONTROVERT THE SUBMISSIONS AS MADE BY LD. DR AND /OR QUERY RAISED BY THE BENCH AT THE TIME OF HEARING, WE A RE OF THE CONSIDERED VIEW THAT THE AO IS JUSTIFIED TO APPLY THE PROVISIONS OF SUB-SECTION (10) OF SECTION 80IA OF THE ACT TO RE- DETERMINE THE PROFIT AS THE PROFIT SHOWN BY ELIGIBL E UNIT IS ABNORMALLY HIGH PARTICULARLY WHEN THE COST OF THE MATERIAL IS THE SAME, MOST OF THE SALES ARE ALSO MADE TO THE SAME PARTY AND BOTH UNITS ARE CARRYING ON THE SIMILAR BU SINESS OF MANUFACTURING OF LIQUID SOAP MATERIAL. WE ARE OF THE CONSIDERED VIEW THAT THE AO IS JUSTIFIED AND REASONABLE TO RESTRICT DEDUCTION AT RS.12,03,773/- BY TAKING THE NET PROFIT RATE OF 10% OF THE TOTAL SALES BY THE ASSESSEE OF THE JAMMU UNIT INSPITE OF THE FACT THAT THE OTHER UNIT I.E. M/S. THE UMERGAUM INDUSTRIES, VALSAD WHOSE PROPRIETOR IS WIFE OF ASSESSEE SHOWING NET PROFIT RATE OF 5% ONLY. IN VIEW OF ABOVE FACT, W E UPHOLD THE ACTION OF AO BY REVERSING THE ORDER OF THE LD. CIT(A). HENCE, GROUND OF APPEA L TAKEN BY DEPARTMENT IS ALLOWED. 10. IN THE RESULT, THE APPEAL OF THE DEPARTMENT IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 8 TH JAN, 2014. E F 8 TH JAN, 2014 * SD SD ( / RAJENDRA) ( . . /B.R.MITTAL) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI: . . ./ SRL , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. & / THE APPELLANT 2. ' & / THE RESPONDENT. 3. J ( ) / THE CIT(A)- CONCERNED 4. J / CIT CONCERNED 5. K 'M , - M , / DR, ITAT, MUMBAI CONCERNED 6. / GUARD FILE. / BY ORDER, TRUE COPY (ASSTT. REGISTRAR) - M , /ITAT, MUMBAI