The order of the Bench was delivered by
A.D. Jain (Judicail Member) -ITA No.168(Asr)/2013 and C.O. no.46(Asr)/2013 have been filed by the assessee, whereas ITA No.295(Asr)/2013 has been filed by the Department, for the assessment year 2009-10, respectively.
2. As to the concurrent maintainability of both, ITA No. 168(Asr)/2013 as well as C.O. No.46, it has been contended that the C.O. has been filed on the receipt of notice regarding the Department's appeal in ITA No.295(Asr)/2013.
3. As per the Registry, there is a delay of 94 days in the filing of C.O. No.46(Asr)/2013. In this regard, the stand of the assessee is that Form No.36 in the Department's appeal in ITA No. 295(Asr)/2013 was received by the assessee on 13.09.2013 and the C.O. was filed on 14.10.2013, 12.10.2013 & 13.10.2013 being Saturday and Sunday.
4. The above facts have not been disputed. The cross objection has been filed within limitation. Therefore, the objection of the Registry in this regard is dismissed.
ITA No.168(Asr)/2013
5. The assessee has taken the following concise grounds in its appeal in ITA No.168(Asr)/2013:
"1. That the AO has in view of the facts and circumstances of the case, grossly erred in law and on facts in disallowing the deduction of Rs.3,79,92,598/- claimed u/s 80IB and the CIT(Appeals) has grossly erred in confirming the same.
2. That in view of the facts and circumstances of the case, the CIT(Appeals) has grossly erred in law and on facts confirming the disallowance of Rs.1,44,000/- out of total disallowance of Rs.8,26,622/- u/s 40(a)(ia) of the Income Tax Act, addition/disallowance made is uncalled for, is unjust and highly excessive.
3. That in view of the facts and circumstances of the case, the Assessing Officer has grossly erred in law and on facts in disallowing sum of Rs.31,00,000/- paid to Sunayana Malhotra and Sanjeev Malhotra as rent for different premises. The CIT (A) has also erred in confirming the same and not appreciating the fact that the said was for business purposes and no tax evasion was involved.
4. That the CIT(Appeals) has in view of the facts and circumstances of the case has grossly erred in fact and in law in sustaining addition of Rs.15,50,000/- out of total addition made by AO on account of salaries paid to various persons.
5. The CIT(Appeals) has failed to appreciate that the person to whom the salaries are paid are working for assessee company and said persons are also assessed to income tax at the highest rate.
6. That the additions made are merely on the basis of surmises and conjecture and not based on any material on record. The explanation field and material placed on record is wrongly and illegally ignored.
7. The Assessing Officer/CIT(Appeals) has failed to appreciate that the said expenses had been incurred in the earlier years and has been allowed as expenses and the deduction u/s 80IB has been allowed on identical facts.
8. That the interest u/s 234B & 234C has been wrongly and illegal charged and has been wrongly worked out.
9. That the addition/disallowance made are unjust, arbitrary & highly excessive."
6. Ground no.1 is against the action of the ld. CIT(A) in confirming the disallowance of deduction of Rs.3,79,92,598/- claimed under section 80IB of the Act.
7. As per the record, the assessee is in the business of manufacture and sale of specialty agro chemicals. It operates two units, one at Bahadurgarh in Haryana and the other at IGC Samba (J&K). The profit from the Samba unit was eligible for deduction under section 80IB of the Income Tax Act, 1961, whereas the profit from the Bahadurgarh unit was liable to tax. For the year under consideration, the ld. CIT(A) upheld the disallowance made by the AO by observing that owing to the close connection between the eligible and ineligible units, i.e., the Samba unit and the Bahadurgarh Unit, being two units of the same company, the course of business between them had been so arranged that the business transacted between them produced to the eligible unit, more than ordinary profit which might be expected to arise in the eligible unit;
and that, therefore, invocation of section 80IB(13) read with section 80IA(10) and the resulting disallowance of Rs.3,79,92,598/- was justified.
8. So far as regards the observations of the ld. CIT(A) that the affairs of the two units of the assessee have been so arranged that the business transacted between them produces to the eligible unit more than ordinary profits expectable as arising in the eligible unit, the ld. counsel for the assessee has filed an application for additional evidence, wherein, it has been stated that the allegation of the Department was that certain transactions relating to transfer of semi-finished products from the Bahadurgarh unit to the Samba unit, were not at market rate; that this was denied by the assessee, seeking support from the certificate from the Cost Accountant; that the said certificate, was, however, not accepted by the ld. CIT(A) and it was assumed that the transfer from the Bahadurgarh unit to the Samba unit took place without any mark up, so as to inflate the profits of the Samba unit of the assessee, as such, so as to draw a comparison, the assessee is filing the copies of the invoices of that period, issued to the third party. The ld. counsel for the assessee has contended that vide order dated 26.03.2013, passed u/s 143(3) of the Act, for the assessment year 2010-11, this issue was again decided by the AO; that vide order dated 29.03.2014, passed u/s 264 of the Act, for the assessment year 2010-11, ld. CIT decided this issue in favour of the assessee. Copies the said orders have been placed on record, for the assessment year 2010-11.
9. The additional evidence filed by the assessee goes to the root of the issue. The ld. CIT(A) did not accept the Cost Accountant certificate produce by the assessee. The assessee is now filing the copies of invoices issued to third party, showing that the transaction relating transfer of semi-finished products from its Bahadurgarh unit to its Samba unit were not at the market rate. Accordingly, this additional evidence is admitted.
10. The ld. counsel for the assessee has also drawn our attention to the AO's remand report as filed before the ld. CIT(A). It is contended that in the said remand report reproduced at pages 4 to 12 of the impugned order, the AO has himself held the deduction claimed under section 80-IB of the Act to be allowable.
11. On the other hand, the ld. DR has placed strong reliance on the impugned order qua this issue.
12. On this issue, it is seen that the ld. CIT(A) has also not taken into consideration, the remand report submitted by the AO in this regard. In the remand report, the AO has clearly stated that the claim of the assessee u/s 80IB of the Act could not have been rejected on the grounds of manipulation of books and different GP ratios, since sufficient explanation had been offered by the assessee; that the comparison of operating margin and expenses of the Samba Unit and the Bahadurgarh Unit showed that Samba unit had turnover of Rs.15,06,67,738/-attributable to sale of agrochemicals having high mark-up rate, whereas the Bahadurgarh unit had a turnover of Rs.34,74,27,893/- consisting of turnover of rice trading of Rs.27,88,11,232/- (80.25%) and rest of Rs.6,86,16,661/- (19.75%) attributable to sale of agrochemicals; that the administrative expenses which could be said to have been utilized by both the units had already been allocated by the assessee himself and so, rejection of the total claim on this basis would also have not been justifiable since the Samba unit enjoys greater benefits due to the excise duty benefit and other industrial policies of the Govt., whereas no such incentives were available to the Bahadurgarh unit; that also, since the Samba unit was in a rural area, cheap and adequate labour and subsidized power, supervisory staff, lease premises etc., were available, giving rise to higher operating margins to the Samba unit, thereby widening the gap between the profitability of the Samba unit and the Bahadurgarh unit, which was located in a highly urbanized area; that besides, transfer of products from one manufacturing unit to other unit has been provided for under section 80IA(10 of the Act, though at prevailing market rates, and so, the assessee's claim u/s 80IB also could not be rejected on this basis, the assessee, having adequately explained the issue and having file certificate of transfer pricing from an independent Cost Accountant, showing the actual transfer pricing at a higher rate than the cost worked out by the Cost Accountant.
13. It would be appropriate to here reproduce the relevant portion of the AO's remand report, as extracted at pages 4 to 12 of the impugned order:
3. Submissions and Remand Report: Since the submission has been reproduced in the remand report it is not mentioned separately for brevity. The remand report is as under:
Kindly refer to your office letter bearing no. F. No. CIT (A)/JMU/2011-12/377 dated 11.07.2012 in connection with subject cited above.
As per the above mentioned letter, your good self has desired the undersigned to furnish comments on the written submissions filed by the appellant as mentioned above. I have gone through the written submissions filed by the assessee and the assessment record for the relevant assessment year. The issues on which the additions/disallowances were made by the then Assessing Officer, explanations offered by the assessee and the comments of the undersigned are furnished as under:-
3.1. Addition of Rs.37992598/- on account of disallowance u/s 80 IB of the I.T. Act, 1961.
The assessee is in the business of manufacturing & sale of specialty agro chemicals & operates from two units. One is at Bahadurgarh (Haryana) & the other is at IGC Samba (J&K). Profit from Samba Unit is eligible for deduction u/s 80 IB of the Act where as profit from Bahadurgarh unit is liable to tax.
During the year the assessee has claimed deduction u/s 80 IB of the Income Tax Act,1961 to the tune of Rs.37992598/- @ 100% of profit derived from its industrial Unit at IGC Samba (J&K). The deduction claimed at Rs.37992598/- has been disallowed by the then Assessing Officer on the following grounds:
i) The assessee has shown operating profit of Samba Unit at 24.70% of sales whereas in Bahadurgarh unit there is operating loss of 4.05% of sales, implying that the expenses of Samba Unit have been booked in the books of Bahadurgarh Unit in order to show more than ordinary profit of Samba Unit where deduction u/s 80 IB is available & decrease the profit in Bahadurgarh Unit with the motive of tax evasion; assessee has booked only Rs.87026/- under salary & allowances. Other administrative, selling & distribution and financial expenses of Bahadurgarh Unit is shown at Rs.12661936/- where as these expenses have been shown in Samba Unit at Rs.7777858/- meaning thereby that profit of eligible Unit is inflated to avail deduction u/s 80 IB of the Income Tax Act;
iii) Both Samba and Bahadurgarh Plants are units of same company & are closely connected as some of the raw material and semi finished goods from Bahadurgarh Unit are transferred to Samba Unit;
iv) Bahadurgarh Unit of the assessee has made sales/transfers of raw material of more than Rs.5.00 crores to the Samba Unit and nearly 50% of sales of finished goods made by Bahadurgarh Unit have been sold to Samba unit. The Samba Unit has further made sales to the sister concern in Samba namely M/s Sudershan Consolidated Ltd;
v) Samba Unit of the assessee has received show cause notices from the Deputy Commissioner of Central Excise Division Jammu for claiming excess refund of central excise.
The then Assessing Officer held that all the above issues prove that books of account of the assessee are not correct and are manipulated to show higher profit at eligible Unit and hence, the deduction u/s 80IB has been denied in toto;
In response to show cause notice issued during the course of assessment proceedings as well as in the appeal submissions, the assessee has taken following stand:
The allegation of inflation of profit at Samba Unit by misappropriation of expenses of Samba unit to Bahadurgarh unit and manipulation of books of accounts is not based upon any finding on record; even in the Asstt. Order also, the AO has not come to any specific conclusion but has mentioned that the reply filed by the assessee's counsel is not acceptable as it appears that the books of accounts have been manipulated by the assessee;
for rejecting the appellant's claim u/s 80IB the AO ought to have detected some such entries of expenses which in his opinion were manipulated, reject the books of accounts and then proceed to make best judgment assessment;
Deduction claimed by the appellant u/s 80 IB of the Act in earlier years stands allowed in scrutiny assessments u/s 143 (3) of the Act as well as vide intimations issued u/s 143(i) f or AY 2005-06 onwards.
The Assessing Officer has perhaps assumed that all expenses in Bahadurgarh unit are in fact pertaining to Samba unit and therefore the whole of deduction u/s 80-IB of Income Tax Act, 1961 is false & is therefore, disallowed;
Samba Unit and Bahadurgarh Unit ade two separate independent industrial units & profit centers managed independently by the staff posted at each unit, maintain separate books of accounts, direct and indirect income as well as all expenses separate book of accounts, direct and indirect income as well as expenses (administrative, selling, distribution, financial expenses) pertaining to respective units are debited in respective unit;
Common expenses such as Director's remuneration has been allocated to both the units in the ratio of 50:50;
Separate profit & loss account & balance sheet is drawn for each unit at the close of the year and subjected to audit by two independent auditors and this method of accounting and allocation of expenses has regularly been followed on consistent basis and has been accepted by the department in scrutiny assessments u/s 143(3) of the Act in preceding years;
Complete books of accounts including production records, pay registers of salaries and wages, bills/vouchers, stock registers in support of purchases, sales and expenses were subjected to detailed scrutiny by the A.O. and not even a single transaction has been pointed out by the AO as found manipulated or not attributable / allocable to other Unit;
Gross profits of two Units are not comparable unless adjustment in regard to special incentives available to eligible Unit at Samba is made and after that the GP ratios are quite comparable;
Gross Profit ratio of Samba unit of 28.09% includes various incentives such as VAT Remission amounting to Rs. 26,83,311.00 and Excise Duty refund amounting to Rs. 64,79,057.00 whereas no such incentives are available to Bahadurgarh unit (having a G.P. Ratio of 23.19%).
If such benefits are not considered, gross profit ratio of Samba Unit would have been 22.51 % as against GP ratio of Bahadurgarh unit at 23.19% showing that G.P. Ratio of Bahadurgarh unit and Samba unit are correct and also proves that stock transfers made by Bahadurgarh unit to Samba unit were at prevailing market price;
Apart from above, the comparison of operating margin & expenses of Samba Unit & Bahadurgarh Unit is misplaced; Samba plant has a turnover of Rs.15,06,67,738/- attributable to sale of agrochemicals having high markup rate, as against which Bahadurgarh unit has a turnover of Rs. 34,74,27,893/- consisting of turnover of rice trading of Rs. 27,88,11,232/- (80.25%) and rest Rs. 6,86,16,661/- (19.75%) attributable to sale of agrochemicals;
Rice business at Bahadurgarh unit has a very low gross profit rate of 1.76%> while that of Chemical business is comparatively much higher (23.53%);
comparison of Net Operating Profit margin of Samba Unit with that of Bahadurgarh Unit has been made without considering a fact that Bahadurgarh unit deals in two activities where the turnover is mainly derived from rice trading (80.25%) with a very meager margin of just 1.76%, whereas the Samba unit derives its turnover only from Chemical business with a margin of 28.09%;
Furthermore, for arriving at correct results, indirect expenses incurred at Bahadurgarh Unit must be apportioned between both the businesses being carried on there whereas the Ld. AO has allocated all the expenses only against chemical business & thereby resulting into distorted figures of margins;
Also, while computing Operating Profit ratio, non-operating incomes has been excluded from the Net profit of the Bahadurgarh Unit (Rent earned from the Mumbai Flat, Rebate on property from DLF, Interest income) on the one hand but the expenses debited in Profit & Loss A/c for earning these non-operating income (Property Tax and Maintenance charges of Rs. 1,86,598.00, Interest on Housing Loan of Rs. 3,68,476.00, Interest to DLF of Rs. 18,565.00 totaling to Rs. 5,73,639.00) have not been reduced which further distorted the working of operating losses;
Samba Unit enjoys greater benefits due to Govt, industrial policy in terms of Excise duty Benefit, Sales Tax Benefit, Interest subsidy, other Industrial policy benefits, whearas no such incentives are available at Bahadurgarh unit;
Another major factor of additional profit at Samba Unit, being Rural area, is availability of cheap and adeguate labour, availability of power at subsidized rates, Supervisory Staff, Lease premises at highly subsidized rates etc. due to which Samba unit has higher Operating margins which is bound to widen the gap between profitability of Samba unit and Bahadurgarh unit which is highly Urbanised area;
It is wrong to assume that operational efficiency and profitability on the products of different units shall be same ignoring the fact that different industrial units have different profitability and growth rate.
It is not uncommon that there is profit in one unit and loss in another.
The distinguishing factors such as Government Grants and Incentives available in Samba Unit, Rented Premises at Bahadurgarh Unit taken at market rent from a private person where as Leased premises at Samba allotted by J&K SIDCO, a govt .agency at a highly subsidized price under industrial promotion scheme, Scale of Operations and Production, Geographical Location (Urban area and Rural area) of the Industrial units, Plant Capacity Utilization of respective units, etc. cannot be ignored while comparing the operations of both units;
The deduction has been disallowed on a false assumption that assessee has booked the expenses of Samba unit in the books of Bahadurgarh unit without considering the fact that the expenses which could be apportioned to a particular unit have been done so on the basis of presence of cost drivers. For example: Director's Remuneration has been apportioned between both the units equally in the ratio of 55.50; salary has been charged to the profit loss A/c of the unit in accordance with the staff employed and actual salary paid in the respective unit for the services received and can't be apportioned to other unit; Rent/ Lease charges of Rs. 40,00,000.00 in Bahadurgarh unit and Rs. 24,000.00 in Samba unit have been debited to the Profit and Loss A/c of the respective plants. (The rent of Bahadurgarh plant can't be compared with the lease charges of Samba plant nor can be apportioned to the operations of Samba unit as the premises at Samba have been taken on lease from SIDCO, a govt agency, at a highly subsidized lease rent of Rs. 24,000.00 p. a. whereas the premises at Bahadurgarh unit have been hired at market rate from a private party); Administrative expenses on EPF, Amount written off, Leave encashment, Service tax paid, Research and Development expenses have been accounted for in respective Unit as per actual and cannot be transferred from one to another as the expenses incurred at Bahadurgarh plant have no relation to Samba unit and cannot be apportioned to Samba unit; Car And Vehicle Expenses, interest expenses on loan for purchase of car etc. can only be debited to Profit and Loss a/c of Bahadurgarh unit as the respective expenses actually pertain to that Unit as Samba unit owns no car or any other vehicle;
Mumbai Flat owned by the company is rented out and rental income arising from the property has separately been shown in the income tax return under the head, "Income from house property". The related expenditures on this property debited in Profit and Loss A/c of Bahadurgarh unit have been added back in the computation statement of the appellant. Thus, these non-business expenses debited in P & L A/c of Bahadurgarh unit do not have any impact on the business income of Bahadurgarh unit;
Similarly, expenses which could be apportioned have been appropriately apportioned as is evident from the following actual appropriations and allocations wherein the Samba unit has got a larger share in the apportionment of expense due to presence of higher cost drivers . For example: Proportionate commission against sales by Samba unit is more than Bahadurgarh unit (both rice and chemical business) i.e., commission paid by Samba unit is Rs. 5.76 lacs on turnover of Rs. 15.07 crores , whereas in Bahadurgarh unit, commission paid on sale of Rs. 34.74 crores amounted to Rs. 8.27 lacs only; Freight, Octroi & Cartage expenses at Samba unit are Rs. 46.12 lacs against Rs. 17.66 lacs at Bahadurgarh unit; Rebate And Discount at Samba unit are Rs. 29.11 lacs against Rs. 0.27 lacs at Bahadurgarh unit; Sales Promotion expenses at Samba unit are Rs. 5.60 lacs against Rs. 0.47 lacs at Bahadurgarh unit; Interest to Suppliers at Samba unit are Rs. 7.77 lacs against Rs. 1.89 lacs at Bahadurgarh unit; Audit Fees at Samba unit is Rs. 1.50 lacs against Rs. 0.30 lacs at Bahadurgarh unit; Some expenses like donation, filing fees, gifts, rent free accommodation to staff, water expenses and advertisement exist at Samba unit only and no such expenses took place at Bahadurgarh plant;
The services against such expenses have been received at the unit itself and there is no case where the expense that could have been apportioned was not appropriately apportioned nor any such instance has been pointed out by the assessing officer. The expenses expended for and on a particular unit have been debited particularly to its account and not to other unit(s) and the Ld. Assessing Officer has also verified this from the accounts produced.
Expenses at one unit are non-comparable with expenses at other Unit as it varies from plant to plant and place to place depending upon its business, line of operations, area of operation, capacity utilization and cannot be equated without isolating these special factors and hence, it is completely unmerited to make comparisons between the expenses and revenue of both the units;
The assumptions of the A.O. that the books of accounts have been manipulated so as to show higher expenses at Bahadurgarh Unit, is neither a fact nor it is supported by any evidence nor has the ld. AO made any mention of any such instance where the expenditures of Samba Unit might have been booked in Bahadurgarh Unit;
The fact that both units belong to same company & there is transfer of raw material & semi finished stock from in-eligible Unit to eligible Unit can also not be a ground to refuse the deduction u/s 80IB;
Sec. 80IB (13) read with sec. 80IA(10) of the Act itself provides for an eventuality of inter-unit transaction, including transfer of product from in-eligible units to 80IB eligible unit; stock transfers are made by Bahadurgarh unit to Samba unit by adding a markup to the cost prices as determined by cost accountant; For example: Units of chemical BIO were transferred at an average price of Rs. 100.16 as against cost of production of Rs. 73.64 on 10.04.2008, Rs. 70.91 on 12.06.2008 and Rs. 77.27 on 14.02.2009, as per cost accountant's certificate. Similarly, Units of chemical B ll were transferred at an average price of Rs. 88.23 during the year whereas production cost as per cost accountant's certificate, was Rs. 70.00 on 10.04.2008 and Rs. 67.27 on 23.02.2009; item wise statement of stock transferred to Samba unit with quantity & value along with certificates of cost working as per Cost Accountant's certificates for various batches were verified by the A.O. with reference to supporting records of purchase bills of raw material, production cards, cost of production statements which sufficiently prove that these Material have been transferred at appropriate price;
A.O. has nowhere in the assessment order made out a case that such transfers are made to yield extra ordinary profit to 80IB eligible unit, as mandated vide sec. 80IA(10), at the cost of in-eligible Unit leading to tax evasion, hence, disallowance of benefit of sec. 801B to the assessee by invoking sec. 80IA(10), is without meeting the pre-condition of the said provision and is therefore illegal;
Transfer of products from one unit to the other unless proved to be false or used as a tool for tax evasion, are to be treated as usual business transactions and sec. 801B itself envisage such transactions and above that, all these transactions have duly been recorded in excise records and same have been accepted by the Central Excise department as correct for the purpose of levy of central excise duty;
The allegation that the assessee has made sales to a sister concern M/s Sudarshan Consolidated Ltd is also wrong; the allegation that M/s Sudarshan Consolidated Limited is a sister concern of the assessee company is based on un- verified facts and records; M/s Sudarshan Consolidated Limited (now Willy Agrotech Limited) is not a sister concern of the appellant as neither any director or a shareholder of the assessee company was the director or shareholder in M/s Sudarshan Consolidated Limited nor do they have any interest in the company M/s Sudarshan Consolidated Limited. Hence, M/s Sudarshan Consolidated Limited can't be considered as the sister concern of the assessee company as has been alleged by the Ld. Assessing Officer. The appellant stoutly refutes any sister concern relationship with M/s Sudarshan Consolidated Limited; Sale made by the Samba Unit to M/s Sudarshan Consolidated Limited are only of finished produce of Samba Unit at the then prevailing market prices as was charged from other customers and are therefore normal business transactions;
Such transfer/sale at market prices is neither illegal nor a tool for tax evasion. The assumption that these transactions of material transfer from one Unit to another have led to manipulation of books of accounts, are totally unfounded, and do not have any bearing, whatsoever, on the question of allowability of deduction u/s 80 IB;
A mere issue of a show cause notice by any statutory / regulatory body or any tax authority including the Central Excise Department, in no way leads to a presumption of crystallization of alleged violation on the part of such noticee & unless fully adjudicated against the noticee cannot be used against him. The presumption of incorrectness and manipulation of books of accounts on the mere ground of issue of a show cause notice, without fully looking into the facts and without seeing the resultant final order of such show cause notice, is virtually condemning the noticee without hearing and is totally against the provisions of law and cannot stand any scrutiny before any legal forum; the Central Excise division has disputed the excise duty refund obtained by the appellant against rebate and discount given to its customers & for freight outward for which necessary replies have been filed with the Central excise department, after which there has been no further communication from the Central Excise department; the Central Excise department has not raised any question on the accuracy and fairness of the books of accounts which have already been audited by an independent auditor as well as Excise Department auditor and hence no dispute can be raised;
The Ld. Assessing Officer has not even thoroughly gone through the alleged notices & without going into the facts has proceeded to conclude that the books of accounts are inaccurate and manipulated. Mere receipt of notice from the Excise Department cannot be a basis to conclude that the Books of Accounts are incorrect or manipulated;
The accounts maintained by the assessee are subjected to scrutiny by the Central Excise Department and the Commercial Tax department J&K Govt, under the J&K Value Added Tax Act ,2005 and both these agencies have also accepted the accounts maintained by the appellant as correct for the purpose of levy of taxes & duties. This also shows that there is no manipulation in the accounts & that the accounts have been properly maintained as required under law & deserves to be accepted;
The Ld. Assessing Officer even after verification of the books of accounts has not pointed out any discrepancy therein and hence, the Ld. AO's contention of manipulation of books of accounts, is un-founded and incorrect;
That the AO has just disallowed the legally available deduction only for the sake of disallowing and he himself is doubtful on his own finding of disallowability of deduction u/s 80 IB as in concluding para on Page 10 he mentions that though the whole of deduction claimed under section 801Bof the Income Tax Act, 1961 has been disallowed, yet is pertinent to mention that alternatively, no deduction is allowed on excise duty refund, interest subsidy and income from other source. This clearly show that the A.O. himself is doubtful of his own findings of disallowability of deduction u/s 80IB on the presumption of incorrectness and / or manipulation of books of accounts because if the AO was sure of his findings and correct in his version of disallowability of benefit of sec. 80IB, then there was no need to give any alternate finding of some portion of the profit as non- deductible;
The rejection of claim of deduction in terms of sec. 80IB of the Act, on all these presumptive grounds, is illegal and cannot stand the test of law and must therefore be quashed and the assessee's claim u/s 80IB be restored as already allowed in preceding years ever since AY 2005-06.
I have carefully gone through the assessment order and material available on assessment records with me and when version of the assessee is compared, it seems that the claim of the assessee u/s 801B could not have been rejected on the grounds of manipulation of books as well as on the ground of different GP ratios for which sufficient pleas and grounds have been explained by the assessee. The comparison of operating margin & expenses of Samba Unit & Bahadurgarh Unit shows that Samba plant has a turnover of Rs.15,06,67,738/- attributable to sale of agrochemicals having high markup rate, as against which Bahadurgarh unit has a turnover of Rs. 34,74,27,893/- consisting of turnover of rice trading of Rs. 27,88,11,232/- (80.25%) and rest Rs. 6,86,16,661/- (19.75%) attributable to sale of agrochemicals;
Secondly, the administrative expenses which could be said to be utilized by both Units have already been allocated by the assessee himself and hence, rejection of claim in toto on this ground may also not be justifiable in view of the fact that Samba Unit enjoys greater benefits due to Govt, industrial policy in terms of Excise duty Benefit, Sales Tax Benefit, Interest subsidy, other Industrial policy benefits, whereas no such incentives are available at Bahadurgarh unit and at Samba Unit, being in Rural area, thee is availability of cheap and adequate labour, availability of power at subsidized rates, Supervisory Staff, Lease premises at highly subsidized rates etc. due to which'/samba merit has higher Operating margins which is bound to widen the gap between profitability of Samba unit and Bahadurgarh unit which is highly Urbanised area.
Thirdly, the assessee claim u/s 80IB cannot also be rejected on the ground of transfer of products from one manufacturing Unit to other Unit as the simple reading of Sec. 80IA( 10) provides for such an eventuality albeit the transfer pricing has to be done at prevailing market rates. For this issue also, the assessee has already explained and attached the certificate of transfer pricing from an independent Cost Accountant which show that the actual transfer pricing was done at higher rate than the cost worked out by the Cost Accountant."
14. It was in evident oblivion of the clear remand report of the AO, that the ld. CIT(A), while upholding the disallowance, observed that it stood clearly established that owing to the close connection between the eligible unit i.e., the Samba unit and the Bahadurgarh unit, being two units of the same company, the course of business between them is so arranged that the business transacted between them produced to the eligible unit more than the ordinary profits which might be expected to arise in the eligible unit; and that therefore, the invocation of section 80IB(13) read with section 80-IA(10) and disallowance of deduction u/s 80IB was justified.
15. While making these observations without any basis, the ld. CIT(A) has erroneously omitted in meeting the specific contents of the remand report of the AO, as taken note of hereinabove. It, therefore, remains uncontroverted that the Samba unit of the assessee enjoys greater benefit due to Govt. industrial policy in terms of excise duty benefit, sales tax benefit, interest subsidy and other industrial policy benefits and that as Juxtapose to this no such incentives are available to the Bahadurgarh unit; that besides, the Samba unit of the assessee is located in rural area and so, labour, power, staff as well as premises are available at subsidized/cheaper rate as compared to the Samba unit, which is situated in an urban area. Further, it has also been ignored that the actual transfer pricing of the products from the one manufacturing unit to the other was done at higher rate than at the cost worked out by the Cost Accountant and the assessee furnished due explanation with regard thereto, accompanied by the certificate of such transfer pricing. In these circumstances, the observations of the ld. CIT(A) regarding alleged close connection between the eligible Samba unit of the assessee and its Bahadurgarh unit, are but the result of assumptions and presumption, as against the documentary material brought on record as well as the remand report of the AO
16. Moreover, vide order 29.03.2014 passed by the ld. CIT, Jammu, under section 264 of the Act, for the assessment year 2010-11, this issues stands decided in favour of the assessee.
17. In view of the above, this issue is restored to the AO to be decided afresh in accordance with law, keeping in view, particularly, the additional evidence admitted by us, the AO's remand report, as reproduced at pages 4 to 12 of ld. CIT(A)'s order and the order dated 29.03.2014 passed by the ld. CIT, Jammu u/s 264 for the assessment year 2010-11.
18. Ground no.2 challenges the action of the ld. CIT(A) in confirming the disallowance of Rs. 1,44,000/- out of total disallowance Rs.8,26,622/- under section 40(a)(ia) of the Act. The AO disallowed commission expenses amounting to Rs.8,26,622/- under section 40(a)(ia) on account of non-deduction of tax on the said commission expenses.
The assessee maintained before the ld. CIT(A) that out of Rs.8,26,622/-, TDS has been deducted on commission expenses of 6,82,822/- and out of only Rs.1,44,000/- on account of non-deduction of TDS, was called for. The assessee produced the challan for deposits of TDS deducted on commission. The ld. CIT(A) observed that the assessee had deducted and deposited the tax on the commission expenses of Rs.6,82,622/- and the challan for deposits of such period had been verified by the AO during the remand proceedings. It was on this basis that the ld. CIT(A) allowed the relief of Rs.6,82,622/- to the assessee and confirmed the addition to the extent of Rs.1,44,000/-, as admitted by the assessee itself.
19. We do not find any error in the order of the ld. CIT(A) in this regard. It is the self admitted case of the assessee that the addition to the extent of Rs.1,44,000/- is justified. Therefore, Ground no.2 lacks merit and is rejected as such.
20. Apropos Ground no.3, the AO disallowed an amount of Rs.31,00,000/- paid by the assessee to Mrs. Sunayana Malhotra and Mr. Sanjeev Malhotra as rent for different premises. The ld. CIT(A) confirmed the disallowance. The assessee contends that the authorities below have failed to appreciate that the payment in question was for business purposes.
21. The expenditure of Rs.25,00,000/- and Rs.6,00,000/-, representing rent payment, was booked in the Bahadurgarh unit of the assessee. In respect of property at 371A, MIE Bahadurgarh, the assessee contended before the ld. CIT(A) that the land and building had not been transferred to the Company at the time of takeover from Mrs. Sunayana, but only right to use the land and building was given for a period of nine years by taking a refundable security of Rs.8,44,605/-; that after the expiry of the said period of nine years, the security was paid back and a rent agreement was entered into with Mrs. Sunayana, a majority shareholder, to hire the factory premises for a period of one year on monthly rental of Rs.2,50,000/-; and that otherwise also, Mrs. Sunayana Malhotra was taxed at the highest slab of tax and, therefore, there was no question of tax evasion. The ld. CIT(A) while deciding the matter against the assessee has observed as follows:
"On the perusal of audited financial statement of the Bahadurgarh unit, it is observed that the land under question is shown under fixed assets of the company and factory building is shown separately under as depreciable asset and depreciation is charged on factory building. There is no mention of refundable deposit for land of any kind in the audit report or notes to accounts of the company. Over the years, the land and building is shown as fixed assets of the company. During the year under consideration, the land under the fixed assets is shown as sold/transferred during the year and rental of Rs.25,00,000/- was claimed as expenses in the year under consideration in respect of said property. This clearly shows that this is a sham transaction entered into with a view to reduce the tax liability of the company. The appellant has produced an unregistered rent agreement in support of its claim. The unregistered rent agreement between the majority shareholder and employee of the company could not be accepted as the same appears to be a document created with the related party to justify a sham transaction. This rent agreement mentions that M/s. Sunaiana Malholtra was in possession of the property at the time of signing of rent agreement whereas the fact is that the land and building was in possession of the company over a number of years. The argument of appellant that Mrs. Sunaina Malhotra is taxed at highest slab is also not sustainable as 30% deduction u/s 24 is allowable to her on rental income and also such transaction will help her to take out money from the company without paying dividend tax. Therefore, this ground of appeal of the appellant is dismissed.
In respect of rent 371-C, ME Bahadurgarh, the appellant has argued that the rent has been increased from Rs.75,000/- to Rs.1,25,000/- per month as the appellant was paying same rental for last three years as per the last agreement and increased rental for the last three years.
On the perusal of the submission of the appellant and findings of the AO, it has been observed that rental property belong to Mr. S.K. Malhotra, husband of Mrs. Sunaina Malhotra, majority shareholder. The appellant has constructed a building by investing more than Rs.80 lakhs on such rented building with rent agreement of only three years. This clearly shows an arrangement between the appellant and the husband of majority shareholder to evade the taxes. Therefore, the disallowance of Rs.6,00,000/- made by the AO by allowing the rental expenses only to the extent of the rent in the previous year i.e. Rs.9,00,000/- is justified. Therefore, this ground of appeal of the appellant is dismissed."
22. Before us, the ld. counsel for the assessee has contended that in the other years, this matter regarding both, Mrs. Sunayana Malhotra as well as Mr. Sanjeev Malhotra, i.e., for the assessment years 2006-07 to 2008-09, assessment years 2010-11 & 2011-12 ( as per history chart filed before us at pages 3-4 thereof), this issue has been decided in favour of the assessee.
23. On the other hand, contending that each year is a separate year, the ld. DR has sought to place reliance on the impugned order in this regard.
24. Having considered the rival contentions in the light of the material on record regarding this issue, we find that indeed, inter-alia, for the assessment years 2010-11 & 2011-12, i.e., assessment years subsequent to the year under consideration, i.e., 2009-10, under similar facts and circumstances, this issue has been decided in favour of the assessee regarding both Mrs. Sunayana Malhotra as well as Mr. Sanjeev Malhotra.
The assessment order for the assessment year 2010-11 passed on 26.03.2013 in the assessee's case for the AY 2010-11, has been placed at pages 24 to 60 of the application for additional evidence. This document being directly relevant to the issue at hand, is admitted. The relevant contents thereof show that this issue has been decided in favour of the assessee for the A.Y. 2010-11. Similar is the position with regard to the order passed under section 264 of the Act by the ld. CIT. The relevant observations contained therein are at page 47 for the assessment year 2011-12, also, this issue has been allowed under scrutiny.
25. Therefore, this matter is remitted to the file of the AO, to be decided afresh in accordance with law, particularly keeping in view the aforesaid decisions taken by the department itself in the assessee's case for the assessment years 2006-07 to 2008-09 and 2010-11 & 2011-12.
Ground no.3 is, accordingly, treated as accepted for statistical purposes.
26. Apropos Ground nos. 4 & 5, the AO found the assessee to have paid the following salaries and consultancy fee:
S.NO. Name of person Amount paid ( in Rs.)
1. Smt. Sunyana Malhotra Rs.24,00,000/-
2. Sh. Sanjeev Malhotra Rs. 4,00,000/-
3. Sh. Sudershan Malhotra Rs. 3,00,000/-
4. Smt. Suman Rohella Rs. 1,20,000/-
27. The assessee offered the following justification before the AO:
Mrs. Mrs. Sunayna Malhotra is the vice President Commercial Sunayna in the company at Bahadurgarh unit. She has a vide Malhotra experience in the business of manufacturing of Agro Specialty Chemicals. Mrs. Sunayna Malhotra entered into the business of manufacturing of Agro Specially Chemicals in the year 1994 under the name of M/s. Kaiser Industries Inc. as a sole proprietor. This company and this business is the brain child of Mrs. Sunayna Malhotra who has nurtured the Kaiser a Industries Inc as a proprietor till 1999 and later on Kaiser Industries Ltd. as Director till Aug, 2005, as the business of Kaiser Industries Inc was taken over by Kaiser Industries for the development of the company in its early years of establishment and in view of her long experience in the line of business being carried on by the company, the company appointed her as Vice President Commercial in Nov. 2006 at a consolidated salary of Rs.2,00,000/- per month with no other perquisites or allowances. After her joining the company in Nov. 2006 the company's performance increased many fold. In today's commercial world the remuneration of top executives is much more than what is offered to Mrs. Sunyana Malhotra. Remuneration of Rs.2,00,000/- per month to Mrs. Sunyana Malhotra is reasonable and not excessive having regard to the services rendered by her, the legitimate needs of business of the assessee & the benefits the company has gained from her services. Due to the guidance and hard work of Mrs. Sunayna Malhotra, the company has been able to sustain and grow in this competitive environment and reach these heights. Salary drawn by Mrs. Sunayna Malhotra from the company has been assessed in her personal hands at the highest rate of tax. Hence, there is no tax avoidance and the transaction is revenue neutral.
Sh. Sanjeev Sh. Sanjeev Malhotra has drawn a salary of Rs.400,000/- Malhotra during the year which is very reasonable in view of vast experience of Sh. Sanjeev Malhotra in managing and running of many companies and is not excessive having regard to the services rendered by him. Salary drawn by Sh. Sanjeev Malhotra from the company has been assessed in his personal hands at the maximum rate of tax. Hence, there is no tax avoidance and the transaction is revenue neutral.
Sh. Sh. Sudershan Malhotra is the General Manager in Sudershan Bahadurgarh unit of the company looking after the Malhotra general administration of the unit. Salary of Rs.25000/-
per month to Sh. Sudershan Malhotra is very reasonable keeping in view the prevailing market conditions. Even the salary of class 4 employees of PSU is more than 25000/- per month these days, while, he is qualified and experienced.
Smt. Suman Amount of Rs.1,20,000/- has been paid to M/s. Organic Rohella Consultants during the year as consultancy charges as per business needs of the company.
28. The AO, however, added the entire amount of Rs.32,20,000/-
representing salary paid, observing that:
a) Mrs. Sunayna Malhotra is the substantial share holder of the company and the assessee has only stated that she is the Vice President Commercial. The assessee has not furnished any evidence in support of its contention. The assessee has not furnished only evidence in support of its contention. Since, Mrs. Sunayana Malhotra is only the substantial share holder of the company she has been benefited only for this purpose. So, the salary of Rs.24,00,000/- paid to her is not allowed as an expenditure and is therefore, added back to the income of the assessee.
b) Sh. Sanjeev Malhotra is the husband of substantial shareholder of Mrs. Sunayana Malhotra. The assessee's contention that the vast experience of Sh. Sanjeev Malhotra in managing and running of many companies and having regard to the services rendered by him is not accepted as Sh. Sanjeev Malhotra operates many companies in Chennai and is the Director of many other companies. He may not be having time to manage the affairs of the company that too at other for of stations. The salary to Sh. Sanjeev Malhotra has been paid only to benefit him as he is the husband of substantial share holder. So, the salary of Rs.4,00,000/- paid to him is not allowed as an expenditure and is therefore added back to the income of the assessee.
c) Sh. Sudershan Malhotra is the Father-in-law of the substantial share holder. The assessee has not proved that Sh. Sudershan Malhotra has done any work in the unit. Neither the assessee has proved that he was qualified enough to be appointed as General Manager in Bahadurgarh unit of the company to look after the general administration of the unit. The salary of Rs.3,00,000/- paid to him is only to benefit the Father-in-law of the substantial share holder. So, the salary paid to him is not justified and is not therefore allowable. The same is added to the income of the assessee.
d) Smt. Suman Rohella has been paid an amount of Rs.1,20,000/- and the assessee has stated that she has been paid on account of consultancy charges. On perusal of the records it is seen that she is the wife of Dr. L.C. Rohella, Director Technical of the assessee company and she has been benefited for that reason. Moreover, the assessee could not furnish details with regard to her qualification and experience of being a consultant. Therefore, the amount of Rs.1,20,000/- paid as salary to Smt. Suman Rohella cannot be allowed as an expenditure and therefore added to the income of the assessee.
In view of above, total amount of Rs.32,20,000/- paid as salary by the assessee to its related parties is added to the income of the assessee.
29. The ld. CIT(A) reduced the disallowance to 50% of the salary paid to Smt. Sunayana Malhotra, Sh. Sanjeev Malhotra, Sh. Sudershan Malhotra. The entire amount of Rs.1,20,000/- representing consultancy fee paid to Smt. Suman Rohella was allowed.
30. The ld. counsel for the assessee has submitted that the following is the history of disallowances of salary and consultancy fee paid.
31. The following case law has also been relied on :
i) 'CIT vs. Gujarat Guardian Limited', 17 Taxman 434 (Del.)
ii) 'Shahzada Nand and Sons vs. CIT, Patiala',3 SCC 432
iii) 'CIT vs. Edward Pvt. Ltd.', AIR 1978 SC 1586
iv) 'Hive Communcation Pvt. Ltd. vs. CIT', 181 (2011) DLT 151
v) 'J.K. Woollen Manufacturers vs. CIT', 1969 SCR (1) 525
vi) 'Jagadamba Rollers Flour Mill Ltd vs. ACIT', 117 ITD 260 (Nag.)
vii) 'Spank Hotels Pvt. Ltd., New Delhi, vs. Department of Income Tax', [IT.A. No.3306/Del/2010]
viii) 'CIT vs. Sudarsan Chits (India) Ltd.', 192 ITR 94 (Ker.)
ix) 'CIT, Bombay vs. Walchand and Co. Private Ltd.', [AIR 1967 SC 1435]
x) ACIT vs. M/s. Alidhara Texspin Engineers, Dadra, order dated 16.11.2011 passed by ITAT, Ahmedabad, in ITA No. 2358/Ahd/2009, for AY 2006-07.
32. The Ld. DR, on the other hand, placed strong reliance on the impugned order.
33. It is seen that as correctly contended, the above history of the disallowance has not been considered by either of the Taxing Authorities. Accordingly, this issue is remitted to the file of the AO to redecide, taking into consideration the history of the disallowances and the case laws cited by the assessee before us, after affording due and adequate opportunity of being heard to the assessee. The assessee shall, no doubt, cooperate in the fresh assessment proceedings. Accordingly, Ground nos. 4 & 5 are treated as allowed for statistical purposes.
34. Ground nos. 6 & 7 stand decided while dealing with other respective grounds.
35. Ground no.8 is consequential.
36. ITA No.295(Asr)/2013 for the AY 2009-10:
This is the Department's appeal for the assessment year 2009-10, taking the following grounds:
"1 "On the facts and circumstances whether the ld. CIT(A) was right in deleting the addition made on account of difference in valuation of closing stock when the closing stock has been valued at cost price on the basis of information furnished by the assessee in form no.3CD.
2. "On the facts and circumstances whether the ld. CIT(A) was right in restricting the disallowance of salary to 50% i.e. to Rs.15,50,000/- from Rs.31,00,000/- when the said expenditure has been claimed by the assessee to inflate the expenses and to benefit the directors and its relatives which are even held excessive and unreasonable by the ld. CIT(A)."
37. The AO found the assessee to have under valued the closing stock of Bahadurgarh unit by Rs.18,33,802/-, working out such under valuation as under:
a) Valuation of Raw Material: The assessee company has shown closing stock of raw material of 144838.18 Kg @ 55.35 per kg., where as the average purchase price as been shown at Rs.63 per kg and freight of Rs.2 (approx). The assessee company in Form 3CD has mentioned that the closing stock has been valued at cost price. The valuation of closing stock by cost price method is worked out at Rs.65 per kg. for raw material which comes out to Rs.94,14,482/-. Therefore, an addition of Rs.13,97,588/- is made on account of under-valuation of closing stock of raw material in Bahadurgarh unit.
b) Finished Goods :The assessee company has shown closing stock of finished goods of 9652 kg. @ 51.17 per kg amounting to Rs.4,93,978/-, whereas in the said unit the gross profit rate is 23.19% and as per the quantitative details the average sales price is Rs.125 per kg. therefore, by reducing gross profit ratio from the sale price, the cost of finished goods comes out to be Rs.9,26,592/-. Therefore, an addition of Rs.4,36,214/- is made on account of under valuation of closing stock of finished goods in Bahadurgarh unit.
38. The ld. CIT(A) deleted the addition. This has given rise to Ground no.1 taken by the Department before us.
39. The ld. DR has contended that the ld. CIT(A) has erred in deleting the addition made correctly by the AO on account of difference in under valuation of closing stock, when the closing stock has been valued at cost price on the basis of the information furnished by the assessee in form No.3CD.
40. The ld. Counsel for the assessee, on the other hand, has placed strong reliance on the impugned order.
41. In this regard, it is undisputed that as contended by the assessee before the ld. CIT(A), the assessee valued the closing stock at cost price based on FIFO method which is a recognized method for valuation of closing stock in accordance with Accounting standard No.2 issued by the Institute of Chartered Accountants. This method was consistently followed by the assessee and this is not the Department's case that it was not so done. As such, the ad-hoc addition made by the AO based on average cost method without affording proper opportunity of being heard to the assessee, was not justified and the ld. CIT(A) was correct in holding so and deleting the addition made. Accordingly, Ground no.1 is rejected.
42. By way of Ground no.2, the department has challenged the action of the ld. CIT(A) in restricting the disallowance of salary to 50%.
43. The ld. DR has contended that the ld. CIT(A) has erred in restricting salary from Rs.31,00,000/- to Rs.15,50,000/-, particularly when the expenditure had been claimed by the assessee only in order to inflate the expenses and to benefit its directors and its relatives; and that the ld. CIT(A) had himself held the payments to be excessive and unreasonable.
44. This ground raised by the Department corresponds to Ground nos.
4 & 5 taken by the assessee in its appeal in ITA No.168(Asr)/2013.
Since that issue has been remitted by us to the AO for the reasons recorded hereinabove, the issue pertaining to this ground raised by the department also goes to the AO for those very reasons and directions.
Accordingly, ground no. 2 is treated as allowed for statistical purposes.
45. C.O. No.46(Asr)/2013 The assessee has raised the following grounds in its C.O:
"1. That the ld. CIT(A) has erred on facts and law in not reducing from the taxable income Rs.65,88,489/- being the amount of excise duty subsidy which though held by him to be capital receipt, no relief was allowed on the erroneous basis that the same has not been routed through P & L account and that no separate addition has been made by the AO in the computation of income. The taxable income of the appellant is liable to be reduced by the said amount of capital receipt including for computing deduction under section 80-IB.
2. That the ld. CIT(A) has erred on facts and law in not reducing from the taxable income Rs.14,30,530/- being the amount of interest subsidy which though held by him to be capital receipt, no relief was allowed on the erroneous basis that the treatment of interest subsidy as capital receipt will not effect the taxable income. The taxable income of the appellant is liable to be reduced by the said amount of capital receipt including for computing deduction under section 80-IB."
46. The assessee has maintained that the matter of refund of Central Excise Duty in the case of the assessee stands already decided in favour of the assessee in their appeal for the assessment year 2008-09, titled M/s. Kaiser Industries Ltd., Appeal No. 288/10-11, decided by the Hon'ble Jurisdictional High Court of J & K, vide order dated 24.03.2011, holding the incentives to be capital receipts not liable to tax (page 13 of the impugned order).
47. In this regard, the observation of the ld. CIT(A) (at page 14 of the impugned order) is that : 'although the assessee's contentions may be acceptable, but since the Deptt. has not agreed with the view taken by the Hon'ble High Court of J & K, and also that the SLP of the Deptt. has been admitted by the Hon'ble Supreme Court, the view taken by the AO needs to be sustained'.
48. Thus, as per the ld. CIT(A), inspite of the continuing existence hitherto of the order/judgment of the jurisdictional High Court in favour of the assessee, as above, since the department has not accepted the said order and it has filed an S.L.P. before the Hon'ble Supreme Court, the view taken by the AO requires to be sustained. Now, this is evidently not the legal position. Rather, it is quite the reverse. The order/judgment of the Jurisdictional High Court, passed in favour of the assessee has not been shown to have been stayed by the Hon'ble Supreme Court in the S.L.P. filed by the department. Thus, despite the fact that the department has preferred an S.L.P. before the Hon'ble Supreme Court, the operative order/judgment is that of the Jurisdictional High Court. It is for this reason that the AO's order which, stands reversed by the Hon'ble High Court, stands obliterated by the decision of the Hon'ble High Court. In this regard, in 'Siemens India Ltd. vs. ITO', 143 ITR 120 (Bom), it was held that merely because an appeal has been filed or Special Leave Application is pending against the decision, it would not denude the operative decision of its binding effect and until it is reversed, that decision is binding on all upon whom it operates as a binding precedent.
49. The same position is applicable to C.O. No.2, i.e., the issue of interest subsidy.
50. Accordingly, both the grounds in the C.O. raised by the assessee are accepted.
51. In the result, the appeal of the assessee is partly allowed for statistical purposes, C.O. of the assessee is allowed and the appeal of the Department is also partly allowed for statistical purposes.
The order pronounced in the open court on 29/03/ 2016.