Delhi High Court
Pr. Commissioner Of Income ... vs Harpreet Kaur L/H Of Virender ... on 24 July, 2017
$~15 & 16
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 141/2017
PR. COMMISSIONER OF INCOME TAX-12, NEW DELHI
..... Appellant
Through Mr. Asheesh Jain, Sr. Standing
Counsel
versus
HARPREET KAUR L/H OF VIRENDER SINGH KOCHAR
..... Respondent
Through Mr. Gautam Jain, Advocate
+ ITA 142/2017
PR. COMMISSIONER OF INCOME
TAX-12, NEW DELHI ..... Appellant
Through: Mr. Asheesh Jain, Sr. Standing
Counsel
Versus
HARPREET KAUR L/H OF VIRENDER SINGH KOCHAR
..... Respondent
Through: Mr. Gautam Jain, Advocate
CORAM:
JUSTICE S.MURALIDHAR
JUSTICE PRATHIBA M. SINGH
ORDER
% 24.07.2017
Dr. S. Muralidhar, J:
1. These are two appeals by the Revenue against the common order dated
29th June 2016 passed by the Income Tax Appellate Tribunal ('ITAT') in
ITA No. 844/Del/2011 and ITA No. 2081/Del/2011 for the Assessment
Years ('AY') 2006-07 and 2007-08, respectively.
2. While admitting these appeals on 21st February 2017 this Court framed
the following questions of law for consideration:
"(i) Did the ITAT fall into error in holding that invocation of
Section 145 of the Income Tax Act, 1961 ('the Act') in the
facts of this case was not justified?
(ii) Is the impugned order erroneous inasmuch as it interprets
Section 80IA (8) and (10) of the Act."
3. The facts in brief leading to the filing of these appeals are that the
Respondent-Assessee was the Proprietor of M/s Vi-John International, Delhi
and M/s Maja Personal Care, Baddi, Himachal Pradesh (H.P.) which are
engaged in the manufacturing of cosmetic goods.
4. In relation to AY 2006-07, the Assessee filed a return income on 31st
October 2006 declaring an income of Rs.2,02,760/-. During the course of
the assessment, a questionnaire was issued by the Assessing Officer ('AO')
following which the AO framed the assessment by order dated 26th
December 2008 assessing the total income of the Assessee at Rs.
1,47,00,040/-. The AO came to the conclusion that the gross profit (GP) of
the units of the Assessee located at Baddi was abnormally high when
compared to the GP of the units located in Delhi; these units were selling the
products through another related concern of the family, viz., M/s Suchet
Agencies on consignment basis; "all of them have been in the same line of
business for years, and all the relevant variables related to the business of
manufacturing of cosmetics are exactly similar in all of the above named
concerns". According to the AO, even after accounting for the advantages
that accrued to the units at Baddi, at the highest an average GP to the extent
of 23% may be allowed. Consequently, the GP of M/s Maja Personal Care
was taken at a maximum of 23% instead of 38.05% as declared by the
Assessee. Consequently, the net profit (NP) ratio for the deduction under
Section 80 IC of the Income Tax Act, 1961 ('the Act') was computed at
21% and a difference was added back to the income of the assessee.
5. Likewise for AY 2007-08 the AO on similar basis, by the assessment
order dated 31st December 2009, the AO added back the difference in the
GP by taking it at a maximum of 25% instead of 43.07%.
6. Aggrieved by the above assessment orders, appeals were filed by the
Assessee before the Commissioner of Income Tax (Appeals) [CIT(A)]. By
orders dated 26th December 2008 (for AY 2006-07) and 10th November
2010 for AY 2007-08 the CIT (A) allowed the appeals of the Assessee. The
CIT(A) held that "the AO was not justified in rejecting the trading results
shown by the Assessee summarily without pointing out either any
mistake/deficiency in the accounts or disturbing the figures of sales or
purchase as declared by the Assessee". According to the CIT(A) there were
considerable differences in the business environment of the Assessee's
concerns in Delhi and at Baddi in H.P. Consequently, the CIT(A) was of the
view that the AO was not correct in slashing the GP rates in both the areas
and substituting it by that determined by the AO.
7. Aggrieved by the orders passed by the CIT(A) for each of the AYs, the
Revenue went in appeal before the ITAT which by the impugned common
order dismissed the appeals. The ITAT concluded that the AO had
arbitrarily made the addition by rejecting the books of accounts and the
additions made by the AO were rightly deleted by the CIT(A). The ITAT
summarized and affirmed the reasons given by the CIT(A) for reversing the
AO. In addition, the ITAT observed as under:
"20. However, there is not an iota of material on the file to prove
the inter-unit transfers between the related units of the assessee,
one situated at Baddi, Himachal Pradesh, and another situated at
Delhi. Moreover, when correctness and completeness of the
audited books of account has not been disputed, merely disputing
the trading result on the basis of higher gross profit ratio is not
permissible under law. When AO has also not returned any
specific findings that there was some arrangement between the
assessee unit, an 80-IC unit and his non 80-IC unit situated at
Delhi to carry out such, transfer of goods, the question of invoking
provisions contained u/s 80-IA (8) & (10) does not arise."
8. The ITAT was of the view that the AO had invoked Section 80 IC read
with Section 80-IA (8) and (10) of the Act "on the basis of conjectures and
surmises only without having an iota of material on record and as such, the
question is answered in favour of the assessee".
9. Having heard Mr. Asheesh Jain, learned the Senior Standing counsel for
the Revenue and Mr. Gautam Jain, learned counsel for the Assessee, the
Court is of the view that the orders of the CIT(A) and the ITAT suffer from
no legal infirmity. The reasons for this conclusion follow.
10. Under Section 80-IA(8) of the Act, one of the pre-requisites for the AO
to not grant the deduction as claimed by the Assessee in his return is where
the AO finds that the consideration at which transfers were made of goods
and services of the eligible business as recorded in its accounts "does not
correspond to the market values of such goods." The Proviso to Section 80-
IA (8) further states:
"that where, in the opinion of the Assessing Officer, the
computation of the profits and gains of the eligible business in the
manner hereinbefore specified presents exceptional difficulties, the
Assessing Officer may compute such profits and gains on such
reasonable basis as he may deem fit." (emphasis supplied)
11. The expression "such reasonable basis" pre-supposes that the AO has to
explain with sufficient clarity why the AO is rejecting the profit figures as
put forth by the Assessee which emerges from the audited accounts of the
Assessee. In the present case, for instance, the AO had to explain why he
was rejecting for AY 2006-07 the GP ratio of 38.05% and substituting it
with a rate of 23%. What the AO appears to have done in the present case is
to reject an explanation given by an Assessee as to the difference in the
selling price of the products manufactured by it at its Baddi unit compared to
that at Delhi unit. The AO proceeded on the basis that the sales were to
related parties thus giving an unfair advantage to the Assessee.
12. The above approach of the AO was rightly found by the CIT(A) to be
not justified. Without pointing out the error, if any, in the accounts or
disturbing the figures of sales or purchases, to compare the trading results of
business of two units and simply reject was clearly not a "reasonable basis",
as contemplated by the proviso to Section 80-IA (8) of the Act. The AO's
order does not explain the basis for determining the GP ratio of 23% instead
of 38.05% for AY 2006-07 and 25% instead of 43.07% for AY 2007-08.
In the circumstances, the ITAT's conclusion that the AO's order was passed
on conjectures and surmises cannot be said to be erroneous.
13. When there are audited accounts of an entity and the calculation of the
GP ratios hinges upon their analysis, the AO should not lightly undertake an
exercise that would amount to negating those accounts.
14. The questions framed by this Court are answered thus:
Question (i) is answered in the negative by holding that the ITAT did not err
in holding that invocation of Section 145 of the Act in the facts of this case
was not justified.
Question no. (ii) is answered in the negative by holding that the impugned
order of the ITAT in its interpretation of Section 80-IA (8) and (10) of the
Act is not erroneous. Consequently, the questions are answered in favour of
the Assessee and against the Revenue.
15. The appeals are dismissed.
S.MURALIDHAR, J
PRATHIBA M. SINGH, J
JULY 24, 2017
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