Addl. CIT v Tribhovandas Bhimji Zaveri
ITAT BENCH ‘H’ MUMBAI
ITA No. 6447/Mum/2009
Assessment Year: 2006-2007
Decided on: 24 June 2011
Order
Per: N V Vasudevan, JM:
ITA No.6447/M/09 is an appeal by the revenue while ITA No.6480/M/09 is an appeal by the assessee.
Both these appeals are directed against the order dated 22/9/2009 of CIT(A) XXV, Mumbai relating to Assessment year 2006-07.
ITA No.6447/M/09- Revenue’s Appeal:-
2. The grounds of appeal raised by the revenue read as follows:
“1. On the facts and in the circumstances of the case, the ld. CIT(A) erred in directing the AO, to allow the deduction u/s. 80-IB of the Act in respect of the profit of Hyderabad Unit without appreciating the fact that the branch has not carried out any manufacturing activity.
2. On the facts and circumstances of the case, the ld. CIT(A) erred in directing the AO to allow deduction u/s. 80-IB of the Act in respect of the profit of Hyderabad Unit without appreciating the fact that the branch is not an industrial undertaking.
3. Without prejudice, not appreciating that even if it is treated as an industrial undertaking, the profit of the Hyderabad branch shown exceptionally high i.e. Gross profit and net profit is high as compared to its Mumbai branch’s gross profit and net profit in order to claim higher deduction u/s. 80-IB.”
3. The assessee is a partnership firm engaged in the business of manufacturing and trading of gold, diamonds and platinum jewellery. The assessee has claimed deduction u/s. 80-IB of the Income Tax Act, 1961 (the Act) of Rs. 1,00,31,186/- being 25% of the profits of Hyderabad branch (Rs.4,08,58,938 being profit of Hyderabad Branch as per P&L less Rs.6,78,696(depreciation)and Rs. 55,500(donation) = Rs. 4,01,24,744/-]. This deduction was disallowed by the department from A.Y. 2002-03 to A.Y 2005-06 on the ground that Hyderabad unit is only a trading branch and not a new industrial undertaking. The CIT(A) and ITAT had decided the issue in favour of the assessee from A.Y. 2002-03 to 2004-05 and appeal for A.Y 2005-06 was pending. According to the AO, the department has not accepted the orders of CIT(A)/ITAT and appeals before High Court/ITAT have been filed by the department, which are pending. The AO thereafter held that there was no plant and machinery or workers in the Hyderabad branch for manufacturing the jewellery and even at head office at Zaveri Bazar, Mumbai. The AO also held that the assessee gets its jewellery made by a large number of Karigars approximately 100 to 150 in numbers, for which the designs are given by the assessee and after that karigars make jewellery at their own premises, spread across various locations, where no supervision of manufacturing activities is feasible or carried out by the Assessee. Only when the karigars bring back the jewellery made, the assessee approves and accepts it after comparing it with the design. The AO therefore held that there are no manufacturing activities. The AO also held that there was complete interlacing of funds, control and management between the Head Office at Zaveri Bazar and Branch Office at Hyderabad. The funds are transferred from Head Office and various expenses which are vital for the survival of the Hyderabad Unit are also incurred at head office. Regular visits of the personnel from Head Office are undertaking to Hyderabad and to say that Hyderabad Unit is an independent new undertaking is not correct. The AO held that the Hyderabad Unit was expansion or reconstruction of the business already in existence and it fails to met the basic condition of section 80-IB(2). The assessee fails to meet any of the requirement of sec. 80-IB i.e.
(a) It is not an industrial undertaking.
(b) It is not engaged in the manufacturing / production of any article or things.
(c) It is not an independent unit but an extension/expansion of the business already in existence.
(d) There was no manufacturing done even in Head Office at Zaveri Bazar.
(e) There was no Plant & Machinery or workers in Hyderabad Branch or Zaveri Bazar, Mumbai or in any other branch for manufacturing of jewellery.
(f) There was complete interlacing of funds, control and management between Hyderabad Branch and Zaveri Bazar head office.
The AO therefore held that the profits of Hyderabad Branch cannot be said to have been derived from industrial undertaking and the deduction u/s. 80-IB is not admissible to the assessee.
4. Without prejudice to the above, the AO also held that in case the Assessee is found to be eligible for deduction u/s.80-IB of the Act, assessee’s working of profits derived from Hyderabad Branch is not correct as several expenses pertaining to branches have not been allocated to the Hyderabad branch leading to inflated profit of the Hyderabad Branch. The AO thereafter tabulated the sales and the expenses incurred in the various branches as follows:
