Revenue Appeal Rejected as Section 80IB Deduction Made Additions Revenue Neutral: Gujarat HC

PCIT Vs Asian Tiles Pvt. Ltd. (Gujarat High Court)

The Gujarat High Court considered a group of Revenue appeals arising from a common order of the Income Tax Appellate Tribunal (ITAT) involving assessees subjected to search and seizure operations. The Excise Department had also conducted inspections and found prima facie evidence of clandestine removal of goods to evade excise duty. The Assessing Officer relied on seized material and made additions based on estimated gross profit from clandestinely disposed goods, along with additions for unexplained investments.

On appeal, the Commissioner (Appeals) granted partial relief by holding that only net profit, and not gross profit, should be taxed. The Commissioner also held that the additional income qualified for deduction under Section 80IB of the Income-tax Act. The Tribunal confirmed the finding of clandestine removal and suppressed profit but reduced the addition to 1% of disclosed sales while maintaining the direction to allow deduction under Section 10B on the additional income.

The High Court observed that it did not agree with the Tribunal’s approach of reducing the additions to 1% of disclosed sales, stating that this exercise lacked any basis and there was no correlation between the estimated undisclosed sales and the disclosed sales.

However, the Court declined to examine the Revenue’s appeals further because both the Commissioner (Appeals) and the Tribunal had held that the additions qualified for deduction under Section 80IB. Since the entire income was exempt and no other source of income had been identified by the Revenue, the dispute was revenue neutral. Accordingly, all the tax appeals were dismissed on that ground.

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

This group of appeals is filed by the Revenue and arises out of the common judgment of the Income Tax Appellate Tribunal, Ahmedabad [“Tribunal” for short] dated 5t^h May 2017 and concerns two sets of assesses identically positioned. These assesses were subjected to search and seizure operations by the Income-tax authorities. The Excise preventive team also had carried out inspection and found prima facie evidence of clandestine removal of goods to evade excise duty. The Assessing Officer completed the assessment at the stage where the show cause notice issued by the Excise Department was still pending. According to the learned counsel for the Revenue, the Assessing Officer placed reliance on material seized during the search and only incidentally referred to the material collected by the Excise Department which formed basis of the show cause notice. At the end of the assessment, the Assessing Officer made additions on the basis of estimated gross profit on the clandestinely disposed of goods manufactured by the assesses. He also made additions in the nature of unexplained investments.

The assesses carried the matter in appeal. CIT [A] gave partial relief. Firstly, he held that not the gross profit but the net profit be brought to tax. While doing so, more significantly, he noticed that the assesses were eligible for deduction under Section 80IB of the Income-tax Act, 1961 and held that even the additional income would be eligible for such deduction.

Both the sides carried the issue before the Tribunal. The Tribunal, by impugned judgment though confirmed clandestine removal of goods and suppressed profit, reduced the addition to 1% of the disclosed sales. The Tribunal maintained direction to the Assessing Officer for giving deduction under Section 10B of the Act to such additional income.

Revenue has filed two sets of appeals before us which are arising out of the said judgment of the Tribunal.

We have heard learned advocates for the parties at a considerable length. Prima facie, we are not in agreement with the approach adopted by the Tribunal. If for some reason, Tribunal was of the opinion that no additions could have been made in absence of reliable material on record, the Tribunal could have so stated. If on the other hand, the Tribunal believed that there was diversion of income by the assessee, the additions made by CIT [A] alteast ought to have been confirmed. The Tribunal, after recording factors for and against the assessees has, as if fried to balance the equities, reduced the additions to 1% of disclosed sales. In our prima facie view, this exercise of the Tribunal limiting the additions has no basis. There was no co-relation between the estimated undisclosed sales and the sales disclosed by the assesses.

In the facts of the present case, however, we are not inclined to examine the appeals of the Revenue any further. This is so because the CIT [A] and the Tribunal have directed that even the additions would qualify for deduction under Section 80IB of the Act If the entire income of the assessee is exempt and there is no other source which the Revenue could trace such income to, the entire exercise would be revenue neutral. Whether one per cent as directed by the Tribunal, or the net profit as held by the CIT [A], or even the gross profit; as desired by the Assessing Officer, would yield no tax to the revenue since whatever additions that may be made or sustained would qualify for deduction under Section 80-IB of the Act.

Rest of the additions primarily are based on facts. CIT [A] has given elaborate reasons to that limited extent. CIT [A] has confirmed the additions and investments, which the Tribunal has subsumed the same in general directions.

In the result, all these Tax Appeals are dismissed only on this ground.