Without any basis AO cannot shift profit from trading to manufacturing activity to disallow deduction u/s 80IE

Aristo Industries Vs ITO (ITAT Kolkata)

It is not in dispute that the assessee had maintained separate books of accounts for trading activity and manufacturing activity. We find that the assessee had claimed deduction u/s 80IE of the Act only in respect of profits derived from manufacturing activity only. It is not in dispute that the profits derived from manufacturing activity of the assessee is eligible for claim of deduction u/s 80IE of the Act. The Audit Report in Form No. 10CCB was made available to the revenue for supporting the claim of deduction u/s 80IE of the Act. It is not in dispute that the assessee had produced the books of accounts for trading and manufacturing activities. The initial assessment year for claim of deduction u/s 80IE of the Act was Asst Year 2010-11 as per Audit Report in Form No. 10CCB. The ld AR stated that no scrutiny assessments were framed by the ld AO for Asst Years 2010-11 and 2011-12. He also stated that subsequently for the Asst Year 2014-15, the scrutiny assessment was framed u/s 144 of the Act accepting the claim of deduction u/s 80IE of the Act for the manufacturing unit of the assessee. It is not in dispute that both Aristo Texcon Pvt Ltd and M/s Segmach Inc., are associated concerns of the assessee firm having common shareholding and common partners. It is not in dispute that the assessee had maintained proper quantitative details separately for trading as well as for manufacturing activities in its stock register. The Central Excise registers, transport challans, way bills, C forms etc as required by the ld AO could not be produced by the assessee in view of the fact that the said records were lying at Assam i.e at the manufacturing unit . Infact the assessee had made several representations before the ld AO and Administrative CIT for transfer of jurisdiction from Kolkata to Assam which was not considered by the revenue. Accordingly, certain documents as called for by the ld AO could not be produced before him.

We find that the ld AO in order to arrive at the conclusion that the assessee had made abnormal profits in its manufacturing activity had stated that the assessee had sold goods to its associate concern M/s Aristo Texcon Pvt Ltd at higher prices than the sales made to M/s Segmach Inc..

From the table presented by Assessee, it could be seen that the assessee had sold goods to both M/s Aristo Texcon Pvt Ltd and M/s Segmach Inc at the same rate of Rs 1920 per piece after 23.5.2011 onwards. The first sale of M/s Segmach Inc. of Felt Block had been made only 12.10.2011 at Rs 1920 per piece. The same rate of Rs 1920 per piece was adopted by the assessee in respect of Felt Block sale made to M/s Aristo Texcon Pvt. Ltd. Moreover, the ld AR submitted that both M/s Segmach Inc and M/s Aristo Texcon Pvt. Ltd are associate concerns of the assessee firm , in as much as, in the former concern, the partners of the assessee firm are having equity stake and in the latter concern, two of the partners of the assessee firm are partners. Hence it is found that there is no variation in rate per piece between the two associate concerns of the assessee firm. Hence the allegation of the ld AO in this regard is factually incorrect. In any case, we find that the books of accounts maintained for both trading and manufacturing activity separately have been produced before the ld AO, which were not rejected by the ld AO. Hence there is no scope for making estimated profit at 12% of turnover in manufacturing activity of the assessee. The ld AO has got power to invoke the provisions of section 80IA(10) of the Act. But the same has been proved as not applicable in the facts of the instant case in as much as there was no variation in selling price between the two concerns taken by the ld AO, which is evident from the aforesaid table. Moreover, the ld AO, without any basis , had held that the profits of the manufacturing activity would have to be determined only at 12% of sales. This has got no rationale supported by proper workings. In addition to this, the ld AO further stated that the differential profit figure of Rs 41,44,392/- needs to be added back to the trading profit of the assessee, without any basis. There is absolutely no connection between the trading activity and manufacturing activity of the assessee. In fact we find that lot of common administrative expenses were in fact debited only in the manufacturing account as could be evident from the independent profit and loss account summarized supra, without making apportionment of common expenses between trading and manufacturing activity. If the same is done, then the assessee would be entitled for higher deduction u/s 80IE of the Act in view of increased profits in manufacturing activity. In this scenario, we hold that there is absolutely no basis for the conclusion of the ld AO that the differential profits figure of Rs 41,44,392/-represents trading profit of the assessee.

In view of the aforesaid findings in the facts and circumstances of the case, we hold that there is absolutely no case made out by the ld AO for shifting of profits from trading activity to manufacturing activity of the assessee and hence we have no hesitation in directing the ld AO to delete the addition of Rs 41,44,392/- made in the assessment. Accordingly, the grounds raised by the assessee are allowed.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

1. This appeal by the assessee arises out of the order passed by the Learned Commissioner of Income Tax (Appeals) – 10, Kolkata (in short the ld CITA) in Appeal No. 149/CIT(A)-10/34(2)/2015-16/Kol dated 01.02.2017 against the order passed by the ITO, Ward-34(2), Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 31.03.2015 for the Assessment Year 201213.

2. The only issue to be decided in this appeal is as to whether the ld CITA was justified in determining the net profit at 12% for manufacturing unit at Rs 45,34,956/-thereby restricting the disallowance to Rs 41,44,392/- u/s 80IE of the Act in the facts and circumstances of the case.

3. The brief facts of this issue is that the assessee is a partnership firm engaged in the business of trading of fabrics and manufacturing of waddings, pillows, mattresses, cushions, mattress supports etc and the return of income for the Asst Year 2012-13 was filed by the assessee on 13.7.2012 declaring Nil income. As per the return, the gross total income was Rs 86,79,348/- and assessee claimed deduction u/s 80IE of the Act to the tune of Rs 86,79,348/- . The ld AO observed that during the relevant financial year, the assessee carried out both trading and manufacturing actvities. Deduction u/s 80IE of the Act was claimed in respect of profits and gains derived from manufacturing or production of eligible article or thing to the tune of Rs 86,79,348/-. The ld AO observed that in view of provisions of section 80IE of the Act, separate account is required to be maintained and audit report in Form No. 10CCB is required to be furnished for the business in respect of which deduction u/s 80IE of the Act is claimed. The ld AO observed that the assessee furnished Consolidated Trading A/c , Profit and Loss Account and Balance Sheet for both trading and manufacturing activity and also failed to furnish the audit report in Form No. 10CCB. The assessee was asked to explain as to why separate accounts were not maintained for trading and manufacturing activity. The assessee was also asked , inter alia, to furnish separate profit and loss account for trading and manufacturing activity, audit report in Form 10CCB, statement of party wise purchase and sales of trading goods, details of transactions with Aristo Texcon Pvt Ltd and percentage of shareholding of the partners of the assessee in Aristo Texcon Pvt Ltd. On the issue of maintenance of separate accounts, the assessee stated that separate books of accounts were maintained and while preparing the audited balance sheet, both the accounts were merged. With regard to furnishing of audit report in Form No. 10CCB, the assessee stated that it was not applicable. As required, the assessee furnished profit and loss account for the trading activity, statement of party wise purchase and sales of trading goods, ledger account of Aristo Texcon Pvt Ltd and the percentage of shareholding of the partners in Aristo Texcon Pvt Ltd. As per the information furnished, three partners viz Manoj Kumar Sharma, Sandeep Sharma and Sri Rajib Sharma held 13.53%, 0.45% and 0.45% share respectively in Aristo Texcon Pvt Ltd during the financial year 2011-12.

4. The ld AO observed that the explanation of the assessee regarding maintenance of separate accounts and its merger was not found satisfactory as nothing is mentioned on this issue in the tax audit report. As per the audited profit and loss account the total turnover of the business including trading and manufacturing activity was Rs 13,49,36,273/- . As per the profit and loss account of trading activity furnished, the trading sales was Rs 9,71,44,973/- and trading purchase was Rs 9,69,76,303/- and thus gross profit from trading was shown to be Rs 1,68,670/- @ 0.17% of trading sales. Based upon information provided in the trading account, the gross profit from sale of manufactured goods was ascertained. It was found that cost of manufactured goods was Rs 1,50,86,353/- and the said goods were sold for Rs 3,77,91,300/- resulting in gross profit of Rs 2,27,04,447/- @ 60% of sales. The assessee was asked to explain abnormally low gross profit rate in trading activity and abnormally high gross profit rate in manufacturing activity. The assessee was required to furnish all the purchase bills, chalalns, transport bills, evidence of receipt of goods, payments made in respect of trading purchases and address of the premises where goods were stored before sale and all sales bills, challans, transport bills, evidence of delivery of goods and payments received in respect of trading sales. The assessee was also asked to furnish item wise details of sales made to Aristo Texcon Pvt Ltd and copy of returns filed with Central Excise Department.

5. As regards high gross profit ration in respect of manufacturing activity, the assessee submitted that they were the first unit to manufacture polyster staple fibre mattresses in India, which are made from Polyster Staple fibre involving carding / lapping / wadding and finally the product is taken to batch oven. The polyster fibres are very light weight in comparison to traditional foam and coir mattress. The submission also accompanied a stock manufacturing journal to explain the gross profit ratio. The assessee furnished the profit and loss account of the manufacturing activity, which shows gross profit at Rs 2,03,22,622/- . Thus the assessee claimed that rate of gross profit from sale of manufactured goods was 53.78% and that from sale of trading goods was 0.17%. The assessee also filed one copy of return filed with the Central Excise Department for the quarter of July 2011, October 2011 and January 2011. The ld AO observed that according to the statement of party wise purchase and sales of trading goods, the assessee had purchased goods from 6 parties and sold goods to 5 parties. Notice u/s 133(6) of the Act was issued to all the parties and all the notices came back unserved with postal remark ‘Not known’. The assessee was asked to explain the trading transactions with documentary evidences as requisitioned earlier. The assessee furnished confirmation of transactions from the suppliers and buyers of trading goods and sales details in respect of manufactured goods sold to Assam Impex, Guwahati, Segmach Inc. , Kolkata and Tashi Lamo Tshongkhang, Bhutan. Since the details as required were not filed by the assessee, the ld AO asked the assessee to explain as to why trading results shown in the profit and loss account furnished should not be rejected. The assessee was also asked to furnish the stock register for the financial year 2011-12, registers maintained as per the requirement of Central Excise Department to record production and removal of goods from the factory for the financial year 2011-12 and all sales bills along with corresponding challans, transport bills and copy of ‘C’ forms and way bills for CST sales in respect of manufactured goods sold.

6. As regards trading results shown in the profit and loss account, the assessee explained that there was thin margin on trading activities and they had undertaken the same to strengthen top line and general profile of the firm. In respect of sales of manufactured goods, the assessee produced pre-printed sales invoices, challans and transport bills for sales made to Tashi Lamo Tshongkhang, Bhutan and computer generated sales invoices for domestic sales. The assessee stated that pre-printed sales invoices, challans, transport bills, way bills and ‘C’ forms in respect of domestic sales were lying in Assam. The assessee also explained that this is the reason that it sought for transfer of jurisdiction from Kolkata to Assam which request has not been accepted by the Kolkata income tax department. The assessee also stated that the Central Excise Registers could not be produced as the same are lying in Assam. The ld AO on verification of sales bill produced as above, it was found that a good number of items were sold to Aristo Texcon Pvt. Ltd at a price higher than the price at which the same items wer sold to other domestic parties and Tashi Lamo Tshongkhang, Bhutan. The ld AO prepared a comparative chart of average sale price of products sold to others and arrived at the conclusion that the assessee had charged excess price to Aristo Texcon Pvt. Ltd to the tune of Rs 27,68,136/-. The ld AO observed that since the assessee had failed to produce the pre-printed sales invoices, challans, transport bills, way bills and C forms in respect of domestic sales and also the registers maintained for the Central Excise Department, the actual price difference cannot be determined. The assessee stated that difference is due to weight, composition of the product, i.e quality of fabric and also due to higher transportation cost because sales are made inclusive of transportation i.e. delivered basis. So far as transportation is concerned, the difference as worked out in the table has been worked out in relation to sales made to Segmach Inc, which, like Aristo Texcan Pvt. Ltd is situated in Kolkata. As regards weight, the comparison has been made for sales of same product identical in all respect. Items having same dimensions but with different weight has not been clubbed and considered separately. Regarding different quality of fabric used for products having same dimension and weight, it was found that nothing is mentioned in the sales invoices in this regard and therefore the submission of the assessee on this point does not hold good. The ld AO further observed that in the absence of transport bills, it is not possible to ascertain as to what extent the price of the same item varied due to cost of transportation. He observed that the margin of profit in trading was low remains un-established. The notices u/s 133(6) of the Act issued to parties had returned unserved. The confirmation of transactions furnished by the assessee has no significance because the only verifiable information provided in the confirmation is the transfer of money from one account to another, which in no way proves that purchases and sales had taken place in the manner as shown in the confirmation. Accordingly the claim of the assessee that there was loss from trading business cannot be accepted. The ld AO applied the provisions of section 80IA(10) of the Act and concluded that the transactions with Aristo Texcon Pvt. Ltd had been made by the assessee with an arrangement that excess profits could be earned by the assessee in its manufacturing unit thereby resulting in higher claim of deduction u/s 80IE of the Act. The ld AO accordingly held that the assessee could have maximum earned net profit of RS 45,34,956/- @ 12% of total turnover of the manufactured goods as against the claim made in the sum of Rs 86,79,348/-. Accordingly for the remaining amount of Rs 41,44,392/- , the ld AO disallowed the claim of deduction u/s 80IE of the Act and treated the same as trading profit and added back to the returned income.

7. Before the ld CITA, the assessee stated that it had maintained separate books of accounts for trading and manufacturing activity and separate profit and loss account was prepared and later merged in the consolidated trading and profit and loss account while filing the return. Admittedly, the deduction u/s 80IE of the Act was claimed only in respect of profits derived from manufacturing unit only. It was stated that there is no requirement of mentioning regarding the maintenance of separate books of accounts in the tax audit report as alleged by the ld AO. It was pleaded that the ld AO had prepared a comparative chart in the assessment order regarding sales made to Aristo Texcon Pvt. Ltd and one M/s Segmach Inc., and as per assumption of ld AO , the assessee had charged excess from Aristo Texcon Pvt. Ltd in comparison to M/s Segmach Inc.. It was pleaded that Aristo Texcon Pvt. Ltd is an associate concern as the partners of the assessee firm viz. Manoj Kumar Sharma, Rajib Sharma and Sandeep Sharma, have stake in the said company. M/s Segmach Inc., is also an associate concern where Rajib Shama and Sandeep Sharma are partners. It was pleaded that the comparisons made by the ld AO was not of the same type of items with same specifications. The items sold to Aristo Texcon Pvt. Ltd and M/s Segmach Inc., is different in specification for one of example, Felt Block having description of 78x72x3 is not the same item as the Felt Block sold to M/s Segmach Inc., is of 6 kg and that of Aristo Texcon Pvt. Ltd is of 10.6 kg. Moreover such sales are excisable goods and have been duly recorded in returns of Central Excise and Central Sales Tax and cannot be discarded on assumptions of the ld AO. The stock ledger of both the items were produced before the ld CITA.

7.1. It was further pleaded that the ld AO had failed to understand that deduction u/s 80IE of the Act is allowed for the profits made and if as per assumption of the ld AO, the profit is 12% of the sales, then not only deduction had to be reduced but taxable profit shall also have to be reduced. It was submitted that the assumption of ld AO that the assessee had inflated the profit of manufacturing activities in order to reduce profit from trading activities is nothing but wild guess made out in air by the ld AO and he had failed to provide any mechanism for such an exercise, especially when separate trading and profit and loss account for trading activities was filed before him. The copy of the VAT audit report was also filed before the ld CITA in respect of trading sales made by the assessee. It was further pleaded that the books of accounts produced by the assessee was never rejected by the ld AO. It was submitted that the claim of deduction u/s 80IE of the Act for the Asst Years 2010-11 and 2011-12 were allowed by the ld AO. The ld CITA did not appreciate the contentions of the assessee and upheld the action of the ld AO. Aggrieved, the assessee is in appeal before us on the following grounds:-

1. GENERAL

On the facts and in the circumstances of the case and in law, the Assessment Order passed by the learned Assessing Officer is arbitrary, perverse, against law, facts and evidences on record.

2. REDUCING THE PROFITS OF MANUFACTURING DIVISION AT 12%

On the facts and in the circumstances of the case and in law the Commissioner of Income Tax (Appeals) erred confirming the action of the Assessing Officer in computing the profit of the manufacturing unit on an estimated/ arbitrary basis of 12%.

3. ADDING THE DISALLOWED AMOUNT OF PROFITS OF MANUFACTURING DIVISION TO TRADING DIVISION

On the facts and in the circumstances of the case and in law the Commissioner of Income Tax (Appeals) erred confirming the action of the Assessing Officer in treating the income of Rs. 41,44,392/- disallowed u/s 80IE as income of trading division.

4. RESIDUAL

The appellant craves leave to add, amend, alter vary and/or withdraw any or all the above grounds of appeal.

8. We have heard the rival submissions. It is not in dispute that the assessee had maintained separate books of accounts for trading activity and manufacturing activity. We find that the assessee had claimed deduction u/s 80IE of the Act only in respect of profits derived from manufacturing activity only. It is not in dispute that the profits derived from manufacturing activity of the assessee is eligible for claim of deduction u/s 80IE of the Act. The Audit Report in Form No. 10CCB was made available to the revenue for supporting the claim of deduction u/s 80IE of the Act. It is not in dispute that the assessee had produced the books of accounts for trading and manufacturing activities. The initial assessment year for claim of deduction u/s 80IE of the Act was Asst Year 2010-11 as per Audit Report in Form No. 10CCB. The ld AR stated that no scrutiny assessments were framed by the ld AO for Asst Years 2010-11 and 2011-12. He also stated that subsequently for the Asst Year 2014-15, the scrutiny assessment was framed u/s 144 of the Act accepting the claim of deduction u/s 80IE of the Act for the manufacturing unit of the assessee. It is not in dispute that both Aristo Texcon Pvt Ltd and M/s Segmach Inc., are associated concerns of the assessee firm having common shareholding and common partners. It is not in dispute that the assessee had maintained proper quantitative details separately for trading as well as for manufacturing activities in its stock register. The Central Excise registers, transport challans, way bills, C forms etc as required by the ld AO could not be produced by the assessee in view of the fact that the said records were lying at Assam i.e at the manufacturing unit . Infact the assessee had made several representations before the ld AO and Administrative CIT for transfer of jurisdiction from Kolkata to Assam which was not considered by the revenue. Accordingly, certain documents as called for by the ld AO could not be produced before him.

8.1. We find that in the Trading Activity, the assessee had incurred a loss of Rs 4,34,216/- as under:-

8.2. We find that in the Manufacturing Activity, the assessee had made profit as under:-

** Represents Insurance Subsidy, Interest on FD, Interest Subsidy and Power Subsidy

8.3. We find that the assessee had reported gross profit from manufacturing and trading activities for earlier and subsequent years as under:-

8.4. We find that the ld AO in order to arrive at the conclusion that the assessee had made abnormal profits in its manufacturing activity had stated that the assessee had sold goods to its associate concern M/s Aristo Texcon Pvt Ltd at higher prices than the sales made to M/s Segmach Inc.. The following table of total sales made to both the parties would explain the facts better :-

From the aforesaid table, it could be seen that the assessee had sold goods to both M/s Aristo Texcon Pvt Ltd and M/s Segmach Inc at the same rate of Rs 1920 per piece after 23.5.2011 onwards. The first sale of M/s Segmach Inc. of Felt Block had been made only 12.10.2011 at Rs 1920 per piece. The same rate of Rs 1920 per piece was adopted by the assessee in respect of Felt Block sale made to M/s Aristo Texcon Pvt. Ltd. Moreover, the ld AR submitted that both M/s Segmach Inc and M/s Aristo Texcon Pvt. Ltd are associate concerns of the assessee firm , in as much as, in the former concern, the partners of the assessee firm are having equity stake and in the latter concern, two of the partners of the assessee firm are partners. Hence it is found that there is no variation in rate per piece between the two associate concerns of the assessee firm. Hence the allegation of the ld AO in this regard is factually incorrect. In any case, we find that the books of accounts maintained for both trading and manufacturing activity separately have been produced before the ld AO, which were not rejected by the ld AO. Hence there is no scope for making estimated profit at 12% of turnover in manufacturing activity of the assessee. The ld AO has got power to invoke the provisions of section 80IA(10) of the Act. But the same has been proved as not applicable in the facts of the instant case in as much as there was no variation in selling price between the two concerns taken by the ld AO, which is evident from the aforesaid table. Moreover, the ld AO, without any basis , had held that the profits of the manufacturing activity would have to be determined only at 12% of sales. This has got no rationale supported by proper workings. In addition to this, the ld AO further stated that the differential profit figure of Rs 41,44,392/- needs to be added back to the trading profit of the assessee, without any basis. There is absolutely no connection between the trading activity and manufacturing activity of the assessee. In fact we find that lot of common administrative expenses were in fact debited only in the manufacturing account as could be evident from the independent profit and loss account summarized supra, without making apportionment of common expenses between trading and manufacturing activity. If the same is done, then the assessee would be entitled for higher deduction u/s 80IE of the Act in view of increased profits in manufacturing activity. In this scenario, we hold that there is absolutely no basis for the conclusion of the ld AO that the differential profits figure of Rs 41,44,392/-represents trading profit of the assessee.

8.5. In view of the aforesaid findings in the facts and circumstances of the case, we hold that there is absolutely no case made out by the ld AO for shifting of profits from trading activity to manufacturing activity of the assessee and hence we have no hesitation in directing the ld AO to delete the addition of Rs 41,44,392/- made in the assessment. Accordingly, the grounds raised by the assessee are allowed.

9. In the result, the appeal of the assessee is allowed.

Order pronounced in the Court on 04.04.2018