K.P.T. THANGAL, VICE PRESIDENT Revenue is in appeal and assessee is also in cross-appeal before us, against same order of learned CIT(A) dt. 16th Oct., 2003, for asst. yr. 199 7 -98. 2. For sake of convenience and brevity, we are dealing with above appeals separately as under. 3. ITA No. 568/Mum/2004 : When matter was taken up for hearing, learned counsel for assessee submitted that he is under instruction from his client not to press ground Nos. 1 and 3 which are as under : "1. learned CIT(A) erred in law and on facts in upholding reopening of assessment made by AO without appreciating fact that assessment was reopened without fulfilling conditions laid down under IT Act, 1961, for reopening of assessment. 3. learned CIT(A) erred in upholding action of AO in excluding interest income of Rs. 13,09, 7 82 from profits of undertaking of appellant for purpose of deduction under s. 80-IA of Act." 4. In view of above, ground Nos. 1 and 3 are dismissed as not pressed. 5. Ground No. 4 has nothing to do with ground that learned CIT(A) erred in stating name of proprietor of M/s S.M.B. Corporation as Shri Rashiklal A. Shah instead of Shri Ratilal A. Shah. 6 . only effective ground, urged by assessee, is directed against order of learned CIT(A) in upholding invocation by AO of provisions of sub-s. (10) of s. 80-IA. facts, leading to dispute, briefly are as under. 7 . assessee is engaged in business of production of Copper T Components and surgical sutures at Daman. original return of income, declaring total income at nil, was filed on 28th Nov., 199 7 . return was accompanied with tax audit report, as required under s. 44AB of IT Act, 1961, copies of P&L a/c, balance sheet of assessee along with its enclosures. same was processed under s. 143(1) of Act. assessment was reopened under s. 14 7 of Act and notice dt. 20th March, 2002 under s. 148 was issued to explain reasons for inaccurate claim of deductions under s. 80-IA of Act; basis for inclusion of interest of Rs. 13,40,682 and receipts of labour charges of Rs. 8,51,000 in total income which were not eligible for deduction under s. 80-IA of Act. 8 . There was action under s. 133A on 7 th Jan., 1999 which was subsequently converted into search under s. 132(1) on 8th Jan., 1999. Separate proceedings for block assessment were completed. learned CIT(A) deleted addition made for block assessment. 9 . During course of reopening of regular assessment, which is before Tribunal now, assessee was asked to show cause as to why profit of business should not be adopted at rate of 22.5 per cent as worked out in block assessment. assessee, in reply, submitted that learned CIT(A) has already allowed claim of assessee under s. 80-IA for earlier years and requested AO to allow present claim under s. 80-IA. 10. With regard to applicability of s. 80-IA(10), AO asked assessee to show cause why profit of business should not be adopted at rate of 22.5 per cent i.e., similar to that of block assessment. In reply, assessee submitted that learned CIT(A) has allowed claim of assessee. However, AO held that assessee was selling almost its entire production sutures and Copper T components to M/s SMB Corporation Proprietary concern of one of directors of assessee. It was further noticed that net profit shown in case of assessee for asst. yr. 1998-99 was approximately 7per cent and net profit in case of M/s SMB Corporation, for same period, was as below as 1 per cent. In asst. yrs. 1996-9 7 to 1998-99 assessee has shown net profit abnormally high i.e.,56.95 to 7 5.5 per cent whereas M/s SMB Corporation has shown net profit at range of .36 per cent to .6 7 per cent. It was noticed that fair market value of same product manufactured by some other companies, was much lower than price charged by assessee from M/s SMB Corporation. Therefore, AO held reason for such disparity in high profit disclosed by assessee would be that assessee enjoyed deduction under s. 80-IA whereas M/s SMB Corporation was not entitled to claim such deduction. Hence AO came to conclusion that profit of M/s SMB Corporation was shifted to hands of assessee. 11. While examining one of directors of assessee, Shri Girish R. Shah, who was asked specific and direct questions, his statements were recorded under s. 132(4). Shri Shah, in his statement, stated that he was not aware of such facts and, according to AO, he tried to evade facts relating to higher profit of assessee. AO noted that it was not properly explained as to how profit declared by assessee was fair, reasonable and in accordance with accounts maintained by assessee. assessee was given opportunity to substantiate claim under s. 80-IA. It mainly contended that conditions under which components were manufactured, are only in assessee s favour and its directors have vast experience in such manufacturing activities and that M/s SMB Corporation purchased same components from other unapproved supplier at much higher prices than charged by assessee. AO held this explanation as unsatisfactory, irrelevant and unsubstantial to reflect correct position. AO also held submission of assessee that only assessee was having clean air system , as not convincing because creation of such facility is not exclusively within competence of assessee only. This product is manufactured in hygienic, suitable temperature and atmospheric conditions which were not practicable for any other manufacturer. 1 2 . Coming to claim of assessee that M/s SMB Corporation purchased same components earlier from unapproved supplier at higher price than price now charged by assessee, AO held as not acceptable because assessee failed to furnish any evidence in this regard either at time of block assessment proceedings or assessment completed under s. 143(3). AO held, even for sake of arguments, if it is assumed, but not accepted, that components purchased by M/s SMB Corporation from unapproved suppliers, were at much higher price than price charged by assessee, one has to take into consideration various other factors like quality, quantity and other relevant cost of production to compare price charged by some other suppliers with assessee. AO also held that while deciding issue, it needs to be considered whether other suppliers were also eligible for claiming deduction under s. 80-IA like assessee. AO found discrepancies in documents seized under search action, which revealed that there were differences in figures of sale shown in excise and IT returns. For asst. yr. 199 7 -98, sales shown in IT returns were higher by Rs. 59,83,000. assessee was offered opportunity to explain same. assessee explained that there were some errors in pre-audited accounts on which basis returns were filed and, in fact, assessee was not liable for such excise returns. It was further submitted that sales shown in IT returns were after audit and, in any case, assessee had shown over all more sales in IT returns than excise returns. Some of products, sold by assessee, were not accepted and returned because of quality problems for which no final bills were made. These facts were not considered at all in excise returns. Thus it was submitted by assessee that excise returns were not correct and valid. IT returns were on basis of audited figures showing higher sales. It was further submitted that sales shown to M/s SMB Corporation were also confirmed from their accounts. AO held this explanation neither convincing nor correct for following reasons : (a)Firstly, sale is not item of account which would significantly vary in unaudited and audited accounts and that too in year under consideration; (b)Merely because product is not liable to excise duty, it does not mean that figures of sale, at variance with books of account, should not be taken note of; (c)The fact that IT returns showed more sales in asst. yrs. 199 7 - 98 and 1998-99, were inflated just to show higher profit, on which less tax was to be paid in view of provisions of s. 80-IA. Inflating figures of assessee for purchases by M/s SMB Corporation, goes to reduce profit of connected assessees whose profits are liable to be highly taxed; (d)Regarding discrepancy in figures returned to Excise and I T Departments, for which no adjustments were made by assessee in books of account, AO held that same was not supported by any evidence; (e)Regarding sales recorded in books of account of M/s SMB Corporation, AO held that these have to be shown because most of entities are controlled by same persons and accounts are made to reduce profit of one of concerns where there is higher incidence of tax. AO held that claim of assessee was not correct observing as under : "The percentage of profit attributable to assessee s industrial undertaking eligible for deduction under s. 80-IA is adopted @ 22.5 per cent by AO in block assessment considering sale of assessee-company and that of Proprietary concern Mr. Ratilal Shah, M/s SMB Corporation. same is reproduced below : M/s Novel Asst. M/s SMB Total profit Cons. P.P. Ltd. yr. Corpn. (Income) (NCPL) Profit Profit NCPL+S Sales Sales (Income) (Income) MB Excluding Interest Income 1996- 1,14,0 7 2,1 7 ,48 6 7 ,13,3 7 64,95,88 7 3,24,40,352 97 ,200 7 4 199 7 3,40,5 7 ,52 1, 7 1, 7 1,34,26,2 1,99,30,812 1,32,54,485 -98 7 93 78 1998- 3,04,21,9 7 2,29,38,98 2,28,30,590 5,41,11,466 1,08,459 99 2 7 1999- 30,35,0 7 80,04,401 29,11,620 3,16,29,280 1,23,459 2000 9 4,61,13, 7 Total 15,22,38,625 18 percentage of profit works out to about 30 per cent, however as it includes profit of SMB Corporation for asst. yr. 1996-9 7 whereas assessee-company began functioning with effect from September and also t k i n g into account turnover of SMB Corporation including other purchases/sales, percentage of profit on average profit rate of 22.5 per cent was considered fair and reasonable and same was adopted on basis of provision of s. 80-IA(10) of IT Act. As can be seen from above table, sales of assessee for relevant year was Rs. 1,99,30,812 and that of SMB Corporation was Rs. 3,40,5 7 ,52 7 on which assessee had earned profit of Rs. 1,32,54,485 and SMB Corporation earned meagre profit of Rs. 1, 7 1, 7 93. comparative figures of sales and resultant profits of assessee and that of SMB Corporation are not worthy of comparing. It is also to be placed on record that M/s SMB Corporation is not eligible unit for benefit under s. 80-IA whereas assessee is. Thus, it is evident from figures of sales and profits earned thereon that profits are booked only in eligible unit of assessee and only negligible profit is shown in non-s. 80-IA benefit unit i.e., SMB Corporation. Therefore, there is no doubt that owing to close connection between assessee carrying on eligible business to which s. 80-IA applies and SMB Corporation, course of business between assessee and M/s SMB Corporation is so arranged that business transacted between them produces assessee more than ordinary profit which might be expected to arise in such eligible business." 13. Aggrieved by this order, assessee approached learned CIT(A). learned CIT(A), videpara 4 of his order, records past history and present dispute of assessee. reasoning for invoking provisions of s. 80-IA(10) is that share holders of Novel Consumers Products (P) Ltd. are directors of M/s SMB Corporation, and his son and manufacture of Copper T components is carried out through assessee, having factory at Daman, industrially backward area and under provisions of s. 80-IA, double fiscal incentive is available to assessee which manufactures or produces goods, article or thing. First five years is tax holiday, followed by 30 per cent deduction of profit in next five years. assessee was selling its entire production of surgical sutures and Copper T components to M/s SMB Corporation. 1 4 . On basis of evidence that came into possession of Revenue, as result of search, AO noticed that there were discrepancies in sale figures of unaudited and audited books of account of assessee. Sales figures in IT returns were higher by Rs. 59.83 lakhs as compared to excise returns filed which was explained to be unaudited accounts, was not relevant. AO noticed that net profit shown by assessee was abnormally high i.e.,more than 50per cent whereas net profit shown by M/s SMB Corporation, was much lower. AO took note of fact that both units were controlled by above two persons. He also noticed that even prior to production started by assessee, M/s SMB Corporation had shown profit margin of 3.41 per cent, which was also accepted by Revenue while completing assessment under s. 143(3) for asst. yr. 1994-95. He held that this may not be much material affecting invocation of provisions of s. 80-IA. He also held that what is material, is from asst. yr. 1995-96 onwards when assessee started supplying components to M/s SMB Corporation. AO further noticed that assessee was making higher profit and M/s SMB Corporation nominal profit. He noted that assessee was showing profit in range of 56 to 7 5 per cent whereas M/s SMB Corporation was showing .36 to .1 per cent This was indirect arrangement so that transactions, between parties, may give more profit to assessee than ordinary profit. In earlier year learned CIT(A) held that there was no supporting document to come to such conclusion. learned CIT(A) further noted that Inter Plast sold component at Rs. 11.10 per set to M/s SMB Corporation whereas price charged by assessee from M/s SMB Corporation, was Rs. 11 per set. He further noted that AO has not made any attempt to obtain comparable sales or purchases of copper flanges from any other source. It was case of assessee that Copper T is considered as drug. Its sales and manufacture are considered as drug goods. There is strict supervision on part of Government so that such units maintain all hygienic conditions. Since only other supplier was M/s Hindustan Latex (public sector undertaking), according to him, assessee has monopoly in market. Except transactions between Inter Plast it was not dealing with any other third party. Hence learned CIT(A) asked assessee to submit working of profit objectively in year in which full tax holiday was available to compare it with other years. Comparative figures of net profit varied from 35 to 39 per cent or little more. learned CIT(A) held that dealing with Inter Plast was not relevant because stringent quality norms were not fulfilled. party was supposed to continue this. Therefore, he held that s. 80-IA(10) was rightly applied by AO. He further held that even on assuming that M/s SMB Corporation was marketing aforesaid equipment, its margin of profit was kept completely on lower side merely because appellant was enjoying tax holiday. In his view, arrangements between two i.e., Novel and M/s SMB Corporation, were for no commercial purpose except to avoid tax. No doubt, considering entire facts, profit for manufacturing unit at Daman, at 35 per cent, would be fair and reasonable in assessee s case for application of provisions of s. 80- IA(10). He further held that such approach would also not suffer from any infirmity, which has been noted by learned CIT(A) in earlier years. Being factually convincing in assessee s own case, he held that it would afford most reliable basis for suitably modifying its transactions for purpose of s. 80- IA(10) which reflected true and fair picture of profit. Therefore, learned CIT(A) directed AO to compute net profit at 35per cent instead of 22.5 per cent applied by him. 15. As stated above, assessee is in appeal before us against invoking s. 80-IA(10) whereas Revenue is in appeal for enhancing profit rate to 35 per cent by learned CIT(A) against 22.5 per cent, adopted by AO. 1 6 . learned counsel for assessee submitted that learned CIT(A) has compared later year s profit ratio of assessee but not compared with any other rate. He further submitted that for asst. yr. 2000-01 AO has accepted figures of assessee. Objecting to invocation of s. 80-IA(10), he submitted that reason given by AO is devoid of merit. First of all, only available evidence i.e.,bills with third party, is in assessee s favour. 1 7 . case of Revenue is that assessee has inflated price, sales and quantity of its products, to show that assessee s sales have boosted so as to claim double benefits. learned counsel for assessee submitted that facts on record show otherwise. M/s SMB Corporation purchased components from Inter Plast @ Rs. 11.10 per set whereas assessee sold it at Rs. 11 per set. He submitted that Copper T is treated as drug. Its manufacture and sale are strictly controlled by Drugs and Cosmetics Rules. Therefore, prices of these are fully controlled by Government. He submitted, even according to AO, as noted by learned CIT(A), prior to production of components by assessee, other parties margin of profit was as low as 3.41 per cent He further stated that Revenue authorities failed to bring any comparative case to show that assessee had committed anything unhealthy. He submitted that price of products sold by other supplier, Hindustan Latex, public sector undertaking, and its products at what price, was never verified. Merely stating by Revenue that assessee has manipulated sale figures, is not fact. Hindustan Latex is competitor. 18. Coming to objection of AO that assessee s director was asked specific and direct questions as well as his statements were recorded, learned counsel for assessee submitted that there was not single question and he was not examined for invocation of provisions of s. 80-IA(10). learned counsel for assessee submitted that Inter Plast is completely outsider. Revenue could have checked up fact with some other parties also but they have failed to do so and invocation of s. 80-IA(10) was made without any basis. He further submitted that there was no production outside books and Revenue authorities accepted sales. 1 9 . In premises of above facts, learned counsel for assessee, relied on decision of Tribunal, D Bench, Mumbai, in case ofITO vs. PCA Engineers Ltd. (1984) 8 ITD 518 (Bom)and submitted that addition made by AO, resorting to s. 80-IA, is to be deleted as s. 80-IA cannot be invoked against assessee. 2 0 . Replying to above, learned Departmental Representative submitted that there were two suppliers. assessee has not given any cause why all sales were made to only one party. other party who sold same products, like assessee exclusively, was public sector undertaking, Hindustan Latex. It shows mindset of parties concerned. Under said circumstances, it can be presumed reasonably and held that there is monopoly of assessee. 21. Regarding difference in purchase and sale figures, as shown in excise and IT returns, learned counsel for assessee submitted that assessee had no opportunity to manipulate books. He submitted that assessee has shown higher profit only to avail tax benefit is not correct. Relying upon decision of Rajasthan High Court in case ofCIT vs. Mayur Laminators (1995) 126 CTR (Raj) 1 7 : (1995) 211 ITR 646 (Raj), learned Departmental Representative submitted that it is burden on assessee to prove that it had fulfilled conditions for claiming tax benefit and not for Revenue to prove negative viz.,the assessee was showing profit at rate of 50 per cent for claiming benefit under s. 80-IA. result shown was about 7per cent which also shows untrue nature of declaration of profit by assessee. 22. learned Departmental Representative, relying upon decision of Gujarat High Court in case ofAnil Starch Products Ltd. vs. CIT (1966) 59 ITR 514 (Guj)which was dealing with s. 15(c) of Indian IT Act, 1922, similar to s. 80-IA of IT Act, 1961, contended that while computing profit for purpose of exemption, material supplied or sold by industrial undertaking, should be valued at market price and not at cost of production. This was case where assessee, pharmaceutical company, manufactured and sold industrial starch but subsequently set up another plant for producing Dextrose for which starch is raw material, held, "Starch, supplied by all industrial undertakings, should be valued at market price and not at its cost price of production". 23. Further relying on decision of Kerala High Court in case ofPadinjarekara Agencies (P) Ltd. vs. CIT (1988) 7 1 CTR (Ker) 108 : (1988) 1 7 3 ITR 63 7 (Ker)the learned Departmental Representative submitted that sales should bebona fideand intermediaries should not be dummies. It should not be stated for purpose of sale or purchase and for beneficial interest of parties concerned, etc. Hence, learned Departmental Representative submitted that order of learned CIT(A), on punt, is to be set aside. 24. We have heard rival submissions, gone through orders of Revenue authorities and decisions cited. In case ofPCA Engineers Ltd.(supra)the Bombay Bench of Tribunal held that denial of exemption under s. 80HH was not justified because business transactions (produce) more than ordinary profit (which) is liable to arise in case of industrial undertaking. In instant case, it is contention of learned counsel for assessee that Revenue has not tried to bring any comparative case and for that matter, even public undertaking (i.e., Central Government undertaking, Hindustan Latex) has not been even considered. This is reason for which it is held that assessee had exclusive market control. learned counsel for assessee has produced before us copies of bill of Inter Plast from 31st Aug., 1994 to 31st July, 1995 (which were before Revenue authorities) to show that purchase price of M/s SMB Corporation of India from third party was more than assessee. total purchase is about more than Rs. 3.15 lakhs itself. Therefore, one of reasons for rejecting contention of assessee that purchases and quantity were not made available, is incorrect. This was made only for one year and for subsequent year purchases were not made because there was lack of hygienic conditions. At same time, price of assessee is less than Rs. 11.10 per set. Revenue has not taken any step to ascertain what was price by making enquiry from Hindustan Latex. As rightly noted by learned CIT(A) while dealing with assessee s case of search for block assessment, copy of order is placed before us at pp. 22 to 52 in paper book, reflects that Revenue has not done any worthwhile attempt to make enquiry to reject assessee s explanation. reasonings, given by Revenue authorities, are that while assessee showed extraordinary profit, other parties showed much less profit. Another reason given by Revenue authorities is that in IT returns assessee has shown more sales than excise returns. In this regard, explanation of assessee is that some of stocks sold were subsequently returned and corresponding changes were not made in books. Though this explanation is not fully convincing, yet it is plausible. Considering fact that assessee had sold at lesser price, as compared to other parties and that purchases made by other parties, from another supplier, were quite substantial and also considering that no attempt has been made as to ascertain exact profit rate or sale price from similar parties, i.e.,Hindustan Latex, we are of view that conclusion arrived at by AO, is not justified. decision of Tribunal, in case ofPCA Engineers Ltd.(supra) supports this view. In this case, Tribunal was considering in detail s. 80HH and also similar cl. 80HH( 7 ) which is identical to cl. 80-IA(10). In light of above facts, appeal of assessee on this ground stands allowed. 25. to 33. These paras are not reproduced here as they involve minor issues. 34. In result, appeal of Revenue is dismissed and appeal of assessee is allowed. *** INCOME TAX OFFICER v. NOVEL CONSUMER PRODUCTS (P) LTD.