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