Recently, in Malay N. Sanghvi v. ITO, the Bombay High Court held that the profits of an undertaking eligible for deduction cannot be treated as “inflated” by invoking section 80-IB(10) of the Income Tax Act in the absence of material on record to prove that there is an arrangement between the eligible unit and the non-eligible unit to generate more than ordinary profits for the eligible unit. The mere fact that there are common customers of both the units does not by itself indicate transfer of profits to the eligible unit.
The appellant questioned the validity of the assessment order saying that s. 80IA(10) cannot be invoked in his case to restrict its deduction under Section 80IB of the Income Tax Act on the basis of the profits of the Appellant’s wife unit at Valsad since there are no business transaction between the Appellant’s unit at Jammu and his wife’s unit at Valsad. Moreover, there is nothing on record to indicate that any transaction between them has resulted in more than ordinary profits arising to the Jammu unit in the normal course of business. It is submitted that the above aspect was completely overlooked by the Tribunal while disposing of the Appeal.
The bench noted that the CIT(A) has rendered a finding that there is nothing on record to indicate that there is any arrangement between the Appellant’s Jammu unit and his wife’s unit at Valsad to generate more than ordinary profits or any transfer of goods and/or services inter se, below the market price, resulting in inflated profits to the Appellant’s Jammu unit. Even before the bench also, the Revenue could not prove that there is any business transacted between Appellant’s unit at Jammu and his wife’s unit at Valsad which resulted in inflating the profits being earned by the Appellant or that there is any transaction between them. “The Tribunal has without considering the validity of the above finding of CIT(A), adopted the test of common customers of both the Appellant’s Jammu unit and his wife’s unit at Valsad, to conclude that profits of the Appellants, are inflated. Common customers by itself in the absence of some arrangement between the parties does not indicate transfer of profits to Appellant’s Jammu unit. The factual finding of the CIT(A) has not been considered by the Tribunal in the impugned order. This issue requires reconsideration by the Tribunal in the context of the appropriate interpretation to be put on Section 80IB(8) and (10) of the Income Tax Act.”
Read the full text of the order below.
