ITAT deletes Addition as AO estimated Profit of Assessee without any basis [Read Order]

In the case of Aristo Industries vs. ITO, Kolkata bench of Income Tax Appellate Tribunal ( ITAT ) recently held that addition cannot be made since the Assessing Officer (AO) has estimated profits of the assessee at 12% of the turnover in manufacturing activity without any basis.

The assessee, Aristo Industries, is a partnership firm which runs a business of trading of fabrics and manufacturing of waddings, pillows etc. As per the return filed the gross total income was around 87 Lakhs. The assessee claimed the same amount as the deduction under Section 80IE of the Income Tax Act, 1961. The Assessing Officer (A.O), on finding that the assessee has failed to maintain separate account for trading and manufacturing activity, asked him 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 the furnishing of the audit report in Form No. 10CCB, the assessee stated that it was not applicable. The assessee was then asked to explain abnormally low gross profit rate in trading activity and abnormally high gross profit rate in manufacturing activity. The explanation provided by the assessee was not found satisfactory by the A.O.

The A.O. 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 the higher claim of deduction under Section 80IE of the Act. The A.O. accordingly held that the assessee could have maximum earned net profit to the tune of Rs.46 Lakhs @ 12% of total turnover of the manufactured goods as against the claim made in the sum of Rs 87 Lakhs. Accordingly, for the remaining amount of Rs 41 Lakhs, A.O 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.

Aggrieved by the decision of A.O. the assessee, appealed before the CIT (A). However, the CIT (A) upheld the decision of the A.O. Thereafter, the assessee preferred an appeal before the ITAT.

After considering the submissions made by both the parties, the ITAT Bench comprising of Judicial Member A.T Varkey and Accountant Member M. Balaganesh observed “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 the 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.”