No disallowance on basis of conjecture and surmises with respect to Diversion of profit from partnership firm to assessee company: ITAT [Read Order]

The Ahmedabad  bench Income Tax Appellate Tribunal ( ITAT ) held that no disallowance made on the basis of conjecture and surmises  wu=ith respect to diversion of profit from partnership firm to assessee company.

The Assessee  Intas Pharmaceuticals Ltd.is having international transactions with its Associated Enterprises. The assessee advanced certain payment to its AE's for selling its products in the respective local overseas territories and thereby increasing sales, the aforesaid advances were of a commercial nature and for the benefit of the assessee.

During the assessment proceedings the Assessing Officer made disallowance of certain expenses claimed by the assessee on the ground that same were pertaining to partnership firm namely M/s. Intas Pharmaceuticals in which the assessee was a partner.

After analyzing the expenses the AO  viewed that many expenses which were otherwise of the partnership firm have been charged to the Profit & Loss Account of the assessee company and thereby leading to reduction of its profit.

Accordingly the AO held that expenses have been diverted from the partnership firm to the assessee company and double tax deduction has been claimed, once in the hands of the partnership firm the income was claimed exempt and then again in the hands of the assessee company, the expenses have been claimed as an allowable expenses

It was argued by the AO that  the expenditures in the nature of Research and Development, packing expenses, financial expenses and selling and distribution expenses pertaining to the partnership firm have been expended by the assessee company and claimed in the Profit & Loss Account of the assessee company, which resulted in deduction of the net profit of the assessee company

Aggrieved by the order assesee filed an appeal before the CIT(A). The CIT(A) restricted the additions . Therefore  the assessee and revenue  filed an appeal before the tribunal.

During the adjudication S. N. Soparkar,  the counsel for assessee  argued that  his issue has been decided in favor of the assessee in assessee’s own case for A.Ys. 2009-10 to 2011-12 .Further  simply because the partnership firm have earned a higher profit rate as compared to the assessee company, cannot itself be a ground for coming to the conclusion that expenses of the partnership firm have been diverted in the hands of the assessee company, without any concrete basis and only on the basis of conjecture and surmises.

Dr. Darsi Suman Ratnam,  Department representatives argued that even though the partnership firm and the assessee company are in the same line of business, the partnership firm earned four times more profit percentage as compared to the assessee company.

The tribunal observed that there is no concrete materials / evidence to come to the conclusion that there has been diversion of profits from the partnership firm to the assessee company.

Therefore AO has erred in facts and in law in coming to the conclusion that there has been diversion of profits from the partnership firms, claiming exemption under Section 80IE(i) and 80IC(3)(ii) of the Act and thereby diverting expenses to the assessee company.

After analyzing the submission of both parties, the bench comprising Annapurna Gupta (Accountant Member) & Siddhartha Nautiyal, (Judicial Member) no disallowance made on the basis of conjecture and surmises  wu=ith respect to diversion of profit from partnership firm to assessee company.

To Read the full text of the Order CLICK HERE

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