2008-VIL-416-ITAT-CHD

Equivalent Citation: [2009] 28 SOT 512 (CHD.)

Income Tax Appellate Tribunal CHANDIGARH

IT APPEAL NOS. 7 AND 8 (CHD.) OF 2008

Date: 08.10.2008

SHIVA EXPORTS

Vs

INCOME-TAX OFFICER, PARWANOO

BENCH

M.A. BAKSHI AND G.S. PANNU, JJ.

JUDGMENT

G.S. Pannu, Accountant Member. - The captioned appeals of the assessee arise out of the respective orders of the CIT(A) dated 7-11-2007 pertaining to the assessment years 1998-99 and 1999 -2000. We fined it expedient to pass a common order since the issues involved are common. First we take up the appeal of the assessee in ITA No. 7/Chandi/2008 pertaining to the assessment year 1998-99. Although the assessee has raised multiple grounds of appeal in the Memo of appeal however, the substantive grievance is in respect of assumption of jurisdiction under section 147 of the Income-tax Act, 1961 (in short ‘the Act’) and disallowance of claim of deduction under section 80-IA of the Act in an order of assessment under section 147/143(3) of the Act.

2. The brief background is that the assessee is a partnership firm which is engaged in the business of manufacturing emergency lights. It filed its return of income for the assessment year 1998-99 on 29-9-1998 declaring nil income. The gross total income declared was Rs. 51,73,798 and deduction under section 80-IA of the Income-tax Act, 1961 (in short ‘the Act’ ) was claimed at Rs. 51,73,798 thus resulting in nil taxable income. This return was accepted as such under section 143(1) on 3-3-2000. Subsequently after recording reasons on 8-3-2006 the Assessing Officer formed a belief that certain income chargeable to tax had escaped assessment inasmuch as the claim of deduction under section 80-IA was wrongly made and allowed. The Assessing Officer also observed that profit declared by the assessee were normally high and the expenses were low. He also observed that the conditions prescribed under section 80-IA relating to the employment of number of workers was also not fulfilled and hence wrong claim of deduction under section 80-IA. For all the above reasons the Assessing Officer initiated reassessment proceedings by making a recourse to section 147/148 of the Act. Subsequently in the assessment framed under section 147/143(3) of the Act on 30-3-2006 the Assessing Officer has determined the total income at Rs. 51,72,780. In the said assessment the claim of the assessee for deduction under section 80-IA has been denied. Further in computing the income of the assessee, the Assessing Officer also held the book results declared as unreliable. The Assessing Officer bifurcated the income declared by the assessee between income from business and income from undisclosed sources. He adopted 7 per cent of the sales as the profit derived by the assessee from its business i.e., Rs. 20,77,190 and the balance of income of Rs. 30,95,591 was treated as income earned by the assessee from undisclosed sources. Hence the determination of total income at Rs. 51,72,780. The assessee had carried such assessment in appeal before the CIT(A). Before the CIT(A) the assessee challenged the validity of initiating proceedings under section 147/148 apart from assailing the merits of the additions made. The CIT(A) has, however, not accepted the pleas of the assessee and the order of the Assessing Officer has since been sustained. Against the same the assessee is in appeal before us.

3. Ground Nos. 1 and 2 raised in the Memo of appeal relate to the action of the CIT(A) in upholding the initiation of proceedings under section 147/148 of the Act. The counsel for the appellant has attacked the assumption of jurisdiction under section 147 on the ground that the reasons recorded cannot be construed as any cause which leads to formation of a belief that certain income had escaped assessment. Our attention was invited to copy of the reasons recorded, placed at pages 32 to 34 to point out that the entire reasons are based only generalized observation. It was pointed out that there is no material referred to by the Assessing Officer to show that the profits declared by the assessee were abnormally high. In fact the assessee had shown a G.P. rate of 22.5 per cent and N.P. rate of 15.32 per cent, which were in any case not abnormally high. Further there is no reference to any material by way of comparable case or otherwise to show that the results declared by the assessee were abnormally high so as to claim excessive deduction under section 80-IA of the Act. Similarly it has been submitted that the reason regarding the inadequacy of expenses was also without any material and purely as per the whim of the Assessing Officer. In nutshell it is submitted that the belief of the Assessing Officer was not based on any material or information and, therefore, the assumption of jurisdiction to make reassessment under section 147 was arbitrary. The ld. counsel vehemently argued that the decision of the Apex Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500 relied upon by the CIT(A) to negate the stand of the assessee, in fact supports the case of the appellant. According to the counsel the Supreme Court has itself observed that the ingredients of section 147 are required to be fulfilled even in a case of intimation under section 143(1) of the Act. In the present case there was no cause or justification for the Assessing Officer to form a belief that certain income chargeable to tax had escaped assessment. On the other hand the ld. D.R. has defended the action of the Assessing Officer to assume jurisdiction under section 147/148 of the Act by placing reliance on the reasoning advanced by the CIT(A).

4. We have considered the rival submissions, perused the case laws cited at bar and also the material relevant on record. In this case the original return filed had been processed and accepted under section 143(1) of the Act. It is a trite law that the intimation under section 143(1) is given without prejudice to the powers available to the Assessing Officer under section 143(2) of the Act. The Hon’ble Delhi High Court in the case of Mahanagar Telephone Nigam Ltd. v. Chairman, CBDT [2000] 246 ITR 173 held that where action under section 143(2) was not taken within the prescribed period, so long as ingredients of section 147 are fulfilled, that would not render Assessing Officer powerless to initiate reassessment proceedings, even when only an intimation under section 143(1) had been issued. The Gujarat High Court in Bharat V. Patel v. Union of India [2004] 268 ITR 116 held that a mere processing of a return under section 143(1) cannot be elevated to the status of regular assessment and formation of opinion about the incidence of tax on a particular item mentioned in the return of income. That if the ingredients of section 147 were satisfied, the issuance of notice was held valid. In Bawa Abhai Singh v. Dy. CIT [2001] 117 Taxman 12, it was held that there must be some material which can be regarded as information on the basis of which, Assessing Officer can have reason to believe that action under section 147 is called for. It was held as under:—

"Information means the communication or reception of knowledge or intelligence. It includes knowledge obtained from investigation study or instruction. "To inform" means to impart knowledge. A detail available in the papers filed before the Income-tax Officer does not by its mere presence or availability become an item of information. It is transmuted into an item of information only if and when its existence is realized and its implications are recognized. Whether a particular fact or material constitutes information in a particular case has to be decided with reference to the facts of that case and there cannot be a definite rule of universal application as to when a particular material will be taken to be an information." [Emphasis supplied]

5. In fact in the latest judgment, the Apex Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) has held that, no opinion is expressed by an Assessing Officer, when an assessment is framed under section 143(1) of the Act and as such, there is no change of opinion on invocation of section 147 of the Act. It was, however, not been held that in each and every case where return of income is accepted in an intimation under section 143(1) of the Act proceeding under section 147 of the Act can be initiated. On the contrary what has been held is that Assessing Officer has jurisdiction to issue notice under section 148 of the Act if there was ‘cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment’. Their Lordships held as under :—

"The scope and effect of section 147 of the Act, as substituted with effect from 1-4-1989 as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147 separate clauses (a) and (b) laid down the circumstances under which reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied: firstly, the Assessing Officer must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment and secondly he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment or that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words, if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment if confers jurisdiction to reopen the assessment.......

Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word "reason" in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an in-built idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991] 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the material would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. (P.) Ltd. [1996] 217 ITR 597 (SC); Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC)." [Emphasis supplied]

6. It has, therefore, been held that "reason to believe" is a mandatory precondition for assumption of jurisdiction under section 147 of the Act. It has been further held that such "reason to believe" must necessarily to be based on relevant material and that relevant material must be such that a reasonable person on information of such material would have formed a requisite belief that income of the assessee has escaped assessment. In this context it would be appropriate to refer to the judgment of Apex Court in the case of Ganga Saran & Sons (P.) Ltd. v. ITO [1981] 130 ITR 1 wherein the Supreme Court inter alia observed that the expression "reason to believe" is stronger than the expression "is satisfied". It was held that belief entertained by the Assessing Officer should not be irrational or arbitrary. Alternatively put it must be reasonable and must be based on reasons which are material. Following the above judgment, the Delhi High Court in the case of United Electrical Co. (P.) Ltd. v. CIT [2002] 258 ITR 317 has held as under :—

"Thus the existence of tangible material, for the formation of opinion in a pre-requisite for initiation of action under section 147 of the Act. Therefore, what section 147 of the Act postulates is that the Assessing Officer must have reason to believe that income has escaped assessment. There should be facts before him that reasonably give rise to the belief but the facts on the basis of which he entertains the belief need not at this stage be rebuttably conclusive to support his tentative conclusion. In case of challenge it is open to the court to examine whether there was material before the Assessing Officer having rational connection or relevant bearing to the formation of the belief that is claimed to have been held at the time when he issued the notice. But the court cannot for the purpose of ascertaining validity of the notice examine the sufficiency of the reasons for the belief.

Explaining the scope of the expression "information" in the background of section 132 of the Act, which logic is equally applicable to a case under section 147 of the Act in L.R. Gupta v. Union of India [1992] 194 ITR 32 a Division Bench of this Court observed thus :

‘The expression ‘information’ must be something more than a mere rumour or a gossip or a hunch. There must be some material which can be regarded as information which must exist on the file on the basis of which the authorizing officer can have reason to believe that action under section 132 is called for any of the reasons mentioned in clause (a), (b) or (c ). When the action of issuance of an authorization under section 132 is challenged in a court it will be open to the petitioner to contend that on the facts or information disclosed no reasonable person could have come to the conclusion that action under section 132 was called for. The opinion which has to be formed is subjective and, therefore, the jurisdiction of the court to infer is very limited. A court will not act as an appellate authority and examine meticulously the information in order to decide for itself as to whether action under section 132 is called for. But the court would be acting within its jurisdiction in seeing whether the act of issuance of an authorization under section 132 is arbitrary or mala fide or whether the satisfaction which is recorded is such which shows lack of application of mind of the appropriate authority. The reason to believe must be tangible in law and if the information or the reason has no nexus with the belief or there is no material or tangible information for the formation of the belief then in such a case, action taken under section 132 would be regarded as bad in law.’

It is thus, trite, that when a challenge is made to the action under section 147 of the Act what the court is required to examine is whether some material exists on record for the Assessing Officer to form the requisite belief and the reasons for the belief have a rational nexus or a relevant bearing to the information of such belief and are not extraneous or irrelevant for the purpose of the said action. But sufficiency of the grounds, which induced the Assessing Officer to act under the said section is not a justiciable issue." [Emphasis supplied]

7. In the aforestated background now we may advert to the factual position in the instant case. In this case, after the processing of return under section 143(1) the Assessing Officer recorded reasons on 8-2-2006 to initiate proceedings under section 147/148 as under :—

"The assessee filed return of income for the above-noted assessment year declaring total income at Rs. Nil after claiming deduction under section 80-IA amounting to Rs. 51,73,798. The assessee-firm derives income from manufacturing of emergency lights. The NP shown is against total turnover of Rs. 2,96,74,155 and Net Profit percentage is 17.4 per cent which is exceptionally high rate of net profit.

A perusal of manufacturing account reveals that assessee has shown expenses under the head ‘electricity’ at Rs. 3,894. Wages Rs. 2,25,502 and Packing expenses Rs. 1,195 only. It appears that either manufacturing activities have not been carried out by the assessee-firm or expenses.

As per fixed assets plant and machinery is worth only Rs. 27,101 whereas total sales/production has been shown at Rs. 2,96,74,155 during the period under consideration. Plant and Machinery engaged in the manufacturing process is not sufficient to generate such a huge production.

From the above facts it is clear that either the income earned by the assessee from other sources has been declared from business activities or the manufacturing expenses have not been booked properly. I have reasons to believe that income to the tune of Rs. 51,73,798 claimed as deduction under section 80-IA/80-IB has escaped assessment. As such notice under section 148 needs to be issued in this case."

8. From the perusal of the above reasons recorded it is evident that the Assessing Officer has assumed jurisdiction under section 147 of the Act since in his prima facie opinion income to the tune of Rs. 51,72,798 claimed as deduction under section 80-IA/80-IB of the Act has escaped assessment on account of the following factors :—

(a)The net profit shown of Rs. 51,73,798 against total turnover of Rs. 2,96,74,155 is 17.4 per cent which is exceptionally high;

(b)That expenses under the head ‘electricity’ at Rs. 3,894, wages at Rs. 2,25,502, packing expenses at Rs. 1,195 debited in the monthly account show that either manufacturing activities have not been carried out by the assessee-firm or expenses have been suppressed to declare maximum profit which is exempt under section 80-IA of the Act; and

(c)That as per fixed assets, plant and machinery is worth Rs. 27,101 whereas total sales/production has been shown at Rs. 2,96,74,155 during the period which is insufficient for such a huge production.

9. It is, therefore, apparent from the reasons recorded that prima facie belief of the Assessing Officer that deduction under section 80-IA of the Act was incorrectly claimed and allowed is unsupported by any material. The Assessing Officer has led no evidence whatsoever to either allege or establish that the expenses incurred were insufficient to carry out the manufacturing process. He has also led no material to assume that net profit declared by the assessee was exceptionally high rate of profit. There is also no material to allege that plant and machinery was insufficient to carry out the manufacturing process. The Assessing Officer has thus not relied upon any material or evidence, which could enable him to assume that income of the assessee has escaped assessment either by understatement of expenses or overstatement of profits. He has merely proceeded on surmises, conjectures and suspicion to observe that income of the assessee has escaped assessment which in law cannot constitute a reason to believe for invoking section 147 of the Act. Reliance is placed on the judgment of the Hon’ble Supreme Court in the case of Indian Oil Corpn. v. ITO [1986] 159 ITR 956¹ wherein it was held "that the reasons to believe is not the same thing as reasons to suspect". It is a case where the Assessing Officer’s belief is unsupported by any evidence and all the factors stated in the reasons recorded fall within the realm of suspicion. In fact plain reading of the reasons supports our conclusion, when he has observed that "either the income earned by the assessee from other sources has been declared from business activities or the manufacturing expenses have not been booked properly". Therefore, proceedings have been initiated for the purpose of investigation and no more. It is settled law that the provisions contained in section 147 of the Act cannot be used as a tool or as a provision to enable the Assessing Officer to conduct investigation. The Hon’ble Apex Court in the case of Madhya Pradesh Indl. Corpn. v. ITO [1965] 57 ITR 637 was held that, proceedings cannot be initiated for the purpose of making fishing and roving enquiries. In our opinion, the Assessing Officer was obliged in law to firstly place on record any material which enabled him to have reason to believe that income of the appellant has escaped assessment and only thereafter initiate proceedings under section 147 of the Act. In other words, until and unless, the aforesaid burden had been discharged, the Assessing Officer could not have resorted to the provisions contained in section 147 of the Act. The Assessing Officer has proceeded on mere assumptions and surmises which in law cannot be a made to assume that income of the assessee has escaped assessment. The Hon’ble Supreme Court in the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 has held as under :—

"The reasons for the formation of the belief contemplated by section 147(a) of the Income-tax Act, 1961, for the reopening of an assessment must have a rational connection or relevant bearing on formation of belief. Rational connection postulates that there must be direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated or re-opening the assessment. At the same time we have to bear in mind that it is not any and every material howsoever vague and indefinite or distant remote and far-fetched which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words "definite information" which were there in section 34 of the Act, 1922 at one time before its amendment in 1948 are not there in section 147 of the Act of 1961 would not lead to the conclusion that action can now be taken for reopening the assessment even if the information is wholly vague indefinite far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence." [Emphasis supplied]

10. In view of the above in our considered opinion the mandatory pre-condition for taking action under section 147 of the Act that the Assessing Officer should have reason to believe that income of the assessee has escaped assessment and such reason to believe must be based on some valid material has not been satisfied in the case of the appellant.

11. In light of the above in our considered opinion all of the above three factors stated in the reasons in absence of any material either individually or cumulatively can be considered a basis so as to enable the Assessing Officer to form a requisite belief that income of the assessee has escaped assessment in terms of the judgment of Apex Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra). In such circumstances, we are of the opinion that initiation of proceedings was without jurisdiction. The entire reassessment proceedings are, therefore, found to be null and void and on this basis the assessment order is liable to be quashed. We, therefore, cancel the assessment on this ground and allow ground Nos. 1 and 2 in favour of the assessee.

12. Taking up the case on merits, we find in assessment year 1998-99 that assessee has declared nil income after claiming deduction under section 80-IA of the Act of Rs. 51,72,781. During the course of reassessment proceedings, the Assessing Officer directed the assessee to explain how with meagre electricity expenses and wages of Rs. 3,894 and Rs. 2,25,502 respectively, the assessee has been able to carry out the turnover of Rs. 2,96,74,155 and declared a profit of Rs. 51,72,781 which works about 17.4 per cent of the sales. The assessee was also directed to explain the process of manufacturing since the minimal expenses on packing at Rs. 1,195 showed that only finished goods were purchased and sold in the garb of manufacturing to claim deduction under section 80-IA of the Act. In reply, assessee submitted that use of power is minimal and there was no need to use the power for heating and cooling expenses. It was submitted that the building had sufficient number of ventilators and few tube lights were used during day time. As regards manufacturing activity, it was submitted that assessee was registered with Department of Industries, Sales Tax Department and Central Excise Department and the manufacturing was being checked by their official. It was also submitted that the goods purchased and sold were supported with bills which were checked by the State Sales Tax Department at their barrier, at Parwanoo. It was further submitted that the goods manufactured were packed in the packing material of raw material. All the packing material like printed boxes, thermocol, polythenes, packing tapes etc., were received from the suppliers along with raw material. The Assessing Officer rejected the submission of the assessee and has concluded in the order of assessment that the assessee did not carry out the process of manufacturing but was engaged in trading of finished goods. In support of his conclusion he has given the following basis :—

(a)Electricity expenses incurred of Rs. 3,894 were minimal, which were just sufficient for the purpose of office use and factory use. Therefore, no electricity was used in the manufacturing process, if carried out by the assessee and the little bit manufacturing if carried out must have been with minimal labour of the workers and the major part of its turnover was of trading of finished goods;

(b)That State Excise and Taxation Department carried out the inspection of the factory at its barrier at Parwanoo to check whether the sales tax is paid on the goods sold or purchased and, it has not their concern whether finished goods or items of raw material were purchased or sold;

(c)That Central Excise Department is concerned on collecting Excise Duty payment and it does not question whether the goods were manufactured by the assessee or whether these were purchased as semi-finished or finished goods. The Assessing Officer has held that, if the assessee carried out the trading in finished goods and voluntarily pays Excise Duty than too, Central Excise officials will not raise any question;

(d)State Industries Department are concerned, only whether there existed only Industrial Unit at the place shown and carrying out the manufacturing or not. He further held that whether the activity was manufacturing or not and if it was manufacturing to what extent and how much turnover was attributable to the same and how much to trading of finished goods is not there concern;

(e)That process of manufacturing explained by the assessee itself indicates that the same was labour intensive however the expenses incurred on labour at Rs. 2,25,502 were grossly inadequate. These expenses incurred come to about Rs. 18,792 per month and this is hardly sufficient for 12 skilled workers. It was held that meagre expenses of Rs. 18,792 to carry out monthly turnover of about Rs. 24,72,846 and thereby earn net profit of Rs. 4,03,065 per month is simply impossible and appears to be highly abnormal;

(f)The emergency light claimed to have been manufactured by the assessee are generally packed in attractive printed boxes containing the information about the specifications of the product and the name of manufacture printed on it in multi-colours and such expenditure per piece of emergency light should not be less than Rs. 10 per piece; whereas the assessee has shown such expenditure at Rs. 1,195 only which is hardly sufficient for 120 pieces i.e., turnover of Rs. 50,000. It was also held that these products cannot be marketed in the boxes received with its raw material as claimed by the assessee as no suppliers of raw material will also supply the packing material of finished products with raw material. He thus held that packing expenses of Rs. 1,195 shows that the assessee manufactured only about 120 pieces of emergency lights during the year and the balance pieces were purchased as finished goods and sold;

(g)That the assessee has not employed at least 20 workers in the process of manufacturing since the activity of the assessee was such that it was carrying out without the aid of power. It was observed, in this regard as under :—

"The major work shown was of soldering of components, wire assembling and testing of PCR and testing of the quality of end product. This process consumes most of the manpower and cannot be said to have been substituted by the machine. The assessee had no plant and machinery. It had only tools. In view of above it cannot be accepted that the assessee carried out the process of manufacturing with the aid of power which would have done more work that would have reduced the requirement of workers. Thus I am of the view that the assessee was required to employ twenty or more workers in the process of manufacturing if any carried out. It had employed only 10 to 17 workers during the year. The meagre expenses on wages also show that the workers employed were not that much as were required. This fact has been confirmed by the State Industrial Department in its certificate of registration filed by the assessee with the return for the assessment year 1996-97. As the assessee had failed to employ twenty or more workers in the process of manufacturing, therefore, the deduction claimed under section 80-IA is disallowed."

(h)The evidence of bills and vouchers cannot be regarded as sufficient evidence or conclusive evidence as in the opinion of the Assessing Officer, it is very easy to procure bills of raw material and finished goods. It has been held that it is not too difficult to get under billing in terms of price of items of raw material and over billing in terms of higher sales rate and such practice in the world of businessman benefits the both parties i.e., Sellers as well as the purchasers.

13. In light of above, the Assessing Officer has proceeded to disallow the claim of deduction under section 80-IA of the Act. He has held that the assessee was engaged mainly in the trading of finished goods and, the assembled work of emergency light, if any carried out was not more than 10 per cent of the total turnover, which at best could be of Rs. 50,000. Accordingly he disallowed the claim of deduction of Rs. 51,72,781 under section 80-IA of the Act. The Assessing Officer has further observed that net profit of Rs. 51,72,781 against sales of Rs. 2,96,74,155 works out about 17.4 per cent of sales and such a high margin of net profit cannot be accepted in such line of business. In his opinion the profit declared by similar cases at Chandigarh or other places where deduction under section 80-IA/80-IB is not admissible ranges between 1 per cent to 5 per cent. In support of the above, he has given the following reasons :

(a)The assessee had not maintained the qualitative day to day record of different types of components used in the claim manufacturing of emergency lights on basis of which the cost of different models of the product could be worked out to ascertain the margin of profit actually earned by the assessee;

(b)The emergency light was already in the market before the assessee started dealing in the same. Manufacturing concerns like BPL and Media etc. were national level companies and assessee being a new entrant could not have completed with these concerns in selling its products in the market and thereby derive several times more net profit than that of theirs;

(c)The margin of profit of the assessee was in average 19.53 per cent of sales in the first five years when the assessee was entitled to 100 per cent deduction under section 80-IA. The same was sharply reduced during the 6th and 7th years then the deduction was admissible only at the rate of 25 per cent of the profits. The net profit in the assessment year 2002-03 was shown at 9.06 per cent only. This shows that the assessee seeing that he had to pay tax on 75 per cent of its profits after five years, it reduced its sales and margin of profit also;

(d)The assessee was asked to furnish the details of cost of different items claimed to have been manufactured and sale rates on which sold to verify the actual profit earned on each model of emergency lights. The assessee had not furnished the same;

(e)The partner of the firm Shri Sudhir Gulati had admitted to have travelled abroad i.e. Hongkong several times before and during the financial year 1997-98. This also proved that the assessee had been suppressing the expenses to claim higher deduction under section 80-IA of the Act;

(f)The partners of the assessee sit in the head office shown at 4299/4300, Ansari Road No. 3, Darya Ganj, New Delhi. I estimate such expenses incurred at Delhi, Head Office at Rs. 50,000 per month. The above expenses are being taken in account while estimating the actual profits of the assessee because by suppressing such expenses the assessee has managed to inflate the income for claiming maximum deduction to convert its concealed taxable income into explained capital;

(g)The assessee had supplied the details of bill-wise purchases of raw material which revealed that the same item was purchased on different rates during the year. For instance many of the PCB kits of emergency lights were purchased for price ranging from Rs. 12.48 to 15.60 and in other bills the same were purchased from Rs. 22.88 to 41.60 per piece;

(h)As regard claim of the assessee that it enjoyed incentive of sales tax exemption, therefore, the margin of profit was higher the same was not acceptable because there were other competitors of the product and in free competition market a major part of such incentive ultimately passes to the Distributors, Dealers and retail customers;

(i)The assessee had used the trademark "SUNCA", which was the property of M/s. Sunfat International Electric Products Ltd., Hongkong. The assessee claimed not to have incurred any expenditure for the use of above trade name.

14. The Assessing Officer has, therefore, held that book results of the assessee being not reliable, are not accepted and the profit derived by the assessee from its business is taken at 7 per cent of the sales which comes to Rs. 20,77,190 and the balance income of Rs. 30,95,591 was treated as income of the assessee from other undisclosed sources.

15. In nutshell it is evident from the above that findings of the Assessing Officer are two fold firstly that the assessee primarily is not engaged in manufacturing of emergency lights but engaged in trading of emergency lights and therefore, no deduction under section 80-IA of the Act is allowable to the assessee; and secondly that profits declared even from the business of trading of emergency lights are excessive and inflated and, therefore, he restricted them to 7 per cent of the total turnover instead of 19.53 per cent of the turnover and the balance declared profit have been assessed of the income from undisclosed sources. On appeal, CIT(A) too did not accept claim of the assessee and affirmed the findings contained in the order of assessment.

16. The counsel for the assessee in his submissions made detailed reference to the following submissions filed before the CIT(A) :

17. He contended that all the above submissions duly supported by evidence have been cursorily brushed aside by the CIT(A). He submitted that authorities below have failed to appreciate the claim of the assessee. It was submitted that subjective considerations have been made a basis do deny the valid and legitimate claim of the assessee. It was his contention that books of account of the assessee are correct and complete and the Assessing Officer has not stated any valid reason for holding, the same to be unreliable. The ld. D.R. supported the order of the Assessing Officer and placed reliance on the findings contained in the order of assessment and submitted that on the facts of the case both the denial of deduction and computation of income by the Assessing Officer was justified.

18. We have carefully considered the rival submissions perused the order, of assessment and material placed on record. The first and foremost issue that arises for our consideration in this appeal is in respect of disallowance of claim of deduction under section 80-IA of the Act. The factual position which remains undisputed is that assessee has been manufacturing emergency light since inception i.e. 28-10-1995 i.e. from financial year 1995-96 relevant to assessment year 1996-97. The assessee has claimed deduction under section 80-IA of the Act both in assessment years 1996-97 and 1997-98 of Rs. 16,95,358 and Rs. 62,42,673 respectively. The said claim of deduction stands duly accepted and allowed in intimation under section 143(1) of the Act, which orders have also attained finality. It has been held in Saurashtra Cement and Chemicals Industries Ltd. v. CIT [1980] 123 ITR 669 (Guj.) in the context of provisions of section 80J of the Act that once relief had been granted in the initial year of assessment then he cannot examine the question again and decide to withdraw the relief, which has been already once granted without disturbing the relief granted in the initial year. Similar view has been expressed by Bombay High Court in the case of CIT v. Paul Bros. [1995] 216 ITR 548 and it was held that there is no provision for withdrawal of deduction for subsequent years unless and until it could be established that such deduction had been withdrawn in the initial assessment year. Applying the above to the facts of the instant case, we are firstly of the considered opinion that since industrial undertaking of the assessee has been accepted to be an eligible undertaking for the purposes of allowability of claim of deduction under section 80-IA of the Act in the initial assessment year it remains an eligible undertaking even in the instant year, since the relief granted in the said year has not been disturbed and has acquired finality. Thus, the undertaking of the assessee at Parwanoo is an eligible undertaking.

19. However, the same is not an absolute proposition inasmuch as the assessee still has to establish that during the year profits of the industrial undertaking are eligible for deduction under section 80-IA of the Act. Section 80-IA of the Act provides that where the total income of the assessee includes and profits and gains derived from the business of an industrial undertaking the assessee shall be eligible for deduction of 100 per cent of such profits for the first five assessment years and 25 per cent of such profits for the next five assessment years. It has been further provided that the industrial undertaking should be engaged in the manufacturing or production of any article or thing. In other words what has been stipulated as pre-condition for claim of deduction under section 80-IA of the Act is that profits claimed to be deductible under section 80-IA of the Act should be not only profits derived from the industrial undertaking but also derived from manufacture of article or thing in the industrial undertaking. In the instant case, the Assessing Officer has held that industrial undertaking of the assessee was not engaged in the manufacturing of emergency lights but was engaged in the trading of finished goods. The Assessing Officer has supported his conclusion by various reasons, as have been set out in para 7 above. Taking up each of them it will be seen that Assessing Officer has held that no authority including the Excise and Tax Department, Sales Tax Registration, State Industries Department verified the alleged activity of manufacturing carried out by the assessee in the industrial undertaking. The purchases made by the appellant are duly supported by purchases invoices which are duly stamped at Himachal Pradesh Barrier. The Assessing Officer has not disputed that in respect of each of the purchases the assessee has been issued Form ST XXXVI, which establish the import of raw material into Himachal Pradesh. In fact assessee has claimed sales tax exemption for such purchases as per the Himachal Sales Tax Act and Rules which has been allowed. In such circumstances, the conclusion that appellant had not purchased raw material but had purchased finished goods is nothing but a figment of imagination. The unit of the assessee is registered with Department of Industries and verified by General Manager of Department of Industries. The assessee-unit is also registered with Central Excise Department and appellant has duly maintained Excise Register RG23A Part-I and Part-II and PLA, which has been checked and authenticated by Excise officials. The assessee has paid excise duty of Rs. 15.95 crores during the financial year 1997-98. The RG 1 register in this regard establishes daily production and sales approved by Excise authorities. Further RG 23 Parts I and II establishes that the stock account of inputs for use in or in relation to manufacture of final product and RG 23 Part II establishes the entry book of duty credit. Further, Personal Ledger Account shows that the assessee has been depositing excise duty over and above the adjustment of Modvat. It is thus evident that there are sufficient records as approved by various authorities to establish that the assessee is engaged in the manufacturing activity. The assumption of the Assessing Officer that neither the authority concerned whether the assessee is engaged in the business of manufacturing or not is baseless and has been arrived by overlooking the documentary evidence placed on record. The stand of the Assessing Officer is totally unsupported by material. He has not approached any of the authorities or made any enquiries from them or otherwise brought any material on record to establish that documents maintained by the assessee in compliance of statutory requirements and verified and accepted by various statutory authorities cannot be made a basis to accept the claim that assessee was engaged in manufacturing of emergency lights. The Assessing Officer has merely proceeded on his whims and fancies to arrive at such an arbitrary conclusion and, therefore, the same is totally unsustainable.

20. The next basis stated by the Assessing Officer to support the contention that there is no manufacturing is that the assessee has incurred meagre expenses on electricity. The assessee has explained in detail the reasons for such expenses on electricity by not only stating the process involved in the manufacturing activity but also furnished month-wise details of consumption of electricity. In the letter dated 17-3-2006, the assessee before the Assessing Officer has explained as under:—

"1. Reference is invited to our earlier correspondence wherein we have explained the manufacturing process. We were using soldering iron for manufacturing which consumed power 10W to 25W each. Thus if 10W soldering iron was used for 100 hours or 25W soldering iron was used 40 hours, the electric consumption was of 1 unit only. The process of soldering required moderate heating (in the absence of fans etc.) to mount chips/transistors on PCB.

Automatic screw drivers consumed power of about 15W each. There were two such screw drivers. Testing equipments were three to finally test the lights manufactured. They also consumed very low power, like 10W to 25W. All these equipments were used only when their requirement arose. Thus power consumption on these was quite low. But we manufactured our goods with the aid of power. Without soldering iron, automatic screw drivers and testing equipments, we could not manufacture emergency lights. This is clear and there is no ambiguity in this. The power consumption was low but there was use of power in our manufacturing process. Thus, we compiled with the required condition specified in the Income-tax Act, 1961.

In the building occupied by us where the manufacturing was done there were only 7 or 8 tube lights and 5 fans including 1 each in the office. The factory was well lighted as there were ventilators near the roof top. We did not use power for lighting tubes during day-time except during cloudy days. The electric consumption may be calculated accordingly. Although we have discontinued the business, the building is still there and you may visit the same and see for yourself the permanent fitting there are as per our explanation. As the building was compact, there was no need to use blowers. The weather during these days was not hot during summer due in Parwanoo being on the hills, therefore, we did not use coolers."

21. In fact the assessee has also led evidence to show that manufacturing process undertaken by the assessee involved very low consumption of electricity in the shape of test report of Electronic Regional Test Laboratories (North), Department of Information Technology, Ministry of Communications and IT wherein they have certified that the energy consumed involved in manufacturing of one piece of electronic emergency light is 0.0055KW. In view thereof the assessee has submitted that the assessee manufactured during this year 78609 electronic emergency lights which would have utilized 432.35 units of electricity and rate of electricity tariff being very low in Parwanoo (HP), the consumption of electricity in manufacturing process would amount of Rs. 649 only out of the total expenses of Rs. 389. It was thus submitted that the balance electricity was used of Rs. 3,245 only for testing, charging and repairing. From the above it is evident that the assessee had duly furnished the explanation which remains totally unrebutted by the Assessing Officer who has purely proceeded on surmises, conjectures and suspicion to assume that the expenses incurred on electricity are insufficient to carry out the process of manufacturing. In view of the above, it has to be held that electricity expenses incurred by the assessee were sufficient for the assessee to engage in the business of manufacturing of emergency light. The inference of the Assessing Officer is highly hypothetical and unsupported by shred of evidence.

22. Likewise, as regards low consumption of packing material the assessee had duly stated before the Assessing Officer as under:—

"3. Your allegation that finished packed goods were purchased is baseless as we have already explained how many times our products was checked by Barrier authorities and Excise authorities. Barrier authorities were interested in checking the sale tax incentive was available on manufacturing only. The Excise authorities used to visit our factory and verify the raw material and finished goods from time to time. There was thus no question of bringing finished goods to Parwanoo in the garb of raw material. We are also enclosing bills of purchases which clearly show that we imported raw material only. All packing material like printed boxes (inner box), thermocol, polythene, packing tape etc. were received from the suppliers along with raw material. Their cost was included in the cost of raw material. We are enclosing copy of some bills to prove this point. There was no need to purchase packing material from outside. The printed (inner) boxes were packed in outer cartons in which the raw material was received. The expenditure on packing material shown in the profit and loss account shows petty items like tape etc. purchased locally in case of emergency."

23. The Assessing Officer instead of rebutting the above explanation has only held that no supplier or raw material would supply packing material for finished goods. This conclusion too is highly vague. Once the appellant furnishes an explanation before the Assessing Officer in our opinion the Assessing Officer cannot merely disbelieve such an explanation. In case the Assessing Officer is not satisfied with the explanation furnished by the appellant either Assessing Officer ought to lead material to disbelieve such an explanation or direct the appellant to lead further evidence to support such an explanation. The Assessing Officer cannot simply hold that such an explanation is not acceptable. This approach is not judicious approach. In the case of the assessee it was explained that all packing material like printed boxes, thermocol, polythenes were received from suppliers along with raw material. It was further explained that bracket cover of the product was imported from Hongkong and each container contained 5 brackets kept in a separate compartment. The size, shape of the final product remained the same as that of the said bracket and accordingly, the containers which were kept were used for final product. The submission of the assessee has remained totally uncontroverted. The Assessing Officer other than stating that such a claim is not acceptable since no supplier of raw material would supply packing material of finished goods has not led any evidence to reject the explanation of the assessee. Therefore, the Assessing Officer was not justified in rejecting the explanation merely on the basis of conjectures and surmises. In absence of any contrary evidence having placed on record, we find merit in the submission of the assessee and therefore, hold that packing expenses incurred were also sufficient to engage in the business of manufacturing.

24. The Assessing Officer has further supported his conclusion in respect of manufacturing activities incurred by the assessee by holding that the bills and vouchers furnished are not reliable for the reason because it is easy to procure under billing of purchases of raw material an overbilling of finished goods. No material whatsoever has been furnished to support his conclusion. The Assessing Officer has merely recorded findings which are unsupported by any material and, thus, the same cannot be made any basis. In view of above we find that each of the basis given by the Assessing Officer to hold that the assessee was not engaged in the business of manufacturing of industrial undertaking is untenable and unsubstantiated and, therefore, unsustainable. We, therefore, hold that the assessee was engaged in the business of manufacturing of emergency lights and the profits derived from the industrial undertaking, were from manufacturing of emergency lights and not derived from trading of emergency lights.

25. The next issue which has also been raised by the Assessing Officer to disallow claim of deduction under section 80-IA of the Act is that the assessee had not employed adequate number of workers to carry on the business of manufacturing as have been stipulated in section 80-IA(2) clause (iv) of the Act. According to the Assessing Officer the assessee ought to have employed twenty employees as the business of the assessee had been carried out without the aid of the power. This finding of the Assessing Officer is factually incorrect and legally misplaced. No evidence has been placed on record to establish that the business of the assessee had been carried out without the aid of power. In fact, the evidence as led by the assessee clearly establishes that it was engaged in the business of manufacturing of emergency lights and the same had been manufactured with the aid of power. There is no dispute that the assessee had duly employed 10 or more employees during the instant year and, therefore, in our considered opinion the assessee had duly fulfilled the requisite conditions specified in clause (iv) of section 80-IA(2) of the Act.

26. In light of the above we, therefore, not only hold that the undertaking of the assessee is industrial undertaking eligible under section 80-IA of the Act but also hold that the profits of the undertaking of the assessee are eligible for deduction under section 80-IA of the Act since it not only carried out the manufacture of emergency light in the instant year but also had the requisite number of employees to carry out the process of manufacture of emergency light. In light of the above we thus hold that the assessee is entitled to claim deduction under section 80-IA of the Act. We may conclude this aspect by only stating that each of the reasons made as a basis to deny the legitimate claim of the assessee are based on mere surmises, conjectures and suspicion. The Assessing Officer has not brought any cogent material on record to establish the industrial undertaking of the assessee was not engaged in the manufacturing of the emergency lights and that it was engaged in trading of emergency lights. It has been consistently held cases that suspicion howsoever strong cannot take the place of proof. In fact in Dhirajlal Girdharilal v. CIT [1954] 26 ITR 736 (SC), it was held that, when a Court of fact acts on material, partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the Court was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated because of the use of inadmissible material.

27. The next issue which arises for our consideration is what are the quantum of the profits eligible for claim of deduction under section 80-IA of the Act. During the year the assessee had declared profits of Rs. 51,72,781. The entire profits declared by the assessee are supported by books of accounts maintained by the assessee including the cash book, ledger bill, books of excise and others including vouchers. The Assessing Officer has not recorded any finding or has not found any defect much less any specific defect in the books of account. He has not established in any manner that either sales were suppressed or any of the expenditure incurred were bogus. The Assessing Officer’s conclusion that the profits declared were exorbitant is based on general hypothesis and presumptive assumptions. The Assessing Officer has applied the rate of 7 per cent of the turnover to compute the profit of the industrial undertaking whereas the assessee has declared 19 per cent of the turnover. Firstly no basis has been given by the Assessing Officer to adopt 7 per cent and, therefore, the same is otherwise unsustainable, in light of the judgment of the Apex Court in the case of State of Orissa v. Maharaja B.P. Singh Deo [1970] 76 ITR 690 wherein it has been held as under:—

"Apart from coming to the conclusion that the material placed before him by the assessee were not reliable, the Assistant Collector has given no reasons for enhancing the assessment. His order does not disclose the basis on which hehas enhanced the assessment. The mere fact that the material placed by the assessee before the assessing authorities is unreliable does not empower those authorities to make an arbitrary order. The power to levy assessment on the basis of best judgment is not an arbitrary power; it is an assessment on the basis of best judgment. In other words, that assessment must be based on some relevant material. It is not a power that can be exercised under the sweet will and pleasure of the concerned authorities. The scope of that power has been explained over and over again by this Court." [Emphasis supplied]

28. In light of the above since the adoption of rate of 7 per cent itself is supported by no basis the Assessing Officer was not justified to restrict the profits of the industrial undertaking at 7 per cent. However even the reasons stated by the Assessing Officer are also not tenable. Non-maintenance of day to day stock records cannot be made the sole basis to hold that the accounts of the assessee are not reliable. What has to be seen is whether the income of the assessee can be deduced from the books of account maintained by the assessee. The assessee led complete material and none of the material has been found to be either incorrect or incomplete for the purpose of rejection of books of account. In fact section 145 of the Act has also not been specifically invoked by Assessing Officer. Even otherwise, it has been consistently held that mere non-maintenance of stock register cannot be made a basis to reject books of account and adoption of arbitrarily rate of profit. Also the fact that in subsequent years the assessee has shown a net profit cannot be made a basis to assume that the profit declared in the instant year are high or exorbitantly high, in absence of any specific discrepancy in the accounts of the year under consideration which either alleges that profits are overstated or expenses are understated. The Assessing Officer has not supported his findings by leading evidence. We may add here that variation in profits can be caused for investigation but that cannot be a case of arriving at a conclusion to support the conclusion. In the instant case we find that the Assessing Officer has merely proceeded on surmises, conjectures to draw and adverse inference against the assessee.

29. In fact in the instant case the assessee has clearly stated that there was no suppression of expenses on travelling rent of building at Ansari Road and on Trademark. It has been established that travelling to Hongkong was undertaken by the partner in connection with his independent and separate business and the premises at Ansari Road, Delhi belonged to one of the partners and as such no rent was paid as is evident from the evidence placed in Paper-Book. So far as trademark expenses, it has not been shown that any expenditure was incurred, which remained to be account for in the books of the assessee. In view of above Assessing Officer was not justified in holding that books of account are not reliable or restricting the profits from 18.53 per cent to 7 per cent. We, therefore, conclude that the entire profits declared by the assessee were correct and same were eligible for deduction under section 80-IA of the Act.

30. Taking up the appeal for assessment year 1999-2000. The foremost issue raised hereto is in respect of initiation of proceedings under section 147 of the Act. The reasons recorded by the Assessing Officer are identical to the reasons recorded for assessment year 1999-2000 other than two additional reasons i.e. provisions contained in sections 80-IA(9) and (10) of the Act are attracted and the assessee does not have the regular number of workers for engaging in the manufacturing activities. Both the above reasons are also vague. In the reasons recorded no basis whatsoever has been stated to establish or allege that these conditions are attracted. In fact here is a case there the Assessing Officer has merely drawn an inference on the basis of assumption that since profit declared is high, therefore, sections 80-IA(9) and 80-IA(10) are attracted. The Assessing Officer has even not cared to examine the provisions contained is section 80-IA of the Act before observing that they are attracted. Section 80-IA(10) of the Act is applicable only when there are dealings between the assessee with another sister concern and not otherwise. In the instant case, the Assessing Officer in the reasons recorded has not showed in any matter that there are dealings between the assessee with another sister concern and therefore, provisions contained in section 80-IA of the Act could not have been invoked by the Assessing Officer. Likewise so far as the conclusion that there are regular number of workers were not employed is also misconceived. It is again an inferential reason, which is too an surmiseful assumption. The Assessing Officer presuming that electricity expenses are meagre has held manufacturing process employed by the assessee is without aid of power and, therefore, he has to employee 20 or more workers. The conclusion here is too misconceived. The finding that the assessee is engaged in the manufacturing of emergency light and mere fact that electricity are meagre does not call for any basis to hold that income of the assessee has escaped assessment. In view of the above we are of the opinion that reasons recorded for assessment year 1999-2000 are misconceived. We, therefore, also quash the proceedings for the instant assessment year 1999-2000.

31. On merits the facts of the assessee are identical to the facts for immediately preceding assessment year and, therefore, for the reasons stated in assessment year 1998-99 the claim of the assessee is directed to be accepted.

32. In the result the appeals filed by the assessee is allowed.

 

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