Delhi High Court: A Division Bench of the High Court elaborated on Sections 80-IA and 145 of the IT Act in two appeals against a common order of the ITAT.

The facts are that the assessee, who was the proprietor of M/S Vi-John International, Delhi was engaged in the manufacturing of cosmetic goods. The assessee filed a return for Assessment Year 2006-07 declaring an income of Rs. 2,02,760. The AO, during the assessment procedure issued a questionnaire following which, the AO framed the assessment at Rs. 1,47,00,040. The AO noted that the units of the assessee located at Baddi were making an abnormally high gross profit when compared to the gross profits of units located in Delhi, these units were selling their products through another related concern of the family on a consignment basis. The AO accounted for the advantages that accrued to the units at Baddi, however, he fixed the average gross profit to 23% instead of 38.05% as declared by the assessee, consequently the net profit for deduction under Section 80-IC of the IT Act was computed at 21% and a difference was added back to the income of the assessee. In the succeeding Assessment Year 2007-08, the AO on a similar calculation added back the difference in the gross profit by taking it at a maximum of 25% instead of the reported 43.07%. The assessee approached the CIT(A) which allowed the appeal and held that the assessing officer had incorrectly calculated the gross profit rates. The Revenue went in appeal which was dismissed by the ITAT. The ITAT concluded that the AO invoked Section 80-IC read with Section 80-IA(8) and (10) “on the basis of conjectures and surmises only without having an iota of material on record and as such, the question is answered in favour of the assessee.”

The Court analysed the proviso to Section 80-IA (8) stating that the CIT(A) and ITAT were correct in not allowing the appeal. The Court held that under Section 80-IA(8) of the Act, the one of the prerequisite for the AO to not grant deduction as claimed by the assessee in his return is where the AO finds the consideration at which transfer of goods were made do not correspond to market value, further the proviso to the section states that the AO has to explain with sufficient clarity why the AO is rejecting the profit figures as put forth by the assessee. The Court took note of the fact that outrightly rejecting the figures without giving reasonable justification on a presumption by comparing the trading results of two businesses was not correct in law. The appeals were dismissed. [Pr. Commissioner of IT v. Harpreet Kaur, 2017 SCC OnLine Del 9397, decided on 24.07.2017]

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