Income Tax Act, 1961

--Deduction under sections 80-IA and 80-IB--Computation Expenses relating to printing work--Assessee was engaged in business of printing and publishing magazines. It had four units for this purpose. During assessment years 1997-98 to 1999-2000, it claimed deduction under section 80-IA and it also claimed deduction under section 80-IB for assessment years 2003-04 and 2004-05. Assessee's fourth unit was carrying out the job work of printing for publishing unit. Assessing officer relying on sub-sections (8), (9) and (10) of section 80-IA held that profit of assessee from fourth unit was to be recomputed. assessing officer observed that expenses relating to cost of paper and expenses were liable to be allocated to fourth unit also. Ownership of newsprint, paper and other material supplied by publishing house to fourth unit for carrying out printing work continued to vest with publishing house. Where printing was done by fourth unit on behalf of first unit, paper would be belonged to assessee but costs thereof were liable to be borne exclusively by publishing business, i.e., the first unit. For assessment years 2003-04 and 2004-05, assessing officer rejected claim with respect to fourth unit, on the ground that assessee had shown huge profits. He reallocated expenses and recomputed profit of fourth unit, which were eligible for deduction under section 80-IB. assessing officer held that no deduction under section 80-IB was allowable to fourth unit, if cost of papers, packing and forwarding charges were also included in the costs incurred by fourth unit. However, Commissioner (Appeals) and as well as Tribunal allowed assessee's claim under sections 80-IA and 80-IB. Held: Rightly so, nature of business of first unit and the fourth unit of assessee were entirely different and there was no justifiable reason for assessing officer to compare profit margin of two units. Assessee had maintained separate books in respect of fourth unit and no specific defects had been pointed out by assessing officer, which were produced before him, as such assessee was entitled to deduction under sections 80-IA and 80-IB as claimed by assessee. Fourth unit was entitled to job work charges only.

It is not in dispute that the assessee has maintained separate books of account for unit No. 4 and the only issue to be addressed is whether the expenses allocated to unit No. 1 are to be taken into account for determining the eligible profits from unit No. 1. The assessing officer relied on the provisions of section 80-IA(9) and section 80-IA(10) to come to a conclusion that the profits attributable to unit No. 4 were liable to be recomputed. The assessing officer held that the expenses relating to cost of paper and other expenses were liable to be allocated to unit No. 4 also inasmuch as in his view, section 80-IA(7) required that the profits from the eligible business must be computed as if the eligible business was the only source of income for the assessee. The ownership of newsprint, paper and other materials supplied by publishing houses to unit No. 4 for carrying on printing activity continue to vest with publishing houses. In cases where unit No. 4 carries on printing activity for other entities, the paper would not belong to the assessee, the paper as well as the rights on the content being printed in unit No. 4 would vest with other entities. In the case of the printing being done by unit No. 4 on behalf of unit No. 1, the paper would belong to the assessee but the costs of which are liable to be borne exclusively by the publishing business, i.e., unit No. 1. [Para 24] It is not in dispute that the printing charges charged by unit No. 4 to unit No. 1 were comparable to the market rates. It is a matter of record that during the period relevant to the assessment years 1997-98 and 1999-2000 unit No. 4 was charging 77 paise per sheet for printing work done for third parties and 70 paise per sheet for printing done for unit No. 1. The assessing officer has also not found any manipulation or defect in the separate books maintained for unit No. 4. Section 80-IA(10) makes it mandatory for the assessing officer to re-compute the profits from eligible business in cases where on account of close connection between the asses-see carrying on eligible business and any other person, the affairs of the assessee with respect to the eligible business are so arranged as to give rise to higher profits to the assessee. In such cases, the assessing officer is required to compute the amount of profits as may be reasonably derived from the eligible business. Section 80-IA(9) deals with situations where goods held for the purposes of eligible business are transferred to another business carried on by the assessee and the consideration at which such transfer is recorded is not the market value. In such cases the assessing officer is required to determine the profits of the eligible undertaking by taking into account the market value of the goods transacted between the businesses carried on by the assessee. [Para 24] In the present case, there is no material to support the view that the job work charges charged by unit No. 4 from unit No. 1 were not at market rates. This court is in agreement with the view taken by the Tribunal that in the absence of any defect or manipulation found by the assessing officer in the books maintained for unit No. 4 and in the absence of any material to indicate that the amount charged by unit No. 4 from unit No. 1 was not at comparable market rates, it would not be open for the Revenue to disregard the profits of unit No. 4 as disclosed by the assessee only on the basis that the profits were significantly higher than the profits earned by the assessee from other undertakings. [Para 26] Given the fact that unit No. 4 carries on job work of printing only, the expenses attributable to unit No. 1 which relate to the publishing business cannot be allocated to unit No. 4. Only those expenses which relate to the printing work carried on by the assessee in unit No. 4 are liable to be deducted from the job charges to arrive at the profits eligible for deduction under section 80-IA or section 80-IB, as the case may be. [Para 27] Commissioner (Appeals) and the Tribunal were correct in holding that the assessee was entitled to deduction under section 80-IA and section 80-IB on the book profits of unit No. 4 as disclosed by the assessee. [Para 29]