P.M. Jagtap, Accountant Member - These three appeals preferred by the revenue against three separate orders of the CIT(A), involve a common issue and the same, therefore, are being disposed of by this consolidated order.

1.1 ITA No. 1761/Del/2001 and ITA No. 4178/Del/2001 are the revenue’s appeals directed against the order of the learned CIT(A)-V, dated 31st Jan., 2001 and 23rd Aug., 2001 for assessment years 1997-98 and 1998-99, respectively, whereas ITA No. 3665/Del/2002, is directed against the order of the learned CIT(A)-XIII, dated 28th June, 2002 for assessment year 1999-2000.

2. In the solitary ground originally raised, which is common in all these three appeals, the revenue has challenged the action of the learned CIT(A) in directing the Assessing Officer to allow deduction under section 80-IA of the Income-tax Act on the basis of book results of unit 4.

2.1 The facts which are material and relevant to decide the common issue involved in the present appeal are as follows:

The assessee is a company, which is engaged in the business of printing and publication of a number of magazines. In its return of income filed for the year under consideration, deduction under section 80-IA of the Act was claimed by the assessee is respect of its unit No. 4 stating that the said unit located at Faridabad was completely independent industrial manufacturing unit undertaking the job of printing of newspapers and magazines as also binding thereof. During the course of assessment proceedings before the Assessing Officer, it was submitted on behalf of the assessee-company that the said unit satisfies all the conditions laid down in the relevant provisions for claiming the deduction under section 80-IA of the Act. The Assessing Officer found that the major work done by unit No. 4 was for its unit No. 1 situated at Jhandewalan. Before the Assessing Officer, a statement of income and expenditure of unit 4 prepared separately was also filed by the assessee-company. The Assessing Officer, however, found that the operating profit margin of unit 4 as per the said statement was shown at about 62 per cent whereas the margin of profit shown by the assessee-company as a whole was only to the extent of 10 per cent. He, therefore, held that the said income and expenditure statement prepared and filed by the assessee in respect of unit 4 was not reliable and there were some serious inconsistencies in the mode of valuation done for unit No. 4 as compared to the overall price mechanism of the assessee. According to him, the business of unit 4 as well as profit derived from the said unit was directly dependent on the marketing and distribution of unit No. 1 of the assessee and, therefore, all the expenses of unit No. 1 relating to marketing and distribution ought to have been taken into account while determining the profit of unit 4. He also observed that the line of business of both the units being similar, there was no reason to have such huge difference/variation in the profit margin of both the units. He, therefore, applied the profit rate of 10 per cent of the sales made by the said unit No. 4 to unit No. 1 as against 62 per cent shown by the assessee and recomputed the profit of the said unit as follows, placing reliance on the provisions of sub-section (10) of section 80-IA of the Act.:

2.2 Accordingly, the claim of the assessee, for deduction under section 80-IA of the Act was restricted by the Assessing Officer to Rs. 49,93,661 being 30 per cent of the profits of unit 4 as computed above in the assessment completed under section 143(3) of the Act.

3. Aggrieved by the aforesaid assessment made by the Assessing Officer, the assessee-company preferred an appeal before the learned CIT(A) and it was submitted on its behalf before her that unit No. 4 was set up in Hyderabad (Faridabad) by it in the year 1995 as a complete independent industrial manufacturing unit. It was also submitted that the said unit was set up in a newly constructed building and even the plant and machinery installed therein was entirely new. It was pointed out that separate books of account were maintained in respect of the said unit and the same were also produced before the Assessing Officer for verification during the course of assessment proceedings. It was pointed out that no defect whatsoever was pointed out by the Assessing Officer in the said books of account. It was contended that the Assessing Officer was not empowered to apply the overall profit rate of the assessee-company to determine the income of unit 4 especially when the line of business of various units of the assessee was different and no defects were pointed out in the books of account maintained in respect of unit 4 showing a higher profit of 62 per cent. It was also pointed out that the rates charged by unit 4 to other units of the assessee including unit No. 1 were even lower than the market rates and the Assessing Officer was not justified in holding the said rates to be exorbitant without bringing any material on record to support this allegation. It was also contended that the provisions of sub-section (8) or sub-section (10) of section 80-IA of the Act were not applicable to the facts of the assessee’s case and the Assessing Officer was not correct in invoking the said provisions. Reliance in support of this contention was placed on behalf of the assessee-company on the decisions in Commissioner Of Income-Tax v. Godavari Corporation Ltd. [1985] 156 ITR 835 (MP) and Punjab Con-Cast Steel Ltd. v. Asstt. CIT [1994] 49 ITD 430 (Chd.).

4. The aforesaid submissions made on behalf of the assessee-company found favour with the learned CIT(A) and she directed the Assessing Officer to allow the deduction claimed by the assessee-company under section 80-IA of the Act on the basis of book results of unit 4 for the following reasons given in para Nos. 9 to 11 of the impugned order for assessment year 1997-98:

"9. The submissions of the appellant are considered. The first issue is whether sub-section (10) of section 80-IA can be applied in a case where there is a close connection between the assessee carrying on the eligible business and an undertaking belonging to the same company. As per the provisions of the Act, this sub-section would apply in the case of close connection between the assessee and "any other person". The phrase ‘any other person’ is a wide phrase and would cover any undertaking whether run by the same industrial house or whether rune by separate industrial house. The contention of the appellant that this sub-section would not apply to a case where the industrial undertaking is run by same house is without merit. It now remains to be seen whether in the present case there was enough reason for the Assessing Officer to invoke the provision of sub-section (10) and if so whether he was justified in applying the profit rate of 1 per cent on sales made by unit 4 to unit 1. In this background, I requested the appellant to specify the reasons on account of which unit 4 had substantially higher rate of profit as compared to unit 1 and the other units run by the appellant.

10. The appellant has given the following factors for higher profit of unit 4:

(i)Newly installed machinery at a double the speed of machinery installed in unit III and may be 100 times small machines installed in unit 1;

(ii)Lowest rate of wages, lease labour since the workers are new appointees;

(iii)Minimum consumption of power, ink and other consumable items.

11. Considering the reasons enumerated above, there was adequate justification for the rate of profit of unit 4 to be substantially higher than that of unit 1. Beside as pointed out there is a difference in the nature of business insofar as one is trading house and the other is a production house. Besides to reject the profit shown by the assessee, the Assessing Officer has to point out some instances where the appellant has inflated her profits either by charging higher rates or by suppressing her expenditure. The Assessing Officer has failed to give such an instance of manipulation by the assessee. Under these circumstances there can be no addition or estimate of profit on the basis of the operating result of different units run by the assessee. The Assessing Officer is directed to allow the deduction claimed under section 80-IA on the basis of book results of units 4."

4.1 The aforesaid decision rendered in assessment year 1997-98 was subsequently followed by the learned CIT(A) while deciding the similar issue in favour of the assessee in their appellate order for assessment years 1998-99 and 1999-2000, which are impugned in the appeals of the revenue for these years.

5. We have heard the arguments of both the sides and also perused the relevant material on record. As has been pointed out on behalf of the assessee-company before the authorities below as well as before us, unit 1 was its publishing house whereas units 3 and 4 were its printing houses. The nature of business of unit 1 and unit 4 of the assessee, thus, was entirely different and there was no justifiable reason to compare the profit margin of the said units. Moreover, separate books of account were maintained by the assessee-company in respect of unit 4 and no material or specific defects were pointed out by the Assessing Officer in the said books which were duly produced before him for verification during the course of assessment proceedings. As noted in the order of the Assessing Officer as well as in the order of the learned CIT(A), the printing work was being done by unit 4 of the assessee-company for unit 1 at fixed rates and the claim of the assessee that the said rates were even lower than the market rates was not rebutted/refuted by the Assessing Officer by bringing any material on record. As rightly contended by the learned counsel for the assessee before us, the expenditure on marketing and distribution of the publications was entirely required to be done for the business of publishing house i.e. unit No. 1 and the same was not connected with the printing business of unit 4. It appears that all these material and relevant aspects, however, were simply brushed aside by the Assessing Officer and he proceeded to reject the book results of unit 4 shown by the assessee merely on the basis that the profit margin shown by the assessee in respect of the said unit was higher at 62 per cent as against profit margin of 10 per cent shown in respect of other units of the assessee. In our opinion, this action of the Assessing Officer was not sustainable in law in the facts and circumstances of the present case including especially the fact that no material or specific defects were pointed out by him in the books of account maintained by the assessee in respect of unit 4 and there was nothing brought on record by him to show that the profit margin of 62 per cent shown in the said books was actually lower. On the other hand, such higher profit margin in respect of unit 4 was satisfactorily explained by the assessee-company and having satisfied with such explanation, the Assessing Officer was directed by the learned CIT(A) to allow the deduction claimed by the assessee under section 80-IA of the Act on the book results of unit 4. As such, considering all the facts and circumstances of the case, we are of the view that the relief allowed by the learned CIT(A) on this issue to the assessee was fully justified and there being no infirmity in the impugned orders of the learned CIT(A) allowing such relief, we uphold the same.

6. During the course of appellate proceedings before us, the revenue has raised the following additional ground in its appeal for assessment year 1997-98 in ITA No. 1761/Del/2001 :

"For the computation of eligible profits under section 80-IA(5), for each individual unit profits are to be determined after taking into consideration the earlier year losses of respective individual unit which has not been looked into by the learned CIT(A) while giving directions in this regard."

7. The learned counsel for the assessee has not raised any objection for admission of the aforesaid additional ground. He, however, has contended that the losses of earlier years of unit 4 had already been absorbed/set off against the profits earned by the said unit prior to the assessment year 1997-98. He has submitted that the assessee, however, has no objection if this matter is restored to the file of the Assessing Officer for the required verification. Accordingly, we restore this issue to the file of the Assessing Officer with a direction that the unabsorbed losses of unit 4 of earlier years, if any, be adjusted against the profits of the said unit for assessment year 1997-98 and accordingly the deduction under section 80-IA be restricted.

8. In the result, the appeals of the Revenue for assessment years 1998-99 and 1999-2000, being ITA No. 4178/Del/2001 and ITA No. 3665/Del/2002 are dismissed whereas the appeal for assessment year 1997-98 being ITA No. 1761/Del/2001, is treated as partly allowed, for statistical purposes.