ITAT Delhi Rules on Section 80-IC: Allegations of Business Shifting and Bogus Expansion Rejected in Absence of Conclusive Evidence
In a significant ruling concerning the eligibility of industrial undertakings for tax incentives, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has reinforced the principle that statutory deductions cannot be denied based on mere suspicion or conjecture. The Tribunal, in the case of DCIT Vs Lotus Herbals Colour Cosmetics, adjudicated on the validity of deductions claimed under Section 80-IC of the Income Tax Act 1961.
The Revenue Department had challenged the deduction, alleging that the assessee had engaged in "business shifting" from a formerly eligible entity to artificially prolong tax benefits. The Tribunal, however, upheld the findings of the Commissioner of Income Tax (Appeals), ruling that the assessee had genuinely undertaken eligible business activities and that the Revenue failed to provide concrete evidence of sham transactions or bogus expansion.
Factual Matrix of the Dispute
The core of the dispute arose during the assessment proceedings for Assessment Years (AY) 2018-19 and 2019-20. The assessee, a partnership firm, was originally incorporated on August 12, 2009. Following the demise of a partner and subsequent reconstitution in 2015, the firm continued its operations with partners Mrs. Swarn Lata Passi, Mr. Nitin Passi, and Mr. Dipin Passi.
Nature of Business and Claim
The assessee operated an industrial unit located in Baddi, Himachal Pradesh. Historically, this unit was engaged in the manufacturing of make-up products. However, during the Financial Year (FY) 2017-18, the assessee diversified its manufacturing portfolio to include skin care and allied products.
For the AY 2018-19, the assessee filed a return declaring income and claiming a deduction amounting to Rs. 27,92,96,406 under Section 80-IC of the Income Tax Act 1961. This claim represented the ninth year of the deduction period for the Baddi unit. The profits eligible for this deduction included earnings from both the existing make-up line and the newly introduced skin care products.
The Survey and Assessment
The tax authorities conducted a survey under Section 133A of the Act. Utilizing materials gathered during this survey, the Assessing Officer (AO) scrutinized the deduction claim. The AO formed the view that the assessee was not entitled to the full deduction, specifically targeting the profits attributed to the skin care division. Consequently, the AO passed an order under Section 143(3), disallowing a substantial portion of the claim, amounting to Rs. 20,79,90,525.