Rajesh Kumar, J. - (1.) The Income Tax Appellate Tribunal has referred the following two questions under Section 256(1) of the Income-tax Act (hereinafter referred to as "Act") relating to the assessment years 1992-93 for opinion to this Court: "(1) Whether on the facts and in the circumstances of the case, the IT AT was legally justified in deleting the addition of Rs.48.98 lacs made by the A.O. on account of lowering of prices of the goods sold which the ITAT have allowed as a measure of business expediency? (2) Whether on the facts and in circumstances of the case, the" ITAT was legally justified in directing to compute the deduction under Section 80-I on total income without excluding any deduction Under Section 80 HH over looking the provisions of Sub-section (9) of Section 80HH?"
(2.) The brief facts of the case are as follows: The assessee/opposite party (hereinafter referred to as "assessee") is a public limited company engaged in the manufacture and sale of various items such as hair oil, toothpaste, shaving cream, perfumes etc. The main buyer of the product was Dabur India Limited who have sold them under their own brand name. The Assessing Authority found that there was a steep fall in the sale from Rs.27,87 crores in the previous preceding year to Rs. 16.76 crores and gross profit from Rs.4,49,26,484/- to Rs, 1,23,40,225/- and gross profit rate from 20.9 percent to 9.52 percent. The assessee was asked to explain about the fall in the. gross profit. The reason for fall in the G.P. has been given as follows: i) Fall due to lowering of prices. Rs.48.98 lacs. ii) Increase in manufacturing and operational expenses. Rs.31.37lacs. iii) Increase in materials cost (out of this a sum of Rs.62.25 lacs. Rs.29.22 lakhs is on account of increase in the rates of GN oil, mineral oil and til oil). Total Rs. 142.60
(3.) The Assessing Authority accepted the reasons given at serial nos. 2 and 3. but did not give benefit for lowering of the prices of the goods for sale to Dabui India Limited. The Assessing Authority, accordingly, made addition o; Rs.48.98,000/- towards extra profit. The Assessing Authority has also allowed the claim under Section 80I of the Act at gross total income as reduced by the deduction under Section 80HH of the Act. The assessee filed appeal before the Commissioner of Income tax (Appeals). The Commissioner of Income tax (Appeals) has confirmed the addition of Rs.48,98,000/-. The Commissioner o Income tax (Appeals), however, accepted the plea with regard to the claim o deduction under Section 80I of the Act and held that the calculation for th purposes of allowing deduction under Section 80I of the Act has to be done on th whole amount of gross total income and not on the remainder after givin allowance under Section 80HH of the Act. The Commissioner of Income Ta (Appeals) has made following observation for confirming the addition c Rs.48,98,000/-. "I have gone through the facts brought on record by the A.O. as well as the submissions made by the Learned A.R. of the appellant. The reasons given for fall in G.P. rate by the appellant appear to be quite strange. With the Sales-tax exemption, the appellant was supplying at higher rates and when the exemption was withdrawn, the appellant company started selling at lower rates. In fact this should have been otherwise. It is relevant to note that for A.Y. 91-92, the appellant had given discount on sales to the buyers while no discount was given for A.Y. 92-93 under reference. If this was the situation, it is not understood why the appellant would supply at a lower rates despite increase in manufacturing cost due to various elements like increase in cost of raw material and withdrawal of sales-tax exemption. All the facts on the record indicate that the appellant was a captive manufacturing unit for M/S Dabur India Ltd. This is more evident from the facts that the director of the appellant company are employees of M/S Dabur India Ltd and they were under the command of M/S Dabur India Ltd so much so that they could not even wait in the Income-tax office in compliance of summons issued by the A.O. beyond a particular time. The plea of the appellant company that they had to fall in line as other suppliers started supplying at a lower rate does not hold for want of details and prudency in conducting the business. The appellant company had not brought out any fact . indicating that a new competitor offering lower rates had entered into the supply sphere of the appellant. Considering the above facts, the only conclusion which could be drawn is that the lowering of prices by the appellant company was not for the purpose of business or the business expenditure required such cut in rates but for some extraneous consideration. The A.O. was, therefore, correct in making addition of Rs.48,98,000/- which represented the fall in sale receipts due to lowering of prices by the appellant company. The addition of Rs.48,98,000/- is, therefore, confirmed.";