Income Tax Appellate Tribunal - Delhi
Rallison Electricals Pvt. Ltd., New ... vs Addl. Cit, New Delhi on 22 June, 2017
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IN THE INCOME TAX APPELLATE TRIBUNAL
[ DELHI BENCHES: "F" NEW DELHI ]
BEFORE SHRI I. C. SUDHIR, JUDICIAL MEMBER
AND SHRI O. P. KANT, ACCOUNTANT MEMBER
ITA. No. 2405/Del/2012
AND ITA. No. 1600/Del/2013
Assessment Years : 2008-09 & 2009-10.
Rallison Electricals Pvt. Ltd., The Addl. Commissioner
GI - 118, Phase - II, Vs. of Income Tax,
Mayapuri Industrial Area, Range : 15,
New Delhi - 110 064. New Delhi.
PAN : AAACR 4510 P
AND
ITA. No. 2979/Del/2014
Assessment Year : 2010-11.
Deputy Commissioner Rallison Electricals Pvt. Ltd.,
of Income Tax, Vs. GI - 118, Phase - II,
Circle : 15 (1), Mayapuri Industrial Area,
New Delhi. New Delhi - 110 064.
PAN : AAACR 4510 P
(Appellants) (Respondents)
Assessee by : Shri Satish Aggarwal, C. A.;
Department by : Shri F. R. Meena, Sr. D. R.;
Date of Hearing : 27.03.2017
Date of Pronouncement : 22.06.2017
O R D E R.
PER I. C. SUDHIR, J. M. :
All the three appeals, two by the assessee for the assessment
years 2008-09 and 2009-10 and one by the Revenue for the
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assessment year 2010-11 were heard together and are being
disposed off, for the sake of convenience, by this common order.
ITA. No. 2405/Del/2012 :
2. The assessee has questioned first appellate order on the following
revised grounds of appeals :-
1. That the order of the Ld. Commissioner of Income Tax (Appeals),
XVIII is arbitrary, biased and bad in law and in facts of the case in so
far it confirm the order of the Assessing Officer.
2. That the Learned CIT (Appeals) has grossly erred in confirming
the action of the assessing officer in treating the business loss from
commodity trading of Rs. 50,61,174/- as speculative loss.
3. That the Learned CIT (Appeals) has grossly erred in confirming
the action of the Assessing Officer in making a notional addition of
Rs.1,00,000/- as alleged administrative and finance cost incurred on
commodity trading.
4. That the Learned CIT (Appeals) has grossly erred in confirming
the addition made by the Assessing Officer u/s 80 IC by reducing the
deduction claimed by the appellant making the below mentioned
disallowances/ additions :
a) That the Learned CIT (Appeals) has grossly erred in confirmingthe
reduction of Rs.52,69,333/- in the profit of Baddi unit eligible for
deduction under section 80IC by treating the same as alleged over
valuation of stock. '
b) That the Learned CIT (Appeals) has grossly erred in confirming the
action of the Assessing Officer in reducing the deduction claimed
under section 80IC by Rs.2,08,03,079/- on apportionment of
expenses including that of depreciation on the basis of
manufacturing turnover of Baddi unit to gross manufacturing
turnover of all manufacturing units including Baddi unit.
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c) That the Learned CIT (Appeals) has grossly erred in confirming
the estimated reduction of Rs. 28,57,222/- from the profits of the
Baddi unit eligible for deduction under section 80IC of the Act,
being estimated profit of the branches and head office @ 1% of
turnover of Baddi unit for affecting sales of Baddi unit.
d) That the Learned CIT (Appeals) has grossly erred in holding
that interest of Rs.20,23,000/- on fixed deposit of Baddi unit is not
eligible for deduction under section
80IC of the Act. "
ITA. No. 1600/Del/2013 :
3. The assessee has questioned first appellate order on the following
revised grounds of appeals :-
1. That the order of the Ld. Commissioner of Income Tax (Appeals),
XVIII is arbitrary, biased and bad in law and in facts of the case in so
far it confirm the order of the Assessing Officer.
2. That the Learned CIT (Appeals) has grossly erred in confirming
the action of the assessing officer in treating the business loss from
commodity trading of Rs.9,58,188/- as speculative loss.
3. That the Learned CIT (Appeals) has grossly erred in confirming
the action of the Assessing Officer in making a notional addition of
Rs.10,000/- as alleged administrative and finance cost incurred on
commodity trading.
4. That the Learned CIT (Appeals) has grossly erred in confirming
the addition made by the Assessing Officer u/s 80 IC by reducing the
deduction claimed by the appellant making the below mentioned
disallowances/ additions :
a) That the Learned CIT (Appeals) has grossly erred in confirmingthe
reduction of Rs.26,21,697/- in the profit of Baddi unit eligible for
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deduction under section 80IC by treating the same as alleged over
valuation of stock. '
b) That the Learned CIT (Appeals) has grossly erred in confirming the
action of the Assessing Officer in reducing the deduction claimed
under section 80IC by Rs.1,55,68,080/- on apportionment of
expenses including that of depreciation on the basis of
manufacturing turnover of Baddi unit to gross manufacturing
turnover of all manufacturing units including Baddi unit.
c) That the Learned CIT (Appeals) has grossly erred in confirming
the estimated reduction of Rs.27,34,294/- from the profits of the
Baddi unit eligible for deduction under section 80IC of the Act,
being estimated profit of the branches and head office @ 1% of
turnover of Baddi unit for affecting sales of Baddi unit.
5. That the Learned CIT (Appeals) has grossly erred in confirming
the action of the Assessing Officer in disallowing additional
depreciation of Rs.51,87,590/- on new plant and machinery
installed at other than Baddi Unit during the year. "
ITA. No. 2979/Del/2014 :
4. The Revenue has questioned first appellate order on the following
grounds :-
" 1. Whether on the facts & in the circumstances of the case, the
Ld. CIT (A) has erred in allowing the appeal of the assessee against
disallowance on account of apportionment of gross expenses by ignoring
the fact that interest expenses while computing the apportionment
cannot be exempted if no separate, insulated financial identity of Baddi
unit is there. Specific unit-wise details of expenditure for the
apportionment principle to be exempted should be presented.
2. Whether on the facts & in the circumstances of the case, the
Ld. CIT (A) has erred in deleting the adhoc addition of 1% of notional
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profit computed on sales as attributable to Baddi Unit without reasoning
for disagreement with the merits of the case and with predecessor's
orders. "
5. In the appeals for the assessment years 2008-09 and 2009-10,
common ground Nos. 2 and 3 have been raised questioning the action of
the ld. CIT (Appeals) in upholding the business loss commodity trading of
Rs.9,58,188/- in assessment year 2009-10 and Rs.50,61,174/- in
assessment year 2008-09 as speculative loss and making a notional
addition of Rs.1,00,000/- in assessment year 2008-09 and Rs.10,000/-
each in the assessment year 2009-10 on administrative and finance cost
incurred on commodity trading.
5.1 In support of this ground, the contention of the ld. AR remained
that the assessee had claimed loss of Rs.50,61,174/- in assessment year
2008-09 and of Rs.9,58,188/- in assessment year 2009-10 on
commodity transaction. He submitted that assessere company is
engaged in the business of manufacturing and trading in electrical,
cables, CFL Alumiuum and cloth. The company had booked raw
materials in commodity exchanges through forward contracts according
to its requirement and according to the prevailing market rates and
fluctuation in rates of copper and aluminum from time to time. He
submitted that most of the transactions entered into were settled by
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actual delivery of commodity and not merely by settlement of rates and
thus, the entire loss cannot be treated as speculative
5.2 The ld. Sr. DR, on the other hand, placed reliance on the orders
of the authorities below with the submission that the assessee had not
produced any evidence to substantiate its claim that part of the loss that
has been incurred has been settled by actual delivery of goods and the
loss is not speculative. The expenses on administrative and finance
estimated at Rs.10,000/- each in the assessment year 2009-10 and
Rs.1,00,000/- in assessment year 2008-09 is very nominal and justified.
The ld. CIT (Appeals) was thus right in upholding the assessment order
on the issue.
5.3 Having gone through the orders of the authorities below, we find
that there is no dispute that if the goods or commodities in respect of
which contracts were entered into were actually taken delivery of
pursuant to the contract, it would not be a speculative transaction even
though the commodity or script may be a highly speculative one by its
very nature and even though at the time when the contracts were entered
into the parties might have had no idea of taking delivery at all. On the
other hand, if the contract is settled or otherwise than by actual delivery,
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then it will be a speculative transaction notwithstanding that the nature
of the commodity was not one lending itself two possibilities of
speculation or that the intention of the parties at the time of entering
into the contract might have been to take actual delivery, but this
intention could not be effectuated for one reason or the other. The actual
delivery means real as opposed to notional delivery. Whether a
transaction is a speculative in general sense or under the Contract Act, is
not relevant for Income Tax purposes. Before the ld. CIT (Appeals) the
assessee admitted that part of the transactions were not settled by actual
delivery of goods and at least part of the loss was speculative. The
assessee, however, could not produce any evidence to substantiate its
claim that part of the loss that has been incurred was settled by actual
delivery of goods and the loss is not speculative. Even before the
Tribunal, the assessee could not improve its case on the issue. We thus
do not find any reason to interfere with the first appellate order. The
same is upheld. The expenses on administrative and finance estimated
at Rs.1,00,000/- in assessment year 2008-09 and Rs.10,000/- each in
assessment year 2009-10 being a nominal one, is justified and upheld.
The ground Nos. 2 and 3 are accordingly rejected.
6. The other common issue in all the three appeals is validity of
addition made by the Assessing Officer under section 80IC of the Act.
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The ld. CIT (Appeals) has decided the issue partially in favour of the
assessee in the assessment year 2010-11 and the Revenue is in appeal
before the Tribunal. We thus took up the Departmental appeal firstly.
The parties advanced their respective arguments. The ld. AR submitted
that the issue is fully covered by the decision of Hon'ble jurisdictional
High Court of Delhi in the case of Control & Switch Gear Co. Ltd. Vs.
DCIT 66 DTR 161 (Del.). The ld. CIT (Appeals) has decided the issue
following this decision of Hon'ble High Court.
6.1 The relevant facts are that in the assessment year 2010-11 the
assessee had claimed deduction under section 80IC of the Act of
Rs.6,46,26,634/- on profit earned from its manufacturing operations
carried on at Baddi Unit, for which a separate profit and loss account
and balance sheet was filed before the Assessing Officer. The Assessing
Officer restricted the deduction to Rs.2,82,33,796/- by making some
adjustments. The ld. CIT (A) has given partial relief of Rs.1,96,95,332/-
to the assessee. Some other reliefs have also been provided by the ld.
CIT (Appeals). This action of the ld. CIT (Appeals) has been questioned
before the Tribunal.
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6.2 In support of the grounds of the appeal preferred by the
Department for the assessment year 2010-11 the ld. Sr. DR has basically
placed reliance on the assessment order. He submitted that
manufacturing activity of the assessee is at Bhiwadi, Chowpanki and
Baddi. The assessee claimed a deduction under section 80IC on its
Baddi Unit. The turnover of Baddi Unit was Rs.32,29,40,504/- through
direct sales and Rs.5,97,42,097/- through branches. The assessee had
shown a net profit of Rs.6,46,26,634/- on account of Baddi Unit as per
books on which the assessee had claimed a hundred per cent deduction
under section 80IC of the I. T. Act. The Assessing Officer was of the view
that the deduction claimed by the assessee was not correct on account of
apportionment of expenses, over valuation of the stock, indirect
expenses, and branch & Head Office profit. Without appreciating all
these material facts and unscientific method applied by the assessee to
work out the claimed deduction, the ld. CIT (A) was not justified in giving
the above relief questioned in the grounds on account of deduction under
section 80IC of the Act and others.
6.3 The ld. AR, on the other hand, tried to justify the first appellate
order and furnished following written synopsis in brief :-
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" 1) The appellant was engaged during the year under appeal in
manufacture and trading of electric cables, CFL lights etc.
2) The appellant filed its return of income declaring an income of
Rs.5,49,09,299/- which was assessed under section 143(3) of the
Act at Rs. 9,17,43,743/-.
3) The appellant had claimed deduction under section 80IC of
Rs.6,46,26,634/- for profit (earned from its manufacturing operations
carried on at Baddi unit, for which a separate profit & loss account &
balance sheet was filed before the Assessing Officer (copy enclosed
at page No. 6 to 11 of paper book).
4) The Assessing Officer had curtailed deduction under section
80IC and restricted the claim of deduction to Rs.2,82,33,796/- by
making below mentioned adjustment in the profit computed for
allowing deduction under section 80IC of the Baddi unit while
passing the assessment order.
(i) The Assessing Officer made an ad-hoc curtailment in claim
eligible for deduction under section 80IC of profit earned by its
Baddi unit being 1% of sales (Rs. 38,26,826/-) of Baddi unit on
notional basis as assumed cost incurred by other units for effecting
its sales. Refer para 5.2.3 page 6 of the assessment order.
(ii) The Assessing Officer apportioned the indirect expenditure
incurred by the respondent for its Baddi unit in the ratio of sales of
Baddi unit to total sales and reduced the claim of deduction under
section 80IC by a further sum of Rs.2,96,20,260/-. Refer para
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5.2.2.4.3 and para 5.2.2.4.4 page 5 and 6 of the assessment order.
(iii) The Assessing Officerhas further imputed overvaluation of stock
of Rs.29,45,752/- of the Baddi unit vide para 5.2.2.4 to para
5.2.2.4.2 at page 4 and 5 of his assessment order by holding that
the stock of the Baddi unit should have been valued at cost price.
5) The Assessing Officer had apportioned the expenditure of Baddi
unit ignoring the separate profit and loss account prepared and filed on
the basis of sales achieved by each division / unit of the appellant
company.
6) The CIT (Appeals) vide his order dated 26.02.2014 allowed partial
relief to the appellant by upholding the criteria of apportionment of
indirect expenditure of Baddi unit on the basis of sales turnover of
Baddi unit to the total turnover of other units except for the allocation of
expenditure of interest on the basis of actual usage of funds for which a
working had been furnished by the respondent during the course of
appellate proceedings. It has resulted in relief of Rs. 1,96,95,332/- as
per chart enclosed in Annexure A attached to the appeal order. (Refer
para 5.1 to 5.2 page number 16-18 of the CIT (Appeals) order.
7) The CIT (Appeals) has further provided relief of Rs. 38,26,826/-
being the amount of notional ad-hoc 1% cost imputed to Baddi unit for
sales affected by other units while computing deduction under section
80IC of the Act. (Refer para 4.4 and 5.5 page numbers 15,16 and page
18 of the CIT (Appeals) order).
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8) The CIT (Appeals) has analyzed the allocation of indirect
expenditure (except interest cost) of Baddi unit in para 4.1, 4.3 and 5.1
of his order and has upheld the principle of apportionment of common
expenditure on the basis of sales by following the ratio of the decision
of jurisdictional Delhi High Court in the case of Control and Switch Gear
Ltd Vs. DCIT 66 DTR 161.
9) The CIT (Appeals) had allowed the relief of Rs. 1,62,33,521/- in
allocation of interest on the basis of actual usage of funds by computing
interest of Rs. 34,61,811/- attributable to activities of Baddi unit as
against the apportioned interest cost of Rs. 2,07,54,839/- made by the
Assessing Officer.
10) The assessee had disallowed / added back expenditure of
Rs.2,20,39,488/- while computing its assessable income which was
again considered for apportionment of indirect expenditure and had
impact of Rs. 24,02,304/- in profit of Baddi unit eligible for computing
deduction under section 80IC of the Act. The CIT (Appeals) held that the
amount of Rs. 2,20,39,488/- could not be considered for allocation of
expenditure once the same had been added back by the assessee to its
income and deleted the curtailment in profit eligible for deduction under
section 80IC of Rs. 24,02,304/- Refer para 4.3 and para 5.2 page 15
and 18 of CIT(A) order.
11) The respondent had filed copy of account of Head Office in its
books of accounts at page 28 to 44 of the paper book. The debits and
credits to the account of Head Office have been taken into consideration
on a daily basis to find out the product on which interest cost
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attributable to net use of funds by the Baddi unit has been computed
by the resident company at Rs. 34,61,811/- which after perusal the CIT
(Appeals) has held attributable to the Baddi unit by him. (Refer page
number 16 and 17 of the paper book)
(i) The respondent company had opening credit balance in its
books of accounts to the account of head office of Rs.
17,57,43,596.23 from which the respondent company had
deducted the investment in Fixed Assets out of share capital
and share premium which was derived by taking ratio of Fixed
Assets as appearing in the balance sheet of Baddi unit to the
total Fixed Assets held by the respondent company. Refer page
number 45 of the paper book.
(ii) The respondent while computing the figure of actual usage of
funds by the Baddi unit had also reduced the profit declared
by the Baddi unit of Rs. 10,62,29,7057- in the preceding two
assessment years to arrive at the opening figure of funds in
use by the Baddi unit.
12) The CIT (Appeals) has allowed relief of the above two
components for computing deduction under section 80IC and upheld
the balance curtailment under section 80IC made by the Assessing
Officer which order deserves to be upheld. "
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6.4 On having gone through the orders of the authorities below,
we find that the ld. CIT (Appeals) has passed a comprehensive and
reasoned order on the issue of deduction under section 80IC of the Act
and other additions / disallowances after discussing respective cases
of the parties. The relevant para Nos. 1 to 5.6 of the first appellate
order are being reproduced hereunder for a ready reference :-
" This appeal has been filed against the assessment order 143(3) of
the Income Tax Act, 1961 (in short "the Act") dated 04.02.2013 for
assessment year 2010-11 in the case of appellant company passed
by Addl. CIT, Range-15, New Delhi (in short "the AO").
{2} In response to notice issued u/s 250 of the Act, authorized
representative Sh. Satish Agrawal, CA (in short "Id. AR") attended
the proceedings on behalf of the appellant and were heard. The
submissions made by the Id. AR have been carefully considered
{3} In the appeal filed, the appellant has raised the following
grounds:
1. On the facts and circumstances of the case, the learned
assessing officer is not justified his orders and the orders
are bad in law and facts of the case.
2. The learned A. O. is not justified in disallowing Rs.
3,63,92,838/- out of Rs. 6,46,26,634/- as deduction
claimed under section 80IC of Income Tax Act, 1961 in the
Manpura (Baddi) unit by disallowing the following:-
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a. The learned A.O. is not justified in disallowing Rs.
29,45,752J- by considering the stock lying at various
branches amounting to Rs. 1,59,48,849/- as overvalued
which has actually been valued at cost price.
b. The learned A.O. is not justified in disallowing Rs.
2,96,2(^260/- by apportioning the gross expenses of
Rs.27,17,45,505/- (inclusive of depreciation) of all the
branches in such proportion which the manufacturing
turnover of Baddi unit bears to gross manufacturing
turnover of all branches, manufacturing units including
Baddi unit.
However expenses incurred at Baddi (Manpura) unit
should be considered exclusively relating to the unit itself
as per the individual balance sheet filed.
c. The learned A.O. is not justified in disallowing Rs.
38,26,826/- on estimated basis by taking 1% profits on
turnover of Rs.38,26,82,601/- of Baddi unit, considering
that the profits could not be derived without getting
services from trading establishments which are taken on
absurd and hypothetical assumptions.
3. The learned A.O. is not justified in disallowing
additional depreciation on new purchase of plant and
machinery Rs. 53,61,388/- of manufacturing units.
4. That the learned assessing officer is not justified in
initiating penalties u/s 271(1)(C) of income tax Act, 1961.
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5. That the assessee reserves the right to crave, leave
and modify any grounds of appeal at the time of hearing of
the case.
{4} During the course of appellate proceeding, Ld. AR of the
appellant attended and filed written submission vide letter
dated 24-01-2014, wherein grounds of appeal are agitated by
submitting as under:-
REGARDING: CLAIM OF DEDUCTION U/S 80 1C.
1. The appellant had claimed deduction u/s 80 1C of
the Act of Rs. 6,46,26,634/-. The Assessing Officer has
allowed a deduction of Rs2,82,33,796/- by curtailing the
deduction by a sum of Rs. 3,63,92,838/-. The Assessing
Officer has disallowed a sum of Rs. 3,63,92,838/- from the
claim of deduction u/s 80 1C and has justified its
disallowance in para 5.2 to 5.2.3 of her assessment order.
2. We submit herewith the gist of each of the
observations of the Assessing Officer along with our
rebuttal for your honor's perusal and record as under:-
2.1 Assessing Officer's observations in para 5.2.1 of the
assessment order regarding apportionment of expenses are as
under:-
Apportionment of Expenses :
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It is seen that there are huge amount of Expenses incurred
at Delhi head Office and 6 Branches of the assessee. The
assessee has not apportioned any of the expenses to
determine the profit derived u/s. 80IC of Baddi Unit. The
assessee uses its network and Head Office to make all kind
of sales, that is sale from 80IC unit and sale from non 80IC
units and obviously there is cost incurred for this purpose.
The assessee also make purchases and uses the bank
account & finance of head office to effect its turnover and
the expenses in relation to all the head office is paid by the
bank account as well as all other common indirect expenses
are paid through the head office bank account.
(a) The Assessing Officer has apportioned expenditure
on the basis of turnover of various units to arrive at the
figure of profit eligible for deduction u/s 801C of Baddi
unit.
(b) The Assessing Officer has observed without any
basis in her assessment order that there are huge amount
of expenses incurred at Delhi Head Office and six branches
of the assessee and the appellant had not apportioned any
of the expenditure to determine the eligible for deduction
u/s of the 80 1C of the Act for its Baddi Unit. The
Assessing Officer had further observed that the appellant
uses its networking and Head Office to make all kinds of
sale including sale from 80 1C unit.
(c) The assessee as per the Assessing Officer makes
purchases and uses bank account and finance of head
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office to affect its turnover and all finance as well as
common indirect expenses are paid through the Head office
bank account.
Our Rebuttal
The appellant company maintained its Administrative
Office at Delhi and had six branches out of which Bombay
branch had nil sales during the year under appeal.
Three branches, i.e. Chopanki, Baddi, Bhiwadi were
manufacturing units and the other two branches, namely,
Cochin and Jalandhar were trading units.
The appellant company was engaged in the production of
industrial cables and other heavy duty cables at its
Bhiwadi and Chopanki units whereas the unit at Baddi
was engaged in manufacturing of household wires and
cables. The manufacturing process for manufacturing of
household wires involves a much simple and a less time
consuming process in comparison to that for manufacture
of industrial and heavy duty cables. The sales from Baddi
unit were mostly to the consumers from whom realization
of payment was quick as compared to that of the other two
manufacturing units.
The appellant company did not use the borrowed funds for
its Baddi unit as Baddi unit had accumulated substantial
surplus of its own during the preceding two financial years
and the company had interest-free funds in the fomi of
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share capital and free reserves. Therefore, apportionment
of interest and bank charges on turnover basis are not
based on facts of the case and are not warranted.
2.2 Assessing Officer's Observations in para 5.2.1.1
The Assessing Officer has given the figure of bank charges
and interest for the year ending 31 March 2009. However,
while computing the disallowances she had adopted the
figure of interest for the year ending 2010. She had made
another observation that there are no separate books,
separate bank account, separate funding, separate
networking for distribution and sales etc. of Baddi unit.
Our Rebuttal
The observation of the Assessing Officer is incorrect with
respect to maintenance of separate books of accounts. The
appellant company maintained separate books of accounts
and prepared a separate balance sheet and profit & loss
account based on separate books of accounts for its
branches including for its Baddi unit. The appellant
company had filed unit wise balance sheet and profit
and loss account during the course of assessment
proceedings based on separate set of books of accounts
maintained at each unit, (copy of balance sheets of
branches filed before Assessing Officer enclosed at page
No. 6 to 27 of the paper book)
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The Baddi unit of the appellant company was catering to
consumers directly in view of which it did not require, nor
had any separate dealer network for its Baddi unit sales.
2.2 Assessing Officer Observations in para 5.2.1.2
In this para the Assessing Officer has reproduced the
submission of the assessee on the issue for apportionment
of expenses which calls for no comment.
2.4 Assessing Officer Observations in para 5.2.1.3
In this para the Assessing Officer has stated that the
assessee had failed to substantiate its claim that no
apportionment of expenditure for Baddi unit was
warranted. The Assessing Officer further stated that no
part of Director's remuneration had been attributed to
Baddi unit, no separate funding of sources and separate
dedicated network was maintained for Baddi unit and the
Head office infrastructure had been used for making
purchases and marketing activity.
The assessing Officer has finally concluded in para 5.2.1.3
that in the circumstances narrated by her, the best course
available for Computing deduction u/s 80 1C would be to
attribute expenses of the Head Office and branches in
terms of turnover and apportioning the common cost as per
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provisions of section 80 IA (5) r.w. section 80 1C (7) and as
prescribed in Rule 18BBB of I. T. Rules.
Our rebuttal
As stated above, the apportionment of all expenditure on
the basis of turnover is not justified in the facts and
circumstances of the case of the appellant in view of :-
a) The products manufactured at Baddi unit were of different
variety and had much shorter production and realization cycle as
compared to the other two manufacturing units at Bhiwadi and
Chopanki.
b) The Baddi unit had accumulated surplus aggregating to
more than Rs. 10 crores from its own working of the
preceding two years for which no interest was paid. The
company had paid up share capital and free reserves of
more than Rs.47 crores (excluding accumulated profits of
Baddi Unit) which fund could have been used for the
working of Baddi unit.
c) The marketing cost of sales incurred by other units
could not be attributed to the Baddi unit in view of direct
sale of products manufactured by it to the consumers in
view of which there was no reguirement for appointment of
distributors.
3. Without prejudice to the fact that apportionment of expenditure
is not warranted, in case your honour decides otherwise and holds
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that apportionment of expenditure is necessary for allowing
deduction u/s 80 1C a more rational, logical and appropriate
approach which is scientific should be adopted for apportionment of
expenses. The Assessing Officer has not distinguished between
nature of expenditure of Delhi, Cochin, Mumbai and Ludhiana units
while apportioning the same for Baddi unit.
4. It is worthwhile to refer to head wise break up of
expenditure of Delhi, Cochin, Mumbai and
Ludhiana/Jalandhar units which were considered by the
Assessing Officer for allocation of expenditure over the
Baddi unit at proportionate turnover basis which is at page
No. 1 to 2 of the paper book.
5. The Assessing Officer has curtailed deduction under section
80 1C by a sum of Rs.2,96,20,260/- by allocating the expenditure
incurred by the assessee company under various heads incurred at
Delhi, Cochin, Mumbai and Ludhiana office by apportioning the
expenditure on the basis of turnover of Baddi unit.
6. The approach of the Assessing Officer cannot be said
to be justified in the facts and circumstances of the case as
some of the expenditures wgre directly identified with the
activity of a particular unit incurred by different units which
could not have been apportioned on the basis of turnover of
the Baddi unit.
7. One such expenditure which has been apportioned on the
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basis of turnover was interest. The apportionment of
interest is not justified as interest is directly identifiable
with the use of funds. The appellant has incurred
expenditure in above three branches (Delhi, Cochin and
Mumbai) (no interest expenditure was incurred in Ludhiana
unit) as under :-
Delhi Cochin Mumbai Total
Head of Expense
debited in P&L
Account
Bank Interest 18,69,36.459/- 550/- 5,656/- 18,69,42,665/-
Interest 1,47,200/- ... ....
1,47,200/-
82,86,384/- 82,86,384/-
Interest on
Secured Loan
Sub- total 19,53,76,249/-
Less:
49,64,879/- 49,64,879/-
Interest on FDR
Balance 19,04,11,370/-
The assessing officer treated the interest expenditure
of Rs. 2,07.54,839/- as attributable to the activities of
Baddi Unit {10.90 % (i.e in the ratio of turnover of
Baddi Unit with respect to total sale as computed by the
assessing officer in para 5.2.2.4.4 at page 6 of her order) of
total Interest of Rs. 19,04,11,370/-}.
The allocation of interest expenditure on the basis of
turnover is not only improper but also not justified in the
24
facts and circumstances of the case as the interest cost has
to be appropriated on the basis of actual use of funds. The
Baddi unit has used its own funds ( accumulated profits)
amounting to Rs. 10,62,29,705/- which had accrued to it
over the last 2 years from its activities( copy of balance
Sheet of Baddi unit for the year ended 31-03-2008 & 31-3-
2009 is at page No. 45 to 67 of the paper book).
Similarly, the Baddi unit has also used interest free funds
of head office which were available in the form of share
capital and share premium of the company of Rs.
52,25,692/-(paid up capital and share premium of the
company apportioned in the ratio of gross block of fixed
assets to total gross block of fixed assets) working enclosed
at page No. 68 of the paper book. In case the interest free
funds (Rs. 10,62,29,705/- and Rs. 52,25,692/- as stated
above) are excluded from the funds used, the interest cost
(assumed = 12.5%) that can be imputed to Baddi unit
would come to Rs. 34,61,811/-.
The above figure of interest that can be imputed to the
working of Baddi unit is also reinforced by the transfer of
funds / receipts of funds from Baddi unit as per the copy of
account. (As per copy of account enclosed at pages 28 to 44
of the paper book). The Baddi unit could not have used
funds in excess of the amount due to the head office during
the year under appeal.
The interest amount if computed @12.5% per annum on the
debit balance due to the head office comes to Rs.
25
34,61,811/-. Therefore, disallowance on account of interest
if any should not be curtailed by an amount of more than
Rs.34,61,811/-.
8. Reg: The disallowance of certain expenditure which
were already disallowed by the Appellant itself in
computation of income
Particulars Amount
Donation Rs. 1,47,200/-
Sales tax Demand Rs. 23,334/-
Income Tax provision for 2010-11 Rs. 2,14,27,338/-
Income Tax Demand 2008-09 Rs. 55,202/-
Income Tax Demand 2009-10 Rs. 3,86,414/-
TOTAL Rs. 2,20,39.488/-
The expenditure of Rs. 27.17.45.505/- of Delhi.
Cochin, Mumbai and Ludhiana units which were
considered by the Assessing Officer for apportionment
for Baddi unit includes below mentioned expenditure
which were already disallowed by the appellant in its
computation of income (copy enclosed at page No. 70 of
the paper book) as the same were not eligible for
deduction under section 80 1C of the Act.
The above amount of Rs. 2,20,39,488/- has again been
considered for apportionment and a sum of Rs. 24,02,304/-
( 10.9% of Rs. 2,20,39,488/-) has been disallowed by the
Assessing Officer under section 80 1C on this account.
The above proportionate disallowance is not tenable and
deserves to be deleted.
26
Reqardinq :- Trading profit
The Assessing Officer has made another adjustment of Rs.
38,26,826/- by estimating hypothetical trading profit of
branches for sales of Baddi unit on incorrect appreciation of
the facts of the case. *
The facts on the issue as narrated by the Assessing Officer are:-
1. The Assessing Officer has notionally held that it is
fair to pay a nominal net trading profit of 7 % on sales
made and disallowed a sum of Rs. 3826,826/- from
deduction claimed under section 80 1C of the Act.
2. The reasoning of the Assessing Officer is subjective
and is not based on actual state of affairs. It is well settled
law that income tax cannot be imposed on notional income.
Refer: CIT vs. Shoorji Vallabhadas & Co. (1962) 46 ITR 144
(SC) wherein The court held that:-
"Income tax is a levy on income. No doubt, the income tax
takes into account two points of time at which the liability
to tax is attracted, viz., the accrual of income or the receipt;
but the substance of the matter is the income. If income
does not result at all, there cannot be a tax, even though in
book keeping, an entry is made about a "hypothetical
income" which does not materialize.
27
Where, however, the income can be said not to have
resulted at all, there is obviously neither accrual nor receipt
of income, even though an entry to that effect might, in
certain circumstances have been made in the books of
account."
In the above case, the assessee firm had agreed to reduce
the managing agency commission during the currency of
the accounting year though the actual deduction took place
after the end of the year. The Supreme Court held that the
larger income neither accrued nor was received by the
assessee firm.
Similar view has been taken in the case of Godhra
Electricity Co.Ltd.Vs. CIT (1997) 225 ITR 746 (SC) and
State Bank of Travancore vs. CIT(Kerala) 158 ITR 103
3. Further, the appellant company's Baddi unit had made
sales of Rs. 32,29,40,504.89/- on the basis of which the
Assessing Officer has already apportioned expenditure
while drafting the assessment order, in view of which, going
by even the own reasoning of the Assessing Officer, no
notional profit could have been attributes to the other
units/branches by disallowing deductions under section 80
1C of the Act.
Reg : Additional Ground
The appellant has moved an additional ground contesting
the disallowance of Rs. 4,41,606/- u/s 40(a)(ii) which has
28
already been disallowed by the appellant as per
computation of income enclosed at page No. 70 of the paper
book.
Therefore the above disallowance u/s 40(a)(ii) is not tenable
and deserves to be deleted.
DETERMINATION:
(1) I have gone through the finding of Assessing Officer in the
assessment order and written submissions filed by learned
Authorized Representative of the appellant. After considering the
same, ground-wise issues are decided hereunder.
(2) Ground of appeal No. 1 is general in nature.
(3) Ground of appeal No. 2 is against disallowing Rs.3,63,92,838/-
out of Rs.6,46,26,634/- as deduction claimed under section 80IC. In
this ground, learned Authorized Representative of the appellant has
submitted as under:-
3. Ground No. 2 is directed against the disallowance of
Rs.3,63,92,838/- made by the assessing officer by curtailing
the deduction claimed under section 80IC of the Act to Rs.
2,82,33,976/- as against Rs. 6,46,26,634/- claimed by the
appellant for its Manpura (Baddi) unit by treating the following
amounts as ineligible for computing profit for deduction under
section 80IC of the Act:-
(i) A sum of Rs. 29,45,752 for stock transferred to
various branches remaining unsold at the yearend (on
the basis of G.P. of Baddi Unit).
29
(ii) Addition of Rs.2,96.20,260/- by apportioning
the gross expenses of Rs. 27,17,45.505/-
(inclusive of depreciation) of four trading units
situated at Delhi, Cochin, Mumbai and Ludhiana
branches in such proportion which the
manufacturing turnover of Baddi unit bears to
total turnover of the appellant company. The
appellant had submitted unit/branch wise
separate profit and loss account and balance
sheet during the course of assessment and
appellate proceedings.
(iii) Notional attribution of Rs.38,26,826/- as expense of
Baddi unit for alleged hypothetical trading profit of branches for
sales of Baddi unit which has been strongly contested by the
appellant. The Assessing Officer has imputed a notional profit
of 1% of sales of Baddi unit to the head office and other
branches had disallowed the amount from the eligible profit
available for deduction under section 80IC of the Baddi unit.
3.1 The appellant has also contended before me that on
account of apportionment a sum of Rs. 24,02,304 has been
wrongly again added back as expense of Baddi unit for
computing deduction under section 80IC whereas the gross
amount of Rs. 2,20,39,488/- had already been disallowed
by the appellant while filing its return of income on account
of inadmissible expenses.
30
Regarding addition of Rs. 2,96,20,260/- by apportioning
the gross expenses of Rs. 27,17,45,505/- (inclusive of
depreciation) in proportion of manufacturing turnover of
Baddi to with total turnover of ail units.
The appellant had claimed deduction under section 80IC of
Rs.6,46,26,634/- which has been curtailed to Rs.
2,82,33,976/- by the Assessing Officer by making various
adjustments to profit eligible for deduction under section
80IC as stated in para 3.1 above.
It is pertinent to mention here that the Baddi unit of
the appellate is eligible for deduction under section 80IC
of the Act.
The Assessing Officer has apportioned the expenditure
incurred by the appellant in its four branches in the ratio of
turnover of Baddi unit to the turnover of manufacturing and
trading units namely Baddi, Bhivsadi, Chopanki, Delhi,
Cochin and Ludhiana. The seventh branch of the appellate
company (Mumbai) did not make sales during the under
year appeal.
The observations of the Assessing Officer with respect to
apportionment of expenditure are given in para 5.2.1 to 5.2
2.3 of the assessment order which for the sake of clarity
are being reproduced as under:-
DEDUCTION U/S. 80IC
31
It is seen that the deduction u/s 80IC has been claimed at
Rs. 6,46,26,634/-. The above is not correctly claimed by the
assessee, in view of the following discussion.
APPORTIONMENT OF EXPENSES:
It is seen that there are huge amount of Expenses incurred
at Delhi Head Office and 6 Branches of the assessee. The
assessee has not apportioned any of the expenses to
determine the profit derived u/s. 80IC of Baddi Unit. The
assessee uses its network and Head Office to make all
kind of sales, that is sale from 80IC unit and sale from non
80IC units and obviously there is cost incurred for this
purpose. The assessee also make purchases and uses the
bank account & finance of head office to effect its turnover
and the expenses in relation to of all the head office is paid
by the bank account as well as all other common indirect
expenses are paid through the head office bank account.
The assessee has incurred huge amount of expenses and
all have been debited to non 80IC activity. One such
example is of Bank Charges and interest (net) of Rs.
14,14,45,461/-. The interest expense for the Baddi Unit for
a turnover of Rs. 32.29 Crores has been mentioned at only
Rs. 14,885/-. The assessee has a common bank account
for it operations. The extremely low interest charges for
Baddi Unit is ridiculous as all the expenditure incurred are
for business of the assessee and expenses will be
eguivalent to turnover of the assessee, in view of the
32
absence of separate books, separate bank A/c, separate
funcling, separate network for distributions & sales etc. the
assessee has even failed to apportion directors
remuneration which reflect the futility of the claim of the
assessee with regards to apportion of expenses.
5.2 1.2 In view of the same, it was asked on 26.12.2012
to the assessee, as to why the expenses should not be
apportioned in terms of the Baddi Unit, to determine the
profits derived of the Baddit Unit for deduction u/s. 80IC.
The assessee replied as under:-
"The expenses incurred at Baddi (Manpura) unit exclusively
relates to our Baddi Unit itself. The expenses incurred at
sale Branches, Manufacturing units at Bhiwadi and
Chowpanki and at Head Office does not include any
expenses incurred on behalf of the Baddi Unit in Himanchal
Pradesh. The company has mainly 3 manufacturing units
namely Bhiwadi unit, Chowpanki unit and Baddi Unit. Our
above mentioned 3 units have manufacture Industrial
cables and other heavy duty cables but out unit at Baddi
(H.P) has manufactured only household wires / domestic
wires and cables. The realization of sundry debtors of our
Baddi Units was guite fast as compared to the realization
of sundry debtor of other manufacturing units having
production of Industrial cable. The Baddi Unit has not
required much funds from the Head Office through the cash
credit limits for its working capital requirements. The Baddi
33
Unit was self reliant to fulfill its day to day funds
requirements. Therefore the expenses uncured by Head
Office on account of CO limits should not be apportioned to
determine the true profits of Baddi Unit claiming deduction
under section 80IC of the Income Tax Act, 1961.
We are filing the Balance sheet and Profit and Loss
Accounts with complete annexure of each of the Branches,
manufacturing units and the Head Office to explain the
individual details of expenses incurred at various limits.
5.2 2.3 In view of the same, the best method would be to
attribute the expenses including depreciation as per I. T Act of the
Head Office and Branches, in terms of turnover and apportioning the
common costs accordingly as per provision of 80IA(5) r.w.s. 80IC(7)
and as prescribed in Rule 18BBB of I.T. Rules which is discussed in
coming paragraphs. "
[4] In this regard, the Id. AR vide written submission dated
24.01.2014 has submitted as under (only relevant extract
reproduced) :-
a) The appellant company maintained its Administrative
Office at Delhi and had six branches out of which
Bombay branch had nil sales during the year under
appeal. Three branches, i.e. Chopanki, Baddi, Bhiwadi
were manufacturing units and the other two branches,
namely, Cochin and Jalandhar were trading units.
b) The appellant company was engaged in the production
of industrial cables and other heavy duty cables at its
34
Bhiwadi and Chopanki units whereas the unit at
Baddi was engaged in manufacturing of household
wires and cables. The manufacturing process for
manufacturing of household wires involves a much
simple and a less time consuming process in
comparison to that for manufacture of industrial and
heavy duty cables. The sales from Baddi unit were
mostly to the consumers from whom realization of
payment was quick as compared to that of the other
two manufacturing units.
c) The appellant company did not use the borrowed
funds for its Baddi unit as Baddi unit had accumulated
substantial surplus of its own during the preceding two
financial years and the company had interest-free
funds in the form of share capital and free reserves.
Therefore, apportionment of interest and bank charges
on turnover basis are not based on facts of the case
and are not warranted.
d) The observation of the Assessing Officer is incorrect
with respect to maintenance of separate books of
accounts. The appellant company maintained separate
books of accounts and prepared a separate balance
sheet and profit & loss account based on separate
books of accounts for its branches including for its
Baddi unit. The appellant company had filed unit wise
balance sheet and profit and loss account during the
course of assessment proceedings based on separate
35
set of books of accounts maintained at each unit.
e) The apportionment of all expenditure on the basis of
turnover is not justified in the facts and circumstances
of the case of the appellant in view of
i) The products manufactured at Baddi unit were
of different variety and had much shorter
production and realization cycle as compared to
the other two manufacturing units at Bhiwadi
and Chopanki.
ii) The Baddi unit had accumulated surplus
aggregating to more than Rs. 10 crores from its own
working of the preceding two years for which no
interest was paid. The company had paid up share
capital and free reserves of more than Rs. 47 crores
(excluding accumulated profits of Baddi Unit) which
fund could have been used for the working of Baddi
unit.
iii) The marketing cost of sales incurred by other
units could not be attributed to the Baddi unit in
view of direct sale of products manufactured by it to
the consumers in view of which there was no
requirement for appointment of distributors.
4.1 The appellant has not principally contested the
apportionment of expenditure adopted by the Assessing
36
Officer except to state that in the case of interest, the usage of
funds by Baddi unit could be easily identified and that the
actual cost of funds should be attributed in Baddi unit for
computing deduction under section 80IC of the Act.
The appellant had also submitted an alternative contention
that if apportionment of expenditure was necessary in the
facts and circumstances of the case for allowing deduction
u/s 80IC, the interest expenditure which was directly
identified with the activity of Baddi unit should not have been
apportioned on the basis of turnover of the Baddi unit and
instead the actual interest cost attributable to Baddi unit be
considered for computing eligible profit for claiming deduction
u/s 80IC of the Act.
In this regard, appellant during the course of appellate
proceedings submitted as under (only relevant extract is
reproduced)
a) One such expenditure which has been
apportioned on the basis of turnover was interest.
The apportionment of interest is not justified as
interest is directly identifiable with the use of
funds. The appellant has incurred expenditure in
above branches (Delhi, Cochin and Mumbai) (no
interest expenditure was incurred in Ludhiana
unit) as under :
37
Head of Expense Delhi Cochin Mumbai Total
debited in P&L
Account.
Bank Interest 18.69.36.459/- 550/- 5,656/- 18.69.42.665/-
Interest on Secured
82,86,384/- 82,86,384/-
Loan
Sub- total 19,53,76,249/-
Less :
Interest on FDR 49,64,879/- 49,64,879/-
Balance 19,04,11,370/-
b) The assessing officer treated the interest expenditure of
Rs. 2,07,54,839/- as attributable to the activities of
Baddi Unit {10.90 % (i.e in the ratio of turnover of Baddi
Unit with respect to total sale as computed by the
assessing officer in para 5.2.2.4.4 at page 6 of her
order) of total Interest of Rs.19,04,11,370/-) }.
c) The allocation of interest expenditure on the basis of
turnover is not only improper but also not justified in the
facts and circumstances of the case as the interest cost
has to be appropriated on the basis of actual use of
funds. The Baddi unit has used its own funds (
accumulated profits) amounting to Rs. 10,62,29,705/-
which had accrued to it over the last 2 years from its
activities, copy of balance Sheet of Baddi unit for the
year ended 31-03-2008 & 31-3-2009 is submitted in
its support
38
d) Similarly, the Baddi unit has also used interest free
funds of head office which were available in the form of
share capital and share premium of the company of
Rs.52,25,692/-(paid up capital and sharepremium of the
company apportioned in the ratio of gross block of fixed
assets to total gross block of fixed assets). In case the
interest free funds (Rs. 10,62,29,705/- and
Rs.52,25,692/- as stated above) are excluded from the
funds used, the interest cost (assumed = 12.5%) that can
be imputed to Baddi unit would come to Rs. 34,61,811/-
The above figure of interest that can be imputed to the
working of Baddi unit is also reinforced by the transfer
of funds / receipts of funds from Baddi unit as per the
copy of account.). The Baddi unit could not have
used funds in excess of the amount due to the head
office during the year under appeal. The interest
amount if computed @12.5% per annum on the debit
balance due to the head office comes to Rs.34,61,811/-.
Therefore, disallowance on account of interest if any
should not be curtailed by an amount of more than
Rs.34,61,811/-
4.2 In support of its claim the appellant was directed by me
to furnish the prescribed form 10CCB on the basis of allocation
of interest cost on Baddi unit in accordance with the usage of
funds. In this regard, the Id. AR vide written submission dated
17.02,2014 has submitted a copy of form 10CCB computing
39
deduction u/s 80IC by allocating the interest cost attributable
to the Baddi unit on actual use of funds.
4.3 The appellant had also submitted vide its submission
dated 24.01.2014 that expenditure of Rs.27,17,45,505/- of
Delhi, Cochin, Mumbai and Ludhiana units which was
considered by the Assessing Officer for apportionment for
Baddi unit includes a sum of 2,20,30,488/- which was already
disallowed by the appellant in its computation of income and
the same was not considered eligible for deduction claimed by
the appellant under section 80 IC of the Act. Break-up of Rs.
2,20,30,488 is as under :-
Particulars Amount %
Donation Rs. 1,47,200/-
Sales Tax Demand Rs. 23,334/-
Income Tax Provisions for 2010-11 Rs. 2,14,27,338/-
Income Tax Demand 2008-09 Rs. 55,202/-
Income Tax Demand 2009-10 Rs. 3,86,414/-
Total Rs. 2,20,39,488/-
The appellant stated that the above amount has been considered
again (twice) for apportionment, once when the appellant added
the amount in its assessable income and again when the
Assessing Officer considered the amount for apportionment on
the basis of turnover. The sum of Rs. 24,02,304/- (10.9% of Rs.
2,20,39,488/-) has been considered ineligible for deduction
40
under section 80 IC on this account, which results in double
addition and deserves to be deleted.
4.4 Regarding ineligibility of Rs. 38,26,826/- on notional basis by
attributing 1% profits on turnover of Rs. 38,26,82,601/- of Baddi unit
as cost,
The Assessing Officer has notionally held that a net profit of
1% on sales made i.e a sum of Rs.38,26,826/- deserves to be
disallowed from deduction claimed under section 80 IC of the Act
by hypothetically holding it to be profit attributableto the
other units. In this context, appellant has submitted before me
that income tax a charge on real income and notional income
cannot be brought to tax. It has cited judgment of Supreme Court
in the case of CIT vs. Shoorji Vallabhadas & Co. (1962) 46 ITR
144 (SC) & M/s. Godhara Electricity Co. Ltd. vs CIT (1997) 225
ITR 746 (SC) wherein the apex court has held that irrespective of
the accounting entries made by the assessee notional income
cannot be charged to tax.
[5.1] The perusal of the assessment order reveals that the
Assessing Officer has curtailed the deduction of section 80IC from
Rs. 6,46,262,634/- to Rs. 3,63,92,838/- by apportionment of
expenditure incurred by the Assessee in its head office and
three sales ' units on the basis of total turnover of the appellant
company to the Baddi unit. The Assessing Officer has also
attributed one percent notional net profit @ 1% of total turnover
of Baddi unit amounting to Rs 38,26,826/- to other units holding
the amount to be ineligible for claiming deduction under section
41
80IC and had also excluded the profit amounting to
Rs.29,45,752/- (on the basis of gross profit margin achieved by of
the Baddi unit on transfer of goods to other units remaining unsold
at the year end.
The appellant has submitted its written and oral arguments
challenging the apportionment of expenditure of its eligible Baddi
unit on the basis of total turnover of the appellant company for all
expenses. The appellant has submitted before me that the
apportionment of expenditure on interest is inequitable and has
filed its working for the imputed interest cost that it has incurred
on operations of its Baddi unit.
The appellant had argued before me that interest cost of the
Baddi unit can be computed by arriving at the figure of usage of
funds by Baddi unit on the basis of debit and credit of head
office account with it during the year under appeal. The appellant
had also submitted a copy of revised form 10CCB claiming
deduction of 80IC of Rs.5,47,01,706/- by imputing interest cost
of Rs, 34,61,811/- to its Baddi unit on my direction during the
course of appellate proceedings.
The appellant has also pointed out before me that the Assessing
Officer has resorted to apportionment of expenditure amounting
to Rs. 2,20,30,488/- which had already been disallowed by the
assessee while computing the return of income which resulted in
curtailment of deduction u/s 80IC of Rs.24,02.304/-.
42
On perusal of the assessment order, written and oral
submissions of the appellant case law on the issue and facts on
record, I proceed to adjudicate the various grounds of appeal in a
consolidated matter.
The appellant has principally not objected to apportionment of
expenditure on the basis of turnover other than interest for arriving
at the claim of deduction under section 80IC. It has substantiated
interest cost attributable to the Baddi unit during the course of
appellate proceedings before me. I find that the apportionment of
common expenditure wherever no specific unit wise detail is
available is judicially recognized for arriving at the profit of '
different units. There is no prescribed formula for apportionment of
expenditure in the Act. The appellant has cited a judgment of
jurisdictional Delhi High Court ifi the case Controls & Switchgear
Co. Ltd. Vs. Deputy Commissioner of Income Tax 66 DTR page no.
161 wherein the Delhi High Court has approved the apportionment
of common expenditure between the unit eligible for deduction
under section 80IC and non-eligible units on the basis of turnover
where specific unit wise detail of expenditure was not furnished
before the lower authorities despite specific query to this effect.
I, respectfully following the judgment of jurisdictional Delhi High
Court cited above, uphold the apportionment of expenditure made
by the Assessing Officer for computing deduction u/s 80IC of the
Act except for interest cost attributable to the Baddi unit. The
Appellant has furnished computation of interest on the basis of
usage of funds for Baddi unit.
43
The Delhi High Court in the above judgment has not made any
interference in the order of CIT (Appeals) and ITAT which
upheld the order of Assessing Officer apportioning common
expenditure on the basis of turnover by observing that the
Assessee in that case had failed to substantiate the unit wise
interest expenditure. It upheld the apportionment of common
expenditure on the basis of turnover.
In the present case, the appellant has substantiated the
interest expenditure for its eligible Baddi unit. I therefore, allow
the claim of the appellant on the issue and direct computation
of deduction under section 80IC by attributing interest cost for
Baddi unit of Rs.34,61,811/- instead of apportioned amount of
interest of Rs.2,07,54,839/- by the Assessing Officer in the
assessment order.
On perusal of the assessment order, written and oral
submissions of the appellant case law on the issue and facts on
record, I proceed to adjudicate the various grounds of appeal in a
consolidated matter.
The appellant has principally not objected to apportionment of
expenditure on the basis of turnover other than interest for arriving
at the claim of deduction under section 80IC. It has substantiated
interest cost attributable to the Baddi unit during the course of
appellate proceedings before me. I find that the apportionment of
common expenditure wherever no specific unit wise detail is
available is judicially recognized for arriving at the profit of '
44
different units. There is no prescribed formula for apportionment of
expenditure in the Act. The appellant has cited a judgment of
jurisdictional Delhi High Court ifi the case Controls & Switchgear
Co. Ltd. Vs. Deputy Commissioner of Income Tax 66 DTR page no.
161 wherein the Delhi High Court has approved the apportionment
of common expenditure between the unit eligible for deduction
under section 80IC and non-eligible units on the basis of turnover
where specific unit wise detail of expenditure was not furnished
before the lower authorities despite specific query to this effect.
I, respectfully following the judgment of jurisdictional Delhi High
Court cited above, uphold the apportionment of expenditure made
by the Assessing Officer for computing deduction u/s 80IC of the
Act except for interest cost attributable to the Baddi unit. The
Appellant has furnished computation of interest on the basis of
usage of funds for Baddi unit.
The Delhi High Court in the above judgment has not made any
interference in the order of CIT (Appeals) and ITAT which upheld
the order of Assessing Officer apportioning common expenditure
on the basis of turnover by observing that the Assessee in that
case had failed to substantiate the unit wise interest expenditure.
It upheld the apportionment of common expenditure on the
basis of turnover.
In the present case, the appellant has substantiated the
interest expenditure for its eligible Baddi unit. I therefore, allow
the claim of the appellant on the issue and direct computation
45
of deduction under section 80IC by attributing interest cost for
Baddi unit of Rs. 34,61,811/- instead of apportioned amount of
interest of Rs. 2,07,54,839/- by the Assessing Officer in the
assessment order.
5.2 The contention of the appellant with regard to apportionment
of suo moto disallowed expenditure of 2,20,39,488/- is also found to
be correct and the Assessing Officer is directed to delete the impact
of such disallowance while computing deduction u/s 80IC of the Act,
which comes to Rs. 24,02,304/-.
5.3 The estimated gross profit on transfer of goods to other units
of the appellant company on goods remaining unsold at the yearend
has been rightly excluded by the Assessing Officer in computing
deduction under section 80IC which calls for no interference and
the curtailment of deduction under section 80IC to the extent of
Rs.29,45,752 is upheld.
5.4 The appellant has contented before me that of 1% attribution
of notional profit of Baddi unit for its sales to other units is without
any basis is illegal and untenable. It has supported its contention by
referring to the judgments of Supreme Court in the cases of CIT vs.
Shoorji Vallabhadas & Co. (1962) 46 ITR 144 (SC) & M/s. Godhara
Electricity Co. Ltd. vs CIT (1997) 225 ITR 746 (SC) to state that
notional income cannot be taxed.
5.5 I find force in the argument of the appellant and ad-hoc 1%
attribution of notional profit computed on sales of Baddi unit
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amounting to Rs. 38,26,826/- being without any basis, is deleted for
computation of deduction u/s 80IC of the Act.
5.6 I have adjudicated on the various components of curtailment
of deduction under section 80IC in the above paragraphs. The
assessee is eligible for deduction u/s 80IC amounting to
Rs.5,17,55,954/- against deduction of Rs. 2,82,33,796/- allowed
by the assessing officer. The assessee gets relief of Rs.2,35,22,158/-
on account of curtailment of deduction u/s 80IC by the Assessing
Officer. A chart giving detail of curtailment of deduction u/s 80IC
by the Assessing Officer under various components and relief
granted by me to the appellant is attached with this order as
Annexure - A. In view of above discussion, ground of appeal No. 2
is partly allowed. "
6.5 We find that the ld. CIT (Appeals) has allowed partial relief to the
assessee on the claimed deduction under section 80IC of the Act by
upholding the criteria of apportionment of indirect expenditure of Baddi
Unit on the basis of sales turnover of Baddi Unit to the total turnover of
other units etc. for the allocation of expenditure of interest on the basis
of actual usages of funds for which a working was furnished by the
assessee. This action of the ld. CIT (Appeals) has resulted in relief of
Rs.1,96,95,332/- towards the claimed deduction under section 80IC of
the Act. He has given relief of Rs.38,26,826/- on the basis that it was
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amount of notional ad-hoc 1% cost inputted to Baddi Unit for sales
affected by other units while computing deduction under section 80IC of
the Act. He has analyzed the allocation of indirect expenditure of Baddi
Unit in para No. 4.1, 4.3 and 5.1 of the first appellate order and has
upheld the principal of apportionment of common expenditure on the
basis of sales by following the ratio of the decision of Hon'ble
jurisdictional High Court of Delhi in the case of Control & Switchgear
Ltd. Vs. DCIT 66 DTR 166 (Del.). The Hon'ble High Court in that
decision (supra) has approved the apportionment of common expenditure
between the unit eligible for deduction under section 80IC and non-
eligible units on the basis of turnover where specific unit-wise detail of
expenditure was not furnished before the lower authorities despite
specific query to this effect. The ld. CIT (Appeals) has allowed a relief of
Rs.1,62,33,521/- in allocation of interest on the basis of actual usages of
funds by computing interest of Rs.34,61,811/- attributable to activities
of Baddi Unit as against the apportioned interest cost of
Rs.2,07,54,839/- made by the Assessing Officer. The ld. CIT (Appeals)
has held that the amount of Rs.2,20,39,488/- could not be considered
for allocation of expenditure once the same had been added back by the
assessee to its income and deleted the curtailment in profit eligible for
deduction under section 80IC of Rs.24,02,304/-. The ld. CIT (Appeals)
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has perused the debits and credits to the account of Head Office and
taking them into consideration on a daily basis to find out the product,
the product on which interest cost attributable to net use by funds by
Baddi Unit has been computed by resident company at Rs.34,61,811/-
has been held attributable to Baddi Unit by him. The ld. CIT (Appeals)
has noted further that the assessee had opening credit balance in its
books of accounts to the account of Head Office of Rs.17,57,43,596.23
from which the assessee company had deducted the investment in fixed
assets out of share capital and share premium, which was derived
by taking into fixed assets as appearing in the balance sheet of Baddi
Unit to the total fixed assets held by the assessee company. He has
further noted that while computing the figure of actual usages of
funds by the Baddi Unit the assessee has also reduced the profit
declared by Baddi Unit of Rs.10,62,29,705/- in the preceding two
assessment years to arrive at the opening figure of funds in use
by the Baddi Unit. In absence of rebuttal of these material facts by
the Revenue, we do not find reason to interfere with the first
appellate order which is comprehensive and speaking meeting out the
objections raised by the Assessing Officer in view of the submission of
the assessee. The same is upheld. The ground Nos. 1 and 2 of the
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appeal are thus rejected. The appeal of the Department for the
assessment year 2010-11 is accordingly dismissed.
6.6 So far as the remaining appeals of the assessee on identical
issue as raised in the appeal preferred by the Department are concerned,
the parties have adopted similar arguments. The ld. AR submitted
that the issue may be decided in view of the decision of Hon'ble
jurisdictional High Court of Delhi in the case of Controls & Switch Gear
Co. Ltd. Vs. DCIT (supra). He, however, submitted that the assessee
does not wish to press ground No. 4(a) raised in the appeal against the
action of the ld. CIT (Appeals) by which he has reduced Rs.52,69,333/-
in assessment year 2008-09 and Rs.26,21,697/- in the assessment year
2009-10 in the profit of Baddi unit eligible for deduction under section
80IC by treating the same as alleged over-valuation of stock. The
ground No. 4(a) of both the appeals are accordingly rejected. So far as
other grounds on the validity of deduction under section 80IC worked
out by the ld. CIT (Appeals), we set aside the orders of the authorities
below to the file of the Assessing Officer to decide the issues raised in
the ground Nos. 4(b) and 4(c) of the appeals preferred by the assessee in
view of our finding on an identical issue in the Departmental appeal for
the assessment year 2010-11 decided above. While deciding the issue,
50
the Assessing Officer will afford opportunity of being heard to the
assessee. The ground Nos. 4(b) and 4(c) of the appeals of the assessee
are accordingly allowed, for statistical purposes.
7. So far as ground No. 5 questioning the action of the ld. CIT
(Appeals) in upholding the disallowance of additional depreciation of
Rs.51,87,590/- on new plant and machinery installed at other than
Baddi unit during the year raised in the appeal for the assessment year
2009-10 is concerned, the ld. AR has not been able to improve its case
before the Tribunal. We thus, uphold the action of the ld. CIT (Appeals).
The ground No. 5 is accordingly rejected.
8. In result, appeals of the assessee are partly allowed and that of
the Department is dismissed.
9. The order is pronounced in the Open Court on : 22nd June, 2017.
Sd/- Sd/-
( O. P. KANT ) ( I. C. SUDHIR )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : the 22nd June, 2017.
*MEHTA*
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Copy of the Order forwarded to :-
1. Appellant;
2. Respondent;
3. CIT;
4. CIT (Appeals);
5. DR, ITAT, ND.
BY ORDER
ASSISTANT REGISTRAR 52 Date Draft dictated on 22.06.2017 Draft placed before author 22.06.2017 Draft proposed & placed before the second member Draft discussed/approved by Second Member.
Approved Draft comes to the Sr.PS/PS Kept for pronouncement on File sent to the Bench Clerk Date on which file goes to the AR Date on which file goes to the Head Clerk.
Date of dispatch of Order.
53