Income Tax Appellate Tribunal - Pune
Deputy Commissioner Of Income Tax vs Finolex Cables Ltd. on 31 July, 2007
Equivalent citations: (2008)114TTJ(PUNE)785
ORDER
Ahmad Fareed, A.M. v This appeal by the Department is directed against the order of the CIT(A), dt. 23rd Dec.,1996 for asst. yr. 1993 94.
2. The assessee, a public limited company, was engaged in the business of manufacturing electric and telephone cables. It had two units an old unit at Pimpri and a new unit at Urse. In respect of the Urse unit the assessee was claiming deduction under Section 80-1. The return for asst. yr. 1993 94 was filed on 31st Dec., 1993 showing total income of Rs. 21,60,82,458. In the assessment order passed by the AO on 4th March, 1996, the total income was assessed at Rs. 34,92,81,571.
2.1 The CIT(A) allowed part relief and his order was challenged by the assessee as well as by the Department. The appeal filed by the "assessee was decided by the Tribunal in ITA No. 299/Pn/1997 on 26th June, 2006. The present appeal is the one filed by the Department.
Ground No. 1On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the disallowance of Rs. 6,90,303 which represented expenses on gift articles and in the absence of the logo/emblem, the same were held as non-business expenses by the AO.
3. The assessee had incurred expenses of Rs. 9,64,578 on gift articles, out of which Rs. 41,731 was worked out as not allowable under Rule 6B. The AO found that Rs. 6,90,303 represented the cost of items/articles which did not have the company logo--articles like sweets, dry fruit boxes, etc. The CIT(A) was of the view that the entire expenditure was incurred 'for furtherance of business', and that it be regulated by Rule 6B.
3.1 We find that this issue is covered in favour of the assessee by the decision of Tribunal Pune, in the assessee's own case in ITA No. 299/Pn/1997 for asst. yr. 1993-94, dt. 23rd June, 2006. In para 5 of its order dt. 23rd June, 2006 (supra) the Tribunal held as under:
Ground No. 5 is against the findings of the learned CIT(A) that the assessee is not entitled to deduct fully the expenditure of Rs. 6,90,303 incurred on gift items and provisions of Rule 6B of the IT Rules are applicable in respect of this expenditure. In the course of hearing before us, the learned counsel pointed out that this issue is covered in the order of Hon'ble Tribunal for asst. yr. 1990-91 (supra). In that order, the expenditure was allowed in full by referring inter alia to the decision of Hon'ble Bombay High Court in the case of CIT v. Allana Sons Ltd. . The facts of this year are identical, with that year inasmuch as it was affirmed before us that these items did not carry the logo of the assessee. Therefore, relying on those decisions, this ground of appeal is allowed.
3.2 We follow the precedent and reject this ground.Ground No. 2
On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the disallowance of Rs. 7,050 made by the AO to cover the payment made to the club and in not appreciating that the expenses were not incurred wholly and exclusively for the purpose of business as held by the AO.
4. It was admitted by the learned Authorised Representative that this issue was covered against the assessee by the decision of Tribunal, Pune in the assessee's own case for asst yr. 1991-92 in ITA No. 430/Pn/1995, dt. 7th April, 2006. In para 7 of its order, the Tribunal held as under:
5th ground of appeal is against the disallowance of a sum of Rs. 11,146 being the expenditure incurred on corporate membership of directors to the club. The learned counsel referred to the decision of Hon'ble Bombay High Court in the case of Otis Elevator Co. (India) Ltd. v. CIT and did not press this ground. Accordingly, this ground is dismissed.
4.1 We follow the precedent and allow this ground.Ground No. 3
On the facts and in the circumstances of the case, the learned CIT(A) erred in allowing Rs. 6,48,429 as bad debts claimed by the assessee when in fact the said amount represents short supply of goods to MTNL, Delhi, to which the assessee had not agreed.
5. The AO has noted in para VIII of his order that under the head 'Administrative and selling expenses' is included an item of Rs. 22,98,628 claimed as bad debts/advances written off, which in turn includes Rs. 6,48,429 deducted by the MTNL Delhi on account of shortages. The AO disallowed this claim and the CIT(A) allowed it.
5.1 We have considered the matter. It is seen that the assessee had supplied goods to MTNL and for certain defects/shortages deductions were made by the buyer in the bills submitted by the assessee. The CIT(A) has held that this claim was allowable under Section 37 of the Act and we see no reason to disagree with him. This ground is accordingly rejected.
Ground No. 4On the facts and in the circumstances of the case, the learned CIT(A) erred in directing to allow the loss of Rs. 45,05,000 claimed by the assessee on sale of investments merely relying on the decision for the earlier assessment year.
6. The AO has noted in para X of his order that in the P&L a/c, expenses claimed under the head 'Administration and selling expenses', included Rs. 1,00,35,152 as 'loss on sale of investments', that the assessee had separately claimed in the statement of total income, Rs. 45,05,000 as tax-free interest, that the assessee had claimed deduction for tax-free interest' in relation to purchase and sale of securities and had at the same time claimed loss on the sale of such securities, that even the interest paid in respect of the loan raised for purchasing the securities had not been considered in arriving at the tax-free interest. Therefore, following his order for asst. yr. 1990-91, the AO worked out the loss from sale of securities after deducting the 'tax-free interest' in para X(4) of his order. The CIT(A) passed a cryptic order merely saying that for the detailed reasons given in his order for the earlier year the addition was deleted.
6.1 It was submitted on behalf of the assessee that this issue was covered by the decision of the Tribunal, Pune in the assessee's own case for asst. yr. 1990-91 in ITA No. 481/Pn/1994, dt. 30th Sept., 2005, given in paras 20 and 21 at pp. 10 to 13 of the order. We have perused the aforesaid order of the Tribunal and we find that this statement is not correct. In paras 20 and 21 of the aforesaid order the Tribunal decided an altogether different issue relating to the claim of deduction under Section 80M.
6.2 In view of the fact that the CIT(A), while deciding the above issue, passed a cryptic order, the matter has to be restored back to his file. He is accordingly directed to pass a speaking order after giving an opportunity of being heard to the assessee. The ground No. 4 is decided accordingly.
Ground No. 5On the facts and in the circumstances of the case, the learned CIT(A) erred in allowing the depreciation on flats of Rs. 6,73,080 and in not appreciating the fact that some of these flats remained vacant and some were used for guest house purposes during the year under consideration.
7. The assessee had constructed certain flats for its employees called Antariksha Complex and had claimed depreciation of Rs. 7,97,562 in respect of these. The AO disallowed the claim of depreciation in respect of those flats, which were lying vacant and were not put to use during the year in question.
7.1 The learned Departmental Representative supported the order of the AO, placing reliance on the decision in the case of CIT v. J.K. Transport . The learned Authorised Representative, on the other hand placed reliance on the decision of Tribunal, Jabalpur in the case of Packwell Printers v. Asstt. CIT (1996) 59 ITD 340 (Jab).
7.2 In the case of Packwell Printers (supra) the Tribunal held as under (headnotes):
The legislature felt that keeping the details with regard to each and every depreciable assets was time-consuming both for the assessee and the AO. Therefore, they amended the law to provide for allowing of the depreciation on the entire block of assets instead of each individual asset. The block of assets has also been defined to include the group of assets falling with the same class of assets. Hence, after the amendment w.e.f. 1st April, 1988, the individual asset has lost its identity and for the purpose of allowing of depreciation, only the block of assets has to be considered. If a block of assets is owned by the assessee and used for the purpose of business, depreciation will be allowed. Therefore, the test of user has to be applied upon the block as a whole instead of upon on individual asset.
In the instant case when the two trucks out of the three in the block were used for the purpose of business, the depreciation had to be allowed on the WDV of the said block of assets, as per the percentage of depreciation prescribed in respect of the block of assets. Therefore, the depreciation was allowed on all the trucks of the assessee. On the same basis, the disallowance of depreciation on jeep, car, motor cycle was also deleted.
7.3 The CIT(A) allowed the assessee's claim for the reasons given in paras 34 and 35 of his order, saying that this was the second year of the claim of depreciation in respect of these flats, that depreciation was allowed in respect of these flats in the earlier year, that depreciation was allowable on the entire block of assets. In view of the above facts arid circumstances, we see no reason to disagree with the CIT(A), and in taking this view we are fortified by the decision of Tribunal, Jabalpur in the case of Packwell Printers (supra). The ground No. 5 is accordingly rejected.
Ground Nos. 6 and 7:
6. On the facts and in the circumstances of the case, the learned CIT(A) erred in allowing the depreciation on leased out assets of Rs. 9,27,69,040 and in not appreciating the fact that the said claim was made not in the interest of commercial expediency but as an attempt to unduly reduce the tax liability.
7. On the facts and in the circumstances of the case, the learned CIT(A) erred in allowing the interest on loan of Rs. 1,74,92,387 taken for purchase of leased assets and in not appreciating the fact that the transaction of leasing was not a bona fide one but a device of tax avoidance and hence cannot be allowed in view of the ratio of the Supreme Court judgment in the case of McDowell and Co. Ltd. v. CTO .
8. These grounds relate to the disallowance/additions of Rs. 9,27,69,040 and of Rs. 1,74,92,397. claimed by the assessee as depreciation in respect of assets allegedly leased out, and as interest/financial cost incurred in relation thereto respectively.
8.1 In the P&L a/c the assessee had shown income of Rs. 1,85,76,096 as 'lease rent' and had claimed depreciation of Rs. 9,27,69,040 in respect of assets allegedly purchased and leased out. The assessee had also claimed interest of Rs. 1,74,92,387 in respect of loan allegedly taken for purchasing the aforesaid assets. The AO disallowed the claim in respect of depreciation as well as interest aggregating to Rs. 11,02,61,427, inter alia., on the ground that the impugned transaction was an attempt to reduce the taxable income. He. however, assessed the lease rent of Rs. 1,85,76,096, shown by the assessee on protective basis.
8.2 The CIT(A) allowed the assessee's claim for the reasons given in paras 44, 45 and 46 as under:
44. I have considered the submissions. I find from the assessment order that the bona fides of the leased transaction are not questioned The AO has accepted the fact of purchase of machinery and leasing of the same to FIL.
45. The AO only felt that this was tax planning to reduce the tax liability.
46. The appellant's computation shows that no doubt during the year the tax liability would be reduced. However, overall, the appellant would gain from the transaction, and there would be income. The appellant had obtained the consent by amending the memorandum only during 1991-92 hence this was a new business. In any case, I do not consider anything mala fide in the transaction. In my opinion, this was a bona fide transaction that had been entered into by the appellant. Under the circumstances and in view of the fact that the use of the assets is not disputed, I hold that the appellant is entitled to the depreciation on the leased assets, hence this ground of appeal is allowed.
8.3 Shri. B.K. Khare, the learned Authorised Representative reiterated the arguments which were put forward on behalf of the assessee before the AO and the CIT(A). The submissions made by him are summarized below.
• that the SLB transaction was a genuine commercial arrangement.
• that business decision cannot be questioned unless the arrangements are sham or unreal.
• that the property in the leased assets was in fact transferred onto the assessee which has not been doubted or questioned by the AO.
• that in the memorandum of the company, the object clause was amended, as noted by the CIT(A) in para 14 (p. 11) of his order.
• that the taxable income of the assessee is not reduced if the effect of the arrangement is viewed in totality covering the entire duration of the lease.
• that reliance was placed on the decisions in the following cases:
(i) Union of India v. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC);
(ii) CIT v. George Williamson (Assam) Ltd. ;
(iii) Industrial Development Corporation of Orissa Ltd. v. CIT ;
(iv) Bombay Burmah Trading Corporation Ltd. v. Asstt. CIT (2002) 76 TTJ (Mumbai) 983 : (2002) 82 ITD 531 (Mumbai);
(v) West Coast Paper Mills Ltd v. Jt. CIT ITA No. 5403/Mum/1999, dt. 21st June., 2005 [reported at (2006) 100 TTJ (Mumbai) 833--Ed.] 8.4 Shri. Pradeep Sharma, learned Departmental Representative, supported the order of AO. He vehemently argued saying that the order of the CIT(A) be reversed and that of the AO be upheld. He placed reliance on the decisions in the following cases:
(i) McDowell and Co. Ltd v. CTO (supra);
(ii) Mid East Portfolio Management Ltd. v. Dy. CIT (2003) 81 TTJ (Mumbai)(SB) 37 : (2003) 87 ITD 537 (Mumbai)(SB).
8.5 We have considered the rival submissions in the light of material on record and the precedents cited. We find that the issue relating to the claim of depreciation and interest in respect of a sale and lease back (SLB) transaction was considered, in detail, by the Special Bench of Tribunal Mumbai in the case of Mid East Portfolio Management Ltd. v. Dy. CIT (supra). The Tribunal Special Bench gave its decision on the facts of Mid Lost Portfolio Management Ltd. (supra) and of ICICI Ltd. The facts of these two cases, the decision given and the observations made by the Tribunal are discussed in the following paras.
8.6 In the case of Mid East Portfolio Management Ltd. (supra) the assessee purchased air-pollution equipments from Rajasthan State Electricity Board (RSEB) and simultaneously leased it back on rent to the said RSEB. The assessee claimed 100 per cent depreciation on the said equipment. The Department rejected the claim on the basis of rule laid down in McDowell and Co. Ltd. v. CTO (supra), holding that the aforesaid transaction in truth was a borrowing of money by the RSEB on the security of asset but the documentation had been so prepared as if it was a sale and lease back (SLB) transaction and, therefore, the assessee was not entitled to depreciation. On second appeal, the Division Bench of the Tribunal was of the view that the true effect of the documentation needed to be considered in deeper perspective and therefore referred the matter to the Special Bench.
8.7 An identical issue arose in the case of ICICI Ltd. (supra) in respect of boiler purchased from and leased back to Gujarat Electricity Board (GEB) and therefore the same was also referred to the Special Bench and the ICICI Ltd., was added as an appellant.
8.8 While discussing the judgment of the Supreme Court, in the case of McDowell and Co. Ltd. (supra), the Tribunal (SB) had, inter alia, noted that the Courts and Tribunals had to expose subterfuges, colourable device, and dubious methods in tax cases, that the lawful dues to the State cannot be withheld through schemes of subterfuge, a colourable device, and a dubious method, that the approach in such cases must be to take the entire arrangement as a whole and see if it makes any economic or commercial sense without attaching weight to the steps that go to make up the arrangement or the scheme, each of which may be legally valid, that the genuineness of the arrangement has to be viewed not in relation to every step taken to achieve the result but in relation to the final result, that one has to look at the truth of the transaction (and if permissible) by going behind the facade of documentation or the series of steps taken, that the Courts (and Tribunals) always have the freedom to 'go behind' the documents to find out the real intention of the party, that the rule presupposes that in a given case the real intention of the parties to a document/transaction/arrangement could be different from what it appears from it ex facie, that the Court must normally proceed on the basis of the professed intention, but if that is under doubt or is disputed or is challenged, then its power to find out the real intention of the parties by ignoring the apparent has to be and has always been conceded, that in cases of make believe arrangement or a subterfuge or a dubious or a colourable device adopted, the Court will be merely removing the facade to expose the real intention of the parties cleverly cloaked and if that intention is discovered to be the evasion of taxes, it cannot be given effect to merely because all the steps taken as component parts of the arrangements are legally correct or valid, that the right of the parties to enter into transactions according to their free will and choice has always been protected, the only rider being that both the professed intention and the real intention should be the same, that all commercial arrangements and documents or transactions have to be given effect to even though they result in a deduction of the tax liability, provided that they are genuine, bonafide and not colourable transaction.
8.9 A sale and lease back (SLB) transaction, is a specie of a finance lease. In such an SLB transaction, an asset is first purchased by the assessee and almost simultaneously, it is leased back to the seller, who thereafter holds and uses the asset in a different capacity. The erstwhile owner becomes the lessee after the lease. The assessee, thus, becomes the owner of the asset though the asset continues to remain with the seller who has now become the lessee. Normally in such a transaction if it is viewed as a pure financing transaction with the asset continuing to be owned by the assessee who has lent the money merely for purpose of security, what is received by the assessee from the lessee must be considered as interest on the monies advanced. The business would be that of money-lending. The assessee would not be entitled to the depreciation on the asset because it is not used in the business of money-lending, and in order to get over this situation, the SLB agreement was thought of. If the SLB agreement is viewed as a leasing transaction, the assessee lessor would be entitled to depreciation on the asset leased out since his business would be that of leasing and not mere money-lending.
8.10 It was, therefore, noted by the Tribunal (SB) that, all SLB transactions as such cannot be considered to be dubious or colourable devices or subterfuges aimed at tax evasion. The enquiry which a Court or the Tribunal can make, when faced with an SLB transaction is to find out the real intention of the parties and ascertain whether a simple loan transaction masquerades as an SLB transaction. Any transaction in which the professed intention and the intention gathered from the documentation are the same, viz, a sale and lease back, must be considered to be a genuine SLB transaction.
8.11 It is true that the Expln. 4A to Section 43(1) inserted by the Finance Act, 1996 w.e.f 1st Oct., 1996 is a recognition of the position that all SLB transactions cannot be held to be motivated only by tax evasion. There can be a genuine SLB transaction. The Explanation only seeks to thwart the move to inflate the value of the asset leased out in order solely to obtain the benefit of 100 per cent depreciation. It applies to an otherwise genuine SLB transaction. If SLB transaction itself is not genuine then there is no need to invoke the Explanation.
8.12 In the cases of Mid East Portfolio Management Ltd. (supra) and ICICI Ltd. (supra) it was held by the Tribunal (SB) that the transactions styled as SLB transactions were, in reality, pure finance transactions and the intention of the parties was not that the property in the equipment should pass on to the assesses by way of sale. In the result the assessees were held nor entitled to the 100 per cent depreciation allowance claimed in respect of the assets/equipments leased out.
8.13 We, now, proceed to apply the above decision of the Tribunal (SB) to the facts of the present case. The relevant facts are discussed by the AO in para XIII of his order. The assessee claimed to have purchased assets from its sister/group company M/s Finolex Pipes Ltd. (FPL for short) now called Finolex Industries Ltd. (FIL for short), for a total sum of Rs. 17,81,49,958 and leased them back to FPL (now FIL). Some assets were shown to have been purchased from other parties too for Rs. 4,38,86,684. The details of these assets are given in the Annex. VII enclosed with the assessment order. The assessee claimed depreciation of Rs. 9,27,69,040 in respect of these assets.
8.14 The assessee also claimed to have raised loans for purchasing these assets and claimed interest of Rs. 1,74,92,387 in respect of these alleged loans. The total claim for deduction, in respect of these alleged SLB transactions, was of Rs. 11,02,61,427, as against the income in the form of lease rent of Rs. 1,85,76,096, offered for tax.
8.15 It was noted by the AO that most of the above items of assets were those which were eligible for depreciation at 100 per cent, that FPL (now FIL) purchased these assets in the months of February to September, 1992, that from September, 1992 to February, 1993 they were sold by FPL to the assessee company, that while FPL was a loss making company, the assessee was making huge profits, that FPL was itself a reputed company having its units in Pune and Ratnagiri, with investments of hundreds of crores raised by way of loans, debentures and shares. In view of the above facts and circumstances the AO formed the opinion, and rightly so, that SLB transactions were motivated by a desire to reduce the taxable income of a profit-making company. He, accordingly, disallowed the total claim of depreciation and interest aggregating to Rs. 11,02,61,427. However, the income of Rs. 1,85,76,096 offered as lease rent was taxed on protective basis.
8.16 The CIT(A) allowed the assessee's claim after making bald and cryptic remarks, in paras 44 to 46 of his order, saying that in the assessment order the bona Jides of the leased transaction were not questioned, that the AO accepted the fact of purchase and lease back of machinery, that he did not consider anything mala fide in the transaction, and that in his opinion this was a bona fide transaction.
8.17 In our considered opinion the order of the CIT(A) is totally erroneous, to say the least. The AO, after discussing the facts and circumstances in detail, concluded that the impugned transactions were 'motivated by nothing else but to reduce the taxable income of the profit making company'. We fail to understand how the CIT(A) got the impression from the assessment order that the bona Jides of the transactions were not questioned by the AO.
8.18 Admittedly, the assessee was a manufacturing company and was not a finance company. The impugned transactions were between two sister/group companies. The assessee, a profit making company, tried to reduce its profit by as much as Rs. 9,27,69,040, by using a device of taking over the claim of depreciation of Rs. 9,27,69,040, from a loss making group company, by creating the aforesaid facade of SLB transaction. If we look at the arrangement as a whole it becomes abundantly clear that the transactions had no commercial or economic sense. We have no doubt in our mind that it was not a bona fide arrangement. We entirely agree with the AO that the real intention behind this arrangement was to reduce the tax liability of the assessee company. Manifestly, it was a case of a colourable device. Once we have held that the arrangement itself was not bona fide it becomes totally immaterial that there was no illegality about the transactions.
8.19 In our considered opinion, the present case is squarely covered by the decision of the Special Bench of Tribunal Mumbai in the case of Mid East Portfolio Management Ltd. (supra). In fact, in the present case the impugned SLB transactions were between two group companies and therefore it stands on a much stronger footing than the case of Mid East Portfolio Management Ltd. (supra). We respectfully follow the decision of the Tribunal (SB) in the case of Mid East Portfolio Management Ltd. (supra) and hold that the order of the CIT(A) has to be reversed; that the order of the AO has to be restored; and that, as a consequence, the lease rent assessed on 'protective basis' has to be deleted. We order accordingly.
8.20 In the case of West Coast Paper Mills Ltd. in ITA No 5403/Mum/ 1999 dt. 21st June, 2005 (supra), the Tribunal Mumbai, while deciding the issue in favour of the assessee, had observed in para 17 of its order that, "the Revenue had not established that the underlying motive of the assessee company in claiming depreciation at the rate of 100 per cent has resulted in some economic detriment or prejudice to the Revenue".
8.21 In the case of Bombay Burmah Trading Corporation Ltd. (supra), the Tribunal Mumbai, while allowing the assessee's claim, had observed, on the facts of that case, that no aspect of the transaction had been found to be of dubious nature.
8.22 The facts of the case in the present appeals are, manifestly, distinguishable, and therefore, the above two decisions of the Tribunal Mumbai do not render any help to the assessee. Similarly, in the other eases, which were cited during the hearing, the facts were distinguishable, and hence those cases are not discussed here.
8.23 The learned Authorised Representative had also drawn our attention to the observations made by the Supreme Court in the case of Union of India v. Azadi Bachao Andolan (supra) in relation to its earlier judgment in the case of McDowell and Co. Ltd. (supra). In the case of Azadi Bachao Andolan (supra) the Circular No. 789 dt. 13th April, 2000 (2000) 160 CTR (St) 5 issued by the CBDT was challenged before the Delhi High Court by two writ petitions, by way of public interest litigation. The prayer was for quashing and declaring as illegal and void, the Circular No. 789 dt. 13th April, 2000 (supra). The High Court quashed the circular and the matter went to the Supreme Court by special leave. The Supreme Court set aside the judgment of the Delhi High Court and declared the Circular No. 789 dt. 13th April, 2000 (supra) as valid.
8.24 In the present case, after examining all the relevant facts and the surrounding circumstances, as discussed in the above paras, we have concluded that the entire arrangement of the impugned SLB transactions was not bona fide, that it was a colourable device, and therefore the assessee's claim could not be allowed. In taking this view we are fortified by the decision of the Supreme Court in the case of Union of India and Ors. v. Play world Electronics (P) Ltd. and Anr. . In this case it was held by the Supreme Court that, "Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious means."
8.25 The grounds Nos. 6 and 7 are accordingly allowed.
Ground No. 8On the facts and in the circumstances of the case, the learned CIT(A) erred in allowing the relief of Rs. 82,78,125 in the computation of deduction under Section 80-1 and in not appreciating the reasons mentioned by the AO for reducing the claim under Section 80-1 by Rs. 1,27,66,065.
9. The assessee had two units--an old one at Pimpri and a new one at Urse which was set up during the previous year relevant to asst. yr. 1990-91, and was eligible for deduction under Section 80-1. In the statement of total income enclosed with the return, deduction of Rs. 7,11,99,318 was claimed under Section 80-1 of the Act in respect of the Urse unit as under:
Particulars Amount (Rs) Amount (Rs) Amount (Rs) Profit as per P&L a/c of the Urse division 28,24,61,348 Depreciation as per books 2,61,00,924 Book loss on sale of assets 6,47,783 Disallowahle under Section 37(2A) 60,634 Entertainment total expenses 27,066 Less : Initial 10,000 17,066 50% allowable 8,533 8,533 2,68,17,874 30,92,79,222 Add : Customs duty paid on opening stock 1,53,83,606 32.46,62,828 Less : Depreciation as per IT Act 1,82,22,148 30,64,40,680 Less : Customs duty paid on closing stock 2,16,43,410 Profit of new undertaking 28,47,97,270 Deduction under Section 80-1 (25% of profit) 7,11,99,318 9.1 The AO was of the view that, in order to increase the quantum of deduction under Section 80-1, the allocation of expenses to the Urse unit was kept proportionately low so as to artificially increase the profit of the Urse unit. The total income, before deduction under Chapter VI-A, was 30,98,92,907, out of which the income of the Urse unit, representing as much as 91.90 per cent, was shown at Rs. 28,49,97,270 and the balance of Rs. 2,50,95,637, representing 8.1 per cent only was shown as the income of the Pimpri unit. The details of total turnover and the expenses claimed under major heads, in respect of the two units, are noted in para XIV of the assessment order as under:
S. No. Particulars Pimpri unit (Rs) Urse unit (Rs) Total (Rs.) 1 Sale 1.29,00,94.454 1,14,68,16,032 2,43,69,10,486 (52.94%) (47.06%) 2 Other Income 9,75,82,218 3,45,46,371 13,21,29,089 Total 1,38,76,76,072 1,18,13,62,903 2,56,90.39,575 3 Manufacturing expenses 74,64,75,580 56,07,18,076 1,30.71,93,656 (57.11%) (42.89%) 4 Payments to and provision for employees 3,60,70,526 92,28,706 4,59,99,237 (78.42%) (21.58%) 5 Administration and selling expenses 9,34,03,495 2,60,56,613 11,94,60,108 (78.19%) (71.81%) 6 Finance charges 9,92,33,628 2,76,42,024 12,68,75,652 (78.22%) (21.78%) 9.2 The AO made changes in relation to inter-branch transfer of material and in the allocation expenses, and accordingly restricted the assessee's claim under Section 80-1 to Rs. 5,84,33,253 computed in para 12.2 of his order, as under:
Particulars (Rs) (Rs) Profit as per return of income 28,47,97,270 Add:
1.
Loss on sale of investment 9,16,635
2. Premium on redemption of debenture 2,86,500
3. Difference disallowed in depreciation 1,27,590 13,30,725 28,61,27,995 Less :
Dividend income 92,75,000 Interest income 74,665 Excess allocation of expenses 4,30,45,328 5,23,94,983 Profit for the purpose of Section 80-1 23,37,33,012 Deduction under Section 80-1 @ 25% of profit 5,84,33,253 9.3 The excess allocation of expenses of Rs. 4,30,45,328 was worked out by the AO, in para 12.1 of his order, as under:
S. No. Particulars (Rs)
1.
Transfer of material 85,65,960
2. Traveling expenditure 22,30,442
3. Provision for employees 10,00,000
4. Rollover charges 43,14,243
5. Finance charges 1,71,90,128
6. Miscellaneous expenditure 77,01,189 Total :
4,30,45,328 9.4 The CIT(A) allowed part relief, which has been in worked out in a chart submitted by the assessee at Rs. 82,78,125, as under:
Particulars AO (Rs) CIT(A) (Rs) Relief by CIT(A) (Rs) Profit (after addition) 28,61,27,995 28,60,00,405 Less: Excess expenses allocated to Urse unit Inter-unit transfer of material 85,65,960 85,65,960 Travelling & conveyance expenses 22,30,442 10,89,750 11,40,692 Employee cost 10,00,000 10,00,000 Rollover charges 43,14,243 43,14,243 Finance charges 1,71,90,128 19,95,488 1,51,94,640 Miscellaneous expenses 77,01,189 14,05,747 62,95,442 Dividend income of Urse unit excluded 92,75,000 92,75,000 Interest income of Urse unit excluded 74,665 74,665 Mistake by AO 20,43,366 20,43,366 Total of excess allocation 5,23,94,993 1,91,54,893 3,31,12,510 Profit after reduction of excess allocation 23,37,33,002 26,68,45,512 Claim under Section 80-1 (a) 25% of profit 5,84,33,251 6,67,11,378 82,78,125 9.5 Shri Pradeep Sharma the learned CIT(ITAT) supported the order of the AO. He vehemently argued saying that the order of the CIT(A) be reversed and that of the AO be upheld.
9.6 Shri. B.K. Khare, the learned Authorised Representative reiterated the arguments put forward on behalf of the assessee before the AO and the CIT(A). He took us through the order of the CIT(A) and the relevant details. He pointed that the two units were at a distance of about 100 kms from each other, that separate books of account were maintained for the Urse unit, that the expenses which were directly attributable to the Pimpri and the Urse units were booked in the accounts of the respective units, and that the expenses which have no relation to the operations of the Urse unit need not be allocated to this unit. He contended that the CIT(A) had examined in his order each and every item in detail and that this ground needed to be rejected.
9.7 We have considered the rival submissions in the light of material on record. The CIT(A) has noted in para 57 of his order that if the loss from leasing business, claimed by the assessee at Rs 8.89 crores, is excluded, the profit of the Pimpri unit would be Rs. 11.41 crores. In other words, in the total profit of Rs. 39.88 crores the share of the Pimpri and the Urse units is worked out at 29 per cent and 71 per cent respectively.
9.8 The assessee's allocation is given in para 61 of the order of the CIT(A). The AO and the CIT(A) examined and reallocated the expenses under major heads as mentioned above.
9.9 The CIT(A) has noted that separate books of account were maintained by the assessee for the two units of Pimpri and Urse. He held that the expenses, which were incurred for a particular unit and were directly attributable either to the Pimpri or to the Urse unit should be allocated to the respective units and we are in agreement with this view. But the difficulty arises about those expenses, which cannot be so attributed to a particular unit.
9.10 We find that the issue about the method of allocation of 'common unidentifiable expenses' to the old and the new units was considered by the Tribunal in the assessee's own ease for asst. yr. 1990-91 in ITA No. 481/PN/1994, dt. 30th Sept., 2005. In para 19 of its order the Tribunal observed as under:
...Next comes the question of allocation of expenses. In this regard assessee's own appeal decided by Tribunal, Pune Bench for the asst. yr. 1989-90. referred supra, has been cited again; wherein it was directed to compute the claim of the assessee in accordance with the formula followed by the assessee. The argument before us is that there were certain common unidentifiable overheads which were allocated on the basis of incurrence of salary and wages. It was stated that generally all expenses wore identifiable except general administrative expenses and those were allocated to the new industrial undertaking on the basis of salaries and wages. It was also argued that since the assessee was running a composite business i.e. industrial undertaking eligible for Section 80-1 benefit as well as other existing manufacturing unit of varieties of cables, therefore, the allocation was made on the basis of salaries and wages of the industrial undertaking. Accordingly, the allocation was based upon the total salaries and wages of the industrial undertaking vis-a-vis the total expenditure on account of salaries and wages incurred by the company as a whole. It was argued that the allocation of common unidentifiable overheads on the basis of the incurrence of salaries and wages was a rational method because such overheads were attributable to the personnel engaged in the conduct of the operation of the company. Now before us, a comparative chart has also been filed according to which, the figures as claimed by the assessee and as assessed by the AO have been compared. According to this chart, the administrative and selling expenses were taken into account by the AO amounting to Rs. 1,28,79,734. However, the facts mentioned in the impugned order by the learned CIT(A) have referred an alternate plea of the assessee that the allocation could be done on the basis of material consumption of the new industrial undertaking. As per this alternate plea, the general administrative expenses attributable to Section 80-1 undertaking would amount to Rs. 1,34,18,626 as against Rs. 1,76,96,128 stated to be estimated by the Department. These figures were stated to be worked out on the basis of material consumption of the new industrial undertaking as a percentage of total material consumption related to the corporate entity. This alternate plea has substantial force, however, one thing is glaring that the figures as mentioned in the comparative chart before us do not tally with the figures as stated before the learned CIT(A). Undoubtedly, there was some apparent mistake. This difference in the figures has to be looked into by the AO and thereafter, allocate the same for the purpose of computation under Section 80-1 as suggested hereinabove. With these directions, we hereby restore this ground back to AO to take into account the alternate plea and recomputed the claim. Resultantly, this ground is partly allowed.
9.11 While taking a similar view, in the assessee's own case for asst. yr. 1991 92 in ITA No. 430/Pn/1995, the Tribunal observed in para 8 of its order dt. 7th April, 2006 as under:
Ground No. 6 is against the computation of deduction under Section 80-1. It was mentioned by the learned counsel that this ground is confined only to the issue of allocation of common administrative expenses to the eligible unit. He referred to the decision of Hon'ble Tribunal in ITA No. 481/Pn/1994 for asst. yr. 1990-91 dt. 30th Sept., 2005, in which the expenses were allocated to various units on the basis of raw material consumed in various units. Respectfully following that decision, the AO is directed to allocate expenses on the basis of raw material consumed.
9.12 Now we proceed to examine, in the following paras, the individual items of expenses, which were allocated/reallocated by the AO and the CIT(A) in their orders and are the subject-matter of this ground.
9.13 The expenditure claimed under the head 'finance charges' is one of the major items in this regard. The AO noted in para 10 of his order that out of the total finance charges of Rs 12,68,75,652 only Rs. 2,76,42,024, representing 21.78 per cent was allocated by the assessee to the Urse unit. The AO apportioned/allocated the finance charges to the two units on the basis of their respective turnover. He, accordingly, made a further allocation of Rs. 1,71,90,178 to the Urse unit, as worked out by him in para 11 of his order. The CIT(A) restricted this allocation to Rs. 19,95,488 thereby giving a relief of Rs. 1,51,94,640.
9.14 The break-up of the finance charges and their allocation made by the assessee and by the AO is given at p. 28 of the order of the CIT(A). In this chart, for instance, the items Nos. 6 and 7 are of 'bank charges' and of 'interest on working capital borrowings' of Rs. 26,72,670 and Rs. 1,27,29,942 respectively out of which only Rs. 60,842 and Rs. 1,440 were allocated by the assessee to the Urse unit, whereas the AO allocated Rs. 12,56,155 and Rs. 59,83,073 respectively on the basis of sale ratio. The CIT(A) accepted the assessee's plea for the reasons given at p. 30 of his order as under:
The AO had allocated the charges based upon the turnover. The appellant stated that the overdraft account was maintained for the company as a whole at Pimprl unit only. It was urged that reallocation of Urse unit was more than Pimpri. The balance sheet drawn up for Urse unit shows that there is a large capital and reserves and surplus funds are made available on the Urse unit. Hence no working capital interest should be allotted to Urse unit. I have considered the submissions. I agree that Urse unit has made profit. Urse unit had also obtained loan which is interest-free on account of sales-tax account. Hence, I agree that no allocation should be made on account of working capital borrowings. The work capital was essentially utilized by the Pimpri unit. Hence, I accept the nil allocation made by the appellant.
9.15 The CIT(A) says in his order that since Urse unit made profit no 'interest on working capital' had to be allocated to Urse unit. But he forgot that the Pimpri unit was also making profit. The order of CIT(A) is cryptic arid his decision is devoid of logic. We asked the learned Authorised Representative for the relevant material to substantiate the assessee's allocation. He agreed that the matter could be restored to the CIT(A) for the purpose of necessary verification of the factual position in this regard.
9.16 The expenditure incurred on 'inland traveling' was of Rs. 22,01,621 out of which only Rs. 25,871 was allocated by the assessee to the Urse unit and the AO enhanced it to Rs. 10,34,761 on sales basis. The CIT(A) reduced it to Rs. 2 lacs, purely on ad hoc basis, which is unsustainable. An item of expenditure which is not directly attributable to a particular unit will have to be allocated to the old and the new units in proportion to the respective values of their 'raw material consumption', as held by the Tribunal in this case for asst. yr. 1990-91 in ITA No. 481/PN/1994, dt. 30th Sept., 2005, mentioned above.
9.17 In relation to the inter-unit transfer of material the AO allocated Rs 85,65,959 to the Urse unit. In para XIV(2) of his order the AO, inter alia, noted as under:
(i) 75,800 kgs of HDPE was transferred from Urse unit to Pimpri unit at an average rate of Rs. 100.40 per kg as against the average purchase price of Rs. 53.92 per kg.
(ii) 47,825 kgs of LDPE black sheet compound was transferred from Urse unit to Pimpri unit at an average price of Rs. 104.12 per kg as against the average purchase price of Rs. 55.27 per kg.
(iii) There are instances that raw material was transferred from Urse unit to Pimpri unit even when the Pimpri unit had enough stock of such material.
9.18 It was submitted on behalf of the assessee before the AO, CIT(A) and also before us that the apparent difference in the purchase price and the transfer price was because of the excise component. There is merit in this argument. The comparison should be between like and like. We find the order of CIT(A), granting relief on this point, is ambiguous. He has not dealt with the specific objections raised by the AO as reproduced above. Therefore, the CIT(A) has to be directed to re-examine the issue and compare the purchase price and the transfer price after excluding the excise component.
9.19 The expenditure under the head 'miscellaneous expenses' was of Rs. 2,75,41,011 out of which the assessee allocated only Rs. 17,17,285, to the Urse unit. The AO allocated Rs. 77,01,189 to the Urse unit, calculated in proportion to the turnover of the two units.
9.20 Admittedly, separate books of account are maintained for the old unit at Pimpri and the new unit at Urse, and therefore the major part of expenses would be identifiable either with one unit or the other, but still there would be some expenses, which cannot be so identified. The new unit is eligible for deduction under Section 80-1, which is calculated at a certain percentage of the profit of that unit, and therefore, it is necessary to correctly determine the profit of the new unit. An error in the allocation of expenses to the two units can distort their respective profits. The AO was of the view that the profit of the new unit was artificially inflated by erroneously shifting certain expenses from the new unit to the old unit. We have mentioned, in the above paras instances where the approach, of the CIT(A) was, in our opinion, inconsistent, and arbitrary.
10. The principles for the allocation of expenses to the old and new units have been clearly laid down in the above paras--namely, that the expenses, which were specifically incurred for a particular unit, and were directly attributable either to the Pimpri or to the Urse units should be allocated to the respective units. And the 'common unidentifiable expenses' have to be allocated to the old and the new units as per the order of the Tribunal in the assessee's own case for asst. yr. 1990-91 in ITA No. 481/PN/1994, dt. 30th Sept., 2005, as reproduced above. In view of the facts and circumstances discussed in the above paras we are of the considered view that entire issue of the allocation of expenses should be remitted back to the file of the CIT(A). He will re-examine the issue in the light of the directions given in the above paras and will pass a fresh order after giving adequate opportunity of being heard to the assessee. The ground No. 8 is decided accordingly.
11. In the result, the appeal filed by the Department is partly allowed.