Income Tax Appellate Tribunal - Chandigarh
Torque Pharmaceuticals Pvt. Ltd., ... vs Assessee on 31 May, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL: "B" BENCH: CHANDIGARH
BEFORE SHRI D K SRIVASTAVA, AM AND Ms. SUSHMA CHOWLA, JM
ITA No. 1105/Chandi/2010
Assessment Year: 2006-07
Torque Pharmaceuticals Pvt. Ltd. v. Addl. C.I.T. R-1,
Plot No. 693, Industrial Area Phase II Chandigarh
Chandigarh
PAN: AABCT 1244 P
Appellant by: Shri Anil Kumar Batra
Respondent by: Smt. Sarita Kumari, DR
ORDER
D K Srivastava: The assessee-company is engaged in the business of manufacturing of pharmaceutical products. In the year under appeal, the assessee had two manufacturing units; one located at Dera Bassi in the State of Punjab the income of which was taxable and the other one at Baddi in the State of Himachal Pradesh the income of which was entitled to special relief u/s 80IC and therefore non-taxable. It filed its return of income on 4.12.2006 returning nil income. It was selected for scrutiny. After scrutiny, the Assessing Officer (AO in short) completed the assessment u/s 143(3) of the Income-tax Act on 19.12.2008 assessing the total income of the assessee-company at Rs.77,54,331/- after making certain additions/disallowances. On appeal, the ld. CIT(A), by her appellate order dated 31.5.2010, has confirmed most of the additions/disallowances made by the AO against which the assessee is now in appeal before this Tribunal.
2. Ground No. 1 taken by the assessee reads as under:-
"1 The ld. CIT(A) has erred in sustaining the addition of Rs. 22,91,117/- being disallowance of expenses in violation of Sec 40(a)(ia) of the Income- tax Act without properly appreciating the facts, supporting evidence and submissions placed on record. The claim be allowed and the addition be deleted."
3. Briefly stated, the facts giving rise to the aforesaid ground of appeal are that the assessee had claimed deduction for a sum of Rs.22,91,170/- being expenditure towards freight outward. The AO noticed that the impugned sum was 2 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010 paid without deduction of tax at source. He therefore called upon the assessee to explain as to why the impugned sum should not be disallowed in terms of section 40(a)(ia). In reply, the assessee submitted before the AO that the amount in question was not disbursed by it but by its distributors and hence the assessee was not required to deduct the tax at source. The AO however did not agree with the aforesaid submissions for the detailed reasons given by him in the assessment order which have been summarized in paragraph 6 of the appellate order passed by the ld. CIT(A).
4. Aggrieved by the impugned disallowance made by the AO, the assessee filed appeal before the CIT(A). He has disposed off the issue under appeal with the following observations:
"8. I have perused the assessment order, assessment record, written submissions, copy of agreement, ledger account showing freight outwards and heard the contentions. Clause 6 & 7 of the agreement for distributorship of the appellant company with distributors (M/s Sitaram Enterprises) as reads as under:
"6. The price shall be original selling price excluding freight. The company shall engage the transporter on behalf of the distributors and distributor is required to make the payment to transporter on receipt of goods within the framework of law.
7. In order to keep all India uniformity of prices of products the freight charges shall be reimbursed in the form of credit notes afterwards."
"9. I have observed that as per the terms of agreement with the distributors, the assessee was to engage the transporter and later was to reimburse the freight paid by distributors by way of credit note. It is quite clear that the payments are only made by the distributors by way of credit note. It is quite clear that the payments are only made by the distributors after they satisfy themselves regarding the condition of goods received. 2
3 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010 Since the appellant company knows beforehand that freight charges will have to be reimbursed, they surely negotiate the rates to be given to the transporters. Though the appellant contended that deduction of tax at source was the liability of the distributors, but I have observed that hardly any distributor has deducted TDS as per confirmations attached."
"10. In fact, the provisions of Section 194C fix the responsibility for deduction of TDS from out of payments of freight on the person making the payment. Here right from the beginning, the assessee knew that payment of freight was his liability which was ultimately paid by way of reimbursement. In my view the liability was of the appellant but in case the distributors had deducted the tax, then to avoid double deduction on the same amount, assessee's liability would have ceased, but to say that it was the liability of the distributors in the first instance is seemingly incorrect."
"11. The provisions of section 194C have to be complied with under all circumstances and the person engaging the transporters is more liable since distributors are only paying on his behalf. The plea on this ground of appeal is not accepted and the addition of Rs.22,91,117/- is confirmed subject to adjustment of the amount of TDS deducted by some of the distributors."
"12. I rely upon the following decisions in support of my decision on this issue:
Hon'ble Supreme Court in the case of Associate Cement Company Ltd. v. CIT (1979) 120 ITR 444.
Hon'ble ITAT Chandigarh bench in the case of Partap Hoon v. Addl CIT, Range-1, Chandigarh in ITA No. 536/Chandi/2009."
5. Aggrieved by the order passed by the ld. CIT(A), the assessee is now in appeal before this Tribunal. In support of appeal, it was submitted that the assessee had entered into agreements with its distributors by which the assessee- 3
4 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010 company was required to meet the entire freight expenses on distribution of its products so as to maintain uniformity in their prices throughout the country. He further submitted that it was the assessee-company, which had engaged the transporters, negotiated their rates/freight charges, loaded its products and thereafter dispatched the consignments to its distributors located all over the country. According to him, the arrangement between the assessee-company and its distributors was that the distributors would pay freight charges on receipt of consignments and thereafter the assessee would issue credit note in favour of distributors. In this connection, he referred to the agreement executed between the assessee-company and the distributors. Relevant clauses of the said agreement form part of the order of CIT(A), which have already been reproduced earlier in this Order. He further submitted that freight charges were actually paid by the distributors and not by the assessee-company and therefore the assessee- company was neither required to deduct the tax at source u/s 194C out of such payments made by the distributors nor the provisions of section 40(a)(ia) were applicable to it. His next submission was that the distributors had already deducted the tax at source and paid the same and therefore the provisions of section 40(a)(ia) were not applicable to the case of the assessee for that reason also. He also referred to the judgment in Transmission Corporation of AP Ltd. v. CIT, 239 ITR 587 (SC) for the proposition that the obligation of the deductor to deduct tax at source is limited only to the appropriate proportion of income chargeable under the Income-tax Act.
6. In reply, the ld. DR supported the order passed by the AO/CIT(A).
7. We have heard both the parties and carefully considered their submissions. The AO has made the impugned disallowance u/s 40(a)(ia) according to which any amount payable to a contractor or sub-contractor, being resident, for carrying out any work, on which tax is deductible at source under Chapter XVII-B of the Income-tax Act and such tax has not been deducted or, after deduction, has not been paid within the prescribed period, shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession". 4
5 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010 The object of section 40(a)(ia) is to ensure that the expenses of the nature specified therein are allowed deduction in computing business income u/s 28 only when tax required to be deducted at source out of such payments is deducted and paid to the Government. Thus section 40(a)(ia) is a statutory device to ensure compliance with the provisions of law relating to deduction of tax at source. If an assessee seeks deduction of expenses of the nature specified in section 40(a)(ia), he must satisfy the prescription of section 40(a)(ia) in that he must deduct tax at source out of such payments and pay the same to the Government. The relevant question is therefore whether the assessee was required to deduct the tax at source u/s 194C out of impugned payments and, if so, whether it had deducted the same and paid to the Government.
8. According to section 194C, any person responsible for paying any sum to any resident for carrying out any "work" in pursuance of a contract shall, at the time of credit of such sum to the account of the contractor or at the time of payment in cash or by issue of a cheque or draft, whichever is earlier, deduct tax at source out of such payments. Explanation III(iv)(c) to section 194C includes "carriage of goods or passengers by any mode of transport other than by railways" within the expression "work".
9. As already stated earlier, the assessee-company had entered into agreement with its distributors under which the assessee was required to meet the expenses towards freight outward so as to maintain uniformity in prices of its products throughout the country. Perusal of the materials available on record shows that the assessee-company not only engaged/hired the transporters for carriage of its products but also negotiated the rates/freight charges with the transporters and thereafter loaded and transported its products to the premises of the distributors. It was thus the assessee-company which entered into agreements with transporters for carriage of goods and thereby committed it-self to pay the agreed freight charges to the transporters. Though the freight was initially paid by the distributors at the instance of the assessee-company, the fact remains that the distributors were merely paying for and on behalf of the 5 6 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010 assessee-company. They had neither engaged the transporters nor otherwise liable to pay freight charges to the transporters nor actually paid them out of their own resources. In law, it was the assessee-company which was required to pay freight charges which were also actually paid by the assessee through the distributors by virtue of agreements between the assessee and its distributors. The distributors were acting merely as agents of the assessee and making the payment of freight charges on behalf of the assessee. Besides, the very fact that the assessee had claimed the impugned expenses as deduction shows that the assessee-company was not only liable to meet the same but had also actually met the same. It cannot therefore be accepted that the assessee was not required to pay freight charges or that it had not paid them. The mere fact that the payment was made by the distributors on behalf of the assessee will not alter the true nature, character and substance of the transaction. All the requirements of section 194C are fulfilled. Therefore it was the statutory responsibility of the assessee to deduct tax at source out of such payments and pay the same to the Government. In this view of the matter, the submission made on behalf of the assessee that the distributors were required to deduct tax at source out of impugned payments is rejected. Since the assessee has failed to deduct tax at source out of impugned payments in terms of section 194C, the ld. CIT(A) has rightly confirmed the impugned disallowance made by the AO in terms of section 40(a)(ia).
10. In support of her decision, the ld. CIT(A) has relied upon the decision of this Tribunal in Pratap Hoon v. Addl. CIT, ITA No. 536/Chandi/2009 and the judgment of the Hon'ble Supreme Court in Associate Cement Company Ltd. v. CIT, 120 ITR 444 (SC) in support of her decision. On perusal of the aforesaid decisions, we find that the ld. CIT(A) has rightly relied upon them in support of her decision.
11. The submission made on behalf of the assessee that the distributors had deducted tax at source out of such payments and therefore the AO was not justified in making the impugned disallowance does not carry any force for several 6 7 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010 reasons. One, section 40(a)((ia) fixes the responsibility on the assessee (and none else) claiming deduction of expenses to deduct tax at source and deposit the same with the Government. The aforesaid statutory condition is not satisfied in the present case and therefore the assessee is not entitled to claim deduction of the impugned expenses. Two, as held by the CIT(A), distributors have not deducted tax at source. Three, the judgment in Transmission Corporation of AP Ltd. v. CIT, 239 ITR 587 (SC) referred to by the ld. authorized representative is inapplicable to the facts of the case and also for the reason that it has not been rendered in the context of section 40(a)(ia).
12. In view of the foregoing, Ground No. 1 is dismissed.
13. Ground No. 2 taken by the assessee is as under:-
"2 The ld. CIT(A) has erred in sustaining the addition of Rs. 3,70,836/- being the amount of interest having not been paid to the bank within the stipulated period as contemplated u/s 43B r. w. explanation 3D of the Income-tax Act. The addition is deleted."
14. Briefly stated, the facts giving rise to the aforesaid ground of appeal are that the assessee was enjoying over draft limit in its CC account with Centurion Bank of Punjab, Chandigarh in respect of which interest amounting to Rs.3,70,836/- was charged by the Bank but was not paid by the assessee to the Bank and consequently converted into loan account. The AO therefore disallowed the impugned interest claimed in the P & L account keeping in view of the provisions of Section 43-B read with Explanation 3D. On appeal, the ld. CIT(A) has confirmed the order passed by the ld. CIT(A) with the following observations:
"16 I have perused the assessment order, assessment records, written submissions and heard the contentions. I have gone through the copy of CC account which is in the assessment records. This account is for the period 12.5.2004 to 31.3.2006. In this account, there are debits only showing amounts drawn and interest charged by Bank. This clearly shows that the interest charged by the Bank was not paid till 31.3.2006. The 7 8 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010 assessee has not filed any Bank statement from 1.4.2006 to the due date of filing of return. The provisions of Section 43B have been violated and the AO has rightly disallowed the claim of payment of interest. This ground of the appellant is dismissed, confirming the addition of Rs. 370,836/-."
15. Aggrieved by the order passed by the ld. CIT(A), the assessee in now in appeal before this Tribunal. In support of appeal, the ld. authorized representative for the assessee submitted that the assessee had filed copy of its bank account before the ld. CIT(A) and therefore the ld. CIT(A) is incorrect in her observations that the assessee had not filed any bank statement from 1.4.2006 to the date of filing of return of income and thereby in coming to the conclusion that the provisions of Section 43B were violated. In support of his submissions, he has placed copy of the assessee's bank account at pp. 25 to 31 of the Paper Book filed before this Tribunal. He urged that the matter should be restored to the file of ld. CIT(A) to enable him to verify the factual position and thereafter pass an appropriate order in this behalf in conformity with law.
16. In reply, the ld. DR supported the order passed by the AO/CIT(A).
17. We have heard both the parties and carefully considered their submissions. The impugned disallowance has been made u/s 43B read with Explanation 3D. According to Explanation 3D, deduction of any sum being interest payable under clause (e) of Sec 43B, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into the loan or advance shall not be deemed to have been actually paid. According to the proviso to Sec 43B, any amount which has actually been paid by the assessee on or before the due date for furnishing the return of income u/s 139(1) in respect of the previous year in which liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.
18. Perusal of the order passed by the ld. CIT(A) shows that she has proceeded on the basis that the assessee has not filed any bank statement from 1.4.2006 to the due date fixed for filing of return u/s 139. The case of the assessee, on the 8 9 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010 other hand, is that it has filed copy of bank account for the aforesaid period before the ld. CIT(A). In the interest of justice, it is considered appropriate to set aside the order passed by the ld. CIT(A) and restore the matter to his file with the direction to verify the position and thereafter dispose off the matter in conformity with law after giving reasonable opportunity of hearing to both the parties. We order accordingly. Ground No. 2 is treated as allowed for statistical purposes.
19. Ground No. 3 taken by the assessee reads as under:
"3 The ld. CIT(A) has erred in sustaining the addition of Rs. 67,420/- being an amount paid as Labour charges to M/s Kiran Enterprises, in violation of Sec 40(a(ia). The addition be deleted."
20. We have heard both the parties and carefully considered their submissions. At the time of hearing, the ld. authorized representative for the assessee did not press the aforesaid ground. In this view of the matter, ground No. 3 taken by the assessee is dismissed as not pressed.
21 G r o u n d N o . 4 t a k e n b y t h e a s s e s s e e r e a d s as under:-
"4 The ld. CIT(A) has erred without appreciating the facts and circumstances of the case, erred in sustaining the capitalization of interest of Rs. 5,92,980/- u/s 36(i)(iii) of Income-tax Act in the hands of Baddi Unit. The addition be deleted."
22. The facts giving rise to the aforesaid ground of appeal are that the profits and gains of the unit located at Baddi, HP were eligible for special relief u/s 80IC and therefore non-taxable while profits and gains of the unit located at Dera Bassi in Punjab were taxable. The AO noticed that unit at Baddi became operational on 1.1.2006. The AO further noticed that the total project cost of Baddi unit was Rs.7,16,94,940/-. On inquiry, the assessee explained that the said cost of project of Baddi unit was met out of loan amounting to Rs. 3.00 crores taken from SIDBI and the remaining cost of project was met out of surplus of earlier years, interest- free secured borrowings, funds from current assets, etc., available with Dera Bassi unit. The assessee further explained before the AO that interest relating to the 9 10 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010 said loan of Rs.3 crores taken from SIDBI for setting up Baddi unit had been capitalized in the hands of Baddi unit. The assessee claimed before the AO that the remaining cost of project was met out of internal resources of Dera Bassi unit and hence there was no question of capitalising any interest over and above what the assessee had already capitalized in the hands of Baddi unit. The AO proceeded to examine the claim of the assessee. On scrutiny of accounts, the AO found that the funds were provided by Dera Bassi unit to Baddi unit. He accordingly worked out the day to day balance of Baddi unit as appearing in the books of Dera Bassi unit up-to 31.12.2005, which is annexed as Annexure A-4 to the assessment order. The AO noticed that there was always a debit balance in the account of Bassi unit as appearing in the books of Dera Bassi unit. He therefore inferred that Baddi unit was consistently enjoying funds belonging to Dera Bassi unit through diversion of interest-bearing funds from Dera Bassi unit to Baddi unit for setting up the unit at Baddi. For the reasons given in the assessment order, he felt that Dera Bassi unit had diverted its interest bearing funds to Baddi unit up-to 31.12.2005 on which the AO worked out interest at Rs.582,625/-. Since interest-bearing funds diverted from Dera Bassi unit were utilised by Baddi unit before the commencement of its production with effect from 1.1.2006, the AO capitalised the interest amounting to Rs.5,82,625/- in respect thereof and capitalised the same in the hands of Baddi unit. While doing so, the AO also took note of the fact that the profits of Baddi unit in the year under appeal were shown at Rs.35.92 lakhs against turnover of Rs.4.67 crores giving net profit rate of 7.54% in the year under appeal as against profits of Rs.45.11 lakhs against total turnover of Rs.19.65 crores giving net profit of 2.3% shown in respect of Dera Bassi unit, which too was manufacturing exactly identical products like Baddi unit. The AO inferred that the assessee was trying to suppress the taxable income of Dera Bassi Unit by not allocating/capitalising the correct amount of interest to Baddi unit. In this view of the matter, the AO capitalised the interest amounting to Rs.582,625/- in the hands of Baddi unit.
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11 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010
23. On appeal, the ld. CIT(A) confirmed the action of the AO with the following observations:
"25. I have perused the assessment order, written submissions, assessment record and heard rival contentions along with cases relied upon. I find that the appellant has submitted that it has invested Rs.7,26,94,940/- in the Baddi unit. To fund the project, the appellant raised Rs.3 crores from SIDBI and balance amount was funded by Dera Bassi unit.
26. From the perusal of financial statement of Derabassi unit, I find that the appellant raised additional working capital loan of Rs.2 crores from the Bank while the turnover of the Derabassi unit did not increase in proportion to the additional working capital raised. In other words, at a total working capital of Rs.89,22,851/- on 31.3.2005, turnover of Derabassi unit was 277695543/- for the previous assessment year 2005-06. On the other hand, during the year under consideration, the working capital limit was increased from Rs.89.22 lacs to Rs.272.28 lacs while the turnover for the year under consideration reduced from Rs.277.69 lacs to Rs.196.57 lacs. It is generally accepted business principle that working capital loan is raised to increase the turnover while in the instant case, the turnover on the contrary has come down while working capital loan increased 3 times. It shows that funds for derabassi unit were diverted to baddi unit for purpose of setting up the project rather than utilizing the same for increase in sale/purchase of Derabassi unit.
27. The Assessing Officer has calculated the interest on the funds utilized by Baddi unit on days product method, which is well accepted method for calculating interest on the funds on daily basis. Therefore I hold that the interest capitalized/disallowed amounting to Rs. (55,87,625/- + Rs.2,52,051/- + Rs.2,053/-) has been correctly done.
28. It is evident that the appellant has funded the balance amount of project investment.
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12 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010
29. Further, I do not find any merit in he submissions of the appellant regarding the funding of the project in excess of the capital investment made over the term loan raised. In other words, the appellant made a total investment of Rs.7.17 crores while the appellant raised just Rs.5 crores from SIDBI. Appellant failed to produce any evidence how the balance amount was funded."
24. Aggrieved by the order passed by the ld. CIT(A), the assessee is now in appeal before this Tribunal. In support of appeal, he has filed details of sources of funding of Baddi unit, a copy of which was earlier filed before the ld. CIT(A). Referring to the aforesaid details, the ld. authorized representative for the assessee submitted that total project cost of Baddi unit was Rs.7,16,94,940/- out of which loan amounting to Rs.3.00 crores alone was taken from SIDBI and the remaining cost was met out of surplus of earlier years, interest-free borrowings, funds from current assets, etc. He also invited our attention to the details of capitalization of expenses on Baddi unit upto 31.3.2005, copy of which was earlier filed before the ld. CIT(A). Perusal of the aforesaid details shows that loan of Rs. 3.00 crores taken from SIDBI alone was utilised to partly meet the total cost of project of Baddi unit on which interest was paid.
25. In reply, the ld. DR supported the order passed by the AO/CIT(A).
26. We have heard both the parties and carefully considered their submissions. For the sake of clarity, the issue under appeal needs to be brought into focus. The AO has not disallowed interest for want of commercial expediency in diverting funds including interest-bearing funds from Dera Bassi unit (a taxable unit) to Baddi unit (a non-taxable unit) for setting up Baddi unit before commencement of commercial production in Baddi unit. What the AO has done is that he has allocated the funds including interest-bearing funds diverted by the assessee from its Dera Bassi unit to Baddi unit and capitalized the interest on such funds in terms of the proviso to section 36(1)(iii) as such funds were utilized for setting up Baddi unit before it started commercial production.
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13 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010
27. As stated earlier, the profits of Baddi unit are eligible for special relief u/s 80IC and therefore non-taxable while the profits of Dera Bassi unit are taxable. Both the units, namely, Baddi unit and Dera Bassi unit are engaged in production of exactly identical products under the same management. Quite obviously, the net profit margin of both the units cannot be significantly different from each other. It is stated in the assessment order that the assessee has shown net profit rate of 7.5% from Baddi unit while it has shown net profit rate of 2.3% from Dera Bassi unit. It is quite evident that the assessee has shown substantially higher rate of net profit of 7.54% in respect of Baddi unit than net profit rate of 2.3% alone shown in respect of Dera Bassi unit. The case of the AO is that the assessee has deliberately shown higher rate of net profit in respect of Baddi Unit as it was non-taxable than the net profit rate recorded in respect of Dera Bassi unit as the profits of Dera Bassi unit were taxable. According to the AO, the modus operandi of the assessee was to divert most of the expenses relating to Baddi unit to Dera Bassi unit so as to show higher rate of net profit as it was non-taxable. It is the case of the AO that total project cost of Baddi unit was met not only out of loan of Rs.3.00 crores taken from SIDBI but also by diverting interest-bearing funds available with Dera Bassi unit and therefore the funds so diverted to Baddi unit were required to be allocated to Baddi unit and consequently the element of interest relating to such funds diverted from Dera Bassi unit to Baddi unit was also required first to be allocated to and thereafter capitalized in the hands of Baddi unit in terms of the proviso to section 36(1)(iii) as such funds were utilized in capital field for meeting the cost of project of Baddi project before the commencement of commercial production in Baddi unit. The case of the assessee, on the other hand, is that it had borrowed Rs.3 crores alone from SIDBI to partly meet the cost of project of Baddi unit and therefore had capitalized interest relating thereto in the hands of Baddi unit. According to the assessee, the AO was not justified in allocating the balance amount of total cost of project of Baddi unit to Baddi unit and in capitalizing interest on such funds in the hands of Baddi unit 13 14 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010 as such funds were provided to Baddi unit by Dera Bassi unit out of its interest- free funds.
28. On the facts and in the circumstances of the case brought on record and more particularly the findings recorded by the CIT(A) in paragraphs 26-29 in her appellate order (reproduced above), it is quite obvious that the project cost of the Baddi unit was met not only by the loan of Rs.3.00 crores taken from SIDBI for setting up the project at Baddi but also by interest-bearing funds and other funds diverted from Dera Bassi unit to Baddi unit. It is for this reason that debit balance was continuously standing in the accounts of Baddi unit as appearing in the books of Dera Bassi unit, which means that funds were diverted from Dera Bassi unit to meet the cost of project of Baddi unit. It is also not in dispute that Dera Bassi unit had taken interest-bearing loans amounting to Rs. 2 crores in the year under appeal. Total amount of interest-bearing funds in the accounts of Dera Bassi unit stood at Rs.272.28 lakhs. The assessee had to borrow funds for Dera Bassi unit to meet the project cost of Baddi unit and also to supplement the funds of Dera Bassi unit which stood depleted by the funds diverted to Baddi unit. If there had been no diversion of funds including interest-bearing funds of Rs.272.28 lakhs from Dera Bassi unit to Baddi unit, there would have been no occasion to borrow or retain interest-bearing funds of such magnitude in Dera Bassi unit. On the facts brought on record by the AO/CIT(A), it is quite obvious that funds including interest-bearing funds were diverted from Dera Bassi unit for setting up the project at Baddi and therefore interest allocable to such funds was liable to be allocated to and capitalized in the hands of Baddi unit in terms of the proviso to section 36(1)(iii) as such funds were utilized in capital field for meeting the cost of project of Baddi unit before the commencement of commercial production in Baddi unit. The action of the AO in allocating the impugned funds to Baddi unit and consequently his further action in allocating interest thereon to Baddi unit and capitalizing the same in terms of the proviso to section 36(1)(iii) is in order.
29. The submission of the assessee that the project cost of the Baddi unit was met partly by loan of Rs. 3.00 crores taken from SIDBI and the remaining amount 14 15 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010 from internal accruals or interest-free funds and therefore the AO was not justified in making the impugned disallowance, cannot be accepted. In CIT v. Abhishek Industries, 286 ITR 1 (P&H), the Hon'ble jurisdictional High Court has held that entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds, etc. do not have any different colour. Whatever are the receipts in the business, they have the colour of business receipts and have no separate identification. Sources have no concern whatsoever. Though the aforesaid judgment has been rendered in the context of section 36(1)(iii), the observations of the Hon'ble High Court as referred to above are quite apposite on the facts and in the circumstances of the case before us. Baddi unit and Dera Bassi unit are sister units of the same assessee. Dera Bassi unit has diverted part of its funds including interest-bearing funds to Baddi unit. The funds so transferred have cost. If the funds diverted are borrowed funds, then the cost is interest paid by the unit diverting its funds. If it is its own money (e.g., internal accruals, etc.), the cost is the amount of interest foregone by the unit diverting its funds. Quite obviously, not only the funds so transferred by Dera Bassi unit to Baddi unit but also interest thereon would need to be allocated to Baddi unit otherwise the profits of Baddi unit, which are exempt from tax, would stand inflated while the profits of taxable unit being Dera Bassi unit would stand artificially suppressed. In this view of the matter, the action of the AO/CIT(A) in allocating the impugned funds and interest thereon to Baddi unit and thereby capitalising the same in terms of the proviso to u/s 36(1)(iii) is held to be in order. Ground No. 4 taken by the assessee is dismissed.
30. Ground no. 5 taken by the assessee reads as under:
"5 The ld. CIT(A) has erred in sustaining the reduction of claim u/s 80IC of the Income-tax Act from Rs.35,92,729/- to Rs.4,66,595/-. The claim of the appellant be accepted."
31. Briefly stated, the facts giving rise to Ground No. 5 are that the assessee had incurred several expenses which were common to both the units. Details of such expenses are given in the assessment order as well as the appellate order 15 16 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010 passed by the first appellate authority. Since the expenses were common to both the units and both the units were engaged in producing exactly identical products, the AO proposed to allocate common expenses on pro-rata basis to both the units so as to correctly work out the profits in respect of taxable unit, i.e., Dera Bassi unit and exempt unit, i.e., Baddi unit. After hearing the assessee, the AO worked out the total common expenses at Rs.2,08,89,444/- out of which he allocated Rs.40,77,619/- to Baddi unit as against Rs.12,14,050/- allocated by the assessee, for the reasons given in the assessment order. On appeal, the ld. CIT(A) has confirmed the action of the AO with the following observations:-
"31. I find that the assessee in his submissions has stated that most of the products manufactured in Derabassi unit and Baddi unit are almost the same. Further, I find that the expenditure which are indirect by nature such as salaries, director remuneration, printing and stationery, post and telegraph, legal and professional charges, rent, etc. are common which are incurred for the business as a whole and not with respect to a particular unit.
32. I am of the view that common expenditure must have benefited both the units and benefits are generally translated in terms of revenue earned by respective units. For instance, a sum of Rs. 27,02,256/- was incurred in R&D Expense out of which Rs. 26,52,787/- was debited to Derabassi unit and balance of Rs. 49,469/- was debited to Baddi unit. Since the appellant has admitted that products manufactures are common, a reasonable conclusion can be drawn that both the units derived almost similar benefits from R&D. I find that allocation of expenditure on the basis of turnover/revenue is the most acceptable method. The contention of the assessee that Baddi unit operated for 3 months does not have any merit for the reason that the period effect has already been taken into consideration as turnover of Baddi unit is for 3 months only and therefore allocation done by the AO is based on 3 months turnover for Baddi unit and 12 months 16
17 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010 turnover for Derabassi unit. As such, no further adjustment is required as the effect of period has already been taken into consideration .
33. Further when nature of the products are common, then significant difference in the net profit rates of Baddi unit (7.54%) and Derabassi unit (2.3%) corroborate the fact that allocation of expenses was not proper.
34. In view of the above discussion, the action taken by the AO by reducing the claim u/s 80IC from Rs.35,92,729/- to Rs.4,66,595/- is confirmed."
32. Aggrieved by the order passed by the ld. CIT(A), the assessee is now in appeal before this Tribunal. In support of appeal, the ld. authorized representative for the assessee submitted that common expenses were not liable to be allocated to Baddi unit as the accounts were separately prepared for Baddi unit in which such expenses were not shown. He further submitted that the accounts of Baddi unit were not rejected by the AO and hence the AO was not justified in allocating the common expenses on pro-rata basis to Baddi unit. According to him, the AO ought to have invoked section 142(2A) of the Income-tax Act if he wanted to make the impugned allocation. He also referred to the provisions of section 80IC(7); 80IA (5); and proviso the section 80IA(8) in support of his submissions.
33. In reply, the ld. DR supported the order passed by the AO/CIT(A).
34. We have heard both the parties and carefully considered their submissions. As already stated earlier, both the units, namely, Baddi unit and Dera Bassi unit, are engaged in the production of exactly identical products. The assessee- company has incurred common expenses details of which have been given in the assessment order as well as in the order of ld. CIT(A). We have perused them. In our view, the assessee has incurred several expenses highlighted by the AO/CIT(A) in their respective orders, which are common to both the units. If such expenses, which are common to both the units, are allocated to one unit alone, it will artificially reduce the profits of that unit and thereby increase the profits of the other unit to which such expenses are not allocated. What is taxable or 17 18 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010 exempt from tax is profit and not artificially inflated or deflated profits. Common expenses are therefore required to be allocated on pro-rata basis to both the units. The ld. CIT(A) has correctly appreciated the factual and legal aspects of the case while deciding the issue under appeal.
35. The plea of the assessee that the AO was not justified in allocating common expenses on pro-rata basis to Baddi unit over and above those shown in the books of Baddi unit without rejecting the books of Baddi unit, has no substance. The AO has neither doubted the correctness of the expenditure nor has disallowed the same on that basis. It is not a case of disallowance of expenses. It is a case of mere allocation of common expenses to both the units. Therefore there was no necessity for specifically rejecting the books as such. What the AO has done is to allocate common expenses on pro-rata basis to both the units. By implication, he has not accepted the allocation of common expenses as recorded in the books of the assessee including those of Baddi unit. The assessee has placed no material before us to show that the impugned expenses are not common to both the units or that they exclusively relate to Dera Bassi unit.
36. The reference made by the ld. authorized representative for the assessee to section 80IC(7); 80IA (5); and proviso the section 80IA(8) is completely misplaced for the reason that what is entitled to relief u/s 80IC(1) is "profits and gains derived by an undertaking or an enterprise" from specified business. Profits represent excess of revenue over expenditure. Therefore all expenses, whether direct or indirect or common, would require proper allocation. This is inherent in the scheme of section 80IC(1) by which profits and profits alone are entitled to relief. Therefore the action of the assessee in allocating common expenses to taxable unit alone is incorrect. Since the assessee has incurred common expenses for both the units, the AO has rightly allocated them on pro-rata basis to both the units instead of allocating to one unit alone.
37. In view of the foregoing, we confirm the order passed by the CIT(A) in this behalf. Ground No. 5 taken by the assessee is dismissed.
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19 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010
38. Ground No. 6 taken by the assessee reads as under:-
"6 The ld. CIT(A) has without appreciating, the facts submission and evidence placed on record, erred in sustaining the addition of Rs. 6,05,187/- being expanses incurred on inward freight charges in violation of Sec 40(a)(ia) of the Income-tax Act. The claim of the assessee be allowed."
39. Briefly stated, the facts giving rise to the aforesaid ground of appeal are that the AO disallowed a sum of Rs. 6,05,187/- being the expenses on freight inward claimed by the assessee, in terms of section 40(a)(ia) in respect of Baddi unit. On appeal, the ld. CIT(A) has confirmed the action of the AO with the following observations:
"46. I have perused the assessment order, submissions and material on record and I find that it is evident from the Table-2 (at page 5, page-3 under Ground No.1 of this appellate order) that the claim of the appellant that 'payment exceeding Rs.50,000/- to a single transporter was not made' is incorrect. Further the appellant failed to place on record any material or evidence to contradict the finding of the Assessing Officer that freight inward charges paid to each transporter were less than Rs.50,000/- in a year.
47. It is important to note that provisions of section 194C(3)(i) have been amended w.e.f. 01.10.2004 t include the instances where the aggregate of the amounts credited or paid or likely to be credited or paid during the year exceeds Rs.50,000/-. Since in this case, total amount credited during the year exceeds Rs.50,000/-, the provisions of section 194C are attracted. The sum of Rs.6,05,187/- disallowed u/s 40()(ia) of the Income Tax Act is therefore confirmed..."
40. We have heard both the parties. The ld. CIT(A) has given cogent reasons for confirming the impugned disallowance. The assessee has not been able to show as to how the order passed by the CIT(A) is erroneous. In this view of the 19 20 Torque Pharmaceuticals Pvt. Ltd., Chd. v. Additional CIT ITA No.1105/Chandi/2010 matter, the order of the CIT(A) in this behalf is confirmed. Ground No. 6 is dismissed.
41. Ground No.7 taken by the assessee is directed against the order of the CIT(A) confirming levy of interest u/s 234B/234C/234D. At the time of hearing, it was fairly submitted on behalf of the assessee that the levy of interest is consequential ad mandatory. Ld. CIT(A) has referred to the judgments of the Hon'ble jurisdictional High Court and Supreme Court in support of her decision. We are in agreement with her decision and therefore confirm her order in this behalf. Ground No.7 is dismissed.
42. In view of the foregoing, the appeal filed by the assessee is partly allowed.
Order pronounced on 4th July 2011
Sd/- Sd/-
(SUSHMA CHOWLA) (D K SRIVASTAVA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Chandigarh: the 4th July 2011
SURESH
Copy to:
1. The Appellant, M/s Torque Pharmaceuticals Pvt. Ltd, Chandigarh
2. The Respondent, Addl CIT, R-1, Chandigarh
3. The CIT(A), Chandigarh
4. The ld. CIT, Chandigarh
5. The D.R, Income-tax Department, Chandigarh
Assistant Registrar, ITAT, Chandigarh
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