Income Tax Appellate Tribunal - Delhi
Jakson Ltd., New Delhi vs Department Of Income Tax on 1 October, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'D': NEW DELHI
BEFORE SHRI C.L. SETHI, JUDICIAL MEMBER &
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
ITA no. 4718/Del/2009
Assessment Year: 2007-08
The Dy. Commissioner of Income Tax, M/s. Jackson Limited,
Circle - 4(1), 101, Ratan Jyoti Building,
New Delhi Vs. 18 - Rajendra Place,
New Delhi.
(Appellant) (Respondent)
PAN: AAACJ 5347 C
Appellant by : Sh. Anoop Kumar Singh, Sr. DR
Respondent by : Sh. Vipin Jain, FCA
ORDER
PER: C.L. SETHI, J.M. The revenue is in appeal against the order dated 01.10.2009 passed by the ld. CIT(A) for the A.Y. 2007-08.
2. The grounds raised by the revenue are as under:-
"1. The order of learned CIT(Appeals) is erroneous & contrary to facts & law.
2. On the facts and in the circumstances of the case and in law, the ld. CIT(Appeals) has erred in deleting the addition of Rs. 67,58,988/- made by the AO disallowing the deduction under section 8O IB of the I.T. Act.
3. The Ld. CIT(A) has ignored the fact that the AO under the addition as per the provision of section 80IB (13) read with 80IA (7) of the I.T. Act."
ITA no. 4718/Del/2009
3. We have heard both the parties and have carefully gone through the orders of the authorities below.
4. In the present case, the AO has worked out the amount of deduction available to the assessee u/s. 80 IB of the Act at Rs.
17,38,33,299/-. While working out the deduction u/s. 80 IB, the AO has allocated the common expenses amounting to Rs. 1,44,07,911/- to the EOU unit in respect of which deduction u/s. 80 IB has been allowed. As a result of such allocation of expenses to EOU unit, the profit of EOU unit has been reduced by Rs. 1,44,07,911/-.
5. On an appeal, the CIT(A) worked out the deduction available to the assessee u/s. 80 IB of the Act at Rs. 18,05,92,287/-, there by the deduction u/s. 80 IB allowed by the AO to the assessee has been increased by Rs. 67,58,988/-. The CIT(A)'s discussion and working has been discussed in para 6 to 6.2 of his order, which are as under:-
6. Ground no. 3 & 5 relate to the grievance of the appellant in restricting the claim of deduction under section 80-IB to the extent of Rs. 17,38,33,299/-. It is observed that the identical issue had come up in the appellant company's own case for assessment year 2005-
06. My predecessor-in-office in appeal No. 196/07-08 vide order dated 17.04.2008 had decided the issue granting partial relief t the appellant. The above decision of my predecessor-in-office was followed by the undersigned in appeal no. 19/2008-09 vide order dated 26.8.2009 for assessment year 2006-07. There being no change in the facts and circumstances of the case, this ground is decided accordingly on the basis of the method Page 2 of 15 ITA no. 4718/Del/2009 adopted by my predecessor-in-office. The administrative expenses include certain expenses incurred and debited by the appellant company in the account books of the non-EOU Unit, but the benefit of which has also gone to the EOU Unit. These expenses are as follows:-
Payment to Auditors: Rs. 2,00,000/-
a)
Remuneration to Rs. 1,36,98,144/-
b) Directors:
Keyman Insurance Rs. 21,46,000/-
c) Policy Premium:
Salary to VP Export and Rs. 9,72,390/-
other Export staff:
d)
Foreign Travel Expenses
of Directors and Export Rs. 57,43,112/-
e) staff:-
Total Rs. 2,27,59,646/-
6.1 In order to meet the ends of justice and to compute the profit of the two units more authentically, it would be fair and proper to apportion only the expenses of Rs. 2,27,59,646/- to the EOU Unit in the ratio of income as under to re-compute the deduction u/s. 80IB of the Act as under:-
a) Total turnover for the year Rs. 4,17,39,28,779/-
under consideration:
b) Total turnover of the EOU Rs. 87,13,31,109/-
Unit:
c) Percentage of (b) to (a) 20.88%
d) 20.88% of common
expenses: Rs. 47,52,214/-
e) Deduction u/s. 80IB of the
EOU Unit to be reduced by Rs. 47,52,214/
Page 3 of 15
ITA no. 4718/Del/2009
f) Deduction u/s. 80IB of the
non EOU Unit to be
increased by Rs. 47,52,214/
6.2 Thus the allowable deduction u/s. 80IB would be as under:-
Non EOU (in EOU (in Rs.)
Rs.)
(i) Profit as per 66,16,084/- 18,82,23,290/-
Profit & Loss
Account
Less: Income on 75,71,818/- 40,17,733/-
which deduction
u/s. 80IB was
not allowed
(ii) Common (+) 47,52,214/- (-) 47,52,214/-
expenses as per
para above.
Income on which 37,96,480/- 17,94,53,343/-
deduction u/s.
80IB is to be
allowed
Allowable 11,38,944/- (30 17,94,343/-
Deduction % of Rs. (100% of
37,96,480/-) 17,94,53,343/-)
Total allowable 18,05,92,287/-
deduction u/s.
80IB
As would be evident from the above that the appellant is entitled to deduction under 80-IB to the extent of Rs. 18,05,92,287/- as against Rs. 17,38,33,299/-
allowed by the AO. Thus, the appellant gets further deduction of Rs. 67,85,988/- under section 80-IB of the Act. Thus, ground no. 3 & 5 are partly allowed."
6. In the course of hearing of this appeal, the ld. counsel for the assessee pointed out that the issue with regard to the allocation of Page 4 of 15 ITA no. 4718/Del/2009 common expenses between non-EOU and EOU unit had come for consideration before the Tribunal in the assessee's own case pertaining to the A.Y. 2005-06, which has been decided by the Tribunal vide order dated 20th November 2009 in ITA no. 1995/Del/2008 filed by the assessee and ITA no. 2517/Del/2008 filed by the Revenue. The Tribunal's order runs as under:-
"2. The only issue raised by the revenue is as under:-
"2. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in allowing relief of Rs. 1,07,65,254/- u/s 80IB ignoring that action of the AO was based on provisions of section 80IB (13) read with 80IA (7) and also on examination of the books of accounts of the assessee."
3. The issue raised by the assessee in ground No. 1 is connected to the above issue raised by the revenue.
4. Ground No. 1 raised by the assessee is as under:-
"1. That on the facts and in the circumstances of the case and in law, the authorities below have erred in invoking and in applying the provisions of section 80-IA (10) read with 80-IB (13) of the Act, and in holding that deduction u/s80-IB is to be allowed to the appellant company on income of the EOU and NON EOU Units, determined after allocating expenses aggregating Rs.
1,81,48,900/- as below, between the two units in the ratio of their respective revenue:-
a) Payments made to the auditors Rs. 1,55,000/-
b) Remuneration paid to the directors: Rs. 1,32,89,500/-
c) Salary paid to the export staff Rs. 7,95,300/-
d) Keyman Insurance premium paid Rs. 21,45,990/-
e) Foreign travel expenses of the Rs. 12,92,532/-
directors
f) Foreign travel expenses of the Rs. 4,70,578/-
export staff Page 5 of 15 ITA no. 4718/Del/2009 Total Rs. Rs. 1,81,48,900/-"
5. Since the only issue raised by the revenue and the ground No. 1 raised by the assessee are interconnected, we proceed to decide them together.
6. The facts relating to the issue involved in these grounds raised by revenue as well as by assessee has been elaborately discussed and deliberated upon by the ld. CIT(A). After considering the facts and circumstances of the case, the ld. CIT(A) has decided the issue by holding that the disallowances of deduction u/s 80IB made by the A.O. to the extent of Rs. 1,27,99,343/- is to be reduced by Rs. 1,07,65,245/- inasmuch as the expenses to the extent of Rs. 1,07,65,245/- cannot be allocated to the eligible unit in respect of which deduction u/s 80IB is allowable.
7. We have carefully gone through the order of the ld. CIT(A) and find that he has decided this issue after considering all the facts in their right and correct perspective. We, therefore, find it fit to reproduce the ld. CIT(A)'s order which reads as under:-
"1. The appellant is a body corporate, and has two manufacturing units in Daman, referred to as "NON EOU Unit" and "EOU Unit". The two units are separated by a distance of more than 8 kilometers. The NON EOU Unit was established in the Assessment year 1998-99. The "EOU Unit" was established in March, 2004. The appellant company has sales offices in different cities of the country. The existing NON EOU Unit and the newly started "EOU Unit", are both engaged in the production u/s 80 IB at the rate of 30% of its profits and gains. The "EOU Unit" is eligible for deduction u/s 80 IB at the rate of 100% of its profits and gains. The appellant company claimed deduction u/s 80 IB at Rs.10,07,70,343 on profits and gains of the "EOU Unit". The Assessing Officer allowed the deduction at Rs.8,79,71,122. Deduction u/s 80 IB is allowed less by Rs.1,27,99,343.
2. Break up of revenue of the appellant company is as under (amount in Rs.):
NON EOU "EOU OTHERS Total:
Unit Unit"
Inland Sales 167,6774386 36,01,54,179 9,47,59,924 213,16,88,489
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ITA no. 4718/Del/2009
Export Sales 2,11,96,414 12,67,35,035 - 14,79,31,449
Other Incomes 1,69,61,692 - 29,83,193 1,99,44,885
Total: 171,49,32,492 48,68,89,214 9,77,43,117 229,95,64,823
3. The Assessing Officer examined the account books of the appellant company and compared the expenses of the two units. The Assessing Officer held that proportionate expenditure of the EOU Unit is much less when compared to the expenditure of the NON EOU Unit. Expenses under "wages" in the NON EOU unit was shown at Rs.33.58 lakhs as against only Rs.12.57 lakhs shown in the EOU Unit. Under the head "Salaries", Rs.1.70 crores were debited in the NON EOU Unit, while nil expenditure was shown in the profit and loss account of the "EOU Unit", Rs.7,95,300 paid as salary to Mr. M. Amanutullah, vice president (Export Division), Mr. Sumit Sood (Manager Exports) and Ajit Kumar Service Engineer, and foreign travel expenses aggregating Rs.4,28,277 incurred by these three persons were entirely debited in the profit and loss account of the NON EOU Unit, although these three persons also handled the export business of the "EOU Unit". Expenses on Directors Remuneration, Rs.1.30 crore, keyman insurance premium on policy on the life of Shri Sameer Gupta, Managing Director and Shri Sundeep Gupta, Whole time Director, Rs.21,45,990, and foreign travel expenses of directors Rs.15,67,140, were debited in the profit and loss account of the NON EOU Unit. The Assessing Officer invoked and applied the provisions of section 80 IB (13) read with 80 IA(7) of the I.T. Act, and reallocated the Administrative expenses of the two units aggregating Rs.6,16,52,483 as under:-
a) Sales of the NON EOU Unit Rs.1,69,79,70,800 (77.72%)
b) Sales of the "EOU Unit" Rs.48,68,89,214 (22.28%)
c) Combined sales of the two units Rs.2,18,48,60,014 (100.00%)
(a) Administrative expenses of the NON EOU Unit Rs.6,07,15,652
(b) Administrative expenses of the "EOU Unit" Rs. 9,36,831 Page 7 of 15 ITA no. 4718/Del/2009
(c) Total Rs.6,16,52,483 Administrative expenses allocated between the two units in ratio of sales:
a) NON EOU Unit : Rs.4,79,16,310 (77.26% of 6,16,52,483)
b) "EOU Unit" : Rs.1,37,36,173 (22.28% of 6,16,52,483) Rs.6,16,52,483 The Assessing Officer reduced the profits of the "EOU Unit" by Rs.1,27,99,343 (1,37,36,173 - 9,36,839), and also reduced deduction u/s 80 IB by this amount.
4. The appellant company submitted that the EOU and NON EOU Unit at Daman are independent units, separated by a distance of approx. eight kilometers. The NON EOU UNIT was set up in the assessment year 98-
99. The "EOU Unit" was set up much later in the assessment year 2004-05 (after nearly six years). The two units operate from separate factory land/building, own and possess separate plant & machinery, have separate power connections, have employed separate team of workers, employees, and have incurred establishment expenses. The two units are separately registered with the sales tax authorities, the Central Excise Authorities, the PF Authorities and other like Government bodies, as independent units.
5. The appellant company has maintained separate books of accounts of the EOU and NON EOU Unit, and of the branches. At the end of the year, the expenses of the branches are merged with expenses of the NON EOU Unit. The appellant company has prepared and filed with the Assessing Officer separate balance sheets, profit and loss accounts, schedules, details annexure of the two units. Purchases, sales and expenses of the two units are vouched and supported by proper bills. The accounts are audited. There is no intermixing of expenses. Profits of "EOU Unit" are not inflated to claim higher deduction u/s 80 IB of the Act. The two units have separate current accounts with HDFC/City Bank. There is no inter mixing of funds of the two units.
Page 8 of 15ITA no. 4718/Del/2009 6.1 The NON EOU Unit sold 2476 DG sets for Rs.169,79,70,800 at an average sale price of Rs.6,85,772. The EOU on the other hand sold only 244 DG sets for Rs.48,68,89,214 at an average sale price of Rs.19,95,447. There is no intermixing of the products manufactured and sold by the two units. The NON EOU Unit sold DG sets of mixed ratings as per customer's requirement. It has a larger customer base, attended through sales offices located in different cities across the country. Operating and establishment cost of the NON EOU Unit are thus more, and NP rate is lower. The "EOU Unit" sold DG sets of higher rating, from its factory. It has a smaller customer base. Operating and establishment cost of the "EOU Unit" are lesser, and NP rate is higher.
6.2 Shri Sameer Gupta, Shri Sundeep Gupta, Shri S.K. Narang and Shri D.P. Nadkarni directors of the company attend whole time to the Inland business fo the appellant company. Mr. M. Aantullaha, employed by the company in the year 2002 heads the Export Division and looks after the export business of the company. The company paid Keyman Insurance Premium amount of Rs.21,45,990 on the life of Shri Sameer Gupta and Shri Sundeep Gupta. Out of foreign travel expenses incurred at Rs.15,67,140, Rs.2,74,608 were spent on attending the Annual meeting at Singapore, and Rs.12,92,532 were spent on visits to the offices of the foreign vendors (Cummins and Stamford) to negotiate import of Alternators and Engines required in the manufacture of DG sets. The appellant company, since inception, has debited (a) remuneration paid to the statutory auditors, Directors and export staff, (b) Keyman Insurance premium amount paid, and (c) foreign travel expenses incurred by the directors and export staff, in the accounts of the NON EOU Unit. There is no change in the accounting policy in the year under appeal. Deduction u/s 80 IB in earlier years was claimed and allowed on profits and gains arrived at after debiting these expenses/payments in the books of the NON EOU Unit.
6.3 The appellant company further submitted that the Assessing Officer has wrongly invoked and applied the Page 9 of 15 ITA no. 4718/Del/2009 provisions of section 80 IB(10)/80 IB(13) of the Act, and that the financial results of the EOU and NON EOU Unit should not be disturbed. The Assessing Officer did not disclose her mind and did not provide any opportunity to the appellant company to plead and defend its case. The appellant company never consented to "the expenditure being allocated in the ratio of sales", as alleged by the Assessing Officer in the assessment order. No cognizance of this statement of the Assessing Officer is to be taken.
6.4 The Assessing Officer has acted on mere surmise and conjecture, and has not applied her mind judiciously to the facts of the case. In allocating the administrative expenses (Rs.6,07,15,652), the Assessing Officer should have excluded expenses of the branches (Rs.4,03,68,981), which are located several hundred/thousand kilometers away from Daman, and on which provisions of section 80 IA(10)/80 IB(13) cannot be applied. The Assessing Officer should have allowed deduction u/s 80 IB on the enhanced income of the NON EOU Unit, resulting from reallocation of the administrative expenses.
7. The appellant company has filed a statement comparing expenses of the branches of the NON EOU Unit for the Ass. Years 2004-2005 and 2005-2006, and has submitted that the branches incurred such expenses even when the EOU unit did not exist. There is no exaggeration of expenses in the year under appeal merely because EOU unit at Daman is set up. The appellant company has also filed a statement comparing (a) income, expenses, GP and NP earnings of the NON EOU unit for the A.Y. 2004-2005 with that of the EOU/NON EOU Units (combined ) for the A.Y. 2005-2006. The appellant company has filed another statement comparing income, expenses, GP and NP earnings of the EOU and the NON EOU Uni5s, inter se, for the A.Y. 2005-2006.
8. The appellant company has also submitted that the provisions of section 80-IA(10) can only be invoked where an assessee caries on an eligible business, and arranges its business with any other person, or for any other reason the business is so arranged by the assessee within itself so that Page 10 of 15 ITA no. 4718/Del/2009 business transactions between them produces more than ordinary profit to the eligible business. Thus there has to be a conscious mind with motive to benefit the eligible business at the cost of the non eligible business, to extract benefits of lower incidence of tax. Unintended and accidental falls out of gains and benefits to the eligible business cannot be made an excuse to invoke provisions of section 80-IA(1). In the present appeal, the NON EOU Unit was in operation prior to setting up of the EOU Unit. The appellant company has neither re-arranged its existing business structure/module between the NON EOU and the EOU Units, or any other person, nor has introduced and adopted any new measures, with a view to directly or indirectly benefit the EOU Unit and allow the EOU Unit to earn more than the ordinary profits at the cost of the NON EOU Unit.
The appellant company has also relied on the decision of the Hon'ble Delhi High Court in CIT vs Dewan System P. Ltd 297 ITR 305, in support of its submissions made above.
9.1 After careful considered of all relevant facts, submissions made by the appellant company and after pursuing the assessment records and the details filed, I am of the opinion that the action of the Assessing Officer is not entirely correct. It is not in dispute that the appellant company has maintained separate books of accounts of its EOU and NON EOU units and of the branches, from which the profits and gains of the two units can be correctly determined/ascertained. The appellant company has also filed with the Assessing Officer separate Balance Sheets, profit and Loss Accounts with schedules, details etc. of the two units and of the branches. Purchases, sales and expenses of the two units are vouched and supported by proper documentary evidence. Accounts of the appellant company are also audited in law. Administrative expense of the EOU and NON EOU Units are conveyance expenses, Insurance expenses, Legal expenses, printing & stationery expenses, Rent Rates and Taxes, Salaries and Amenities to staff, Travelling expenses, Postage, Telegram and Telephone expenses, Payment to Auditors, Vehicle Repairs and Maintenance expenses, Water & Electricity expenses, Page 11 of 15 ITA no. 4718/Del/2009 Computer software expenses, Remuneration to Directors, Repairs and Maintenance expenses and Bad debts written off.
9.2 Provisions of section 80-IA(10) as under :-
"Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived there from."
9.3 The Assessing Officer has not brought on record specific instances to show that the appellant company has debited expenses of the EOU Unit in the account books of the NON EOU Unit, with a view to inflate the profits of the EOU Unit and claim higher deduction u/s 80-IB of the Act. Therefore adhoc apportionment of the entire Administrative expenses of Rs.6,16,52,483 to the EOU Unit in the ratio of sales as done by the .............. cannot be entirely sustained, as one without basis. The action of the Assessing Officer would call for modification. A review of the Administrative expenses leaves one without doubt that these include certain expenses incurred and debited by the appellant company in the account books of the NON EOU Unit, but the benefit of which has also resulted to the EOU unit. These expenses are :
a) Payments made to the Auditors: Rs. 1,55,000
b) Remuneration paid to the Directors: Rs.1,32,89,500
c) Salary paid to the Export staff: Rs. 7,95,300
d) Keyman Insurance premium paid: Rs. 21,45,990
e) Foreign travel expenses of the Directors: Rs. 12,92,532
f) Foreign travel expenses of the Export staff Rs. 4,70,578 Total common expenses: Rs.1,81,48,900 Page 12 of 15 ITA no. 4718/Del/2009 In order to therefore meet the ends of justice, and to compute the profits of the two units more authentically, it would be fair and proper to apportion only the above expenses of Rs.1,81,48,900 to the EOU unit in the ratio of Income as under, and recomputed the deduction u/s 80 IB of the Act:
a) Total Revenue for the year: Rs.229,95,64,823
b) Total Revenue f the EOU Unit: Rs.48,68,89,214
c) % of (b) to (a) above 21.17%
d) 21.17% of Rs.1,81,48,900 above: Rs.38,42,685
e) Admn expenses debited in the books of the EOU Rs.9,36,831
f) Income of the EOU unit to be reduced by (d-e) Rs.29,05,854
g) Deduction u/s 80IB of the EOU unit to be reduced by Rs.29,05,854
h) Deduction u/s 80IB of the NON EOU unit to be increased by 30% of Rs.29,05,854 above: Rs.8,71,756 The appellant company is entitled to relief of Rs.1,07,65,245 (1,27,99,343 + 8,71,756 - 29,05,854) RELIEF ALLOWD: Rs.1,07,65,245/-"
8. From the order of the ld. CIT(A) and in the light of the argument made by both the parties, it is not in dispute that the assessee company has been maintaining separate books of account of the exempted unit and the non-exempted unit and all its branches. The expenses of the branches are booked in non- exempted unit. The assessee company has prepared and filed the separate balance sheets, profit and loss accounts and other details and annexures. The purchases and sales as well as expenses of these units are independently vouched and supported by proper bills. The accounts are audited. There is no finding recorded by the A.O. that the expenses of exempted unit are included in the non-exempted unit or there is any inter- mixing of expenses. Their bank accounts are also separate. There is no inter-mixing of funds of two units. The ld. CIT(A) has also considered about the sale price of DG sets sold in non- eligible unit vis-à-vis DG sets sold in exempted unit, and has come to the conclusion that the assessee has not booked the expenses of eligible units in the non-eligible unit with a view to increase the profit of eligible unit which is exempted u/s 80IB of the Act. However, it is important to note that various overall management and administrative expenses as pointed out by the Page 13 of 15 ITA no. 4718/Del/2009 ld. CIT(A) in his order are certainly related to both the units. Therefore, the ld. CIT(A) has allocated these expenses to both the units in proportion to the total revenue of the year vis-à-vis the revenue of exempted unit and non-exempted unit. In the light of these facts which have been categorically found by the ld. CIT(A) and nothing contrary to that has been brought to our notice, we are of the considered view that the ld. CIT(A) has rightly deleted the addition to the extent of Rs. 1,07,65,254/- from the total addition made by the A.O. and has rightly allocated the various expenses aggregating to Rs. 1,81,41,900/- , details of which are set out in the ld. CIT(A)'s order, both the units i.e. exempted unit and non-exempted unit in proportion to their respective revenue. Therefore, only ground raised by revenue and the ground No. 1 raised by the assessee are both dismissed."
7. From the order of the CIT(A), it is clear that the manner of working about the allocation of expenses between EOU unit and non-EOU unit has been done in the same manner as so done by the CIT(A) in the assessee's own case for the A.Y. 2005-06. The CIT(A) has further mentioned that the CIT(A)'s order for the A.Y. 2005-06 has also been followed in the A.Y. 2006-07. The CIT(A)'s order in the A.Y. 2005-06 has been upheld by the Tribunal by rejecting the assessee's appeal as well as the revenue's appeal on this issue as noted above. Therefore, respectfully following our order passed in the A.Y. 2005-06, in ITA no.
1995/Del/2008 fled by the assessee, and ITA no. 2517/Del/2008 filed by the revenue, we uphold the order of the CIT(A) in this assessment year where the CIT(A) has allocated the common expenses between EOU and Page 14 of 15 ITA no. 4718/Del/2009 non-EOU unit with reference to the turnover of respective unit in the same manner as was done by him in A.Y. 2005-06.
8. In the result, the appeal filed by the revenue is dismissed.
9. This decision was pronounced in the open court immediately after the hearing was over on 15th February, 2010.
Sd/- Sd/-
(SHAMIM YAHYA) (C.L. SETHI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 15TH February, 2010
*Nitasha
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, New Delhi.
By Order
Deputy Registrar
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