Income Tax Appellate Tribunal - Kolkata
Deepak Industries Ltd., Kolkata vs Assessee on 11 June, 2013
आयकर अपीलीय अधीकरण, Ûयायपीठ - "सी ", कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH "C", KOLKATA
[(सम¢) ौी एन.
एन.एस.
एस.सैनी,ी, लेखा सदःय, एवं ौी महावीर िसंह, Ûयायीक सदःय]]
[Before Hon'ble Sri N.S.Saini AM & Hon'ble Sri Mahavir Singh, JM]
आयकर अपील संÉया /ITA No.247/Kol/2012
िनधॉरण वषॅ/Assessment Year : 2008-09
(अपीलाथȸ/APPELLANT ) -वनाम- (ू×यथȸ/RESPONDENT)
M/s.Deepak Industries Ltd.. D.C.I.T., Circle-6,
Kolkata -versus- Kolkata
(PAN:AAACD 8676 J)
अपीलाथȸ कȧ ओर से/ For the Appellant: Shri S.Jhajharia
ू×यथȸ कȧ ओर से/For the Respondent: Shri K.N.Jana,Sr.DR
सुनवाई कȧ तारȣख/Date of Hearing : 11.06.2013
घोषणा कȧ तारȣख/Date of Pronouncement : 18.06.2013.
आदे श/ORDER
Per Shri N.S.Saini, AM
This is an appeal filed by the assesee against the order of ld. CIT(A)-VI, Kolkata dated 30.12.2011.
2. The sole issue involved in this appeal is that the ld. CIT(A) erred in confirming the action of the AO in restricting the deduction u/s 80IC to only at Rs.90,62,385/- in place of Rs.1,14,96,983/- claimed by the assessee.
3. The brief facts of the case are that the AO observed that the financial condition of the assessee company was not good. The reserves and surplus as on 01.04.2007 was (-)Rs.3.10 crores. Moreover the company was declared as sick industrial company by the Board of Industrial and Financial Reconstruction. So the submission of the assessee that the entire funding of Rudrapur unit was made through internal accrual was not acceptable. The AO further observed that the assessee company has taken secured loans as well as unsecured loans throughout the year. The loan fund has been utilized towards investment in fixed assets, inventories, sundry debtors and cash & ITA.247/Kol/2012 2 M/s.Deepak Industries Ltd., Kolkata vs DCIT.Circle-6,Kol A.Yr.2008-09 bank balances. The assessee company has inflated profit of Rudrapur unit for the purpose of higher deduction u/s 80IC. He further observed that the actual profit of Rudrapur Unit can be determined after allocating finance charges and head office expenses to this unit. He observed that the average value of fixed assets and current assets including loans and advance for all the three units in crores are as under :-
Kolkata Unit Faridabad Unit Rudrapur Unit
Average value of ½ (7.5 26.0+2.2+17.9) ½(10.8+18.8+11.2+15.6 ½(9.1+3.2+4.2+1.3)
Fixed Assets, Current 2 2 2
Assets, Loans & = 26.8 = 28.2 = 8.9
Advances in crores
He further observed that ratio of the Average Value of Fixed Assets, Current Assets, Loans and advances is expressed as under : 268 : 282 : 89. The AO further observed that the total financial charge excluding hire charges and bill discount is Rs.1,53,25,937/-. The sum of ratio (268 + 282+ 89) is 639. The finance charge for Rudrapur Unit is allocated in the above ratio as under :-
89 x 1,53,25,937 = Rs.21,34,598/-639
Accordingly the finance charge of Rs.21,34,598/- was reduced from the profit of the Rudrapur unit. Regarding the allocation of Head office expenses the AO observed that the assessee has incurred a sum of Rs30,29,642/-. The head office expenses have to be allocated among all the units to arrive at the correct profits earned by them. The AO observed that the turn overs of these three units were as under :-
Kolkata : 58 crores Faridabad : 108 crores Rudrapur : 5 crores
Considering the turn overs of all the three units a sum of Rs.3 lakhs was allocated to Rudrapur Unit to arrive at the correct profit of this unit. The AO then observed that the assessee company has claimed deduction of Rs.1,14,96,983/- u/s 80IC in respect of profit from Rudrapur Unit. As above finance charge of Rs.21,34,598/- was allocated to Rudrapur unit. Head office expenses of Rs.3 lakhs was allocated to Rudrapur Unit. After reducing the financial charge and head office expenses, the deduction of Rs.90,62,385/- (11496983 - 2134598 - 300000) is allowed u/s 80IC in respect of Rudrapur unit.
ITA.247/Kol/2012 3M/s.Deepak Industries Ltd., Kolkata vs DCIT.Circle-6,Kol A.Yr.2008-09
4. Being aggrieved against such order the assessee filed an appeal before the ld. CIT(A). Before the ld. CIT(A) the assessee submitted that copy of the audited account of the head office expenses is enclosed. From a perusal of the same it will be seen that no loan had at all been borrowed by the head office and as will further appear from the Balance sheet of the Head office, it had neither borrowed any loan nor advanced any loan to either Faridabad or Rudrapur and the amount due from these two units only represented the profits accruing in these two units and which have been transferred to Head Office for accounting purposes. It was submitted that therefore the action of the AO in allocating proportionate finance charges was wholly bad, illegal, unjustified and uncalled for. The AO has failed to prove the nexus between borrowals and advances to Rudrapur unit by Faridabad unit. Regarding allocation of direct and indirect expenses incurred by the Head office or Faridabad unit in respect of Rudrapur Unit it was submitted that the head office or New Allenberry Works, Kolkata did not depute any person for supervising the Rudrapur unit and hence the question of allocation of any expenditure from the head office or New Allenbery Works, Kolkata is wholly bad, illegal, unjustified and uncalled for. As regards Faridabad Unit, it was submitted that some persons were deputed for supervising the work of Rudrapur Unit at the initial stage of starting such unit and for this purpose Faridabad unit has already debited the account of Rudrapur unit by Rs.6,45,753/- in respect of salary and other allowances of those executives and out which Rs.85,829/- has been capitalized. Hence it was submitted that the action of the AO in further allocating Rs.3,00,000/- to Rudrapur unit regarding expenditure was wholly bad, illegal, unjustified and uncalled for because Rs.6,45,753/- had already been transferred form Faridabad unit to Rudrapur unit on account of such expenditure. Hence it was submitted that the action of the AO in restricting the addition allowable u/s 80IC to Rs.90,62,385/- claimed by the assessee should be vacated. The ld. CIT(A) after considering the submissions of the assessee has held as under :-
6. I have duly considered the observations of the Assessing Officer and submissions of the assessee. The Assessee is engaged in the business of Engineering and is running two Units separately Le., one at Faridabad and the other at Rudrapur in Uttaranchal. Both the units are in the same line of manufacturing of tractor gears and automobile gears. The assessee had set up the Rudrapur Unit on 01.12.2007. The Assessing Officer observed that surplus ITA.247/Kol/2012 4 M/s.Deepak Industries Ltd., Kolkata vs DCIT.Circle-6,Kol A.Yr.2008-09 and reserve are negative amount at Rs. 3.10 crares as on 1.4.2007 and it has been declared as a Sick Industrial Company by the Board of Industrial Finance Reconciliation. The assessee company has not debited any finance charges to Rudrapur Unit stating that no loan was taken for Rudrapur Unit and the entire funding was made fram the internal accrual basis for setting up of this new Unit.
The assessee-company has also not debited any Head Office expenses to Rudrapur Unit for which there is no reasonable explanation given by the appellant. The assessee is having total assets for Rudrapur Unit amounting to
1.Rs. 11.60 crores and Rs. 5.43 crores as on 31.3.08 and 31.3.07 respectively.
7. The assessee had taken secured and unsecured loans throughout the period before and after establishing Rudrapur Unit. The Head Office expenses amounts to Rs.30,29,642/-. The Assessing Officer has allocated head office expenses on the basis of turnover while the expenses for finance charges have been allocated on the basis of average value of fixed and current assets including loans and advances. The plea of the assessee cannot be accepted that no funds have been taken on loan for establishing Rudrapur Unit. The assessee had taken loans before setting up of Rudrapur Unit. It cannot be accepted that all the funds of the assessee in the form of share capital has gone into the setting up of Rudrapur Unit while there was a negative reserve and surplus of Rs. 4.4 crores at the time when the Rudrapur Unit was being established. The assessee did not have sufficient spare funds to establish Rudrapur Unit without taking extra loans. The money has been given from common kitty for establishing Rudrapur Unit. It is clear that the assessee is trying to show maximum profit by not allocating the expenses to tax free unit of Rudrapur Unit. In this way, the assessee has shown more expenses in the other taxable unit and deducted the expenses from the profits thereby to pay lesser amounts of taxes. The provisions of section 14A although applies to exempted income but the basic principle that any expenses incurred for earning income which is not taxable has to be allocated expenditure incurred for the same. The basic principle has to be followed even in the case of where the deduction @ 100% is being claimed by the assessee from the income of a Unit. The provisions of sub-section 8 of section 801A as per 8018 (13) are also applicable as the services of taxable unit in the form of finance charges, Interest and loan raised funds are being used directly by a unit claiming exemption u/s 8018 of the Income-tax Act, 1961. The Assessing Officer has rightly used the reasonable method {as provided in the proviso to section 801A(8) of I.T.Act,1961} for allocation of expenses to the exempted unit. There is a huge difference in the net profit shown from both the Units which shows that the assessee has allocated more expenses to the older Unit for claiming higher deduction of expenses to show lesser income and thereby avoiding payment of Income-Tax. Therefore, the plea of the assessee is not accepted. The reasons and allocation basis adopted by the Assessing Officer has been found to be fair and reasonable and is accordingly upheld the addition of Rs.24,34,598/-. The appeal of the assessee is dismissed on this ground.
5. The ld. AR of the assessee reiterated the submissions made before the ld. CIT(A).
6. The ld. DR supported the orders of the lower authorities.
ITA.247/Kol/2012 5 M/s.Deepak Industries Ltd., Kolkata vs DCIT.Circle-6,Kol A.Yr.2008-09
7. We have heard the rival submissions and perused the orders of the authorities below and materials available on record. In the instant case the assessee has three manufacturing units at Kolkata, Faridabad and Rudrapur. The income of the Rudrapur unit qualifies for deduction u/s 80IC of the Act whereas income from Faridabad and Kolkata units are fully taxable. The AO observed that the Head Office expenditure of the assessee was Rs.30,29,642/- and the assessee claimed the entire expenses as deduction form income from Kolkata and Faridabad units and no part of the expenses was allocated towards income of Rudrapur unit. According to the AO the Head Office expense was incurred for all the three units and therefore should have been allocated to all the three units. The AO accordingly allocated Rs.3,00,000/- towards Rudrapur unit on the basis of sale relating to the three units. Further the AO observed that the assessee has incurred interest expenditure of Rs.1,53,25,937/- and the entire expenses was claimed from income of Kolkata and Faridabad units. According to the AO as the loan amount was also utilized for Rudrapur unit therefore he apportioned the interest expenditure of Rs.24,34,598./- for Rudrapur unit on the basis of total assets of the three units. Thereby the AO reduced the income of the Rudrapur unit by Rs.24,34,598/- net and increased the income of the other two units with the same amount. As a consequence to this deduction u/s 80IC of the Act was reduced by Rs.24,34,598/-. On appeal the ld. CIT(A) confirmed the action of the AO.
7.1. Before us the ld. AR of the assessee submitted that no expenses in the Head Office was incurred for the Rudrapur unit. We find that no details of the Head Office expenditure was filed before us. No material was brought before us to show that the entire expenses incurred by the Head Office were only for Kolkata and Faridabad units and no expenses was incurred for Rudrapur unit. In absence of any such material being brought on record before us we do not find any error in the orders of the lower authorities to the effect that the Head Office expenses should be allocated on a reasonable basis in respect of all the three units of the assessee company. Further, the allocation of Head Office expense was done by the AO in the ratio of sales of all the three units and no mistake was brought before us to show that the allocation of expenditure on the basis of the sales was not proper in the instant case and there ITA.247/Kol/2012 6 M/s.Deepak Industries Ltd., Kolkata vs DCIT.Circle-6,Kol A.Yr.2008-09 should have been any other better method for allocation of Head Office expenses to the units. Therefore this part of the ground of appeal is dismissed.
7.2. In respect of interest expenditure of Rs.1,53,25,937/- the ld. AR of the assessee contended that no part of the borrowed funds were utilized for Rudrapur unit. The ld. AR filed before us a statement showing loan balance of 31.03.2006, 31.03.2007 and 31.03.2008 and pointed out that loan amount have gradually decreased each year. From this he argued that it shows that no loan amount was utilized for setting up of Rudrapur unit. He also filed a statement showing internal accruals of the company for three years ended on 31.03.2006, 31.03.2007 and 31.03.2008. The said statement shows that the net profit of the company before depreciation for the year ended 31.03.2006 was Rs..6,30,38,583/-, for 31.03.2007 was 5,10,88,326/- and for 31.03.2008 was Rs.19,98,67,950/-. From the above statement it was contended that the investment in Rudrapur unit was made out of internal accruals only.
7.3. On the other hand, the ld. DR pointed out from the assessment order that the net profit of the assessee company as on 01.04.2007 was (-)Rs.3.10 crores, therefore the assessee could not have invested in Rudrapur unit from internal accruals as claimed by the assessee. We find no force in the argument of the ld. DR. We find that it is not in dispute that the net profit of the assessee company during the period 31.03.2006 was Rs,.6,30,38,583/- and during the period 31.03.200-7 was Rs.5,10,88,326/-. Thus merely because there was a negative net work of the company does not necessarily mean that the profit generated by the company during the period 31.03.2006 and 31.03.2007 could not have been invested for the purpose of investment in Rudrapur unit. However, at the same time, we also find that merely because the loan amount has gradually reduced from 31.03.06 to 31.03.2008 and as because there was profit earned by the company during the years ended 31.03.2006 to 31.03.2008 it cannot be concluded that the investment in the Rudrapur unit was made from the profits so generated only. We find that the party wise details of the loan on which the interest expenditure of Rs.1,53,25,937/- was incurred by the assessee was not brought on record before us by both the parties. Both the parties before us has ITA.247/Kol/2012 7 M/s.Deepak Industries Ltd., Kolkata vs DCIT.Circle-6,Kol A.Yr.2008-09 brought no material to show the purpose for which loan in question was taken by the assessee and how the loan amount for which the interest expenditure was utilized during the period under consideration. The year-wise breakup of investment made in the Rudrapur unit was also not filed before us by both the parties. In absence of complete details before us we are not in a position to adjudicate this part of the ground of appeal completely. In the above circumstances, in our considered opinion, it shall be fair and in the interest of justice to restore this part of the ground of appeal back to the file of the AO for proper verification of the utilization of the loan amount in respect of the interest expenditure of Rs.1,53,25,937/- was incurred by the assessee and thereafter to decide the issue afresh as per law after allowing reasonable opportunity of hearing to the assessee. Thus this part of the ground of appeal of the assessee is partly allowed for statistical purposes as stated above.
8. In the result the appeal of the assessee is partly allowed for statistical puruposes.
Order pronounced in the court on 18.06.2013.
Sd/- Sd/-
[ौी.महावीर िसंह, Ûयायीक सदःय ] [ौी एन.एस.सैनी,, लेखा सदःय]
[Mahavir Singh ] [N.S.Saini]
Judicial Member Accountant Member
(तारȣख)
तारȣख)Date: 18.06.2013.
R.G.(.P.S.)
आदे श कȧ ूितिलǒप अमेǒषतः-
Copy of the order forwarded to:
1. M/s. Deepak Industries Ltd.., C/o Salarpuria Jajodia & Co., 7, C.R.Avenue, Kolkata-700072.
2 D.C.I.T., Circle-6, Kolkata
3. CIT Kolkata 4. CIT (A)-VI, Kolkata.
5. CIT(DR), Kolkata Benches, Kolkata.
स×याǒपत ूित/True Copy,
आदे शानुसार/ By order,
Deputy /Asst. Registrar, ITAT, Kolkata Benches
ITA.247/Kol/2012 8
M/s.Deepak Industries Ltd., Kolkata vs DCIT.Circle-6,Kol A.Yr.2008-09