DCIT-CENTRAL CIRCLE-1(4), MUMBAI, MUMBAI vs. NAVKAR CORPORATION LIMITED, NAVI MUMBAI

The brief facts qua the issue involved are that the assessee company is mainly engaged in providing composite infrastructure facility by providing Container Freight Stations (CFS) within the notified Custom Zone, extended Inland Port facility for import and export of goods. The assessee owns and operates three CFS located in state of Maharashtra and one CFS located in state of Gujrat. The return of income was e- filed on 28-09-2018 for the year under reference declaring total income of Rs.35,20,50,000/- The said income was declared after claiming deduction under Chapter VIA under section 801A(4)(i) of the Act amounting to Rs.266,13,62,345/- The tax on Book Profit being higher than the tax payable on the total income, tax u/s 115JB was paid for taxation amounting to Rs. 128,54,71,778/-.

In so far as the disallowance of deduction u/s.80IA(4)(i) which has been raised by the Revenue in Ground Nos.1-6, succinctly put. The facts are that assessee has invested in infrastructure facility (extended Inland Port) being Container Navkar Corporation Limited Freight Station (for short 'CFS) as per the Government Notification herein after referred to as Eligible Unit. The said infrastructure facility had commenced operation from 28-09- 2008 The assessee commenced claiming deduction u/s 80- IA(4)(i) of the Act from the AY 2010-11 for 10 consecutive years. The assessee has been maintaining separate books of account for Eligible Unit. The said books of account maintained for Eligible Unit has been audited and audit report in Form 10CCB dated 01-09-2018 has been issued and uploaded on 28/09/2018 Based on the audit report in Form 10CCB the assessee has claimed deduction u/s 80-IA(4)(i) of the Act.

The returns of income filed for the assessment years mentioned herein below were subject to scrutiny assessment u/s 143(3) of the Act and based on the submission and explanation the deduction u/s 80-IA(4)(i) of the Act claimed as per Form 10CCB in respect of Eligible Unit has been accepted and allowed.

The ld. AO noted that assessee is engaged in the business of providing cargo handling services and also maintaining warehousing services and there is nothing on record which could distinguish the receipts attributable to Cargo handling charges and warehousing services. The following total gross receipts from the business has been reflected at Rs.428,17,36,000/-. Head of receipts Amount Auction sales 2,64,20,000/- Cargo Handling Services 382,70,34,000/- Transportation 36,45,93,000/- EDI Income 36,02,000/- MND receipts 6,00,87,000/- Total 428,17,36,000/

Thereafter, ld.AO has observed that assessee has not maintained separate books of accounts in respect of eligible business activities and whereas consolidated accounts maintained by the assessee for both eligible and illegible units. In response to the show-cause notice, assessee has duly submitted vide reply dated 11/02/2021 and had clarified that it had maintained separate books of accounts for eligible unit and also filed copies of balance sheet as well as profit and loss account of the eligible unit which was appended with the reply. However, ld. AO still maintained that no separate account details have been made and it was only when ld. AO issued a show-cause notice assessee had Navkar Corporation Limited filed separate balance sheet and profit and loss account. After referring the proviso to sub-section 8 to Section 80IA and after incorporating the balance sheet and profit and loss account, ld. AO noted that the expenses apportioned between eligible and non-eligible unit is @65.88% and 34.11% respectively in the following manner:-

Accordingly, ld.AO has computed the deduction u/s.80IA of Rs.52,14,47,455/- as against Rs66,13,62,345/- and amount of Rs.13,99,14,890/- was disallowed.

Apart from that ld. AO has also noted that assessee has claimed amount of Rs.55,71,649/- on account of loss of sale of fixed assets in respect of certain trolleys and trucks etc., which have purchased in different years beginning from the year 2008-2017 and depreciation has been claimed there against opening WDV as on 01/04/2017 and same has been computed at Rs.4,13,86,407/- and depreciation claimed till date was at Rs.3,69,28,155/- and the sale consideration mentioned of Rs.4,47,20,787/-. The assessee has computed the deduction in the following manner:-

On addition of Rs.55,71,649/- on account of sale of fixed assets during the year, ld. CIT(A) held that here in this case block of asset has not ceased to exist after the sale of assets Navkar Corporation Limited and other conditions of taxability of the said amount u/s.50 is not fulfilled.

Before us, ld. Counsel submitted that Ld. AO has erred in not appreciating the vital fact that the assessee has been maintaining separate books of account based on which audit has been carried out under sub-section 7 of section 80-IA of the Act and report in Form 10CCB has been issued by the Independent Chartered Accountant. The deduction under sub-section (1) from profits and gains derived from an undertaking shall not be admissible unless the accounts of the undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288 before the specified date referred to in section 44AB and the assessee fumishes by that date the report of such audit in the prescribed form duly signed and verified by such accountant 14. The Ld. Counsel further submitted that Ld. AO has erred in not appreciating the fact that the assessee has submitted the audited balance sheet of the Eligible Unit wherein the assets, liabilities, revenue and expenses of the Eligible Unit are recorded in respect of the said unit. The same being audited and report in Form 10CCB issued which is the conclusive evidence that separate books of account has been maintained and that the assets, liabilities, revenue and expenses of the Eligible Unit has been recorded separately in respect of the Eligible Unit. He further submitted that the Ld AO erred in concluding that separate accounts are not Navkar Corporation Limited maintained merely on the basis of consolidated balance sheet filed with the return of income. Further, the Ld. AO has also erred in observing that the expenses have not been apportioned/allocated correctly. He submitted that the allocation has been done on actual basis and in case of common expenses the same has been allocated on scientific basis like turnover, etc 15. Alternatively, ld. Counsel submitted that in any case, the Ld. AO has erred in computing the deduction u/s 80-IA(4) (i) of the Act at ₹52,14,47,455/- The Ld AO while computing the deduction has applied the ratio to the Net Taxable Income from Business which is after adjustments of additions and disallowances/deductions as per the Act. The Ld. AO after applying the ratio to the Net Business Income has again made the adjustments of additions and disallowances/deductions as per the Act as claimed by the assessee in the Computation of Income of Eligible Unit.

For easy reference the summary of the computation of Business Income as per return of income is given hereinbelow:- Particulars Computation of Total Income Profit as per Profit and 128.38 Loss Account Add: Other Comprehensive 4.70 Income and Ind AS impact Total Profit as per Profit 133.08 and Loss Navkar Corporation Limited Add: Donation, Gratuity, 27.04 Leave Encashment, CSR Expenses, etc Less: Depreciation, ICDS 58.16 impact, Income from Other Sources Less: Income from Other Sources 1.21 Business Income 100.75

Ld. Counsel submitted that the Ld. AO has grossly erred in applying the allocation ratio determined by him to the net Business Income and again making the adjustments as per Computation of Income of Eligible Unit which resulted in reduction in the deduction from Eligible Unit. Particulars Re-Computation of Deduction by Ld. AO Profit as per Profit and Loss 66.37 Account (Ld. AO has considered the Business Income of 100.75, which is after making the adjustments and applied the ratio @ 65.88% thereon. Add: Ind AS impact 3.53 Total Profit as per Profit and Loss 69.91 Add: Donation, Gratuity, Leave 20.96 Encashment, CSR Expenses, etc Navkar Corporation Limited Less: Depreciation, ICDS impact, 31.54 Income from Other Sources Less: Income from Other Sources 0.95 Business Income 58.38 18. Assuming, without admitting that the allegations and inferences of the Ld. AO are correct, the calculation of eligible profit as per the method adopted by him is as under. Particulars Combined Eligible Non- (PBP9) 65.88% Eligible 34.12% Revenue Income from 428.17 282.08 146.9 Operations Other Income 2.95 194~ 1.01 431.12 284.02 147.10 Less: Expenses 302.74 199,45 103.29 Net Profit as per 128.38 84,58 43.80 Profit and Loss Account Computation of Income (Segmental) Particulars Combin Eligible Non- ed 65.88% Eligible (PBP1) 34.12% Profit as per Profit and 128.38 84.58 43.80 Loss Account Add: Items as per 4.70 3.10 160 Computation of Navkar Corporation Limited Income (Other Comprehensive Income and Ind AS adjustment) 133.08 87.67 45.41 Add: Donation, 27.04 17.81 9.23 Gratuity, Leave Encashment, CSR Expenses, etc Less: ICDS impact, Income 59.38 39.12 20.26 from Other Sources Business Income 100.74 66.37 34.37 Less: Non-eligible Receipts 4.20 (PBP 50) 62.17

Thus, as per the above the deduction u/s 80-IA(4)(i) of the Act amounts to Rs.62.17 crores which is less by Rs.3.97 crores (Rs.66.14 – Rs.62.17) as compared to deduction claimed by the assessee. Ld.Counsel submitted that the method applied by the Ld. AO is on ad hoc basis without brining on record any cogent reason to do so especially when the separate books of account are maintained and the same are audited and report in Form 10CCB has been issued. The deduction claimed u/s 80-IA(4)(i) of the Act has been consistently accepted by the Department.

Regarding addition of book profit on sale of depreciation assets, ld. Counsel submitted that the assessee being Limited Navkar Corporation Limited Company has to maintain Fixed Assets on historical cost basis and the Depreciation is claimed as per rate prescribed under the Companies Act. The assessee company in its Fixed Assets Schedule has to maintain accumulated depreciation and from the historical cost, the accumulated depreciation at the year end is deducted and net block is disclosed.

Ld. Counsel pointed out that during the year under consideration the assessee has sold Depreciable Assets forming part of the Block of Assets for a consideration of Rs.4,47,20,787/-. As per Companies Act the historical cost of the assets sold amounting to Rs.7,60, 77,293/- has been deducted from the respective block of assets and corresponding accumulated depreciation till the date of sale of assets amounting to Rs.3,69,28,155/- has been deducted. The net book profit amounting to Rs.55,71, 649/- arising therefrom has been credited to Profit and Loss Account. The said details were submitted during the assessment proceedings before the Ld. AO as per Annexure 8 of the submission. The computation of book profit is tabulated herein below. Particulars Amount Sale Consideration - A 4,47,20,787 Cost of acquisition 7,60,77,29 Less: Accumulated 3,69,28,155 Depreciation till date Balance cost on assets after 3,91,49,138 depreciation - B Book Profit (A-B) 55,71,649 Navkar Corporation Limited 22. In the Computation of Total Income, the depreciation allowed at the rates prescribed under the Income Tax Rules, 1962 is claimed as per block of assets. Further, in respect of the assets sold during the year the sale consideration is credited to the respective block of assets and net depreciation has been claimed. The block of assets is disclosed in the Tax Audit Report and the Form ITR. The block of assets in respect of sale of assets as disclosed in the ITR and TAR is reproduced herein below. Particulars Furniture Total Plant& Machinery 10% 15% 1,71,34,83,990 8,80,54,618 180,15,38,608 Opening WDV as on 01-04- 2017 Additions during the year 1,73,83,82,867 4,31,67,050 178,15,49,917 4,42,74,894 4,45,893 4,47,20,787 Less: Sates during the year 32,80,35,457 21,49,353 33,01,84,810 Less: Depreciation WDV as on 31-03-2018 3,02,55,56,506 11,98,47,550 314,54,04,056

Thus, in the Computation of Total Income, the assessee while adjusting the Book Profit on sale of depreciable assets has deducted the amount by putting (-) against the sum of Rs.55,71,649/-. It is submitted that the assessee has not claimed any loss on sale of depreciable assets amounting to Rs. 55,71,649/-. The Ld. AO presumed that the said negative figure is loss on sale of depreciable assets. The Ld. AO has completely misunderstood the facts. He has relied upon figure of Profit on sale of assets as per books. However, he has not noticed that the block of assets as per Income Tax is having Navkar Corporation Limited huge positive balance and the same is not exhausted. Accordingly made the addition of Rs.55,71,649/-.

The Ld. CIT(A) observing the above-mentioned facts has rightly deleted the addition made by the Ld. AO.

On the other hand, ld. DR strongly relied upon the order of the ld. AO and referred to various submissions made in the impugned assessment order and submitted that once assessee is not showing any book of accounts, AO is justified in computing the deduction u/s.80IA(4) in accordance with the proportionate expenses.

We have carefully considered the rival submissions and perused the assessment order, the appellate order, the statutory audit report in Form 10CCB, the audited segmental financials of the eligible unit, the consolidated financial statements, and the working papers placed in the paper-book, including the computation tables reproduced in the record. The controversy has two limbs: (i) restriction of deduction under section 80-IA(4)(i), premised on alleged absence of separate books and alleged arbitrariness in apportionment; and (ii) addition of Rs.55,71,649/- on account of “profit on sale of depreciable assets” credited in books but reduced in the tax computation.

At the threshold, eligibility of the assessee’s Container Freight Station (CFS) undertaking under section 80-IA(4)(i) stands admitted in the assessment order itself (para 2) and has been consistently accepted in scrutiny assessments for earlier years, viz., 2012-13 (order dated 21.01.2015), 2013-14 (27.02.2016), 2014-15 (22.12.2016), 2016-17 (09.05.2018)

The Assessing Officer’s primary objection is that separate books were not maintained for the eligible unit. The record, however, shows the exact converse. The assessee has placed on file: (i) the Form 10CCB issued by an independent Chartered Accountant under section 80-IA(7); (ii) the audited balance sheet of the eligible unit showing its distinct assets, liabilities, revenue and expenses; (iii) a tabular break-up of total expenses between the eligible and non-eligible units (Annexure 6). Section 80-IA(7) stipulates that deduction “shall not be admissible unless the accounts of the undertaking … have been audited … and the assessee furnishes … the report of such audit in the prescribed form.” The assessee has complied in letter and spirit. Once such audited segmental accounts are produced, the onus shifts to the Revenue to demonstrate, with tangible material, why those accounts are unreliable. No instance of inflation of income, suppression of expenditure, or any inconsistency in ledgers has been identified. The AO has relied only on the existence of a consolidated balance sheet accompanying the return; that Navkar Corporation Limited does not negate the presence of separate segmental books indeed, corporate accounting ordinarily requires both.

The AO next alleges that common expenses were apportioned without basis and, since expenses were distributed in the ratio 65.88 : 34.11 (eligible : non-eligible), the revenue also ought to be allocated in the same proportion; on that foundation and purporting to invoke section 80-IA(8), he recomputed deduction at Rs.52,14,47,455/-. This approach suffers from multiple defects:-  Firstly, the assessee has demonstrated that direct costs were booked on actuals to the respective units; only unavoidable common costs (finance charges, employee costs, and overheads of a shared nature) were apportioned on a scientific basis, principally turnover, and supported by working papers. The Ld. CIT(A) has accepted this factual position after verification. In the absence of a specific defect, the AO could not discard an audited methodology merely because he preferred a different allocator.  Secondly, section 80-IA(8) is triggered in cases of inter-unit transfers of goods or services at a price other than the market value. The AO’s order does not identify any concrete inter-unit transaction whose pricing distorted eligible profits. A bare assertion that “revenue should also follow the expense ratio” is not a substitute for the statutory pre-conditions of section 80- IA(8). No exercise has been made to ascertain market value, nor to show that any intra-entity transfer price depressed or inflated the eligible profits.

We therefore hold, on facts and in law, that the assessee maintained separate, auditable books for the eligible undertaking; that its apportionment of common costs rests on a reasonable and consistently applied scientific basis; that there is no factual predicate for invoking section 80-IA(8); and that the AO’s double-adjustment vitiates the computation.

We now turn to the second limb addition of Rs.55,71,649/- on account of profit on sale of depreciable assets. The facts are undisputed. During the year, assets forming part of the block of assets were sold for Rs.4,47,20,787/-. In the Companies Act books, the historical cost Rs.7,60,77,293/- less accumulated depreciation Rs.3,69,28,155/- yielded a book surplus of Rs.55,71,649/-, which was credited to the Profit & Loss Account. For tax purposes, however, the assessee credited the sale consideration to the block and claimed depreciation on the resultant WDV. The closing WDV remained substantially positive at Rs.314,54,04,056/- (Plant & Machinery and Furniture combined), as evidenced by the ITR and Tax Audit Report tables reproduced on record.

Under the block of assets regime of section 32 read with section 43(6), no separate capital gain or business profit arises on sale of an individual asset unless the block ceases to exist or the full value of consideration exceeds the block, resulting in a section 50 adjustment. Neither eventuality has occurred. The figure of Rs.55.71 lakh is a book presentation under financial reporting; it was rightly neutralised in the tax computation because the Act does not tax that line item when the block continues. The AO’s assumption that the negative adjustment represented a claim of loss is factually incorrect and contrary to the block-concept. The Ld. CIT(A) has, therefore, rightly deleted the addition.