ACCENT PHARMA,CHENNAI vs. ACIT, CENTRAL CIRCLE 1(1), CHENNAI

आदेश / O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER:

2.1 We heard the rival contentions and find merit in the assessee’s submissions and hence condone the delay in filing these appeals.

3. M/s. Accent Pharma, the assessee, a partnership firm, is engaged in manufacturing pharmaceutical products. In the returns filed for the assessment years 2012-13 & 2013-14, inter-alia, the assessee claimed deductions u/s.80IB of the Income Tax Act, 1961 (hereinafter ‘the Act’) from the profits derived from Jammu unit. The AO found that the assessee is having two manufacturing facilities, one in Chennai, a non eligible unit u/s.80IB of the Act and the other in Jammu, an eligible unit u/s.80IB of the Act. Further, he found that the assessee claimed the expenditure on the partners remuneration only in the accounts of Chennai unit alone. Since the partners are common for both the units of the assessee, he required the assessee to show cause as to why the partners remuneration was not debited at all in the accounts of the Jammu unit, the assessee replied that remuneration to partner is not a deduction in computing the income of the firm under the IT Act, there is no question of setting off remuneration to partners in computing the deduction u/s.80IB of the Act, therefore, partner remuneration is not allocated to Jammu unit. The AO held that since the partners being controller of the affairs of the whole partnership, the remuneration to the partners must have been allocated to both the units. Debiting the entire partners remuneration, in the accounts of Pondy unit alone is not correct. Therefore, while making the assessments for the assessment years 2012-13 & 2013-14, the AO taking the sales made by the units as a base, proportionately allocated the partners remuneration to the respective units and accordingly reworked the deduction allowable u/s.80IB of the Act, which resulted in the consequential disallowance u/s.80IB of the Act in the respective assessment year. Aggrieved, the assessee filed appeals before the CIT(A). The ld.CIT(A) following the decision of the ITAT Pune Bench in the case of Khinvasara Investment (P.) Ltd., v. JCIT, SR-5, Pune, (2008) 110 ITD 198 (Pune)

and relying on the ITAT Delhi Bench decision in the case of Relaxo Rubber Ltd. vs. DCIT, C.Circle-25, (2006) 152 Taxman 47 (Delhi) dismissed the respective appeals. Aggrieved against those orders, the assessee filed these appeals with common grounds and hence the grounds of assessment year 2012-13 are extracted as under:- “1. The Hon’ble C.I.T. (Appeals) is not justified in confirming the disallowing the sum of Rs.17,36,048/- under Section 80 IB.

2. The CIT(A) erred in holding that merely because partners are one and the same both in Pondy Unit and in Jammu Unit, there should be proportionate allocation of Remuneration to partners to reduce the claim under section 80IB.

4. The case was heard through video conferencing. The ld.AR submitted that the assessee being a partnership firm is entitled to claim set off of remuneration to partners on its book profits in terms of Section 40(b)(ii) of the Act, in accordance with the limits laid down as per clause (v) there under. Inviting our attention to the written submissions, the ld.AR submitted that the assessee is eligible to claim partners remuneration of Rs.1.96 crore u/s.40(b)(ii) of the Act, from the Pondy unit alone, however, the assessee has claimed Rs.54 lakhs only. Similarly, it was eligible to claim Rs.3.67 crores towards partners remuneration u/s.40(b)(ii) from Jammu unit, however, it has not taken any remuneration from this units profits, as Rs.54 lakhs paid from Pondy unit itself was less than the eligible profits from that unit. When the partners remuneration paid is grossly below the eligible deduction under the Act, there is no scope for any disallowance per se under normal provisions of the Act much less u/s.80IB of the Act, there is no scope for attributing an artificial disallowance u/s.80IB of the Act as was done by the AO. The ld.AR further submitted that the Pune bench decision relied at by the ld.CIT(A) is not applicable to the facts of this case. The remuneration to directors of a private limited company is a charge on the company’s profit which mandatorily reduces the book profit of the company while in a partnership, like the assessee, the remuneration to partners is an appropriation out of book profits to determine the allowance u/s.40(b) of the Act and it does not alter the book profits in terms of the IT Act. In other words, the book profits of a firm by definition is prior to charge of partner’s remuneration and does not alter irrespective of whether a partner takes a salary or not. Therefore, the ld.AR pleaded that there can be no remuneration attributable to the exempt unit as the actual remuneration paid is far below the maximum entitled allowance under the Act.

While confirming the stand taken by the AO, the decision of ITAT Pune Bench in the case of Khinvasara Investment (P.) Ltd. v. Joint Commissioner of Income-tax SR-5; Pune[2008] 110 ITD 198 (PUNE) was followed. The relevant portion/facts of the order of the ITAT is reproduced below:

'The assessee-company was operating two units. For the purposes of claiming deduction under section B0-IA, the assessee had taken the expenses of the eligible unit at Rs. 40,11,896. He submitted that all indirect expenses had been allocated an turnover basis; that the directors' remuneration was allocated on time basis which was equal for both the units; and that the direct expenses had been debited on actual basis, The Assessing Officer, however, was of the view that the assessee inflated expenses of another unit with a view to claim higher deduction in respect of eligible unit and, accordingly, he reallocated all the expenses on turnover basis leading to decrease in profits of the eligible unit by Rs. 19,35,502.

On appeal, the assessee contended that in respect of direct expenses, there was no question of reallocation as they had been debited on actual basis; that separate books of account had been maintained for both the units; and, therefore, reallocation made by Assessing Officer was not sustainable at all. The Commissioner (Appeals) accepted the assessee's contention regarding direct expenses. He, however, was of the view that expenses such as salary, printing and stationery, telephone expenses vehicle expenses which were common to both the units should be allocated on turnover basis between the two units. He was also of the view that it would be fair to allocate the director's remuneration on the basis of turnover as higher turnover would require more attention of the management. On second appeal it was held by the ITAT that the Commissioner (Appeals) had rightly come to the conclusion that the expenses which were property relatable to one or the other unit should be allocated to that unit only. Further, he rightly held that head office expenses and directors' remuneration should be allocated on the basis of turnover of the two units as that seemed to be the only rational way to allocate these expenses. Thus, there was no reason to interfere with the order of the commissioner (Appeals). Thus, the appeal of the assessee was to be dismissed, [Para 4.3]

Following the above decision of ITAT cited supra, I am of the opinion that the AO has rightly made the disallowance of expenses relatable to 80IB unit of Rs. 17,36,048. In this regard the decision of ITAT Delhi Bench 'E 'in the case of Relaxo Rubber Ltd v.DCIT, C. CIRCLE-25(2006) 152 TAXMAN 47 (DEI-HI) (MAG.) was also taken into account. Hence, this ground of appeal is dismissed.

6 We heard the rival contentions and gone through the relevant material. The assessee has a tax deduction eligible unit u/s.80IB of the Act in Jammu and a non-eligible unit in Chennai. As per the provisions of Section 80IB of the Act, the AO is bound to examine as to whether the profits and gains derived from the eligible business is arrived in accordance with the provisions of the Act and where it is not arrived so, the AO is duty bound to determine it disclosing the reasons for the variations. When the assessee maintained separate accounts for each of the units and has not booked any expenditure towards the partner’s remuneration in the Jammu unit, an issue arises as to whether the profits and gains arrived by the assessee for the Jammu unit is correct or not which is the main issue in this case. As per the partnership deed, the managing partner and the working partner have agreed to actively devote their time and attention to the business of partnership and in consideration they were entitled to the total remuneration subject to the limits specified u/s.40(b) of the Act. In the assessee’s case, the assessee has booked the entire partner’s remuneration in the accounts of Pondy unit alone and has not charged the Jammu unit at all. It is not the case of the assessee that the Jammu unit earned the income without the time and attention of the above partners. Thus, the profits and gains arrived for the Jammu unit without any claim towards partner’s remuneration did not reflect the correct profits and gains of that unit and hence due correction had to be made. The AO based on the sales of the respective units, allocated the partners remuneration claimed in the Pondy unit alone to the respective unit, which on the facts and circumstances, is the only rational way and hence the allocation made by the AO is in accordance with the principle of apportionment. Therefore, we do not find any reason to interfere with the orders of the lower authorities. Therefore, corresponding grounds of the assessee fail in each of these appeals.

Order pronounced on 17th November, 2020 at Chennai.