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Income Tax Appellate Tribunal, DELHI BENCH ‘B’: NEW DELHI
Before: SHRI YOGESH KUMAR U.S. & SHRI AVDHESH KUMAR MISHRA
ORDER PER BENCH Cross appeal by the Assessee and Revenue containing common facts were heard together being inter-connected with each other and are being disposed off by this common order.
These appeals filed by the assessee and Revenue are directed against orders dated 10.01.18 and 25.09.2018 respectively of the Commissioner of Income Tax (Appeals)-22, New Delhi [‘CIT(A)’].
2.1 Similar grounds have been taken by the appellants in their above- mentioned appeals. Therefore, for brevity, the cases of the Assessment Year (‘AY’) 2013-14 are taken as lead cases. Grounds taken by the assessee and Revenue in appeal of AY 2013-14 are extracted here under:
A.Y. 2013-14 “1. The Assessee Company is aggrieved by action of CIT(A) in confirming the reduction of deduction u/s 80-IC of the Act by Rs.43,56,584/-on the ground that the allocation of Head Office indirect expenses has not been made to 80 IC units. The learned Commissioner of Income Tax (Appeals) has further erred in determining an incorrect amount of disallowance on account of incorrect determination of turnover and ignoring that an amount has already been allocated.
2. The Assessee Company is aggrieved by the order of CIT(A) on the computation of deduction u/s 10AA of the Act on the ground that the allocation of Head Office expenses amounting to Rs.5,36,335/- made to 10AA unit has been made in excess of the amount already allocated and has further erred in determining an incorrect amount of disallowance on account of incorrect determination of turnover and ignoring that an amount has already been allocated.
3. The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in disallowing on ad-hoc basis at 15% of the expenses a sum of Rs.13,42,417/- out of foreign traveling expenses allegedly on the ground that such expenses are not for business purpose.
4. The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in disallowing 1/3rd of expenses on ad-hoc basis of club , 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. membership and expenses amounting to Rs.1,59,005/- allegedly on the ground that the same are personal in nature.
5. The Appellant Company craves leave to add, alter or amend the ground of appeal at a later stage.”
A.Y. 2013-14 “1. On the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in allowing a relief of Rs.72,199/- on account of excess claim u/s 80IC in relation to transfer from non 80IC units to 80IC units as disallowed by the A.O.
2. On the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in allowing a relief of Rs.74,95,918/- made by A.O. while determining the adjustment on account of difference in transfer rate from Non 80IC units to 80C unit.
3. On the facts and in the circumstances of the case and in law Ld. CIT(A) has erred in directing the Assessing Officer not to allocate expenses amounting to Rs. 66,57,651/- on depreciation as applied for allocating the expenses of salaries of CMD/MD, interest expenses pertaining to car loan of CMD/MD u/s 80IC.
4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the Assessing Officer not to allocate expenses amounting to Rs. 8,19,617/- on depreciation as applied for allocating the expenses of salaries of CMD/MD, interest expenses pertaining to car loan of CMD/MD u/s 10AA.
5. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing to allow deduction u/s 10AA in respect of income of Rs.29,57,724/- from sale of scrap by SEZ unit.
6. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in reducing the disallowance to Rs.12,42,840/- from Rs.49,82,586/- made by the AO u/s 14A of the I.T. Act read with Rule 8D of the Income Tax Rules, 1962.
7. The appellant craves leave to add to alter, amend or vary from the above grounds of appeal at or before the time of hearing.”
, 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. 2.2 The issues raised in the above-mentioned six appeals are summed up as under: i. Deduction under section 80IC of the Act. ii. Deduction under section 10AA of the Act. iii. Disallowance under section 14A of the Act. iv. Disallowance of foreign travelling expenses. v. Disallowance of Club expenses. vi. Disallowance of depreciation on software license.
The relevant facts giving rise to these appeals of AY 2013-14 are that the assessee, manufacturer of electrical equipments; such as, switches, sockets, Air Circuit Breakers, Controls, Panels, Relays, etc., filed its income Tax Return (‘ITR’) of AY 2013-14 was filed on 20.11.2013 declaring income of Rs.21,45,63,270/- under normal provisions of the Income Tax Act, 1961 (‘Act’) and book profit of Rs.53,93,07,972/- under section 115JB of the Act. The case was picked up for scrutiny. Meanwhile, the assessee, noticing incorrect challan number of self-assessment tax mentioned in the ITR, revised its original ITR on 30.01.2014 though there was no change in the income declared in the original ITR. Again, the first revised ITR was further revised on 30.03.2015 showing income of Rs.22,12,26,430/- under normal provision of the Act and book profit of Rs.53,93,07,972/- under section 115JB of the Act. The reasoning for second revision of ITR stated by the assessee is wrong claim of deduction of Rs.73,41,484/- under section 80IC of the Act. The case was 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. picked up for scrutiny and consequential assessment, was completed under section 143(3) of the Act at income of Rs.23,94,69,221/- under normal provisions of the Act and book profit of Rs.54,42,90558/- under section 115JB of the Act as per following computations:
Particulars Amount (Rs.) Amount (Rs.) Income as per the ITR 22,12,26,430/- Addition/Disallowance 1 On a/c of excess claim u/s 67,29,850/- 80IC 2 On a/c of excess claim u/s 8,19,617/- 10AA 3 On account of sale of scrap by 29,57,724/- SEZ unit u/s 10AA 4 On a/c of disallowance u/s 14A 49,82,586/- 5 On a/c of foreign travelling 13,42,417/- 6 On a/c of depreciation on 1,09,592/- goodwill 7 Club Membership fees 1,59,005/- 8 Disallowance of deduction u/s 11,42,000/- 1,82,42,791/- 35(2AB) of the Act Total taxable income 23,94,69,221/- 3.1 Aggrieved, the assessee filed appeal before the CIT(A), who allowed part relief. The quantum additions/disallowances made in the assessment upheld the Ld. CIT(A) were challenged by the assessee and reliefs allowed by the Ld. CIT(A) were challenged by the Revenue. and 2533/Del/2018:
At the outset, the Ld. Authorized Representative (‘AR’), with the help of tabular charts/details placed on records, demonstrated that the actual tax
ITA No.2622, 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. effect in the Revenue appeals; and of AY 2013-14 and 2014-15 were below the threshold limit of Rs.60,00,000/-; therefore, these appeals were not maintainable. To which, the Ld. Sr. Departmental Representative (‘Sr. DR’) submitted that the tax effect in these cases had to be ascertained only by the Assessing Officer (‘AO’). However, the Ld. AR submitted the copies of appeal effects given by the AO and his applications filed under section 154 of the Act for consequential relief in pursuance of the Ld. CIT(A)’s orders. Prima facie, we find that the tax effects in these cases are below the threshold limit of Rs.60,00,000/-. Accordingly, these appeals of the Revenue; ITA No.2532/Del/2018 and ITA No.2533/Del/2018 of AYs 2013-14 and 2014-15 are not maintainable as per the CBDT Circular No.09/2024 dated 17.09.2024. Hence, these appeals stand dismissed accordingly. However, the Revenue has full liberty to file Miscellaneous Applications (‘MA’), within stipulated time period, if tax effect in any of these cases is found above the threshold limit.
5. Issues raised in assessee’s appeal of AY 2013-14 are as under: i. Deduction under section 80IC of the Act on account of allocation indirect expenses of the Head Office of Rs.43,56,584/- (Gr. No. 1) ii. Deduction under section 10AA of the Act on account of allocation of indirect expenses of Head Office of Rs.5,36,335/- (Gr. No. 2)
, 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. iii. Disallowance of foreign travelling expenses of Rs.13,42,417/- (G. No. 3) iv. Disallowance of Club expenses of Rs.1,59,005/- (Gr. No. 4).
6. The assessee has claimed deductions under section 80IC and 10AA of the Act for its units situated in Uttarakhand and NOIDA respectively. The AO, questioning the pricing of goods/material transferred to & from exempted to non-exempted units & vice-versa and allocating the Head Office expenses of Rs.4,05,20,654/- not apportioned amongst exempted & non-exempted units to them, held that the assessee had debited these expenditures in its Head Office expenses, so that it could avail maximum deductions under section 80IC and 10AA of the Act. However; the AO, observing as under, restricted the claim of deductions under section 80IC and 10AA of the Act:
“4.4 In year under consideration the details filed by the authorized representative show that some goods are transferred at lower rates and some are at higher rate as compared to rates charged to outside parties. The authorized representative has submitted that the net difference (Overcharge) of (74,95,918/-) may be allowed, if the contentions of assessee are not accepted. This figure of overcharge ₹ (74,95,918/-) is arrived at after netting off of higher rates with lower rates charged as compared to outside parties. The higher rates cannot be offset by lower rates as claimed by the authorized representative because once a price is realized from outsider it becomes market rate and it cannot be compared with any artificial price taken in inter unit transfers. In view of the above the difference of ₹ 2,40,663/- (65,778/- of BT Haridwar Unit,₹1,466/- of BD Haridwar Unit and 1,73,420/- Panel Haridwar) which is worked by taking into consideration the material/goods transferred to 80IC beneficiary units at less than market price. Further the provisions of the Act in this regard is to prevent the undue benefit going to the exempt unit and not to give it advantage which it itself has failed to recognize by transferring the goods to the exempt unit. Since, the assessee has claimed 7 , 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. a deduction of 30% on BT Haridwar unit, 30% on BD Haridwar unit and 30% on Panel Haridwar Unit therefore, the undue benefit of cost by transferring goods/materials at less than market price to the tax benefit unit to the extent of 19,733/- (30% of ₹65,778/-) of BT Haridwar unit. 440/- (30% of 1466/-) of BD Haridwar unit and 52,026/- (30% of 1,73,420/-) Panel Haridwar Unit is added back to the total income of the assessee. Therefore, the total undue benefit of cost by transferring goods/materials at less than market price to the tax benefit unit amounting to ₹ 72199/- is added back to the total income of the assessee. 4.5 Further the assesses was asked to furnish the details of Head Office Expenses and to explain as to why the head office expenses related to the administration and establishment should not be allocated to the tax- exempt unit because the head office activities relate to the entire business comprising of taxable units and not taxable units. 4.6 The assessee's submissions in this regard vide letter dated 16.03.2016 were as under: "We submit that, as per law, profits derived from SEZ and industrial undertakings are eligible for exemption u/s 10AA, deduction u/s 801C and exemption u/s 10B (though no exemption has been claimed by the assessee during the year under assessment) of the Income Tax Act, 1961 respectively. There is no concept of reducing indirect expenses of Head Office. However, to avoid litigation, the allocation of Head Office expenses is done keeping in view the turnover of the 10AA & 80IC units. Further, it will not be out of place to mention that the HO not merely cater to the demands and supply of support services to the industrial units but also is bound to handle secretarial work, planning for development of new business lines, studying the policies and patterns of competitors worldwide. Further, all the units have complete administrative, finance and human resource infrastructure. The allocation of HO expenses has been done on systematic way and fully justified. Without prejudice to above, we further submit that: a) it will not be out of place to put to your knowledge that the expenses disallowed/additions made on account of Rule 8D out of the total expenses of the HO of the company should be eliminated from the HO , 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. expenses for calculating any allocation of such expenses to Units having claimed deduction/exemption under Section 80IC/10AA. b) Further expenses/provisions (e.g. Provision for Bad and Doubtful Debts amounting to Rs.5,48,36,300/-, Provision for Inventory amounting to Rs. 49,98,000/-, and Donations amounting for Rs. 18,22,700/- and instead of Book Depreciation amounting to Rs. 1,40,05,048/-, Depreciation allowable as per income Tax Act/Rules amounting to Rs.1,13,98,299/- should be taken) which have been disallowed/added/adjusted in computation of income should also be excluded for calculating any allocation of such expenses to Units having claimed deduction/exemption under Section 80IC/10AA. The detail of Head office expenses allocation and claim of exemption u/s 10AA & deduction claimed u/s 80IC of the Act in view of these head office expenses is enclosed as "Annexure - 1". Therefore, during the year under assessment, there should not be any further additions/disallowances towards allocation of head office expenses." 4.7 The submissions of the assessee have duly been considered and the same are not found to be acceptable. The head office exists for the different units of the business. If there is only one premises from where a business is carried out the concept of head office is unconceivable. Further the head office cannot be considered to be operating only for some units. The concept of head office to govern the activities of its all units from one place exists because there are certain common features which are to be taken care of in different unit of the business organization. The head office in itself does not manufacture any goods. It exists solely because there are other units under the umbrella. The assessee has suo-moto allocated some expenses of head office to the tax-exempt units. But while allocating the expenses of 37,36,07,722/- on the basis of turnover of the units including inter branch transfer the assessee has not allocated the expenditure towards salary and wages, Power and fuel, vehicle running and maintenance and miscellaneous expenses of CMD & MD and depreciation amounting to 4,05,20,654/- stating that they are looking after the corporate affairs since they are not looking after the affairs of the beneficiary units which are managed by independent staff these expenses in proportion to their salary cannot be allocated to the exempt units. The 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. contention of the assessee cannot be accepted because it's not possible that a promoter/share holder will not look after the exempt units and leave them at the mercy of other staff members whose stake are limited to salary, wages and some perks where as he has put in his capital in that business and has to essentially apply himself to all aspects of business to safeguard his capital and increase profit. 4.8 Therefore, the assessee's contention having not been accepted for the reasons mentioned above the common expenses incurred by the head office aggregating to ₹ 4,05,20,654/- in respect of payments made to CMD & MD and the Director and depreciation are required to be allocated to tax exempt units on the basis of their turnover. Accordingly the share of expenses in respect of the 80IC unit is calculated and the figure comes to ₹ 1,32,14,658/-. This amount is allocated as per the turnover of the 4 units in respect of which 80IC benefit has been claimed. This allocation comes to ₹ 42,01,186/ in Bus Trunking unit ₹ 28,37,082/ in Bus Duct unit and ₹38,47,505/- in MCCB unit and ₹ 23,28,885/- in Panel unit. A part from the MCCB unit which eligible for 100% deduction, the rest of the 3 units which are Bus trunking unit, bust duct unit and Panel unit are eligible for 30% deduction. Therefore, there is an excess claim of ₹ 66,57,651/- by not allocating head office expenses as discussed above. Thus, the claim of deduction u/s 80IC is found to be in excess by an amount of ₹ 67,29,850/- (₹ 72,199 + 66,57,651) which is disallowed and added back to the [Addition of ₹ 67,29,850/-] returned income.
Allocation of H.O. Expenses in respect of 10AA Units: - The 5. assessee has claimed deduction at Rs.2,10,30,825/- u/s 10AA of the Income Tax Act for SEZ unit situated at Plot No.43. NSEZ, Noida. The assessee was asked to furnish the head office expenses and the reason as to why the head office expenses should not be allocated to the tax-exempt unit in Noida as done in earlier year. The submissions of the assessee are on the same lines as given in respect of 80IC benefit units.
5.1 The submissions of the assessee are not found to be acceptable as part of the activities related to the business of 10AA benefit unit is carried out by the head office and accordingly the expenses if not allocated to the said unit the profit of the said unit is distorted and does not present the correct picture of profits of that unit. Therefore, following the decision of the 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. Hon'ble ITAT Mumbai in Assistant Commissioner of Income v/s Asea Brown Boverd Ltd., (2007) 11 TTJ Mum 502 wherein it was held as under: “……………..all expenses, whether they are direct or indirect or fixed, semi-fixed or variable, must be adjusted to determine the profits derived from the industrial undertaking. Similarly, head office expenses or expenses which are common to all the units/undertakings/divisions will have to be spread over and charged against the receipts of all the units/ undertakings/divisions. If this course is not followed, then what would stand allowed under Section 80IA would be inflated profits and not the net profits derived from the industrial undertaking in terms of the provisions of Sections 29 to 43.”
The expenses incurred by the head office are allocated between all units; tax exempt units as well as taxable units on the basis of their turnover. The share of common expenditure incurred by the head office toward payments to CMD & MD and the Director and depreciation as discussed above in respect of allocation of expenses to 80IC benefit unit is allocated to the 10AA benefit unit on the proportionate basis of its turnover. The assessee has sua moto allocated out of some heads of expenses an amount of ₹ 1,52,53,651/- as expenses of 10AA unit. However, by allocating the share of common expenditure incurred by the head office toward payments to CMD & MD and the Director and depreciation and including the expenses suo-moto allocated by the assessee the amount should have been ₹1,68,92,884/-. Thus, the total amount allocated out of the head office expenses other than out of heads of expenses already allocated by the assessee comes to ₹16,39,233/- (₹1,68,92,884-1,52,53,651). Further, the assessee has claimed on exemption of 50% u/s 10AA of the Act and accordingly 50% of ₹ 16,39,233/-amounting to ₹ 8,19,617/- is added to the returned income of the assessee by curtailing the deduction u/s 10AA to this extent. Penally proceedings u/s 271 (1) (c) to be initiated for furnishing of inaccurate particulars of Income. [Addition of ₹ 8,19,617/-]
5.2 Disallowance of deduction u/s 10AA in respect of scrap sales: - During the course of assessment proceedings, it was found that the assessee had made scrap sales of 29,57,724/- in unit operated in special economic zone (SEZ) which is specifically designated for export. The assessee was asked why the same should not be disallowed as done in 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. earlier year since scrap has been sold locally and not eligible for deduction. The assessee vide submission dated 16.03.2016 has stated that "The assessee company is engaged in Industrial activity of the manufacturing of electromechanical devices such as switches etc. During the manufacturing process, some scrap is generated as a normal production activity in the manufacturing process. The same is a recovery against the material cost incurred by the company. The company's claim of Exemption u/s 10AA of the Income Tax Act. 1961 on the taxable income/profits of this eligible unit is fully justified."
5.3 The contention of the assessee is not found to be acceptable because the income of scrap sales is not derived from the assessee’s activity of exports from the unit. The scrap is sold locally and hence, not eligible for deduction. Therefore, the excess deduction claimed of Rs.29,57,724/- in respect of scrap sale is disallowed and added to the [Addition of ₹ 29,57,724/-] returned income.
In appeal, the Ld. CIT(A), vide order dated 10.01.2018, allowed part relief as under:
“5.3 The appellant's contention has been examined. The order of ITAT relates for A.Y. 2008-09. I have carefully gone through the order of the CIT(A) and ITAT for A.Y. 2008-09. The facts of the case and the manner in which the additions were made by the AO is different from the present case. The Hon'ble ITAT has dismissed the revenue stand on the basis of comparing the profit of eligible unit in comparison with other business of the appellant. The ITAT has categorically compared the GP rate and net profit ratio and given the finding that profit of eligible unit were not higher in comparison with the other business. The Hon'ble ITAT relied upon tribunal own order in the case of CAT Vision Products Ltd. (supra) and also mentioned that Ld. DR could not brought to our knowledge any contrary decision. These findings of the ITAT shows that factually the present case is different from A.Y. 2008-09. In the present case the appellant has not submitted details of gross profit and net profit ratio of eligible unit vis-à-vis other business units. In absence of these details, I do not see any reason to take a different stand and I intend to follow the order done in the case of appellant by my predecessor CIT(A) for A.Y.
, 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. 2011-12. While deciding the appeal for A.Y. 2011-12 the Ld. CIT(A) has observed as follows: - “5. Ground no 1.2 and 2 pertain to allocation of certain Head Office expenses in the ratio of turn over to 80IC units and 10AA units. These expenses fall in four categories i.e. salaries of CMD/MD, interest expenses pertaining to car loan of CMD/MD, depreciation and exchange rate difference. In the assessment year 10-11, the CIT(A) held that the salaries of CMD and MD are to be allocated to 80IC unit and 10AA unit, as it could not be held that they were not working for 80IC/10AA units. As regards depreciation, it was held that the depreciation of head office assets could not be allocated to 80IC/10AA units. Following the said order, allocation of salary of CMD and MD of Rs.2,90,09,573/- in the ratio of turnover done by the AO is upheld. For the same reason allocation of interest of Rs.1,48,933/- is also upheld. The exchange difference of Rs.80,63,567/-is also to be allocated as this expenditure has been incurred for common funds benefit from which, is derived by 80IC/10AA units as well. As regards deprecation of Rs.97,05,608/-, allocation of the same is deleted following the appellate order of CIT(A) for A.Y. 2010-11. The AO will, therefore, work out the allocation and recomputed the allowable deduction u/s 80IC and 10AA by excluding the allocation of depreciation of Rs.97,05,608/-. Therefore, grounds, no. 1.2 and 2 are treated as partly allowed." 5.4 There is no change in facts and circumstances of the case. Therefore, I do not have any reason to take a different view on allocation of head office expenses. Hence, following the order of CIT(A) for A.Y. 2011-12, the AO is directed to recompute the allocation of head office expenses in view of the finding given by Ld. CIT(A). The AO will, therefore, workout the allocation and recompute the allowable deduction u/s 80IC and 10AA by excluding the allocation of depreciation. As a result, grounds no. 1.2 and 2 of the appeal are partly allowed for this reason.
The ground no. 2.1 deals with deduction/exemption in respect of of scrap of sales u/s 10AA. The appellant claimed that scrap sales just reduced the cost of inputs and, therefore, it cannot be excluded for computing the deduction The appellant also relied on the decision of Hon'ble ITAT Bangalore dated 15.06.2012 in where in the ITAT held that 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. “In respect of Scrap sale amount, we find that the Hon'ble Tribunal in its decision for the AYs 2001-02 & 02-03 in the assessee company's own case in ITA Nos: 426, 427, 468 & 469/B/2006, following its earlier decision for the AYs 98-99 and 99-00& 99-00 and extensively reproducing its reasoning, has concluded that, ‘ it is clear that the sale of scrap reduced the quantum of expenditure debited for that purpose. On that basis, the amount received from the sale of Scrap cannot be excluded for the purpose of computing deduction u/s10A” For the A.Y. 2011-12, the CITIA) allowed the appeal on the same issue following ITAT decision. Following the above order of Hon'ble ITAT Bangalore, ground no. 2.1 of the appeal is allowed.”
At the outset, the Ld. AR submitted that the Ld. CIT(A), following the finding of his predecessor’s decision in the assessee’s case for AY 2011-12 verbatim, directed the AO to restrict the claim of deductions under section 80IC and 10AA of the Act. However, the AO did not follow the same while giving effect to the impugned order. The relief by the CIT(A), as per the assessee, worked out to Rs.23,01,067/- and Rs.2,83,282/- under section 80IC and 10AA of the Act respectively (Thus, the Ld. CIT(A) upheld the addition of Rs.43,56,584/- and Rs.5,36,335/- under section 80IC and 10AA of the Act). However, the AO did not allow the said relief. Hence, the assessee filed applications for rectification in this regard.
The Ld. AR drew our attention to the order of the coordinate bench in assessee’s own case in 6178/Del/2014 & 3381/Del/2016, to submit that the similar disallowances under section 80IC and 10AA of the Act sustained by the Ld. CIT(A) in AY 2009-10 to 2011-12 were deleted by the ITAT observing as under:
ITA No.2622, 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. “4. The Ground No. 1 arises from the reduction made by the ld. AO on account of entered transferred of goods with reference to Section 80IC(7) r.w.s. 880IA(8) of the Act which was restricted by the Ld. CIT(A) and department appeal have been dismissed in view of the low tax effect. It can be observed that assessee’s own case and for A.Y. 2008-09. The issue is covered in favour of the assessee with following relevant findings in para no. 6 as follows: - “6. Ld. DR even though contended that the assessee has not taken this plea before the AO but we found that the assessee has taken this plea before the AO and the Ld. CIT(A). We also noted that the component transfer to panel unit are customer specific product and of different strength and specification therefore, they cannot be compared with the similar components company sold in the open market. The AO had made the adjustment due to the market value of the inter unit transfer but could not discharge the onus which in our opinion lie on him to ascertain the market value in respect of the component which were transferred by the assessee from one unit to the other unit. The onus lies on the AO to bring the comparative instance if the AO was not able to bring any comparative instance, he should adopted the market value on the basis of the value as determined by the Government of India, Excise Department i.e cost plus 10%. Ignoring this value in our opinion, will tantamount to that provision of section 80IA(a) of the Act has not been correctly applied by the AO and, therefore on the basis itself ignoring the alternate contentions of the assessee that if any deduction has to be reduced u/s 80IC in respect of Panel Division that has to be reduced only by Rs.28,405/-. We allow Ground No.1 taken by the assessee and set aside the order of the Ld.CIT(A) confirming the reduction of the deduction claimed u/s 80IC of the Act by Rs.10,28,461/-. Thus, Ground No.1 and 1.2 taken by the assessee are allowed while Ground No.1 taken by the revenue stands dismissed.” 4.1 As Ld. DR has not pointed any difference in facts and law as relied in assessee’s case in AY 2008-09, respectfully following the same the ground is decided in favour of the assessee.
The Ground no. 1.1. The issue relates to deduction u/s 80IC denied by Ld. AO on the ground that the allocation of ‘head office’ expenses had not been made to benefit claiming 80IC units. It comes from the order of ld. CIT(A) that on page no. 22 he has discussed ground no. 2.1(i) and 2.2(i) 15
ITA No.2622, 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. which were on the connected issue but has not given any conclusive findings. Thus considering same to be declined the ground is being decided. Ld. AR has pointed out that vide for A.Y. 2008-09, the issue has been discussed in favour of the assessee with following relevant findings and following the same the ground is decided in favour of assessee; “We noted that in the case of Catvision Products Ltd. 84 TTJ (Del) 241. This Tribunal has held that only the direct expenditure had to be considered while working out the profit for the purpose of deduction u/s 80IC. Mumbai Bench of the ITAT also in the matter of DCW Ltd. 132 TTJ (Mum.) 442 held for the purpose of section 80IA that indirect expenses cannot be reckoned in the computation of determining the profits of the eligible undertaking. Ld. DR even though vehemently referred to the order of the AO but could not brought to our knowledge any contrary decision. We, therefore, confirm the order of Ld. CIT(A) in deleting the reduction made by the AO in the deduction u/s 10B of the Act amounting to Rs.35,83,048/-. Thus, Ground no. 2 of the revenue stands dismissed.” 5.1 As Ld. DR has not pointed any difference in facts and law as relied in assessee’s case in AY 2008-09, respectfully following the same the ground is decided in favour of the assessee. for AY 2010-11 the ground no. 1, 1.2 and 2 and in for AY 2011-12 the ground no 1 are common to this ground accordingly same are also decided in favour of assessee.”
The Ld. AR submitted that the Head Office expenses other than the salary of promoters CMD/MD looking after the work of company at macro level, depreciation on cars and exchange difference apportioned amongst various units, had already been accepted by the AO. The dispute revolved around the apportionment of salary of promoters CMD/MD looking after the work of company at macro level, depreciation on cars and exchange , 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. difference. The Ld. AR, emphasizing on the fact that the issues relating to claims under section 80IC and 10AA of the Act are squarely covered by the decision of the Co-ordinate Bench in assessee’s own case in 6178/Del/2014 & 3381/Del/2016. Hence, he prayed for the relief following the reasoning given in the said order as precedent.
On the other hand the Ld. Sr. DR vehemently argued the case and supported orders of authorities below. He placed emphasis on the finding of the Ld. CIT(A) that the facts of the case of relevant year were distinguishable from the facts of AY 2008-09. He submitted that the salary of CMD/MD, interest on car loans, depreciation, exchange rate difference, other expenses, etc. claimed in the Head office could be allowed against the business income only. It was contended that the actual business of the assessee was manufacturing of electrical equipments; such as, switches, sockets, Air Circuit Breakers, Controls, Panels, Relays, etc. and not to manage the corporate activities. The Head Offices had the overall supervision and control over all manufacturing units whether or not eligible for deductions under section 80IC and 10AA of the Act and therefore, the entire head office expenses required to be apportioned between various units eligible/non- eligible for deductions under section 80IC and 10AA of the Act.
We have heard both parties at length and have perused the material available on the record. On pointing out to the Ld. AR that the issue of apportionment of Head Office expenses for the purpose of claiming deduction , 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. under section 80IC of the Act decided by the Hon’ble Delhi High Court in assessee’s case for AY 2006-07 in favour of the Revenue [ITA No.1155/2011 reported in 2011 TIOL-825-HC-DEL-IT], the Ld. AR distinguished the case in hand by submitting that the Hon’ble High Court had not decided any proposition of law and the said order was based on facts only. Further it was submitted that the Head Office expenses to a large extent had been apportioned amongst various units and disputed expenditure was only around 5% of Head Office expenditure. The disputed amount was around 5- 6% of Head Office expenses only. It was contended that the salary of three promotor directors; namely, Mr. Rishi Nath Khanna, Mr. Anuj Khanna and Mr. Aditya Khanna had been debited to respective units. Thus, the AO’s claim that manufacturing units had been left to employees were not factually correct. Undisputedly, only the salary of two promotors CMD/MD had been claimed in the Head Office expenses. It was submitted that the CMD/MD sitting in the Head Office were engaged in overall work of the company at macro level and specifically corporate matters such as growth, JV, PR works, surplus funds management, etc. These two promotors CMD/MD sitting in the Head Office did not have any micro level control over the functioning of various manufacturing units as those units were controlled by other promoter directors whose salary had been claimed in those units. It was contended that the indirect expenses claimed under the Head Office expenses were required to be incurred for overall growth of the appellant company and such expenses did not directly impact the profits ‘derived from industrial undertaking’ and 18 , 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. that was why the word used in the section is ‘derived from industrial undertaking’ as against ‘profits attributable to industrial undertaking’.
We have given a thoughtful consideration to the entire facts of the case on the issues relating to deductions under section 80IC and 10AA of the Act. We find merit in the submissions of the Ld. AR. We find that these issues are squarely covered by the decisions of the Co-ordinate Bench in assessee’s own case in 6178/Del/2014 & 3381/Del/2016. We therefore, following the decision of the Co-ordinate Bench in assessee’s own case in 6178/Del/2014 & 3381/Del/2016, delete the disallowances of Rs.43,56,584/- and Rs.5,36,335/- made under section 80IC and 10AA of the Act respectively by the AO and sustained by the Ld. CIT(A). The respective grounds raised in this regard are thus stand allowed accordingly. The assessee gets consequential relief.
The next issue is in respect of disallowances made out of foreign travelling and club expenses. The AO has disallowed certain percentage of these expenses by recording the reason that the assessee failed to demonstrate that these expenses have been wholly and exclusively incurred for business purposes only. The finding of the AO was not specifically controverted with the help of documentary evidences during the appellate proceedings either before the Ld. CIT(A) or us. However, the AO has made these disallowances on adhoc basis. Keeping in view the facts in entirety and past trend of disallowances made in this regard as highlighted by the Ld. , 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. CIT(A), we restrict the disallowances @ 10% and 20% of foreign travelling and club expenses instead of 15% and 33.33% upheld by the Ld. CIT(A). The respective grounds raised in this regard are thus stand partly allowed as above. The assessee gets consequential relief.
In the result, the assessee’s appeal; is partly allowed as above. and 7981/Del/2018:
The above finding will apply mutatis mutandis in these appeals.
In view of the above, we therefore, following the decision of the Co- ordinate Bench in assessee’s own case in 6178/Del/2014 & 3381/Del/2016, delete disallowances of Rs.26,39,859/- and Rs.7,10,295/- of AY 2014-15 and disallowances of Rs.31,10,758/- and Rs.9,07,524/- of AY 2015-16 under section 80IC and 10AA of the Act respectively by the AO and sustained by the Ld. CIT(A). The respective grounds raised in this regard in both appeals are thus stand allowed accordingly. The assessee gets consequential relief in both years.
The next issue is in respect to disallowances made out of foreign travelling and club expenses in AY 2014-15/ITA No.2623/Del/2018. Keeping in view the facts in entirety and past trend of disallowances made in this regard as highlighted by the Ld. CIT(A), we restrict the disallowances @ 10% and 20% of foreign travelling and club expenses instead of 15% and 33.33% of 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. AY 2014-15 upheld by the Ld. CIT(A). The respective grounds raised in this regard of AY 2014-15 are thus, partly allowed as above. The assessee gets consequential relief in AY 2014-15/ITA No.2623/Del/2018.
In AY 2015-16/ITA No.7981/Del/2018, there is only dispute regarding the disallowance made out of club expenses only. Keeping in view the facts in entirety and past trend of disallowance made in this regard as highlighted by the Ld. CIT(A), we restrict the disallowances @ 20% of club expenses instead of 33.33% of AY 2015-16 upheld by the Ld. CIT(A). The respective ground raised in this regard of AY 2015-16 is thus partly allowed as above. The assessee gets consequential relief in AY 2015-16/ITA No.7981/Del/2018.
In the result, the assessee’s appeals; and are partly allowed as above.
Revenue’s appeal; ITA No.8274/Del/2018:
The issues raised in this appeal are summed up as under: i. Deduction under section 80IC of the Act. ii. Deduction under section 10AA of the Act. iii. Disallowance under section 14A of the Act. iv. Disallowance of depreciation on software license.
The Ld. AR submitted that the issue relating to claim of deduction under section 80IC and 10AA of the Act, the grounds raised by the Revenue , 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. were factually incorrect as the Revenue had challenged even that disallowance made under section 80IC and 10AA of the Act which had been upheld by the Ld. CIT(A). The Ld. AR submitted that the Revenue had challenged the disallowances of Rs.71,94,849/- and Rs.20,99,005/- under section 80IC and 10AA of the Act which also include the disallowances of Rs.31,10,758/- and Rs.9,07,524/- under section 80IC and 10AA of the Act upheld by the Ld. CIT(A), which had been challenged by the assessee in ITA No.2623/Del/2018.
We find merit in the submission of the Ld. AR that the Revenue has erred in challenging the entire disallowances made out of deductions under section 80IC and 10AA of the Act. Thus, it is hereby inferred that the Revenue has challenged only the disallowances of Rs.40,84,091/- and Rs.11,91,481/- made under section 80IC and 10AA of the Act deleted by the Ld. CIT(A).
In view of the above finding in it is hereby inferred that the indirect expenses claimed under the Head Office expenses are required to be incurred for overall growth of the appellant company and such expenses have not directly impacted the profits ‘derived from industrial undertaking’. Accordingly, Grounds Nos.1 and 2 raised by the Revenue fail.
The next issue is with respect to the disallowance of deduction under section 10AA of the Act arising from the scrap sale of Rs.34,12,997/-. The AO disallowed it on the reasoning that the scrap sale was domestic sale and it had no relation with the export sale eligible for deduction under section 10AA
ITA No.2622, 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. of the Act. On the other hand, the assessee’s claim is that it directly reduces the cost of inputs resulting export sale and thus, it has direct correlation with the deduction under section 10AA of the Act. The Ld. CIT(A), following the decision of the ITAT in the case of Wipro Ltd. in deleted the disallowance in this regard. The Ld. AR, placing reliance on the decisions of the coordinate bench in the case of EXL Service.Com India Pvt. Ltd. in and Wipro Ltd. (supra), prayed for relief. We do not find any infirmity, on this issue, in the order of the Ld. CIT(A). Therefore, the ground numbered 3 raised by the Revenue fails accordingly.
The next issue is with respect to the disallowance under section 14A of the Act. At the outset, the Ld. AR submitted that this issue was squarely covered by the decision of the Co-ordinate Bench in assessee’s own case in ITA No. 3381/Del/2016. The Ld. AR drew our attention to the finding of the Ld. CIT(A) wherein it had been held that the assessee had surplus fund to make investments. We find that this issue is squarely covered by the decision of the Co-ordinate Bench in assessee’s own case in ITA No.3381/Del/2016. Further, we do not find any infirmity, on this issue, in the order of the Ld. CIT(A). Therefore, the ground numbered 4 raised by the Revenue fails accordingly.
The last issue is with respect to the disallowance of depreciation on software license. At the outset, the Ld. AR submitted that this issue was squarely covered by the decision of the Special Bench of the ITAT in the case , 2623 & 7981/Del/2018 2533 & 8274/Del/2018 C & S Electric Ltd. of Amway India Enterprises reported in 111 ITD 112 (Del)(SB), which had been duly followed by the Ld. CIT(A) while allowing the relief on this score. We do not find any infirmity, on this issue, in the order of the Ld. CIT(A). Therefore, the ground numbered 5 raised by the Revenue fails accordingly.
In the result, the revenue’s appeal stands dismissed as above.
In the result, all appeals of the Revenue are dismissed and all appeals of the assessee are partly allowed as above.
Order pronounced in open Court on 30th June, 2025