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Income Tax Appellate Tribunal, “C”, BENCH KOLKATA
Before: SHRI A.T.VARKEY, JM &DR. A.L.SAINI, AM
आदेश / O R D E R
Per Dr. A. L. Saini:
The captioned appeal filed by the Assessee, pertaining to assessment year 2010-11, is directed against an order passed by the learned Commissioner of Income Tax (Appeals)-16, Kolkata, (in short the ld. CIT(A)], which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 ( in short the ‘Act’), dated 30.03.2013.
The ground of appeal and additional grounds of appeal raised by the assessee are as follows:
M/s Deepak Industries Ltd. ITA No.2317/Kol/2016 Assessment Year:2010-11 1. For that in view of the facts and in the circumstances the ld. CIT(A) erred in confirming the action of the A.O. in disallowing Rs. 60,30,690/- in the computation of deduction u/s 80IC and such action of the ld. CIT(A) is wholly bad and illegal and in view of the facts and in the circumstances it may kindly be held accordingly.
Without prejudice to Ground no. 1 above, the ld. CIT(A) erred in directing the A.O. to enhance the deduction u/s 80IC by the amount of disallowance so made and in view of the facts and in the circumstances it may kindly be held accordingly.
For that your petitioner craves the right to put additional grounds and/ or to alter / amend/ modify the present grounds at the time of hearing.
Additional grounds: 1. For that in view of the facts and in the circumstances and without prejudice the ld. CIT(A) erred in directing A.O to verify the reduction of interest of Rs.62,91,275/- from the amount of deduction u/s 80IC and also allow relief if no deduction has been claimed without appreciating the fact that interest so allocated should have been reduced from such interest earned and hence only the net interest be considered for purpose of 80IC and it may be held accordingly.
Without prejudice to ground no. 2 & Additional Ground no. 1, the ld. CIT(A) erred in not granting deduction u/s 80IC on disallowance of finance charges so confirmed by it and it may be held accordingly.
For that in view of the facts and in the circumstances the ld. CIT(A) was wholly unjustified in not adjudicating the Additional ground so raised before it in respect of disallowance of Rs. 5,00,000/- u/s 40a(ia) and hence the ld. CIT(A) may kindly be directed to consider such ground for fresh adjudication.
The brief facts qua the issue are that during the assessment proceedings it was observed by assessing officer that as per assessee`s submission the Fixed Deposit on which interest was earned of Rs. 62,91,275/- was made from the fund transfer UCO-Bank, Defence colony Brach, New Delhi of Faridabad Unit. The balance as at 31.03.2010 in the said account bearing no. 00021000025 amounting to Rs. 13,774/- is reflected in the schedule 7 of Tax Audit Report under the head balance with schedule banks in current account under the unit of Faridabad. Hence, AO noted that in no circumstances, when the bank account was maintained under
M/s Deepak Industries Ltd. ITA No.2317/Kol/2016 Assessment Year:2010-11 Faridabad unit, the interest on FD can not be shown under Rudrapur Unit. Hence, AO was of the opinion that at the time of calculation of total income, the amount Rs. 62,91,275/- should be kept outside the purview of deduction claim under section 80IC of the Act.
During scrutiny proceedings ld AO observed that the assessee company has claimed deduction of Rs.19,64,57,382/- u/s 80IC of the Act, in respect of profit from Rudrapur Unit. The assessee company has three units viz. Kolkata Unit, Faridabad Unit and Rudrapur Unit. Before the AO the assessee submitted consolidated account for the whole year and also three balance sheets and profit & loss account for three branches. On perusal of all the accounts, it is found that the assessee has not debited any finance charge/ interest in the profit & loss account of Rudrapur Unit. Moreover head office expenses have not been allocated to Rudrapur Unit. The assessee company was requested to explain as to why finance charge and head office expenses should not be allocated to Rudrapur unit. In response, the assessee company submitted that no loan was takenin respect of Rudrapur Unit and the entire funding was made from internal accruals.
The AO noticed that the financial condition of the assessee company is not good. Moreover, the company was declared as Sick Industrial company by the Board of Industrial/ Financial Reconstruction. So the submission of the assessee that the entire funding of Rudrapur Unit was made through internal accrual is not acceptable. 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 debtor and cash and bank balances. Therefore, AO noticed that the assessee company has inflated profit of Rudrapur Unit for the purpose of higher deduction u/s. 80IC of the Act. The actual profit of Rudrapur Unit can be determined after allocating finance charges and head office expenses to this unit. The average value of fixed assets and current assets including loans and advances for all three units are shown in crores as under:
M/s Deepak Industries Ltd. ITA No.2317/Kol/2016 Assessment Year:2010-11
The ratio of the average value of Fixed Assets. Current Assets & Advances is expressed as under: 4701 :5953:3128. The total finance charge excluding hire charges & bill discount is Rs. 2,65,79.000/-. The sum ratio (4705+5953+3128) is 13,786. The finance charge of Rudrapur Unit was allocated in the above ratio as under: 3,128 x 2,65,79,000 = 60,30,690 13.786 Accordingly, finance charge of Rs. 60,30,690 /- was allocated to Rudrapur Unit by AO. Considering the turnover of those three units a sum of Rs. 3 lakhs was also disallowed on estimate basis towards allocation to Rudrapur Unit to arrive at the correct profit of this Unit. In view of above discussion after reducing i) interest on F.D of Faridabad Unit of Rs. 62,91,275 (ii) Allocation of H.O financial charges relating to Rudrapur Unit of Rs. 60.30.690/= and (iii) Allocation of H.O. office expenses relating to Rudrapur Unit Rs. 3,00,000/= totaling Rs.1,26.21.965, deduction under the head 80IC was allowed of Rs. 18,38,35,416 [19,64,57,382 – 1,26,21,965].
5.Regarding the assessee`s claim of deduction of Rs. 5.00.000/- in computation of income under the head Gross amount of late Deposit of TDS in earlier year, the AO noticed that the said deduction is not treated as allowable expenditure under the head business income,since the above expenditure was not passed through profit and loss account.The said expenditure is not treated as wholly exclusively and necessarily business expenditure. Hence, the deduction of Rs. 5,00,000/-was not allowed by AO against business income.
M/s Deepak Industries Ltd. ITA No.2317/Kol/2016 Assessment Year:2010-11 6. Aggrieved by the order by the Assessing Officer, the assessee carried the matter in appeal before the ld CIT(A) who has partly deleted the addition made by AO.
7.We have heard both the parties and perused the material available on record. During the course of hearing the ld Counsel submitted before us written submission, which is reproduced below for ready reference:
“Appellant has raised 3 Grounds originally and subsequently 3 Additional Grounds were raised vide letter dt. 28.9.2016 and as such the issues are summarized ground-wise as under: - CIT(A) A.O 1 Grounds No. l. 2 & 3 Disallowance of Page 5 -6 Page 3, deduction of para 5.2-7 Rs.60,30,690/- u/s 80IC on account of allocation of interest from Non- eligible unit 2 Addl. Grounds No. 1 Reduction of interest Page 6 Page 2, & 2 receipt indeduction u/s para 4.4 80IC 3 Addl. Ground No. 3 Disallowance of Rs. - Page 3 5,00,000- u/s 40(a)(ia) - para 8 Rs.62,91,275/-
A. As regards, Serials No. 1 &2 :
AO has allowed deduction u/s 80IC of Rs.18,38,35,416/- as against the claim of the appellant at Rs.19,64,87,382/-. As such deduction has been short allowed by Rs. 1,26,22,966/-. Such lower deduction has been granted on 3 limbs: [Rudrapur unit which is the unit eligible for deduction u/s 80IC has been claimed is referred as 'eligible unit' hereinafter and Faridabad unit with which transaction undertaken is referred as ‘Non- eligible unit’] a) Interest received at Bank Account (of eligible unit) - Rs.62,91,275/- b) Interest allocated by A.O - Rs. 60,30,690/- c) Further allocation of expenses by A.O. - Rs. 3,00,000/- Rs.1.26,22,966/-
As regards the interest of Rs.62,91,275/- at Faridabad Bank Account of eligible unit, the same has already been reduced in the computation of deduction u/s 80IC by assessee [Paper Book - Page 76] and as such the reduction of the said amount again by the A.O has amounted to double reduction, hence the Ld. CIT(A) directed for verification of the same instead of deletion of such sum. The appellant prays that although even interest has been offered by assesse itself however the net interest only Rs.62,91,275 - Rs.51,058/- =
M/s Deepak Industries Ltd. ITA No.2317/Kol/2016 Assessment Year:2010-11 Rs. 62,40,277/- be only considered [even though mater has been set aside to AO by CIT(A)]. As regards the allocation of Rs.60,30,690/-, the A.O has allocated such expenses on the premise that the Rudrapur unit ("eligible unit") has made transaction with Faridabad unit ("non-eligible unit") and hence the interest so debited at the non-eligible unit needs to be apportioned to eligible unit to the tune of Rs. 60,80,690/- and hence reduction of claim of deduction of 80IC by AO. However, such observation and conclusion of the A.O. is incorrect on following premise: a) Financials of the Faridabad unit (Non-eligible unit) for the year ended 31.3.2010 & 31.3.2009 are as follows. [P/b - Pg 109] Year Profit for the Loan at the end of Interest Interest year the year (in Rs.) debited (in Rs.) received(in (in Rs) Rs.)
31.3.2010 7,83,79,759 5,37,45,340 31,59,501 1,82,69,565
31.3.2009 3,10,37,467 5,37,44,437 42,25,457 1,00,75,065
i) From the above, it will be seen that the loan at Faridabad unit has remained at the same level and as such no new loan has been taken and further profit for both this year and last year is also substantially high. On a perusal of inter unit balance (between eligible and non-eligible unit) (at page 86 P/B) it can be seen that the balance has come from 5,26,97,859/- (on 31.3.2009) to (-) 11,15,236/- (on 31.3.2010). Since profit at the Non-eligible unit is substantial and no new loan has been taken by the Non-eligible unit and further Inter Unit balance has reduced in comparison to last year (Cash Flow between the eligible unit and Non-eligible unit may also be referred to which is at page 136 of P/B) presumption has to be in appellant's favour [following Britannia Industries Ltd. 280 ITR 525 (Cal)] that the transaction between the eligible unit and Non-eligible unit is not out of borrowed fund but is out of own fund at such units. Hence, no interest can be apportioned from Non-eligible unit to eligible unit and hence Assessing Officer’s action in allocating Rs.60,30,690/- is bad in law. ii) In A.Y 2008-09, allocation of interest was made for the purpose of deduction u/s 80IC and the matter had travelled to Hon’ble ITAT and the matter was set aside to AO in ITA No.217/k/12 dt. 18.6.2013. In the set aside proceedings and in order u/s 254/ 143 [P/B pg 131] the AO had substantially accepted the contention of the appellant and interest of only Rs.1,80,000/- was apportioned. Hence under any circumstances interest allocation amount cannot be more than such sum of Rs.1,80,000/- only iii) Interest debited at Faridabad unit (Non-eligible unit) is Rs.31,59,501/- whereas the A.O. has allocated Rs.60,30,690/- and it will be appreciated that even if entire such amount is apportioned then also it cannot be more than interest debited at Faridabad unit which is at Rs. 31,59,501/- only. iv) Even otherwise, the interest at Faridabad unit (Non-eligible unit) after netting of the interest received is net receipt figure [31,59,501 - 1,82,69,565 = (-) 1,51,10,064 ] and as such the question of allocation of interest cannot arise. In such respect, reliance is placed on the following judgments: - Page | 6
M/s Deepak Industries Ltd. ITA No.2317/Kol/2016 Assessment Year:2010-11 a) Metrochem Industries Ltd. 389 ITR 181(Guj) b) ACG Associated Capsules Ltd. 18 taxmann.com 137 (SC) c) B.M.W. Industries Ltd. (ITA No.2115/K/2007) III. As regards the allocation of expenses of further Rs. 3,00,000/- to eligible unit by the AO, the AO has made such disallowance to determine the correct profit of the eligible unit. It has to be appreciated that the AO has done it on arbitrary basis and without any verification. The fact is that, expenses of other units with which eligible unit had transaction has duly transferred the expenses and the same has been debited at the eligible unit and as such the AO's action in such respect is bad and CIT(A) wrongly affirmed it. For the perusal of the Hon'ble Bench the expense so debited is as follows: Expenses transferred from Faridabad to eligible unit - P/B Rs. 18,91,776/- page 117 and 92 Expenses transferred from Head Office (P/B page 92) Rs.6,75,795/-
From the above, it can be appreciated that the expenses had been duly transferred from Non-eligible unit and the head office to the eligible unit and hence no further apportionment of expenses can be made without any further evidence to such effect which the AO has failed to bring on record. Hence AO's action and affirmation of same by CIT(A) is bad in law. B. As regards Additional Ground No.3 at Sl. 3 regarding disallowance u./s 40(a)(ia) of Rs.5,00,000/- reliance is being placed on the following judgments of Jurisdictional High Court and prayer is being made to set aside the issue for verification in the light of such judgment. i).PCIT v. Tirupati Construction – G.A. No.2146 of 2016 (ITAT 287 of 2016) dt. 28.03.2016.”
We note that deduction u/s 80IC of the Act has been allowed by the A.O. to the tune of Rs. 18,38,35,416/- as against Rs. 19,64,87,382/-. The A.O. has made the disallowance on following grounds: (i).The A.O. has observed that the assessee earned fixed deposit interest worth Rs. 62,91,275/- from the fund transfer of Faridabad Unit. Hence, the fixed deposit cannot be shown in Rudrapur unit. The A.O. kept this outside the purview of deduction u/s 80IC.
(ii) On perusal of accounts, it was found by the A.O. that the assessee has not deposited any finance charges of Rudrapur unit. The A.O. considered the submission of the assessee and allocated Rs. 60,30,690/- as finance charges of Rudrapur unit. Page | 7
M/s Deepak Industries Ltd. ITA No.2317/Kol/2016 Assessment Year:2010-11 (iii) Allocation of H.O. office expenses relating to Rudrapur Unit, on estimate basis of Rs. 3,00,000/- Hence, AO did not allow total deduction u/s 80IC of the Act of worth Rs.1,26,21,965/-( Rs. 62,91,275 +Rs. 60,30,690 +Rs. 3,00,000)
We note that regarding interest earned on fixed deposit worth Rs. 62,91,275/- from the fund transfer of Faridabad Unit, the contention of the ld DR for the revenue is that the said fixed deposit cannot be shown in Rudrapur unit, as the same does not belong to Rudrapur unit. By showing the fixed deposit in the name of Rudrapur unit, the assessee is claiming higher deduction under section 80IC of the Act by inflating profit, which is not acceptable. Whereas, ld Counsel for the assessee submitted before us written submission as mentioned above, wherein he has stated that: “As regards the interest of Rs.62,91,275/- at Faridabad Bank Account of eligible unit, the same has already been reduced in the computation of deduction u/s 80IC by assessee [Paper Book - Page 76] and as such the reduction of the said amount again by the A.O has amounted to double reduction.”
After hearing both the parties, we are of the view that this issue needs to be examined by the assessing officer therefore the A.O. is directed to verify whether the assessee has reduced Rs.62,91,275/- from deduction u/s 80IC and then give deduction on this amount.
Regarding the finance charges of Rudrapur unit of Rs. 60,30,690/-, we note that the A.O. allocated Rs. 60,30,690/- as finance charges of Rudrapur unit without taking into account facts submitted by the assessee. The ld Counsel submitted before us explanation which has not been considered by the AO, the relevant portion of the submission is reproduced below for ready reference: “As regards the allocation of Rs.60,30,690/-, the A.O has allocated such expenses on the premise that the Rudrapur unit ("eligible unit") has made transaction with Faridabad unit ("non-eligible unit") and hence the interest so debited at the non-eligible unit needs to be apportioned to eligible unit to the tune of Rs. 60,80,690/- and hence reduction of claim of deduction of 80IC by AO. However, such observation and conclusion of the A.O. is incorrect on following premise: a) Financials of the Faridabad unit (Non-eligible unit) for the year ended 31.3.2010 & 31.3.2009 are as follows. [P/b - Pg 109]
M/s Deepak Industries Ltd. ITA No.2317/Kol/2016 Assessment Year:2010-11 Year Profit for the year Loan at the end of Interest Interest (in Rs) the year (in Rs.) debited (in Rs.) received(in Rs.) 31.3.2010 7,83,79,759 5,37,45,340 31,59,501 1,82,69,565 31.3.2009 3,10,37,467 5,37,44,437 42,25,457 1,00,75,065
The ld DR for the Revenue has fairly agreed that these facts were not verified by the AO, therefore, we direct the AO to verify the facts as mentioned above and re-compute the deduction under section 80IC in accordance with law.
Regarding the allocation of H.O. office expenses relating to Rudrapur Unit, on estimate basis of Rs. 3,00,000/-, we note that assessee`s books of accounts are audited by a chartered accountant. The books of accounts are not rejected by the AO. We note that the AO could have ventured into estimation only after rejecting the books of accounts of the assessee u/s 145(3) and thereafter by best judgment assessment u/s 144 of the Act. Here in this case, the AO has not passed any order u/s 144 of the Act. The AO thus without rejecting the books of account of the assessee has gone for estimation on suspicion and conjectures and made estimated disallowance of Rs.3,00,000/-, which is not tenable and therefore, we delete the addition of Rs.3,00,000/-
9.The assessee has raised ground relating commission paid of Rs. 5 lakhs, which has been disallowed.However, the said sum was disallowed in A.Y. 2009-10 also. Therefore, the A.O. is directed to verify the TDS payment and allow the claim of the assessee in accordance with law.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the Court on 26.04.2019
Sd/- Sd/- (A.T.VARKEY) (A.L.SAINI) �या�यकसद�य / JUDICIAL MEMBER लेखासद�य / ACCOUNTANT MEMBER �दनांक/ Date: 26/04/2019 (SB, Sr.PS)
M/s Deepak Industries Ltd. ITA No.2317/Kol/2016 Assessment Year:2010-11 Copy of the order forwarded to: 1. M/s Deepak Industries Ltd. 2. DCIT, Circle-6, Kolkata 3. C.I.T(A)- 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata. 6. Guard File.