DCIT(LTU), NEW DELHI vs. M/S. C&S ELECTRIC LTD,, NEW DELHI

These cross appeals have been filed against the order dated 31.03.2013 of CIT(A)-LTU, New Delhi pertaining to 2008-09 AY.

We have heard the rival submissions and carefully considered the order of the tax authorities below. We noted that the assessee has claimed the deduction u/s 80IC amounting to Rs.17,77,02,892/-. The AO out of the said claim reduced the deduction by Rs.18,19,179/- when the matter went before the Ld. CIT(A), Ld. CIT(A) sustained the action of the AO while reducing the deduction u/s 80IC to the extent of Rs.10,28,461/- out of Rs.17,77,02,892/-. The assessee claimed the deduction u/s 80IC in respect of BT Division, Panel Division and BD Division.

Ld.AR before us relied on the decision of the Mansarover Builders Pvt. Ltd. in with reference to section 40A(2), it was held that the obligation is on the AO to determine the market value first.

The assessee also relied before us under Rule 8 of Central Excise Valuation Rules, 2000 in which it has been mentioned that reasonable value for inter unit transfer has determined by the Government of India is cost plus 10%.

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.

Ground No.1.3 since not pressed by the assessee stands dismissed as not pressed. Ground No.2 taken by the Revenue relates to the deletion of the addition of Rs.35,83,048/- made by the AO on account of the reduction in the claim of the deduction u/s 10B while Ground No.2 taken by the assessee relate to the claim of the deduction u/s 10B of the Act in respect of the disallowance made u/s 40A amounting to Rs.7,92,300/-.

Since both the grounds relate to the claim of the deduction u/s 10B, they are disposed off together.

So far as, the ground taken by the assessee is concerned, we heard the rival submissions and carefully considered the same and we also gone through to the provision of section 10B(i) of the Act. It is not denied that the disallowance of Rs.7,92,300/- was made u/s 40A of the Act whereas the disallowance is so made, the profit and gains of the business or profession has computed under the said head will automatically increase. Section 10B(i) allows the deduction on the profits and gains computed under the head income from business of the eligible unit in accordance with the provision of section 30 to 43D of the Income Tax Act.

Now, coming to the ground taken by the Revenue, we noted that in this case, the AO while computing the profit of the eligible unit for deduction u/s 10B allocated the corporate expenses while the assessee was of the view that neither the receipt nor the expense which has not related to the operation of the undertaking, can find place in the computation of the profits of 100% EOU. The AO, therefore, reduced the deduction u/s 10B by Rs.35,83,048/- but the Ld. CIT(A) deleted the said reduction made by the AO. 4

We heard the rival submissions and carefully considered the same. We noted that in the case of the assessee, the profits of the eligible unit were not higher in comparison with the other business. GP rate of eligible unit was 25.20% as compared to the GP rate of other units in aggregate at 29.97%. While the net profit ratio of the eligible unit was 5.87% as compared to the net profit of other units at 15.09%. We noted that in the case of Catvision Products Ltd. 84 TTJ (Del)

This Tribunal has held that only the direct expenditure has 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, confirmed 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.

Ground No.3 of the revenue related to the restricting the disallowance of Rs.4,23,507/- u/s 14A r.w. Rule 8D of the Act.

We heard the rival submissions on this ground and we noted that the assessee while computing the income disallowed a sum of Rs.4,23,507/- u/s 14A but the AO without recording any satisfaction applied Rule 8D and increase the disallowance by Rs.17,77,193/-. This is settled law that no disallowance u/s 14A r.w. Rule 8D can be made without recording the satisfaction by the AO u/s 14A(ii) that the claim made by the assessee is not correct having regard to the accounts of the assessee. Even we noted that in this case, the assessee had capital and reserve much more than the investment. The capital and reserve as on 31.03.2007 were Rs.1,17,79,62,711/- while the investments were only Rs.37,15,000/-. Therefore, in view of the decision of the Jurisdictional High Court in the case of TAIKISHA Engineering India Ltd. 370 ITR 338(332) [Del.], no disallowance can be made. We, therefore, confirm the order of the Ld. CIT(A) to restrict the disallowance of Rs.4,23,507/-.

Ground No.4 in assessee’s appeal as well as in revenue’s appeal related to the reducing and sustenance of the disallowance out of the foreign travel expenses. The facts relating to this ground are that the AO disallowed 20% of Rs.16,76,438/- claimed by the assessee as foreign travel expenses. When the matter went before the Ld. CIT(A) but Ld. CIT(A) restricted the disallowance to 30% of the expenses against foreign currency and credit cards i.e. to Rs.11,55,832/-. Both the assessee as well as revenue has come in appeal.

We heard the rival submissions and carefully considered the same. We noted that the disallowance was made by the AO and sustained by the Ld. CIT(A) partly on the basis of the expenses incurred for personal purposes. It is not denied that the assessee has paid fringe benefit tax on these expenses. Since fringe benefit tax has been paid, therefore, no disallowance can be made on account of the personal expenses. Our aforesaid view is duly supported by the decision of Delhi Bench of this Tribunal in for AY 2009-10 in the case of Aero Enterprises. No contrary decision has been brought to our knowledge even though the provision of section 115W is clear in this regard. We, therefore, delete the disallowance of Rs.11,55,832/-. Thus, Ground No.4 raised by the assessee is allowed while Ground No.4 taken by the revenue stands dismissed.

Ground No.5 in revenue’s appeal relates to the claim of the depreciation on goodwill amounting to Rs.5,35,254/-. The AO did not accept the contention of the assessee that the goodwill is eligible for depreciation as in tangible assets. When the matter went before the Ld. CIT(A), the Ld. CIT(A) allowed the depreciation to the assessee.

We heard the rival submissions and carefully considered the order of the tax authorities below. In our opinion, the issue involved is duly covered in favour of the assessee by the decision of this Tribunal in the case of Controls & Switchgear Contractors Ltd. in for the AY 2007-08. No contrary decision was brought to our knowledge. We, therefore, confirm the order of the Ld. CIT(A) allowing the depreciation on goodwill of the assessee, thus this ground is allowed.

Now, there remains Ground Nos.3 & 5 and additional ground taken by the assessee before the Ld. CIT(A). Ground No.3 relates to the disallowance of leave encashment u/s 43B of the Income Tax Act. The facts relating to this ground are that the assessee claimed a sum of Rs.23,60,025/- on account of the leave encashment paid u/s 43B in the revised return, the claim was for Rs.27,13,432/-.

We heard the rival submissions and considered the order of the tax authorities below. We noted that vide letter dated 15.05.2012, the assessee has amended the ground of appeal relating to the claim of the leave encashment u/s 43B by taking the following ground:-

After hearing rival submissions and going through the order of the tax authorities below, we noted that the assessee in the original computation of income reduced a sum of Rs.6,68,071/- out of the claim of depreciation in respect of building for which the assessee was declaring income under the had income from “house property” but we noted during the impugned assessment year, after the merger, the assessee was not earning any rent and the building being used by the assessee himself, therefore, the assessee filed the revised computation of income and claimed the depreciation on the building amounting to Rs.6,68,071/-.

Ground No.6 relates to not adjudicating the additional ground with regard to the gratuity amounting to Rs.10,62,376/- before the Ld. CIT(A).

We heard the rival submissions and carefully considered the same. We noted that vide letter dated 15.05.2012, the assessee has taken the following additional ground before the Ld. CIT(A) relating to the claim of the gratuity amounting to Rs.10,62,376/-:-

In the result, the appeal of the revenue stands dismissed while appeal filed by the assessee is partly allowed for statistical purposes.