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IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCHES: “F” NEW DELHI ] BEFORE SHRI I. C. SUDHIR, JUDICIAL MEMBER AND SHRI O. P. KANT, ACCOUNTANT MEMBER ITA. No. 2405/Del/2012 AND ITA. No. 1600/Del/2013 Assessment Years : 2008-09 & 2009-10. Rallison Electricals Pvt. Ltd., The Addl. Commissioner GI – 118, Phase – II, Vs. of Income Tax, Mayapuri Industrial Area, Range : 15, New Delhi – 110 064. New Delhi. PAN : AAACR 4510 P A N D ITA. No. 2979/Del/2014 Assessment Year : 2010-11. Deputy Commissioner Rallison Electricals Pvt. Ltd., of Income Tax, Vs. GI – 118, Phase – II, Circle : 15 (1), Mayapuri Industrial Area, New Delhi. New Delhi – 110 064. PAN : AAACR 4510 P (Appellants) (Respondents) Assessee by : Shri Satish Aggarwal, C. A.; Department by : Shri F. R. Meena, Sr. D. R.; Date of Hearing : 27.03.2017 Date of Pronouncement : 22.06.2017 O R D E R. PER I. C. SUDHIR, J. M. :
All the three appeals, two by the assessee for the assessment years 2008-09 and 2009-10 and one by the Revenue for the
assessment year 2010-11 were heard together and are being disposed off, for the sake of convenience, by this common order.
ITA. No. 2405/Del/2012 :
The assessee has questioned first appellate order on the following revised grounds of appeals :-
That the order of the Ld. Commissioner of Income Tax (Appeals), XVIII is arbitrary, biased and bad in law and in facts of the case in so far it confirm the order of the Assessing Officer. 2. That the Learned CIT (Appeals) has grossly erred in confirming the action of the assessing officer in treating the business loss from commodity trading of Rs. 50,61,174/- as speculative loss.
That the Learned CIT (Appeals) has grossly erred in confirming the action of the Assessing Officer in making a notional addition of Rs.1,00,000/- as alleged administrative and finance cost incurred on commodity trading.
That the Learned CIT (Appeals) has grossly erred in confirming the addition made by the Assessing Officer u/s 80 IC by reducing the deduction claimed by the appellant making the below mentioned disallowances/ additions : a) That the Learned CIT (Appeals) has grossly erred in confirmingthe reduction of Rs.52,69,333/- in the profit of Baddi unit eligible for deduction under section 80IC by treating the same as alleged over valuation of stock. ' b) That the Learned CIT (Appeals) has grossly erred in confirming the action of the Assessing Officer in reducing the deduction claimed under section 80IC by Rs.2,08,03,079/- on apportionment of expenses including that of depreciation on the basis of manufacturing turnover of Baddi unit to gross manufacturing turnover of all manufacturing units including Baddi unit.
c) That the Learned CIT (Appeals) has grossly erred in confirming the estimated reduction of Rs. 28,57,222/- from the profits of the Baddi unit eligible for deduction under section 80IC of the Act, being estimated profit of the branches and head office @ 1% of turnover of Baddi unit for affecting sales of Baddi unit. d) That the Learned CIT (Appeals) has grossly erred in holding that interest of Rs.20,23,000/- on fixed deposit of Baddi unit is not eligible for deduction under section 80IC of the Act. ”
ITA. No. 1600/Del/2013 :
The assessee has questioned first appellate order on the following revised grounds of appeals :-
That the order of the Ld. Commissioner of Income Tax (Appeals), XVIII is arbitrary, biased and bad in law and in facts of the case in so far it confirm the order of the Assessing Officer. 2. That the Learned CIT (Appeals) has grossly erred in confirming the action of the assessing officer in treating the business loss from commodity trading of Rs.9,58,188/- as speculative loss.
That the Learned CIT (Appeals) has grossly erred in confirming the action of the Assessing Officer in making a notional addition of Rs.10,000/- as alleged administrative and finance cost incurred on commodity trading.
That the Learned CIT (Appeals) has grossly erred in confirming the addition made by the Assessing Officer u/s 80 IC by reducing the deduction claimed by the appellant making the below mentioned disallowances/ additions : a) That the Learned CIT (Appeals) has grossly erred in confirmingthe reduction of Rs.26,21,697/- in the profit of Baddi unit eligible for
deduction under section 80IC by treating the same as alleged over valuation of stock. '
b) That the Learned CIT (Appeals) has grossly erred in confirming the action of the Assessing Officer in reducing the deduction claimed under section 80IC by Rs.1,55,68,080/- on apportionment of expenses including that of depreciation on the basis of manufacturing turnover of Baddi unit to gross manufacturing turnover of all manufacturing units including Baddi unit. c) That the Learned CIT (Appeals) has grossly erred in confirming the estimated reduction of Rs.27,34,294/- from the profits of the Baddi unit eligible for deduction under section 80IC of the Act, being estimated profit of the branches and head office @ 1% of turnover of Baddi unit for affecting sales of Baddi unit. 5. That the Learned CIT (Appeals) has grossly erred in confirming the action of the Assessing Officer in disallowing additional depreciation of Rs.51,87,590/- on new plant and machinery installed at other than Baddi Unit during the year. ”
ITA. No. 2979/Del/2014 :
The Revenue has questioned first appellate order on the following grounds :-
“ 1. Whether on the facts & in the circumstances of the case, the Ld. CIT (A) has erred in allowing the appeal of the assessee against disallowance on account of apportionment of gross expenses by ignoring the fact that interest expenses while computing the apportionment cannot be exempted if no separate, insulated financial identity of Baddi unit is there. Specific unit-wise details of expenditure for the apportionment principle to be exempted should be presented.
Whether on the facts & in the circumstances of the case, the Ld. CIT (A) has erred in deleting the adhoc addition of 1% of notional
profit computed on sales as attributable to Baddi Unit without reasoning for disagreement with the merits of the case and with predecessor’s orders. ”
In the appeals for the assessment years 2008-09 and 2009-10, common ground Nos. 2 and 3 have been raised questioning the action of the ld. CIT (Appeals) in upholding the business loss commodity trading of Rs.9,58,188/- in assessment year 2009-10 and Rs.50,61,174/- in assessment year 2008-09 as speculative loss and making a notional addition of Rs.1,00,000/- in assessment year 2008-09 and Rs.10,000/- each in the assessment year 2009-10 on administrative and finance cost incurred on commodity trading.
5.1 In support of this ground, the contention of the ld. AR remained that the assessee had claimed loss of Rs.50,61,174/- in assessment year 2008-09 and of Rs.9,58,188/- in assessment year 2009-10 on commodity transaction. He submitted that assessere company is engaged in the business of manufacturing and trading in electrical, cables, CFL Alumiuum and cloth. The company had booked raw materials in commodity exchanges through forward contracts according to its requirement and according to the prevailing market rates and fluctuation in rates of copper and aluminum from time to time. He submitted that most of the transactions entered into were settled by
actual delivery of commodity and not merely by settlement of rates and thus, the entire loss cannot be treated as speculative
5.2 The ld. Sr. DR, on the other hand, placed reliance on the orders of the authorities below with the submission that the assessee had not produced any evidence to substantiate its claim that part of the loss that has been incurred has been settled by actual delivery of goods and the loss is not speculative. The expenses on administrative and finance estimated at Rs.10,000/- each in the assessment year 2009-10 and Rs.1,00,000/- in assessment year 2008-09 is very nominal and justified. The ld. CIT (Appeals) was thus right in upholding the assessment order on the issue.
5.3 Having gone through the orders of the authorities below, we find that there is no dispute that if the goods or commodities in respect of which contracts were entered into were actually taken delivery of pursuant to the contract, it would not be a speculative transaction even though the commodity or script may be a highly speculative one by its very nature and even though at the time when the contracts were entered into the parties might have had no idea of taking delivery at all. On the other hand, if the contract is settled or otherwise than by actual delivery,
then it will be a speculative transaction notwithstanding that the nature of the commodity was not one lending itself two possibilities of speculation or that the intention of the parties at the time of entering into the contract might have been to take actual delivery, but this intention could not be effectuated for one reason or the other. The actual delivery means real as opposed to notional delivery. Whether a transaction is a speculative in general sense or under the Contract Act, is not relevant for Income Tax purposes. Before the ld. CIT (Appeals) the assessee admitted that part of the transactions were not settled by actual delivery of goods and at least part of the loss was speculative. The assessee, however, could not produce any evidence to substantiate its claim that part of the loss that has been incurred was settled by actual delivery of goods and the loss is not speculative. Even before the Tribunal, the assessee could not improve its case on the issue. We thus do not find any reason to interfere with the first appellate order. The same is upheld. The expenses on administrative and finance estimated at Rs.1,00,000/- in assessment year 2008-09 and Rs.10,000/- each in assessment year 2009-10 being a nominal one, is justified and upheld. The ground Nos. 2 and 3 are accordingly rejected.
The other common issue in all the three appeals is validity of addition made by the Assessing Officer under section 80IC of the Act.
The ld. CIT (Appeals) has decided the issue partially in favour of the assessee in the assessment year 2010-11 and the Revenue is in appeal before the Tribunal. We thus took up the Departmental appeal firstly. The parties advanced their respective arguments. The ld. AR submitted that the issue is fully covered by the decision of Hon’ble jurisdictional High Court of Delhi in the case of Control & Switch Gear Co. Ltd. Vs. DCIT 66 DTR 161 (Del.). The ld. CIT (Appeals) has decided the issue following this decision of Hon’ble High Court.
6.1 The relevant facts are that in the assessment year 2010-11 the assessee had claimed deduction under section 80IC of the Act of Rs.6,46,26,634/- on profit earned from its manufacturing operations carried on at Baddi Unit, for which a separate profit and loss account and balance sheet was filed before the Assessing Officer. The Assessing Officer restricted the deduction to Rs.2,82,33,796/- by making some adjustments. The ld. CIT (A) has given partial relief of Rs.1,96,95,332/- to the assessee. Some other reliefs have also been provided by the ld. CIT (Appeals). This action of the ld. CIT (Appeals) has been questioned before the Tribunal.
6.2 In support of the grounds of the appeal preferred by the Department for the assessment year 2010-11 the ld. Sr. DR has basically placed reliance on the assessment order. He submitted that manufacturing activity of the assessee is at Bhiwadi, Chowpanki and Baddi. The assessee claimed a deduction under section 80IC on its Baddi Unit. The turnover of Baddi Unit was Rs.32,29,40,504/- through direct sales and Rs.5,97,42,097/- through branches. The assessee had shown a net profit of Rs.6,46,26,634/- on account of Baddi Unit as per books on which the assessee had claimed a hundred per cent deduction under section 80IC of the I. T. Act. The Assessing Officer was of the view that the deduction claimed by the assessee was not correct on account of apportionment of expenses, over valuation of the stock, indirect expenses, and branch & Head Office profit. Without appreciating all these material facts and unscientific method applied by the assessee to work out the claimed deduction, the ld. CIT (A) was not justified in giving the above relief questioned in the grounds on account of deduction under section 80IC of the Act and others.
6.3 The ld. AR, on the other hand, tried to justify the first appellate order and furnished following written synopsis in brief :-
“ 1) The appellant was engaged during the year under appeal in manufacture and trading of electric cables, CFL lights etc.
2) The appellant filed its return of income declaring an income of Rs.5,49,09,299/- which was assessed under section 143(3) of the Act at Rs. 9,17,43,743/-.
3) The appellant had claimed deduction under section 80IC of Rs.6,46,26,634/- for profit (earned from its manufacturing operations carried on at Baddi unit, for which a separate profit & loss account & balance sheet was filed before the Assessing Officer (copy enclosed at page No. 6 to 11 of paper book).
4) The Assessing Officer had curtailed deduction under section 80IC and restricted the claim of deduction to Rs.2,82,33,796/- by making below mentioned adjustment in the profit computed for allowing deduction under section 80IC of the Baddi unit while passing the assessment order.
(i) The Assessing Officer made an ad-hoc curtailment in claim eligible for deduction under section 80IC of profit earned by its Baddi unit being 1% of sales (Rs. 38,26,826/-) of Baddi unit on notional basis as assumed cost incurred by other units for effecting its sales. Refer para 5.2.3 page 6 of the assessment order.
(ii) The Assessing Officer apportioned the indirect expenditure incurred by the respondent for its Baddi unit in the ratio of sales of Baddi unit to total sales and reduced the claim of deduction under section 80IC by a further sum of Rs.2,96,20,260/-. Refer para
5.2.2.4.3 and para 5.2.2.4.4 page 5 and 6 of the assessment order.
(iii) The Assessing Officerhas further imputed overvaluation of stock of Rs.29,45,752/- of the Baddi unit vide para 5.2.2.4 to para 5.2.2.4.2 at page 4 and 5 of his assessment order by holding that the stock of the Baddi unit should have been valued at cost price.
5) The Assessing Officer had apportioned the expenditure of Baddi unit ignoring the separate profit and loss account prepared and filed on the basis of sales achieved by each division / unit of the appellant company.
6) The CIT (Appeals) vide his order dated 26.02.2014 allowed partial relief to the appellant by upholding the criteria of apportionment of indirect expenditure of Baddi unit on the basis of sales turnover of Baddi unit to the total turnover of other units except for the allocation of expenditure of interest on the basis of actual usage of funds for which a working had been furnished by the respondent during the course of appellate proceedings. It has resulted in relief of Rs. 1,96,95,332/- as per chart enclosed in Annexure A attached to the appeal order. (Refer para 5.1 to 5.2 page number 16-18 of the CIT (Appeals) order.
7) The CIT (Appeals) has further provided relief of Rs. 38,26,826/- being the amount of notional ad-hoc 1% cost imputed to Baddi unit for sales affected by other units while computing deduction under section 80IC of the Act. (Refer para 4.4 and 5.5 page numbers 15,16 and page 18 of the CIT (Appeals) order).
8) The CIT (Appeals) has analyzed the allocation of indirect expenditure (except interest cost) of Baddi unit in para 4.1, 4.3 and 5.1 of his order and has upheld the principle of apportionment of common expenditure on the basis of sales by following the ratio of the decision of jurisdictional Delhi High Court in the case of Control and Switch Gear Ltd Vs. DCIT 66 DTR 161.
9) The CIT (Appeals) had allowed the relief of Rs. 1,62,33,521/- in allocation of interest on the basis of actual usage of funds by computing interest of Rs. 34,61,811/- attributable to activities of Baddi unit as against the apportioned interest cost of Rs. 2,07,54,839/- made by the Assessing Officer.
10) The assessee had disallowed / added back expenditure of Rs.2,20,39,488/- while computing its assessable income which was again considered for apportionment of indirect expenditure and had impact of Rs. 24,02,304/- in profit of Baddi unit eligible for computing deduction under section 80IC of the Act. The CIT (Appeals) held that the amount of Rs. 2,20,39,488/- could not be considered for allocation of expenditure once the same had been added back by the assessee to its income and deleted the curtailment in profit eligible for deduction under section 80IC of Rs. 24,02,304/- Refer para 4.3 and para 5.2 page 15 and 18 of CIT(A) order.
11) The respondent had filed copy of account of Head Office in its books of accounts at page 28 to 44 of the paper book. The debits and credits to the account of Head Office have been taken into consideration on a daily basis to find out the product on which interest cost
attributable to net use of funds by the Baddi unit has been computed by the resident company at Rs. 34,61,811/- which after perusal the CIT (Appeals) has held attributable to the Baddi unit by him. (Refer page number 16 and 17 of the paper book)
The respondent company had opening credit balance in its (i) books of accounts to the account of head office of Rs. 17,57,43,596.23 from which the respondent company had deducted the investment in Fixed Assets out of share capital and share premium which was derived by taking ratio of Fixed Assets as appearing in the balance sheet of Baddi unit to the total Fixed Assets held by the respondent company. Refer page number 45 of the paper book.
The respondent while computing the figure of actual usage of (ii) funds by the Baddi unit had also reduced the profit declared by the Baddi unit of Rs. 10,62,29,7057- in the preceding two assessment years to arrive at the opening figure of funds in use by the Baddi unit.
12) The CIT (Appeals) has allowed relief of the above two components for computing deduction under section 80IC and upheld the balance curtailment under section 80IC made by the Assessing Officer which order deserves to be upheld. ”
6.4 On having gone through the orders of the authorities below, we find that the ld. CIT (Appeals) has passed a comprehensive and reasoned order on the issue of deduction under section 80IC of the Act and other additions / disallowances after discussing respective cases of the parties. The relevant para Nos. 1 to 5.6 of the first appellate order are being reproduced hereunder for a ready reference :-
“ This appeal has been filed against the assessment order 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 04.02.2013 for assessment year 2010-11 in the case of appellant company passed by Addl. CIT, Range-15, New Delhi (in short “the AO”).
{2} In response to notice issued u/s 250 of the Act, authorized representative Sh. Satish Agrawal, CA (in short “Id. AR”) attended the proceedings on behalf of the appellant and were heard. The submissions made by the Id. AR have been carefully considered
{3} In the appeal filed, the appellant has raised the following grounds:
On the facts and circumstances of the case, the learned 1. assessing officer is not justified his orders and the orders are bad in law and facts of the case.
The learned A. O. is not justified in disallowing Rs. 2. 3,63,92,838/- out of Rs. 6,46,26,634/- as deduction claimed under section 80IC of Income Tax Act, 1961 in the Manpura (Baddi) unit by disallowing the following:-
a. The learned A.O. is not justified in disallowing Rs. 29,45,752J- by considering the stock lying at various branches amounting to Rs. 1,59,48,849/- as overvalued which has actually been valued at cost price.
b. The learned A.O. is not justified in disallowing Rs. 2,96,2(^260/- by apportioning the gross expenses of Rs.27,17,45,505/- (inclusive of depreciation) of all the branches in such proportion which the manufacturing turnover of Baddi unit bears to gross manufacturing turnover of all branches, manufacturing units including Baddi unit.
However expenses incurred at Baddi (Manpura) unit should be considered exclusively relating to the unit itself as per the individual balance sheet filed.
c. The learned A.O. is not justified in disallowing Rs. 38,26,826/- on estimated basis by taking 1% profits on turnover of Rs.38,26,82,601/- of Baddi unit, considering that the profits could not be derived without getting services from trading establishments which are taken on absurd and hypothetical assumptions.
The learned A.O. is not justified in disallowing 3. additional depreciation on new purchase of plant and machinery Rs. 53,61,388/- of manufacturing units.
That the learned assessing officer is not justified in 4. initiating penalties u/s 271(1)(C) of income tax Act, 1961.
That the assessee reserves the right to crave, leave 5. and modify any grounds of appeal at the time of hearing of the case.
{4} During the course of appellate proceeding, Ld. AR of the appellant attended and filed written submission vide letter dated 24-01-2014, wherein grounds of appeal are agitated by submitting as under:-
REGARDING: CLAIM OF DEDUCTION U/S 80 1C.
The appellant had claimed deduction u/s 80 1C of 1. the Act of Rs. 6,46,26,634/-. The Assessing Officer has allowed a deduction of Rs2,82,33,796/- by curtailing the deduction by a sum of Rs. 3,63,92,838/-. The Assessing Officer has disallowed a sum of Rs. 3,63,92,838/- from the claim of deduction u/s 80 1C and has justified its disallowance in para 5.2 to 5.2.3 of her assessment order.
We submit herewith the gist of each of the 2. observations of the Assessing Officer along with our rebuttal for your honor’s perusal and record as under:-
2.1 Assessing Officer’s observations in para 5.2.1 of the assessment order regarding apportionment of expenses are as under:-
Apportionment of Expenses :
It is seen that there are huge amount of Expenses incurred at Delhi head Office and 6 Branches of the assessee. The assessee has not apportioned any of the expenses to determine the profit derived u/s. 80IC of Baddi Unit. The assessee uses its network and Head Office to make all kind of sales, that is sale from 80IC unit and sale from non 80IC units and obviously there is cost incurred for this purpose. The assessee also make purchases and uses the bank account & finance of head office to effect its turnover and the expenses in relation to all the head office is paid by the bank account as well as all other common indirect expenses are paid through the head office bank account.
The Assessing Officer has apportioned expenditure (a) on the basis of turnover of various units to arrive at the figure of profit eligible for deduction u/s 801C of Baddi unit.
The Assessing Officer has observed without any (b) basis in her assessment order that there are huge amount of expenses incurred at Delhi Head Office and six branches of the assessee and the appellant had not apportioned any of the expenditure to determine the eligible for deduction u/s of the 80 1C of the Act for its Baddi Unit. The Assessing Officer had further observed that the appellant uses its networking and Head Office to make all kinds of sale including sale from 80 1C unit.
(c) The assessee as per the Assessing Officer makes purchases and uses bank account and finance of head
office to affect its turnover and all finance as well as common indirect expenses are paid through the Head office bank account.
Our Rebuttal
The appellant company maintained its Administrative Office at Delhi and had six branches out of which Bombay branch had nil sales during the year under appeal. Three branches, i.e. Chopanki, Baddi, Bhiwadi were manufacturing units and the other two branches, namely, Cochin and Jalandhar were trading units.
The appellant company was engaged in the production of industrial cables and other heavy duty cables at its Bhiwadi and Chopanki units whereas the unit at Baddi was engaged in manufacturing of household wires and cables. The manufacturing process for manufacturing of household wires involves a much simple and a less time consuming process in comparison to that for manufacture of industrial and heavy duty cables. The sales from Baddi unit were mostly to the consumers from whom realization of payment was quick as compared to that of the other two manufacturing units.
The appellant company did not use the borrowed funds for its Baddi unit as Baddi unit had accumulated substantial surplus of its own during the preceding two financial years and the company had interest-free funds in the fomi of
share capital and free reserves. Therefore, apportionment of interest and bank charges on turnover basis are not based on facts of the case and are not warranted.
2.2 Assessing Officer’s Observations in para 5.2.1.1
The Assessing Officer has given the figure of bank charges and interest for the year ending 31 March 2009. However, while computing the disallowances she had adopted the figure of interest for the year ending 2010. She had made another observation that there are no separate books, separate bank account, separate funding, separate networking for distribution and sales etc. of Baddi unit.
Our Rebuttal
The observation of the Assessing Officer is incorrect with respect to maintenance of separate books of accounts. The appellant company maintained separate books of accounts and prepared a separate balance sheet and profit & loss account based on separate books of accounts for its branches including for its Baddi unit. The appellant company had filed unit wise balance sheet and profit and loss account during the course of assessment proceedings based on separate set of books of accounts maintained at each unit, (copy of balance sheets of branches filed before Assessing Officer enclosed at page No. 6 to 27 of the paper book)
The Baddi unit of the appellant company was catering to consumers directly in view of which it did not require, nor had any separate dealer network for its Baddi unit sales.
2.2 Assessing Officer Observations in para 5.2.1.2
In this para the Assessing Officer has reproduced the submission of the assessee on the issue for apportionment of expenses which calls for no comment.
2.4 Assessing Officer Observations in para 5.2.1.3
In this para the Assessing Officer has stated that the assessee had failed to substantiate its claim that no apportionment of expenditure for Baddi unit was warranted. The Assessing Officer further stated that no part of Director’s remuneration had been attributed to Baddi unit, no separate funding of sources and separate dedicated network was maintained for Baddi unit and the Head office infrastructure had been used for making purchases and marketing activity.
The assessing Officer has finally concluded in para 5.2.1.3 that in the circumstances narrated by her, the best course available for Computing deduction u/s 80 1C would be to attribute expenses of the Head Office and branches in terms of turnover and apportioning the common cost as per
provisions of section 80 IA (5) r.w. section 80 1C (7) and as prescribed in Rule 18BBB of I. T. Rules.
Our rebuttal
As stated above, the apportionment of all expenditure on the basis of turnover is not justified in the facts and circumstances of the case of the appellant in view of :- a) The products manufactured at Baddi unit were of different variety and had much shorter production and realization cycle as compared to the other two manufacturing units at Bhiwadi and Chopanki.
b) The Baddi unit had accumulated surplus aggregating to more than Rs. 10 crores from its own working of the preceding two years for which no interest was paid. The company had paid up share capital and free reserves of more than Rs.47 crores (excluding accumulated profits of Baddi Unit) which fund could have been used for the working of Baddi unit.
c) The marketing cost of sales incurred by other units could not be attributed to the Baddi unit in view of direct sale of products manufactured by it to the consumers in view of which there was no reguirement for appointment of distributors.
Without prejudice to the fact that apportionment of expenditure 3. is not warranted, in case your honour decides otherwise and holds
that apportionment of expenditure is necessary for allowing deduction u/s 80 1C a more rational, logical and appropriate approach which is scientific should be adopted for apportionment of expenses. The Assessing Officer has not distinguished between nature of expenditure of Delhi, Cochin, Mumbai and Ludhiana units while apportioning the same for Baddi unit.
It is worthwhile to refer to head wise break up of 4. expenditure of Delhi, Cochin, Mumbai and Ludhiana/Jalandhar units which were considered by the Assessing Officer for allocation of expenditure over the Baddi unit at proportionate turnover basis which is at page No. 1 to 2 of the paper book.
The Assessing Officer has curtailed deduction under section 80 1C by a sum of Rs.2,96,20,260/- by allocating the expenditure incurred by the assessee company under various heads incurred at Delhi, Cochin, Mumbai and Ludhiana office by apportioning the expenditure on the basis of turnover of Baddi unit.
The approach of the Assessing Officer cannot be said to be justified in the facts and circumstances of the case as some of the expenditures wgre directly identified with the activity of a particular unit incurred by different units which could not have been apportioned on the basis of turnover of the Baddi unit.
One such expenditure which has been apportioned on the
basis of turnover was interest. The apportionment of interest is not justified as interest is directly identifiable with the use of funds. The appellant has incurred expenditure in above three branches (Delhi, Cochin and Mumbai) (no interest expenditure was incurred in Ludhiana unit) as under :-
Delhi Cochin Mumbai Total Head of Expense debited in P&L Account Bank Interest 18,69,36.459/- 550/- 5,656/- 18,69,42,665/-
Interest 1,47,200/- 1,47,200/- ... .... 82,86,384/- 82,86,384/- Interest on Secured Loan Sub- total 19,53,76,249/- Less: 49,64,879/- 49,64,879/- Interest on FDR Balance 19,04,11,370/-
The assessing officer treated the interest expenditure of Rs. 2,07.54,839/- as attributable to the activities of Baddi Unit {10.90 % (i.e in the ratio of turnover of
Baddi Unit with respect to total sale as computed by the assessing officer in para 5.2.2.4.4 at page 6 of her order) of total Interest of Rs. 19,04,11,370/-}.
The allocation of interest expenditure on the basis of turnover is not only improper but also not justified in the
facts and circumstances of the case as the interest cost has to be appropriated on the basis of actual use of funds. The Baddi unit has used its own funds ( accumulated profits) amounting to Rs. 10,62,29,705/- which had accrued to it over the last 2 years from its activities( copy of balance Sheet of Baddi unit for the year ended 31-03-2008 & 31-3- 2009 is at page No. 45 to 67 of the paper book).
Similarly, the Baddi unit has also used interest free funds of head office which were available in the form of share capital and share premium of the company of Rs. 52,25,692/-(paid up capital and share premium of the company apportioned in the ratio of gross block of fixed assets to total gross block of fixed assets) working enclosed at page No. 68 of the paper book. In case the interest free funds (Rs. 10,62,29,705/- and Rs. 52,25,692/- as stated above) are excluded from the funds used, the interest cost (assumed = 12.5%) that can be imputed to Baddi unit would come to Rs. 34,61,811/-.
The above figure of interest that can be imputed to the working of Baddi unit is also reinforced by the transfer of funds / receipts of funds from Baddi unit as per the copy of account. (As per copy of account enclosed at pages 28 to 44 of the paper book). The Baddi unit could not have used funds in excess of the amount due to the head office during the year under appeal.
The interest amount if computed @12.5% per annum on the debit balance due to the head office comes to Rs.
34,61,811/-. Therefore, disallowance on account of interest if any should not be curtailed by an amount of more than Rs.34,61,811/-. 8. Reg: The disallowance of certain expenditure which were already disallowed by the Appellant itself in computation of income
Particulars Amount Donation Rs. 1,47,200/- Sales tax Demand Rs. 23,334/- Income Tax provision for 2010-11 Rs. 2,14,27,338/- Income Tax Demand 2008-09 Rs. 55,202/- Income Tax Demand 2009-10 Rs. 3,86,414/- TOTAL Rs. 2,20,39.488/-
The expenditure of Rs. 27.17.45.505/- of Delhi. Cochin, Mumbai and Ludhiana units which were considered by the Assessing Officer for apportionment for Baddi unit includes below mentioned expenditure which were already disallowed by the appellant in its computation of income (copy enclosed at page No. 70 of the paper book) as the same were not eligible for deduction under section 80 1C of the Act.
The above amount of Rs. 2,20,39,488/- has again been considered for apportionment and a sum of Rs. 24,02,304/- ( 10.9% of Rs. 2,20,39,488/-) has been disallowed by the Assessing Officer under section 80 1C on this account. The above proportionate disallowance is not tenable and deserves to be deleted.
Reqardinq :- Trading profit
The Assessing Officer has made another adjustment of Rs. 38,26,826/- by estimating hypothetical trading profit of branches for sales of Baddi unit on incorrect appreciation of the facts of the case. *
The facts on the issue as narrated by the Assessing Officer are:-
The Assessing Officer has notionally held that it is 1. fair to pay a nominal net trading profit of 7 % on sales made and disallowed a sum of Rs. 3826,826/- from deduction claimed under section 80 1C of the Act.
The reasoning of the Assessing Officer is subjective 2. and is not based on actual state of affairs. It is well settled law that income tax cannot be imposed on notional income. Refer: CIT vs. Shoorji Vallabhadas & Co. (1962) 46 ITR 144 (SC) wherein The court held that:-
“Income tax is a levy on income. No doubt, the income tax takes into account two points of time at which the liability to tax is attracted, viz., the accrual of income or the receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a “hypothetical income” which does not materialize.
Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances have been made in the books of account.”
In the above case, the assessee firm had agreed to reduce the managing agency commission during the currency of the accounting year though the actual deduction took place after the end of the year. The Supreme Court held that the larger income neither accrued nor was received by the assessee firm.
Similar view has been taken in the case of Godhra Electricity Co.Ltd.Vs. CIT (1997) 225 ITR 746 (SC) and State Bank of Travancore vs. CIT(Kerala) 158 ITR 103
Further, the appellant company’s Baddi unit had made sales of Rs. 32,29,40,504.89/- on the basis of which the Assessing Officer has already apportioned expenditure while drafting the assessment order, in view of which, going by even the own reasoning of the Assessing Officer, no notional profit could have been attributes to the other units/branches by disallowing deductions under section 80 1C of the Act.
Reg : Additional Ground
The appellant has moved an additional ground contesting the disallowance of Rs. 4,41,606/- u/s 40(a)(ii) which has
already been disallowed by the appellant as per computation of income enclosed at page No. 70 of the paper book. Therefore the above disallowance u/s 40(a)(ii) is not tenable and deserves to be deleted.
DETERMINATION:
(1) I have gone through the finding of Assessing Officer in the assessment order and written submissions filed by learned Authorized Representative of the appellant. After considering the same, ground-wise issues are decided hereunder. (2) Ground of appeal No. 1 is general in nature.
(3) Ground of appeal No. 2 is against disallowing Rs.3,63,92,838/- out of Rs.6,46,26,634/- as deduction claimed under section 80IC. In this ground, learned Authorized Representative of the appellant has submitted as under:- 3. Ground No. 2 is directed against the disallowance of Rs.3,63,92,838/- made by the assessing officer by curtailing the deduction claimed under section 80IC of the Act to Rs. 2,82,33,976/- as against Rs. 6,46,26,634/- claimed by the appellant for its Manpura (Baddi) unit by treating the following amounts as ineligible for computing profit for deduction under section 80IC of the Act:-
(i) A sum of Rs. 29,45,752 for stock transferred to various branches remaining unsold at the yearend (on the basis of G.P. of Baddi Unit).
(ii) Addition of Rs.2,96.20,260/- by apportioning the gross expenses of Rs. 27,17,45.505/- (inclusive of depreciation) of four trading units situated at Delhi, Cochin, Mumbai and Ludhiana branches in such proportion which the manufacturing turnover of Baddi unit bears to total turnover of the appellant company. The appellant had submitted unit/branch wise separate profit and loss account and balance sheet during the course of assessment and appellate proceedings.
(iii) Notional attribution of Rs.38,26,826/- as expense of Baddi unit for alleged hypothetical trading profit of branches for sales of Baddi unit which has been strongly contested by the appellant. The Assessing Officer has imputed a notional profit of 1% of sales of Baddi unit to the head office and other branches had disallowed the amount from the eligible profit available for deduction under section 80IC of the Baddi unit.
3.1 The appellant has also contended before me that on account of apportionment a sum of Rs. 24,02,304 has been wrongly again added back as expense of Baddi unit for computing deduction under section 80IC whereas the gross amount of Rs. 2,20,39,488/- had already been disallowed by the appellant while filing its return of income on account of inadmissible expenses.
Regarding addition of Rs. 2,96,20,260/- by apportioning the gross expenses of Rs. 27,17,45,505/- (inclusive of depreciation) in proportion of manufacturing turnover of Baddi to with total turnover of ail units.
The appellant had claimed deduction under section 80IC of Rs.6,46,26,634/- which has been curtailed to Rs. 2,82,33,976/- by the Assessing Officer by making various adjustments to profit eligible for deduction under section 80IC as stated in para 3.1 above.
It is pertinent to mention here that the Baddi unit of the appellate is eligible for deduction under section 80IC of the Act.
The Assessing Officer has apportioned the expenditure incurred by the appellant in its four branches in the ratio of turnover of Baddi unit to the turnover of manufacturing and trading units namely Baddi, Bhivsadi, Chopanki, Delhi, Cochin and Ludhiana. The seventh branch of the appellate company (Mumbai) did not make sales during the under year appeal.
The observations of the Assessing Officer with respect to apportionment of expenditure are given in para 5.2.1 to 5.2 2.3 of the assessment order which for the sake of clarity are being reproduced as under:-
DEDUCTION U/S. 80IC
It is seen that the deduction u/s 80IC has been claimed at Rs. 6,46,26,634/-. The above is not correctly claimed by the assessee, in view of the following discussion.
APPORTIONMENT OF EXPENSES:
It is seen that there are huge amount of Expenses incurred at Delhi Head Office and 6 Branches of the assessee. The assessee has not apportioned any of the expenses to determine the profit derived u/s. 80IC of Baddi Unit. The assessee uses its network and Head Office to make all kind of sales, that is sale from 80IC unit and sale from non 80IC units and obviously there is cost incurred for this purpose. The assessee also make purchases and uses the bank account & finance of head office to effect its turnover and the expenses in relation to of all the head office is paid by the bank account as well as all other common indirect expenses are paid through the head office bank account.
The assessee has incurred huge amount of expenses and all have been debited to non 80IC activity. One such example is of Bank Charges and interest (net) of Rs. 14,14,45,461/-. The interest expense for the Baddi Unit for a turnover of Rs. 32.29 Crores has been mentioned at only Rs. 14,885/-. The assessee has a common bank account for it operations. The extremely low interest charges for Baddi Unit is ridiculous as all the expenditure incurred are for business of the assessee and expenses will be eguivalent to turnover of the assessee, in view of the
absence of separate books, separate bank A/c, separate funcling, separate network for distributions & sales etc. the assessee has even failed to apportion directors remuneration which reflect the futility of the claim of the assessee with regards to apportion of expenses.
5.2 1.2 In view of the same, it was asked on 26.12.2012 to the assessee, as to why the expenses should not be apportioned in terms of the Baddi Unit, to determine the profits derived of the Baddit Unit for deduction u/s. 80IC. The assessee replied as under:-
“The expenses incurred at Baddi (Manpura) unit exclusively relates to our Baddi Unit itself. The expenses incurred at sale Branches, Manufacturing units at Bhiwadi and Chowpanki and at Head Office does not include any expenses incurred on behalf of the Baddi Unit in Himanchal Pradesh. The company has mainly 3 manufacturing units namely Bhiwadi unit, Chowpanki unit and Baddi Unit. Our above mentioned 3 units have manufacture Industrial cables and other heavy duty cables but out unit at Baddi (H.P) has manufactured only household wires / domestic wires and cables. The realization of sundry debtors of our Baddi Units was guite fast as compared to the realization of sundry debtor of other manufacturing units having production of Industrial cable. The Baddi Unit has not required much funds from the Head Office through the cash credit limits for its working capital requirements. The Baddi
Unit was self reliant to fulfill its day to day funds requirements. Therefore the expenses uncured by Head Office on account of CO limits should not be apportioned to determine the true profits of Baddi Unit claiming deduction under section 80IC of the Income Tax Act, 1961. We are filing the Balance sheet and Profit and Loss Accounts with complete annexure of each of the Branches, manufacturing units and the Head Office to explain the individual details of expenses incurred at various limits.
5.2 2.3 In view of the same, the best method would be to attribute the expenses including depreciation as per I. T Act of the Head Office and Branches, in terms of turnover and apportioning the common costs accordingly as per provision of 80IA(5) r.w.s. 80IC(7) and as prescribed in Rule 18BBB of I.T. Rules which is discussed in coming paragraphs. ”
[4] In this regard, the Id. AR vide written submission dated 24.01.2014 has submitted as under (only relevant extract reproduced) :-
a) The appellant company maintained its Administrative Office at Delhi and had six branches out of which Bombay branch had nil sales during the year under appeal. Three branches, i.e. Chopanki, Baddi, Bhiwadi were manufacturing units and the other two branches, namely, Cochin and Jalandhar were trading units. b) The appellant company was engaged in the production of industrial cables and other heavy duty cables at its
Bhiwadi and Chopanki units whereas the unit at Baddi was engaged in manufacturing of household wires and cables. The manufacturing process for manufacturing of household wires involves a much simple and a less time consuming process in comparison to that for manufacture of industrial and heavy duty cables. The sales from Baddi unit were mostly to the consumers from whom realization of payment was quick as compared to that of the other two manufacturing units. c) The appellant company did not use the borrowed funds for its Baddi unit as Baddi unit had accumulated substantial surplus of its own during the preceding two financial years and the company had interest-free funds in the form of share capital and free reserves. Therefore, apportionment of interest and bank charges on turnover basis are not based on facts of the case and are not warranted. d) The observation of the Assessing Officer is incorrect with respect to maintenance of separate books of accounts. The appellant company maintained separate books of accounts and prepared a separate balance sheet and profit & loss account based on separate books of accounts for its branches including for its Baddi unit. The appellant company had filed unit wise balance sheet and profit and loss account during the course of assessment proceedings based on separate
set of books of accounts maintained at each unit. e) The apportionment of all expenditure on the basis of turnover is not justified in the facts and circumstances of the case of the appellant in view of i) The products manufactured at Baddi unit were of different variety and had much shorter production and realization cycle as compared to the other two manufacturing units at Bhiwadi and Chopanki.
ii) The Baddi unit had accumulated surplus aggregating to more than Rs. 10 crores from its own working of the preceding two years for which no interest was paid. The company had paid up share capital and free reserves of more than Rs. 47 crores (excluding accumulated profits of Baddi Unit) which fund could have been used for the working of Baddi unit.
iii) The marketing cost of sales incurred by other units could not be attributed to the Baddi unit in view of direct sale of products manufactured by it to the consumers in view of which there was no requirement for appointment of distributors.
4.1 The appellant has not principally contested the apportionment of expenditure adopted by the Assessing
Officer except to state that in the case of interest, the usage of funds by Baddi unit could be easily identified and that the actual cost of funds should be attributed in Baddi unit for computing deduction under section 80IC of the Act.
The appellant had also submitted an alternative contention that if apportionment of expenditure was necessary in the facts and circumstances of the case for allowing deduction u/s 80IC, the interest expenditure which was directly identified with the activity of Baddi unit should not have been apportioned on the basis of turnover of the Baddi unit and instead the actual interest cost attributable to Baddi unit be considered for computing eligible profit for claiming deduction u/s 80IC of the Act.
In this regard, appellant during the course of appellate proceedings submitted as under (only relevant extract is reproduced)
a) One such expenditure which has been apportioned on the basis of turnover was interest. The apportionment of interest is not justified as interest is directly identifiable with the use of funds. The appellant has incurred expenditure in above branches (Delhi, Cochin and Mumbai) (no interest expenditure was incurred in Ludhiana unit) as under :
Head of Expense Delhi Cochin Mumbai Total debited in P&L Account. Bank Interest 18.69.36.459/- 550/- 5,656/- 18.69.42.665/- Interest on Secured 82,86,384/- 82,86,384/- Loan Sub- total 19,53,76,249/- Less : Interest on FDR 49,64,879/- 49,64,879/- Balance 19,04,11,370/-
b) The assessing officer treated the interest expenditure of Rs. 2,07,54,839/- as attributable to the activities of Baddi Unit {10.90 % (i.e in the ratio of turnover of Baddi Unit with respect to total sale as computed by the assessing officer in para 5.2.2.4.4 at page 6 of her order) of total Interest of Rs.19,04,11,370/-) }.
c) The allocation of interest expenditure on the basis of turnover is not only improper but also not justified in the facts and circumstances of the case as the interest cost has to be appropriated on the basis of actual use of funds. The Baddi unit has used its own funds ( accumulated profits) amounting to Rs. 10,62,29,705/- which had accrued to it over the last 2 years from its activities, copy of balance Sheet of Baddi unit for the year ended 31-03-2008 & 31-3-2009 is submitted in its support
d) Similarly, the Baddi unit has also used interest free funds of head office which were available in the form of share capital and share premium of the company of Rs.52,25,692/-(paid up capital and sharepremium of the company apportioned in the ratio of gross block of fixed assets to total gross block of fixed assets). In case the interest free funds (Rs. 10,62,29,705/- and Rs.52,25,692/- as stated above) are excluded from the funds used, the interest cost (assumed = 12.5%) that can be imputed to Baddi unit would come to Rs. 34,61,811/- The above figure of interest that can be imputed to the working of Baddi unit is also reinforced by the transfer of funds / receipts of funds from Baddi unit as per the copy of account.). The Baddi unit could not have used funds in excess of the amount due to the head office during the year under appeal. The interest amount if computed @12.5% per annum on the debit balance due to the head office comes to Rs.34,61,811/-. Therefore, disallowance on account of interest if any should not be curtailed by an amount of more than Rs.34,61,811/-
4.2 In support of its claim the appellant was directed by me to furnish the prescribed form 10CCB on the basis of allocation of interest cost on Baddi unit in accordance with the usage of funds. In this regard, the Id. AR vide written submission dated 17.02,2014 has submitted a copy of form 10CCB computing
deduction u/s 80IC by allocating the interest cost attributable to the Baddi unit on actual use of funds.
4.3 The appellant had also submitted vide its submission dated 24.01.2014 that expenditure of Rs.27,17,45,505/- of Delhi, Cochin, Mumbai and Ludhiana units which was considered by the Assessing Officer for apportionment for Baddi unit includes a sum of 2,20,30,488/- which was already disallowed by the appellant in its computation of income and the same was not considered eligible for deduction claimed by the appellant under section 80 IC of the Act. Break-up of Rs. 2,20,30,488 is as under :-
Particulars Amount % Donation Rs. 1,47,200/- Sales Tax Demand Rs. 23,334/- Income Tax Provisions for 2010-11 Rs. 2,14,27,338/- Income Tax Demand 2008-09 Rs. 55,202/- Income Tax Demand 2009-10 Rs. 3,86,414/- Total Rs. 2,20,39,488/-
The appellant stated that the above amount has been considered again (twice) for apportionment, once when the appellant added the amount in its assessable income and again when the Assessing Officer considered the amount for apportionment on the basis of turnover. The sum of Rs. 24,02,304/- (10.9% of Rs. 2,20,39,488/-) has been considered ineligible for deduction
under section 80 IC on this account, which results in double addition and deserves to be deleted.
4.4 Regarding ineligibility of Rs. 38,26,826/- on notional basis by attributing 1% profits on turnover of Rs. 38,26,82,601/- of Baddi unit as cost,
The Assessing Officer has notionally held that a net profit of 1% on sales made i.e a sum of Rs.38,26,826/- deserves to be disallowed from deduction claimed under section 80 IC of the Act by hypothetically holding it to be profit attributableto the other units. In this context, appellant has submitted before me that income tax a charge on real income and notional income cannot be brought to tax. It has cited judgment of Supreme Court in the case of CIT vs. Shoorji Vallabhadas & Co. (1962) 46 ITR 144 (SC) & M/s. Godhara Electricity Co. Ltd. vs CIT (1997) 225 ITR 746 (SC) wherein the apex court has held that irrespective of the accounting entries made by the assessee notional income cannot be charged to tax.
[5.1] The perusal of the assessment order reveals that the Assessing Officer has curtailed the deduction of section 80IC from Rs. 6,46,262,634/- to Rs. 3,63,92,838/- by apportionment of expenditure incurred by the Assessee in its head office and three sales ' units on the basis of total turnover of the appellant company to the Baddi unit. The Assessing Officer has also attributed one percent notional net profit @ 1% of total turnover of Baddi unit amounting to Rs 38,26,826/- to other units holding the amount to be ineligible for claiming deduction under section
80IC and had also excluded the profit amounting to Rs.29,45,752/- (on the basis of gross profit margin achieved by of the Baddi unit on transfer of goods to other units remaining unsold at the year end.
The appellant has submitted its written and oral arguments challenging the apportionment of expenditure of its eligible Baddi unit on the basis of total turnover of the appellant company for all expenses. The appellant has submitted before me that the apportionment of expenditure on interest is inequitable and has filed its working for the imputed interest cost that it has incurred on operations of its Baddi unit.
The appellant had argued before me that interest cost of the Baddi unit can be computed by arriving at the figure of usage of funds by Baddi unit on the basis of debit and credit of head office account with it during the year under appeal. The appellant had also submitted a copy of revised form 10CCB claiming deduction of 80IC of Rs.5,47,01,706/- by imputing interest cost of Rs, 34,61,811/- to its Baddi unit on my direction during the course of appellate proceedings.
The appellant has also pointed out before me that the Assessing Officer has resorted to apportionment of expenditure amounting to Rs. 2,20,30,488/- which had already been disallowed by the assessee while computing the return of income which resulted in curtailment of deduction u/s 80IC of Rs.24,02.304/-.
On perusal of the assessment order, written and oral submissions of the appellant case law on the issue and facts on record, I proceed to adjudicate the various grounds of appeal in a consolidated matter.
The appellant has principally not objected to apportionment of expenditure on the basis of turnover other than interest for arriving at the claim of deduction under section 80IC. It has substantiated interest cost attributable to the Baddi unit during the course of appellate proceedings before me. I find that the apportionment of common expenditure wherever no specific unit wise detail is available is judicially recognized for arriving at the profit of ' different units. There is no prescribed formula for apportionment of expenditure in the Act. The appellant has cited a judgment of jurisdictional Delhi High Court ifi the case Controls & Switchgear Co. Ltd. Vs. Deputy Commissioner of Income Tax 66 DTR page no. 161 wherein the Delhi High Court has approved the apportionment of common expenditure between the unit eligible for deduction under section 80IC and non-eligible units on the basis of turnover where specific unit wise detail of expenditure was not furnished before the lower authorities despite specific query to this effect.
I, respectfully following the judgment of jurisdictional Delhi High Court cited above, uphold the apportionment of expenditure made by the Assessing Officer for computing deduction u/s 80IC of the Act except for interest cost attributable to the Baddi unit. The Appellant has furnished computation of interest on the basis of usage of funds for Baddi unit.
The Delhi High Court in the above judgment has not made any interference in the order of CIT (Appeals) and ITAT which upheld the order of Assessing Officer apportioning common expenditure on the basis of turnover by observing that the Assessee in that case had failed to substantiate the unit wise interest expenditure. It upheld the apportionment of common expenditure on the basis of turnover.
In the present case, the appellant has substantiated the interest expenditure for its eligible Baddi unit. I therefore, allow the claim of the appellant on the issue and direct computation of deduction under section 80IC by attributing interest cost for Baddi unit of Rs.34,61,811/- instead of apportioned amount of interest of Rs.2,07,54,839/- by the Assessing Officer in the assessment order.
On perusal of the assessment order, written and oral submissions of the appellant case law on the issue and facts on record, I proceed to adjudicate the various grounds of appeal in a consolidated matter.
The appellant has principally not objected to apportionment of expenditure on the basis of turnover other than interest for arriving at the claim of deduction under section 80IC. It has substantiated interest cost attributable to the Baddi unit during the course of appellate proceedings before me. I find that the apportionment of common expenditure wherever no specific unit wise detail is available is judicially recognized for arriving at the profit of '
different units. There is no prescribed formula for apportionment of expenditure in the Act. The appellant has cited a judgment of jurisdictional Delhi High Court ifi the case Controls & Switchgear Co. Ltd. Vs. Deputy Commissioner of Income Tax 66 DTR page no. 161 wherein the Delhi High Court has approved the apportionment of common expenditure between the unit eligible for deduction under section 80IC and non-eligible units on the basis of turnover where specific unit wise detail of expenditure was not furnished before the lower authorities despite specific query to this effect.
I, respectfully following the judgment of jurisdictional Delhi High Court cited above, uphold the apportionment of expenditure made by the Assessing Officer for computing deduction u/s 80IC of the Act except for interest cost attributable to the Baddi unit. The Appellant has furnished computation of interest on the basis of usage of funds for Baddi unit.
The Delhi High Court in the above judgment has not made any interference in the order of CIT (Appeals) and ITAT which upheld the order of Assessing Officer apportioning common expenditure on the basis of turnover by observing that the Assessee in that case had failed to substantiate the unit wise interest expenditure. It upheld the apportionment of common expenditure on the basis of turnover.
In the present case, the appellant has substantiated the interest expenditure for its eligible Baddi unit. I therefore, allow the claim of the appellant on the issue and direct computation
of deduction under section 80IC by attributing interest cost for Baddi unit of Rs. 34,61,811/- instead of apportioned amount of interest of Rs. 2,07,54,839/- by the Assessing Officer in the assessment order.
5.2 The contention of the appellant with regard to apportionment of suo moto disallowed expenditure of 2,20,39,488/- is also found to be correct and the Assessing Officer is directed to delete the impact of such disallowance while computing deduction u/s 80IC of the Act, which comes to Rs. 24,02,304/-.
5.3 The estimated gross profit on transfer of goods to other units of the appellant company on goods remaining unsold at the yearend has been rightly excluded by the Assessing Officer in computing deduction under section 80IC which calls for no interference and the curtailment of deduction under section 80IC to the extent of Rs.29,45,752 is upheld.
5.4 The appellant has contented before me that of 1% attribution of notional profit of Baddi unit for its sales to other units is without any basis is illegal and untenable. It has supported its contention by referring to the judgments of Supreme Court in the cases of CIT vs. Shoorji Vallabhadas & Co. (1962) 46 ITR 144 (SC) & M/s. Godhara Electricity Co. Ltd. vs CIT (1997) 225 ITR 746 (SC) to state that notional income cannot be taxed.
5.5 I find force in the argument of the appellant and ad-hoc 1% attribution of notional profit computed on sales of Baddi unit
amounting to Rs. 38,26,826/- being without any basis, is deleted for computation of deduction u/s 80IC of the Act.
5.6 I have adjudicated on the various components of curtailment of deduction under section 80IC in the above paragraphs. The assessee is eligible for deduction u/s 80IC amounting to Rs.5,17,55,954/- against deduction of Rs. 2,82,33,796/- allowed by the assessing officer. The assessee gets relief of Rs.2,35,22,158/- on account of curtailment of deduction u/s 80IC by the Assessing Officer. A chart giving detail of curtailment of deduction u/s 80IC by the Assessing Officer under various components and relief granted by me to the appellant is attached with this order as Annexure - A. In view of above discussion, ground of appeal No. 2 is partly allowed. ”
6.5 We find that the ld. CIT (Appeals) has allowed partial relief to the assessee on the claimed deduction under section 80IC of the Act by upholding the criteria of apportionment of indirect expenditure of Baddi Unit on the basis of sales turnover of Baddi Unit to the total turnover of other units etc. for the allocation of expenditure of interest on the basis of actual usages of funds for which a working was furnished by the assessee. This action of the ld. CIT (Appeals) has resulted in relief of Rs.1,96,95,332/- towards the claimed deduction under section 80IC of the Act. He has given relief of Rs.38,26,826/- on the basis that it was
amount of notional ad-hoc 1% cost inputted to Baddi Unit for sales affected by other units while computing deduction under section 80IC of the Act. He has analyzed the allocation of indirect expenditure of Baddi Unit in para No. 4.1, 4.3 and 5.1 of the first appellate order and has upheld the principal of apportionment of common expenditure on the basis of sales by following the ratio of the decision of Hon’ble jurisdictional High Court of Delhi in the case of Control & Switchgear Ltd. Vs. DCIT 66 DTR 166 (Del.). The Hon’ble High Court in that decision (supra) has approved the apportionment of common expenditure between the unit eligible for deduction under section 80IC and non- eligible units on the basis of turnover where specific unit-wise detail of expenditure was not furnished before the lower authorities despite specific query to this effect. The ld. CIT (Appeals) has allowed a relief of Rs.1,62,33,521/- in allocation of interest on the basis of actual usages of funds by computing interest of Rs.34,61,811/- attributable to activities of Baddi Unit as against the apportioned interest cost of Rs.2,07,54,839/- made by the Assessing Officer. The ld. CIT (Appeals) has held that the amount of Rs.2,20,39,488/- could not be considered for allocation of expenditure once the same had been added back by the assessee to its income and deleted the curtailment in profit eligible for deduction under section 80IC of Rs.24,02,304/-. The ld. CIT (Appeals)
has perused the debits and credits to the account of Head Office and taking them into consideration on a daily basis to find out the product, the product on which interest cost attributable to net use by funds by Baddi Unit has been computed by resident company at Rs.34,61,811/- has been held attributable to Baddi Unit by him. The ld. CIT (Appeals) has noted further that the assessee had opening credit balance in its books of accounts to the account of Head Office of Rs.17,57,43,596.23 from which the assessee company had deducted the investment in fixed assets out of share capital and share premium, which was derived by taking into fixed assets as appearing in the balance sheet of Baddi Unit to the total fixed assets held by the assessee company. He has further noted that while computing the figure of actual usages of funds by the Baddi Unit the assessee has also reduced the profit declared by Baddi Unit of Rs.10,62,29,705/- in the preceding two assessment years to arrive at the opening figure of funds in use by the Baddi Unit. In absence of rebuttal of these material facts by the Revenue, we do not find reason to interfere with the first appellate order which is comprehensive and speaking meeting out the objections raised by the Assessing Officer in view of the submission of the assessee. The same is upheld. The ground Nos. 1 and 2 of the
appeal are thus rejected. The appeal of the Department for the assessment year 2010-11 is accordingly dismissed.
6.6 So far as the remaining appeals of the assessee on identical issue as raised in the appeal preferred by the Department are concerned, the parties have adopted similar arguments. The ld. AR submitted that the issue may be decided in view of the decision of Hon’ble jurisdictional High Court of Delhi in the case of Controls & Switch Gear Co. Ltd. Vs. DCIT (supra). He, however, submitted that the assessee does not wish to press ground No. 4(a) raised in the appeal against the action of the ld. CIT (Appeals) by which he has reduced Rs.52,69,333/- in assessment year 2008-09 and Rs.26,21,697/- in the assessment year 2009-10 in the profit of Baddi unit eligible for deduction under section 80IC by treating the same as alleged over-valuation of stock. The ground No. 4(a) of both the appeals are accordingly rejected. So far as other grounds on the validity of deduction under section 80IC worked out by the ld. CIT (Appeals), we set aside the orders of the authorities below to the file of the Assessing Officer to decide the issues raised in the ground Nos. 4(b) and 4(c) of the appeals preferred by the assessee in view of our finding on an identical issue in the Departmental appeal for the assessment year 2010-11 decided above. While deciding the issue,
the Assessing Officer will afford opportunity of being heard to the assessee. The ground Nos. 4(b) and 4(c) of the appeals of the assessee are accordingly allowed, for statistical purposes.
So far as ground No. 5 questioning the action of the ld. CIT (Appeals) in upholding the disallowance of additional depreciation of Rs.51,87,590/- on new plant and machinery installed at other than Baddi unit during the year raised in the appeal for the assessment year 2009-10 is concerned, the ld. AR has not been able to improve its case before the Tribunal. We thus, uphold the action of the ld. CIT (Appeals). The ground No. 5 is accordingly rejected.
In result, appeals of the assessee are partly allowed and that of the Department is dismissed.
The order is pronounced in the Open Court on : 22nd June, 2017.
Sd/- Sd/- ( O. P. KANT ) ( I. C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : the 22nd June, 2017. *MEHTA*
Copy of the Order forwarded to :- 1. Appellant;
Respondent;
CIT;
CIT (Appeals);
DR, ITAT, ND. BY ORDER
ASSISTANT REGISTRAR
Date Draft dictated on 22.06.2017 Draft placed before author 22.06.2017 Draft proposed & placed before the second member Draft discussed/approved by Second Member. Approved Draft comes to the Sr.PS/PS Kept for pronouncement on File sent to the Bench Clerk Date on which file goes to the AR Date on which file goes to the Head Clerk. Date of dispatch of Order.