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Income Tax Appellate Tribunal, DELHI BENCH ‘E’ : NEW DELHI
Before: SHRI G.D. AGRAWAL & SHRI KULDIP SINGH
ASSESSEE BY : Shri Rupesh Jain, Advocate, REVENUE BY : Shri Umesh Chander Dubey, CIT DR Date of Hearing : 07.09.2016 Date of Order : 27.10.2016
O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : The Appellant, Assistant Commissioner of Income-tax, Circle 4(1), New Delhi (hereinafter referred to as ‘the Revenue’) by filing the present appeal sought to set aside the impugned order dated 04.07.2008 passed by the Commissioner of Income-tax (Appeals)-VII, New Delhi qua the assessment year 2005-06 on the grounds inter alia that :- “1. The order of the Ld. CIT (A) is erroneous & contrary to facts and law.
2. The learned CIT (A) has erred in directing the Assessing Officer to recomputed the deduction allowable under section 80-IB of the Income Tax Act, 1961 in respect of unit III of the assessee company without considering the fact that the assessee has overstated the profits of PPD Unit – III by Rs.2,14,64,799/-.
3. The appellant craves leave to add, to alter, or amend any grounds of the appeal raised above at the time of the hearing.”
Briefly stated the facts of this case are : assessee company is into the manufacturing and trading of photosensitive goods, chemicals and photographic equipment and it has claimed deduction under section 80IB of the Income-tax Act, 1961 (for short ‘the Act’) at Rs.22,50,55,364/- pertaining to Unit-III (PPD unit). Assessee company computed book profit at Rs.30,13,30,903/- u/s 115JB of the Act and tax liability worked out at Rs.2,36,28,109/-. During scrutiny proceedings, it is noticed that during the year under assessment, assessee had production units of photosensitive goods and photographic equipment at various locations. Assessee claimed deduction in respect of income earned by 3 units running at Dadra. The DDRF unit at Dadra is eligible for 30% deduction of profit u/s 80IB but, due to loss, no deduction has been claimed. PPD unit is eligible for deduction u/s 80IB which has commenced production from 30.03.2005. Assessee company shown total value of machinery and plant at Rs.3.08 crores and loss Rs.63,07,125/- and hence claimed no deduction u/s 80IB in the new unit. Assessee company filed audit report in Form No.10CCB only in respect of PPD unit by computing the profit at Rs.22,50,55,364/- but no deduction has been claimed in respect of Unit No.1 & 2. Assessee was called upon to explain to substantiate the deduction/s 80IB of the Act.
AO noticed form the records and consolidated profit & loss account that certain expenses are being claimed in order to claim higher deduction u/s 80IB of the Act as three units at Dadra are located in the same premises and dealing in same products whereas one unit is eligible for deduction at 70%, the other at 100% and the third one is not eligible for any deduction. Assessee company claimed to have maintained separate books of accounts for all the three units. Assessee is also running a unit at Bhilad which deals in chemical production and at Delhi for the sale of mini lab equipments. AO noticed from the comparative status of accounts of the assessee that the expenditure in PPD unit is much less as compared to expenditure debited in the Bhilad unit and Delhi unit.
AO came to the conclusion that the entries of expenses have not been correctly recorded in the books and have not been properly allocated.
AO also noticed that the expenditure pertaining to PPD unit is only 55% but the corresponding sales and purchases were 64% and as such, expenditure is on lower side and the assessee was called upon to explain. AO found the submission made by the assessee not tenable and came to the conclusion that the profit of the Unit-III has been overstated by Rs.2,14,64,799/- and consequently disallowed the same. AO also computed the amount of foreign exchange fluctuation to be debited to the PPD Unit at Rs.26,83,392/- (93% of Rs.28,85,369/- and reduced the deduction u/s 80IB accordingly and assessed the total income at Rs.28,84,32,550/-.
Assessee carried the matter before the ld. CIT (A) by way of filing the appeal who has allowed the appeal. Feeling aggrieved, the Revenue has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
Undisputed facts of this case are inter alia that the assessee is into manufacturing of photosensitive goods, chemicals and trading in photographic equipments through various units located at different places; that the assessee has claimed 100% deductions u/s 80IB qua Unit No.III producing photosensitive material situated at Dadra, Nagar and Haveli; that the assessee company has debited foreign exchange fluctuation cost amounting to Rs.30,49,679/- in the books of Unit-III on actual basis; that the assessee in the ordinary course of its business offers several types of commission/ discount on its various products viz. chemicals and photographic paper produced in different units.
In the backdrop of the aforesaid undisputed facts, AO disallowed deductions to the tune of Rs.2,14,64,799/- on two counts : (i) under the head of “foreign exchange fluctuation” which he has computed by proportionately allocating to the three units located at Dadra to the tune of Rs.26,83,392/- i.e. 93% of Rs.28,85,369/- and reduced the deduction u/s 80IB accordingly and (ii) proportionately allocated the expenditure relating to special discount & commission qua Unit No.II and PPD Unit-III and disallowed the deduction u/s 80IB accordingly.
To decide the controversy at hand, the first question arises for determination in this case is :-
“as to whether ld. CIT (A) has erred in deleting the disallowance of deduction of Rs.26,83,392/- u/s 80IB of the Act on account of foreign exchange fluctuation expenses to Unit-III?
Ld. CIT (A) deleted the disallowance of deduction of Rs.26,83,392/- u/s 80IB on account of foreign exchange fluctuation to Unit-III by making following observations :-
“I have considered the submissions of the appellant and the order of the assessing officer. It is not in doubt that foreign exchange fluctuation expense allocated by the assessing officer relates to import of raw materials. The three units at Dadra are separate and independent units with separate books of account which are even being audited by Chartered Accountant. The raw material purchased with respect to these units is also identified separately which has even been accepted by the assessing officer. In such circumstances, in principal, when the purchase of raw material is identified separately, the foreign exchange fluctuation expense in connection thereof is also liable to be allocated in the unit of purchase on actual basis.
In view of the above, I am not in' agreement with the action of the assessing officer in treating the foreign exchange fluctuation expense arising on account of import of raw material as common expense.
Coming to the facts of the appellant's case, on perusal of Annexure 'C' to the assessment order, which contains the basis of allocation of administrative expenses amongst various units of the appellant company, it is observed that expense of Rs.30,49,679 has already been debited in the books of Unit III/PPD unit which was eligible for 100% deduction under section 80IB of the Act. As explained by the appellant, the aforesaid amount was debited in the books on actual basis. In the assessment order the assessing officer has allocated Rs.26,83,392 on account of net foreign exchange fluctuation expense towards Unit III on the basis of ratio of its sales which is, in fact, less than the amount which already stood allocated to the Unit on actual basis, as discussed above. The action of the assessing officer has resulted in double deduction of the cost in books of Unit III, first, by way of deduction of Rs.30,49,679 already debited in the books of that unit and, secondly, by way of further allocation of Rs.26,83,392 made by the assessing officer in the assessment order. The action of the assessing officer is a patent mistake which calls for rectification and, therefore, I direct the assessing officer to delete the disallowance of deduction under section 80IB of the Act by amount of Rs.26,83,392 on account of higher deduction of foreign exchange fluctuation expense to Unit III.”
From the facts and circumstances of the case and the books of account and documents annexed therewith perused by the AO as well as ld. CIT (A), it is proved that when all the three units owned by the assessee have been maintaining separate books of account duly audited by the competent authority and the raw material purchased by each of the unit is separately identifiable, there is no question of treating the foreign exchange fluctuation expenses on account of import of raw material as common expenses. More so, when the assessee has itself debited expenses of Rs.30,49,679/- in the books of account on actual basis reallocating the amount of Rs.26,83,392/- on the basis of proportionate sale by the AO is a patent illegality, resulting into double deduction of the cost in the books of Unit-III. So, we are of the considered view that findings returned by the ld. CIT (A) qua deletion of disallowance of Rs.26,83,392/- of deduction u/s 80IB of the Act on account of foreign exchange fluctuation expenses to Unit - III need no interference, hence upheld.
Now, the second question arises for determination in this case is :
“as to whether expenditure relating to special discount and commission & discount are required to be allocated like other expenditure proportionate to the turnover amongst Unit No.II and PPD Unit No.-III, as has been done by AO?” 13. From the scrutiny of books of account and voucher relied upon by the assessee, AO noticed that in the commission account, the expenditure pertaining to PPD unit is only 55% whereas the corresponding sale percentage is 64% meaning thereby the expenses are on lower side.
14. When it is not in dispute that the chemical as well as photographic paper sold by the assessee company are being produced by independent units, the special discount offered has to be calculated independently for the purpose of 80IB qua Unit-III.
When it is undisputed case of the assessee that, “the customers who purchased chemicals were also asked to purchase the photographic paper produced at various other units of the assessee so as to qualify for commission, the actual beneficiary of the discount scheme is the paper producing division which is Unit-II and PPD Unit at Dadra.” In other words, if client does not purchase photographic paper then he is not eligible for discount on chemical. So, we are of the considered view that the entire scheme for extending discount has been launched to increase the sale of photographic paper being produced at Unit-II and PPD Unit and as such, expenditure relating to discount/commission is required to be allocated to both the units proportionately.
So when the assessee has itself bifurcated the other expenditure on proportionate basis on the turnover the expenditure pertaining to special discount and commission or also required to be bifurcated, as has been done by the AO.
Findings of the ld. CIT (A) that, “the commission expenses by its very nature is product specific unless some material suggesting otherwise is brought on record by the assessing officer”, are not tenable because when it is admitted case of the assessee that the commission/discount on chemical is available only to the customer who purchases photographic paper also which is being produced by Unit-II qua for which no deduction has been claimed and 100% deduction is claimed qua PPD Unit u/s 80IB.
Had there not been any such condition to purchase the photographic paper so as to qualify for discount for purchasing chemical along with paper from PPD unit, there would have not been any need to bifurcate the other expenses proportionately. So, in the instant case, commission expenses are not “products specific” rather intricately inter-woven. So, we are of the considered view that the ld. CIT (A) has erred in deleting the allocation of the commission expenses and disallowing the deduction u/s 80IB proportionately. So, the findings returned by the ld. CIT (A) are hereby set aside and findings returned by the AO are hereby restored. Resultantly, present appeal filed by the Revenue is hereby partly allowed.
Order pronounced in open court on this day 27th of October, 2016.