ADDL CIT 2(1), MUMBAI vs. ADOR WELDING LTD, MUMBAI

First we shall take the appeal in ITA No. 2468/Mum/2010.

The issue raised in the ground No.2 of the appeal by the Revenue is against the holding by the ld.CIT(A) that the assessee was entitled to deduction of Rs.19,66,56,000/- under section 80IB of the Income Tax Act, 19621 (hereinafter referred to as the Act) in relation to its Silvassa Unit, by ignoring the admission by the assessee vide letter dated 24.12.2008 qua certain expenses were not properly allocated .

Facts in brief are that the assessee is engaged in the business of Manufacturing of welding consumables, equipment and project engineering products. The assessee was an associate concern of J B Advani group with the share holding of 49.84% held by M/s J B Advani and Co.Pvt.Ltd Company. The assessee has various manufacturing units located at Chennai, Chinchwad (Pune), Ahmednagar, Bhandup , Raipur and Silvassa. Silvassa Unit being new investment of the operative unit from the assessment year 2004-05 all the four units of the assessee were engaged in manufacturing of consumables of electrodes and welding material whereas Chennai unit was engaged in the manufacturing of engineering equipments. During the year the assessee filed its return of income for the 3 6479/Mum/2010 2468/Mum/2010 assessment year 2006-07 declaring total income of Rs.24,38,46,972/- on 21.2.2016 by claiming deduction under section 80IB of Rs.19,66,56,000/- being 100% of the profits of industrial unit located at Silvassa. The assessee also filed her copy of tax audit report and other details and thereafter the case of the assessee was scrutinizes and during the course of scrutiny proceedings, the assessee was required to furnish details of sales and other income, direct expenses, indirect expenses pertaining and allocable to each of these units which were filed by the assessee vide letter dated 24.12.2008. On the basis of such information furnished by the assessee, the AO came to the conclusion that there was mismatch between the profit worked out and the turnover of the unit, certain expenses are disproportionate to turnover which was not pertaining the criterion for allocation of expenses, certain expenses were not apportioned among the unit whose incomes are claimed exempt u/s 80IB. During the course of assessment proceedings, the assessee vide letter dated 24.12.2008 admitted the lapses on non-allocation of certain expenses to Silvassa unit and claim of deduction u/s 80IB was reduced to 1931.56 lakhs as against the claim as claimed earlier Rs.1966.56 lakhs and thus thereby reducing the claim of Rs.35 lakhs. The AO also worked out some variation under various head as regard allocation of expenses such as depreciation and financial charges which was calculated at Rs.15 lakhs, and clubbed with 4 6479/Mum/2010 2468/Mum/2010 the amount as offered by the assessee vide letter dated 24.12.2008 and thus, total deduction u/s 80IB worked out to Rs.15 lakhs accordingly, the deduction 80IB was reduced to Rs.1916.56 lakhs. The AO finally passed the order under section 143(3) of the Act vide order dated 29.12.2008 by assessing the income of the assessee at Rs.25,17,02,430/- by making various disallowances including the reduction under the scheme u/s 80IB of the Act as discussed above. Thereafter, the assessee during the course of hearing before the ld.CIT(A) explained the various anomalies and discrepancies which were admitted before the AO vide letter dated 24.12.2008 and also explained the difference of non allocation of expenses as calculated by the assessee of Rs.15.78 lakhs. Finally the ld. CIT(A) after considering he submissions and arguments of the ld.AR allowed the appeal of the assessee on this ground by deleting the addition of Rs.15 lakhs thereby restored the deduction 80IB by observing and holding as under : “8. According to the A.O. the net variation of Rs.15.78 lakh under the head as indicated above is different from the heads under which assessee has accepted the variation in allotment of expenses i.e. depreciation and financial charges which are chosen by the assessee whereas the variation related to cost of goods sold and manufacturing expenses. Accordingly, the A.O. has clubbed the variation of Rs.15 lakh with the amount as accepted by the assessee and reduced the same from the claim of deduction u/s. 80IB by quantifying the reduction at Rs.50 lakh (Rs.35 + 15 lakh).

The A.R. submitted that the A.O. is not justified in reducing the deduction u/s. 80IB. According to him the assessee has claimed 5 6479/Mum/2010 2468/Mum/2010 deduction u/s. 80IB as certified by the C.A. in Form No. 10CCB. He has also filed a letter justifying the allocation of expenses to Silvassa Unit which refers to financial charges in respect of export bill discounting and interest thereon. The company is a debt free company and did not utilize borrowed funds.

The A.R. further submitted that out or total export for which the financial charges and interest is attributable, the assessee company during the previous year has given the following details: total exports for the A.Y. 2006-07 Rs.39,77,32,009/- Equipment exports (manufactured in Pune plant) Rs.13,33,32,415/- Total consumable exports Rs.26,43,99,594/- Export E:ales from Silvassa plant Rs.19,36,000/- % of exports from Silvassa plant is 0.48% Total finance cost including interest is Rs.72.51lakh. Interest and finance charges attributable to Silvassa Plant Rs.0.35 lakh only.

I have duly considered the submissions of the A.R. and I find that the AO has allocated the expenses on the basis of the turnover of the company whereas the assessee has allocated the expenses on actual basis. Since the Silvassa unit is involved in export business only, the interest attributable to Silvassa unit amounting to Rs.45 lakh has been allocated to Silvassa unit as the assessee is a debts free company and no borrowed funds have been used. Since the assessee has allocated the actual expense in respect of the Silvassa unit the same is required to be allowed. The AO is directed to allow deduction u/s 80IB as claimed by the appellant.”

The perusal of the order of ld.CIT(A) reveals that the discrepancies as pointed out by the AO and admitted by the assessee during the course of assessment proceedings regarding the finding of facts qua the said discrepancies being explained fully as the assessee has booked all the expenses on the basis of actual and thus there was no difference in 7 6479/Mum/2010 2468/Mum/2010 allocation and restored the deduction of Rs.1916.56 as claimed by the assessee. Looking into facts and circumstances of the case in totality, we find no discrepancy or infirmity in the order of ld. CIT(A) which after considering the submissions of the ld.AR directed the AO to allow the claim of assessee for deduction u/s 80IB of the Act and therefore the same upheld by dismissing the appeal of the revenue on this ground.

Ground No.2 is against the holding by the ld.CIT(A) that value of bonds held by the assessee should be excluded from the value of investments while computing disallowance u/s 14A of the IT Act read with rule 8D of the Income Tax Rules, 1962. During the course of assessment proceedings, the AO found that the assessee has earned dividend income of Rs.67,74,600/- and also incurred Rs.28.28 lakhs expenditure under the head interest expense. The AO further observed that the assessee has not allocated or attributed any expenses to earning of exempt income in terms of section 14A r.w.rule 8D and calculated the disallowance at Rs.17,05,460/- comprising Rs.6,34,000/- under rule 8D(2)(ii) and Rs.10,71,460/- under rule 8D(2)(iii). During the appellate proceedings before the FAA it was submitted that the provisions of section14A r.w.r 8D were not applicable to the assessment year 2006-07 which is the year under consideration and were applicable from the assessment year 2008- 09. The ld. counsel also submitted before the ld. CIT(A) that the assessee 8 6479/Mum/2010 2468/Mum/2010 has made investments which were inclusive of investment in bonds, the income from which is liable to be taxed and was not exempt. After considering the submissions of the ld.AR, the FAA partly allowed the appeal of the assessee by observing as under : “5. I have duly considered the submission of the A.R. and I find that the assessee was having interest income from bonds which is not exempt. In any case the assessee was having investment in unquoted shares to the extent of Rs.225.82 lakh which was sold in this year. Hence, 0.5% of average of opening and closing balance of Rs.225.82 lakh would amount to Rs.112.91 lakh. Accordingly, the disallowance should be restricted to Rs.89,000/- as computed above. The A.O. is directed to restrict the disallowance to Rs.89,000/- u/s. 14A. 6. I do not agree with the submissions of the A.R. that Rule BD is not retrospective. The Hon'ble ITAT, Mumbai, in the case of Daga Capital Management in dated 20/10108 has held that Rule 8D is retrospective in nature. Hence, the same is applicable in the case of the appellant for AY 2006-07. However, the amount is required to be restricted to Rs.89,000/- as mentioned above. This ground of appeal is partly allowed “’

In the result, the appeals of the revenue are dismissed. Order pronounced in the open court on 16.08.2016. Sd sd (SHAILENDRA KUMAR YADAV) (RAJESH KUMAR) न्यधनयक सदस्य / JUDICIAL MEMBER ऱेखध सदस्य / ACCOUNTANT MEMBER म ंबई MUMBAI; ददनधंक DATED : 16 .8.2016 Sr.PS:SRL: