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Income Tax Appellate Tribunal, DELHI BENCHES : “D” NEW DELHI
Before: SHRI H.S. SIDHU & SHRI J. SUDHAKAR REDDY
PER J.SUDHAKAR REDDY, ACCOUNTANT MEMBER
This is an appeal filed by the assessee directed against the order of the Commissioner of Income Tax (Appeals) VIII, New Delhi dated 4.1.2013 for the assessment year 2008-09.
Kortek Electronics (India) Ltd. vs. ACIT 2. The assessee is a company and is in the business of manufacturing and trading in electronic components and goods. It manufactures, monitors, DVDs and other electronic items for LG and Set up boxes for Tatasky. The assessee has two manufacturing units, one at Greater Noida and the other at Rurdrapur, Uttaranchal.
The assessee claimed deduction u/s 80IC in respect of Rudrapur Unit. It filed its return of income declaring net taxable income of Rs. 12,09,55,320/- on 29.9.2008.
The AO completed assessment u/s 143(3) read with section 92CA(3) of IT Act 1961 (herein referred to Act) determining the total income at Rs. 13,36,35,770/- interalia disallowing an amount of Rs. 34,470/- u/s 14A and restricting the assessee’s claim for deduction u/s 80IC to Rs. 2,57,263/- and making a disallowance u/s 40(a) (ia) to the tune of Rs. 38,75,000/-. On appeal the first appellate authority granted part relief. Aggrieved the assessee is in appeal before us on the following grounds :-
1. “That the assessment order passed U/s 143(3) and the additions disallowances made are illegal, bad in law and without jurisdiction.
2. That in view of the facts and circumstances of the case, the CIT(A) has erred in law and on facts in upholding the action of the AO in rejecting the books of accounts without pointing out any error in the regular books of account maintained by the appellant. In any case the books have been illegally and wrongly rejected and the said rejections of books of account cannot be justified by any material on record. 3. That in view of the facts and circumstances, the CIT(A) erred in law and on facts in upholding the disallowing the sum of Rs.34,4701- U/s 14A r.w.r 8D made by the AO. 4. That, in view of the facts and circumstances, CIT(A) erred in law and on facts in upholding the action of the Aa in disallowing the sum of Rs.38,75,0001- U/s 40(a)(ia) of the Act. 5. The CIT(A) has failed to appreciate that the payment was paid in March 2006 for the music right from Yash Raj Films and Saregama India P. Ltd as Royalty and there was no liability to deduct the TDS as per provision of the Act in the year the payments were made. 6. That the observation of the AO & CIT(A) in holding that the royalty
2 20x5 Kortek Electronics (India) Ltd. vs. ACIT expenses are prior period expense are unjust, illegal and cannot be justified by any material on record.
That the AO erred in law and on facts in reducing the deduction Rs.87,70,981/- u/s 80lC by reallocation of expenses and the CIT( A) erred in the upholding the same.
8. That in view of facts and circumstance, the CIT(A) erred on facts and in law in upholding the method adopted by the AO to reallocate the expenses and has failed to appreciate that the appellant has enough capital of its own.
9. The additions / disallowances made are unjust, unlawful, without jurisdiction and are also highly excessive. The income has been wrongly & illegally computed at Rs.13,36,35,770/- as against income declared at Rs. 12,09,55,320/-.
10. That the CIT(A) and AO erred in not providing proper and adequate opportunity to assessee company to place the material on record to substantiate its claim and the same was done by the assessing officer.
That the explanations given, evidence produced and material placed and made available on record have not been properly considered and judicially interpreted and the same do not justify the addition made.
12. That the addition made is based on mere surmises and conjunctures and the same cannot be justified by any material on record and against the principle of natural of justice.
That interest u/s 234B & 234C of the Income Tax Act, 1961 has been wrongly and illegally charged and has been wrongly worked out. “ 3. We have heard Shri Salil Kapoor Ld. Counsel for the assessee and Shri Rashmita Jha the Ld. Sr.DR on behalf of the assessee.
On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below we hold as follows.
Ground No. 1 is general in nature.
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Kortek Electronics (India) Ltd. vs. ACIT 6. Ground No. 3 is on the disallowance made u/s 14A r.w.r 8D. The assessee does not have income which is exempt from tax. Under these circumstances no disallowance can be made u/s 14A of the Act. The Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT 378 ITR 33 (Delhi) laid down as follows :-
“that no exempted income was earned by the assessee in the relevant assessment year and since the genuineness of the expenditure incurred by the assessee was not in doubt, no disallowance could be made under section 14A.” 7. Respectfully following the same we allow ground No. 3.
Ground No. 4 is against the disallowance made by invoking section 40(a)(ia) of the Act . The assessee relies on the decision of Hon’ble Jurisdictional High Court in the case of 377 ITR 635 (Del) and submits that the second proviso to section 40(a)(ia), which was brought out by the Finance Act 2012 w.e.f 1.4.2013, was held as having retrospective operation and as a payee i.e Yash Raj Films and Saregama India P. Ltd. had filed their returns and paid taxes, no disallowance can be made u/s 40(a)(ia). On a query from the bench he submitted that the issue should be set aside to the file of the AO for fresh adjudication. On further query, he filed a letter dated 30th April, 2011 of M/s. Yash Raj Films written to the office of the Asstt.
Commissioner of Income Tax C.R. Building, New Delhi, in response to a requisition of information u/s 133(6) of the Act and submitted that the payee’s have recorded the amounts received from the assessee in their books of accounts. In our considered view the assessee should have made every effort to gather necessary evidence from the payees i.e. M/s. Yash Ram Films Pvt. Ltd. and M/s. Saregama India Ltd. that they have paid taxes on these receipts from the assesee and then sought for set aside of the case. The assessee should prima facie demonstrate that 4 20x5
Kortek Electronics (India) Ltd. vs. ACIT in its case the second proviso to section 40(a) (ia) is attracted before seeking set aside of the matter. As in this case the revenue has already obtained some information u/s 133(6) of the Act, we are of the opinion that this issue should be set aside to the file of the AO for fresh adjudication. The assessee shall make every effort to obtain from the payees, evidence that they have filed their return of income and paid taxes on these payments and furnish the same to the AO. In the result ground No. 4 ,5 and 6 are allowed for statistical purposes.
Last issue is part disallowance of deduction claimed u/s 80IC of the Act. This is covered by ground No. 2,7,8 and 9. The contentions of the assessee are summerized as follows :-
a) Books of accounts are rejected without pointing out any defects, which act is bad in law. b) The explanation given by the assessee that insurance charges, bank charges and interest have been correctly allocated between the unit at Greater Noida and the unit at Rudrapur has been arbitrarily rejected by the revenue authorities. c) The assessee prepared unit wise working capital requirement and that these demonstrates as follows :
“The working capital requirement at Noida as on 31.3.2008 was Rs.28.23 crores and the fixed assets stood at Rs.21.57 crores, totaling upto Rs.49.80 crores. The reserves/profits as on 31.3.2008 at Noida stood at Rs.26.57 crores and the credit facilities stood at Rs.22.17 crores, totaling upto Rs.48.74 crores. In the case of Ruderpur, the fixed assets as on 31.3.2008 were Rs.9.81 crores and the working capital requirement Rs.1.29 crores, totaling
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Kortek Electronics (India) Ltd. vs. ACIT upto Rs.11.10 crores. The reserves/profits as on 31.3.2008 at Ruderpur stood at Rs.10.43 crores. Based on the above, it is clear that each unit is independently funding its activities, hence, there is no question of allocation of any interest to the Ruderpur unit. We would also like to mention here the credit periods for various products purchased and sold by the two units-
Product Purchase from Other Purchase sale LG DVD Player 90 Days 45-60 Days 15 Days Rudrapur PCB-Noida 30 Days 30-45 Days 15 Days Set top Box - N.A. 45-60 Days 90-110 Noida days
As can be seen from-the above the borrowing for working capital is purely to meet the needs of the Noida unit aJ:1d more specifically for Set Top Boxes as the payment terms for it require external funding. This is confirmed by the fact that the Sundry Debtors/Sales ratio for Noida is 0.28 and for Rudrapur is 0.04 as on 31.3.2008. The Noida unit needs funding to fill up this gap. Hence, interest booked at Noida is specifically for that unit. On the issue of other expenses the assessee states as follows :- Regarding the other mentioned expenses, we state that the two units function independent of each other and all direct/indirect expenses pertaining to each unit are booked accordingly. There is no separate head office or corporate office of the assessee where expenses need to be bifurcated between units. The company is a private limited entity with limited -corporate overheads, hence, there is no need for bifurcation of expenses other than managing directors remuneration, his travel expenses and statutory audit fees, which have already been allocated.
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Kortek Electronics (India) Ltd. vs. ACIT d) That the profit declared in the Greater Noida Unit was 6.30% of turn over and whereas the profit declared at Rudrapur Unit which is exempt was only 1.80% of turnover and hence the allegation of diversion of profits is factually incorrect. e) That the findings of the Ld. CIT(A) that the assessee has not furnished the required details to the AO is factually incorrect. All details as asked for were furnished before the AO. f) That the AO for the assessment year 2007-08 his orders u/s 143(3) on 30.11.2009 and for the asstt. year 2009-10 vide order dated 30.3.2013 u/s 143 (3) read with section 144C(1), on similar facts and circumstances has not disturbed the allocation made by the assessee. Thus on the ground of consistency, the allocation made by the assessee has to be accepted. g) On a query from the bench, he drew our attention to the balance sheet of the assessee company which is in the paper book specifically to schedule 3 i.e secured loans and submitted that the term loan and cash credit facility are secured by way of hypothecation of the fixed assets and the current assets, of Greater Noida Unit only.
Ld. DR relied on the order of the Ld. CIT(A) as well as the AO and submitted that the assessee failed to give any details and has not properly allocated expenses between the two units resulting in inflation of profits of Rudrapur unit and deflation of profits in Greater Noida. She prayed that the order of the first appellate authority be upheld.
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Kortek Electronics (India) Ltd. vs. ACIT 11. After hearing rival submissions we find that the AO on the very same set of facts, for the assessment year 2007-08 vide order dated 30.11.2009 passed u/s 143(3) and for the assessment year 2009-10 vide order dated 30.3.2013 passed u/s 143(3) r.w.s 144 C(1) has accepted the allocation made by the assessee between these two units. The assessee has made the allocation on in question in this year on the same basis. The books of account have been rejected by the AO without pointing out any defects. Books of account cannot be rejected first because the AO is not satisfied with the defects of expenses made by the assesee between the units.
He has to point out as to what is wrong with the books of accounts. Such rejection is bad in law. Moreover in this case the assessee has made detailed submissions with facts and figures on the issue of allocation of expenses being insurance charges, bank charges and interest. These factual submissions have not been controverted by the AO or the Ld. CIT(A). The AO at page 5 records that the assessee has provided the working capital requirement of the two units. This note was rejected only of the ground that the majority of the purchases of Rudrapur Unit are made through Greater Noida unit. This is a rejection based on surmise. We find that the percentage of profit declared by Greater Noida unit are much higher than the percentage of profit declared by Rudrapur unit. The assessee has also demonstrated that the working capital required by the Rudrapur unit is much lessor that the working capital required by the Greater Noida unit. The banks which have granted loans, have done so for Greater Noida unit only. Ld. DR could not controvert this factual submissions of the Ld. Counsel for the assessee. Under these circumstances, we are of the considered opinion that the AO should have been consistent in his stand on allocation of expenditure in all the years in which the account of the assessee have 8 20x5
Kortek Electronics (India) Ltd. vs. ACIT been scrutinised. The AO should have give specific reasons as to why he does not agree with the calculations furnished by the assessee or the note on requirement of the working capital for both the units before rejecting the allocation made by the assessee. In the absence of such reasons we uphold the contentions of the assessee and set aside the order of the Ld. CIT(A) on this issue and allow these ground of appeal of the assessee.
In the result the appeal of the assessee is allowed in part.