SVP INDUSTRIES LTD.,NEW DELHI vs. ACIT, CIRCLE- 22(2), NEW DELHI

ORDER PER CHANDRA MOHAN GARG, J.M. These appeals have been filed against the order of CIT(A)-15 & 17 New Delhi dated 21.02.2019 & 26.02.2019 for AYs 2012-13 & 2013-14.

by the assessee in for A.Y. 2012-13 are as under:-

2. That the reduction of profits and gains of the unit eligible for deduction u/s 80JJA of the Act by the proportionate indirect expenses and the depreciation of plant and machinery of the whole business in ratio of total turnover of the business and total turnover of the exempt unit as made by the CIT (Appeals) is arbitrary, not based on any principle and bad in law.

3. That without prejudice to Grounds No. 1 and 2 above, the Assessing Officer ought not to have deducted the depreciation amounting to Rs.1,12,94,053/- in relation of the turbine, ETP and the plant and machinery not connected with the eligible unit for working out the eligible profits and gains of the eligible unit claiming deduction u/s 80JJA of the Act.

4. That the disallowance of expenses of Rs. 8,21,317/- u/s 14A of the Act as made by the Assessing Officer and sustained by the CIT (Appeals) is arbitrary, unjust, bad in law and at any rate very excessive.

3. The ld. counsel submitted that the CIT (Appeals) ought not to have denied the deduction as claimed by the assessee and allowed by the Assessing Officer u/s 80JJA of the Income-tax Act, 1961 (the Act) and consequently the enhancement of income by Rs.5,29,61,675/- is arbitrary, unjust and at any rate very excessive. He further submitted that the reduction of profits and gains of the unit eligible for deduction u/s 80JJA of the Act by the proportionate indirect expenses and the depreciation of plant and machinery of the whole business in ratio of total turnover of the business and total turnover of the exempt unit as made by the CIT (Appeals) is arbitrary, not based on any principle and bad in law. It is also been contended that without prejudice to Grounds No. 1 and 2 above, the Assessing Officer ought not to have deducted the depreciation amounting to Rs.1,12,94,053/- in relation of the turbine, ETP and the plant and machinery not connected with the eligible unit for working out the eligible profits and gains of the eligible unit claiming deduction u/s 80JJA of the Act.

4. Precisely reiterating written submissions/synopsis dated 20.04.2023 of assessee, the ld. counsel submitted that the provision of Section 80JJA is contained in Chapter VIA of the Act. The provision of Section 80AB of the Act of Chapter VIA states that where any deduction is required to be allowed under any section included in this Chapter under the head "C-Deduction in respect of certain income" in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then for the purpose of computing the deduction under that section, the amount of income of that nature has to be computed in accordance with 2 & 4026/Del/2019 the provisions of this Act, shall alone be deemed to be the amount of income of that nature which is derived by the assessee and included in his gross total income. He further submitted that as per the provision of Section 80AB of the Act, the profits and gains derived from the business of processing of bio degradable waste has to be computed as per the provisions of the Act on standalone basis. He vehemently contended that the expression "derived" has been considered by the Supreme Court in the case of CIT vs. Sterling Foods in 237 ITR 579 wherein the Hon'ble Supreme Court held that there must be a direct nexus between the profits and gains and the industrial undertaking.

5. The ld. counsel placing reliance on the preposition rendered Hon’ble Apex Court in the case of Liberty India reported in 317 ITR 218 at page 233 (SC), contended that the Hon'ble Supreme Court held that such profits are to be computed as if such eligible business is only source of income. Therefore, the devices adopted to reduce or inflate the profits of the eligible business have to be rejected. The ld. counsel thus submitted that the ld. CIT(A) while allocating the expenses between distillery unit and has accepted the total turnover of eligible unit as Rs. 9,26,17,112/- and expenses claim by the assessee on press mud of Rs. 2,16,85,058/- and expenses for bio gas generation of Rs. 66,76,326/- without any dispute. The ld. counsel further contended that in the calculation at page 9 the ld. CIT(A) has taken total depreciation of Rs. 2,76,64,099/- and propionate depreciation of Rs. 58,67,599/- to estimate deduction u/s. 80JJA of the Act which is not correct as per law. The ld. counsel further submitted that the ld. CIT(A) has also apportioned direct expenses towards manufacturing, selling and administrative purposes of Rs. 8,46,12,237/- without any basis as the same were related to non eligible distillery unit and not related with the deduction eligible unit of bio compost division therefore the action of ld. CIT(A) reducing entire depreciation which was not related to the eligible unit and other expenses which were also not related to eligible unit from the amount of deduction u/s. 80JJA of the Act was perverse and thus not sustainable therefore Assessing Officer may kindly be directed to accept the claim of assessee for deduction of u/s. 80JJA of the Act by considering the actual profit derived from bio compost division and by considering the depreciation pertaining ETS unit and 3 & 4026/Del/2019 directed expenses for press mud and bio gas generation only. For above preposition the ld. counsel has relied on following judgments:- (i) Zandu Pharmaceuticals Works Ltd. vs. CIT [2013] 350 ITR 366 (Bom) (ii) M/s. Hindustan Lever Ltd. vs. DCIT Cir 1(1), Mumbai 2012 (2) TMI 571- ITAT Mumbai (iii) CIT vs Jiyajeerao Cotton Mills Ltd. IT Reference No. 600 of 1979 order dated 25th Jan 1990 (iv) National Fertilizers Ltd. [2005] 142 Taxman 5 (AAR)

6. The ld. counsel also submitted that In the case of Zandu Pharmaceuticals Works vs. CIT in 350 ITR 366, the Bombay High Court, after following the principle laid down in the judgment of Supreme Court in the case of Sterling Foods (supra) held that the principle of direct nexus between the profits and gains of an industrial undertaking is equally applicable to the expenses also and there must be a direct nexus between industrial undertaking and the expenses which are sought to be apportioned/attributable to it. The expenses which do not relate to an industrial undertaking/unit and they relate to other units or to the head office of the assessee, cannot be taken into consideration while computing the deduction under the said provisions and while doing so, the Bombay High Court has followed the reasoning of the Madras High Court in the case of Bush Boake Allen (India) Ltd. vs. ACIT in 273 ITR 152 (Mad) and then thereafter the Bombay High Court had excluded the expenses relating to R&D units of the assessee while working out the eligible profits u/s. 80HH/80-I of the Act.

7. He further submitted that In the case of Hindustan Lever Ltd. vs. DCIT in 2012 (2) TMI 571 (Mumbai Tribunal), the said company had claimed the deduction u/s 80HH and 80-I of the Act in respect of the eligible units on a standalone basis. However, the Assessing Officer restricted the deduction by allocating the common expenses including the Head Office expenses such as expenses of Chairman, Company Secretary, Public Relations Department, salary and wages and staff welfare expenses relating to Chief Controller Finance against the profits from the respective undertakings. The Mumbai Bench of the Tribunal, after following its own judgment in the case of the said assessee & 4026/Del/2019 itself, directed the Assessing Officer to exclude such expenditure from allocation while computing the profits of the eligible undertakings. On further appeal, the Bombay High Court upheld the order of the ITAT in CIT vs. Hindustan Lever Ltd. in 394 ITR 73.

8. Furthermore, pressing into service authority of Advance Ruling, Delhi in the case of National Fertilizers Ltd. in [2005] 142 Taxman 5 held that while computing the profit and gain derived from industrial undertaking eligible for deduction u/s. 80-I of the Act, the expenses incurred in corporate office as well as marketing divisions were not to be allocated to the industrial undertaking. The ld. counsel concluded his arguments by submitting that as per facts and circumstances of the case the ld. CIT(A) was not correct and justified in reducing entire amount of depreciation including proportionate depreciation and proportionate direct expenses towards manufacturing selling and administrative which are connected with the non eligible distillery unit and they have no connection with the eligible unit for deduction u/s. 80JJA of the Act hence the Assessing Officer may kindly be directed to allow deduction to the assessee accordingly.

9. Replying to the above supporting the orders of the authorities below the ld. Senior DR submitted that in para 4.7 the ld. CIT(A) has recorded sustainable findings wherein we have held that no separate books of accounts have been maintained by the assessee for eligible and non eligible distillery unit, the assessee failed to substantiate that only one employee/supervisor was appointed to look after the functioning for eligible ETP unit and the loans appearing in the books of accounts relates to non eligible distillery unit and not to eligible ETP unit. Therefore the ld. Senior DR submitted that in such a situation the ld. CIT(A) was right in allocating depreciation and other direct expenses such as administrative, manufacturing and selling between eligible and non eligible unit and hence appeal of assessee may kindly be dismissed.

10. Placing rejoinder to the above the ld. counsel submitted that before the ld. CIT(A) the assessee submitted detailed submissions vide dated 18.08.2015 to substantiate its claim of deduction u/s. 80JJA of the Act wherein the assessee clearly established that the only depreciation element pertaining to eligible ETP unit was to be reduced from the deduction claimed by the assessee and other expenses related to non & 4026/Del/2019 eligible distillery unit are not required to be considered while calculating the quantum of deduction. The ld. counsel submitted that the assessee before the ld. CIT(A) also submitted working claim of deduction u/s. 80JJA of the Act which is in accordance with the scheme of said provision and preposition rendered by various courts including Hon’ble Supreme Court and Hon’ble High Court.

11. On careful consideration of above submissions, first of all, we note that the authorities below have not disputed that the total turnover for eligible unit during FY 2011-12 was Rs. 9,26,17,112/- and the assessee incurred cost of press mud consume at Rs. 2,16,85,058/- and expenses on bio gas generation was Rs. 66,76,362/-. The dispute and controversy arose when the Assessing Officer reduced the deduction by the amount of depreciation of Rs. 1,12,94,053/- and calculated the amount eligible for deduction u/s. 80JJA at Rs. 5,29,61,675/-. The aggrieved assessee carried the matter before ld. CIT(A) who enhanced the reduction of depreciation to Rs. 2,76,64,099/- and proportionate depreciation of Rs. 58,67,599/-. The ld. CIT(A) also reduced the claim of deduction by reducing the proportionate direct expenses such as administrative, manufacturing and selling amounting to Rs. 8,46,12,237/- by finally calculating the net profit (-) eligible for deduction under section 80JJA of the Act at Rs.( 2,62,24,108/-).

12. On careful consideration of above submissions first of all, we note that the Hon’ble Supreme Court in the case of CIT vs Sterling Food (supra) held that there must by a direct nexus between the profits and gains and the activities of eligible undertaking in the present case there is no dispute regarding turnover claimed by the assessee. In the case of Zandu Pharaceutical Works vs. CIT (supra) after following the proposition of Hon’ble Supreme Court (supra) held that the principal of direct nexus between the profit and gains of eligible industrial undertaking is equally applicable to the expenses also and there must be direct nexus between the eligible industrial undertaking and the expenses which were sought to be apportioned by the Assessing Officer. In this judgment the Hon’ble Bombay High Court also followed the preposition rendered by Hon’ble High Court of Madras in the case of Bush Boake Allen (India) Ltd. vs ACIT (supra) and excluded the expenses relating to R&D unit while working eligible profit and deduction u/s. 80HH/80I of the Act. 6 & 4026/Del/2019

13. In the present appeal the Assessing Officer rightly deducted the depreciation amounting to Rs. 1,12,94,053/- as the amount of depreciation related to eligible ETP unit and findings recorded in this regard are upheld and the amount of depreciation and proportionate depreciation reduced by the ld. CIT(A) is restricted to the said deduction of depreciation to the extent of Rs. 1,12,94,053/- and contention of ld. counsel against action of Assessing Officer reducing depreciation amount from the claim of deduction is dismissed. So far as other expenses like administrative manufacturing and selling are concerned the ld. CIT(A) could not establish any direct nexus or relation with the eligible ETP unit and the audited accounts of assessee clearly shows that the same are related to eligible distillery unit therefore no apportionment or reduction was required to be made in this regard and the action of the ld. CIT(A) allocating such unrelated expenses with the eligible unit is not correct and justified. Accordingly, findings of Assessing Officer are upheld and action of ld. CIT(A) further reducing claim is set aside. Consequently we hold that the amount calculated by the Assessing Officer eligible for deduction u/s. 80JJA of the Act amounting to Rs. 5,29,61,675/- is quite correct and as per mandate of the law and hence, the Assessing Officer is directed to allow the deduction accordingly. Thus, ground nos. 1 to 3 of assessee are partly allowed in the manner as indicated above.

14. Apropos ground no. 4 the ld. counsel submitted that the assessee does not want to press the same therefore the same is dismissed as withdrawn. AY 2013-14

15. Since facts and circumstances of AY 2013-14 are quite identical and similar with AY 2012-13 on identically worded ground no. 1 to 3 of assessee therefore our conclusion for AY 2012-13 would apply mutatis mutandis to the similar grounds of assessee for AY 2013-14. Consequently, the amount of eligible for deduction u/s. 80JJA of the Act amounting to Rs. 5,23,02,007/- as calculated by the Assessing Officer for said assessment year is hereby uphold and the Assessing Officer is directed to allow the deduction accordingly. Thus, ground nos. 1 to 3 of assessee are partly allowed in the manner as indicated above.