2005 (2) TMI 748 - AT - Income Tax

Deductions u/s 80-IA and 80HHC - Profits and gains from infrastructure undertakings - Unabsorbed depreciation - comparable market price - Duty drawback - Inclusion of sales tax in total turnover - Lease Buyback - freight outward in closing stock - HELD THAT - Accordingly the deeming provision of section 80-IA(7) for treating the eligible industrial undertaking as the only source of income of assessee for computation of deduction u/s 80-IA(5) is applicable to assessment year 1996-97 and subsequent years being succeeding to the initial assessment year which is assessment year 1995-96. In that view of the matter the depreciation of Rs. 3.66 crores allowed in respect of Kurkumbh unit for assessment year 1994-95 could well be set off against income/profit of assessee from other units in that year (assessment year 1994-95) as the aforesaid deeming provision of section 80-IA(7) was not applicable in assessment year 1994-95; and so the same was rightly set off in assessment year 1994-95 and in turn the said notional unabsorbed depreciation amount of Rs. 3.66 crores could not be carried forward in assessment year 1995-96 so as to deduct the same from the eligible profit of Kurkumbh unit in assessment year 1995-96 for the purpose of computing deduction under section 80-IA. Thus we find no fault with the impugned order of ld. CIT(A) in directing the Assessing Officer not to reduce the amount of Rs. 3.66 crores as unabsorbed depreciation from the eligible profits of Kurkumbh unit while computing deduction u/s 80-IA for assessment year 1995-96. We therefore decline to interfere with the same on this count. Following the judgment of the Hon ble Apex Court of India in the case of Tata Iron Steel Co. Ltd. v. State of Bihar 1962 (9) TMI 49 - SUPREME COURT we are of the considered view that whatever principle the assessee may have adopted in the cost audit records for value of captive or internal transfers such transfers will have to be assigned a commercial value in terms of sub-section (9) of section 80-IA. We agree with the view has been held by the ld. CIT(A) that is the more appropriate market price will be the domestic price of the same goods actually purchased by the assessee in preference to the selling price of a very small quantity by the other undertaking of the assessee. It is necessary to bear in mind that sub-section (9) of section 80-IA does not at all mandate the market price has to be necessarily the selling price of goods actually sold by the assessee. On the other hand the requirement is that the goods should be valued as per the market price. If the actual selling price realized in a given factual situation is demonstrated by the assessee as not the appropriate market price then such a selling price can be discarded in favour of more appropriate and representative market price. Thus we are of the considered view that the findings/conclusions drawn by ld. CIT(A) are justified. Income from other sources should be excluded from eligible profit for the purpose of computing deduction u/s 80-IA - From the perusal of ld. CIT(A) s impugned order it is clear that whatever alternative method is applied there is enough evidence on the record to signify that the profits of both the undertakings on the external sales have a higher rating compared to the Global Profit earned by the assessee. As such we are of the view that the adoption of the formula of global profit by Assessing Officer is not sustainable in view of clear findings of ld. CIT(A) based on evidence on record; and that the manner in which ld. CIT(A) has adopted transfer pricing policy is in line with the intent and purpose of section 80-IA(9). The approach of ld. CIT(A) in averaging the sales price and application of such average to the total transfers during the year should understandably be acceptable. If the market price on each day of transfer is not ascertainable then the principle of averaging will meet the test of the proviso to section 80-IA(9) also. Besides in the case of wide fluctuations between two extremes the adoption of the weighted average formula will avoid any distortion in the depiction of reasonable profits. The principle of averaging will result in a reasonable depiction of a representative market price which can be applied to the totality of transfers during the year. We therefore find no fault with the decision of CIT(A) on the issue to the extended not disputed by the assessee. Duty drawback - Since the method of computation of eligible profit for the purpose of deduction u/s 80-IA is the same in all the three years in respect of Kurkumbh and Patalganga II the eligible units as also the ineligible/other units; and ld. CIT(A) has accepted the method of computation of eligible profit in assessment year 1995-96 and which we have upheld we do not find any valid reason for CIT(A) to differ in subsequent years 1996-97 and 1997-98. Therefore the order of CIT(A) is modified in the manner that we direct the Assessing Officer to allow deduction u/s 80-IA in accordance with the computation submitted by assessee except with regard to ground No. 2( c ) in assessment year 1996-97 and ground Nos. 1( c ) and 1( d ) in assessment year 1997-98 which were not pressed and subject to verification of OS income as directed by us above. Thus ground No. 1 in revenue s appeal for assessment years 1996-97 and 1997-98 comprised in issue No. 1 tabulated above together with ground Nos. II and I in assessee s appeals for assessment years 1996-97 and 1997-98 respectively comprised in issue No. 2 in assessee s appeals stand disposed of by this decision. In the result assessee s appeals are allowed in part as indicated above.

Summary

Issues Involved:

1. Deduction u/s 80-IA
2. Lease & Buy Back
3. Disallowance of Expenditure on Repairs as Capital Expenditure
4. Unutilized Modvat Credit in Closing Stock
5. Entertainment Expenses
6. Disallowance u/r 6D
7. Taxability of Interest on Right Issue Proceeds
8. Foreign Travel Expenses
9. Inclusion of Sales Tax in Total Turnover for Deduction u/s 80HHC
10. Inclusion of Freight Outward in Closing Stock

Summary:

Issue 1: Deduction u/s 80-IA

The Tribunal addressed whether unabsorbed depreciation from AY 1994-95 could be set off before allowing deduction u/s 80-IA for AY 1995-96. The Tribunal upheld the CIT(A)'s decision that AY 1995-96 was the initial assessment year for the Kurkumbh unit, so the depreciation from AY 1994-95 could not be carried forward and set off. The Tribunal also upheld the CIT(A)'s finding that the Global Profit method adopted by the AO was erroneous and that the market prices used by the assessee for intra-unit transfers were appropriate. The Tribunal directed the AO to verify the nexus between other sources of income and the industrial undertaking before excluding them from eligible profit for deduction u/s 80-IA.

Issue 2: Lease & Buy Back

The Tribunal found the issue of Lease and Buy Back transactions academic and infructuous as the assessee was already in appeal in the second round on this issue.

Issue 3: Disallowance of Expenditure on Repairs as Capital Expenditure

The Tribunal upheld the CIT(A)'s decision that the expenditure on repairs amounting to Rs. 57,82,509 was of a revenue nature and fell within the purview of section 37.

Issue 4: Unutilized Modvat Credit in Closing Stock

The Tribunal upheld the CIT(A)'s decision to delete the addition of unutilized Modvat credit, directing the AO to give effect to the opening balance as well as the closing stock.

Issue 5: Entertainment Expenses

The Tribunal upheld the CIT(A)'s decision to delete the disallowance of expenses on gift articles not bearing the company's logo and on dry fruits, following the precedent set in earlier years.

Issue 6: Disallowance u/r 6D

The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 3.5 lakhs made by the AO under rule 6D.

Issue 7: Taxability of Interest on Right Issue Proceeds

The Tribunal held that the interest on right issue proceeds was assessable in AY 1997-98, not in AY 1996-97, following the decision in CIT v. Henkel SPIC (India) Ltd.

Issue 8: Foreign Travel Expenses

The Tribunal followed its earlier decision to reduce the disallowance of foreign travel expenses of the Chairman and Managing Director from 25% to 10% and of all other persons from 10% to 5%.

Issue 9: Inclusion of Sales Tax in Total Turnover for Deduction u/s 80HHC

The Tribunal decided this issue in favor of the assessee, following the judgment in CIT v. Sudarshan Chemicals Industries Ltd.

Issue 10: Inclusion of Freight Outward in Closing Stock

The Tribunal decided this issue in favor of the assessee, following its decision in the assessee's case for AY 1995-96.