2011 (8) TMI 307 - HC - Income Tax

Deduction u/s 80I - Apportionment of expenses - The assessee is a Public Limited Company engaged in the manufacture of pharmaceuticals and packaged fast foods - The assessee has three manufacturing units in Madras Hyderabad and Bangalore - In the statement of income filed the assessee claimed deduction of a sum of Rs.19, 33, 104/- under Section 80-I of the Income Tax Act 1961 relatable to the Hyderabad Unit - Held that - merger had taken place as early as in the year 1988 - It is not as though the Hyderabad Unit s Profit and Loss Account have not come for consideration before the assessee company in the matter of allocation of the expenditure - On the admitted fact that the income and expenditure of the three Units are considered at the Corporate Office with the apportionment thus fixed at 38.77% on the basis of the total turnover to the turnover relatable to the Hyderabad Unit the expenditure apportioned thus was rightly made by the Assessing Officer as confirmed by the Commissioner of Income Tax (Appeals) - Therefore set aside the order of the Tribunal in remanding the case to the Assessing Officer for re-working of the apportionment.

Summary

Issues involved:
1. Whether the Tribunal was right in directing the assessing officer to re-compute the business profits of the Hyderabad Unit using the formula laid down by the Delhi Tribunal in the case of Food Specialities Ltd.?

Issue-wise detailed analysis:

1. Tribunal's Direction to Re-compute Business Profits:

The case revolves around the computation of business profits for the Hyderabad Unit of a Public Limited Company engaged in the manufacture of pharmaceuticals and packaged fast foods. The company claimed a deduction under Section 80-I of the Income Tax Act, 1961, for the Hyderabad Unit. The Assessing Officer (AO) noted discrepancies in the expenses reported for the Hyderabad Unit, particularly in advertisement, sales promotion, and traveling expenses. The AO argued that the method used by the company resulted in an artificially high profit for the Hyderabad Unit, leading to a higher deduction claim under Section 80-I.

The AO adopted a formula for allocating expenses based on the percentage of the Hyderabad Unit's turnover to the total turnover of the Pharmaceutical Divisions. This allocation method was challenged by the assessee, who argued that the Hyderabad Unit had its own marketing setup and that the expenses should not be allocated based on turnover alone. The Commissioner of Income Tax (Appeals) upheld the AO's method, stating that the expenses incurred by the Corporate Office for the Hyderabad Unit should be apportioned to ascertain its true profits.

The Income Tax Appellate Tribunal (ITAT) considered the case and, while confirming the need for apportionment of expenses, remanded the matter back to the AO to determine the actual expenditure for apportionment. The ITAT's decision was based on a precedent set by the Delhi Tribunal in the case of Food Specialities Ltd. Vs. ACIT, which involved apportioning increased overhead expenses between an old unit and a new unit based on turnover.

The Revenue challenged the ITAT's decision, arguing that the Hyderabad Unit's expenses should be allocated based on the percentage of turnover, as no specific evidence was provided by the assessee to support a different method. The High Court examined the facts and concluded that the AO's method of apportioning expenses based on turnover was appropriate. The Court noted that the merger of the Hyderabad Unit with the assessee company in 1988 meant that the expenses should be pooled and accounted for at the Corporate Office.

The High Court found no illegality or arbitrariness in the AO's formula, which allocated 38.77% of the total traveling expenses and field staff costs to the Hyderabad Unit based on its turnover percentage. The Court rejected the assessee's claim to use pre-merger expenses as a basis for apportionment, as it lacked supporting evidence. The Court also distinguished the present case from the Delhi Tribunal's decision in Food Specialities Ltd., stating that the merger had occurred years earlier, and the allocation method used by the AO was more appropriate.

In conclusion, the High Court set aside the ITAT's order and restored the AO's method of apportioning expenses based on turnover, thereby allowing the Revenue's appeal. The Court emphasized the need for a consistent and evidence-based approach to expense allocation for the purpose of computing deductions under Section 80-I of the Income Tax Act, 1961.