2010 (2) TMI 911 - AT - Income Tax

Deduction u/s.80-IB(10) - assessee s appeal is against not allowing deduction u/s.80-IB in respect of profits of Unit-I though the same was allowed by the A.O. at the rate of 25%. The Revenue is aggrieved against the decision of the learned CIT(A) that Unit-II was a new unit and not an extension of Unit-I and hence 100% deduction be allowed in respect of profit of Unit-II - Assessing Officer observed that the assessee failed to produce Attendance register. He opined that there were inflated numbers of employees. He, therefore, disallowed 20% of the expenses claimed by the assessee under the head Salary and wages Held that - In the absence of any specific finding given by the A.O. in respect of salary paid to employees of Unit-I, the learned CIT(A) held that no addition could be made, Assessing Officer could not have made any addition without brining on record any material to show that the entries in this register were not correct, no disallowance is permissible Bifurcation of Administrative, Selling and Financial expenses on the basis of turnover - assessee has no objection on the manufacturing expenses being apportioned on the basis of goods manufactured. The learned CIT(A) directed to apportion these three types of expenses on the basis of turnover of both the Units Held that - Selling expenses have direct relation with the turnover, apportionment of selling expenses on the basis of the amount of turnover in both the Units is appropriate. The financial expenses represent the cost of money borrowed for use in business. Raw material for a product in Unit-I may cost Rs.100 while in the other unit may cost Rs.1000. Bifurcation of the expenses on the basis of quantity produced would obviously lead to absurd situation because the number of units manufactured with different values cannot be the basis of apportioning the expenses, apportionment of Financial expenses needs to be done on the basis of value of goods manufactured in both the Units. Administrative expenses which included rent, travelling and telephone expenses etc. contention of the ld AR is not acceptable for apportioning such expenses on the basis of number of units manufactured. There is no connection of such expenses with the quantity of goods manufactured. such expenses need to be apportioned on the basis of value of turnover in both the Units. order accordingly.

Issues Involved:

1. Whether Unit-II is an extension of Unit-I or a separate manufacturing unit.
2. Apportionment of Administrative, Selling, and Financial expenses between Unit-I and Unit-II.
3. Deduction under Section 80-IB for Unit-I and Unit-II.
4. Disallowance of salary and wages in respect of Unit-II.

Issue-wise Detailed Analysis:

1. Whether Unit-II is an extension of Unit-I or a separate manufacturing unit:

The primary issue was whether Unit-II constituted a new manufacturing unit or was merely an extension of Unit-I. The Assessing Officer (AO) argued that Unit-II was an extension of Unit-I, based on common production registers and other discrepancies. However, the assessee contended that Unit-II was a distinct unit with new machinery and separate location (Gala 8, Building No.2), unlike Unit-I located at Gala 6 and 7. The Commissioner of Income-tax (Appeals) [CIT(A)] supported the assessee's claim, noting separate issue and purchase registers for both units and new licenses for Unit-II. The Tribunal upheld the CIT(A)'s view, confirming that Unit-II was a separate and distinct unit from Unit-I.

2. Apportionment of Administrative, Selling, and Financial expenses between Unit-I and Unit-II:

The AO found discrepancies in the expenses claimed by the assessee, suggesting that expenses of Unit-II were shifted to Unit-I to inflate Unit-II's profits. The CIT(A) accepted the AO's view in principle but directed the apportionment of common expenses differently. The Tribunal agreed with the CIT(A) that Administrative, Selling, and Financial expenses should be apportioned based on turnover rather than the number of units produced due to differing values of products manufactured in each unit. Selling expenses were directly related to turnover, while Financial expenses were better apportioned based on the value of goods manufactured. Administrative expenses, including rent, travel, and telephone, were also to be apportioned based on turnover.

3. Deduction under Section 80-IB for Unit-I and Unit-II:

The assessee claimed 100% deduction under Section 80-IB for Unit-II, while the AO allowed only 25% deduction, treating Unit-II as an extension of Unit-I. The CIT(A) and the Tribunal upheld the assessee's claim that Unit-II was a new unit eligible for 100% deduction. However, the Tribunal directed the AO to grant deduction at the eligible rate for Unit-I, as it was still entitled to deduction for the remaining period.

4. Disallowance of salary and wages in respect of Unit-II:

The AO disallowed 20% of the salary and wages claimed for Unit-II due to discrepancies in the Attendance register. The CIT(A) reduced the disallowance to the wages of two employees who did not sign the register. The Tribunal upheld the CIT(A)'s direction, finding it reasonable, and noted that no adverse findings were recorded for Unit-I employees, thus no disallowance was permissible.

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes, directing appropriate apportionment of expenses and granting eligible deductions under Section 80-IB for both units. The order was pronounced on 25.2.2010.

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