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2011 (11) TMI 451 - HC - Income TaxDeduction u/s 80IA Tribunal held that proportionate Corporate and Head Office expenses viz salary wages and bonus also to be taken into account for computing deduction u/s 10A - Held That - The order of Tribunal that the Assessing Officer must examine the accounts either of corporate/Head Office accounting or of Silvasa Unit to ascertain essential expenditure incurred at the corporate office for running Silvasa Unit has gone wrong lending misplaced support to the concept of best judgment because of non-availability of the materials or relying upon the accounting of the assessee. We think that this is not the way to find essential expenditure actually incurred for the Silvasa Unit alone. Set aside the order of Tribunal and direct the AO to implement earlier two decisions of the Tribunal calling for the audited accounts both Silvasa Unit as well as audited accounts of corporate office and to find out the expenses incurred essentially for the Silvasa Unit the amount of such expenses if found shall be deducted from the profit earned at the Silvasa Unit if there is none in real sense obviously no other expenditure at the corporate level which is remotely or indirectly related should be taken into consideration.
Issues Involved:
1. Interpretation of Section 80 IA (5) of the Income Tax Act, 1961 regarding corporate expenses. 2. Entitlement of the assessee-company to deduction under Section 80 IA for the Silvasa Unit. Detailed Analysis: Issue 1: Interpretation of Section 80 IA (5) of the Income Tax Act, 1961 regarding corporate expenses The primary issue was whether the Tribunal erred in law by interpreting Section 80 IA (5) of the Income Tax Act, 1961, to hold that corporate expenses incurred by the assessee-company at its Registered and Head Office in Calcutta were essential expenses with a direct nexus to the running of its Silvasa unit, thereby making them deductible in computing profits and gains derived from the eligible business. The appellant argued that the corporate, administrative, and overhead expenses recorded at the Head Office had no direct nexus with the manufacturing or selling operations of the Silvasa Unit. The appellant maintained separate books of accounts for each unit, and the expenses incurred at the Head Office were for corporate functions and not directly related to the operations of any manufacturing unit, including the Silvasa Unit. The appellant cited several Supreme Court decisions to support the contention that only expenses with a direct nexus to the eligible business should be considered for deductions under Section 80 IA. The Revenue, however, argued that the meaning of "derived from" should not be restricted and that the corporate/Head Office expenses should be considered for the Silvasa Unit. The Tribunal had previously held that corporate expenditure essentially incurred for the Silvasa unit should be taken into account for the purpose of allowing benefits under Section 80 IA. The Tribunal's interpretation was accepted by both parties in earlier judgments, and the Assessing Officer was directed to examine the nature of the expenditures to determine their relevance to the Silvasa Unit. The Court found that the Tribunal's direction to consider proportionate essential expenses incurred at the corporate office for the Silvasa Unit was not followed with appropriate application of mind. The Tribunal had encouraged guesswork by the Assessing Officer, which was deemed legally impermissible. The Court set aside the Tribunal's judgment and directed the Assessing Officer to implement the earlier decisions of the Tribunal by calling for audited accounts of both the Silvasa Unit and the corporate office to ascertain the essential expenditures incurred for the Silvasa Unit. Issue 2: Entitlement of the assessee-company to deduction under Section 80 IA for the Silvasa Unit The second issue was whether the assessee-company was rightfully entitled to a deduction of Rs. 9,02,62,300/- in respect of profits and gains derived from the eligible business of the Silvasa Unit for the assessment year 2000-01. The appellant contended that the Silvasa Unit, being situated in a backward area, was eligible for deductions under Section 80 IA. The company maintained separate audited accounts for the Silvasa Unit, and the profits derived from this unit were computed based on these accounts. The appellant argued that corporate expenses incurred at the Head Office should not be allocated to the Silvasa Unit as they had no direct nexus with its operations. The Revenue supported the Tribunal's findings that the corporate/Head Office expenses should be taken into consideration for the Silvasa Unit. The Tribunal had previously ruled that the expenses related to the Silvasa Unit should be properly accounted for, and only by making entries under the head "Corporate Expenses," the assessee could not increase the profit of the Industrial Undertaking. The Court concluded that the Tribunal's earlier decisions, which had been accepted by both parties, should be implemented. The Assessing Officer was directed to examine the audited accounts of both the Silvasa Unit and the corporate office to determine the essential expenditures incurred for the Silvasa Unit. The Court emphasized that only those expenses with a direct nexus to the Silvasa Unit should be considered for deductions under Section 80 IA. Conclusion The Court set aside the Tribunal's judgment and directed the Assessing Officer to re-examine the audited accounts of both the Silvasa Unit and the corporate office to ascertain the essential expenditures incurred for the Silvasa Unit. The expenses with no direct nexus to the Silvasa Unit should not be considered for deductions under Section 80 IA. The fresh assessment was to be completed within three months from the date of communication of the judgment.
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