2013 (2) TMI 349 - AT - Income Tax

Deduction allowable u/s 10B - assessee is engaged in the activity of trading as well as manufacturing of export of dehydrated onions granted approval of 100% EOU by the Development Commissioner, Kandla Free Trade Zone - Held that - As in the assessment year under consideration purchase and sale of dehydrated onions was of Rs.11,19,19,308/-. Out of the said total purchases of dehydrated onions of Rs.11,19,19,308/-, the assessee purchased from its group concern dehydrated onions of Rs.10,22,63,149/-. As observed during the assessment proceedings, the AO asked the assessee to furnish explanation that the material being purchased from its group concerns was at market rates but the assessee could not furnish any proof regarding the comparable market rates. There is also no dispute to the fact that the trading activity constituted 58.20% of total sales. The assessee worked out from the said trading activity negative profit (Rs.59,97,840/-). The assessee has shown the net profit from both the activities i.e. trading and manufacturing of Rs.1,46,32,804/-. The AO has stated that if the negative profit as calculated by the assessee on exports of onions which is a trading activity, the net profit on the sale of Rs.9,96,48,019/- that is from manufacturing activity actually performed by the assessee comes to Rs.2,06,30,644/- (net profit of Rs.1,46,42,804 negative profit of Rs.59,97,840). Thus agreeing with the observation of the AO that the said calculation as given by the assessee has no merit considering that the net profit as per tax audit report for the entire business activity is 6.14% and on the other hand, the profit from actual manufacturing activity will be 20.70%. The assessee has not disputed the fact that the assessee is not maintaining separate books of account and has allocated some of the expenses to the trading activity which the CIT(Appeals) has held that the same should not be allocated to trading activity and be considered for manufacturing activity. Therefore, finding substance in the contention of the DR that when some of the expenses which should not have been allocated to trading and are allocated to manufacturing activity, the profit from manufacturing activity will reduce. There are also certain common expenses like establishment etc. which have not been considered by the CIT(Appeals) for allocation to the manufacturing activity. Considering the facts of the case, while computing profits & gains of eligible business, all the direct as well as indirect expenses have to be considered for computation of profits & gains of eligible activity to claim deduction u/s 10B. If excessive expenditure is considered in respect of activity which is not eligible for deduction u/s 10B, it will be unfair as profits and gains of an activity which is not eligible for deduction will be understated and on the other hand, the profits and gains of eligible activity will be inflated to get more deduction u/s 10B. Thus confirm the action of the AO in working out the deduction allowable to the assessee u/s 10B by reversing the order of CIT(Appeals) - in favour of revenue.

Summary

Issues Involved:
1. Eligibility for exemption under Section 10B of the Income Tax Act.
2. Determination of profit from trading activity versus manufacturing activity.
3. Allocation of expenses between trading and manufacturing activities.
4. Calculation of allowable deduction under Section 10B.
5. Set off of brought forward business loss and unabsorbed depreciation.

Detailed Analysis:

1. Eligibility for Exemption under Section 10B of the Income Tax Act:
The primary issue was whether the assessee's trading activities were eligible for exemption under Section 10B. The assessee, a partnership firm engaged in manufacturing and exporting dehydrated onions, claimed exemption under Section 10B. The Assessing Officer (AO) and the learned Commissioner of Income Tax (Appeals) [CIT(A)] agreed that the purchase and sale of dehydrated onions constituted trading activity, which is not eligible for exemption under Section 10B.

2. Determination of Profit from Trading Activity versus Manufacturing Activity:
The AO observed that the assessee purchased finished dehydrated onions worth Rs.11,19,19,308 and exported them, which was considered a trading activity. The AO determined that this trading activity constituted 58.2% of total sales and calculated the net profit from trading activity at Rs.85,16,292, which did not qualify for exemption under Section 10B. The CIT(A) also agreed that trading activities were not eligible for exemption but recalculated the profits by excluding certain expenses allocated to trading activity by the assessee.

3. Allocation of Expenses between Trading and Manufacturing Activities:
The AO and CIT(A) disagreed on the allocation of expenses. The AO noted that the assessee allocated various expenses to trading activity, resulting in a negative profit of Rs.59,97,840. The CIT(A) found that some expenses were wrongly allocated to trading activity and should be attributed to manufacturing. The CIT(A) adjusted the expenses, reducing the total loss from trading activity and recalculated the deduction under Section 10B.

4. Calculation of Allowable Deduction under Section 10B:
The AO calculated the exemption allowable under Section 10B at Rs.55,23,930, while the CIT(A) recalculated it at Rs.1,35,45,075. The CIT(A) disagreed with the AO's method of attributing expenses and recalculated the deduction by considering only 10% of certain common expenses for trading activity. However, the Tribunal upheld the AO's method, stating that in the absence of separate books of accounts, the percentage of total sales method was fair and reasonable.

5. Set off of Brought Forward Business Loss and Unabsorbed Depreciation:
The Tribunal agreed with the CIT(A) that the assessee was entitled to set off brought forward business loss and unabsorbed depreciation from the assessment year 2004-05. This acknowledgment was crucial in determining the final allowable deduction under Section 10B.

Conclusion:
The Tribunal concluded that the AO's method of calculating the net profit for trading activity, which constituted 58.2% of total sales, was appropriate. The net profit from trading activity at Rs.85,16,292 did not qualify for exemption under Section 10B. The Tribunal reversed the CIT(A)'s order and confirmed the AO's calculation of the allowable deduction under Section 10B, ensuring that all direct and indirect expenses were considered in computing the profits and gains of eligible business. The appeal by the Department was allowed, and the AO's method was upheld as the fair and reasonable approach.