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2014 (9) TMI 604 - AT - Income TaxAllocation of certain expenses Allocation of interest and finance charges - Advertisement and Publicity expenses Held that - When the company s name and products are being advertised or published, or the expenditure is for the purpose of the company as a whole, as for publishing financial results; in the register of Indian manufacturers, ITEZ, etc., there is no rationale for segregating the same unit wise - the company, toward this, apart from making a bald statement that the product/s advertised is not manufactured at the 80-IC unit, has made no specific case on the said lines at any stage, other than the expenditure on placement, which we have clarified to be unit specific, the balance impugned expenditure would stand to be allocated on some reasonable basis, as turnover . Legal and professional charges Held that - The nature of the expenditure classified as others being not specified, though listed under different units, it is not possible for us to express any opinion in its respect, so that the allocability of the same, as in the case of other expenses listed above, would stand to be determined upon stating their nature and purpose - The matter require restoration for the purpose of verification of indeterminate expenditure, and allocation, as appropriate, i.e., either to the specific unit or on the basis of turnover, to the file of the A.O. Audit Expenses Held that - The assessee operates through different production units, the common expenditure at the entity or the corporate level is necessarily required to be allocated to the different operating units to determine the income attributable thereto, on some reasonable basis - The turnover stands regularly followed, across the length and breadth of the country, as a reasonable basis for allocation among different functional units relying upon Consolidated Coffee Ltd. Versus State Of Karnataka 2000 (11) TMI 136 - SUPREME Court - The assessee has also not suggested any more appropriate parameter for allocating the common expenditure, incurred for the purpose of more than one unit or all the units or as a company as whole, so that there was no reason not to uphold the allocation based on this parameter, representing the volume of activity at a particular unit. Interest attributable to capital work-in-progress disallowed Held that - The assessee s case is unimpeachable in-as-much as, rather than witnessing an outlay on CWIP, there has been, on the contrary, a decline at 31.03.2009, the relevant year-end, the addition for the year - the capital and reserves have also witnessed an increase during the current year Decided against revenue. Adjustment u/s 145A Held that - Section 145A being mandatory in its application - irrespective and notwithstanding the method of accounting being regularly followed by the assessee in computing the business income assessable to tax u/s.28, section 145A, to the extent applicable, would have to be given effect to the order of the CIT(A) is upheld Decided against revenue. Prior paid expenses disallowed Held that - There is no correlation whatsoever between the income booked by the assessee, which stands to be assessed u/s.28 r/w s.5, and the expenditure, similarly claimed - No material or evidence in this respect stands led by the assessee at any stage, there is no basis to hold that the expenses had crystallized during the current year - there is nothing to evidence even the delayed receipt of claim by the creditor, i.e., during the current year, which though would be of little moment in-as-much as the expenditure would stand incurred only on the basis of the underlying contracts and, in any case, could be provided for on the basis of the best assessment as on the date of finalization of the accounts for the relevant year Decided in favour of revenue.
List of Issues:
1. Allocation of expenses to the Dehradun Unit for deduction under Section 80-IC of the Income Tax Act. 2. Allocation of interest and finance charges. 3. Denial of deduction under Section 80-IC on interest income of the Dehradun unit. 4. Deletion of disallowance of interest attributable to capital work-in-progress (CWIP). 5. Depreciation allowance on UPS. 6. Adjustment under Section 145A of the Act. 7. Disallowance of prior period expenses. Issue-wise Detailed Analysis: 1. Allocation of Expenses to the Dehradun Unit for Deduction under Section 80-IC: The first issue is the allocation of advertisement, legal and professional, and audit expenses to the Dehradun Unit, which is eligible for deduction under Section 80-IC of the Income Tax Act. The assessee allocated a minimal amount to the Dehradun unit, while the Assessing Officer (A.O.) allocated expenses based on the turnover of different units. The CIT(A) upheld the allocation of advertisement expenses among all units and directed verification of legal and professional expenses specific to the Mumbai unit. The tribunal agreed that the advertisement expenses related to the company as a whole should be allocated based on turnover. Legal and professional charges specific to a unit should not be allocated, but entity-level expenses should be. Audit expenses, being for the company, were to be allocated among all units. 2. Allocation of Interest and Finance Charges: The allocation of interest and finance charges was contested, with the assessee and A.O. adopting different methods. The tribunal found the assessee's method of allocation based on net current assets valid for interest expenditure. However, bank charges related to the Mumbai unit should not be allocated to the Dehradun unit. The matter was restored to the A.O. for verification and decision on merits. 3. Denial of Deduction under Section 80-IC on Interest Income of the Dehradun Unit: The assessee's ground for deduction under Section 80-IC on interest income was dismissed as not maintainable because the CIT(A) did not adjudicate it. The assessee was advised to take permissible recourse under law. 4. Deletion of Disallowance of Interest Attributable to Capital Work-in-Progress (CWIP): The deletion of disallowance of interest attributable to CWIP was upheld by the CIT(A) based on the tribunal's order for the previous year. The tribunal found no merit in the Revenue's appeal, noting that the assessee had sufficient capital and reserves to fund CWIP and there was a decline in CWIP during the year. 5. Depreciation Allowance on UPS: The tribunal upheld the CIT(A)'s decision to allow depreciation on UPS at 60%, following the Delhi High Court's decision in CIT vs. Orient Ceramics & Industries Ltd. The tribunal saw no reason to disturb the decision as no contrary decision was presented. 6. Adjustment under Section 145A of the Act: The tribunal confirmed the CIT(A)'s deletion of the adjustment under Section 145A, noting that the assessee consistently followed a scientific method in valuing stocks. The adjustment resulted in a decrease in profit, which was in line with Section 145A requirements. 7. Disallowance of Prior Period Expenses: The tribunal found no substance in the assessee's claim for prior period expenses, noting that the assessee maintained accounts on a mercantile basis, and no evidence was provided to show that the expenses crystallized during the current year. The tribunal upheld the Revenue's disallowance of prior period expenses. Conclusion: The assessee's appeal was partly allowed and partly allowed for statistical purposes, while the Revenue's appeal was partly allowed. The tribunal's order emphasized the need for proper allocation of expenses, adherence to accounting principles, and provided specific directions for verification and decision on merits by the A.O.
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