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2015 (3) TMI 270 - AT - Income TaxEligibility for deduction u/s 80IC - issue of substantial expansion at Parwanoo Unit was decided by the AO against the assessee by holding that the assessee has failed to substantiate that the plant and machinery at Parwanoo unit as on 1.4.2005 was only of ₹ 34,63,220 out of total plant and machinery - CIT(A) allowed the claim - Held that - We are in agreement with the conclusion of the CIT(A) that this amount of increase of plant and machinery during the year under consideration viz. ₹ 18,35,423 is more than 50% of the opening value of the plant and machinery for Parwanoo i.e. ₹ 34,63,220 (as on 1.4.2005) then the claim of expansion of Parwanoo unit was rightly held in favour of the assessee. We also note that the Director of Industries, H.P. also acknowledged the substantial expansion of Parwanoo unit as on 24.11.2005 by the certificate dated 8.2.2006 which has not been controverted by the AO which clarifies that after substantial expansion as on 24.11.2005, the investment in plant and machinery was increased from ₹ 33.32 lakh to ₹ 52.36 lakh during the year under consideration.CIT(A) dealt the issue of substantial expansion as per letter and spirit of the provisions of the Act and the percentage of revenue of total turnover cannot be the sole basis for deciding the claim of substantial expansion of the assessee without appreciating the other surrounding circumstances and totality of the facts. - Decided in favour of assessee. Apportionment of expenses on the basis of sales ratio of Parwanoo and non-Parwanoo unit - Books of accounts rejected for invoking provisions of section 80IC(6) read with section 80IA(10) - Held that - Although we note that deduction u/s 80IC was claimed for the first time by the assessee company during the year under consideration i.e. AY 2006-07 but as the scheme of statutory provisions of the Act is itself clear on this issue that on the issue of allocation of expenses with reference to computation of eligible profits for determination of the amount of deduction u/s either 80IB or 80IC is concerned, provisions of section 80IA(5), (7) to (12) of the Act shall apply. In this situation, it is also relevant to note that the conclusion of the Tribunal in assessee s own case for AY 2001-02 in which has been upheld by the Hon ble High Court, wherein approving apportionment of expenses placed by assessee has been approved by holding that the revenue has not pointed out any item which has been incurred for Parwanoo business and charged to non-Parwanoo business so as to increase the profit of the Parwanoo business which may result in higher deduction u/s 80IB of the Act. Thus the CIT(A) granted relief for the assessee on legal and cogent reasons - Decided in favour of assessee. Discount offered to the employees under ESOP Scheme disallowed - Held that - expenditure in question is wholly for the purpose of business of the assessee and the fact that the parent company is also benefitted by a reason for motivated work benefits would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 137(1) of the Act. - Decided in favour of assessee.
Issues Involved:
1. Substantial expansion of the Parwanoo unit and eligibility for deduction under Section 80IC. 2. Allocation of common expenses between eligible and non-eligible businesses. 3. Treatment of expenditure incurred towards Internet bandwidth testing charges and site survey and commissioning charges. 4. Disallowance of discount offered to employees under ESOP Scheme as notional loss. 5. Charging of interest under Sections 234B/234D of the Income Tax Act. Detailed Analysis: 1. Substantial Expansion of the Parwanoo Unit and Eligibility for Deduction under Section 80IC: The primary issue was whether the assessee's Parwanoo unit had undertaken substantial expansion to qualify for deduction under Section 80IC. The Revenue argued that the approval letter dated 08 Feb 2006 from the Director of Industries, Himachal Pradesh, was a proposal, not an approval for substantial expansion. The CIT(A) erred in not noting that the assessee failed to clarify the issue of 'substantial expansion' and filed additional evidence only during appellate proceedings. The CIT(A) granted relief to the assessee, noting that the opening value of plant and machinery was based on audited accounts accepted by the AO in the preceding year. The CIT(A) concluded that the increase in plant and machinery during the year under consideration was more than 50% of the opening value, thus qualifying as substantial expansion. The Tribunal upheld this conclusion, noting that the Director of Industries also acknowledged the substantial expansion. 2. Allocation of Common Expenses Between Eligible and Non-Eligible Businesses: The Revenue contended that the CIT(A) erred in not rejecting the books of accounts for invoking provisions of Section 80IC(6) read with Section 80IA(10). The AO apportioned expenses based on the sales ratio of Parwanoo and non-Parwanoo units. The CIT(A) held that the deduction should be computed as if the Parwanoo unit was the only source of income, and the AO could disturb the deduction amount only if books of accounts were rejected based on adverse material. The Tribunal upheld this view, noting that the method of allocation of expenses had been approved in earlier years and by the jurisdictional High Court. 3. Treatment of Expenditure Incurred Towards Internet Bandwidth Testing Charges and Site Survey and Commissioning Charges: The assessee argued that these expenses should be treated as additions to "Plant and Machinery" for determining substantial expansion. The CIT(A) excluded these amounts, noting that even without them, the increase in plant and machinery was more than 50% of the opening value. The Tribunal agreed, stating that the amounts spent on site survey and commissioning charges for internet bandwidth during the earlier year could not be treated as part of substantial expansion during the relevant financial year. 4. Disallowance of Discount Offered to Employees Under ESOP Scheme as Notional Loss: The CIT(A) confirmed the disallowance of Rs. 1,29,791/- made in respect of discount offered to employees on allotment of shares under an ESOP Scheme, holding it as notional loss. The assessee contended that the discount was compensation to employees and should be allowable under Section 37(1). The Tribunal, following the decision of the ITAT Bangalore Bench in Nova Nordisk India (P) Ltd. vs DCIT and the Hon'ble Karnataka High Court in Mysore Kirloskar Ltd. vs CIT, held that the expenditure was wholly for the purpose of business and allowed the deduction. 5. Charging of Interest Under Sections 234B/234D of the Income Tax Act: The assessee's ground related to charging of interest under Sections 234B/234D was dismissed as infructuous, being consequential to the main issue. Conclusion: The Tribunal upheld the CIT(A)'s order on substantial expansion and allocation of expenses, allowing the assessee's claim for deduction under Section 80IC. The Tribunal also allowed the deduction for ESOP-related expenses, following precedents. The assessee's cross-objection regarding the treatment of specific expenses was dismissed. The charging of interest under Sections 234B/234D was deemed academic and dismissed.
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