2015 (12) TMI 1757 - AT - Income Tax

Disallowance of deduction u/s 80IC by allocating indirect expenses to the eligible Unit - as per revenue profit eligible for deduction under section 80IC is to be worked out after deducting all the direct and indirect expenses - Held that - The words derived from has a narrow meaning, inasmuch as it contemplates first degree connection with the eligible Unit as held, inter alia, by the Hon ble Supreme Court in the case of Pandian Chemicals Limited 2003 (4) TMI 3 - SUPREME Court and this principle laid down in the context of income is also applicable for the allocation of expenses as held by the Coordinate Bench of this Tribunal in the case of Balarampur Chini Mills Limited -vs.- DCIT 2011 (7) TMI 1150 - ITAT KOLKATA wherein held that expenses incurred by the assessee under the general head of Office Expenses, which are not directly incurred for the eligible Unit, cannot be said to have first degree connection with such Unit so as to reduce the same on pro rata basis for computing the profit of such Unit eligible for deduction - Decided against revenue

Summary

Issues:
Challenge to deletion of disallowance under section 80IC for indirect expenses allocation.

Analysis:
The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2006-07. The primary issue raised in the appeal was the deletion of disallowance made by the Assessing Officer concerning the allocation of indirect expenses to the eligible unit for deduction under section 80IC. The assessee, a company engaged in manufacturing and trading of printing ink, claimed a deduction under section 80IC for the profit of its Sikkim Unit. The Assessing Officer observed that certain indirect expenses were not allocated to the Sikkim Unit, such as staff salary, director's remuneration, bonus, etc., and therefore restricted the deduction claimed by the assessee.

During the appeal process, the Commissioner of Income Tax (Appeals) disagreed with the Assessing Officer's decision and allowed the claim of the assessee for deduction under section 80IC in full. The Commissioner observed that no indirect expenses could be allocated for computing the deduction under section 80IC as they were not directly attributable to the eligible Sikkim Unit. The Revenue, aggrieved by this decision, brought the matter before the Tribunal for resolution.

In the Tribunal's analysis, it was noted that the deduction under section 80IC is in respect of profit and gains derived by the eligible undertaking. The Tribunal referred to legal precedents, including the decision of the Hon'ble Supreme Court in the case of Pandian Chemicals Limited, to emphasize the narrow meaning of the term "derived from" and its requirement for a first-degree connection with the eligible unit. The Tribunal also cited the case of Balarampur Chini Mills Limited to establish that expenses not directly incurred for the eligible unit cannot be reduced on a pro-rata basis for computing the unit's profit eligible for deduction.

Based on the legal principles and precedents cited, the Tribunal upheld the order of the Commissioner of Income Tax (Appeals) and dismissed the appeal of the Revenue. The Tribunal's decision was pronounced in open court on December 4, 2015.