2018 (2) TMI 1768 - AT - Income Tax

Disallowance of deduction u/s 80IC - disallowance of certain expenses by way of allocation out of common Head office expenses to the eligible Kotdwar Units - II and III - Held that - Except for the fact that the assessee purchased raw material from its Noida Unit, there is no reference to any interconnectivity between Kotdwar-III unit and Noida Unit - not the case of the Assessing Officer that the raw material purchased by the assessee from the Noida unit was not at arm s length price - the new unit at Kotdwar-III was set up for reducing the transportation cost from Noida to the State of Uttarakhand where the assessee was making supplies to M/s Hero Honda and its ancillary company which was located at Haridwar, Uttarakhand - the assessee did not transfer any old machinery from the existing unit at Noida to Kotdwar-III unit and the transactions of purchase of raw material from the Noida unit were at arm s length price, we are of the considered opinion that the ld. CIT(A) was fully justified in holding that there was no splitting up or reconstruction of the business already in existence at Noida Unit and thereby allowing deduction u/s 80IC of the Act. Apportionment of head office expenses, we find that the same have been allocated in the ratio of turnover. It cannot be said that the Kotdwar units II and III unit were running without any support and assistance from its head office. That being the position, head office expenses relatable to such units were, in our considered opinion, rightly allocated on the basis of turnover and disallowed. Respective grounds of the assessee as well as the Revenue are thus not allowed. Disallowance u/s 14A - whether AO recorded proper satisfaction before venturing to make disallowance as per Rule 8D? - Held that - AO has nowhere recorded any satisfaction about the incorrect claim having been lodged by the assessee with reference to its accounts. There is no discussion whatsoever about the examination of the assessee s claim about the actual incurring of expenses in relation to the exempt income. It can be seen from the impugned order that the Assessing Officer even did not consider the correct amount offered by the assessee for disallowance at ₹ 6.46 lac. In view of the fact that no proper satisfaction was recorded, in our considered opinion, the Assessing Officer did not acquire any valid jurisdiction for computing disallowance u/s 14A

Summary

Issues:
1. Disallowance of deduction u/s 80IC of the Income-tax Act, 1961 for Assessment Year 2012-13.
2. Disallowance of expenses allocation for Kotdwar Units II and III.
3. Disallowance u/s 14A of the Act for Assessment Year 2012-13.
4. Disallowance of deduction u/s 80IC for Assessment Year 2011-12.

Analysis:

Issue 1: Disallowance of deduction u/s 80IC for Assessment Year 2012-13
- The Assessing Officer disallowed the deduction u/s 80IC, claiming that Unit-III Kotdwar was set up by splitting up and reconstruction of an existing business at the Noida unit. However, it was found that there was no evidence of machinery transfer from Noida to Kotdwar-III, and the new unit was established to reduce transportation costs, not as a split-up. Hence, the deduction u/s 80IC was allowed.
- The apportionment of head office expenses based on turnover was deemed appropriate as the Kotdwar units received support from the head office, leading to the disallowance of respective grounds by both the assessee and the Revenue.

Issue 2: Disallowance of expenses allocation for Kotdwar Units II and III
- The Assessing Officer allocated head office expenses to Kotdwar Units II and III based on turnover, which was upheld as these units operated with support from the head office. Therefore, the allocation and subsequent disallowance were considered justified.

Issue 3: Disallowance u/s 14A of the Act for Assessment Year 2012-13
- The Assessing Officer computed disallowance u/s 14A using Rule 8D, but the CIT(A) found that the assessee voluntarily offered a higher disallowance amount. As the Assessing Officer did not record proper satisfaction before invoking Rule 8D, the disallowance was held to be invalid. The CIT(A)'s decision to sustain the voluntary disallowance was upheld.

Issue 4: Disallowance of deduction u/s 80IC for Assessment Year 2011-12
- The issue was similar to that of Assessment Year 2012-13, where the claim of splitting up and reconstruction was rejected, and the assessee was considered eligible for deduction u/s 80IC. However, common head office expenses and depreciation were directed to be disallowed in the ratio of turnover.

In conclusion, the appeals were dismissed for Assessment Year 2012-13, and the appeal for Assessment Year 2011-12 was partly allowed, with directions for computing disallowances after providing a reasonable opportunity for hearing.