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2014 (1) TMI 1883 - AT - Income TaxAddition u/s 36(1)(iii) - advances made to Unit No. II at Baddi - interest attributable to such interest free advances made by the assessee to its own exempt unit - HELD THAT - In the Chandigarh office, debit balance of ₹ 33,17,606/- is reflected which admittedly is nothing but working capital of the assessee for running the Unit No. II at Baddi and it also includes the profit declared by the Baddi Unit. The assessee in the Chandigarh Unit had shown a capital of ₹ 49,34,981/- and had also shown debit balance in the name of B.K. Raman Co. Unit II ₹ 37,17,608/-. In the first instance, the said ₹ 37,17,608/- includes the profit earned by B.K.Raman Co. Unit II, Baddi which is not to be considered for computing the advances, if any. Further, the assessee in its Chandigarh office had raised certain loans on which it was paying interest and on the other hand, it had advanced money to the Unit No. II at Baddi which was an exempt unit - we hold that the interest attributable to such interest free advances made by the assessee to its own exempt unit is to be disallowed following the ratio laid down in CIT Vs Abhishek Industries 2006 (8) TMI 123 - PUNJAB AND HARYANA HIGH COURT - we find merit in the contention of the assessee that in addition to the said interest bearing loans, it had certain interest free loans and the average cost ratio of the interest expenditure is to be considered for computing the disallowance of interest expenditure in the hands of the assessee. Accordingly, we direct the Assessing Officer to compute disallowance of interest expenditure attributable to the advances made to Unit No. II at Baddi by applying average cost ratio. Second advance considered by the Assessing Officer was to M/s B.K.Varun Co. no merit in the order of the Assessing Officer in charging any interest on the debit balances as the net balance available with the assessee is to be considered for making any disallowance under section 36(1)(iii) - the said aspect, whether the assessee has credit balance throughout the year, has not been verified by the Assessing Officer and in order to adjudicate the issue, we deem it fit to restore this issue back to the file of Assessing Officer who shall verify the stand of the assessee in this regard and in case the assessee has net credit balance from month to month, then no disallowance is to be made in the hands of the assessee. However, where the assessee has debit balance in the account of M/s B.K.Varun Co. in any of the months, then the disallowance of interest is to be worked out on average cost ratio. Third interest free advance made by the assessee to M/s Singal Polymer against whom there is a debit balance of ₹ 370,627/- in the books of account of the assessee. Though the said concern is a business associate of the assessee i.e. to whom goods have been sold by the assessee but that does not justify the advancement of interest free loan to the said concern. Accordingly, we hold that interest relatable to such interest free advance is to be disallowed in view of the provisions of section 36(1)(iii) of the Act. However, the rate of interest to be applied in such case is to be on the basis of average cost ratio i.e. taking into consideration the interest free advances available to the assessee and the interest bearing advances available with the assessee. Before the Commissioner of Income Tax (Appeals), the assessee had submitted that the average rate of interest is not 18% which has been applied by the Assessing Officer to work out the disallowance under section 36(1)(iii) of the Act. The Assessing Officer is thus, directed to apply average cost ratio in order to compute the disallowance under section 36(1)(iii) of the Act in respect of the advance of ₹ 370,627/- made to M/s Singal Polymer. The ground No. 1 raised by the revenue is thus, partly allowed. Addition on account of disallowance under section 80IC pertaining to Unit No. II, Baddi - whether the assessee is carrying on any manufacturing activities? - HELD THAT - We hold that once assessee is engaged in an activity of manufacture, which is not prohibited under the 13 th Schedule of the Income Tax Act, then it cannot be said that the assessee was not engaged in any manufacturing. The assessee has declared income from carrying on of such activity and in addition the assessee had carried on the said activity on job work basis. The assessee is thus, entitled to the claim of deduction under section 80IC of the Act on profits arising from its own manufacturing activity and also the activity carried on, on job work basis. We find support from the ratio laid down in CIT Vs Impel Forge Allied Industries Ltd. 2008 (12) TMI 370 - PUNJAB HARYANA HIGH COURT wherein it has been held that where the assessee is engaged in any manufacturing activity and in addition carries on the same activity on job work basis, the assessee is eligible for the claim of deduction under section 80IB of the Act. Following the same parity of reasoning, we hold that the assessee is entitled to the claim of deduction under section 80IC of the Act on its total profits. Assessee has not incurred any expenditure for carrying out the said manufacturing activity - Assessee during the course of hearing was directed to produce the electricity bills and some of the bills have been produced which relate to the Baddi Unit II i.e. manufacturing unit. Merely because the entries have not been correctly posted in the manufacturing account but have been debited to the Profit Loss Account by the assessee does not disentitle the assessee to the claim of deduction under section 80IC of the Act. We find no merit in the order of the Assessing Officer in this regard. The Commissioner of Income Tax (Appeals) has allowed the claim of the assessee in view of the order passed for the preceding year, against which the department has not filed any appeal. However, we have adjudicated the claim of the assessee vis- -vis the deduction claimed under section 80IC of the Act in paras above, and accordingly, we uphold the order of Commissioner of Income Tax (Appeals) in granting the deduction under section 80IC of the Act, though on different basis. The ground No. 2 raised by the revenue is thus, dismissed. Allocation of expenses to the exempt unit which have been debited to the Chandigarh trading unit of the assessee - The expenses had been found to be in relation to the Baddi manufacturing unit and some of the common expenses have been attributed to the Baddi manufacturing unit. Admittedly, the unit at Baddi is exempt from tax and profits of the Chandigarh unit are taxable. In the entirety of the facts and circumstances, and the elaborate discussions made by the Assessing Officer and by the Commissioner of Income Tax (Appeals), we are in conformity with the order of the authorities below in allocating the common expenditure and also the particular expenditure of the Baddi unit to the exempt unit. Accordingly, we find no merit in the ground No. 2 raised by the assessee in its Cross Objection. Deduction under section 54F - assessee had deposited a sum of ₹ 1,94,000/- within the stipulated period as initial payment and the balance had to be paid in installments - HELD THAT - Where the assessee has deposited the said sum of ₹ 1,94,000/- within the stipulated time, as provided under section 54F of the Act, we find no merit in the addition to that extent. As against the claim of ₹ 12,96,000/-, we direct the Assessing Officer to allow deduction under section 54F of the Act in the hands of the assessee to the extent of ₹ 1,94,000/-. The ground No. 1 raised by the assessee in the Cross Objection is thus, partly allowed.
Issues Involved:
1. Deletion of addition under section 36(1)(iii) of the Income Tax Act, 1961. 2. Deletion of addition on account of disallowance under section 80IC of the Income Tax Act, 1961. 3. Allocation of expenses to the exempt unit. 4. Deduction under section 54F of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Deletion of Addition under Section 36(1)(iii): The revenue contested the deletion of an addition of Rs. 14,24,481/- made by the Assessing Officer (AO) under section 36(1)(iii) of the Income Tax Act. The AO noted that the assessee made interest-free advances to several entities while incurring interest expenses on secured loans in its Chandigarh unit. The CIT(A) deleted the addition, relying on a similar decision for the assessment year 2006-07. The Tribunal held that interest attributable to interest-free advances to the assessee's exempt unit should be disallowed, following the Punjab & Haryana High Court ruling in CIT Vs Abhishek Industries. The AO was directed to compute the disallowance using the average cost ratio. 2. Deletion of Addition on Account of Disallowance under Section 80IC: The revenue challenged the deletion of an addition of Rs. 15,13,623/- made under section 80IC pertaining to Unit II at Baddi. The AO observed discrepancies in the GP and NP rates between the Chandigarh and Baddi units and reallocated expenses accordingly. Additionally, the AO argued that job work did not constitute manufacturing and that the items produced were prohibited under the 13th Schedule. The CIT(A) allowed the deduction, citing judicial precedents that job work income qualifies for deduction under section 80IC. The Tribunal upheld the CIT(A)'s decision, noting that the items manufactured were not listed in the 13th Schedule, and the assessee was engaged in legitimate manufacturing activities. 3. Allocation of Expenses to the Exempt Unit: The assessee contested the allocation of expenses to the exempt Baddi unit, arguing that the expenses were incurred by the Chandigarh unit. The Tribunal found merit in the AO and CIT(A)'s decision to allocate common and specific expenses to the exempt unit, given the tax-exempt status of the Baddi unit and the taxable nature of the Chandigarh unit's profits. The Tribunal upheld the allocation of expenses. 4. Deduction under Section 54F: The assessee claimed a deduction under section 54F for the investment in a new flat, initially amounting to Rs. 12,96,000/-. The AO disallowed the claim, noting non-compliance with the provisions. The assessee restricted the claim to Rs. 1,94,000/-, which was paid as a down payment within the stipulated period. The Tribunal found merit in allowing the deduction to the extent of Rs. 1,94,000/-, directing the AO to adjust the deduction accordingly. Conclusion: The Tribunal partly allowed the revenue's appeal and the assessee's cross-objections, providing specific directions for recalculating disallowances and deductions based on the average cost ratio and compliance with relevant provisions of the Income Tax Act. The order was pronounced on January 30, 2014.
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