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2021 (3) TMI 1371 - AT - Income TaxTaxable income of EOU for which deduction u/s 10B claimed - Allocation of Head Office Expenditure to Non-EOU units for the purpose of determining division wise profitability - assessee company is engaged in the business of manufacturing and export of agro chemicals drug intermediates - HELD THAT - AO simply allocated the CBD expenses on the basis of turnover , by ignoring the criteria of gross block of assets and manpower employed in the respective units without any basis. The assessee tried to justify its basis of allocation by stating that all the units are though operational but at a different level of age of operationality and that the adoption of turnover criteria would be lopsided as certain units are capital intensive and labour intensive. The assessee company had adopted the balanced approach by taking the average of gross block of assets, turnover and manpower employed in the respective units for the purpose of allocation of common expenses. As pleaded that the result of the allocation of common expenses on the basis of turnover had resulted in the reduction in the profit of EOU unit of Rs 27,92,178/- and consequently resulted in reduction of loss of Non EOU unit by the same amount. Despite these contentions, the ld CITA simply upheld the action of the ld AO without giving any independent findings. We find that since the allocation basis of common expenditure has been rejected by the lower authorities without any basis and by totally ignoring the various contentions raised thereon in respect of each of the behaviour of various units and the past assessments framed in the hands of the assessee u/s 143(3) We are inclined to grant relief to the assessee by applying the principle of consistency and in the absence of change in facts during the year under consideration. Accordingly, the reduction in profit of EOU unit and consequential reduction of loss of Non EOU unit by the same amount is hereby reversed and relief is granted to the assessee. Accordingly, the Ground No. 2 raised by the assessee is allowed. Inter related and deal with allocation of research development expenses to various units - assessee had claimed deduction u/s 35(1)(iv) towards capital expenditure on research and development - HELD THAT - We find from the perusal of the financial statements of the assessee enclosed in the paper book filed before us, R D unit is an independent unit having its own separate plant and situated in a different location. The activity carried out in the said R D unit is totally different from that carried out at the other units i.e research for developing new products and processes. The said R D unit has a separate electric meter, has independent staff, unit requires independent inputs or raw materials etc. Separate books of accounts are maintained for this R D unit so as to deduce the division wise profitability. The said unit does not need any support from any of the other units and can function independently having its own customers and capable of generating independent revenue on its own. Hence expenditure of R D unit cannot be apportioned to EOU units which has no connection with R D unit. We find from the past behaviour of the department in the income tax scrutiny assessments of the assessee, the revenue had not sought to disturb the contentions of the assessee with regard to this impugned issue. No addition or disallowance could be made merely based on the concession given by the assessee on without prejudice basis that 5% of R D expenses could be allocated to other units. There is no estoppel against the statute. There is no basis also for the said allocation to be carried out. No contrary evidence has been brought on record by the ld DR before us at the time of hearing. Hence we are not inclined to accede to the request of the ld DR that atleast 5% of expenses should be subject matter of allocation to other units. There is absolutely no change in the facts and circumstances of the case during the year under consideration and hence the revenue having accepted the stand of the assessee in earlier years has to strictly abide by the principle of consistency. With regard to yet another contention of the ld AO that deduction u/s 35(2AB) of the Act could be claimed only by a company manufacturing or producing products, we find that the said section 35(2AB) of the Act does not restrict the research and development only with respect to the products already in existence. From the bare reading of the Explanation to Section 35(2AB) of the Act, we find that expenditure on scientific research , in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970. It is not in dispute that the assessee is already engaged in manufacturing pharma products. Accordingly, the assessee would be entitled for deduction u/s 35(2AB) of the Act. We hold that allocation of expenses to EOU units, allocation of deduction u/s 35(1)(iv) and allocation of deduction u/s 35(2AB) to other units is not warranted in the peculiar facts and circumstances of the instant case.
Issues Involved:
1. Allocation of Head Office Expenditure to Non-EOU units. 2. Allocation of Research & Development (R&D) expenses to various units. 3. Deduction u/s 35(1)(iv) and 35(2AB) of the Income Tax Act, 1961. 4. Principle of consistency in tax assessments. Detailed Analysis: 1. Allocation of Head Office Expenditure to Non-EOU units: The assessee challenged the confirmation of allocation of Rs. 27,92,178/- of Head Office Expenditure to Non-EOU units for determining division-wise profitability. The assessee company, engaged in manufacturing and export of agrochemicals and drug intermediates, allocated Head Office Expenses among its various units based on average gross block of assets, turnover, and manpower employed. The AO, however, allocated these expenses solely based on turnover, which the assessee argued was unjustified as it ignored the criteria of gross block of assets and manpower employed. The Tribunal found that the AO's allocation lacked a speaking order and was inconsistent with past assessments. Therefore, applying the principle of consistency, the Tribunal reversed the reduction in profit of the EOU unit and granted relief to the assessee. 2. Allocation of Research & Development (R&D) expenses to various units: The assessee claimed deductions for capital expenditure on R&D and in-house R&D expenses. The AO sought to allocate R&D expenses to EOU units, arguing that the R&D unit was not standalone and aimed to claim higher deductions u/s 10B. The assessee contended that the R&D unit was independent, generating its own revenue and maintaining separate books. The Tribunal agreed with the assessee, noting that the R&D unit was a separate entity with its own infrastructure and customers. The Tribunal also emphasized the principle of consistency, highlighting that similar claims were accepted in past assessments. Consequently, the Tribunal held that R&D expenses should not be allocated to EOU units and allowed the deductions claimed by the assessee. 3. Deduction u/s 35(1)(iv) and 35(2AB) of the Income Tax Act, 1961: The AO reduced the profits of EOU units by the amounts claimed as deductions u/s 35(1)(iv) and 35(2AB). The Tribunal found that the R&D unit was an independent unit, and its expenses should not be allocated to other units. The Tribunal also clarified that section 35(2AB) does not restrict R&D to existing products, and the assessee, engaged in manufacturing pharma products, was entitled to the deduction. Thus, the Tribunal held that the allocation of expenses and deductions to EOU units was unwarranted and allowed the assessee's claims. 4. Principle of consistency in tax assessments: The Tribunal emphasized the importance of consistency in tax assessments, noting that the revenue had accepted the assessee's method of allocation in past scrutiny assessments. The Tribunal cited several judicial decisions supporting the principle of consistency, including those from the Hon'ble Jurisdictional High Court and other High Courts. The Tribunal concluded that, in the absence of any change in facts or circumstances, the revenue should adhere to the principle of consistency and not disturb the assessee's claims. Conclusion: The Tribunal allowed the appeal of the assessee, reversing the allocation of Head Office and R&D expenses to EOU units and upholding the deductions claimed under sections 35(1)(iv) and 35(2AB) of the Income Tax Act, 1961. The Tribunal's decision was based on the principle of consistency and the independent nature of the R&D unit.
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