2016 (12) TMI 545 - AT - Income Tax

Allocation of expenses relating to the Head office to the SEZ unit - Held that - It is not in dispute that both Head office and SEZ unit are under common management. Further there is interlacing of funds also. The books of accounts of both the units were maintained by the assessee only. Hence it cannot be altogether ruled out that the benefit of various expenses booked in the Head officer did not go to the SEZ unit. The expenses listed out by the AO and confirmed by Ld CIT(A) such as Foreign tour expenses, motor car expenses, office expenses, printing & stationery etc., are common in nature and SEZ unit could have also been benefitted by the those expenses. A.R submission that the Block insurance policy was taken only for Head office and not for SEZ unit requires examination. Accordingly we restore the issue relating to Block insurance policy to the file of the AO with the direction to examine the relevant policy documents and if it is found that the same has been paid in respect of Head office only, then the AO should exclude the same from common expenses. In respect of remaining expenses confirmed by Ld CIT(A), in our view, the order of Ld CIT(A) does not call for any interference, since the allocation of those expenses in the sales ratio appears to be reasonable. Accordingly we confirm the order passed by Ld CIT(A) in respect of remaining expenses. - Decided partly in favour of assessee

Summary

Issues:
Cross appeals against the order passed by Ld CIT(A)-27, Mumbai for the assessment year 2009-10. Appeal filed by revenue dismissed due to tax effect below ?10 lakhs as per CBDT Circular No.21/2015. Appeal by assessee challenges the allocation of expenses between Head office and SEZ unit.

Analysis:
The revenue's appeal was dismissed as the tax effect was below ?10 lakhs, complying with CBDT Circular No.21/2015. The assessee's appeal focused on the allocation of expenses between the Head office and SEZ unit. The AO allocated expenses to the SEZ unit based on turnover ratios, which the Ld CIT(A) partially upheld, disagreeing with certain expenses chosen by the AO.

The assessee contended that separate accounts were maintained for the SEZ unit, with expenses properly recorded. The nature of the SEZ unit's work was highlighted as less complex, requiring fewer general and administrative expenses. The Ld CIT(A) sustained an allocation of ?16,29,934 out of the total expenses. The assessee challenged this partial sustainment.

The Ld D.R argued that the profit rates indicated certain common expenses were not accounted for in the SEZ unit to inflate profits. Common management and fund interlacing between units supported this argument. The Tribunal agreed, noting that expenses like foreign tours, motor car expenses, and office expenses could benefit both units.

The Tribunal found merit in the Ld D.R's contentions due to common management and fund interlacing between units, suggesting shared benefits from Head office expenses. The issue of the Block insurance policy was remanded to the AO for further examination to determine if it pertained solely to the Head office. The Tribunal upheld the Ld CIT(A)'s decision on the remaining expenses as reasonable based on sales ratios.

In conclusion, the appeal of the assessee was partly allowed, challenging the partial sustainment of expenses allocation, while the revenue's appeal was dismissed. The judgment was pronounced on 18.10.2016.