2018 (1) TMI 844 - AT - Income Tax

Deduction u/s. 80IC - the assessee company is having two units, one at Bawal which is taxable unit; and other one is at Haridwar - Held that - In the impugned orders as well as the material referred to before us at the time of hearing. The assessee is carrying out operation from two units; Bawal unit which is a taxable; and unit of Haridwar which is eligible for deduction 100% u/s.80IC on its profits derived. The Revenue s case is that, the assessee has loaded more expenditure in the taxable unit to reduce the profit and therefore, indirect expenditure have been allocated on the turnover ratio. It is an undisputed fact that the assessee has been maintaining separate bank accounts and separate books of account, wherein income and expenditure are separately debited and credited to the respective books of account. From the perusal of the expenses allocated by the Assessing Officer, we find that he has in general picked up the indirect expenditures for the purpose of allocation, without even identifying the expenditure which can be reckoned as common. Thus, the basis for allocation of expenditure without examining the separate books of account by the AO on the facts and circumstances of the case is not called for and same is rejected. It is further seen that though, the ld. CIT (A) has identified certain expenditure which can be reckoned as common, but he too appears to have not examined the accounts of the units as to which expenditures are identifiable qua each unit. Therefore, we are of the opinion that the matter should be restored back to the file of the Assessing Officer for a limited purpose to examine - Firstly, to identify the expenditure qua each unit from the separate ledger accounts; and if the expenditures debited are attributable for the particular unit, that is, the expenditure pertains to Bawal unit only then same should be allowed from the profits of Bawal Unit or vice-versa for the Haridwar unit and in that case no allocation should be made for such expenditures. Secondly, only in case where expenditures are not identifiable and are common in nature that alone should be considered for the allocation purpose. Lastly, after identifying the common expenditure, the details of which would be provided by the assessee, the Assessing Officer will also examine as to whether the allocation key should be based on product ratio or turnover ratio , because, there could be certain expenses, for example, sales promotion, packing and freight etc., definitely the same should be allocated on product ratio wise; however if certain common expenses like salary of managing directors, travelling expenses of the employees which may be common for both the units including that of the directors and auditors remunerations, then same could be taken on ratio of turnover basis. However, the assessee will provide the necessary details for allocation key to common expenses which are identified and only if such expenses required allocation on product ratio then same may be examined and if not, then turnover ratio should be taken. Allocation of management fees there could not be any allocation in the AY 2011-12 for the reasons stated by the Ld. Counsel above, which is not disputed by the Ld. DR and hence, we hold that for the A.Y. 2011-12, there cannot be any allocation. As for the A.Y. 2012-13, the assessee has already allocated the management fees as admitted above, hence no further allocation is required. Thus, on this point, we completely agree with the ld. Counsel and reject the arguments raised by the ld. DR. Matter is remanded back to the Assessing Officer who shall provide ample opportunity to the assessee to substantiate its case on the issue of allocation in view of our direction.

Issues Involved:
1. Deletion of addition made on account of management fee paid to a related party.
2. Reallocation of expenses between taxable and exempt units.

Detailed Analysis:

Issue 1: Deletion of Addition Made on Account of Management Fee Paid to a Related Party

Assessment Year 2008-09:
The Revenue challenged the deletion of ?1,23,27,262/- added by the Assessing Officer (AO) under Section 40A(2)(b) of the Income Tax Act, 1961, on account of management fees paid to M/s Talbros Automotive Components Ltd. The AO's reasoning included the lack of explanation regarding fair market value, absence of specific service details, and the arrangement being a conduit for profit transfer. The CIT(A) deleted the addition, following the Tribunal's decision for the assessment year 2010-11, which established that the AO did not meet the requirements of Section 40A(2) and failed to provide evidence of excessive or unreasonable expenditure. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.

Assessment Year 2011-12:
The Revenue raised a similar ground regarding the deletion of ?1,49,39,841/- paid as management fees. The Tribunal, following its earlier decision, upheld the CIT(A)'s deletion of the addition, noting that the issue was identical to the previous assessment year and covered by the Tribunal's order for the assessment year 2010-11.

Assessment Year 2012-13:
The issue was again raised by the Revenue concerning the disallowance of ?1,63,50,000/- paid as management fees. The Tribunal confirmed the deletion of the addition, consistent with its findings for the earlier years.

Issue 2: Reallocation of Expenses Between Taxable and Exempt Units

Assessment Year 2011-12:
The AO noted improper allocation of expenses between the taxable unit at Bawal and the exempt unit at Haridwar, leading to a disallowance of ?1,20,03,861/-. The CIT(A) observed that the assessee maintained separate books and bank accounts for both units and identified certain common expenses that should be allocated based on the product ratio rather than turnover ratio. The CIT(A) accepted an allocation of ?3,70,168/- to the Haridwar unit.

Assessment Year 2012-13:
The AO made a similar allocation of indirect expenses based on turnover ratio, resulting in a disallowance of ?1,21,11,486/-. The CIT(A) again accepted the product ratio for allocation of certain expenses and confirmed an addition of ?22,03,072/-.

Tribunal's Decision:
The Tribunal remanded the matter back to the AO for both assessment years to:
1. Identify the expenditure attributable to each unit from the separate ledger accounts.
2. Allocate only the common expenditures.
3. Determine the appropriate allocation key (product ratio or turnover ratio) for common expenses.

The Tribunal agreed with the assessee's rationale for not allocating management fees to the Haridwar unit in the assessment year 2011-12 and noted that the fees were allocated in the assessment year 2012-13.

Conclusion:
The Tribunal dismissed the Revenue's appeal for the assessment year 2008-09 and partly allowed the appeals for the assessment years 2011-12 and 2012-13 for statistical purposes, remanding the issue of expense allocation back to the AO for further examination. The deletion of additions made on account of management fees was upheld for all years in question.

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