2018 (4) TMI 1129 - AT - Income Tax

Apportionment of bad debt written off to the eligible units - registering profit of eligible units for the purpose of allowing deduction u/s 80-IB and 80-IC - Held that - Perusal of the bad debts written off would show that all the debts pertained to assessment year 2002-03 and earlier Financial Years. The units for which deduction u/s 80-IB and 80-IC were claimed by the assessee, came into existence only in F.Y. 2004-05. Bad debts written off which was claimed as deduction did not pertain to any of the units for which the assessee claimed deduction u/s 80-IB and 80-IC. Apportionment of bad debt written off to the eligible units and registering profit of those eligible units for the purpose of allowing deduction u/s 80-IB and 80-IC, as done by the revenue authorities is unsustainable. The apportionment is directed to be deleted. Ground No.3 raised by the assessee is allowed. Apportionment of residual cost - Held that - The allocation done by the assessee on the basis of number of employees who are directly linked with the factory operation is more logical. The residual cost is incurred at the head office and is not capable of being identified with any of the units which are running by the assessee. It is only because of this difficulty that the Assessing Officer and the assessee resorted to allocation of residual cost. When it comes to allocation of residual cost, it cannot be done arbitrarily. The allocation should have due regard to the efforts put at the head office level to be eligible. That can be done only by allocation on the basis of number of employees linked to factory operation divided by total number of employees into corporate office into sales of the eligible units divided by total sales. This allocation of residual cost done by the assessee was logical - Decided against revenue

Summary

Issues Involved:
1. Allocation of bad debts written off to units eligible for deduction under sections 80-IB and 80-IC of the Income Tax Act.
2. Allocation of corporate office residual cost to eligible and non-eligible units.

Detailed Analysis:

1. Allocation of Bad Debts Written Off:
The primary issue was whether bad debts written off should be allocated to units eligible for deductions under sections 80-IB and 80-IC of the Income Tax Act. The assessee contended that the bad debts pertained to non-eligible units for business carried on before the eligible units were established. The Assessing Officer (AO) allocated these bad debts to the eligible units in the ratio of sales, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal reviewed the details of the bad debts written off, which were provided in the assessee's Paper Book, and found that the bad debts related to financial years before the eligible units commenced operations. As such, the Tribunal concluded that the bad debts did not pertain to the units for which deductions under sections 80-IB and 80-IC were claimed. Therefore, the apportionment of bad debts to the eligible units by the revenue authorities was deemed unsustainable and directed to be deleted. The Tribunal allowed Ground No.3 raised by the assessee.

2. Allocation of Corporate Office Residual Cost:
The second issue involved the allocation of residual costs incurred at the corporate office, amounting to ?40.43 crores, which could not be directly identified with any single function or unit. The assessee allocated these costs to the eligible and non-eligible units based on the number of employees at the corporate office directly involved in manufacturing activities, further allocated based on turnover. The AO, however, allocated these costs based on the ratio of workers of eligible units to the total number of workers across all manufacturing locations, arguing that this method better reflected the benefit derived by the whole organization, including the eligible units. The CIT(A) accepted the assessee's method of allocation, finding it more logical as it considered both the number of employees and the turnover of the eligible units.

The Tribunal agreed with the CIT(A), noting that the allocation of residual costs should not be arbitrary and should reflect the efforts at the head office level. The Tribunal found the assessee's method of allocation, which considered the number of employees linked to factory operations and the sales ratio, to be logical and appropriate. Consequently, the Tribunal dismissed Ground No.2 raised by the revenue.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the allocation of bad debts (Ground No.3) and dismissed the revenue's appeal concerning the allocation of residual costs (Ground No.2). The order was pronounced in the open court on 20/04/2018.