2019 (3) TMI 988 - AT - Income Tax

Deduction admissible u/s. 80 IC - Disallowance of expenses of taxable unit after reallocation - Low NP of taxable units as compared to the exempt ones also audit expenses were only debited in one taxable unit - HELD THAT - As decided in favour of assessee 2016 (9) TMI 752 - ITAT DELHI and 2018 (3) TMI 1738 - ITAT DELHI assessee has produced all the books of accounts and vouchers before the AO during the assessment proceedings. In fact, no show cause query was issued by the AO on this account during the assessment proceedings. AO has not considered the fact that the units in exempted zones are mainly engaged in manufacturing on job work basis where there is either negligible or no input cost of raw material involved. It was noted that if the sales were made using their own raw material, there would be substantial difference in the GP rate insofar as, if the cost of raw material was excluded, the GP rate in all the units would remain the same. The fact that the exempted unit at Haridwar has shown a loss has not been referred to by the AO. Therefore, it is clear that no profit has been diverted to this unit. It was further noted that there has been no investigation or specific exercise to show that the amount claimed as deduction u/s 80-IC was wrong. We find considerable cogency in the finding of the CIT(A) that there is no ground for disallowing claim for job work expenses for the eligibility u/s 80-IC as the same is allowable. Deduction under Section 80-IC - Substantial expansion - claiming the exemption at the same rate of 100% beyond the period of five years on the ground that the assessee has now carried out substantial expansion in its manufacturing unit - HELD THAT - On a perusal of para 21 of the decision rendered in the case of CIT vs. Classic Binding Industries 2018 (8) TMI 1209 - SUPREME COURT OF INDIA it is seen that the said position of law has not been varied. Accordingly upholding the order to the extent as far as position of law is concerned the issue is restored back to the file of AO with a direction to grant relief after verification of facts in accordance with law. Needless to say that the assessee shall be granted a reasonable opportunity of being heard.

Summary

Issues Involved:
1. Deletion of addition on account of disallowance of expenses of taxable unit after reallocation.
2. Deletion of addition on account of restriction of deduction under Section 80IC.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Disallowance of Expenses of Taxable Unit After Reallocation:

The Revenue challenged the CIT(A)'s decision to delete the addition of ?3,55,16,810/- made by the AO due to disallowance of expenses of taxable units after reallocation. The AO observed that expenses were debited mainly to taxable units, which was disproportionate to their turnover. The AO questioned the low net profit (NP) in taxable units compared to exempt units and the high expenses in some units. The CIT(A) granted relief, noting that the AO did not provide factual evidence of discrepancies and made additions based on conjecture without proving any falsity in the claim. The CIT(A) referenced previous ITAT decisions that consistently favored the assessee on similar issues. The Tribunal upheld the CIT(A)'s decision, citing consistency in the assessee’s favor over the years and the lack of any change in facts and circumstances. The Tribunal noted that the AO’s approach lacked investigation and material evidence, deeming the disallowance arbitrary.

2. Deletion of Addition on Account of Restriction of Deduction Under Section 80IC:

The Revenue contested the CIT(A)'s deletion of ?9,71,51,832/- added by the AO by restricting the deduction under Section 80IC. The AO argued that the assessee's unit had its initial year of claiming deduction as AY 2003-04 and had not undertaken substantial expansion, thus the deduction rate should be 25% instead of 100%. The CIT(A) granted relief, referencing ITAT decisions in similar cases and distinguishing the assessee's case from others where the facts were different. The Tribunal considered the Apex Court's decision in CIT vs. Classic Binding Industries, which clarified that once the initial assessment year under Section 80IC starts, there cannot be another initial assessment year allowing 100% deduction for the next five years. The Tribunal found that the AO did not examine whether substantial expansion had been carried out. Consequently, the Tribunal upheld the CIT(A)'s decision on the legal position but remanded the issue back to the AO for verification of facts regarding substantial expansion, directing the AO to grant relief after such verification in accordance with the law.

Conclusion:

The Tribunal dismissed the Revenue's appeal concerning the disallowance of expenses of taxable units due to lack of evidence and consistency in favor of the assessee. For the issue of deduction under Section 80IC, the Tribunal upheld the CIT(A)'s decision on legal grounds but remanded the matter to the AO for factual verification regarding substantial expansion. The appeal was partly allowed for statistical purposes.