2017 (2) TMI 1552 - AT - Income Tax

Deduction u/s. 80IB - allocating managerial commission and salary, wages bonus in the ratio of turnover to the Silvassa Unit II and thereby reducing the deduction - HELD THAT - Tribunal in 2017 (1) TMI 1203 - ITAT AHMEDABAD for A.Ys. 2008-09 2009-10 had considered similar issues and heldassessee has maintained separate books of accounts for Silvassa unit-I II as evident from the two Audit Reports exhibited. A perusal of the orders of the authorities below shows that the allocation of expenses have been made more out of compulsion then out of necessity. In our considered opinion and the understanding of the facts, the A.O. has not pointed out any flaw or defect in the allocations statement exhibited elsewhere. We find force in the contention of the ld. counsel that the Managerial Commission cannot be allotted to the Silvassa unit. We also agree that only expenses relating to the concerned undertaking should be deducted from the profits thereon. In the absence of any direct nexus brought on record by the revenue authorities for the impugned allocation of expenses, we do not find any merit in the said allocation. We, accordingly, direct the AO to delete the allocations re-drawn by him. Also assessee has already included the managerial commission and remuneration while allocating common expenses to the Silvassa unit. The A.O. has once again included these expenses while computing the reallocation. We, accordingly, direct the A.O. to verify the computation once again and decide the issue afresh in the light of our findings given for ground no. 1. Ground no. 1 is allowed and ground no. 2 is treated as allowed for statistical purpose.

Summary

Issues:
Challenging order of Ld. CIT(A)-III regarding allocation of managerial commission and salary, wages & bonus in ratio of turnover to Silvassa Unit II, reducing deduction u/s. 80IB of Income Tax Act, 1961.

Analysis:
The Assessee appealed against the order of Ld. CIT(A)-III, challenging the allocation of managerial commission and salary, wages & bonus by the AO in the ratio of turnover to Silvassa Unit II, impacting the deduction u/s. 80IB for A.Y. 2010-11. The Assessee contended that similar issues were decided in their favor in earlier assessment years by the Tribunal. The Tribunal reviewed the orders of authorities below and found merit in the Assessee's argument, citing a Co-ordinate Bench decision in the case of Catvision Products Ltd. and a judgment of the Hon'ble Madras High Court in the case of CIT vs. Hindustan Lever Ltd. The Tribunal emphasized that only expenses directly related to the business activity should be reduced for deduction purposes, while indirect expenses should not be deducted.

The Tribunal referenced a decision by the Hon'ble High Court of Bombay in the case of Zandu Pharmaceutical Works Ltd., emphasizing that expenses must be incurred for and on behalf of the concerned undertaking to be deductible. The Tribunal found that the allocation of expenses by the AO lacked a direct nexus with the concerned undertaking, leading to the conclusion that the Managerial Commission should not be allocated to Silvassa unit. Additionally, the Tribunal noted a double allocation of Managerial Commission by the AO, which was already included in the common expenses allocated to Silvassa unit by the Assessee. The Tribunal directed the AO to reevaluate the computation and decide the issue afresh in line with their findings, allowing the first ground of appeal and treating the second ground as allowed for statistical purposes.

In conclusion, the Tribunal upheld the appeal, emphasizing the importance of direct nexus between expenses and the concerned undertaking for deduction purposes. The Tribunal's decision was based on established legal principles and precedents, ensuring a fair and just outcome in the matter.