2018 (11) TMI 1965 - HC - Income Tax

Determination of profit of assessee's two units - AO computed the profits of both the units on the basis of allocation of proportionate expenditures, in the ratio of their respective turnover to the combined turnover - finding of the appellate authorities holding that the assessee has not inflated the profits from MEL (Non-EOU) and MEL (EOU) by debiting the common expenditure in the books of accounts of the non-EOU and the estimation of the profits by the AO HELD THAT - CIT(A) accepted the re-computation made by the AO. Tribunal affirmed the view of the CIT(A). It also came to the view that the AO has not found any defect or mistake in the books of accounts so as to justify invocation of sec 145. That, in fact, the AO having accepted the books profit as shown in respect of MEL (EOU), P L a/c. as well as that of MEL (Non-EOU) could not have interfered with the same. That in the absence of any defect in the books of accounts, there was no justification for determination of profits of MEL (EOU) undertaking in the ratio of turnover by aggregating the profit shown in respect of two undertakings. That activity of MEL (Non-EOU) is largely trading, whereas in the case of MEL (EOU), it is manufacturing and production. Therefore, the comparison of the financial result has to be considered likewise. Thus, no ground to interfere in the impugned orders. The orders passed by both the authorities are just and proper. Each of the expenses allocated by the assessee has been rightly reflected in the books of accounts of both the units. Therefore, the findings recorded by the Tribunal, being just and proper, do not call for interference. Hence, the first substantial question of law is answered by holding that the findings of the appellate authorities that the assessee has not inflated the profits from MEL (Non-EOU) and MEL (EOU) by debiting the common expenditure in the books of accounts of MEL (Non-EOU) and the estimation of the profits by the AO are just and appropriate.

Summary

Issues:
Assessment of profits for two units - MEL (EOU) and MEL (Non-EOU) based on allocation of common expenditures. Allegation of inflating profits by debiting common expenses to MEL (Non-EOU). Questions on the correctness of the assessment and compliance with relevant tax provisions.

Analysis:

Issue 1: Allocation of Expenditures and Profit Computation
The case involved the assessment of profits for MEL (EOU) and MEL (Non-EOU) by allocating common expenditures. The Revenue alleged that expenses were wrongly allocated to MEL (Non-EOU) to inflate profits of MEL (EOU). The CIT(A) partly allowed the appeal, leading to further appeals and cross-objections. The Revenue contended that the orders of the CIT(A) and Tribunal were erroneous as they failed to consider the material on record and the company's books of accounts. They argued that expenses were improperly shown in MEL (Non-EOU) to portray a higher profit for MEL (EOU). However, the respondent argued that both units maintained separate accounts, and the apportionment of expenses was based on actual expenditures incurred by each unit.

Issue 2: Compliance with Tax Provisions
The substantial questions of law raised included whether the appellate authorities correctly assessed the profits of MEL (EOU) and MEL (Non-EOU) and if the allocation of expenses complied with tax provisions. The CIT(A) and Tribunal considered each expense allocated by the assessee and found them appropriately reflected in the books of both units. The Tribunal noted that the AO did not identify any defects in the books of accounts to warrant invoking section 145 of the Income Tax Act. They emphasized that the comparison of financial results should consider the distinct activities of MEL (EOU) in manufacturing and production, and MEL (Non-EOU) in trading. Ultimately, the Tribunal upheld the CIT(A)'s decision, concluding that the allocation of expenses was justified and the profits were accurately computed for each unit.

In conclusion, the High Court upheld the decisions of the appellate authorities, finding no grounds to interfere with the orders. The Court determined that the expenses allocated by the assessee were appropriately reflected in the books of both units, and the profit computation was deemed accurate. Consequently, the Court answered the substantial questions of law by affirming that the profits were not inflated by debiting common expenses to MEL (Non-EOU), and the assessment by the AO was just and proper. Therefore, the appeals were disposed of accordingly.