2022 (6) TMI 1522 - AT - Income Tax

Deduction u/s 80IA - profit derived from the eligible power plant by apportionment of more expenses - apportionment of expenditure between Power Plant and Sponge and Iron unit - HELD THAT - As observed that a similar issue was involved in assessee s own case for earlier years right from AY 2008-09 and when the same reached to the Tribunal initially for AY 2008-09 Tribunal upheld the appellate order of the CIT (A) giving similar relief to the assessee on the issue under consideration and decided that certain expenses were not attributable to the Power Plant Division as they were exclusively related to manufacturing activities of the Sponge Iron Unit. Tribunal also noted that previous decisions in the assessee s own case for earlier years (AY 2008-09 and AY 2009-10) had set a precedent for not apportioning such expenses to the Power Plant Division. The assessee has not charged the price to its associate concern at an higher rate. It is commensurate to the market rate. Considering the finding of the ld. CIT(A) on this issue we do not see any reason to interfere in it. AO has rightly been directed not to exclude a sum from eligible profit for grant of deduction under section 80IA. Decided against revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issue presented and considered in this judgment is whether the apportionment of common expenses between the Power Plant Division and the Sponge Iron Unit of the assessee company was justified, specifically in the context of claiming deductions under Section 80IA of the Income-tax Act, 1961.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Apportionment of Common Expenses and Deduction under Section 80IA

Relevant Legal Framework and Precedents:

The legal framework revolves around Section 80IA of the Income-tax Act, 1961, which provides for deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development. The provision requires that profits eligible for deduction must be derived from the eligible business, and any common expenses must be appropriately apportioned to ensure accurate profit calculation.

Precedents from earlier assessment years (AYs) were considered, where similar issues were adjudicated, and relief was granted to the assessee by the CIT (A) and upheld by the Tribunal.

Court's Interpretation and Reasoning:

The court interpreted that the apportionment of common expenses should be based on a rational and scientific method. The CIT (A) and the Tribunal had previously decided that certain expenses were not attributable to the Power Plant Division as they were exclusively related to manufacturing activities of the Sponge Iron Unit. The Tribunal also noted that previous decisions in the assessee's own case for earlier years (AY 2008-09 and AY 2009-10) had set a precedent for not apportioning such expenses to the Power Plant Division.

Key Evidence and Findings:

The key evidence included the financial records of the assessee, showing separate accounts for the Power Plant and Sponge Iron units. The assessee argued that the Power Plant was an automatic plant requiring minimal expenses, and historical data supported that no maintenance cost was incurred during the warranty period.

Application of Law to Facts:

The court applied the law by assessing the nature of the expenses and their direct relation to the respective units. It was found that manufacturing expenses were not related to the Power Plant Division and thus should not be apportioned. Administrative expenses were to be apportioned based on the turnover ratio, which was a more equitable method.

Treatment of Competing Arguments:

The Revenue argued that common expenses should be shared between the units due to their geographical proximity and shared administration. However, the court found that the assessee had maintained separate accounts and had previously been granted relief on similar grounds, which was not contested by the Revenue in subsequent years due to low tax effect.

Conclusions:

The court concluded that the apportionment of expenses as done by the Assessing Officer was not justified. The CIT (A)'s decision to allocate administrative expenses based on turnover ratio was upheld, and the manufacturing expenses were deemed not allocatable to the Power Plant Division.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning:

"The Hon. CIT (A) in preceding years from A.Y. 2007-08 to A.Y 2015-16 has also deleted the allocation made by the Assessing Officer holding the expenditure not allocatable to 80IA unit."

Core Principles Established:

The principle that expenses should be apportioned based on their direct relation to the respective units and that turnover ratio is a suitable method for apportioning administrative expenses was reinforced. The court also emphasized the importance of consistency with past decisions in similar circumstances.

Final Determinations on Each Issue:

The appeal by the Revenue was dismissed, and the decision of the CIT (A) to partially allow the deduction under Section 80IA by reallocating expenses based on turnover ratio was upheld. The court found no merit in the Revenue's arguments for reallocating manufacturing expenses to the Power Plant Division.

In conclusion, the judgment reaffirmed the necessity of a rational basis for expense apportionment and upheld the principle of consistency with prior rulings in similar cases, particularly when such rulings have not been contested by the Revenue in subsequent years.