2018 (8) TMI 2167 - AT - Income Tax

Addition u/s 14A r.w. Rule 8D - Assessee disallowed an amount as administrative expenditure pertaining to exempt income earned by the assessee during the year under consideration - HELD THAT -Assessee was having enough interest free own fund and there was no unsecured loan reflected in the balance sheet of the company. Therefore we are not inclined with the decision of the ld. CIT (A) to make disallowance in respect of interest expenses u/s. 14A of the act. Administrative expenses we find merit in the finding of the assessing officer that assessee has not maintained separate accounts for the treasury division and it has also failed to furnish the relevant basis for allocation of this expenses and also failed to substantiate with relevant material for not allocating the common management expenses towards administrative expenses. We justify the decision of the CIT (A) for the disallowance u/s 14A r.w. Rule 8D as computed by the assessing officer in para 8.11 of the assessment and we delete the other part of expenses in the category of interest disallowance to the amount. Nature of expenses - Disallowance on account of product registration expenses - AO noticed that assessee has incurred an amount for registering PPL products in foreign countries - assessee company explained that these expenses have been incurred to enable assessee to register and sell its products in specified territories - CIT(A) deleted addition - HELD THAT - It is noticed that assessee has incurred these expenses for registering its product in various countries to enable the assessee to sell the product in such counties. As in absence of registration the assessee would not be able to sell the product in the foreign countries as per the regulatory requirement of different countries it is mandatory to get the product of the assessee registered in respect of counties for the purpose of selling in the overseas markets. Therefore the finding of the assessing officer that assessee is getting benefit of enduring nature of registration of product has no merit. In the light of the above facts and circumstances we observed that ld. CIT (A) has correctly deleted the impugned addition. Addition on account of difference in value of stock shown before the bank - CIT(A) deleted addition - HELD THAT - The assessee has also explained that details of closing stock used to be furnished to the bank on the basis of estimated fair market value whereas inventory shown under books of account was valued on cost or market rate whichever was lower on the basis of accounting standard-2. It is also noticed that loan obtained from the bank during the year was reduced to Rs. 5.54 crores as on 31st March 2008 as against Rs. 12.5 crores as on 31st March 2007 which demonstrate that there is no question of inflating the value of stock because of reduction in the amount of loan obtained from the bank. AO has not disproved the above facts contended by the assessee in support of its claim that difference is only on account of difference in valuation rates - Decided in favour of assessee. Reduction of the claim u/s 80IC of the Income Tax Act for the Baddi unit - AO as of the view that profit was comprised of three parts i.e. manufacturing of product marketing of product and on account of brand sales thus Baddi unit comprised of only manufacturing activity therefore the profit in respect of Baddi unit should be restricted to profit attributable towards manufacturing activities only - HELD THAT - After perusal of material on record we observe in the case of the assessee the sale and market division are the integral part of the manufacturing unit which cannot be separated on artificial basis. In the case of the assessee there are only two units located at Kalol and Baddi and while claiming tax benefits incomes and expenses incurred for Kalol units has been reduced from the total profits and deduction has been claimed on the basis of profit attributable to Baddi unit. The marketing and distribution costs are generally allocated on the basis of turnover on scientific basis therefore we do not justify the action of the assessing officer of segregation of profit to Baddi unit on assumption basis. All the activities from beginning to end of the process together constitute the business of Baddi unit and profit derived from the entire process is eligible for the tax holiday and not from separate activities of the unit. In such circumstances provisions of section 80IC do not require assessee to split the activities and contribute the profit attributable to separate activities which constitute one business. We have also considered the decision of Cadila Healthcare Ltd. 2012 (6) TMI 13 - ITAT AHMEDABAD wherein on identical facts on claim of deduction from eligible profits derived by a Baddi unit of a pharmaceutical company it is held that that eligible profits should not be artificially segregated in to manufacturing marketing and brand profits. Decided against revenue.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

1. Whether the disallowance of expenses under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962, was justified in the context of investments made from interest-bearing funds.

2. Whether the product registration expenses incurred by the assessee should be treated as capital in nature or as revenue expenses.

3. Whether the addition made by the Assessing Officer on account of the difference between the stock value shown to the bank and the value recorded in the books was justified.

4. Whether the reduction of the claim under Section 80IC of the Act for the Baddi unit was warranted, specifically concerning the segregation of profits into manufacturing and marketing profits.

ISSUE-WISE DETAILED ANALYSIS

1. Disallowance under Section 14A read with Rule 8D

- Legal Framework and Precedents: Section 14A of the Income Tax Act disallows expenses incurred in relation to income not includible in total income. Rule 8D provides the method for determining such disallowance.

- Court's Interpretation and Reasoning: The Tribunal noted that the assessee had sufficient interest-free funds and no unsecured loans, implying that investments were likely made from these funds. The Tribunal found the CIT(A)'s decision to disallow interest expenses unjustified, but upheld the disallowance of administrative expenses due to lack of separate accounts for the treasury division.

- Key Evidence and Findings: The balance sheet showed significant share capital and reserves, with no unsecured loans, supporting the assessee's claim of using interest-free funds for investments.

- Application of Law to Facts: The Tribunal applied the principles from the Act and Rules, concluding that the disallowance of interest was unwarranted but upheld the administrative expenses disallowance.

- Treatment of Competing Arguments: The Tribunal balanced the assessee's evidence against the CIT(A)'s assumptions, focusing on the actual financial statements rather than presumptions.

- Conclusions: The appeal was partly allowed, with disallowance limited to administrative expenses.

2. Product Registration Expenses

- Legal Framework and Precedents: The nature of expenses (capital vs. revenue) is determined by their purpose and benefit duration.

- Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that these expenses were necessary for regulatory compliance and did not create an enduring benefit, thus classifying them as revenue expenses.

- Key Evidence and Findings: The expenses were for registering products in foreign countries, a requirement for sales in those markets.

- Application of Law to Facts: The Tribunal considered the regulatory nature of the expenses, aligning with the CIT(A)'s view that they were not capital in nature.

- Treatment of Competing Arguments: The Tribunal dismissed the Assessing Officer's view of enduring benefit, emphasizing the necessity for compliance.

- Conclusions: The appeal of the revenue on this issue was dismissed.

3. Addition on Account of Stock Value Difference

- Legal Framework and Precedents: The valuation of stock should reflect actual costs or market value, not estimates given to banks.

- Court's Interpretation and Reasoning: The Tribunal found the difference due to valuation methods, not quantity discrepancies, supporting the CIT(A)'s decision to delete the addition.

- Key Evidence and Findings: The stock value discrepancy was due to different valuation bases, not actual stock differences.

- Application of Law to Facts: The Tribunal emphasized the consistency of valuation methods with accounting standards.

- Treatment of Competing Arguments: The Tribunal supported the CIT(A)'s reliance on precedents that valuation differences alone do not justify additions.

- Conclusions: The revenue's appeal was dismissed.

4. Reduction of Claim under Section 80IC

- Legal Framework and Precedents: Section 80IC provides deductions for profits derived from eligible businesses, without requiring segregation of profits into manufacturing and marketing components.

- Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that the entire business process, including manufacturing and marketing, constituted the eligible business for deduction purposes.

- Key Evidence and Findings: The Baddi unit's profits were derived from integrated business activities, not just manufacturing.

- Application of Law to Facts: The Tribunal emphasized the holistic nature of the business operations, rejecting artificial segregation.

- Treatment of Competing Arguments: The Tribunal dismissed the Assessing Officer's segmentation approach, aligning with judicial precedents supporting integrated profit consideration.

- Conclusions: The revenue's appeal was dismissed, upholding the CIT(A)'s decision.

SIGNIFICANT HOLDINGS

- The Tribunal upheld the principle that disallowance under Section 14A should be based on actual financial evidence, not assumptions about fund sources.

- It reinforced the classification of product registration expenses as revenue, emphasizing regulatory compliance over enduring benefits.

- The Tribunal confirmed that valuation differences without quantitative discrepancies do not justify stock value additions.

- It established that Section 80IC deductions should consider the entire business process, not artificially segregated profits.

The final determinations were that the assessee's appeal was partly allowed, and the revenue's appeals were dismissed, aligning with the CIT(A)'s findings on all major issues.