1997 (1) TMI 129 - AT - Income Tax

Assessing Officer, Assessment Year, Backward Area, Business Expenditure, Foreign Currency, Industrial Undertaking, Plant And Machinery, Profits And Gains

Summary

Issues Involved:
1. Whether Unit-II should be treated as a separate unit for the purpose of deductions under sections 80HH and 80-I.
2. Whether the deduction under sections 80HH and 80-I should be allowed from the profits of Unit-I without deducting the loss incurred in Unit-II.
3. Whether depreciation should be allowed on the additional cost of imported plant and machinery due to exchange rate fluctuations.
4. Whether the claim of deduction of expenses relating to earlier years should be allowed.
5. How administrative and other expenses should be allocated between Unit-I and Unit-II.
6. Whether certain items of income should be included for deductions under sections 80HH and 80-I.

Detailed Analysis:

1. Separate Unit for Deductions (Unit-II):
The primary issue was whether Unit-II should be considered a separate industrial undertaking for the purposes of deductions under sections 80HH and 80-I. The assessee set up Unit-II in collaboration with Italian concerns, claiming it as a separate unit. The Assessing Officer (AO) rejected this claim, viewing Unit-II as an expansion of Unit-I. However, the CIT(Appeals) ruled in favor of the assessee, recognizing Unit-II as a separate undertaking. The Tribunal upheld this decision, noting that Unit-II was an independent and viable unit capable of producing goods independently of Unit-I, despite common management and interlacing of funds. This conclusion was supported by various judicial precedents, including Textile Machinery Corpn. Ltd. v. CIT and CIT v. Indian Aluminium Co. Ltd..

2. Deduction Without Deducting Loss:
The second issue was whether deductions under sections 80HH and 80-I should be allowed from the profits of Unit-I without deducting the loss incurred in Unit-II. The CIT(Appeals) ruled in favor of the assessee, allowing deductions from Unit-I's profits without considering Unit-II's losses. The Tribunal upheld this decision, referencing CIT v. Canara Workshops (P.) Ltd., which held that profits from one priority industry should not be reduced by losses from another industry owned by the same assessee.

3. Depreciation on Exchange Rate Fluctuations:
The third issue concerned the allowance of depreciation on the additional cost of imported plant and machinery due to exchange rate fluctuations. The AO disallowed the claim, but the CIT(Appeals) directed the AO to verify and recompute the depreciation. The Tribunal confirmed this decision, citing judicial precedents like CIT v. Arvind Mills Ltd., which supported the allowance of depreciation on increased liabilities due to exchange rate fluctuations.

4. Deduction of Expenses of Earlier Years:
The fourth issue was whether the claim of deduction of Rs. 25,315 relating to expenses of earlier years should be allowed. The CIT(Appeals) allowed the deduction, noting that these expenses crystallized during the current year. The Tribunal upheld this decision, finding that such expenses are a regular feature and tend to cancel out over time.

5. Allocation of Administrative and Other Expenses:
The fifth issue was the method of allocating administrative and other expenses between Unit-I and Unit-II. The CIT(Appeals) suggested allocation on an actual basis or by production rate, while the assessee preferred the installed capacity ratio. The Tribunal found the installed capacity ratio more appropriate, given Unit-II's larger capacity and initial operational challenges. This method was deemed to provide a more accurate reflection of the expenses attributable to each unit.

6. Inclusion of Certain Income Items for Deductions:
The sixth issue involved whether certain items of income (lease rent, job work charges, technical service charges, interest income, dividend income, and profit on sale of investment) should be included for deductions under sections 80HH and 80-I. The Tribunal ruled that job work charges, dividend income, and profit on sale of investment were not eligible for deductions. However, it allowed deductions for technical service charges (as they reduced the expenditure of the industrial undertaking) and part of the interest income, excluding interest from income-tax refunds.

Conclusion:
- Revenue's appeals for both assessment years were dismissed.
- Assessee's appeal for assessment year 1991-92 was allowed.
- Assessee's appeal for assessment year 1992-93 was partly allowed.