2005 (11) TMI 201 - AT - Income Tax

Computation of deduction u/s 80-IA - various undertakings - maintaining separate accounts - manufacturing activity - allocation of head office expenditure - setting off the brought forward losses - clubbing the profit and loss of units engaged in same activities - Non-speaking order Order passed by the learned CIT(A) and no reason has been given why unit 206 should be treated as independent unit - HELD THAT - There is no such restriction that two undertakings manufacturing the same type of product will be considered as one undertaking. There are conditions specified in sub-s. (2) of s. 80-IA for an undertaking to be eligible to claim deduction. As per this sub-section, all that is required is that the undertaking should be a new undertaking having new plant and machinery. It nowhere puts a condition that it should manufacture a new product or goods other than what is being manufactured or produced by the assessee in any other undertakings. Thus, the reasoning of the AO that units 196 and 205 are one and the same and accepted by the CIT(A) for units 196 and 205 is not correct. There is nothing to justify, in view of the express provisions of the Act, to hold that units 196, 205 and 206 need to be clubbed for computing deduction under s. 80-IA. Accordingly, so long an undertaking fulfils the requirement of these provisions, the deduction under s. 80-IA cannot be denied or reduced by adjusting loss of other undertakings. In this case it is clear that these undertakings are located in different premises, being Nos. 196, 205 and 206. The plant and machinery are also independent and there is no allegation in the assessment order that in these undertakings there is a mixing up of machinery or plant. This is important because as per sub-s. (2) of this section for claiming exemption as an industrial undertaking one has to fulfil the condition that the undertaking has not been formed by transfer to a new business of machinery or plant previously used for any purpose. In view of this fact, it cannot be held that these undertakings are not independent undertakings and each of the undertakings, i.e., 196,205 and 206 are independent undertakings. Accordingly, the action of the AO in clubbing the income of all 3 units for computing deduction under s. 80-IA was not justified. The deduction under s. 80-IA is to be computed with respect to each unit independently taking into consideration the profit of each unit only without clubbing loss of other units. The contention of the Departmental Representative that CIT(A) was unjustified in treating unit 206 as an independent unit cannot be accepted. The CIT(A) has given valid reasons for treating unit 206 as an independent unit and the contention of the Departmental Representative that CIT(A) has not given any reasons is also against the facts on record. The order of the CIT(A) is very specific and the CIT(A) has given detailed reasoning for the same and accordingly we hold that CIT(A) was correct in holding that unit 206 is an independent unit. Even otherwise, as stated above, we are of the view that there cannot be clubbing of units 196, 205 and 206. The contention of the Revenue on this point is being rejected. Allocation of the balance 10 per cent head office expenditure - Any allocation of the expenditure of the head office has to be done to all the units which are operating under the head office, unless there are valid reasons to exclude any particular unit. The learned Departmental Representative could not point out any infirmity in the formula adopted by the CIT(A) and more so when the allocation of 90 per cent head office expenditure done by the assessee to all the units has been accepted by the AO as well. Adjustment of the brought forward losses under the head office, the CIT(A) has rightly held that there is no reason to allocate these losses of all earlier years when there was profit in one unit and loss in other units and more so when all units were treated as separate industrial undertakings for computation of deduction u/s. 80-IA in the earlier years. Thus, ground No.1 raised by the Revenue is rejected.

Summary

Issues Involved:
1. Deduction under Section 80-IA.
2. Deduction under Section 80HHC.

Detailed Analysis:

1. Deduction under Section 80-IA:

The Revenue appealed against the CIT(A)'s order allowing a deduction under Section 80-IA at Rs. 97,97,898, as opposed to Rs. 31,01,627 restricted by the AO. The primary contention was whether the profits of units 196, 205, and 206 should be clubbed together and if the head office expenses and brought forward losses should be allocated to these units.

The assessee, a company engaged in manufacturing medical disposals, maintained separate accounts for its various units. The AO had clubbed the profits of units 196, 205, and 206, allocated the entire head office expenditure, and adjusted brought forward losses against the profits of these units. The CIT(A) partly accepted the assessee's contention, holding that only units 196 and 205 should be clubbed, while unit 206 should be treated independently.

The Tribunal upheld the CIT(A)'s decision, emphasizing that under Section 80-IA, each unit should be treated as an independent undertaking. The Tribunal noted that the AO's reasoning for clubbing the units was flawed and contrary to the provisions of the Act, which require that the deduction be computed for each unit independently. The Tribunal also agreed with the CIT(A) that the head office expenses should be allocated proportionately to all units and not just the three units in question. Additionally, the Tribunal supported the CIT(A)'s decision not to adjust brought forward losses against the current year's income of the units, as these losses pertained to earlier years when profits and losses were determined individually for each unit.

2. Deduction under Section 80HHC:

The Revenue challenged the CIT(A)'s exclusion of excise duty from the total turnover and the exclusion of losses from the share business activity while computing the deduction under Section 80HHC.

The Tribunal upheld the CIT(A)'s decision, citing various High Court judgments that supported the exclusion of excise duty from the total turnover for computing the deduction under Section 80HHC. The Tribunal also agreed with the CIT(A) that the share business activity, being independent and maintained separately, should not be included in the computation of the deduction under Section 80HHC. The Tribunal referenced several judgments from the Delhi Bench of the Tribunal that upheld this view.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on both grounds. The Tribunal held that the deductions under Sections 80-IA and 80HHC were correctly computed by treating each unit independently and excluding excise duty and share business losses from the respective computations.