2006 (6) TMI 198 - AT - Income Tax

Deduction u/s 80-IA and 80B - Profits And Gains From Infrastructure Undertakings - adjustment of deemed losses against profit - reallocation expenses - Bad debts written-off - HELD THAT - We are of the view that the confusion in the line of argument of the learned counsel arises out of insufficient appreciation of the import of the provisions contained in sub-section (5) and sub-section (1) of section 80-IA. Sub-section (5) creates a fiction that for the purpose of computing deduction u/s 80-IA, the eligible unit was the only unit operated by the assessee in the initial assessment year and in subsequent years for which the deduction is available. Therefore, its carried forward losses and unabsorbed depreciation have to be kept separately from other units operated by the assessee, if any, as also its profits. In view thereof, the provisions contained in section 80B(5) will have to be taken into consideration for finding out the gross total income as if eligible unit was the only unit operated by the assessee. It will also have to be held that profits and gains mentioned in sub-section (1) of section 80-I cannot exceed in quantum terms the gross total income defined in section 80B. We are also of the view that the decision of Hon'ble Supreme Court in the case of IPCA Laboratories Ltd. v. Dy. CIT 2004 (3) TMI 9 - SUPREME COURT supports our view for the reason that section 80HHC also uses the words profits derived by the assessee form the export of such goods or merchandize , which are similar to the words profits and gains derived by any eligible undertaking used in section. Thus, ground No. 1 of the appeal of the assessee is dismissed. Reallocation of expenses from Pimpri unit to Chakan unit - deduction u/s 80-IA - We are of the view that the learned CIT(A) has rightly come to the conclusion that the expenses which are properly relatable to one or the other unit should be allocated to that unit only. We are also in agreement with him that head office expenses and directors' remuneration should be allocated on the basis of turnover of the two units as that seems to be only the rational way to allocate these expenses. Thus, we do not find any reason to interfere with the order of the learned CIT(A). Thus, ground No. 2 of the appeal of the assessee is dismissed. Bad debts written-off - A debt, which is otherwise a proper bad debt and the recovery of which has been pending for quite sometime, does not become a good debt merely on the reasoning that no step has been taken to recover the debt. In some cases, such a legal pursuit may amount to throwing good money in litigation for recovery of an amount whose recovery was doubtful on account of counter claims of the debtors. Therefore, we are of the view that the argument of the learned DR does not lead to a conclusion that the debts were not bad. Further, the debts have been written-off from the books of account, they pertained to the trading transactions of the assessee and in most of the cases legal proceedings were barred by limitation. Thus, we are of the view that it is a case where bad debts have been written-off from the books of account, which have been considered earlier in computation of income of the assessee. In view thereof, we do not find any reason to interfere with the order of the learned CIT(A) on this issue. In result, the appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Calculation of eligible profits for deduction under section 80-IA.
2. Reallocation of expenses from Pimpri plant to Chakan plant.
3. Deduction of bad debts written-off.

Issue-wise Detailed Analysis:

1. Calculation of Eligible Profits for Deduction under Section 80-IA:

The assessee contested that the lower authorities erred in deducting the set-off of loss incurred in the assessment year 1997-98 by the Chakan Unit against the profits of the Chakan unit for the assessment year 1998-99. The assessee argued that the losses were already adjusted against the profits of another plant in the assessment year 1997-98, leaving no unabsorbed loss for subsequent years. The CIT(A) referred to section 80-IA(5), which mandates that for computing deduction under section 80-IA, it must be presumed that the eligible business is the only source of income. Thus, the losses from the previous year must be reduced from the profits of the subsequent year. The Tribunal upheld this view, citing decisions from ITAT Chennai and Mumbai Benches, which emphasized that the provisions of section 80-IA create a legal fiction isolating the profits and losses of the eligible unit from other sources of income. Consequently, the first ground of the assessee's appeal was dismissed.

2. Reallocation of Expenses from Pimpri Plant to Chakan Plant:

The assessee challenged the reallocation of certain expenses from the Pimpri plant to the Chakan plant for calculating eligible profits under section 80-IA. The CIT(A) agreed with the assessee that direct expenses identifiable with one unit should not be reallocated. However, he upheld the reallocation of common head office expenses and directors' remuneration on a turnover basis, reasoning that higher turnover would require more management attention. The Tribunal found no reason to interfere with this conclusion, affirming that the reallocation method adopted by the CIT(A) was rational and appropriate. Thus, the second ground of the assessee's appeal was dismissed.

3. Deduction of Bad Debts Written-off:

The revenue's sole ground of appeal was against the CIT(A)'s decision to allow the deduction of bad debts amounting to Rs. 5,50,295/-. The Assessing Officer had disallowed the deduction, arguing that the debts were merely provisioned and not written-off in the books of account, and that no steps were taken to recover them. The CIT(A) found that the debts were indeed written-off and pertained to sales from earlier years, satisfying the conditions of section 36(1)(vii). The Tribunal supported this finding, noting that the debts were old, recovery was barred by limitation, and legal proceedings would likely be futile due to counterclaims. Therefore, the Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal.

Conclusion:

The Tribunal dismissed both the assessee's and the revenue's appeals, upholding the CIT(A)'s decisions on all contested issues. The judgments emphasized the importance of legal fictions created by tax provisions and the rational allocation of expenses for computing eligible deductions.