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2014 (4) TMI 618 - AT - Income TaxClaim of deduction u/s 80IC of the Act - Applicability of section 115JB of the Act Partial disallowance of 10% of turnover as profit on account of the market value of the brand Held that - The assesses books have been accepted, brand is owned by it which is integral part of the assets of the eligible unit - The sales have not been disturbed, profits of the eligible unit have gone up to 33% from preceding year s 29% due to its product superiority - The basis given by authorities below for reduction of claim is vague and factually incorrect based on an assumption that brand does not belong to the assessee - Without any material or basis, it is assumed that it may belong to some other concern connected to its directors - The fact of the matter is that the brand is owned by assessee and the products manufactured at Haridwar unit are the only products - There exists no other entity which is identified as owner of the brand by AO thus the allegation is factually incorrect - the provision of sec 80IC have been introduced by legislature to promote the industrial activity and their profitability - Merely because the industrial undertaking earned higher profits does not call for an inference that claim of deduction is to be will be nil on presumptions there was no justification in CIT(A)s order retaining the reduction of 10% from the deduction thus, is set aside Decided against Revenue. Disallowance @ 5% of turnover Value of the director s experience and knowledge Held that - The AO was of the view that 5% of the turnover of the company is attributable to the experience and specialized knowledge of the director and not to the eligible unit - As per the P&L a/c for the period ending 31-03-2006, the director s remuneration was Rs. 60,000/- Over a period of two years it has been increased to Rs. 23,00,000 - This shows that adequate compensation is being provided to the director for his services, knowledge, contract and skills - As the company have adequately compensated the director for using their experience and specialized knowledge, therefore, the benefit accruing to the company belongs to it and would form part of its eligible profit - Benefit accruing a company as a result of experience or knowledge of its employees (Directors) cannot be used to bifurcate the eligible profit derived by the industrial undertaking u/s 80IC thus, the order of the CIT(A) upheld Decided against Revenue. The assessee filed a consolidated financial statement in which the expenses incurred by all the units and the head office have been reduced before arriving at the total eligible profit for claiming deduction u/s 80IC revenue has not controverted the statement in any manner - All sales, purchases and manufacturing activities are carried out by the Haridwar Unit - The other branches are providing sales promotion and after sales service - The income earning activities thus cannot be held to the carried out from places other than the eligible unit besides in consolidated financial statement the income of these branches has already been reduced Decided against Assessee. Liability to pay MAT u/s 115JB of the Act Held that - CIT(A) was of the view that the exemption is available to SEZ only and that too when the assessee is a developer - Ongoing through the above sub-section (6) it is clear that the exemption is available from any business carried on in a unit - The assessee has carried on the business in its unit at Haridwar and hence it is eligible for deduction under Section 115JB of the Act thus, there is no reason to interfere in the order of the CIT(A) Decided against Assessee.
Issues Involved:
1. Deduction under Section 80-IC. 2. Applicability of Section 115JB (Minimum Alternate Tax - MAT). Detailed Analysis: 1. Deduction under Section 80-IC: - Assessee's Claim and AO's Reduction: - The assessee, an industrial undertaking in Haridwar, claimed deduction under Section 80-IC for manufacturing auto parts. The AO acknowledged the eligibility but reduced the deduction, attributing high profitability to brand value, directors' experience, and branch activities. - The AO estimated 20% of sales as profit due to brand value and 5% due to directors' experience, reducing the eligible profits for deduction. - CIT(A) Ruling: - The CIT(A) reduced the brand value attribution from 20% to 10% but upheld the AO's decision on MAT applicability. - The CIT(A) disagreed with the AO's reduction based on directors' experience and branch activities, restoring the deduction on these grounds. - Tribunal's Decision: - Brand Value: The Tribunal found no justification for reducing the deduction based on brand value, as the brand was owned by the assessee and integral to its operations. The reduction of 10% by CIT(A) was deleted. - Directors' Experience: The Tribunal upheld CIT(A)'s decision that adequate compensation to directors negated the need for further reduction based on their experience. - Branch Activities: The Tribunal confirmed that all sales and manufacturing activities were conducted at the Haridwar unit, and expenses were properly accounted for, dismissing the AO's allocation of profits to other branches. 2. Applicability of Section 115JB (MAT): - Assessee's Argument: - The assessee argued that it should be exempt from MAT under Section 115JB(6), which exempts income from business carried on in a unit or Special Economic Zone (SEZ). - Authorities' Interpretation: - Both AO and CIT(A) held that the exemption under Section 115JB(6) applies only to SEZ units and not to other units. - Tribunal's Conclusion: - The Tribunal upheld the authorities' interpretation, confirming that the exemption under Section 115JB(6) is restricted to SEZ units. Consequently, the assessee's liability under MAT was affirmed. Conclusion: - Revenue's Appeal: Dismissed. - Assessee's Appeal: Partly allowed, with the deletion of the 10% reduction for brand value but upholding the applicability of MAT under Section 115JB. (Order pronounced in open court on 10.1.2014.)
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