2015 (7) TMI 842 - AT - Income Tax

Eligibility of the EOU unit for claiming deduction u/s 10B - AO denied the claim of deduction mainly on the ground that 10B unit was an expansion of business since it was started in F.Y. 1999-2000 and secondly the expenses of 10B unit were shifted to non 10B unit to show and claim higher profits in 10B unit - CIT(A) allowed claim - Held that - CIT(A) has rightly held that the unit of the assessee was eligible for claim of 10B deduction as per the CBDT Circular No.1/2005 dated 6th January 2005. The Ld. CIT(A) after analyzing the remand reports, details and evidences on the file and considering the submissions of the assessee has very rationally allocated certain expenses of the non 10B Unit to the eligible Unit and thereafter has restricted the disallowance to ₹ 33,54,723/- and has allowed the balance claim of deduction. We do not find any reason to interfere in the well reasoned order of the CIT(A). - Decided against revenue.

Issues Involved:
1. Eligibility of the unit for deduction under Section 10B of the Income Tax Act.
2. Allocation and shifting of expenses between 10B and non-10B units.
3. Calculation and restriction of allowable deduction under Section 10B.

Issue-wise Detailed Analysis:

1. Eligibility of the unit for deduction under Section 10B:
The assessee claimed a deduction under Section 10B for the Export Oriented Unit (EOU) at Roha, which was engaged in manufacturing BTCA, a chemical used in the textile industry. The unit was converted into an EOU in July 2005. The Assessing Officer (AO) denied the deduction on the grounds that the unit was an expansion of an existing business since it had been operational since FY 1999-2000 and could not be considered an independent new unit. However, the CIT(A) referenced CBDT Circular No. 1/2005, which clarified that an undertaking set up in a Domestic Tariff Area and subsequently converted into an EOU is eligible for deduction under Section 10B. The CIT(A) upheld the eligibility of the unit for the deduction, a decision which was affirmed by the Tribunal.

2. Allocation and shifting of expenses between 10B and non-10B units:
The AO contended that the expenses of the 10B unit were shifted to the non-10B unit to show higher profits in the 10B unit. The AO's first remand report indicated that identifying specific shifted expenses would be time-consuming and instead relied on a ratio and proportionate method. The AO's subsequent reports reiterated the need to sustain the disallowance based on comparative analysis of expenses between the units. The CIT(A) considered the remand reports, the assessee's explanations, and the monthly production reports submitted to the Excise Department, which showed the actual raw material consumption and power & fuel expenses. The CIT(A) concluded that the raw material and power & fuel expenses were not shifted between units, supported by the fact that the raw materials for the units were entirely different and monitored by the Excise Department.

3. Calculation and restriction of allowable deduction under Section 10B:
The CIT(A) allocated certain expenses of the non-10B unit to the 10B unit based on logical criteria, such as turnover for administrative expenses and actuals for raw material consumption. The reallocation resulted in a reduction of the 10B unit's profit. The CIT(A) restricted the disallowance of the deduction to Rs. 33,54,723 and directed the AO to allow the balance amount of Rs. 1,11,01,062 as a deduction under Section 10B. The Tribunal found the CIT(A)'s order well-reasoned and upheld the decision, dismissing the revenue's appeal.

Conclusion:
The Tribunal affirmed the CIT(A)'s decision that the unit was eligible for the Section 10B deduction and upheld the rational allocation of expenses between the 10B and non-10B units. The appeals for both assessment years 2007-08 and 2008-09 were dismissed, with the Tribunal finding no merit in the revenue's arguments. The order was pronounced in open court on 22/07/2015.

← Previous Next →