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2015 (12) TMI 1373 - AT - Income TaxReallocation of expenses while granting Deduction u/s.80IB & 801C - Held that - It cannot be said that the benefit of R & D activity at Goa- PTD unit has benefited all the manufacturing units of the assessee during the year. Even as discussed above, the assessee has not allocated expenditure of Banglore R&D unit on the ground that the assessee s formulation units were not deriving benefit from the activity carried in Bangalore unit, hence applying the same analogy, the issue in the light of observations made above is required to be relooked into by the AO. We further find that even the above explanation was not offered by the assessee before the AO. The explanation given vide letter dated 30.03.10 for the first time was offered to the Ld. CIT(A), who has also not discussed it in the impugned order. Thus the above submissions of the assessee that the benefit of R&D activities of the assessee has been enjoyed by the other units manufacturing formulations have not been examined by either of the lower authorities. Even by the above submissions made before us without any supporting evidence are not sufficient to decide the issue under consideration. The matter under the circumstances required to be examined afresh by the AO in the light of the observations made above and considering the evidences that may be submitted by the assessee to support its claim. Under the circumstances, we restore this issue to the file of the AO to examine the contentions raised by the assessee in this respect and to verify as to which manufacturing units of the assessee had got the benefit of R&D activity and to what extent from the Goa-PTD unit and thereafter to decide the issue a fresh and to accordingly allocate the expenditure of the Goa- PTD unit to such manufacturing units proportionately. Disallowance under section 14A - disallowance restricted by the Ld. CIT(A) to the extent of 5% of the dividend income as against the suo-moto disallowance offered by the assessee @ 2% of the dividend income - Held that - different coordinate benches of this Tribunal have observed that in such cases certain percentage of exempt income can constitute a reasonable estimate for making disallowance for the years earlier to assessment year 2008-09. The Hon ble Bombay High Court in the case of CIT vs. Godrej Agrovet Ltd. (2014 (8) TMI 457 - BOMBAY HIGH COURT ) has upheld the order of the Tribunal directing the AO to restrict the disallowance to the extent of 2% of the total exempt income earned by the assessee. Under the circumstances, the proposition of law which emerges from the order of the Hon ble High Court in the case of Godrej Agrovet (supra) is that certain percentage of exempt income can constitute a reasonable estimate for making disallowance for the years earlier to assessment year 2008-09 and not that in each every case, such percentage is to be restricted @2% only. The Ld. CIT(A), in the facts and circumstances of the case has restricted the disallowance @5% of the dividend income against ₹ 1,19,012/- which appears to be quite reasonable. We therefore do not find any infirmity in the order of the Ld. CIT(A) in this respect. Addition on account of adjustments under section 145A in relation to excise duty and sales tax on closing inventory of raw material, packing material and stores & spares - Held that - The assessee was following Exclusive method in respect of raw material, packing material and spare parts and therefore adjustment on account of tax/duty is required to be made in respect of such items in the purchase/ sales, opening stock and closing stock. The auditors had computed the adjustment under section 145A at Nil as per clause 12(b) of the auditors report which has not been accepted by the AO without giving any reasons. The AO has made his own adjustment which does not give details of adjustment made in relation to opening stock, sales and closing stock in relation to items mentioned by him. The matter in our view requires fresh verification and AO is required to give specific finding as to how adjustment prepared by auditors was not found acceptable. We, therefore, set aside the order of CIT(A) and restore the matter to the file of AO for passing a fresh order after necessary examination in the light of our observations made above and after allowing opportunity of hearing to the assessee Ad-hoc disallowance @ 5% of repairs expenses incurred at Mumbai - Held that - We find that the AO has allowed the repair expenses in respect of other units except a few expenses about which the assessee could not substantiate its claim as discussed in the assessment order. In respect of Mumbai Unit, the AO had called upon the invoices of ₹ 50,000/- and above. It is an admitted fact on the file that the assessee has no evidence to support the claim as the same has allegedly been destroyed in fire. The AO thus could not verify the said claim of expenditure. The AO, despite the above fact, considering the overall facts of the case, has allowed the claim but has retained only 5% adhoc disallowance for want of supporting evidences, which action seems to be quite justified. We do not find any infirmity in the order of the AO in this respect. Addition made by the AO on account of capital expenditure as against the assessee s claim that the same was revenue expenditure - CIT(A) deleted the addition - Held that - This issue has been discussed by the Ld. CIT(A) after thoroughly examining the nature of expenses and relying upon the various case laws, has observed that these expenses were allowable as revenue expenditure because no new asset was acquired by the assessee and the expenditure was incurred to preserve the existing assets. He therefore held that the expenditure was allowable as revenue expenditure. However, the depreciation allowed on the asset in relation to the above amount of expenditure was liable to be withdrawn. After considering the submissions of the Ld. Representatives of the parties, we do not find any infirmity in the order of the Ld. CIT(A) in this respect. The appeal of the Revenue is therefore dismissed. Repairs and maintenance expenses was incurred for the maintenance and preservation of the assets and no new capital has come into existence. He, relying upon various judicial decisions of the higher judicial authorities, has held that the nature of expenses is revenue in nature.
Issues Involved:
1. Reallocation of research and development expenditure for deduction under Sections 80IB and 80IC. 2. Disallowance under Section 14A of the Income Tax Act. 3. Adjustments under Section 145A of the Income Tax Act. 4. Ad-hoc disallowance of repairs expenses. 5. Deletion of addition on account of capital expenditure treated as revenue expenditure. Detailed Analysis: Issue 1: Reallocation of Research and Development Expenditure The assessee challenged the reallocation of research and development (R&D) expenditure for deduction under Sections 80IB and 80IC. The Assessing Officer (AO) restricted the R&D expenditure of Goa R&D Unit to the Goa Unit only, while the assessee argued that the expenditure should be allocated to all units in the ratio of their turnover. The AO also disallowed the allocation of scientific research expenditure from the Jogeshwari R&D Unit to the Roha and Pithampur units. The Tribunal found that the benefit of R&D activities at Goa-PTD was not enjoyed by all units but only certain units. The Tribunal restored the issue to the AO to re-examine the allocation of R&D expenditure based on the units benefiting from the research. Issue 2: Disallowance under Section 14A The AO disallowed Rs. 11,87,354 under Section 14A as per Rule 8D, while the assessee had made a suo-moto disallowance of Rs. 47,605. The CIT(A) restricted the disallowance to 5% of the dividend income, amounting to Rs. 1,19,012. The Tribunal upheld the CIT(A)'s decision, finding it reasonable and consistent with the precedent set by the Hon'ble Bombay High Court in the case of "CIT vs. Godrej Agrovet Ltd." Issue 3: Adjustments under Section 145A The assessee contested the adjustments made by the AO under Section 145A related to excise duty and sales tax on closing inventory. The Tribunal restored the matter to the AO for fresh verification, directing the AO to examine the adjustments in light of the Tribunal's observations and the assessee's contentions. The Tribunal emphasized the need for the AO to consider the unpaid excise duty on finished goods and its inclusion in the valuation of closing stock. Issue 4: Ad-hoc Disallowance of Repairs Expenses The AO made an ad-hoc disallowance of 5% of repairs expenses incurred at the Mumbai unit due to the absence of supporting evidence, which was confirmed by the CIT(A). The Tribunal found the AO's action justified, given the lack of evidence due to the destruction of records in a fire. The Tribunal upheld the 5% ad-hoc disallowance as reasonable under the circumstances. Issue 5: Deletion of Addition on Account of Capital Expenditure The Revenue appealed against the CIT(A)'s deletion of an addition of Rs. 2,52,46,442, which the AO had treated as capital expenditure. The CIT(A) held that the expenses were revenue in nature as they were incurred to preserve existing assets without acquiring new ones. The Tribunal found no infirmity in the CIT(A)'s decision and upheld the deletion of the addition. Conclusion The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeals, directing the AO to re-examine specific issues and confirming the CIT(A)'s decisions on others. The Tribunal emphasized the importance of verifying the allocation of R&D expenditure and the reasonableness of disallowances under Section 14A and repairs expenses.
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