2016 (1) TMI 27 - AT - Income Tax

Reallocation of expenses incurred amongst Unit-I & Unit- II in proportion to the sales of these units - CIT(A) allowed part relief - Held that - Given a finding that Assessee has kept separate production record for both the units which indicate the quantitative of raw material consumed and production as per excise law, therefore held that A.O was not justified in re-allocating the expenses in proportion to the sale in both the units. However, with respect to certain other expenses, CIT(A) has noted that the procedure followed by Assessee for allocating the expenses were not logical and without any documentary evidence and with respect to those expenses he had directed to the A.O to apportion the expenses in the ratio of turnover. Before us, Revenue has not brought any material on record to controvert the findings of ld. CIT(A) - Decided against revenue

Summary

Issues:
1. Reallocation of expenses between different units for tax exemption eligibility.
2. Apportionment of expenses based on turnover ratio.
3. Discrepancies in profit ratios between units for tax benefits.

Analysis:
1. The appeal dealt with the reallocation of expenses incurred by a partnership firm engaged in manufacturing and trading of dyes and chemicals between its two units, one eligible for tax exemption and the other not. The Revenue challenged the CIT(A)'s decision to delete the addition of expenses reallocated to the unit eligible for exemption, impacting the claim under section 10B of the Income Tax Act, 1961. The Tribunal noted the Revenue's contention but upheld the CIT(A)'s decision based on precedents and lack of specific defects in the firm's accounts.

2. Another issue revolved around the apportionment of certain expenses based on turnover ratio between the two units. The Revenue contested the CIT(A)'s directive to allocate only specific expenses in this manner, arguing for a broader allocation. However, the Tribunal, following previous decisions, supported the CIT(A)'s reasoning, emphasizing the lack of material to challenge the allocation method applied by the firm.

3. The discrepancy in profit ratios between the units was a crucial point in determining tax benefits. The AO had raised concerns about the significant difference in profit ratios between the units, suspecting profit diversion for tax advantage. Despite the Revenue's plea to set aside the CIT(A)'s order, the Tribunal, guided by earlier judgments, found no fault in the CIT(A)'s decision and dismissed the appeal, affirming the order in favor of the assessee.

In conclusion, the Tribunal's judgment upheld the CIT(A)'s decision regarding the reallocation and apportionment of expenses, as well as the profit ratio differences between the units, based on established legal principles and precedents, ultimately dismissing the Revenue's appeal.