2016 (1) TMI 741 - AT - Income Tax

Excess deduction u/s 80IC - whether the assessee has claimed less expenses against 80IC units, thereby manipulating the accounts? - AO held that the assessee has claimed travelling expenses, legal and professional expenses, tender fee, commission, audit fee and director s remuneration disproportionately without any basis and the same was to be allocated and claimed in proportionate to the sales allocated to the eligible 80IC units and non 80IC units, made the impugned disallowance and reduced the deduction claimed by the assessee u/s 80IC deleted by CIT(A) - Held that - We are in agreement with the conclusion of the ld. CIT(A) that the expenses like travelling, legal and professional fees, tender fees, commission etc are in the nature of direct expenses which can be linked to the sales of respective units. While the assessee is maintaining separate books of account supported by bills and vouchers and all relevant details which were audited by the competent auditors and the claim of the assessee u/s 80IC of the Act was also verified and certified, then while the AO has not pointed out any defect in the financial statement and separately maintained books of accounts of the assessee and the AO has not raised any doubt in regard to the correctness, completeness of the financial statement and results of the assessee, then the notional disallowance made by the AO by taking proportionate sales of eligible 80IC and non 80IC units cannot be held as sustainable and in accordance with law. Under the above-noted factum and circumstances, the action of the AO in reducing the claim of deduction u/s 80IC cannot be held as correct and justifiable and thus we are inclined to hold that the ld. CIT(A) was rightly in directing the AO to delete the impugned addition. We are unable to see any ambiguity or perversity or any other valid reason to interfere with the order of the first appellate authority - Decided against revenue

Summary

Issues Involved:
1. Disallowance of excess deduction under section 80IC of the Income Tax Act.
2. Allocation of expenses between eligible and non-eligible units for claiming deduction under section 80IC.

Issue 1: Disallowance of excess deduction under section 80IC of the Income Tax Act:
The case involved an appeal by the Revenue against the order of the CIT(A) allowing excess deduction under section 80IC of the Income Tax Act. The AO had reduced the deduction claimed by the assessee under section 80IC due to disproportionate allocation of expenses, such as travelling expenses, legal and professional charges, tender fee, commission, audit fee, and director's remuneration, to eligible and non-eligible units. The AO contended that the allocation was unjustified and aimed at reducing tax liability. The CIT(A) allowed the appeal, directing the AO to delete the addition. The Revenue argued that the CIT(A) granted relief without basis, while the assessee maintained separate audited accounts for eligible and non-eligible units. The Tribunal noted that the AO failed to raise doubts on the correctness of the audited reports and the separate accounts maintained by the assessee. It was held that the expenses were direct and linked to sales, and the notional disallowance made by the AO was unsustainable. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal.

Issue 2: Allocation of expenses between eligible and non-eligible units for claiming deduction under section 80IC:
The AO disputed the allocation of expenses like travelling, legal and professional fees, tender fees, commission, etc., between eligible and non-eligible units for claiming deduction under section 80IC. The AO believed that these expenses should have been allocated in proportion to sales, leading to additions based on sales ratios of eligible and non-eligible units. The Tribunal referred to a similar case from the ITAT Mumbai Bench, emphasizing the allocation of head office expenses in proportion to turnover. The Tribunal noted that the assessee maintained separate audited accounts for different units, which were duly certified. The Tribunal found the AO's allocation of expenses based on sales ratios unjustified and arbitrary, as the separate accounts and audited reports were in order. Consequently, the Tribunal agreed with the CIT(A) that the expenses were direct and linked to sales, and upheld the decision to delete the addition made by the AO. Grounds raised by the Revenue were dismissed for lacking merit.

In conclusion, the Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal and emphasizing the importance of proper allocation of expenses between eligible and non-eligible units for claiming deductions under section 80IC of the Income Tax Act.