2016 (4) TMI 1116 - AT - Income Tax

Allocation of Head Office expenses to units eligible for deduction u/s 80IB and 10B - only reasoning given by the Ld. Counsel of the assessee is that the head office has its own stream of income and therefore only 50% of the expenses should be allocated - Held that - It is an accepted factual position that head office has its own stream of income. Thus under these circumstances it cannot be said that the entire expenses incurred by the Head Office/Corporate Office were incurred as common expenses. Therefore under these circumstances the total expenses of the head office cannot be said to be available for allocation in other units. The Ld. Counsel has tried to justify that 50% of the total expenses of Head Office/Corporate Office on an ad-hoc basis should be taken as the expenses pertaining to the income earned by the head office and balance 50% can be made available for allocation to all the units. But we find that Ld. Counsel has not given any transparent scientific or concrete basis of bifurcation nor has he given any reasoning as to why these expenses should be bifurcated on fifty-fifty basis. It is also noted by us that even lower authorities had not examined this aspect from this angle. This issue is likely to have far reaching implications and may create history in assessee s hands in other years as well. Therefore principally accepting the stand of the assessee that total expenses incurred by HO/CO are not available for allocation but for determining that how much portion of these expenses is available for allocation to all the units we send this issue back to the AO for reexamining this issue and finding out some fair rational transparent and scientific basis of bifurcation of these expenses and their allocation among all the units. The AO shall decided this issue afresh after considering all the facts and submissions and evidences as may be brought on record by the assessee in support of its contentions for which the AO shall give adequate opportunity of hearing. The assessee is free to raise all the legal and factual issues in this regard. Thus with these directions we send this issue back to the file of the AO. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Allocation of Head Office expenses to units eligible for deduction u/s 80IB and 10B.
2. Disallowance of Rs. 20.00 lakhs on an ad-hoc basis in respect of other income of 80IB/10B units.
3. Disallowance under section 14A read with Rule 8D.
4. Charging of interest under section 234A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Allocation of Head Office expenses to units eligible for deduction u/s 80IB and 10B:
The assessee challenged the allocation of Head Office expenses to units eligible for deduction under sections 80IB and 10B, with a total disallowance reworked at Rs. 79.92 lakhs. The AO noted that no part of the Head Office expenses was allocated to the tax-exempt units, leading to an ad-hoc addition of 25% in the allocation sheet. The Ld. CIT(A) upheld the need for allocation but suggested a different working, reducing the disallowance to Rs. 79.92 lakhs. The Tribunal accepted the principle that not all Head Office expenses should be allocated to the units and sent the issue back to the AO for reexamination to find a fair, rational, and scientific basis for allocation.

2. Disallowance of Rs. 20.00 lakhs on an ad-hoc basis in respect of other income of 80IB/10B units:
The AO made an ad-hoc disallowance of Rs. 20.00 lakhs due to the lack of unit-wise details for items like interest and miscellaneous income. The Ld. CIT(A) confirmed this disallowance without specific findings. The Tribunal, noting the relation to the first issue, sent this back to the AO for reconsideration in line with the directions given for the first issue.

3. Disallowance under section 14A read with Rule 8D:
The assessee and revenue both appealed against the disallowance under section 14A. The Ld. CIT(A) had deleted the interest component of the disallowance, citing that specific borrowings were used for business purposes, and no borrowed funds were used for investments. The Tribunal upheld this deletion. For the expenses component, the Ld. CIT(A) had not accepted the assessee's voluntary disallowance and had made his own calculations. The Tribunal, noting the need for factual analysis related to the first issue, sent this back to the AO for reexamination.

4. Charging of interest under section 234A of the Income Tax Act, 1961:
This ground was dismissed as consequential, with no specific adjudication required.

Other Grounds:
Grounds 6 and 7 of the assessee's appeal were general and dismissed without specific adjudication.

Revenue’s Appeal:
The Revenue's appeal, concerning the relief given by the Ld. CIT(A) out of the disallowance made under section 14A, was addressed in conjunction with the assessee's appeal. The Tribunal dismissed the grounds related to interest and sent the expenses component back to the AO for reexamination.

Conclusion:
Both the assessee’s and revenue’s appeals were partly allowed for statistical purposes, with specific issues sent back to the AO for reexamination and fresh adjudication.