2017 (5) TMI 18 - AT - Income Tax

Non sustaining the re-computation of books profit made after bifurcating the interest expenses and other expenses between SEZ and DTA units - Held that - The assessee has admitted during the appellate proceedings that no separate books of account for SEZ and DTA were maintained. However, it was claimed that the books of account are so maintained that revenue earned the expenditure incurred, the additions/deletions made to the work in progress could be precisely determined separately in DTA and SEZ at any point of time w.e.f. 01/4/2009. It was also claimed that the accounts were maintained in SAP software and for bifurcation of expenses between the SEZ and DTA, various cost centers which has been assigned different codes in SAP are maintained and it was claimed that once the expenditure has been bifurcated in the cost centers then they are further bifurcated into the revenue or capital. The revenue expenses further bifurcated between the DTA and SEZ on the basis of turnover. This claim of the assessee itself appears to be contradictory as once it has been claimed that various cost centers assigned different codes bifurcate the expenses between the SEZ and DTA and then the expenses are further bifurcated into revenue and capital and then further again revenue expenses were finally bifurcated into DTA and SEZ on the turnover basis. Further with regard to the interest cost it is claimed that it is based on the area developed under DTA and SEZ. In our considered view, although the assessee has claimed that he is maintaining books of account and SAP software and various expenses are allocated by the various cost centers on a predetermined and scientific basis and revenue component of the interest expenses were allocation on turnover basis, appears to be misleading. The assessee has got various types of loans and the loans are utilized for the development of SEZ and DAT. Since the area is demarcated and the loan expenditure incurred on these areas can be identified without any difficulty. Further the income of the one area qualified for deductions while the income of other area is taxable. Therefore, the obligation is on the assessee to identify the borrowed amount spent on the development of SEZ and DTA separately. Simply making a claim that the assessee is having maintained account in SAP software in scientific manner shall not establish the correctness of the allocation of the expenses between the two SEZ and DTA, therefore, in the interest of justice and equity, we find it appropriate to remand the issue to the file of the Assessing Officer to be decided de novo. - Appeal of the revenue allowed for statistical purposes only.

Summary

Issues Involved:
1. Whether the CIT(A) was justified in not sustaining the re-computation of book profit made by the Assessing Officer (AO) after bifurcating the interest expenses and other expenses between Special Economic Zone (SEZ) and Domestic Tariff Area (DTA) units.

Detailed Analysis:

1. Background and Facts:
The appeal by the revenue emanates from the order of the CIT(A)-I, Jaipur, dated 08/12/2015, for the A.Y. 2011-12. The assessee, engaged in developing, operating, and maintaining SEZ, filed a return declaring a loss of ?5,01,30,620/-. However, the assessee did not choose its first year of deduction under Section 80IAB of the Income Tax Act, 1961. The assessee declared income from lease rent premium and interest income as part of its business income and showed a working of MAT computation, resulting in a loss after debiting profit from SEZ.

2. Assessing Officer’s Re-computation:
The AO noticed that the assessee did not proportionately bifurcate expenses based on turnover. The AO re-computed the book profit at ?1,26,85,795/- by bifurcating interest and other expenses between SEZ and DTA units. The AO observed that it was impractical to distinguish expenses precisely between SEZ and DTA units and suggested that the only logical basis for dividing expenses was the ratio of turnover.

3. CIT(A)’s Findings:
The CIT(A) deleted the addition, holding that:
- The appellant company, a joint venture between the Rajasthan Government and Mahindra Group, filed its return declaring a loss and worked out the book profit for MAT purposes to be NIL.
- The company maintained separate accounts for SEZ and DTA, bifurcating various expenses like cost of land, development, interest, and depreciation based on separate accounts.
- The AO’s method of bifurcating expenses based on turnover led to absurd results, such as showing a profit of ?1,26,85,795/- from DTA operations on revenue of ?63,60,339/-.
- The company consistently followed a systematic method for bifurcating expenses using SAP software, allocating expenses to various cost centers on a predetermined and scientific basis.

4. Tribunal’s Analysis:
The Tribunal noted that:
- The assessee admitted that no separate books of account for SEZ and DTA were maintained but claimed that the accounts were maintained in a manner that revenue and expenses could be precisely determined separately.
- The Tribunal found the assessee’s claim contradictory and misleading, as the allocation of expenses between SEZ and DTA was not adequately substantiated.
- The Tribunal emphasized the obligation on the assessee to identify borrowed amounts spent on SEZ and DTA development separately, given the tax implications.

5. Tribunal’s Conclusion:
The Tribunal remanded the issue to the AO for a de novo decision, directing the assessee to produce all relevant documents and information regarding expenses incurred in SEZ and DTA units. The appeal of the revenue was allowed for statistical purposes only.

Order Pronounced:
The order was pronounced in the open court on 27/04/2017.