2019 (3) TMI 224 - HC - Income Tax

Eligibility to deduction u/s 80IA - income derived from the Chennai and Pondicherry manufacturing unit - inclusion of income from service centres in the claim under Section 80IA - allocation of expenditure - HELD THAT - The inclusion of income from service centres in the claim u/s 80IA was rightly found by the assessing officer to be incorrect. As regards the financial overheads, the methodology followed by the CIT(A) was that 50% of the expenditure be apportioned directly on the basis of turnover of three (3) units and the balance of 50% be apportioned in the ratio of 1 3 between the two manufacturing units and the trading unit. As against the service centre expenses, AO had observed that the service centres provided free service under warranty for the new systems sold for two years and thereafter earns income from the Annual Maintenance Contract entered into with the customers. The centres also undertake installation of the new UPS systems and provide technical support during the period of warranty when necessary. The expenditure incurred was, according to the Assessing Officer, to be directly allocated to the manufacturing units, as warranty was a part of their sale transaction. In the absence of any material before us to indicate that the methodology for allocation of expenditure followed by the CIT (A) and confirmed by the Tribunal was incorrect or perverse, we find no reason to interfere with the factual findings of the Tribunal and the first substantial question of law is answered in the affirmative, against the revenue and in favour of the assessee. Quantum of deduction granted stands enhanced consequent upon the re-working of the claim by the CIT(A), to an amount in excess of that claimed by the assessee - HELD THAT - Mr.Ranganathan does not raise any factual dispute regarding the details set out above. Certain limitations are placed by statute on the quantum of relief allowable in relation to deductions under Chapter VI A of the Act, in terms of Sections 80A(2) and (4), 80AB, 80AC and 80B. These include a mandate that the relief granted shall not exceed the gross total income as defined u/s 80B(5). The relief granted, as seen above, has been restricted to the gross total income computed only. In these circumstances, we do not find any reason to interfere with the order of the Tribunal. - Decided in favour of the assessee and against the revenue.

Summary

Issues Involved:
1. Allocation of common expenditure.
2. Entitlement to benefit under Section 80IA exceeding the claim in the return.

Issue-wise Detailed Analysis:

1. Allocation of Common Expenditure:

The primary issue involved the allocation of common expenditure between the manufacturing units and service centers. The assessee, a manufacturer and trader in Uninterrupted Power Supply Systems, claimed deductions under Section 80-IA of the Income Tax Act, 1961, for income earned from its manufacturing units and service centers. The Assessing Officer (AO) viewed the service centers as standalone units and restricted the deduction to income derived from the manufacturing units alone. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed that income from service centers was not eligible for deduction under Section 80-IA, a conclusion that the assessee did not contest further.

The CIT(A) modified the allocation of expenditures between the manufacturing units and service centers. The Revenue challenged two specific directions of the CIT(A) before the Income Tax Appellate Tribunal (ITAT): (i) Allocation of 50% of financial expenses on a turnover basis and the remaining 50% in a 1:3 ratio between manufacturing and trading units, and (ii) Allocation of 20% of service center expenses, including employee costs, to manufacturing and trading units instead of the entire amount on a turnover basis. The ITAT concurred with the CIT(A)'s conclusions, leading to the current appeals.

The High Court confirmed that only income from the manufacturing units at Chennai and Pondicherry was eligible for deduction under Section 80-IA. The AO's methodology for allocation included direct expenditure to respective units, common expenditure like financial overheads based on sales, and other expenses allocated on turnover. The CIT(A) reworked the allocation, finding the AO's assumptions baseless and modifying the method of computation. The CIT(A) allocated 50% of financial overheads based on turnover and 50% in a 1:3 ratio. For service center expenses, the CIT(A) attributed only 10% to manufacturing units, as most service calls related to old units.

The Tribunal found the CIT(A)'s allocation methodology cogent and required no interference. The High Court, referencing multiple case laws, concluded that re-allocation of expenses is a question of fact, not law, unless there is perversity. The Revenue failed to demonstrate any perversity in the CIT(A)'s method. Therefore, the first substantial question of law was answered in favor of the assessee.

2. Entitlement to Benefit Under Section 80IA Exceeding the Claim in the Return:

The second issue was whether the assessee could receive a deduction under Section 80IA exceeding the amount claimed in the return. The CIT(A)'s reworking of the claim resulted in a higher deduction than initially claimed by the assessee. The assessee provided a chart showing the deduction amounts for the relevant assessment years, which the Revenue did not dispute. The High Court noted statutory limitations on the quantum of relief under Chapter VI A of the Act, ensuring it does not exceed the gross total income. The relief granted was restricted to the gross total income computed, and the High Court found no reason to interfere with the Tribunal's order.

Thus, the second substantial question of law was also answered in favor of the assessee. The Tax Case (Appeals) were dismissed with no costs.