2022 (6) TMI 955 - AT - Income Tax

Exemption u/s 10B - allocation of all expenses of non-EOU unit to EOU unit, whereby the exemption claim under section 10B of the Act was reduced - HELD THAT - In the present case, it is not in dispute that assessee is having manufacturing units in respect of agrochemicals as well as Pharma products, which are EOU as well as non-EOU units. As is evident from the copy of assessment order for assessment year 2002 03, forming part of the paper book, the incinerator plant at Dombivali was set up in financial year 2001 02. Further, from the statement of profit and loss account for the year ending 31/03/2002, it is also evident that services were availed by Non-EOU Mahad unit and EOU Taloja unit from the Dombivali unit in respect of which internal unit transfers were made and income was earned by the Dombivali unit. There is no examination by the Assessing Officer whether the EOUs were utilising the services of the other units or of Maharashtra Pollution Control Board for incineration process during the period Dombivali unit was non-operational. Further, if that be the case then allocation of expenditure of Dombivali unit to EOU, without availing any service, will result in additional allocation of expenditure to the EOU of the assessee. We are of the considered view that all the aspects in respect of this issue have not been examined by any of the lower authorities and in such a scenario, the impugned allocation of expenditure of Dombivali unit only to the Taloja EOU of the assessee, while computing deduction under section 10B of the Act, is set aside. We, further, deem it appropriate to remand this issue to the file of Assessing Officer for de novo adjudication after examination of all the aspects as mentioned above. Allocation of R and D expenditure to EOU units - As relying on own case 2021 (3) TMI 1371 - ITAT MUMBAI we hold that there is no need to allocate expenses to EOU units and that assessee would be eligible for deduction u/s 35(1)(iv)and the same need not be allocated to EOU units. Setting off of loss of non-EOU against income from EOU - As relying on own business losses of a non-eligible unit, whose income is not eligible for deduction u/s 10A of the Act, cannot be set off against the profits of the undertaking eligible for deduction u/s 10A for the purpose of determining the allowable deduction u/s 10A

Summary

Issues Involved:

1. Exemption under section 10B of the Income Tax Act.
2. Allocation of expenses including depreciation of the incineration plant.
3. Allocation of Research and Development (R&D) expenditure.
4. Disallowance under section 14A of the Income Tax Act.
5. Setting off losses of non-EOU units against profits of EOU units.

Issue-wise Detailed Analysis:

1. Exemption under Section 10B:
The assessee contested the reduction of the exemption under section 10B from Rs. 29,20,37,176/- to Rs. 25,11,55,516/-. The Tribunal found no specific discussion on this issue in the provided judgment, implying that the primary focus was on the allocation of expenses and the setting off of losses, which indirectly affect the exemption amount.

2. Allocation of Expenses Including Depreciation of the Incineration Plant:
The assessee argued against the allocation of expenses of the Dombivali incineration plant to the Taloja EOU unit, which reduced the exemption under section 10B. The Tribunal noted that the Dombivali unit was set up to serve both internal and external clients but had become non-operational due to external factors. The Tribunal found that the lower authorities had not examined all aspects, such as whether the Taloja unit actually availed services from the Dombivali unit during its non-operational period. The Tribunal remanded the issue back to the Assessing Officer for a fresh examination, emphasizing that expenses should only be allocated if services were rendered to the EOU unit.

3. Allocation of Research and Development (R&D) Expenditure:
The assessee challenged the allocation of R&D expenses to EOU units, arguing that the R&D unit operated independently. The Tribunal referred to a previous decision in the assessee's favor, where it was established that the R&D unit was an independent entity with its own revenue and expenses. The Tribunal upheld this view, ruling that the R&D expenses should not be allocated to the EOU units, thereby allowing the assessee's claim.

4. Disallowance under Section 14A:
The assessee did not press this ground during the hearing. Consequently, the Tribunal dismissed this ground as not pressed.

5. Setting Off Losses of Non-EOU Units Against Profits of EOU Units:
The assessee argued against the setting off of losses from non-EOU units against the profits of EOU units, which affected the exemption under section 10B. The Tribunal cited a previous decision in the assessee's favor, which held that losses from non-eligible units should not be set off against the profits of eligible units for the purpose of determining the allowable deduction under section 10B. The Tribunal followed this precedent and ruled in favor of the assessee, allowing the appeal on this ground.

Conclusion:
The Tribunal allowed the appeal partly for statistical purposes, remanding the allocation of the incineration plant expenses back to the Assessing Officer for a fresh examination, while ruling in favor of the assessee on the issues of R&D expenditure allocation and setting off of losses. The ground related to section 14A disallowance was dismissed as not pressed.