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TMI Blog2014 (4) TMI 618X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue appeal:- Ld. CIT(A) erred in law and on facts in upholding the reduction in assesses claim u/s sec. 80IC on following issues: (i) Restricting apportionment of profits in respect of Brand valuation to 10%. (ii) Deleting reduction of claim u/s 80IC by Rs. 29,75,890/- worked out by AO as attributable to directors due to high net profit of 33%. (iii) Assessee carried out only assembling of imported parts at Haridwar. CIT(A) failed to appreciate that profits reported by assessee were generated by joint activities of head office and branches. Hence the eligible profits have been rightly apportioned by AO between head office and branches. 2.1. A perusal of the grounds reveal that the main and common issue involved in both the appeals pertains to claim of deduction under Section 80-IC beside assesee's ground about application of 115JB. 3. Brief facts are the assessee is an industrial undertaking situated at Haridwar (Uttrakhand) and is claimed to be an eligible unit u/s 80-IC of the Act. It is engaged in the manufacture of auto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction to 12% of the total profit on account of the expenses of branches. 3.6. Ld. CIT(A), however, confirmed the order of the AO holding that assessee to be liable to MAT under Section 115JB of the Act and is not exempt under clause (6) of Section 115JB. 3.7. Aggrieved both, the parties are before us; assessee against the partial disallowance of 10% of the turnover as profit on account of the market value of the brand; upholding the liability u/s 115JB and the revenue in respect of the relief granted by the learned CIT(A). 4. Ld. Counsel for the assessee Shri Ved Jain contends that ground. 1 of departmental appeal and ground 5 of assessee's appeal pertain to the first issue i.e. the determination of the profits eligible for deduction under section 80-IC. It has not been disputed that assessee is having an industrial undertaking at Haridwar which is eligible for deduction under section 80-IC. The entire sales of Rs.10,55,16,186/- has been made from Haridwar unit and assessee does not have any other unit or any other sales, purchases or income. The sale and purchases are fully vouched, there is no whisper of any allegation that sales have been over-invoiced or the purchases a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l sales i.e. the turnover of the company. The estimation made by the AO however seems to be on the higher side as the sales turnover during the period ending 31-03-2006 was Rs. 1.21 crore as against Rs. 10.55 crore in the relevant period i.e. 10% of the present turnover approximately. Keeping in view, the growth of the company in the two years after start of manufacturing process and the profit attributable to the reduced cost of the goods as result of manufacturing, a against goods purchased by the appellant company from the market, the brand value of the goods is valued at 10% of the total turnover which in the current year was Rs. 10,55,16,186/-. Thus, out of the total profit the eligible profit for the purpose of section 80IC would be reduced by 10% Rs. 10,55,16,186 i.e. Rs. 1,05,51,618/-." 4.4. It is pleaded that ld. CIT(A) failed to appreciate that there is no reference to any expense on brand building incurred by the undertaking out of books or utilization of any brand owned by some other entity. Copy of registration certificate of brand in assesses name was already filed. Thus the brand is also a commercial asset of the eligible undertaking and is part of its income genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st income on the fixed deposit and the Authority for Advance Ruling has held that "source of income is independent of the export and hence cannot be considered to be an eligible income." 4.8. Similarly the reference by CIT(A) to the judgment of the Supreme Court in the case of Liberty India vs. CIT [2009] 317 ITR 0218 is also not correct. It was a case of a Duty Drawback/DEPB and not of deduction i/s 80IC, there it was held that Duty Drawback and DEPB are independent source of income and cannot be included while determining the eligible income for deduction. 4.9. In the present case there is no dispute about the income earned being only from manufacture or production of article or thing. The only source of income as is evident from the profit and loss account is sales of Rs.10,55,16,186 from Haridwar unit only, where the manufacturing activities are being carried on and there is no other source of income like interest or DEPB or Duty Drawback or interest on FDR. On the contrary, both the lower authorities by apportioning a part of it towards market value of brand are going against the judgment of Hon'ble Supreme Court itself rendered in Liberty India (Supra). The entire sales bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad made provision for the same in the relevant section. Section 80HHC of the Act is a case in point. That section makes a clear distinction between the export sales and other sales because such a distinction was inherent in the situation and was called for. There is no such distinction contemplated under section 80HH. Manufacture or production of an article or thing is a condition precedent for an undertaking to become an industrial undertaking. That, however, does not mean that the profits derived from manufacture alone can be taken into consideration for working out the deduction under section 80HH. Once a particular undertaking is held to be an industrial undertaking then there is no alternative, but to go to the profits and gains derived from such an industrial undertaking for working out the relief under section 80HH. The use of the word "manufacture" is in a different context which should not be lost sight of. There is no justification for stretching it further and to hold that only manufacturing profits in the backward area would be considered for the purposes of section 80HH and not the trading profits. In a case where an assessee was manufacturing sleepers and was also pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into account the rate charged to a supplier: it should have been compared with the market value of power supplied to a consumer. 33. It is admitted by the Department that in Chhattisgarh the power was supplied to the industrial consumers at the rate of Rs. 3.20/- per unit for the AY 2004-05 and Rs. 3.75/- per unit for the AYs 2005-06 and 2006-07. It was this rate that was to be considered while computing the market value of the power. 34. The CIT-A and the Tribunal had rightly computed the market value of the power after considering it with the rate of power available in the open market namely the price charged by the Board. There is no illegality in their orders. 35. In view of above, the question is decided against the Department and in favour of the Assessee. The tax appeals have no merit. They are dismissed. (iii) Commissioner of Income-tax -III Versus Velankani Information Systems (P.) Ltd., (ITA Nos. 374 & 375 of 2011 and 273 to 276 of 2012 dated - April 2, 2013 (Karnataka) But if the assessee is in the business of taking land, putting up commercial buildings thereon and letti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustrial activity and their profitability. Merely because the industrial undertaking earned higher profits does not call for an inference that claim of deduction is to be wily nily reduced on presumptions. In consideration of entirety of facts and circumstances we see no justification in CIT(A)s order retaining the reduction of 10% from the deduction, same is deleted. Revenues ground is dismissed and that of assessee is upheld on this issue. 7. Apropos second issue raised by revenue facts are, disallowance of Rs.29,75,809/- made by the AO, computed @ 5% of the turnover as the value of the directors' experience and knowledge. 8. Ld. DR supports the order of AO. 9. Ld. Counsel for the assessee contends that the Directors are employees of the company and they have been suitably compensated. It is settled law that revenue cannot sit in the armchair of businessman and decide which business expenditure should be incurred in which manner. The AO cannot sit on assesses business acumen and judgment to decide that which percentage of the turnover should be paid to the directors for their experience and knowledge. 9.1. Ld. CIT(A) on page 20 of his order has elaborately dealt with the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst issue raised by revenue we have given elaborate reasons to hold that claim u/s 80IC can not be reduced on surmises and assumptions. For the same reasons we uphold the order of ld CIT(A) on this issue. Revenue ground is dismissed. 10. The facts about third issue raised by revenue are - ld. AO held that entire profits derived by industrial undertaking at Haridwar cannot be allowed as it is to be allocated to other branches on the basis of salary and wages expenses. Thus only 12% of the profit derived from the industrial undertaking will be eligible for deduction under section 80-IC. Assessee claimed that all the purchases, sales and manufacturing activities are carried out at Haridwar industrial undertaking only. There is no rationale to hold that expenses incurred at the Branch offices/head office will be the basis for allowing deduction under section 80-IC of the Act. Rejecting assesses explanation AO reduced the claim u/s 80IC. 10.1. Aggrieved assessee preferred first appeal, where it was contended that it is not the case of the AO that all the expenses of head office or branches have not been deducted while computing 80-IC of the Act. The AO's contention is baseless as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore arriving at the total eligible profit for claiming deduction u/s 80IC. AO has not controverted this statement in any manner. All sales, purchases and manufacturing activities are carried out by the Haridwar Unit. The other branches are providing sales promotion and after sales service The income earning activities thus cannot be held to the carried out from places other than the eligible unit besides in consolidated financial statement the income of these branches has already been reduced. In consideration of all these facts and circumstances we uphold the order of CIT(A), this ground of the revenue is dismissed. 13. Apropos assesses remaining issue about MAT, Ld. AO held that the assessee is liable to pay MAT under Section 115JB. The CIT(A) has upheld the order. In this regard it may be relevant to refer to sub-section (6) of Section 115JB which reads as under:- "(6) The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be." ..... X X X X Extracts X X X X X X X X Extracts X X X X
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