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TMI Blog2017 (4) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is entitled to claim deduction under the provisions of the section 80IB of the Act and the impugned order of the CIT-A on this issue is justified and delete the addition - Decided in favour of assessee Disallowance u/section 14 A - applicability of rule 8D - Held that:- as on 11-04-07 the opening surplus was 212 crores and as on the same the share capital was at 63.77 crores. Therefore it amply proves that the Assessee has made investments from its own funds and as rightly pointed by the Ld. AR that the AO did not examine the nexus between the investments if any made from borrowed funds, without the same application of Rule 8D to compute the expenditure for the purpose of disallowance u/ section 14 A of the Act is bad. We find that the issue in hand is covered by the decision in the case of CIT Vs. Ashish Jhunjhunwala [2015 (12) TMI 905 - CALCUTTA HIGH COURT] which held that while rejecting the claim of the Assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons. We find the AO without assigning any reasons to the claim of the Assessee applied Rule 8D, therefore, the disallowance as mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igible for deduction under chapter VIA of the Act. According to AO, the assessee prepared a separate Profit Loss account for each unit and claimed the profits from the above units as eligible for deduction under Chapter VI-A. The assessee determined the profit and gains from the said units considering both direct cost and indirect cost, according to AO is principally correct. The AO found that indirect expenses of the said four units is attributing only 6.07%, according to him it should be apportioned at 20% of ₹ 14,66,47,200/- as against the claim of Assessee at ₹ 4,45,41,000/- and accordingly the deduction of ₹ 10,21,06,2000/- should be withdrawn. In explanation, the submissions of assessee before the AO the relevant portion is reproduced herein below:- Head Office expenses The Company has apportioned the incremental expenditure incurred at the head office during the year under consideration on the basis of the ratio of turnover of the Jammu (Water Based) factory over total turnover of the company. For this purpose the expenditure incurred at the head office in the Financial year 2002-03 was taken as the base year, as the Jammu (Water Based) factory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jammu (Water Based) and identical basis for allocation of common head office and selling expense has been adopted with respect to the Jammu (Solvent Based) based and Jammu (Rajdoot) units of company with regard to which deduction u/s. 80-IB has been claimed in the return for the year under assessment as above...... . Assessee further submitted ... While on the issue we may draw attention of your kindself to section 80-IB of the Act which entitles an assessee to a deduction of the profits derived from an eligible undertaking subject to the provisions of the said section. Your kindself is aware that the word derived from has a much narrower meaning than attributable to . The Hon'ble Supreme Court has explained the meaning of the words derived from in its decision in CIT vs. Sterling Foods [237 ITR 579 (SC)] and has held that the said words would require the existence of a direct nexus and a mere commercial connection with a source does not amount to 'derive from'. Therefore, in order to arrive at the profits 'derived from' the industrial undertaking, it is necessary to deduct only those expenses which are incurred directly in the three industria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g at the amount deductable under Section 80IB of the Act has been accepted by the Hon'ble Tribunal of jurisdiction which is the last fact finding authority..... 7. But, the AO did not accept such submissions of the assessee. According to him, the indirect expenses apportioned on the basis of turnover claiming to be accepted being rational and scientific basis of allocation. Accordingly, total indirect expenses 20% of ₹ 14,66,47,200/- (-) ₹ 445,41,000/- as apportioned by the assessee, the difference of ₹ 10,21,06,200/- was withdrawn from claim of deduction u/s.80IB of the Act and the same was not allowed by the AO. 8. In first appeal, before the CIT-A the assessee contended that in the earlier years, the allocation of common selling head office expenses as adopted by the assessee was accepted by the Hon ble Kolkata Tribunal for the A.Ys. 2001-01, 2001-02 vide order dated 17/20-10-2006 in assessee s own case. Considering the above submissions as made by the assessee before the CIT-A allowed the ground of appeal and deleted the addition made thereon by holding as under:- 4. I have considered the finding of the AO in his order dt. 22-12-2011 and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditures derived by the unit except for common HO selling expenses . It was only relating to the common HO selling expenses the Auditors' gave the said note, The company as a whole has an audited account from this audited accounts common HO selling expenses attributable to the Pondicherry unit has not been considered by the auditors. We agree with the A/R that this allocation is an estimation from audited figures based on some scientific/reasonable method and not audit (as the company has an audited account). the same has been covered by way of note. The assessee itself has adopted a basis for allocation of common HO and selling expenses which may be attributed to the operations at the Pondicherry unit as stated in the foregoing paragraphs. The assessee has taken all relevant common HO selling expenses attributable to Pondicherry Unit, applied inflation rate @ 5% from F.Y. 1996-97 (i.e. AY.l997-98) after arriving at the total common HO Selling expenses for the relevant assessment year applied the turnover ratio (turnover of Pondicherry/ turnover of the company). From the detailed calculations of allocations of common head office expenses placed at pages 67-68 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Following the ratio laid down in the decisions rendered by the Hon ble Supreme Court, we uphold the decision of the CIT(A) on this issue and thus dismiss Ground Nos. (iii) (iv) raised by the Department. 11. On perusal of the orders for AY 2000-01 and 2001-02 in ITA No s. 1889/Kol/2004, 268 /Kol/2005 and CO No s. 107 65 /Kol)/2005 in assessee s own case placed at page no-86 of paper book shows the basis of apportionment of head office and common selling expenses is being followed by the Assessee consistently. We find the Tribunal found the basis of apportionment of common head office and common selling expenses adopted consistently by the company is scientific and reasonable and accepted and allowed deduction under Section 80IB of the Act. Respectfully following the above, we uphold the impugned order of the CIT-A and we have no hesitation to allow the deduction as claimed u/s.80IB of the Act and therefore, ground raised in this regard fails and it is dismissed. 12. Ground no.2 is relating to disallowance of deduction u/s. 80IB of the Act in respect of income of ₹ 57,93,000/- on account of sale of scrap. 13. During the assessment proceedings the AO found that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and relevant finding of which is reproduced herein below: With respect to the second issue the assessee submitted that .....other income' of ₹ 15,86,OOOI- as appearing in the Profit Loss A/c of the Unit at Pondicherry comprises of income arising on account of sale of scrap generated in the manufacturing process employed at said Unit. The said fact would be apparent from the complete set of invoices reused by the unit In this regard. Since such general of scrap is directly connected w:th the production process employed by the company at its Unit at Pondicherry the profit derived from which is eligible for deduction under sect/on 80-IB of the Act. The generation of scrap has therefore a direct nexus with the goods produced by the company at the said eligible Unit and the profit derived therefrom is incidental to the activity of the industrial undertaking. The provision of section 80-IB under which the impugned deduction has been allowed by the Assessing Officer is in pari material to section 80-I and 80IA. It is submitted that in the under noted decisions which have been rendered in the context of section 80-I of the Act by various High Courts, it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO rightly applied the Rule 8 D as he was not satisfied with the expenditure as offered by the Assessee on its own and confirmed the impugned addition made by the AO . 21. Before us the ld.AR submits that the assessee on its own disallowed to an extent of ₹ 21 ,921/- which involves electricity, corporation tax and telephone charges. The AO did not examine the workings of assessee as offered by the assessee before him in the assessment proceedings. He did not make any reference to such workings in his order and without proving the nexus between the borrowed funds and investments made applied Rule 8D. The Ld. AR referred to page no- 192 of the paper book to show the details of expenditure as made by the assessee. The Ld. AR also referred to page no-8 of the paper book to show that the assessee has reserve of ₹ 200 crores of common fund and referred to page no-9 of the paper book to substantiate its claim. The ld. AR of the assessee also drew our attention to page no-10 of the paper book to show the profit on sale of investments and dividend income earned from investments and further referred to page no-12 to show interest expenditure. In support of assessee s cont ..... X X X X Extracts X X X X X X X X Extracts X X X X
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