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TMI Blog2018 (1) TMI 844X X X X Extracts X X X X X X X X Extracts X X X X ..... is for allocation of expenditure without examining the separate books of account by the AO on the facts and circumstances of the case is not called for and same is rejected. It is further seen that though, the ld. CIT (A) has identified certain expenditure which can be reckoned as common, but he too appears to have not examined the accounts of the units as to which expenditures are identifiable qua each unit. Therefore, we are of the opinion that the matter should be restored back to the file of the Assessing Officer for a limited purpose to examine:- * Firstly, to identify the expenditure qua each unit from the separate ledger accounts; and if the expenditures debited are attributable for the particular unit, that is, the expenditure pertains to Bawal unit only then same should be allowed from the profits of Bawal Unit or vice-versa for the Haridwar unit and in that case no allocation should be made for such expenditures. * Secondly, only in case where expenditures are not identifiable and are common in nature that alone should be considered for the allocation purpose. * Lastly, after identifying the common expenditure, the details of which would be provided by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. The CIT (A) has erred in deleting the addition of ₹ 1,23,27,262/-made on account of management fee paid to M/s Talbros Automative Components Ltd. Which is clearly in violation of the section 40A (2)(b) of the I.T. Act and no reasonableness has been proved by the assessee with regard to the fair market value of the services/facilities, legitimate needs of the business and benefits accrued for the services/facilities for which the payment is made and no such services was needed by the assessee company uptill A.Y. 2007-08 also. 4. At the outset, ld. counsel for the assessee submitted that, this issue stands covered in favour of the assessee by the judgment of the Tribunal in assessee s own case for the Assessment Year 2010-11. He further submitted that the ld. CIT (A) too has followed the said Tribunal order. 5. On the other hand, ld. D.R. strongly relied upon the order of the Assessing Officer. 6. After considering the relevant finding given in the impugned orders as well as the order of the Tribunal, we find that Assessing Officer had noted that the assessee had paid management fees worth ₹ 1,23,27,262/- to its sister concern, namely, M/s. Talbros Automo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates that right person should be taxed for the right year for the right income. Further, the issue is being discussed about contravention of provisions of section 40A of the IT Act 1961, i.e., non-adhering of the statute and the entire arrangement of affairs from view of reasonability. viii. The case laws relied upon by the assessee are very old and general in nature and are mainly related to the provisions of section 37(1) 36(1 )(iii) except one namely CIT vs. Padmani Packaging (P) ltd. [2006] which is with reference to provisions of section 40A(2). In the said case law, only the issue paying higher commission expenses was discussed. In the judgement of Romesh Kumar vs. CIT [2014], the issue has been decided in favour of revenue for the commission expenses issue. In view of above facts, the management fees paid by the assessee company worth ₹ 1,23,27,262/- are being disallowed and are added to the total income. 7. The ld. CIT (A) following the order of the Tribunal for the assessment year 2010-11 has deleted the said addition. 8. We find that the Tribunal has discussed this issue in detail and has finally concluded in the following manner:- We heard the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases. 14. In CIT Vs. Edward Keventer (P.) Ltd. [1972] 86 ITR 370, the Calcutta High Court considering identical provision in 1922 Act, it was held that the section places two limitations in the matter of exercise of the power. The section enjoins the Assessing Officer in forming any opinion as to the reasonableness or otherwise of the expenditure incurred must take into consideration (i) the legitimate business needs of the company and (ii) the benefit derived by or accruing to the company. The legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman. It is not for the Assessing Officer to dictate what the business needs of the company should be and he is only to judge the legitimacy of the business needs of the company from the point of view of a prudent businessman. The benefit derived or accruing to the company must also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of reallocation expenses between taxable and exempt unit without giving any comments on this in her order, and even the assessee company in its ground of appeal to CIT(A) has admitted that the proper allocation of expenses to Haridwar Unit (Tax Exempt) from Bawal unit have not been made in its books of account and admitted to allocate ₹ 3,70,168/- to Haridwar Unit. This shows that the assessee company has not followed the act to properly allocate the expenses to its tax exempt unit. The criterion of taking the product ratio for allocation of the expenses between the units was very vague and unreasonable. As it is turnover which bears a proportionate relation with the expenses rather than no. of products. 11. So far as the first issue is concern, admittedly it is similar to the ground raised in the assessment year 2009-10, and therefore, the finding given therein, that it is covered by the order of the Tribunal for the assessment year 2010-11, we hold that ld. CIT (A) has rightly followed the order of the Tribunal in deleting the said addition and accordingly, ground no.1 raised by the Revenue is dismissed. 12. Now so far as the issue raised in ground no.2 is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Foreign exchange fluctuation - 56,13,569 Bank charges 83 1,25,430 13. The Assessing Officer noted that the allocation is not in commensurate with the turnover of the units like advertisement expenses and Director s salary has not been shown in the tax exempt unit, the Assessing Officer accordingly, proceeded to allocate the indirect expenses in proportion of the turnover which was in ratio of 79:21 in respect of Bawal and Haridwar Unit, respectively. The expenses allocated by the Assessing Officer were as under:- Head of expense Haridwar Unit Bawal Unit Salary and wages 4622445.24 17389199 Contribution to PF 257540.85 968844.15 Contribution to ESI 31086.51 116944.49 Contribution to Haryana labour welfare fund 1218 4582 Staff welfare benefits 828198.42 3115603 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uct ratio and not in the turnover ratio, because assessee is producing only 15 products from Haridwar Unit and 185 products from Bawal Unit (in the ratio of 12:185) and accordingly, he held that an amount of ₹ 3,70,168/- have to be allocated. The relevant observation and facts recorded by the ld. CIT(A) is as under:- a) Since the staff and labour is independent at both the units, and it is only Managing Director, who is common to both, at the most, it is his salary and other related expenses to him which can be allocated in the product ratio and not in turnover ratio as explained in para 28 above. The allocation can be as under in the ratio of 12:185: - HEAD TOTAL EXPENSES HARIDWAR UNIT BAWAL UNIT Salary 2727000 166112 2560888 Travelling Expenses 254306 15491 238815 Rent 1419185 86448 1332737 TOTAL 4400491 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0699./- pertains to export from Bawal unit.) d) Therefore, if at all some allocation is to be done, it could only be ₹ 3,70,168/- (278825 + 33198 + 58145) from Bawal unit to Haridwar unit, of course, this is without prejudice to our claim that , no further allocation is required considering the facts of the case. 14.1 At this juncture, it would be relevant to take note of the fact that in the assessment year 2012-13 also, similar allocation has been done by the Assessing Officer on turnover basis for following expenses:- Expenses allocated as per turnover Head of expense Hardiwar Unit Bawal Unit Disallowance of excess expenses debited to bawal unit Salaries wages other benefits 10056640.16 25859931.84 5,620,003 Repair maintenance 935407.76 2405334.24 576,475 Rent 444186.4 1142193.6 444,186 Rates taxes 59660.72 153413.28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 53,35,857 b) Similarly auditor remuneration can be allocated only in the product ratio because the accounts maintained for 10 products will be 10 times than the accounts for 1 product. It cannot be in the ratio of turnover because auditor has to check the number of entries and not the quantum of figure in entry. Whether the entry is for 1 lac or for 10 lacs, the efforts required to put in by the auditor remain same. Accordingly, auditor remuneration can be allocated as under:- HEAD TOTAL EXPENSES HARIDWAR UNIT BAWAL UNIT Auditor Remuneration 3,45,000 34,500 3,10,500 c) As regards Foreign Exchange Fluctuation, the raw material imported from Japan is entered in the books of Bawal unit. No raw material is transferred to Haridwar unit. It is only semi-finished product which is transferred to Haridwar unit. The total cost of import includes cost of raw material, tools and dies and Bought- out-parts. Bought-out-parts and raw material are used only in Bawal unit. It is only tools and cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this fact has not been denied and which fact has been noted by the ld. CIT(A), on perusal of the entire material placed on record before him. He has also called for the remand report of the Assessing Officer on this point. In any case and without prejudice, the assessee had given the allocation of certain expenditure like salary of the directors, travelling expenses, rent, auditor s remuneration, foreign exchange fluctuation etc. The allocation key has been accepted on product ratio basis , because, in Haridwar Unit the assessee is only required to maintain its account and expenditure qua fifteen products only as compared to 185 products manufactured in Bawal Unit. Ld. CIT (A) has duly examined this factor and has accepted this allocation key which should be accepted and accordingly, the order of the ld. CIT (A) should be confirmed. 17. In the rejoinder, ld. Sr. D.R. submitted each and every expenditure cannot be allocated on the basis of product ratio, for example, salary, travelling, rent, etc., thus such allocation key cannot be accepted. He also pointed out one important fact that AO has not allocated the management fees paid to sister concern as he has made the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant findings given in the impugned orders as well as the material referred to before us at the time of hearing. The assessee is carrying out operation from two units; Bawal unit which is a taxable; and unit of Haridwar which is eligible for deduction 100% u/s.80IC on its profits derived. The Revenue s case is that, the assessee has loaded more expenditure in the taxable unit to reduce the profit and therefore, indirect expenditure have been allocated on the turnover ratio. We find that it is an undisputed fact that the assessee has been maintaining separate bank accounts and separate books of account, wherein income and expenditure are separately debited and credited to the respective books of account. From the perusal of the expenses allocated by the Assessing Officer, we find that he has in general picked up the indirect expenditures for the purpose of allocation, without even identifying the expenditure which can be reckoned as common. Thus, the basis for allocation of expenditure without examining the separate books of account by the AO on the facts and circumstances of the case is not called for and same is rejected. It is further seen that though, the ld. CIT (A) has identif ..... X X X X Extracts X X X X X X X X Extracts X X X X
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