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TMI Blog2017 (6) TMI 1193X X X X Extracts X X X X X X X X Extracts X X X X ..... finance estimated at ₹ 1,00,000/- in assessment year 2008-09 and ₹ 10,000/- each in assessment year 2009-10 being a nominal one, is justified and upheld. The ground Nos. 2 and 3 are accordingly rejected. Validity of addition made u/s 80IC - apportionment of common expenditure between the unit eligible for deduction under section 80IC and non-eligible units on the basis of turnover - Held that:- CIT (Appeals) correctly allowed partial relief to the assessee on the claimed deduction under section 80IC of the Act by upholding the criteria of apportionment of indirect expenditure of Baddi Unit on the basis of sales turnover of Baddi Unit to the total turnover of other units etc. for the allocation of expenditure of interest on the basis of actual usages of funds for which a working was furnished by the assessee. This action of the CIT (Appeals) has resulted in relief of ₹ 1,96,95,332/- towards the claimed deduction under section 80IC of the Act. He has given relief of ₹ 38,26,826/- on the basis that it was amount of notional ad-hoc 1% cost inputted to Baddi Unit for sales affected by other units while computing deduction under section 80IC of the Act CIT ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making a notional addition of ₹ 1,00,000/- as alleged administrative and finance cost incurred on commodity trading. 4. That the Learned CIT (Appeals) has grossly erred in confirming the addition made by the Assessing Officer u/s 80 IC by reducing the deduction claimed by the appellant making the below mentioned disallowances/ additions : a) That the Learned CIT (Appeals) has grossly erred in confirmingthe reduction of ₹ 52,69,333/- in the profit of Baddi unit eligible for deduction under section 80IC by treating the same as alleged over valuation of stock. ' b) That the Learned CIT (Appeals) has grossly erred in confirming the action of the Assessing Officer in reducing the deduction claimed under section 80IC by ₹ 2,08,03,079/- on apportionment of expenses including that of depreciation on the basis of manufacturing turnover of Baddi unit to gross manufacturing turnover of all manufacturing units including Baddi unit. c) That the Learned CIT (Appeals) has grossly erred in confirming the estimated reduction of ₹ 28,57,222/- from the profits of the Baddi unit eligible for deduction under section 80IC of the Act, being estimated profit of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achinery installed at other than Baddi Unit during the year. ITA. No. 2979/Del/2014 : 4. The Revenue has questioned first appellate order on the following grounds :- 1. Whether on the facts in the circumstances of the case, the Ld. CIT (A) has erred in allowing the appeal of the assessee against disallowance on account of apportionment of gross expenses by ignoring the fact that interest expenses while computing the apportionment cannot be exempted if no separate, insulated financial identity of Baddi unit is there. Specific unit-wise details of expenditure for the apportionment principle to be exempted should be presented. 2. Whether on the facts in the circumstances of the case, the Ld. CIT (A) has erred in deleting the adhoc addition of 1% of notional profit computed on sales as attributable to Baddi Unit without reasoning for disagreement with the merits of the case and with predecessor s orders. 5. In the appeals for the assessment years 2008-09 and 2009-10, common ground Nos. 2 and 3 have been raised questioning the action of the ld. CIT (Appeals) in upholding the business loss commodity trading of ₹ 9,58,188/- in assessment year 2009-10 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention of the parties at the time of entering into the contract might have been to take actual delivery, but this intention could not be effectuated for one reason or the other. The actual delivery means real as opposed to notional delivery. Whether a transaction is a speculative in general sense or under the Contract Act, is not relevant for Income Tax purposes. Before the ld. CIT (Appeals) the assessee admitted that part of the transactions were not settled by actual delivery of goods and at least part of the loss was speculative. The assessee, however, could not produce any evidence to substantiate its claim that part of the loss that has been incurred was settled by actual delivery of goods and the loss is not speculative. Even before the Tribunal, the assessee could not improve its case on the issue. We thus do not find any reason to interfere with the first appellate order. The same is upheld. The expenses on administrative and finance estimated at ₹ 1,00,000/- in assessment year 2008-09 and ₹ 10,000/- each in assessment year 2009-10 being a nominal one, is justified and upheld. The ground Nos. 2 and 3 are accordingly rejected. 6. The other common issue in all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds on account of deduction under section 80IC of the Act and others. 6.3 The ld. AR, on the other hand, tried to justify the first appellate order and furnished following written synopsis in brief :- 1) The appellant was engaged during the year under appeal in manufacture and trading of electric cables, CFL lights etc. 2) The appellant filed its return of income declaring an income of ₹ 5,49,09,299/- which was assessed under section 143(3) of the Act at ₹ 9,17,43,743/-. 3) The appellant had claimed deduction under section 80IC of ₹ 6,46,26,634/- for profit (earned from its manufacturing operations carried on at Baddi unit, for which a separate profit loss account balance sheet was filed before the Assessing Officer (copy enclosed at page No. 6 to 11 of paper book). 4) The Assessing Officer had curtailed deduction under section 80IC and restricted the claim of deduction to ₹ 2,82,33,796/- by making below mentioned adjustment in the profit computed for allowing deduction under section 80IC of the Baddi unit while passing the assessment order. (i) The Assessing Officer made an ad-hoc curtailment in claim eligible for deduction under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT (Appeals) had allowed the relief of ₹ 1,62,33,521/- in allocation of interest on the basis of actual usage of funds by computing interest of ₹ 34,61,811/- attributable to activities of Baddi unit as against the apportioned interest cost of ₹ 2,07,54,839/- made by the Assessing Officer. 10) The assessee had disallowed / added back expenditure of ₹ 2,20,39,488/- while computing its assessable income which was again considered for apportionment of indirect expenditure and had impact of ₹ 24,02,304/- in profit of Baddi unit eligible for computing deduction under section 80IC of the Act. The CIT (Appeals) held that the amount of ₹ 2,20,39,488/- could not be considered for allocation of expenditure once the same had been added back by the assessee to its income and deleted the curtailment in profit eligible for deduction under section 80IC of ₹ 24,02,304/- Refer para 4.3 and para 5.2 page 15 and 18 of CIT(A) order. 11) The respondent had filed copy of account of Head Office in its books of accounts at page 28 to 44 of the paper book. The debits and credits to the account of Head Office have been taken into consideration on a daily bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw and facts of the case. 2. The learned A. O. is not justified in disallowing ₹ 3,63,92,838/- out of ₹ 6,46,26,634/- as deduction claimed under section 80IC of Income Tax Act, 1961 in the Manpura (Baddi) unit by disallowing the following:- a. The learned A.O. is not justified in disallowing ₹ 29,45,752J- by considering the stock lying at various branches amounting to ₹ 1,59,48,849/- as overvalued which has actually been valued at cost price. b. The learned A.O. is not justified in disallowing ₹ 2,96,2(^260/- by apportioning the gross expenses of ₹ 27,17,45,505/- (inclusive of depreciation) of all the branches in such proportion which the manufacturing turnover of Baddi unit bears to gross manufacturing turnover of all branches, manufacturing units including Baddi unit. However expenses incurred at Baddi (Manpura) unit should be considered exclusively relating to the unit itself as per the individual balance sheet filed. c. The learned A.O. is not justified in disallowing ₹ 38,26,826/- on estimated basis by taking 1% profits on turnover of ₹ 38,26,82,601/- of Baddi unit, considering that the profits could not be derive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer has observed without any basis in her assessment order that there are huge amount of expenses incurred at Delhi Head Office and six branches of the assessee and the appellant had not apportioned any of the expenditure to determine the eligible for deduction u/s of the 80 1C of the Act for its Baddi Unit. The Assessing Officer had further observed that the appellant uses its networking and Head Office to make all kinds of sale including sale from 80 1C unit. (c) The assessee as per the Assessing Officer makes purchases and uses bank account and finance of head office to affect its turnover and all finance as well as common indirect expenses are paid through the Head office bank account. Our Rebuttal The appellant company maintained its Administrative Office at Delhi and had six branches out of which Bombay branch had nil sales during the year under appeal. Three branches, i.e. Chopanki, Baddi, Bhiwadi were manufacturing units and the other two branches, namely, Cochin and Jalandhar were trading units. The appellant company was engaged in the production of industrial cables and other heavy duty cables at its Bhiwadi and Chopanki units whereas the unit at Baddi was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the assessee had failed to substantiate its claim that no apportionment of expenditure for Baddi unit was warranted. The Assessing Officer further stated that no part of Director s remuneration had been attributed to Baddi unit, no separate funding of sources and separate dedicated network was maintained for Baddi unit and the Head office infrastructure had been used for making purchases and marketing activity. The assessing Officer has finally concluded in para 5.2.1.3 that in the circumstances narrated by her, the best course available for Computing deduction u/s 80 1C would be to attribute expenses of the Head Office and branches in terms of turnover and apportioning the common cost as per provisions of section 80 IA (5) r.w. section 80 1C (7) and as prescribed in Rule 18BBB of I. T. Rules. Our rebuttal As stated above, the apportionment of all expenditure on the basis of turnover is not justified in the facts and circumstances of the case of the appellant in view of :- a) The products manufactured at Baddi unit were of different variety and had much shorter production and realization cycle as compared to the other two manufacturing units at Bhiwadi and Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der :- Head of Expense debited in P L Account Delhi Cochin Mumbai Total Bank Interest 18,69,36.459/- 550/- 5,656/- 18,69,42,665/- Interest 1,47,200/- ... .... 1,47,200/- Interest on Secured Loan 82,86,384/- 82,86,384/- Sub- total 19,53,76,249/- Less: Interest on FDR 49,64,879/- 49,64,879/- Balance 19,04,11,370/- Baddi Unit with respect to total sale as computed by the assessing officer in para 5.2.2.4.4 at page 6 of her order) of total Interest of ₹ 19,04,11,370/-}. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 55,202/- Income Tax Demand 2009-10 ₹ 3,86,414/- TOTAL ₹ 2,20,39.488/- The expenditure of ₹ 27.17.45.505/- of Delhi. Cochin, Mumbai and Ludhiana units which were considered by the Assessing Officer for apportionment for Baddi unit includes below mentioned expenditure which were already disallowed by the appellant in its computation of income (copy enclosed at page No. 70 of the paper book) as the same were not eligible for deduction under section 80 1C of the Act. The above amount of ₹ 2,20,39,488/- has again been considered for apportionment and a sum of ₹ 24,02,304/- ( 10.9% of ₹ 2,20,39,488/-) has been disallowed by the Assessing Officer under section 80 1C on this account. The above proportionate disallowance is not tenable and deserves to be deleted. Regarding :- Trading profit The Assessing Officer has made another adjustment of ₹ 38,26,826/- by estimating hypothetical trading profit of branches for sales of Baddi unit on incorrect appreciation of the facts of the case. * The facts on the issue as narrated by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NATION: (1) I have gone through the finding of Assessing Officer in the assessment order and written submissions filed by learned Authorized Representative of the appellant. After considering the same, ground-wise issues are decided hereunder. (2) Ground of appeal No. 1 is general in nature. (3) Ground of appeal No. 2 is against disallowing ₹ 3,63,92,838/- out of ₹ 6,46,26,634/- as deduction claimed under section 80IC. In this ground, learned Authorized Representative of the appellant has submitted as under:- 3. Ground No. 2 is directed against the disallowance of ₹ 3,63,92,838/- made by the assessing officer by curtailing the deduction claimed under section 80IC of the Act to ₹ 2,82,33,976/- as against ₹ 6,46,26,634/- claimed by the appellant for its Manpura (Baddi) unit by treating the following amounts as ineligible for computing profit for deduction under section 80IC of the Act:- (i) A sum of ₹ 29,45,752 for stock transferred to various branches remaining unsold at the yearend (on the basis of G.P. of Baddi Unit). (ii) Addition of ₹ 2,96.20,260/- by apportioning the gross expenses of ₹ 27,17,45.505/- (inclusive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is seen that the deduction u/s 80IC has been claimed at ₹ 6,46,26,634/-. The above is not correctly claimed by the assessee, in view of the following discussion. APPORTIONMENT OF EXPENSES: It is seen that there are huge amount of Expenses incurred at Delhi Head Office and 6 Branches of the assessee. The assessee has not apportioned any of the expenses to determine the profit derived u/s. 80IC of Baddi Unit. The assessee uses its network and Head Office to make all kind of sales, that is sale from 80IC unit and sale from non 80IC units and obviously there is cost incurred for this purpose. The assessee also make purchases and uses the bank account finance of head office to effect its turnover and the expenses in relation to of all the head office is paid by the bank account as well as all other common indirect expenses are paid through the head office bank account. The assessee has incurred huge amount of expenses and all have been debited to non 80IC activity. One such example is of Bank Charges and interest (net) of ₹ 14,14,45,461/-. The interest expense for the Baddi Unit for a turnover of ₹ 32.29 Crores has been mentioned at only ₹ 14,885/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... costs accordingly as per provision of 80IA(5) r.w.s. 80IC(7) and as prescribed in Rule 18BBB of I.T. Rules which is discussed in coming paragraphs. [4] In this regard, the Id. AR vide written submission dated 24.01.2014 has submitted as under (only relevant extract reproduced) :- a) The appellant company maintained its Administrative Office at Delhi and had six branches out of which Bombay branch had nil sales during the year under appeal. Three branches, i.e. Chopanki, Baddi, Bhiwadi were manufacturing units and the other two branches, namely, Cochin and Jalandhar were trading units. b) The appellant company was engaged in the production of industrial cables and other heavy duty cables at its Bhiwadi and Chopanki units whereas the unit at Baddi was engaged in manufacturing of household wires and cables. The manufacturing process for manufacturing of household wires involves a much simple and a less time consuming process in comparison to that for manufacture of industrial and heavy duty cables. The sales from Baddi unit were mostly to the consumers from whom realization of payment was quick as compared to that of the other two manufacturing units. c) The appellant c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest expenditure which was directly identified with the activity of Baddi unit should not have been apportioned on the basis of turnover of the Baddi unit and instead the actual interest cost attributable to Baddi unit be considered for computing eligible profit for claiming deduction u/s 80IC of the Act. In this regard, appellant during the course of appellate proceedings submitted as under (only relevant extract is reproduced) a) One such expenditure which has been apportioned on the basis of turnover was interest. The apportionment of interest is not justified as interest is directly identifiable with the use of funds. The appellant has incurred expenditure in above branches (Delhi, Cochin and Mumbai) (no interest expenditure was incurred in Ludhiana unit) as under : Head of Expense debited in P L Account Delhi Cochin Mumbai Total Bank Interest 18,69,36.459/- 550/- 5,656/- 18,69,42,665/- Interest on Secured Loan 82,86,384/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an amount of more than ₹ 34,61,811/- 4.2 In support of its claim the appellant was directed by me to furnish the prescribed form 10CCB on the basis of allocation of interest cost on Baddi unit in accordance with the usage of funds. In this regard, the Id. AR vide written submission dated 17.02,2014 has submitted a copy of form 10CCB computing deduction u/s 80IC by allocating the interest cost attributable to the Baddi unit on actual use of funds. 4.3 The appellant had also submitted vide its submission dated 24.01.2014 that expenditure of ₹ 27,17,45,505/- of Delhi, Cochin, Mumbai and Ludhiana units which was considered by the Assessing Officer for apportionment for Baddi unit includes a sum of 2,20,30,488/- which was already disallowed by the appellant in its computation of income and the same was not considered eligible for deduction claimed by the appellant under section 80 IC of the Act. Break-up of ₹ 2,20,30,488 is as under :- Particulars Amount % Donation ₹ 1,47,200/- Sales Tax Demand ₹ 23,334/- Income Tax Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer of goods to other units remaining unsold at the year end. The appellant has submitted its written and oral arguments challenging the apportionment of expenditure of its eligible Baddi unit on the basis of total turnover of the appellant company for all expenses. The appellant has submitted before me that the apportionment of expenditure on interest is inequitable and has filed its working for the imputed interest cost that it has incurred on operations of its Baddi unit. The appellant had argued before me that interest cost of the Baddi unit can be computed by arriving at the figure of usage of funds by Baddi unit on the basis of debit and credit of head office account with it during the year under appeal. The appellant had also submitted a copy of revised form 10CCB claiming deduction of 80IC of ₹ 5,47,01,706/- by imputing interest cost of Rs, 34,61,811/- to its Baddi unit on my direction during the course of appellate proceedings. The appellant has also pointed out before me that the Assessing Officer has resorted to apportionment of expenditure amounting to ₹ 2,20,30,488/- which had already been disallowed by the assessee while computing the return o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of apportioned amount of interest of ₹ 2,07,54,839/- by the Assessing Officer in the assessment order. On perusal of the assessment order, written and oral submissions of the appellant case law on the issue and facts on record, I proceed to adjudicate the various grounds of appeal in a consolidated matter. The appellant has principally not objected to apportionment of expenditure on the basis of turnover other than interest for arriving at the claim of deduction under section 80IC. It has substantiated interest cost attributable to the Baddi unit during the course of appellate proceedings before me. I find that the apportionment of common expenditure wherever no specific unit wise detail is available is judicially recognized for arriving at the profit of ' different units. There is no prescribed formula for apportionment of expenditure in the Act. The appellant has cited a judgment of jurisdictional Delhi High Court ifi the case Controls Switchgear Co. Ltd. Vs. Deputy Commissioner of Income Tax 66 DTR page no. 161 wherein the Delhi High Court has approved the apportionment of common expenditure between the unit eligible for deduction under section 80IC and non-el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC) to state that notional income cannot be taxed. 5.5 I find force in the argument of the appellant and ad-hoc 1% attribution of notional profit computed on sales of Baddi unit amounting to ₹ 38,26,826/- being without any basis, is deleted for computation of deduction u/s 80IC of the Act. 5.6 I have adjudicated on the various components of curtailment of deduction under section 80IC in the above paragraphs. The assessee is eligible for deduction u/s 80IC amounting to ₹ 5,17,55,954/- against deduction of ₹ 2,82,33,796/- allowed by the assessing officer. The assessee gets relief of ₹ 2,35,22,158/- on account of curtailment of deduction u/s 80IC by the Assessing Officer. A chart giving detail of curtailment of deduction u/s 80IC by the Assessing Officer under various components and relief granted by me to the appellant is attached with this order as Annexure - A. In view of above discussion, ground of appeal No. 2 is partly allowed. 6.5 We find that the ld. CIT (Appeals) has allowed partial relief to the assessee on the claimed deduction under section 80IC of the Act by upholding the criteria of apportionment of indirect expenditure of Baddi Unit on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 17,57,43,596.23 from which the assessee company had deducted the investment in fixed assets out of share capital and share premium, which was derived by taking into fixed assets as appearing in the balance sheet of Baddi Unit to the total fixed assets held by the assessee company. He has further noted that while computing the figure of actual usages of funds by the Baddi Unit the assessee has also reduced the profit declared by Baddi Unit of ₹ 10,62,29,705/- in the preceding two assessment years to arrive at the opening figure of funds in use by the Baddi Unit. In absence of rebuttal of these material facts by the Revenue, we do not find reason to interfere with the first appellate order which is comprehensive and speaking meeting out the objections raised by the Assessing Officer in view of the submission of the assessee. The same is upheld. The ground Nos. 1 and 2 of the appeal are thus rejected. The appeal of the Department for the assessment year 2010-11 is accordingly dismissed. 6.6 So far as the remaining appeals of the assessee on identical issue as raised in the appeal preferred by the Department are concerned, the parties have adopted similar arguments. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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