Tribunal distinguishes manufacturing units, grants deductions based on turnover.

The Tribunal determined that Unit-II was a separate manufacturing unit from Unit-I, based on distinct machinery and location, rejecting the AO's argument of it being an extension. It directed the apportionment of expenses based on turnover, granting 100% deduction under Section 80-IB for Unit-II and adjusting the deduction for Unit-I. The disallowance of salary and wages for Unit-II was reduced by the CIT(A) to two employees, with no disallowance for Unit-I. The Tribunal dismissed the Revenue's appeal, allowing the assessee's appeal for appropriate expense apportionment and deductions.

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Issues Involved:

1. Whether Unit-II is an extension of Unit-I or a separate manufacturing unit.
2. Apportionment of Administrative, Selling, and Financial expenses between Unit-I and Unit-II.
3. Deduction under Section 80-IB for Unit-I and Unit-II.
4. Disallowance of salary and wages in respect of Unit-II.

Issue-wise Detailed Analysis:

1. Whether Unit-II is an extension of Unit-I or a separate manufacturing unit:

The primary issue was whether Unit-II constituted a new manufacturing unit or was merely an extension of Unit-I. The Assessing Officer (AO) argued that Unit-II was an extension of Unit-I, based on common production registers and other discrepancies. However, the assessee contended that Unit-II was a distinct unit with new machinery and separate location (Gala 8, Building No.2), unlike Unit-I located at Gala 6 and 7. The Commissioner of Income-tax (Appeals) [CIT(A)] supported the assessee's claim, noting separate issue and purchase registers for both units and new licenses for Unit-II. The Tribunal upheld the CIT(A)'s view, confirming that Unit-II was a separate and distinct unit from Unit-I.

2. Apportionment of Administrative, Selling, and Financial expenses between Unit-I and Unit-II:

The AO found discrepancies in the expenses claimed by the assessee, suggesting that expenses of Unit-II were shifted to Unit-I to inflate Unit-II's profits. The CIT(A) accepted the AO's view in principle but directed the apportionment of common expenses differently. The Tribunal agreed with the CIT(A) that Administrative, Selling, and Financial expenses should be apportioned based on turnover rather than the number of units produced due to differing values of products manufactured in each unit. Selling expenses were directly related to turnover, while Financial expenses were better apportioned based on the value of goods manufactured. Administrative expenses, including rent, travel, and telephone, were also to be apportioned based on turnover.

3. Deduction under Section 80-IB for Unit-I and Unit-II:

The assessee claimed 100% deduction under Section 80-IB for Unit-II, while the AO allowed only 25% deduction, treating Unit-II as an extension of Unit-I. The CIT(A) and the Tribunal upheld the assessee's claim that Unit-II was a new unit eligible for 100% deduction. However, the Tribunal directed the AO to grant deduction at the eligible rate for Unit-I, as it was still entitled to deduction for the remaining period.

4. Disallowance of salary and wages in respect of Unit-II:

The AO disallowed 20% of the salary and wages claimed for Unit-II due to discrepancies in the Attendance register. The CIT(A) reduced the disallowance to the wages of two employees who did not sign the register. The Tribunal upheld the CIT(A)'s direction, finding it reasonable, and noted that no adverse findings were recorded for Unit-I employees, thus no disallowance was permissible.

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes, directing appropriate apportionment of expenses and granting eligible deductions under Section 80-IB for both units. The order was pronounced on 25.2.2010.

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