Tribunal affirms expense allocation, remands interest issue for review

The Tribunal upheld the allocation of head office expenses and finance charges to the Rudrapur unit, finding no error in the method used for allocation. The Tribunal remanded the issue of interest expenditure allocation back to the AO for further verification and appropriate decision-making. The appeal was partly allowed for statistical purposes, with the AO directed to reassess the interest expenditure allocation after proper verification.

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Issues Involved:
1. Restriction of deduction under Section 80IC of the Income Tax Act.
2. Allocation of finance charges to Rudrapur unit.
3. Allocation of Head Office expenses to Rudrapur unit.

Detailed Analysis:

1. Restriction of Deduction under Section 80IC:
The primary issue in this appeal was the restriction of the deduction claimed by the assessee under Section 80IC of the Income Tax Act. The assessee claimed a deduction of Rs.1,14,96,983/- for the Rudrapur unit, which was reduced by the Assessing Officer (AO) to Rs.90,62,385/-. The AO observed that the financial condition of the assessee company was poor, with reserves and surplus showing a negative balance of Rs.3.10 crores as of 01.04.2007. The company was also declared a sick industrial company by the Board of Industrial and Financial Reconstruction. The AO did not accept the assessee's claim that the Rudrapur unit was funded through internal accruals, noting that the company had taken both secured and unsecured loans throughout the year. The AO allocated finance charges and head office expenses to the Rudrapur unit, reducing the deduction claimed under Section 80IC.

2. Allocation of Finance Charges:
The AO allocated finance charges to the Rudrapur unit based on the average value of fixed assets, current assets, loans, and advances across all units. The AO observed that the total financial charge, excluding hire charges and bill discount, was Rs.1,53,25,937/-. The finance charge for the Rudrapur unit was calculated as Rs.21,34,598/-, which was then reduced from the profit of the Rudrapur unit. The assessee contended that no loans were borrowed for the Rudrapur unit, and the entire funding was made from internal accruals. However, the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] did not accept this argument, as the company had negative reserves and surplus, indicating that loans were likely used for funding the Rudrapur unit.

3. Allocation of Head Office Expenses:
The AO allocated head office expenses of Rs.30,29,642/- among all units based on their turnover. For the Rudrapur unit, Rs.3,00,000/- was allocated. The assessee argued that no head office expenses should be allocated to the Rudrapur unit, as no personnel from the head office were deputed to supervise the unit. The assessee also pointed out that Rs.6,45,753/- had already been debited by the Faridabad unit for supervising the Rudrapur unit. However, the AO and CIT(A) upheld the allocation, noting that the expenses should be reasonably distributed among all units to reflect the true profits.

Conclusion:
The Tribunal upheld the AO's allocation of head office expenses and finance charges to the Rudrapur unit, finding no error in the method used for allocation. The Tribunal noted that the assessee failed to provide sufficient evidence to support its claim that no expenses were incurred for the Rudrapur unit. However, the Tribunal found that the details of loans and their utilization were not adequately examined. Therefore, the Tribunal remanded the issue of interest expenditure allocation back to the AO for further verification and appropriate decision-making. The appeal was partly allowed for statistical purposes, with the AO directed to reassess the interest expenditure allocation after proper verification.

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