2015 (10) TMI 1003 - AT - Income Tax

Appellate Tribunal affirms proper expense allocation in partnership firm tax appeal for Manufacturing and Trading

The Appellate Tribunal upheld the Commissioner of Income Tax (Appeals) decision, dismissing the Revenue's appeal regarding the reallocation of expenses ... Addition on account of reallocation of expenses relating to raw materials, manufacturing expenses, administrative expenses, selling expenses and financial expenses amongst Unit-I & Unit-II in proportion to the sales in these units - CIT(A) deleted the addition - Held that:- CIT(A) while granting partial relief has noted that similar addition made by the A.O in the preceding year [2015 (9) TMI 1340 - ITAT AHMEDABAD] was not approved by his predecessor in 2007-08 and further A.O has not pointed out any specific defect in the books of accounts which have been audited. He has further given a finding that Assessee has kept separate production record for both the units which indicate the quantitative of raw material consumed and production as per excise law. He therefore held that A.O was not justified in re-allocating the expenses in proportion to the sale in both the units. However, with respect to certain other expenses, he has noted that the procedure followed by Assessee for allocating the expenses were not logical and without any documentary evidence and with respect to those expenses he had directed to the A.O to apportion the expenses in the ratio of turnover. Before us, Revenue has not brought any material on record to controvert the findings of ld. CIT(A) We further find that while dismissing the appeal of Revenue for A.Y. 2007-08 in Assessee’s own case wherein CIT(A) while deleting the addition has noted that no defect or the differences in the product, process, raw materials, end users etc. have been pointed by Revenue and the A.O has proceeded to calculate the income of the 2 units on a wrong assumption. He has further noted that the addition has been made on a hypothetical formula by the A.O - Decided against revenue. Issues Involved:1. Reallocation of expenses between two units for tax assessment.2. Apportionment of specific expenses based on turnover ratio.3. Justification of the Assessing Officer's decision.4. Dismissal of certain grounds by the Departmental Representative.Analysis:Issue 1: Reallocation of ExpensesThe appeal pertains to the reallocation of expenses between two units of a partnership firm engaged in Manufacturing and Trading of Dyes and Chemicals for the assessment year 2008-09. The Assessing Officer (A.O) re-allocated expenses between Unit-I (taxable) and Unit-II (tax-exempt) based on sales, suspecting manipulation to reduce taxable profits. The Commissioner of Income Tax (Appeals) [CIT(A)] partially upheld the appeal, noting the Assessee maintained separate accounts and production records for both units, which were audited and found in order. The CIT(A) held that the A.O's reallocation was unjustified, as no specific defects were found in the Assessee's records. However, for certain expenses, the CIT(A) directed the A.O to apportion them based on turnover ratio.Issue 2: Apportionment of Specific ExpensesThe CIT(A) found the Assessee's allocation of Consultancy Charges, Income Tax Appeal fee, Membership Fee, and Professional Tax between units lacked logic and supporting evidence. Consequently, the CIT(A) directed the A.O to apportion these expenses based on the turnover of both units. The decision was based on the lack of documentary evidence and logical allocation by the Assessee, emphasizing the need for proper justification in expense allocation.Issue 3: Justification of the Assessing Officer's DecisionThe A.O's decision to re-allocate expenses was based on the significant variation in gross profit ratios between the two units, suspecting manipulation to reduce taxable profits in Unit-I. However, the CIT(A) found the A.O's reasoning lacking, as no specific defects were identified in the Assessee's audited records. The CIT(A) highlighted the Assessee's separate accounts and production records for each unit, indicating proper maintenance and no apparent need for reallocation based on sales.Issue 4: Dismissal of Certain GroundsThe Departmental Representative (D.R.) dismissed grounds 3 & 4 as general and not pressing. The D.R. argued that grounds 1 & 2 were interconnected, emphasizing the need for proper allocation of expenses between the units. The CIT(A)'s decision was supported by the Assessee's submission of separate audited accounts and production records, which influenced the dismissal of the Revenue's appeal.In conclusion, the Appellate Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal due to the lack of evidence to counter the findings regarding expense allocation and the Assessee's proper maintenance of separate records for each unit. The judgment emphasized the importance of logical and documented expense allocation for tax assessment purposes.