2018 (2) TMI 429 - AT - Income Tax

Appeal granted for Section 80IB & 35(2AA) deductions, stresses expense allocation nexus & procedural compliance

Transpek Silox Industry Ltd. Versus The ACIT, Range-4, Baroda

The Tribunal partly allowed the appeal, directing the AO to allow the deduction under Section 80IB as claimed by the assessee and permitting the actual ... Deduction u/s.80IB - calculation of claim - expenses claimed as deduction for calculating net profit for Silvassa Unit – II - Held that:- AO failed to point out any direct nexus of the alleged common expenditures to have been incurred for Silvassa Unit – II and also did not pointed out any defect in the allocation statement prepared by the assessee for expenses claimed as deduction for calculating net profit for Silvassa Unit – II. We therefore set aside the findings of the ld. CIT(A) and allow ground 1, 2 and 3 of the Assessee and direct the Assessing Officer to allow the deduction u/s.80IB of the Act as claimed by the assessee in its return of income. Disallowance of weighted deduction u/s.35(2AA)- Held that:- Assessee has been unable to produce Form 3CI as contemplated in Rule 6(6) of the I. T. Rules. In this circumstances we are unable to accept assessee’s plea of allowing weighted deduction of 175% of the amount paid. However, we intend to accept the assessee’s alternate plea of allowing the deduction of expenditure of ₹ 2,20,800/- paid by the assessee to National Laboratory. From perusal of Form 3CH (Rule 6(6) of the I.T. Rule) which is an order of approval of scientific research programme placed in Paper Book, we find that the assessee has paid ₹ 2,20,800/- through cheque No.265292 dated 22.11.2010. We therefore accept the assessee’s alternate plea and allow the expenditure of ₹ 2,20,800/- as against ₹ 3,86,400/- claimed by the assessee. Issues Involved:1. Reduction of deduction under Section 80IB of the Income Tax Act.2. Allocation of managerial commission and salary, wages, and bonus expenses.3. Disallowance of deduction under Section 35(2AA) of the Income Tax Act.Detailed Analysis:Issue 1: Reduction of Deduction under Section 80IB of the Income Tax ActThe assessee, a limited company engaged in manufacturing industrial chemicals, claimed a deduction under Section 80IB of the Income Tax Act at 30% of the profits earned from its Silvassa Unit-II. The Assessing Officer (AO) reduced this deduction by reallocating common expenses incurred for various units. The Tribunal found that the AO failed to establish a direct nexus between the common expenses and the Silvassa Unit-II. The Tribunal referenced previous decisions, including the assessee's own cases for earlier assessment years and judicial precedents, emphasizing that only expenses with a direct nexus to the unit's activities should be considered. Consequently, the Tribunal directed the AO to allow the deduction of Rs. 2,88,01,427 as claimed by the assessee.Issue 2: Allocation of Managerial Commission and Salary, Wages, and Bonus ExpensesThe AO allocated managerial commission and salary, wages, and bonus expenses in the ratio of turnover to the Silvassa Unit-II, which led to a reduction in the deduction under Section 80IB. The Tribunal observed that the AO did not point out any defects in the allocation statement prepared by the assessee. Citing previous Tribunal decisions and judicial precedents, the Tribunal concluded that the AO's allocation lacked a direct nexus to the unit's activities. Therefore, the Tribunal set aside the findings of the CIT(A) and directed the AO to allow the deduction as claimed by the assessee.Issue 3: Disallowance of Deduction under Section 35(2AA) of the Income Tax ActThe assessee claimed a weighted deduction of Rs. 3,86,400 under Section 35(2AA) for a payment of Rs. 2,20,800 to the National Chemical Laboratory. However, the assessee failed to submit Form 3CI, which is required to substantiate the claim. The Tribunal noted that despite the absence of Form 3CI, the payment was made for business purposes and was approved by the CSIR in Form 3CH. While the Tribunal did not allow the weighted deduction due to the non-submission of Form 3CI, it accepted the alternative plea of the assessee to allow the actual expenditure of Rs. 2,20,800.Conclusion:The Tribunal partly allowed the appeal, directing the AO to allow the deduction under Section 80IB as claimed by the assessee and permitting the actual expenditure under Section 35(2AA) while disallowing the weighted deduction due to procedural non-compliance. The decision emphasized the importance of direct nexus in the allocation of expenses and adherence to procedural requirements for claiming deductions.