Turnover-based allocation of common expenses governs eligible profit computation, while section 14A disallowance needs complete factual support.

For deduction under section 80IC, common administrative expenses may be allocated on a turnover basis where that method is shown to be fair and reasonable for computing eligible profits, and the net profit ratio approach is not preferred absent reliable material showing distortion. On section 14A read with Rule 8D, a disallowance cannot be properly examined without complete factual material on exempt income and the basis for the adjustment; where the record is incomplete, the matter requires fresh consideration after hearing the assessee. The note therefore highlights turnover-based expense allocation for eligible-unit profit computation and the need for adequate facts before applying section 14A disallowance.

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Issues: (i) Whether common administrative expenses for computing deduction under section 80IC were to be allocated on the basis of turnover rather than net profit ratio of the units; (ii) Whether the disallowance under section 14A read with Rule 8D required fresh consideration in the absence of complete facts.

Issue (i): Whether common administrative expenses for computing deduction under section 80IC were to be allocated on the basis of turnover rather than net profit ratio of the units.

Analysis: The deduction claim depended on correct computation of profits of the eligible units. In the absence of a reliable basis showing distortion in the turnover method, allocation of common expenses by turnover was treated as fair and reasonable for determining the profits of the eligible business. The contrary allocation on net profit ratio was therefore not accepted.

Conclusion: The issue was decided against the assessee and in favour of the Revenue, and the turnover basis for allocation of common expenses was upheld.

Issue (ii): Whether the disallowance under section 14A read with Rule 8D required fresh consideration in the absence of complete facts.

Analysis: The record did not contain complete material on the exempt income earned or on the factual foundation necessary for applying section 14A and Rule 8D. In such circumstances, the issue could not be finally examined on merits and required reconsideration by the first appellate authority after giving the assessee an opportunity of hearing.

Conclusion: The issue was restored for fresh adjudication and the Revenue's ground was allowed only for statistical purposes.

Final Conclusion: The appeal succeeded only to the extent that the allocation method under section 80IC was upheld, while the section 14A disallowance was sent back for fresh decision.

Ratio Decidendi: For computing profits of an eligible undertaking, common expenses may be allocated on a turnover basis where that method is shown to be reasonable, and a section 14A disallowance cannot be sustained without the necessary factual foundation.

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