Borrowing Cost Allocation reduces eligible-unit deductions, while unsupported ad hoc expense disallowances fail without reasons or identified defects.

Borrowing costs attributable to funds transferred from a non-eligible unit to a section 80-IC eligible undertaking may be allocated proportionately according to the period of fund utilisation, reducing the eligible undertaking's deduction. Such allocation is distinct from disallowance of interest for failure to deduct tax at source; the tax-deduction-at-source disallowance operates independently and does not create double disallowance. In contrast, flat-rate disallowances of telephone, travelling and conveyance expenses without stated reasons or identified defects are arbitrary and unsustainable. The notes distinguish reasoned allocation and statutory tax-deduction disallowance from unsupported estimated expense disallowances.

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Issues: (i) Whether interest on borrowings charged to the non-eligible unit could be allocated to the section 80-IC eligible unit for computing its deduction; (ii) Whether disallowance of interest for failure to deduct tax at source resulted in double disallowance; (iii) Whether ad hoc disallowances of telephone, travelling and conveyance expenditure were sustainable.

Issue (i): Whether interest on borrowings charged to the non-eligible unit could be allocated to the section 80-IC eligible unit for computing its deduction.

Analysis: Funds transferred from the non-eligible unit to the eligible unit had been sourced substantially from borrowings, while the entire borrowing cost was charged to the non-eligible unit. Proportionate allocation of interest to the eligible unit, calculated with reference to the period for which it utilised the funds, was held appropriate.

Conclusion: Allocation of interest to the eligible unit and corresponding reduction of the section 80-IC deduction were sustained against the assessee.

Issue (ii): Whether disallowance of interest for failure to deduct tax at source resulted in double disallowance.

Analysis: Allocation of interest between eligible and non-eligible units did not constitute a disallowance of the expenditure. The separate disallowance arose from non-compliance with the tax-deduction-at-source requirement and operated independently.

Conclusion: The disallowance under section 40(a)(ia) did not amount to double disallowance and was sustained against the assessee.

Issue (iii): Whether ad hoc disallowances of telephone, travelling and conveyance expenditure were sustainable.

Analysis: The disallowances were made at a flat percentage without any specific reason or identified defect, and their confirmation was likewise unsupported by reasons. Such disallowances were arbitrary.

Conclusion: The ad hoc disallowances of telephone, travelling and conveyance expenses were deleted in favour of the assessee.

Final Conclusion: The allocation of borrowing cost to the eligible undertaking and the tax-deduction-at-source disallowance remain effective, but the unsupported estimated expense disallowances cannot stand.

Ratio Decidendi: Borrowing costs attributable to funds used by a deduction-eligible undertaking may be allocated to that undertaking on a proportionate utilisation basis, whereas an ad hoc expenditure disallowance without stated reasons or identified defects is unsustainable.

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