TaxTMI 
TaxTMI 
2015 (5) TMI 389
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....tion to Jorhat Unit and part relief was allowed by CIT(A) against the reduction made by the Assessing Officer. The second issue is regarding disallowance out of foreign travel expenses and third issue is regarding enhancement of book profit u/s 115JB. The Revenue's appeal is in connection with issue No. 1 & 3 raised by the assessee in its appeal because part relief was allowed by CIT(A) on these two issues. 3. Regarding the first issue i.e. regarding reduction in the claim of the assessee for deduction u/s 80IB of the Act of Jorhat Unit, written submissions of Learned A.R. of the assessee are as per Para No. 4.1 to 13, which are reproduced below for the sake of ready reference:- "4.1 As per the information already on record, the assessee company has been carrying out manufacturing from its industrial undertaking situated at Kanpur since long. It was only w.e.f. 12.9.2000 that it had set up an industrial undertaking at Jorhat; the first assessment year being 2001-02. It is undisputed that the said unit qualified for deduction under section 80IB(4) of the Act from the assessment year 2001-02 onward. In the first assessment year, the Assessing Officer had allowed the relief unde....
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....ived by the assessee from that unit. Similar power for adjustment is available to the Assessing Officer by virtue of such section (8) and (10) of section 80-IA which are so far as may be, applicable to the legible business u/s 80-IB. We, therefore reject the argument of Ld. A.R. of the assessee that such adjustment is not possible merely because accounts of the Jorhat Unit are audited. In fact auditing of the accounts is one of the conditions for allowability of deduction u/s 80- IB by virtue of sub section (7) of Section 80-IA and in spite of that sub section (8) and sub section (10) of section 80-IA are made applicable to section 80-IB as well which, empowers the Assessing Officer to adjust profit of eligible unit under the circumstances mentioned therein. In our considered view, the case of the assessee would fall in sub section (8) of section 80-IA in as much as the services are provided to the Jorhat Unit by the Kanpur Head Office by way of advertisement and publicity and other expenses and therefore, they are required to be adjusted in the Jorhat Unit for computing profits of that unit which is eligible for deduction u/s 80-IB. Accordingly this argument of the assessee is rej....
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.... between the assessee and the 'other person'[which also means another assessee as per specific provision contained in section 2(31) of the Act].In the instant case, there is no another assessee, but a unit of the assessee wherein expenses incurred at Head Office already stood allocated. The assessee's reply as has been reproduced by the Assessing Officer in pages 9, 10 and 11 of the assessment order is as under (quote from the assessment order):- "Another reply was filed, relevant part of which is being reproduced as under:- a) "Yours honour has, like in earlier years required us to show cause as to why part of the expenses of Kanpur unit may not be allocated to the Jorhat unit on the basis of sales. As regards the same a detailed reply expense-wise has already been submitted to your honour during the earlier years wherein it has categorically been explained why the expenses should not be allocated. In addition to the above it is further submitted that as you are aware that the assessee company has manufacturing units at Kanpur and Jorhat. The unit at Jorhat is entitled to deduction u/s.80-IB of the Income Tax Act. Separate books of account are being duly maintained at each o....
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....nding. xi) It is also most respectfully submitted that certain expenditure in the nature of ROC expenses, Kanpur office repair expenses, motor vehicle expenses etc. A.G.M. expenses, security guard is essential expenditure which was being incurred by the company even before the Unit at Jorhat was set up and merely because a new unit was set up there, it does not suomoto give rise to the situation that the expenses must be allocated. xii) It is further submitted that the statute contemplates to allow deduction u/s.80IB in respect of the income of an 'industrial undertaking' and not that of an'assessee'. And therefore, it cannot be the intention of the statute to allocate all the expenditure incurred by the assessee to such industrial undertaking unless the same relates to it. In view of the above it is submitted that no allocation of expenses be made." 4.6. The Assessing Officer, after discussing the matter in paras 4 and 4.1 of the assessment order, which read as under: "Deduction u/s.80-IB 4. It is seen that assessee company has claimed deduction under section 80-IB of I.T.Act at Rs. 20,63,46,403/- in respect of net profit of Jorhat unit which is claimed to be ind....
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....pendent business. It is pertinent to reproduce relevant provisions of sub-section (10) of section 80-IA as under:- "Where it appears to assessing officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reasons, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might expected to arise in such eligible business, the assessing officer shall, in computing the profits and gains of such eligible business for the purpose of deduction under this section, take the amount of profit as may be reasonably deemed to have been derived therefrom." 4.1 In view of the above discussion, it is apparent that the assessee has been claiming lesser expenses in the Jorhat unit, profit of which is exempt u/s 80-B as compared to Kanpur unit which is another major unit and where entire profit is taxable. Even in the earlier years, the assessee was engaged in the same practice. In view of these facts and in view of the sub-section (10) of the section 80-IA, to work out the reasonable profit,....
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....515502.00 Amount allocated in the ratio of Turnover Directors' Remuneration 3180000.00 1950058.75 Amount allocated in the ratio of Profit of the units Directors' Sitting Fees 10000.00 6132.26 Amount allocated in the ratio of the Profit of the units Directors' Commission 19386420.00 14515596.00 Amount allocated in the ratio of Profit of the units Salary, Bonus, P.F., E.S.I and Gratuity of Sales Staff 3072334.95 5126225.22 50% allocated to Jorhat unit Salary, Bonus, P.F., E.S.I., and Gratuity of Office staff 434423.00 237600.00 50% allocated to Jorhat unit Salary, Bonus, P.F., E.S.I, and Gratuity of other staff 170898.00 174240.00 100% allocated to Jorhat unit 139592117.44 92525354.23 (emphasis provided) 4.3 I have considered the facts and circumstances of the case, submissions and arguments of the Ld. AR which have been briefly summarised above. The issue of allocation of the expenses was subject matter of appeal in earlier years and the Hon'ble Tribunal in ITA No.1003/Luc/2006 vide its order dated 28.9.2007 in the case of the appellant itself for A.Y.2004-05 has decided this i....
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....is of allocation. In view of this position, keeping in mind the principle of consistency, I hereby direct the A.O. to follow the same method as adopted in A.Y. 2004-05 & A.Y. 2006-07 (after the CIT(A)'s order). This ground of appeal is disposed off accordingly." from where it is seen that the CIT(A) has simply followed the Tribunal's order dated 28.09.2007 passed in ITA No.1003/Luc/2006 for the assessment year 2002-03, supra and did not appreciate the facts of the case and perception of law as had been pleaded before him. 10. In the background the assessee's submissions are that even though the CIT(A) has followed the order of the Hon'ble Tribunal in the assessee's own case for earlier assessment years, the matter requires reconsideration for the reasons given hereunder. (i) The assessee's case has also been that, at the time of finalization of accounts Jorhat Unit, had already taken into consideration the expenses that had been allocated from the Head Office. To such allocation there was no dispute whatsoever. Kind attention is invited to the submissions made before the authorities below, as find reproduction in Para 4.2 of the CIT(A)'s order which has been reproduced in ....
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....eans an assessable entity under section 2(31) of the Act. (v) During the assessment years 2002-03 and 2004-05 there existed neither any such allocation as has been made in the assessment year under reference here, nor the plea to the effect that there was absence of "business arrangement" between the assessee and any other person, had not been taken before the Hon'ble ITAT. (vi) The requirement to allocate expenses, as per the express provision of law comes into the picture only when there are two assessees. This please had also not been raised before the tribunal in the assessment years 2002-03 and 2004-05 for which appeals have been decided vide order dated 28.09.2007. 11. Although decision of a Coordinate Bench needs to be followed and it is more so in a case where such a decision has been rendered in the assessee's own case, but there is an exception to this principle. In case new facts or provision of law which had not been considered in an earlier decision, are brought on record, a departure is called for. Reliance in this regard is placed on the decision of Hon'ble Apex Court in the case of CIT vs. Brij Lal Lohia & Mahabir Prasad Khemka reported in (1972) 84 ITR 273....
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.... and 4.3.2 of his order, which are reproduced below for the sake of ready reference:- "4.3 Decision: I have considered the facts and circumstances of the case, submission and arguments of the Ld. AR which have been briefly summarized above. The issue of allocation of the expenses was subject matter of appeal in earlier years and the Hon'ble Tribunal in ITA No.1003/Luc/2006 vide its order dated 28.9.2007 in the case of the appellant itself for A.Y. 2004-05 has decided this issue in the following manner :- " We note that tribunal in the case assessee for the assessment year 2001-2003 in ITA No. 385 referred to above, has held in Para 29 and elsewhere in that order that distribution of pro rata expenses of Jorhat Unit would be unfair. We, therefore, restore that matter to the file of the Assessing Officer for giving an opportunity of hearing to the assessee to find out a suitable method for allocation of expenses incurred by Head Officer and which are affecting the profits of Jorhat Unit. As a result, this ground of the assessee is allowed but for statistical purposes and Assessing Officer will decide the issue in the light of the discussion made herein above and offer an....
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....r assessment year 2004-05 and the assessee has not contested the method adopted by the Assessing Officer in that year i.e. order for assessment year 2004-05. He has also noted that in assessee's own case i.e. for immediately preceding year 2006-07, CIT(A) has accepted the aforesaid basis of allocation. Hence, it is seen that the order of CIT(A) is in line with the Tribunal decision in assessee's own case for assessment year 2004-05 and consequent order passed by the Assessing Officer as per the direction of the Tribunal in that year. Now this is claimed by Learned A.R. of the assessee before us that the matter requires reconsideration for the reason that in the present year, the assessee has taken into consideration the expenses that have been allotted from the Head Office. The second reasoning given by the Learned A.R. of the assessee is that the plea to the effect that there was absence of business arrangement between the assessee and other person, had not been taken before the Tribunal in assessment year 2004-05. We do not find any merit in these contentions because even if the assessee has made some allocation in the present year, it has to be seen that such allocation is in li....
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....ions, which are reproduced below for the sake of ready reference:- "14. The discussion appears in Para 5 of the assessment order. The facts in brief are that the directors of the company undertook foreign trips and it is not in dispute that such foreign trips has been undertaken for the purposes of business of the assessee company, as expenses attributable to the directors own travelling have duly been allowed and disallowance as restricted to the expenses attributable to their companions, on the ground that none of them is either directors and/or employees/consultants to the assessee company. 15. The CIT(A) has upheld the disallowance of Rs. 8,64,228/- by simply saying that "the appellant company has not been demonstrated as to what manner foreign travel by the spouse of the directors of the company could wholly and exclusively for the purpose of business". It is submitted that in the modern age, it is a matter of custom and usage that directors/senior executives of a company are accompanied by their spouse(s) because it has got an essential social aspect also, as it helps in making a report with the counter parts in the overseas market. Thus, it becomes a matter of necessit....
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....such a case could not be allowed, as it could not be said that it was for commercial expediency. Thus, the ratio of Madhav Prasad Jatia's case (1979) 118 ITR 200 (SC) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act." Page 8 xxx xxx xxx xxx xxx xxx xxx xxx xxx "We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated abo....
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....al engagements in the foreign country, these judgments also do not help the assessee in the present case because business expediency is not established. 9. As per above discussion, we have seen that in the absence of any evidence regarding invitation to the spouse of the Directors of the company 24 or their participation in any social engagements in the foreign country visited by them along with the Directors of the assessee company, we do not find any reason to interfere in the order of CIT(A) on this issue. This issue is decided against the assessee. 10. The third issue is regarding enhancement of book profit. The written submissions submitted by the assessee on this issue are contained in Para 18 to 24, which are reproduced below for the sake of ready reference:- "18. In the present case "return" of income was filed declaring an income of Rs. 35,51,71,770/-. However, the book profit was Rs. 81,91,99,448/- as was declared taxable under section 115JB and taxes were also paid on that basis. As the income assessed as per normal provision of law (after incorporation various disallowances worked out to Rs. 35,55,45,000/- the Assessing Officer completed the assessment as per b....
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.....00 during the year under appeal. The AO's remarks in the Assessment Order are being reproduced hereunder:- "It is seen that an amount of Rs. 37083608/- was incurred as expenses on PMS. The total amount given on PMS was Rs. 90 crores. Accordingly, proportionate expenditure amounting to Rs. 48,71,190 (Rs.3,70,83,608 x 11,82,21,258/ 90,00,00,000) is proposed to be disallowed/added while computing the Book Profit" 6.2 The Ld. AR has vehemently argued that the AO was not empowered to make any adjustments to the profit as per the Profit & Loss account. Reference has been made to the Hon'ble Apex Court's ruling in the case of Malyala Manorama Co. Ltd. [2008] 169 Taxman 471. I do not however agree with the Ld.A.R. since the adjustments, as specifically given in section 115JB are necessarily to be considered in working out the 'Book Profits' under that section. It is for this very reason that the dividend income of Rs. 11.82 crores has been excluded in working out the book profit. Clause (f) to the Explanation 1 of the section is very clear on this and reads as under:- "(f)the amount or amounts of expenditure relatable to any income to which section 10(other than the provisions co....
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....ed. In this regard, I rely on the decision of the Hon'ble Tribunal in the case of Southern Petro Chemicals Vs. DCIT (93 TTJ Chennai 161). 6.7 The AO would add Rs. 10,00,000/- + proportionate PMS charges (as referred in Para 6.4 & 6.5) to the Book Profit for computation of tax liability u/s.115JB of the Act. In result, Ground No.10 partly allowed." 19. From the aforesaid discussion, it is seen that the authorities below have applied Explanation (1), clause (f) an sub-clause (ii) appearing below clause (i) of Explanation (1). It is submitted that on the facts of the present case where the investment in shares either directly or through PMS has yielded huge income in the form of short term capital gain which is taxable, it cannot be said that there was any expenditure that could be identified and said to be related to the exempted income. The expenditure was essentially been incurred for the purposes of earning income which is taxable and in case, by virtue of the "share holding being hold beyond a specified period" any incidental income has been earned, it cannot be said that the expenditure was relatable to any exempt income. Therefore, no part of the expenses could have been ....
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....ade by the assessee, in its appeal fully cover the issue raised by the revenue. It is worthy of mention here that the CIT(A), over and above the formula laid down by him for disallowance of expenses on PMS, has further held that a sum of Rs. 10,00,000/- should be disallowed out of expenses incurred on direct investment (other than PMS charges). No such disallowance had been made by the Assessing Officer and he had restricted himself only to the disallowance out of expenses paid for PMS. Therefore disallowance resorted to by the ld.CIT(A) was wholly uncalled for." 11. Learned D. R. of the Revenue supported the assessment order. 12. We have considered the rival submissions. We find that this issue was decided by learned CIT(A) as per Para 6.1 to 6.7 of his order, which are reproduced below for the sake of ready reference:- "6.1 On perusal of the appellant's records, it has been observed that the appellant has earned dividend income of Rs. 11,82,21,258.00 during the year under appeal. The AO's remarks in the Assessment Order are being reproduced here under: "It is seen that an amount of Rs. 37083608/- was incurred as expenses on PMS. The total amount given on PMS&#....
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....under the PMS) but no amount of PMS charges has been allocated to the earning of dividend income in the PMS. PMS charges paid should have also been spread over the dividend income of Rs. 1,69,35,903/- earned by the PMS. The method of apportion of such PMS charges to the earning of dividend would be as under: Dividend Income (Rs.1,69,39,903)--------------------------------------- X Total PMS charges (Rs....) =Total Income (Capital Gain+ Dividend) 6.5 The A.O is directed to compute this amount. 6.6 As regards dividend income generated through self investment, it is seen that such earning of dividend income is more than Rs, 10 crores. The number of transactions that have contributed to the earning of such dividends are large. This means that considerable time, effort and expenditure was required on part of the management and supporting staff of the HQ to carry out such transaction which resulted in earning of such huge dividends. I estimate such expenditure to "be Rs. 10,00,000/- per annum which comes to 1% of the dividend earned. In this regard, I rely on the decision of the Hon'ble Tribunal in the case of Southern Petro Chemicals vs DCIT (93 TTJ Chennai 161). 6.7 The....
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....y CIT(A) in Para 6.1 of his order, as reproduced above, that for working out the disallowance in respect of PMS expenditure, the Assessing Officer has considered the total dividend income of Rs. 1182.21 lac and therefore, it is seen that disallowance was made by the Assessing Officer for expenses incurred in relation to total dividend income whereas as per the decision of CIT(A), he has bifurcated such disallowance in two parts because the dividend income earned by the assessee of Rs. 1182.21 lac is in two categories i.e. partly from PMS investment to the extent of Rs. 169.39 lac and the balance in excess of Rs. 10 crore is on account of direct investment. Considering all these facts, we do not find any reason to interfere in the order of CIT(A) on this issue because when dividend income from PMS is only Rs. 169.35 lac, the entire dividend income of Rs. 1182.21 lac cannot be considered for making disallowance out of expenses incurred on PMS and therefore, part relief allowed by CIT(A) is justified. At the same time, CIT(A) has covered up this aspect of earning dividend income of more than Rs. 10 crores out of direct investment by directing the Assessing Officer to disallow Rs. 10 c....
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....e assesses grievance is that the Assessing Officer has mechanically applied Rule 8D(ii) without adverting to the requirement of law as contained in sub-section (1) of section 14A. It is a law well settled by long line of decisions that in the absence of any finding, as envisaged in sub-section (1) of section 14A, being recorded by the Assessing Officer, he cannot invoke the provision of sub-section (2) of section 14A and Rule 8D(ii). 6. In appeal before the ld. CIT(A) the assessee had made extensive submissions, copy of which appear at pages 54 to 59 and additional submission, copy of which appears at pages 62 to 63. Reliance is specifically placed on the decision referred to therein (page 58) reading as under:- "(a) DCIT vs. Jindal Photo Limtied (Delhi) (Trib.) ITA no.4539/Del/2010 in this case it was held that it is a prerequisite that before invoking Rule 8D, the AO must record his satisfaction on how the assessee's calculation is incorrect. The AO cannot apply Rule 8D without pointing out any inaccuracy in the method of apportionment or allocation of expenses. Further, the onus is on the AO to show that expenditure has been incurred by the assessee for earning tax=-free i....
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....remaining issues, except the disallowance u/s 14A read with Rule 8D, we find that these issues were decided by us while deciding the cross appeals for assessment year 2007-08 by way of confirming the order of CIT(A) on these issues and the grounds raised by both the sides on these issues were rejected in that year. Similarly in the present year also, the grounds raised by both the sides are rejected on similar line. 17. Regarding the disallowance u/s 14A read with Rule 8D, we find that this issue was decided by learned CIT(A) as per Para 6.2.2 of his order, which is reproduced below for the sake of ready reference:- "6.2.2 Decision The AO has correctly appreciated the facts of the case. No doubt, the appellant company has used the services of PMS for managing its investments. But as the records show, considerable amount of investment has also been managed by the company by itself and which has resulted into considerable income (running into Crores) through dividend and capital gains. Very little expenditure (Rs.2,27,000/- on/y) had been shown by the appellant company on earning income on account of dividend and Long Term Capital Gains on investments managed by itself which....