TaxTMI 
TaxTMI 
2017 (6) TMI 1193
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....erred in confirming the action of the assessing officer in treating the business loss from commodity trading of Rs. 50,61,174/- as speculative loss. 3. That the Learned CIT (Appeals) has grossly erred in confirming the action of the Assessing Officer in making a notional addition of Rs. 1,00,000/- as alleged administrative and finance cost incurred on commodity trading. 4. That the Learned CIT (Appeals) has grossly erred in confirming the addition made by the Assessing Officer u/s 80 IC by reducing the deduction claimed by the appellant making the below mentioned disallowances/ additions : a) That the Learned CIT (Appeals) has grossly erred in confirmingthe reduction of Rs. 52,69,333/- in the profit of Baddi unit eligible for deduction under section 80IC by treating the same as alleged over valuation of stock. ' b) That the Learned CIT (Appeals) has grossly erred in confirming the action of the Assessing Officer in reducing the deduction claimed under section 80IC by Rs. 2,08,03,079/- on apportionment of expenses including that of depreciation on the basis of manufacturing turnover of Baddi unit to gross manufacturing turnover of all manufacturing units including Baddi ....
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....Baddi unit. 5. That the Learned CIT (Appeals) has grossly erred in confirming the action of the Assessing Officer in disallowing additional depreciation of Rs. 51,87,590/- on new plant and machinery installed at other than Baddi Unit during the year. " ITA. No. 2979/Del/2014 : 4. The Revenue has questioned first appellate order on the following grounds :- " 1. Whether on the facts & in the circumstances of the case, the Ld. CIT (A) has erred in allowing the appeal of the assessee against disallowance on account of apportionment of gross expenses by ignoring the fact that interest expenses while computing the apportionment cannot be exempted if no separate, insulated financial identity of Baddi unit is there. Specific unit-wise details of expenditure for the apportionment principle to be exempted should be presented. 2. Whether on the facts & in the circumstances of the case, the Ld. CIT (A) has erred in deleting the adhoc addition of 1% of notional profit computed on sales as attributable to Baddi Unit without reasoning for disagreement with the merits of the case and with predecessor's orders. " 5. In the appeals for the assessment years 2008-09 and 2009-10, common groun....
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....culative transaction notwithstanding that the nature of the commodity was not one lending itself two possibilities of speculation or that the intention of the parties at the time of entering into the contract might have been to take actual delivery, but this intention could not be effectuated for one reason or the other. The actual delivery means real as opposed to notional delivery. Whether a transaction is a speculative in general sense or under the Contract Act, is not relevant for Income Tax purposes. Before the ld. CIT (Appeals) the assessee admitted that part of the transactions were not settled by actual delivery of goods and at least part of the loss was speculative. The assessee, however, could not produce any evidence to substantiate its claim that part of the loss that has been incurred was settled by actual delivery of goods and the loss is not speculative. Even before the Tribunal, the assessee could not improve its case on the issue. We thus do not find any reason to interfere with the first appellate order. The same is upheld. The expenses on administrative and finance estimated at Rs. 1,00,000/- in assessment year 2008-09 and Rs. 10,000/- each in assessment year 200....
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....he claimed deduction, the ld. CIT (A) was not justified in giving the above relief questioned in the grounds on account of deduction under section 80IC of the Act and others. 6.3 The ld. AR, on the other hand, tried to justify the first appellate order and furnished following written synopsis in brief :- " 1) The appellant was engaged during the year under appeal in manufacture and trading of electric cables, CFL lights etc. 2) The appellant filed its return of income declaring an income of Rs. 5,49,09,299/- which was assessed under section 143(3) of the Act at Rs. 9,17,43,743/-. 3) The appellant had claimed deduction under section 80IC of Rs. 6,46,26,634/- for profit (earned from its manufacturing operations carried on at Baddi unit, for which a separate profit & loss account & balance sheet was filed before the Assessing Officer (copy enclosed at page No. 6 to 11 of paper book). 4) The Assessing Officer had curtailed deduction under section 80IC and restricted the claim of deduction to Rs. 2,82,33,796/- by making below mentioned adjustment in the profit computed for allowing deduction under section 80IC of the Baddi unit while passing the assessment order. (i) Th....
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....n the case of Control and Switch Gear Ltd Vs. DCIT 66 DTR 161. 9) The CIT (Appeals) had allowed the relief of Rs. 1,62,33,521/- in allocation of interest on the basis of actual usage of funds by computing interest of Rs. 34,61,811/- attributable to activities of Baddi unit as against the apportioned interest cost of Rs. 2,07,54,839/- made by the Assessing Officer. 10) The assessee had disallowed / added back expenditure of Rs. 2,20,39,488/- while computing its assessable income which was again considered for apportionment of indirect expenditure and had impact of Rs. 24,02,304/- in profit of Baddi unit eligible for computing deduction under section 80IC of the Act. The CIT (Appeals) held that the amount of Rs. 2,20,39,488/- could not be considered for allocation of expenditure once the same had been added back by the assessee to its income and deleted the curtailment in profit eligible for deduction under section 80IC of Rs. 24,02,304/- Refer para 4.3 and para 5.2 page 15 and 18 of CIT(A) order. 11) The respondent had filed copy of account of Head Office in its books of accounts at page 28 to 44 of the paper book. The debits and credits to the account of Head Office have been....
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....orders are bad in law and facts of the case. 2. The learned A. O. is not justified in disallowing Rs. 3,63,92,838/- out of Rs. 6,46,26,634/- as deduction claimed under section 80IC of Income Tax Act, 1961 in the Manpura (Baddi) unit by disallowing the following:- a. The learned A.O. is not justified in disallowing Rs. 29,45,752J- by considering the stock lying at various branches amounting to Rs. 1,59,48,849/- as overvalued which has actually been valued at cost price. b. The learned A.O. is not justified in disallowing Rs. 2,96,2(^260/- by apportioning the gross expenses of Rs. 27,17,45,505/- (inclusive of depreciation) of all the branches in such proportion which the manufacturing turnover of Baddi unit bears to gross manufacturing turnover of all branches, manufacturing units including Baddi unit. However expenses incurred at Baddi (Manpura) unit should be considered exclusively relating to the unit itself as per the individual balance sheet filed. c. The learned A.O. is not justified in disallowing Rs. 38,26,826/- on estimated basis by taking 1% profits on turnover of Rs. 38,26,82,601/- of Baddi unit, considering that the profits could not be derived without get....
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....ment order that there are huge amount of expenses incurred at Delhi Head Office and six branches of the assessee and the appellant had not apportioned any of the expenditure to determine the eligible for deduction u/s of the 80 1C of the Act for its Baddi Unit. The Assessing Officer had further observed that the appellant uses its networking and Head Office to make all kinds of sale including sale from 80 1C unit. (c) The assessee as per the Assessing Officer makes purchases and uses bank account and finance of head office to affect its turnover and all finance as well as common indirect expenses are paid through the Head office bank account. Our Rebuttal The appellant company maintained its Administrative Office at Delhi and had six branches out of which Bombay branch had nil sales during the year under appeal. Three branches, i.e. Chopanki, Baddi, Bhiwadi were manufacturing units and the other two branches, namely, Cochin and Jalandhar were trading units. The appellant company was engaged in the production of industrial cables and other heavy duty cables at its Bhiwadi and Chopanki units whereas the unit at Baddi was engaged in manufacturing of household wires and cables....
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....onment of expenditure for Baddi unit was warranted. The Assessing Officer further stated that no part of Director's remuneration had been attributed to Baddi unit, no separate funding of sources and separate dedicated network was maintained for Baddi unit and the Head office infrastructure had been used for making purchases and marketing activity. The assessing Officer has finally concluded in para 5.2.1.3 that in the circumstances narrated by her, the best course available for Computing deduction u/s 80 1C would be to attribute expenses of the Head Office and branches in terms of turnover and apportioning the common cost as per provisions of section 80 IA (5) r.w. section 80 1C (7) and as prescribed in Rule 18BBB of I. T. Rules. Our rebuttal As stated above, the apportionment of all expenditure on the basis of turnover is not justified in the facts and circumstances of the case of the appellant in view of :- a) The products manufactured at Baddi unit were of different variety and had much shorter production and realization cycle as compared to the other two manufacturing units at Bhiwadi and Chopanki. b) The Baddi unit had accumulated surplus aggregating to more than Rs....
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....,36.459/- 550/- 5,656/- 18,69,42,665/- Interest 1,47,200/- ... .... 1,47,200/- Interest on Secured Loan 82,86,384/- 82,86,384/- Sub- total 19,53,76,249/- Less: Interest on FDR 49,64,879/- 49,64,879/- Balance 19,04,11,370/- Baddi Unit with respect to total sale as computed by the assessing officer in para 5.2.2.4.4 at page 6 of her order) of total Interest of Rs. 19,04,11,370/-}. The allocation of interest expenditure on the basis of turnover is not only improper but also not justified in the The assessing officer treated the interest expenditure of Rs. 2,07.54,839/- as attributable to the activities of Baddi Unit {10.90 % (i.e in the ratio of turnover of facts and circumstances of the case as the interest cost has to be appropriated on the basis of actual use of funds. The Baddi unit has used its own funds ( accumulated profits) amounting to Rs. 10,62,29,705/- which had accrued to it over the last 2 years from its activities( copy of balance Sheet of Baddi unit for the year ended 31-03-2008 & 31-3- 2009 is at page No. 45 to 67 of th....
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....stment of Rs. 38,26,826/- by estimating hypothetical trading profit of branches for sales of Baddi unit on incorrect appreciation of the facts of the case. * The facts on the issue as narrated by the Assessing Officer are:- 1. The Assessing Officer has notionally held that it is fair to pay a nominal net trading profit of 7 % on sales made and disallowed a sum of Rs. 3826,826/- from deduction claimed under section 80 1C of the Act. 2. The reasoning of the Assessing Officer is subjective and is not based on actual state of affairs. It is well settled law that income tax cannot be imposed on notional income. Refer: CIT vs. Shoorji Vallabhadas & Co. (1962) 46 ITR 144 (SC) wherein The court held that:- "Income tax is a levy on income. No doubt, the income tax takes into account two points of time at which the liability to tax is attracted, viz., the accrual of income or the receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a "hypothetical income" which does not materialize. Where, however, the income can be said not to have resulted at all, there is obviously nei....
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....the basis of G.P. of Baddi Unit). (ii) Addition of Rs. 2,96.20,260/- by apportioning the gross expenses of Rs. 27,17,45.505/- (inclusive of depreciation) of four trading units situated at Delhi, Cochin, Mumbai and Ludhiana branches in such proportion which the manufacturing turnover of Baddi unit bears to total turnover of the appellant company. The appellant had submitted unit/branch wise separate profit and loss account and balance sheet during the course of assessment and appellate proceedings. (iii) Notional attribution of Rs. 38,26,826/- as expense of Baddi unit for alleged hypothetical trading profit of branches for sales of Baddi unit which has been strongly contested by the appellant. The Assessing Officer has imputed a notional profit of 1% of sales of Baddi unit to the head office and other branches had disallowed the amount from the eligible profit available for deduction under section 80IC of the Baddi unit. 3.1 The appellant has also contended before me that on account of apportionment a sum of Rs. 24,02,304 has been wrongly again added back as expense of Baddi unit for computing deduction under section 80IC whereas the gross amount of Rs. 2,20,39,488/- had alrea....
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....Unit for a turnover of Rs. 32.29 Crores has been mentioned at only Rs. 14,885/-. The assessee has a common bank account for it operations. The extremely low interest charges for Baddi Unit is ridiculous as all the expenditure incurred are for business of the assessee and expenses will be eguivalent to turnover of the assessee, in view of the absence of separate books, separate bank A/c, separate funcling, separate network for distributions & sales etc. the assessee has even failed to apportion directors remuneration which reflect the futility of the claim of the assessee with regards to apportion of expenses. 5.2 1.2 In view of the same, it was asked on 26.12.2012 to the assessee, as to why the expenses should not be apportioned in terms of the Baddi Unit, to determine the profits derived of the Baddit Unit for deduction u/s. 80IC. The assessee replied as under:- "The expenses incurred at Baddi (Manpura) unit exclusively relates to our Baddi Unit itself. The expenses incurred at sale Branches, Manufacturing units at Bhiwadi and Chowpanki and at Head Office does not include any expenses incurred on behalf of the Baddi Unit in Himanchal Pradesh. The company has mainly 3 manufactu....
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....pared to that of the other two manufacturing units. c) The appellant company did not use the borrowed funds for its Baddi unit as Baddi unit had accumulated substantial surplus of its own during the preceding two financial years and the company had interest-free funds in the form of share capital and free reserves. Therefore, apportionment of interest and bank charges on turnover basis are not based on facts of the case and are not warranted. d) The observation of the Assessing Officer is incorrect with respect to maintenance of separate books of accounts. The appellant company maintained separate books of accounts and prepared a separate balance sheet and profit & loss account based on separate books of accounts for its branches including for its Baddi unit. The appellant company had filed unit wise balance sheet and profit and loss account during the course of assessment proceedings based on separate set of books of accounts maintained at each unit. e) The apportionment of all expenditure on the basis of turnover is not justified in the facts and circumstances of the case of the appellant in view of i) The products manufactured at Baddi unit were of different variety and ....
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.... Balance 19,04,11,370/- b) The assessing officer treated the interest expenditure of Rs. 2,07,54,839/- as attributable to the activities of Baddi Unit {10.90 % (i.e in the ratio of turnover of Baddi Unit with respect to total sale as computed by the assessing officer in para 5.2.2.4.4 at page 6 of her order) of total Interest of Rs. 19,04,11,370/-) }. c) The allocation of interest expenditure on the basis of turnover is not only improper but also not justified in the facts and circumstances of the case as the interest cost has to be appropriated on the basis of actual use of funds. The Baddi unit has used its own funds ( accumulated profits) amounting to Rs. 10,62,29,705/- which had accrued to it over the last 2 years from its activities, copy of balance Sheet of Baddi unit for the year ended 31-03-2008 & 31-3-2009 is submitted in its support d) Similarly, the Baddi unit has also used interest free funds of head office which were available in the form of share capital and share premium of the company of Rs. 52,25,692/-(paid up capital and sharepremium of the company apportioned in the ratio of gross block of fixed assets to total gross block of....
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....and deserves to be deleted. 4.4 Regarding ineligibility of Rs. 38,26,826/- on notional basis by attributing 1% profits on turnover of Rs. 38,26,82,601/- of Baddi unit as cost, The Assessing Officer has notionally held that a net profit of 1% on sales made i.e a sum of Rs. 38,26,826/- deserves to be disallowed from deduction claimed under section 80 IC of the Act by hypothetically holding it to be profit attributableto the other units. In this context, appellant has submitted before me that income tax a charge on real income and notional income cannot be brought to tax. It has cited judgment of Supreme Court in the case of CIT vs. Shoorji Vallabhadas & Co. (1962) 46 ITR 144 (SC) & M/s. Godhara Electricity Co. Ltd. vs CIT (1997) 225 ITR 746 (SC) wherein the apex court has held that irrespective of the accounting entries made by the assessee notional income cannot be charged to tax. [5.1] The perusal of the assessment order reveals that the Assessing Officer has curtailed the deduction of section 80IC from Rs. 6,46,262,634/- to Rs. 3,63,92,838/- by apportionment of expenditure incurred by the Assessee in its head office and three sales ' units on the basis of total turnover ....
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....for apportionment of expenditure in the Act. The appellant has cited a judgment of jurisdictional Delhi High Court ifi the case Controls & Switchgear Co. Ltd. Vs. Deputy Commissioner of Income Tax 66 DTR page no. 161 wherein the Delhi High Court has approved the apportionment of common expenditure between the unit eligible for deduction under section 80IC and non-eligible units on the basis of turnover where specific unit wise detail of expenditure was not furnished before the lower authorities despite specific query to this effect. I, respectfully following the judgment of jurisdictional Delhi High Court cited above, uphold the apportionment of expenditure made by the Assessing Officer for computing deduction u/s 80IC of the Act except for interest cost attributable to the Baddi unit. The Appellant has furnished computation of interest on the basis of usage of funds for Baddi unit. The Delhi High Court in the above judgment has not made any interference in the order of CIT (Appeals) and ITAT which upheld the order of Assessing Officer apportioning common expenditure on the basis of turnover by observing that the Assessee in that case had failed to substantiate the unit wise inte....
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....nit wise interest expenditure. It upheld the apportionment of common expenditure on the basis of turnover. In the present case, the appellant has substantiated the interest expenditure for its eligible Baddi unit. I therefore, allow the claim of the appellant on the issue and direct computation of deduction under section 80IC by attributing interest cost for Baddi unit of Rs. 34,61,811/- instead of apportioned amount of interest of Rs. 2,07,54,839/- by the Assessing Officer in the assessment order. 5.2 The contention of the appellant with regard to apportionment of suo moto disallowed expenditure of 2,20,39,488/- is also found to be correct and the Assessing Officer is directed to delete the impact of such disallowance while computing deduction u/s 80IC of the Act, which comes to Rs. 24,02,304/-. 5.3 The estimated gross profit on transfer of goods to other units of the appellant company on goods remaining unsold at the yearend has been rightly excluded by the Assessing Officer in computing deduction under section 80IC which calls for no interference and the curtailment of deduction under section 80IC to the extent of Rs. 29,45,752 is upheld. 5.4 The appellant has contente....
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.... Court of Delhi in the case of Control & Switchgear Ltd. Vs. DCIT 66 DTR 166 (Del.). The Hon'ble High Court in that decision (supra) has approved the apportionment of common expenditure between the unit eligible for deduction under section 80IC and noneligible units on the basis of turnover where specific unit-wise detail of expenditure was not furnished before the lower authorities despite specific query to this effect. The ld. CIT (Appeals) has allowed a relief of Rs. 1,62,33,521/- in allocation of interest on the basis of actual usages of funds by computing interest of Rs. 34,61,811/- attributable to activities of Baddi Unit as against the apportioned interest cost of Rs. 2,07,54,839/- made by the Assessing Officer. The ld. CIT (Appeals) has held that the amount of Rs. 2,20,39,488/- could not be considered for allocation of expenditure once the same had been added back by the assessee to its income and deleted the curtailment in profit eligible for deduction under section 80IC of Rs. 24,02,304/-. The ld. CIT (Appeals) has perused the debits and credits to the account of Head Office and taking them into consideration on a daily basis to find out the product, the product on which ....