TaxTMI 
TaxTMI 
2023 (3) TMI 50
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....gned order is bad in law. 2. The learned Principal Commissioner of Income-tax-1, Rajkot failed to appreciate that necessary inquiries were made by the assessing officer during assessment proceedings u/s 143(3) in respect of claim of deduction u/s 36(1)(viii) of the Act and hence the order could not have been considered as erroneous u/s 263. 3. The learned Principal Commissioner of Income-tax-1, Rajkot erred in holding that the A.O. has erroneously allowed excess claim of deduction u/s 36(1)(viii) of the Act and that there was incorrect application of law and therefore erred in setting aside the assessment order." 3. As transpires from the order of the Ld. Pr. CIT before us, the error noted in the assessment order passed in the case of the assessee under Section 143(3) of the Act for the impugned year i.e. AY 2017-18 was that the assessee's claim of deduction for creation of special reserve from the profit of "eligible business" as per Section 36(1)(viii) of the Act had been allowed in excess by the Assessing Officer without properly examining the calculation of the claim submitted by the assessee. 4. As per the Ld. Pr. CIT, the computation furnished by the a....
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....tific basis. Having stated that, the assessee bank Summarily allocated the Indirect cost in the ratio of 5:3.5:1.25:0.25 to its business of short term finance, long term finance, treasury activities and investing activities, the reason for such attribution has been mentioned as its own experience, however, no cogent evidences has been furnished by the assessee bank in support of its claim of such apportionment of indirect expenses. Further, the same also contradicts its own contention that such apportionment should be based on equitable and scientific basis. It Is also pertinent to mention that no separate books of accounts have been made by the assessee bank for computation of such profit of eligible business. As the assessee bank has done arbitrary apportionment of its cost as per the weightage decided by its experience, the same has resulted in arbitrary reduction of profit in short term finance (resulting in loss) and arbitrary increase in long term finance (resultantly increasing the eligibility for amount of deduction u/s 36(1) (viii) and accordingly, the result of its segment wise profit computation cannot be relied upon. Further, the assessee bank has cont....
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....nt on to hold the assessment order as erroneous causing prejudice to the Revenue for the Assessing Officer having not examined the claim of the assessee to deduction on creation of special reserve as per Section 36(1)(viii) of the Act and accordingly he set aside the assessment order directing the Assessing Officer to pass a fresh assessment order after proper verification and due application of mind. 6. We have heard both the parties. The contention of the learned Counsel for the assessee before us was that the jurisdiction assumed by the Ld. Pr. CIT in the present case was against all canons of law and not in accordance with the provisions of Section 263 of the Act at all. His contention being that the issue of assessee's claim of deduction on account of creation of special reserve as per Section 36(1)(viii) of the Act had been inquired during the assessment proceedings in details by the Assessing Officer; the assessee had furnished detailed replies giving the entire basis on which the profits of the eligible business had been computed and also pointing out that this basis of calculating profits of the eligible business had been accepted in preceding years i.e. AYs 2014-15 and....
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.... (vi) The learned CIT(A)'s order in the case of the assessee for AY 2013-14 accepting in principle the assessee's method of computation of profits from eligible business for the purpose of creating special reserve under Section 36(1)(viii) of the Act (paper-book page Nos. 20 - 34). 7. It was also pointed out that Department's appeal against the order passed by the learned CIT(A) approving the assessee's basis of computing profits from its eligible business for the purpose of creation of special reserve under Section 36(1)(viii) of the Act had been dismissed by the ITAT on account of the tax effect being the limit prescribed as per the CBDT Circular No. 17 of 2019 dated 08.08.2019. 8. The learned Departmental Representative, on the other hand, relied on the order of the Ld. Pr. CIT. 9. On considering the contention of the learned Counsel for the assessee and perusing the order of the Ld. Pr. CIT, we are convinced with the contention of the learned Counsel for the assessee that the impugned order passed under Section 263 of the Act was not in accordance with law. The basic premise with the Ld. Pr. CIT for invoking the revisionary jurisdiction was for the assessee's calculat....
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.... this clause) carried to such reserve account" shall be allowed as deduction. We have during the relevant year carried Rs. 6,00,00,000 to Special Bad and Doubtful Debt Reserve. However. 20% of the profit of the eligible business as computed under the head "Profits and gains of business or profession" amounted to Rs. 4,94,94,107only, the later being lower of the two has been claimed as deduction. Details of appropriation of profit for the F.Y.2016-17is enclosed and computation of segment-wise profit is attached at PP-14-20. We have computed the profit of the business of long term finance independently applying Section 28 to 430 of the I.T. Act meaning that income or expenditure which is not relatabte or attributable to the eligible business has to be excluded. As van be seen from the language used for deducibility of expenses in Sections 30, 31 and 32 of the KT. Act, which allow rent/rates/insurance, repairs & depreciation on assets is "assets used for the purpose of business", in Sec. 36(1)(iii) which allows interest on capital, the words used are "borrowed for the purpose of business', the words used in Section 37 which allows any expenditure ".... wholly and excl....
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....ppraisal, reviews, renewals, disbursement, etc and frequent supervision and site inspection, etc whereas long term loans are appraised once in 5 years and requires no yearly renewals etc. Similarly, investment activity needs less efforts, less office space, and less time whereas treasury operation takes lots of branches, time and efforts. !n view of this, the allocation of indirect cost /should, be based on some equitable basis applying appropriate weightage determined on time and efforts consideration. Rationally, when the indirect costs are common to different income centres, the apportionment of such cost to the income centres should be based on facts and reasons as also on an equitable and scientific basis. (section 37). Based on our experience, we may state that the benefit of indirect overheads should be apportioned to various segment as shown in the Exibit-1 i.e. in the ratio of 5 : 3.5 ; 1.25 : and 0.25 to Short term , long term , treasury activities and investing activities, respectively and interest should be apportioned in the ratio of funds used by each segment. 2.4. Computation of profit from eligible business :Based on the ....
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....(viii) of the Act had been furnished by the assessee along with giving scientific and cogent basis for the same. The basis of allocation of all elements of income and expenses ,both direct and indirect was given ,pointing out that it was in accordance with fundamental principles of cost apportionment as laid down by Cost Accounting Standards issued by the Institute of Cost Accountants of India. The Ld. Pr. CIT having not pointed out any infirmity in the same to the assessee, and even the infirmities pointed out in his order u/s 263 of the Act not addressing this explanation of the assessee, there is no error in the order of the AO found by the Ld.PCIT. Even otherwise, we have noted that this assessee's basis of calculating claim of deduction under Section 36 (1)(viii) of the Act has been consistently accepted and approved by the learned CIT(A) in preceding assessment years, i.e. AYs 2014-15 and 2012-13. The Assessing Officer, therefore, accepting the assessee's claim of deduction in the impugned year, has taken a plausible view. 11. In view of the above, we hold that there was no error in the order of the Assessing Officer accepting the assessee's claim of deduction under Sectio....
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....,33,862 Depreciation as per book Other assets Avg Dis 2,65,07,718 Total indirect expenses 1,12,60,47,283 Total Expenses apportioned 4,03,57,94,239 Segment-wse Net profit before tax & Prov for std assets as per P/L A/c 58,02,22,937 1.79,33,287 76.18,05,055 31,92,05,142 1,96,05,70,575 1,03.70.91,480 -3,99,71,678 31,34,56,431 75,16,138 3,94,456 6,63,857 1,67,56,486 2,200,00 12,22,36,319 91,57,95,836 6,43,35,916 24,24,04,265 3.3 Income/expense adjusted for IT purpose Total expenses after adjustment as per IT Act. Seument-wise Adjusted profit/loss as per L.T. Act. Profit as percentage of average funds deployed 3.4 Average interest eaming of the segment% Average interest expense apportioned % Gross Margin before overheads allocation Other direct expense as % of funds deployed 4. Common OH as percentage of average funds deployed Net profit as % of funds deployed Calculation of Claim u/s 36(1)(vill): 4.03.57.94,239 58,02,22,937 1,96,06,70,575 -3,99,73,676 1037091 AKD 12,22,35,349 91,57,95,036 21,31,56,421 6,43,35,916 24,24,04,265 214400286 1.01% -0.17% 2.20....