Case Law Details
ITO Vs Indica Industries Pvt. Ltd. (ITAT Delhi)
Conclusion: Since assessee had not transferred any old machinery from the existing unit to new unit and the transactions of purchase of raw material from the existing unit were at arm’s length price, deduction u/s 80IC was allowable as there was no splitting up or reconstruction of the business already in existence at Noida Unit.
Held: Assessee started supplying its products to Hero Honda and other customers from the new undertaking at Kotdwar-III unit which were earlier manufactured at Noida unit. AO disallowed deduction u/s 80IC on the ground that Unit-III Kotdwar was set up by splitting up and reconstruction of a business already in existence at the Noida unit. In this regard, it was observed that there was no splitting up of the existing unit inasmuch as there was no finding by AO that any machinery earlier used in Noida unit was transferred to Kotdwar-III unit. Except for the fact that assessee purchased raw material from its Noida Unit, there was no reference to any interconnectivity between Kotdwar-III unit and Noida Unit. In fact, the new unit at Kotdwar-III was set up for reducing the transportation cost from Noida to the State of Uttarakhand where the assessee was making supplies to M/s Hero Honda and its ancillary company. In view of the fact that assessee did not transfer any old machinery from the existing unit at Noida to Kotdwar-III unit and the transactions of purchase of raw material from the Noida unit were at arm’s length price, deduction u/s 80IC was allowable as there was no splitting up or reconstruction of the business already in existence at Noida Unit.
FULL TEXT OF THE ITAT JUDGEMENT
This batch of three appeals has two cross appeals for the assessment year 2012-13 and one Departmental appeal for the assessment year 2011-12. Since some of the issues raised in these appeals are common, we are, therefore, disposing of these appeals by this consolidated order for the sake of convenience.
Assessment Year 2012-13
2. The first issue raised in the Departmental appeal is against the deletion of disallowance of deduction of Rs.1,35,93,691/- u/s 80IC of the Income–tax Act, 1961 (hereinafter also called `the Act’). The assessee is in appeal against the confirmation of disallowance of certain expenses by way of allocation out of common Head office expenses to the eligible Kotdwar Units – II and III.
3. Briefly stated, the facts of the case are that the assessee claimed deduction amountinITO, g to Rs.1,35,93,691/- u/s 80IC of the Act in respect of Unit-III Kotdwar. The Assessing Officer, following his view for the immediately preceding year, i.e., assessment year 2011-12, held that this eligible unit was formed after splitting up the existing unit at Noida and, hence, the same was merely an expansion or splitting up of the main existing unit at Noida. That is how, the assessee’s claim for deduction of Rs.1.35 crore was denied. Without prejudice to the denial of deduction, the Assessing Officer observed that the assessee was having its head office at Noida, controlling and supervising the operations of all the manufacturing units including Unit-III and Unit-II at Kotdwar. The assessee was required to furnish the details of expenses incurred at head office for the purposes of proportionate allocation of Kotdwar Units – II & III. The assessee furnished certain details. The Assessing Officer allocated head office expenses to the eligible units in the ratio of turnover, and proportionately reduced the quantum of deduction u/s 80IC. The ld. CIT(A) held that there was no splitting up of the Noida unit and the assessee installed an altogether new unit for which deduction was admissible u/s 80IC. As regards the allocation of expenses, the ld. CIT(A) accepted the allocation of Rs.1,76,432/- out of head office expenses to the Kotdwar Unit-III and also Rs.48,448/- out of head office expenses by Noida as pertaining to Kotdwar Unit-II. The contention of the assessee for allowing such expenses was rejected. Both the sides are in appeal in support of their respective stands.
4. We have heard both the sides and perused the relevant material on record. It is observed that the Assessing Officer disallowed deduction u/s 80IC on the ground that Unit-III Kotdwar was set up by splitting up and reconstruction of a business already in existence at the Noida unit. In this regard, it is observed that there is no splitting up of the existing unit inasmuch as there is no finding by the Assessing Officer that any machinery earlier used in Noida unit was transferred to Kotdwar-III unit. The fact of the matter is that the assessee started supplying its products to Hero Honda and other customers from the new undertaking at Kotdwar-III unit which were earlier manufactured at Noida unit. Except for the fact that the assessee purchased raw material from its Noida Unit, there is no reference to any interconnectivity between Kotdwar-III unit and Noida Unit. It is not the case of the Assessing Officer that the raw material purchased by the assessee from the Noida unit was not at arm’s length price. In fact, the new unit at Kotdwar-III was set up for reducing the transportation cost from Noida to the State of Uttarakhand where the assessee was making supplies to M/s Hero Honda and its ancillary company which was located at Haridwar, Uttarakhand. In view of the fact that the assessee did not transfer any old machinery from the existing unit at Noida to Kotdwar-III unit and the transactions of purchase of raw material from the Noida unit were at arm’s length price, we are of the considered opinion that the ld. CIT(A) was fully justified in holding that there was no splitting up or reconstruction of the business already in existence at Noida Unit and thereby allowing deduction u/s 80IC of the Act.
5. As regards apportionment of head office expenses, we find that the same have been allocated in the ratio of turnover. It cannot be said that the Kotdwar units – II and III unit were running without any support and assistance from its head office. That being the position, head office expenses relatable to such units were, in our considered opinion, rightly allocated on the basis of turnover and disallowed. Respective grounds of the assessee as well as the Revenue are thus not allowed.
6. The only other ground in the appeal of the Revenue is against deletion of disallowance of Rs.31,16,268/- u/s 14A of the Act.
7. The facts apropos this ground are that the assessee earned exempt dividend income of Rs.1,79,68,892/- and a sum of Rs.2,42,047/- was offered for disallowance u/s 14A towards management fees, custody fees, audit fees and portfolio management fees. The Assessing Officer invoked the provisions of section 14A and computed disallowance in terms of Rule 8D at Rs.31,66,268/-. The ld. CIT(A) observed that apart from offering disallowance of Rs.2,66,688/- (noted by the AO as Rs.2,42,047), the assessee had also offered additional disallowance of Rs.3,79,432/- which escaped the Assessing Officer’s attention. Thus, it was found that the assessee offered disallowance for a total sum of Rs.6,46,120/- and not Rs.2,66,688/-. Considering the fact that the investment portfolio of the assessee was handled and managed by portfolio managers and the portfolio managers’ fees was voluntarily disallowed by the assessee along with other direct expenses, the ld. CIT(A) held that disallowance to the extent of Rs.6.46 lac was in order. He, therefore, deleted the remaining disallowance. The Department is aggrieved against the deletion of such disallowance.
8. We have heard both the sides and perused the relevant material on record. It is found as an admitted position that the assessee’s investments were handled by portfolio managers to whom only a particular sum was paid as fees, which along with other direct expenses, comes to Rs.2,42,047/-, being the amount voluntarily disallowed by the assessee.
9. Sub-section (2) of section 14A clearly stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to exempt income as per Rule 8D if he, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim made by the assessee. The crucial question which looms large before us is whether the Assessing Officer recorded proper satisfaction before venturing to make disallowance as per Rule 8D. It can be seen from the assessment order itself that the Assessing Officer has nowhere recorded any satisfaction about the incorrect claim having been lodged by the assessee with reference to its accounts. There is no discussion whatsoever about the examination of the assessee’s claim about the actual incurring of expenses in relation to the exempt income. It can be seen from the impugned order that the Assessing Officer even did not consider the correct amount offered by the assessee for disallowance at Rs.6.46 lac. In view of the fact that no proper satisfaction was recorded, in our considered opinion, the Assessing Officer did not acquire any valid jurisdiction for computing disallowance u/s 14A. Since the ld. CIT(A) has sustained the amount disallowable u/s 14A at Rs.6,42,120/-, being the amount voluntarily offered by the assessee, we uphold the impugned order to pro tanto.
10. In the result, both the appeals are dismissed.
Assessment Year 2011-12
11. The only issue raised in this appeal is against deletion of disallowance of deduction u/s 80IC amounting to Rs.1,23,76,540/-.
12. Both the sides are in agreement that the facts and circumstances of this ground are mutatis mutandis similar to those for the assessment year 2012-13. We have dealt with this issue in the earlier part of this order whereby the claim of the Revenue of setting up of Unit-III Kotdwar by splitting up and reconstruction of a business already in existence at Noida Unit, has been jettisoned and disallowance of proportionate amount of expenses has been upheld. Following the view taken hereinabove, we hold that the ld. CIT(A) was justified in treating the assessee as eligible for deduction u/s 80IC. However, we hold that common head office expenses and depreciation should be, accordingly, disallowed in the ratio of turnover. The AO will compute such disallowance after allowing a reasonable opportunity of being heard.
13. In the result, the appeal is partly allowed.
The order pronounced in the open court on 28.02.2018.
