ITO, New Delhi V. M/s. Indica Industries Pvt. Ltd., New Delhi

ITA 1764/DEL/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3145 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2012-2013
• Appeal Filed On: 04-04-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHIMA NEB
• Assessee Lawyers: H MITTER
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : B : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER ITA NO.1764/DEL/2016 ASSESSMENT YEAR : 2012-13 ITA NO.3836/DEL/2015 ASSESSMENT YEAR: 2011-12 ITO, WARD-12(2), NEW DELHI. VS. INDICA INDUSTRIES PVT. LTD., A-4, GREATER KAILASH, PART-I, NEW DELHI. PAN: AAACI0233Q ITA NO.1509/DEL/2016 ASSESSMENT YEAR : 2012-13 INDICA INDUSTRIES PVT. LTD., A-4, GREATER KAILASH, PART-I, NEW DELHI. PAN: AAACI0233Q VS. ITO, WARD-12(2), NEW DELHI. (APPELLANT) (RESPONDENT) ITA NOS.1764 & 1509/DEL/2016 ITA NO.3836/DEL/2015 2 ASSESSEE BY : SHRI H. MITTER, CA DEPARTMENT BY : MS ASHIMA NEB, SR. DR DATE OF HEARING : 27.02.2018 DATE OF PRONOUNCEMENT : 28.02.2018 ORDER PER R.S. SYAL, VP: THIS BATCH OF THREE APPEALS HAS TWO CROSS APPEALS FOR THE ASSESSMENT YEAR 2012-13 AND ONE DEPARTMENTAL APPEAL FOR THE AS SESSMENT YEAR 2011- 12. SINCE SOME OF THE ISSUES RAISED IN THESE APPEA LS ARE COMMON, WE ARE, THEREFORE, DISPOSING OF THESE APPEALS BY THIS CONSO LIDATED ORDER FOR THE SAKE OF CONVENIENCE. ASSESSMENT YEAR 2012-13 2. THE FIRST ISSUE RAISED IN THE DEPARTMENTAL APPEA L IS AGAINST THE DELETION OF DISALLOWANCE OF DEDUCTION OF RS.1,35,93 ,691/- U/S 80IC OF THE INCOMETAX 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. ITA NOS.1764 & 1509/DEL/2016 ITA NO.3836/DEL/2015 3 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE CLAIMED DEDUCTION AMOUNTING 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 2 011-12, HELD THAT THIS ELIGIBLE UNIT WAS FORMED AFTER SPLITTING UP THE EXI STING UNIT AT NOIDA AND, HENCE, THE SAME WAS MERELY AN EXPANSION OR SPLITTIN G 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 HA VING ITS HEAD OFFICE AT NOIDA, CONTROLLING AND SUPERVISING THE OPERATIONS O F ALL THE MANUFACTURING UNITS INCLUDING UNIT-III AND UNIT-II AT KOTDWAR. T HE ASSESSEE WAS REQUIRED TO FURNISH THE DETAILS OF EXPENSES INCURRED AT HEAD OFFICE FOR THE PURPOSES OF PROPORTIONATE ALLOCATION OF KOTDWAR UNITS II & II I. THE ASSESSEE FURNISHED CERTAIN DETAILS. THE ASSESSING OFFICER A LLOCATED HEAD OFFICE EXPENSES TO THE ELIGIBLE UNITS IN THE RATIO OF TURN OVER, 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 ASSES SEE INSTALLED AN ALTOGETHER NEW UNIT FOR WHICH DEDUCTION WAS ADMISSI BLE U/S 80IC. AS ITA NOS.1764 & 1509/DEL/2016 ITA NO.3836/DEL/2015 4 REGARDS THE ALLOCATION OF EXPENSES, THE LD. CIT(A) ACCEPTED THE ALLOCATION OF RS.1,76,432/- OUT OF HEAD OFFICE EXPENSES TO THE KO TDWAR 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 ALLOWI NG 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 REL EVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE ASSESSING OFFICER D ISALLOWED 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 A T THE NOIDA UNIT. IN THIS REGARD, IT IS OBSERVED THAT THERE IS NO SPLITTING U P OF THE EXISTING UNIT INASMUCH AS THERE IS NO FINDING BY THE ASSESSING OF FICER THAT ANY MACHINERY EARLIER USED IN NOIDA UNIT WAS TRANSFERRE D 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 UNDERTA KING 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 ITA NOS.1764 & 1509/DEL/2016 ITA NO.3836/DEL/2015 5 PURCHASED BY THE ASSESSEE FROM THE NOIDA UNIT WAS N OT AT ARMS LENGTH PRICE. IN FACT, THE NEW UNIT AT KOTDWAR-III WAS SE T UP FOR REDUCING THE TRANSPORTATION COST FROM NOIDA TO THE STATE OF UTTA RAKHAND 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 MACHINER Y FROM THE EXISTING UNIT AT NOIDA TO KOTDWAR-III UNIT AND THE TRANSACTIONS O F PURCHASE OF RAW MATERIAL FROM THE NOIDA UNIT WERE AT ARMS LENGTH P RICE, WE ARE OF THE CONSIDERED OPINION THAT THE LD. CIT(A) WAS FULLY JU STIFIED IN HOLDING THAT THERE WAS NO SPLITTING UP OR RECONSTRUCTION OF THE BUSINESS ALREADY IN EXISTENCE AT NOIDA UNIT AND THEREBY ALLOWING DEDUCT ION U/S 80IC OF THE ACT. 5. AS REGARDS APPORTIONMENT OF HEAD OFFICE EXPENS ES, 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 WITHOU T ANY SUPPORT AND ASSISTANCE FROM ITS HEAD OFFICE. THAT BEING THE POS ITION, HEAD OFFICE EXPENSES RELATABLE TO SUCH UNITS WERE, IN OUR CONSI DERED OPINION, RIGHTLY ITA NOS.1764 & 1509/DEL/2016 ITA NO.3836/DEL/2015 6 ALLOCATED ON THE BASIS OF TURNOVER AND DISALLOWED. RESPECTIVE GROUNDS OF THE ASSESSEE AS WELL AS THE REVENUE ARE THUS NOT AL LOWED. 6. THE ONLY OTHER GROUND IN THE APPEAL OF THE REVEN UE IS AGAINST DELETION OF DISALLOWANCE OF RS.31,16,268/- U/S 14A OF THE AC T. 7. THE FACTS APROPOS THIS GROUND ARE THAT THE ASSES SEE 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 ASSE SSING OFFICER INVOKED THE PROVISIONS OF SECTION 14A AND COMPUTED DISALLOW ANCE 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 R S.2,42,047), THE ASSESSEE HAD ALSO OFFERED ADDITIONAL DISALLOWANCE O F RS.3,79,432/- WHICH ESCAPED THE ASSESSING OFFICERS ATTENTION. THUS, I T 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 INVES TMENT PORTFOLIO OF THE ASSESSEE WAS HANDLED AND MANAGED BY PORTFOLIO MANAG ERS AND THE PORTFOLIO MANAGERS FEES WAS VOLUNTARILY DISALLOWED BY THE AS SESSEE ALONG WITH OTHER ITA NOS.1764 & 1509/DEL/2016 ITA NO.3836/DEL/2015 7 DIRECT EXPENSES, THE LD. CIT(A) HELD THAT DISALLOWA NCE TO THE EXTENT OF RS.6.46 LAC WAS IN ORDER. HE, THEREFORE, DELETED TH E REMAINING DISALLOWANCE. THE DEPARTMENT IS AGGRIEVED AGAINST THE DELETION OF SUCH DISALLOWANCE. 8. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE REL EVANT MATERIAL ON RECORD. IT IS FOUND AS AN ADMITTED POSITION THAT T HE ASSESSEES INVESTMENTS WERE HANDLED BY PORTFOLIO MANAGERS TO WHOM ONLY A P ARTICULAR SUM WAS PAID AS FEES, WHICH ALONG WITH OTHER DIRECT EXPENSE S, COMES TO RS.2,42,047/-, BEING THE AMOUNT VOLUNTARILY DISALLO WED BY THE ASSESSEE. 9. SUB-SECTION (2) OF SECTION 14A CLEARLY STIPUL ATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE I NCURRED IN RELATION TO EXEMPT INCOME AS PER RULE 8D IF HE, HAVING REGARD T O THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE. THE CRUCIAL QUESTION WHICH LOOMS LARGE BE FORE US IS WHETHER THE ASSESSING OFFICER RECORDED PROPER SATISFACTION BEFO RE VENTURING TO MAKE DISALLOWANCE AS PER RULE 8D. IT CAN BE SEEN FROM TH E 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 ITA NOS.1764 & 1509/DEL/2016 ITA NO.3836/DEL/2015 8 ACCOUNTS. THERE IS NO DISCUSSION WHATSOEVER ABOUT THE EXAMINATION OF THE ASSESSEES CLAIM ABOUT THE ACTUAL INCURRING OF EXPE NSES IN RELATION TO THE EXEMPT INCOME. IT CAN BE SEEN FROM THE IMPUGNED OR DER THAT THE ASSESSING OFFICER EVEN DID NOT CONSIDER THE CORRECT AMOUNT OF FERED BY THE ASSESSEE FOR DISALLOWANCE AT RS.6.46 LAC. IN VIEW OF THE FACT T HAT NO PROPER SATISFACTION WAS RECORDED, IN OUR CONSIDERED OPINION, THE ASSESS ING OFFICER DID NOT ACQUIRE ANY VALID JURISDICTION FOR COMPUTING DISALL OWANCE U/S 14A. SINCE THE LD. CIT(A) HAS SUSTAINED THE AMOUNT DISALLOWABL E 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 EARL IER PART OF THIS ORDER ITA NOS.1764 & 1509/DEL/2016 ITA NO.3836/DEL/2015 9 WHEREBY THE CLAIM OF THE REVENUE OF SETTING UP OF U NIT-III KOTDWAR BY SPLITTING UP AND RECONSTRUCTION OF A BUSINESS ALREA DY IN EXISTENCE AT NOIDA UNIT, HAS BEEN JETTISONED AND DISALLOWANCE OF PROPO RTIONATE AMOUNT OF EXPENSES HAS BEEN UPHELD. FOLLOWING THE VIEW TAKEN HEREINABOVE, WE HOLD THAT THE LD. CIT(A) WAS JUSTIFIED IN TREATING THE A SSESSEE AS ELIGIBLE FOR DEDUCTION U/S 80IC. HOWEVER, WE HOLD THAT COMMON H EAD OFFICE EXPENSES AND DEPRECIATION SHOULD BE, ACCORDINGLY, DISALLOWED IN THE RATIO OF TURNOVER. THE AO WILL COMPUTE SUCH DISALLOWANCE AFTER ALLOWIN G A REASONABLE OPPORTUNITY OF BEING HEARD. 13. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 28.02.201 8. SD/- SD/- [SUCHITRA KAMBLE] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 28 TH FEBRUARY, 2018. DK ITA NOS.1764 & 1509/DEL/2016 ITA NO.3836/DEL/2015 10 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.