DCIT, New Delhi V. M/s Lloyd Electric & Engineering Ltd., New Delhi

ITA 2305/DEL/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3500 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 1 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-07-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 08-04-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 28-05-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BK GUPTA
• Assessee Lawyers: YOGESH AGGARWALC A
• Keywords: Bad and doubtful debts
• Section: 80IC

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F : NEW DELHI BEFORE SHRI R.P.TOLANI AND SHRI K.D.RANJAN ITA NO.2305/DEL/2009 ASSESSMENT YEAR : 2005-06 DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 4(1), NEW DELHI. VS. M/S LLOYD ELECTRIC & ENGINEERING LTD., B- 10/1/, OKHLA INDL. AREA PHASET-II, NEW DELHI. PAN AAACL0484G (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI B.K.GUPTA, SR. D.R. RESPONDENT BY : SHRI YOGESH AGGARWAL,C.A. ORDER PER K.D.RANJAN, AM: THIS APPEAL BY THE REVENUE FOR ASSESSMENT YEAR 2005 -06 ARISES OUT OF ORDER OF LD. CIT(A)-VII, NEW DELHI. THE GROUNDS OF APPEAL RA ISED ARE AS UNDER: 1. THE ORDER OF THE LD.CIT(A) IS ERRONEOUS & CONTR ARY TO FACTS & LAW. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LEARNED CIT(A) HAS ERRED IN RESTRICTING DISALLOWANCE U/S 80 -IC TO RS.15,16,316/- AS AGAINST THE DISALLOWANCE OF RS.71,06,795/- AS CA LCULATED BY THE A.O. A) IGNORING THE SUBSTANTIAL STOCK TRANSFER HAS BEEN MA DE FROM THE BHIWADI UNIT TO THE KALA-AMB UNIT. B) AS THE A.O. HAS RIGHTLY ALLOCATED THE EXPENDITURE T OWARDS THE KALA- AMB UNIT AS THE EXPENDITURE UNDER VARIOUS HEADS HAV E NOT BEEN ALLOCATED WITH A CLEAR INTENTION TO INFLATE DEDUCTI ON U/S 80IC C) AS NO REASON WAS ASSIGNED BY THE CIT(A) TO EXCLUDE THE FINANCE CHARGES FOR THE ALLOCATION PURPOSE. 2. THE ONLY ISSUE FOR CONSIDERATION RELATES TO REST RICTING THE DISALLOWANCE U/S 80IC TO RS.15,16,316/- AS AGAINST THE DISALLOWANCE OF RS.71 ,06,795/-. THE FACTS OF THE CASE, STATED IN BRIEF, ARE THAT ASSESSEE IS A PUBLIC LIMITED COM PANY ENGAGED IN THE BUSINESS OF MANUFACTURING OF AC COILS AND ASSEMBLING OF ACS AND TRADING OF STEEL ITEMS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAD TWO MANUFACTURING UNITS THE UNIT AT BHIWADI WHICH WAS ENGAGED IN THE MANUFACTURING OF AIR CONDITIONING CONDENSERS AND EV APORATOR COILS AND ALSO ROOF MOUNTED ITA NO.2305/DEL/2009 2 ACS FOR RAILWAYS. THE OTHER UNIT WAS LOCATED AT KAL A-AMB, HIMACHAL PRADESH FOR MANUFACTURING OF AIR CONDITIONING EQUIPMENTS, WINDO WS AS WELL AS SPLIT ACS WHICH COMMENCED ITS OPERATION FOR THE FIRST TIME IN THE Y EAR UNDER CONSIDERATION. THE DATE OF COMMENCEMENT OF THIS UNIT AS PER FORM NO.10CCB FILE D WITH THE RETURN OF INCOME WAS 30.6.2004. THE ASSESSING OFFICER IN HER ORDER HAS A NALYZED THE RESULTS OF TWO UNITS AND OBSERVED THAT WHILE THE PROFIT PERCENTAGE WAS VERY HIGH IN THE NEW UNIT LOCATED AT KALA- AMB, HIMACHAL PRADESH BUT EXPENDITURE IN BOOKS AGAI NST THIS UNIT WAS MUCH LOWER. FROM THE DETAILS OF EXPENDITURE INCURRED FOR BOTH THE UN ITS, THE ASSESSING OFFICER NOTED THAT EXPENDITURE UNDER THE HEAD SALARY AND ALLOWANCES WAS AT RS.98,95,770/- OUT OF WHICH RS.89,71, 570/- RELATED TO UNIT AT BHIWADI WHILE FO R THE KALA-AMB UNIT, AN AMOUNT OF RS.8,46,700/- WAS DEBITED. SIMILARLY, UNDER THE LAB OUR WELFARE, OUT OF TOTAL EXPENDITURE OF RS.23,98,496/- THE AMOUNT RELATING TO BHIWADI UNIT WAS RS.20,39,034/- WHILE ONLY AN AMOUNT OF RS.3,59,462/- WAS DEBITED IN KALA-AMB ACC OUNT. ON A QUERY, IT WAS STATED THAT TWO PERSONS, NAMELY, VINOD PRABHAKARAN AND B.S.BHAR DWAJ WHO WERE PREVIOUSLY WORKING FOR BHIWADI UNIT WERE LOOKING AFTER KALA-AM B UNIT. HOWEVER, THEIR SALARIES AND TRAVELING EXPENSES AMOUNTING TO RS.1,47,535/- AND R S.2,30,002/-, RESPECTIVELY WERE NOT REFLECTED IN KALA-AMB ACCOUNT. ON FURTHER QUERY, IT WAS STATED BY THE ASSESSEE THAT THESE EXPENSES COULD BE TREATED AS RELATED TO KALA-AMB UN IT. FURTHER, DIRECTORS REMUNERATION OF RS.7.02 LACS AND RS.1.71 LACS WAS ENTIRELY DEBITED TO BHIWADI UNIT. ON THE BASIS OF ABOVE, THE ASSESSING OFFICER WAS OF THE OPINION THAT THE E XPENDITURE DEBITED TO KALA-AMB UNIT WAS LOWER THAN THE EXPENDITURE DEBITED TO BHIWADI U NIT. THE ASSESSING OFFICER ALSO NOTED THAT THE PERCENTAGE OF TURNOVER OF KALA-AMB UNIT WA S 25.74 PER CENT AND THE MATERIAL COST WAS 32.08 PER CENT. HE ALLOCATED INDIRECT EXPENSES I.E. ELECTRICITY EXPENSES; ADMINISTRATIVE EXPENSES; SELLING EXPENSES; AND FINA NCE CHARGES RELATABLE TO BOTH THE UNITS @ 25.74% OF THE TOTAL EXPENSES TO KALA AMB UNIT. T HUS THE DEDUCTION UNDER SECTION 80- IC OF THE ACT WAS COMPUTED AT A LOWER FIGURE OF RS 71,06,795. 3. ON APPEAL THE ASSESSEE EXPLAINED THE REASONS AS TO WHY THE EXPENDITURE WAS NOT ALLOCABLE TO KALA-AMB UNIT. HOWEVER, LD. CIT (A) E XAMINED THE MATTER IN DETAIL. THE LD. CIT(A) ALLOWED PART RELIEF BY OBSERVING AS UNDER: RIVAL CONTENTIONS HAVE CAREFULLY BEEN CONSIDERED. AFTER CONSIDERING THE RIVAL SUBMISSIONS I HAVE COME TO THE CONCLUSION THAT IN T HE INSTANT CASE, ISSUE IN DISPUTE ITA NO.2305/DEL/2009 3 IS DETERMINATION OF ALLOWABLE DEDUCTION UNDER SECTI ON 80-IC OF THE INCOME TAX ACT IN RESPECT OF NEW UNIT AT KALA-AMB, HIMACHAL PRADES H. THE ASSESSING OFFICER HAS RIGHTLY OBSERVED THAT THE EXPENSES CLAIMED AT K ALA-AMB UNIT ARE LOWER AT EXEMPT UNIT AS COMPARED TO OLD UNIT AT BHIWADI. BUT I ALSO FIND FORCE IN THE FOLLOWING CONTENTIONS OF THE APPELLANT- A) THAT THE PRODUCT MIX AT EXEMPT UNIT IS DIFFERENT TH AN THE BHIWADI UNIT AND THEREFORE THE COST STRUCTURE AT THE TWO UNITS DIFFE RENT. B) THAT COST OF PRODUCTION ALSO INCLUDED COST OF MATER IALS, WHICH WAS HIGHER AT EXEMPT UNIT AND THE COMBINED RATE OF COST OF MAT ERIALS AND EXPENSES TOGETHER AT EXEMPT UNIT WAS ALMOST SAME TO NON-EXEM PT UNIT. C) THAT THE ALLOCATION OF EXPENSES IN THE RATIO OF TUR NOVER CANNOT BE APPLIED SELECTIVELY OVERLOOKING THE COST OF MATERIALS AND O THER FACTS OF THE CASE. 2. THERE IS NO SPECIFIC FINDING THAT MANUFAC TURING EXPENSES AT BHIWADI UNIT INCLUDED EXPENSES RELATED TO KALA-AMB. BUT SOME OF THE ADMINISTRATIVE AND SELLING EXPENSES DEFINITELY HAVE SOME COMMON EXPENSES SUCH AS DIRECTOR REMUNERATION, TRAVELING AND AUDIT FEES WHICH CAN BE SAID TO BE IN CURRED FOR BOTH THE UNITS. ON MERITS OF THE CASE, VARIOUS EXPENSES CLAIMED AT THE TWO UNITS CAN BE TREATED AS UNDER- ADDITIONAL EXPENSES TO BE ALLOCATED TO KALA-AMB UNIT MANUFACTURING EXPENSES THE A.O. HAS ALREADY EXCLUDED EXCISE DUTY AND ELECT RICITY EXPENSE. THERE IS NO REASON WHY THE OTHER SHOULD BE ALLOCATE D WHEN THE TWO UNITS MAINTAIN SEPARATE ACCOUNTS, ARE LOCATED 300 KMS APART AND TH E A.O. HAS NOT INDICATED ANY MIXING OF EXPENSES. HENCE NO AMOUNT NEED TO BE ALLO CATED TO KAL-AMB UNIT. ADMINISTRATIVE EXPENSES THERE ARE SOME EXPENSES LIKE DIRECTORS REMUNERATION AND AUDITORS FEE WHICH NEED TO BE ALLOCATED IN THE RATIO OF TURNOVER DIRECTORS REMUNERATION 720,000 AUDIT FEE 275,000 25.73% OF ABOVE 995,000 256,014 ITA NO.2305/DEL/2009 4 THE A.O. HAS FOUND THAT TWO PERSONS- VINOD PRABHAKARAN AND B.S.BHARDWAJ WERE ALSO WORKING FOR KALA-AMB UNIT. THEIR SALARY EXPENSES NEED TO BE ALLO- CATED TO KAL-AMB UNIT. 147,535 PF RELATED TO ABOVE 10,368 THE FOREIGN TRAVEL OF VINOD PRABHAKARAN WILL ALSO BE ALLOCATED 377,689 IT IS OBSERVED THAT DOMESTIC TRAVELING AT THE TWO UNITS SEPARATELY AND EXPENSES SHOWN IN THE ACCOUNTS OF BHIWADI UNIT ARE INCURRED FOR BHIWADI UNIT. HOWEVER EXPENSES OF RS.21,45,774 ACCOUNTED IN THE BOOKS OF HEAD OFFICE DELHI CAN BE SAID TO BE USED COMMONLY FOR THE TWO UNITS. (25.73% OF RS.21,45,774) 552,108 TOTAL 1,696,699 MARKETING & SELLING EXPENSES A.O. HAS ALREADY EXCLUDED COMMISSION AND CARRIAGE OUTWARD. -- DISCOUNT AND BAD DEBTS ARE ALSO RELATED TO SALES AFFECTED FROM BHIWADI UNIT AND THEREFORE NEED NOT BE ALLOCATED. -- ADVERTISEMENT & PUBLICITY RS.880,106 AND BUSINESS PROMOTION RS.677,733 CAN BE SAID TO BE COMMON EXPENSES AND NEED TO BE ALLOCATED, WHICH COMES TO RS.400,832. OF THIS RS.15,776 IS ALREADY ACCOUNTED IN THE BOOKS OF KALA-AMB AND THEREFORE BALANCE AMOUNT NEED TO BE ALLOCATED. 385,056 TOTAL ADDITIONAL EXPENSES TO BE ALLOCATED TO KAL-AMB UNIT. 2,081,755 3. THE NEW UNIT BECAME OPERATIONAL W.E.F. 30-6-2004 AS PER THE AUDIT REPORT IN FORM NO.10CCB FILED WITH THE RETURN . THE APPELLANT CONTENDED THAT THE UNIT WAS PRACTICALLY OPERATIVE O NLY FOR A PERIOD OF 4 MONTHS COMPRISED OF DECEMBER 2004 TO MARCH, 2005 AN D THEREFORE ADDITIONAL EXPENSES SHOULD HAVE BEEN ALLOCATED FOR FOUR MONTHS ONLY AS AGAINST A PERIOD OF 10 MONTHS AS PER THE ASSESSMENT ORDER. IN MY OPINION, SOME EXPENSES ARE ALSO REQUIRED BEFORE A UNIT BECOM ES COMMERCIALLY ITA NO.2305/DEL/2009 5 OPERATIONAL OR COMMENCES TRIAL PRODUCTION. THE DATE OF COMMENCEMENT AS SHOWN IN THE AUDIT REPORT CAN BE FAIRLY RELIED UPON . I AGREE WITH THE APPELLANTS CONTENTION THAT EVEN AS PER THIS DATE T HE ALLOCATION NEED TO BE MADE FOR 9 MONTHS INSTEAD OF 10 MONTHS AS TAKEN IN THE ASSESSMENT ORDER. ON PRO-RATA ALLOCATION FOR 9 MONTHS, THE CLAIM UND ER SECTION 80-IC SHALL STAND REDUCED BY RS.15,61,316 AS AGAINST THE REDUCT ION OF RS.71,06,795/- MADE BY THE ASSESSING OFFICER. 4. BEFORE US, LD. SR. D.R. SUBMITTED THAT IN KALA-A MB UNIT, THE ASSESSEE HAS NOT DEBITED ANY EXPENDITURE IN RESPECT OF FINANCIAL CHA RGES. BHIWADI UNIT OF THE ASSESSEE IS MORE CAPITAL ORIENTED THAN KALA-AMB UNIT AND HENCE FINANCE CHARGES ARE TO BE ALLOCATED. THE DATE OF COMMENCEMENT AS PER FORM NO. 10CCB IS 3 0 TH JUNE AND NOT NOVEMBER/DECEMBER, AS CLAIMED BY THE ASSESSEE. HE F URTHER SUBMITTED THAT APPORTIONMENT OF THE EXPENSES COULD BE MADE ON THE BASIS OF GROSS RECEIPTS. HE FURTHER SUBMITTED THAT APPORTIONMENT OF THE EXPENSES COULD BE MADE ON THE BASIS OF GROSS RECEIPTS. HE PLACED RELIANCE ON THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF CONSOLIDATED COMPANY LTD. VS. STATE OF KARNATAKA (S UPRA) FOR THE PROPOSITION THAT THE HEAD OFFICE EXPENSES COULD BE APPORTIONED ON THE BA SIS OF GROSS RECEIPTS BETWEEN THE AGRICULTURAL AND NON-AGRICULTURAL ACTIVITY WAS JUST IFIED. ON THE OTHER HAND, THE LD. AR OF THE ASSESSEE STRONGLY SUPPORTED THE ORDER OF THE LD . CIT (APPEALS). 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. FROM THE ABOVE FACTS WE FIND THAT THE LD. CIT (APPE ALS) WHILE DECIDING THE ISSUE HAD RELIED ON THE FACT THAT THE PRODUCT MIXED AT EXEMPT UNIT IS DIFFERENT THAN THE BHIWADI UNIT AND, THEREFORE, THE COST STRUCTURE AT THE TWO UNITS WOULD BE DIFFERENT. THAT COST OF PRODUCTION ALSO INCLUDED COST OF MATERIAL, WHICH WA S HIGHER AT EXEMPT UNIT AND THE COMBINED RATE OF COST OF MATERIALS AND EXPENSES TOG ETHER AT EXEMPT UNIT WAS ALMOST THE SAME TO NON-EXEMPT UNIT. THAT THE ALLOCATION OF EX PENSES IN THE RATIO OF TURNOVER COULD NOT BE APPLIED SELECTIVELY OVER-LOOKING THE COST OF MATERIAL AND OTHER FACTS OF THE CASE. HE ALSO NOTED THAT THERE WAS NO SPECIFIC FINDING TH AT THE MANUFACTURING EXPENSES AT BHIWADI UNIT INCLUDED EXPENSES RELATED TO KALA-AMB UNIT. HOWEVER, HE HAD IDENTIFIED CERTAIN ADMINISTRATIVE AND SELLING EXPENSES, WHICH WERE COMMON TO BOTH THE UNITS. THESE EXPENSES RELATED TO REMUNERATION, TRAVELLING, AUDIT FEE, SALARY EXPENSES OF TWO PERSONS, NAMELY, VINOD PRABHAKARAN AND V.S. BHARDWAJ, OTHER HEAD OFFICE COMMON EXPENSES, ITA NO.2305/DEL/2009 6 PUBLICITY AND ADVERTISEMENT EXPENSES. HE IDENTIFIE D THESE EXPENSES AND ALLOCATED IN THE RATIO OF 25.73 PER CENT. THE LD. CIT (APPEALS) ALS O NOTED THAT THE EXEMPT UNIT BECAME OPERATIONAL WITH EFFECT FROM 30 TH JUNE, 2004. THE CONTENTION OF THE ASSESSEE THAT T HE UNIT WAS PRACTICALLY OPERATIVE ONLY FOR FOUR MONTHS COMP RISED OF DECEMBER, 2004 TO MARCH, 2005 AND, THEREFORE, ADDITIONAL EXPENSES COULD HAVE BEEN ALLOCATED FOR FOUR MONTHS AS AGAINST 10 MONTHS IN THE ASSESSMENT ORDER. THE LD . CIT (A), HOWEVER, TOOK THE PERIOD OF NINE MONTHS FOR ALLOCATION OF PRO-RATA EXPENSES AS THE UNIT STARTED OPERATIONS ON 30 TH JUNE 2004. THIS IN OUR OPINION IS QUITE REASONABLE. DUR ING THE COURSE OF HEARING NO EVIDENCE WAS LED CONTRARY TO FINDINGS OF THE LD. CIT (APPEAL S) IN ALLOCATING THE EXPENSES RELATABLE TO EXEMPT UNIT. SINCE THE LD. CIT (A) HAD PASSED A SPEAKING ORDER ANALYZING EACH AND EVERY EXPENSE AND IN THE ABSENCE OF ANY CONTRARY MA TERIAL ON RECORD, IN OUR CONSIDERED OPINION, THE ORDER PASSED BY THE LD. CIT (APPEALS) IS TO BE UPHELD. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER PASSED BY THE L D. CIT (APPEALS). 6. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. PRONOUNCED IN THE OPEN COURT ON : 23 RD JULY, 2010. SD/- SD/- ( R. P. TOLANI) (K. D. RANJAN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 23 RD JULY, 2010. PSP / MEHTA. COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT DEPUTY REGISTRAR ITA NO.2305/DEL/2009 7