M/s Torque Pharmaceuticals Private Limited, Chandigarh V. Addl. CIT, Chandigarh

ITA 671/CHANDI/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68609 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 year(s) 6 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 25-03-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 10-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Notional interest
• Section: 143(3); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A CHANDIGARH BEFORE SHRI T.R.SOOD ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO.671/CHD/2011 ASSESSMENT YEAR : 2007-08 M/S TORQUE PHARMACEUTICALS PVT.LTD. VS THE AD DL.CIT, PLOT NO. 693, RANGE 1, INDUSTRIAL AREA PHASE-2, CHANDIGARH. CHANDIGARH. PAN : AABCT-1244P (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI PARIKSHIT AGGARWAL RESPONDENT BY : SHRI AKHILESH GUPTA DATE OF HEARING : 24.09.2013 DATE OF PRONOUNCEMENT : 23.12.2013 O R D E R PER SUSHMA CHOWLA, JM THE ASSESSEE HAS FILED THE APPEAL AGAINST THE ORDER OF THE CIT(APPEALS), CHANDIGARH DATED 18.11.2009 RELATING TO ASSESSMENT YEAR 2007-08 AGAINST THE ORDER PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 ( 'THE ACT' FOR SHORT). 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN SUSTAINING THE ADDITION OF RS. 31,06,069/-, BEING D ISALLOWANCE OF INTEREST EXPENSES IN DERA BASSI UNIT OF THE ASSESSE E BY ESTIMATING THE NOTIONAL INTEREST ON FUNDS INVESTED IN BADDI MANUFA CTURING UNIT PRESUMPTIONS AND SURMISES. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HA S ERRED IN SUSTAINING THE ESTIMATION ( OF NOTIONAL INTEREST ON CAPITAL WORK IN PROGRESS AND PASSING ORDER FOR CAPITALISING THE SAM E IN DERA BASSI UNIT. 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HA S ERRED IN SUSTAINING THE ESTIMATION OF THE NOTIONAL INTEREST ON ADDITIONS TO FIXED ASSETS AND PASSING ORDER FOR CAPITALISING THE SAME IN DERA BASSI UNIT. 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HA S ERRED IN 2 SUSTAINING THE ESTIMATION OF THE NOTIONAL INTEREST ON FUNDS STANDING IN THE NAME OF BADDI TRADING UNIT IN DERA BASSI UNIT A ND PASSING ORDERS FOR DISALLOWING THE SAME IN DERA BASSI UNIT. 5. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HA S ERRED IN SUSTAINING THE ADDITION OF RS. 5,84,188/- ON ACCOUN T OF CAPITALISATION OF THE WEB/SOFTWARE DEVELOPMENT EXPENSES. 6. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HA S ERRED IN SUSTAINING THE REDUCTION OF THE CLAIM OF THE ASSESS EE U/S 80IC BY RS.89,81,947/- BY SHIFTING/ALLOCATING SOME EXPENSES FROM DERA BASSI UNIT TO BADDI MANUFACTURING UNIT BASED ON ESTIMATES , SURMISES AND PRESUMPTIONS. 7. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HA S ERRED IN SUSTAINING THE REDUCTION OF CLAIM UNDER SECTION 80I C RESULTING FROM WRONG CALCULATION OF THE DEDUCTION. 8. THE LEARNED COMMISSIONER OF INCOME TAX (A PPEALS) HAS ERRED IN SUSTAINING THE DISALLOWANCE OF THE CA RRIED FORWARD OF DEPRECIATION LOSS. 3. THE ASSESSEE HAS FILED AMENDED GROUND NO.7 WHICH READS AS UNDER: 7. THE LD. CIT(A) HAS ERRED IN SUSTAINING THE ADDIT ION/ DISALLOWANCE OF FOLLOWING EXPENSES/ITEMS U/S 28 TO 44D OF THE ACT A ND ALSO BY REDUCING THE CLAIM OF DEDUCTION U/S 80-IC OF THE ACT ON SAME ITEMS WHI CH ULTIMATELY RESULTED INTO DOUBLE ADDITION/DISALLOWANCE A) DISALLOWANCE /ADDITION ON ACCOUNT OF CAPITALIZATION OF INTEREST RS. 31,06,069/- B) DISALLOWANCE/ADDITION ON ACCOUNT OF ALLEGATION OF C OMMON EXPENSES RS. 89,81,947/-' 4. THE ISSUE IN GROUND NO.1 RAISED BY THE ASSESSEE IS AGAINST THE DISALLOWANCE OF INTEREST EXPENDITURE OF RS. 31,06,0 69/- IN DERA BASSI UNIT. 5. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS ENGAGED IN THE BUSINESS OF FORMULATION OF DRUGS AND HAS TWO FORMUL ATION UNITS, ONE AT DERA BASSI AND THE SECOND AT BADDI. THE ASSESSEE H AD FILED SEPARATE BALANCE-SHEET AND PROFIT & LOSS ACCOUNT FOR THE DER A BASSI UNIT AND FOR BADDI UNIT I.E. BADDI MANUFACTURING UNIT AND BADDI TRADING UNIT. IN RESPECT OF THE BADDI MANUFACTURING UNIT, THE ASSESS EE HAD CLAIMED DEDUCTION UNDER SECTION 80IC OF THE ACT. THE UNIT AT DERA BASSI WAS ALSO THE HEAD OFFICE OF THE ASSESSEE. THE FUNDS UT ILIZED FOR BOTH BADDI 3 UNITS HAD BEEN TRANSFERRED FROM THE DERA BASSI UNIT . THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD BORROWED FUNDS FOR DERA BASSI UNIT AND WAS PAYING INTEREST @ 11% ON TERM LOAN AND @ 10 .75% ON THE CASH CREDIT LIMIT, IMPLYING THEREBY THAT THE COST OF BOR ROWED FUNDS TO THE ASSESSEE WAS NOT LESS THAN 10.75% DURING THE YEAR U NDER CONSIDERATION. THE ASSESSING OFFICER WAS OF THE VIEW THAT DISALLOW ANCE OF INTEREST IN THE DERA BASSI UNIT WAS TO BE MADE ON ACCOUNT OF DI VERSION OF FUNDS TO THE BADDI MANUFACTURING UNIT. THE TOTAL SECURED LO ANS AS ON 31.03.2007 WERE RS. 216.85 LACS AND UNSECURED LOANS WERE RS. 9 9.44 LACS AND THE ASSESSEE HAD CLAIMED INTEREST EXPENDITURE OF RS. 31 ,06,069/- IN THE DERA BASSI UNIT. THE BADDI MANUFACTURING UNIT OF THE AS SESSEE AS ON 313.2007 UNDER THE HEAD CAPITAL REFLECTED AN ENTRY OF TOR QUE HEAD OFFICE AGAINST WHICH SUM OF RS. 435.41 LACS WAS REFLECTED. THE ASSESSING OFFICER TABULATED THE MONTH-WISE FUNDS DIVERTED BY THE DERA BASSI UNIT TO THE BADDI UNIT AND COMPUTED THE DISALLOWANCE OF THE INTEREST AT RS. 43,45,928/-. HOWEVER, AS THE ASSESSEE HAD ONLY DEB ITED SUM OF RS.31,06,069/- UNDER THE HEAD INTEREST EXPENDITURE IN THE DERA BASSI UNIT, ADDITION WAS RESTRICTED TO RS. 31,06,069/- AN D PROFITS OF BADDI MANUFACTURING UNIT WERE REDUCED TO THE SAID EXTENT AND CONSEQUENTLY, THE DEDUCTION CLAIMED UNDER SECTION 80IC OF THE ACT WAS REDUCED BY A SUM OF RS. 31,06,069/-. 6. BEFORE THE CIT(APPEALS), THE PLEA OF THE ASSESSE E WAS THAT NO FRESH BORROWALS WERE RAISED BY THE DERA BASSI UNIT IN THE YEAR UNDER APPEAL AND ON THE CONTRARY, THE SECURED LOANS HAD DECLINED BY RS. 91.33 LACS. THE UNSECURED LOANS, THOUGH HAD INCREASED AS COMPAR ED TO THE PRECEDING YEAR BUT THE SAID LOANS WERE INTEREST-FREE. HENCE THE PLEA OF THE ASSESSEE WAS THAT THERE WAS NO TRANSFER OF BORROWED FUNDS TO BADDI UNIT. WITH REGARD TO THE DEBIT BALANCE OF THE EARLIER YEARS, I T WAS CLAIMED BY THE 4 ASSESSEE THAT THE SAME WERE TRANSFERRED OUT OF CAPI TAL AND RESERVES OF THE COMPANY WHICH BELONG NOT ONLY TO THE DERA BASSI UNI T BUT ALSO TO THE BADDI UNIT AND NO INTEREST WAS PAID ON CAPITAL AND RESERVES. THE ASSESSING OFFICER FURTHER NOTED THAT THE ASSESSEE W AS ASKED AS TO WHY INTEREST RELATING TO CAPITAL IN PROGRESS BE NOT CAP ITALIZED UNDER THE HEAD CAPITAL WORK IN PROGRESS. THE PLEA OF THE ASSESS EE IN THIS REGARD WAS THAT IT HAD NOT BORROWED ANY FUNDS FOR CREATION OF FIXED ASSETS AND CAPITAL WORK IN PROGRESS AND HENCE, NO MERIT IN ANY DISALLOWANCE. 7. THE CIT(APPEALS) REJECTING THE EXPLANATION OF TH E ASSESSEE IN VIEW OF THE OUTSTANDING SECURED AND UNSECURED LOANS, AND CLAIM OF INTEREST EXPENDITURE AT RS. 31,06,069/- DEBITED TO THE PROFI T & LOSS ACCOUNT, UPHELD THE RESTRICTION OF DISALLOWANCE TO THE EXTEN T OF RS. 31,06,069/-. THE ASSESSEE IS IN APPEAL AGAINST THE SAID DISALLOW ANCE. 8. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT OUT OF THE SECURED LOANS, RS. 35,89,949/- WAS ON ACCOUNT OF VEHICLE LO AN AND THE BALANCE INTEREST BEARING BORROWINGS WAS THE CC LIMIT OF RS. 1.81 CR. IT WAS FURTHER POINTED OUT BY THE LD. AR FOR THE ASSESSEE THAT AT THE START OF THE YEAR, THE OUTSTANDING OF THIS BORROWING WAS RS.2.72 CR. THE SECOND PLEA RAISED BY THE ASSESSEE WAS THAT NOTIONAL INTEREST W AS DISALLOWED ON FUNDS TRANSFERRED FROM DERA BASSI UNIT TO BADDI UNIT, PRO FITS OF WHICH WERE EXEMPT UNDER SECTION 80IC OF THE ACT. IT WAS POINT ED OUT BY THE LD. AR FOR THE ASSESSEE THAT ASSESSING OFFICER VIDE PARA 2 AT PAGE 3 OF THE ASSESSMENT ORDER HAS COMPUTED THE DISALLOWANCE BY A PPLYING INTEREST RATE OF 10.75% WHEREAS AVERAGE COST OF DEBT HAD TO BE CONSIDERED AND APPLIED FOR WORKING DISALLOWANCE, IF ANY. RELIANCE FOR THE SAID RATIO WAS PLACED ON THE DECISION OF THE MUMBAI BENCH OF THE T RIBUNAL IN DCIT VS MTZ POLYFILMS LTD. (ITA NO. 3042/MUM/2010 ORDER DAT ED 27.01.2012, COPY OF WHICH IS PLACED AT PAGES 17 TO 30 OF THE PA PER BOOK. IT WAS 5 FURTHER CLARIFIED BY THE LD. AR FOR THE ASSESSEE TH AT THOUGH IN THE CASE OF MIXED FUNDS, THE DISALLOWANCE OF INTEREST IS TO BE MADE AS PER THE RATIO LAID DOWN BY THE HON'BLE PUNJAB & HARYANA HIGH COUR T IN CIT VS ABHISHEK INDUSTRIES LTD. 286 ITR 1 (P&H). HOWEVER, THE SAID DECISION IS SILENT ON THE RATE OF INTEREST TO BE APPLIED FOR WORKING OUT THE DISALLOWANCE. IT WAS POINTED OUT BY THE LD. AR FOR THE ASSESSEE THAT IF INTEREST BEARING FUNDS ARE UTILIZED AND INTEREST FR EE FUNDS ARE AVAILABLE, THEN AVERAGE COST OF DEBT IS TO BE APPLIED TO COMPU TE THE DISALLOWANCE. OUR ATTENTION WAS DRAWN TO THE BALANCE SHEET PLACED AT PAGES 240 & 242 OF THE PAPER BOOK AND IT WAS POINTED OUT THAT CASH CREDIT BALANCES HAD REDUCED. 9. THE LD. DR FOR THE REVENUE, HOWEVER PLACED RELIA NCE ON THE ORDER OF THE ASSESSING OFFICER AND POINTED OUT THAT IT WA S ONLY THE DERA BASSI UNIT WHICH WAS IN LOSS AND THE OTHER TWO UNITS WERE SHOWING PROFIT WHICH WERE CLAIMING DEDUCTION UNDER CHAPTER VI. IT WAS FU RTHER STRESSED BY THE LD. DR FOR THE REVENUE THAT THE ASSESSEE WAS TAKING LOAN @ 10.75% RATE OF INTEREST, THEN AVERAGE COST OF FUNDS IS NOT TO B E APPLIED. REFERENCE WAS MADE ON THE RATIO LAID DOWN, BY THE CIT(APPEALS ) IN PARA 11 AT PAGE 5 OF THE APPELLATE ORDER IN THIS REGARD. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE RAISED VIDE GROUND NO. 1 IS IN RELATION TO TH E INTEREST EXPENDITURE RELATABLE TO THE INTEREST FREE FUNDS DIVERTED FROM THE HEAD OFFICE TO THE MANUFACTURING UNIT BY THE ASSESSEE. THE ASSESSEE H AD ESTABLISHED BADDI UNIT DURING THE FINANCIAL YEAR 2005-06 I.E. IN THE PRECEDING YEAR AND IT WAS UNDER CONSTRUCTION AND CAME INTO PRODUCTION IN DECEMBER,2005. THE FUNDS NECESSARY FOR THE ESTABLISHMENT OF THE SA ID MANUFACTURING UNIT WERE TRANSFERRED FROM THE DERA BASSI UNIT WHICH IN- TURN HAD BOTH INTEREST BEARING AND INTEREST FREE FUNDS AVAILABLE WITH IT. THE CLAIM OF THE 6 ASSESSEE IS THAT AT THE START OF THE YEAR UNDER APP EAL, THE OUTSTANDING OF THE BORROWINGS IN DERA BASSI UNIT WAS RS. 2.72 CR W HICH HAD REDUCED TO RS.1.81 CR AT THE CLOSE OF THE YEAR. FURTHER IT HA D INTEREST FREE FUNDS TOTALING RS. 99,44,876/- AND VEHICLE LOAN OF RS. 35 ,89,949/-. THE ASSESSEE WAS PAYING INTEREST @ 10.75% ON ITS CC LIM IT AND THE ASSESSING OFFICER HAD APPLIED THE SAID RATE OF INTEREST IN OR DER TO COMPUTE THE DISALLOWANCE OF INTEREST RELATABLE TO THE FUNDS TRA NSFERRED FROM THE DERA BASSI UNIT TO BADDI UNIT. THE TOTAL DISALLOWANCE O N THIS ACCOUNT WORKED OUT TO RS.43,45,928/- WHICH WAS RESTRICTED TO RS. 3 1,06,069/- I.E. THE INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE. THE PLEA OF THE ASSESSEE AGAINST THE SAID DISALLOWANCE IS THAT WHERE IT HAD MIXED FUNDS I.E. INTEREST BEARING FUNDS AND ALSO INTEREST FREE FUNDS AVAILABLE, THEN THE AVERAGE COST OF DEBT HAD TO BE APPLIED TO COMPUTE T HE DISALLOWANCE OF INTEREST, IF ANY, IN THE HANDS OF THE ASSESSEE. AS PER CALCULATION OF THE ASSESSEE, THE AVERAGE COST OF DEBT FOR THE YEAR UND ER CONSTRUCTION WAS 1.48% AS PER THE CALCULATION SHEET PLACED AT PAGE 1 OF THE PAPER BOOK. 11. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN CIT VS ABHISHEK INDUSTRIES LTD. (SUPRA) HAVE LAID DOWN THE RATIO TH AT IN CASES OF MIXED FUNDS AVAILABLE WITH THE ASSESSEE AND WHERE INTERES T FREE ADVANCES HAVE BEEN MADE OUT OF SUCH MIXED FUNDS, DISALLOWANCE OF INTEREST RELATABLE TO SUCH INTEREST FREE ADVANCES IS WARRANTED. HOWEVER, ON THE PERUSAL OF THE SAID JUDGEMENT IT IS APPARENT THAT IT IS SILENT ON THE RATE OF INTEREST TO BE APPLIED IN CASES WHERE THE ASSESSEE HAS MIXED FUNDS AVAILABLE WITH IT. IN THE FACTS AND CIRCUMSTANCES OF THE CASE WE FIND MER IT IN THE PLEA OF THE ASSESSEE THAT WHERE MIXED FUNDS ARE DIVERTED TOWARD S INTEREST FREE ADVANCES, THEN THE DISALLOWANCE IF ANY, SHOULD BE M ADE UPTO THE LEVEL OF AVERAGE COST OF DEBT TO THE ASSESSEE. 7 12. WE FIND SUPPORT FROM THE RATIO LAID DOWN BY THE MUMBAI BENCH OF TRIBUNAL IN DCIT VS MTZ POLYFILMS LTD. (SUPRA) WHEREIN IT HAS BEEN PROPOSED THAT FOR DISALLOWING INTEREST UNDER SECTIO N 36(1)(III), THE TOTAL FUNDS I.E. OWNED FUNDS AND BORROWED FUNDS, SHOULD H AVE BEEN CONSIDERED FOR WORKING OUT THE DISALLOWANCE OF INTEREST. FOLL OWING THE ABOVESAID PROPOSITION, WE DIRECT THE ASSESSING OFFICER TO REC OMPUTE THE DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT BY ADOPTING THE AVERAGE COST OF DEBT FOR THE YEAR UNDER APPEAL AND APPLYING THE SAME TO THE INTEREST FREE ADVANCES MADE BY THE ASSESSEE. REASO NABLE OPPORTUNITY OF HEARING SHALL BE AFFORDED TO THE ASSESSEE BY THE AS SESSING OFFICER. THE GROUND OF APPEAL NO. 1 RAISED BY THE ASSESSEE IS TH US, ALLOWED FOR STATISTICAL PURPOSES. 13. THE GROUND NOS. 2, 3 & 4 ARE LINKED TO THE ISSU E RAISED VIDE GROUND NO. 1. HOWEVER, NO DISALLOWANCE WAS MADE IN RESPEC T OF THESE ISSUES AS THE TOTAL INTEREST EXPENDITURE DEBITED TO THE PROFI T & LOSS ACCOUNT WAS DISALLOWED BY THE ASSESSING OFFICER WHILE COMPUTING THE DISALLOWANCE AS PER THE ISSUE RAISED VIDE GROUND NO.1. THE ASSESSE E DURING THE YEAR UNDER CONSIDERATION HAD MADE ADDITION TO THE FIXED ASSETS ALSO TO THE CAPITAL WORK IN PROGRESS AND NO INTEREST RELATABLE TO SUCH ADDITIONS WAS DISALLOWED BY THE ASSESSING OFFICER, THOUGH THE ASS ESSING OFFICER OBSERVED THAT THE NECESSARY EXPENDITURE RELATING TO THE ABOVESAID WAS DISALLOWABLE IN THE HANDS OF THE ASSESSEE. WE ARE IN CONFORMITY WITH THE OBSERVATIONS OF ASSESSING OFFICER IN THIS REGARD TH AT NOTIONAL INTEREST RELATABLE TO THE CAPITAL WORK IN PROGRESS IS TO BE COMPUTED IN VIEW OF THE PROVISIONS OF THE ACT. HOWEVER, AVERAGE COST OF DE BT IS TO BE APPLIED TO WORK OUT THE DISALLOWANCE OF INTEREST EXPENDITURE R ELATABLE TO THE AMOUNTS OUTSTANDING UNDER CAPITAL WORK IN PROGRESS. 8 14. THE SECOND ADDITION MADE BY THE AUTHORITIES BEL OW IS IN RESPECT OF THE FIXED ASSETS ACQUIRED DURING THE YEAR. THE ASS ESSING OFFICER HAD WORKED OUT THE DETAILS OF STARTING DATE ON WHICH TH E CREATION OF THE ASSET WAS INITIATED AND THE CLOSING DATE ON WHICH THE ASS ET WAS ACTUALLY PUT TO USE FOR THE PURPOSE OF BUSINESS AND IT WAS OBSERVED THAT THE CORRESPONDING INTEREST NEEDS TO BE CAPITALIZED ON T HE SAID FIXED ASSETS ADDITIONS ALSO. THE TOTAL ADDITION TO FIXED ASSET DURING THE YEAR WAS RS.1.14 CR IN THE DERA BASSI UNIT. HOWEVER, SINCE T HE ENTIRE INTEREST CLAIMED IN THE DERA BASSI UNIT HAD BEEN DISALLOWED, NO SEPARATE ADDITION WAS MADE. WE FIND NO MERIT IN THE SAID DISALLOWANC E WHERE THE ASSET HAS ACTUALLY BEEN PUT TO USE IN THE YEAR UNDER CONSIDER ATION ITSELF. ACCORDINGLY, THERE IS NO MERIT IN ANY DISALLOWANCE OF INTEREST RELATABLE TO THE PERIOD I.E. STARTING DATE OF CREATION OF THE ASSET TO THE CLOSING DATE ON WHICH THE ASSET WAS PUT TO USE, IF THE WHOLE EXE RCISE WAS DONE WITHIN THE YEAR. ACCORDINGLY, WE ALLOW THE CLAIM OF THE A SSESSEE IN THIS REGARD I.E. RAISED VIDE GROUND NO. 3. 15. THE ASSESSEE VIDE GROUND NO. 4 HAS RAISED THE I SSUE OF DISALLOWANCE OF NOTIONAL INTEREST ON FUNDS STANDING IN THE NAME OF BADDI TRADING UNIT IN DERA BASSI UNIT. THE LD. AR FOR TH E ASSESSEE MADE TWO SUBMISSIONS THAT FIRST OF ALL ONLY THE OPENING BALA NCE OF RS. 18,00,000/- IS TO BE CONSIDERED IN CASE ANY DISALLOWANCE IS TO BE MADE AND NOT THE PROFIT WHICH IS TRANSFERRED IS TO BE CONSIDERED IN MAKING THE AFORESAID DISALLOWANCE. FURTHER AVERAGE COST OF DEBT AS WORK ED OUT AS PER COMPUTATION SHEET PLACED AT PAGE 1 OF THE PAPER BOO K IS TO BE APPLIED FOR WORKING THE DISALLOWANCE, IF ANY. 16. WE FIND MERIT IN BOTH THE PLEAS OF THE ASSESSEE . THE ASSESSING OFFICER IS DIRECTED TO CONSIDER THE OPENING BALANCE FOR WORKING THE SAID DISALLOWANCE OF INTEREST UNDER SECTION 36(1)(III) O F THE ACT AND NOT THE 9 PROFIT GENERATED FOR THE YEAR UNDER CONSIDERATION. FURTHER THE RATE OF INTEREST TO BE APPLIED IS THE AVERAGE COST OF DEBT. THE ASSESSING OFFICER SHALL VERIFY THE CLAIM OF THE ASSESSEE IN THIS REGA RD AND COMPUTE THE DISALLOWANCE OF INTEREST IN THIS REGARD. HOWEVER, THE TOTAL DISALLOWANCE OF THE INTEREST I.E. VIDE GROUND NO. 1, 2 & 4 SHALL NOT EXCEED RS. 31,06,069/- I.E. THE INTEREST EXPENDITURE DEBITED T O THE PROFIT & LOSS ACCOUNT. ACCORDINGLY, WE ALLOW GROUND NOS. 2 & 4 F OR STATISTICAL PURPOSES. THE GROUND NO. 3 RAISED BY THE ASSESSEE I S ALLOWED. 17. THE ISSUE IN GROUND NO. 5 IS IN RELATION TO THE ADDITION MADE ON ACCOUNT OF CAPITALIZATION OF WEB/SOFTWARE DEVELOPME NT EXPENSES TOTALING RS. 5,84,188/-. THE ASSESSING OFFICER VIDE PARA 3. 5 HAD OBSERVED AS UNDER : THE ASSESSEE HAS UNDER THE HEAD 'SOFTWARE DEVELOPME NT' CLAIMED AN AMOUNT OF RS. 9,65,730/- BEFORE 30.9.2006 AND AN AM OUNT OF RS. 2,60,566/- AFTER 30.9.2006. THUS, DEPRECIATION @ 60 % IS ALLOWABLE ON WEB DEVELOPMENT EXPENSES AMOUNTING TO RS. 9,65,730/ - WHICH COMES TO RS. 5,79,4387-. SIMILARLY, ON THE AMOUNT OF RS. 2,6 0,566/-, DEPRECIATION AMOUNTING TO RS. 78,170/- IS ALLOWABLE AS PER THE I .T. RULES. THUS, THE TOTAL DEPRECIATION ALLOWABLE ON THE WEB/SOFTWARE DE VELOPMENT EXPENSES COMES OUT TO RS. 6,57,608/-. AFTER ALLOWING DEPRECI ATION OF RS. 6,57,608/-, THE NET ADDITION ON ACCOUNT OF CAPITALI ZATION OF WEB & .SOFTWARE DEVELOPMENT EXPENSES COMES OUT TO RS. 5,8 4,188/- (RS. 12,41,796/-- RS;6,57,608/-). 18. THE ASSESSING OFFICER, THEREAFTER HAD WORKED OU T THE DISALLOWANCE IN THE HANDS OF THE ASSESSEE AFTER ALLOWING DEPRECI ATION @ 60% ON THE ADDITION MADE ON ACCOUNT OF SOFTWARE DEVELOPMENT EX PENSES TOTALING RS. 9,65,730/- BEFORE 30.09.2006 AND RS. 260,566/- AFTER 30.09.2006. 19. THE CIT(APPEALS) HAD CONFIRMED THE ABOVESAID DI SALLOWANCE. 20. WE ARE IN CONFORMITY WITH THE ORDERS OF THE AUT HORITIES BELOW IN VIEW OF THE AMENDMENT TO THE INCOME TAX ACT UNDER W HICH IT HAS BEEN PROVIDED THAT THE COMPUTERS INCLUDING COMPUTER SOFT WARE WERE TO BE 10 CONSIDERED AS TANGIBLE ASSET UNDER THE HEAD PLANT & MACHINERY AS PER THE NEW APPENDIX-1 UNDER RULE 5 OF INCOME TAX RULES , 1962 APPLICABLE FROM ASSESSMENT YEAR 2003-04 ONWARDS. IN VIEW OF T HE ABOVESAID AMENDMENT CARRIED OUT TO THE PROVISIONS OF THE ACT UNDER WHICH THE DEFINITION OF COMPUTER HAS BEEN ENLARGED TO INCLUDE COMPUTER SOFTWARE, THE EXPENDITURE INCURRED ON WEB/SOFTWARE DEVELOPMEN T IS TO BE INCLUDED AS COST OF THE TANGIBLE ASSET ON WHICH THE ASSESSEE IS ENTITLED TO DEPRECIATION @ 60%. UPHOLDING THE ORDER OF ASSESSI NG OFFICER, WE DISMISS GROUND NO. 5 RAISED BY THE ASSESSEE. 21. THE ISSUE IN GROUND NO. 6 RAISED BY THE ASSESSE E IS AGAINST ALLOCATION OF COMMON EXPENSES AMONGST VARIOUS UNITS I.E. BETWEEN THE THREE UNITS, DERA BASSI UNIT, BADDI MANUFACTURING U NIT AND BADDI TRADING UNIT. THE ASSESSEE HAD CLAIMED DEDUCTION UNDER SECT ION 80IC OF THE ACT ON THE PROFITS OF BADDI MANUFACTURING UNIT IN THE C OMPUTATION OF INCOME WHEREAS THE PROFITS OF DERA BASSI UNIT AND THE BADD I TRADING UNIT WERE TAXABLE. BY WAY OF THE ALLOCATION OF EXPENSES, THE DEDUCTION CLAIMED UNDER SECTION 80IC OF THE ACT WAS RECOMPUTED BY THE ASSESSING OFFICER. THE ASSESSEE HAS RAISED THE GROUND NO. 6 IN THIS RE GARD AND VIDE AMENDED GROUND NO. 7 IS AGGRIEVED BY THE RE-WORKING OF THE DEDUCTION UNDER SECTION 80IC OF THE ACT WHICH IN-TURN RESULTE D INTO DOUBLE ADDITION/DISALLOWANCE I.E. ADDITION MADE ON ACCOUNT OF CAPITALIZATION OF INTEREST AND ALLOCATION OF COMMON EXPENSES AND ALSO DEDUCTION ALLOWED UNDER SECTION 80IC OF THE ACT. 22. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT TH E CONCEPT OF ALLOCATION OF EXPENSES BETWEEN THE THREE UNITS IS C OVERED AGAINST THE ASSESSEE. HOWEVER, THE SAID ALLOCATION MADE BY THE ASSESSING OFFICER WAS INCORRECT AS THE TURNOVER OF BADDI TRADING UNIT HAD NOT BEEN CONSIDERED WHILE WORKING OUT THE SAID ALLOCATION OF EXPENSES. OUR 11 ATTENTION WAS DRAWN TO THE COMPUTATION OF EXPENSES AMONGST UNITS AFTER CONSIDERING THE TURNOVER AND EXPENSES OF BADDI TRAD ING UNIT AS TABULATED AT PAGE 47 OF THE PAPER BOOK. THE LD. AR FOR THE A SSESSEE FURTHER POINTED OUT THAT THE PERUSAL OF THE BALANCE SHEET A ND TRADING, PROFIT & LOSS ACCOUNT OF BADDI TRADING UNIT WOULD REFLECT TH AT SALES TO THE TUNE OF RS.3.23 CR WERE CONDUCTED FROM THE SAID UNIT AND THE SAME HAD TO BE CONSIDERED. THE SECOND ASPECT OF COMPUTATION OF DE DUCTION UNDER SECTION 80IC OF THE ACT WAS THE WRONG CALCULATION O F THE SAID DEDUCTION UNDER SECTION 80IC OF THE ACT RESULTING IN DOUBLE D ISALLOWANCE. 23. THE LD. DR FOR THE REVENUE PLACED RELIANCE ON T HE ORDERS OF THE AUTHORITIES BELOW. 24. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION WAS MA INTAINING SEPARATE BOOKS OF ACCOUNT FOR EACH OF THE UNIT OPERATED BY I T. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD THREE UNITS I .E. DERA BASSI UNIT. BADDI TRADING AND BADDI MANUFACTURING UNIT. THE PR OFITS OF THE BADDI UNIT WERE EXEMPT UNDER SECTION 80IC OF THE ACT. TH E ASSESSING OFFICER ALLOCATED CERTAIN EXPENSES FROM DERA BASSI UNIT TO BADDI MANUFACTURING UNIT WHICH AS PER THE ASSESSING OFFICER WERE COMMON EXPENSES WHICH BENEFITED THE WHOLE COMPANY. WHILE WORKING OUT THE DISALLOWANCE, THE ASSESSING OFFICER CONSIDERED THE TURNOVER RATIO OF DERA BASSI UNIT AND BADDI MANUFACTURING UNIT BUT EXCLUDED THE TURNOVER AND EXPENSES OF BADDI TRADING UNIT. THE ASSESSING OFFICER, THUS DI SALLOWED PORTION OF THE COMMON EXPENSES DEBITED TO THE PROFIT & LOSS AC COUNT TO DERA BASSI UNIT. FURTHER IDENTICAL DISALLOWANCE WAS MADE BY R ESTRICTING DEDUCTION UNDER SECTION 80IC OF THE BADDI MANUFACTURING UNIT WHICH AS PER THE ASSESSEE RESULTS INTO DOUBLE ADDITION. THE LD. AR F OR THE ASSESSEE BEFORE US HAS FAIRLY ADMITTED THAT ALLOCATION OF COMMON EX PENSES HAS TO BE 12 MADE BETWEEN THE UNITS OF THE ASSESSEE. HOWEVER, T HE TURNOVER OF ALL THE THREE UNITS AND THE EXPENSES DEBITED THEREIN SHOULD BE CONSIDERED IN ORDER TO WORK OUT ALLOCATION OF EXPENSES AMONGST AL L THE UNITS. THE ASSESSEE HAS FURNISHED TABULATED DETAILS BEFORE US WHICH ARE AS UNDER : 13 25. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO RECOMPUTE THE COMMON EXPENSES TO BE ALLOCATED TO THE UNIT CLAIMIN G EXEMPTION UNDER SECTION 80IC OF THE ACT AND RE-WORK THE INCOME OF T HE TAXABLE UNITS AND CORRESPONDENTLY REWORK THE DEDUCTION AVAILABLE TO T HE ASSESSEE UNDER SECTION 80IC OF THE ACT. HOWEVER, WHILE CARRYING OU T THE SAID EXERCISE OF COMPUTATION OF THE DEDUCTION UNDER SECTION 80IC OF THE ACT, NO FURTHER DISALLOWANCE IS TO BE MADE ON ACCOUNT OF THE EXPEND ITURE WHICH IN-TURN WOULD RESULT IN DOUBLE ADDITION IN THE HANDS OF THE ASSESSEE. THE ASSESSEE HAS MADE A SIMULATED PRESENTATION OF THE I SSUE, WHICH IS AS UNDER : (A) ORIGINAL COMPUTATION OF ASSESSES AS PER BOOKS PARTICULARS TAXABLE EXEMPT TOTAL UNIT UNIT (RS.) AMOUNT AMOUNT (RS.) (RS.) GROSS RECEIPTS 100 100 200 LESS: EXPENSES 50 50 100 NET PROFIT 50 50 100 DEDUCTION U/S 80-IC OF PROFIT OF PROFIT OF EXEMPT UNIT 0 50 50 TAXABLE INCOME 50 0 50 B) COMPUTATION IF ALLOCATION OF EXPENSES OF RS. 10 FROM TAXABLE UNIT TO EXEMPT UNIT IS MADE : PARTICULARS TAXABLE EXEMPT TOTAL UNIT UNIT (RS.) AMOUNT AMOUNT (RS.) (RS.) GROSS RECEIPTS 100 100 200 LESS: EXPENSES 40 60 100 NET PROFIT 60 40 100 DEDUCTION U/S 80-IC OF PROFIT OF EXEMPT UN IT 0 40 40 TAXABLE INCOME 60 0 60 14 26. THE ASSESSING OFFICER IS DIRECTED TO RECOMPUTE THE DEDUCTION UNDER SECTION 80IC OF THE ACT KEEPING IN MIND THE ABOVE. THE GROUND NOS. 6 & 7 RAISED BY THE ASSESSEE ARE THUS, PARTLY ALLOWED. 27. THE GROUND NO.8 RAISED BY THE ASSESSEE IS NOT P RESSED. ACCORDINGLY, THE SAME IS DISMISSED AS NOT PRESSED. 28. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD DECEMBER,2013. SD/- SD/- ( T.R.SOOD) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 23 RD DECEMBER, 2013 POONAM COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT(A), THE CIT, DR ASSISTANT REGISTRAR ITAT,CHD.