Amartex Industries Ltd. v. Asstt. CIT

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The Tax PublishersITA Nos. 1056/Chd/2010 & 693 & 1116/Chd/2011 2013 TaxPub(DT) 1905 (Chd-Trib) : (2013) 155 TTJ 0043 Income Tax Act, 1961 --Deduction under section 80-ICComputation Allocation of expenses debited to HO--During the course of assessment proceedings it was noted by assessing officer that assessee had five manufacturing units at different locations, including Baddi unit however, assessee was eligible for claim of deduction under section 80-IC in respect of Baddi unit only, common expenses are to be allocated between Head Office (HO) and branch office in order to determine eligible profits of business at Baddi Unit. Since assessee had computed profits of its units not on sale price of goods manufactured by them but at pre-determined price at which goods were transferred to HO, without accounting for margin of profits, which were reflected in records of HO and retail counters. *Held:* There was no question of allocation of expenses of HO to Baddi Unit, especially because HO had shown profits at close of the year. Further, direct expenses of other units, in no manner, can be attributed to Baddi Units. Selling and distribution, financial expenses and depreciation or assets could not be debited to Baddi Unit. However, in view of fact that turnover of Baddi Unit was 2.54 per cent of total turnover, assessing officer was directed to recompute deduction under section 80-IC after allocating directors' salary, directors' conveyance expenses, professional and auditors remuneration at 2.54 per cent of total turnover. Common expenditure is to be allocated between the HO and the branch office in order to determine the eligible profits of business at Baddi Unit. In the facts of the present case, the assessee is one composite unit consisting of five manufacturing units, one Head Office, one central warehousing unit and more than 100 retail outlets within India. The assessee is entitled to the benefit of deduction under section 80-IC only in respect of Baddi Unit. The assessee for the year under consideration had shown total turnover of Rs. 116.30 crores. The total income declared by the assessee for the year under consideration was Rs. 3.46 crores. The total turnover of Baddi Unit was only Rs. 2.94 crores which was 2.54 per cent of the total turnover of the assessee. The deduction of Rs. 66,49,378 had been claimed by the assessee against the eligible profits of Baddi unit. The said profits were declared by the assessee by following the consistent method of accounting under which it had recorded its earning, i.e., the sale value of the goods sold by it at predetermined price, which was recorded in its books of account for transfer of goods to the central warehousing unit. The goods therefrom are transferred to the retail outlets on the tag price of the goods, i.e., the price to be charged from the end consumer. The difference in the sale price shown by Baddi Unit and the tag price of the goods varies upto 20 per cent. The said gross profit was reflected in the account of Head Office and takes care of the various expenses incurred by the Head Office and the retail counters in order to ultimately sell the products manufactured by the assessee. The assessee was booking its sales on the transfer of the goods to the central warehousing units at a predetermined price, irrespective of the fact that the goods are sold in the market or not. The said goods-were reflected as sold at a predetermined price in the Baddi Unit and the balance profits were accounted for in the books of account of the Head Office. The Baddi unit has no sundry debtors. It is to be kept in mind that the consolidated profits of the company are assessed to tax in the hands of the assessee and only in respect of part of the turnover of Baddi Unit, the assessee had claimed deduction under section 80-IC on the net profits of the said unit. In the entirety of the above said facts and circumstances of the case where the assessee has computed the profits of its business units not on the sale price of the goods manufactured by the unit, but at a predetermined price on which the goods are transferred to its Head Office, without accounting for the margin of profits, which are being reflected in the hands of the Head Office and retail counters, which in turn accounts for the expenses of the Head Office and retail outlets, there is no merit for allocation of expenses of the HO to the Baddi Unit especially because the HO had shown profits at the close of the year. [Para 30] Where the assessee had declared profits of the eligible business on their transfer to warehouse, on a predetermined price and computed the income, irrespective of the fact whether the goods were sold or not, the expenses as tabulated in Table-2 are not to be taken into account for apportionment of expenses of the Head Office to the Baddi unit. In any case, the amounts debited to the P&L a/c of the Head Office were total expenses of the company, i.e., all its units, manufacturing facilities and retail outlets minus the amount shown for the Baddi unit. The expenses considered in Table-2, are repair and maintenance, salary and wages, selling and distribution expenses, printing and stationery, staff welfare, telephone, travelling and rates, taxes and fees. The abovesaid expenditure except selling and distribution are the expenses attributable to different units being run by the assessee and no part of the said expenditure could be held to be attributable to the Baddi unit, even to the extent of its turnover to the total turnover. The direct expenses of other units, in no manner can be attributed to Baddi Unit. Similarly, the selling and distribution expenses are not to be considered in view of the fact that the Baddi Unit is computing its income by reflecting sales of its manufactured items at predetermined price and transferring part of its margin of profits to the Head Office and retail units, which at the end of year had declared profits, which are assessable in the hands of assessee itself. In case these margin of profits are excluded from Head Office and included in the hands of Baddi Unit, the resultant figure after debiting even the allocated expenditure on selling and distribution, would be eligible for the benefits of deduction under section 80-IC. [Para 31] There is merit in the plea of the assessee that where no part of the borrowed funds were utilized for setting up of Baddi unit, the said financial expenditure could not be attributed to the running of Baddi unit. The assessing officer has failed to bring on record any evidence to the contrary. Similarly, depreciation claimed on assets which are installed at different units of the assessee and their user could not be attributed to the Baddi unit. The only expenses to be considered for allocation are directors' salary, directors' travelling and conveyance, legal and professional expenses and auditors remuneration. In view of the orders of the authorities below in accepting the contention of the assessee that the turnover of Baddi unit was 2.54 per cent of the total turnover, assessing officer is directed to recompute the disallowance under section 80-IC by excluding 2.54 per cent of the total expenditure of directors' salary, directors' travelling and conveyance expenses, legal and professional expenses and auditors remuneration being attributable to Baddi unit. The balance deduction under section 80-IC is allowable in the hands of assessee. The assessing officer shall afford reasonable opportunity of hearing to assessee. There is no merit in the orders of authorities below, that the said addition were made on agreed basis, in view of submissions of the Authorised Representative for the assessee before us and written submissions filed before Commissioner (Appeals). Mere providing the details at the behest of assessing officer does not imply agreed addition. [Para 32] SUBSCRIBE FOR FULL CONTENT

The Tax PublishersITA Nos. 1056/Chd/2010 & 693 & 1116/Chd/2011
2013 TaxPub(DT) 1905 (Chd-Trib) : (2013) 155 TTJ 0043

Income Tax Act, 1961

--Deduction under section 80-ICComputation Allocation of expenses debited to HO--During the course of assessment proceedings it was noted by assessing officer that assessee had five manufacturing units at different locations, including Baddi unit however, assessee was eligible for claim of deduction under section 80-IC in respect of Baddi unit only, common expenses are to be allocated between Head Office (HO) and branch office in order to determine eligible profits of business at Baddi Unit. Since assessee had computed profits of its units not on sale price of goods manufactured by them but at pre-determined price at which goods were transferred to HO, without accounting for margin of profits, which were reflected in records of HO and retail counters. Held: There was no question of allocation of expenses of HO to Baddi Unit, especially because HO had shown profits at close of the year. Further, direct expenses of other units, in no manner, can be attributed to Baddi Units. Selling and distribution, financial expenses and depreciation or assets could not be debited to Baddi Unit. However, in view of fact that turnover of Baddi Unit was 2.54 per cent of total turnover, assessing officer was directed to recompute deduction under section 80-IC after allocating directors' salary, directors' conveyance expenses, professional and auditors remuneration at 2.54 per cent of total turnover.

Common expenditure is to be allocated between the HO and the branch office in order to determine the eligible profits of business at Baddi Unit. In the facts of the present case, the assessee is one composite unit consisting of five manufacturing units, one Head Office, one central warehousing unit and more than 100 retail outlets within India. The assessee is entitled to the benefit of deduction under section 80-IC only in respect of Baddi Unit. The assessee for the year under consideration had shown total turnover of Rs. 116.30 crores. The total income declared by the assessee for the year under consideration was Rs. 3.46 crores. The total turnover of Baddi Unit was only Rs. 2.94 crores which was 2.54 per cent of the total turnover of the assessee. The deduction of Rs. 66,49,378 had been claimed by the assessee against the eligible profits of Baddi unit. The said profits were declared by the assessee by following the consistent method of accounting under which it had recorded its earning, i.e., the sale value of the goods sold by it at predetermined price, which was recorded in its books of account for transfer of goods to the central warehousing unit. The goods therefrom are transferred to the retail outlets on the tag price of the goods, i.e., the price to be charged from the end consumer. The difference in the sale price shown by Baddi Unit and the tag price of the goods varies upto 20 per cent. The said gross profit was reflected in the account of Head Office and takes care of the various expenses incurred by the Head Office and the retail counters in order to ultimately sell the products manufactured by the assessee. The assessee was booking its sales on the transfer of the goods to the central warehousing units at a predetermined price, irrespective of the fact that the goods are sold in the market or not. The said goods-were reflected as sold at a predetermined price in the Baddi Unit and the balance profits were accounted for in the books of account of the Head Office. The Baddi unit has no sundry debtors. It is to be kept in mind that the consolidated profits of the company are assessed to tax in the hands of the assessee and only in respect of part of the turnover of Baddi Unit, the assessee had claimed deduction under section 80-IC on the net profits of the said unit. In the entirety of the above said facts and circumstances of the case where the assessee has computed the profits of its business units not on the sale price of the goods manufactured by the unit, but at a predetermined price on which the goods are transferred to its Head Office, without accounting for the margin of profits, which are being reflected in the hands of the Head Office and retail counters, which in turn accounts for the expenses of the Head Office and retail outlets, there is no merit for allocation of expenses of the HO to the Baddi Unit especially because the HO had shown profits at the close of the year. [Para 30] Where the assessee had declared profits of the eligible business on their transfer to warehouse, on a predetermined price and computed the income, irrespective of the fact whether the goods were sold or not, the expenses as tabulated in Table-2 are not to be taken into account for apportionment of expenses of the Head Office to the Baddi unit. In any case, the amounts debited to the P&L a/c of the Head Office were total expenses of the company, i.e., all its units, manufacturing facilities and retail outlets minus the amount shown for the Baddi unit. The expenses considered in Table-2, are repair and maintenance, salary and wages, selling and distribution expenses, printing and stationery, staff welfare, telephone, travelling and rates, taxes and fees. The abovesaid expenditure except selling and distribution are the expenses attributable to different units being run by the assessee and no part of the said expenditure could be held to be attributable to the Baddi unit, even to the extent of its turnover to the total turnover. The direct expenses of other units, in no manner can be attributed to Baddi Unit. Similarly, the selling and distribution expenses are not to be considered in view of the fact that the Baddi Unit is computing its income by reflecting sales of its manufactured items at predetermined price and transferring part of its margin of profits to the Head Office and retail units, which at the end of year had declared profits, which are assessable in the hands of assessee itself. In case these margin of profits are excluded from Head Office and included in the hands of Baddi Unit, the resultant figure after debiting even the allocated expenditure on selling and distribution, would be eligible for the benefits of deduction under section 80-IC. [Para 31] There is merit in the plea of the assessee that where no part of the borrowed funds were utilized for setting up of Baddi unit, the said financial expenditure could not be attributed to the running of Baddi unit. The assessing officer has failed to bring on record any evidence to the contrary. Similarly, depreciation claimed on assets which are installed at different units of the assessee and their user could not be attributed to the Baddi unit. The only expenses to be considered for allocation are directors' salary, directors' travelling and conveyance, legal and professional expenses and auditors remuneration. In view of the orders of the authorities below in accepting the contention of the assessee that the turnover of Baddi unit was 2.54 per cent of the total turnover, assessing officer is directed to recompute the disallowance under section 80-IC by excluding 2.54 per cent of the total expenditure of directors' salary, directors' travelling and conveyance expenses, legal and professional expenses and auditors remuneration being attributable to Baddi unit. The balance deduction under section 80-IC is allowable in the hands of assessee. The assessing officer shall afford reasonable opportunity of hearing to assessee. There is no merit in the orders of authorities below, that the said addition were made on agreed basis, in view of submissions of the Authorised Representative for the assessee before us and written submissions filed before Commissioner (Appeals). Mere providing the details at the behest of assessing officer does not imply agreed addition. [Para 32]