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Pragati Paper Industries Ltd., 10/5, East Patel Nagar, New Delhi. Vs. Addl. CIT, Range-14, New Delhi.
August, 21st 2015
           IN THE INCOME TAX APPELLATE TRIBUNAL
                 (DELHI BENCH "F" NEW DELHI)
         BEFORE SHRI I.C. SUDHIR AND SHRI T.S. KAPOOR

                          ITA Nos. 4512/Del/2013
                          Assessment Year: 2007-08
Pragati Paper Industries Ltd.,       vs.         Addl. CIT,
10/5, East Patel Nagar,                          Range-14,
New Delhi.                                       New Delhi.
 (PAN: AABCP7684H)
(Appellant)                            (Respondent)

                          ITA Nos. 6232/Del/2012
                          Assessment Year: 2008-09
Pragati Paper Industries Ltd.,       vs.         Addl. CIT,
10/5, East Patel Nagar,                          Range-14,
New Delhi.                                       New Delhi.
(PAN: AABCP7684H)
      (Appellant)                             (Respondent)

                          ITA Nos. 5152/Del/2013
                          Assessment Year: 2009-10
Pragati Paper Industries Ltd.,       vs.         Addl. CIT,
10/5, East Patel Nagar,                          Range-14,
New Delhi.                                       New Delhi.
 (PAN: AABCP7684H)
(Appellant)                            (Respondent)

                   Appellant by: Shri K. Sampath, Adv.
                  Respondent by: Shri Vikram Sahay, Sr.DR

                          Date of hearing :   04 .06.2015
                   Date of pronouncement:     20 :08.2015

                                 ORDER

PER I.C. SUDHIR: JUDICIAL MEMBER
      In all the three appeals, the assessee has questioned First Appellate

Order on the common ground involving the issue as to whether the Learned
                                                                           2


CIT(Appeals) was justified in allocating the remuneration to directors, audit

fee and travelling expenses towards income of unit exempt under sec. 80IA

and 80IC of the Act and thereby reducing the exemption available under

these sections?

2.    Heard and considered the arguments advanced by the parties in view

of orders of the authorities below, material available on record and the

decisions relied upon.



3.    The facts in brief are that the assessee company is a paper

manufacturer with units in Punjab and at Kala Amb (Himachal Pradesh).

The assessee has also a captive power generating plant at Punjab unit and the

power generated by this plant was exclusively used by the assessee on paper

unit in Punjab. The assessee has claimed deduction under sec. 80IA for this

power unit at Punjab and also claimed deduction under sec. 80IC for paper

unit at Kala Amb. In the assessment year 2007-08, the return of income was

filed at a total income of Rs.15,86,54,540 and the assessment was completed

under sec. 143(3) after disallowing Rs.85,76,544 under sec. 80IA and

Rs.18,36,000 under sec. 80IC of the Act. Learned CIT(Appeals) had

confirmed the disallowance made by the Assessing Officer. However, the

ITAT vide its order dated 07.1.2011 had set aside both the disallowances to
                                                                         3


the file of the Assessing Officer for fresh consideration based on the

additional evidence filed before the ITAT. In the assessment framed under

sec. 143(3)/254 of the Income-tax Act, 1961 dated 30.11.2011, the

Assessing Officer had restored the same disallowances of Rs.85,76,544

(consisting of Rs.71,27,544 on account of valuation of power @ Rs.4.68 per

unit + Rs.14,49,000 on account of allocation of expenditure relatable to

power unit) under sec. 80IA and Rs.18,36,000 under sec. 80IC of the

Income-tax Act, 1961. The Learned CIT(Appeals) has deleted Rs.71,27,544

i.e. the addition made on account of valuation of power unit at the rate of

Rs.4.68 per unit upheld the remaining disallowances.



4.    Similar are the facts with different amounts in the remaining

assessment years involving the same issue i.e. reallocation of expenses for

the eligible units under sec. 80IA for power unit and under sec. 80IC for

paper unit at Kala Amb.



5.    In support of the ground, the Learned AR reiterated submissions made

before the authorities below. The Assessing Officer had apportioned the

expenses incurred on directors' remuneration, travelling and conveyance of

directors and audit fees towards paper manufacturing unit in Punjab and the
                                                                           4


power unit in Punjab as well as paper unit in Kala Amb in respect of which

deduction under sec. 80IA and 80IC of the Act were claimed. He submitted

that the assessee had separate directors for the power unit in Punjab and

paper unit at Kala Amb. There was also separate director at the headquarter.

Salary and travelling expenses etc. of the separate directors and other staff

were debited in the accounts of the respective unit.   The Assessing Officer

while restoring the disallowances made in the original assessment order has

not pointed out any defect or any specific material in the accounts which

would call for the allocation of expenses as made by him in the impugned

assessment order. The Learned AR submitted further that observations of the

Assessing   Officer   that   no   remuneration,    travelling   expenses   of

directors/managers were debited in the accounts de void of facts and logics.

On the other hand, all the expenses of the directors/managers of the

respective units were debited in the accounts of the respective units. He

submitted that copies of accounts of the said units showing directors'

remuneration, traveling expenses, etc. separately debited in the accounts of

the power unit and manufacturing unit at Kala Amb are placed in the paper

book. He submitted that accounts are audited and separate report of the

chartered accountant in the prescribed form No. 10CCB was also filed with

the return. No defect in the said audit report was pointed out by the
                                                                           5


Assessing Officer. The Learned AR contended that the assessee had fully

complied with the provisions of sec. 80IA(7) of the Act. Thus, allocation

made by the Assessing Officer was arbitrary and unjustified. He submitted

that when the services of directors are identifiable qua respective unit and

that remuneration, travelling expenses were debited in the books of account

of respective unit, there is no justification to allocate directors'

remuneration, travelling expenses of manufacturing unit in Punjab to the

other units on presumption. He submitted that the managing directors'

remuneration is booked at head office because he is not directly managing

the units and persons employed there are managing the affairs. Therefore,

this expense is not required to be allocated to the units.






6.    Regarding the audit fee, the Learned AR submitted that it is debited in

the head office as per accounting principles and practice. The assessee

maintained unit-wise books of account and the accounts of each of three

units were duly audited and authenticated. No specific defect or discrepancy

was pointed out by the Assessing Officer in the audit report. Thus, the

deduction of the claim under sec. 80IA of the Act for the power unit in

Punjab and under sec. 80IC for the paper unit in Kala Amb made by the

Assessing Officer in the claim of eligible profit of the power unit in Punjab
                                                                           6


and the paper unit in Kala Amb. should be held to be unjustified. The

Learned CIT(Appeals) was thus not justified in upholding the assessment

order. The Learned AR referred page No. 1 to 14 of the paper book i.e. copy

of Punjab Unit balance sheet, profit and loss account and schedule of

director's, manager's remuneration, travelling expense etc.



7.    Without prejudice to the above submissions and in alternative plea,

the Learned AR submitted that the reduction of the eligible profit under sec.

80IA and 80IC of the Act by allocating directors' remuneration, travelling

expenses, etc. merely on estimate and not on concrete material on record is

unjustified and wrong on facts and in law. He contended that the allocation

made by the Assessing Officer is excessive and disproportionate in as much

as the allocation of directors' remuneration, travelling expenses etc. to the

Punjab Paper Unit amounted to double Directors' remuneration, travelling

expenses, etc. for Kala Amb Unit. He pointed out that Director's

remuneration has already been debited in the accounts of the Kala Amb

Paper Unit. Similarly, vehicle running and maintenance expenses has also

been debited in the accounts of Kala Amb Paper Unit. In addition to this

directors' travelling and conveyance expenses were already debited in Kala

Amb Unit. Therefore, further allocation of directors' remuneration,
                                                                              7


travelling expenses etc. to this unit made by the Assessing Officer in the

impugned assessment order has resulted in the reduction in the eligible profit

by further amount is totally unjustified and wrong.



8.    In support of the above alternative submissions, the Learned AR for

example submitted that in the assessment year 2009-10, directors'

remuneration amounting to Rs.16,80,000 had already been debited in the

account of the Kala Amb Paper Unit. Similarly, vehicle running and

maintenance expenses of Rs.1,62,851 was debited in the accounts of Kala

Amb Paper Unit. In addition to this directors' travelling and conveyance

expenses at Rs.21,750 was already debited in Kala Amb Unit. Thus,

directors' remuneration, travelling expenses, etc. had already been debited in

the account of Kala Amb Unit. Therefore, further allocation of directors'

remuneration, travelling expenses, etc. to this unit made by the Assessing

Officer in the impugned assessment order which resulted in to the reduction

in the eligible profit by Rs.13,68,706 is totally unjustified and wrong. If this

alternative plea is allowed then directors' remuneration, travelling expenses,

etc. between the two units, namely, the Power Unit and Punjab Paper Unit

will be reallocated as under:
                                                                             8


        "If your honour does not allow our Ground No.2 in full as prayed in
        the grounds of appeal but accepts our above submissions then your
        honour will have to allocate the Directors' remuneration, travelling
        expenses, etc. between the two units, namely the Power Unit and
        Punjab Paper Unit No. 1. This reallocation will be as under:



                              Punjab Paper Punjab               Kala    Amb
                              Unit         Power Unit           Paper Unit
Turnover of Unit     12246,36 10922.13     1324.24

Directors'              136.80     122.00          14.80               Nil
remuneration
Director's                4.97       4.43           0.54               Nil
travelling
expenses
Audit fee                 0.82       0.73           0.09               Nil

Total                  142.49       127.16         15.43

Disallowance in                                 13.86           13.68
eligible profit as
per A.O
Difference as a                                + 1.57          -13.68
result           of
allocation to the 2
units only as per
Submissions.
Relief allowable = Rs.13.68 Lac (-) Rs.1.57 Lac = Net Rs.12.11 Lac



9.      The Learned Senior DR on the other hand tried to justify the orders of

the authorities below with the submission that they have made and upheld

the claimed disallowances after discussing the issue in detail in compliance
                                                                             9


of the order of the ITAT. The Assessing Officer in the second round again

afforded sufficient opportunity to the assessee to establish genuineness of its

claim made under sec. 80IA and 80IC of the Income-tax Act, 1961 to which

the assessee has thoroughly failed to. The Assessing Officer was thus having

no option but to reallocate the expenses on proportionate basis as provided

under sec. 80IA(10) of the Act.



10.   Having gone through the orders of the authorities below, we find that

in the original assessment, similar disallowances under secs. 80IA and 80IC

of the Act were made. The same were upheld by the Learned CIT(Appeals)

against which the assessee went in second appeal before the ITAT in the

assessment year 2007-08. Before the ITAT, regarding deduction claimed

under sec. 80IC of the Act against the paper unit at Kala Amb, the assessee

submitted that it was having separate directors for power unit at Punjab and

paper unit at Kala Amb and head office and accordingly, the profit and loss

account of unit was prepared claiming salary of respective directors in

distinguished units. Regarding the deduction claimed under sec. 80IA, in the

power unit in Punjab, the Learned AR submitted that sale price of power @

Rs.4.95 per unit was adopted by the assessee, the Assessing Officer,

however, applied the rate of Rs.4.68 per unit and worked out the eligible
                                                                           10


profit accordingly. The assessee contended that it has explained the nature

of duties of the respective director qua the assigned unit, however,

authorities below have not adverted to the explanation of the assessee in this

behalf and on assumption, expenses have been allocated. In the assessment

year 2007-08 on the issue of power rate and in the assessment years on the

common issues of reduction of disallowances under sec. 80IA and 80IC of

the Act, the appeal was preferred before the ITAT and the ITAT set aside the

matter to the file of the Assessing Officer to decide the issues afresh after

considering the information received under RTI Act by the assessee

regarding the rate of power per unit and other submissions of the assessee

justifying the claimed deduction under sec. 80IA of the Act for the power

unit in Punjab and 80IC for the paper unit at Kala Amb. In compliance, the

Assessing Officer after discussing the case of the assessee has restored the

similar amount of disallowances made under sec. 80IA and 80IC of the Act

as made in the original assessment. Before the Learned CIT(Appeals), the

assessee questioned the action of the Assessing Officer and the Learned

CIT(Appeals) allowed relief of Rs.71,27,544 in assessment year 2007-08 on

the issue of adoption of value of power per unit @ Rs.4.92 per unit for

computation of deduction under sec. 80IA of the Act on power unit. The

Learned CIT(Appeals) has however, upheld the action of the Assessing
                                                                             11


Officer regarding the disallowance of Rs.14,49,000/- under sec. 80IA in

relation to power plant in Punjab and Rs.18,36,000 under sec. 80IC with

regard to paper unit at Kala Amb. The Assessing Officer has dealt with the

issue in para No.3.2.2 to 3.2.3 of the assessment order reproduced

hereunder:



      "3.2.2 In the course of present proceedings the assessee reiterated its
      earlier reply and also drew attention to para 3 of ITAT's order
      wherein the claim of having separate directors for power unit, paper
      unit at Kala Amb (HP) and head office (read paper unit in Punjab)
      was made.


      3.2.2    The contention of the assessee that every unit had different
      director is not verifiable from the record. In the profit and loss account
      of Power Unit not a single rupee has been debited on this account. The
      contention that MD's remuneration has been booked at head office
      only because he is not directly managing any unit is flawed,
      contradictory and against all norms of accounting principles as well as
      general practice. First of all no evidence has been brought on record to
      prove that the MD did not do any thing, not even took any policy
      decision, for the other two units. Secondly by stating that the MD
      `did' not manage any unit directly' , the assessee has at least conceded
      that he did not something indirectly for other units. In fact the
      argument is a total figment of imagination as far as power unit is
      concerned because not even a single rupee has been debited to this
                                                                      12


unit on account of salary of any employee also. This means this unit
had neither any professional employee nor any director to run its
affairs and the unit ran on its own with the guidance and managerial
skills of labour and still could achieve a turnover of Rs.14 crores and
net profit of 47.80%. Moreover looking at the addresses of the head
office and power unit, it is against all odds that MD would never have
given any time to the unit by personally visiting it specially when no
professional help was engaged. Even otherwise the general practice is
to allocate such expenses of head office to all the units as in the
process of decision making the Head Office executives spend time in
respect of each unit. In fact the theory of head office itself is full of
holes. The head office is nothing but paper unit at Punjab whose
profits are not eligible for any deduction under the Act. The assessee
had the full liberty to designate any unit as Head Office. And it
conveniently made the taxable unit as its Head Office as this was the
most profitable option. This has been the general tendency amongst
the tax payers and experience of the legislature as well. That is why
the sub-sections (10) of Sec. 80IA is there on the rule book from the
first very day.


3.2.3 For the reasons discussed above, the assessee had failed to
establish its case and rebut the conclusions arrived earlier in the
original assessment. The disallowances made out of deduction on
account of over pricing of power supply and non/undertaking of
director's remuneration etc. are given effect to as under:


Allocation of expenditure common to all units.
                                                                            13


      Nomenclature Total      Turnover of                 Turnover
                                                   Turnover
      of           amount (in Punjab                      of
                                                   of Punjab      HP
      expenditure  Lakhs)     Paper Unit                  (Kala)
                                                   Power Unit
                              (In lakhs)                  Paper Unit
                                                   (In Lakhs)
                                                          (In Lakhs)
                       Rs.14920.57 Rs.11614.76 Rs.1461.15 Rs.1844.66
      Director's       Rs. 136.80    Rs. 106.49    Rs. 13.34     Rs.16.91
      remuneration
      Directors'       Rs. 11.03     Rs. 8.58      Rs. 1.08      Rs. 1.36
      Travelling
      Audit Fee        Rs. 0.75      Rs. 0.58      Rs. 0.07      Rs. 0.09
      Additional Expenditure to be allowed      Rs. 14.49 Rs. 18.36
      Eligible units







11.   Similar orders on the issue of allocation of expenses in eligible units

under sec. 80IA and 80IC have been passed by the authorities below in the

remaining assessment years 2008-09 and 2009-10. We do not find reason to

interfere with the orders of the authorities below regarding the making of

reduction in the disallowances under sections 80IA and 80IC of the Act on

account of reallocation of directors' remuneration, travelling expenses etc.

on proportionate basis by the Assessing Officer in absence of the evidence

furnished by the assessee that all the expenses were separately maintained in

the eligible units. We, however, find substance in the alternative arguments

of the Learned AR that the allocation made by the Assessing Officer on the
                                                                             14


proportionate basis was excessive and disproportionate inasmuch as

allocation of directors' remuneration, travelling expenses and audit fee etc.

to the Punjab Paper Unit amounted to double directors' remuneration,

travelling expenses etc. for Kala Amb Unit. We thus set aside the matter to

the file of the Assessing Officer to examine the alternative contention made

by the Learned AR in this regard and while allocating the expenses to the

eligible units take into consideration the expenses, if any, already debited by

the assessee in these eligible units while computing the deduction claimed

under sec. 80IA and 80IC of the Income-tax Act, 1961 on proportionate

basis to avoid double addition, after affording opportunity of being heard to

the assessee. The alternative plea is thus allowed for statistical purposes. The

ground is allowed for statistical purposes.



12.   In the assessment year 2008-09, one more issue has been raised

regarding reduction of insurance claim received from the income eligible for

exemption under sec. 80IC of the Act, reducing the exemption.

13.   Considered the argument advanced by the parties on the issue.

14.   The Assessing Officer observed in the working of the profit of Kala

Amb Unit that these appeared insurance receipt of Rs.5,56,165 and interest

of Rs.5,534 under the head `other income'. There also appeared loss of
                                                                             15


Rs.2,00,921 on account of fall of factory wall. The assessee had taken the

loss on account of factory wall. The assessee had taken the loss on account

of factory wall into consideration in computing the profit of the undertaking

but it had not reduced the insurance claim and interest from profit for

claiming deduction under sec. 80IC of the Act. In absence of satisfactory

explanation by the assessee, the Assessing Officer following the decision of

Hon'ble Supreme Court in the case of Liberty India ­ 317 ITR 218 (S.C)

held that there is no first degree nexus between the insurance/interest receipt

and business undertaking hence, it does not form part of net profit of eligible

industrial undertaking and the same cannot be treated as income derived

from industrial undertaking. The Learned CIT(Appeals) has upheld the same

with this noting that the assessee did not furnish evidence to substantiate that

the claim that these were only repair expenses and not capital expenses. He

noted further that Rs.2,00,921 on account of fall of factory wall was already

taken into consideration by the assessee.

15.    Since the assessee has failed to improve its case before us on the

issue, we do not find reason to interfere with the first appellate order in this

regard. Same is upheld. The issue is thus decided against the assessee.
                                                                        16


16.   In result, the appeals for the assessment years 2007-08 and 2009-10

are allowed for statistical purposes and appeal for assessment year 2008-09

is partly allowed.

      Order pronounced in the open court on 20 .08.2015

                        Sd/-                                    Sd/-
                ( T.S. KAPOOR )                        ( I.C. SUDHIR )
             ACCOUNTANT MEMBER                       JUDICIAL MEMBER

Dated: 20 /08/2015
Mohan Lal
                         Copy forwarded to:
                         1)     Appellant
                         2)     Respondent
                         3)     CIT
                         4)     CIT(Appeals)
                         5)     DR:ITAT
                                               ASSISTANT REGISTRAR


                                                   Date
Draft dictated on computer                    10.08.2015
Draft placed before author                    10.08.2015
Draft proposed & placed before the second
member
Draft discussed/approved by Second Member.
Approved Draft comes to the Sr.PS/PS       21.08.2015
Kept for pronouncement on                  20.08.2015
File sent to the Bench Clerk               21.08.2015
Date on which file goes to the AR
Date on which file goes to the Head Clerk.
Date of dispatch of Order.

 
 
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