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
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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
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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
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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
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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
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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,
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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:
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"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
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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
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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
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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
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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.
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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
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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
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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.
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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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