Whether when company's name and products are being advertised or financial results being published, there is any rationale for segregating such expenditure Unit-wise - NO: ITAT

THE issue before the Bench is - Whether when company's name and products are being advertised or financial results being published, there is any rationale for segregating such expenditure Unit-wise. And the answer is NO.

Facts of the case

A) The assessee concern has raised a ground with regard to the allocation of certain expenses to the assessee's Dehradun Unit, exigible to deduction u/.80-IC, viz. advertisement expenses, legal and professional expenses, audit expenses. It was in the business of manufacture of rectifiers, transformers, devices, thyristors, etc. for telecommunication, railways and defence departments, operating through different units, of which only the Dehradun unit was an eligible undertaking

u/s.80-IC. It had claimed a meager allocation to the Dehradun unit, so that the bulk of the expenditure under the said heads of account stood allocated to non-80-IC units, purportedly on the basis of actual, AO did not found the same acceptable in the absence of proper substantiation of its claims by the assessee and, accordingly, allocated the same on the basis of the turnover of the different units. On appeal, CIT(A) found in respect of the advertisement expenditure, as indeed had the AO prior thereto, that the said expenditure stood incurred for the company's products and, therefore, could not be segregated, and would stand to be allocated among the said units. With regard to the legal and professional expenses, CIT(A) directed AO to verify the assessee's claim of some expenditure, forming part thereof, as incurred only in relation to and pertaining to the Mumbai unit, so that it would not stand to be allocated. Vide its ground nos. 2 & 3, the assessee impugns the allocation of interest and finance charges, which stood allocated both by the assessee as well as the A.O., by adopting different methods, the allocation by AO, having found confirmation by CIT(A), would be essentially as to whose method was, in the given facts and circumstances of the case, more appropriate.

B) The first ground of the Revenue's appeal agitates the deletion of the disallowance on account of interest attributable to capital work-in-progress (CWIP). The deletion by CIT(A) was by following the order by the tribunal in the assessee's case for the immediately preceding year. The Revenue was in appeal, contending that the decision by the tribunal would not apply in-as-much as the facts for the current year were different.

C) The issue pertain to depreciation allowance exigible on UPS. While the assessee claims it at 60%, on the basis that it forms part of its computer system, which was entitled to depreciation at that rate, the stand of the Revenue was that the same was only an electrical equipment that was attached to the computer, and which by itself would not make it a part of the computer system, thus the the normal rate of 15% would hold.

D) During assessment, AO had made addition u/s 145A toward Modvat/VAT in computing the assessee's business income u/s.28 on the basis that tax audit report, wherein, assessee's auditors had certified a decrease in the profit by the impugned sum, being in respect of MODVAT/VAT. On appeal, it found favour with the CIT(A) on the basis that the assessee had consistently followed a scientific method in valuing its stocks from year to year. Accordingly, it had paid taxes on the enhanced profit due to the valuation of the closing stock till the immediately preceding year. However, for this year, on account of a decrease in the closing stock, there had been a decline in the valuation of the closing stock and, accordingly, a decrease in the profit reckoned with reference to section 145A, and which therefore could not be ignored merely because there was a decrease in profit. The same was, accordingly, deleted.

E) The last ground of the Revenue's appeal was related to the disallowance of prior period expenses, in the sum of Rs.6,24,247/-. The same again finds reflection per the assessee's TAR, even as there was a net gain in-as-much as the assessee had booked both, the income as well as the expenses, relating to the prior period/s. On appeal, it was contended that the expenditure, though pertaining to a prior period, would stand to be allowed for the current year in-as-much as the expenditure stood crystallized only during the current year. The same stood allowed on that basis, so that the Revenue is in appeal.

Held that,

A) ++ we are unable to discern any controversy, much less one that should warrant travelling to the stage of the second appellate authority. This is as admittedly the allocation is to be made, and necessarily so, where there is an expenditure which is incurred for the company as a whole, while the expenditure incurred for the purposes of or in relation to a particular unit would stand to be excluded from allocation, form as it does, part of the expenditure of the relevant unit. The assessee has units located at Dehradun, Nasik and Mumbai; the latter two being non 80-IC units. Further, as explained, the products manufactured by the different units are not the same. The assessee has allocated the entire expenditure on the basis of the same being unit specific, so that the same is toward a particular unit, precluding allocation by adopting some method, seeking to justify the same by listing the purpose of and the unit in relation to which the expense/s has been incurred. We also observe no enquiry by the A.O. in the matter, with the assessee duly explaining the same vide its letters. The Revenue, to be fair, has in fact accepted the assessee's allocation for most part, so that the dispute survives only in respect of three items, besides interest and financial charges, each of which we shall deal separately as under:

a) Advertisement and Publicity expenses

The allocation for the Dehradun unit, at Rs.21,400/-, is in respect of the advertisement for placements. The same is decidedly in order in-as-much as the expenditure is unit specific. In fact, we observe another expense for Rs.4,83,018/- toward placement, which includes for two positions at Dehradun and Mumbai units each, so that the expenditure on the said insertion would stand to be divided equally between the Dehradun and Mumbai units, which has not been made. Apart there-from, the advertisement expenditure is in respect of products, in the national media; for fixed deposits; for publishing results; and in commercial publications. We are in agreement with the Revenue authorities that the same cannot be separated. When the company's name and products are being advertised or published, or the expenditure is for the purpose of the company as a whole, as for publishing financial results; in the register of Indian manufacturers, ITEZ, etc., we do not see any rationale for segregating the same unit wise. In fact, as we observe, the company, toward this, apart from making a bald statement that the product/s advertised is not manufactured at the 80-IC unit, has made no specific case on the said lines at any stage, including before us. As such, other than the expenditure on placement, which we have clarified to be unit specific, the balance impugned expenditure would stand to be allocated on some reasonable basis, as 'turnover';

b) Legal and professional charges

The expenditure incurred for the Dehradun unit is at Rs.69,119/-. The assessee had clearly specified the nature of the expenditure. The same, as we observe, is in respect of specific jobs, assignments, i.e., is unit specific, so that we do not consider any reason for proportioning the same across different units. Though, therefore, we are in principle in agreement with the stand of the assessee, we observe some expenditure to have been incurred at the entity level, though appropriated to the Mumbai unit, which being incurred in relation to the company as a whole, would require being allocated amongst different units. Further, there are expenses, nature of which would require being clarified in further detail in-as-much as the same could also have relation to more than one unit. The nature of the expenditure classified as 'others' being not specified, though listed under different units, it is not possible for us to express any opinion in its respect, so that the allocability of the same, as in the case of other expenses listed above, would stand to be determined upon stating their nature and purpose. The matter would, therefore, require restoration for the purpose of verification of such indeterminate expenditure, and allocation, as appropriate, i.e., either to the specific unit or on the basis of turnover, to the file of the A.O;

c) Audit Expenses

The audit expenses are for the assessee as a company and, therefore, would require being allocated amongst its different operating units. The allocation is accordingly upheld. The assessee relied on the decision in the case of CIT vs. Hindustan Liver Limited 2012-TIOL-876-HC-MAD-IT. As a perusal of the said decision shows, court upheld the order by the Tribunal principally on the ground that it had only followed its order for the immediately preceding years which had not been challenged by the Revenue. The issue before us is primarily factual, which in our view does not give rise to any question of law, much less a substantial question of law. When the assessee operates through different production units, the common expenditure at the entity or the corporate level is necessarily required to be allocated to the different operating units to determine the income attributable thereto, on some reasonable basis. The turnover stands, in fact, regularly followed, across the length and breadth of the country, as a reasonable basis for allocation among different functional units. The decision by the apex court in the case of Consolidated Coffeee Ltd. vs. State of Karnataka [2001] 248 ITR 432 (SC), also referred in the said decision, if anything, only upholds the same as a valid basis for allocation. The assessee has also not suggested any more appropriate parameter for allocating the common expenditure, incurred for the purpose of more than one unit or all the units or as a company as whole, so that we find no reason not to uphold the allocation based on this parameter, representing the volume of activity at a particular unit. We decide accordingly';

d) Interest expenditure

The interest expenditure stands allocated to the Dehradun unit at Rs.4.14 lacs by the assessee on the basis of the net current assets of the Dehradun unit to that of the company as a whole. We find the same to be a valid basis. We say so as the perusal of the balance-sheet reveals secured loans to be principally toward working capital. Further, the company has adequate capital and reserves to finance the fixed assets, implying that the borrowed capital, i.e., unsecured loans, is also deployed toward working capital. The said allocation, thus confirmed in principle, would however be required to be verified by the A.O. in-as-much as we find no finding by the Revenue authorities in relation thereto, and, two, is only for interest expenditure at Rs.54.26 lacs. The balance finance cost of Rs.27.69 lacs, is, as we observe, qua bank charges and brokerage and deposits and loans. The brokerage expenses would definitely require being similarly allocated, i.e., as the interest expense. Toward the bank charges, as explained by the assessee during hearing, is principally on opening LC and retirement of bills, which have no relation to the Dehradun unit but only to the working of the Mumbai unit. If so, no part thereof would require being allocated, while, if and to the extent not so, the A.O. shall, after determining the nature thereof, allocate the same on some reasonable basis. The matter to that extent is restored back to the file of the A.O. for proper verification of the assessee's claim and a decision on merits by issuing definite findings of fact, and after allowing reasonable opportunity of hearing to the assessee. We decide accordingly.

B) ++ we have perused the order by the tribunal, which is essentially fact based, finding the assessee to have sufficient capital and reserves, besides internal accruals, to fund the CWIP. For the current year, in fact, the assessee's case is unimpeachable in-as-much as, rather than witnessing an outlay on CWIP, there has been, on the contrary, a decline therein, i.e., from Rs.359.99 lacs (as on 31.03.2008) to Rs.100.47 lacs as at 31.03.2009, the relevant year-end, the addition for the year being at Rs.8.98 lacs. That apart, the capital and reserves have also witnessed an increase during the current year. We, in view of the foregoing, find no merit in the Revenue's case and, accordingly, dismiss its ground;

C) ++ the tribunal in the assessee's case for A.Y. 2008-09, while appreciating the case of both the parties, had restrained from rendering any finding of its own in the matter, which was essentially of fact, and decided the matter following the decision by Delhi HC in the case of CIT vs. Orient Ceramics & Industries Ltd 2011-TIOL-68-HC-DEL-IT. The said matter having been decided by the tribunal for an earlier year, following the decision by a higher forum, we see no reason to disturb the same; no contrary decision, much less by the jurisdictional high court or by the apex court, having been brought to our notice for us to consider revisiting the issue. We decide accordingly, dismissing the Revenue's ground;

D) ++ the assessee admittedly follows exclusive method of accounting. It is, therefore, required to furnish per its audit report the effect of the deviation on the profit or loss with reference to section 145A and which it provides per Annexure 8 to the TAR. The same, as stated, results in a decrease in profit at Rs.26.37 lacs, detailed at Annexure 8 to TAR, being in respect of MODVAT (Rs.16.44 lacs) and VAT (Rs.9.93 lacs). We fail to observe any controversy here; section 145A being mandatory in its application. As such, irrespective and notwithstanding the method of accounting being regularly followed by the assessee in computing the business income assessable to tax u/s.28, section 145A, to the extent applicable, would have to be given effect to. Whether the same results in an increase in the profit for a particular year or a decrease, is another matter altogether, and toward which we observe no adverse finding by the A.O. In the absence of any infirmity or error having been found by the Revenue, we find no reason to disturb the same, which is in fact unexceptional and has found favour with CIT(A) on the same basis. The same is accordingly confirmed. We decide accordingly;

E) ++ we find no substance in the assessee's case, which has since found acceptance by the CIT(A). There is, firstly, no correlation whatsoever between the income (for the prior period) booked by the assessee, which stands to be assessed u/s.28 r/w s.5, and the expenditure, similarly claimed. The expenditure would, on the other hand, stand to be allowed u/s. 37(1). The assessee admittedly maintaining its accounts on mercantile basis, the claim for expenditure could be allowed to it only on the basis of its' accrual. No material or evidence in this respect stands led by the assessee at any stage, including before us. That is, the issue is legal, and different considerations, based on the relevant provisions of law, coupled with facts, would apply, and no general plea, by netting income and expenditure, which is without any basis in law, would hold. No doubt, where the expenditure is in dispute, it would stand to arise or inure only on the resolution of the dispute. However, as afore-stated, there is no whisper or an iota of evidence toward any subsisting dispute, so that the same is only a bald plea. There is, accordingly, no basis to hold that the said expenses had crystallized during the current year. In fact, there is nothing to evidence even the delayed receipt of claim by the creditor, i.e., during the current year, which though would be of little moment in-as-much as the expenditure would stand incurred only on the basis of the underlying contracts and, in any case, could be provided for on the basis of the best assessment as on the date of finalization of the accounts for the relevant year. Needless to add, no case in this regard has been made out before any authority, including before us. We decide accordingly, and the Revenue succeeds. In the result, the assessee's appeal is partly allowed and partly allowed for statistical purposes, and the Revenue's appeal is partly allowed.