ITAT, ‘A’ BENCH, KOLKATA
Section 40C of the Act applies only in respect of Head Office expenses of a non-resident and has no application to the computation of deduction under section 80-IA; the head office expenses in the case of the non-resident as per provision of section 44C cannot be equated with the head office expenditure in the case of the resident assessee.
Tide Water Oil Co. (I) Ltd.
ITA No. 1791 to 1793/Kol/2007
17. We have carefully considered the issue in view of the material placed on record, rival submissions, the orders of the lower authorities and the case laws cited the Id. D.R. has correctly pointed out that the ITATJin its decision dated 29-3-2004 for assessment year I 999-2000 in the case of the assessee and order dated 10-9-2004 for assessment year 2000-01 held that the expenditure of Head Office is required to be allocated to Sil^asa Unit for determining its profit for the purpose of Sec.80IA of the Act but was directed to find whether the expenditure was essentially incurred for running Silvasa Unit. The ITAT held that the Assessing Officer finds that the expenditure was essentially incurred for running the Silvasa Unit then the same was liable to be reduced from the profit of Silvasa Unit for computing deduction u/s 80IA but if be finds that the expenditure had nothing to do with the running of the Silvasa Unit and was purely of the corporate nature, such expenditure was not required to be reduced in computing the deduction u/s 80IA. The directions to the A.O. were very specific for assessment year 1999-2000 for assessment year 2000-01. The ITAT directed the Assessing Officer to decide the issue afresh on the basis of the ITAT order for assessment year 1999-2000. For assessment year 1998-99-there was no order for the ITAT on the quantum appeal however, the ITAT had upheld the orders u/s 263 dated 20-11-2002 and 30-1 1-2005 for assessment year 1998-99. The directions for assessment year 1999-2000 and 2000r01 of the ITAT as per its aforestated orders were duly considered while finalizing the fresh assessment for assessment year 1998-99. The assessee has also accepted the order of the ITAT sustaining the action u/s 263 of the Act dated 16-12-2005 for assessment year 1998-99 and the orders of the ITAT dated 29-3-2004 and 10-9-2004 (supra) for assessment year 1999-2000 and 2000-01. Thus, the only issue required to be considered was as to how much expenditure was essentially incurred for running the Silvasa Unit because the same was required to be reduced from the profits of Silvasa Unit for computing deduction u/s 801A. The Id. CIT(A) has also held in his impugned order dated 9-4-2007 that it was clear that as per the principle laid down by the ITAT the ITAT had directed that the essential expenditure out of the corporate expenses must be reduced from the income of the Silvasa Unit but the expenditure that had nothing to do with the running of the Silvasa Unit was not to be reduced from the income of the Silvasa Unit. The Id. CIT(A) has also held that there was no question of allowing or disallowing expenses because the corporate expenses were allowable expenses in the case of the assessee. The Id. C1T(A) has taken note of the fact that the accounts of the unit-; were separately maintained and the appellant claimed deduction on the basis of the separate accounts so maintained, however, corporate expenses were reflected in the accounts of the Head Office and no part of such expenses were reduced from the income of Silvasa Unit and, therefore, the separate excise for quantifying deducting u/s 80IA had to be under taken for the purpose of carrying out the directions given as per the order of the ITAT. The Id. CIT(A) held that each unit of the company must share a certain portion of head office expenses for correct determination of the income of that unit when it was necessary to determine the income of such unit separately and distinctly, otherwise the corporate income of the unit would be more than the income of the assessee to the extent of the head office expenses reflected in the head office alone. The Id. CIT(A), therefore, held that the correct position should be that the head office expenses or corporate expenses should also be allocated to each unit of the assessee in such a manner that the aggregate income of each unit taken together was equal to the income of the assessee as a whole and the exercise of allocation had to be carried out. The Id. CIT(A) also held that with due respect the reference to the Supreme Court judgment in the case of Rajasthan Warehousing Corporation (supra) was misconceived and the decision was not applicable to the computation of profit eligible for deduction u/s 801A because what was applicable was the general principle that if the quantum of deduction u/s 801A was a part or whole of the income of the unit, it was necessary to correctly work out such income by correct application of the accounting principles according to which the overhead cost was to be considered for the purpose of determining the cost of manufacturing of the different products of the business. In the opinion of the Id. C1T(A) it was in this context that the Hon'ble Tribunal in its aforestated orders had given the direction that the Assessing Officer should take into account that expenditure without which the unit could not run and ignore the rest of the expenditure. The Id. CJT(A) also held that the reference to aforestated judgment and to the provision of Sec.l4A was relevant only to the extent they overlap on the aforestated accounting principle. He further held that since the reference to Sec.l4A of the Act by the assessee was only by way of analogy, the submission of the assessee that the CBDT circular on the issue prohibiting the reopening of assessments by applying Sec. MA retrospectively was not relevant to the issue. Thus, according to the Id. CIT(A), the only relevant issue in the appeal of the assessee before him was that the deduction should be granted before reducing the profit by allocated corporate expenses but this claim of the assessee was accepted by the Id. CIT(A) only partly following the direction of the Hon'ble ITAT, as discussed above. For giving effect to the directions of the ITAT as per order dated 29-3-2004 and 10-9-2004 (supra). The Id. CIT(A), however, referred to the provisions of Sec.40C of the Act which provide for allocation of the Head Office expenses in the case of a 'Non Resident' and on the same analogy directed that the amount of Rs.40,34,620/-'considered by him as essential for running the Silvasa Unit should be reduced from the profit of the Silvasa Unit for allowing the deduction u/s 80IA as against the entire amount of Rs. 1,75.73,406/- reduced by the A.O. In our considered opinion, The view of the Id. CIT(A) that the essential expenditure should be determined by making reference to Sec.40C of the Act is not correct because this section has limited application as it applies only in respect of Head Office expenses of a Non Resident and has no application to the computation of deduction u/s 801A of the Act and the analogy drawn by the Id. CIT(A) cannot, therefore, be considered correct. It is also observed that the expenditure for the purpose of Sec.44C meant only the executive and general administration expenditure incurred by the assessee outside India, as is clear from the provisions of clause (iv) of Explanation 2 to Sec.44C of the Act and the expenditure so incurred outside India included the expenditure as per sub clauses (a), (b), (c) and (d) of clause (iv) to Explanation 2 Sec.44CJwhich are re-produced below for the sake of convenience. '
"head office expenditure means executive and general administration expenditure incurred by the assessee outside India, including expenditure incurred in respect of-
(a) rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business or profession;
(b) salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites and profits in lieu of or in addition to salary, whether paid or allowed to any employee or other person employed in, or managing the-affairs of, any office outside India;
(c) traveling by any employee or other person employed in, or managing the affairs of, any office outside India; and
(d) such other matters connected with executive and general administration as may be prescribed. "
18. It can be seen from the details filed by the assessee that the composite expenditure debited to the head office accounts were not incurred outside India. Notwithstanding that the expenditure was incurred in India and the Head Office of the assessee and its various units were all situated in India, the expenditure in question not only included the expenditure similar to that enumerated in the sub clauses (a), (b), (c) and (d) of Clause (iv) to Explanation 2 Sec.44C, which are mainly executive and general administration expenditure incurred by the Non Resident outside India, but also included expenditure under various heads as discussed above including interest, advertising, selling and marketing, repairs etc. The Id. CIT(A) was, therefore, hot correct in restricting the deductible expenditure to Rs.40,32,620/- which was considered less than 5% of the executive and general administration expenses. In our considered opinion the reliance on the provisions of Sec.44C was not correct because the head office expenses in the case of the Non Resident as per the provision of Sec.44C can not be equated with the Head Office expenditure in the case of the resident assessee because the corporate office has incurred substantial expenditure on behalf of its units situated at various places through out the country.
19. We are also of the considered opinion that/jhe provisions of Sec.801A(5) are very clear to the effect that the profits and gains of an eligible business for the purposes of determining the quantum of deduction u/s 801A for the relevant assessment years was to be computed 'as if such eligible business were the only source of income of the assessee during the previous years relevant to the assessment years for which the determination is to be made.! The provisions of sub Sec (5) of Sec.80IA are re-produced below for the sake of convenience.
"Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (I) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year up to and including the assessment year for which the determination is to be made. "
20. As per the clear provision of law laid down as per Sec.80IA(5) of the Act, the profit of Silvasa Unit of the assessee were, therefore, to be computed as if it were the only source of income of the assessee during the relevant previous year. In such a situation the expenditure incurred by the head office to the extent it related to the business of the Silvasa Unit was liable to be deducted while determining the correct profit of the unit for the purpose of computation of deduction u/s 801A of the Act. Since the Hon'ble 1TAT as per its order dated 29-3- 2004 and 10-9-2004 for assessment year 1999-2000 and assessment year 2000-01 had restricted the scope of fresh assessment by the A.O. the only issue before the A.O. was as to how much of the composite expenditure debited in the books of account of the assessee under the head office expenses was to be considered as the expenditure of the Silvasa Unit and in view of the ratio of decision in the case of CIT vs. R.N.Kumar (supra), filed at page 33 to 37 of the Paper Book volume 1 filed by the assessee and relied upon by the Id. counsel of the assessee, the Assessing Officer could not have gone beyond the directions of the ITAT while finalizing the fresh assessment. The Id. C1T(A) has also following this view as per his impugned order sari has*dismissed the grounds of the assessee as per ground No. l (a), l(b) and l(c) of the assessee before him and had considered only the ground no. l(d) relevant to the issue that how much should be the expenditure out of the total corporate expenses which was to be reduced from the profits of Silvasa Unit as per its separate books of account for determining the correct profit of the Silvasa Unit as per provisions of section 80IA.