TMI Blog2011 (7) TMI 1147X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the assessee is now in appeal before this Tribunal. 2. Ground No. 1 taken by the assessee reads as under:- 1 The ld. CIT(A) has erred in sustaining the addition of ₹ 22,91,117/- being disallowance of expenses in violation of Sec 40(a)(ia) of the Incometax Act without properly appreciating the facts, supporting evidence and submissions placed on record. The claim be allowed and the addition be deleted. 3. Briefly stated, the facts giving rise to the aforesaid ground of appeal are that the assessee had claimed deduction for a sum of ₹ 22,91,170/- being expenditure towards freight outward. The AO noticed that the impugned sum was paid without deduction of tax at source. He therefore called upon the assessee to explain as to why the impugned sum should not be disallowed in terms of section 40(a)(ia). In reply, the assessee submitted before the AO that the amount in question was not disbursed by it but by its distributors and hence the assessee was not required to deduct the tax at source. The AO however did not agree with the aforesaid submissions for the detailed reasons given by him in the assessment order which have been summarized in paragraph 6 of the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances and the person engaging the transporters is more liable since distributors are only paying on his behalf. The plea on this ground of appeal is not accepted and the addition of ₹ 22,91,117/- is confirmed subject to adjustment of the amount of TDS deducted by some of the distributors. 12. I rely upon the following decisions in support of my decision on this issue: Hon'ble Supreme Court in the case of Associate Cement Company Ltd. v. CIT (1979) 120 ITR 444. Hon'ble ITAT Chandigarh bench in the case of Partap Hoon v. Addl CIT, Range-1, Chandigarh in ITA No. 536/Chandi/2009. 5. Aggrieved by the order passed by the ld. CIT(A), the assessee is now in appeal before this Tribunal. In support of appeal, it was submitted that the assessee had entered into agreements with its distributors by which the assesseeTorque company was required to meet the entire freight expenses on distribution of its products so as to maintain uniformity in their prices throughout the country. He further submitted that it was the assessee-company, which had engaged the transporters, negotiated their rates/freight charges, loaded its products and thereafter dispatched the cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of expenses of the nature specified in section 40(a)(ia), he must satisfy the prescription of section 40(a)(ia) in that he must deduct tax at source out of such payments and pay the same to the Government. The relevant question is therefore whether the assessee was required to deduct the tax at source u/s 194C out of impugned payments and, if so, whether it had deducted the same and paid to the Government. 8. According to section 194C, any person responsible for paying any sum to any resident for carrying out any work in pursuance of a contract shall, at the time of credit of such sum to the account of the contractor or at the time of payment in cash or by issue of a cheque or draft, whichever is earlier, deduct tax at source out of such payments. Explanation III(iv)(c) to section 194C includes carriage of goods or passengers by any mode of transport other than by railways within the expression work . 9. As already stated earlier, the assessee-company had entered into agreement with its distributors under which the assessee was required to meet the expenses towards freight outward so as to maintain uniformity in prices of its products throughout the country. Perusal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of the Hon ble Supreme Court in Associate Cement Company Ltd. v. CIT, 120 ITR 444 (SC) in support of her decision. On perusal of the aforesaid decisions, we find that the ld. CIT(A) has rightly relied upon them in support of her decision. 11. The submission made on behalf of the assessee that the distributors had deducted tax at source out of such payments and therefore the AO was not justified in making the impugned disallowance does not carry any force for several reasons. One, section 40(a)((ia) fixes the responsibility on the assessee (and none else) claiming deduction of expenses to deduct tax at source and deposit the same with the Government. The aforesaid statutory condition is not satisfied in the present case and therefore the assessee is not entitled to claim deduction of the impugned expenses. Two, as held by the CIT(A), distributors have not deducted tax at source. Three, the judgment in Transmission Corporation of AP Ltd. v. CIT, 239 ITR 587 (SC) referred to by the ld. authorized representative is inapplicable to the facts of the case and also for the reason that it has not been rendered in the context of section 40(a)(ia). 12. In view of the foregoing, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be restored to the file of ld. CIT(A) to enable him to verify the factual position and thereafter pass an appropriate order in this behalf in conformity with law. 16. In reply, the ld. DR supported the order passed by the AO/CIT(A). 17. We have heard both the parties and carefully considered their submissions. The impugned disallowance has been made u/s 43B read with Explanation 3D. According to Explanation 3D, deduction of any sum being interest payable under clause (e) of Sec 43B, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into the loan or advance shall not be deemed to have been actually paid. According to the proviso to Sec 43B, any amount which has actually been paid by the assessee on or before the due date for furnishing the return of income u/s 139(1) in respect of the previous year in which liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return. 18. Perusal of the order passed by the ld. CIT(A) shows that she has proceeded on the basis that the assessee has not filed any bank statement from 1.4.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee claimed before the AO that the remaining cost of project was met out of internal resources of Dera Bassi unit and hence there was no question of capitalising any interest over and above what the assessee had already capitalized in the hands of Baddi unit. The AO proceeded to examine the claim of the assessee. On scrutiny of accounts, the AO found that the funds were provided by Dera Bassi unit to Baddi unit. He accordingly worked out the day to day balance of Baddi unit as appearing in the books of Dera Bassi unit up-to 31.12.2005, which is annexed as Annexure A-4 to the assessment order. The AO noticed that there was always a debit balance in the account of Bassi unit as appearing in the books of Dera Bassi unit. He therefore inferred that Baddi unit was consistently enjoying funds belonging to Dera Bassi unit through diversion of interest-bearing funds from Dera Bassi unit to Baddi unit for setting up the unit at Baddi. For the reasons given in the assessment order, he felt that Dera Bassi unit had diverted its interest bearing funds to Baddi unit up-to 31.12.2005 on which the AO worked out interest at ₹ 582,625/-. Since interest-bearing funds diverted from Dera Bass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssi unit were diverted to baddi unit for purpose of setting up the project rather than utilizing the same for increase in sale/purchase of Derabassi unit. 27. The Assessing Officer has calculated the interest on the funds utilized by Baddi unit on days product method, which is well accepted method for calculating interest on the funds on daily basis. Therefore I hold that the interest capitalized/disallowed amounting to Rs. (55,87,625/- + ₹ 2,52,051/- + ₹ 2,053/-) has been correctly done. 28. It is evident that the appellant has funded the balance amount of project investment. 29. Further, I do not find any merit in he submissions of the appellant regarding the funding of the project in excess of the capital investment made over the term loan raised. In other words, the appellant made a total investment of ₹ 7.17 crores while the appellant raised just ₹ 5 crores from SIDBI. Appellant failed to produce any evidence how the balance amount was funded. 24. Aggrieved by the order passed by the ld. CIT(A), the assessee is now in appeal before this Tribunal. In support of appeal, he has filed details of sources of funding of Baddi unit, a copy of which wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that the assessee has deliberately shown higher rate of net profit in respect of Baddi Unit as it was non-taxable than the net profit rate recorded in respect of Dera Bassi unit as the profits of Dera Bassi unit were taxable. According to the AO, the modus operandi of the assessee was to divert most of the expenses relating to Baddi unit to Dera Bassi unit so as to show higher rate of net profit as it was non-taxable. It is the case of the AO that total project cost of Baddi unit was met not only out of loan of ₹ 3.00 crores taken from SIDBI but also by diverting interest-bearing funds available with Dera Bassi unit and therefore the funds so diverted to Baddi unit were required to be allocated to Baddi unit and consequently the element of interest relating to such funds diverted from Dera Bassi unit to Baddi unit was also required first to be allocated to and thereafter capitalized in the hands of Baddi unit in terms of the proviso to section 36(1)(iii) as such funds were utilized in capital field for meeting the cost of project of Baddi project before the commencement of commercial production in Baddi unit. The case of the assessee, on the other hand, is that it had bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the impugned funds to Baddi unit and consequently his further action in allocating interest thereon to Baddi unit and capitalizing the same in terms of the proviso to section 36(1)(iii) is in order. 29. The submission of the assessee that the project cost of the Baddi unit was met partly by loan of ₹ 3.00 crores taken from SIDBI and the remaining amount from internal accruals or interest-free funds and therefore the AO was not justified in making the impugned disallowance, cannot be accepted. In CIT v. Abhishek Industries, 286 ITR 1 (P H), the Hon ble jurisdictional High Court has held that entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds, etc. do not have any different colour. Whatever are the receipts in the business, they have the colour of business receipts and have no separate identification. Sources have no concern whatsoever. Though the aforesaid judgment has been rendered in the context of section 36(1)(iii), the observations of the Hon ble High Court as referred to above are quite apposite on the facts and in the circumstances of the case before us. Baddi u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Further, I find that the expenditure which are indirect by nature such as salaries, director remuneration, printing and stationery, post and telegraph, legal and professional charges, rent, etc. are common which are incurred for the business as a whole and not with respect to a particular unit. 32. I am of the view that common expenditure must have benefited both the units and benefits are generally translated in terms of revenue earned by respective units. For instance, a sum of ₹ 27,02,256/- was incurred in R D Expense out of which ₹ 26,52,787/- was debited to Derabassi unit and balance of ₹ 49,469/- was debited to Baddi unit. Since the appellant has admitted that products manufactures are common, a reasonable conclusion can be drawn that both the units derived almost similar benefits from R D. I find that allocation of expenditure on the basis of turnover/revenue is the most acceptable method. The contention of the assessee that Baddi unit operated for 3 months does not have any merit for the reason that the period effect has already been taken into consideration as turnover of Baddi unit is for 3 months only and therefore allocation done by the AO is base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The ld. CIT(A) has correctly appreciated the factual and legal aspects of the case while deciding the issue under appeal. 35. The plea of the assessee that the AO was not justified in allocating common expenses on pro-rata basis to Baddi unit over and above those shown in the books of Baddi unit without rejecting the books of Baddi unit, has no substance. The AO has neither doubted the correctness of the expenditure nor has disallowed the same on that basis. It is not a case of disallowance of expenses. It is a case of mere allocation of common expenses to both the units. Therefore there was no necessity for specifically rejecting the books as such. What the AO has done is to allocate common expenses on pro-rata basis to both the units. By implication, he has not accepted the allocation of common expenses as recorded in the books of the assessee including those of Baddi unit. The assessee has placed no material before us to show that the impugned expenses are not common to both the units or that they exclusively relate to Dera Bassi unit. 36. The reference made by the ld. authorized representative for the assessee to section 80IC(7); 80IA (5); and proviso the section 80IA( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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