TMI Blog2014 (4) TMI 618X X X X Extracts X X X X X X X X Extracts X X X X ..... their profitability - Merely because the industrial undertaking earned higher profits does not call for an inference that claim of deduction is to be will be nil on presumptions – there was no justification in CIT(A)s order retaining the reduction of 10% from the deduction thus, is set aside – Decided against Revenue. Disallowance @ 5% of turnover – Value of the director’s experience and knowledge – Held that:- The AO was of the view that 5% of the turnover of the company is attributable to the experience and specialized knowledge of the director and not to the eligible unit - As per the P&L a/c for the period ending 31-03-2006, the director’s remuneration was Rs. 60,000/- Over a period of two years it has been increased to Rs. 23,00,000 - This shows that adequate compensation is being provided to the director for his services, knowledge, contract and skills - As the company have adequately compensated the director for using their experience and specialized knowledge, therefore, the benefit accruing to the company belongs to it and would form part of its eligible profit - Benefit accruing a company as a result of experience or knowledge of its employees (Directors) cannot be us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law and on facts in upholding the reduction in assesses claim u/s sec. 80IC on following issues: (i) Restricting apportionment of profits in respect of Brand valuation to 10%. (ii) Deleting reduction of claim u/s 80IC by Rs. 29,75,890/- worked out by AO as attributable to directors due to high net profit of 33%. (iii) Assessee carried out only assembling of imported parts at Haridwar. CIT(A) failed to appreciate that profits reported by assessee were generated by joint activities of head office and branches. Hence the eligible profits have been rightly apportioned by AO between head office and branches. 2.1. A perusal of the grounds reveal that the main and common issue involved in both the appeals pertains to claim of deduction under Section 80-IC beside assesee's ground about application of 115JB. 3. Brief facts are the assessee is an industrial undertaking situated at Haridwar (Uttrakhand) and is claimed to be an eligible unit u/s 80-IC of the Act. It is engaged in the manufacture of auto parts like power locks, car locks and other similar parts used in the automobile industry. Its manufacturing operations commenced in preceding assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Section 115JB of the Act and is not exempt under clause (6) of Section 115JB. 3.7. Aggrieved both, the parties are before us; assessee against the partial disallowance of 10% of the turnover as profit on account of the market value of the brand; upholding the liability u/s 115JB and the revenue in respect of the relief granted by the learned CIT(A). 4. Ld. Counsel for the assessee Shri Ved Jain contends that ground. 1 of departmental appeal and ground 5 of assessee s appeal pertain to the first issue i.e. the determination of the profits eligible for deduction under section 80-IC. It has not been disputed that assessee is having an industrial undertaking at Haridwar which is eligible for deduction under section 80-IC. The entire sales of Rs.10,55,16,186/- has been made from Haridwar unit and assessee does not have any other unit or any other sales, purchases or income. The sale and purchases are fully vouched, there is no whisper of any allegation that sales have been over-invoiced or the purchases are understated by assessee. Books of accounts have been fully accepted. Thus there is neither any dispute about the veracity of accounts and their audit nor the computation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeping in view, the growth of the company in the two years after start of manufacturing process and the profit attributable to the reduced cost of the goods as result of manufacturing, a against goods purchased by the appellant company from the market, the brand value of the goods is valued at 10% of the total turnover which in the current year was Rs. 10,55,16,186/-. Thus, out of the total profit the eligible profit for the purpose of section 80IC would be reduced by 10% Rs. 10,55,16,186 i.e. Rs. 1,05,51,618/-. 4.4. It is pleaded that ld. CIT(A) failed to appreciate that there is no reference to any expense on brand building incurred by the undertaking out of books or utilization of any brand owned by some other entity. Copy of registration certificate of brand in assesses name was already filed. Thus the brand is also a commercial asset of the eligible undertaking and is part of its income generating apparatus and is an integral part of the eligible profits for deduction u/s 80IC. The claim has been allowed on same lines in preceding year by an assessment u/s 143(3) after due verification. When assessee has demonstrated that the sale proceeds pertain to eligible unit, brand i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Liberty India vs. CIT [2009] 317 ITR 0218 is also not correct. It was a case of a Duty Drawback/DEPB and not of deduction i/s 80IC, there it was held that Duty Drawback and DEPB are independent source of income and cannot be included while determining the eligible income for deduction. 4.9. In the present case there is no dispute about the income earned being only from manufacture or production of article or thing. The only source of income as is evident from the profit and loss account is sales of Rs.10,55,16,186 from Haridwar unit only, where the manufacturing activities are being carried on and there is no other source of income like interest or DEPB or Duty Drawback or interest on FDR. On the contrary, both the lower authorities by apportioning a part of it towards market value of brand are going against the judgment of Hon ble Supreme Court itself rendered in Liberty India (Supra). The entire sales being out of the manufacturing of product, there cannot be any bifurcation of sales that a percentage is on account of manufacturing and the other to brand value. The entire sales being from manufacturing no notional or hypothetical splitting is possible as endeavored by both t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or production of an article or thing is a condition precedent for an undertaking to become an industrial undertaking. That, however, does not mean that the profits derived from manufacture alone can be taken into consideration for working out the deduction under section 80HH. Once a particular undertaking is held to be an industrial undertaking then there is no alternative, but to go to the profits and gains derived from such an industrial undertaking for working out the relief under section 80HH. The use of the word manufacture is in a different context which should not be lost sight of. There is no justification for stretching it further and to hold that only manufacturing profits in the backward area would be considered for the purposes of section 80HH and not the trading profits. In a case where an assessee was manufacturing sleepers and was also purchasing sleepers for trading purposes it could perhaps be said that the assessee was having two separate activities and perhaps the income derived from the sale of sleepers which were purchased by the assessee it could be said that relief under section 80HH was not admissible. That is, however, not the case with the assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be considered while computing the market value of the power. 34. The CIT-A and the Tribunal had rightly computed the market value of the power after considering it with the rate of power available in the open market namely the price charged by the Board. There is no illegality in their orders. 35. In view of above, the question is decided against the Department and in favour of the Assessee. The tax appeals have no merit. They are dismissed. (iii) Commissioner of Income-tax -III Versus Velankani Information Systems (P.) Ltd., (ITA Nos. 374 375 of 2011 and 273 to 276 of 2012 dated - April 2, 2013 (Karnataka) But if the assessee is in the business of taking land, putting up commercial buildings thereon and letting out such buildings with all furniture as his profession or business, then notwithstanding the fact that he has constructed a building and he has also provided other facilities and even if there are two separate rental deeds, it does not fall within the heading of income from house property. Therefore, firstly what is the intention behind the lease and secondly what are the facilities given along with the buildings and documents executed in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 7. Apropos second issue raised by revenue facts are, disallowance of Rs.29,75,809/- made by the AO, computed @ 5% of the turnover as the value of the directors experience and knowledge. 8. Ld. DR supports the order of AO. 9. Ld. Counsel for the assessee contends that the Directors are employees of the company and they have been suitably compensated. It is settled law that revenue cannot sit in the armchair of businessman and decide which business expenditure should be incurred in which manner. The AO cannot sit on assesses business acumen and judgment to decide that which percentage of the turnover should be paid to the directors for their experience and knowledge. 9.1. Ld. CIT(A) on page 20 of his order has elaborately dealt with the facts and contentions and objectively held that the payment of Rs.23 Lacs to director is adequate and calls for no further estimation based on surmises. It is pleaded by the assessee that reasonings given by the CIT(A) for deletion of the addition are objective and correct the order needs to be upheld. 10. We have heard the rival contentions and perused the material available on record. Ld. CIT(A) has deleted this disallowance by fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wages expenses. Thus only 12% of the profit derived from the industrial undertaking will be eligible for deduction under section 80-IC. Assessee claimed that all the purchases, sales and manufacturing activities are carried out at Haridwar industrial undertaking only. There is no rationale to hold that expenses incurred at the Branch offices/head office will be the basis for allowing deduction under section 80-IC of the Act. Rejecting assesses explanation AO reduced the claim u/s 80IC. 10.1. Aggrieved assessee preferred first appeal, where it was contended that it is not the case of the AO that all the expenses of head office or branches have not been deducted while computing 80-IC of the Act. The AO s contention is baseless as an assumption may be possible when there is a finding that part of these expenses is not deducted while working of the eligible income. When it un disputed that relevant expenses have been properly and correctly accounted for in the books which are duly audited and considered while computing the income of the eligible unit, there is no rationale in the assuming that any other activity is carried out by the appellant. 10.2. Ld. CIT(A) deleted the reduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reduced. In consideration of all these facts and circumstances we uphold the order of CIT(A), this ground of the revenue is dismissed. 13. Apropos assesses remaining issue about MAT, Ld. AO held that the assessee is liable to pay MAT under Section 115JB. The CIT(A) has upheld the order. In this regard it may be relevant to refer to sub-section (6) of Section 115JB which reads as under:- (6) The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be. 13.1. The authorities below have held that this exemption is available to SEZ only and that too when the assessee is a developer. Ongoing through the above sub-section (6) it is clear that the exemption is available from any business carried on in a unit. The assessee has carried on the business in its unit at Haridwar and hence it is eligible for deduction under Section 115JB of the Act. The word between Unit and Special Economic Zone is not of , it is or . Thus the unit does not get quantified with Special Eco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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