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ITO-7 (2) -2, Mumbai-20 Versus M/s Sadhana Nitro Chem Limited, Mumbai

Eligibility of the EOU unit for claiming deduction u/s 10B - AO denied the claim of deduction mainly on the ground that 10B unit was an expansion of business since it was started in F.Y. 1999-2000 and secondly the expenses of 10B unit were shifted to non 10B unit to show and claim higher profits in 10B unit - CIT(A) allowed claim - Held that:- CIT(A) has rightly held that the unit of the assessee was eligible for claim of 10B deduction as per the CBDT Circular No.1/2005 dated 6th January 2005. T .....

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22-7-2015 - Shri R.C.Sharma & Shri Sanjay Garg, JJ. For the Petitioner : Shri Neil Philip For the Respondent : Shir V.Mohan ORDER Per Sanjay Garg, Judicial Member These appeals have been filed by the revenue against the order of the CIT(A), Mumbai relating to assessment years 2007-08 & 2008-09, respectively. 2. Since the issues in both the appeals of the revenue are same, therefore, both the appeals are being heard and disposed of by this common order. For the sake of convenience, the fa .....

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er the Audit report the date of commencement of production was mentioned as 07.07.2005. However, as per the letter dated 21-12-09, it has been functioning since FY 99-00.The AO further noted that another non- EOU unit has also been functioning from the same compound and engaged in the manufacturing of the same product. The AO asked the assessee to submit the necessary details viz date of setting up of both the units, details of raw material used, details of expenditure, end products manufactured .....

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l year 1999-2000 and is Expansion of business . (e) It cannot be called an independent new unit. The assessee has been running this unit since 1999-2000. The conversion into EOU unit does not mean that it was not an expansion of business. 3. During appellate proceedings before the CIT(A) , the assessee made certain submissions and explanations and also produced certain details such as break-up of the income and expenditure account of the 10B units and non-10 B units. The Ld. CIT(A) forwarded the .....

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sessment order was based on ratio and proportionate method. The AO,however, compared the expenses of 10B and non 10B unit to show the difference between the expenditure incurred by both the units. The AO further reported as under:- "In fact, in the submissions of the break up of the expenses given by the assesseeat the time of appellate proceedings, they have themselves admitted that only the actual expenses have been allocated and a common/ administrative expenses have not been allocated t .....

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king any further enquiries." 5. The AO sent his further remand report by letter dated 15-09-2010 analysing the amount of different types of expenditure incurred. In this remand report, the AO requested that the disallowance made by him was required to be sustained. 6. The ld.CIT(A) however as per further directions given vide letter dated 25-05-2011, again directed the AO to submit another remand report. The remand report so given by the AO was forwarded to the assessee. The assessee furnis .....

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of the assessee in respect of remand reports, allocated certain expenses of the non-10B unit to the 10B eligible unit. He accordingly restricted the disallowance of deduction u/s.10B to the extent of ₹ 33,54,723/- and directed the AO to allow the balance amount of ₹ 1,11,01,062/- as deduction u/s.10B of the Act. The relevant part of the observations made by the ld. CIT(A) is reproduced as under: The assessee was having one Export Oriented 10B unit and other non 10B units also. In the .....

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eing exported. It was an admitted fact that this unit was set up by the assessee in F.Y.1999-2000 for manufacturing the same product i.e. BTCA Product. This unit was converted into Export Oriented unit i.e. EOU w.e.f. July 2005. Prior and subsequent to this date, the same product i.eBTCA was produced in this unit. The CBDT in Circular No.1/2005 dated 6th January 2005 has clarified that an undertaking set up in Domestic Tariff Area and deriving profit from export, which is subsequently converted .....

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r claiming higher deduction. In this respect, the AO has compared the ratio of raw material consumption, power &fuel and other expenses of 10B units and non 10B units. The assessee has explained that 10B unit and non 10B unit were manufacturing different products and the raw material for both the units were totally different. The Raw material of 10B unit could not have been used/consumed for production in non 10B unit. The assessee has explained that the actualexpenses incurred for 10B unit .....

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t expenses of 10B units have been shifted to non 10B Units. In this respect, the assessee has explained that its manufacturing activity of BTCA Product (10B Unit Product) was under constant supervision and check of the Excise Department since this unit was getting various types of concession in Govt. duty. cess etc. For this purpose, the assessee had to file monthly production report to the Excise Dept. in the Form No.ER2 under Central Excise Rules. The assessee has filed copies of these report .....

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not functioning and therefore, power & fuel expenses were not incurred in that unit during that month. The, assessee has explained that the raw material for BTCA i.e. 10B unit product was totally different from products of other non 10B unit. In view of this particular position, the raw material expenses of 10B unit could not have been shifted to the non 10B unit expenses. In fact, the raw material for both 10B & non 10B units were entirely different and could not have been used in othe .....

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and secondly, in some months there was no production in 10B units. Consequently, the power and fuel consumption of 10B units was much lesser than non 10B units. In view of assessee's explanation, the A.O's finding cannot be supported that the assessee has shifted raw material consumption and power & fuel expenses of 10B units to non 10B units. In respect of operation/maintenance, employees cost, admin expenses, selling distribution, miscellaneous expenses, the allocation to 10B unit .....

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irs & Maintenance Other Repair & Maintenance Affluent Expenses R & D Actuals Actuals Actuals Ratio of assets in EOU as a percentage to total assets. Actuals Tonnage Salary Wages & Benefits Actuals Administrative Expenditure Turnover Basis except insurance on the ratio of Fixed Assets in the EOU as compared to total assets. Selling & Distribution Actual Misc. Expenditure (Including Interest) Term Loan & Bank Interest Turnover Basis Actual Deprecation Actuals Payment to Aud .....

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ropriate and logical if the salary and distribution expenses would have been apportioned on the basis of turnover. The allocation of other expenses was not required to be disturbed. The allocation of salary and selling and distribution expenses on turnover basis will be as under: Particulars Total Exp. Allocation on the basis of Turnover 10B Unit Non 10B Unit Employees benefit 3,27,80,430 20,48,776 3,07,31,653 Selling & Distribution 2,62,06,988 16,37,936 2,45,69,052 The above reallocation of .....

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