TMI Blog2020 (5) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... product mix of the appellant is quite different in both the Units which has also not been taken into account by the AO while making the addition. In such circumstances, the addition made by the AO is not based on the facts of the case and therefore, the addition made by the AO is directed to deleted Negative adjustment made by AO to the eligible profits u/s 10AA - HELD THAT:- It is a well settled rule that the expenses have to be apportioned on actual basis, however when such apportionment is not possible, then the assesse has to retort to other methods. In the present case the appellant submitted the list of expenses which were apportioned on the actual basis and the details of such expenses and the justification for accounting it on actual basis. Regarding the segregation on the actual basis of the appellant, the AO has not found any fault with the basis of allocation on actual basis. If the expenses are allocated on the actual basis, then it is the best method of allocation. If any expense cannot be bifurcated on the actual basis, then only the allocation has to be resorted to. Since the appellant has booked all these expenses on the basis of actual, and the AO has not p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ri Parimal S. Parmar, A.R. ORDER PER T. S. KAPOOR - AM: This is an appeal filed by the Revenue against the order of learned CIT(A)-10, Ahmedabad, dated 20/03/2017 relating to assessment year 2012-13. 2. The Revenue has taken the following grounds of appeal: (1) That the ld. CIT(A) has erred in law and on facts in deleting the disallowance of expenses claimed under the head material accessories of ₹ 1,22,62,031/-. (2) That the ld. CIT(A) has erred in law and on facts in deleting the disallowance of deduction u/s 10AA of the Act ₹ 35,20,119/-. (3) That the ld. CIT(A) has erred in law and on facts in deleting the disallowance of EPF ESI contribution of ₹ 15,62,361/-. (4) That the ld. CIT(A) has erred in law and on facts in deleting the disallowance of interest on deposits of ₹ 4,03,200/-. (5) That the ld. CIT(A) has erred in law and on facts in deleting the disallowance of bad debts of ₹ 54,148/-. (6) That the ld. CIT(A) has erred in law and on facts in deleting the disallowance of penalty of ₹ 89,419/-. (7) That the ld. CIT(A) has erred in law and on facts in deleting the addition u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to employees contribution to PF ESIC though forming part of departmental appeal was actually rejected by learned CIT(A), hence, the assessee was advised that cross objection must be filed before the Hon ble ITAT and immediately thereafter the concerned Advocate prepared memorandum of cross objection and filed the same. The learned AR in this respect filed an affidavit duly signed and sworn in by partner of the assessee firm and it was prayed that in view of the substantial justice, the cross objections filed by the assessee may be condoned and may be heard on merits. Learned DR did not object to the application for condonation of delay and finding the reason for delay in filing cross objection reasonable, we condone the delay and learned AR was directed to proceed with his arguments. 5. Regarding Merits of cross objections, the learned DR fairly agreed that the issue of disallowance of PF ESIC was in fact against the assessee, therefore, same may be decided accordingly. 6. Learned DR as regards the Revenue s appeal submitted that assessee was having two units; one in SEZ and one in non SEZ and had claimed excessive expenditure in the non SEZ unit as compared to SEZ uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the other hand, replying to the argument of learned DR submitted that AO had wrongly rejected the books of accounts which action of the AO has been held to be not valid by learned CIT(A) and department has not filed any appeal against such finding of learned CIT(A). Further, it was submitted that leaned CIT(A) had rightly deleted the addition by relying on the additional evidence filed by the assessee. It was submitted that such additional evidences were forwarded to AO for his remand report on the merits of documents but AO did not make any comments on the merits of the evidences and requested the learned CIT(A) not to accept the additional evidence. It was further submitted that AO did not compare cost of SEZ unit and non SEZ unit in the correct manner as the products manufactured in SEZ and non SEZ units were different and certain products were of customized as per the requirements of customers. Further, consumption of accessories differs from product to product. It was further submitted that detailed submissions regarding cost of manufacture per unit was provided to learned CIT(A) which were forwarded to AO and from the explanations filed before the learned CIT(A). It was de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation of income. As regards the other amounts, it was submitted that such penalties in the form of interest on sales tax was not infraction of any law but rather the same were compensatory in nature and therefore were allowable expenditures and learned CIT(A) had rightly allowed the same. 19. Arguing last ground of appeal, the learned AR submitted that Section 40A(2)(b) of the Act applies to revenue expenditure whereas the amount in question was paid for purchase of plant and machinery which is capital in nature and therefore, assessee had not claimed any expenses and learned CIT(A) had therefore rightly allowed the relief to the assessee. 20. We have heard the rival parties and have gone through the materials placed on record. 21. We find that AO had made various additions after analyzing the various ratio of expenses to material consumed and also by holding that some of the expenses specifically related to SEZ unit which the assessee had wrongly allocated to both the units. Before the learned CIT(A), the assessee filed detailed explanations and also filed additional evidences and also filed detailed calculations of cost per unit in SEZ unit as well as in non SEZ unit. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the books of the appellant are maintained in ERP system and accordingly all the subsidiary books are maintained electronically. The AO never confronted the appellant about these observations and without giving opportunity of being heard, rejected the books of accounts. It is a settled position of law that the appellant has to be given an opportunity of being heard before rejecting the books of accounts. Still, the additional evidences filed by the appellant in support of his claim were forwarded to the AO for his comments. Instead of giving comments on the additional evidences filed by the appellant, the AO just reiterated the basis of additions made in the assessment order. The AO has not given any comments, whatsoever, in the remand report on the additional evidences filed during the course of appeal proceedings. It is also seen that the AO in the remand report has not placed any findings contrary to the submissions of the Appellant. Accordingly, looking upon the facts and circumstances of the case, the rejection of books of accounts is not justified. Accordingly, the case is now being decided on merits of the case. The Appellant further submitted quantitative detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave also gone through the assessment order and remand report submitted by the AO and rejoinder filed by the appellant. Brief facts of the issue is that the Appellant firm is engaged in manufacturing kids readymade garments for the children below or of 16 years of age and export the same from both Non SEZ and SEZ unit respectively. Appellant claimed deduction u/s. 10AA at ₹ 35,20,119/- and a loss of ₹ 1.55.719/- in its Non SEZ unit. AO asked the appellant to justify the claim of expenses made in Non SEZ unit. Appellant stated it had maintained separate books for its SEZ and Non SEZ unit. The expenses which could have been directly attributable to specific unit were allocated on actual basis and for the rest, expenses were allocated in the ratio of the turnover of Non SEZ and SEZ unit and the details of the same were provided by the Appellant. After perusing the details of the expenses as mentioned above submitted by the Appellant, the AO observed that the entire export sale amounting to ₹ 7,49,27,019/- was made by the Appellant through SEZ unit and thus the expenses namely F.O.C export (Outward) expenses amounting to ₹ 3,70,155/- and foreign fluctuation loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturing export sales of ₹ 6,63,62,229/- from non-SEZ unit and export sale of ₹ 7,49,27,019/- from SEZ Unit. Therefore, the appellant has shown considerable sale of exports from non-SEZ Unit and therefore the foreign fluctuation loss and FOC expenses have rightly been allocated in the ratio of turnover by the appellant. The AO, while passing the order, has somehow overlooked the export sales of the non-SEZ unit and therefore arrived at this conclusion which is not factually correct. In case of claim of bad-debts also, it has clearly been submitted by the appellant that the export to Al-Bandar International House has been made by the appellant from non-SEZ Unit only. Therefore, the bad debts would also be debited in this unit also. Therefore, the AO's observation on this issue is also factually wrong and therefore cannot be sustained. With regards of treatment of direct expenses adopted by the appellant, AO was of the view that such expenses should have allocated all such expenses on the basis of turnover. The appellant during the course of assessment proceedings, in its submission dated 28/01/2014 submitted that the appellant maintained separate books fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ongly classified under the head loans and advances . Similarly, it was submitted that the advance given to Shri Prafulkumar B. Shah was advanced against business expenditure which was adjusted during the FY 2012-13. The learned CIT(A) has therefore allowed relief to the assessee by holding that assessee had furnished factual submissions and the advances were given for business purposes and therefore, same cannot be treated as non-business purposes. Moreover, the assessee had sufficient interest free reserves to finance interest free advances. In view of the above, ground no.4 is also dismissed. 25. Now coming to ground no.5 regarding bad debts, we find that the AO had made this addition by holding that the sale was made out of SEZ unit whereas the fact is otherwise as the sale was made from non SEZ unit. The learned CIT(A) has made a finding of fact that sale to the party was made out of non SEZ unit. Finding no infirmity in the order of leaned CIT(A), ground no.5 is also dismissed. 26. As regards, ground no.6 regarding deletion of penalty, we find that out of said penalties, penalty amounting to ₹ 29,092/- were towards EPF penalty and penalty on late submission of exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction : Plain reading of the above provisions envisages that the provisions of S,40A(2){b) of the Act are applicable on expenses claimed as deduction. As the appellant has not claimed any deduction out of the related party transaction, the provisions of S.40A(2)(b) cannot be applied. Accordingly, the said ground of appeal is also allowed. The AO is directed to delete the said addition. In view of the above, ground no.7 is also dismissed. 28. In a nutshell, the appeal filed by Revenue is dismissed. 29. Now coming to cross objections filed by the assessee, we find that ground nos. 1 to 4 taken by the assessee are regarding the action of learned CIT(A) by which he has confirmed the action of AO in disallowing employees contribution PF ESIC. In this connection, we find that learned CIT(A) has dismissed this ground of appeal by relying on the judgment of Hon ble Gujarat High Court in case of Gujarat State Road Transport Corporation and no argument was advanced by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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