TMI Blog2013 (12) TMI 1741X X X X Extracts X X X X X X X X Extracts X X X X ..... in Dera Bassi unit. 3. The Learned Commissioner of Income Tax (Appeals) has erred in sustaining the estimation of the notional interest on additions to fixed assets and passing order for capitalising the same in Dera Bassi unit. 4. The Learned Commissioner of Income Tax (Appeals) has erred in sustaining the estimation of the notional interest on funds standing in the name of Baddi trading unit in Dera Bassi unit and passing orders for disallowing the same in Dera Bassi unit. 5. The Learned Commissioner of Income Tax (Appeals) has erred in sustaining the addition of Rs. 5,84,188/- on account of capitalisation of the Web/Software development expenses. 6. The Learned Commissioner of Income Tax (Appeals) has erred in sustaining the reduction of the claim of the assessee u/s 80IC by Rs. 89,81,947/- by shifting/allocating some expenses from Dera Bassi unit to Baddi Manufacturing unit based on estimates, surmises and presumptions. 7. The Learned Commissioner of Income Tax (Appeals) has erred in sustaining the reduction of claim under Section 80IC resulting from wrong calculation of the deduction. 8. The Learned Commissioner of Income Tax (Appeals) ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had only debited sum of Rs.31,06,069/- under the head interest expenditure in the Dera Bassi unit, addition was restricted to Rs. 31,06,069/- and profits of Baddi manufacturing unit were reduced to the said extent and consequently, the deduction claimed under section 80IC of the Act was reduced by a sum of Rs. 31,06,069/-. 6. Before the CIT(Appeals), the plea of the assessee was that no fresh borrowals were raised by the Dera Bassi unit in the year under appeal and on the contrary, the secured loans had declined by Rs. 91.33 lacs. The unsecured loans, though had increased as compared to the preceding year but the said loans were interest-free. Hence the plea of the assessee was that there was no transfer of borrowed funds to Baddi unit. With regard to the debit balance of the earlier years, it was claimed by the assessee that the same were transferred out of capital and reserves of the company which belong not only to the Dera Bassi unit but also to the Baddi unit and no interest was paid on capital and reserves. The Assessing Officer further noted that the assessee was asked as to why interest relating to capital in progress be not capitalized under the head capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of the Assessing Officer and pointed out that it was only the Dera Bassi unit which was in loss and the other two units were showing profit which were claiming deduction under Chapter VI. It was further stressed by the ld. DR for the revenue that the assessee was taking loan @ 10.75% rate of interest, then average cost of funds is not to be applied. Reference was made on the ratio laid down, by the CIT(Appeals) in para 11 at page 5 of the appellate order in this regard. 10. We have heard the rival contentions and perused the record. The issue raised vide ground No. 1 is in relation to the interest expenditure relatable to the interest free funds diverted from the Head Office to the manufacturing unit by the assessee. The assessee had established Baddi Unit during the financial year 2005-06 i.e. in the preceding year and it was under construction and came into production in December, 2005. The funds necessary for the establishment of the said manufacturing unit were transferred from the Dera Bassi unit which in-turn had both interest bearing and interest free funds available with it. The claim of the assessee is that at the start of the year under appeal, the outstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest free advances made by the assessee. Reasonable opportunity of hearing shall be afforded to the assessee by the Assessing Officer. The ground of appeal No. 1 raised by the assessee is thus, allowed for statistical purposes. 13. The ground Nos. 2, 3 4 are linked to the issue raised vide ground No. 1. However, no disallowance was made in respect of these issues as the total interest expenditure debited to the Profit Loss Account was disallowed by the Assessing Officer while computing the disallowance as per the issue raised vide ground No.1. The assessee during the year under consideration had made addition to the fixed assets also to the capital work in progress and no interest relatable to such additions was disallowed by the Assessing Officer, though the Assessing Officer observed that the necessary expenditure relating to the abovesaid was disallowable in the hands of the assessee. We are in conformity with the observations of Assessing Officer in this regard that notional interest relatable to the capital work in progress is to be computed in view of the provisions of the Act. However, average cost of debt is to be applied to work out the disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure debited to the Profit Loss Account. Accordingly, we allow ground Nos. 2 4 for statistical purposes. The ground No. 3 raised by the assessee is allowed. 17. The issue in ground No. 5 is in relation to the addition made on account of capitalization of web/software development expenses totaling Rs. 5,84,188/-. The Assessing Officer vide para 3.5 had observed as under : The assessee has under the head Software Development claimed an amount of Rs. 9,65,730/- before 30.9.2006 and an amount of Rs. 2,60,566/- after 30.9.2006. Thus, depreciation @ 60% is allowable on Web Development Expenses amounting to Rs. 9,65,730/- which comes to Rs. 5,79,4387-. Similarly, on the amount of Rs. 2,60,566/-, depreciation amounting to Rs. 78,170/- is allowable as per the I.T. Rules. Thus, the total depreciation allowable on the Web/Software Development Expenses comes out to Rs. 6,57,608/-. After allowing depreciation of Rs. 6,57,608/-, the net addition on account of capitalization of Web Software Development Expenses comes out to Rs. 5,84,188/- (Rs. 12,41,796/-Rs 6,57,608/). 18. The Assessing Officer, thereafter had worked out the disallowance in the hands of the assessee af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the turnover and expenses of Baddi trading unit as tabulated at page 47 of the Paper Book. The ld. AR for the assessee further pointed out that the perusal of the balance sheet and trading, Profit Loss Account of Baddi trading unit would reflect that sales to the tune of Rs. 3.23 Cr were conducted from the said unit and the same had to be considered. The second aspect of computation of deduction under section 80IC of the Act was the wrong calculation of the said deduction under section 80IC of the Act resulting in double disallowance. 23. The ld. DR for the revenue placed reliance on the orders of the authorities below. 24. We have heard the rival contentions and perused the record. The assessee during the year under consideration was maintaining separate books of account for each of the unit operated by it. During the year under consideration, the assessee had three units i.e. Dera Bassi unit. Baddi trading and Baddi manufacturing unit. The profits of the Baddi unit were exempt under section 80IC of the Act. The Assessing Officer allocated certain expenses from Dera Bassi unit to Baddi manufacturing unit which as per the Assessing Officer were common expenses which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50 0 50 b) Computation if allocation of expenses of Rs. 10 from Taxable unit to exempt unit is made: Particulars Taxable Exempt Total Unit Unit (Rs.) Amount Amount (Rs.) (Rs.) Gross receipts 100 100 200 Less: Expenses 40 60 100 Net Profit 60 40 100 Deduction u/s 80-IC of profit of exempt unit 0 4 0 40 Taxable Income 60 0 60 26. The Assessing Officer is directed to recompute the deduction under section 80IC of the Act keeping in mind the above. The ground Nos. 6 7 raised by the assessee are thus, partly allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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