ORDER
M.V. Nayar, A.M.
1. This is an appeal filed by the Revenue against the order of the CIT(A)-XIV, New Delhi, in appeal No. 725/01-02, dt. 11th March, 2002 whereby the Revenue has taken two grounds of appeal, namely, the deduction allowed under Section 80-IA and the deduction allowed under Section 80HHC to the assessee.
2. In the first ground of appeal, the Revenue has objected to the order of the CIT(A) allowing deduction under Section 80-IA at Rs. 97,97,898 as against Rs. 31,01,627 restricted by the AO.
3. The brief facts of the case are that the assessee is a company engaged in the business of manufacture and sale of medical disposals like cannula, blood bags, I.V., etc. It has got various units, Out of the total 7 units, 5 units are engaged in the manufacturing activity whereas the remaining 2 units in the head office are in respect of share business and other business. The assessee-company has been maintaining separate accounts and computing its profit and loss of each of its units separately and computing the deduction under Section 80-IA in respect of each of the units independently as per the provisions of the Act. For the assessment year under consideration, the assessee filed its IT return claiming deduction under Section 80-IA, Since there was a profit of
Rs. 4,59,10,915 in unit 196, a deduction of Rs. 1,37,73,275 was claimed being 30 per cent of Rs. 4,59,10,915, The AO, however, while completing the assessment restricted this claim to Rs. 39,01,627, The basis for doing this was that unit 196, unit 205 and unit 206 are one and the same and as such aggregate of the profit and loss of these units have to be considered, not merely the profit of unit 196 only. The AO has further held that entire head office expenditure are to be allocated, not only 90 per cent as done by the assessee and in the process, he allocated remaining 10 per cent of head office expenditure to these three units only, not to all the units and accordingly, he deducted these expenditure from the aggregate profit and loss of these three units while computing deduction under Section 80-IA. Not only that, the AO further held that the brought forward losses in respect of the head office are also to be adjusted against the profit and loss of these three units. Based on the above reasoning, the AO computed the net profit of these three units (taking all as one) at Rs. 1,30,05,424 and allowed a deduction at the rate of 30 per cent on this to the extent of Rs. 39,01,627.
4. The assessee filed an appeal against the above order before the CIT(A) contending that each unit is independent of the other and the AO was not justified in clubbing the profit and loss of three units, namely, units 196, 205 and 206. It was further contended that the brought forward losses of each unit have to be adjusted against the income of that unit only and it cannot be adjusted in aggregate in view of the determination of the loss of each of the units individually in the assessment of the assessee in the earlier years. Further, the AO was not justified in allocating the head office expenditure to these 3 units ignoring the fact that out of the total expenditure of the head office, 90 per cent of the expenditure have already been allocated proportionately to each of the units and the balance 10 per cent of the expenditure is in respect of the activities carried out by the head office on its own which has nothing to do with the working of the units.
4.1 The CIT(A) partly accepted the contention of the assessee. He held that the AO was justified so far in clubbing the profit and loss of units 196 and 205 as these were engaged in same activities but was not justified in clubbing the profit and loss of unit 206 which is an independent unit and the activity of that unit is different from the activities of units 196 and 205. The CIT(A) further held that the brought forward losses of the head office determined in earlier years cannot be adjusted against the current year’s income of units 196 and 205 as in all earlier years to which these brought forward losses pertain there were profit in one unit and loss in other units and also all the units are treated as separate industrial undertakings for computation of Section 80-IA deduction.
4.2 The CIT(A) on the issue of allocation of head office expenditure held that the AO was not justified in allocating the remaining 10 per cent of the expenditure to the 3 units only. These expenditure have to be allocated to all the units in the way 90 per cent of the expenditure have been allocated by the assessee. On the basis of the above reasoning, the CIT(A) recomputed the deduction under Section 80-IA at Rs. 97,97,898 as against Rs. 39,01,627 computed by the AO. It is against these findings of the CIT(A) that the Revenue is in appeal.
5. The learned Departmental Representative has contended that the CIT(A) was not justified in holding that unit 206 is an independent unit. The order passed by the learned CIT(A) is a non-speaking order and no reason has been given why unit 206 should be treated as independent unit. He further contended that in the assessment order, the AO has given valid reasons for clubbing the income of all 3 units. The GP rate of one unit is much lower as compared to the GP rate of other units. Further, there is a common finished goods register, which is being maintained by the assessee, and as such the activities of these units are one and the same and they are also located in the same locality. Further, unit 206 is selling only dies and moulds to other production units and as such cannot be treated as an independent unit. The learned Departmental Representative also contended that the CIT(A) was not justified in holding that the head office expenditure have to be allocated proportionately to all units and there is no basis why the CIT(A) has held so,
6. Opposing the contention of the Departmental Representative, the learned Authorised Representative has argued that the arguments advanced by the learned Departmental Representative are de hors the material. It was submitted that the assessee-company has been filing its return regularly for the last many years and along with the return of income every year unit-wise account of profit and loss is being submitted and deduction under Section 80-IA is being computed and allowed unit-wise. The learned Authorised Representative invited attention to the computation of income and the statement of account filed for the preceding years whereby separate computation has been made for each of the units. He also invited attention to the assessment order for the asst. yr. 1996-97, dt. 14th March 2000, passed under Section 143(3) of the Act whereby the AO has also accepted unit-wise account. It was submitted that there is no change in the working of any of the units during the year. What was being done and manufactured by each unit in the year 1995 continues to be done in the year under consideration. It was further submitted that each of the units is working independently. Attention was invited to the assessment order where the AO has himself stated that these units are located differently and not in the same premises. Unit 196 means the unit at plot No. 196 while” unit No. 205 means the unit at plot No. 205. Each of the units is having independent premises, independent production facility. It was further contended that separate books of account are being maintained for each of the units and the profit and loss are being computed individually for each of the units.
6.1 As regards the AO’s observation in the assessment order that the GP rate for one of the units is very much lower as compared to the GP rate of other units, the reason for the same was the export order where the margin of profit was higher. The AO has nowhere controverted this explanation. Further, the AO despite making this observation has accepted the books of account. He has not rejected the books of account, meaning thereby that the results declared as per books of account have been accepted and no adverse inference can be drawn against the assessee on this pretext.
6.2 As regards the transfer of raw materials sometimes from one unit to another, it was submitted that this fact has been duly explained to the AO and was also explained to the CIT(A). In case of shortage of material in a unit, the raw material of other unit used to be transferred sometimes but the transfer was need based and always at cost price which did not affect the profit or loss of one unit or the other. It was just like instead of purchasing from the market, the same was procured from other unit at the same cost at which it was bought by that unit. This was merely a facilitation explained before the AO. There was absolutely no diversion of profit from one unit to another. On the contrary, these transfer entries in the books of account confirm the fact that separate accounts are being maintained and each transaction is being properly documented and there is no mixing up between one unit and another. Had there been mixing up, these transfer entries would not have been there. This point also gets, strengthened by the fact that in the past, the Department has accepted each, unit independently. Further, the AO except stating that there is transfer of raw material, has not given any adverse feature or reason for doubting the genuineness of the transaction. 6.3 As regards the issue, that units 196 and 205 are engaged in similar activities and unit 206 is making tools and dies, which are being used in unit 196 and unit 205, it was submitted that as per provisions of Section 80-IA, the deduction under this section is available in respect of each undertaking individually and the profit and gain of the undertaking has to be computed separately. Not only that, there can be many undertakings in the same line of business, manufacturing the same items. However, the deduction under, this section has to be computed for each of the units separately and not on the aggregate basis as has been done by the AO. For this purpose, attention was invited to Sub-section (5) of Section 80-IA which reads as under:
(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of Sub-section (1) apply shall/for the purposes of determining the quantum of deduction under that Sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year upto and including the assessment year for which the determination is to be made.
As per the above section, the deduction has to be computed considering the unit as the only unit and there cannot be any adjustment on account of profit or loss of other units. It has been further argued that merely because units 196 and 205 are manufacturing same item cannot be a ground for clubbing and so will be the case of unit 206. As per provisions of Section 80-IA, the deduction is for a new undertaking; and as such, as and when a new undertaking is set up by an assessee, the income of that undertaking will be eligible for deduction under this section. The profit/loss of other undertaking cannot be adjusted or clubbed against income of this new undertaking on -the ground that the new undertaking is manufacturing the same goods or items, which are being done by the other units. The deduction under this section is undertaking specific. On the basis of above explanation, it was contended that what was submitted before the AO for claiming deduction under Section 80-IA was correct though the CIT(A) has held that units 196 and 205 need to be clubbed and unit 206 need not be clubbed. Since the assessee has not, filed an appeal against the said order in view of the nil impact being there on the tax liability, still on merit, the action of the CIT(A) even in clubbing of the two units, i.e., 196 and 205 is against the provisions of the law as explained above. Further, the CIT(A) has given valid reasons for holding that unit 206 is an independent unit. It was argued by the learned Authorised Representative that the contention of. the learned. Departmental Representative that the CIT(A) has not given reasons for treating, unit 206 as a. separate unit is wrong as the CIT(A) in para 5 on p. 4 of the order has given a categorical finding to the effect that unit 206 is engaged in an activity which is entirely different from the activities of units 196 and 205. It has been further held in that order that unit 206 is a tool room and engaged in the manufacture of dies and tools which are not only consumed by all units of the assessee-company but are also sold to outside parties in earlier as well as subsequent years. As such, it has been argued that no fault on this point can be found in the order of the CIT(A).
6.4 On the issue of allocation of head office expenditure, the learned Authorised Representative stated that the assessee-company has already allocated 90 per cent of the expenditure to all the units proportionately. The balance 10, per cent of the expenditure were hot allocated since the head office is working independently and carrying on activities on its own, other than for the various units and as such the total expenditure incurred by the head office cannot be considered to have been incurred for the units. Despite these facts, the CIT(A) has held that the balance 10 per cent of the expenditure also needs to be allocated. Though the CIT(A) is not correct in doing so as stated above still the assessee did not contend the same in appeal as there was no impact on tax liability. The only correction which the CIT(A) applied is that he corrected the wrong allocation done by the AO to the three units, i.e., 196, 205 and 206 and has held that the allocation should be done for all units including unit No. 292 which is also working independently, exactly in the manner, the remaining 90 per cent of the expenditure have already been allocated by the, assessee-company itself. As such, the CIT(A) has given relief on this point by correcting the allocation formula wrongly applied by the AO and the learned Departmental Representative in his argument has not been able to point out what is wrong in allocating the balance 10 per cent of the expenditure also to all units, and why the other units should be ignored which has been done by the AO, and more so when AO himself has accepted the allocation of 90 per cent expenditure done by the assessee.
6.5 As regards the setting off the brought forward losses the learned Authorised Representative has pointed out that the CIT(A) in para 3 on. p. 4 has given a categorical finding that there is no reason to allocate brought forward losses of head office as in all earlier years there were profits in one unit and loss in other units and also all units were treated as separate industrial undertakings for computation of deduction under Section 80-LA. The CIT(A) has further held that even if at all brought forward losses of HO (Others) is to be allocated it should be allocated to all the units in earlier years to which it pertains to and not in the year under appeal. In his argument, the learned Departmental Representative could not point out any mistake in the reasoning given by the CIT(A) in his order and as such on this reasoning itself the action of the CIT(A) is justified. On merit also each unit has to be treated under provisions of Section 80-IA(5) as an independent unit as if such unit were the only source of income of the assessee during the relevant previous year. If that be so, then the profit and loss of other units under no circumstances can be allocated to other units and that too in the subsequent year. On the basis of the above reasoning, the learned Authorised Representative supported the order of the CIT(A).
7. We have considered the arguments advanced by the Revenue as well as the assessee-company. Admittedly, in this case, the assessee-company is having various undertakings and has been maintaining separate accounts. Each of the units’ profit and loss are being determined separately and there is no dispute regarding eligibility of its claim under Section 80-IA. The dispute is regarding the computation of the claim. The AO has allowed the claim at Rs. 39,01,627 as against the claim of Rs. 1,37,73,275 made by the assessee-company. The AO on the basis of the reasoning given in the assessment order that units 196, 205 and 206 are situated in the same locality and some of the material has been transferred from one unit to another, there is variation in the GP rate and there is a common finished goods register, has held that the profit and loss of these units need to be clubbed together for computing deduction under Section 80-IA. However, we are unable to accept the contention of the AO. As explained by the learned Authorised Representative in his arguments stated hereinabove, the above reasoning of the AO is against the provisions of law. 7.1 As per provisions of Section 80-IA, the deduction is available with respect to an undertaking, which is eligible under the provisions of that section. There can be different undertakings with one assessee, as is the case with the assessee-company. There is a possibility that different undertakings may start operation at different point of time though they may be engaged in the same business. There is no such restriction that two undertakings manufacturing the same type of product will be considered as one undertaking. There are conditions specified in Sub-section (2) of Section 80-IA for an undertaking to be eligible to claim deduction. As per this Sub-section, all that is required is that the undertaking should be a new undertaking having new plant and machinery. It nowhere puts a condition that it should manufacture a new product or goods other than what is being manufactured or produced by the assessee in any other undertakings. Thus, the reasoning of the AO that units 196 and 205 are one and the same and accepted by the GIT(A) for units 196 and 205 is not correct. There is nothing to justify, in view of the express provisions of the Act, to hold that units 196, 205 and 206 need to be clubbed for computing deduction under Section 80-IA. Accordingly, so long an undertaking fulfils the requirement of these provisions, the deduction under Section 80-IA cannot be denied or reduced by adjusting loss of other undertakings.
7.2 As regards the computation of deduction under Sub-section (7) of Section 80-IA, as it was at that point of time for the assessment year under consideration, it has been provided that:
Notwithstanding anything contained in any provisions of the Act, the profits and gains of eligible business to which the provisions of this section apply for the purpose of determining the quantum of deduction shall be as if such undertaking were the only source of income of the assessee during the relevant assessment year.
Thus, the above provisions treat each undertaking as independent undertaking and nowhere it has been provided that profit or loss of other undertaking is to be merged or aggregated. In this case it is clear that these undertakings are located in different premises, being Nos. 196, 205 and 206. The plant and machinery are also independent and there is no allegation in the assessment order that in these undertakings there is a mixing up of machinery or plant. This is important because as per Sub-section (2) of this section for claiming exemption as an industrial undertaking one has to fulfil the condition that the undertaking has not been formed by transfer to a new business of machinery or plant previously used for any purpose. In view of this fact, it cannot be held that these undertakings are not independent undertakings and each of the undertakings, i.e., 196, 205 and 206 are independent undertakings. The various allegations made by the AO in the assessment order nowhere disturb this fact of an independent undertaking. The transfer of raw material from one unit to another by proper entries cannot be held to mean that these two undertakings are common. Similarly, having common finished goods register, cannot be held to mean that these undertakings are not independent. This view gets further supported by the then Sub-section (9) and the present Sub-section (8) of Section 80-IA whereby it has been provided that when goods are transferred by an eligible undertaking to any other business being carried on by the same assessee, then value of such goods has to be competed at the market value for computing the deduction under this section. This clause on the contrary authorises transfer of goods of an eligible undertaking to another undertaking and accordingly the transfer of finished goods by an undertaking of the assessee to a common finished goods register cannot be held to be a ground for clubbing the income of two units so long the profit and loss of each unit has been computed independently. Accordingly, the action of the AO in clubbing the income of all 3 units for computing deduction under Section 80-IA was not justified. The deduction under Section 80-IA is to be computed with respect to each unit independently taking into consideration the profit of each unit only without clubbing loss of other units. The contention of the Departmental Representative that CIT(A) was unjustified in treating unit 206 as an independent unit cannot be accepted. The CIT(A) has given valid reasons for treating unit 206 as an independent unit and the contention of the Departmental Representative that CIT(A) has not given any reasons is also against the facts on record. The order of the CIT(A) is very specific and the CIT(A) has given detailed reasoning for the same and accordingly we hold that CIT(A) was correct in holding that unit 206 is an independent unit. Even otherwise, as stated above, we are of the view that there cannot be clubbing of units 196, 205 and 206. The contention of the Revenue on this point is being rejected.
7.3 As regards the allocation of the balance 10 per cent head office expenditure which have been allocated by the CIT(A) to all the units proportionately instead of allocating only to the 3 units as has been done by the AO, we are in agreement with the argument given by the learned Authorised Representative. Though in his arguments the learned Authorised Representative has raised the issue that allocation of 10 per cent of expenditure need not be made as the same pertains to head office activities and has nothing to do with any of the units but we are not giving our findings on this issue as the assessee is not in appeal. Any allocation of the expenditure of the head office has to be done to all the units which are operating under the head office, unless there are valid reasons to exclude any particular unit, The learned Departmental Representative could not point out any infirmity in the formula adopted by the CIT(A) and more so when the allocation of 9.0 per cent head office expenditure done by the assessee to all the units has been accepted by the AO as well.
7.4 As regards the adjustment of the brought forward losses under the head office, the CIT(A) has rightly held that there is no reason to allocate these losses of all earlier years when there was profit in one unit and loss in other units and more so when all units were treated as separate industrial undertakings for computation of deduction under Section 80-IA in the earlier years. 7.5 There is another aspect, which we have noticed in this case and for that reason itself this ground of the Revenue should fail is that the assessee has been filing its return for last many years showing profit and loss of each of the units separately. Units 196, 205 and 206, 292, unit GTK (since closed) and unit head office (shares), have been treated separately and the profit and loss of each of these units has been accepted in the asst. yrs. 1995-96, 1996-97 and 1997-98. No clubbing as resorted by the AO in this year has been done in the past. The activities of each of the units continue to be same as in past years. For the sake of consistency as well, the same should have been accepted.
8. In view of the above, ground No. 1 raised by the Revenue is rejected.
9. As regards the second ground whereby the deduction computed under Section 80HHC allowed by the CIT(A) is being disputed, the learned Departmental Representative has stated that the learned CIT(A) was not justified in excluding excise duty from the total turnover while computing, deduction under Section 80HHC. Moreover, the CIT(A) was not justified in excluding the loss in share business activity which is an independent activity and has nothing to do with the export business of the assessee while computing deduction under Section 80HHC. The learned Departmental Representative has argued that, turnover should include excise duty. The learned Authorised Representative in his reply has stated that the above issues are, squarely covered by various judgments of the High Courts and this Tribunal in favour of the assesses As regards the first issue it has been stated that there are judgments of at least six High Courts where it has been held that excise duty is to be excluded from the total turnover while computing deduction under Section 80HHC. For this, reliance has been placed on the following judgments :
1. CIT v. Sudershan Chemicals & Industries
2. CIT v. Sundaram Fastners Ltd.
3. CIT v. Wheels India Ltd. (2005) 197 CTR (Mad) 284 : 275 ITR 319 (Mad)
4. CIT v. Chloride India Ltd.
5. CIT v. K. Rajendranathan Nair
6. CIT v. Bharat Earthmovers Ltd.
7. CIT v. Wolkmen India Ltd. (2002) 178 CTR (Raj) 301 : (2003) 132 Taxman.7 (Raj).
10. We have considered the arguments of both the sides. Since the above issue is squarely covered by the judgments of the various High Courts, we hereby uphold the order of the CIT(A) on this ground that excise duty is to be excluded from the total turnover while computing deduction under Section 80HHC.
11. As regards the loss in the share business activity, the learned Authorised Representative has submitted that the assessee has been maintaining separate books of account and share business activity is an independent business as profit and loss of that activity cannot be taken into account while computing deduction under Section 80HHC. For this, the learned Authorised Representative has placed reliance on the following judgments of the Delhi Bench of the Tribunal where the above view has been upheld :
1. Bharat Commerce & Industries Ltd. v. Dy. CIT, ITA No. 3344/D/2000, dt. 30th Nov., 2004.
2. Bharat Commerce & Industries Ltd. v. Dy. CIT, MA No: 62/Del/705 in ITA No. 4516/D/99. dt. 5th April, 2005.
3. Bhagwan J. Bahirwani v. ITO ITA No. 3772/Del/2001, dt. January. 2005
4. Virender Kumar Bajaj v. Asstt. CIT. ITA No. 2690/Del/2004 dt. 2nd Sept. 2005.
In view of the above issue being squarely covered in favour of the assessee by judgments of this Tribunal itself, we uphold the action of the CIT(A) in excluding the loss in the share business activity while computing deduction under Section 80HHC of the Act. Accordingly, this ground No. 2 of the Revenue is rejected.
12. In the result, the appeal of the Revenue is dismissed.