Ashok Leyland Ltd. Vs ACIT (ITAT Chennai)

Income Tax Appellate Tribunal (ITAT) Chennai ruled on cross-appeals filed by Ashok Leyland Ltd. and the Income Tax Department regarding deductions claimed under Section 35(2AB) of the Income Tax Act for Research and Development (R&D) expenses. The case revolved around the company’s claim for weighted deduction on its R&D expenditure, which was disallowed by the Assessing Officer (AO) due to the absence of Form 3CL from the Department of Scientific and Industrial Research (DSIR). The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance, leading to the current appeal.

The dispute focused on whether the weighted deduction under Section 35(2AB) was permissible without Form 3CL. Ashok Leyland argued that the non-availability of the form should not impact the claim, while the AO maintained that the provision mandates DSIR approval. The ITAT referred to Rule 6(7A)(b) of the Income-tax Rules, which, post-amendment in 2016, requires Form 3CL for claiming the weighted deduction. Given this regulatory change, ITAT upheld the CIT(A)’s decision, denying the weighted deduction but allowing normal deduction on revenue expenses and depreciation on capital expenses.

The tribunal examined judicial precedents, including CIT v. Vegetable Products Ltd. (88 ITR 192), where the Supreme Court ruled that tax laws should be interpreted in favor of the assessee in case of ambiguity. The ITAT also considered Sobha Developers Ltd. v. CIT, a Karnataka High Court ruling that supported a taxpayer-friendly approach. Despite these precedents, ITAT concluded that the regulatory framework in AY 2018-19 clearly mandated DSIR certification, making the weighted deduction inadmissible.

Ultimately, ITAT Chennai partially allowed Ashok Leyland’s appeal by permitting depreciation on capital R&D expenditure while rejecting the claim for a weighted deduction. The Revenue’s appeal was dismissed. The ruling underscores the importance of regulatory compliance in tax claims, particularly concerning R&D incentives.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

These are appeals preferred by the assessee & the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter in short “the Ld.CIT(A)”), Delhi, dated 06.03.2023 for the Assessment Year (hereinafter in short “AY”) 2018-19. Since the issues involved in these cross appeals were inter related, both these appeals were heard together and are accordingly being disposed off by this common order.

2. We first take up the assessee’s appeal in ITA No.554/Chny/2023.

3. Ground No. 1 raised by the assessee is general in nature, therefore doesn’t require any adjudication.

4. Ground Nos. 2 to 6 are against the action of the Ld. CIT(A) partially confirming the disallowance made by the AO out of the deduction claimed in respect of the Research & Development expenditure incurred at the approved in-house R&D facility u/s 35(2AB) of the Act.

4.1 The facts as discernible from the records are that, the assessee had incurred scientific research expenditure, both revenue and capital, at its approved in-house R&D facility. According to the AO, the assessee had claimed weighted deduction of Rs.731,68,77,636/- being 200% of the aggregate expenditure u/s 35(2AB) of the Act. The AO in the course of assessment, had required the assessee to submit the Form 3CL issued by the DSIR, to which the assessee is noted to have submitted that, the DSIR was yet to issue Form 3CL. According to the assessee however, the non-availability of Form 3CL would not prevent it from claiming weighted deduction u/s 35(2AB) of the Act. After considering the submissions of the assessee, the AO is noted to have held that, in absence of Form 3CL, the assessee cannot claim weighted deduction u/s 35(2AB) of the Act.

4.2 The AO thereafter observed that, the assessee had incurred revenue expenditure of Rs.387,57,96,408/-, in relation to which weighted deduction of 200% being Rs.775,50,92,814/- had been claimed as deduction u/s 35(2AB) of the Act. The AO is noted to have held that normal deduction for the revenue expenditure was allowable and therefore disallowed the weighted component of deduction claimed u/s 35(2AB), which was ascertained at Rs.387,57,96,408/-. With regard to the balance R&D expenditure of capital nature of Rs.100,21,22,016/-, the AO noted that, the assessee had claimed weighted deduction at 200% being Rs.200,42,44,032/-. According to the AO, this entire claim was to be disallowed. The AO is noted to have specifically denied the alternate claim raised by the assessee in respect of 100% of capital expenditure u/s 35(1)(iv) of the Act and instead allowed depreciation @ 15% on the capital expenditure being Rs.30,06,36,605/- [Rs.100,21,22,016 X 15%]. The AO accordingly disallowed sum of Rs.557,94,03,835/-(Rs.387,57,96,408/- + Rs.170,36,07,427) u/s 35(2AB) of the Act. Being aggrieved by the order of the AO, the assessee carried the matter in appeal before the Ld. CIT(A).

4.3 It is noted that the Ld. CIT(A) has in principle upheld the action of the AO. However, before the Ld. CIT(A), the assessee brought to his notice that, the AO had made the disallowance u/s 35(2AB) on the erroneous presumption that, the assessee had claimed weighted deduction @ 200%, whereas the assessee had actually claimed weighted deduction @ 150%. The assessee accordingly pointed out that, the AO had made excessive disallowance of Rs.314,04,44,623/-. The Ld. CIT(A) is noted to have found this contention of the assessee to be factually correct and accordingly directed the AO to make necessary correction and modify the disallowance figure to Rs.243,89,59,212/-
(Rs.557,94,03,835/- minus Rs. Rs.314,04,44,623). Being aggrieved by the order of the Ld. CIT(A), the assessee is now in appeal before us.

4.4 Having considered the submissions of the assessee, in light of the findings of the lower authorities, we note that, Section 35(2AB) of the Act, provides that, an assessee shall be allowed weighted deduction in relation to expenditure incurred on the in-house R&D facility as approved by the prescribed authority, i.e. DSIR. Sub-clause (4) of Clause (2AB) of Section 35 provides that, the prescribed authority, i.e. DSIR shall submit its report in relation to the approval of the research facility in such Form as prescribed. Rule 6(7A)(b) of the Income-tax Rules, 1962 as amended by the IT(10th Amendment) Rules, 2016 applicable with effect from 01.07.2016 provides that, the approval of expenditure under 35(2AB) of the Act shall be subject to the condition that, the prescribed authority, i.e. DSIR, shall submit its report in Form 3CL to the PCCIT or CCIT. The relevant Rule is reproduced hereunder:

“(7A) Approval of expenditure incurred on in-house research and development facility by a company under sub-section (2AB) of section 35 shall be subject to the following conditions, namely :—

(a) The facility should not relate purely to market research, sales promotion, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature;

(b)The prescribed authority shall furnish electronically its report,—

(ii) quantifying the expenditure incurred on in-house research and development facility by the company during the previous year and eligible for weighted deduction under sub-section (2AB) of section 35 of the Act in Part B of Form No. 3CL;

(ba) The report in Form No. 3CL referred to in clause (b) shall be furnished electronically by the prescribed authority to the Principal Chief Commissioner of Income-tax or Chief Commissioner of Income-tax or Principal Director General of Income-tax or Director General of Income-tax having jurisdiction over such company within one hundred and twenty days,—

(i) of the grant of the approval, in a case referred to in sub-clause (i) of clause (b);

(ii) of the submission of the audit report, in a case referred to in sub-clause (ii) of clause (b);

(c) The company shall maintain a separate account for each approved facility; which shall be audited annually and a report of audit in Form No. 3CLA shall be furnished electronically to the Secretary, Department of Scientific and Industrial Research on or before the due date specified in Explanation 2 to sub-section (1) of section 139 of the Act for furnishing the return of income, for each succeeding year.”

4.5 In light of the above Rule, as introduced by the IT (10th Amendment) Rules, 2016 applicable with effect from 01.07.2016, the position of law as prevailing in AY 2018-19 is that, furnishing of Form 3CL by DSIR is a pre-requisite to claim the weighted component of deduction u/s 35(2AB) of the Act. The reliance placed by the assessee on the decisions rendered by this Tribunal in their own case in earlier AY 2011­12 is found to be distinguishable as the AY involved was prior to the insertion of the aforementioned Rule. Accordingly, due to the change in position of law, the aforesaid decision is no longer applicable in the relevant AY 2018-19. For the aforesaid reasons therefore, since the expenditure incurred at the R&D facility was not approved by DSIR in Form 3CL, in light of the restriction set out in Rule 6(7A)(b) of the Income-tax Rules, 1962, the Ld. CIT(A) had rightly denied weighted deduction u/s 35(2AB) of the Act.

4.6 We now come to the alternate claim raised by the assessee for deduction of the capital R&D expenditure of Rs.100,21,22,016/- u/s 35(1)(iv) of the Act. It is noted that, the lower authorities have denied this alternate claim on the ground that, no evidence was provided by the assessee in relation thereto. Before adverting to the facts of the present case, it is noted that Section 35(1)(iv) of the Act, provides that any expenditure of a capital nature on scientific research, related to the business of the assessee shall be admissible as deduction in terms of provision of Section 35(2) of the Act. It is further noted that sub-clause (ia) of Section 35(2) of the Act provides that, where the capital expenditure has been incurred after 31.03.1967, the entire value of capital expenditure is eligible for deduction from the profits of the business. Hence, in our considered view therefore, an assessee is entitled for normal deduction i.e. 100% of the capital expenditure incurred at its R&D facility in terms of Section 35(1)(iv) read with Section 35(2)(ia) of the Act, irrespective whether such capital expenditure is eligible for weighted deduction u/s 35(2AB) of the Act or not.

4.7 Our view finds support from the decision of the Hon’ble jurisdictional Madras High Court in the case of CIT vs Rajapalayam Mills Ltd. (265 Taxman 209). In the decided case, the assessee had claimed deduction u/s 35(2AB) of the Act in respect of the expenditure, both revenue and capital, incurred at its R&D facility. Since the assessee was unable to fulfill the conditions prescribed in Section 35(2AB) of the Act, the claim for weighted deduction was denied to it. The assessee had alternatively claimed normal deduction us 35(1)(i) and 35(1)(iv) of the Act in respect of the revenue and capital expenditure respectively. On appeal, this tribunal is noted to have upheld the allowance of deduction at normal rate u/s 35(1) of the Act. On further appeal by the Revenue, we find that the Hon’ble High Court upheld the order of this Tribunal, by holding as under:

“2. The present Appeal has been filed by the Revenue under Section 260-A of the Income Tax Act by raising the following purported substantial questions of law arising from the order passed by the Income Tax Appellate Tribunal dated 31.7.2008, by which the learned Tribunal upheld the order of the learned Commissioner of Income Tax (Appeals) and held that the expenditure incurred by the Assessee on Scientific Research was not entitled to weighted deduction of 1.5 times under Section 35(2AB) of the Act as the Project in question was not duly approved by the Competent Authority, however, the Assessee, was entitled to normal deduction of 100% of expenditure incurred only under Section 35(1)(i) of the Act.

3. The learned Commissioner of Income Tax (Appeals) had discussed the above aspect in his order dated 31.10.2006 as hereunder: —

…..

3.2  After considering the submissions I find that the assessing officer has rightly rejected the claim of the appellant u/s. 32(2AB) as there was no approval from the prescribed authority as on the date of completion of assessment. Having regard to alternative claim, I find that the assessing officer had no occasion to consider the claim of the appellant. In the circumstances, the assessing officer is directed to consider the claim of deduction u/s. 35(1)(i) for Rs. 55,12,558/- representing R&D Revenue Expenditure and deduction u/s. 35(1)(iv) for Rs. 46,387/- representing expenditure incurred for the purchase of Camera used in R&D unit.”

4. However, the Revenue took up the matter before the Tribunal which held against the Revenue on the said aspect of the matter in the following manner:—

“4. After considering the rival submission carefully, we agree that Sec.35(1) as well as Sec.35(2AB) deal with the same expenditure i.e., scientific expenditure consisting of revenue and capital expenditure and only difference is that Sect.35(1) provides for allowance at normal rate i.e., actual expenditure whereas Sec.35(2AB) allows deduction to be claimed at weighted rate of 150% subject to fulfilment of certain conditions. Therefore, we find nothing wrong with the directions of the CIT(Appeals) to the Assessing Officer to allow normal deduction under Sec.35(1) particularly in view of the fact that the Assessing Officer himself has allowed deduction for the Asst. Year 2005-06.”

5. Though there was no issue about the claim of weighted deduction, the Revenue has still preferred the present Appeal under Section 260A of the Act which was admitted by a coordinate Bench of this Court by order dated 9.1.2009, by framing the following substantial questions of law:—

“(i) Whether, on the facts and circumstances of the case, the Tribunal was right in law in entertaining a change of claim of deduction by the assessee from 35(2AB) to 35(1) of the Income Tax Act?

(ii) Whether, on the facts and circumstances of the case, the Tribunal was right in granting relief under Section 35(1) when the Assessee has not produced the relevant approval from the prescribed authorities for the claim of deduction?”

6. Having heard the learned Senior Standing Counsel for the Revenue, we are satisfied that there is no substance in the present Appeal, since the claim of weighted deduction at 1.5 times of the expenditure incurred by the Assessee on Scientific Research was not even decided against the Revenue by the Appellate Authorities, viz., the Commissioner of Income Tax (Appeals) and the Tribunal and therefore, there was no occasion for the Revenue to prefer any further appeal, as the expenditure was allowed only under Section 35(l)(i) of the Act which does not require any approval by the Competent Authority.

7. Since the spending of the amount on Scientific Research itself was not even disputed by the Revenue, in our opinion, the Appellate Authorities have rightly allowed the claim under Section 35(1)(i) of the Act. The Assessee has not preferred any Appeal against that finding and therefore, the question of approval by the Competent Authority for making such claim becomes irrelevant. Therefore, we do not find any substantial question of law to be arising in the present Appeal.

8. We do not find any merit in the present Appeal filed by the Revenue and the same is liable to be dismissed and accordingly, it is dismissed.

No order as to costs. A copy of this judgment may be sent to the Assessee forthwith.”

4.8 In view of the above decision supra, the legal position which emerges is that, the denial of weighted deduction u/s 35(2AB) will not disable the assessee from claiming normal deduction for the said R&D expenditure, both revenue & capital, u/s 35(1)(i) and 35(1)(iv) of the Act respectively. Now reverting back to the facts of the present case, it is noted that the assessee had furnished the details of the expenditure incurred at its approved in-house R&D facility before the lower authorities, which was inter alia included in the audited accounts certified by the statutory auditor in Form 3CLA. It was brought to our notice that the assessee vide letter dated 05.03.2021 had furnished the Form 3CLA, which contained the details of R&D expenditure, including expenditure of capital nature, consolidated claim statement, details of disclosure of R&D expenditure in the notes to audited financial statements along with a reconciliation statement between the amount certified in Form 3CLA and the figures reported in notes to audited financial statements. Having perused these details, we find that the details evidencing incurrence of capital expenditure at the approved in-house R&D facility was duly disclosed in the notes to the audited financial statements and further the statutory auditor had verified and certified the same being relatable to scientific research in Form 3CLA. According to us therefore, these contemporaneous evidences sufficiently establish that the capital expenditure of Rs.100,21,22,016/- was incurred in relation to scientific research and was therefore eligible for deduction u/s 35(1)(iv) of the Act. Hence, the order of the lower authorities to that extent stands reversed.

4.9 In view of our above findings therefore, we direct the AO to further allow normal deduction for the capital R&D expenditure of Rs. 100,21,22,016/- u/s 35(1)(iv) of the Act, and resultantly delete disallowance to the extent of Rs.70,14,85,411/- (Rs.100,21,22,016/-minus Rs.30,06,36,605/-). This ground therefore stands partly allowed.

5. Ground Nos.7 to 15 of the assessee’s appeal and Ground No.3 of the Revenue appeal relates to the claim of the assessee regarding deduction u/s 80IA of the Income Tax Act, 1961 (hereinafter in short “the Act”) for its plant/unit at Pantnagar.

5.1 The facts as noted are that, the assessee had established a manufacturing facility for production of commercial vehicles in Pantnagar, Uttarakhand, which was eligible for deduction u/s 80-IC of the Act. The said unit had commenced its operations in the year 2010 and the relevant AY 2018-19 is the ninth year for the eligible unit. The assessee is noted to have claimed deduction of Rs.360,05,58,183/- u/s 80-IC of the Act in the return of income, which was accompanied with the audit report obtained from Chartered Accountant in Form 10CCB. The AO in the course of assessment is noted to have made enquiries into the deduction claimed by the assessee and had inter alia requisitioned the books of accounts and also the basis of allocation of common costs. The assessee is found to have furnished the requisite details along with explanation in support of its claim. Thereafter, the AO had show-caused the assessee to explain why the claim of 80-IC should not be restricted to 3% of its cost base, which according to the AO worked out to Rs.69,40,86,511/-. The relevant contents of the show-cause is noted to be as follows:-

“In relation to deduction claimed u/s 80/C, the assessee company is show caused to why the claim of 80/C be not restricted as per calculation below for AY 2018-19.

Total Cost base for A.Y 2018-19 for Pant Nagar Unit – 7712,07,23,451/-

Margin Allowed at 3% – Rs.231,36,21,703/-

Deduction @ 30% -69,40,86,511/-

So for Pant Nagar Unit allowable margin is Rs. 69,40,86,511/, while the company has taken a benefit of Rs. 360,05,58,183/. The remaining claim of 80IC i.e. Rs. 290,64,71,673/- is to be disallowed and added back to the total income of the assessee company.”

5.2 The assessee is noted to have submitted its reply on 19.04.2021 giving a note on the activities being carried out at the eligible unit. The assessee also explained the manner in which the sales were recognized and credited in the stand-alone accounts of the eligible unit and, the basis of allocation of all common costs including sales, marketing, product development, etc. The submissions of the assessee are found to be extracted in the impugned assessment order. According to the AO, the submissions of the assessee was not satisfactory. The AO observed that the books of accounts were maintained against the principles of accounting standards and was being prepared in a manner to create artificial profits with the intention of claiming increased deduction under section 80-IC of the Act. According to AO, the assessee was recognizing sales at different points for the purposes of Income-tax, vis-à-vis, GST and that the assessee’s action of booking the sales at the retail point was without any basis. The AO further observed that, the eligible unit was a cost center and therefore, only a minimum margin should be allowed on their total activities as the AO characterized the assessee to be a low-risk manufacturer. The AO noted that, the design sketch comes from design departments located outside the eligible units and also the R&D happens outside the eligible unit and thus the eligible unit was carrying out only a low-end activity. With these observations, the AO is noted to have concluded that the assessee was shifting profits to its 80-IC unit through artificial booking of higher sales and overheads. Overall, therefore, according to the AO, the assessee had arranged its affairs in such a manner so as to evade tax by showing higher profits in a low-end job, i.e. manufacturing activity carried out at the eligible unit. After these discussions, the AO is noted to have taken the cost base as available in the stand-alone accounts of the eligible unit, applied margin of 3% and accordingly computed allowable deduction u/s 80-IC of the Act at Rs.69,40,86,511/- and the remaining claim of Rs.290,64,71,673/- was disallowed and added back to the total income.

5.3 Aggrieved by the above assessment order, the assessee is noted to have preferred an appeal before the Ld. CIT(A). It is noted that, the assessee had furnished detailed submissions before the Ld. CIT(A). Thereafter, the Ld. CIT(A) is noted to have made his own enquiries from the assessee. After considering the submissions, rejoinder along with the details, the Ld. CIT(A) is noted to have observed that, the revenues recognized by the eligible unit was indeed identifiable as the vehicles manufactured in various units were identifiable by their chassis number which contained an alphabet identifying the manufacturing unit. The Ld. CIT(A) further observed that, even the operating costs were identifiable unit-wise. He also noted that, the other common expenditure such as R&D, marketing sales promotion, finance, etc. had been allocated using suitable allocation keys. According to Ld. CIT(A) therefore, the AO should not have disregarded the stand-alone accounts of the Pantnagar Unit. The Ld. CIT(A) is noted to have also analyzed the unit-wise profitability of the eligible 80-IC unit and found that the gross profit was comparatively lower than some other non-eligible units, but the net profit was almost same to certain other non-eligible units. This fact according to Ld. CIT(A) showed that, more indirect expenses were being claimed in other units in comparison to the eligible unit which, according to him, lent credence to the AO’s allegation that the profits shown in 80-IC eligible unit was higher. The Ld. CIT(A) thus held that, the allocation of the expenses to the eligible unit was not done in a proper manner. Hence, according to him also, the financial results of the eligible unit did not reflect the correct picture. The Ld. CIT(A) further agreed with the AO that the assessee was only a manufacturing unit, which was carrying out the orders received from head office and was therefore a low-risk entity.

5.4 In light of the above observations, the Ld. CIT(A) proceeded to estimate the profitability of the eligible unit. It is noted that the Ld. CIT(A) did not agree with the AO’s action of adopting margin of 3% over the cost base, as according to him, it did not have any cogent logic or basis. Instead, the Ld. CIT(A) observed that the combined PBT of the assessee was 8.35% and that of eligible unit was 12.09% and that if the financial results of the eligible unit were removed, then PBT of the assessee was 6.09%. The Ld. CIT(A) accordingly directed the AO modify the disallowance u/s 80-IC by adopting margin of 6.09% instead of 3%. Aggrieved by this order of the Ld. CIT(A), both the parties are in appeal before us.

5.5 Assailing the action of Ld. CIT(A), the Ld. AR for the assessee argued that, the lower authorities had erred in alleging that the stand- alone financials of the eligible units were distorted to reflect higher profits. The Ld. AR first narrated the entire business model of the company along with the manner in which its manufacturing facility at Pantnagar operates. He submitted that, the provisions of Section 80-IC were meant to allow deduction for the profits derived by a manufacturing undertaking and therefore understandably, a manufacturing plant is a profit center and not a cost center as wrongly alleged by the lower authorities. He further showed that that, the entire revenues were mapped to the sales made to the customers out of the products manufactured by the eligible unit. He explained that, all the chassis manufactured by the company had a unique alphabet on the basis of which the place of manufacture could be identified. He thus showed us that, the revenues credited in the stand-alone accounts of the eligible unit was the exact same revenues which was derived from sale of these engines to the ultimate customers. He pointed out that, even the Ld. CIT(A) had acknowledged this factual position. He further showed us that, the operating costs incurred at the manufacturing facility were not in dispute. Now coming to the common & indirect costs, he invited our attention to the relevant cost allocation parameters and showed us that, all the indirect costs including R&D costs, sales & marketing costs etc. were appropriately allocated and debited in the stand-alone accounts of the eligible unit. He thus argued that, the observations made by the lower authorities that, the relevant R&D and sales & marketing efforts were not made by the eligible unit but the revenues included the benefits from such efforts was misplaced as all the relevant costs & expenses towards R&D and sales & marketing had been appropriately allocated to work out the eligible profits of the Pantnagar Unit.

5.6 In light of the above, the Ld. AR contended that the lower authorities were unable to pin-point any specific defect or infirmity in the audited stand-alone accounts of the eligible unit and rather had made sweeping remarks which did not have any cogent basis. He also argued that, the assessee was a listed entity and that separate accounts were being maintained in SAP software for the eligible unit, which was also audited and certified by the auditor. According to him therefore, if the AO was not satisfied with the correctness of the accounts, then he was required to follow the mandate laid down in Section 145(3) of the Act and that by not doing so, the action of the AO in estimating the profits of the eligible unit was unjustified.

5.7 The Ld. AR further showed the comparative figures of the gross profit and net profit of the eligible unit and other non-eligible units and showed that the profits of Pantnagar were commensurate with the profits of their non-eligible Ennore Unit but was comparatively higher than overall profit of the company. He explained the reasons for the same by bringing to our notice the different product mix viz., higher tonnage vehicles which had higher margins were being manufactured by the eligible unit. Also, the per unit employee cost at the eligible unit was lower due to the high level of automation at their state-of-the-art eligible facility. Further, the said eligible unit also enjoyed other subsidies from the Government, which was also a contributing factor to the higher profit margin of the eligible unit. He accordingly contended that, eligible profits of the Pantnagar Unit had been ascertained in accordance with due accounting principles and provisions of law and therefore urged that the disallowance made u/s 80-IC ought to be deleted.

5.8 Per contra, the Ld. CIT, DR supported the action of the AO. Reiterating the findings of the AO, he argued that the revenues shown by the eligible unit had no proper linkage with the books of accounts and therefore contended that the revenues were artificially increased to show higher profits. For this, he referred to the AO’s finding that, for GST the sales were recognized at manufacturing point whereas for income-tax sales were recognized at retail point. He argued that a manufacturing facility is always a cost center and in assessee’s case, the plant was simply carrying out the orders of the head office and therefore only a reasonable profit should be attributed to the cost base incurred at this plant. According to him all the R&D efforts, sales efforts, related risks etc.

were borne by head office and not the eligible unit and therefore, according to him, it was improper to attribute the entire revenues from sale of products manufactured at the eligible unit to the stand-alone accounts of the eligible unit. He thus supported the AO’s action of estimating 3% profit for the eligible unit was fair & reasonable.

5.9 We have heard the rival submissions and perused the material placed on our record. The AO in the impugned order is noted to have observed that, the assessee operates an eligible manufacturing undertaking in Pantnagar and the profits of this eligible unit has been computed by the assessee at Rs.360,05,58,183/-. According to the AO, the books of accounts of the eligible unit have been done in a manner to create higher profits than other units, which in his view was nothing but diversion of profits. For holding so, the AO is noted to have majorly disputed the correctness of the revenues booked by the eligible unit, which according to him did not have any basis. The AO also observed that the designs, sketches for the products and marketing activities weren’t conducted by the eligible unit whereas, the assessee booked the entire turnover in the eligible unit. According to him, the eligible unit was a cost center only and hence, only a minimum margin of 3% was permissible, which we find was based on his earlier predecessor’s estimation done in AY 2016-17.

5.10  On a perusal of the facts placed before us, it is noted that, the assessee had set-up a commercial vehicle manufacturing facility in the year 2009 with an aggregate capex of Rs.2250 crores at Pantnagar, Uttarakhand. The assessee had placed on record the relevant Notification No. 177/2004 dated 28.06.2004 issued by the CBDT notifying the said location as a designated area eligible for deduction u/s 80-IC of the Act. The assessee is noted to be involved in manufacture of Commercial heavy vehicles, inter-alia, chassis/products and integrated facility for assembling Axle, Gear-box, vehicle, cab-welding etc. Upon completion of manufacture, the assessee transfers these completed chassis/products from sales-yard to their nodal point located at warehouses termed as regional sales office (‘RSO’)/Warehouse; and therefrom, the heavy-vehicles/goods/products are sold and sent to the ultimate consumers. It was brought to our notice that, the sales-yard is generally within the same premises as that of the manufacturing units to accommodate storage of the manufactured chassis etc, as they cannot be kept inside the plant for operational efficiency reasons and thereafter transferred to RSO/ware-house, from where the goods are sent to the ultimate customers. However, according to AO, there was no linkage between the goods sold from the RSO with the goods manufactured by the eligible unit and therefore he alleged that, the revenues credited in the stand-alone financials were shown to be higher, to shift profits. In this regard, we find that the Ld. CIT(A) had rightly taken note of the assessee’s explanation that, the products manufactured by the eligible unit was identifiable from the chassis/product number which inter alia included a unique 11^th alphabet from which the place of manufacture i.e. Pantnagar Unit was identifiable. The assessee had placed before us sample invoices to show that, they contained the chassis numbers from which the place of manufacture i.e. Pantnagar, was discernible from the eleventh character in chassis ‘P’ which indicated the Pantnagar unit. We thus find ourselves in agreement with the assessee that, the sales out of the products manufactured at the eligible unit were clearly identifiable and hence the revenues booked in the stand-alone financials of the eligible unit indeed had clear linkage with the production. According to us therefore, the presumptuous inference drawn by the AO that the revenues credited in the stand-alone accounts had no linkage with production at the eligible unit is factually erroneous.

5.11 It is noted that the next observation made by the AO for disputing the correctness of the stand-alone accounts was qua the price at which the sales were recorded in the stand-alone financials of the eligible unit. Before adverting to the facts of the present case, let us first have a look at the relevant provisions of the Act. In this regard, it would first be relevant to examine the provisions of sub-section (8) of section 80-IA of the Act which stands incorporated by sub-section (6) of section 80-IC, by virtue of which, sub-section (5) and sub section (7) to (12) of section 80IA is brought into Section 80-IC of the Act. Section 80-IA(8) of the Act mandates that, the profits of the eligible business shall be computed on the basis that transfer of goods are recorded at the market value of goods. The relevant extracts of the provision of section 80-IA(8) of the Act is as follows:

“(8) Where any goods [or services] held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods [or services] held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods [or services] as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods [or services] as on that date :

Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.

[Explanation.—For the purposes of this sub-section, “market value”, in relation to any goods or services, means—

(i) the price that such goods or services would ordinarily fetch in the open market; or

(ii) the arm’s length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA.”

5.12 From the above it is clear that, the sale price shall be the price which such goods fetch in the open market. We note that, the sales recorded in the stand-alone accounts are based on the price at which the goods manufactured were sold to the customers viz., based on the invoices raised upon the third parties. According to us therefore, this basis of revenue recognition followed by the assessee is in line with Section 80-IC(6) read with Section 80-IA(8) of the Act. We therefore see no reason to tinker with the figure of revenues recognized in the stand­alone accounts of the eligible unit.

5.13 We find that the Revenue’s case is that, the assessee is discharging GST at the manufacturing point (when transferring to RSO/Warehouse) whereas booking sales at the retail point (sale to customers from the RSO) and due to this timing mismatch, the Revenue is disputing the correctness of the sales value credited in the stand-alone books of accounts for income-tax purposes. We find this particular observation to be misplaced. Firstly, as noted above, the revenues have been rightly recognized in accordance with the mandate laid down in 80-IC(6) read with Section 80-IA(8) of the Act and hence does not warrant interference. Secondly, the Ld. AR has rightly brought to our notice that, under the GST laws, the levy of GST gets triggered upon transfer of goods from one point to another, even if it involves transfer from the manufacturing facility to the sales office of the same assessee. He showed us that, the levy of GST is not dependent upon ultimate sale, but is required to be discharged based on movement of goods from one place to another. It is for this reason that the GST is discharged at the manufacturing point, whereas the sales is recognized in the books when the goods are actually sold to customers and the ultimate risk, reward, possession and ownership is transferred. In light of the foregoing therefore, we are in agreement with the assessee that the recording of revenues of the eligible unit with reference to the prices at which they were sold to the third parties in the open market, was based on sound accounting principles as well as the relevant provisions of law.

5.14 Apart from the above, the Ld. AR additionally brought to our notice that, this manner of revenue recognition has been consistently followed by the assessee in all the earlier years and that this AY 2018-19 was their 9th year of claim. He showed us that, there were substantial inter-unit transfers in the preceding AY 2017-18 and that, the revenues therefrom were benchmarked to the prices at which same products were sold in market to the customers. These transactions being in the nature of specified domestic transactions u/s 92BA of the Act were referred for transfer pricing scrutiny and the TPO in the order passed u/s 92CA(3) of the Act had found these specified domestic transactions to be at arm’s length and no adverse inference was drawn u/s 80-IA(8) of the Act. Having regard to these contemporaneous facts, we find merit in the plea of the Ld. AR of the assessee that, when the manner of revenue recognition for recording inter-unit transfers i.e., market value at which goods were sold to ultimate customers, has been accepted to be sound & reasonable basis by the TPO in the earlier AY 2017-18, then applying the principle of consistency, and in absence of change of any facts and in position of law in the relevant AY 2018-19, the basis of recognizing revenues in the relevant year could not have been disputed by the AO.

5.15 It is further noted that, much ado has been made by the lower authorities that, a manufacturing unit is a cost center and therefore have no role in profit generation. We find this observation to lack any cogent logic. The Ld. AR has rightly pointed out that, the benefit of deduction u/s 80-IC of the Act is available only to such a unit which is engaged in manufacture of any article or thing and therefore the logic propounded by the lower authorities that, a manufacturing unit is a cost center having no/limited role in profit generation is contrary to the intention of the Legislature and the very purpose of bringing in this profit-linked deduction i.e. Section 80-IC of the Act. Also, in our considered view, normally a profit center is that segment of the business organization which has a profit base or is responsible for generating company’s profits. Without a doubt, a manufacturing plant is both a source of revenues & profits and is in fact the main engine of the business function and, hence a profit center. It is noted that, Human resources department, R&D center, administration office etc. are regarded as cost centers and they are not a source of any revenue or profits. Accordingly, this particular observation made by the lower authorities ascribing manufacturing unit to be a cost center to limit the profit attributable to the eligible unit, is found to be erroneous and unjustified.

5.16 The lower authorities are noted to have also laid much emphasis on the R&D efforts and sales/marketing efforts undertaken by the assessee outside the eligible unit, which according to them, were the major contributing factors to the revenues of the company. According to the Ld. CIT, DR, the profits reported by the eligible unit was inclusive of these efforts which should not form part of the stand-alone accounts of the eligible unit. By not segregating the profits attributable to the R&D efforts and sales/marketing efforts, according to the Revenue, the assessee had artificially reported higher profits in the accounts of eligible unit. Having considered the entire gamut of facts show to us, we find these observations to be not only be factually erroneous but also outlandish. As noted above, sales planning, marketing, R&D etc. cannot be considered as profit generators and are subservient to the manufacturing activity.

These efforts only aid the manufacturing unit in the course of business. Moreover, the Ld. AR has brought to our notice that all the relevant sales, marketing, R&D costs etc. incurred by the company at a centralized level had been allocated amongst all the units including the eligible unit by applying appropriate cost allocation parameters for arriving at the profits. The relevant cost allocation principles adopted by the assessee, as taken note of by us is as follows:-

5.17 Having gone through the above, we therefore note that, all the common costs had indeed been allocated by the assessee to the eligible unit based on sound parameters. We agree with the Ld. AR that, all the costs attributable to the R&D efforts and sales/marketing efforts towards the sales of goods manufactured by the eligible unit, were already captured and debited in the audited stand-alone accounts and therefore there was no further cost left to be attributed thereto. It is noted that the lower authorities have not pointed out any infirmity or falsity in the above cost allocation parameters adopted by the assessee. It is also not the Revenue’s case that, the assessee had not allocated any particular cost/expense, which was otherwise required to be allocated, by which higher profits were reported. Accordingly, when the Revenue had accepted the total cost base, which included the expenditure/costs incurred towards R&D efforts and sales/marketing efforts, to be the costs incurred at the eligible unit, then it was improper for them to turn around and contrarily allege that the revenues attributable to such efforts ought to be excluded.

5.18 In view of our above findings therefore, we find that the revenue of the eligible unit was booked on prudent accounting principles and in accordance with provisions of Section 80-IA(8) of the Act. It is noted that, there is no dispute regarding the direct costs debited in the audited stand-alone accounts of the eligible unit. The assessee has further demonstrated that the common/indirect costs have been allocated on sound and reasonable parameters. According to us therefore, the resultant profits relatable to the manufacturing unit as reported in the audited financial statements did not suffer from any infirmity, as wrongly alleged by the lower authorities in as much as there was no excess or higher profits reported by the assessee in its eligible unit at Pantnagar.

5.19 We further note that, the case of the lower authorities is also that, the profits derived by the assessee from the eligible business are more than the ordinary profits of other business and therefore he estimated at what could be a reasonable profit from such eligible business and such profit be taken as reasonably deemed to have been derived from the eligible business for the purposes of computing the deduction u/s 80-IC of the Act. We find that both the AO and the Ld. CIT(A) did not bring on record any material or evidence on the basis of which they could say that the accounts of the business of the eligible unit have been so arranged that it has produced to the assessee more than the ordinary profits. Instead, both the lower authorities are noted to have proceeded only on surmises and conjectures. On the other hand, the assessee has placed before us the unit-wise profitability of the eligible unit as well as the non-eligible units. Having perused the same, we find that functionally, asset-wise and risk-wise, the eligible unit at Pantnagar is comparable with the non-eligible unit at Ennore and we also note that the profitability of both these units are also comparable. Moreover, in our considered opinion, when the assessee has placed the audited standalone accounts of the eligible unit at Pantnagar and still if the AO was of the view that the profits of the unit set up in backward area should be lower than other units, then the onus lay on the AO to establish the same with cogent material and corroborative evidence or at least, find specific fault or infirmity in the books produced by the assessee. We however note that the AO clearly failed to do so. Nothing tangible was brought on record to support such allegation or reasoning. As noted above, both the revenues recognized in the stand-alone accounts as well as the costs debited in the stand-alone accounts were based on fair & reasonable parameters and sound accounting principles. The AO has not pointed out any specific defect in the manner of preparation of the stand-alone accounts, with corroborative evidence. Instead, the disallowance is noted to have made on mere suspicion and unfounded, baseless observations, as already discussed above.

5.20 According to us, the fact that high profits were earned by the eligible unit in comparison to other units by itself cannot lead to conclusion that the deduction claimed u/s 80IC was excessive. It is well known that higher or lower profit of a business in comparison to other units can be as a result of the cumulative effect of several factors. For instance, from the facts of the present case, it is noted that unlike the other non-eligible units, the eligible unit at Pantnagar had received grant of Rs.207.16 crores by way of incentive/subsidy from the government. We further note that the product profile manufactured by the eligible unit was also different. It was brought to our notice that, the eligible unit manufactured higher tonnage vehicles which had a better margin, whereas other units manufactured the lower tonnage vehicles which had comparatively lower margins. Due to difference in nature of products manufactured, the margins varied. It was also brought to our notice that, the employee costs at the Pantnagar Unit was comparatively lower to other eligible units due to the high level automation at this new plant whereas other plants were still labor-intensive. Having regard to these factors, we thus note that the assessee had also substantiated on facts that the eligible unit enjoyed benefit of subsidies, better margins and savings in costs in comparison to other units, which contributed to its higher profitability. The aforesaid facts lend credence to our view that the mere higher profit earned by eligible unit cannot be the reason to conclude that the assessee transacted in such an ‘arranged’ manner so as to produce more profits to it. In this regard, we find merit in the Ld. AR’s reliance on the judgment of the Hon’ble Bombay High Court in Schmetz India (P.) Ltd.’s case (211 Taxman 59) in which it has been held that merely because an assessee makes extra ordinary profit, it would not lead to the conclusion that the same was organized/arranged for the purpose of claiming higher deduction u/s 10A of the Act. The case of the assessee is further supported by the decisions of the coordinate Benches of this Tribunal in AT Kearney India (P.) Ltd. v. Addl. CIT (153 ITD 693) and Zavata India (P.) Ltd. v. ITO (141 ITD 456).

5.21 Coming to the argument of the Ld. CIT, DR that, the AO was legally empowered to estimate the profits, we find the same to be fundamentally flawed. The Ld. AR brought to our attention that, the AO could have legally interfered with the stand-alone profits of the eligible unit only if he could first point out, (a) as to whether he was of the view that the transactions conducted by the eligible unit were not at fair market value in terms of section 80IA(8) of the Act, or that (b) there was any arrangement with AEs in terms of Section 80IA(10) of the Act which led to higher profits. As already noted by us above, the revenues recognized in the stand-alone accounts was in accordance with Section 80-IA(8) of the Act and therefore the first option (a) was not applicable in the present case. Further, it is not the AO’s case that there was any such arrangement as set out in Section 80-IA(10), basis which it could be alleged that the profits had been shifted out of non-eligible unit to the eligible unit. According to us, the AO has failed to show that there existed any arrangement between the assessee and its connected persons or other ineligible units, by which the transactions were so arranged as to produce more than the ordinary profits in the hands of the assessee.

Since the AO was also unable to show that there was any ‘arrangement’ in terms of Section 80IA(10) of the Act, in our view, the AO could not have invoked the deeming provision and then estimated and scaled down the profits of the eligible unit of the assessee. Thus, according to us, even legally, the AO had erred in estimating the profit of the eligible unit without satisfying the condition precedent as prescribed in section 80-IA(6) read with section 80IA(8) & (10) of the Act. In this regard, we find that, the reliance placed by the Ld. AR on the decision of the Hon’ble Delhi High Court in the case of Pr.CIT Vs Harpreet Kaur (397 ITR 125) against which the SLP preferred by the Revenue has been dismissed by the Hon’ble Apex Court, to be relevant. In the decided case, the AO observed that the profit of the eligible unit of the Assessee located at Baddi was abnormally high when compared to the profits of other units located in Delhi, although the business in these units was the same and all other variables in the business of cosmetics was also similar. The AO accordingly rejected the stand-alone accounts reporting profit of 38.05% and instead adopted 23% for working out the amount eligible for deduction u/s 80-IC of the Act. On appeal, the Hon’ble Delhi High Court held that, without pointing out the specific error in the accounts or disturbing the figures of sales or purchases in terms of Section 80-IA(8) / (10) of the Act, the AO could not have estimated lower profits by comparing the results with other units. The relevant findings taken note of by us, is as under:-

“9. Having heard Mr. Asheesh Jain, learned the Senior Standing counsel for the Revenue and Mr. Gautam Jain, learned counsel for the Assessee, the Court is of the view that the orders of the CIT(A) and the ITAT suffer from no legal infirmity. The reasons for this conclusion follow.

10. Under Section 80-IA(8) of the Act, one of the pre-requisites for the AO to not grant the deduction as claimed by the Assessee in his return is where the AO finds that the consideration at which transfers were made of goods and services of the eligible business as recorded in its accounts “does not correspond to the market values of such goods.” The Proviso to Section 80- IA (8) further states:

“that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.” (emphasis supplied)

11. The expression “such reasonable basis” pre-supposes that the AO has to explain with sufficient clarity why the AO is rejecting the profit figures as put forth by the Assessee which emerges from the audited accounts of the Assessee. In the present case, for instance, the AO had to explain why he was rejecting for AY 2006-07 the GP ratio of 38.05% and substituting it with a rate of 23%. What the AO appears to have done in the present case is to reject an explanation given by an Assessee as to the difference in the selling price of the products manufactured by it at its Baddi unit compared to that at Delhi unit. The AO proceeded on the basis that the sales were to related parties thus giving an unfair advantage to the Assessee.

12. The above approach of the AO was rightly found by the CIT(A) to be not justified. Without pointing out the error, if any, in the accounts or disturbing the figures of sales or purchases, to compare the trading results of business of two units and simply reject was clearly not a “reasonable basis”, as contemplated by the proviso to Section 80-IA (8) of the Act. The AO’s order does not explain the basis for determining the GP ratio of 23% instead of 38.05% for AY 2006-07 and 25% instead of 43.07% for AY 2007-08. In the circumstances, the ITAT’s conclusion that the AO’s order was passed on conjectures and surmises cannot be said to be erroneous.”

5.22 In view of the above, we thus find substance in the argument of the Ld. AR that, the AO’s action of estimating the profit of eligible unit was erroneous and therefore we reject this contention of the Ld. CIT, DR. Also, the basis of adopting margin of 3% and 6.09% by the AO and Ld. CIT(A) respectively, is found to be ad hoc, lacking any rational basis and is per-se arbitrary and whimsical and so, is rejected. Moreover, we also note that, it is not a case where the AO had invoked section 145(3) of the Act and rejected the book results and has passed the order u/s 144 of the Act. We thus find merit in the Ld. AR’s alternate plea as well that, the AO could not have legally ventured into estimation of profits without rejecting the books of accounts u/s 145(3) of the Act.

5.23 In support of our above findings, we also gainfully refer to the decision of this Tribunal at Ahmedabad in the case of Cadilla Health Care Ltd Vs ACIT (21 taxmann.com 483) wherein this Tribunal, on similar facts & circumstances, had negated the Revenue’s contention that the profit attributable to the marketing and R&D activities, which was carried outside the eligible unit, should be demarcated and excluded from the computation of the profits of the eligible unit. In the decided case also, the assessee was carrying out manufacturing operations at its eligible units and that the marketing efforts were being conducted outside the unit and therefore the AO had demarcated and assigned profits of the eligible unit to the marketing division and thereby reduced the figure of profits allowable as deduction u/s 80-IC of the Act. The relevant findings of the AO taken note of by this Tribunal, was as under:-

“6.6    ….The AO’s main thrust after the elaborate discussion was that only the manufacturing profit of the Baddi Unit is the profit which alone is eligible for deduction u/s.80IC. The assessee-company was generating substantial profit on account of its brand value and marketing network on those products when acquired/purchased on P2P basis. The ultimate sale price, on that point of time, as per AO, for those products consisted the (i) profit from manufacturing of the product which was taken by P2P supplier, (ii) profit derived from brand value of the product and (iii) profit derived from marketing network of those products. The AO has then invited attention on the provisions of section 80IC and opined that the profits and gains of an eligible business is the only source of income of the assessee. He has referred section 80IC(7) r.w.s.80IA(5), so that the profits of the eligible undertaking is to be computed as if such eligible business is the only source of income. His conclusion was that the sale price of the products manufactured at the Baddi Unit should be the cost of the production plus a reasonable amount of profit which should have been charged, however, the average sale price was escalated by claiming profit derived on sale of products manufactured by Baddi Unit which according to him, the alleged huge profit was not correct for the purpose of claiming the deduction u/s.80IC of the IT Act.

6.8 He has given an another reasoning and wanted to analyze the issue from yet an another angle. According to him, the assets, such as, brand value and marketing network are the assets owned by the assessee-company as a whole organization. Those assets were not owned by the said Undertaking, i.e. Baddi Unit. Those brands were acquired prior to the setting up of Baddi Unit. The profits of the assessee-company were on account of three reasons; viz. (i) maufacturing assets, (ii) brand assets and (iii) marketing assets. Out of the three, only the manufacturing assets was owned by the said Undertaking, i.e. Baddi Unit. Hence the profit only to the extent of the “manufacturing profit” could be said to be derived from the Baddi Undertaking, which according to AO, was eligible for deduction u/s.80IC of IT Act….

5.24 After taking cognizance of the above observations made by the AO, the Tribunal is noted to have firstly examined the provisions of Section 80-IC of the Act and the meaning of the term ‘profits’ from the eligible business. It held that, the term ‘profit’ implies the gain made by the business. The calculation of ‘profit’ was held to be a function of the price received upon sale less the total cost. It was noted that, the total cost not only includes manufacturing costs but all other costs including R&D, marketing, common overheads to make the sale possible. The Tribunal thus noted that the assessee’s eligible unit had debited all direct and indirect costs in the stand-alone accounts and reduced it from the sales figure to arrive at the profits eligible for deduction u/s 80-IC of the Act. We concur with this analogy of the Tribunal as discussed and the relevant findings taken note of, are as follows:-

“Firstly, the term “Profit” implies a comparison between the stage of a business at two specific dates separated by an interval of a year. Thus fundamentally the meaning is that the amount of gain made by the business during the year. This can be ascertained by a comparison of the assets of the business at the two dates. To determine the “profit” of a manufacturing Unit the accounting standard has given certain guidelines, enumerated in short. In the accounting the “profit” is the difference between the purchase price and the cost of bringing the product to market. A “gross profit” is equal to sales revenue minus cost of goods sold or the expenses that can be traced directly to the production of the goods. Rather, the “operating profit” is also defined as equal to sales revenue minus cost of goods plus all expenses, except interest and taxes. Most of the manufacturing companies have ‘Total Cost’ based pricing method. Total Cost has, broadly speaking, two components; i.e. raw-material plus value addition (it includes all overheads). Therefore, profit margin is price minus total cost. In manufacturing Unit, thus cost of conversion is production overheads, such as, direct labour cost and inextricably linked expenditure of production. In general, every manufacturing concern has fixed manufacturing capacity. So the objective of such concern ought to be to maximize the profit. Now the problem, as posed, is that let us assume that the said manufacturing unit is producing two products; viz. “A” & “B”. For production of “A” product, let us say, there is less working hours, but fetching more value for less money. However, in the production of product “B” due to complex process of manufacturing it requires more working hours. For pricing product “B” the situation is that more money expenditure and may fetch less value. Therefore, in the processing department it is not possible to segregate the two components to determine the segregated margins. Keeping this accounting principle in mind, we revert back to the language of section 80IC which says that a deduction is permissible of such profits of a specified Undertaking engaged in manufacturing of certain article or thing. The business of the said enterprise/concern should be manufacturing of article or thing and the profit therefrom is eligible for deduction u/s.80IC if that profit is part and parcel of the gross total income. As noted hereinabove, profit is the difference between the purchase price and the cost of production along with the cost of bringing the product to market. This basic principle of accountancy, as appeared, have been adopted by Baddi Unit because as per Profit & Loss account, cost of material, personal cost and general expenses, corporate expenses were reduced from the sale price to arrive at the “profit before tax” i.e. Rs. 116,82,91,400/-.”

5.25 Like in the present case before us, in the above decided case (supra) also, the AO had not pin-pointed any defect in the working of the “profit” of the eligible Unit and had instead estimated the margin of the eligible at 10% of cost basis. The Tribunal is noted to have held that, there was no cogent basis to the purported segregation and the assumption of the AO that, the major portion of the profit would be attributed to other functions and that only a nominal profit was to be attributed to the eligible manufacturing unit. The relevant findings are as under:-

“10.3 It is not in dispute that for Baddi Unit the assessee has maintained separate books of accounts and therefore drawn a separate profit and loss account. In such a situation, whether the AO is empowered to disturb the computation of profit, is always a subject matter of controversy. From the side of the assessee, reliance was placed on Addl. CIT v. Delhi Press Patra Prakashan [2006] 10 SOT 74 (Delhi) (URO). In this case, the assessee was claiming deduction u/s.80IA in respect of a Unit No.4. The said Unit was showing profit @ 62%. As against that, AO has noticed that a margin of profit shown by the assessee as a whole was only to the extent of 10%. The AO has therefore recomputed the profit of the said Unit by applying sub-section (10) of section 80IA and restricted the profit of the said Unit to 10% only. While dealing this issue, the Respected Coordinate Bench has concluded that it was not justified to disturb the working of profit merely because the profit rate of eligible unit was substantially higher than overall rate of profit of other Units of the assessee, more so when separate books were maintained by the assessee in respect of the said eligible Unit. In the present case as well the AO has proceeded to disturb the profit of the Baddi Unit and held that only 6% profit is eligible for deduction u/s.80IC.While doing so, identically, the AO has not pinpointed any defect in the working of the “profit” of the Baddi Unit. In such a situation, we can say that the legal proposition as laid down by Delhi Bench can also be applied in the present appeal as well.

10.4 The AO has also concluded that only the incremental profit, representing the difference between the profits earned earlier when the products were procured on P2P basis and the profits earned by the Baddi Unit, should be treated as a manufacturing profit. The AO has then said that earlier the assessee was procuring the products on P2P basis and showing the average profit at 80%, however, on the basis of average selling rate of the produces manufactured by Baddi Unit the average profit was gone up to 86%. The AO has therefore restricted the deduction only at 6%. He has placed reliance on Rolls Royce Plc (supra). In that case, the assessee was a UK based company carrying on marketing and sales activities in India through a subsidiary. The subsidiary was also rendering support services to the assessee, a UK based company. The assessee was carrying out manufacturing operations. It was held that 35% of its profits could be attributed to the marketing activities carried out in India and, therefore, chargeable to tax in India. The facts of that case were altogether different and there was a finding that undisputedly there was a PE in India and as per Indo-UK DTAA the income has to be taxed in India. An another fact was that there was no separate account of the assessee’s India operation and the AO had found that on the basis of global accounts the profits were determined on sales. In that case, marketing was said to be the primary activity for earning profit. The profit was directly due to operation in India. In that context the word “attributable” was considered and then it was held that such part of the income as it was reasonably attributable to the operations carried out in India is taxable. The expression “business connection” was also considered and then it was found that it will include a person acting on behalf of a non-resident and carried on certain activities is having business connection. A business connection has to be real and intimate and through which income must accrue or arise whether directly or indirectly to the non-resident. On those facts, since it was found that R&D activities were carried out by the assessee, therefore, 15% of the profit was allocated to the R&D activities and balance of the profit was attributable to the marketing activities in India. The said decision was entirely based upon the connectivity of the marketing operations with the profits. The CBDT Circular No.23 of 1969 dated 23/07/1969 was also taken into account wherein it was opined that where a non-resident’s sales to Indian customers are secured through the services of an agent in India then that profit is attributable to the agent’s services. Meaning thereby because of the close connection of the agent’s marketing activity the proportionate profit was attributed to the said activity. Contrary to this, there was no finding that upto the extent of 80%, the profit was attributed to the assessee-company. The segregation between 80% and 6% was not on account of any evidence through which it could independently be established that the major portion of the profit could be attributed to the assessee-company and rest of the profit could only be attributed to the Baddi Unit.”

5.26 In the decided case (supra) also, the Tribunal also noted that the AO had not disputed the allocation of common expenses amongst the units including the eligible unit and the fact that the costs incurred on R&D, marketing, brand promotion etc. had already been allocated on sound allocation parameters while computing the profits of the eligible unit as well. Accordingly, when the cost base of the eligible unit was held to be correctly worked out, the Tribunal held it to be improper to segregate and allocate the profits of the eligible unit to the R&D, marketing, brand promotion activities, when all the related costs had already been considered in the stand-alone accounts of the eligible unit, by holding as under:-

“10.5 The AO has also made out a case that the book profit percentage of Baddi Unit was 58.67%, whereas the profit of the assessee-company as a whole was 11.88%. If we further elaborate this aspect, then the AO has also given a working through which the average selling rate was 86.36% of the Baddi Unit. Meaning thereby if we presume for example that the assessee has gross profit of 86%, then the net profit was disclosed at 58%. A question thus arises that what beneficial purpose could be served for the reduction of gross profit to a lower percentage of net profit, specially when the allegation of the A.O. was that there was an attempt to declare higher profit of Baddi unit to get more advantage of deduction. On perusal of the P&L account, it is an admitted factual position that the assessee has in fact debited certain expenses which have included head office expenses, such as, marketing expenses and corporate expenses. Meaning thereby the net profit of the Baddi Unit was not merely production cost minus sale price, but the difference of sale price minus all general expenses which were attributable to the sales. Therefore, it is not reasonable to say that unreasonably the profit was escalated. The difference between the two percentages of profit, i.e. about 28% ( G.P. – N.P.) thus represented the expenditure which could be said to be in respect of marketing network and brand of the product related expenses. The AO has not complained about the allocation of expenditure as made by the assessee while computing the profit of the Baddi Unit. Once the assessee has itself taken into account the related expenses to arrive at the net profit, then it was not reasonable on the part of the Revenue Department to further reallocate those expenses by curtailing the percentage of eligible profit.

5.27 We find that the identical factual situation is involved in the present case also. As already noted above, the assessee has already allocated all the indirect costs including expenses incurred on R&D, sales, marketing etc. in the audited stand-alone accounts of the eligible unit, a fact which has not been disputed by the lower authorities. Therefore, in light of the above decision (supra), the lower authorities’ action of further ascribing profits of the eligible unit towards R&D, sales, marketing efforts is held to be wholly improper.

5.28 According to us, the entire action of the lower authorities of segmentation of eligible profit of the manufacturing unit was meaningless having no sanction in law. As rightly pointed out by the Ld. AR, there is no line of demarcation to determine the sale price of a product, apart from its market price, as prescribed in Section 80-IA(8) of the Act. According to us, the sale price cannot further be segregated by imputing price attributable to marketing and R&D efforts for the simple reason that there is no such provision contained in law. We agree with the Ld. AR that, the method of computation to be adopted by the assessee, in line with Section 80-IA(8) of the Act and the relevant jurisprudence on this subject is that, on one side of the P&L A/c the sale price i.e. market value of products is to be credited and on the other side, the production cost plus overheads including common & indirect costs allocable to turnover is to be debited to compute the profit. We find that, this is what has been done by the assessee and certified by the auditor as well in Form 10CCB. Accordingly, we see no reason to tinker with the eligible profits as computed by the assessee, particularly when, the lower authorities have not pointed out any specific infirmity in the calculation, basis of allocation etc. In support of the foregoing, we further rely on the following findings made by this Tribunal in the case of Cadilla Health Care Ltd (supra);

“10.6 From the side of the Revenue, ld. Special Counsel has argued that in terms of the provisions of section 80IA(5) the deduction is to be computed as if such eligible business is the only source of income of the assessee. According to him, the manufacturing profit was the only source of income and that alone should be accounted for in the P&L account to claim the deduction u/s.80IC of the Act. Ld. DR has explained that as per the view of the A.O. up-to 80% of the profit was the result of efficient marketing network plus due to the brand name of the company. Only 6% was the manufacturing profit, per A.O. It is true that section 80IC does recognized the provisions of section 80IA. Refer, Sub-section (7) of section 80IC which prescribes as follows:—

“Section 80IC(7) : The provisions contained in sub-section (5) and sub-sections (7) to (12) of section 80IA shall, so far as may be, apply to the eligible undertaking or enterprise under this section.”

Due to this reason, our attention was drawn on the provisions of section 80IA(5) of IT Act; reads as under:—

…..

As per this section, the profits of an eligible undertaking shall be computed as if such eligible business is the only source of income of the assessee. In this section again, the Statute has used three terms, i.e. “profit”, “business” and “income”. As narrated hereinabove an ‘income’ has a wider expression than the ‘profit’. Likewise, ‘business’ has also a wider meaning than the word ‘income’. In the present case, manufacturing of pharmaceutical products is declared as “eligible business”. Then the question is that what is the profit of such an eligible business? On careful reading of this sub-section, it transpires that the said eligible profit should be the only source of income. If we examine the separate profit & loss account of Baddi Unit, then it is apparent that the only source of income was the sales of the qualified products. In the said P&L A/c there was no component of any other sources of income except the sale price and otherwise also the assessee has confined the claim only in respect of the eligible profit which was derived from the sales of the pharmaceutical products. This section do not suggest that the eligible profit should be computed first by transferring the product at an imaginary sale price to the head office and then the head office should sale the product in the open market. There is no such concept of segregation of profit. Rather, we have seen that the profit of an undertaking is always computed as a whole by taking into account the sale price of the product in the market.

10.7 The Ld. AO has suggested that the assessee should have passed entries in its books of account by recording internal transfer of the product from Baddhi Unit to the head office marketing unit and that too at arm’s length price. From the side of the appellant an argument was raised that what should be the arm’s length price in a situation when a product is ultimately to be sold in the open market. Whether the AO is suggesting that an imaginary line be drawn to determine the profit of the Baddi Unit at a particular stage of transfer of products. Definitely a difficulty will arise to arrive at the sale price as suggested by AO on transfer of product from Baddi to head office. What could be the reasonable profit which is to be charged by the Baddi Unit will then be a subject of dispute and shall be an issue of controversy. On the contrary, if the sale price is recorded at the market price, which is easily ascertainable, that was recorded in the Baddi Unit account, the scope of controversy gets minimal. Rather, the intense contention of the Ld.AR is that the facts of the case have explicitly demonstrated that the goods manufactured at Baddi Unit were transported to various C&F agents across the country for sale purpose. Therefore, the eligible business is the manufacturing of pharmaceutical products and the only source of income was the profit earned on sale of the products.

10.8 An interesting argument was raised by ld. Special Counsel that the provisions of section 80IA(8) prescribes the segregation of profit in case of transfer of goods from one Unit to another Unit. But section 80IA(8) reads as follows:—

…..

Where any goods held for the purpose of the eligible business are transferred to any other business carried on by the assessee, then if the consideration for such transfer as recorded in the accounts of the eligible business do not correspond to the market value of such goods, then for the purposes of the deduction the profits and gains of such eligible business shall be computed as if the transfer has been made at the market value of such goods as on that date. Though the section has its own importance but the area under which this section operates is that where one eligible business is transferred to any other business. We again want to emphasis that the word used in this section is “business” and not the word “profit”. We can hence draw an inference by describing these two words and thus have precisely noted that ‘eligible business’ has a different connotation which is not at par or identical with the “eligible profit”. The matter we are dealing is not the case where business as a whole is transferred. This is a case where manufacturing products were sold through C&F in the market. Even this is not the case that first sales were made by the Baddi Unit in favour of the head office or the marketing unit and thereupon the sales were executed by the head office to the open market. Once it was not so, then the fixation of market value of such good is out of the ambits of this section. If there is no intercorporate transfer, then the AO has no right to determine the fair market value of such goods or to compute the arm’s length price of such goods. The AO has suggested two things; first that there must be inter-corporate transfer, and second that the transfer should be as per the market price determined by the AO. Both these suggestions are not practicable. If these two suggestions are to be implemented, then a Pandora box shall be opened in respect of the determination of arm’s length price vis a vis a fair market and then to arrive at reasonable profit. Rather a very complex situation shall emerge. Specially when the Statute do not subscribe such deemed inter-corporate transfer but subscribe actual earning of profit, then the impugned suggestion of the AO do not have legal sanctity in the eyes of law.

10.9 A very pertinent question has been raised by ld.AR Mr. Patel that what should be the line of demarcation to determine the sale price of a product if not the market price. As far as the present system of fixation of sale price of the product is concerned, a consistent method was adopted keeping in mind the several factors, depending upon the market situation, we have been informed. But if the assessee is compelled to deviate from the consistent method of pricing, then any other suggestion shall not be workable because no imaginary line of profit can be drawn, precisely pleaded before us. So the uncertainty is that on the production cost what should be the reasonable mark-up which shall cover up the margin of profit of a manufacturing unit. And why at all this complex working of computation be adopted by this assessee when a very simple method is adopted that on one side of the P&L A/c the production cost plus overheads were debited and on the other side of the P&L A/c sale price was credited to computed the profit. There are certain expenditure which are notional expenditure and there are certain expenditure which are self-generated to create the brand value of a product. Naturally, the allocation of notional expenditure particularly in respect of self-generated brand is a matter of hypothesis and not a matter of realty. Logically it is not realistic to set apart a value of a self generated brand which had grown in number of years.

10.10 The segment reporting of profit is although in practice but the purpose of such reporting is altogether different. Such segment information is particularly useful for financial analysis, so that the management may keep a close watch on the performance of the diversified business lines. The areas of demarcation are business segment, geographical segment, etc. But as far as the Revenue of an enterprise is concerned while segmentation is required, then Revenue from sales to external customers are reported in the segmented statement of profit and loss. In an accounting system, an intra-company sale between divisions or units is not regarded as Revenue for the purpose of such financial reporting. As per the Accounting Standards an Enterprise Revenue ignores in house-sales that represent Revenue to one segment and Expense to another. In this connection, the AO has discussed the Hon’ble Supreme Court decision pronounced in the case of Liberty India (supra). The AO wanted to justify his attempt of segmentation on the basis of the theory that only the profits derived due to manufacturing activity can be said to be derived from eligible undertaking. It was contested by AR before us that the “segment reporting” is about the segregation of business and not about the segregation of any specific activity. In the case of Liberty India (supra) it was observed that the IT Act broadly provides two types of tax incentives, namely, investment linked incentives and profit linked incentives. The Court was discussing Chapter VIA which provides incentive in the form of tax deductions to the category of “profit linked incentives”. The incentive is linked with generation of ‘operational profit’. Therefore, the respected Parliament has confined the grant of deductions only derived from eligible business. Each eligible business constitutes a stand alone item in the matter of computation of profit. The Court has said that because of this reason the concept of “segment reporting” was introduced in Indian Accounting Standards. Ld. Counsel Mr. Srivastava has argued that the deduction u/s.80IC is a profit linked incentive. Only the Operational Profit has to be claimed for 80IC deduction. According to him, each of the eligible business constitutes a stand alone item in the matter of computation of profit. For the computation of profit of an eligible business the word used is “derived” in section 80IC which is a narrower connotation, as compared to the word “attributable”. In other words, by using the expression “profits derived by an undertaking”, Parliament intended to cover such sources not beyond the first degree, i.e. the first degree of manufacturing activity. The law pronounced by the Hon’ble Supreme Court is final and should not be disputed. However, a judgement is to be correctly interpreted.

….

10.13  …But at present, when the method of accounting as applicable under the Statute, do not suggest such segregation or bifurcation, then it is not fair to draw an imaginary line to compute a separate profit of the Baddi Unit. The Baddi Unit has in fact computed its profit as per a separately maintained books of account of the eligible manufacturing activity. To implement the method of the computation at stand alone basis, as conveyed by the AO, the manufacturing unit has prepared a profit & loss account of its manufacturing-cum-sale business activity. If the Statute wanted to draw such line of segregation between the manufacturing activity and the sale activity, then the Statute should have made a specific provision of such demarcation. But at present the legal status is that the Statute has only chosen to give the benefit to “any business of drug manufacturing activity” which is incurring expenditure on research activity is eligible for this prescribed weighted deduction. The segregation as suggested by the AO has first to be brought into the Statute and then to be implemented. Without such law, in our considered opinion, it was not fair as also not justifiable on the part of the AO to disturb the method of accounting of the assessee regularly followed in the normal course of business. It is true that otherwise no fallacy or mistake was detected in the books of accounts of Baddi Unit prepared on stand alone basis through which the only source of income/profit was the manufacturing of the specified products. We therefore hold that the AO’s action of segregation was merely based upon a hypothesis, hence hereby rejected. These two grounds Nos.6 & 7 are allowed.”

5.29 In view of the above, we therefore hold that the action of the lower authorities in assuming that the profits of the eligible unit was artificially higher because the other units or company as a whole had a lower profitability without any relevant evidence or material, was baseless and unjustified. We also disapprove their observations for segregating and estimating profits of the eligible unit on pure hypothesis, for the reasons discussed above. Before parting on this issue, it is noted that, the AO has used the expression ‘tax evasion’ and adoption of ‘colorable device’ by the assessee in several places in the assessment order, for making the impugned disallowance. We find such usage to be uncalled for as the allegations of ‘tax evasion’ is a very serious allegation and therefore, the AO should have desisted from using such expression when he never made out such a case in the impugned order. We note that, such allegation, for the reasons discussed above, were unfounded and that the decisions relied upon by the AO for stating so, was completely distinguishable having no relevance in the factum of the present case. It is not in dispute that the assessee had indeed invested and set-up a manufacturing facility in industrially designated backward area in Pantnagar, Uttarakhand, in which it has investment more than Rs.2250 crores. The said unit has been in operation for more than nine years and in none of the prior years the authorities are noted to have doubted its existence. It is also not the Revenue’s case that the assessee has not fulfilled the conditions precedent in Section 80-IC to avail deduction in respect of profits derived by this eligible unit. We are in agreement with the Ld. AR of the assessee that the assessee is free and entitled to arrange its affairs within the four corners of law to avail tax benefits, which the law permits it to claim. According to us therefore, the AO grossly erred in alleging tax evasion in the present case.

5.30 For the reasons set out above, we thus hold that the profits reported in the stand-alone audited financials of the eligible unit as certified in Form 10CCB issued by the auditor was based on sound accounting principles which does not warrant any interference. Accordingly, the AO is directed to allow the deduction u/s 80-IC as claimed by the assessee in the return of income and therefore delete the disallowance of Rs.2,90,64,71,673/-. Hence, the Ground Nos. 7 to 15 of the assessee stands allowed and Ground No. 3 of the Revenue is dismissed.

6. Now we take up the remaining grounds in the Revenue’s appeal in ITA No. 561/Chny/2023.

7. Ground No. 1 of the Revenue is general in nature and therefore does not call for any specific adjudication and is accordingly dismissed.

8. Ground No. 2 of the Revenue is against the Ld. CIT(A)’s deleting the disallowance of additional depreciation claimed by the assessee u/s 32(1)(iia) of the Act in relation to pollution control and energy saving equipment’s.

8.1 According to the AO, the pollution control and energy saving devices which were depreciable at the rate of 40%, did not fall within the definition of ‘plant & machinery’ and therefore it was not eligible for additional depreciation u/s 32(1)(iia) of the Act. The AO is noted to have accordingly disallowed the additional depreciation of Rs.13,39,070/-claimed in relation to these devices. On appeal the Ld. CIT(A) is noted to have agreed with the assessee’s submission that these devices were specifically mentioned and classified as ‘plant & machinery’ in the Appendix to Income-tax Rules and therefore the assessee was eligible to claim addition depreciation u/s 32(1)(iia) of the Act. The Ld. CIT(A) accordingly deleted the impugned disallowance. Aggrieved by the order of Ld. CIT(A), the Revenue is now in appeal before us.

8.2 Heard both the parties. The limited issue-in-dispute before us is that, whether the pollution control and energy saving devices are in the nature of ‘plant & machinery’ and therefore eligible for additional depreciation u/s 32(1)(iia) of the Act. The Ld. AR brought to our notice the relevant New Appendix-I to the Income-tax Rules, 1962 which contains the rates at which the depreciation is admissible. He showed us that Sl. No. III contained the depreciation rates applicable on ‘plant & machinery’. It was pointed out that, the ‘energy saving devices’ were specifically mentioned at Sl. No. III(8)(ix), ‘renewable energy devices’ were mentioned at Sl. No. III (8)(xiii) and ‘pollution control devices’ were mentioned at Sl. No. III(3)(vii) & (ix). We are therefore in agreement with the Ld. CIT(A) that these fixed assets were in the nature of ‘plant & machinery’ and hence the assessee had rightly claimed additional depreciation u/s 32(1)(iia) of the Act on the same. The Ld. CIT, DR appearing before us are was unable to controvert the same. We therefore do not see any reason to interfere with the order of Ld. CIT(A) in this regard and accordingly dismiss this ground of the Revenue.

9. Ground No. 4 of the Revenue is against the Ld. CIT(A)’s action of deleting the disallowance made u/s 14A of the Act while computing the book profit u/s 115JB of the Act.

9.1 The facts as noted are that, during the year, the assessee had derived exempt income of Rs.5,544/- and according to it, no expenditure was incurred for deriving such exempt income. The AO was not agreeable to the contention of the assessee and sought to invoke Rule 8D. The AO is noted to have computed disallowance u/s 14A of Rs.19,00,28,934/- being 1% of the average value of investments held by the assessee. On appeal the Ld. CIT(A) is noted to have held that, the disallowance u/s 14A of the Act cannot exceed the exempt income and therefore confirmed disallowance u/s 14A of the Act to the extent of dividend income viz., Rs.5,544/- and deleted the balance disallowance of Rs.19,00,23,390/-. It was brought to our notice that this finding of Ld. CIT(A) has attained finality and no further appeal has been preferred by the Revenue on this aspect.

9.2 However, apart from the above, the AO also added the disallowance computed u/s 14A to the book profit u/s 115JB of the Act. In this regard, the Ld. CIT(A) had held that, the disallowance u/s 14A is a notional disallowance and therefore cannot be added back by taking recourse under clause (f) of Explanation to Section 115JB of the Act, while computing book profit. Following the decision of Hon’ble Karnataka High Court in the case of CIT Vs Gokaldas Images Pvt Ltd (429 ITR 526), the Ld. CIT(A) accordingly deleted the addition made u/s 14A to the book profit as well. Being aggrieved by this order of Ld. CIT(A) deleting the disallowance u/s 14A added to the book profit u/s 115JB, the Revenue is in appeal before us.

9.3 Heard both the parties. Now the issue in dispute before us, is whether the disallowance of Rs.5,544/- confirmed by the Ld. CIT(A) u/s 14A of the Act was to be added back while computing book profit u/s 115JB of the Act. Before us, the Ld. Counsel for the assessee submitted that this issue stands settled by the decision of Hon’ble Karnataka High Court in the case of Sobha Developers Ltd. vs CIT (434 ITR 266) wherein on similar facts and circumstances it was held that, the disallowance made u/s 14A cannot be added to book profit u/s 115JB. The relevant findings taken note of are as follows:-

“6. We have considered the submissions made on both sides and have perused the record. Before proceeding further, it is apposite to take note of relevant extract of section 115JB of the Act, which reads as under:

…..

7. Thus from perusal of the relevant extract of section 115JB, it is evident that sub-section (1) of section 115JB provides the mode of computation of the total income of the assessee and tax payable on the assessee under section 115JB of the Act. Sub-section (5) of section 115JB provides that save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee being a company mentioned in this section. Therefore, any expenditure relatable to earning of income exempt under section 10(2A) and section 10(35) of the Act is disallowed under section 14A of the Act and is added back to book profit under clause (f) of section 115JB of the Act, the same would amount to doing violence with the statutory provision viz., sub-sections (1) and (5) of section 115JB of the Act. It is also pertinent to mention here that the amounts mentioned in clauses (a) to (i) of Explanation to section 115JB(2) are debited to the statement of profit and loss account, then only the provisions of section 115JB would apply. The disallowance under section 14A of the Act is a notional disallowance and therefore, by taking recourse to section 14A of the Act, the amount cannot be added back to book profit under clause (f) of section 115JB of the Act. It is also pertinent to mention here that similar view, which has been taken by this court in Gokaldas Images (P.) Ltd. (supra) was also taken by High Court of Bombay in CIT v. Bengal Finance & Investments (P.) Ltd. [IT Appeal. No. 337 of 2013, dated 10-2-2015]. It is pertinent to note that in Rolta India Ltd., the Supreme Court was dealing with the issue of changeability of interest under sections 234B and 234C of the Act on failure to pay advance tax in respect of tax payable under section 115JA/115JB of the Act and therefore, the aforesaid decision has no impact on the issue involved in this appeal. Similarly, in Maxopp Investment Ltd. (supra) the Supreme Court has dealt with section 14A of the Act and has not dealt with section 115JB of the Act. Therefore, the aforesaid decision also does not apply to the fact situation of the case.

In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered in favour of the assessee and against the revenue. In the result, the order passed by the tribunal dated 9-1-2015 insofar as it pertains to the findings recorded against the assessee is hereby quashed.”

9.4 As far as the decision of Hon’ble Calcutta High Court in the case of CIT Vs Jayshree Tea & Industries Ltd (GA No. 1501 of 2014) dated 19.11.2014 relied upon by the Ld. CIT, DR is concerned, it is found to be distinguishable on facts. In the decided case, the Hon’ble High Court had noted that, the computation of expenditure relatable to exempt income in terms of clause (f) of Section 115JB was required to be made, because in the assessee itself had contended that it had incurred certain expenditure for earning exempt income and it was not the assessee’s case that NIL expenditure was incurred in relation thereto. On these specific facts therefore, the matter was set aside back to the AO to arrive at the amount relatable to earning exempt income, without resorting to Rule 8D.

However, in the case before us, the assessee in the return of income had claimed that NIL expenditure was incurred for earning exempt income of Rs.5,544/-. Accordingly, the facts are found to be distinguishable.

9.5   Moreover, we also take note of the decision of the Hon’ble Supreme Court in the case of CIT v. Vegetable Products Ltd. (88 ITR 192) wherein the Hon’ble Supreme Court has held that in case of doubt or dispute [on an issue] interpretation/construction in favour of the assessee may be adopted. Therefore, in the light of Hon’ble Apex Court decision in CIT v. Vegetable Products Ltd.(supra), we are inclined to follow the decision of Hon’ble Karnataka High Court in Sobha Developers Ltd. vs CIT (supra) and consequently, dismiss this ground of the Revenue.

10. In the result, the appeal of the assessee is partly allowed and the appeal of the Revenue stands dismissed.

Order pronounced on the 14^th day of February, 2025, in Chennai.