IN THE ITAT PUNE BENCH ‘A’

Khinvasara Investment (P.) Ltd.

v.

Joint Commissioner of Income-tax SR-5, Pune

MUKUL SHRAWAT, JUDICIAL MEMBER

AND K.G. BANSAL, ACCOUNTANT MEMBER

IT APPEAL NOS. 360 AND 420 (Pune) OF 2002

[ASSESSMENT YEAR 1998-99]

JUNE 9, 2006

I. Section 80-IA, read with section 80B, of the Income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertakings - Assessment year 1998-99 - Whether in view of fiction being created by section 80-IA(5), for purpose of computing deduction under section 80-IA, it has to be presumed that assessee was running only one unit, i.e., eligible unit, for which deduction was available and no other unit in initial assessment year and in subsequent years - Held, yes - Whether, therefore, carried forward losses and unabsorbed depreciation of eligible unit have to be kept separately from other units operated by assessee, if any, as also its profits; and loss incurred by assessee in respect of its eligible unit cannot be set off against profits of some other unit held by assessee - Held, yes

II. Section 80-IA of the Income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertakings - Assessment year 1998-99 - Assessee was operating two units - Whether for purpose of computing profits of eligible unit under section 80-IA, direct expenses, which were properly relatable to one or other unit, were to be allocated to that unit only - Held, yes - Whether, however, head office expenses such as salary, printing and stationery, telephone expenses, vehicle expenses, which were common to both units, and directors’ remuneration, should be allocated on basis of turnover of two units - Held, yes

III. Section 36(1)(vii) of the Income-tax Act, 1961 - Bad debts - Assessment year 1998-99 - Whether a debt which is otherwise a proper bad debt and recovery of which has been pending for quite sometime, does not become a good debt merely on reasoning that no step has been taken to recover same - Held, yes - Whether where certain debts which had been considered earlier in computation of income of assessee had been written off from its books of account and in most of cases, legal proceedings for recovery of same were barred by limitation, assessee would be entitled to deduction of said amount under section 36(1)(vii) - Held, yes

Facts-I

The assessee-company was having two units. In its return of income for the assessment year 1998-99, the assessee claimed deduction under section 80-IA in respect of one of its unit. The lower authorities noticed that during the assessment year 1997-98, the assessee had incurred loss comprising of business loss and unabsorbed depreciation in the said unit; therefore, for computation of profits of this unit for the purpose of deduction under section 80-IA, the losses carried forward from year 1997-98 will have to be reduced from the profits of the year 1998-99. To this, the assessee submitted that the said loss had already been adjusted in that very year against the profits of another unit operated by it and, thus, for all practical purposes there remained no unabsorbed loss of earlier years. Rejecting the submissions of the assessee, the lower authorities reduced the loss carried forward from the assessment year 1997-98 from the eligible profits of the assessment year 1998-99 on ground that for the purpose of computing deduction under section 80-IA, it had to be presumed that the assessee was running only one unit, being the eligible unit and no other unit.

On second appeal :

Held-I

Sub-section (5) of section 80-IA creates a fiction that for the purpose of computing deduction under section 80-IA, the eligible unit was the only unit operated by the assessee in the initial assessment year and in subsequent years for which the deduction is available. Therefore, its carried forward losses and unabsorbed depreciation have to be kept separately from other units operated by the assessee, if any, as also its profits. Coming to sub- section (1) of section 80-IA, profits and gains constitute a sub-set of the gross total income. It is also clear from the language of this sub-section, which starts with the words ‘where the gross total income of an assessee includes any profits and gains derived from eligible business’. Looking to the language, it is clear that profits and gains is a sub-set of the gross total income and, a sub-set cannot be larger than the main set as inherently it has to be smaller than the main set. In view thereof, the provisions contained in section 80B(5) will have to be taken into consideration for finding out the gross total income as if eligible unit was the only unit operated by the assessee. Further, the profits and gains mentioned in section 80-I(1) cannot exceed, in quantum terms, the gross total income defined in section 80B. Thus, the appeal of the assessee was to be dismissed. [Para 3]

Facts-II

The assessee-company was operating two units. For the purposes of claiming deduction under section 80-IA, the assessee had taken the expenses of the eligible unit at Rs. 40,11,896. He submitted that all indirect expenses had been allocated on turnover basis; that the directors remuneration was allocated on time basis which was equal for both the units; and that the direct expenses had been debited on actual basis. The Assessing Officer, however, was of the view that the assessee inflated expenses of another unit with a view to claim higher deduction in respect of eligible unit and, accordingly, he reallocated all the expenses on turnover basis leading to decrease in profits of the eligible unit by Rs. 19,35,502.

On appeal, the assessee contended that in respect of direct expenses, there was no question of reallocation as they had been debited on actual basis; that separate books of account had been maintained for both the units; and, therefore, reallocation made by Assessing Officer was not sustainable at all. The Commissioner (Appeals) accepted the assessee’s contention regarding direct expenses. He, however, was of the view that expenses such as salary, printing and stationery, telephone expenses, vehicle expenses which were common to both the units should be allocated on turnover basis between the two units. He was also of the view that it would be fair to allocate the director’s remuneration on the basis of turnover as higher turnover would require more attention of the management.

On second appeal :

Held-II

The Commissioner (Appeals) had rightly come to the conclusion that the expenses which were properly relatable to one or the other unit should be allocated to that unit only. Further, he rightly held that head office expenses and directors’ remuneration should be allocated on the basis of turnover of the two units as that seemed to be the only rational way to allocate these expenses. Thus, there was no reason to interfere with the order of the Commissioner (Appeals). Thus, the appeal of the assessee was to be dismissed. [Para 4.3]

Facts-III

The assessee-company claimed deduction of bad debts which, according to it, had been written off in its books of account. The Assessing Officer disallowed the assessee’s claim on ground that the assessee had made merely a provision in respect of these debts and the debts had not been written off in the books of account, and further that the assessee did not take any step for recovery of the debts.

On appeal, the assessee reiterated its stand that the debts had been written off in the books of account; that the amounts from some debtors were more than three years old, therefore, recovery of same was barred by limitation; and, therefore, no legal proceedings could have been taken against those parties. The assessee further submitted that it was following prudent policy for writing off bad debts after a period of about 3 to 4 years and in case of any future recovery, the amounts were credited to the profit and loss account in the year of recovery. The Commissioner (Appeals) allowed the assessee’s claim holding that all the conditions mentioned in section 36(1)(vii) regarding deduction of bad debts had been satisfied.

On revenue’s appeal :

Held-III

A debt, which is otherwise a proper bad debt and the recovery of which has been pending for quite sometime, does not become a good debt merely on the reasoning that no step has been taken to recover the debt. In some cases, such a legal pursuit may amount to throwing good money in litigation for recovery of an amount whose recovery was doubtful on account of counter claims of the debtors. Therefore, the argument of the revenue that the assessee had not taken any step to recover the amount, did not lead to a conclusion that the debts were not bad. Further, the debts had been written-off from the books of account; they pertained to the trading transactions of the assessee; and in most of the cases legal proceedings were barred by limitation. Thus, the instant case was one where bad debts had been written-off from the books of account, which had been considered earlier in computation of income of the assessee. Therefore, there was no reason to interfere with the order of the Commissioner (Appeals) on the issue. [Para 6.5]

In the result, the appeal of the revenue was to be dismissed. [Para 7].