ITAT Mumbai: Corporate Overhead Allocation to Independent Units Unjustified for Income Tax Deductions

Marico Industries Wins Relief as ITAT Mumbai Disallows Corporate Overhead Allocation for Tax Deductions

Mumbai, March 7, 2025 – In a significant win for M/s Marico Industries Ltd, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench "B", has ruled against the allocation of corporate overhead expenses and depreciation to the company’s independently operating manufacturing units in Goa and Kanjikode for income tax deduction purposes. The bench, comprising Accountant Member Shri Amarjit Singh and Judicial Member Shri Anikesh Banerjee , delivered the order on March 7, 2025, addressing appeals and cross-appeals related to assessment years 2000-01, 2001-02, and 2002-03.

Case Overview: Appeals and Cross Appeals on Income Tax Assessments

The case involved appeals by Marico Industries against orders passed by the Commissioner of Income-tax (Appeals) and cross-appeals by the Revenue (Income Tax Department). The core dispute revolved around the assessment of Marico 's income and the eligibility for deductions under Sections 80IB and 80HHC of the Income-tax Act, 1961, and computation of book profit under Section 115JA.

Marico Industries, a manufacturer of consumer products under brands like Parachute and Saffola, claimed deductions for its units in Kanjikode and Goa. The Assessing Officer (AO) had allocated corporate office expenses, depreciation, finance costs, miscellaneous expenses, and R&D expenses to these units, thereby reducing the deductible profits. The Commissioner of Income-tax (Appeals) partly upheld the AO's order, leading to further appeals before the ITAT.

Assessee's Arguments: Independent Unit Operations and Direct Nexus of Expenses

Represented by Shri Nitesh Joshi & Shri Milin Bakhai , Marico Industries argued that the Goa and Kanjikode units operated independently and were cash surplus. They contended that allocating corporate overheads and depreciation, which were not directly related to unit operations, was unjustified. Marico asserted that finance costs were incorrectly allocated as no borrowed funds were utilized by these cash-surplus units. Furthermore, they challenged the allocation methodology for miscellaneous and R&D expenses. On the issue of 80HHC deduction, Marico argued against the reduction of 90% of gross interest received and challenged the addition of provision for advertisement and sales promotion expenses to book profit calculation under section 115JA.

Revenue's Stance: Corporate Support and Proportional Allocation

Ms. Monica H Pande, SR AR, representing the Revenue, defended the allocation of corporate overheads, finance costs, and other expenses. The Revenue argued that the corporate office provided essential support services and that expenses should be allocated proportionally based on turnover to ensure fair profit computation and prevent excessive deductions. They emphasized that the company's financial structure benefited all units and justified the AO's allocation methodology and additions due to lack of detailed evidence from the assessee.

Tribunal's Decision: Upholding Independent Operations and Direct Nexus Principle

The ITAT sided with Marico Industries on key grounds, allowing the assessee’s appeals and dismissing the Revenue’s cross-appeals.

Corporate Overheads and Depreciation: The Tribunal, referencing its previous order in ITA No.2800/Mum/2003 in the assessee’s own case, reiterated that expenses for deduction under section 80IA must have a direct nexus with the eligible unit's operations. It held that corporate expenses and depreciation of corporate office assets lacked this direct nexus to the Goa and Kanjikode units, which operated independently.

> "With regard to corporate expenses and depreciation relating to the assets installed at the corporate office, as discussed earlier these costs are not directly relating to the operation of eligible units. As per the provisions of section 80IA, income has to be derived from the eligible unit, that means the income has to be determined on the basis of revenue generated by the eligible unit and expenses incurred in the specific eligible unit and no other outside cost to be included unless there is direct nexus to it."

Finance Costs: The Tribunal found that the Goa and Kanjikode units were cash surplus, and therefore, the allocation of finance costs was unjustified. Following its earlier decision in ITA No.2800/Mum/2003, the ITAT emphasized that the AO cannot selectively consider periods of working capital deficit while ignoring surplus periods.

Miscellaneous and R&D Expenses: While initially remitting the issue of miscellaneous expenses back to the AO for re-evaluation with proper documentation, the ITAT allowed the appeal on R&D expenses, citing precedence in ITA No.1621/Mum/2004, directing the AO to verify if R&D expenditure indeed related to products manufactured at the eligible units.

80HHC Deduction and Interest Income: Referring to the Supreme Court's judgment in ACG Associated Capsules (P.) Ltd. v. CIT , the Tribunal allowed Marico 's appeal on the reduction of 90% interest, stating that if interest income is netted off against interest expenses, it should not be further reduced for 80HHC computation.

Provision for Advertisement and Sales Promotion: The ITAT allowed the appeal, deeming the provision for Advertisement and Sales Promotion expenses as an ascertained liability based on accounting estimates and not an unascertained liability for the purpose of book profit computation under section 115JA.

Revenue's Appeals Dismissed

The Tribunal also dismissed all grounds raised by the Revenue in its appeals, relating to disallowances on recreation expenses, miscellaneous expenses, shortage and leakage expenses, packing material cost allocation, and inclusion of sales tax in turnover for 80HHC computation. The ITAT upheld the CIT(A)'s decisions, citing lack of evidence from the AO for ad-hoc disallowances and relying on previous Tribunal and High Court judgments on similar issues, including Sudarshan Chemicals Ltd for sales tax exclusion from turnover.

Implications

This order provides significant relief to Marico Industries and sets a precedent regarding the allocation of corporate overheads to independent units for income tax deduction claims. The ITAT's emphasis on the principle of direct nexus and the independent operational nature of the units underscores the importance of demonstrating a clear link between expenses and the eligible undertaking for availing deductions under the Income-tax Act. The decision also clarifies the treatment of interest income and ascertained liabilities in the context of Sections 80HHC and 115JA, respectively.

The appeals for assessment years 2001-02 and 2002-03, having identical facts and grounds, were also decided mutatis mutandis based on the lead case decision, further solidifying Marico 's comprehensive victory in this round of litigation.