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Income Tax Appellate Tribunal, DELHI BENCH “G” NEW DELHI
Before: SHRI CHALLA NAGENDRA PRASAD & SHRI M BALAGANESH
आदेश /O R D E R PER C.N. PRASAD, J.M.
This appeal is filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-Dehradun dated 28/12/2016 for the AY 2012-13. The assessee in its appeal raised the following grounds: - 1. “The action of the learned CIT (Appeals) is holding that the scrap sales of the appellant company of Rs.5,40,548/- was not derived from the manufacturing activities and thus upholding the action of the 1 Assessing Officer in denying the benefit of section 80 IC is unjust, illegal, arbitrary, illusory and uncalled for.
2. Alternatively, his action in not accepting assessee’s plea that scrap has been derived by manufacturing or its sale is a reimbursement of packing cost incurred and thus benefit of section 80 IC is allowable is unjust, illegal, arbitrary, illusory.
That his action in allowing only direct cost charged by banks on cheque returns for benefit of deduction under section 80 IC and not the balance amount is unjust, illegal, arbitrary, illusory and uncalled for.
4. That his action in not considering that indirect cost are also incurred on cheque returned and in not allowing benefit of section 80 IC on the full amount of Rs.5,24,320/- is unjust, illegal, arbitrary, illusory and uncalled for.”
In spite of issue of several notices, none appeared on behalf of the assessee nor any adjournment was sought. The appeal is disposed off on hearing the Ld. DR.
3. Ground no.1 to 3 raised by the assessee are directed against the order of the Ld.CIT(A) in sustaining the disallowance u/s 80IC on sale of scrap of Rs.5,40,548/-.
Brief facts are that the assessee company is engaged in the business of manufacturing and trading of homeopathy medicines and cosmetics filed return of income on 20.09.2012 declaring income of Rs.20,89,28,360/-. The assessment was completed u/s 143(3) on 24.03.2015 determined the income of the assessee at Rs.22,35,41,030/-. While completing the assessment the Assessing Officer denied deduction u/s 80IC on the scrap sales of Rs.5,40,458/- on the ground that the packing material received from the suppliers in which raw materials are packed, which was sold as scrap is not income derived from manufacturing activity of the assessee so as to be eligible for deduction u/s 80IC of the Act. The AO held that deduction u/s 80IC is available only on that income which is derived by the assessee from manufacturing process. Accordingly, the claim for deduction u/s 80IC on scrap sales was denied.
The Ld.CIT(A) on examining the contentions of the assessee upheld the action of the AO in denying deduction u/s 80IC on scrap sales being packing materials observing as under: -
“10. I have duly considered the facts and circumstances of the case. The first issue in consideration is whether the income from the sale of scrap is eligible for deduction under section 8CIC. it is quite clear from the submissions made by the assessee that the scrap which is being sold does not arise during the course of manufacturing the medicines or cosmetic products, but is the remains of the packing materials in which the raw materials, that are used in the manufacturing of medicines were received. The Assessee has relied on the case of CIT Vs. Core Healthcare, in support of its claim. I have perused the said judgment. In fact in the said judgment the Hon’ble High Court has recalled its earlier judgment dated 25.04.2001 on the point that there was an error in summararily dismissing the appeal 3 of the Revenue agaisnt the decision of the Tribunal to allow deduction against sale of empty containers. Hence the decision cited by the assessee does not help it. With regard to the decision of the Hon’ble Jaipur Bench of the ITAT in the assesee’s case for the assessment year 2010-11, it is respectfully observed that that the said judgment may not correctly represent the legal position in the matter. This is because the facts of the assessee’s case are more similar to the facts of CIT vs. Alpine Solvex Ltd. 219 CTR(MP) 499 in which the assessee company had a solvent extraction plant where soyabean oil was manufactured from soyabean seeds. The assessee claimed deduction u/s 80HH and u/s 80-1 on the amount realized by it sale proceed of old gunny bag which was used as packing material. The sale proceed of such gunny bag were included in the total turnover of the undertaking. The AO rejected the assessee's claim and held that it was not an income “derived by” the assessee from industrial undertaking and that it was, therefore, not eligible for deduction u/s 80HH and 80-1. The Hon'bie Madhya Pradesh High Court relying on the decision of Hon'bie Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. vs. CIT 113 1TR 84, noted that the expression, ‘derived from’ was more restricted then the term “attributable to” which was comparatively broader expression. It also placed reliance on the decision of Supreme Court in the case of Pandian Chemicals Ltd. vs. CIT 262 ITR 278 to state that the word “derived from" used in 80HH must be understood as something which had direct or immediate nexus with the appellant’s industrial undertaking. The Hon'bie High Court held that the main business of the assessee was to manufacture and sell soya oil by extracting it from soyabean seeds in their extraction plant. Therefore, only income derived from sale of soya oil is to be held as income “derived 'from” industrial undertaking and so far as income earned out of sale of gunny bag was concerned, it cannot be kept at par with the income from sale of soya oil. The High Court was of the view that sale of gunny bag was not the main or even ancillary business activity of the assessee. The gunny bag were not manufactured in its plant. It was established only for production of soya oil. It was not a regular or continuous business activity of the assessee. The court held that merely because some gunny bags were lying in the factory as surplus or as waste material and were sold to earn some income it could not be regarded as income "derived from'’ the industrial undertaking. Hence the Hon'ble High Court expressed the view that the sale of gunny bag did not have direct or immediate nexus with the industrial undertaking. In the assessee's case also, the scrap that the assessee has sold is not generated out of manufacturing process of medicines or cosmetics or even the packaging of medicines or cosmetics, but was an incidental part of the acquisition of raw material for manufacturing. The scrap is, therefore, not a direct outcome of the manufacturing process but is incidental to the activities associated with the manufacture of goods by the assessee. Thus sale of scrap can be said to be “attributable to” the industrial undertaking. It cannot be said “derived from” the industrial undertaking or arising out of manufacturing. Therefore, relying on the judgment of the Hon'ble Madhya Pradesh High Court in CIT vs. Alpine Solvex Ltd, 219 CTR(MP) 499 and the Supreme Court judgment in Pandian Chemicals Ltd., 262 ITR 278, I hereby hold that the assessee is not entitled to deduction u/s 80-IC on the sale of scrap as income from sate of scrap was not '‘derived by” the assessee from the manufacturing or production. Accordingly, the AO was justified in refusing the benefit of deduction u/s 8O-IC to the extent of Rs.5,40,548/-.”
On careful reading of the Ld.CIT(Appeals) order, we do not see any valid reason to interfere with the decision taken by the Ld.CIT(A) in holding that the income from sale of scrap being packing material of raw materials as income not derived from industrial undertaking of the assessee. Thus, we sustain the order of the Ld.CIT(Appeals) and reject ground nos.1 to 3 of the grounds of appeal.
Coming to ground no.4 of grounds of appeal the assessee challenged the order of the Ld.CIT(A) in denying deduction u/s 80IC of the Act on Rs.5,24,320/- representing charges against cheques returned. We observe that the AO denied deduction u/s 80IC of the Act on this amount of Rs.5,24,320/- on the ground that such income cannot partake the character of income from manufacturing process.
This was sustained by the Ld.CIT(A) observing as under: -
“16. As regards the issue of cheque return charges of Rs.5,24,320/-, it is observed from the submission of the assessee, that this partly a reimbursement claimed from the defaulters for the bank charges that the assessee has to incur and debits to the P&L account and is therefore a revenue neutral receipt. Since the expenses to the equivalent amount have been debited, allowing the receipt to be considered for deduction will only reflect the profits of the undertaking more honestly. However, it is also noticed that besides the bank charges incurred, the assessee charges an administrative cost of Rs.500/- per cheque returned and includes the receipts from the same under this head. This is clearly not a receipt, “derived from” the business of manufacture and sale of medicines and cosmetics but an income derived on account of levy of a processing charge for such bounced cheques. In the same the amount so earned is not deductible. The Assessing Officer may therefore ascertain the amount paid to the bank and debited to P&L account and allow deduction on the corresponding credit. The remaining is fit to be disallowed.”
On careful reading of the observations of the Ld.CIT(Appeals), we do not see any infirmity in holding that cheque returning charges are not income derived from industrial undertaking so as to be eligible for deduction u/s 80IC of the Act. Accordingly, we uphold the orders of the Ld.CIT(A) and reject the ground no.4 of the assessee.
In the result, appeal of the assessee is dismissed.
Order pronounced in the open court on 27.09.2023