ACIT, CIRCLE, PARWANOO vs. SHIVOM COTSPIN LIMITED, SIRMOUR

आदेश/Order

PerAnnapurnaGupta, AM:

The captioned appeals relate to the same assessee and have been

filed against orders passed by the Commissioner of Income Tax

(Appeals)(in short referred to as CIT(A), under section 250(6) of the

Income Tax Act,1961(hereinafter referred to as “Act”)for assessment

years(A.Y) 2012-13 , 2013-14&2015-16. While the Revenue has filed

appeal against consolidated order of the CIT(A) for A.Y 2012-13 &

2013-14 dt.16-10-2019,cross appeals have been filed by the assesseeand

the Revenue against order of CIT(A)for A.Y 2015-16 dt.28-03-2019.

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 3 2. At the outset it was pleaded that the appeals for A.Y 2012-13 and

2013-14be taken up first for hearing together since identical issue was

raised in them, relating to the claim of deduction u/s 80IC of the

Act.The appeals of the Revenue for the said two years were accordingly

first taken up for hearing.

Our attention was drawn to the identically worded grounds raised

by the Revenue for both the years, which, for the sake of convenience,

we are reproducing those raised in ITA No. 46/Chd/2020 relating to

A.Y 2012-13 as under:- 1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the appeal of the assessee by holding that the assessee has carried out substantial expansion in AY 2012-13 within the meaning of Section-80IC, whereas, the actual investment made in plant & machinery by the assessee was less than the value of 50% of the existing value of Plant & Machinery (before taking depreciation in any year) as on 1st day of the relevant financial year 2011-12 and therefore, the assessee did not fulfill the primary requirement of substantial expansion as per defined in clause-(ix) of Sub-Section-8 of Section-80IC of the Income-tax Act, 1961.

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 4 the first day of FY 2011-12 and accumulated depreciation on the same date [on the first day of FY 2011-12] was Rs.19,96,67,972/- and that therefore, the assessee was required to make an investment of at least of 50% of the value existing Plant & Machinery which worked out to Rs.25,55,35,725/- [50% of Rs.51,10,71,449/- (Rs.31,14,03,477/- + Rs.19,96,67,972/-)], whereas, the amount of addition made in Plant & Machinery during FY 2011-12 was Rs.5,85,76,223/- (Rs.5,64,01,223/- + Rs.21,75,000/-] only against the requirement of investment of Rs.25,55,35,725/- in Plant & Machinery.

Referring to the above,it was pointed out that the solitary issue in the

appeals related to interpretation of the meaning of the term ‘substantial

expansion” provided for in section 80IC of the Act ,for the purposes of

claimingdeduction @ 100% of profits on account of the same . More

specifically, interpreting the requirement ofaddition to plant and

machinery exceeding 50% of its Book Value provided for in the

definition of substantial expansion, whether it is to be done entirely in

the year in which expansion is claimed to be done or could be spread

over years.

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 5 4. Taking us through the facts of the case, it was pointed out that

this was the second round before us. That in the first round the assessees

claim of deduction of 100% of its profits from business, u/s 80IC of the

Act,in the impugned sixth and seventh year since commencement of

business, being A.Y 2012-13 & 2013-14,claimed on account of

substantial expansion undertaken , after having availed 100% deduction

for the initial five years, had beenrestricted to 30% of the profits by the

AO ,which was upheld right upto the ITAT. That against the order of the

ITAT,the assessee went in appeal to the Hon’ble High Court. That the

Hon’ble HighCourts order, dated 19-03-2018,allowing the assesses

appeal,upheld in principle the entitlement to 100% deduction of profits

on undertaking substantial expansion but at the same timedirected the

Assessing Officer to decide the issue of claim on the basis of substantial

expansion.

That thereafter the Assessing Officer proceeded to give effect to

the order of the Hon'ble High Court and while doing so noted that the

assessee company had carried out substantial expansion over a period of

two years, i.e financial years 2010-11 & 2011-12 relating to A.Y 2011-

12 and 2012-13 respectively,and claimed deduction @ 100% profits

from A.Y 2012-13 onwards.Referring to the definition ofsubstantial

expansion given in clause (ix) of sub section (8) of section 80IC of the

Act, the AO interpreted the same to the effect that the addition to plant

and machinery exceeding 50% is to be carried out entirely in the year

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 6 in which substantial expansion is claimed to have been undertaken, i.e

in one year itself .The AO held thatthere was no concept of addition to

plant and machinery done in two years to be considered in a cumulative

manner. Accordingly he held that no substantial expansion had been

undertaken in A.Y 2012-13, one of the impugned years before us, and

disallowed the claim of the assessee for 100% deduction of profits. For

the same reason theassesses claim of 100% deduction for the subsequent

year i.e A.Y 2013-14 was also denied. The relevant findings of the

Assessing Officer while disallowing the claim in A.Y 2012-13 are as

under:-

“It is obvious from the definition of substantial expansion given, there should be increase in Plant & Machinery by the value of 50% of the existing value of Plant & Machinery (before taking depreciation in any year) as on Ist day of the same financial year. In this regard, para-3 of assessee's reply itself says that you have made more than 50% of original investment in the year of substantial expansion without calculating the value of Plant & Machinery in the same year, but in the initial year of formation of unit. Further, in Form No. 10CCB, you have stated the same facts that you have made substantial expansion bymaking investment of Rs. 945.89 lacs in Plant & Machinery which is more than 50% of value of Plant & Machinery calculated in February 2007, while substantial expansion was carried out in the FY. 2011-12. Hence, you case is further examined from the assessment record (especially the Depreciation Chart forming part the duly audited Balance Sheet as on 31.03.2012) and it is gathered that in the year of substantial expansion, you had Plant & Machinery worth Rs. 31,14,03,477/- (after taking depreciation) on the first day of FY. 2011-12 and accumulated depreciation on the same date (on the first day of FY. 2011-12] was Rs. 19,96,67,972/-. Thus, you were required to make investment at

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 7 least of 50% of the value existing Plant & Machinery which in you case works to Rs. 25,55,35,725/- [50% of Rs. 51,10,71,449/-(31,14,03,477/- +19,96,67,972/-)]. Further, as per the same Depreciation Chart forming part the duly audited Balance Sheet as on 31.03.2012, the amount of addition made in Plant & Machinery during FY. 2011-12 is Rs. 5,85,76,223/- (Rs. 5,64,01,223/- + Rs. 21,75,000/-] only. It is therefore clear that you have made investment of Rs. 5,85,76,223/- only against the requirement of investment of Rs. 25,55,35,725/- in Plant & Machinery and therefore you do not fulfill the basic requirement of making addition of at least 50% of the existing value of Plant & Machinery (before taking depreciation in any year) as on 1st day of the same financial year.

Thus, it is clear that the assessee does not fulfill the requisite conditions of substantial expansion, as it had not made the requisite of investment and, therefore, the assessee is not entitled to benefit of deduction u/s 801c @ 100%, as per the direction of the Hon'ble High Court. Hence it is held that the assessee is entitled to claim of deduction u/s 80IC @ 30% only.”

assesses claim, holding that aharmoniousreading of the statute laid out

thatto allow the benefit of enhanced rate of deduction from the year of

carrying out the substantial expansion ,the only requirement was to meet

the objective of the substantial expansion in the said year. The relevant

findings of the Ld. CIT(A) at para 5.2.5 ofhis order is as under:-

“5.2.5 I have perused the facts of the case, the action of the A.O. and the submissions of the appellant. I find merits in the contention of the appellant. The huge increase in the block of plant and machinery from 21.69 Crores as on 01.04.2010 to 36.56 Crores as on 31.03.2012 cannot be denied. The appellant made substantial advances for booking the plant and machinery in A.Y. 2011-12 which were received in A.Y. 2012-13. A harmonious reading of the statute clearly lays down

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 8 that the objective of substantial expansion needs to be met to allow the benefit of enhanced rate of deduction u/s 80IC of the Act from the year of carrying out of substantial expansion. In this context, the case law relied on by the appellant has sufficient persuasive value. Moreover a similar issue have also been decided in the case of Joonktollee Tea & Industries V DCIT,Circle-4 Kolkata in ITA Nos. 110 & 401/Kol/2010.

Officer contending that as per the definition of substantialexpansion

provided in section 80IC(8) sub section (ix), substantial expansion

means increase in investment in plant and machinery by at least 50% of

the book value of the plant and machinery as on the first day of the

previous year in which the substantial expansion is undertaken. While in

the present case, the increase in investment by 50% took place in two

years and, therefore, the Assessing Officer had rightly held that no

substantial expansion had been undertaken by the assessee in the

impugned assessment year 2012-13 so as to entitle it to100% deduction

of its profits in the year and the succeeding year.

order of the CIT(A).

whether for the purposes of claiming deduction @ 100% of profits u/s

80IC of the Act on account of substantial expansion , the investment in

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 9 plant and machinery exceeding 50% of book value,in terms of the

definition of substantial expansion in the said section, is to be

considered of the year in which expansion is claimed to be achieved or

can be cumulatively considered from earlier years since when expansion

is undertaken.

The undisputed facts in the present case relating to addition to

plant and machinery are that the gross block as on 31-03-2010 was

Rs.21,69,13,432 and on 31-03-2012 was 36,56,29,700, the addition of

Rs.15.089crores, exceeding 50% of the Book Value as on 31-03-2010,

being made in two years,A.Y 2011-12 of Rs.9.449 crores and in A.Y

2012-13 of Rs.5.64 crores.The assessee has claimed to have completed

substantial expansion in A.Y 2012-13and accordingly claimed

deduction @ 100% of the profits for A.Y 2012-13 & 2013-14,the

impugned years before us.

disallowed for the reason that there is no concept of additions being

considered cumulatively of two years ,for the said purpose .

any infirmity in the same. The Ld.CIT(A),we hold, has rightly held

thata harmonious reading of section 80IC lays down that to be eligible

for enhanced rate of deduction u/s 80IC from the year of carrying out

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 10 substantial expansion,only the objective of substantial expansion is to

be met in that year.This is clearly evident on reading section

80IC(1),(2),(3) alongwith (8)(v) &( ix). For clarity we are reproducing

the said sub sections hereunder:

“Special provisions in respect of certain undertakings or enterprises in certain special category States.

80-IC. (1)Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (2), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains, as specified in sub-section (3).

(2) This section applies to any undertaking or enterprise,—

(a) which has begun or begins to manufacture or produce any article or thing, not being any article or thing specified in the Thirteenth Schedule, or which manufactures or produces any article or thing, not being any article or thing specified in the Thirteenth Schedule and undertakes substantial expansion during the period beginning— (i) on the 23rd day of December, 2002 and ending before the 1st day of April, 2007, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Sikkim; or

(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 11 accordance with the scheme framed and notified by the Central Government in this regard, in the State of Himachal Pradesh or the State of Uttaranchal; or

(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in any of the North-Eastern States;

(b) which has begun or begins to manufacture or produce any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule, or which manufactures or produces any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule and undertakes substantial expansion during the period beginning—

(i) on the 23rd day of December, 2002 and ending before the 1st day of April, 2007, in the State of Sikkim; or

(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in the State of Himachal Pradesh or the State of Uttaranchal; or

(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any of the North-Eastern States.

(3) The deduction referred to in sub-section (1) shall be— (i) in the case of any undertaking or enterprise referred to in sub-clauses (i) and (iii) of clause (a) or sub-clauses (i) and (iii) of clause (b), of sub-section (2), one hundred per cent of such profits and gains for ten assessment years commencing with the initial assessment year; (ii) in the case of any undertaking or enterprise referred to in sub-clause (ii) of clause (a) or sub-clause (ii) of clause (b), of sub-section (2), one hundred per cent of

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 12 such profits and gains for five assessment years commencing with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains. . . .

(8) for the purposes of this section,— …. (v) "Initial assessment year" means the assessment year relevant to the previous year in which the undertaking or the enterprise begins to manufacture or produce articles or things, or commences operation or completes substantial expansion; … (ix) "Substantial expansion" means increase in the investment in the plant and machinery by at least fifty per cent of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken;”

As is evident from a bare reading,Section 80IC (1) allows deduction of

profits earned by undertakings /enterprises specified in subsection (2),

at rates and for period specified in sub section (3).Sub Section (2)

specifies eligibility criteria for undertakings based on their location

and specific time period within which they begin manufacturing or

undertake substantial expansion.The period for availing deduction

specified in Sub Section (3) commences from the “initial assessment

year” which term has been defined in sub section (8) sub clause (v) as

meaning the year in which manufacture or production is commenced or

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 13 in relation to substantial expansion, the year in which expansion is

completed.Substantial expansion in turn is defined in sub clause (ix) of

the same to mean increasein investmentby 50% or more of book value of

plant and machinery of the previous year in which expansion is

undertaken.

It is relevant to point out a glaring distinctionvis a vis the act of

substantial expansion, in the aforesaid twodefinitions. While the

definition of initial assessment year refers to the act of” completion” of

substantial expansion,the definition of substantial expansion

contemplates additional investment in plant and machinery to the extent

of 50% or more of the book value as on the first day of the previous

year in which expansion is “undertaken”(emphasis provided by us). The

definition of substantial expansion does not use the term” completed”

but” undertaken” which in contradistinction to” completed” means

commenced or begun.Therefore, clearly the definition of substantial

expansion and that of initial assessment year perceive different stage of

substantial expansion with one referring to commencement while the

other to completion of expansion .Reading the two definitions together,

there is no iota of doubt that even the Legislature contemplated that the

substantial expansion can involve more than one year, and therefore, it

has specified the comparison of investment in the plant & machinery

with theyear in which the substantialexpansion is begun,while thebenefit

of enhanced deduction is allowed only once substantial expansion is

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 14 completed. Thus reading sub section (3) alongwith the definition of the

terms “initial assessment year” used therein and that of “substantial

expansion” used in the definition of the term” initial assessment year”

,what is literally derived therefore is that with respect to substantial

expansion undertaken the deduction is to be allowed from the year in

which the expansion is completed(definition of initial assessment

year)which expansion is to be considered in terms of investment

exceeding specified limit in plant and machinery as compared to that

from the first date of the year in which expansion is commenced.Thus

substantial expansion can commence in preceding years but deduction

will be provided only on completion of the same.

This interpretation is in consonance with the phrase used in sub section

(2) of the section which spells out one of the eligibility criterias for

claiming deduction as “undertaking substantial expansion during period

beginning………”,meaning thereby that the eligibility criteria of

undertaking substantial expansion, set out in the section,allows the same

to be done over a specified period and in no way restricts it to a year.

The ITAT Kolkata Bench has also interpreted this subsection likewise

in the decision relied upon by the Ld.CIT(A) in the case of Joonktollee

Tea & Industries (supra) ,

Undoubtedly the harmonious reading of the provisions of section

80IC of the Act lay down,as rightly held by the Ld.CIT(A) ,that for

claiming deduction on account of substantial expansion what is

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 15 imperative is meeting the objective of substantial expansion ,i.e of

having invested in plant and machinery ,which may have been

undertaken over a period of more than a year.

We, therefore, do not see any reason to differ with the the Ld.

CIT(A) that in the facts of the present case where addition to plant and

machinery exceeding 50% of book value was done in two years ,the

assessee can be said to have undertaken substantial expansion making it

eligible for claiming deduction @100% of profits from the year of

completion of substantial expansion ,being A.Y 2012-13 and also IN the

succeeding year i.e A.Y 2013-14.

dismissed.

up the first appeal of the assessee in ITA No. 560/Chd/2019, the

assessee we note has raised the followingeffective grounds:-

ITA No. 560/Chd/2019A.Y 2015-16

2.1 That the learned CIT(A) has erred in law and on facts in confirming the actions of the DCIT in making additions of Rs. 15,73,942/- on account of disallowance of deduction u/s

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 16 80-IC on interest income, duty drawback and miscellaneous receipts ignoring the fact that assessee had only claimed deduction to the extent of 30% of such amount. (Tax Effect=Rs. 3,57,466/-)

2.2 That learned CIT(A) has erred in law and facts in confirming the action of the DCIT in not allowing deduction u/s 80IC on account of interest received amounting Rs. 6,12,516/-assessed as business income ignoring interest paid during the year for the business purpose. (Tax Effect=Rs. 1,98,731/-)

moved an application for admission of the same dated 7.9.2020. The

additional ground sought to be admitted is reproduced as under:-

“That authorities below have erred in facts and in law in not allowing 100% deduction u/s 80IC of the eligible profits of the business and restricting the deduction to 30% of the profits”.

sought to claim deduction u/s 80IC @ 100% of its profits as opposed to

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 17 30% claimed by it, onaccount of substantial expansion being undertaken in assessment year 2012-13 and the impugned year being the 9th year

from theinitial year when the assessee had commenced operation. The

Ld. Counsel for the assessee has pointed out that it had claimed 30%

deduction on the basis of the decision of the ITAT Chandigarh bench in

the case of HycronElectronicsLtd which stated that a new entity carrying

out substantial expansion was not entitled to thebenefit of 100%

deduction on account of substantial expansion. The Ld. counsel has

pointedout that this matter had travelledupto the High Court in A.Y

2012-13 and that the High Court had held that even newundertakings

were entitled to deduction @ 100% on account of substantial

expansion. The Ld. Counsel for the assessee contended that it was a

genuineclaim of the assessee in accordance withlaw and, therefore, the

assessee had sought to raise thisground before us. It was contended that

it was a legal ground and the same ought to be admitted by the ITAT.

itsadditional ground is a legal claim of its entitlement of deduction u/s

80IC of the Act @ 100% as opposed to 30% claimed by it, the additional

ground is admitted for adjudication. The order was pronounced in the

Open Court.

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 18 Further, since admittedly the Hon'ble High Court has in the case

of the assessee itself approved the proposition of law that even new

undertakings are entitled to deduction of profits @ 100% on account of

substantial expansion undertaken,whichproposition of law has been

confirmed by the Hon'ble Supreme Court also in the case of

AarhamSoftronics vide order dated 20.2.2019, and we have held that the

assessee has completed substantial expansion in A.Y 2012-13 in the

Revenues appeal dealt with above, and this being the fourth year since

completion of expansion, we hold that the assessee is eligible to

deduction u/s 80IC @ 100% profits earned in the impugned year. The

additional ground raisedbythe assessee is accordingly allowed.

out that the said ground related to disallowance of claim of deduction

u/s 80IC of the Act on insurance claim received by the assessee during

the year amounting to Rs. 67,00,112/-.It was pointed out that the said

claim had been denied by holding that the impugned receipt had no

direct nexus with the business activity of the assessee and, therefore,

was not eligible for deduction u/s 80IC of the Act. Further, our attention

was drawn to the order of the Ld. CIT(A) who had upheld the same

holding that the receipt was directly related to the running and

maintenance of plant engaged in generation of electricity. That the

money received was actually on account of loss of production and there

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 19 wasno nexus of the same with the manufacturing activity of the

assessee. Our attention was drawn to the findings of the Ld. CIT(A) at

para 5.23.4 and 5.2.5 to theorder which are as under:-

“5.2.4 However, with respect to claim of deduction u/s 80IC on the insurance receipts of Rs.6700112/- the contention of the appellant cannot be accepted. The appellant claimed that the Insurance claim has been received against the damages caused to the circuit breakers of the machineries of the plant the repair expenditure on which had already been debited to the P&L a/c and accordingly the claim of section 80 IC has been reduced with that amount. He argued that the nature of claim is directly linked and inextricably derived from the main business i.e. for putting the assets of the generating station back to working condition. Hence the receipt is directly related with the running and maintenance of the Plant engaged in generation of electricity. Accordingly, the insurance receipts for repair is rightly claimed by the company u/s 80 IC and needs to be allowed.

5.2.5 i have perused the facts of the case, the action of the A.O. and the submissions of the appellant. This contention of the appellant cannot be accepted. The issue is squarely covered by the decision reported at [2013] 40 taxmann.com 399 (Madras) in the case of Commissioner of Income-tax Vs. Gangothri Textiles Ltd. Wherein the following question of law was raised before the Higi Court:—

8 "Whether the insurance money received on loss of production is entitled for deduction under Section 80IA”

The High Court while allowing the appeal of the Revenue held that in the absence of any nexus shown

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 20 between the compensation received and the business activities of the industrial undertaking, the compensation could not be held as derived from the undertaking for the purpose of inclusion under Section 80-IA of the Act. Even otherwise, the issue is squarely covered by the decisions of the Apex Court relied on by the A.O. in his order. These receipts emanate out of the contract between the appellant and the insurance company and cannot be held to have a first degree nexus with the manufacturing activities. This contention of the appellant is accordingly rejected and appeal of the assessee on this issue is dismissed. Accordingly, Ground No. 2 of the assessee is partly allowed.”

been incorrectly appreciated by the Ld. CIT(A).That the insurance claim

had been received not on account of damage of any plant and machinery

but on account of loss of stock onaccount of fire. It was pointed out that

a major fire had broken out in the factory premises resulting in damage

of cotton andother bye products during the year.That the actual damage

came to Rs. 84,07,925/- against whichthe claim of Rs. 67,00,112/- had

been received from the insurance company only and there was no

element of income in the nature of receipt and the said receipt was only

in the nature of compensation for lossincurred in the business activityof

the assessee. That all the relevantdocumentsreflecting the aforesaid

factsbeing copy of accountof stock damage by fire, copy of loss on

account of fire in stock register, copy of FIR for loss on fire, copy of

insurance claim letter issued by the Oriental Insurance Company and all

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 21 replies filed before the DCIT and even before CIT(A) were filedbefore

us. The Ld. Counsel, therefore, contended that the Ld. CIT (A) had

wrongly upheld the disallowance on the ground that it involved

insurance claim vis-a-vis loss of production.

CIT(A).

assessee. We have noted that time and again the assessee had claimed

both before the Assessing Officer and Ld. CIT(A) that it had been

compensated by Insurance Company for loss in stock on account of fire.

The necessary evidence to this fact, we have noted were also filed by the

assessee but the Ld. CIT(A) incorrectly appreciated the facts of the

case, noting it as compensation for loss on account of damage to

machinery.Considering the fact that the assessee had been compensated

for loss of stock and compensation by its inherent nature has no element

of profit in it, there is no question of reducing the amount of

compensation from the profits of the assessee for the purpose of

deduction u/s 80IC of the Act. The claim of the assessee, therefore, of

inclusion of insurance claim received, amounting to Rs. 67 lacs, in the

computation of profits for the purpose of claiming deduction u/s 80IC of

the Act is, therefore, allowed. Ground of appeal No.1 is, accordingly

allowed.

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 22

action of the Ld. CIT(A) in upholding the disallowance of deduction u/s

80IC on interest income, duty draw back and misc. receipts to the extent

of 100%of the said receipts as against the assessee’s claim of deduction

u/s 80IC @ 30%.

is eligible to claim deduction @ 100% of its profits u/s 80IC of the Act

as per the decision of the Hon'ble High Court in its own case, re-

affirmed by the decision of the Hon'ble Supreme Court in the case of

AarhamSoftronics (supra) , this ground of appeal becomes infructuous.

assessee eligible to deduction of profits @ 100% while adjudicating the

additional ground raised by it at para 13 above, ground No.2.1 of the

appeal is dismissed as infructuous.

disallowance of deduction u/s 80IC of the Act onaccount of interest

receivedamounting to Rs. 6,12,516/-.

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 23 25. Before us, the Ld. Counsel for the assessee pointed out that the

same was denied by holding that the said income couldnot said to be

derived from the business activity of the assessee.Before us, Ld.

Counsel for the assessee pointed out that the details of the interest

income earned is reproduced at page 104 of its written

submissionswhich are as under:-

Interest on Bank FDR for purchase of FLC Rs. 4,10,106 for import of Machinery

Interest on HPSEB Security Deposit Rs. 1,80,000//-

Interest from Sundry Customers on Rs. 22,410/- delayed payment

netting be allowed of interestexpenditure against the interest income

earned and disallowance be restricted only to the net income. Reliance

in this respect was placed on the decision of the Hon'ble Apex Court in

the case of ACG Associated Capsules (P) Ltd vs CIT 343 ITR 89 (SC)

and the decision of the ITAT Chandigarh Bench in the case of

Padmawati Steel in ITA No. 587/Chd/2014 and the decision of the

Hon'ble Punjab & Haryana High Court in the case of HM Steels Ltd

(2015) (8) TMI 516.

CIT(A).

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 24

the Ld. Counsel for the assessee. Clearly, the entire gross interest

income cannot disallowed for the purpose of calculating profitseligible

of deduction u/s 80IC of the Act and it is only the net interest income

after consideringthe interestexpenditure incurred for the purpose of

earning of said income which are to be disallowed.

We accordinglyaccept this plea of the assessee and direct the

Assessing Officer to determine the net income afterreducing therefrom

interest expenditure incurred for the purpose of earning the same and

reduce this net income from the profitseligible for deduction u/s 80IC of

the Act.

expenditureu/s 14A of the Act.The Ld. Counsel for the assessee pointed

out that at the time of filing of the return, the assessee suomotu

disallowed interest of Rs. 20,75,709/- u/s 14A on investment of Rs. 95

lacs in Partap Fabric Pvt. Ltd and Rs. 2.90 crores in PartapSpintex Ltd.

The Assessing Officer, however, worked out the disallowance u/s 14A to

Rs. 23,42,834/- by determining the same as per Rule 8D of the Income

Tax Rules, 1962.

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 25 31. Before the Ld. CIT(A), the assessee argued that there was a

calculation mistake. The CIT(A) on considering the same, directedthe

Assessing Officer torework the disallowance after verification of the

factual mistake pointed out by the assessee.

as per law,no disallowance u/s 14A was warranted in the case of the

assessee, firstly because no exempt income in the form of dividend had

beenearned from theimpugned investments made by the assessee and

further because there was sufficient own funds availablewith the

assessee for making the investment calling for no disallowance of

interest. Our attention in this regard was drawn to the financial

statement of the assessee placedbefore us at paper bookpages 5 to

58.Drawing our attention to note No. 20 &21 at page 19 of the paper

book, being details of Revenue from the Operation andOther Income

respectively reflected in the profit and loss account, it was pointed out

that no dividend income was reflected in the same. Further, our attention

was drawn to the fact that while the own funds of the assessee

amounting to Rs. 21.95 crores in the form of Share Capital being Rs.

8.1 crores and Reserves and Surplusamounting to Rs. 13.85 crores, the

investment in shares amounted to Rs. 3.85 crores only. Our attention in

this regard was drawn to thenote No.1 & 2 of the financial statement at

page No.11 & 12 of the paper book reflecting the Share Capital and

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 26 Reserve and Surplus and tonote No.11 at page 16 of the paper book

reflecting the non-current investments made by the assessee in shares

amounting to Rs. 3.85 crores. The Ld. Counsel for the assessee

contended that in view of the same, no disallowance u/s 14A of the Act

was warranted.

never raised these grounds before the lower authorities and the factual

contention of the assessee neededverification. He, therefore, pleaded

that the issue be restored back to the file of the CIT(A).

this plea of no disallowance being made u/s 14A has been raisedbefore

us for the first time and in this regard the assessee has made

certainfactual averments before us regarding no exempt income being

earned and its own funds being more than the investments made.

Sincethe factualclaims need verification, we consider it fit to restore

this issue back to the file of the AO to verifythe factualclaim of the

assessee and thereafter decide the issue in accordance with law.

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 27 36. Ground No.4 relates to disallowance of interest u/s 36(1)(iii) of

the Act on account of interest free advances givenby the assessee to one

M/s Rama CotspinPrivate Ltd.

were not made for business purposes but at the same time held that the

instead of disallowance interest @ 12% as done by the AO, the average

cost should be taken for the purpose of computing the disallowance.

sufficient own fundsamounting toRs. 21.95 cores in the form of Share

capital of Rs. 8.1 cores and ReservesRs. 13.85 crores, therefore, it was

to be presumed that the own funds wereused for making the impugned

advance of Rs. 78,56,792/-. In this regard the Ld. counsel for the

assessee relied upon the decision of the Hon'ble Apex Court in the case

of CIT vs Reliance Industries Ltd (2019) 410 ITR 466(SC).

CIT(A).

the Ld. Counsel for the assessee. Undoubtedly,the advances made were

miniscule as compared to the own funds available with the assessee and,

therefore, it could be safely presumed that the same had been made out

of the own funds available with the assessee, calling for no disallowance

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 28 of interest u/s 36(1)(iii) of the Act. Reliance placed by the Ld. Counsel

for the assessee on the decision of the Hon'ble Apex Court in the case of

Reliance Industries Ltd (supra) is apt wherein the Hon'ble Supreme

Court has held as under;-

"The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee."

36(1)(iii) of the Act. Ground No.4 of the appeal is accordingly allowed.

The appeal of the assessee accordingly stands partly allowed.

957/Chd/2019.

Ld. CIT(A) in allowing deduction u/s 80IC of the Act on income from

sale of by-product and other sales, which had been disallowed by the

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 29 Assessing Officer holding that theycould not be said to be derived from

the manufacturing activity. The relevant findings of the Ld. CIT(A) in

this regard is at paras 5.2.1 to 5.2.3, which are as under:-

“5.2.1 I have perused the facts of the case, the action of the A.O. and the submission of the appellant. With respect to the receipts on account of Sr. No. 1 and 2 on account of by product and hard waste, the same is akin to scrap having residuary value and is being generated from the process of manufacturing. To decide the issue whether the sale of scrap is eligible for deduction u/s 80IC or not, it is material to see as to how the scrap is being generated. In case the scrap is generated out of the manufacturing activity, the same is to be taken as derived from industrial undertaking and will be eligible for deduction u/s 80IC. In case, the scrap is not generated out of the manufacturing activity, the deduction u/s 80IC is ineligible. The order of the AO does not state as to how the scrap is not generated from the manufacturing activity. No details or mention of the sale bills or any factual information has been brought out in the order to substantiate the disallowance of the scrap for claim of deduction u/s 80IC. The A.O is first required to give a finding that the scrap generated is not derived from manufacturing activity before disallowing deduction u/s 80IC.

5.2.2 In this case, the appellant has clearly brought out the nature of scrap being generated and the linkages to the manufacturing activity.

5.2.3 The issue under appeal has been considered and decided by the Hon'ble Punjab & Haryana High Court in 17 taxmann.com 253 in the case of Commissioner of Income Tax - 1vs. M/s. Micro Turners for A.Y. 2006-07. While disallowing the

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 30 appeal of the revenue on thisissue, the Hon'bleHigh Court has held as under:-

“In the present case, the assessee is engaged in the manufacturing of automobile shafts' accessories. In such process, scrap is generated. Such scrap has direct link with the manufacturing process, i.e., manufacturing of shafts is bound to be generated.Therefore, in view of the judgment of the Madras High Court, with which we respectfully agree, no substantial question of law arises for our consideration.

The appellant has also placed on record copy of ledger account which clearly shows that the appellant has sold by products from combermoil, PSF waste, blower room waste etc. which is directly related to the manufacturing process of the appellant. Accordingly, considering the judgment referred supra and the various judgments relied on by the appellant and also considering the facts of

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 31 the case, the contention of the appellant for claim of deduction u/s 80IC on sale of scrap is allowed.”

a categorical finding of fact that the scrap in the present case has been

generated out of the manufacturing activity of the assessee. The said

fact has not been controvertedby the Revenue before us. Further, the Ld.

CIT(A) has held the scrap generated from manufacturing activity has a

direct link with the manufacturing process, relying upon the decision of

the Hon'ble jurisdictional High Court in the case of CIT vs Micro

Tuners (supra) . The Ld. DR has not been able to distinguish the

aforesaid decision before us.

law as laid down by the Hon'ble Jurisdictional High Court as above, we

donot find any infirmityin the order of the CIT(A) holding that the scrap

generated from the manufacturing can be said to be derived from

manufacturing activity and, thus, eligible for deduction u/s 80IC of the

Act.

Ground No.1 of the appeal raised by the Revenue is, therefore,

dismissed.

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 32 addition made by the A.O. u/s 36(l)(iii) by directing to recalculate average cost debt.

the Ld. CIT(A) in directing the Assessing Officer to recalculate the

disallowance of interest u/s 36(1)(iii) on average costbasis instead of

rate of 12% applied bythe Assessing Officer.

in ground No.4, wherein, we have entirely deleted the disallowance of

interest u/s 36(1)(iii) at para39 of our order above. The ground

raisedbythe Revenue, therefore, becomes infructuous and is, according

dismissed.

3.On the facts and in the circumstances of the case, Ld. CIT(A) has erred in allowing interest income u/s 80-IC on the income not derived from the manufacturing activity as per observation of the AO.

infact, the Ld. CIT(A) has not allowed deduction on the interest income

earned and the assessee has raised ground No. 2.2 in its appeal pleading

for netting of interest for the purpose of disallowance of claim u/s 80IC

of the Act.

ITA Nos.560 & 957-c-2019 & 46 & 47-c-2020 ShivamCotspin Ltd, Sirmour 33 52. Considering the same, since we have already restored this issue to the file of the Assessing Officer, wherein we have directed the Assessing Officer to allow netting at para28 of our order above, the disallowance is to be restricted to the net amount of interest alone. This ground of appeal is also, therefore, restored back to the file of the Assessing Officer to be decided along with ground No.2.2 of the assessee’s appeal. In the result, this appeal of the Revenue stands partly allowed.

Order pronounced on 28.12.2020.

Sd/- Sd/- (संजय गग�) (अ�नपूणा� गु�ता) (SANJAY GARG) (ANNAPURNA GUPTA) �या�यक सद�य/ Judicial Member लेखा सद�य/ Accountant Member Dated : 28.12.2020 “आर.के.” आदेशक���त�ल�पअ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकरआयु�त/ CIT 4. आयकरआयु�त (अपील)/ The CIT(A) 5. �वभागीय��त�न�ध, आयकरअपील�यआ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड�फाईल/ Guard File

आदेशानुसार/ By order, सहायकपंजीकार/ Assistant Registrar