DCIT-CIRCLE, PARWANOO vs. M/S SHIVOM COTSPIN LTD., SIRMOUR

आदेश/Order PerAnnapurnaGupta, AM:

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 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.

3. It is prayed that the order of the Ld.CIT(A) be set- aside and that the AO restored

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. & 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 & 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 & 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.”

“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 & 401/Kol/2010.

6. Before us, the Ld. DR has relied on the order of the Assessing 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.

7. The Ld. counsel for the assessee, on the other hand, relied on the order of the CIT(A).

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.

“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 & 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 & 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 & 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 & 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 & 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.

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 & 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/-)

4. That the learned CIT(A) has erred in law and on facts in confirming the actions of the DCIT in making disallowance u/s 36(1)(iii) on account of interest free advances to Rama Cotspin Private Limited. (Tax Effect=Rs. 2,10,420/-)

“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”.

“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 & 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.”

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

21. In ground No. 2.1 of the appeal, the assessee has challenged the 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%.

23. In view of the above, and moreover since we have held the 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.

No.2.2, the assessee has challenged the disallowance of deduction u/s 80IC of the Act onaccount of interest receivedamounting to Rs. 6,12,516/-. & 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

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.

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.

"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."

The appeal of the assessee accordingly stands partly allowed.

“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 & 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 & 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.”

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

Order pronounced on 28.12.2020.