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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Per CHANDRA POOJARI, AM:
These appeals filed by the assessee are directed against separate orders of
the CIT(A)-I, Kochi and pertain to the assessment years 2005-06 and 2006-07.
The assessee raised the following grounds of appeal:
The learned Commissioner (Appeals) erred in sustaining the disallowance made by the Assessing Officer in respect of deduction u/s 80IB of the Income Tax Act
The learned officer ought to have held that income by way of subsidies, job work charges and sale of scap amounts to profit of business for the purpose of deduction u/s. 80IB of the Act. .
I.T.A. Nos.325&326/Coch/2017
The learned officers failed to note that the above receipts are directly connected to the manufacturing activity of the appellant and therefore qualified for deduction u/s 801B of the Income Tax Act.
The learned officers ought to have appreciated that all the receipts for which deduction u/s 801B of Income Tax Act was claimed are based on the activities of the appellant firm and that the industrial undertaking though leased out, carried out manufacturing activity, which is sufficient compliance of law for the purpose of 80IB of the Income Tax Act.
The learned Commissioner (Appeals) erred in concluding that other income amounting to Rs. 99,097/- does not qualify for deduction u/s 801B. It is incidental to business.
The learned Commissioner (Appeals) erred in sustaining the addition of Rs 10,08,618/- in respect of alleged bogus purchases having been made by the appellant out of undisclosed sources. The findings of the Commissioner of Income Tax (Appeals) is bad in law.
However, the Ld. AR did not press grounds relating to denial of deduction of job
work charges and sale of scrap and hence, they are dismissed as not pressed.
2.1 The only argument of the Ld. AR was with regard to denial of deduction u/s.
80IB of the Act on subsidies. The assessee claimed deduction u/s. 80IB on
receipt of subsidies but the same was rejected by the Assessing Officer and the
CIT(A).
Against this, the assessee is in appeal before us.
After hearing both the parties, we are of the view that a similar issue was
considered by the Supreme Court in the case of Meghalaya Steels Ltd. (383 ITR
217) wherein it was held that when income from cash assistance received
I.T.A. Nos.325&326/Coch/2017
against export schemes are included as income under the head profits and
gains of business or profession, it is obvious that subsidies which go to
reimbursement of cost in the production of goods of a particular business would
also have to be included under the head profits and gains of business or
profession and not under the head income from other sources. Therefore, the
asssessee is entitled to deduction u/s. 80IB of the Act. In view of the above
judgment, subsidies is to be considered for deduction u/s. 80IB of the Act.
Accordingly, we allow this ground of appeal taken by the assessee.
Ground No. 5 relating to denial of deduction of other income amounting to
Rs.99,097/- was not pressed and hence, the same is dismissed as not pressed.
Ground No. 6 is with regard to sustaining the addition of Rs 10,08,618/- in
respect of alleged bogus purchases made by the assessee out of undisclosed
sources.
The facts of the case are that the Assessing Officer made addition u/s. 69 of
the Act of the differentials between the amounts being expenses debited in the
I.T.A. Nos.325&326/Coch/2017
books of accounts and the amounts substantively supported by invoices, which
amounts relate to the transactions carried out with its sister concerns being
unexplained differential of Rs. 5,54.845/- and unexplained differential of Rs.
4,53,773/-.
On appeal, the CIT(A) confirmed the addition made by the Assessing Officer.
Against this, the assessee is in appeal before us. The Ld. AR submitted that
the Assessing Officer had not carried out sufficient inquiries and investigations
regarding the above issue. The Ld. AR negated the AO's statement that the
invoices should "contain payment details like cheque no., draft no. dale of
payment etc." and the observation of the AO that "all invoices were found to be
intact and none of them were cancelled".
9.1 The Ld. DR relied on the order of the lower authorities.
We have heard the rival submissions and perused the material on record. In
our opinion, the lower authorities had not given an opportunity to the assessee
to reconcile the difference between the actual purchases made as per the
invoices produced by the assessee and actual entries shown in the books of
account of the assessee. Being so, we are of the opinion that it is appropriate to
opportunity to the assessee to reconcile the same before the Assessing Officer.
Hence, this issue is remitted to the file of the Assessing Officer with a direction to
I.T.A. Nos.325&326/Coch/2017
the Assessing Officer to give opportunity to the assessee to reconcile the same
and decide thereof. Hence, the appeal of the assessee in ITA No.
325/Coch/2017 is partly allowed for statistical purposes.
The grounds raised in assessee’s appeal in ITA No. 326/Coch/2017 are as
follows:
The learned officers ought o have held that income by way of subsidies, lease rent, job work charges and sale of scrap amounts to profit of business for the purpose of deduction u/s. 80IB of the Act.
The learned officers failed to note that the above receipts are directly connected to the manufacturing activity of the assessee and therefore, qualified for deduction u/s. 80IB of the Act.
The learned officers ought to have appreciated that all the receipts for which deduction u/s. 80IB was claimed are based on the activities of the appellant firm and that the industrial undertaking though leased out, carried out manufacturing activity which is sufficient compliance of law for the purpose of deduction u/s. 80IB of the Act.
However, the Ld. AR did not press grounds relating to denial of deduction of job
work charges and sale of scrap and hence, they are dismissed as not pressed.
With regard to the ground relating to denial of deduction of subsidies u/s.
80IB of the Act, as discussed earlier in para 4, the assessee is entitled for the
same and accordingly, this ground of appeal of the assessee is allowed.
I.T.A. Nos.325&326/Coch/2017
The next issue is with regard to denial of deduction of lease rent u/s. 80IB
of the Act.
The facts of the case are that the assessee had received lease rent to the
tune of Rs.63 lakhs by leasing/renting of factory and one building and claimed it
as income from business and on the profit, the assessee claimed deduction u/.
80IB of the Act. The Assessing Officer was of the opinion that since the
assessee was not actually involved in manufacturing or production of an article
or thing so as to claim deduction u/s. 80IB of the Act, the claim of the assessee
was rejected.
The Ld. AR submitted that in case of lease rentals, it was income from
leasing out of the unit as a whole to ECPL, which continues the manufacturing
activity. The assessee had offered the lease rentals under the head profits and
gains of business or profession and the AO had also assessed the same under
'business'. According to the Ld. AR, the subsidy income received for the
industrial unit, as also the job work charges are for work undertaken by the unit,
the scrap is derived from the unit and so has direct nexus to the manufacturing
activity.
15.1 The Ld. AR relied on the judgment of the Madras High Court in the case of
CIT Vs. Universal Radiators (P) Ltd. (128 ITR 531) wherein it was held that there
I.T.A. Nos.325&326/Coch/2017
is nothing in sec 80IB which requires that the assessee themselves should
manufacture. The unit should be involved in manufacturing. In the assessee’s
case, ECPL was carrying out the same activity of manufacturing in the unit and
also the assessee had offered lease rental under the business head and therefore
the assessee was entitled to deduction u/s 80IB in respect of the lease rentals.
Also, subsidy income was received for the production carried out by the assessee
and hence, it had direct nexus with the business of the assessee. The Ld. AR also
relied on the judgment of the Supreme Court in the case of CIT vs. Vikram
Cotton Mills Ltd. (169 ITR 597) wherein it was held that when an assessee leases
out its assets and the intention of the assessee is not to discontinue the business
but to lease out its assets for a temporary period as part of exploitation, lease
rent received from letting out the assets is assessable as income from business
and not as income from other sources. Therefore, the assessee would be eligible
for deduction u/s. 80IB of the Act and the profit derived from the factory either
by lease or otherwise would be attributable to the priority industry. The
assessee must have something to do with the factory and the income earned
must have nexus with the priority industry. If these attributes are satisfied, then
the assessee would be eligible for deduction u/s. 80IB of the Act. Therefore, the
rental income would have to be taken as eligible for relief u/s. 80IB of the Act.
On the other hand, the Ld. DR submitted that the relevant part of Section
80-IB of the Act reads as follows; "(1) Where the gross total income of an
I.T.A. Nos.325&326/Coch/2017
assessee includes any profits and gains derived front any
business ............................................ . a deduction from such profits and gains
of an amount equal to such percentage and for such number of assessment
years as specified in this section.". According to the Ld. DR, Section 80IB
provides for a deduction from the profits and gains of an amount equal to a
certain percentage and for a certain number of assessment years as specified in
sub-section (3) and sub-section (4) of that section. One of the conditions of
eligibility is that the assessee must be an industrial undertaking which
manufactures or produces an article or thing not being an article or thing
specified in the list in the Eleventh Schedule or operates one or more cold
storage plant or plants in any part of India. The Ld. DR relied on the judgment
of the Supreme Court in the case of Cambay Electrical Supply Co. Ltd. (113 ITR
84) wherein it was held that the expression 'attributable to" has a much wider
import than the expression 'derived from' thereby intending to cover receipts
from sources other than the actual conduct of the business of the industrial
undertaking. In other words, it can be understood to mean that there can be
receipts which are incidental to the actual conduct of the" business of industrial
undertaking yet the same may not fail within the expression of 'derived from' so
as to be eligible for the benefits envisaged under Section 80-IB of the Act.
Therefore, according to the Ld. DR, as per the judgment of the Apex Court, to be
eligible as deductible, the incomes need to be directly derived from the business
I.T.A. Nos.325&326/Coch/2017
activities of production or manufacturing and not merely correlated or associated
with them.
16.1 The Ld. DR relied on the judgment of the Supreme Court in the case of
Sterling Food (237 ITR 53) wherein it was held that the nexus between the
income and the industrial undertaking was not direct but was only incidental, it
would not fall within the expression "profits derived from industrial undertaking”.
The Ld. DR relied on the judgment of the Apex Court in the case of Pandian
Chemicals Ltd. (262 ITR 278) in which the question was whether the interest
derived from the deposit made with the Electricity Board could be construed as a
profit derived from the industrial undertaking of the assessee for the purposes of
deduction under Section 80HH. According to the Apex Court, the said income
was not eligible for the purposes of the claim under Section 80HH of the Act.
Therefore, certain incomes falling within the parameters of being incidental to
business can fall within the scope of the business of the assessee, and yet it
cannot be said to have been derived from the eligible industrial undertaking of
the assessee, so as to be eligible for deduction under Section 8O-IB of the Act.
We have heard the rival contentions and perused the record. The main
contention of the Ld. AR is that the industrial undertaking was closed down and
let out to other assesses and consequently, earned lease rent from the industrial
undertaking. According to the Ld. AR, the lease rent was earned from the
I.T.A. Nos.325&326/Coch/2017
eligible industrial undertaking and hence, deduction u/s. 80IB is to be granted.
Thus, the controversy before us is centred around the interpretation of the word
“derived from” used by the legislature u/s. 80IB of the Act. The Hon'ble
Supreme Court in the case of Cambay Electrical Supply Co. Ltd. 113 ITR 84 (SC)
held that the expression 'derived from' is much narrower than the expression
“attributable to". According to the Court, whenever legislature intended to give
narrower meaning, it has used the word “derived from”. In view of the above
judgment of the Supreme Court, let us now examine the scope of word “derived
from” used by the Legislature u/s. 80IB of the Act. Section 80-IB provides for
deduction in respect of profits and gains derived from industrial undertaking to
which section 80IB(1) applies. Sub section (2) to the said section prescribes
various conditions which are to be fulfilled for claiming the deduction. One of the
conditions of eligibility is that the assessee must be an industrial undertaking
which manufactures or produces an article or thing not being an article or thing
specified in the list in the Eleventh Schedule. A reading of the section shows
that deduction is available in respect of profits and gains which are derived from
industrial undertaking which is engaged in the activity of manufacture or
production of an article or thing. Applying the test laid down by the judgment of
the Supreme Court cited supra, we are of the view that deduction u/s. 80IB is
available only in respect of such profits and gains which have direct proximity
and nexus with the activities of manufacturing or production of an article or
thing. In other words, profits and gains attributable to the business of the
I.T.A. Nos.325&326/Coch/2017
industrial undertaking would not be entitled for deduction u/s. 80IB of the Act.
In our view, the profits and gains accrue to the assessee only in the course of
business of manufacturing or production of an article or thing. Viewed from this
angle, the lease rent earned by the assessee by letting out the industrial
undertaking to other parties cannot be equated with the profits and gains
derived from the industrial undertaking. The Ld. DR relied on the judgment of
the Apex Court in the case of Pandian Chemicals Ltd. (262 ITR 278) wherein it
was held that interest derived from industrial undertaking of the assessee on
deposits made with the Electricity Board for supply of electricity for running the
industrial undertaking cannot be said to flow directly from the industrial
undertaking and therefore, was not profits and gains derived from the industrial
undertaking for the purpose of special deduction u/. 80HH of the Act.
Contrary to this, the Ld. AR relied on the judgment of the Madras High
Court in the case of CIT Vs. Universal Radiators (P) Ltd. (128 ITR 531). In that
case, the assessee leased out certain machinery belonging to it to another
Company to manufacture certain component parts, which were automobile
accessories. The products so manufactured by the other company were made
available to the assessee. The assessee’s claim that the rent received by it from
the lease of the machinery was to be treated as profits attributable to the priority
industry and hence, would qualify for deduction u/s. 80I of the I.T. Act, 1961,
was accepted by the ITO. The Addl. Commissioner, however, held that the
I.T.A. Nos.325&326/Coch/2017
assessee was not entitled to the relief and revised the order by the ITO. The
Tribunal, in the appeal by the assessee, restored the order of the ITO. In the
present case, the assessee leased out the entire industrial undertaking to
another company for the business of manufacturing and production. There were
no payments made to the lessee by the present assessee (lessor) for making
available those components used as accessories for manufacturing or production
of its products. However, in the case of CIT vs. Universal Radiators (P) Ltd. cited
supra, the products manufactured by the lessee was made available to the lessor
(assessee) so as to enable manufacture or production of its products. Being so,
the ratio laid down by the judgment of the Madras High Court in the case of CIT
vs. Universal Radiators (P) Ltd. cited supra cannot be applied to the facts of the
present assessee’s case. Further, in the case of Vikram Cotton Mills Ltd. (169
ITR 597) (SC), the issue was with regard to leasing out assets to another
assessee for a temporary period as part of exploitation and temporary
suspension of business without any intention to permanently closing down of the
business. In that case, the question was whether receipt of lease of commercial
asset is business income or income from other sources. There was no issue
relating to granting of deduction u/s. 80IB of the Act. The ratio laid down in this
case cannot be applied to the facts of the present case.
I.T.A. Nos.325&326/Coch/2017
18.1 In view of this, the lease rent received by the assessee by letting out
the industrial undertaking is not having any direct connection with the
manufacture or production of an article or thing by the assessee and the same
cannot be considered as business income eligible for deduction u/s. 80IB of the
Act. This ground of appeal of the assessee is dismissed.
In the result, the appeals of the assessee are partly allowed for statistical
purposes. Order pronounced in the open Court on this 01st March, 2019
sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER
Place: Kochi Dated: 01st March, 2019
GJ Copy to: 1. Navas M. Meeran, Adimaly Agro Food Industries, Adimaly. 2. The Assistant Commissioner of Income-tax, Circle-1(2), Kochi. 3. The Commissioner of Income-tax(Appeals-I, Kochi. 4. The Pr. Commissioner of Income-tax, Kochi. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order
(ASSISTANT REGISTRAR) I.T.A.T., Cochin