SRI.NAVA M.MEERAN,ADIMALY vs. THE ACIT, ERNAKULAM, ERNAKULAM

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.

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).

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 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.

Rs.99,097/- was not pressed and hence, the same is dismissed as not pressed.

respect of alleged bogus purchases made by the assessee out of undisclosed

sources.

the Act of the differentials between the amounts being expenses debited in the 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/-.

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.

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 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.

follows:

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.

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.

of the Act.

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.

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 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.

80-IB of the Act reads as follows; "(1) Where the gross total income of an 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 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.

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 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 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.

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 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.

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.

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