C I T JAIPUR vs. M/S OM METAL and MINEARL LTD and ORS

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 109 / 2010 Commissioner of Income Tax-I, New Central Revenue Building, Statue Circle, Jaipur (Raj) ----Appellant Versus M/s OM Metals & Minerals Ltd. (Now Om Metals Infraprojects Ltd.), Om Tower, Church Road, M.I. Road, Jaipur ----Respondent

_____________________________________________________ For Appellant(s) : Mr. Anuroop Singhi with Mr. Aditya Vijay For Respondent(s) : Mr. Sanjay Jhanwar with Ms. Archana, Mr. Mahendra Gargeiya _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Order 22/08/2017 1. By way of the appeals, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has dismissed the appeal of the department. 2. This Court while admitting the matter framed the following question of law:- “i) Whether on the facts and circumstances of the case, the Tribunal was right and justified in allowing deduction under Section 80IB(4) on the sale of scrap of Rs. 2,98,005/- ignoring that the amount on sale of scrap was not derived from the manufacturing activity but were merely incidental to the manufacturing activity? ii) Whether on the facts and circumstances of the case, the Tribunal was right and justified in allowing deduction of Rs. 64,05,413/- under Section 80IA(4) in respect of profit earned by the

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assessee from Vijaywada Project, merely on replacement of old dam gates with new dam gates, ignoring that the said deduction is available only with respect to new infrastructure facility.?” 3. The issue No. 1 is now squarely covered by the decision in case of Liberty India 317 ITR 218. However, in view of the decision of the Supreme Court in case of Commissioner of Income Tax vs. Meghalaya Steels Ltd. (2016) 67 Taxman. Com 158 (SC) wherein it has been held as under:- “18. The judgment in Sterling Foods lays down a very important test in order to determine whether profits and gains are derived from business or an industrial undertaking. This Court has stated that there should be a direct nexus between such profits and gains and the industrial undertaking or business. Such nexus cannot be only incidental. It therefore found, on the facts before it, that by reason of an export promotion scheme, an Assessee was entitled to import entitlements which it could thereafter sell. Obviously, the sale consideration therefrom could not be said to be directly from profits and gains by the industrial undertaking but only attributable to such industrial undertaking inasmuch as such import entitlements did not relate to manufacture or sale of the products of the undertaking, but related only to an event which was post manufacture namely, export. On an application of the aforesaid test to the facts of the present case, it can be said that as all the four subsidies in the present case are revenue receipts which are reimbursed to the Assessee for elements of cost relating to manufacture or sale of their products, there can certainly be said to be a direct nexus between profits and gains of the industrial undertaking or business, and reimbursement of such subsidies. However, Shri Radhakrishnan stressed the fact that the immediate source of the subsidies was the fact that the Government gave them and that, therefore, the immediate source not being from the business of the Assessee, the element of directness is missing. We are afraid we cannot agree. What is to be seen for the applicability of

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Sections 80-IB and 80-IC is whether the profits and gains are derived from the business. So long as profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies is the Government would make no difference, as it cannot be disputed that the said subsidies are only in order to reimburse, wholly or partially, costs actually incurred by the Assessee in the manufacturing and selling of its products. The "profits and gains" spoken of by Sections 80-IB and 80-IC have reference to net profit. And net profit can only be calculated by deducting from the sale price of an article all elements of cost which go into manufacturing or selling it. Thus understood, it is clear that profits and gains are derived from the business of the Assessee, namely profits arrived at after deducting manufacturing cost and selling costs reimbursed to the Assessee by the Government concerned.” 4. The other decision of Punjab and Haryana High Court in case of Commissioner of Income Tax-1 vs. Micro Turners reported in [2012] 17 taxmann. Com 253 (Punj. & Har.) wherein it has been held as under:- “3. In respect of second question of law, the Tribunal has relied upon judgment of the Madras High Court in Fenner (India) Ltd. v. CIT MANU/TN/0786/1998 : [2000] 241 ITR 803 : [2002] 125 Taxman 386 (Mad.), wherein industrial undertaking was engaged in the manufacturing of V-belts, oil seals, O-rings, rubber moulded products, etc. Certain scrap material resulted from process which has a saleable value. The Hon'ble Madras High Court has held that to say that the scrap material has no direct link or nexus with the industrial undertaking, cannot at all be accepted to commend acceptability on the facts and in the circumstances of the case. 4. 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

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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. 5. Learned counsel for the revenue relied upon another judgment of Madras High Court in Pandian

Chemicals

Ltd.

CIT MANU/TN/0141/2002 : [2002] 254 ITR 562: [2003] 128 Taxman 126 (Mad.). But in the said judgment, a finding was recorded that there is no detail in respect of scraps, gunny bags for which assessee has claimed deduction. The judgment in Fenner India's case (supra) is applicable to the facts of the present case and not the one in Pandian Chemicals' case. In view thereof, no substantial question of law arises for consideration of this court. Consequently, the present appeal is dismissed. 5. In that view of the matter, the first issue is required to be answered in favour of the assessee against the department. 6. The issue No.2 regarding 80IA deduction is squarely covered by the decision of Bombay High Court Commissioner of Income Tax, Central II vs. ABG Heavy Industries Ltd. reported in (2010) 322 ITR 323 (Bombay) against which the SLP came to be dismissed on 6th December, 2010 and also decision of this Court in Tax Appeal No. 631/2008 (CIT, Ajmer vs. M/s Shiva Construction Pvt. Ltd.) decided on 25th May, 2017. 7. In that view of the matter, both the issues are answered in favour of the assessee against the department. 8. The appeal stands dismissed. (INDERJEET SINGH)J. (K.S.JHAVERI)J. A.Sharma/