M/S. TORSA MACHINES LTD. vs. COMMISSIONER OF INCOME TAX

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ITA/5/2014HC GauhatiGAHC01002938201407 November 20163 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the substantial question of law is answered in favor of the assessee. The Court reasoned that Section 80IC was inserted to provide growth incentives. While the manufacturing activity itself is eligible for deduction, the income derived from erecting and servicing the self-manufactured machinery at the customer's site should not be excluded from the expression 'profits and gains derived from the business' under Section 80IC. The Court relied on the Himachal Pradesh High Court's decision in Spray Engineering Devices Ltd. vs. Asstt. Commissioner of Income Tax and the Bombay High Court's decision in CIT vs. International Data Management Ltd., which supported the view that service and erection charges have a direct nexus with the main business activity and are thus eligible for deduction. The Court also noted that a previous decision of the Gauhati High Court relied upon by the lower authorities had been subsequently altered. Therefore, the ITAT's decision was set aside, and the appeal was allowed.

What were the facts?

The assessee, engaged in manufacturing Stone Crushing Plants and Accessories, claimed deduction under Section 80IC for the assessment year 2007-08. The Assessing Officer disallowed a sum of Rs. 11,57,601/- received as service and erection charges, holding it ineligible for deduction as it was not derived from manufacturing activities. The CIT(A) upheld this decision, stating the charges were incidental income. The ITAT also ruled against the assessee. The assessee appealed to the High Court against the ITAT's order, challenging the disallowance of deduction for service and erection charges.

What were the issues?

1. Whether, on the facts and circumstances, the Tribunal was justified in law in holding that income received by the assessee from service/erection charges of plants and accessories was not part and parcel of income derived from manufacturing activities, and thus not eligible for deduction under Section 80IC of the Income Tax Act, 1961? Assessee's Contentions: - The service and erection charges received for installing Stone Crushing machineries at the customer's site are directly connected to income generated from manufacturing activities, making the disallowance irrational. - Judgments relied upon by the Assessing Officer and higher forums were wrongly applied to the present case. Revenue's Contentions: - For income to be eligible for deduction under Section 80IC, there must be a direct nexus with the manufacturing activity. Unless this connection is established, the issue cannot be answered in favor of the assessee.

Which sections of the Income-tax Act were involved?

Section 80IC,Section 260A,Section 80IB

AI-generated summary — verify with the full judgment below

ITA 5/2014 BEFORE HON’BLE MR. JUSTICE HRISHIKESH ROY HON’BLE MR. JUSTICE L.S. JAMIR Heard Mr. R Goenka, the learned counsel appearing for the appellant. Also heard Mr. S Sarma, the learned standing counsel for the Income Tax Department, represe nting the respondent.

2.

This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as ’IT Act’) was admitted on the following substantial question of l aw, as framed by the Court on 19.6.2014: Whether on facts and the circumstances of the case, the Tribunal was justified in law in holding that income received by the assessee during the assessment yea r in question from services/erection charges of plants and accessories was not a part and parcel of the income which it derived from their manufacturing activit ies from eligible undertakings/enterprises and, hence, they were not entitled to claim deduction available to them under Section 80IC of the Income Tax Act, 19 61? 

3.

The appellant is engaged in the business of manufacturing of Stone Crush ing Plants and Accessories and they filed the return of income for the assessmen t year 2007-08 on 31.10.2007, disclosing certain income and claiming deduction u nder Section 80 IC of the IT Act. However, the deduction of claim towards the se rvice and erection charge for a sum of Rs.11,57,601/- was declared to be ineligi ble for deduction, under Section 80 IC by the Assessing Officer on 29.12.2009 ( Annexure-A). He opined that earnings from service and erection charge is not der ived from manufacturing business and thus the deduction claimed under this head is ineligible under Section 80 IC of the IT Act.

4.

The aggrieved assessee challenged the decision before the Commissioner o f Income Tax (Appeals) Guwahati but, the appellate authority by its order dated 29/11/2010 declared that the service and erection charges are not derived from t he business of manufacturing activity of the assessee and thus the earnings unde r that head is not eligible for deduction, under Section 80 IC of the IT Act. Ac cording to the CIT(A), the service and erection charge was merely incidental inc ome attributed to manufacture and thus the order of assessing authority was uphe ld on 29.11.2010 (Annexure-B) by the appellate authority.

5.

The above decision of the appellate authority was challenged by the asse ssee in the Income Tax Appellate Tribunal, Guwahati Bench and the learned Tribun al by the impugned verdict dated 23.12.2013 (Annexure-C) held that income derive hineries, manufactured by others. The expression profits and gains  derived fro m the business as mentioned in Section 80 IC may not cover activities unrelated to the manufacturing but when the manufactured machinery is installed by the man ufacturer themselves at the site of the customer, the amount received on this co unt, should not in our understanding, be excluded from the expression derived fr om the business, referred to in Section 80 IC of the IT Act. Therefore when the assessee installs/erects the self-manufactured stone crushing plants and service them at the customer’s site, the amount received from such service, is nothing but earnings from the business of manufacturing activity.

11.

The income derived from erection and commissioning by the manufacturer w as also the issue for consideration of the Himachal Pradesh High Court for deduc tion under Section 80IB of the IT Act. The Division Bench in their judgment of 7 .11.2009 while deciding ITA No.39/2006 (Spray Engineering Devices Ltd. vs. Asstt . Commissioner of Income Tax and another) after threadbare discussion of the leg IT (Appeals) for their conclusion against the assessee had relied on this Court’ s earlier decision in Asst. CIT vs. M/s Meghalaya Steels Ltd. reported in 332 IT R Gauhati 91, but, we find that this decision of the Division Bench was subseque ntly altered by this Court, in the later judgment of 8.4.2013 reported in 358 IT R 551. Therefore the overruled judgment of this Court can’t be applied to decide this Appeal. That apart, the other judgments on the basis of which the issue wa s answered against the assessee, are found to be inapplicable on the facts of th is case and therefore, in our considered opinion, the authorities in their decis ion(s) had erred in rejecting the claim of the appellant, under Section 80 IC of the IT Act.

15.

For the above discussions and reasoning, we find merit in this challenge

and accordingly, the substantial question of law framed by us in the present Ap peal is answered in favour of the assessee and against the department. With this declaration, the Appeal stands allowed. Parties to bear their own cost.

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