ACIT, NEW DELHI vs. M/S. LEGACY FOOD PVT. LTD., NEW DELHI

ORDER PER O.P. KANT, AM:

These two appeals by the Revenue are directed against common impugned order dated 05/09/2016 passed by the Learned Commissioner of Income -tax (Appeals)-5, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2010-11 and 2011-12. In these appeals, identical grounds have been raised in same set of facts and circumstances, accordingly, both these appeals were heard together and disposed off by way of this consolidated order for convenience and avoid repetition of the facts. For brevity, the grounds raised by the assessee in 2011-12 are reproduced as under:

1. Whether on the facts and in law , the Ld CIT(A), was right in deleting the addition of Rs. 2,59,58,108/- made by the AO by way of disallowance of benefit of deduction U/s 80IC.

3. The Ld. CIT (A) ought to have considered the legal issue raised by the AO for the A. Y. 2010-11 while deciding the issue for the A. Y. 2011-12 as well, as the facts and legal position remains the same for both the years. The Ld CIT (A) has erred in deleting the addition which is unjustified against the facts of the case as well as against the provision of law.

4. The Ld. CIT (A) erred on facts and in law on account of violation of section 80-1C (7) r.w.s 80-IA (7) of Income-tax Act 1961 and simultaneous violation of Rule 18BBB of Income-tax Rule, 1962.

8. That the appellant craves leave to add, alter, amend or forego any ground(s) of the appeal raised above at the time of the hearing.

2. Briefly stated facts of the case are that the assessee was engaged in rendering services of the job work to M/s Glaxo Smithkline Consumer Healthcare Ltd.(in short the ‘Glaxo’). According to the Assessing Officer, the job work was only of packaging of “Horlicks”, “Boost” and another products of the company ‘Glaxo’, whereas according to the assessee, it was engaged in contract manufacturing of those products for the said company. 2.1 The assessee filed return of income for assessment year 2010-11 on 06/10/2010 declaring nil income and for assessment year 2011-12 on 29/09/2011 declaring total income of ₹ 6,07,98,667/-. The assessments under section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’) for assessment years 2010-11 and 2011-12 were completed on 31/03/2013 and 24/03/2014 respectively. During the assessment proceeding, the Assessing Officer noticed claim of deduction by the assessee under section 80IC of the Act amounting to ₹ 8,33,74,722/- @ 100% of the profit of the eligible business for assessment year 2010-11 and amounting to ₹ 2,59,58,108/- @ 30% of the profit of the eligible business for assessment year 2011-12. The claim of the assessee was examined by the Assessing Officer in the light of the nature of the activities carried out by the assessee. The Assessing Officer noted that nature of the business was shown in form No. 3CD of the Tax Audit Report is of rendering services of the job work (packaging of Horlicks, Boost etc.) for the ‘Glaxo’. The profit and loss account of the assessee showed job work receipt of ₹ 26,41,75,048/- for assessment year 2010-11 and ₹ 30,58,84,250/- for assessment year 2011-12. In response to the query raised by the Assessing Officer to justify the claim of deduction, the assessee submitted a detailed reply along with copy of the Excise Registration Certificate and the process flowchart. It was claimed by the assessee that it was contract manufacture and had entered into a MOU with the ‘Glaxo’ by way of written agreement dated 11/10/2004 for the processing of raw material supplied by the Glaxo by use of its own plant and machinery followed by packaging of the final products. The assessee claimed that product manufactured by the company were treated as manufacturing activities under the Central Excise Rules falling within chapter 19 of Central Excise Tariff Act. 2.2 The Assessing Officer perused the manufacturing expenses of the assessee and found that no significant material was being put to use in the process undertaken by the assessee in respect of the total job work receipts of ₹ 26,41,75,048/- for assessment year 2010-11 and ₹ 30,58,84,250/- for assessment year 2011-12, ₹ against which, the manufacturing expenses of only 7,87,48,768/-and ₹ 8,53,10,054/- had been claimed as incurred. The Assessing Officer noticed that, even out of those expenses, the majority of the expenses related to generator, electricity expenses. The Assessing Officer referred to the definition of the manufacturing provided in section 2(29BA) of the Act and observed that the activity of the assessee do not satisfy the manufacturing defined in said section. The Assessing Officer mentioned that the similar issue was in the assessment for assessment year 2009-10, wherein the deduction under section 80IC had been denied to the assessee.

2.3 In view of the above observations, the learned Assessing Officer disallowed claim of deduction under section 80IC of the Act amounting to ₹ 8,33,74,722/- for assessment year 2010-11 and ₹ 2,59,58,108/- for assessment year 2011-12. 2.4 Aggrieved, the assessee filed appeal before the Ld. CIT(A) and submitted that in assessment year 2009-10, the Ld. CIT(A) as well as the Tribunal has decided the issue in favour of the assessee. The assessee also submitted that it has complied all the necessary condition for claim of deduction under section 80IC i.e. it was doing manufacturing activities and had consequently correctly claim the deduction under the said section. The detailed submission of the assessee have been reproduced by the Learned CIT(A) in the impugned order. 2.5 The Ld. CIT(A) referred the matter to the Assessing Officer regarding the possible application of the provision of section 80IC(7) of the Act. In the remand report, the Assessing Officer submitted that the assessee has not complied the Rule 18BBB of the Income-tax Rules, 1962 (in short ‘the Rules’) and did not file details of the approval/permission issued by the Central Government/State Government/local authority for carrying out the eligible business vide column 13 of the form No. 10CCB of the Income-tax forms. The Ld. CIT(A) forwarded the remand report to the assessee. In the rejoinder, the assessee submitted that relevant requirement of approval/permission issued by the central government/state government/local authority was not in relation to deduction under 80IC and it was related only to section 80IA/80IB of the Act.

2.6 The Ld. CIT(A) is of the view that the Assessing Officer has relied on the finding in assessment year 2009-10, wherein the Learned first appellate authority has already deleted the disallowance, which has also been affirmed by the Tribunal. The Ld. CIT(A) held that in view of the matter stood decided in favour of the assessee by two authorities, he saw no reason to deviate for the same particularly when there was no change in the facts and circumstances of the case. He also relied on the decision of the Tribunal in the case of Zeon Life sciences Private Limited (59 taxmann.com 229) wherein the job work activity has been held to be tantamount to manufacturing. The CIT(A) concluded that the issue of manufacturing process involved in the case of the assessee was no longer res integra and had to be decided in favour of the assessee. 2.7 On the issue of possible application of the provision of section 80IC(7) the Ld. CIT(A) has given two findings; • Firstly, the Ld. CIT(A) observed that from the financial statements and the discussion with the Authorized Representative of the assessee, there was no other businesses, which was carried out by the assessee hence, there was no reason to go into the issue of deriving of more than ordinary profit, which might be expected to arise in the eligible business as enshrined in those subsection. • Secondly, the learned AO pointed out the issue of deficiency in the form No. 10CCB filed by the assessee. The Ld. CIT(A) held this to be a non-issue and agreed with the submission of the assessee and observed that said requirement of submitting details of approval/permission was in relation to section 80IA or 80IB only and not with relation to deduction under section 80IC of the act. 2.8 The relevant finding of the Ld. CIT(A) is reproduced as under: “5.6.3 Keeping all the facts and circumstances in mind, the issue regarding the manufacturing process involved in the appellant’s business is no longer res-integra and has to be decided in favour of the appellant. Coming to the other issue, which . involves the possible application of the provisions of section 80IC(7) r.w.s 80IA(10), although the Assessing Officer has not commented on this issue in the remand report, it is clear from the financial statements and the discussions with the AR, that there is no other business, which is carried out by the appellant company. Hence, there is no reason to go into the issue of the deriving of more than ordinary profits which might be expected to arise in the eligible business as enshrined in those sub sections. However, the A.O has raised a separate issue regarding the deficiencies in the Audit Report in Form 10CCB, which are briefly discussed at para 5.4 herein above. The provisions of section 80IC of the Act are applicable to any undertaking or enterprise, which has begun or began to manufacture, produce any article or thing, and is not engaged in the manufacture or production of any article or thing, specified in Thirteenth Schedule of the Act. The section further deals with an industrial undertaking situated in any of the eligible states and which is engaged in the manufacture or production of articles or thing specified in Fourteenth Schedule of the Act. In the present case, the appellant has established its manufacturing unit in Himachal Pradesh, an industrially backward state specified in Eighth Schedule to the Income Tax Act. As per the provisions of section 80IC(4) of the Act, the conditions to be fulfilled by the undertaking or the enterprises are enshrined. It is provided that for availing deduction u/s 80IC of the Act, the undertaking or enterprises is to fulfill the following conditions i.e. (i) it is not formed by splitting up or the reconstruction of the business already in existence; (ii) it is not formed by transfer to a new business or machinery or plant previously used for any purpose. It is not the case of the department that any machinery was previously used for any purposes, which has been transferred to the appellant or it was formed by splitting up or the reconstruction of the business already in existence.

5.6.4 In so far as the deficiencies in form 10CCB is concerned, which issue the AO has raised during the remand proceedings, this is found to be a non-issue. Form 10CCB is an omnibus form to be filled up by an assessee claiming deduction under the provisions of sections 801, 80IA, 80IB or 80IC, except for certain entities such as multiplex theatres [defined in section 80IB (7A)], convention centres [defined in section 80IB (7B)] and hospitals in rural areas [defined in section 80IB (11B)]. Sub Rule (3) of Rule 18BBB provides that only those enterprises carrying on the business for developing or operating and maintaining or developing, operating and maintaining an infrastructure facility (as per section 80IA (4)(b) would submit the form accompanied by a copy of the agreement of the enterprise with the Central Government or the local authority for carrying on the business of developing or operating and maintaining or developing, operating and maintaining the infrastructure facility. This aspect has been clarified as per action point 6 mentioned in the Rules.”

2.9 The other issues raised by the assessee were also adjudicated by the Ld. CIT(A) in the impugned order. 2.10 Aggrieved with the finding of the Ld. CIT(A) the Revenue has raised the deletion of disallowance of deduction in both the assessment years in ground No. 1 of the appeals. In ground No. 2 to 6, the Revenue has challenged silence of Ld. CIT(A) on violation of Sub-rule 4 of Rule 18BBB of the Rules, by merely stating that it was found to be a nonissue.

4.1 Since the Revenue has challenged that provisions of Section 80-IC(7) have not been satisfied by the assessee, it is relevant to first reproduce the relevant provisions as under:

“80-IC (7) The provisions contained in sub-section (5) and sub- sections (7) to (12) of section 80-IA shall, so far as may be, apply to the eligible undertaking or enterprise under this section.”

4.2 We find that section 80-IC(7) of the Act has further prescribed applicability of section 80-IA(5) and 80-IA(7) to 80- IA(12) of the Act. The section 80-IA(5) reads as under: “80-IA. (5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.”

4.3 Since in the instant case issue in dispute is not in respect of the quantum of the deduction with respect to intra-units and therefore, there is no effect of section 80IA(5) of the Act in the instant case. 4.4 Further, the section 80-IA(7) of the Act prescribes for admissibility of the deduction subject to filing of the Audit Report in prescribed form duly signed and verified by the accountant. The relevant section is reproduced as under: “80-IA (7) The deduction under sub-section (1) from profits and gains derived from an undertaking shall not be admissible unless the accounts of the undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub- section (2) of section 288, and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant.”

4.5 Further, the Rule 18BBB has prescribed form No. 10CCCB for filing the Audit Report along with the agreement or approval or permission, whichever may be the case, as under :

“[Form of audit report for claiming deduction under section 80-I or 80-IA or [80-IB or section 80-IC]. 18BBB. (1) The report of the audit of the accounts of an assessee, which is required to be furnished under sub-section (7) of section 80- IA or sub-section (7) of section 80-I, except in the cases of multiplex theatres as defined in sub-section (7A) of section 80-IB or convention centres as defined in sub-section (7B) of section 80-IB [or hospitals in rural areas as defined in sub-section (11B) of section 80-IB], shall be in Form No. 10CCB. (2) A separate report is to be furnished by each undertaking or enterprise of the assessee claiming deduction under section 80-I or 80-IA or 80-IB [or 80-IC] and shall be accompanied by the Profit and Loss Account and Balance Sheet of the undertaking or enterprise as if the undertaking or the enterprise were a distinct entity. (3) In the case of an enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining an infrastructure facility, the form shall be accompanied by a copy of the agreement of the enterprise with the Central Government or the State Government or the local authority for carrying on the business of developing or operating and maintaining or developing, operating and maintaining the infrastructure facility. (4) In any other case, the form shall be accompanied by a copy of the agreement, approval or permission, as the case may be, to carry on the activity signed or issued by the Central Government or the State Government or the local authority for carrying on the eligible business.]”

4.6 While examining the application of the section 80-IA(7), the Assessing Officer in the remand report proceedings has pointed out that the assessee did not enclose a copy of agreement or approval or the permission, as was required under sub-rule (4) of Rule 18BBB of the Rules. The assessee in its rejoinder submitted the comments, which have been summarized by the Ld. CIT(A) as under: “5.5 In the rejoinder to the report of the A.O filed during the course of hearing on 30.08.2016 the appellant has submitted that the filing of the Audit Report is the responsibility of the statutory auditor and column no. 13 of form 10CCB is not applicable for 80IC cases. From a bare perusal of section 80IC, it is apparent that there is no such requirement of taking any approval from Central Government/State Government/ Local Authority for carrying out the eligible business. In fact form 10CCB is a consolidated form for deductions claimed under sections 80IA, 80IB & 80IC. It is stated that approval is required from Central Government/State Government/ Local Authority in cases of 80IA/80IB and not for section 80IC. It is settled law that the action point mention in the Rules cannot override the Rules nor can the Rules override the Act. My attention has been drawn to action point 6 and moreover it is submitted that this was never the case of the A.O in the assessment orders and it was precisely for this reason that column no. 13 was never required to be filled in by the assessee.”

4.7 After taking into consideration the rejoinder the Ld. CIT(A) adjudicated the issue of deficiency in form No. 10CCB as under: “5.6.4 In so far as the deficiencies in form 10CCB is concerned, which issue the AO has raised during the remand proceedings, this is found to be a non-issue. Form 10CCB is an omnibus form to be filled up by an assessee claiming deduction under the provisions of sections 801, 80IA, 80IB or 80IC, except for certain entities such as multiplex theatres [defined in section 80IB (7A)], convention centres [defined in section 80IB (7B)] and hospitals in rural areas [defined in section 80IB (11B)]. Sub Rule (3) of Rule 18BBB provides that only those enterprises carrying on the business for developing or operating and maintaining or developing, operating and maintaining an infrastructure facility (as per section 80IA (4)(b) would submit the form accompanied by a copy of the agreement of the enterprise with the Central Government or the local authority for carrying on the business of developing or operating and maintaining or developing, operating and maintaining the infrastructure facility. This aspect has been clarified as per action point 6 mentioned in the Rules.”

4.8 Now before us, the Revenue has raised the grounds that the Ld. CIT(A) has found this to be a nonissue and not given any reasoned finding on violation of the subrule (4) of the Rule 18BBB of the Rules. 4.9 On perusal of the above finding of the learned CIT(A), we find that Ld. CIT(A) has not appreciated the requirement of the sub-rule (4) of the Rule 18BBB of the Rules. We have already reproduced Rule 18BBB in preceding paragraphs of this order. The sub-rule (3) is applicable in case of the enterprise carrying on the business of the developing or operating and maintaining or developing, operating and maintaining the infrastructure facility, whereas the sub-rule (4) is applicable on the any other case carrying on the eligible business. No doubt that the deduction under section 80IC is allowable to an undertaking or enterprises carrying on the business referred to in subsection 80IC(2), which are eligible business for said section. Thus, the sub-rule (4) is applicable in case of deduction under section 80IC of the Act and the form 10CCB filed by the assessee was to be accompanied with a copy of the agreement or approval or permission, as the case may be, to carry on the activity, signed or issued by the Central Government or the State Government or the local authority for carrying on the eligible business. Evidently, this requirement has not been fulfilled by the assessee. The Revenue before us has taken this ground specifically and also submitted that this issue has not been considered by the Tribunal in assessment year 2009-10. The filing of agreement/approval/permission being one of requirement of the statute and not complied by the assesee cannot be rejected as non-issue. In the facts and circumstances of the case and in the interest of the substantial justice, we feel it appropriate to restore the issue in dispute the file of the Assessing Officer to provide one more opportunity to the assessee to satisfy the requirement of section 80IA(7) of the Act along with Rules thereon. We are aware that activity of the assessee has been held to manufacturing activity in earlier year by the Tribunal but the assessee is required to fulfill the requirement of law in relevant assessment year. We may note that the Hon’ble Supreme Court in the case of Distribution (Baroda) Pvt. Ltd. Vs. Union of India 155 ITR 120 has held that to perpetuate an error is no heroism and to rectify it is compulsion of judicial conscience. The issue in dispute is accordingly restored to the file of the Learned Assessing Officer, who after verification of the compliance of Section 80-IC(7), shall decide the issue in dispute of deduction under section 80-IC of the Act in accordance with law. 4.10 Further, for examining the applicability of the section 80IA(8) to 80IA(12), the relevant provision are reproduced as under: “80-IA(8) Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date: Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation.—For the purposes of this sub-section, "market value", in relation to any goods or services, means— (i) the price that such goods or services would ordinarily fetch in the open market; or (ii) the arm's length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA. (9) Where any amount of profits and gains of an undertaking or of an enterprise in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading "C.—Deductions in respect of certain incomes", and shall in no case exceed the profits and gains of such eligible business of undertaking or enterprise, as the case may be. (10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom: Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm's length price as defined in clause (ii) of section 92F. (11) The Central Government may, after making such inquiry as it may think fit, direct, by notification in the Official Gazette, that the exemption conferred by this section shall not apply to any class of industrial undertaking or enterprise with effect from such date as it may specify in the notification. (12) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger— (a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and (b) the provisions of this section shall, as far as may be, apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place. (12A) Nothing contained in sub-section (12) shall apply to any enterprise or undertaking which is transferred in a scheme of amalgamation or demerger on or after the 1st day of April, 2007.”

4.11 Here in the instant case, section 80IA(8) and 80IA(10) of the Act are relevant to find out the reason of the abnormal profit and examine whether the assessee has shifted profit or expenditure to eligible business or to any other business carried on by the assessee or shifted profit or expenditure to any other person. 4.12 The Ld. CIT(A) in para 5.6.3 of the impugned order has mentioned that the Assessing Officer has not commented in remand report on this issue. The Ld. CIT(A), however, on the basis of the financial statements and discussion with the Authorized Representative of the assessee held that there was no other business which was carried out by the assessee company and, therefore, there was no reason to go into the issue of deriving more than ordinary profit which might be expected to arise in the eligible business. The learned CIT(A) did not call for report or comment from the Assessing Officer on the specific submission of Authorized Representative. In our opinion, for application of section 80-IA(8) and 80-IA(10), the Ld. CIT(A) was required to examine all the expenses incurred by the assessee for ascertaining shifting of any expenses to any other business of the assessee or to any other concern. From the finding of the Ld. CIT(A), it cannot be ascertained that he has examined the expenses as per the requirement of the section 80IA(8) or 80IA(10) of the Act. The Ld CIT(A) is having coterminous power of the Assessing Officer, and thus, he was required to examine this issue thoroughly. In view of the facts of the circumstances of the case and in the interest of the substantial justice, we feel it appropriate to restore this issue back to the file of the Assessing Officer for deciding applicability of section 80IA(8) and 80IA(10) of the Act over the affairs of the assessee. 4.13 The grounds raised by the Revenue in both the appeals are accordingly allowed for statistical purposes

5. In the result, both appeals of the Revenue are allowed for statistical purposes. Order pronounced in the open court on 28th February, 2020.