DCIT, NEW DELHI vs. M/S. L.T. FOODS LTD., NEW DELHI

PER K. NARASIMHA CHARRY, JM Challenging the order dated 28/3/2013 in appeal number 30/11- 12/715 passed by the learned Commissioner of Income Tax (Appeals)-XXX III, New Delhi (“Ld. CIT(A)”), in the case of LT foods Ltd (previously known as M/s. LT oversees Ltd) (“the assessee”), for the assessment year 2007- 08 both the Revenue and assessee filed these two appeals.

Subsequently, there was search & survey at different business/ 3. residential premises of the assessee and group cases under section 132(4) of the Act/133A of the Act on 10/02/2009, pursuant to which notice under section 153A of the Act was issued to the assessee on 7/10/2009 and the assessee, in response to the said notice, filed the return of income on 22/01/2010, declaring a total income of Rs. 39, 83, 900/- after availing deduction under section 80 G of the Act amounting to Rs. 2, 65, 000/-and Rs. 25,66,86, 795/-under section 80IB of the Act. After scrutiny, by order dated 19/08/2011, the assessment was complete under section 153A of

the Act at Rs. 29, 98, 97, 528/- after denying the claim of the assessee for deduction under section 80IB(11A) of the Act and making the following additions: –

S.No Addition Amountin Rs. 1 addition under section 40A(3) of the Act 8,00,129/- 2 addition under section 40(a)(ia) of the Act 1,84,67,810/- 3 Addition on account of shorter deduction of TDS 10,30,213/- 4 Disallowance on account of personal expenses 7,70,096/- 5 Addition under section 69 of the Act on account of 1,63,39,670/- unexplained investment 6 Addition under section 14A of the Act read with 18,18,915/- Rule 8D of the Rules Total 29,98,97,528/- Aggrieved by such additions, assessee preferred appeal before the 3. Ld. CIT(A). By way of impugned order, the Ld. CIT(A) deleted the disallowance of the claim of the assessee for deduction under section 80IB(11A) of the Act and the addition of Rs. 1, 63, 39, 67 0/- made by the assessing officer under section 69 of the Act. Ld. CIT(A), however, sustained the addition is made on account of section 40A(3) of the Act, 40(a)(ia) of the Act, alleged personal expenses and under 14A of the Act read with Rule 8D of the Rules with certain partial reliefs.

Revenue, therefore, filed ITA No. 4046 /Del/ 2013 challenging the 4. deletion of the disallowance under section 80IB(11A) of the Act and 69 of the Act; whereas the assessee filed ITA 4164 /Del/ 2013 challenging the additions that are sustained. Now we shall proceed to deal with these two appeals and dispose them of by way of this common order because the order giving rise to these two appeals is one and the same and it would be convenient to do so.

ITA No 4046/Del/2013

According to the assessee, the assessee commenced the integrated 6. business of processing, transporting, storage, handling and sale of food grains in Bahalgarh, Sonepat, Haryana in the previous year relevant to the assessment year 2003-04 by creating significant infrastructure for storage, handling and transportation of paddy/rice and had deployed the most advanced imported equipment with a view to ensure least possible losses in post-harvest processing of food grains and to enhance the efficiency in the grain management system. Assessee claimed deduction under section 80IB(11A) of the Act, stating that the handling, storage and transportation of paddy/rice constitute the major components of their integrated

business, and that all conditions specified in such section stood fulfilled.

In the appeal assessee preferred by the assessee against the 8. rejection of the claim of the assessee for deduction under section 80IB(11A) of the Act, learned CIT(A), on an appraisal of the facts and circumstances of the case and position in law, agreed with the contentions of the assessee and deleted the disallowance made by the Ld. Assessing Officer. Ld. CIT(A) held that the assessee was engaged in the integrated business of transporting, handling and storage of food grains and fulfilled condition stipulated in section 80IB(11A) of the Act and, therefore, the assessee was eligible to claim deduction under that section. Ld. CIT(A) further agreed with the contention of the assessee that the unit at Bahalgarh was not formed by way of transfer of old plant and machinery and it commenced commercial operations in the previous year relevant to the assessment year 2003-04.

Aggrieved by such findings of the ld. CIT(A), Revenue filed appeal 9. challenging the findings of the ld. CIT(A) and justifying the order of the Ld.

Assessing Officer on two counts. First contention raised on behalf of the Revenue is that the assessee was engaged in manufacture and sale- purchase of rice and not storage, handling & transportation of food grains as contemplated under section 80IB(11A) of the Act; and secondly, that plant and machinery put to use by the assessee prior to 01.04.2001 in Bahalgarh Unit constituted more than 20% of the total machinery.

According to the Revenue, the assessee is in the business of 10. procurement, storage and processing/handling, packaging and marketing of branded and non-branded Basmati Rice; that the assessee was basically engaged in the business of milling of paddy in earlier years which has continued and on the same business assessee is now claiming deduction u/s 80IB(11A); that the assessee procures paddy from mandis and then after milling, rice is manufactured, and therefore, the assessee has not derived any profit from the integrated business of handling, storage and transportation, but on the other hand, the income of the assessee company is from manufacturing of rice from paddy only which is not eligible business in terms of 80IB(1) for claiming deduction u/s 80IB(11A).

deduction u/s 80IB(11A) which was never the intention of the legislature; that there is a separate provision of deduction u/s 80IB for manufacturing concerns and section 80IB(11A) is not the provision meant for such manufacturing activity; that in fact, deduction u/s 80IB(11A) is for certain service activities and not for manufacturing activity; that the Assessee is claiming deduction not against service activities, but against its manufacturing activities , which is against the mandate of the statute. According to him, dehusking of paddy into rice is a manufacturing activity; that the purpose of incentive of deduction u/s 80IB(11A) is not admissible on manufacturing activity, on ‘integrated business of handling, storage and transportation of food grains’; that ‘Manufacturing’ activity cannot be treated as ‘ handling’ by any stretch of imagination; that the deduction under section 80IB(11A) is not meant for agricultural activity as such, but for ‘integrated business of handling, storage and transportation of food grains’, by creating enhanced facility of bulk handling, storage and transportation of food grains; that since the provision is related to food grains, it does not entitle all agricultural activities eligible for deduction u/s 80IB(IA), including the dehusking; and that even if dehusking of rice is an agricultural activity, the said activity does not partake the character of ‘handling’ to make it eligible for deduction under section 80IB(11A).

manufacturing of rice; that Manufacturing of rice from paddy is different from the ‘Integrated business of handling, storage and transportation’; that the nature of business of the assessee is shown as rice manufacturing and merchant exports in the statement of the particulars required to be furnished under Section 44 AB of the Act, whereas in schedule 9 appended to the P&L Account relating to sales is silent as to the receipt from integrated business of handling, storage and transport. In support of this contention, he placed reliance on the decisions of the Hon’ble Apex Court in the cases of Raja Provision Stores Vs. Appellate Tribunal (Sales Tax), Trivandrum 1999 taxmann.com 1941 (SC, and State of Karnataka Vs. B. Raghurama Shetty 1981 taxmann.com 413 (SC).

Ld. DR submitted that the deduction u/s 80IB (11A)is admissible in a 13. case of an undertaking deriving profit from the integrated business of handling, storage and transportation of food grains; that as regards storage and transportation activity, there is no dispute; that the main issue in the instant case is as to what is ‘handling’ in terms of Section 80IB(11A). According to him, processing/manufacturing of paddy into rice doesn’t come under ‘handling of food grains’, and that on this score the business of the assessee doesn’t fall under the eligible business of ‘integrated business of handling, storage and transportation of food grains’.

handling, storage and transportation of food grains’, which later on was extended to the business of processing, preservation and packaging of fruits and vegetables by Finance Act, 2004 w.e.f. 1.4.2005 and thereafter by Finance Act, 2009 w.e.f. 1.4.2010 the benefit was further extended to the Meat products and Poultry or Marine or dairy products. He, therefore, contends that sec 80IB(11A) was inserted in the Income-tax Act with the legislative intention of development of infrastructure for integrated bulk handling, storage and transportation of food grains keeping in background the storage and transit loss of food grains, but not to extend the benefit of deduction to existing or new industrial undertaking engaged in manufacturing or production of food grains as the same was already available under sub-sec (3) to (5) of section 80IB to such undertaking depending upon the period of commencement of business and the location of industrial undertaking for the period as specified therein. Further according to him, the Memorandum explaining the provisions of section 80IB(11A) makes it explicitly clear that the sole emphasis was to encourage building of storage capacities by undertaking upgradation and modernization of infrastructure for bulk handling, storage and transportation of food grains. He referred to the speech of the Finance Minister, while introducing this provision, laying stress on the storage and transportation of food grains as the reasons, and also to the Circular NO. 14/2001 was also issued by CBDT on 9.11.2001.

According to the Ld. DR, the word "handling" in its original sense 15. and in the context of food grains would encompass within its ambit, processes and activities relating to creation of facilities for cleaning and removing of foreign material from the food grain so as to prevent damage

from such material, facilities for drying of food grains to prevent loss during storage due to excessive moisture, pre storage bulk grain dumping and drying facilities, creation of facilities for mechanized sampling, weighing and detection of live infectants, mechanized receiving and handling by storing in Silos equipped with facilities of aeration and fumigation, loading and unloading facilities and traffic management and dumping pits, chain conveyors, elevators and faculties for mechanized shipment so as to integrate storage with quick transportation. Further, he submitted that, the sequence of three activities covered under section 80IB(11A) i.e., ‘handling’, ‘storage’ and ‘transportation’ of food grains needs to be carefully noted and the first activity listed in the section is of ‘handling, which shall answer the description narrated by him above, and since the assessee in this case is processing paddy into rice only after storage of food grains in silos, such activity of processing of paddy into rice is not eligible activity in terms of section 80IB(11A). Placing reliance on the decision of Hon'ble Supreme Court in case of CGT v. NS GettiChettiar, [1971] 82 ITR 599, Sole Trustee, LokaShikshana Trust v. CIT, [1975] 101 ITR 234 (SC), and Smt. TarulataShyam v. CIT, [1977] 108 ITR 345 (SC) he submitted that the definitions in other Acts or technical meaning of a word or expression in the statute may be relevant but not sacrosanct, and the Courts should not hesitate to depart the meaning if the text and settings in which the word or expression is used demands so. On this premise he submits that when Sec 80IB(11A) is read along with Memorandum of explaining the provisions in the backdrop of National Policy on Handling, storage and transportation of Food grains, it would emerge that the word "handling" in its ordinary sense and in the context of food grains would cover the above activities defined as ‘handling’ by

him.

The other ground urged by the Ld. DR is that the old machinery put 17. to use by the assessee prior to 01/04/2001 in Bahalgarh unit constitutes more than 20% and, therefore, the claim of the assessee for a deduction under section 80IB(11A) of the Act cannot be allowed in view of explanation (2) to section 80IB of the Act which stipulates that were in

the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred exceeds 20% of the total value of the machinery or plant used in the business, then deduction under section 80IB of the Act would not be allowed.

Per contra, it is the submission of the Ld. AR that the in the 18. previous year relevant to the assessment year 2003-04, assessee was carrying on the integrated business of handling/processing, storage and transportation of food grains by creating significant infrastructure for handling, storage and transportation of paddy/rice, in order to ensure least possible losses in the post-harvest processing of food grains and to enhance the efficiency in the grain management system, in furtherance of the larger objective of the agro economy of the Country, by obtaining best prices to the farmers for their produce; to minimize the losses of food grains in the course of handling, storage and transportation; and for creation of modern infrastructure to support agro economy; and that since the process of handling/processing, storage and transportation of paddy/rice is part and parcel of the integrated business of the assessee company, deduction under section 80IB(11A) of the Act was claimed by the assessee on fulfillment of all conditions specified therein which was, of course, denied on two grounds, firstly that there is no handling activity as contemplated in the ‘integrated business of handling, storage and transportation of food grains’, but only manufacture of rice from paddy, the other ground being that the machinery used by the assessee constitutes more than 20% of the old machinery.

of CIT vs. Cynamid India Ltd.: 237 ITR 585, CST vs. D.S. Bist: 44 STC 392, Sterling Foods vs. State of Karnataka: 68 STC 239, and CIT vs. Relish Foods: 237 ITR 59 (SC), Sacs Eagles Chicory vs. CIT: 255 ITR 178 (SC) and also on the decisions reported inCIT vs. GitwakoFarma (I) (P) Ltd: 332 ITR 471 (Del), Raghbir Chand Som Chand v. Excise and Taxation Officer ([1960] 11 S.T.C. 149.) (P&H), CIT vs. Karjan Co-operative Cotton Sale Ginning & Pressing Society Ltd.: 129 ITR 821 (Guj), D.D. Shah & Bros vs. UOI: 283 ITR 486 (Raj), B.G.Chitale vs. DCIT: 305 ITR(AT) 81 (Pun SB), and CESTAT, Chandigarh in the case of Dunar Foods Ltd. v. CCE: 2017 (346) ELT 612.While referring to section 80IB(11A) of the Act, he submitted that it provides deduction in respect of profits derived from undertakings engaged in the integrated business of handling, storage and transportation of food grains.

In this regard, it is argued that section 80IB(11A) of the Act provides 21. deduction in respect of profits derived from undertakings engaged in the integrated business of handling, storage and transportation of food grains on a cumulative basis and this beneficial provisions of section 80IB(11A) of the Act was introduced in order to encourage transportation, handling and storage of food grains, with the primary intention of minimizing losses which occur during post-harvesting of food grain. Reliance in this regard is placed on the decision of the Mumbai Bench of the Tribunal in the case of ITO vs. Shankar K. Bhanage: 25 taxmann.com 310, where while adverting to the terms “integrated business of handling, storage and transportation of food grains” used in section 80IB(11A) of the Act it was held that the main purpose of bringing this provision is construction of godowns specifically for stocking food grains for greater efficiency in the grain

management system and minimize post harvest food grain losses.”

word handling itself would include within its ambit processing and manufacture and even for the restrictive activity of storing food grains, the assessee has necessarily to process the food grains. In this context, he submitted that section 80IB(11A) of the Act mandates that the undertaking of the assessee should be engaged in an ‘integrated business’ which means an act or process of making whole or entire, and when the legislature has intentionally used the word ‘integrated business’ in section 80IB(11A) of the Act, it would only imply that all the integrated activities/processes involved in the grain management system from collecting the paddy from the fields/mandi till bringing the food grain to its consumable and marketable form which shall include the steps required to minimize post harvest food grain losse shall have to be undertaken by the assessee, which also includes the process of de-husking/milling of paddy/rice/wheat to bring it to its consumable form also falls within the ambit of the term ‘integrated business’ as used in the said section. Then the Ld. AR referred to the various stages involved in the grain management system and also in the prevention of post-harvest losses vis- à-vis the activities of the assessee and submitted that all the conditions stipulated in the section i.e. all the three activities of (i) handling, (ii) storing and (iii) transportation have been undertaken on an integrated basis, and by picking up the intermediary activity of milling in isolation from the integrated process, it is not open for the Revenue to say that it is only a manufacture of rice from paddy to disallow the deduction under section 80IB(11A) of the Act. According to him such anactivity of the assessee is only intermediary in the activities in the nature of processing of the food grains and falls within the ambit of handling and, therefore, it cannot be the sole basis for denying deduction under section 80IB(11A) of

the Act.

Interactive Pvt. Ltd: 349 ITR 309, Direct Information Private Ltd. vs. ITO: 15 taxmann.com 63 and the following decisions of the Delhi High Court in the cases of CIT vs. Escorts Ltd : 338 ITR 435, CIT vs. Delhi Press Patra Prakashan Ltd. (No.2) : 355 ITR 14, and CIT vs. Tata Communications Internet Services Ltd.: 251 CTR 290 he submitted that it is a well settled proposition of law that where the Act provides for a deduction which is allowable to an appellant for a certain term/ period (such as a period of consecutive ten years in present case), the Revenue is required to examine the eligibility of the appellant and whether all statutory preconditions are satisfied in the first year in which the appellant claims such a term deduction. In such cases, without disturbing the assessment for the initial year, it is not open to the Revenue to make disallowance of such deduction in the subsequent year(s), unless there is a material change in the fundamental facts.

On the aspect of allegation as to the use of old machinery or plant 26. in the new business in excess of 20%, argument of the learned AR is twofold. Firstly, he argues that the learned Assessing Officer failed to demonstrate or establish on facts as to how the assessee violated the conditions of the provisions under explanation-2 to section 80IB (2) of the Act. According to the assessee there was no transfer of any previously used machinery to the new business and the entire machinery at Bahalgarh unit was used for the integrated activity of handling, storage and transportation of food grains with effect from October 2002, and therefore, the assessee does not suffer any disqualification mentioned in explanation two of section 80IB (2) of the Act. The 2nd argument advanced by the learned DR is that the provisions of section

80IB (2) of the Act have no application to the business of the assessee at all, in as much as, the provisions under section 80IB (2) of the Act are applicable only to “industrial undertakings” different from the “undertaking” mentioned in 80IB(11A) of the Act. On this aspect. He argued at length inviting our attention to the provisions of section 80 IA of the Act prior to its amendment by way of Finance Act, 1999 and subsequent amendments making it unwieldy, leading to the restructuring of the said section into two parts, namely, section 80 IA of the Act dealing with the tax holiday to industrial undertakings or enterprises engaged in the infrastructure development and section 80IB of the Act dealing with business other than infrastructure business. He submitted that in contrast to the unamended section 80 IA of the Act, which was dealing with the deduction, at some percentage of the profits derived from certain businesses in subsection one thereof attenuating the conditions stipulated for making such business eligible for such directions in subsections (2) to (4 E) thereof, whereas subsection 5 prescribing the amount of deduction of profits available to each business, section 80IB of the Act is also structured that the nature of every eligible business, the conditions stipulated for eligibility and the percentage of deduction are all given in the watertight compartments of the subsections. He submitted that every subsection of section 80IB of the Act is a self-contained code and does not admit of looking into some other subsection for the purpose of identifying the eligible business, the conditions stipulated for seeking eligibility and the percentage of deduction. We had taken to various subsections of section 80IB of the Act to demonstrate that for the purposes of subsection 11A of section 80IB of the Act, one need not look into any other subsection of section

80IB of the Act

Before adverting to the specific contentions raised by the parties in 28. respect of deduction claimed under section 80IB(11A) of the Act, we deem it just and necessary to refer to section 80IB(11A) of the Act and to look into the scheme promoted by the Government of India under TFC 14/99- Volume III, dated 4th July, 2000, which resulted in promulgation of the National Policy on Handling Storage and Transportation of Food grains,

speech of the Finance Minister while introducing section 80-IB(11A) on the statute vide Finance Bill, 2001, Memorandum explaining provisions of the Finance Bill, 2001, and the Circular No. 14/2001 dated 09.11.2001 issued by the Central Board of Direct Taxes, explaining the intent and purpose of introducing provisions of section 80IB(11A) of the Act.

“In order to reduce storage and transit losses of food grains at farm and commercial level, to modernize the system of handling, storage and transportation of the food grains procured by the Food Corporation of India (FCI) and to bring in additionality of resources through private sector involvement, the Government has approved a National Policy on Handling Storage and Transportation of Food grains, details of which are given below: Objectives of the Policy

The main objectives of the policy are: (i) to reduce storage and transit losses at farm level where about 70% of the total food grain production is retained and consumed and also to encourage the farmers to adopt scientific storage methods. (ii) to modernize the system of handling, storage and transportation of the food grains procured by the Food Corporation of India (FCI). (iii) to harness efforts and resources of public and private sectors, both domestic and foreign to build and operate infrastructure for introduction of bulk handling storage and transportation of food grains in the country.” In his speech the Finance Minister, while introducing section 80- 31. IB(11A) on the statute vide Finance Bill, 2001, observed that,-

"The storage of food grains and their transportation are our major concern. Sir, I propose to provide a tax holiday for five years and 30% deduction of profits for the next five years to the enterprises engaged in the integrated business of handling, transportation and storage of food grains." 32. Further, the Memorandum explaining provisions of the Finance Bill, 2001, has a bearing on gathering the legislative intent behind insertion of section 80-IB(11A) of the Act:

“TAX HOLIDAY FOR UNDERTAKING ENGAGED IN THE INTEGRATED HANDLING, STORAGTE AND TRANSPORTTION OF FOOD GRAINS Under the existing provisions of section 80IB of the Income -tax Act, 1961 a deduction is allowed, in computing the taxable income, in respect of profits derived from a new industrial undertaking or a ship or the business of a hotel. To address the country’s basic concerns relating to enhanced food security and agricultural development, upgradation and modernization of infrastructure for storage, handling and transportation of food grains is a central concern in which introduction of modern technology would bring greater efficiency in the grain management system and minimize post harvest food grain losses.” (emphasis supplied) 33. Apart from the above, Circular No. 14/2001 dated 09.11.2001 issued by the Central Board of Direct Taxes, is also helpful to be referred for explanation of the intent and purpose of introducing provisions of section 80IB(11A) of the Act, and it reads thus:

“Tax holiday for undertakings engaged in the integrated handling, storage and transportation of food grains 51.1 Under the existing provisions of section 80-IB of the Income-tax Act, a deduction is allowed, in computing the taxable income, in respect of profits derived from a new industrial undertaking, or, a ship, or the business of a hotel. 51.2To address the country’s basic concerns relating to enhanced food security and agricultural development, upgradation and modernization of infrastructure for storage, handling and transportation of food grains is a central concern. The introduction of modern technology would bring greater efficiency in the grain management system and minimize post harvest food grain losses. 51.3 To encourage building of storage capacities, section 80-IB has been amended to provide that any undertaking engaged in integrated bulk handling, storage and transportation shall be allowed hundred per cent deduction for the first five years and a deduction of 25% of profits (30% in case of companies) for the next five years. 51.4 The amendment will come into effect from 1st April, 2002, and will, accordingly, apply in relation to the assessment year 2002-03 and subsequent years.” (emphasis supplied). On a careful understanding of the above, we also have no 34. hesitation to hold that the beneficial provisions of section 80IB(11A) of the Act was introduced to encourage the development of infrastructure facilities in the private sector in the direction of integrated transaction of transportation, handling and storage aiming at the enhanced food security by way of acquiring greater efficiency in the grain management system and minimizing the post-harvest food grain losses. There is a purpose of providing incentive to the private operators to create and enhance the infrastructural facilities in handling, storage and transportation in respect of food grains is stretching the financial food security through acquiring greater efficiency in the grain management system and minimize the post- harvest food grain losses.

80IB(11A) of the Act, the speech of the Finance Minister, CBD to circular number 14 of 2001 and also the discussion made in the Sampat Iyengar’s law of income tax 10th edition, learned Assessing Officer observed that the purpose behind the enactment of section 80IB(11A) of the Act was enhanced food security, because a large quantity of food grains was rotting in the country every year because of inadequate storage facility,and that to enhance food security and agricultural development, upgradation and modernisation of infrastructure for storage, handling and transportation of food grains in order to minimise the post-harvest food grain losses by creating infrastructure, therefor.

under section 80IB(11A) of the Act we deem it just and necessary to refer to the post-harvest losses that would occur between harvest and human consumption, which shall include on-farm losses, such as when grain is threshed, winnowed and dried, as well as losses along the chain during transportation, storage and processing. According to the assessee, the flowchart below demonstrates the various processes/stages involved post the stage of harvest of paddy/rice:

Post-Harvest Transportation from field after threshing and winnowing of paddy from field Cleaning of unmilled paddy to remove dust, sand & unhealthy paddy

Storage of unmilled paddy to reduce moisture content and for ageing purposes

De-husking or milling of paddy to make it consumable and marketable Separation and polishing of de-husked paddy Grading and packaging

Transportation to markets

Further, the measures to be taken in prevention of post-harvest 38. losses, are elaborated in the recommendations of the Agricultural Marketing Information Network, in order to prevent post-harvest losses of paddy/rice and are,- “To minimise post-harvest losses, the following measures should be followed. - Timely harvest at optimum moisture percentage (20 percent to 22 percent).

- Use of proper method of harvesting. - Avoid excessive drying, fast drying and rewetting of grains, which causes more broken rice. - Immediate drying the wet grain after harvest, preferably within 24 hours to avoid heat accumulation. - Ensure uniform drying to avoid hot and wet spots and mechanical damage due to handling. - Avoid the losses in threshing and winnowing by better mechanical methods. - Follow sanitation during drying, milling and after milling to avoid contamination of grains and protect from insects, rodents and birds. - Use proper technique of processing i.e. cleaning, parboiling and milling. - Adopt the grading practices to get more profit and to avoid the economic losses. - Use efficient and good packaging for storage, as well as in transportation. - Use proper scientific technique in storage for maintaining optimum moisture content i.e. 12 percent for longer period and 14 percent for shorter storage period. - Use pest control measures (fumigation) before storage. - Provide aeration to stored grain and stir grain bulk occasionally. - Move stocks in sacks to discourage pest incidence and their multiplication. - Proper handling (loading and unloading) of paddy/rice with good transportation facilitates helps in reduction in losses at farm and market level” 39. In this context, it is necessary to look at the activities conducted by the assessee in their integrated business of handling, storage and transportation of the food grains in furtherance of the above object of enhancing the food security by achieving the greater efficiency in the grain management system and minimizing the post-harvest food grain losses. If the unit of the assessee at Bahalgarh strives to achieve these objectives, it would certainly be entitled to the benefit of deduction under section 80IB(11A) of the Act. We are of the considered opinion that for this

purpose we will have to keep it in mind that the incentive is provided for the integrated business of handling, storage and transportation of food grains with this particular avowed object and, therefore, there shall not be any compartmentalization of these activities for the purpose of allowing the deduction.

Orders of the authorities below made reference to and extracted 41. the legal opinion given by Shri PorusFerrack Kaka. The activities of the assessee with reference to which the legal opinion was given clearly establishes /corroborate the said fact only.According to assessee, they are conducting all the necessary activities from collection of the Paddy from the fields/mandi till they are made ready for human consumption by

placing them in the markets, and more particularly, avoiding the losses in threshing and winnowing by better mechanical methods, following sanitation during drying, milling and after milling to avoid contamination of grains and protect from insects, rodents and birds, using proper technique of processing i.e. cleaning, parboiling and milling, adopting the grading practices to get more profit and to avoid the economic losses, and using efficient and good packaging for storage, as well as in transportation, by investing more than Rs.30 crores for setting up of the eligible unit and for this purpose advanced machinery with improved technology was installed for efficiently handling food grains and to avoid any post-harvest losses, developed huge storage capacity to handle paddy stock of more than 1,50,000 Metric Ton (MT) and 70,000 MT of rice in order to bring efficiency in the grain management system and incurring significant expenditure to facilitate transportation of food grains by way of acquiring trucks, tractors and trolleys and has also hired trucks for the purposes of carrying food grains from the farmers and mandis to its storage blocks and thereafter to the markets, followed by upgradation and modernization of infrastructure for handling of food grains in order to bring greater efficiency in the storage and grain management system and minimize post-harvest food grain losses. Assessee also brought it to the notice of the learned Assessing Officer that the special auditors in the report at pages number is 30 and 31 part II volume 5 observed that the condition that the assessee should be engaged in the business of handling, storage and transportation of food grains was fulfilled.

Revenue does not dispute any of the activities carried by the 42. assessee or installing the machinery Per treatment and processing of the

Paddy, setting up of storage facilities or hiring of trucks for transportation of the Paddy from the fields/Mandi to the storage and treatment facility and, rice from there to the markets. In fact, the assessing officer made a remark in the assessment order that simply because some part of the assessee’s business coincides with the part of the provision, he cannot be allowed to take benefit of something which was never the intention of the legislature. It goes without saying that the activities like collection of the paddy from the fields/mandi till they are made ready for human consumption by placing them in the markets, and more particularly, avoiding the losses in threshing and winnowing by better mechanical methods, following sanitation during drying, milling and after milling to avoid contamination of grains and protect from insects, rodents and birds, using proper technique of processing i.e. cleaning, parboiling and milling, adopting the grading practices to get more profit and to avoid the economic losses, and using efficient and good packaging for storage, as well as in transportation, by investing more than Rs.30 crores for setting up of the eligible unit and for this purpose advanced machinery with improved technology would coincide with the provision.

excessive moisture, pre storage bulk grain dumping and drying facilities, creation of facilities for mechanized sampling, weighing and detection of live infectants, mechanized receiving and handling by storing in Silos equipped with facilities of aeration and fumigation, loading and unloading facilities and traffic management and dumping pits, chain conveyors, elevators and faculties for mechanized shipment so as to integrate storage with quick transportation.

In plain English handling includes any process not amounting to 45. manufacture of the treatment of the product with a view to deal with the

same to achieve a desired purpose. In a sense it includes all the activities preparatory and axillary in nature. Merely because the word processing is occurring in 80IB(11A) of the Act in respect of the fruits or vegetables, it does not exclude all the processes from meaning of “handling”. As stated supra, there are various steps involved in minimizing the post-harvest losses as per the recommendations of the Agricultural Marketing Information Network. If we exclude the specific activities like storage and transport, all other activities which are preparatory, axillary and sundry in nature, but in furtherance of the avowed object of better grain management and minimizing the post-harvest losses to achieve food security would naturally fall within the category of handling otherwise, such an expression will remain redundant. It cannot be said that the intermediary processes undertaken by the assessee in clearing, steaming, soaking, drying, polishing and grinding besides de-husking the paddy would significantly enhance the life of the food grain , reduces the loss of food grain and contributes to the preservation of food grains. If those activities do not answer the description of handling, we wonder what would be handling. The word has to be understood in its contextual sense and merely because the learned assessing officer does not agree with the assessee to include the milling of the paddy is covered by “handling”, it does not take away the other activities from the meaning of handling, so long as such activities keep nexus with the objective for which the benefit is intended. Whether or not the de-husking of paddy would form part of the handling, we shall deal with it a little later. In our opinion, the activities carried out by the assessee certainly form part of the expression “handling.”.

argument of the assessee that the word “handling’ takes into its fold many activities and processes in furtherance of the avowed object of securing the minimal post-harvest losses woven around the storage and transportation, which includes the milling of the paddy, Revenue argued in identical terms that "handling" in the context of food grains in the context of 80IB(11A) of the Act would encompass within its ambit, processes and activities relating to creation of facilities for cleaning and removing of foreign material from the food grain so as to prevent damage from such material, facilities for drying of food grains to prevent loss during storage due to excessive moisture, pre storage bulk grain dumping and drying facilities, creation of facilities for mechanized sampling, weighing and detection of live infectants, mechanized receiving and handling by storing in Silos equipped with facilities of aeration and fumigation, loading and unloading facilities and traffic management and dumping pits, chain conveyors, elevators and faculties for mechanized shipment so as to integrate storage with quick transportation.

In that case also, reference was made to the scheme promoted by 47. the Government of India under TFC 14/99-Volume III, dated 4th July, 2000, which resulted in promulgation of the National Policy on Handling Storage and Transportation of Food grains, speech of the Finance Minister while introducing section 80-IB(11A) on the statute vide Finance Bill, 2001, Memorandum explaining provisions of the Finance Bill, 2001, and the Circular No. 14/2001 dated 09.11.2001 issued by the Central Board of Direct Taxes, explaining the intent and purpose of introducing provisions of section 80IB(11A) of the Act in support of the rival contentionsof the parties. Having considered all these things in extenso, the Tribunal

reached a conclusion that carrying out milling of paddy to rice will not take out the case of the assessee from the purview of 80IB(11A) of the Act, and all the activities carried out by the assessee by creating infrastructure for handling, storage and transportation would entitle them to be covered by 80IB(11A) of the Act. On the aspect of processing the paddy to rice vis-à- vis the stipulated activity of “handling, storage and transportation of food grains” under section 80IB(11A) of the Act, the Tribunal observed that,-

“39. xxx xxx xxx

…to find out the intention of the legislature let us understand the process of handling required to be carried on in respect of the food grains. In this regard it will be relevant to refer to the process carried out by the assessee which has been described through pictorial chart (in the paper book filed on 30.9.2013 at page 58 to 82), the process has been described as:

years depending on the quality and time required for maturing the same - 14. Godowns are fitted with climatic control and fumigation facilities so as to preserve the paddy from withering out - from insets and other natural calamities - 15. Paddy is also kept at a particular moisture level - 16. After maturing of paddy from one year to two years the same is de-husked and sent to modernized Silos -

processes particularly the process of defusing so as to remove the inborn pests. After this the process it is again packed and carried to the stores where the same is kept for maturing for a period of one year to two years. All facilities for securing maximum security to the food grains i.e; paddy have been installed to safeguard the paddy from withering, spillage and other natural calamities. Regular fumigation is done to preserve the food grains from natural calamities and to save it from various pests. After keeping the paddy for a period of 12 to 24 months the same is transferred to the Silos where the same is again stored for a period of 15 to 60 days and then sent to milling machine. Therefore it is clear that before process of milling of paddy begins it has to be stored in a proper storage so as to prevent the losses of such food grains. This has been definitely done by the assessee. Therefore it is clear that the assessee has definitely done handling and storage of food grains as well as the transportation because the assessee has employed its own trucks. At this stage we posed a question to ourselves that if the facilities created by the assessee are not in the nature of handling and storage then which activities would fall in that category ? The obvious answer which we can think of that these activities have to be classified as handling and storage etc. because if the meaning was restricted only to creating of stores then legislature would have made the deduction available in case of warehousing facilities then instead of using the expression 'the integrated business of handling, storage and transportation of food grains' the deduction would have been provided 'for the business of modern warehouses' which has not been done. This clearly shows that perhaps the facilities which have been created by the assessee were the kind of facilities which were made eligible for the deduction under Sec 80IB(11A). xxx xxx xxx xxx xxx xxx 44. …….a question would arise whether the assessee is required to carry out only activity of handling, storage and transportation of food grains for claiming deduction u/s 80IB(11A). In our opinion, the answer has to be "no" because in the commercial word an entrepreneur would engage in any business only when the same is commercially profitable. Therefore in case of integrated business of handling, storage and transportation of food grains may not itself be very profitable and if the same is combined with the activity of processing of paddy into rice by spending smaller amount of money for milling mills then such entrepreneur would definitely extend the activity and get into the composite business of handling, storage and transportation and processing of the rice. Let us imagine the situation where the businessman is engaged in the business of procuring, handling, storage

and transportation of paddy separately and then selling the same to another businessman who is engaged in the business of only processing of paddy into rice then same would involve unnecessary further cost in terms of carrying the paddy from handling and storage unit to processing unit because the paddy bags have to be loaded into the trucks carried to the processing unit and then again unloaded and put in to the milling machines for processing of the paddy. This will make both the businesses unviable. Even the legislature intention cannot be that deduction is allowable only if the activity of handling, storage and transportation is undertaken separately because in that case legislature would have provided for deduction in case of warehouses which is not there. In this regard the Ld. D.R. for the Revenue had strongly placed reliance on the decision of Mumbai Bench of the Tribunal in case of ITO v. Shankar K. Bhanage, [2012] 139 ITD 39/25 taxmann.com 310. In that case the assessee was a contractor appointed by F.C.I. for handling the food grains at Turbhe/ Kalyan/ Bhivandi shed and stored food grains at Bhiwandi Depot and transported food grains from above goods sheds to Bhiwandi Depot. For these activities the assessee claimed deduction u/s 80IB (11A) and the same was allowed by the CIT(A). On appeal to the Tribunal the deduction was denied by observing that the assessee was not eligible for deduction because the assessee has not created any infrastructure for carrying out these activities. Thus it is clear that in this case the assessee was merely carrying on the activities without any infrastructure whereas in case before us the assessee has purchased trucks, created facilities for storage and installed various machines like dryers, climatic control equipment and fumigation facilities. Thus the assessee before us has not only carried out handling and storage activities but has also created infrastructure for handling, storage and transportation of the food grains. 45. The Assessing officer also denied the deduction by observing that the main business of the assessee was manufacturing of the rice and not of handling, storage and transportation as observed earlier neither it is possible commercially or nor it is intention of the legislature that for claiming this deduction a businessman should have independently engaged in the business of handling, storage and transportation of the food grains…… “ xxx xxx xxx xxx xxx xxx Thus it is clear that it is not necessary to carry out a particular activity independently for which the deduction is eligible. Even if such activity is part of overall activity even then the deduction is allowable but of course such deduction is to be allowed on a proportionate basis. Similar view

was taken by Mumbai Bench of the Tribunal in case of Samraj Seafoods (P.) Ltd v. ITO ITA No. 2875/Mum/2005. In the case before us the Assessing officer has observed that the assessee has not received any independent income from handling, storage and transportation of the food grains. We have already discussed this aspect earlier and further in view of the decision in case of Sanchita Marine Products (P) Ltd. (supra) and Samraj Seafoods (P.) Ltd.'s case (supra). it is clear that it is not necessary for a businessman to receive income from each of the activity separately in case of a composite business. This can be further understood from a simple example of a car manufacturer. Let us say for example a deduction is available for manufacture and sale of engine of the car. Now a car manufacturer could be producing its own engines and using the same in final assembly of the Car then it cannot be said that the assessee has not received separate income from sale of engine, therefore deduction is not allowable. 48. The Tribunal wondered that if the facilities created by the assessee are not in the nature of handling and storage then which activities would fall in that category and answered that these activities have to be classified as handling and storage etc. because if the meaning was restricted only to creating of stores then legislature would have made the deduction available in case of warehousing facilities then instead of using the expression 'the integrated business of handling, storage and transportation of food grains' the deduction would have been provided 'for the business of modern warehouses' which has not been done. In such circumstances, while reaching the conclusion that the assessee is entitled to deduction under section 80IB(11A) of the Act, the Tribunal made a reference to the case of L.T. Overseas (P.) Ltd for the assessment year 2004-05 and 2005-06 in which case the deduction under section 80IB(11A) of the Act was allowed to the assessee who was conducting the activities which were identical to the activities conducted by the assessee in the case of Laxmi Energy (supra) and the assessee before us.

while dealing with this alternative prayer for remand of the matter to the file of learned Assessing Officer that the facts involved in Laxmi energy (supra) are identical to the facts involved in the case on hand, in respect of the activities of the assessee. It is therefore, clear that the assessees who were conducting the business similar to the one done by the assessee in this case, were found entitled to the benefit under section 80IB(11A) of the Act and such a view is consistent so far. Without mincing many words, while following the ratio of those cases, we are of the considered opinion that the activities involving the cleaning, steaming, soaking, drying, polishing, grinding etc.are covered by the expression “handling” and the assessee is certainly conducting such activities which would entitle to the benefit of deduction under section 80IB(11A) of the Act.

On this aspect, argument of the learned AR is that milling is not a 51. distinct process from handling of food grains because by milling nothing more is done than de-husking the paddy to increase the longevity of the

grains and it is part of the efficient grain management covered by the expression “handling”. He placed reliance on the decision of the Hon’ble Apex Court in the case of CIT VS.Cynamide India Ltd 273 ITR 585 ((SC) wherein the Hon’ble Apex Court considered the question whether de- husking rice was a negligible operation and the consequences of such operation on the rice vis-a-vis the de-husking rice and held that the operation of de-husking paddy is not an industrial or manufacturing operation, as is commonly understood; it is essentially an agricultural operation and such changes as are brought about in the product or outcome of agricultural operations; that both Rice and husk remain in the natural form as a result of de-husking and are covered by the term “agricultural product”. Hon’ble Apex Court further held that the beneficial provisions should be construed liberally, so as to include not merely the primary product as it actually grows, but also a product which undergoes a simple operation, so as to make it more saleable or more useful and, therefore, rice and husk, though separated, remains as they were produced and hence continue to remain agricultural products.

He further submitted that milling is done in order to prevent postal 52. harvest losses because in the traditional way in the process of separating the husk and brawn from rice for human consumption, the traditional process was pounding either by human beings or machines in which process there used to be huge, qualitative and quantitative deterioration of the food grains and the mechanical process of using hullers and mills minimize such losses and therefore, the milling process cannot be seen as a separate activity necessitating to take it away from the expression of handling of food grains with the object of preventing the post-harvest

losses. He placed reliance on several decision to show that so long as there is no qualitative difference in the material after the process, such process cannot be termed as manufacture.

As we have stated above, we will have to test the expression 53. “handling”, occurring in section 80IB(11A) of the Acton the touchstone of the object sought to be achieved through such incentive, namely, achieving the enhanced food security by way of greater efficiency in the grain management system by minimizing the post-harvest food grain losses. It is an undeniable fact that traditionally pounding was the way in which the paddy was converted to the form of rice by separating the husk and brawn. It is also common knowledge that that in that process there used to be quantitative and qualitative losses, caused by the breaking of the grains etc. By dehusking the paddy and converting it into rice, no new article is brought into existence which is qualitatively different from the inputs, but is the simple process of de-husking the paddy to obtain the rice. This conversion meets the objective of minimizing the post-harvest losses which would lead to the greater efficiency of the food grain management system and consequently to the enhanced food security. In Commissioner of Customs(Import) vs. Dilip Kumar and Company &Othrs CA No. 3327 of 2007 (SC), the Hon’ble Supreme Court held that while interpreting the taxing statutes, the applicability of the section has to be seen in strict sense, and once the section is found to be applicable, then it has to be constructed liberally. Since undoubtedly the provisions of section 80IB(11A) of the Act are applicable to the activities of the assessee like clearing, steaming, soaking, drying, polishing and grinding it can also be not denied that de-husking the paddy would significantly enhance the

life of the food grain, thereby reduces the loss of food grain and contributes to the preservation of food grains. In such an event , we are unable to understand how this particular process does not fit in the expression “handling”. For these reasons, we are of the considered opinion that the de-husking of the paddy to convert it into rice is also an integral part of reducing the post-harvest food grain loss.

In respect of the contention of the allegation of the learned 54. Assessing Officer that part of the old machinery was used in the Bahalgarhunit for the purpose of conduct of the integrated business of handling, storage and transportation of the food grains, it could be seen from the orders of the authorities below that the assessee had taken a plea before the learned assessing officer that entirely new machinery was used in the Bahalgarh unit for the purpose of conduct of the integrated business of handling. The legal opinion tendered by Porous Kaka also refer to this contention. Assessee contended before the learned assessing officer that the undertaking carrying integrated business of handling, storage and transportation of food grains commenced in October, 2002 can be seen from the purchases/stock record of paddy, according to which purchase of paddy commenced only post 1st April, 2001 and prior to that the undertaking only had set up polishing and finishing planned to undertake job work of the processing done at the Kakroi unit at Sonipat, and all the references to the evidence in the special audit report of unit commencing operations prior to 1/4/2001 were references to such polishing and finishing capacity set up at Bahalgarh unit. It was further contended before the learned Assessing Officer that a statement of the capacity was given in the closing financial statement that

was enclosed and such statement along with other corroborative documents/records would conclusively establish that the composite undertaking of handling, storage and transportation of food grains was commenced only after 1st April, 2001 and the schedule for the assets for the FY 2001-02 and 2002-03 clearly shows the major additions in building and plant and machinery subsequent to 1st April, 2001.

Apart from this, assessee further contended that it was within the 55. command of the special auditor to securesuch information, which was very much relevant to the commencement of the business of the assessee at Bahalgarh,and it was in the form of prospectusissued at the time of initial public offer by the assessee during the FY 2006-07 according to which and other material that was produced before the SEBI as well as other statutory authorities, the information furnished thereunder was authentic and relevant. It is also brought to our notice that in the prospectus the assessee stated that prior to 1st April, 2001 the undertaking had only set up polish of sand finishing planned to undertake job work of the processing done at Kakroi unit at Sonipat, which according to the assessee was only intermediary process, and such fact was acknowledged by the Revenue audit while carrying out audit in the case of the assessee for the AY 2004-05 and 2005-06 and such observation was communicated by the Revenue audit to the Department, vide audit memo dated 17th March, 2009 wherein additional fact about the commencement of business at Bahalgarh unit by the assessee was brought to light mentioning that the Director’s report also pointed to the audited balance sheet of the assessee for the year ended on 31/3/2001, revealing that the production in Bahalgarh unit for which direction under section 80IB of the

Act was claimed, commencing December, 2000.

Ld. CIT(A), however, made a reference to the quantitative details 57. and considered the contention of the assessee that the entire machinery used the as eligible unit at Bahalgarh was new one and not old machinery was used and observed that the learned Assessing Officer, without mentioning the instances of old plant and machinery being used by Bahalgarh unit, presumed that the plant and machinery for Bahalgarh unit used prior to 1/4/2001 and was transferred such old machinery for the new unit. Ld. CIT(A) also referred to the special audit report wherein it was observed that for the purpose of examining the question whether the unit at Bahalgarh had started with effect from October 2002, examination of the stock registers, unit-wise books of accounts and sales tax

registration certificate in respect of Bahalgarh unit took place, and it was only after examination of all these things the special auditors concluded that the assessee was engaged in the business of handling, storage and transportation of food grains and such business was eligible for a deduction under section 80IB(11A) of the Act.

with business of a ship, (7) deals with the business of Hotel, (7A) deals with the business of any multiplex theatre, (8) and (8A) deal with carrying on scientific Research and Development, (9) with the undertakings located in North-Eastern Region et cetera, (10) deals with an undertaking developing and building housing project, (11A) deals with the undertaking in the business of processing, preservation and packaging of fruits or vegetables or meat and meat products or poultry or marine or dairy products, or from the integrated business of handling, storage and transportation of food grains, (11B) and (11C) dealing with an undertaking deriving profits from the business of operating and maintaining a hospital in rural areas etc., (12A) dealing with a company transferred to another Indian company, et cetera.

making a specific reference to them. It makes the things very clear that the legislative intent of the condition of not to use the old machinery more than 20% in the new business, is the rule for subsections (3) to (5) and it is relaxed in respect of the industrial undertaking setting up for the specific purpose of operating cold chain facility for agricultural produce. It goes without saying that the condition stipulated in clause (iii) of subsection(2) (iii)is a specific one in respect of subsections (3) to (5) and cannot be made generally applicable to all other subsections where a reference was made only to “business” or “undertaking”. The eligible conditions for the businesses or undertakings other than subsections (3) to (5) are given in such subsections alone, and for such purpose there does not appear to be any need to look into subsection (2), and for that matter any other subsection.

Further, while referring to definition of “industrial undertaking.” 61. under various statutes, Hon’ble jurisdictional High Court, in the case of Ansal Housing & Construction Ltd VS. CIT 320 ITR 420 (Delhi), observed that such establishments or undertakings as are carrying on some manufacturing activity or factories, are treated as “industrial undertakings”, thereby making a distinction between an “undertaking” and “industrial undertaking”. Contention of the assessee based on the CBDT circular number 1/2009, dated 27/3/2009, providing explanatory notes to the provisions of Finance Act, 2008 also merits consideration in this context. In that circular, it was stated that, after the commencement of business, the deduction was being allowed under section 35D only to an industrial undertaking or unit, but in order to provide a level playing field to the service sector, the section was amended to provide the benefit of

amortization to all the assessee, is after the commencement of his business, in connection with the extension of his undertaking or in connection with his setting up a new unit. The explanation offered in this circular also makes the distinction between “undertaking” and “industrial undertaking” in unequivocal terms.

deduction under section 80IB(11A) of the Act either in respect of the activities conducted by the assessee to meet the demand of the section, namely, deriving income from the integrated business of handling, storage and transportation of food grains or for non-compliance with the conditions depleted under section 80IB (2) of the Act. We do not find anything illegality are regularity either in the reasoning or the conclusions reached by the Ld. CIT(A) on this aspect, and while confirming the same find the grounds number1 to 3 of Revenue’s appeal devoid of merits and reliable to be dismissed.

3,77,72,500/- submitted that income arising from seized material from all premises searched/surveyed and all persons searched in the group and alleged to be not found in the books of account, was taxed in the hands of Vijay Arora, Surender Arora, Ashok Arora and Ashwani Arora. It was further submitted that though incomes returned in the returns filed and every seized document, in relation to Shri Vijay Arora and his family and all persons in the group, were explained in accordance with requirement of the Act.Since the learned Assessing Officer, however, was not satisfied with such explanation, in order to buy peace and avoid fruitless litigation, Shri Vijay Arora offered an additional income of Rs. 3,77,72,500/- in the assessment year 2009-10 over and above what has been returned in his return u/s 153A and 139(1) to cover all seized documents, loose sheets, transactions, investments, expenditures, credits money, bullion, jewllery and other valuable articles belonging to him, and or in the name of his wife Ranju Arora, his son Abhinav Arora and all other persons in the group they belong to. Similar letters were by Surender Arora, Ashok Arora and Ashwani Arora also.

Learned Assessing Officer further observed that the surrender made by the individuals in their hands might be their unaccounted income which has been surrendered but no one can be allowed to own up the unaccounted income of the group companies. On this premise. Learned Assessing Officer proceeded to add an amount of Rs. 1, 63, 39, 6, 70/- under section 69 of the Act.

persons have already surrendered an amount of Rs. 3, 72, 55, 6, 11/- in their return of income filed under section 153A of the Act and subsequently, a further sum of Rs. 5,21,50,000/- was surrendered on the basis of peak of all transactions during the course of their respective assessment proceedings, thereby declaring/surrendering a total sum of rupees, 8,94,05, 611/- on the basis of the seized purpose. He further submitted that a similar question had arisen for the assessment years 2008-09 and 2009-10 and when the issue reached before the learned DRP, learned DRP considered the same very extensively and held that in the background of the promoters/directors surrendering/declaring a sum of rupees, 8,94,05,611/- for the assessment year 2008-09 and 2009-10 in the returns filed under section 153A of the Act and in the course of assessment proceedings and in making the declaration/surrender of income, all the entries in the seized documents were taken to consideration, both in the trading account as well as in the peak arrived at on the basis of these entries, and the assessing officer had categorically accepted the surrender/declaration of the income on the basis of the seized documents, in the interest of Revenue, there is no justification for making again, another addition in the hands of the company.

Ld. AR therefore, submits that the Ld. CIT(A) rightly followed the 69. directions of the learned DRP,having satisfied that the amount covered by the entries of the seized documents was offered to tax by the promoters/directors in their individual capacity and therefore, to avoid double taxation the same are not be permitted to be taxed in the hands of the assessee.

submitted that view of the observations of the special auditor that the amount surrendered by the individuals may be their unaccounted money, which is nothing to do with the entries in the seized documents and therefore, it is a reasonable for the Ld. CIT(A) to consider the amounts surrendered by the individuals as against the, tax liability of the company in respect of the entries in the seized documents.

Though the Revenue disputed the findings of the Ld. CIT(A), no 71. facts, rendering the observations of the Ld. CIT(A) illegal or irregular are brought to our notice. There is no dispute that the total surrendered amount of Rs. 8, 94, 05, 611/- was covered by the entries of the seized documents. It is not in dispute that, except the suspicion of the special auditor, and for that matter that of the learned Assessing Officer, the amounts surrendered by the individuals were covered by the entries of the seized documents. When once the amount covered by the entries of the seized documents was surrendered by the individuals in their individual returns of income, bringing the same amount to tax in the hands of the company does not arise and it amounts to double taxation. Further, this issue has been considered by the learned DRP for the assessment years 2008-09 and 2009-10 wherein learned DRP in unequivocal terms, observed that while taking into consideration the trading accounts as well as the peak arrived at on the basis of the entries of the seized documents, assessing officer accepted the surrender of the income on the basis of the seized documents in the hands of the individuals, in the interest of Revenue, there is no justification for making again as an addition in the hands of the company.

reference to any documents, that the amount declared by the individuals is in respect of their some other undisclosed income and it has nothing to do with the amount covered by the seized documents, mere suspicion of the special auditor or the learned Assessing Officer does not take the place of legal evidence or proof, and it cannot be a basis for bringing the very same amount to tax in the hands of the company also. It is always open for the assessing officer to show that the amount surrendered by the individuals was in respect of their own undisclosed income independent of the entries in the seized documents, basing on which now the learned Assessing Officer wants to tax the company. Without undertaking any such exercise, it is not permissible for the learned Assessing Officer to proceed to tax the company for the very same amount, basing on suspicions.

We, therefore, we find substance in the contentions raised on 73. behalf of the assessee and hold that inasmuch as the amount covered by the entries in the seized documents was already offered to tax by the promoters/directors of the assessee company in their individual returns of income and has already been accepted by the learned Assessing Officer taking into consideration the entries in the seized documents vis-a-vis the trading accounts as well as the peak arrived on the basis of such entries, it is not open for the learned Assessing Officer to tax the same again in the hands of the company. Consequently, we find that the findings of the Ld. CIT(A) not suffer any legality or irregularity and no interference with the same is warranted. We, therefore, while confirming the findings of the Ld. CIT(A) decline to interfere with the same.

ITA 4164 /Del/ 2013

exempted under sub rule (k) of rule 6DD, which provides that no disallowance under sub section (3) of section 40 of the Act shall be made where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee draft exceeds twenty thousand “where the payment is made by a person to his agent who is required to make payment in cash for goods or services on behalf of such person."

appellant on behalf of the transport company; that in such an event, the appellant is under obligation to make payment to the truck driver, as payments are made only after receipt/delivery of goods; that considering the totality of the circumstances, the case of the appellant squarely falls in the purview of sub rule (k) of rule 6DD of the Income Tax Rules, 1962 (“the Rules”) and accordingly, no disallowance was called for in terms of section 40A(3) of the Act. Reliance is placed on the decision of Pune Bench of Tribunal in the case of ITO vs. DhanshreeIspat in ITA No. 794 of 2013, and a decision of Amritsar Bench of the Tribunal in Royal Wood Industries vs. JCIT: ITA No.53 of 2015 in support of the argument that where cash payments are made under bona fide conditions and no doubt is raised over genuineness of the payments and the payees are identifiable and the assessee has sufficiently explained the circumstances under which the payments have been made to the truck drivers in cash, but the Assessing Officer made disallowance by taking a pedantic view of the cash transaction, no disallowances u/s. 40A(3) is warranted.

followed the law and Rules and it is not possible for the Revenue authorities to add any new entries to Rule 6DD (k) of the Rules. He submitted that if the contention of the assessee is accepted, the provisions of Section 40A(3) of the Act can easily be circumvented with impunity by tendering the amount to some person on behalf of the payer stating that it was paid to the agent. Further, when the assessee had a transport contractor, the assessee is not really under any obligation to make payments to the truck drivers, and if the assessee does so, the assessee is liable to the legal consequences.

Sl. No. Nature of payment Amount 1. Freight charges paid to transporters/ truck Rs.30,47,456 operators 2. Repair charges Rs.1,72,940 3. Clearing & forwarding charges Rs.4,03,951 4. Sales and business promotion expenses Rs.1,31,900 5. Imprest account payments Rs.2,67,000 6. Cash deposited in bank account of Dawaat Foods Rs.22,000 Ltd. Total Rs.40,00,647

After considering the contentions of the assessee, the CIT(A), 81. however, deleted disallowance to the extent of Rs.2,15,985/- being 20% of cash payments of Rs.10,79,924/- made on holidays and Sundays, and the

CIT(A), however, confirmed disallowance to the extent of Rs.5,84,144 under section 40A(3) of the Act, in the following manner, and no further appeal has been preferred by the department.

Sl. Nature of payment As per AO Exclusion Payments Disallowance No. considered confirmed by for CIT(A) disallowance 1. Freight charges Rs.30,02,856 Rs.6,15,973 Rs.23,86,883 Rs.4,77,376 paid to transporters/ truck operators 2. Repair charges Rs.1,72,940 Rs.30,000 Rs.1,42,940 Rs.28,588 3. Rs.4,03,951 Rs.4,03,951 Nil Nil Clearing & forwarding charges 4. Rs.1,31,900 - Rs.1,31,900 Rs.26,380 Sales and business promotion expenses 5. Rs.2,67,000 Rs.30,000 Rs.2,37,000 Rs.47,400 Imprest account payment 6. Rs.22,000 - Rs.22,000 Rs.4,400 Cash deposited in bank account of Dawaat Foods Ltd. Total Rs.40,00,647 Rs.10,79,924 Rs.29,20,723 Rs.5,84,144

At the outset, we would like to state that insofar as the 82. disallowance under section 40A(3) of the Act is concerned, identify of the payees or the genuineness of payment are irrelevant considerations, because it is only after crossing the threshold of such genuineness of the expenditure, the question of payment in terms of section 40A(3) of the Act will arise. Assessee is harping on the escape clause under Rule 6DD(k) which says that where a payment or aggregate of payments made by a

person to his agent who is required to make payment in cash for goods or services on behalf of such person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as prescribed under rule 6ABBA, no disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub- section (3A) of section 40A of the Act.

According to the assessee, the truck driver acts as an agent of the 83. assessee. By no stretch of imagination can we say that the truck driver who operates the track pursuant to the agreement between the assessee and the transport contractor would be the agent of the assessee. Even otherwise also, we are not prepared to accept such an argugment because such acceptance would render the provisions under section 40A(3) of the Act nugatory and every payment could be taken out of the purview of section 40A(3) of the Act by delivering the cash to some intermediary calling him as an agent. There is no privity of contract between the person receiving the sums in cash and the assessee and the truck driver. Such payments are not protected under rule 6 DD (k) of the Rules. On this premise, we reject contention of the assessee.

An alternative plea is taken on behalf of the assessee to the effect 84. that in certain instances, the assessing officer has proceeded to disallow expenses without first verifying if the aggregate payments were made to a single person on a single day and if the pre-requisites of section 40A(3) of the Act were fulfilled. This plea does not seem to have been taken before the Ld. CIT(A) and at this stage it is difficult to accept the same because

the assessee does not produce any material to show that any such instances had taken place. In the absence of any such material prima facie to show that, as a matter of fact, the learned Assessing Officer had proceeded to disallowed expenses without any verification of the aggregate payments to a single person on a single day, we cannot countenance such plea. We, therefore, find ground numbers 10 to 13 is devoid of merits and accordingly dismiss the same.

payment is made to non-resident and TDS provisions are not applicable, no disallowance to be made under section 40(a)(ia) of the Act; and that if expenditure is not claimed in Profit & Loss account and the payment made directly or indirectly relates to such expenditure, no disallowance to be made under section 40(a)(ia) of the Act. Pursuant to these observations of the Ld. CIT(A), assessing officer deleted the addition to the extent of Rs. 1, 53, 76, 284/-on account of non-deduction of TDS and Rs. 6, 54, 8, 62/- on account of shorter deduction of TDS, against which Revenue does not prefer any appeal.

on this issue.

amendment. What follows naturally in view of the decision of the Hon’ble Apex Court in the case of CIT VS. Gold Coin Health Food (P) Ltd, (supra) the presumption goes in favour of the retrospective operation of this curative or declaratory amendment.

We, therefore, set-aside the impugned findings of the authorities 90. below on the aspect of disallowance arising out of the non-deduction of tax at source as detailed supra, and remand the issue to the file of the learned Assessing Officer to apply the restriction on the disallowance in terms of section 40(a)(ia) of the Act, as amended by the Finance Act, 2014. Grounds number 14 to 17 or, accordingly, allowed in part for

issue of eligibility of expenditure incurred on foreign travel by the family members of the directors is covered in favour of the assessee by the order of Ld. DRP for the assessment year 2008-09 and 2009-10, wherein a similar disallowance was made by the assessing officer and deleted by the Ld. DRP. Ld. DR does not dispute this position.

on 3 counts, namely, the assessing officer has not recorded the satisfaction for denying the claim made by the assessee as to the expenditure incurred for earning the exempt income; share in profit from the partnership form cannot be considered for the purposes of disallowance under 14A of the Act read with Rule 8D of the Rules, and lastly that such investment was made out of the own funds of the assessee without utilizing any borrowed funds and therefore, there cannot be in interest expense for earning the exempt income. Ld. DR relied on the orders of the authorities below.

Sd/- sd/- (G.S. PANNU) (K. NARSIMHA CHARRY) VICE PRESIDENT JUDICIAL MEMBER Dated: 30.09.2020