M/S. LEO FASTENERS,,CHENNAI vs. ADDL. CIT,, PONDICHERRY

आयकर अपील�य अ�धकरण, ’सी’ �यायपीठ, चे�नई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘C’ BENCH, CHENNAI �ी संजय अरोड़ा, लेखा सद�य एवं �ी धु�वु� आर.एल रे�डी, �या�यक सद�य के सम� Before Shri Sanjay Arora, Accountant Member & Shri Duvvuru RL Reddy, Judicial Member आयकर अपील सं./I.T.A.No.736/Mds/2012 �नधा�रण वष�/Assessment Year:2008-09 M/s. Leo Fasteners, The Additional Commissioner of Rep. by its Partner, Vs. Income Tax, Pondicherry Range, A-27A, Industrial Estate, Pondicherry. Thattanchavady, Pondicherry 605 009. [PAN:AABFL0652J] (अपीलाथ� /Appellant) (��यथ�/Respondent) अपीलाथ� क� ओर से / Appellant by : Smt. G. Vardhini Karthick, Advocate ��यथ� क� ओर से/Respondent by : Shri Ashish Tripathi, JCIT सुनवाई क� तार�ख/ Date of hearing : 02.08.2017 घोषणा क� तार�ख /Date of Pronouncement : 31.08.2017 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER: This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) XII, Chennai, dated 23.03.2012 relevant to the assessment year 2008-09, wherein, the assessee has challenged confirmation of disallowance of deductions claimed under section 80IB as well as 80IA of the Income Tax Act, 1961 [“Act” in short].

2 I.T.A. Nos.736/M/12

2.1 From the details available in the records, the crux of the issue with regard to the claim of deduction under section 80IB of the Act is that the assessee firm claims to have two units i.e. Unit-I & Unit-Il. Unit-I was the old unit existing from the financial year 1997 -98 and was claiming deduction under section 80-IB of the Act @ 100%, from the assessment year 1998-99 to 2002-03. The assessee, during the financial year 2003-04, claimed to have formed a new unit (Unit-Il) on 23.10.2003, at a different location (from that of Unit-I). For this Unit-I the assessee obtained a separate licence, separate electricity connection and separate excise registration. Under this background, the assessee claimed the unit-II as separate "Industrial Undertaking" and started claiming a fresh deduction under section 80-IB of the Act @ 100% starting from the assessment year 2004-05.

2.2 There was a survey under section 133A of the Act on 18.11.2004 in the case of assessee and its group, wherein, it was noticed that the activities

3 I.T.A. Nos.736/M/12

carried out by the assessee do not constitute manufacturing and processing activity and hence, it was held that the assessee is not eligible for claiming deduction under section.80-IB of the Act with regard to the Unit II.

2.3 Further, the Assessing Officer also noticed the so called Unit-Il claimed to have been started by the assessee on 23.10.2003 (i.e. during the financial year 2003-04) is not a new or independent manufacturing unit. The Assessing Officer also noticed that the assessee, in order to claim deduction under section 80IB of Act, the new Unit (i.e. Unit –II) projected the Unit-I and Unit- II as if they are two separate and independent units. The Assessing Officer also observed that even the activities undertaken by the assessee in the so called Unit-Il are not independent. These activities are intrinsically interlinked with Unit-I and other group concerns. The different steps the nut manufacturing process are shared/distributed among the Unit-Il, Unit-I and other group concerns. In other words, Unit-I, Unit-II and other group concerns are collectively engaged in the process of manufacturing the nuts. However, the assessee was claiming the entire sales of the manufactured nuts in the hands of Unit-Il only. The assessee was showing the work done by the Unit-I and the other group concerns as the job work done by them for the Unit-Il, in the manufacturing process. Further, the Assessing Officer has also noticed that assessee was showing huge profit in the Unit-Il, and the job work charges paid to the Unit-I and the group concerns are framed in such a

4 I.T.A. Nos.736/M/12

way that profit in their (unit-I & group concern) hands is very nominal, as income of Unit II was claimed exempt under section 80IB of the Act @100%, whereas, others are not eligible for deduction. By observing the above discrepancies and anomalies, the Assessing Officer, in the assessments of assessment years 2004-05 to 2007-08, disallowed the assessee's claims of 100% deduction under section 80IB of the Act. Similarly, for the assessment year under consideration, i.e., 2008-09 also, the facts involved are same to that of earlier assessment years, the Assessing Officer disallowed the claim of deduction under section 80IB of the Act.

5 I.T.A. Nos.736/M/12

section 80IB of the Act. However, with regard to the claim of deduction under section 80IA of the Act, the ld. DR has submitted the Department has preferred further appeal before the Hon’ble Apex Court against the decision in the case of Velayudhaswamy Spinning Mills Pvt. Ltd. v. ACIT 340 ITR 477 and the same is pending.

6 I.T.A. Nos.736/M/12

100% to 25%, based on the broad reasoning that it is not an independent unit, i.e., which can exist on its own. Against the appellate order, both the assessee as well as Revenue are in appeal before the Tribunal and vide its consolidated order dated 12.11.2010, the Tribunal has held that the assessee’s so called Unit II is nothing but a colourable device formed by splitting up of the existing old unit (Unit I) and hence not eligible for deduction under section 80IB of the Act. Since the facts and circumstances existing in the earlier assessment years 2004-05 to 2007-08 are also continuing in the current assessment year 2008-09, by following the order of the Tribunal for earlier assessment years dated 12.11.2010, the ld. CIT(A) dismissed the ground raised by the assessee. It is, on account of this, both the assessee and the Revenue are aggrieved and preferred further appeals before the Hon’ble Jurisdictional High Court. After considering the submissions of both parties, vide its order dated 10.07.2017 in T.C.(A) Nos. 533 to 538 of 2010, 1217 to 1220 of 2010 and 787 & 788 of 2014, the Hon’ble Madras High Court has observed and held as under: “26. In the instant case also, to examine whether there is an substantial expansion, one would have to look at the following indices: (i) Is there an investment to substantiate fresh capital in the concerned industrial undertaking. (ii) Is there employment of requisite labour. (iii) Whether or not, the undertaking manufactures or produces articles or things.

7 I.T.A. Nos.736/M/12

(iv) Whether or not, it has profits, which are clearly attributable to the industrial undertaking qua which deduction is sought. (v) Whether or not, it has the industrial undertaking qua which deduction is sought has a separate or distinct identity. 26.1. When these tests are employed, it is quite clear that in so far as Unit II is concerned, the Assessee has employed a substantial amount of fresh capital. 26.2. In this behalf, the CIT(A)s have held that the investment made by the partners by way of capital contribution and loan has been split and/or diverted from Unit I. 26.3. To our minds, this objection loses sight of the fact that what is required to be examined is that separate and distinct investment has been made to expand or set up a new industrial undertaking. The fact that the source of investment, i.e., are common to Units I and II, by itself, would not disentitle the Assessee from claiming deduction qua Unit II on this score. Furthermore, CIT(A)s orders itself show that moneys have also been borrowed from banks, such as, SBI and HDFC, to fund Unit II. 26.4. Therefore, this objection, to our minds, is completely, misconceived. 26.5. Furthermore, the Assessee has engaged separate labour and is engaged in manufacture and production of articles. 26.6. The objection taken by the Authorities below, that the article produced and/or manufactured by the Assessee is commercially no different from what Unit I manufactured, according to us, is not a ground on which deduction claimed under Section 80 IB can be denied to the Assessee. 26.7. The only condition that the Assessee, in this behalf, is required to fulfill is that, they should manufacture and produce an article or thing. Sub- clause (iii) of sub-section (2) of Section 80IB of the 1961 Act does not require that, in order to claim deduction, the article or any manufacture must be commercially different from that which is manufactured under the aegis of the existing business. 26.8. Employing such a test would, in our view, result in altering the scope, and the effect of sub-clause (iii) of Section 80IB(2) of the 1961 Act and adding a condition, which is not provided for by the legislature. 27. In so far as the aspect of transfer of machinery is concerned qua Unit I, the CIT(A)s and the Tribunal have accepted the fact that the machinery, if transferred is below the permissible limit of 20% of the total value of plant and machinery, it cannot be viewed as violation of the conditions prescribed

8 I.T.A. Nos.736/M/12

under Section 80IB of the 1961 Act for claiming deduction. However when it came to putting to test the said proposition, vis-à-vis Unit II, the Authorities below construed such transfer as manipulation, only to claim deduction under Section 80IB of the 1961 Act, by keeping the value of the transferred machinery below the permissible limit of 20% of the total value of the plant and machinery of the recipient unit, i.e., Unit II. 27.1. According to us, this objection is without any basis. There is no discussion, either in the order of the Tribunal, or in the order of the CIT(A)s, as to how this would amount to manipulation, as long as the machinery transferred to Unit II was within the permissible limit of 20%, as set out in Explanation 2 to sub-section (2) of Section 80IB. This could not, in our view, form the basis for declining the deduction claimed by the Assessee. 27.2. In raising this objection, the Authorities below have ignored the fact that the condition stipulated in sub-clause (ii) of subsection (2) of Section 80IB disentitle the Assessee from claiming a deduction, only, if, the formation of the new business takes place via transfer of machinery and/or plant, previously used for any purpose. Therefore, it is not a mere transfer of plant and machinery, which is used previously for some purpose, but the fact that transfer is of such nature that it enables the formation of the undertaking qua which deduction is sought by an Assessee. It is not the Revenue's case that the transferred machinery enabled the formation of Unit II. 27.3. As indicated herein above, four (4) nut former machines were imported specifically for setting up Unit II. Furthermore, the record shows that the value of the transferred machines were below 20%. Therefore, we find no basis for declining the claim for deduction made by the Assessee under Section 80IB on the ground that it had manipulated the transfer of machinery in such a manner that its value was kept below 20% of the total value of the plant and machinery installed in Unit II. 28. This issue came up for consideration before the Supreme Court in the matter of: Bajaj Tempo Ltd. V. Commissioner of Income Tax (1992) 196 ITR 188. 28.1. This case was again decided under the provisions of Section 15C of the 1922 Act. Notably, Section 15C of the 1922 Act did not have appended to it a provision similar to Explanation 2 to Section 80IB(2) of the 1961 Act, despite which, the Supreme Court made the following apposite observations: " Words of a statute are undoubtedly the best guide. But if their meaning gets clouded then the courts required to clear the haze. Sub- section (2) advances the objective of sub-section (1) by including in it every undertaking except if it is covered by clause (i) for which it is necessary that it should not be formed by transfer of building or

9 I.T.A. Nos.736/M/12

machinery. The restriction or denial of benefit arises not by transfer of building or material to the new company but that it should not be formed by such transfer. This is the key to the interpretation. The formation should not be by such transfer. The emphasis is on formation not on use. Therefore it is not every transfer of building or material but the one which can be held to have resulted in formation of the undertaking. " 28.2. In this case, the Supreme Court was called upon to rule whether carrying on business by a new undertaking in a premises leased from another business would disentitle the Assessee to claim deduction under Section 15 C of the 1922 Act. The Supreme Court, as indicated above, ruled in favour of the Assessee by stressing on the fact that it is not a mere transfer of machinery and plant, which was used, previously, for other purpose, that would deprive an Assessee from claiming deduction, but what would, in fact, disentitle the Assessee from claiming deduction, if, transfer enables the formation of new business qua which deduction is claimed. The Court held that the provisions of the like nature, which are incorporated in the Statute by the Legislature to give a fillip to industrialization, should, in case of doubt and/or ambiguity, be interpreted in a manner, which favours the Assessee. In other words, such provisions should liberally construed. 29. The second objection, which the Authorities below have taken qua Assessee vis-à-vis his claim for deduction in respect of Unit II is that, it had purchased nut blanks from Unit I. In this context, one may note that in respect of financial year 2003-04, nut blanks, worth Rs.3,14,26,875/- were purchased, while in financial year, 2004-05, nut blanks, worth Rs.8,98,39,763/- were purchased. Based on this, it was concluded by the CIT(A)s that the whole idea was, to shift the activities from Unit I to Unit II. However, it is not suggested by the Authorities below that Unit II had not purchased the nut blanks for a true value from Unit I. 29.1. Once again, in our opinion, the mere fact that nut blanks were purchased from Unit I cannot be a reason to deny deduction under Section 80IB, vis-à-vis Unit II. The deduction is made available to the Assessee, vis-à-vis Unit II, as it fits the attributes of an industrial undertaking and not to the Assessee per se. As long as the Assessee has invested a substantial amount in setting up an industrial undertaking, which is separate and distinct, it is entitled to claim the said deduction. 29.2. As indicated above, the substantial expansion of Unit I or even, if, Unit II is concerned as an expanded form of Unit I, which, for the reasons given above, is clearly substantial, it cannot be denied deduction under Section 80IB of the 1961 Act. The fact that it has used raw material, i.e., nut blanks, which have been supplied by Unit I, cannot come in the way of one reaching a conclusion that it is a separate and independent unit. This proposition can be better explained by the following illustration. Say for

10 I.T.A. Nos.736/M/12

example, the Assessee had established Unit II, in another company or entity, would the Revenue, then, be able to deprive such an entity of exemption under Section 80IB of the 1961 Act. The distinction, separateness and independence of an industrial undertaking cannot be made dependent only on the attribute of ownership. 29.3. Therefore, for all these reasons, we are of the view that both CIT(A)s as well as the Tribunal were wrong in concluding that the Assessee could not claim deduction under Section 80IB of the 1961 Act vis-à-vis Unit II.” 6. Respectfully following the above judgement of Hon’ble Jurisdictional High Court in assessee’s own case for earlier assessment years, we set aside the order of the ld. CIT(A) and direct the Assessing Officer to allow the claim of deduction under section 80IB of the Act in respect of Unit II of the assessee in the assessment year 2008-09 and thus, the ground raised by the assessee is allowed.

11 I.T.A. Nos.736/M/12

“38.1. Furthermore, we have also concluded in favour the Assessee that the computation of deduction, under Section 80IA of the 1961 Act, by the Assessing Officer, in respect of A.Ys.2006-07 and 2007-08 vide Assessment Orders dated 29.12.2008 and 18.12.2009, has to be carried out keeping in mind the legal principles set forth by the Division Bench of this Court in the matter of Velayudhaswamy Spinning Mills Pvt. Ltd. V. Assistant Commissioner of Income Tax (2012) 340 ITR 477 (Madras). 38.2. In this behalf, as noted above by us, the decision of the Delhi High Court in the matter of Dewan Kraft Systems Private Limited, with which, we have agreed, would also be applicable. Accordingly, these appeals are allowed. The questions of law raised therein are answered in favour of the Assessee and against the Revenue. However, the Assessing Officer is directed to re-compute the deduction claimed by the Assessee under Section 80IA of the 1961 Act, vis-à-vis A.Ys.2006-07 and 2007-08, keeping in mind the foregoing discussion. 39. In sum, while, T.C.(A)Nos.533 to 538 of 2010, 787 and 788 of 2014, preferred by the Revenue, are dismissed; T.C.(A) Nos.1217 to 1220 of 2010, preferred by the Assessee, are allowed. However, there will be no order as to costs. 8. Mere filing of the SLP before the Hon’ble Apex Court is not a valid ground for not following the judgment of the Hon’ble Madras High Court. Further, it is not the case of the Revenue that the judgment of the Hon’ble Madras High Court in the case Velayudhaswamy Spinning Mills P. Ltd (supra) is stayed by the Hon’ble Apex Court. It is pertinent to mention that in the absence of any stay granted by the Hon’ble Apex Court against the operation of the judgment of the Hon’ble Madras High Court, all the lower judiciaries as well as quasi judicial authorities are bound to follow the decision of the Hon’ble Jurisdictional High Court. Thus, respectfully following the decisions of Hon’ble Madras High Court in the case of Velayudhaswamy Spinning Mills Pvt. Ltd. v. ACIT (supra) as well as in assessee’s own case for earlier assessment years, we direct the Assessing Officer to allow the

12 I.T.A. Nos.736/M/12

claim of deduction under section 80IA of the Act as well in the assessment year under consideration. Thus, the ground raised by the assessee is allowed.

Order pronounced on the 31st August, 2017 at Chennai.

Sd/- Sd/- (SANJAY ARORA) (DUVVURU RL REDDY) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 31.08.2017 Vm/- आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant, 2.��यथ�/ Respondent, 3. आयकर आयु�त (अपील)/CIT(A), 4. आयकर आयु�त/CIT, 5. �वभागीय ��त�न�ध/DR & 6. गाड� फाईल/GF.