ACIT, HARIDWAR vs. M/S. METRO FROZEN FRUIT & VEGETABLES P LTD., ROORKEE

Whether Ld. CIT (A) has erred in law in interpreting the provisions of section 80-IC read with Schedule XIV (Part C, Si. No. 4) of the IT Act, 1961 according to his own surmises and belief and holding that the provisions of section 80-IC needs to be interpreted liberally.

Brief issue involved in this case is that the assessee is engaged in the business of processing and packaging of vegetables and is eligible for deduction u/s 80IC of the Income Tax Act, 1961. During the year under consideration the assessee filed return of income for Assessment Year 2007-08 on 22.09.2009 declaring total income of Rs 970/- after claiming the deduction u/s 80IC of the Act at Rs. 2831216/-. The relevant form No.10CCB etc. were filed before the AO supporting the deduction claimed by the assessee. It is admittedly the 3rd year of the claim of deduction u/s 80IC. The assessee is engaged in the business of processing the packaging of vegetables. This activity is listed in the fourteenth schedule of the Income Tax Act, 1961 and therefore the assessee has been granted deduction u/s 80IC of the Act. Only issue of dispute is that whether on rent income shown in profit and loss account by the assessee of Rs 47,62,030/- is eligible for deduction u/s 80 IC of the act or not. Assessee has claimed deduction on the same as according to assessee it is freezing charges of peas and is part of the process of processing of vegetables. The AO denied the deduction and held that this is not the business income of the assessee derived from the eligible industrial undertaking as it is on account of storage chares and on which no incentives has been envisaged.

The ld. DR relied heavily on the order of the AO and has stated that when there is no ambiguity in the law there should not be liberal interpretation and therefore according to the ld. DR assessee is not eligible for the deduction u/s 80IC on rental income.

Against this, the ld. AR of the assessee submitted that the rental income received from M/s. Mother Dairy Food Process Ltd and the bills are in facts for freezing charges and not rent. He submitted that erroneously it is shown as rent in profit and loss account. For this, he showed us the bills raised by the assesse, which are for freezing charges. He submitted that merely because in the profit and loss account assessee disclosed it as rent, it could not be said that this income is not derived from industrial undertaking. He further submitted that during the year, it has processed the products of Mother Dairy Food Process Ltd, which involved various activities and for this, he submitted a detailed flow chart of process of frozen peas starting from arrival until the transfer to HDPE bags etc. According to him, freezing activity is required to keep this material in the cold room maintaining temperature of -20‟C or below. The whole composite Page 4 of 7 activity as per flow chart is undertaken. Further the whole consideration of processing is bifurcated in to two parts one for the preparation and processing of the products and second for the freezing of the same. He submitted that freezing charges are part of the integrated activity of processing. For this argument, he relied on several decisions that substance of the transaction must be seen. He further submitted that definition of the “processing” is wide and freezing activity is part of the „processing” of vegetables as defined in various dictionaries. He also submitted that statutory provision governing deductions are to be liberally construed. It was also one of the arguments that even in the case of Job worker and in the case of Works Contact deduction u/s 80IC is allowed. Regarding the decision of the Hon‟ble Supreme Court in the case of Liberty India Vs. CIT 183 Taxmann 349 (SC) raised in one of the grounds of this appeal that Hon‟ble Supreme Court has answered this issue with respect to claim of DEPB/ duty Drawback are not part of the profit of the industrial undertaking and it held that it is not eligible for deduction. He submitted that in this case the income itself is from the undertaking and therefore has direct nexus with the undertaking. Therefore, he submitted that reliance of the revenue on this decision of the Hon‟ble Supreme Court is incorrect.

We have carefully considered the rival contention and perused the relevant material produced before us. The brief fact is that the assessee is claiming to be eligible for deduction u/s 80IC of the Act on its income derived from its Units set up at Plot No. 22, Bhagwanpur, Haridwar in Uttaranchal in December 2006. According to certificate produced in From No. 10CCB certified Page 5 of 7 by the auditors of the company the assessee has derived profits and gain from that industrial undertaking of the eligible business amounting to Rs. 28,31,216/- on which deduction is claimed and this is the third year of the deduction. On perusal of the annual accounts of the company an amount of Rs. 4762030/- credited as rent received shown in profit and loss account, which is the receipt in dispute for this deduction u/s 80IC of the Act. The assessee has earned this amount from Mother Dairy Food Process Ltd by nine bills, which are raised relevant to processing charges by the assessee. The bills showed that the amount of income involved in them is “freezing Charges‟ and same are shown in profit and loss account as „rent‟. Undisputedly the claim of the assessee is that processing of vegetables involves receipt of the material loading, unloading, depodding, air cleaning, boiling, processing, freezing and then filing into HDPE bags. It was also submitted that as a part of the above process the peas are required to be freezed in cold room where the temperature is minus 20 degree Celsius or below. Assessee has prepared two types of bills i.e. (1) as processing charges and (2) as freezing charges, instead of one composite bill for processing charges. On perusal of the balance sheet, it is evident that the assessee has shown freezing charges as rent income in the profit and loss account for this year and in the last year too. This fact we could verify from the profit and loss account itself Wherein in the year ended 31.03.2008 also the assessee has credit an amount of Rs. 24,79,876/- as rental income which are of similar nature and indisputably deduction on this is granted by revenue in that year. This fact could not be controverted by the ld. Departmental Representative. For this year, AO considered this receipt as Page 6 of 7 storage charges and denied the deduction. However, on perusal of the various bills produced before us that in fact theses are bills for freezing charges. Merely because the assessee prepares separate bills for freezing charges and treating them as rent in its profit and loss account it cannot be said that such income is not derived from the undertaking, which is eligible for deduction. The AO is required to verify whether that the nature of such income is derived from the eligible undertaking or not. If the answer found to that question is yes then the deduction should have been allowed to the assessee on this income. In our view this income forms part of the composite activity of processing of vegetables and certainly eligible for deduction u/s 80IC of the Act. The ld. AR also aptly relied on the Britannica Encyclopedia, Wikipedia where freezing is considered as one of the process of the processing of vegetables etc. It is not the case of the AO that freezing charges does not form part of the processing of vegetables and it is altogether different source of income or different business activity of the assessee. Only reason advanced by AO is that receipt in income is storage charges. Therefore, we do not have any hesitation in in holding that freezing charges earned by the assessee are part of the composite activity of processing of peas. The decision relied upon by the ld. DR of Hon‟ble Supreme Court in case of Liberty India Vs. CIT (supra) does not apply to the facts of this case as in that case Hon‟ble Supreme Court held that the DEPB/ duty Drawback which has received from the Govt. of India to support the assessee are not income derived from the industrial undertaking. Here in this case freezing activity, which is carried out by the assessee is part of the composite activity of processing Page 7 of 7 of vegetables. It is not the case of the revenue that freezing activity are not at all required to carry out-processing of vegetable performed by the assessee of Mother Dairy Food Pvt. Ltd. Therefore, we confirm the order of the learned Commissioner of Income tax (Appeals) and held that freezing charges earned by the assessee is an integral part of the processing of vegetables and therefore is eligible for deduction u/s 80IC of the Act. In the result, the appeal of the revenue is dismissed.

Order pronounced in the open court on 28.01.2016.