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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI C.N. PRASAD & SHRI RAJESH KUMAR
आयकर अपील�य अ�धकरण, मुंबई �यायपीठ , मुंबई । IN THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH, MUMBAI BEFORE SHRI C.N. PRASAD, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER आयकर अपील सं/ (�नधा�रण वष� / Assessment Year:2009-10 बनाम/ The ACIT, M/s. Glenmark Generics Ltd., Large Tax Payer Unit, B/2, Mahalaxmi Chambers, Vs. Centre-1, 29th Floor, 22, Bhulabhai Desai Road, World Trade Centre, Mumbai -400 026 Cuffe Parade, Mumbai-400 005 �थायी लेखा सं./जीआइआर सं./PAN/GIR No.AACCG 9820D (अपीलाथ� /Appellant) (��यथ� / Respondent) .. अपीलाथ� ओर से/ Appellant by: Ms. Bharti M. Singh ��यथ� क� ओर से/Respondent by: Shri Vijay Mehta सुनवाई क� तार�ख / Date of Hearing :01.02.2016 घोषणा क� तार�ख /Date of Pronouncement :05 .02.2016 आदेश / O R D E R PER C.N. PRASAD, JM:
This appeal is filed by the Revenue against the order of the Ld. CIT(A)-24, Mumbai dated 31.05.2013 pertaining to assessment year 2009-10.
The first ground in Revenue’s appeal is that the Ld. CIT(A) erred in holding that scrap scale income of Rs. 10,79,232/- of Goa unit is eligible for deduction u/s. 80IB of the Income tax Act, 1961.
Brief facts are that the Assessing Officer while completing the assessment and while computing the deduction u/s. 80IB of the Act excluded scrap sale holding that the same is not derived from industrial undertaking. It was the submission of the assessee that scrap sale is generated from the manufacturing activities of the industrial undertaking and it is part and parcel of a reminder portion of raw material, finished goods, rejected goods etc., and is generated out of inventory process by the industry. Therefore, the income from sale of scrap is an income from manufacturing operation, and eligible for deduction u/s. 80IB of the Act. The assessee placed reliance on the decision of the ITAT Ahmedabad Bench in the case of M/s. Arvind Fashions Ltd Vs ACIT (37 SOT 369), Hon’ble Gujarat High Court in the case of DCIT Vs Harjivandas Juthabhai Zaveri (258 ITR 785), Hon’ble Madras High Court in the case Fenner (India) Ltd. Vs CIT (241 ITR 803). However, the AO rejected the submission of the assessee and treated the scrap sale as income not derived from industrial undertaking for the purpose of computation of deduction u/s. 80IB of the Act.
On appeal, the Ld. CIT(A) following the decision of the Ahmedabad Bench and on the decision of the Mumbai Bench in the case of J & B Industries allowed the claim of the assessee
The Ld. Departmental Representative vehemently supporting the orders of the AO submits that the scrap sale is not income derived from industrial undertaking for the purpose of allowing deduction u/s. 80IB of the Act.
6. The Ld. Counsel for the assessee submits that scrap sale is generated out of manufacturing activities and it has first degree nexus with the industrial undertaking being by-product of the manufacturing products therefore it is derived from industrial undertaking for the purpose of computation of deduction u/s. 80IB of the Act. He further placed reliance on the decision of Pune Bench in the case of Finolex Cables Ltd in dated 15.7.2011 and ACIT Vs Preetam Enterprises in ITA No. 780/PN/2009 dated 29.,4.2011. In the case of Finolex Cables (supra) the Co- ordinate Bench of the Tribunal held as under:
“Ground no. 6 relates to CIT(A)’s direction to the A.O to allow the deduction u/s 80-IB of the Act in respect of scrap generated out of manufacturing process treating the same as business income. The A.O observed that the scrap is not a bye product of the assessee and hence the sale of the same cannot be treated as the business income of the unit and hence not eligi9ble for deduction u/s 80-IB of the Act. As regards the alternative ground of the assessee of taking net income earned out of the sale of scrap, the A.O to 104/PN/07 A.Y: 2000-01 to 2002- 03 Page 15 of 16 observed that the same is not acceptable as the cost relating to the sale of scrap was already debited to the P & L a/c of the unit. The A.O also did not grant deduction u/s 80-IB in respect of miscellaneous income amounting to Rs. 56,32,480/- relying on the judgments of Apex Court in the case of Pandian Chemicals (233 ITR 497) and Sterling Foods Ltd. (236 AITR 529). On appeal, the CIT(A) has confirmed the view taken by the A.O on this issue. At the very outset, the Learned Counsel for the assessee has mentioned that the said issue is also covered in favour of the assessee by virtue of Madras High Court judgment in the case of M/s Fenner India Ltd (241 ITR 803) for the proposition that the profit on sale of scrap material since had a direct link or nexus with the industrial undertaking and therefore, it is eligible for deduction u/s 80IB. Considering the similarity in language used in sections 80HH and 80IB of the Act, we are of the considered opinion that the assessee should succeed in this regard also. Accordingly, ground 3 of the revenue’s appeal is dismissed.”
Similarly in the case of Preetam Enterprises, the Co-ordinate Bench held as under:
“The issue involved in this appeal is in respect of claim of sec. 80-IB in respect of income from machining charges (job work) and scrap sale. The issue of claim of deduction u/s 80- IA on income from machining and scrap sale is covered by the decision of ‘B’ Bench of the Tribunal in the case of Ramchandra Enterprises in 1067/PN/2008 and 353/PN/2009 wherein the issue has been decided as under: “5. The ld. CIT(A) has appreciated this submissions therefore he has held that the machining charges received by the assessee did qualify the deduction u/s 80IB after considering the precedents namely Rane (Madras) Ltd., 238 ITR 377, Taj Fire Works Industries 288 ITR 92 (Mad.) and Northern Aromatics Ltd., 196 CTR 479 (Del.) .We find no fallacy in the decision of ld. CIT(A) for allowing the claim in respect of machining charges received by the assessee. However, the question before us as raised from the side of the assessee is in respect of scrap sales. In this regard the submission of the assessee was that the scrap is generated during manufacturing activity hence, the vehement submission was that the generation of scrap was incidental to the manufacturing activity. Hence the argument was that the income earned on sale of scrap was income from business of an eligible industrial undertaking hence entitled for 80IB deduction. A relevant portion of the submission pertaining to sale of scrap is reproduced below:- “3.1 Income from Sale of Scrap.
The scrap is generated during various machining activities carried out by the appellant during the course of manufacturing activity. The generation of scrap it-self is due to business activity of the appellant. Thus income earned on account of sale of scrap has direct link / nexus with the industrial undertaking and therefore, entitled for deduction u/s 80IB. 3.2 In this connection the reliance is placed on Hon. ITAT Mumbai ‘G’ Bench’s decision in the case of Asia Investments Ltd., Vs. D.C.I.T (90 TTJ 65). In this case issue involved was deduction u/s 80HH in respect of receipts from sale of scrap. Following the decision of Hon. Madras High Court in the case of Fenner (India) Ltd. Vs. CIT (241 ITR 803) the Hon. ITAT held that profit from sale of the scrap material was eligible for deduction u/s. 80HH.”
On the basis of the above facts we have examined few precedents namely Fenner (India) Ltd., 241 ITR 803, Wheels (I) Ltd. 141 ITR 745. The observation of the courts were that a deduction can be claimed only in respect of profits derived from an industrial undertaking. An industrial undertaking itself must be the source of that profit. Observation has also been made that it is wrong to say that the scrap has no direct nexus with industrial undertaking manufacturing such products. In the other case, Wheels (I) Ltd. (supra) the court was of the view that the sale of scrap was nothing but a byproduct of the industry. The generation of scrap if happens during the manufacturing activity then eligible for deduction. An another decision of respected co ordinate bench Mumbai has also been quoted namely Asian Investments 90 TTJ 65. Thus considering the factual aspect as also the legal aspect a view can be taken in favour of the assessee especially under the circumstances when it is demonstrated before the authorities below that the generation of the scrap in this case had a direct link and close nexus with the manufacturing activity of the assessee. Once it is established that during the manufacturing activity scrap was generated as a byproduct hence, following the view pronounced by the Hon’ble Courts we are of the considered opinion that the assessee is eligible for the claim of deduction u/s 80IB in respect of sale of scrap.”
Similar view has been taken in assessee’s own case in and 1238/PN/2008 for A.Y. 2004-05 and 2005-06.
6.2 Nothing contrary has been brought to our notice by the learned DR. So following the aforesaid order of the Tribunal in the case of Ramchandra Enterprises (supra), the issue with regards to allowability of deduction u/s 80-IB in respect of income from machining charges and sale of scrap is decided in favour of the assessee.”
Respectfully following the above said decision of the Co- ordinate Bench, we uphold the order of the Ld. CIT(A) on this issue. Ground No. 1 is accordingly allowed.
The next issue raised by the Revenue is that the Ld. CIT(A) erred in allowing depreciation on goodwill.
At the very outset, the Ld. Counsel for the assessee submits that this issue is squarely covered by the decision of the Hon’ble Supreme Court in the case of CIT Vs Smifs Securities Ltd., (348 ITR 302). The Hon’ble Supreme Court considered a question “whether goodwill is an asset within the meaning of Sec. 32 of the Act and whether depreciation on goodwill is allowable under the said section?
The Hon’ble Supreme Court held as under:
“In the present case, the assessee had claimed deduction of Rs.54,85,430/‐ as depreciation on goodwill. In the course of hearing, the explanation regarding origin of such goodwill was given as under:
"In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd with Smifs Securities Ltd (duly sanctioned by Hon'ble High Courts of Bombay and Calcutta) with retrospective effect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vest in the company. In the process goodwill has arisen in the books of the company."
It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele.
The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32 (1) of the Income Tax Act, 1961 [‘Act’, for short]. We quote hereinbelow Explanation 3 to Section 32(1) of the Act: "Explanation 3.‐‐ For the purposes of this sub‐section, the expressions "assets' and "block of assets' shall mean‐‐
[a] tangible assets, being buildings, machinery, plant or furniture;
[b] intangible assets, being know‐how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature."
Explanation 3 states that the expression "asset' shall mean an intangible asset, being know‐how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words "any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression "any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that "Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act.
One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) ["CIT(A)', for short] has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee‐Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee‐Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal ['ITAT', for short]. We see no reason to interfere with the factual finding. One more aspect which needs to be mentioned is that, against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove. For the afore‐stated reasons, we answer Question No.[b] also in favour of the assessee.” Respectfully following the decision of the Hon’ble Apex Court, we uphold the order of the Ld. CIT(A) in allowing depreciation on goodwill to the assessee.