DCIT 9(2), MUMBAI vs. KRYFS POWER COMPONENTS LTD, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) Per Rajendra, A.M.लेखा सद�य राजे�� के अनुसारः Challenging the order dated of the CIT(A)-,Mumbai,the Assessing Officer(AO)had filed the present appeal.The assessee has filed Cross Objections. Assessee-company,engaged in the business of manufacturing electric laminates etc.,filed its return of income on 20.10.2006,declaring income of Rs.13.48 crores.Originally, the return was processed u/s.143(1)of the Act.Later on the Assessing Officer(AO),issued a notice u/s.148 of the Act and completed the assessment,u/s.147 r.w.s.143(3) of the Act, on 14.12.2009,determining the income of the assessee at Rs. 13,94,20,415/-. 2.Effective Ground of appeal is about income from sale of scrap and its eligibility for deduction u/s.80IB of the Act.During the assessment proceedings,the AO found that the assessee had credited scrap sales of Rs.1.37 Crores interest income of Rs.8.66 lakhs to the P&L A/c.and had included those two items in the income of the eligible business for deduction under section 80IB of the Act.The AO asked it to show as to why the incomes from interest and sale of scrap should not be excluded from the profit of the business for computation of deduction u/s. 80IB, as the same was not derived from the undertaking. The assessee submitted that the sale of scrap was directly related to manufacturing activity and part of the manufacturing process.After considering the submission of the assessee, the AO held that the interest income could not be considered as profit from business, that it had derived interest from bank deposits/FDs,that same was not directly from the business,that there was no commercial connection between the interest and business activity of the assessee,that the immediate and effective source of interest was the application of surplus fund, that direct and effective source of income was the deposit, that the industrial undertaking could not be treated the ultimate source of income.Referring to

9106/10 Kryfs power the decisions of Liberty India Ltd.(317 ITR 218); Pandiyan Chemicals Ltd. ( 262ITR278) and Sterling Foods Ltd.( 237ITR579), the AO held that the income from sale of scrap had not been derived from industrial undertaking.Finally, FD interest income of Rs.8.64 lacs (Rs.7.09 lacs and Rs.1.57 lacs) and income from sale of scrap (Rs.1.37 cr.) was excluded from the profits of the undertaking for the computation of deduction u/s. 80IB of the Act.

3.Aggrieved by the order of the AO,the assessee filed an appeal before the First Appellate Authority(FAA).Before him,it was contended that interest income was directly related to the business, that the scrap had resulted from the activity of his only industrial undertaking, that both the items were directly derived from the undertaking eligible for deduction. After considering the submission of theassessee and the assessment order,the FAA held that the interest income had arisen out of the surplus fund invested in deposits, that the direct source was surplus fund and not the industrial undertaking.Relying upon the judgment of Liberty India(supra),the FAA upheld the order of the AO.With regard to the income from sale of scrap,the FAA held that the income had resulted directly from the operations of the undertaking,that the assessee was eligible for claiming deduction u/s.80IB of the Act, amounting to Rs.1.37 crores. 4.Before us,the Departmental Representative (DR)supported the order of the AO.The Authrorised Representative(AR)contended that there was direct relationship between the sale of scrap and industrial undertaking.He relied upon the cases of Nirma Ltd. (367 ITR 12) and Sadhu Forging Ltd. (336 ITR 444).

5.We have heard the rival submissions and perused the material before us. We find that the AO had excluded the income arising out of sale of scrap as she was of the opinion that it did not have direct nexus with the manufacturing activity of the undertaking, that the assessee is a manufacturer of electric laminates and other articles, that the scrap is generated from manufacturing activities. We find that in the case of Sadhu Forging Ltd. the Hon’ble Delhi High Court has dealt the issue of sale of scrap and its eligibility u/s.80IB of the Act. Facts of the case were that during the assessment year 2004-05, the assessee had shown gross receipts, which apart from sales of goods included sales of scrap, labour charges and job works charges, and claimed deduction under section 80-IB of the Act. The AO Officer held that under the provisions of section 80-IB , the assessee’s industrial undertaking set up for the purpose of manufacture of steel forging, transmission gears and parts and accessories of motor vehicles, could not be permitted deduction on sale of scrap, job work charges and labour charges as they were not derived from the industrial undertaking.The FAA held that the scrap generation at various stages of the manufacturing process was part of the manufacturing activity of an industrial unit and thus represented profits and gains derived from the industrial undertaking.The Tribunal held that scrap was generated through the process of manufacturing and thus profits on sale of scrap represented profits and gains derived from the industrial undertaking. The Tribunal also held that job works/labour charges income received by the assessee, by utilizing its plant and machinery installed in the undertaking, gave rise to income which had a direct nexus with the assessee’s industrial undertaking, and thus was entitled to claim of deduction under section 80-IB of the Act. Dismissing the appeal filed by the Department,the Hon’ble High Court held as under: “that the industrial undertaking set up by the assessee was for the purpose of manufacture of steel forging, transmission gears and part and accessories of motor vehicles and the scrap of these items was stated to be a by product of manufacturing process. The activity of forging

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