Income Tax Appellate Tribunal - Chandigarh
Indo Farm Industries Ltd.,, Chandigarh vs Assessee on 22 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCHES 'B' CHANDIGARH
BEFORE Ms. SUSHMA CHOWLA, JUDICIAL MEMBER
AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER
ITA No.518/Chd/2010
Assessment Year: 2007-08
M/s Indo Farm Industries Ltd V. Addl CIT,
SCO 859, Range III, Chandigarh
NAC Manimajra
Chandigarh
AAACW 1982 A
ITA No.702/Chd/2010
Assessment Year: 2007-08
.
A.C.I.T V. M/s Indo Farm Industries Ltd
Circle 3(1) Manimajra
Chandigarh Chandigarh
(Appellant) (Respondent)
Assessee By : Shri Tej Mohan Singh
Department by: Smt. J yoti Kumari, C IT
Date of hearing: 22.03.2012
Date of pronouncement: 06.06.2012
ORDER
PER SUSHMA CHOWLA, JM
These cross-appeals filed by the assessee and the Revenue are against the order of C IT(A) dated 26.3.2010 relating to Assessment Year 2007-08 against the order passed u/s 143(3) of the Act.
2. Both the appeals relating to the same assessee were heard together and are being disposed off by this consolidated order for the sake of convenience.
3. The assessee has raised several grounds of appeal but at the outset the ld. AR for the assessee stated that grounds No. 3 & 4 are not pressed and ground No. 5 is consequential. The effective grounds of appeal are as under:
"1 That the ld. CIT(A) has erred in law as well as on facts in upholding the addition of Rs. 180.13 lakhs made on account of disallowance u/s 80IC claimed on interest, dividend, rent, processing fee, exchange gain and Misc. income without appreciating the explanation 2 rendered during the course of proceedings before her which is arbitrary and unjustified.
2. That the income earned being intrinsically related to the business activities of the assessee company constitutes income which is eligible for deduction u/s 80IC and as such the disallowance sustained is arbitrary and unjustified."
4. The Revenue in ITA No. 702/Cnd/2010 has raised the following grounds of appeal:
"1 Ld. CIT(A) has erred in deleting the disallowance of depreciation made by the Assessing Officer on plant and machinery of Rs. 79,07,000/- as the assessee could not prove that plant and machinery was put to use in the Financial Year 2006-07.
2. ld. CIT(A) has erred in deleting the disallowance of interest of Rs. 5,56,800/- made by the Assessing Officer on advance made for purchase of immoveable property which cannot be treated as business expenditure."
5. The brief facts of the case are that assessee was manufacturing tractors and tractor parts. The company started its Unit-I on 31.10.2000 at Plot No. 104- 105, HPSIDC, Baddi and the assessee claimed deduction u/s 80IC of the Act for unit No. I for Assessment Year 2001-02 onward. The Unit No. II at EPIP, Phase II, Baddi was started on 30.3.2002 and the deduction u/s 80IC was claimed from Assessment Year 2002-03 onward. During the year under consideration the assessee had claimed deduction u/s 80IC of the Act on the ground that it had undertaken substantial expansion of its unit already in existence for the casting unit. The claim of the assessee that it has increased installed capacit y from 6000 numbers of tractors to 12000 number of tractors per annum by investing Rs. 10.54 crores towards purchase of plant and machinery during the year under consideration, was not extracted by the Assessing Officer and the assessee was held not to be eligible for deduction u/s 80IC of the Act. The said deduction u/s 80IC of the Act was granted by the C IT(A) in view of the additions made to the plant and machinery. The Revenue is not in appeal against the said grant of deduction u/s 80IC of the Act.
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6. The second issue was in relation to the claim of deduction u/s 80IC of the Act on other income of Rs. 180.13 lakhs. The said other income comprised of income from interest, dividend, rent, processing fee, exchange gain and miscellaneous income. The Assessing Officer was of the view that since the other income of Rs. 180.13 lakhs was not derived from the industrial undertaking eligible for deduction u/s 80IC of the Act and the said receipt does not come within the first degree sources and in view of the ratio laid down by the Hon'ble Supreme Court in Libert y India V CIT, 317 ITR 218, the said receipts were treated as income from other sources and no deduction u/s 80IC was allowed to the assessee. Further the assessee has given advances of Rs. 46,40,000/- for purchase of propert y, which as per the Assessing Officer were not related to the business of the assessee and as the assessee had borrowed funds on which interest was paid by the assessee and in view of the ratio laid down by the Hon'ble Punjab & Haryana High Court in Abhishek Industries V. CIT, {286 ITR 1 (PH)}, the corresponding interest relatable to the interest free advances amounting to Rs. 5,56,800/- was disallowed by the Assessing Officer.
7. The CIT(A) in addition to granting the deduction u/s 80IC of the Act on the profit from manufacturing activities carried out by the assessee also considered the issue of deduction u/s 80IC of the Act on the other income received by the assessee. The C IT(A) in view of the ratio laid down by the Hon'ble Supreme Court in Libert y India (supra) held that the said income may be attributable to the industrial undertaking but could not be said to have been derived from the eligible business. The C IT(A) further held that the said income was definitely beyond the first degree source and as such the order of the Assessing Officer was confirmed. Further in respect of the advances made for the purchase of immovable property and the interest relatable to such advances in view of the interest being paid on borrowed funds by the assessee, the C IT(A) held that the said amount was advanced for purchase of building 4 which was to be utilized for the assessee-company and consequentl y there was no justification in disallowance of interest.
8. The assessee is in appeal against the order of ld. C IT(A) in rejecting the deduction claimed u/s 80IC of the Act on other income of Rs. 180.13 Lakhs. The revenue is in appeal against the depreciation allowed on the plant and machinery installed during the year, which as per the Assessing Officer was not put to use in Financial Year 2006-07. The second issue raised by the Revenue is against the disallowance of interest on the advances made for the purchase of immovable propert y.
9. The ld. AR for the assessee pointed out that the assessee was engaged in the manufacture of tractors and tractor parts for the past many years and casting units for the manufacturing of tractor parts was set up during the year under consideration. The ld. AR for the assessee pointed out that the Assessing Officer had denied the deduction u/s 80IC of the Act which was granted by the ld. CIT(A), against which the Revenue is not in appeal. The ld. AR for the assessee pointed out that deduction u/s 80IC of the Act was denied on other income. Our attention was drawn to the list of other income placed at page 20 of the paper book out of which Rs. 161.88 lakhs was the interest on advances by way of sales to the dealer. The ld. AR for the assessee said that the income was intrinsicall y related to the business of the assessee firm and hence eligible for deduction u/s 80IC of the Act. The explanation filed before the Assessing Officer is placed at page 37 of the paper book along with the list of parties/dealers at pages 48 to 51 of the paper book. The ld. AR for the assessee further pointed out that the business income declared by the assessee has been assessed as such but no benefit of deduction u/s 80IC has been allowed to the assessee. In respect of balance items of income in the list at page 37 of the paper book it was pointed out that the same are also intrinsicall y linked to the business of the assessee. Further the ld. AR for the assessee contended that the ratio laid down by the 5 Hon'ble Supreme Court in Libert y India, 317 ITR 297 (SC) was not properl y applied by the authorities below. Further reliance was placed on the following decisions:
CIT V. Vidyut Corporation, 324 ITR 221 (Bom) Phatela Cotgin Industries P. Ltd V. C IT, 303 ITR 411 (PH) CIT V. Sharp Industries, 282 ITR 336 (Mad) Nirma Industries Ltd., 283 ITR 402 (Guj) CIT V. Indo Matsushiita Carbon Co. Ltd., 286 ITR 201 (Mad)
10. The ld. DR for the revenue in repl y pointed out that for claiming the deduction u/s 80IC of the Act, the income should be derived from business of the assessee but the items of income in the present case were not derived from the business of undertaking but are actuall y attributable to the business of the undertaking and hence not entitled to the benefit of deduction u/s 80IC of the Act. The ld. DR for the revenue placed reliance on Libert y India V. CIT, {317 ITR 218 (SC)} and CIT V. Sterling Foods, {237 ITR 579 (S.C)}.
11. We have heard the rival contentions and perused the record. In the facts of the present case, the assessee is carryi ng out the manufacturing of tractor and tractor parts and also casting of tractor parts. The casting unit has been set up by the assessee during the year under consideration. The assessee claimed profits of the undertaking to be eligible for deduction u/s 80IC of the Act which were initiall y denied by the Assessing Officer but was allowed by the ld. CIT(A), against which the Revenue is not in appeal and hence the issue is settled in favour of the assessee. The second aspect of the claim of deduction u/s 80IC was in relation to other income earned by the assessee. The break up of other income earned by the assessee during the year under consideration is placed at page 20 of the paper book i.e. Schedule 13 of the Balance Sheet was as under:-
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Other Income Rs. (In Lakhs)
Interest
Banks 5.89
Others 161.88
Dividend 0.07
Profit on sale of fixed assets 1.20
Rent --
Processing fee (Income) 4.45
Exchange gain 0.11
Miscellaneous 6.53
180.13
Tax deducted at source 0.86
12. The assessee had furnished the explanation in respect of each item of
other income before the Assessing Officer vide letter dated 23/24.11.2009 placed at page 37-38 of the paper book which is as under:
"i) Interest from others amounting Rs. 1,67,76,847/- is on account of interest charged to our Dealers on overdue outstanding amounting, which is part of business income of Sales Turnover over which the interest amount is charged thereon. It was also allowed as part of business income in our previous Assessment Year 2006-07.
ii) Profit on sale of assets amounting Rs. 109163/- is a book profit and is not taxable as per IT Act.
iii) Dividend received amounting Rs. 6,600/- is on investment of Equity Share of Canara Bank which are exempt from income tax.
iv) Profit on account of currency fluctuation amounting Rs. 11,421/- is on account of variation in exchange rates of realization of export sale of goods and are therefore, part of business income.
v) Any other income amounting Rs. 11,09,105/- is comprising of Rs.
5,74,500/- on account of liquidated charges on delayed supply of machineries from HMT Ltd. Pinjore (Haryana) and Rs. 4,45,309.52 is on account of Processing Fee charged from Dealers towards documentation charges for appointment of dealership and the balance amount of Rs. 89,285.48 is on account of other miscellaneous income towards replacement cost of components charged from customers. All these incomes re incidental to trade and part of business income. 7
13. Out of total income of Rs. 188.13 lakhs, the interest from other i.e. interest charged from the dealers on over due outstandings was Rs. 167.86 lakhs. The list of parties/dealers from whom the interest was charged totaling to Rs. 167.86 lakhs is placed at pages 48 to 51 of the paper book. The said income was declared as business income of the assessee and was assessed as business income.
14. Section 80IC of the Act provides that where the gross total income of an assessee, includes, any profit and gain derived by an undertaking/enterprise from any business, then in accordance with the provisions of sub-sections, would be entitled to deduction from such profits and gains as computed under sub-section (3) of the Act and the same shall be deducted while computing the total income of the assessee. The basis for grant of deduction u/s 80IC of the Act are the profits and gains 'derived' by an undertaking from the business carried on by it.
15 The Hon'ble Apex Court in Libert y India (supra) has held as under:
"The Income-tax Act, 1961, broadly provides for two types of tax incentives, viz, investment -linked incentives and profit-linked incentives. Chapter VI-A of the Act which provides for incentives in the form of deductions essentially belongs to the category of "profit-linked incentives". Therefore, when section 80IA/80IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives: what attracts the incentives u/s 80IA/80IB is the generation of profit (operational profits). It is for this reason that Parliament has confined deduction of profits derived from eligible business mentioned in sub-section (3) to (11A) constitutes a stand-alone item in the matter of computation of profits.
Section 80IB and 80!A are a code by themselves as they contain both substantive as well as procedural provisions.
Section 80IB provides for the allowing of deduction in respect of profits and gains derived from the eligible business. The connotation of the words "derived from" is narrower as compared to that of the words "attributable to". By using the expression "derived from" Parliament intended to cover sources not beyond the first degree."
16. The Hon'ble Supreme Court further held as under:
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"Only to the extent of profits derived from such industrial undertaking after the specified date. Apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of the profits. This is the importance of the words "derived from an industrial undertaking "as against "profits attributable to an industrial undertaking. DEPB/Duty drawback are incentives which flow from the schemes framed by the Central Government or from section 75 of the Customs Act, 1962. Incentives profits are not profits derived from eligible business u/s 80IB: they belong to the category of ancillary profits of such undertaking."
17. The Hon'ble Court while delivering the said judgment had considered the ratio laid down by the Hon'ble Apex Court in C IT V. Sterling Foods (supra).
18. The Hon'ble Supreme Court while analyzing the provisions of section 80IB of the Act observed that the said Section provides for allowing of deduction in respect of profit and gains derived from eligible business. The Court thus held that -
"The words 'derived from' are narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from", Parliament intended to covers sources not beyond the first degree)."
The Hon'ble Supreme Court also on analyzing the Sections 80IA/80IB of the Act, held as under -
"On an analysis of section 80IA and 80IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub-section (2), would be entitled to d ed under sub-section (1)n only to the extent of profit derived from such industrial undertaking after specified date(s).
Hence, apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words "derived from industrial undertaking" as against "profits attributable to industrial undertaking."
19. The Court thereafter at length had considered the claim of DEPB and Dut y draw back and held that such receipts do not form part of net profit eligible for the purpose of Section 80I/80IA/80IB of the Act.
20. The provisions of Section 80IC of the Act are parimateria to Section 80IA/80IB of the Act. The words in section 80IC are also "profits derived from 9 business of undertaking". In line with the ratio laid down by the Hon'ble Apex Court in Libert y India (supra) the issue in the present appeal is to be considered whether the income received by the assessee by way of interest on the amounts due from dealers was the income of first degree of the undertaking, making it eligible for the benefit of deduction u/s 80IC of the Act.
21. The Hon'ble Bombay High Court in CIT V. Vidyut Corporation., 324 ITR 221 (Bom) appl ying the ratio laid down by the Hon'ble Apex Court in Libert y India V. C IT (supra) in respect of interest received on the delayed payments of prices of goods held by the assessee held the same to be part of sale price and derived from undertaking and eligible for deduction u/s 80IB of the Act. The Bombay Hon'ble High Court held as under:
"Held, that what was received by the assessee from the purchaser was a component of interest towards delayed payment of the price of the goods sold, supplied and delivered by the assessee. There could be no dispute about the position that the price realized by the assessee from the sale of goods manufactured by the industrial undertaking constituted a component of the profits and gains derived from the eligible business. The purchaser, on account of the delay in payment of the sale price also paid interest to the assessee. This formed a component of the sale price and was paid towards the lag which had occurred in the payment of the price of the goods sold by the assessee. On these facts, therefore, the payment of interest on account of the delay in payment of the sale price of the goods supplied the undertaking partook of the same nature and character as the sale consideration."
22 The Hon'ble Bombay High Court in C IT V. Vidyut Corporation (supra) held that the assessee was entitled to deduction u/s 80IB of the Act on the interest received on late payment of price of goods sold. The Hon'ble High Court further held that the interest received on unsecured loan was not derived from industrial undertaking and thus was not eligible for deduction u/s 80IB of the Act.
23. The facts of the present case before us are identical to the case before the Hon'ble Bombay High Court in CIT V. Vidyut Corp (supra) and appl ying the ratio laid down by the Hon'ble Bombay High Court, we uphold that the interest 10 received on the overdue payment from its dealers constituted the price of the goods sold by the assessee and such interest income is derived from the manufacturing activities carried on by the assessee and are business income eligible for deduction u/s 80IC of the Act.
24. Similar view has been taken by the Hon'ble Punjab & Haryana High Court in Phatela Cotgin Industries P. Ltd. V. CIT, {303 ITR 411 (PH)}, the Hon'ble Madras High Court in CIT V. Sharp Industries, {282 ITR 336 (Mad)} and CIT V. Indo Matsushita Carbon Co. Ltd, 286 ITR 201 in respect of interest received on belated payments of sale proceeds of article, manufactured by the assessee, being entitled to deduction u/s 80HH and 80I of the Act.
25. In view thereof, we find merit in the plea of the assessee in this regard and hold that the assessee is eligible for deduction u/s 80IC of the Act on the interest received on overdue payments from its dealers as the same constituted business income and is derived from the manufacturing activities carried on by it. However, we direct the Assessing Officer to verify the claim of the assessee and in case the interest income is found to be relatable to the payments due from the dealers against the sale proceeds on manufactured items, the assessee is eligible for deduction u/s 80IC of the Act. The Assessing Officer shall afford reasonable opportunity of hearing to the assessee and recompute the deduction u/s 80IC of the Act.
26. Other income shown by the assessee i.e. interest income received from bank and dividend income are not derived from the profits and gains of the business and not eligible for deduction u/s 80IC of the Act. Profit on sale of fixed asset reflected at Rs. 1.20 Lakhs is book entry under the head "other income" and the same is to be excluded as the said profit is to be considered in the computation of income while allowing depreciation on assets. 11
27. The income from processing fee of Rs. 4.45 lakhs and exchange gain of Rs. 0.11 lakhs are also not derived from the profits and business and consequentl y not eligible for deduction u/s 80IC of the Act.
28. The assessee has failed to furnish the bifurcation of miscellaneous income at Rs. 6.53 lakhs and in the absence of the details, we uphold the order of authorities below in denying the deduction u/s 80IC of the Act on the same. The Assessing Officer is directed to recompute the deduction u/s 80IC of the Act in line with our directions in paras given above. Ground Nos. 1 and 2 raised by the assessee are partly allowed.
29. Ground No. 1 raised by the Revenue in ITA No. 702/Chd/2010 is against the allowance of depreciation on plant and machinery. The ld. DR for the revenue pointed out that the presumption by the Assessing Officer was of non- user of the said machinery by the assessee during year under consideration and consequentl y the denial of depreciation on the said asset. The ld. DR for the revenue placed reliance on Dineshkumar Gulabchand Agrawal V. CIT and another, {267 ITR 768 (Bom)}.
30. The ld. AR for the assessee in repl y pointed out that the facts are enumerated by the ld. CIT(A) in para 4 and the report of the Assessing Officer before the ld. C IT(A) at page 7 of the order of the ld. C IT(A) in which has been admitted by the Assessing Officer that the assessee-company had fulfilled the conditions of substantial expansion. The ld. AR for the assessee further referred to the observations of ld. CIT(A) in para 30 under which the said claim was allowed to the assessee in view of the evidence produced in the form of electricit y bill. It is further stated by the ld. AR for the assessee that 563 units of casting were manufactured during the year which were utilized for in-house production. The Assessing Officer had denied the depreciation on plant and machinery in view of the sale/purchase of casting unit by the assessee. The ld. 12 AR for the assessee further referred to the various explanations by the assessee which establish the start of production and it is pointed out that if the plant and machinery was put to use, depreciation was allowable.
31. We have heard the rival contentions and perused the record. The assessee during the year under consideration had established casting unit and have made investment of Rs. 166.00 lakhs and made investment of Rs. 166.00 lakhs in plant and machinery. The Assessing Officer during the course of assessment proceedings and also remand proceedings while the appeal was pending before the ld. CIT(A) had made enquiries. The assessee has furnished on record the evidence by way of sanctions/approvals taken from the Pollution Control Board and Electricit y Department, which are placed at pages 60 to 62 of the paper book under which the production of new unit has been shown from 14.10.2006. The assessee has also submitted a copy of electricit y Bill under which it claims that the power sanction for Furnace was put to use on 14.10.2006. In view of above said facts and circumstances, we uphold the findings of the CIT(A) that the assessee has put the plant and machinery to use from 14.10.2006 and has started production and the assessee is entitled to claim the depreciation on plant and machinery. Upholding the order of CIT(A), we dismiss the ground No. 1 raised by the Revenue.
32. The second issue raised by the Revenue is in respect of interest attributable to the advances made for the purchase of immovable propert y. The Assessing Officer was of the view that the advance made for the purchase of immovable propert y was not related to the business and in view of the assessee paying interest on borrowed funds, interest relatable to such advances was to be disallowed in view of the ratio laid down in C IT V. Abhishek Industries, {286 ITR 1 (PH)}. The plea of the assessee before the ld. C IT(A) was that the Regd Office of the company was situated at SCO 859, NAC Manimajra, Chandigarh and the said property was purchased by the assessee for the aforesaid purposes. 13 The ld. C IT(A) in view of the facts of the case where the amount of Rs. 46,40,000/- was utilized for the purpose of purchase of office of the assessee- company, held the said payment to be for commercial expediency and in view of the ratio laid down by S.A. Builders V. C IT, 288 ITR 1 (S.C) deleted the disallowance of interest of Rs. 5,56,800/-. The ld. DR for the revenue has not controverted the findings of the ld. C IT(A) in this regard. Consequentl y we are in agreement with the order of the ld. CIT(A) that where the amount has been invested by the assessee for the purchase of immovable propert y for running its Regd Office, there is no merit in disallowing any part of interest attributable to such investment in the propert y. The investment made by the assessee was for commercial expediency and appl ying the principles of Hon'ble Supreme Court in S.A. Builders V CIT (Supra) we uphold the order of the ld. C IT(A). Ground No. 2 raised by the revenue is dismissed.
33. In the result, the appeal filed by the assessee is partl y allowed and appeal of the Revenue is dismissed.
Order Pronounced in the Open Court on this 6th day of June, 2012 Sd/- Sd/-
(MEHAR SINGH) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated : 6 t h June.2012 SURESH
Copy to: The Appellant/The Respondent/The CIT/The CIT(A)/The DR