Income Tax Appellate Tribunal - Chandigarh
Sh. Raman Singal, Chandigarh vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCH 'B' CHANDIGARH
BEFORE SHRI T.R.SOOD ACCOUNTANT MEMBER
AND Ms. SUSHMA CHOWLA, JUDICIAL MEMBER
ITA No.544/CH D/2011
Assessment Year : 2007-08
The Dy. Commissioner of Vs Shri Raman Singal,
Income Tax, 185, Industrial Area-II,
Circle 1(1), Chandigarh.
Chandigarh.
PAN : AEFPS6301F
&
C.O. 55/Chd/2011
In ITA No.544/ CHD/2011
Assessment Year : 2007-08
Shri Raman Singh Vs The Dy. Commissioner of
185, Industrial Area-II, Income Tax,
Chandigarh. Circle 1(1),
Chandigarh.
.
(Appellant) (Respondent)
Appellant by : Shri M.R.Sharma
Respondent by : S h r i A k h i l e s h Gu p t a
Date of Hearing : 1 0 . 0 1 . 2 0 14
Date of Pronouncement : 3 0 .0 1 . 2 0 14
O R D E R
PE R S U S H M A C H O W L A , J M The revenue has filed the appeal against the order of CIT(Appeals) Chandigarh, dated 21.01.2011 relating to assessment year 2007-08 against the order passed under section 143(3) of the I.T. Act, 1961 and the Cross Objection has been filed by the assessee against the appeal filed by the revenue.
2. Both the appeal filed by the revenue and the Cross Objections filed by the assessee were heard together and are being disposed of by this consolidated order for the sake of convenience.
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3. The revenue has raised under mentioned grounds of appeal:
1. On the facts and in the circumstances of the case, the Ld. CIT(A) has gravely erred in deleting the addition of Rs. 14,24,481/- made by the AO as per section 36(1)(iii) of the Income Tax Act, 1961 after considering the judgment of Hon'ble High Court of Punjab & Haryana in the case of Abhishek Industries Ltd.,
2. That on the facts and circumstances of the case and in law Ld. CIT(A) has gravely erred in deleting the addition of Rs. 15,13,623/- on account of disallowance under section 80 1C of the Income Tax Act 1961 pertaining to Unit-ll Baddi.
3. The appellant craves to add or amend any ground any grounds of appeal before the appeal is heard or disposed off.
4. It is prayed that the order of the Ld. CIT(A) be cancelled and that of the assessing officer may be restored.
4. The assessee has raised the following grounds in the Cross Objections :
1. That the order of the Assessing Officer as upheld by the Commissioner of Income Tax (Appeals), Chandigarh disallowing Rs.
1,94,000/-- being the actual amount appropriated for the purchase of residential flats bad in law and needs to be set aside.
2. That the order of the Assessing Officer as upheld by the Commissioner of Income Tax (Appeals) Chandigarh disallowing an amount of Rs. 4,11,787/- in the facts and circumstances of the case is bad in law and needs to be set aside.
3. That the appellant craves leave to add, amend or delete any of the grounds before the corss-objections and appeal is finally heard.
5. The assessee has moved an application for amendment in ground No. 1 of the Cross Objection i.e. instead of the figure 'Rs.1,94,000/-' the figure of 'Rs. 12,96,000/-' be adopted.
6. The ground No. 1 raised by the revenue is against the deletion of addition made by the Assessing Officer under section 36(1)(iii) of the Act. The Assessing Officer during the course of assessment proceedings, noted that the assessee had made interest free advances to B.K.Raman & Co. Unit No. II, Baddi, B.K.Varun &Co. (HPL) and S i n g h a l P o l ym e r . O n t h e o t h e r h a n d , t h e a s s e s s e e w a s p a yi n g i n t e r e s t in the Chandigarh unit. The explanation of the assessee was that it 3 was the sole proprietor of B.K.Raman &Co. Chandigarh and Unit II at Baddi and the credit to his account of Rs. 37,17,606/- was nothing but a working capital and there was no merit in any charge of interest on such transfer of capital from one unit to the other. In respect of B.K. Varun & Co., it was pointed out that no interest was charged as there was a debit balance of Rs. 20,41,042/- against credit balance of Rs. 1,06,10,906/- and hence, there was net credit with the assessee of Rs. 85,69,864/-. The advance to M/s Singhal Polymer of Rs. 3,70,627/- was advanced interest free. The said was claimed to be a pure business transaction i.e. the person to whom goods were sold by the assessee. The Assessing Officer noted that the assessee had debited sum of Rs. 14,24,481/- under the head interest in the books of M/s B.K.Raman & Co. Chandigarh and was of the view that interest @ 18% on outstanding debit balance had to be disallowed, resulting in disallowance of Rs. 26,73,621/- which was restricted to Rs. 14,24,481/-, i.e. the interest expenditure claimed by the assessee.
7. Before the Commissioner of Income Tax (Appeals), the assessee made elaborate submissions which are incorporated under para 21 at pages 14 to 16 of the appellate order and deleted the addition in view o f t h e s i m i l a r i s s u e b e i n g d e c i d e d i n a s s e s s m e n t ye a r 2 0 0 6 - 0 7 v i d e appellate order dated 30.03.2010. The revenue is in appeal against the said deletion of the addition.
8. The ld. DR for the revenue placed reliance on the order of the Assessing Officer. The ld. AR for the assessee placed reliance on the order of the Commissioner of Income Tax (Appeals) and the submissions made before the Commissioner of Income Tax (Appeals) e x p l a i n i n g e a c h o f t h e d e b i t e n t r y.
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9. We have heard the rival contentions and perused the record. T h e a s s e s s e e d u r i n g t h e ye a r u n d e r c o n s i d e r a t i o n h a d d e c l a r e d i n c o m e from business as sole proprietor of B.K. Raman & Co. Chandigarh and Unit II at Baddi. In the Chandigarh office, the assessee had claimed interest expenditure of Rs. 14,24,481/- on account of the interest paid on secured loans. As against this, the assessee had shown certain debit balances on which no interest was charged. The first concern to whom amount had been advanced was the Unit No. II at Baddi. In the Chandigarh office, debit balance of Rs. 33,17,606/- is reflected which admittedly is nothing but working capital of the assessee for running the Unit No. II at Baddi and it also includes the profit declared by the Baddi Unit. The assessee in the Chandigarh Unit had shown a capital of Rs. 49,34,981/- and had also shown debit balance in the name of B.K. Raman & Co. Unit II Rs. 37,17,608/-. In the first instance, the said Rs. 37,17,608/- includes the profit earned b y B.K.Raman & Co. Unit II, Baddi which is not to be considered for computing the advances, if a n y. Further, the assessee in its C h a n d i g a r h o f f i c e h a d r a i s e d c e r t a i n l o a n s o n w h i c h i t w a s p a yi n g interest and on the other hand, it had advanced money to the Unit No. II at Baddi which was an exempt unit. In the totalit y of the abovesaid facts and circumstances, we hold that the interest attributable to such interest free advances made by the assessee to its own exempt unit is to be disallowed following the ratio laid down by t h e H o n ' b l e P u n j a b & H a r ya n a H i g h C o u r t i n C I T V s A b h i s h e k Industries 286 ITR 1 (P&H). However, we find merit in the contention of the assessee that in addition to the said interest bearing loans, it had certain interest free loans and the average cost ratio of the interest expenditure is to be considered for computing the disallowance of interest expenditure in the hands of the assessee. 5 A c c o r d i n g l y, we direct the Assessing Officer to compute disallowance of interest expenditure attributable to the advances made to Unit No. II at Baddi by applying average cost ratio.
10. The second advance considered by the Assessing Officer was to M/s B.K.Varun &Co., against whom debit balance of Rs. 20,41,042/- has been shown. The said company was also reflected as a creditor in the books of the assessee at Rs. 1,06,10,906/- and the net credit available with the assessee was Rs. 85,69,864/-. In view of the abovesaid credit balance, we find no merit in the order of the Assessing Officer in charging any interest on the debit balances as the net balance available with the assessee is to be considered for making any disallowance under section 36(1)(iii) of the Act. However, the said aspect, whether the assessee has credit balance t h r o u g h o u t t h e ye a r , h a s n o t b e e n v e r i f i e d b y t h e A s s e s s i n g O f f i c e r and in order to adjudicate the issue, we deem it fit to restore this issue back to the file of Assessing Officer who shall verify the stand of the assessee in this regard and in case the assessee has net credit balance from month to month, then no disallowance is to be made in the hands of the assessee. However, where the assessee has debit balance in the account of M/s B.K.Varun & Co. in any of the months, then the disallowance of interest is to be worked out on average cost ratio.
11. Now coming to the third interest free advance made by the a s s e s s e e t o M / s S i n g a l P o l ym e r a g a i n s t w h o m t h e r e i s a d e b i t b a l a n c e of Rs. 370,627/- in the books of account of the assessee. Though the said concern is a business associate of the assessee i.e. to whom goods have been sold by the assessee but that does not justify the a d v a n c e m e n t o f i n t e r e s t f r e e l o a n t o t h e s a i d c o n c e r n . A c c o r d i n g l y, 6 we hold that interest relatable to such interest free advance is to be disallowed in view of the provisions of section 36(1)(iii) of the Act. However, the rate of interest to be applied in such case is to be on the basis of average cost ratio i.e. taking into consideration the interest free advances available to the assessee and the interest bearing advances available with the assessee.
12. Before the Commissioner of Income Tax (Appeals), the assessee had submitted that the average rate of interest is not 18% which has been applied by the Assessing Officer to work out the disallowance under section 36(1)(iii) of the Act. The Assessing Officer is thus, directed to apply average cost ratio in order to compute the disallowance under section 36(1)(iii) of the Act in respect of the a d v a n c e o f R s . 3 7 0 , 6 2 7 / - m a d e t o M / s S i n g a l P o l ym e r . The ground No. 1 raised by the revenue is thus, partly allowed.
13. The issue in ground No. 2 raised by the revenue is against the deletion of addition of Rs. 15,13,623/- made on account of disallowance under section 80IC of the Act pertaining to Unit No. II, Baddi.
14. The brief facts relating to the issue are that the assessee was running a trading unit at Chandigarh which is the Chandigarh Unit and was also running a manufacturing unit at Baddi. The Assessing Officer, during the course of assessment proceedings noted that in the Chandigarh Unit, the assessee had shown GP rate of 2.31% and NP rate of 0.52% as against GP rate of 50.62% and NP rate of 23.25%, shown in the Baddi Unit. The Assessing Officer further noted that large number of expenses were claimed in the Chandigarh Unit which were on account of the Baddi Unit. The assessee was show caused to ex plain the same. It was explained by the assessee that the Unit No. 7 II at Baddi operates separately under its own staff except the vehicle running expenses of Rs. 28,103/- which may be allowed on proportionate basis. The Assessing Officer, after considering the different expenses claimed in the Chandigarh Unit allocated Rs. 411,787/- to the Baddi Unit and observed that the same would increase the profit of the Chandigarh Unit and reduce the profit of the B a d d i U n i t a c c o r d i n g l y. Further it was noted by the Assessing Officer that the assessee had shown job work of Rs. 22,90,481/- in Unit No. II Baddi on which the assessee had shown job work income of Rs. 22,90,481/- on which it had claimed deduction under section 80IC of the Act. The Assessing Officer was of the view that job work was not an activity which falls within the definition of 'manufacture' or production of any article or thing. Further the manufacturing account of the Baddi Unit reflected that no expenses relating to manufacturing activity were debited as only purchases, freight and cartage and the tax was debited to the manufacturing account. The Profit & Loss Account below manufacturing account reflected the salary and wages of Rs. 262,800/- and water and electricity expenditure of Rs. 868,244/- were debited. The Assessing Officer was thus, of the view that the assessee had not undertaken any m a n u f a c t u r i n g a c t i v i t y. The Assessing Officer further held that it was an admitted fact that the assessee was engaged in the business of plastic mouldings at Baddi Unit and the 13th Schedule of the Income Tax Act specifically mentions plastic and articles thereof as an item falling under the Schedule. Since the plastic items were prohibited under the 13th Schedule, the assessee was held to be not eligible for deduction under section 80IC of the Act.
15. The Commissioner of Income Tax (Appeals) after deliberating upon the definition of the term 'manufacturing' and the various 8 judicial pronouncements on the issue observed that a liberal view on the meaning of 'manufacture' has been taken by various courts and in the absence of any definition in the Act, the word has to be given an ordinary meaning. Further reliance was placed on the ratio laid down b y t h e H o n ' b l e P u n j a b & H a r ya n a H i g h C o u r t i n C I T V s I m p e l F o r g e & Allied Industries Ltd. (2009) 183 Tax man 38 (P&H) that where the assessee is engaged in the business of manufacturing and trading of tractor and auto parts and was also doing job work of similar nature, it would be entitled to the deduction claimed under section 80IB of the Act both in respect of the income derived from its own manufacturing and income derived from job work done for the others. In view thereof, the Commissioner of Income Tax (Appeals) deleted the addition made by the Assessing Officer. The revenue is in appeal against the same.
16. It was vehemently pointed out b y the ld. DR for the revenue that the assessee has failed to book any manufacturing expenses and in the absence of the same and also for the fact that the assessee was doing job work, the assessee is not entitled to any deduction under section 80IC of the Act. The ld. DR for the revenue further pointed out that the Commissioner of Income Tax (Appeals) has failed to give any finding against the observation of the Assessing Officer that the items manufactured by the assessee were restricted items.
17. The ld. AR for the assessee in reply pointed out that the expenses relating to manufacturing were claimed in the Profit & Loss Account by an error and the same would not disentitle the assessee to his claim of deduction under section 80IC of the Act. The ld. AR for the assessee further referred to the notification of the Department of Industries, Baddi under which the assessee was given a certificate for 9 the manufacturing and job work of plastic bottles and plastic measuring cups, the copy of the said notification is placed at page 67 of the Paper Book. Our attention was further drawn to the Customs Tarrif Schedule III placed at pages 68 to 72 of the Paper Book and under item No. 3923 at page 69 of the Paper Book. The articles for c o n v e ya n c e o r p a c k i n g o f g o o d s o f p l a s t i c ; s t o p p e r s , l i d s , c a p s a n d other closures of plastics was recognized as an item of manufacturing under the 13th Schedule.
18. We have heard the rival contentions and perused the record. The assessee has two trading units, one at Chandigarh and the other at Baddi. In addition, the assessee has Unit No. II at Baddi which is the manufacturing unit wherein the assessee carries on the business of manufacturing of plastic bottles and plastic measuring cups. The assessee had claimed deduction under section 80IC of the Act in respect of the profits of the Unit No. II at Baddi. The Assessing Officer had in the first instance re-allocated the expenses of Chandigarh and Baddi Unit to the exempt unit resulting in an addition of Rs. 411,787/- against which the assessee has raised ground No. 2 in its Cross Objections. Further, the benefit of deduction under section 80IC of the Act was denied to the assessee on two accounts i.e. it was held by the Assessing Officer that in the absence of any manufacturing expenses and also because of the fact that the assessee was engaged in the manufacturing of banned items under 13th Schedule of the Act, the assessee was not engaged in any manufacturing activities. Further it was noted by the Assessing O f f i c e r t h a t t h e a s s e s s e e w a s c a r r yi n g o n s i m i l a r a c t i v i t y o n j o b w o r k basis on which the assessee was not entitled to any deduction under section 80IC of the Act. The Commissioner of Income Tax (Appeals), o n t h e o t h e r h a n d , h a d a l l o w e d t h e c l a i m o f t h e a s s e s s e e i n e n t i r e t y. 10 The first aspect to be considered in the present appeal is whether the a s s e s s e e i s c a r r yi n g o n a n y m a n u f a c t u r i n g a c t i v i t i e s .
19. The ld. AR for the assessee at page 67 of the Paper Book has filed the copy of letter regarding acknowledgement of entrepreneur issued by the Single Window Clearing A g e n c y, Department of Industries, Baddi, District Solan dated 06.08.2007 under which the Unit of the assessee under the micro/small/medium scale enterprises is recognized for the manufacturing and job work of plastic bottles and plastic measuring cups. The assessee further at pages 68 to 72 of the Paper Book has placed on record the Custom Tariff Schedule III Chapter 39, under which at item No. 3923, the articles for the c o n v e ya n c e o r p a c k i n g o f g o o d s o f p l a s t i c s , s t o p p e r s , l i d s , c a p s a n d other closures of plastics are recognized. The assessee claims to be "engaged in the manufacturing of plastic bottle/containers for packing of Harpic for M/s Reckitt Benckiser & also packing material for M/s Emami Ltd. in addition to manufacturing for assessee himself. Since the assessee was manufacturing bottles/packing material, so it has to be held that the assessee is engaged in the business of manufacture or production of an article or thing." In addition the said manufacturing is claimed to have been carried on by the assessee on its own. The deduction claimed under section 80IC of the Act was denied to the assessee as the assessee was found to be engaged in the manufacture of the items which are under Schedule 13 of the Act and in view of the provisions of section 80IC of the Act, the said deduction was held by the Assessing Officer to be not allowable as under sub-section (2) to section 80IC of the Act, wherein it is provided that an understanding or enterprise which manufactures or produces any article or thing, which is not specified in the 13th Schedule of the Act. The plea of the assessee in this regard was that 11 in case the tariff classification of the goods manufactured by the eligible unit are considered, then the same falls outside the scope of Schedule 13 of the Income Tax Act. As the assessee was engaged in the manufacture of items which are not falling within 13th Schedule of the Income Tax Act, the assessee is eligible for deduction under section 80IC of the Act. The manufacturing activity to be undertaken b y the assessee have been recognized by the Ministry of Industries, Baddi and is also provided under the Customs Tariff Schedule III Chapter 13 as referred to by us in the paras herein above. As per the said custom tariff, Schedule 3 Chapter 13, the assessee is covered by item No. 3923 which provides "articles for the conveyance or packing of goods, of plastics, stoppers, lids, caps and other closers of plastics." Under Schedule 13 of the Income Tax Act, the plastics and articles thereof which are enlisted are as per the excise classification of item No. 3909 to 3915. The items manufactured by the assessee falling under item No. 3923 is thus, outside the provisions of the 13th Schedule to Income Tax Act. Under such circumstances, it cannot be said that the assessee was engaged in the manufacture of items which are prohibited under the 13th Schedule to Income Tax Act. In view thereof, we hold that once assessee is engaged in an activity of manufacture, which is not prohibited under the 13th Schedule of the Income Tax Act, then it cannot be said that the assessee was not engaged in any manufacturing. The assessee has d e c l a r e d i n c o m e f r o m c a r r yi n g o n o f s u c h a c t i v i t y a n d i n a d d i t i o n t h e assessee had carried on the said activity on job work basis. The assessee is thus, entitled to the claim of deduction under section 80IC of the Act on profits arising from its own manufacturing activity and also the activity carried on, on job work basis. We find support from t h e r a t i o l a i d d o w n b y t h e H o n ' b l e P u n j a b & H a r ya n a H i g h C o u r t i n 12 CIT Vs Impel Forge & Allied Industries Ltd. (supra), wherein it has been held that where the assessee is engaged in any manufacturing activity and in addition carries on the same activity on job work basis, the assessee is eligible for the claim of deduction under section 80IB of the Act. Following the same parity of reasoning, we hold that the assessee is entitled to the claim of deduction under section 80IC of the Act on its total profits.
20. Now coming to the second aspect of the objections raised by the Assessing Officer that the assessee has not incurred any expenditure f o r c a r r yi n g o u t t h e s a i d m a n u f a c t u r i n g a c t i v i t y. Undoubtedly the assessee has only debited the cost of purchases and cartage to the manufacturing account and has not debited the expenditure incurred on other related items of expenditure for carrying on the manufacturing activities. The Profit & Loss Account prepared by the assessee reflects the salary and wages at Rs. 262,800/- and electricity expenses at Rs. 868,244/-. The ld. AR for the assessee during the course of hearing was directed to produce the electricity bills and some of the bills have been produced which relate to the Baddi Unit II i.e. manufacturing unit. Merely because the entries have not been correctly posted in the manufacturing account but have been debited to the Profit & Loss Account by the assessee does not disentitle the assessee to the claim of deduction under section 80IC of the Act. We find no merit in the order of the Assessing Officer in this regard. The Commissioner of Income Tax (Appeals) has allowed the claim of t h e a s s e s s e e i n v i e w o f t h e o r d e r p a s s e d f o r t h e p r e c e d i n g ye a r , against which the department has not filed any appeal. However, we have adjudicated the claim of the assessee vis-à-vis the deduction claimed under section 80IC of the Act in paras above, and a c c o r d i n g l y, w e u p h o l d t h e o r d e r o f C o m m i s s i o n e r o f I n c o m e T a x 13 (Appeals) in granting the deduction under section 80IC of the Act, though on different basis. The ground No. 2 raised by the revenue is thus, dismissed.
21. The assessee is aggrieved by the allocation of expenses to the exempt unit which have been debited to the Chandigarh trading unit of the assessee. The expenses had been found to be in relation to the Baddi manufacturing unit and some of the common expenses have b e e n a t t r i b u t e d t o t h e B a d d i m a n u f a c t u r i n g u n i t . A d m i t t e d l y, t h e u n i t at Baddi is exempt from tax and profits of the Chandigarh unit are taxable. In the entiret y of the facts and circumstances, and the elaborate discussions made by the Assessing Officer and by the Commissioner of Income Tax (Appeals), we are in conformity with the order of the authorities below in allocating the common expenditure and also the particular expenditure of the Baddi unit to the exempt unit. A c c o r d i n g l y, w e f i n d n o m e r i t i n t h e g r o u n d N o . 2 raised by the assessee in its Cross Objection.
22. Now coming to the ground No. 1 raised by the assessee in the Cross Objection. The claim was in respect of the deduction under section 54F of the Act. The assessee during the ye a r under consideration had declared long term capital gains on sale of a flat against which it had claimed to have made investment for the purchase of another flat in Amaravati Aggarwal Builders Pvt. Ltd. On the letter of intent of the said builder dated 22.10.2005, the assessee had deposited a sum of Rs.1,94,000/- within the stipulated period as initial p a ym e n t and the balance had to be paid in installments. The Assessing Officer noted that though the assessee had claimed deduction under section 54F of the Act at Rs.12,96,000/- the assessee had failed to comply with the provisions of the said Act. 14
23. The ld. AR for the assessee before us, restricted the claim to R s . 1 , 9 4 , 0 0 0 / - w h i c h w a s p a i d a s d o w n p a ym e n t . T h e l d . A R f o r t h e assessee has placed on record copy of the receipt of having paid the sum of Rs.1,94,000/-. In the totality of the facts and circumstances, where the assessee has deposited the said sum of Rs.1,94,000/- within the stipulated time, as provided under section 54F of the Act, we find no merit in the addition to that extent. As against the claim of Rs. 12,96,000/-, we direct the Assessing Officer to allow deduction under section 54F of the Act in the hands of the assessee to the extent of Rs.1,94,000/-. The ground No. 1 raised by the assessee in the Cross Objection is thus, partly allowed.
24. In the result, appeal of the revenue and Cross Objections of the assessee are partly allowed.
O r d e r p r o n o u n c e d i n t h e o p e n C o u r t o n 3 0 t h J a nu a r y, 2 0 1 4 .
Sd/- Sd/-
( T. R .S O O D ) ( S US H M A C H OW LA )
A C C O U N TA N T M EM B E R J U D IC IA L M E M B E R
D a t e d : 3 0 t h J a n u a r y, 2 0 1 4
'Poonam'
Copy to:
The Appellant, The Respondent, The CIT(A), The CIT,DR.
Assistant Registrar ITAT,CHD.