Gujarat High Court
Commissioner Of Income Tax vs Enviro Control Associates on 1 August, 2006
Author: M.R. Shah
Bench: R.S. Garg, M.R. Shah
JUDGMENT M.R. Shah, J.
1. At the instance of the Revenue, Income Tax Appellate Tribunal has referred the following question for our consideration;
Whether, on the facts and circumstances of the case and in law, the Tribunal was right in holding that the assessee firm is entitled for deduction under Section 80HH and 80J of the Income Tax Act, 1961?
2. The assessee was a partnership firm carrying on business of manufacturing water/air pollution control plant at the site of its customers. It claimed deduction under Section 80HH and 80J of the Income Tax Act, 1961 [hereinafter referred to as 'the Act'] since the very year of its inception, i.e., Assessment Year 1982-83 and the Assessing Officer was also allowing the said deductions as claimed. For the Assessment Year 1987-88, the assessee firm claimed deduction of Rs. 23,023/- under Section 80J of the Act and Rs. 11,696/- under Section 80H of the Act and the Assessing Officer allowed the same in the assessment order framed under Section 143(3) of the Act. The Commissioner of Income Tax, Surat issued a notice dated 18.1.1990 upon the assessee for the proposed action under Section 263 of the Act on the ground that the assessment order passed by the Assessing Officer was erroneous and prejudicial to the interests of the Revenue as conditions laid down for allowing deduction under Section 80HH and 80J of the Act have not been fulfilled by the assessee and the assessee was called upon to show cause as to why deductions allowed by the Assessing Officer should not be deleted. The assessee firm submitted a reply on 29.1.1990 and after considering the same, the Commissioner of Income Tax, Surat, did not agree with the contentions raised on behalf of the assessee and he passed the order under Section 263 directing the Assessing Officer to withdraw the deductions allowed by him under Section 80HH and 80J of the Act. Being aggrieved and dissatisfied with the order passed by the C.I.T., Surat under Section 263 of the Act directing the Assessing Officer to withdraw the deductions allowed by him under Section 80HH and 80J of the Act, the assessee approached the Income Tax Appellate Tribunal, Ahmedabad Bench 'B', by way of an appeal which was numbered as ITA No. 1650/Ahd/1990. It was the contention on behalf of the assessee before the Tribunal that the assessee firm fulfilled all the conditions required for deduction under Section 80HH and 80J of the Act and that the assessee firm was claiming such deductions from the very beginning of the concern itself and its claim for deduction was being allowed by the concerned Assessing Officer and now the Department cannot be permitted to reopen the matter once decided. It was further submitted that the assessee was an industrial undertaking as enumerated in Section 80HH and 80J of the Act. The Tribunal, by its order dated 28th June 1994, allowed the assessee's appeal by quashing and setting aside the order passed by the C.I.T., Surat, passed under Section 263 by holding that the case of the assessee was rightly processed by the Assessing Officer and there was no justification for the C.I.T., Surat to make an order under Section 263 of the Act with direction to Income Tax Officer to withdraw the deduction made in favour of the assessee under Section 80HH and 80J of the Act. The Tribunal based the foundation of its order with the ruling of the Hon'ble Supreme Court in the case of C.I.T. v. N.C. Buddharaja & Co. (1993) CTR 420 as well as in the case of Bangalore Water Supply and Sewerage Board v. A. Rajappa AIR 1978 SC Page 549. However, at the instance of the Revenue, the Income Tax Appellate Tribunal, Ahmedabad Bench 'B' has referred the aforesaid question for our due consideration.
3. Shri B.B. Naik, learned Counsel appearing on behalf of the Revenue, has submitted that the Tribunal has committed an error in holding that all the conditions which are enumerated in Section 80HH of the Act have been met with. He has further submitted that for the purpose of availing the benefit under Section 80J, an Industrial Undertaking, eligible for deduction under Section 80HH has to manufacture or produce articles in any backward area and that even if it is split up, it loses the benefit of deduction under Section 80HH. It is submitted that, so far as the assessee is concerned, it has shifted the place of work from place to place after the entrusted job was completed in a particular place, the assessee had not a fixed place of work in a specified backward area, and it might be that it worked in backward areas on tentative basis but that does not establish that the assessee was having its industrial undertaking in backward area. It is further submitted by him that the assessee had its Head Office in Surat City which was not a backward area and therefore the the Tribunal has committed an error in upsetting the order passed by the Commissioner of Income Tax, Surat. Shri Naik has further submitted that in any case in view of the decision of the Hon'ble Supreme Court in the case of C.I.T. v. N.C. Budharaja and Co. and Anr. 204 ITR 412, the learned Tribunal has committed an error in holding that assessee firm was manufacturing and producing an article or thing in terms of Section 80J and 80HH for being entitled for deduction under the said Sections.
4. We have heard Shri BB Naik, learned Counsel for the Revenue. Nobody appears on behalf of the assessee despite service of notice.
5. The question which pause our consideration is whether the assessee can be said to be engaged in manufacturing or production of an article in any backward area at the place of his/its clients so as to attract the provisions under Section 80HH and 80J of the Act. In the present case, the work of the assessee is to undertake various R & D work for works related to water and air pollution problems for different industrial wastes and executes turnkey project in the field of water pollution control including water purification plants. The work includes design, detailed engineering, piping, electrical, insrumentation works including erection, testing and commissioning of the plants. The assessee company also takes up the work of supply of water/waste water treatment plant equipments with design and also takes up air and water quality controlling works, prepared design, laboratory studies and prepared tenders for different clients for above works and only after award of work, the assessee prepared detailed cost break up for payment purpose or turnkey contract value agreed by the owner. Now, considering the decision of the Calcutta High Court, in the case of Gifton Laboratories (P) Ltd. v. CIT , the Tribunal has rightly come to the conclusion that the assessee firm was an 'industrial undertaking' and was engaged in manufacturing and production of article in the shape of air/water pollution control systems.
5.1. So far as the reliance placed upon the decision of the Hon'ble Supreme Court in the case of C.I.T. v. N.C. Budharaja And Co. and Anr. (supra) is concerned, it is required to be noted that question was with regard to an assessee constructing a Dam, and the question before the Hon'ble Supreme Court was whether the activity of construction of a Dam can be characterised as manufacture or production of an article or articles as the case may be within the meaning of Section 80HH(2)(i) of the Act. The Hon'ble Supreme Court observed as under;
It is equally difficult to say that the process of constructing a dam is a process of manufacture or a process of production. It is true that a dam is composed of several articles; it is composed of stones, concrete, cement, steel and other manufactured articles like gates, sluices etc. But to say that the end product, the dam, is an article is to be unfaithful to the normal connotation of the word. A dam is constructed; it is not manufactured or produced. The expressions 'manufacture' and 'produce' are normally associated with movables-articles and goods, big and small-but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road or a building.
Now, considering the working of the assessee firm, i.e., designing, erection and commissioning of water and air pollution control plant and also the work of the assessee to undertake various R & D work for works related to water and air pollution problems for different industrial wastes and executes turnkey project in the field of water pollution control including water purification plants. The Tribunal has rightly held that the assessee firm is an industrial undertaking and is engaged in manufacturing or producing article in the shape of water/air control. Even in C.I.T. v. N.C. Budharaja and Co. and Anr. (supra), the Hon'ble Supreme Court has also observed that in such matters one has to look to the activity and decide whether it can be said to be manufacturing or producing an article. Construction of a dam, road or bridge cannot be compared with the activity of the assessee undertaking turnkey projects involving erection of the plant. Under the circumstances, the decision of the Hon'ble Supreme Court in the case of C.I.T. v N.C. Budharaja and Co. and Anr., (supra), will not be of any assistance to the Revenue.
5.2. Now, as regards the issue, whether the assessee firm was manufacturing or producing the plant in a backward area which is one of the requirements of the deduction under Section 80HH of the Act, the assessee had given out the details of work done by him in the relevant year where it is mentioned that the total receipt in turnkey project account was of Rs. 43,39,178/-, which included receipt Rs. 14,42,916 for the work done in an economically backward area. It is required to be noted that the assessee claimed deduction under Section 80HH of the Act on the amount of Rs. 14,42,916, only i.e., for the work done in economically backward area. Now, looking to the activity of the assessee to commission the water purification and other plants at the site of their customers situated in a backward area, the assessee will be entitled to the deduction under Section 80HH and 80J of the Act. If the assessee firm sets up its own industrial undertaking at the site of its customers for whom water/air pollution control plant is manufactured as declared under the Act, the assessee will be entitled to the benefit of Section 80HH of the Act for the articles manufactured and/or for the plant commissioned in the backward area. It is required to be noted that, for the earlier years and right from the beginning, the assessee was claiming deduction under Section 80HH and Section 80J of the Act, and the Assessing Officer allowed such deductions under Section 80HH and 80J of the Act. The Income Tax Appellate Tribunal has, therefore, not committed any error in holding that the assessee firm was entitled for deduction under Section 80HH and 80J of the Income Tax Act, 1961.
6. We, therefore, answer the question referred to us against the Revenue and in favour of the assessee. The Reference shall stand disposed of accordingly. No costs.