Income Tax Appellate Tribunal - Ahmedabad
Ajay Packaging, Nani Daman vs Department Of Income Tax on 23 October, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D"
(BEFORE S/SHRI T K SHARMA AND D C AGRAWAL)
ITA No.4147/Ahd/2008
(Assessment Year:- 2001-02)
The Income-tax Officer, V/s M/s Ajay Packaging,
Vapi Ward-4, Daman Survey No.54/7C, 52/3C
Daman Industrial Estate,
Kadaiya, Daman
PAN: AAEFA 6576 B
[Appellant] [Respondent]
ITA Nos.08 and 09/Ahd/2009
(Assessment Years:- 2001-02 and 2005-06)
M/s Ajay Packaging, V/s The Income-tax Officer,
Survey No.54/7C, 52/3C Vapi Ward-4,
Daman Industrial Estate, Daman
Kadaiya, Daman
[Appellant] [Respondent]
Department by :- Shri C K Mishra, DR
Assessee by:- Shri K N Bhatt, CA
ORDER
Per D C Agrawal (Accountant Member): These are three appeals; one filed by the Revenue for Assessment Year 2001-02 [ITA No.4147/Ahd/08], and the other two filed by the assessee [ITA Nos.08 and 09/A/09] for Assessment Years 2001-02 and 2005-06. They involve some common issues and are therefore taken up together for the sake of convenience.
1 ITA No.4147/Ahd/2008:2 The Revenue has raised the following grounds of appeal:
(1) On the facts and circumstances of the case and in law, the learned CIT(A) has erred in considering the year under consideration is 5th year of commencement of production instead of 6th year.
(2) On the facts and circumstances of the case and in law, the learned CIT(A) has erred in allowing the deduction u/s 80IB of the I.T. Act on scrap sales of Rs.91,489/-.
(3) It is therefore prayed that the order of the learned CIT(A) be set aside and that of the AO be restored.
3 The assessee is engaged in the business of manufacturing of Corrugated Boxes. It has two units. The AO mentions that Unit-I started manufacturing activity in the AY 1996-97 whereas Unit-II started manufacturing activity in the AY 1999-2000. Reckoning from these assessment years, the AO held that the year under consideration is the 6 t h year for Unit-I and 3 rd for Unit-II for the purpose of allowing deduction u/s 80IB of the Income-tax Act, 1961 ["the Act" for short].
4 The CIT(A), on the other hand, noted that the assessee has started manufacturing activity in Unit-I only from AY 1979- 98 and not from AY 1996-97 and it seems the AO has confused the previous year with the assessment year. He accordingly held that the present assessment year is only 5 t h year of operation.
5 We have heard the learned DR and the learned AR. In our considered view, the issue requires verification from the 2 assessment records. Let the AO finds out and also the assessee produce before the AO as to from which assessment year manufacturing activity was started. Necessary records from the concerned departments, P&L Account / Trading Account showing the Balance-Sheet, assessment records for the Assessment Years 1996-97 and 1997-98 should be examined to decide the issue. We accordingly restore this matter to the file of the AO as without examining the basic records this issue can not be decided. Accordingly this ground of appeal raised by the Revenue is allowed for statistical purpose.
6 Ground No.2 relates to the claim of deduction u/s 80IB on scrap sales. We have heard the learned DR and the learned AR. In our view, the issue is now covered in favour of the assessee by the decision of the Tribunal Ahmedabad Bench-B in the case of ITO v M/s Subh Paper Production [ITA No.2413/Ahd/2009, order dated 23-10-2009], wherein it has been held as under:-
"6. We have heard the learned DR and learned AR of the assessee. In our considered view, the issue whether assessee is entitled for deduction under Section 80IB on sale of scrap generated in the manufacturing activity is covered by the decisions of Hon'ble Supreme Court in Indian Cine Agencies Vs. CIT (2009) 308 ITR 98 (SC) and also by various other authorities as under:
1. In [2005] 273 ITR (A.T.) 0001- Assistant Commissioner of income-tax vs. Maxcare Laboratories Ltd. Income-tax Appellate Tribunal--Cuttack held that the income from sale of empty drums/containers, sale of useless materials was out of the business of industrial undertaking of the 3 assessee. For determining the profits of business of the industrial undertaking the sale of empty drums/containers, sale of useless materials could be taken into account.
2. In [2001] 251 ITR 0806- Ship Scrap Traders vs. Commissioner of Income-tax Bombay High Court has observed that for assessees engaged in ship breaking the scrap and, steel obtained by dismantling and breaking up of the ship must be regarded as a different commercial commodity from the ship itself, and the activity would amount to manufacture. Hence, the assessees would be entitled to the special deduction under sections 80HHA and 80-I.
3. In [1982] 133 ITR t)034- Commissioner»of Income-tax vs. Sundaram Clayton Ltd. Madras High Court held that the scrap sold by the assessee being the byproduct arising out of the manufactured items coming within the scope of a priority industry, the income arising from such sale would be attributable to the priority industry.
(Cambay Electric Supply Industrial Co. Ltd. v. CIT[1978] 113 ITR 84 (SC) applied.)
4. In [2005] 279 ITR (A.T.) 0024- Deputy Commissioner of Income-tax vs. Investwel Publishers P. Ltd. Income-tax Appellate Tribunal--Mumbai held that the raddi sales formed part of the income derived from the publishing business. The magazines which were not sold became obsolete and were sold as raddi and therefore this income was of the nature as income received by sale of magazines. Deduction under section 80-1 would be eligible on this income 4
5. In [2000] 241 ITR 0803- Fenner (India) Ltd. vs. Commissioner of Income-tax (No. 2) Madras High Court Held that in the industrial undertaking in the manufacture of V-Belts, oil seals, O-rings and rubber moulded products, certain scrap materials resulted which had a saleable value. The scrap materials had direct link or'nexus with the industrial undertaking. Therefore, profit from the sale of the scrap materials was eligible for deduction under section 80HH.
6. In Nirma Industries Ltd. vs. Assistant Commissioner of Income-tax, Central Circle 2(1) Nirma Industries Ltd. V/s. , ACIT , 95 ITD 199 (And.) (SB) it was held :
'".........Regarding Sale of Bardana and Sale of Waste material:
22. At the time of hearing before us, it is submitted by the learned counsel that sale of Bardana and Waste material has generated during the course of production of the Industrial Undertaking. Therefore, it has direct and immediate nexus with the Industrial Undertaking. The learned DR could not controvert the above statement made by the learned counsel for the assessee. Moreover it was pointed out by the learned counsel for the assessee that the Hon'ble Jurisdictional High Court has decided identical issue in favour of the assessee in the case of Dy. CIT v. Harjivandas Juthabhai Zaveri vide [IT Reference No. 189 of 1999]. Since the Bardana Waste material has generated during the course of production of the Industrial Undertaking, we hold that it has a direct and immediate nexus with the Industrial Undertaking and therefore entitled to deduction under section 80HH/80-I. Accordingly, we uphold the order of the ClT(A) in this respect.
Revenue has relied on decision of Hon'ble M.P. High Court in D.P. Agarawal Vs. CIT 272 ITR 118 MP. However, the facts in that case are different. The assessee D.P. Agarwal was engaged in rerolling of Iron and Steels. It used to purchase old/discarded guns and used/their contents for rerolling. Certain brass scrap was separated from the guns which was sold separately. Hon'ble M.P. High Court held that 5 generation of brass scrap and re-rolling Iron and Steel has no relationship. That, assessee had obtained brass scrap by dismantling guns and not from the process of rerolling of steel. The generation of brass scrap could not be said to be from the process of manufacture or is not a product or byproduct from the activities of the assessee's industrial undertaking. In other words, brass scrap was generated prior to the start of rerolling process and was not a product or by product of the process of rerolling. However, brass scrap and final product manufactured by the assessee i.e. Iron and Steel had no common raw-material. Revenue has further relied on the decision of the Apex Court in CIT Vs. Sterling Foods (1999) 237 ITR 279 and Pandayan Chemicals Vs. CIT(2003) 262 ITR 278 (SC). These two decisions highlighted the distinction between "derived from" and "attributable to" and Revenue has sought to emphasis that scrap is not derived from the business of manufacturing activity. At best it can be attributed to such activities. We do not subscribe to this view of the Revenue. Once a product or byproduct or waste is the result of some manufacturing process which has resulted in the finished goods sold by the assessee and if the finished goods can be said to be derived from manufacturing activity then there is no reason to hold that scrap resulted from the same activity is not derived from manufacturing activity. The same process is generating two times (i) Finished product sold by the assessee and the other, (ii) waste, byproduct or scrap. No such distinction can be created as if final product is derived from the manufacturing activity and other is not. Both are generated at the same time from the same process except that one has higher market value and other has not, and accordingly the same is treated as scrap. In any case, the issue is now fully covered in favour of the assessee by the later decisions of the Courts and also of the Apex Courts as noted above."
Where scrap is generated during the course of manufacturing activity of the product and basic constituent of scrap is the same as of the raw material which has gone to make the final product, then it can be said that the scrap is generated during the course of manufacturing activity and, therefore, its sale is part of sale of main product. It can be said that the scrap under these circumstances is derived from manufacturing activity.
6Accordingly, deduction u/s 80IB would be available to the assessee. As a result, the appeal filed by the Revenue is partly allowed for statistical purpose.
ITA No.08/Ahd/2009:7 This is an appeal filed by the assessee raising the following grounds of appeal:
1 The Learned CIT(A) erred in law as well as on facts while upholding the addition made by the AO on account of different depreciation.
2 The Learned CIT(A) erred in law as well as on facts while sustaining the addition of Rs.5,50,000/- as loans received from partners from unexplained sources inspite of substantive evidences produced by the appellant.
3 The Learned CIT(A) erred in law and on facts in sustaining addition for an amount of unsecured loans of Rs.10 lacs inspite of substantive evidences produced by the appellant.
8 The first issue is not pressed and hence it is rejected.
9 The second issue relates to the addition on account of sum of Rs.5,50,000/- received by the assessee firm from its partners. During the course of assessment proceedings the AO noticed that the assessee firm has received the following sum as capital contribution from the partners:
Sr. No. Name of the partner Amount
-------- ---------------------------------- ------------
1 Shri Ravjibhai R Patel Rs.50,000/-
2 Shri Dhamjibhai K Patel Rs.50,000/-
3 Shri Shivdas K Patel Rs.50,000/-
4 Shri Prakash M Patel Rs.5,00,000/-
5 Anjali R Patel Rs.50,000/-
7
6 Smt. Hemlata L Patel Rs.50,000/-
7 Manisha L Patel Rs.30,000/-
8 Shri Yogesh R Patel (Minor) Rs.50,000/-
When inquired, the assessee furnished the details of sources of capital in the cases of Manisha L Patel [Rs.30,000/-], Anjali R Patel [Rs.50,000/-] and Smt. Hemlata L Patel [Rs.50,000/-]. In the cases of rest, no explanation regarding the source of the capital introduced was furnished. The AO accordingly made an addition of Rs.7 lacs.
10 The CIT(A) examined the issue and called for the remand report and finally he accepted the capital introduced by
1. Shri Ravjibhai R Patel Rs.50,000/-
2. Shri Dhamjibhai K Patel Rs.50,000/-
3. Shri Shivdas K Patel Rs.50,000/-
He accordingly confirmed the addition in respect of capital introduced by Shri Prakash M Patel of Rs.5 lacs and Shri Yogesh R Patel of Rs.50,000/-.
11 Before us, the learned AR submitted that the capital so introduced by the partners are through banking channels, from their bank accounts, they have declared them in the returns of income, and they have also accepted that they have introduced this capital in the firm. Once, it is so, there is no case for making any addition. He also relied upon the decision of the Tribunal in 8 the case of ITO v M/s M Tex [ITA No.3427/Ahd/2008, order dated 18-09-2009].
12 The learned DR, on the other hand, stressed that the assessee has failed to prove the source of cash credits in the accounts of the partners.
13 We have considered the rival submissions and perused the material on record. In our considered view, once the partners have accepted that they have given money to the firm, the transfer is through banking channel and has been declared in the return of income of the respective partners, then, requiring the assessee to prove the source of such money is not called for. If the partners fail to prove the source of this money, then the addition is called for only in their personal cases. So far as the firm is concerned, it has discharged its onus the moment the partners accept that they have introduced the capital / money in the firm. We derive support from the judgment of the Hon'ble Madhya Pradesh High Court in the case of CIT v Metachem Industries (2000) 245 ITR 160 (MP). Our aforesaid view is also supported by the decision of the Tribunal in the case of ITO v M/s M Tex [ITA No.3427/Ahd/2008, order dated 18-09-2009], wherein it has been held as under:-
"22 We have heard ld. DR and the Ld. AR of the assessee. In the case of CIT vs Kulwant Singh & Co. (2008) 299 ITR 53 (P&H), it is held that where amounts found credited in their account of their partners coming from savings account, and copies of accounts are produced, then initial onus on the firm with regard to identity and financial capacity of the partners is discharged. Similar view has been held by ITAT Ahmedabad Bench "D" in the case of M/s Heritage 9 Realty vs. ITO (ITA Nos.561 and 562/Ahd/2004 - for Assessment Years 1996-97 & 97-98) pronounced on 12/06/2009, wherein it has held as under:-
"3 Heard both the parties and carefully gone through the material available on record. In the AY 1996-97, addition of Rs.73,000/- has been made in respect of cash credit introduced by the partner Smt. Shantaben Antaria. Similarly in the AY 1997-98, the addition of Rs,1,24,000/- has been made in respect of cash credit introduced by partners Smt. Shantaben Andharia and Shri Alap Andharia. These credits were examined by the AO and he discarded the contention of the assessee that such credits were introduced by the above partners out of sales proceeds of agricultural produces on the ground that no detail evidence regarding sale of agricultural produce, sales bills and bank accounts were submitted. However, owning of agricultural land by them was not disputed. Thus, there is no dispute of the fact that the credits in question were the amount introduced by the partners. The question, therefore, arises for our consideration as to whether the said amount can be added in the hands of the firm when the source in the hands of the partners disclosed is not accepted. Hon'ble Allahabad High Court in the case of CIT vs. Jaiswal Motors Finance 141 ITR 706 and observed that if AO had any doubt with regard to source of deposits in partners' account, he may take suitable action in the case of partners, if he happens to be their AO or he may refer the matter to the concerned AO as partners are I.T. assessees. Tribunal in the case of Dhorajia Construction Co. vs ITO 42 ITD 450 (Ahd) in which decision this Tribunal relying on aforementioned decision of Allahabad High Court in the case of CIT vs. Jaiswal Motors Finance (supra) has given similar relief to the assessee. In view of the above, we are of the considered view that the impugned additions made u/s 68 of the Act in the hands of the assessee-firm in both the AYs under consideration is not proper. The said additions are, therefore, deleted."
As a result, the addition so confirmed by the CIT(A) is deleted.
14 Ground No.3 relates to the addition in respect of Rs.10 lacs being unsecured loans. The AO found that a sum of 10 Rs.5 lacs each has been credited in Unit-II in the names of Shri Dhananjay P Patel and Shri Manoj P Patel. The AO seems to have asked the assessee to file confirmations from the depositors. As these confirmations were not filed, the AO made the addition u/s 68 of the Act. The learned CIT(A) also confirmed the addition.
15 Before us, the learned AR submitted that it was explained to the CIT(A) that these depositors had old deposits with Unit-I which were transferred to Unit-II by the assessee. Since this is not a credit this year, no addition is called for. He submitted a copy of the certificate from the bank in support of his contention. The learned DR, on the other hand, relied on the order of the authorities below.
16 We have considered the rival submissions and perused the material on record. We restore the matter to the file of the AO for carrying out necessary verification. If the credit entries in the names of these two persons are old existing in Unit-I, and have been transferred by the assessee directly from bank account of Unit-I to the bank account of Unit-II, no further action is called for and no addition should be made. But where money has gone back to the creditors and then again received back from the creditors in Unit-II, then necessary inquiry as contemplated u/s 68 should be carried out. As a result, this ground is allowed for statistical purpose.
The appeal filed by the assessee is partly allowed and partly allowed for statistical purpose.
11 ITA No.09/Ahd/2009:17 This is an appeal filed by the assessee raising the following grounds of appeal:
1 The Learned CIT(A) erred in law as well as on facts in not allowing deduction u/s 80IB of the Income-Tax Act, 1961, on consideration of the facts of the case in totality.
2 The Learned CIT(A) erred in law as well as on facts while upholding the addition of Rs.46,000/- as capital introduced by partners from in genuine sources inspite of substantive evidences produced by the appellant.
3 The Learned CIT(A) erred in law and on facts in sustaining addition for an amount ofRs.36,841/- on the belief that the same amount of sales has not been offered as against TDS on the same has been claimed. He has relied merely on the remand report of the AO.
4 The Learned CIT(A) erred in law and on facts in not allowing deduction u/s 80IB on scrap sales of Rs.99,476/-.
5 The Learned CIT(A) erred in law and on facts in not allowing deduction u/s 80IB on the additions made.
18 The first issue relates to not allowing deduction u/s 80IB on the ground that the assessee-firm did not have more than ten employees even though it is running with aid of power. In support of his contention, the assessee sought to produce Wages Register before the CIT(A). The AO objected to it and hence the CIT(A) refused to admit the same.
1219 Before us, the learned AR submitted that the Wages Register is a crucial evidence and in the interest of justice, the CIT(A) should have admitted it so as to decide whether the assessee had more than ten employees.
20 After hearing both the parties, we restore this matter to the file of the CIT(A) with the direction that he would admit the Wages Register and examine whether the assessee had requisite number of employees and then decide the issue afresh on claim of deduction u/s 80IB. Thus, this ground of appeal is allowed for statistical purpose.
21 Ground No.2 relates to the addition in respect of introduction of capital of Rs.46,000/- by the partners. In this case also the partners have admitted to have introduced capital, through banking channels and, therefore, the firm is not required to explain the source of this money. Following our decision in AY 2001-02, we delete the addition. This ground of appeal is allowed.
22 Ground No.3 is not pressed and hence it is rejected.
23 Ground No.4 relates to deduction u/s 80IB on scrap sales. It is undisputed fact that scrap is generated during the course of manufacturing of corrugated boxes and have same constituents as material composing final product. Following our decision in the AY 2001-02 in the Departmental appeal, we allow the claim of the assessee. As a result, the appeal of the assessee is partly allowed and partly allowed for statistical purpose.
1324 In the result -
1 The appeal filed by the Revenue is partly allowed for statistical purpose.
2 The appeal filed by the assessee for AY 2001-02 is partly allowed and partly allowed for statistical purpose.
3 The appeal filed by the assessee for AY 2005-06 is partly allowed and partly allowed for statistical purpose.
Order pronounced in the open court today on 31-12-2009 Sd/- Sd/-
(T K SHARMA) (D C AGRAWAL)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date : 31-12-2009
Copy of the order forwarded to :
1. M/s Ajay Packaging, Survey No.54/7C, 52/3C Daman Industrial Estate, Kadaiya, Daman
2. The ITO Vapi Ward-4, Daman
3. CIT concerned
4. CIT(A), Valsad
5. The DR, ITAT, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABA 14