2001 (7) TMI 109 - HC - Income Tax

Audit reports and new manufacturing unit setup on leased land: s. 80HH deduction and s. 54D relief allowed

Failure to enclose the audit report with the return was held not to bar deduction under s. 80HH where the audit report is furnished before completion of ... Entitlement to benefit u/s 80HH - Capital Gains - Exemption - Special Deduction - Furnishing of Audit Report - activity of decortication of groundnuts was an industrial undertaking engaged in manufacture or production activity - benefit of section 54D - sale of land as corresponding asset of land - HELD THAT:- Mere fact that the assessee failed to enclose the audit report along with the return itself would not disentitle him to claim the benefit, and, on the other hand, if he files the audit report before the assessment order is passed, he will be entitled to the deduction. Admittedly, in this case, the petitioner filed the audit report before conclusion of the assessment proceedings for the assessment years 1981-82 and 1984-85. As regards the assessment year 1979-80 also, it was filed in the reassessment proceedings in response to the show-cause notice under section 148 of the Act. The relief under section 54D of the Act is disallowed mainly on the ground that in establishing the factory at Kadiri, the capital from Anantapur factory has been diverted. Even according to the Department, no machinery from the Anantapur factory has been transferred to the Kadiri factory and the Kadiri factory was constructed on a land secured on lease and new machineries have been erected thereon. The Tribunal on appreciation of the facts recorded the finding that the Kadiri factory is an independent factory and it is not a reconstruction of the existing unit. Admittedly, the assessee has set up an industrial undertaking at Gooty by investing a sum on a land secured by it on lease during the assessment years 1985-84 and 1986-87. Therefore, the reason given by the Department to deny the benefit under section 54D that the assessee has not purchased the land at Gooty for establishing the factory is untenable. The finding recorded by the Tribunal that the factory set up at Gooty is a new factory is based on acceptable evidences The Tribunal is the final fact-finding authority and the factual findings recorded by it cannot lightly be interfered with unless in a given case they are shown to be perverse and based on 'no evidence'. In the result and for the foregoing reasons, we answer the questions against the Revenue and in favour of the assessee. Issues Involved:1. Whether decortication of groundnuts constitutes a manufacturing activity eligible for benefits u/s 80HH.2. Whether the claim u/s 80HH is valid despite not being made in Form No. 10C.3. Whether an industrial undertaking must be engaged in manufacturing for benefits u/s 54D.4. Whether the benefit u/s 54D is applicable for the sale of land when the corresponding asset was not acquired as required.Summary:Issue 1: Decortication of Groundnuts as Manufacturing Activity u/s 80HHThe Tribunal held that decortication of groundnuts into kernels constitutes a manufacturing activity, relying on precedents such as Omkarmal Agarwal v. CIT, CIT v. M. R. Gopal, and Ganesh Trading Co. v. State of Haryana. The court affirmed this view, stating that the process results in the groundnuts losing their original identity in commercial parlance, thus qualifying as a manufacturing activity.Issue 2: Claim Validity u/s 80HH Without Form No. 10CThe Tribunal opined that the requirement to file an audit report with the return is directory, not mandatory, and a curable defect if the report is filed before the assessment order. The court upheld this view, referencing the judgment in Addl. CIT v. Murlidhar Mathura Prasad, and noted that the audit report was filed before the conclusion of the assessment proceedings.Issue 3: Industrial Undertaking Requirement for Section 54DThe Tribunal found that for the purpose of section 54D, it is not necessary for an industrial undertaking to be engaged in manufacturing or production. The court agreed, emphasizing that section 54D should be construed liberally and that the term 'industrial undertaking' should be understood in a broad sense, encompassing any business activity.Issue 4: Applicability of Section 54D for Sale of LandThe Tribunal concluded that the new factory set up at Gooty was an independent entity and not a reconstruction of the existing unit. The court upheld this finding, noting that the assessee had invested in setting up a new industrial undertaking within the stipulated period, thus qualifying for the benefit u/s 54D despite the land being leased and not purchased.Conclusion:The court answered all questions against the Revenue and in favor of the assessee, affirming the Tribunal's findings on all issues.