Court allows deduction under section 80IB in appeal on assessment reopening issue.

The appeal involved issues of reopening of assessment and disallowance of deduction under section 80IB of the Income Tax Act, 1961. The court dismissed the reopening of assessment ground as it was not pressed. Regarding the disallowance of deduction under section 80IB, the court found that the assessee fulfilled all conditions for the deduction, including employing the required number of workers. The court accepted the assessee's appeal, directing the deduction under section 80IB to be granted as claimed.

---

---

Issues Involved:
1. Reopening of the assessment.
2. Disallowance of deduction u/s 80IB of the I.T. Act, 1961.

Summary:

Reopening of the Assessment:

At the very outset, Ld.Counsel for the assessee did not press the first ground in relation to re-assessment proceedings and by making endorsement against this ground in the memorandum of appeal to the effect that the ground is "not pressed", it was pleaded for dismissal of this ground. Since this ground has not been pressed, the same is dismissed as not pressed.

Disallowance of Deduction u/s 80IB:

The Assessing Officer noticed that the assessee reduced its income by Rs. 57,25,080/- claiming the amount as expenditure u/s 80I of the Act. There is no provision for allowing expenses u/s 80I against the income of the assessee. Further, the audit report in form 3CD mentioned that the deduction admissible under chapter VIA was 'Nil'. The assessee did not claim any deduction u/s 80I in its return of income filed in form 2D for assessment year 2002-03. Therefore, the Assessing Officer had reason to believe that income had escaped assessment to the extent of Rs. 57,25,080/-. A notice u/s 148 was issued to the assessee on 11.05.2006 and subsequently notices u/s 142(1) and 143 were issued.

The Assessing Officer completed the assessment u/s 147/143(3) vide order dated 28.12.2007, disallowing the claim of deduction u/s 80I amounting to Rs. 57,25,080/-.

The assessee appealed, arguing that only one portion of the manufacturing process was outsourced to M.J. Enterprises Ltd. under the appellant's control and supervision, while other processes were undertaken by the appellant at its rented factory premises. The job work of corrugation of kraft paper was outsourced because M.J. Enterprises Ltd. had the machines and surplus capacity. The appellant argued that outsourcing part of the manufacturing process does not disqualify the claim for deduction u/s 80IB.

However, CIT(A) observed that one of the conditions for allowance of deduction u/s 80I is that an assessee must employ 10 or more workers in a manufacturing process carried on with the aid of power, or employ 20 or more workers without the aid of power. The appellant had employed only 4 workers and argued that 8 workers were hired from M.J. Global Ltd., a sister concern. CIT(A) concluded that the appellant did not meet the required conditions for deduction u/s 80I, as the manufacturing done by the appellant was negligible and the number of workers employed was less than 10.

Still aggrieved, the assessee appealed further, reiterating the submissions made before lower authorities and providing various documents to support the claim for deduction u/s 80I. The assessee argued that all conditions for deduction u/s 80IB were fulfilled, including employing 10 or more workers, as contract labour also qualifies for deduction. The assessee cited the decision of Hon'ble Gujarat High Court in the case of CIT vs. Prithviraj Bhoorchand, 280 ITR 94, which held that workers engaged on a contract labour basis are considered employees for the purposes of section 80-I.

After considering the facts, material on record, and relevant precedents, it was concluded that the assessee fulfilled all conditions for deduction u/s 80IB. The action of the authorities below in not allowing the claim of the assessee u/s 80IB was deemed unwarranted. The appeal of the assessee was accepted, and the deduction u/s 80IB was directed to be granted as claimed by the assessee.

Order pronounced in open court on 17.12.2012.

---