2013 (9) TMI 1146 - AT - Income Tax

Appeal partly allowed: Assessee wins on income exclusion, remitted for fresh adjudication.

Donear Industries Ltd. Versus Asst. Commissioner of Income Tax- 8 (1), Aayakar Bhavan, Mumbai

The appeal was partly allowed, with issues 1 and 2 decided in favor of the assessee regarding the exclusion of income from scrap sale and processing ... Eligible income for allowance of deduction under section 80 IB - Held that:- Scrap generation was part of manufactu - ring activity of the industrial undertaking run by the assessee.Therefore, reversing the order of the FAA,we decide ground in favour of the assessee. Exclusion of the income from the 80IB deduction on the ground that it was apportionable to the payment of processing charges - Held that:- As decided in assessee's own case for the AY 2007-08 Job-work got done under own, supervision of the assessee can be considered to,be a part of the manufacturing process of the assessee and in this vies of matte, dyeing and printing although got done as job-work can ‘qualify as manufacturing process. Thus we decide ground in favour of the assessee. Disallowance of interest u/s.36 (l)(iii) on the ground that the same should be considered as relatable to acquisition of capital assets - Held that:- We find that share capital,reserves and surplus as well as work-in-progress for the AY under consideration had gone up drastically as compared to the figures of the last AY.We also find that there was decrease in loan payment by the assessee.While deciding the issue against the assessee these vital factors were not considered by the AO/FAA.But,it is also a fact that the assessee had not filed required details before the departmental authorities.Therefore,we are of the opinion that matter needs further veri -fication.So,in the interest of justice matter is remitted back to the file of the AO for fresh adjudication of the issue in question.He is directed to afford a reasonable opportunity of hearing to the assessee. Disallowance under section 14A r.w.Rule 8D - Held that:- Provision of Rule 8D of the Rules are not applicable for the year under consideration.But,it is also a fact that the Hon’ble High Court has in the case of Godrej and Boyce Mfg. Co. Ltd. [2010 (8) TMI 77 - BOMBAY HIGH COURT ] has held that a reasonable disallowance could be made after considering the facts of the case concerned.In our opinion, in the interest of justice matter should be remitted back to the file of the AO for fresh adjudication. Issues Involved:1. Exclusion of Rs. 7,36,938/- from the sale of scrap for deduction under section 80 IB.2. Exclusion of Rs. 5,91,70,507/- as income apportionable to processing charges for deduction under section 80 IB.3. Disallowance of interest of Rs. 21,15,000/- under section 36(1)(iii) related to the acquisition of capital assets.4. Addition of Rs. 4,37,665/- by invoking Rule 8D under section 14A for the assessment year.Detailed Analysis:1. Exclusion of Rs. 7,36,938/- from the sale of scrap for deduction under section 80 IB:The assessee-company included the income from the sale of scrap in its deduction claim under section 80 IB. The Assessing Officer (AO) excluded this income, relying on judgments from the Supreme Court and Madras High Court in the case of Pandian Chemicals, which held that scrap sale income was not eligible for deduction under section 80 IB. The First Appeal Authority (FAA) upheld the AO's decision, stating that the income from the sale of scrap was not derived from manufacturing activity. However, the Tribunal found that sections 80HH and 80IB are materially different and that for section 80IB, a direct nexus between the industrial activity and profits is not a pre-condition. Citing the Delhi High Court judgment in Sadhu Forging Ltd., the Tribunal held that scrap generation is part of the manufacturing activity, thus reversing the FAA's order and deciding in favor of the assessee.2. Exclusion of Rs. 5,91,70,507/- as income apportionable to processing charges for deduction under section 80 IB:The AO excluded the income earned from job work under processing charges from the deduction under section 80 IB, citing the Supreme Court's decision in K. Ravindranathan Nair, which dealt with section 80HHC. The FAA upheld this exclusion. However, the Tribunal noted that in previous years, similar issues were decided in favor of the assessee by the Tribunal. The Tribunal referred to its own earlier orders and concluded that job work done under the assessee's supervision qualifies as manufacturing activity. Therefore, the Tribunal reversed the FAA's order and decided this issue in favor of the assessee.3. Disallowance of interest of Rs. 21,15,000/- under section 36(1)(iii) related to the acquisition of capital assets:The AO disallowed the interest expense, stating that the interest-bearing funds were used for capital work in progress and that the assessee failed to prove otherwise. The FAA upheld the AO's decision, emphasizing the lack of evidence provided by the assessee. The Tribunal observed significant increases in share capital, reserves, and work-in-progress, along with a decrease in loan payments, which were not considered by the AO/FAA. However, due to the absence of required details from the assessee, the Tribunal remitted the matter back to the AO for fresh adjudication, directing the AO to provide a reasonable opportunity for the assessee to present evidence.4. Addition of Rs. 4,37,665/- by invoking Rule 8D under section 14A for the assessment year:The AO applied Rule 8D to disallow expenses related to tax-exempt dividend income. The FAA upheld this disallowance. The Tribunal noted that the Special Bench decision in Daga Capital Management, which the AO and FAA relied on, was reversed by the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd., which held that Rule 8D was not applicable for the relevant assessment year. However, a reasonable disallowance could still be made. Consequently, the Tribunal remitted the matter back to the AO for fresh adjudication, directing the AO to make a reasonable disallowance after considering the facts and hearing the assessee.Conclusion:The appeal was partly allowed, with issues 1 and 2 decided in favor of the assessee, and issues 3 and 4 remitted back to the AO for fresh adjudication. The Tribunal directed the AO to provide a reasonable opportunity for the assessee to present evidence. The order was pronounced in the open court on 6th September 2013.