2012 (7) TMI 188 - AT - Income Tax

Separate units deemed independent for s.80IB; excise refund non-taxable; depreciation allowed; s.43B PF deductible; s.234B interest waived; EOU loss set-off

ITAT AMRITSAR allowed the appeal. It held separate units constituted independent industrial undertakings for deduction under s.80IB despite common ... Deduction under section 80IB - requirement of a separate and independent industrial undertaking - Expansion or capacity augmentation does not ipso facto preclude recognition as a new industrial undertaking - Separate statutory registrations are not a pre condition for claiming deduction under section 80IB - Admissibility of survey statements under section 133A - no evidentiary value for substantive findings - Excise duty refund - characterization as capital receipt - Processing, preservation and packaging for deduction under section 80IB(11A) - Depreciation - classification of expenditure as plant and machinery v. building for rate application - Employees' provident fund contribution - allowability in view of authoritative precedent - Interest under section 234B - waiver by administrative instruction binding the Assessing Officer - Set off of loss of a 100% EOU against profits of other undertakings - entitlement subject to verificationDeduction under section 80IB - requirement of a separate and independent industrial undertaking - Expansion or capacity augmentation does not ipso facto preclude recognition as a new industrial undertaking - Separate statutory registrations are not a pre condition for claiming deduction under section 80IB - Admissibility of survey statements under section 133A - no evidentiary value for substantive findings - Disallowance of deduction claimed u/s 80IB amounting to Rs.7,01,56,903 (Unit 2 and Unit 3) - whether units are separate and eligible - HELD THAT: - Tribunal examined whether Unit 2 and Unit 3 constituted independent industrial undertakings for claim of deduction under section 80IB. It applied established tests (investment of substantial fresh capital, requisite labour, independent production and identifiable profits) and judicial precedents holding that expansion or proximity does not automatically negate separate undertakings. The assessee proved fresh investment in building and plant & machinery, separate production records and separate unit wise profit & loss accounts which were not rejected by the AO. The Tribunal held that statutory registrations being common and common ancillary facilities do not by themselves disqualify the claim; replies from excise and other authorities about consolidated registration did not mandate denial where the statutory scheme for section 80IB does not require separate registrations for co located units. Further, material obtained by post assessment survey under section 133A has no evidentiary value to overturn the claim. In view of these findings and in reliance on binding and persuasive authorities, the Tribunal concluded that the deduction wrongly denied in the assessment year should be restored.Disallowance of Rs.7,01,56,903 under section 80IB deleted; claim of deduction for Unit 2 and Unit 3 upheld.Excise duty refund - characterization as capital receipt - Taxability of excise duty refund and its treatment for purposes of deduction under section 80IB - HELD THAT: - Tribunal followed the decision of the jurisdictional High Court holding that excise duty refund is a capital receipt and not exigible to tax. On that basis the refund in issue was held not to be includible as income and the corresponding disallowance sustained by AO/CIT(A) was set aside.Refund of excise duty treated as capital receipt; disallowance of claim relating to excise duty refund deleted.Processing, preservation and packaging for deduction under section 80IB(11A) - Eligibility of Controlled Atmospheric (CA) Stores activity at Srinagar for deduction u/s 80IB(11A) - HELD THAT: - Tribunal analysed whether the CA Stores carried out 'processing' (in conjunction with preservation and packaging) as required by section 80IB(11A). On the material before it the Tribunal found no clear change effected in the fruits by the CA Stores that would amount to processing; technical material placed by Revenue warranted consideration. Given technical questions of the nature and extent of operations and the absence of full appreciation of that material below, the Tribunal did not decide the merits on record but directed reassessment/re adjudication by the AO with opportunity to the assessee to address the technical aspects.Issue set aside to the file of the AO for re adjudication with directions to consider technical material and afford opportunity to the assessee (remanded).Allowability of business travel expenses - requirement of proof of business nexus - Disallowance of directors' foreign travel expenses of Rs.8,88,046 - extent of allowance - HELD THAT: - AO disallowed the expenditure for lack of evidence of business purpose. Tribunal noted the assessee conceded a portion and failed to substantiate certain items; considering export/import nature of business and the volume of remaining expenditure the Tribunal allowed 35% of the balance expenses as reasonable business expenditure while confirming disallowance of the specifically conceded amount.Partly allowed - specified amount confirmed disallowed; 35% of the remaining expenses allowed.Depreciation - classification of expenditure as plant and machinery v. building for rate application - Disallowance of depreciation claim (mezzanine/erection material) on ground that amount was building not plant - HELD THAT: - Tribunal found on the material that the contested expenditure related to mezzanine and erection material integral to plant and machinery and not part of building. As such the higher depreciation rate applicable to plant & machinery should apply and the AO's lower rate adjustment was reversed.Disallowance reversed; depreciation as claimed on plant & machinery allowed.Employees' provident fund contribution - allowability in view of authoritative precedent - Whether employees' contribution to provident fund paid by employer is deductible - HELD THAT: - Tribunal applied the Supreme Court precedent cited by parties and held that the employees' contribution paid during the year is allowable deduction. The CIT(A)'s contrary view was reversed in accordance with authoritative ruling.Amount representing employees' provident fund contribution allowed as deduction.Interest under section 234B - waiver by administrative instruction binding the Assessing Officer - Levy of interest under section 234B in view of CBDT instruction/notification - HELD THAT: - Tribunal noted the CBDT Notification providing waiver of interest under section 234B for assessees resident and carrying on business in Kashmir Valley for the relevant period. Revenue conceded and the Tribunal held that interest could not be levied in conformity with the binding administrative instruction.Interest under section 234B deleted.Set off of loss of a 100% EOU - entitlement subject to verification - Admissibility of set off of loss of a 100% Export Oriented Undertaking against other income - HELD THAT: - Tribunal accepted in principle the legal proposition (as supported by High Court authority) that loss of an eligible unit such as a 100% EOU can be set off against profits of other undertakings where statute does not prohibit it. However, because the quantum of loss was raised for the first time before the Tribunal and had not been verified, the Tribunal admitted the ground but remitted the matter to the AO for verification of books and computation after affording the assessee opportunity of being heard.Additional ground admitted; claim of set off remitted to the AO for verification and decision.Final Conclusion: The appeal is partly allowed: the Tribunal deleted the disallowance of deduction under section 80IB for Unit 2 and Unit 3 (restoring the claimed deduction), held excise duty refund to be a capital receipt and deleted the related disallowance, allowed certain deductions (depreciation, employees' PF contribution, part of foreign travel expenses), and directed deletion of interest under section 234B in accordance with CBDT instruction; the claim under section 80IB(11A) (CA Stores) and the admitted additional ground for set off of 100% EOU loss were remitted to the Assessing Officer for fresh consideration with opportunity to the assessee. Issues Involved:1. Disallowance of deduction under section 80IB for Unit-2 and Unit-3.2. Disallowance of excise duty refund as capital receipt.3. Disallowance of deduction under section 80IB(11A) for Controlled Atmospheric Cold Storage Plant.4. Disallowance of Directors' foreign travel expenses.5. Disallowance of depreciation on construction material.6. Disallowance of employees' contribution to Provident Fund.7. Levy of interest under section 234B.8. Additional ground for set-off of loss from 100% Export Oriented Undertaking.Detailed Analysis:1. Disallowance of Deduction Under Section 80IB for Unit-2 and Unit-3:The assessee claimed deductions under section 80IB for Unit-2 and Unit-3, which were disallowed by the AO on the grounds that these units were not separate and independent undertakings but extensions of Unit-1. The AO based this on common registration, records, and facilities shared among the units. The CIT(A) upheld this disallowance.Tribunal's Findings:- The Tribunal found that the assessee had made substantial fresh investments in plant and machinery for both units.- The Tribunal noted that the assessee maintained separate production records and financial accounts for each unit.- The Tribunal held that there is no statutory requirement under section 80IB for separate registration or maintenance of separate records.- The Tribunal relied on various judicial precedents, including the Supreme Court's decision in Textile Machinery Corporation Ltd. v. CIT, to conclude that the units were independent and viable undertakings.- The Tribunal allowed the deduction under section 80IB for both Unit-2 and Unit-3.2. Disallowance of Excise Duty Refund as Capital Receipt:The AO disallowed the excise duty refund as a capital receipt, treating it as income attributable to the industrial undertaking.Tribunal's Findings:- The Tribunal relied on the jurisdictional High Court's decision in Shree Balaji Alloys v. CIT, which held that excise duty refund is a capital receipt and not liable to be taxed.- The Tribunal allowed the assessee's claim for the excise duty refund as a capital receipt.3. Disallowance of Deduction Under Section 80IB(11A) for Controlled Atmospheric Cold Storage Plant:The AO disallowed the deduction under section 80IB(11A) for the Controlled Atmospheric Cold Storage Plant, citing that the assessee was not involved in the processing of fruits, which is a requirement under the section.Tribunal's Findings:- The Tribunal observed that the AO and CIT(A) did not consider the technical aspects of the CA stores.- The Tribunal set aside the issue to the AO for re-adjudication, considering the technical material and provisions of law.4. Disallowance of Directors' Foreign Travel Expenses:The AO disallowed Rs. 8,88,046/- on account of Directors' foreign travel expenses, citing lack of evidence to substantiate the business purpose.Tribunal's Findings:- The Tribunal noted that the assessee failed to explain specific expenditure incurred by Mrs. Ruhi Tariq and Mr. M.S.T.- The Tribunal allowed 35% of the remaining expenses, considering the volume and genuineness of the expenditure.5. Disallowance of Depreciation on Construction Material:The AO reclassified expenses on construction material as part of the building and allowed depreciation at a lower rate.Tribunal's Findings:- The Tribunal found that the construction material was utilized for mezzanine floors, which are part of the plant and machinery.- The Tribunal directed the AO to allow depreciation as claimed by the assessee.6. Disallowance of Employees' Contribution to Provident Fund:The AO disallowed Rs. 42,123/- representing employees' contribution to Provident Fund.Tribunal's Findings:- The Tribunal relied on the Supreme Court's decision in CIT v. Alom Extrusions Ltd., which allows such contributions if paid during the year.- The Tribunal directed the AO to allow the claim.7. Levy of Interest Under Section 234B:The AO levied interest under section 234B.Tribunal's Findings:- The Tribunal referred to CBDT Notification No. 275/12/2007, which waives interest under section 234B for assessees in Kashmir.- The Tribunal directed the AO to delete the interest.8. Additional Ground for Set-off of Loss from 100% Export Oriented Undertaking:The assessee raised an additional ground for setting off the loss of Rs. 5,33,53,582/- from a 100% Export Oriented Undertaking.Tribunal's Findings:- The Tribunal admitted the additional ground and relied on the Bombay High Court's decision in CIT v. Galaxy Surfactants Ltd., which allows set-off of losses.- The Tribunal remanded the issue to the AO for verification and decision based on the books of account.Conclusion:The Tribunal allowed the appeal of the assessee on most grounds, directing the AO to allow deductions and set-offs as claimed, while remanding some issues for further verification. The Tribunal emphasized the importance of maintaining separate records and fulfilling statutory requirements for claiming deductions under section 80IB.