2012 (11) TMI 982 - HC - Income Tax

Court Upholds Tribunal Decision Allowing Deduction for Manufacturing Activity

The court upheld the Income Tax Appellate Tribunal's decision allowing deduction under section 80IA, finding the activity constituted manufacturing. The ... Deduction u/s.80IA – small scale industrial undertaking – Held that:- In the case of Prabhudas Kishoredas Tobacco Products Private Limited. (2006 (1) TMI 68 - GUJARAT HIGH COURT ) it was hold that the use of tobacco which was used in the input do not retain its identity once the beedies are rolled and in relation to the assessee's status as unit of small scale industrial undertaking, the Court decided the issue in assessee's favour by holding that while ascertaining the monetary limit laid down in the provision, all assets of business be not taken into consideration, upholding the version of the Tribunal treating the activity carried out by the assessee amounting to manufacture of beedi. - In favor of assessee Disallowance u/s.40A(2)(b) - Alleged that interest paid to the persons at the rate of 22% excessive and unreasonable – Held that:- Amount is borrowed in earlier years at a stipulated rate of interest and which is still utilized for the purpose of business, the interest rate could not have been renegotiated. Even the lending rate by banks in respect of secured loan is as high as 19.5%. Therefore, rate of interest, paid by the assessee is quite reasonable - Since the rate of interest paid by the assessee is reasonable disallowance deleted Issues:1. Deduction under section 80IA challenged by Revenue2. Disallowance under section 40A(2)(b) challenged by assesseeIssue 1: Deduction under section 80IAThe Revenue challenged the order of the Income Tax Appellate Tribunal regarding the deduction under section 80IA. The Assessing Officer disallowed the deduction claimed by the assessee on the grounds that the company had already started production before the insertion of section 80IA and did not provide evidence of a new industrial undertaking producing permissible articles. The CIT(Appeals) set aside the Assessing Officer's order based on a previous decision in favor of the assessee. The Tribunal upheld the CIT(Appeals) decision, citing a previous court ruling that the activity carried out by the assessee amounted to the manufacture of beedi. The Tribunal's decision was based on the court's judgment, and as no new evidence was presented, the issue did not require further consideration.Issue 2: Disallowance under section 40A(2)(b)The second issue involved the disallowance of Rs.77,09,880 under section 40A(2)(b) of the Income Tax Act. The Assessing Officer disallowed the interest paid by the assessee at 22% as excessive and unreasonable. The CIT(Appeals) did not sustain this disallowance, noting that the loans were taken for business purposes, had not been doubted by the Assessing Officer, and the interest rate had been consistent for the past 10 years. The Tribunal upheld the CIT(Appeals) decision, emphasizing that the loans were borrowed for business purposes since earlier assessment years and no disallowance had been made in the past. The Tribunal found the rate of interest paid by the assessee to be reasonable, considering the nature of the loans and the overall business operations. As the issue was factual and the Tribunal's reasoning was sound without any legal errors, the Tax Appeal was dismissed.---