2013 (1) TMI 540 - AT - Income Tax

Appeal outcome: Partial win for Revenue in deduction under Section 10B, exclusion of interest income upheld for Section 80HHC.

DEPUTY COMMISSIONER OF INCOME TAX. CIRCLE-4. BARODA Versus M/s TYCO VALVES & CONTROL INDIA PVT LTD.

The Revenue's appeal for A.Y. 2003-04 was partly allowed for statistical purposes, confirming the deduction under Section 10B for the assessee's Chennai ... Deduction u/s.10B - disallowed the claim for the Chennai Unit as section 10B requires that the industrial unit should not be formed by the transfer of previously used machinery - Held that:- The start point of the limitation for claiming the benefit flowing from section 10B would commence from the year of manufacture or production of the undertaking. If the conditions prescribed in the section are not satisfied in the year of commencement of production, it would not be able to claim such deduction in the subsequent years, unless the said initial test on the date of the starting point has been satisfied. Section 10B therefore do not give any indication that in each year of claim it’s eligibility should be newly established, because the relevance of the phrase “newly established undertaking” is only to identify initial year of period for which assessee is eligible for claim of exemption u/s.10B. Thus on examination of the facts recorded by the AO, it was noticed that the Chennai Unit was established/ acquired in the year 2000-01. Due to this reason, reliance can be placed on Saurashtra Cement & Chemical Industries(1979 (2) TMI 21 - GUJARAT HIGH COURT) and thus to hold that in the absence of any disturbance in respect of relief granted in initial year, there was no legal justification to disturb the continuous deduction of section 10B in any of the subsequent assessment year. Although it is possible, as in the present case, that in any of the subsequent years the assessee had acquired new plant & machinery, may be of substantial value, as also may be increase the turnover or efficiency, nonetheless the act subscribes that the undertaking must not be formed by the splitting up or the reconstruction of a business already in existence. Therefore, the initial year is the year to establish the eligibility of the claim - it was not evident from the records that the transaction relating to the machinery constituted outright sale thus hereby hold that the AO has wrongly presumed that the transaction in question was a purchase of machinery by Chennai Unit - rejection of deduction u/s.10B was bad in law - in favour of assessee. Deduction u/s.10B - CIT(A) allowed claim observing the activities carried on by the assessee were manufacturing - revenue contested against as it was engaged in polishing the valves - Held that:- The petitioner has shown various manufacturing steps which the raw castings have to undergo [viz.Turning, boring, milling, radial drillings and boring, deburning, etc.]. He purchased raw valves and thereafter put them under the aforesaid process. Therefore, after processing that raw valves, that becomes altogether a new product, which is distinct from raw casting and is commercially marketable, and that comes under the manufacturing activity. See CIT v/s. Perfect Liners [1979 (1) TMI 4 - MADRAS HIGH COURT] - As decided in CIT v. M.R. Gopal [1965 (7) TMI 40 - Madras High Court] the word “manufacture” has to be understood in a wide sense - in favour of assessee. Computation of deduction u/s.80HHC - addition of interest on deposit with banks - Held that:- interest only constitutes income and it can never be part or equivalent to turnover. Further it is assessable under the head income from other sources and in no case it will form part of computation mechanism as provided under section 80HHC unless it is held as business income and if it is so then 90% thereof would be required to be excluded. See CIT vs. Delhi Brass & Metal Works [2008 (11) TMI 42 - HIGH COURT DELHI] - in favour of assessee. Addition of Bogus payment - disalloance of Commission payment - Held that:- As the payments were made to independent unrelated parties made to procure the business as supported by details of the commission agents and the details of the TDS payments no bogus payment is to be concluded - AO had not examined the commission agents as certain basic information about the payment of commission was very much part of the record as also had been enquired by the Auditor, hence very much part of the assessment record. Without any investigation AO has wrongly disallowed claim - in favour of assessee. Ad-hoc disallowance - Held that:- Since most of these expenses are incurred on cash basis and incurred for snacks, food and hotel expenses etc. Various gift items were also purchased for different persons including guest. Since the business purpose of these expenses cannot be fully verifiable part disallowance is justified. However looking to the quantum of expense 10% disallowance is on higher side. I restrict the same to ₹ 1 lac. The balance disallowance of ₹ 5,70,800/- is deleted - partly in favour of assessee. Issues Involved:1. Deduction under Section 10B of the Income Tax Act.2. Inclusion of interest income in total turnover for Section 80HHC deduction.3. Disallowance of commission expenses.4. Ad-hoc disallowance of miscellaneous expenses.Detailed Analysis:1. Deduction under Section 10B of the Income Tax Act:- Background: The Revenue's appeal for A.Y. 2003-04 concerns the deduction claimed by the assessee under Section 10B for its Chennai Unit. The AO disallowed the claim, asserting that more than 20% of the plant and machinery consisted of previously used machinery, contrary to Section 10B requirements.- Tribunal's Findings: The Tribunal noted that the Chennai Unit was established in F.Y. 1998-99, and the machinery was acquired in 1996. The AO's assertion that the machinery was an outright purchase was based on the assessment of an associate concern, Sakhi Raimondi Valves (India) Ltd. However, the CIT(A) found no evidence to support this and concluded it was a lease transaction.- Legal Precedent: The Tribunal referenced the Gujarat High Court's decision, which upheld the assessee's eligibility for Section 10B deduction in earlier years, stating that once allowed, the deduction should not be denied in subsequent years without new material evidence.- Conclusion: The Tribunal confirmed the CIT(A)'s findings, allowing the deduction under Section 10B for the assessee, as the transaction was a lease and not an outright purchase.2. Inclusion of Interest Income in Total Turnover for Section 80HHC Deduction:- Background: The AO included interest income in the total turnover for computing Section 80HHC deduction, which reduced the deduction amount.- Tribunal's Findings: The Tribunal, referencing previous decisions, held that interest income should not be included in total turnover as it is assessable under 'income from other sources' and not business income.- Conclusion: The Tribunal affirmed the CIT(A)'s decision to exclude interest income from the total turnover for Section 80HHC computation.3. Disallowance of Commission Expenses:- Background: The AO disallowed commission expenses claimed by the assessee, questioning their legitimacy.- Tribunal's Findings: The CIT(A) found that the payments were made to independent parties and were necessary for business procurement. The details of commission agents and TDS payments were provided, and the AO did not find the payments to be bogus.- Conclusion: The Tribunal upheld the CIT(A)'s decision, allowing the commission expenses as legitimate business expenses.4. Ad-hoc Disallowance of Miscellaneous Expenses:- Background: The CIT(A) made an ad-hoc disallowance of Rs. 1,00,000 out of miscellaneous expenses, which the assessee contested.- Tribunal's Findings: The CIT(A) justified the disallowance due to the unverifiable nature of cash expenses for snacks, food, and gifts.- Conclusion: The Tribunal found no error in the CIT(A)'s decision and confirmed the ad-hoc disallowance.Summary of Results:- Revenue's Appeal for A.Y. 2003-04 (ITA No.2981/Ahd/2008): Partly allowed for statistical purposes.- Revenue's Appeal for A.Y. 2004-05 (ITA No.322/Ahd/2009): Dismissed.- Assessee's Cross Objection (CO No.44/Ahd/2009): Dismissed.