2013 (7) TMI 353 - AT - Income Tax

Tribunal Allows Deduction for Manufacturing Firm, Adjusts Disallowances

The Tribunal allowed the deduction under Section 80IB for a partnership firm engaged in manufacturing a new product, overturning the AO and CIT(A)'s ... Deduction u/s 80IB - disallowance on the ground that conversion of raw material in the therapeutic food does not amounts to manufacture - Held that:- As in the present case various raw materials are subject to various stages of processing like roasting, grinding, mixing, blending, etc through a skilled labours and machines in a proper proposition and ratio. The ultimate product which comes into existence is a therapeutic food, which is a new product, definitely separate and distinct from the raw materials. It has a different characteristics altogether and commercially also it is no longer regarded as original commodity. This therapeutic food cannot be reversibly changed to original form once again. The department in the earlier years all throughout has accepted that the assessee is engaged in manufacturing of therapeutic food and allowed the claim for deduction u/s 80IB. Even though principle of res judicata does not apply to the Income Tax proceedings, however, if the same facts are permeating in all the years which has been accepted by both the parties, the same cannot be disturbed or a contrary view can be taken without any change in the facts and circumstances or change in the law, thus assessee is entitled for deduction u/s 80IA as the same has been allowed in the earlier assessment years. In favour of assessee. Protective addition - Held that:- Computation of deduction u/s 80IB as made by the assessee is wholly erroneous in so far as, while computing the net income for the purpose of deduction u/s 80IB, the assessee has removed the interest paid on partners capital which has resulted into enhancement of profit. This working is wrong as the profit of the firm is always worked out after the interest and remuneration paid to the partner, which is an outgoing expense while computing the net profit of a partnership firm. Thus, the addition of Rs. 5,66,185/-, though made on protective basis by the AO stands confirmed. Since already held above, that the assessee is liable for claim for deduction under Section 80IB, therefore, this addition would be on substantive basis. Thus the ground raised by the assessee is dismissed. Disallowance u/s 40(a)(ia) - outward freight charges paid to different drivers - Held that:- The entire details for the payments made to the various truck drivers as claimed by the assessee has not been furnished. If the assessee has claimed that firstly, there is no privity of contract with the individual truck drivers which have been engaged on random basis and secondly, no payment has been made exceeding 50,000/-, then these aspects need to be proven by the assessee and proper scrutiny and examination is to be carried out to establish that the assessee has made the payments to individual truck drivers who had transported the goods on random basis without any privity of contract. The onus is wholly upon the assessee- thus set aside this issue to the file of the AO to decide the issue afresh - in favour of assessee for statistical purposes. Disallowance of 10% of labour charges paid to different contractors - Held that:- The payments made to the different parties have been made through account payee cheques and nothing has been brought on record that these payments are excessive looking to the fair market rate. Looking to fact that there are certain payments which are not open to full verification, therefore disallowance is to be restricted to 5% - treated as partly allowed. Charging and levy of interest u/s 234B - assessee submitted that entire sale made have been subjected to TDS, therefore, no interest under 234B could have been levied - Held that:- AO is directed to examine the details of TDS and in case if it is found that TDS has been deducted on all the receipts/sales, then interest under Section 234B cannot be levied - treated as allowed subject to verification done by the AO. Issues Involved:1. Disallowance of claim under Section 80IB.2. Protective addition of Rs. 5,66,185/-.3. Disallowance under Section 40(a)(ia) on account of outward freight charges.4. Disallowance of 10% of Rs. 85,75,907/- on account of labour charges.5. Charging and levy of interest under Section 234B.Issue-wise Detailed Analysis:1. Disallowance of Claim under Section 80IB:The assessee, a partnership firm registered as a Small Scale Industry, claimed a deduction under Section 80IB for Rs. 15,75,000/- for converting raw food materials into therapeutic food. The Assessing Officer (AO) disallowed the claim, arguing that the process did not result in a new and distinct product with different chemical properties. The AO relied on various judicial pronouncements, including the Supreme Court's decision in Indian Hotels Company Ltd. vs. ITO, to support the disallowance. The CIT(A) upheld the AO's decision, stating that no new commodity with a different character was produced. However, the Tribunal noted that the assessee had been allowed the deduction in previous years under scrutiny proceedings and held that the assessee was engaged in manufacturing a new product. Consequently, the Tribunal set aside the CIT(A)'s view and allowed the deduction under Section 80IB.2. Protective Addition of Rs. 5,66,185/-:The AO made a protective addition of Rs. 5,66,185/-, arguing that if the disallowance under Section 80IB did not stand, the interest on the partner's capital account should be added back to the income. The CIT(A) confirmed this addition. The Tribunal found that the assessee's method of computing the deduction under Section 80IB was erroneous as it excluded interest paid on partners' capital, which inflated the profit. The Tribunal confirmed the addition on a substantive basis since the assessee's claim for deduction under Section 80IB was allowed.3. Disallowance under Section 40(a)(ia) on Account of Outward Freight Charges:The AO disallowed Rs. 97,80,755/- under Section 40(a)(ia) for non-deduction of TDS on outward freight charges. The assessee argued that payments to individual truck drivers did not exceed Rs. 50,000/- and were made on a random basis without any privity of contract. The CIT(A) upheld the disallowance, noting that payments exceeding the specified amount were made to truck numbers listed in the books. The Tribunal remanded the issue back to the AO for fresh examination, directing the assessee to provide relevant details to prove that payments were made to individual truck drivers without any privity of contract.4. Disallowance of 10% of Rs. 85,75,907/- on Account of Labour Charges:The AO disallowed 25% of payments made to labour contractors, who were relatives of the partners, under Section 40A(2)(b), considering them excessive. The CIT(A) reduced the disallowance to 10%. The Tribunal found that while payments were made through cheques, there were discrepancies and shortfalls in details provided by the assessee. The Tribunal restricted the disallowance to 5%, reducing the addition to Rs. 4,27,895/-.5. Charging and Levy of Interest under Section 234B:The assessee contended that no interest under Section 234B should be levied as all sales were subjected to TDS. The Tribunal directed the AO to verify the details of TDS and, if found correct, to not levy interest under Section 234B.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, setting aside some issues for fresh examination and modifying the disallowance percentages in others. The order was pronounced in open Court on 30th April 2013.