Statutory deduction eligibility turns on unit-wise facts; notional inter-unit adjustments and unsupported interest disallowance were rejected.

An industrial unit's eligibility for incentive deduction is determined on its own statutory facts: the Noida unit satisfied the SSI conditions for section 80IB, and buns were treated as bakery products rather than confectionery under the Eleventh Schedule. Reductions in section 80IC based on alleged inter-unit benefit and notional expenses were unwarranted because no evidence of transfer or specific defect in turnover-based allocation was shown, and job work profits remained eligible as industrial production. Interest disallowance under section 36(1)(iii) was deleted where interest-free funds covered the advances. Common head office expense allocation on turnover basis was also accepted.

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Issues: (i) Whether the Noida unit was a small-scale industrial undertaking eligible for deduction under section 80IB and whether buns manufactured by it fell within the prohibited category of confectionery under the Eleventh Schedule; (ii) Whether the reduction of deduction under section 80IC on the basis of alleged inter-unit benefit and notional expenses between the Tahliwal and Phillaur units was justified; (iii) Whether profits derived from job work charges were eligible for deduction under section 80IC; (iv) Whether the disallowance of interest under section 36(1)(iii) was sustainable in view of the assessee's own interest-free funds; (v) Whether the allocation of common head office expenses on turnover basis while computing deduction was liable to be disturbed.

Issue (i): Whether the Noida unit was a small-scale industrial undertaking eligible for deduction under section 80IB and whether buns manufactured by it fell within the prohibited category of confectionery under the Eleventh Schedule.

Analysis: Eligibility under section 80IB depended on the unit being regarded as a small-scale industrial undertaking under section 11B of the Industries (Development & Regulation) Act, 1951. The assessee possessed an SSI certificate valid for the relevant year, and the investment in qualifying plant and machinery, after excluding items not covered by the applicable notification, remained below the prescribed limit. The argument that all units of the assessee had to be clubbed for the investment test was not accepted on the applicable notification regime. On the manufacturing issue, buns were treated as bakery items and not as confectionery; the revenue did not dislodge the distinction relied upon by the assessee.

Conclusion: The Noida unit was held eligible for deduction under section 80IB, and buns were held not to be prohibited confectionery.

Issue (ii): Whether the reduction of deduction under section 80IC on the basis of alleged inter-unit benefit and notional expenses between the Tahliwal and Phillaur units was justified.

Analysis: The reduction was made on estimate without evidence of any transfer of goods or services between the two units. The assessee had allocated common expenses on a turnover basis, and no specific defect in that allocation was shown. In the absence of factual material supporting the invocation of sections 80IA(8) and 80IA(10), the notional adjustment was found unwarranted.

Conclusion: The reduction of deduction under section 80IC was deleted and the assessee's claim was allowed.

Issue (iii): Whether profits derived from job work charges were eligible for deduction under section 80IC.

Analysis: The manufacturing activity remained the same whether undertaken for the assessee's own account or as job work for another concern. The authorities relied upon accepted the principle that such production does not cease to be industrial activity eligible for deduction merely because it is done on job work basis.

Conclusion: Deduction under section 80IC on job work profits was held allowable.

Issue (iv): Whether the disallowance of interest under section 36(1)(iii) was sustainable in view of the assessee's own interest-free funds.

Analysis: The assessee demonstrated substantial share capital, reserves and other interest-free funds sufficient to cover the advances in question. No contrary material was brought to show diversion of borrowed funds for non-business purposes. In such circumstances, no disallowance of interest was justified.

Conclusion: The interest disallowance under section 36(1)(iii) was deleted.

Issue (v): Whether the allocation of common head office expenses on turnover basis while computing deduction was liable to be disturbed.

Analysis: The assessee had maintained separate books for the units and had apportioned common expenses on a turnover basis, a method accepted in subsequent years as well. The revenue action was based on estimate and did not identify any specific error in the allocation method.

Conclusion: The addition on account of common expenses was deleted.

Final Conclusion: The assessee's claims for deduction and related deletions were sustained in full, and the revenue's appeals failed.

Ratio Decidendi: A unit is entitled to incentive deduction when it satisfies the statutory eligibility conditions on its own facts, and adjustments based on conjecture or notional inter-unit benefits cannot be sustained without evidence.

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