2019 (3) TMI 638 - AT - Income Tax

Tribunal grants subsidy deduction but remits bogus purchases issue for further review

Navas M. Meeran Versus The Assistant Commissioner of Income-tax, Circle-1 (2), Kochi

The Tribunal partly allowed the appeals, granting the deduction for subsidies under Section 80IB based on the Supreme Court's interpretation. The issue of ... Deduction u/s 80IB on receipt of subsidies - HELD THAT:- We are of the view that a similar issue was considered by the Supreme Court in the case of Meghalaya Steels Ltd. [2016 (3) TMI 375 - SUPREME COURT] wherein it was held that when income from cash assistance received against export schemes are included as income under the head profits and gains of business or profession, it is obvious that subsidies which go to reimbursement of cost in the production of goods of a particular business would also have to be included under the head profits and gains of business or profession and not under the head income from other sources. Therefore, the assessee is entitled to deduction u/s. 80IB. Bogus purchases - addition u/s 69C - differentials between the amounts being expenses debited in the books of accounts and the amounts substantively supported by invoices, which amounts relate to the transactions carried out with its sister concerns being unexplained - HELD THAT:- The lower authorities had not given an opportunity to the assessee to reconcile the difference between the actual purchases made as per the invoices produced by the assessee and actual entries shown in the books of account of the assessee. Being so, we are of the opinion that it is appropriate to opportunity to the assessee to reconcile the same before the AO. Hence, this issue is remitted to the file of the AO with a direction to the AO to give opportunity to the assessee to reconcile the same and decide thereof. Denial of deduction of lease rent u/s. 80IB - whether receipt of lease of commercial asset is business income or income from other sources? - HELD THAT:- Deduction u/s. 80IB is available only in respect of such profits and gains which have direct proximity and nexus with the activities of manufacturing or production of an article or thing. Profits and gains attributable to the business of the industrial undertaking would not be entitled for deduction u/s. 80IB. The profits and gains accrue to the assessee only in the course of business of manufacturing or production of an article or thing. Viewed from this angle, the lease rent earned by the assessee by letting out the industrial undertaking to other parties cannot be equated with the profits and gains derived from the industrial undertaking. Lease rent received by the assessee by letting out the industrial undertaking is not having any direct connection with the manufacture or production of an article or thing by the assessee and the same cannot be considered as business income eligible for deduction u/s. 80IB of the Act. This ground of appeal of the assessee is dismissed. Issues Involved:1. Deduction under Section 80IB of the Income Tax Act for subsidies.2. Deduction under Section 80IB for other income.3. Addition of Rs. 10,08,618/- for alleged bogus purchases.4. Deduction under Section 80IB for lease rent.Issue-wise Detailed Analysis:1. Deduction under Section 80IB for Subsidies:The primary argument was whether the assessee was entitled to a deduction under Section 80IB for subsidies received. The assessee claimed this deduction, which was initially rejected by the Assessing Officer and the CIT(A). The Tribunal referred to the Supreme Court's judgment in the case of Meghalaya Steels Ltd. (383 ITR 217), which stated that subsidies reimbursing production costs should be included under the head 'profits and gains of business or profession' and not 'income from other sources.' Consequently, the Tribunal allowed the assessee's appeal, granting the deduction under Section 80IB for subsidies.2. Deduction under Section 80IB for Other Income:The assessee did not press the ground relating to the denial of deduction for other income amounting to Rs. 99,097/-, and hence, this ground was dismissed as not pressed.3. Addition of Rs. 10,08,618/- for Alleged Bogus Purchases:The Assessing Officer added Rs. 10,08,618/- under Section 69 of the Act, citing discrepancies between the expenses recorded in the books and the invoices provided. The CIT(A) upheld this addition. The assessee argued that sufficient inquiries were not conducted by the Assessing Officer. The Tribunal found that the lower authorities did not provide the assessee an opportunity to reconcile the differences between the actual purchases and the book entries. Therefore, the Tribunal remitted the issue back to the Assessing Officer, directing them to allow the assessee to reconcile the discrepancies and decide accordingly. This ground was partly allowed for statistical purposes.4. Deduction under Section 80IB for Lease Rent:The assessee claimed a deduction under Section 80IB for lease rent received from leasing/renting a factory and building, arguing that the income was from business activities. The Assessing Officer rejected this claim, stating that the assessee was not involved in manufacturing or production activities. The Tribunal examined various judgments, including those of the Supreme Court and the Madras High Court, to interpret the term 'derived from' as used in Section 80IB. The Tribunal concluded that the lease rent did not have a direct nexus with manufacturing or production activities and thus did not qualify for a deduction under Section 80IB. This ground of appeal was dismissed.Conclusion:The appeals were partly allowed for statistical purposes, with the Tribunal granting the deduction for subsidies under Section 80IB, remitting the issue of alleged bogus purchases for further examination, and dismissing the claims for other income and lease rent deductions under Section 80IB.