Tribunal ruling: Revenue appeal partly allowed. Assessee wins on labor charges deduction. Trading profit issue remanded.

The Tribunal partly allowed the Revenue's appeal, remanding issues 1 and 3 for fresh examination. Issue 2, regarding deduction u/s 80-IB on labor charges, was decided in favor of the assessee, upholding the deduction. The Tribunal found no error in the CIT(A)'s approach and allowed the deduction. The dispute over deduction u/s 80-IB on trading profit was referred back to the AO for reevaluation based on principles regarding the role of machinery components. The Revenue's appeal on this ground was allowed for statistical purposes.

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Issues Involved:
1. Deduction u/s 80-IB on trading profit.
2. Deduction u/s 80-IB on labour charges.
3. Application of provisions of s. 80-IA(9) in computing deduction u/s 80HHC.

Summary:

Issue 1: Deduction u/s 80-IB on Trading Profit

The dispute pertains to the scaling down of the deduction claimed u/s 80-IB from Rs. 23,44,244 to Rs. 18,39,930 due to the assessee's engagement in trading activities. The CIT(A) allowed the deduction on the trading profit of Rs. 5,26,458, which was contested by the Revenue. The Tribunal referred to its previous order for the asst. yr. 2003-04, where it was held that the geared motor's role in the machinery must be examined to determine if it is an indispensable component or merely an aid. The issue was restored to the AO for fresh examination in light of these principles. Consequently, the Revenue's appeal on this ground was allowed for statistical purposes.

Issue 2: Deduction u/s 80-IB on Labour Charges

The assessee declared income from labour charges amounting to Rs. 11,54,620, which the AO disallowed, arguing it was not derived from the industrial undertaking. The CIT(A) upheld the assessee's claim, stating that the processes involved constituted manufacturing activities. The Tribunal agreed, noting that the job work involved manufacturing parts of biscuit making machinery using the same machinery as for the main product. The Tribunal found no error in the CIT(A)'s approach and upheld the deduction u/s 80-IB on labour charges. Thus, the Revenue's appeal on this ground failed.

Issue 3: Application of Provisions of s. 80-IA(9) in Computing Deduction u/s 80HHC

The AO applied s. 80-IA(9) to hold that the deduction u/s 80-IB should be reduced from the profits of business before computing the deduction u/s 80HHC. The CIT(A) upheld the assessee's claim for independent deductions u/s 80-IB and 80HHC. The Tribunal referred to the Chennai Special Bench decision in Asstt. CIT vs. Rogini Garments, which supported the AO's stance. However, an unreported judgment of the Madras High Court in SCM Creations was brought to the Tribunal's notice, which purportedly supported the assessee's view. The Tribunal set aside the CIT(A)'s order and restored the issue to the AO for fresh adjudication, considering the Madras High Court judgment. The Revenue's appeal on this ground was allowed for statistical purposes.

Conclusion:

The appeal of the Revenue was partly allowed, with issues 1 and 3 being remanded for fresh examination and issue 2 being decided in favor of the assessee.

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