2006 (6) TMI 187 - AT - Income Tax

ITAT Upholds Disallowance of Deduction u/s 80-IA, Affirms Additional Tax Levy.

Ghodavat Pan Masala (India) (P.) Limited. Versus Joint Commissioner Of Income-tax, Special Range, Kolhapur.

The ITAT dismissed the appeals, affirming the disallowance of the deduction under section 80-IA and upholding the levy of additional tax. The Tribunal ... Disallowing the claim of the assessee for deduction under section 80-IA - non-fulfilment of the condition regarding the ratio of the cost of old machinery to the cost of total machinery in the initial year - deduction disallowed on the ground that since this condition was not satisfied in the initial year of production, the assessee is not entitled to claim of deduction in this year also. The case of the appellant-assessee was that the assessee's undertaking was not formed with the old machinery and in the alternative the condition regarding satisfaction of the aforesaid ratios should be examined from year-to-year. HELD THAT:- The learned counsel has taken a totally new plea before us that the business of the assessee could have been carried on without use of machinery and, therefore, the undertaking was not formed by transfer to it any machinery or plant previously used for any purpose. The learned DR has pointed out that the aforesaid position is factually incorrect as the value of machinery has been increasing from year-to-year. On consideration of facts, we are of the view that it was necessary for the assessee to use machinery for efficient production of its goods - Without the existence of the machinery, the assessee might have worked as a cottage industry, working its processes manually. However, that was not the intent of the assessee when the undertaking was set up, as it bought old and new machinery, which at the end of the relevant previous year amounted to Rs. 88,59,423 in value terms. Thus, the assessee intended to use mechanized process and that is why it bought old machinery from Sanjay Ghodawat, HUF also. This view is strengthened further by the fact that the assessee had purchased and installed machinery of the value of Rs. 11,67,282 when the production was started on 24-6-1994. Coming to the satisfaction of the condition of the ratio of the old machinery to total machinery, we have two decisions of Hon'ble Bombay High Court in the matter. The decision of the Court in the case of ADDITIONAL COMMISSIONER OF INCOME-TAX VERSUS SUESSIN TEXTILE BALL BEARINGS LIMITED [1985 (9) TMI 32 - BOMBAY HIGH COURT] is in favour of the revenue - However, the decision of the Hon'ble Court in the case of ADVANI OERLIKON (P.) LTD. VERSUS COMMISSIONER OF INCOME-TAX [1984 (1) TMI 342 - BOMBAY HIGH COURT] favours the assessee. The case of the learned counsel was that in the case of Suessin Textile Ball Bearings Ltd., the question was not finally answered by the Hon'ble Court as it was mentioned in the judgment that since the Tribunal had given a finding of fact in an earlier year that the value of the building used by the assessee did not exceed 20 per cent of the total value of machinery, plant and building, the assessee would be entitled to deduction under section 84(1). The case of the learned counsel was that in view thereof, the aforesaid judgment represented merely the observations of the Hon'ble Court which cannot override the decision in the case of Advani Oerlikon (P) Ltd. in view of the decision of Hon'ble Bombay High Court in the case of COMMISSIONER OF INCOME-TAX VERSUS THANA ELECTRICITY SUPPLY LIMITED [1993 (4) TMI 37 - BOMBAY HIGH COURT]. It may be mentioned here that the Hon'ble Court had clearly held that the conditions have to be examined with reference to first year of operation and, therefore, the assessee was not entitled to partial exemption claimed by it. Such a judgment cannot be said to be merely an observation. There is no reason for us to cancel the levy of additional tax also. Appeal dismissed. Issues Involved:1. Disallowance of deduction under section 80-IA.2. Levy of additional tax.Issue 1: Disallowance of Deduction under Section 80-IAThe appeals arise from a common order by the Commissioner of Income-tax (Appeals), Kolhapur, disallowing the assessee's claim for deduction under section 80-IA, despite the assessee's assertion of compliance with the conditions laid down in the Act. The assessee, engaged in manufacturing pan-masala and gutka, revised its return to claim the deduction. The Assessing Officer denied the claim, arguing that the assessee had purchased old machinery in the first year of production, and the ratio of old to total machinery exceeded 20% initially, which disqualified the assessee from the deduction.The Commissioner of Income-tax (Appeals) upheld this decision, stating that the conditions of section 80-I(2)(i) and (ii) must be met in the first year of operation and throughout the period of the claim. The assessee contended that the ratio fell below the requisite percentage in subsequent years and relied on various judicial decisions to support its claim.Before the Tribunal, the assessee argued that the deduction should be allowed if the conditions were met in any of the subsequent years within the eligible period. The assessee cited cases such as CIT v. Satellite Engineering Ltd. and Addl. CIT v. Suessin Textile Ball Bearings Ltd., which supported the view that the conditions could be met in subsequent years. The Tribunal, however, found that the business was not initially formed without old machinery and that the condition regarding the ratio of old machinery must be satisfied in the first year of operation, as supported by the decision in Suessin Textile Ball Bearings Ltd.The Tribunal concluded that the assessee's argument that the business could be carried on without machinery was factually incorrect, as the value of machinery increased significantly over the years. The Tribunal decided to follow the later judgment of the Bombay High Court in Suessin Textile Ball Bearings Ltd., which required the conditions to be met in the first year of operation. Consequently, the appeal on this ground was dismissed.Issue 2: Levy of Additional TaxGiven the Tribunal's decision on the disallowance of the deduction under section 80-IA, there was no basis to cancel the levy of additional tax. Therefore, the appeal on this ground was also dismissed.Conclusion:The appeals for both the assessment years were dismissed, affirming the disallowance of the deduction under section 80-IA and upholding the levy of additional tax.This order was pronounced in the court on July 3, 2006.