2024 (10) TMI 34 - HC - Income Tax

Manufacturing unit deduction under section 80IC upheld despite amalgamation, rental income reclassified as house property

The Pr. Commissioner of Income Tax -6 Versus Mahle Filters Systems (India) Ltd.

Delhi HC upheld ITAT's decision allowing deduction u/s 80IC to the assessee who established manufacturing unit at Parwanoo prior to amalgamation. Court ... Deduction u/s 80IC - Calculation of deduction u/s 80IC - HELD THAT:- We find that the view ultimately taken by the ITAT does not give rise to any substantial question of law. We also take note of our judgment rendered in the context of a Scheme duly approved by a High Court and the lack of authority inhering in the AO to doubt its validity or question its provisions in Aamby Valley Ltd. [2024 (7) TMI 1529 - DELHI HIGH COURT]. Eligibility for deduction u/s 80IC - There is no ambiguity as to the amalgamation/ merger undertaken by the appellant and its legal and economic effect. While doing so the appellant followed the prescribed procedure. Everything that the appellant did was permitted by law and was perfectly legal in the eyes of law. The legal effect of each of the aforesaid transactions undertaken by the appellant was achieved. It could not, therefore, be said that the appellant had employed any colorable device. It is clear that the appellant is eligible for the deduction under section 80IC of the Act as appellant had established the manufacturing unit at Parwanoo prior to the amalgamation with erstwhile Mahle. Therefore, provisions of section 80IC(4) of the Act are not applicable in the case of the appellant. There is no proper justification for the addition made by the AO and accordingly the same is deleted. Disallowance of royalty payments - expenses incurred by the Assessee are for enduring benefit and are thus capital in nature? - ITAT deleted addition - HELD THAT:- We note that the Tribunal has relied upon the decision of this Court in Hero Honda Motors Ltd. [2015 (2) TMI 368 - DELHI HIGH COURT] We thus find no justification to interfere with the view taken by the Tribunal. Treating 'income from house property' declared by the Assessee to 'income from other sources' - Assessee has entered into 'lease and License agreement' not 'lease rental agreement' - ITAT deleted addition - HELD THAT:- There is no dispute that the factory building owned by the assessee was let out for which the assessee earned rental income of Rs. 47.26 lakhs. Whether there existed 'leave and licence' agreement and not 'rental agreement' would not change the colour of receipts in the hands of the assessee. The undeniable fact is that the assessee has earned rental income from letting out its property and the same has to be taxed under the head 'income from house property' eligible for deduction as per the provisions of section 24 - We, accordingly, direct the Assessing Officer to tax rental income under the head 'income from house property' as per provisions of law. Issues Involved:1. Deduction under Section 80IC2. Calculation of deduction under Section 80IC3. Disallowance under Sections 35, 35AC, and 35DDA4. Disallowance under Section 14A read with Rule 8D5. Disallowance of royalty payments6. Classification of income from house property7. Enhancement of deduction under Section 80ICIssue-wise Detailed Analysis:1. Deduction under Section 80IC:The Tribunal upheld the decision of the CIT(A) in deleting the disallowance of Rs. 2,96,26,413 under Section 80IC. The Tribunal observed that the Assessing Officer (AO) misunderstood the facts, noting that the manufacturing unit at Parwanoo, Himachal Pradesh was always eligible for deduction under Section 80IC and belonged to M/s Purolator India Ltd. The amalgamation of Mahle Filter Systems (India) Ltd with Purolator India Ltd, approved by the Delhi High Court, was not a sham transaction. The Tribunal found no error in the CIT(A)'s findings and dismissed the revenue's grounds.2. Calculation of Deduction under Section 80IC:The Tribunal upheld the deletion of disallowance of Rs. 64,23,771 for calculating deduction under Section 80IC. The AO had disallowed this amount, arguing that the income did not have a direct nexus with the eligible business. However, the Tribunal found that other income items like rent receipts, interest receipts, scraps, discount received, and foreign exchange gain were directly linked to the industrial undertaking, thus eligible for deduction under Section 80IC.3. Disallowance under Sections 35, 35AC, and 35DDA:The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 1,25,45,326 under Sections 35, 35AC, and 35DDA. The CIT(A) noted that the amalgamation was approved by the Delhi High Court and the manufacturing unit at Parwanoo continued to be owned and managed by the appellant post-amalgamation. The Tribunal found no justification to entertain the appeal on this question, as the revenue could not controvert the CIT(A)'s findings.4. Disallowance under Section 14A read with Rule 8D:This issue was closed by the court on 26 September 2023, as it was conceded that it was covered against the Revenue by the judgment in Principal Commissioner of Income Tax vs. Caraf Builders and Constructions Pvt. Ltd.5. Disallowance of Royalty Payments:The Tribunal relied on the decision in Commissioner of Income Tax vs. Hero Honda Motors Ltd. and upheld the CIT(A)'s decision to delete the disallowance of Rs. 32,34,071 on account of royalty payments. The Tribunal found no justification to interfere with the CIT(A)'s view.6. Classification of Income from House Property:The Tribunal directed the AO to tax the rental income under the head 'income from house property' as per the provisions of law. The Tribunal noted that the factory building was let out, and the nature of the agreement (leave and license vs. rental) did not change the nature of the receipts. The rental income was eligible for deduction under Section 24 of the Act.7. Enhancement of Deduction under Section 80IC:The Tribunal observed that the enhancement of deduction from Rs. 2,64,42,825 to Rs. 2,96,26,413 was justified. The Tribunal found no substantial question of law arising from the CIT(A)'s decision and upheld the enhancement.Conclusion:The High Court found no substantial question of law arising from the Tribunal's decisions on the above issues. The appeal was dismissed, affirming the Tribunal's findings and the CIT(A)'s decisions on all counts.