2025 (10) TMI 30 - AT - Income Tax

Decision upholds taxpayer's s.80IC and s.80IA claims, deletes disallowances, directs s.80IC unit-wise computation, penalties dismissed

Assistant Commissioner of Income-tax, Circle-2 (1), Rajkot Versus Bhawani Industries India LLP And (Vice-Versa)

ITAT (RAJKOT - AT) upheld the CIT(A)'s findings and allowed the taxpayer's claims. The tribunal deleted disallowances under s.80IC, finding Rudrapur ... Deduction claimed u/s 80IC - Allegation of transfer of profit of one unit to another unit eligible for deduction u/s 80C - Allocation of expenses - scope of definition of manufacture - Claim denied as no books of accounts of either Rudrapur unit or Rajkot unit were produced for verification, and also without appreciating the fact that, the Rudrapur unit on which huge deduction has been claimed, does not have any manufacturing capacity but is only capable to process semi-finished goods sent by the Rajkot Unit - CIT(A) deleted the additions HELD THAT:- From the manufacturing expenses, it may be noted that expenditure like electric expenses, labour expenses etc, which is required for manufacturing the goods are incurred by Rudrapur Unit. Further the details of manufacturing process carried out at Rudrapur Unit on each part is submitted by the assessee. Besides, the reason for nomenclature of the goods supplied by Rajkot Unit to Rudrapur unit is same that of finished goods supplied by Rudrapur Unit to Tata Motors, which is meant for identification of the finished parts corresponding to Purchase order of the customer i.e. TML. In other words to identify the raw material and parts with respect to finished goods similar nomenclature has been used and accepted by the customer TML and others. As submitted that one should go with process carried out instead nomenclature of the goods. We note that raw goods (ram material) received from Rajkot- Unit, thereafter many process are being carried out at Rudrapur Unit and there is substantial value addition in the goods. Therefore, there is price difference between Rajkot Unit charged for raw material and Rudrapur Unit Charged for finished goods. We note that after getting the raw material from Rajkot unit, further substantial process is required to be carried out at Rudrapur Unit before selling the same to Tata Motors. Hence, it falls in the definition of manufacture. We note that while granting the Registration under Central Excise Act, Excise department has specifically mentioned in the registration certificate that it is manufacturing Unit. Similarly in the report of Service Tax department it is also stated that Rudrapur Unit is carried out manufacturing activities. We note that similar addition was made in assessment year (AY) 2011-12. In that case also the AO has raised all the above contentions. However, the CIT(A) as well as the Hon'ble ITAT have dealt with all these contentions of the AO and held that there is no expenditure of Rudrapur Unit is accounted for in the books of account Rajkot Unit. Relevant para of ITAT order in assessee’s own case in [2022 (10) TMI 229 - ITAT RAJKOT] held that the assessee is entitled for deduction under section 80IC. Restricting the disallowance of deduction u/s 80IC on protective basis, on the alleged ground of inflated profit of Rudrapur unit, being sale by Rajkot unit, in respect of item code 235F and 236F to Rudrapur unit-1 - There is more G.P. margin that is, of 41.96%, as compare to Rajkot unit of 35.71% and accordingly assessee claimed deduction u/s. 80IC for Rudrapur unit-1. Further there are other benefits offered by the state government as well as central government i.e. in cheap power tariff rate etc. In addition to that the assessee was asked in the notice of AO dated 14.12.2015 to give item-wise and consignment wise details of transfer of goods from one unit/ premises to another unit/premises in the tabular format. Similar details regarding components transferred to Rudrapur Unit is being asked in the above notice. In response to that the assessee has submitted the following details. (a) The item-wise details of all the components which are transferred from Rajkot unit to Rudrapur Unit. The detail contains list of items there manufacturing cost to the Rajkot unit and the price at which it is transferred to the Rudrapur unit. (b) Item-wise list of all the finished components which are finally sold to TATA Motors by the Rudrapur Unit. (c) Item-wise details of the products which are transferred from Rajkot Unit to Sanand Unit. And similarly the list containing details of the products transferred from Sanand unit to TATA Motors. (d) Item-wise details of the products and components which are transferred from Rajkot unit to Gurgaon unit and thereafter from Gurgaon unit to Maruti Suzuki. These details were submitted by the assessee, before the assessing officer. We also find that in subsequent assessment years, the assessing officer/ transfer pricing officer, has accepted the above price at arm`s length price, based on the same facts and circumstances, and did not make any addition in the hands of the assessee. Therefore, taking into account this factual position also, the disallowance restricted by the learned CIT(A) should be deleted, accordingly, we delete the same. Late payment of PF and ESI - Assessee fairly agreed that the above grounds raised by the assessee are squarely covered, against the assessee, by the judgement in the case of CHECKMATE SERVICES P. LTD [2022 (10) TMI 617 - SUPREME COURT (LB)] therefore, these grounds raised by the assessee, may be dismissed. Learned DR for the Revenue, has also agreed with the arguments of learned Counsel for the assessee. Therefore, we dismiss the above two grounds raised by the assessee. Deduction u/s 80IA - Claim not made in the return of the income but the claim is made by way of submitting letter during the assessment proceeding - HELD THAT:- We note that assessee is eligible for deduction u/s 80IA for windmill and for that copy of Audit Report in Form 10 CCB were submitted by the assessee during the course of assessment proceedings. CIT(A) has already held that assessee is engaged in manufacture and production activities at the eligible units. We also find merit in the conclusion reached by the learned CIT(A) to the effect that appellate authorities can entertain claim of the assessee, even though, same is not claimed in the original return of income filed. That being so, we decline to interfere with the order of Id. CIT(A) in allowing the deduction. His order on this issue is, therefore, upheld and the grounds of appeal of the Revenue are dismissed. Disallowance of deduction u/s 80IC - apportionment of expenditure of two units - assessee-firm maintains the books of account of each unit separately. The assessee, accounts for the expenses of each unit in their respective books of account. There is no expenditure which are incurred for one unit is accounted for in the books of another unit except the Audit fees of Rs. 45,000, no other expenditure which are incurred common for more than one unit. The Rudrapur Unit is situated at distance of 1350 Kms from Rajkot Unit. Hence, logically also there is no expenditure which are incurred common for both the units. We have also gone through the reply given by the assessee during the assessment proceedings, by explaining, each and every expense, which is reproduced above, and we find merit in the said reply of the assessee, given by it, during the assessment proceedings. Hence, the conclusions arrived at by the CIT(A), on this issue, are, therefore, correct and admit no interference by us. We, approve and confirm the order of the CIT(A) and dismiss the ground raised by the revenue. Calculating deduction u/s 80IC - Eligible unit for the year under consideration was Rudrapur Unit -I and not Unit II. Therefore, while calculating the deduction u/s 80IC only profit or loss of eligible unit to be considered. CIT(A), relying on the decision of Milestone Gears Private Limited [2019 (1) TMI 421 - ITAT CHANDIGARH] has held that for the purpose of calculating deduction u/s 80IC, profit of each undertaking should be treated separately and losses from other eligible undertaking should be ignored. The Profit and losses of all the eligible undertaking could not be netted off. On this factual position, CIT(A) directed the assessing officer to delete the addition, and allowed the ground of appeal the assessee. For the foregoing reasons, it is not possible to state that the impugned order passed by CIT(A) suffers from any legal infirmity. Therefore, we confirm the findings of the learned CIT(A) and dismiss the ground raised by the revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether an industrial undertaking located in a notified area qualifies as a 'new industrial undertaking' and its activities amount to 'manufacture' within the meaning of section 80IC (now s.80IC context) when (a) significant inputs/semi-finished goods are procured from another unit of the same assessee, and (b) substantial plant & machinery investment, separate registrations and identifiable manufacturing processes exist. 2. Whether deduction under section 80IC is precluded where (a) no separate books were initially produced for the eligible unit, or (b) the eligible unit performs finishing/processing on semi-finished goods bearing the same nomenclature as goods of the supplying unit. 3. Whether a protective addition (disallowance) based on alleged inflated profit of the eligible unit due to inter-unit transfers should be sustained when (a) transfer prices are at arm's length (or accepted in subsequent years) and (b) value-addition at the eligible unit is shown. 4. Whether an appellate authority may entertain and allow a deduction under section 80IA (alternate deduction) claimed for the first time during assessment proceedings though not claimed in the original return. 5. Whether common/head-office or Rajkot-unit expenses may be apportioned to the eligible unit (Rudrapur) for computation of profit eligible for section 80IC deduction, where the assessee maintains separate books for each unit and specific unit-wise expenses are recorded. 6. Whether loss of one eligible undertaking (Rudrapur-II) can be set off against profit of another eligible undertaking (Rudrapur-I) for computing deduction under section 80IC. 7. Procedural/tax-effect issue: whether an appeal filed by Revenue should be dismissed where tax effect falls below enhanced monetary threshold prescribed by administrative instruction. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Qualification as 'new industrial undertaking' and definition of 'manufacture' for section 80IC Legal framework: Eligibility for deduction under section 80IC requires an industrial undertaking to be a new industrial undertaking in specified areas, engaged in manufacture/production of articles (subject to exclusions), with separate identity and prescribed investment/employment parameters. Precedent treatment: The Court/Tribunal analyzed authoritative precedent (including Textile Machinery Corporation and other Supreme Court/High Court decisions) setting tests for 'new industrial undertaking': substantial fresh capital investment, requisite employment, manufacture/production of articles, ascertainable profits attributable to the undertaking, and separate/distinct identity. On 'manufacture', reliance was placed on statutory definition requiring change in name, character and use (as argued by Revenue) but also on the practical approach of examining processes and value-addition. Interpretation and reasoning: The Tribunal examined documentary evidence: separate registrations (Central Excise, VAT, Service Tax, MSME, PF, ESIC), Form 10CCB audit reports, unit-wise audited accounts, substantial WDV of plant & machinery (~Rs. 9.83 crore), unit-specific operating expenses (electricity, wages, job work), independent managerial staff and land allotment at vendor park. It accepted that the Rudrapur unit undertook substantial further processing/value-addition on inputs (forgings/raw components) sourced from Rajkot or outsiders and that the nomenclature similarity was for order identification rather than indicating absence of manufacture. The Tribunal found that the processes effected at Rudrapur produced substantial value addition, supported by gross/net profit margins and price differentials between Rajkot supplies and Rudrapur finished sales. Registration by excise/service tax treating the location as a manufacturing unit reinforced the factual conclusion. Ratio vs. Obiter: Ratio - where a unit has separate registrations, significant fixed capital investment, distinct operations and demonstrates value addition by documented processes and expenses, it qualifies as a 'new industrial undertaking' and its activities can amount to 'manufacture' for section 80IC even if certain inputs/semi-finished goods are procured from another unit of the same assessee. Obiter - discussion of nomenclature and commercial reasons for retaining same item codes. Conclusion: The Tribunal sustained the appellate authority's finding that Rudrapur qualifies as an eligible 'new industrial undertaking' and that its activities constitute 'manufacture' for section 80IC purposes; Revenue's disallowance was rejected. Issue 2 - Effect of absence/non-production of separate books and role of inter-unit procurement Legal framework: Eligibility assessment may examine unit-wise books, audit reports (Form 10CCB), and documentary proof; absence of separate records can be a ground for inquiry, but presence of unit-wise audited accounts and registrations supports eligibility. Precedent treatment: Tribunal considered its own earlier order for a subsequent year (identical facts) which accepted separate accounting and unit-wise audit, applying principles of consistency and evidentiary sufficiency. Interpretation and reasoning: The Tribunal found that separate books and audit reports for Rudrapur were produced; even where some inputs were transferred from Rajkot, the Rudrapur unit incurred unit-specific manufacturing expenses and had independent financials. Reliance on excise and service tax registration and capital investment weighed against AO's inference that Rudrapur lacked manufacturing capacity. Ratio vs. Obiter: Ratio - production/availability of unit-wise audited records, registrations and demonstrable unit-specific expenses rebut an AO's presumption that a unit is non-manufacturing merely because it receives semi-finished inputs from a sister unit. Obiter - none. Conclusion: Non-production argument was rejected; the unit's independent records and activities established eligibility despite inter-unit procurement. Issue 3 - Protective addition for inter-unit transfers and arm's-length pricing Legal framework: AO may adjust profits where inter-unit transfers are at non-arm's-length; however, any reduction of eligible deduction must be justified by demonstrable lack of value addition or improper pricing. Precedent treatment: Tribunal relied on subsequent transfer-pricing/assessment acceptance in later years and consistency principles; earlier ITAT order (on similar facts for subsequent year) had dismissed revenue's challenge. Interpretation and reasoning: The Tribunal analyzed item-wise prices, demonstrated price differentials between Rajkot semi-finished supplies and Rudrapur finished sales (evidence of 15-30% higher realization), and noted that transfer prices were accepted in later years by transfer-pricing/assessing authorities. Since the protective addition (Rs.1.18 crores) formed part of the main 80IC disallowance, deletion of the main disallowance required deletion of the connected protective addition. The Tribunal found the protective addition unsupported given evidence of value-addition and accepted pricing. Ratio vs. Obiter: Ratio - protective additions linked to a main disallowance must fall if the main disallowance is deleted on merit; arm's-length pricing evidence and subsequent acceptance negate the basis for protective addition. Obiter - weight to later acceptance by tax authorities in similar factual matrix. Conclusion: Protective addition for inter-unit transfers was deleted. Issue 4 - Allowing deduction under section 80IA claimed first during assessment (not in original return) Legal framework: Appellate authorities may, in appropriate circumstances and consistent with judicial precedents, entertain claims not made in original return if supported by evidence and law. Precedent treatment: Tribunal followed appellate authority which allowed the 80IA claim relying on judicial precedents that appellate authorities can allow such claims when substantiated; AO's reliance on rule that claim after filing return must be by revised return was considered but disregarded in light of precedent. Interpretation and reasoning: The assessee produced Form 10CCB audit report and legal opinion and relied on precedents (including a High Court decision) to substantiate the 80IA claim. The Tribunal found the appellate authority's allowance proper and declined to interfere. Ratio vs. Obiter: Ratio - appellate authorities can allow deductions not claimed in the original return when supported by documentary evidence and authority; requirement of revised return is not an absolute bar in such circumstances. Obiter - none. Conclusion: Deduction under 80IA, claimed during assessment, was allowed by the Tribunal. Issue 5 - Apportionment of common/head-office expenses between units Legal framework: Apportionment is permissible where common expenses have been incurred and not reflected in unit accounts; conversely, where separate books reflect unit-specific expenses, apportionment may be inappropriate. Precedent treatment: The Tribunal relied upon the assessee's unit-wise audited books, explanations for each expense head and factual details showing that most expenses were charged to the specific unit incurring them. Interpretation and reasoning: AO apportioned several expenses on turnover basis and disallowed part of 80IC deduction (Rs.28,21,215). The assessee demonstrated unit-wise expense booking (remuneration to partners not borne by Rudrapur, liaison/travel/technical costs attributable to Rajkot, separate term loans etc.). Given separate books, physical distance between units and supporting bills, the Tribunal upheld the appellate authority's deletion of AO's apportionment. Ratio vs. Obiter: Ratio - where distinct books of account and supporting vouchers show unit-specific incurrence of expenses, apportionment by AO on a turnover basis is not justified. Obiter - practical note on distance and unit management. Conclusion: Apportionment disallowance was deleted; AO's apportionment was not sustained. Issue 6 - Set-off of loss of one eligible undertaking against profit of another for section 80IC Legal framework: Computation of deduction under section 80IC requires assessment of profits of the eligible undertaking(s); jurisprudence indicates whether profits/losses of separate undertakings should be aggregated or treated separately. Precedent treatment: Tribunal relied on an ITAT decision (Milestone Gears Pvt. Ltd.) and accepted the approach that profits of each undertaking should be treated separately for section 80IC computation and that losses of a distinct eligible undertaking need not be netted against profit of another eligible undertaking for computing deduction. Interpretation and reasoning: Rudrapur-II incurred loss; AO disallowed set-off, but CIT(A) allowed set-off relying on separate undertaking principle. The Tribunal found no legal infirmity in CIT(A)'s reliance on precedent and factual position (distinct unit-wise accounts) and upheld set-off as allowed by CIT(A). Ratio vs. Obiter: Ratio - for section 80IC computation, profits/losses of distinct eligible undertakings are to be treated per-undertaking; losses of one eligible undertaking need not reduce deduction attributable to another undertaking unless statutory language/intent requires aggregation. Obiter - reliance on ITAT precedent. Conclusion: Set-off of Rudrapur-II loss against Rudrapur-I profit for section 80IC computation was allowed. Issue 7 - Dismissal of Revenue appeal on tax-effect threshold Legal framework: Administrative/Board circular raising monetary limits for appeals may render appeals non-maintainable where tax effect falls below prescribed threshold. Interpretation and reasoning: The Tribunal noted the enhanced monetary threshold and dismissed Revenue's appeal where tax effect was below that threshold. Ratio vs. Obiter: Ratio - appeals below the prescribed tax-effect threshold may be dismissed per administrative direction. Obiter - reference to circular as administrative direction. Conclusion: Revenue's appeal with tax effect below the enhanced threshold was dismissed.