TaxTMI 
TaxTMI 
2022 (12) TMI 206
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....ed in ITA 281/CHD/2018 are reproduced hereunder: 1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by Assessing Officer on account of the issue of disallowance of interest u/s. 36(1)(iii) of I.T. Act, 1961. 2. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by Assessing Officer on account of denial of deduction u/s. 80IC of the Income Tax Act, 1961 in respect of Kala Amb Unit, even when the assessee does not fulfill the necessary conditions for claiming deduction u/s. 80IC of the I.T. Act, 1961. 3. It is prayed that the order of the Ld. CIT(A) be set-aside on the above issues and that of the Assessing Officer be restored. 4. The appellant craves leave to add or amend any grounds of appeal before the appeal is heard and kindly disposed off." 2.2. At the cost of re-iteration, the parties have unanimously submitted that the arguments advanced in ITA 281/CHD/2018 would address the grounds in the other appeal also. Accordingly, in the said background the arguments advanced by the parties on the issues arising are addressed. 3. T....
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.... being used and there was a jump in electricity consumption after installation of new machinery and that there was no proof that the new unit is an independent separate unit from the old one, the assessee's explanation was called forth. The AO, it was submitted vide ordersheet entry dated 22.03.2013 required the assessee to explain why the deduction claimed u/s. 80IC should not be disallowed. The assessee's reply made available on 28.03.2013 was considered by the AO. This reads as under: "As far as question of disallowance of deduction of Kala Amb unit u/s. 80IC of the Income Tax Act is concerned it has repeatedly been submitted by us that they is no reason for disallowance of this deduction. The unit was set up as a new unit with machinery worth Rs. 94 lac app. All the proofs of setting up of this unit like clearance from pollution control board, VAT/CST number, certificate from Industries Department, application for power connection etc. have already been submitted to your goodself. " 4.2. The explanation offered by the assessee, it was submitted, was faulted with by the AO. The AO held that the assessee had not provided evidence which had been sought earlier.....
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....ere worker and was not authorized by us to make any statement on our behalf, therefore his statement cannot be considered as piece of evidence. The assessee has not been given time and opportunity to controvert the same. As far as the statement of Mr. Gyan Chand Sharma is concerned he himself has stated that he has joined Kala Amb unit on 16th January, 2013. He has also stated that the entire machinery belongs to Amber Enterprises India Pvt. Ltd. and it is now manufacturing Phillips lighting from September, 2012 and prior to it was manufacturing the Air Conditioners. His statement supports our submissions. No adverse evidence has been given by Mr. Gyan Chand Sharma. 2. Copies of bills of machinery required by the Income Tax Officer who visited Kala Amb on 29/03/2013 are enclosed herewith for your kind perusal. " 4.5. This reply of the assessee, it was reiterated, was considered by the AO and noticing that more than sufficient time had been given to the assessee to reply to the ordersheet entry dated 22.03.2010, the Inspection/Enquiry Report of the ITO and ITI and the reply filed, it was submitted, was considered. It has been extracted in pages 33 to 36 of the order. As ....
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....on later on. The inspection clearly proved that these new machines have been installed at the present location since the commencement of production on 08.01.2010 and there is no change or shifting of these machines from another site/location to the present site/location. 6. Even at the time of commencement of production of Kala Amb Unit on 08.01.2010, complete machinery was not installed and there was some machinery installed after the date of commencement of production. Hence production on 08.01.2010 cannot commence without the use of old machinery in the production process of the assessee company. 7. The electric connection of Amrit Aircon System Pvt. Ltd. has been used by the assessee company in the month of January 2010, February 2010 and March 2010 and high consumption of electricity in these months as compared to earlier months clearly proves that the old machines of Amrit Aircon System Pvt. Ltd. have been put to use by the assessee company in its year of commencement of production and also in the later years. 8. As per plan of installation of machinery and manufacturing process, it is not possible to run the unit without the use of old machines of ....
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....30% in its 6th year. In order to avail 100% deduction on account of production from the old machines assessee company camouflaged the production from old machines by setting up some of new machines in the name of other sister concern i.e. M/s. Amber Enterprises (India) Pvt. Ltd. Though new unit was shown to have started its operation on 08.01.2010, but the production was not entirely out of new machines but also through old machines of M/s. Amrit Aircon System Pvt. Ltd. (more than 20% value) and hence was not eligible for 80IC deduction." 4.7. Relying upon the above reasons extracted in the assessment order it was his submission that the relief granted by the CIT(A) on facts is challenged by the Revenue. 4.8. Referring to the impugned order it was submitted that the CIT(A) has tabulated the reasons of the AO alongwith the assessee's submissions from pages 7 to 12 and thereafter allowed a relief to the assessee. The order was assailed on the ground that the AO on facts has relied upon the Inspection Report carried out u/s. 131. Accordingly, relief granted by the CIT(A) it was submitted, is unjustified on facts. 5. The ld. AR appearing on behalf of the assessee relied up....
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....bmitted, did manufacture ACs and as a result thereof sold these. These sales are not doubted or rebutted on record. No evidence let alone the cogent evidence upsetting these facts is available on record. The assessee, it was submitted, initially used the electricity connection of its earlier sister concern whose premises were taken on rent. The earlier concern, it was submitted, had stopped its manufacturing activity and the premises were lying idle. It was his submission that since manufacturing of ACs is a highly competitive business activity where the market is very sensitive to every new technology, hence manufacturing of ACs started may suddenly require to be stopped. It was his submission that every change in technology/knowledge of how AC was to be rated or considered most suitable dictated that new requirements were required to be inbuilt in the product being manufactured. These marketing gimmicks and strategies often resulted in manufacturing of products which were thus found to be out of sync with the marketing requirements. Hence, manufacturing of certain type of ACs at times had to be stopped abruptly. The earlier activity consequently had to be stopped. The expenses in....
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....d Sh. Paramjit Singh ITI were authorised u/s. 131 of the Income Tax Act, 1961 to carry out on spot inquiries for verifying the claim of the assessee company with regard to deduction u/s. 80-IC of the Income Tax Act, 1961. The on spot verification was conducted on 29.03.2013 and the enquiry report dated 30.03.2013 was submitted." 5.5. Inviting attention to the assessment order page 32 it was submitted that the reply of the assessee was submitted on 31.03.2013 which has also been extracted in the order. Inviting attention to page 1 of the assessment order it was submitted that the assessment order was passed on 31.03.2013. In the said background, it was his submission that the assessee admittedly before the AO did not get a reasonable opportunity to argue its case although a reply was made available. It was submitted that a meaningful and effective opportunity for a fair hearing admittedly was before the First Appellate Authority. These facts itself will show that the AO without giving an effective opportunity to the assessee to address the material available on record passed the unfair and incorrect order. 5.6. In the said background, attention was invited to pages 7 to 12 of ....
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....e highlights of our submission filed before the AO is as under: * The assessee has set up its unit at Kala Amb which is an area notified u/s. 80-IC of the Act and producing notified things as per the guidelines of the said section. * There is no doubt that assessee has carried its operations from the premises taken on rent from sister concern namely M/s. Amrit Aircon System Private Limited and such fact nowhere violates the conditions for claiming deduction u/s.80-IC of the Act. The rent deed is forming part of paper book at Pg 42 to Pg 48. The said rent deed was entered on 22.12.2008 and it was valid for the period of 5 years. * Now, we would like to explain that assessee is a newly established unit which is evident from following points: * Unit at Kala Amb is an Independent Unit started with an investment of Rs. 94 Lacs in Machinery which includes a complete oven unit, assembling unit, conveyor line, gas charging line etc. The List of machineries purchased by assessee (Pg 61 of PB) along with their electricity load (Pg 62-63 of PB) and line diagram (Pg 64 of PB) depicting manufacturing process of air conditioners is forming part of paper book. ....
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....ess/technology used for manufacturing is customer specific and any change in the machinery/process/technology cannot be made without the consent of clients. The vendors from whom the raw material is to be procured by the assessee are also predefined by the clients. The assessee is not allowed to sell AC's in the open market as there is complete reconciliation with the clients for raw material purchased from their predetermined vendors and production made by the assessee. The clients frequently checks the specification of machineries which are engaged in the manufacturing process and all this is done to make sure the quality of finished goods to be sold by them. The assessee company has invested appx. Rs. 94 Lacs in the Plant & Machinery up to 31.03.2010 which is sufficient enough to run a plant at the initial stage In the F.Y 2008-09 as well as in the initial months of year under consideration, M/s. Amrit Aircon System Private Limited was working in full swing and there was no intention of the said concern to reduce its production and transfer its machinery to assessee company. From the details of machinery purchased by asse....
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....ing System is totally different from the AC's which is evident from the machines inspected by the inspectors and bills for the same produced before the AO. The inspectors as well as the AO have not clearly identified the machineries of M/s. Amrit Aircon System Private Limited being used by the assessee. Further, the observations of the AO as given at Pg 39-42 of the assessment order were distinguished in detail in submission filed before the CIT(A) in Para 6.17 of the submission and the same is forming part of paper book at Pg 65 to Pg 97. The said submissions are also reproduced by the CIT(A) in his order dated 08.12.2017 at Pg 7-13. As far as the question of salaries/wages and electricity consumption is concerned, the assessee has itself admitted that due to inadvertent error, a portion of these expenditures is claimed by M/s. Amrit Aircon System Private Limited. This fact was brought to the notice of the AO during the course of assessment proceedings and it was also explained to the AO that the portion of expenditure excessively claimed by M/s. Amrit Aircon System Private Limited has already been disallowed by the AO of that concern in its assessme....
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....erial. In this regard, the decision of the Hon'ble Chandigarh Bench of the Tribunal in the case of M/s. Shiva Exports Vs. ITO as reported in 28 SOT 512 is directly in support of the appellant wherein under similar circumstances, the claim of deduction under section 80-IA was allowed. On similar lines is another decision of the Hon'ble Chandigarh Tribunal in the case of ACIT Vs. M/s. Octave Exports, MANU/IG/0282/2014 : 165 TTJ 425. Considering the whole gamut of facts, it is held that the action of the AO in disallowing the claim of deduction under section 80-IC of the Act is not based on correct reasoning and hence not sustainable. The grounds of appeal pertaining to the aforesaid impugned issue are, thus, considered allowed." 7.1. It is also relevant to extract the specific objections of the AO tabulated by the assessee and addressed by the assessee before the First Appellate Authority in para 8: 8. Contesting the aforesaid observations of the AO, the appellant insisted that the eligibility criterion for the claim of deduction under section 80IC was fulfilled in all parameters and that the disallowance of the said claim was not only unwarranted but also arbitra....
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.... of both the companies are installed in same shed in such a way that production is incomplete in absence of running of any of the old machinery. Therefore, the unit of assessee is not an integrated and independent unit. Just because appellant was manufacturing from the leased shed with common power connection of its sister concern, it cannot be assumed that assessee is not an integrated and independent unit. Independence and integrity of a business is matter of technical inspection wherein various factors like production cycle, manufacturing process, machinery deployed investments made and technology used are key decisive factors. Therefore, the ITO and 777, on whose report the AO has placed Reliance and who are not technical persons, cannot draw a conclusion in the inspection of only few hours that assessee is not an integrated and independent unit. As per inspectors, there was no clear demarcation of machinery of assessee and M/s Amrit Aricon System Private Limited at factory premises, it is submitted that production cycle is a technical process and only technical persons like production manager can explain it better and as evident from the Page 5 of statement of Sh. San....
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....han the factual position. 6. At the time of commencement of the unit at Kala Amb, complete machinery was not installed and some machinery has been installed after 08.01.2010 i.e. date of production. Substantial machinery had been purchased and installed by the appellant at Kala Amb in the FY 2008-09 and also in FY 2009-10 and thus it cannot be said that the unit was incapable of carrying out the production in January 2010. 7. The use of old electricity connection of M/s Amrit Aircon System Private Limited by assessee and high consumption of electricity from January 2010 to March 2010 proves that machinery of M/s AmritAircon System Private Limited has been used by assessee in its year of commencement of production as well as in the subsequent years. It is an admitted fact that and till the date of sanction of its own electricity load, the assessee has used the electricity connection of M/s AmritAircon System Private Limited and there is no violation of conditions of section 80-IC of the Act. Further, the high consumption of electricity by assessee as compared to M/s Amrit Aircon System Private Limited is obvious due to the fact that in the entire FY 2009-10 and ....
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....ction of Air Conditioners then why the assessees unit with an investment of Rs.94.70 Lakhs in the machinery is not considered as self sufficient by the AO has not, been clarified by him while passing the Assessment Order. 11. The old machinery of M/s AmritAircon System Private Limited has not been transferred in books of assessee in order to avoid disallowance of deduction u/s 80-IC of the Act. This conclusion of AO is rather his own belief without any fact on record. 12. The value of new machinery installed on 08.01.2010 was Rs.57,50,308/-not Rs.94,70,803/- and therefore, the assessee is using old machinery of its sister concern which is more than 20% of the value of new machinery and therefore, the assessee has violated the conditions of section 80-IC of the Act. It is a fact on record that all major machineries worth Rs.81.22 Lakhs were installed and running in the assessees unit by January 2010 and it is not mandatory that all the machinery including gensetsetc must be installed for start of commercial production. 13. The unit was never capable of producing goods of its own and therefore, has never came into existence. This again is a presumption of t....
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....w unit, admittedly, commenced operations from the leased premises with the aid of electricity connection and labour, also taken on lease from the sister concern viz. Amrit Aircon Pvt. Ltd. In the assessment proceedings, it was admitted that the expenses on electricity, fuel, wages & salary amounting to Rs. 7,57,793/- were inadvertently booked in the accounts of the sister concern, which was subsequently taken care of in the assessment proceedings of the said sister concern for the A.Y. 2010-11. The eligible unit of the appellant company was set up with a capital outlay of approximately Rs. 94 lakhs in purchase and procurement of plant and machinery. Besides, all the necessary legal clearances for setting up of the unit was stated to have been complied with. The eligibility conditions as specified in section 80IC is seen to have been met in entirety. Merely because the new unit was set up in leased premises, it's existence and operationality cannot be doubted. It is not the case of the Assessing Officer that there was no investment in plant and machinery for setting up the eligible unit. Neither the invoices produced in support of the purchase of plant and machinery required for....
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....n drawn on such basis cannot be relied upon to deny the claim of deduction to the appellant under section 80IC of the Act. It is a fact on record that at the time of inspection in March, 2013, the process of manufacturing of air-conditioners stood ceased since November, 2011 and the plant and machinery installed at the said premises with substantial modification was, instead, seen to have been used for the production of Philips luminaries. In such a situation, it is nothing but presumptuous on the part of the inspecting team to observe or comment that the machines installed in the unit were old or appeared to have old power connection of more than 5-6 years vintage or that the old machines of the sister concern were used in the manufacturing of air-conditioners at the relevant point of time. Reliance on such observations of the inspecting team falls in the realm of giving credence to tendentious or fanciful thinking. The report beset with such fatalities cannot be relied upon to draw any adverse inference with regard to the existence of the facility for manufacture of air conditioners at the relevant point of time. 12. Besides the above factual and direct evidences, there ....
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....use of the use of inadmissible material. In this regard, the decision of the Hon'ble Chandigarh Bench of the Tribunal in the case of M/s. Shiva Exports Vs. ITO as reported in 28 SOT 512 is directly in support of the appellant wherein under similar circumstances, the claim of deduction under section 80-IA was allowed. On similar lines is another decision of the Hon'ble Chandigarh Tribunal in the case of ACIT Vs. M/s. Octave Exports, MANU/IG/0282/2014 : 165 TTJ 425. Considering the whole gamut of facts, it is held that the action of the AO in disallowing the claim of deduction under section 80-IC of the Act is not based on correct reasoning and hence not sustainable. The grounds of appeal pertaining to the aforesaid impugned issue are, thus, considered allowed." (emphasis supplied) 8. On a careful consideration of the entirety of facts before us, as referred to hereinabove from the record we find no infirmity in the order. In the face of the unrebutted factual findings on record, the suspicions aroused by the Report have no credibility. The reliance placed by the Revenue accordingly on the Inspector's Report wherein the inspection was conducted on 29.03.2013 cannot ....
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....ee, it was submitted, thereafter vide ordersheet entry dated 04.02.2013 was required to furnish details of allocation of expenses amongst various units. The assessee was required to explain why expenses may not be allocated on the basis of turnover of each unit as it was noticed that the expenses pertaining to all the units have been entered for all the units, however, it was noticed that they have mostly been debited to non 80IC units. The assessee, it was submitted, as per reply dated 28.03.2013 claimed that the books of account of each unit were maintained as an independent unit and were consequently accounted for in that unit only. 9.1. The AO considering the record, it was submitted, concluded that no proof or evidence had been submitted to prove that the expenses relating to interest other than term loan, Directors remunerations and bill discounting charges were exclusively related to that unit only. Accordingly, it was concluded that the assessee company was claiming more expenses in the non-exempted units and less from the exempted units. It was submitted that by this type of allocation, the AO concluded that the assessee company is transferring profits from non-exempted....
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....d by the assessee heavily relied upon in the present proceedings are extracted from pages 3 to 6 of the synopsis is reproduced hereunder: OUR SUBMISSIONS: 1. Regarding first issue of disallowance made by AO u/s. 36(1)(iii) of the Act, our point wise submission is as under: a) Issue of disallowance made by AO u/s. 36(1)(iii) of the Act on account of Building under Construction (BUC) During the year under consideration, the assessee has made additions of Rs. 2,38,00,011/- under the head Building under Construction (as evident from page 1 of the paper book wherein under the head of Fixed Asset, balance of Capital Work in Progress (CWIP) has been separately shown) and unit wise details of the same are tabulated below. These additions were made out of sufficient own funds of Rs. 88,13,69,061/- in the shape of Share Capital (Rs. 1,79,04,800/-) and Reserves and Surplus (Rs. 86,34,64,261/-) which is much more the total balance of Building under Construction of Rs. 2,38,00,011/-. The same is evident from Consolidated Balance Sheet forming part of paper book at Pg 1 of the Paper Book. The appellant company practices proper method of speci....
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....f these units. Now coming on the second thought that if these units have not raised any borrowed funds then from which source these units have met their capital needs, it is submitted that on consolidated basis, the group has interest free own funds of Rs. 88,13,69,061/- in the shape of Share Capital and Reserves and Surplus which are sufficient enough to make investments of Rs. 3,29,35,109/- (amount of P & M on which interest disallowance has been made by the AO) in the Plant & Machinery. c) Issue of disallowance made by AO u/s. 36(1)(iii) of the Act on account of investment in shares of * In the financial year ending on 31.03.2007, the assessee company had made investments to sister concern the tune of Rs. 1,47,50,000/- in its sister concern namely M/s. Amber Aviation (I) Pvt. Ltd. * The assessee has not earned any income, either exempt or taxable, from the said investments. * The assessee has not made any investments/nor given any share application money during the year under consideration and therefore, there is no nexus between the investments made in earlier years and interest expenditure claimed in year under consideration. * In t....
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....the assessee 1. The assessee company failed to provide detail of all direct/indirect expenses incurred by it in managing its affairs. 2. All the funds of the business belong to the common kitty as held in the case of M/s Abhishek Industries Ltd. (286 ITR 1). 3. Funds utilized in machinery and building by the assessee company come from the common kitty and portion of interest bearing fund are utilized by the assessee company In construction of building and installation of Plant 6t Machinery. 1. There was availability of adequate and sufficient interest free funds with the appellate company to cover up the investments in BUC and P & M. 2. The appellate has successfully proved the utilization of borrowed funds for its business purpose. 3. The appellant has followed a systematic accounting system of recognizing the interest cost for specific purposes for which the borrowed funds have been used. 4. The AO has not proved any nexus of borrowed funds with the amount spent on BUC/additions made to the machinery 1. There are no borrowed funds in units situated at Kala Amb, Kasna and Unit-V, therefore, it is incorrect on the part of the AO to say that investment in Bui....
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....en purchase of the machinery and their having been put to use. For the rest of the units, wherein, additions to plant and machinery have been made but no interest was capitalized, it was submitted that those units have neither taken any secured loan nor incurred any finance cost. On the contrary, investment has been made by utilizing own interest-free funds available in the shape of share capital as well as reserves and surplus. The appellant further contended that it had sufficient own funds to the extent of Rs. 88.13 crores in the shape of share capital and reserves in its balance sheet which was much more than the total amount spent on building under construction of Rs. 2.38 crores and investment in plant and machinery to the tune of Rs. 3.29 crores. The appellant further averred that it followed unit -wise accounting and maintained the books of accounts accordingly. Unit -wise secured loan structure of the appellant company and its utilization in the existing business of the respective units was clearly demonstrated. It was also brought out that the old term loans brought forward from the earlier years already stand invested in the business assets of the company which are alrea....
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....lant in the earlier years and the same cannot be said to be in the nature of business activity carried out by the company. The AO also noted that the said investment could, at best, earn dividend income which is exempt from tax under the provisions of the Act. The AO finally concluded that the commercial expediency of making the investment by the appellant could not be established and, thus, following the ratio of the judgement of the Hon'ble Punjab and Haryana High Court in the case of Abhishek Industries Ltd., MANU/PH/0531/2006 : 286 ITR 1, disallowed the proportionate interest @ 12% on Rs. 1,47,50,000/- amounting to Rs. 17,70,000/-. 18. The admitted facts on record are that the appellant had made the above investment in the Financial Year 2006-07 and the said investment has not earned any income, whether taxable or exempt, during the year on the said investments. During the appellate proceedings, attention was drawn to the facts in the Financial Year 2006-07 i.e. the year of making the investment, wherein the total borrowed funds were Rs. 3.32 crores which included secured loans of Rs. 3.21 crores and unsecured loans of Rs. 10.67 lakhs. It was also submitted that as....
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....round raised by the Revenue and the prayer of the Revenue on facts cannot be allowed. The facts taken into consideration available on record namely that the assessee had sufficient interest free funds available sources in the year under consideration and the availability also in the year when the amount was advanced to M/s. Amber Enterprises which advance admittedly was not in the year under consideration are all relevant and cogent facts. These we find have not been assailed. Being satisfied with the detailed finding on facts based on evidences available on record, which have been considered by the First Appellate Authority. In the absence of any infirmity in the conclusion arrived at we find no good reason to interfere with the order. Ordered accordingly. Accordingly, the ground of the Revenue is dismissed. 13. In the result, the appeal of the Revenue is dismissed. 14. In ITA 436/CHD/2018, the following grounds have been raised by the Revenue: 1. In the facts and circumstances of the case, whether the Ld. CIT(A) was correct in deleting the addition made by Assessing Officer on account of the issue of disallowance of interest u/s. 36(1)(iii) of the Income Tax Act, 1....
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....d that the said investment could, at best, earn dividend income which is exempt from tax under the provisions of the Act. The AO finally concluded that the commercial expediency of making the investment by the appellant could not be established and, thus, following the ratio of the Judgment of the Hon'ble Punjab and Haryana High Court in the case of Abhishek Industries Ltd., MANU/PH/0531/2006 : 286 ITR 1, disallowed the proportionate interest @ 12% on Rs. 99,40,000/- amounting to Rs. 11,82,030/-. 7. The admitted facts on record are that the appellant had made the investment of Rs. 98,50,000/- in the shares of M/s. Amber Aviation (I)/Pvt Ltd. in the FY 2006-07 and the said investment has not earned any income, whether taxable or exempt, during the year on the said investment. During the appellate proceedings, attention was drawn to the facts in the FY 2006-07 i.e. the year of making the investment, wherein the total borrowed funds were Rs. 3.32 Crores which included secured loans of Rs. 3.21 Crores and unsecured loans of Rs. 10.67 Lakhs. It was also submitted that as on 31.03.2007, there was a debit balance in the cash credit limit account of the appellant of Rs. 60.56 ....