TaxTMI 
TaxTMI 
2017 (4) TMI 1612
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....That the Ld. CIT(A) has erred in accepting that the process of preparation of poultry feeds amount to production of an article within the meaning of section 80IB. (iv) That the Ld. CIT(A) has erred in allowing the entire amount of Rs.1,24,21,2905/- claimed as deduction U/S 80-IB. (v) That the Ld. CIT(A) has erred in directing the A.O. to net off the interest income credited in the profit and loss account of the eligible undertaking against the interest expense debited in the said profit and loss account without the appreciating the facts and circumstances of the case supported by the decision of Hon'ble Supreme Court in the case of Pandian Chemicals Limited Vs. CIT,[2003] 129 TAXMAN 539 (SC) and the decision of High Court of Jammu and Kashmir in the case of Asian Cement Industries Vs Income Tax Appellate Tribunal, [2012] 28 TAXMAN 290(Jammu & Kashmir) (vi) That the Ld. CIT(A) has erred in directing the A.O. to recompute the income of the eligible undertaking and re-compute the deduction u/s 80IB after netting off the interest income credited in the profit and loss account of the eligible undertaking against the interest expense debited in the said profit and loss accou....
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....1B(5) of the Act also on the ground at it was engaged in manufacture or production of an article. 6. The AO however was of the view that in the production process explained by the Assessee, there was no change in chemical composition of the end product and therefore there was no manufacture. However before recording such an authentic technical finding, the AO however did not refer to any scientific data or scientific experiments or technical report to support his conclusion. The AO accordingly rejected the claim of the Assessee for deduction u/s.80IB(5) of the Act. 7. On appeal by the Assessee, the CIT(A) held that the Assessee was eligible for deduction u/s.80IB(5) of the Act and in doing so relied on the decision rendered in Assessee's own case by the Tribunal referred to in the earlier part of this order. 8. Aggrieved by the order of the CIT(A), the revenue is in appeal before the Tribunal. 9. We have heard the rival submissions. The issue to be decided is as to whether the assessee is engaged in the manufacture of a production of an article to be eligible for deduction under section 80IB. This issue has duly been decided by this Bench in assessee's own case in ITA No.15....
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.... the restriction thereon too has to be construed so as to advance the objective of the provision and not to frustrate it. Conditions of Sec 801B (2) (iii) should be fulfilled by every new industrial undertaking claiming deduction either/under sub sec (3) (4) or (5) of Sec 80 IB i.e. to say the undertaking must be engaged in manufacture or production of an article. If this condition is not fulfilled no deduction is permissible under any of the sub sections of Sec 801B. The industrial undertakings notified and approved by the Central Govt. and situated in North Eastern States are eligible for tax holiday for period of 10 years' as against period of 5 years available to other backwards states. In Notification No. SO 627 (E) dated 04.08.1999 the Central Government has recognised poultry and cattle feed industry, to be an eligible industry u/s 80 IB (4). Once the Central Government notified the poultry 'feed industry u/s 80 IB (4) then there is a tacit admission that it is engaged in "manufacture or production of an article". This is so because unless poultry feed industry does not manufacture an article; no deduction can be permissible u/s 80IB. Once the Central Govt. accepted ....
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.... feed. Hence conversion of physical shape of the feed involves only processing and not manufacture. It was submitted by him that the raw material and end product were the same and therefore what the Assessee does is only "Processing" and not "Manufacture". For an activity to be called "Manufacture" one of the important criteria is that the end product of the manufacturing process is to be completely different from the ingredients, as regards its chemical composition, integral structure or its use and such factor is missing in the case of the Assessee. It was also submitted that the activity carried out by the Assessee was mere mixing together of different ingredients, without involving any change in the chemical composition of the ingredients and therefore, the decisions rendered on this issue have overlooked this aspect. It was submitted that the decision rendered in Assessee's own case did not consider the decision of the Hyderabad Bench of ITAT in the case of Venkateswara Feeds (supra) and therefore the decision requires reconsideration. 12 . The learned DR filed before us a chart explaining the process carried out by the Assessee, which is as follows: Raw materials (corn, so....
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....ofits of the business on which deduction u/s 80IB(5) of the Act has to be allowed. The case of the AO is that interest income had no direct nexus with the business of manufacture and sale of poultry feed and therefore the said income cannot be considered as part of profits of the eligible business for the purpose of allowing deduction u//s 80IB(5) of the Act. The CIT(A) however found that the interest income arose out of fixed deposits which were securities for availing credit facilities by the assessee in the course of its business of manufacture and sale of poultry feed. The FDs were made only for the purpose of offering them a security for credit facilities availed from the banks and such a condition was also imposed by the banks for extending credit facilities. The CIT(A) further found that the assessee had earned interest income of Rs.25,46,860/- and had paid interest on loans and credit facilities of Rs.39,22,489/-. Taking note of all these facts the CIT(A) came to the following conclusion :- "I have considered the finding of the AO in the assessment order and the written submission filed by the AR along with different case laws on this issue. I have considered the Hon'....
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.... income with the interest expenses was rightly allowed by CIT(A). 18. We have considered the rival submissions and are of the view that the interest income and the interest expenses had a direct nexus and therefore netting of interest income against the interest expenses had to be allowed. Since the interest expenses was much more than the interest income no interest income can be excluded from the profits on which deduction u/s 80IB(5) of the Act ought to be allowed. We therefore uphold the order of CIT(A) on this issue and dismiss ground nos. (iv) and (vi) raised by the revenue. 19. Ground No.(vii) raised by the revenue reads as follows :- "(vii) That the Ld. CIT(A) has erred in directing the A.O. to compute the disallowance u/s 14A read with rule 8D(2)(ii) and 8D(2)(iii) only on the investment in the shares of Punjab National Bank amounting to Rs.34,100/-." 20. The AO disallowed a sum of Rs.66,678/- and Rs.59,170/- as expenses incurred in earning exempt income and accordingly made additions of the aforesaid sum by invoking the provision of section 14A of the Act read with Rule 8D(2)(ii) and 8d(2)(iii) of the Rules respectively. The following were the observations of the AO....
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.... r.w.r 0.5% of 1,18,34,000/- 59,170/- 3.4 In view of the aforesaid paragraph, an amount of Rs.59,170/- is disallowed u/s 14A read with Rule 8D. Hence Disallowance added to the total income of assessee." 21. Before CIT(A) the assessee submitted that the investments primarily comprised of investments in shares of subsidiaries and group companies. The details of investments held by the appellant at the opening & the closing of the relevant AY 2010-11 were given and the same is as follows :- Particulars 31.03.2009 31.03.2010 Investments in Equity & Preference Shares of Group companies 118.00 118.00 Other Investments in Shares & MF 0.34 0.34 TOTAL INVESTMENTS 118.34 118.34 22. It was submitted that on perusal of the above table it can be seen that almost 99.71 percent of the Investments were in shares of its group companies. These shares were acquired with the purpose to acquire and enjoy controlling interest and finance the business activities/projects undertaken for furtherance of the business objectives of the Group of which the appellant was the flagship. The principal purpose behind making investment in shares of these group companies was to enjoy controllin....
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....n to the decision of the Bombay High Court in the case of CIT Vs HDFC Bank Ltd [ITA No. 330 of 2012 dated 23.07.2014 affirmed the decision of the coordinate Bench in the case of Reliance Utilities & Power Ltd (supra) and held that if the assessee has sufficient interest free funds then it will have to be presumed that the investment made by the assessee were out of such interest-free funds available with the assessee. It was pointed out that the facts involved in the present case and applying the ratio laid down in the above judicial precedents, it is submitted that the entire investments were made out of own surplus funds and accordingly the disallowance of interest was not warranted under Section 14A read with Rule 8D(2)(ii). 24. As far as disallowance under Rule 8D(2)(iii) is concerned the assessee submitted that it is only the dividend yielding investments that should be considered for the purpose of computing disallowance under Rule 8D(2)(iii) of the Rules. In this regard the assessee placed reliance on the decision of ITAT, Kolkata in the case of REI Agro Ltd. 144 ITD 141. 25. CIT(A) accepted the submissions made on behalf of the assessee and he held as follows :- "I have....