AI Drafter 
TaxTMI 
TaxTMI 
2025 (7) TMI 811
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....from business and is eligible for deduction U/s. 80IC of the Act. 4. The A.O. / DRP erred by not appreciating the fact that job work charges wrongly classified as lease rental income represent the income derived from manufacture of goods and the same forms part of business income which is eligible for deduction U/s. 80IC of the Act. 5. The A.O. / DRP erred in making an addition on account of excess deduction U/s. 80IC of Rs. 1,21,41,264/-. 6. Any other ground that may be urged at the time of hearing with the prior approval of the Hon'ble Members of Income Tax Appellate Tribunal." 2. Succinctly stated, the assessee company which is engaged in the business of manufacturing of blow moulded and injection moulded plastic products such as bottles & caps etc., had e-filed its return of income for A.Y 2018-19 on 28/11/2019 declaring an income of Rs. 29,16,74,520/- under the normal provisions and an income of Rs. 22,48,28,203/- U/s. 115JB of the Act. Subsequently, the case of the assessee company was selected for scrutiny assessment U/s. 143(2) of the Act. 3. During the course of the assessment proceedings, the A.O. observed that the assessee company dur....
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....ts were disclosed and subjected to deduction of tax at source as "lease rental income". Further, the A.O. observed that the lease rental was not shown by the assessee company as a part of its sales and was rather shown separately as "lease rental" in its books of accounts. On further being confronted, the assessee company submitted that the subject income i.e., "lease rentals" though should have been credited in its books of accounts as "job work charges", but the same had wrongly been classified as "lease rental income". Although, the A.O. did not find any substance in the aforesaid claim of the assessee company regarding the wrong nomenclature used for its aforesaid receipts, but even otherwise, held a firm conviction that as "job work charges" were also receipts from an incidental activity, thus, the same could not be equated with the principal activity of the assessee company and brought within the meaning of "profits derived from the eligible undertaking" for purpose of claiming deduction U/s. 80IC of the Act. 5. Apart from that, the A.O. observed that there were other receipts on which the assessee company had claimed deduction under Section 80IC of the Act, viz., (i) inte....
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....u/s 80IC of the Act, 1961 from one of the units located at Baddi 2. From the above, it can be concluded that the assessee had two streams of revenue viz., sale of products and other income consisting of lease rental income and others. The AO, on the basis of nature of income, concluded that the other income cannot be included in the profits derived from the undertaking to claim deduction u/s 80IC. The AO discussed the provisions of the section 80IC and the legal position on the aspect of whether other income forms part of profits derived from the eligible undertaking or not. Accordingly, the AO has denied the 80IC deduction of Rs. 4,04,70,880/- on the other income excluding the scrap sales and disallowed excess deduction of Rs. 1,21,41,264/- claimed by the assessee. 2.5.3 During the proceedings before DRP, the assessee has been asked to substantiate the claim of deduction of lease rental income as job working charges under the section 80IC. The assessee stated that it has installed machines at clients place for manufacturing the plastic products and claimed such manufacturing of products at clients place constitute job working and hence eligible to claim deduction under se....
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....er the head other income in its books of accounts and reported under other income in the audited financials. The assessee has been asked to justify the claim of deduction of lease rental income u/s 80IC with relevant to the copies of ease agreements, nature of services provided and the related documents/invoices. On perusal of the lease agreement, it is seen that the assessee has entered into an agreement with M/s Reckitt Benckiser (India) Private Ltd with regard to supply of man power, equipment and maintenance and claimed such lease rental income as job working charges eligible for deduction as job working charges eligible u/s 80IC of the Act 2.5.8 In this regard, the assessee is primarily engaged in the business of manufacturing of blow moulded and injection moulded plastic products such as bottles and caps. As seen from the break-up of revenue from operations, the assessee derives income from sale of products which constitutes more than 88% of operating income. The assessee has disclosed other income also which contains lease rental income. The assessee claims this lease rental income as job work charges and pleads that such job work charges are entitled to deduction u....
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....greed to entrust the operation and maintenance of the equipment to the service provider on the terms and conditions hereinafter contained." 2.5.10 Here, the company means the lessee and the service provider is the assessee as per the above agreement. 2.5.11 The assessee company acted as contractor to M/s. Reckitt Benckiser (India) Private Limited who has taken the contract from the assessee. As seen above, the scope of work as contained in the said agreements is entirely for supply of the machinery at the site of the lessee and supply of man power only On perusal of the invoices produced by the assessee also indicate that the assessee has provided only equipment / machinery to the lessee. The sample copy of one of the invoices is extracted as under. It is pertinent to mention that description given in all invoices raised is "rental charges on account of lease of equipment". 2.5.12 It is clear that the lessee has paid to the assessee the lease rental charges and not towards any manufacturing activity or job working charges. It is noticed that service Tax is also charged in all the invoices indicating that the invoice is only for providing equipment on leas....
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....article or thing 2.5.17 It is now a settled principle that in order to claim deduction u/s 80IA or 80IC or 80HHC, there should be direct nexus between the income earned and the main activity the profits of which are eligible for deduction. In other words, the profits of the undertaking should be directly derived from the activity or business which is eligible for the deduction. The following established judicial decisions have spelled out the above principle. 2.5.18 In Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/ 129 Taxman 539 the Supreme Court construed the ambit of the expression "derived from" in section 80HH. The assessee had earned interest on a deposit placed with the Electricity Board for the supply of electricity. The contention of the assessee was that this should be treated as income derived from the industrial undertaking under section 80HH because, without electric supply, the undertaking could not be run. The Supreme Court held that the expression "derived from" should be "understood as something which has direct or immediate nexus" with the industrial undertaking. Though electricity may be required for the purposes of the industrial undertaking....
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....it was held as under:- "Since interest income earned from fixed deposits reserves kept as security and as a business pre-requisite had nothing to do with carrying on assessee's business of manufacture and sale of electric meters, same would not be entitled to benefit of deduction under section 80-IC." 2.5.21 Hon'ble ITAT, Delhi in case of Conventional Fastners Vs ITO in ITA.No.6016/Del./2017Date of Order: 18/05/2018 for Assessment Year: 2013- 2014 held as under :- 10.1 I have considered the rival submissions. It is not in dispute that assessee earned interest on FDRs which was deposited with the concerned authorities for taking tender/contracts. Similar issue was considered in earlier year as well as in subsequent years and the authorities below have admittedly denied deduction under section 80IC to the assessee on same set of facts. In A.Y. 2009-2010 the assessee preferred appeal before ITAT, Delhi Bench which was dismissed by the Tribunal vide order dated 25.01.2017 (supra). Copy of the order of the Tribunal is placed on record. In this year also, similar facts have been recorded that the assessee in this year has earned interest income on FDRs ....
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....pment income for the purpose of allowing deduction u/s. 80IC of the Act is upheld. In view of the above, the addition of Rs. 1,21,41,264/- on account of excess deduction claimed u/s 80IC by the AO is confirmed. 10. Thereafter, the A.O. vide his final assessment order passed U/s. 143(3) r.w.s 144C(13) of the Act, dated 23/08/2022 gave effect to the directions of the DRP and determined the income of the assessee company at Rs. 30,38,15,784/-. 11. The assessee company, being aggrieved with the order passed by the A.O. U/s. 143(3) r.w.s 144C(13) of the Act has carried the matter in appeal before us. 12. We have heard the Ld. Authorized Representatives of both parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. 13. Controversy involved in the present appeal lies in a narrow compass, i.e., as to whether or not the "lease rental income", and income from the other streams of income disclosed by the assessee company under the head "Other income" in its books of account, and reported as such in its audited....
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....ance of the equipment. Further, as observed by the A.O/DRP, the "agreement" nowhere mentioned that the assessee company is to manufacture articles or products on job work basis. Apart from that, the A.O/DRP had observed that a perusal of the "manpower supply and maintenance agreement" (supra), revealed that the assessee company had further represented to the lessee for operating and maintaining the equipment. Accordingly, the assessee company had based on the aforesaid "agreements" both agreed to lease its equipment as well as entrust the operation and maintenance of the equipment. Our aforesaid view can be safely be gathered from the recitals of the latter "agreement", which reads as under: "AND WHEREAS the company has taken on lease vide a lease deed dated 22nd May 2015 from the service provider 2 SEB machines ("Equipment") with supporting infrastructure (Chiller, Compressor, Pneumatic Systems) for manufacturing of blow moulding components i.e, the plastic bottle's (Bottles") AND WHEREAS the service provider has represented to the company that for operating and maintaining the equipment it possesses specialized staff, skill, knowledge, expertise and licenses. ....
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....kes within its meaning receipts which are incidental to the actual conduct of the business of the industrial undertaking yet the same may not fall within the meaning "derived from" so as to be eligible for the benefit envisaged U/s. 80IA of the Act. Also, we find that the Hon'ble Apex Court in its order in the case of Sterling Foods Vs. CIT (1999) 237 ITR 53 (SC), had held, that where the nexus between the income and the industrial undertaking was not direct but was only incidental, it would not fall within the expression "profits derived from industrial undertaking". Also, the Hon'ble Apex Court in the case of Pandian Chemicals Ltd. (2003) 262 ITR 278 (SC), had held, that though certain incomes falling within the parameters of being incidental to business, can fall within the scope of the business of the assessee, yet it cannot be said to have been derived from the eligible industrial undertaking of the assessee so as to be eligible for deduction U/s. 80IA of the Act. Further, the Hon'ble Apex Court in its celebrated judgment in the case of Liberty India Ltd vs. CIT [2009] 183 Taxman 349 (SC), had brough....
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....ceived by the assessee company on account of the installation of self- manufactured stone crushing plants will fall within the meaning of "profits derived by" the assessee company from its eligible business for claiming deduction u/s 80IC of the Act, the issue involved in the case of the assessee company before us is that whether the "lease income" received by it from supply of machinery and equipment at the business premises of its client, viz., M/s. Reckitt Benckiser (India) Private Ltd. will be eligible for deduction u/s 80IC of the Act. We may herein observe that both the "agreements", viz. (i). agreement for equipment lease; and (ii). manpower supply and maintenance agreement, both dated 22.05.2015 are for the supply of equipment, manpower and maintenance, and nowhere mentions that the assessee company is manufacturing articles or products on job work basis. Apart from that, as observed by us at length herein above, viz. (i) disclosure of the amount received by the assessee company as "lease income" and not as a part of its sales in its audited books of accounts; (ii). raising of invoices by the assessee company on its client viz., M/s. Reckitt Benckiser (India) Private Ltd. m....
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.... Ltd. (2015) 59 taxmann.com 299 (Delhi) As in the case of the assessee company before us, it is proved that the subject amount was received on account of "lease income" for the supply of equipment to its client and not for manufacturing or job work charges, thus, the same being distinguishable as against the facts that were involved in the aforesaid case i.e. as to whether the amount received by the assessee company towards job work charges will qualify for deduction under Section 80IC of the Act, being distinguishable on facts will not carry the case of the assessee company any further. 24. We shall now deal with the claim of the assessee company that the remaining receipts/income that were disclosed in "Note-19" under the head "Other incomes" of its "Profit and loss account" for the subject year, viz., (i) interest on others: Rs. 1,63,125/-; (ii) Product Development Income (Net): Rs. 54,76,624/-; (iii) liabilities written back: Rs. 16,65,013/-; (iv) capital subsidy amortization: Rs. 30,00,000/- and (v) Miscellaneous income: Rs. 16,116/- had rightly been included as a part of the eligible profits for computing deduction u/s 80IC of the Act. A). Interest on others: R....
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....see company from its eligible business. At the same time, we find that though it is the claim of the assessee company that the subject amount forms part of its sales, but if that would have been so, then why it has separately been accounted for in its financial statement under the head "Other income". (iv). Be that as it may, we herein set-aside the issue to the file of the AO for fresh adjudication. If the claim of the assessee company that the subject amount was received on account of technical data supplied to the customer alongwith the manufactured product is found to be in order, then, the A.O shall allow the assessee's claim for deduction on the said receipt u/s 80IC of the Act. Needless to say, the AO shall in the course of the set-aside proceedings afford a reasonable opportunity of being heard to the assessee company which shall remain at liberty to substantiate its claim based on fresh documentary evidence/material, if any. C. Liabilities written back: Rs. 16,65,013/- (i). The assessee company states that the subject amount relates to the excess provision that was made in the earlier years, which, having been debited to its "Profit & loss account" had....
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....n in the backward areas or specific sectors. (iii). Although clause (xviii) to Section 2(24) of the Act, as made available on the statute vide the Finance Act, 2015 explicitly includes "assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee" in the definition of "Income", but an exception is carved out, wherein it is provided that if the subsidy has been reduced from the "actual cost" of the asset in accordance with the "Explanation 10" to Section 43(1) of the Act., then the provisions of Section 2(24)(xviii) will not be applicable. (iv). We are of the view that amortization of a capital subsidy in itself is not allowable as a direct deduction under Section 80-IC or under the Income Tax Act, but rather, the impact of the capital subsidy is reflected in the reduced "actual cost" of the asset, leading to a claim of lower depreciation over the asset's life. Although revenue subsidies that form part of the "profits and gains of business" are eligible for deduct....
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.... asset reduces the actual cost of the asset for depreciation purposes under Section 43(1) of the Act, thus, the depreciation allowed on the asset would be on the reduced cost with a resultant higher profit eligible for deduction under Section 80IC of the Act. (vi). We thus, are of the firm conviction, that though the revenue subsidies are included in the profits eligible for deduction under Section 80IC of the Act due to their direct nexus with business operations, but the capital subsidies impact profits through the reduced depreciation allowable on the subsidized cost of the asset, and thus, the inclusion by the assessee company of the amount of "capital subsidy amortization" in the eligible profits for deduction under Section 80IC, based on our aforesaid deliberations will not qualify for deduction under Section 80IC of the Act. E. Miscellaneous income: Rs. 16,118/- (i). In the absence of any material/evidence regarding the nature of the aforesaid income/receipt, we are unable to conclude that the same was derived by the assessee company from its eligible business. 25. The Grounds of Appeal No.2 to 5 are partly allowed for statistical purposes. 26. The....