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August 29, 2022

Deduction under Section 80IB for industrial undertakings manufactured at third-party allowable

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Deduction under Section 80IB for industrial undertakings manufactured at third-party allowable

Facts and Issue of the case

The grounds of appeal raised by the assessee are as follows:-

 The order of assessment is contrary to the facts and prejudicial to the assessee.

On appreciation of the facts and circumstances of the case the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer of not granting deduction to the assessee u/s 80IB of the Income tax Act.

On appreciation of the facts and circumstances of the case and interpretation of law, the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer in treating the income earned by the assessee as income not eligible for deduction U/s 80IB. The action of the Learned Commissioner of Income Tax (Appeals) in concluding that the assessee has not carried out any manufacturing activity is contrary to the facts of the case on record and hence deserves to be deleted.

On appreciation of the facts and circumstances of the case the Learned Commissioner of Income Tax (Appeals) has erred in holding that the assessee firm has not caried out any manufacturing activity at its industrial undertaking at Daman on or before 31.03.2004.

The assessee craves leave to add, amend, modify or alter the above grounds of appeal at any stage of appellate proceedings.

The facts are that assessee is a partnership firm engaged in the business of manufacturing of insulated cable, coper scrap, AC, DC wire set, stranded copper wire, wiring harness and PV tape and sleeve. The assessee filed its return of income for the year under consideration, declaring a total income of Rs. NIL, on 07.10.2004, wherein, an amount of Rs.8,00,308/-, was claimed as deduction u/s 80-IB of the Act. The return of income was processed u/s 143(1) of the Act. The return of income was accompanied by computation of income and audited accounts along with audit report in Form No: 3CB, 3CD and 10CCB. Thereafter, the case of the assessee has been picked for scrutiny, as per the Board’s Instruction No. 10/2004. Therefore, notice u/s 143(2) of the Act was issued on 13.01.2005 and served upon the assessee. The notice u/s 142 of Act was issued on 27.07.2005 requiring the assessee to furnish-various details. In response to notices u/s 143(2) and 142 of the Act, assessee attended office of the assessing officer and submitted required details. The assessing officer observed that assessee has started its business activity from the accounting period relevant to Assessment Year 2004- 05. As such, the year under consideration is the first year of business activity of the assessee. The assessing officer observed from the return of income, the assessee has claimed depreciation on fixed assets. Ongoing through the case records of the assessee, it was noted by assessing officer that assesses is not utilizing the power in its unit, therefore, during the assessment proceedings, a show-cause letter was issued on 03.11.2006 stating as to why the claim made u/s 80-IB of the Act should not be disallowed under the Provisions of section 80- IB(2)(IV) of the Act and why same should not be taxed?

In response to the above show-cause notice, the assessee has filed a written submission before assessing officer along with necessary details on 20.11.2006, wherein it has stated that, as the electricity connection has not been released by the Electricity Department, it has used generator for generating the power, which was hired from M/s Nangalwala Impex (Pvt) Ltd, in the period from 15.02.2004 to 31.03.2004. In this regard, assessee has submitted the confirmation letter of M/s Nangalwala Impex Pvt. Ltd, which is the sister concern of the assessee. Further, on going through the return of income for the year under consideration, it was observed by the assessing officer that undertaking has made job work from M/s, Nangalwala Chemical Industries at Alwar for copper drawing and making rubber cable. Therefore, during the assessment proceedings, a show-cause letter was issued on 21.12.2005, stating as to why its claim made u/s 80-1B of the Act should not be disallowed?

The assessing officer has gone through the submission of the assessee and observed that assessee is not doing any manufacturing activity and it is doing job work from M/s Nangalwaia Chemical Industries, which is the sister concern of the assessee. The assessing officer observed that Mr Naresh Agarwal is the common partner in both the firms namely M/s Nangalwala Chemical Industries as well as in M/s N-Core Cables. Therefore, AO noted that it was in the knowledge of Mr. Naresh Agarwal that the manufacturing activity for the assessee undertaking is done by M/s Nangalwala Chemical Industries and assessee undertaking is not doing any manufacturing activity as manufacturing activity was carried out under the supervision of Mr. Naresh Agarwal. In view of the above, activity of the unit of the assessee was not considered as a manufacturing activity by assessing officer therefore, assessing officer disallowed the claim of deduction u/s 80IB of the Act to the tune of Rs.8,00,308/-.

Aggrieved by the order of Assessing Officer, the assessee carried the matter in appeal before Ld. CIT(A), who has confirmed the action of the Assessing Officer. Aggrieved by the order of Ld. CIT(A) the assessee is in appeal before us.

Shri A. Gopalakrishnan, Learned Counsel for the assessee begins by pointing out that assessee received orders from customers to supply the goods to them and the assessee executed these orders by way of manufacturing done by M/s Nangalwala Chemical Industries of Alwar, under the direct supervision of one of the partners. Mr. Naresh Agarwal is the main technical person of company`s client’s unit. The assessee used its own Technical know-how, own process for manufacturing, own raw material and under the direct supervision of one of the partners therefore deduction under section 80IB can not be denied just because part good was manufactured at other place. This happened because electricity connection was not provided by Electricity Department on time. When the electricity connection was available to the assessee on 30.03.2004, the assessee never used outside premises for manufacturing purposes. The ld Counsel also submitted that in the event it is held that the manufacturing activity has taken place at Naganwala Impex Private Limited Alwar under the supervision of the Partner, even then the assessee shall be considered to be engaged in the business of manufacturing and deduction u/s 80IB is allowable in view of the decisions of the Jurisdictional Bombay high Court in the case of Anglo French Drug Co. (Eastern) Ltd .

On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.

Observation by the court

The court  had  heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. Regarding power connection, ld Counsel submits that admin, of U. T. of Daman & Diu has sanctioned the power connection on 01.03.2004 subject to submission of occupancy certificate of the building. Thereafter the agreements were entered into with the Electricity Department on 23.03.2004 for the release of power connection and ultimately power was released on 30.03.2004. Thus, even if the assessee operates the machinery for one day on 31.03.2004 and manufactures items, it is eligible for deduction u/s 80IB of the Act. Therefore, as per ld Counsel, this critical evidence has been overlooked and ignored by the lower authorities while concluding that power has not been used for manufacturing. The Learned Counsel also pleaded that ld CIT(A) did not confine scope of adjudication up to the direction given by Hon`ble ITAT, which is against the principle of natural justice.

About plant and machinery, ld Counsel submits that entire machinery has been transported in a truck by the supplier and installation of commissioning of Plant and Machinery was done by the employees of the assessee within 5 to 10 days because of their past experience. The Purchases of raw materials has never been disputed by the AO either in the original assessment order or in the remand report. The assessee sufficiently substantiated the diesel purchase bills and the AO has not controverted the same except to point out some discrepancy in the invoice number, which is third-party evidence and not at all in the control of the assessee. The assessee has given exhaustive details of manufacturing process, number of working hours required to manufacture the items sold, copy of the audited balance sheet disclosing the purchases and sale and installation of plant and machinery before all the authorities and the same has not been found to be false at any stage.

Further the books of accounts had been produced before the AO during the course of assessment proceedings and has been duly verified. The observations made by ld CIT(A) are general in nature. The assessee had submitted Permanent Certificate of Registration as an SSI unit obtained from DIG, Daman specifying the date of commencement of production.The Assessee’s manufacturing activity consisted of (i) canvassing of orders, (ii) preparation of specifications of the material to be supplied to Formula Cables and electrical on the basis of orders, (iii) placing orders for the manufacture of rubber cables with Nangalwala chemicals Ind. (iv) to ensure that the manufacturing process is carried on by Nangalwala chemicals, under the direct supervision of the Partner Mr. Naresh Agarwal, the Partner and (v) to have a check over the quality control of Cables manufactured and assuring that the end products conform to specification as per customers order giving performance and guarantee to the customer. Further the Payment of cable making charges Rs. 46,518/- Paid to Nagalwal Chemical has been debited to Profit and Loss Account,. The court note that decision of the Honorable Bombay high Court in the case of Penwalt India Ltd wherein on a similar situation the Hon’ble High Court has held that assessee in that case qualify for the relief u/s 80-I of the Act. In this regard it is submitted by ld Counsel that section 80-I is pari-materia to section 80-IB of the Act and therefore is squarely applicable to the facts of the case of the assessee as well.

On the identical facts, our view is fortified by the judgment of the Hon’ble Bombay high Court in the case of Anglo French Drug Co. (Eastern) Ltd reported in wherein pursuant to Circular issued by CBDT the Hon`ble Bombay High Court has clearly held that manufacturing at third party premises using their machinery under the supervision and control of an assessee amounts to manufacturing by the industrial undertaking.

From the above judgment of the Hon`ble Bombay High Court in the case of Anglo French Drug Co. (Eastern) Ltd(supra), it is abundantly clear that it is not necessary that the manufacturing company must manufacture the goods by its own plant and machinery at its own factory. If in substance the manufacturing company has employed another company for getting the goods manufactured by it under its own supervision or control, the assessee can be considered as a company engaged in manufacture of goods and, thus, an industrial company. Therefore, we note that in the assessee`s case under consideration, assessee received orders from customers to supply the goods to them and the assessee executed these orders by way of manufacturing done by M/s Nangalwala Chemical Industries of Alwar, under the direct supervision of one of the partners. The assessee applies own technology, standard process, own raw material, own quality control/check, and the goods are manufactured as per the specification given by customers. Based on these facts and circumstances, we note that assessee is entitled to get deduction under section 80-IB of the Act. Hence, the court  direct the assessing officer to allow deduction under section 80IB of the Act, to the tune of Rs. Rs.8,00,308/-.

Conclusion

The appeal filed by the assessee is allowed by the court.

N-Core-Cables-Vs-ACIT-ITAT-Surat

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