Section 80-I read with section 80-IA of Income-tax Act

IN THE ITAT, MUMABI BENCH ‘I’ Joint Commissioner of Income-tax, Special Range 47 - Mumbai v. Associated Capsules (P.) Ltd. K.P.T. THANGAL, VICE PRESIDENT AND D.K. SRIVASTAVA, ACCOUNTANT MEMBER IT APPEAL NO. 3214 TO 3216 AND 193 (MUM) OF 2000 C. O. NOS. 45, 171 AND 172(M) OF 2000 [ASSESSMENT YEARS 1994-95 TO 1997-98] FEBRUARY 5, 2008 Section 80-I read with section 80-IA of Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings, etc. after certain dates - Assessment year 1995-96 - Whether benefit of section 80-I/80-IA is not available to a unit or new unit unless unit’s in nature of an ‘undertaking’ - Held yes - Whether a unit qualifies to be called an ‘undertaking’ when it undertakes production or manufacture of articles or things in its own right and produces such articles or things by itself as a separate and independent unit - Held, yes - Assessee had been engaged in business of production of empty hard gelatine capsules and their sale to pharmaceutical companies since 1960 - Manufacturing activities were carried out by assessee with help of capsule manufacturing machines - Commensurate with growth of business, assessee kept on adding new undertaking to its existing undertakings - In relevant assessment year assessee had 17 capsule manufacturing machines installed in 4 separate undertakings - Assessee claimed deduction under section 80-I in respect of undertaking No. II and also claimed deduction under section 80-IA in respect of undertaking No. III - Assessing Officer held that undertaking Nos. II and III could not be regarded as separate and independent undertakings for purpose of deduction under sections 80-I and 80-IA and, accordingly, denied deduction claimed by assessee - Commissioner (Appeals) held that each of undertaking was separate and independent and was producing capsules in its own right - He, therefore, allowed assessee’s claim for deduction under section 80-I/80-IA - Whether since Commissioner (Appeals) after examining relevant materials on record held that units in question were not only a well integrated units producing capsules on there own but also had separate and distinct identity of there own and further since findings recorded by the Commissioner (Appeals) that units in question were separately and independently engaged in production of capsules on this own had not been shown to be incorrect or based on no material Commissioner (Appeals) had rightly allowed deduction under section 80-I/80-IA as claimed - Held, yes Words and phrases: The term ‘undertaking’ as appearing in section 80-I/80-IA of the Income-tax Act, 1961. FACTS The assessee had been engaged in the business of production of empty hard gelatine capsules and their sale to the pharmaceutical companies since 1960. The manufacturing activities were carried out by the assessee with the help of capsule manufacturing machines. Commensurate with the growth of the business, the assessee kept on adding new undertakings to its existing undertakings. In the relevant assessment year, the assessee had 17 capsule manufacturing machines installed in 4 separate undertakings. The assessee claimed deduction under section 80-I in respect of undertaking No. II; wherein machine Nos. 6 to 9 were installed. It also claimed deduction under section 80-IA in respect of undertaking No. III; wherein machine Nos. 10 to 13 were installed. The Assessing Officer having noticed that the departmental authorities had carried out a survey under section 133A at the factory premises of the assessee-company, and found that all the four undertakings were located in the same premises of the factory and all of them were involved in the production of capsules, that the source of power for all the units was one inasmuch as there was one electricity bill for the factory, that air-conditioning plant for all the units was common, and that certain ancillary activities, pre and post manufacturing, were common held that all the four undertaking claimed by the assessee to be separate and independent from each other were essentially one undertaking. He, therefore, concluded that undertaking Nos. II and III could not be regarded as separate and independent undertakings for the purpose of deduction under section 80-I and 80-IA and accordingly denied the deduction claimed by the assessee. On appeal, the Commissioner (Appeals) held that though all the machines and undertakings involved in the manufacturing of the same article, namely, capsules were located in the same premises, the area of each of the four undertakings was clearly demarcated and separated from each other, that though the main source of power in the entire factory was common, the power consumed by each machine in each undertaking was clearly and separately recorded, that though centralised air conditioning facility was provided to all the undertakings it could be shut off in any undertaking without affecting others, that the supply of raw material was controlled and monitored machine-wise and also undertaking-wise, that the machines in each undertaking had distinctive features, that online sorting of capsules was carried out machine-wise, that though sorting and packing operations were common operations for all the undertakings but they were in the nature of post manufacturing operations, and that in terms of operational independence, each of the four undertakings was working independently of the other undertakings. He, therefore, held that each of the undertaking was separate and independent and was producing capsules in its own right. He therefore, upheld the assessee’s claim for deduction under sections 80-I and 80-IA. On revenues’ appeal to the Tribunal: HELD Relief under section 80-I/80-IA is admissible in respect of the profits and gains derived from, inter alia, an industrial undertaking. (Para 11) It is apparent on bare perusal of section 80-I/80-IA that the notion of ‘undertaking’ is a core jurisdictional element for the application of section 80-I/80-IA. Other conditions stipulated by section 80-I/80-IA can be satisfied only when there is an ‘undertaking’. However, mere existence of an ‘undertaking’ is not sufficient. The ‘undertaking’ should also be new in the sense that it should have begun to manufacture or produce specified articles or things after the prescribed time schedule. Therefore, there must primarily be manufacture or production of articles or things involving a new undertaking or undertakings. However, controversies do arise in cases where the old business is being carried on by the assessee and the new activity is launched by him by establishing new plants and machinery by investing substantial funds to produce the articles or things which are same as those of the old business or produce some distinct marketable products which may feed the old business. (Para 12) There is no doubt that the benefit of section 80-I/80-IA is not available to a unit or new unit unless the unit is in the nature of an ‘undertaking’. The term ‘unit’, according to the New Oxford Dictionary of English, signifies an individual thing or person regarded as single and complete, especially for purposes of calculation. It also signifies a ‘device that has a specified function..’ The term ‘undertaking’, on the other hand, is defined in the same Dictionary as ‘task that is taken on’ and also as ‘the action of undertaking to do something .’ In Black’s Law Dictionary, the term ‘undertaking’ is defined to mean, inter-alia, ‘to take on an obligation or task’. The Income-tax Act does not define the term ‘undertaking’ though the term ‘industrial undertaking’ is defined in section 33B as ‘any undertaking which is mainly engaged in the business of .... or in the manufacture or processing of goods ...’ In the absence of a precise statutory definition of the term ‘undertaking’, the crucial question whether a unit is to be considered as an undertaking within the meaning of section 80-I/80-IA is left to be answered by the courts and Tribunals. The term ‘undertaking’ has to be approached telelogically focusing on the subject matter the unit in question is concerned with. In order to constitute an ‘undertaking’, the unit must undertake the specified task. In the context of section 80-I or section 80-IA, the obligation or task to be undertaken by a unit is the manufacture or production of articles or things specified in that section. The ‘undertaking’ envisaged by the aforesaid provisions is the one which undertakes to manufacture or produce the articles or things in its own right and consequently derives the profits or gains there-from. Therefore, a unit qualifies to be called an ‘undertaking’ when it undertakes the production or manufacture of articles or things in its own right and produces such articles or things by itself as a separate and independent unit. It should not only be a separate and independent unit but a well integrated unit capable of undertaking the manufacturing or production of articles or things. The Supreme Court in the case of Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 173 (SC) had held that an undertaking claiming deduction must be a new integrated unit by itself where articles or things are manufactured or produced. The relevant tests in this behalf have been laid down by the Supreme Court in the said judgment as follows : (i) Investment of substantial fresh capital in the industrial undertaking set up; (ii) Employment of requisite labour therein; (iii) Manufacture or production of article in the said undertaking ; (iv) Earning of profits clearly attributable to the said new undertaking; and (v) Above all, a separate and distinct identity of the industrial unit set up. (Para 13) In the instant case, the assessee’s units in question were engaged in the production of capsules and had also produced the capsules in the year under appeal. The assessee had been denied deduction on the sole ground that all the units were also producing capsules and, were, therefore, part of the same undertaking. The Commissioner (Appeals) after examining the relevant materials on record held that the units in question were not only a well integrated units producing capsules on there own but also had separate and distinct identity of their own. The findings recorded by the Commissioner (Appeals) that the units in question separately and independently engaged in the production of capsules on there own had not been shown to be incorrect or based on no material. It was also not in dispute that each undertaking had not only produced the capsules but also derived the profits and gains from them. The department had also not rebutted the assessee’s submission that it had treated each undertaking as separate and independent in its accounts. It was also not the case of the department that any of the negative tests laid down in section 80-I (2) was attracted in the instant case. Therefore, the Commissioner (Appeals) had decided the issue correctly. Hence, the appeal filed by the revenue was liable to be dismissed. (Para 14) CASE REVIEW Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 173 (SC) - Followed EDITORS NOTE 1. The Commissioner (Appeals) in terms of the judgment of the Supreme Court in the case of CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275/130 Taxman 179 was justified in deleting the disallowance of Rs. 65,61,852, made by the Assessing Officer, on account of unutilized modvat credit. 2. The Commissioner (Appeals) following the decision of the Mumbai bench of the tribunal rendered in the case of Dy. CIT v. Maharashtra Scooters Ltd., [1997] 61 ITD 12 (Pune) (TM) and also the another order of the tribunal rendered in the assessee’s own case for the assessment year 1997-98 was justified in deleting the addition made by the Assessing Officer to the income of the assessee on account of sales tax set off holding that sales tax set off was not covered by the provision of section 43B. 3. Where the assessee had disallowed 50 per cent of the entertainment expenses on its own and the Assessing Officer enhanced the amount of disallowance to 75 per cent for want of relevant details and further the Commissioner (Appeals) confirmed the order of the Assessing Officer in this behalf since the Commissioner (Appeals) had asked the assessee as to whether it had maintained details of the guest entertained and other relevant details in this behalf and the assessee could not give those details, the Commissioner (Appeals) was justified in confirming the Assessing Officer’s action in disallowing 75 per cent of the expenditure. 4. Where the assessee contended before the Tribunal that the Commissioner (Appeals) erred in confirming the action of the Assessing Officer in reducing from the profits of the business 90 per cent of gross amount of rent and interest received instead of the net amount since a similar issue has recently been considered by the Supreme Court in the case of Hero Exports v. CIT, [2007] 295 ITR 454/165 Taxman 445 (SC)and further since the ratio laid down in Hero Export’s case (supra) had not been considered by the Commissioner (Appeals) as the said judgment was not available at that point of time when he decided the appeal, the issue required a fresh decision by the Commissioner (Appeals). 5. Sales tax and excise duty deserved to be excluded from total turnover for the purpose of computing relief under section 80HHC.