2006 (6) TMI 253 - AT - Income Tax

Deductions - Profits and gains from industrial undertakings etc. after certain dates/infrastructure undertakings Block assessment in search cases

Summary

Issues Involved:
1. Eligibility of deduction under section 80-IA for profits from manufacturing done by Loan Licensee Manufacturers (LLMs).
2. Nature of assessed income as undisclosed income under section 158B(b).
3. Jurisdiction of the Assessing Officer to issue notice for initiating block assessment.

Issue-wise Detailed Analysis:

1. Eligibility of Deduction under Section 80-IA:
The primary issue was whether the assessee-company could claim deductions under section 80-IA for profits arising from manufacturing activities carried out by Loan Licensee Manufacturers (LLMs) who were not independently eligible for such deductions. The Assessing Officer disallowed the deduction for profits generated by three out of eight LLMs, treating Rs. 10,25,47,143 as undisclosed income. The CIT(A) held that the assessee was entitled to the deduction under section 80-IA even for work done by LLMs not independently eligible. This decision was based on the Bombay High Court's ruling in CIT v. Penwalt India Ltd., which established that the principal entity's eligibility sufficed for claiming deductions, regardless of the subcontractors' eligibility. The Tribunal upheld the CIT(A)'s decision, emphasizing that the manufacturing activity, including subcontracted work, was under the strict control and supervision of the assessee and was integral to its overall business operations. The Tribunal also referenced similar decisions by various High Courts, reinforcing the principle that an industrial undertaking's eligibility for deductions under section 80-IA did not necessitate the independent eligibility of subcontractors.

2. Nature of Assessed Income as Undisclosed Income:
The second issue was whether the income assessed by the Assessing Officer constituted undisclosed income as defined under section 158B(b). The block assessment was based on an admission by one of the assessee's directors during a search operation, which was later retracted. The CIT(A) noted that no incriminating documents were found during the search, and the only issue was the claim of deduction under section 80-IA. The Tribunal agreed with the CIT(A), stating that the admission on a point of law was not binding and that the retraction required further investigation by the authorities, which was not done. Furthermore, the Tribunal highlighted that the claim for deduction was made in regular returns, and all relevant facts were disclosed to the department, negating the notion of undisclosed income. The Tribunal concluded that the assessed income did not qualify as undisclosed income under Chapter XIV-B of the Income-tax Act.

3. Jurisdiction of the Assessing Officer to Issue Notice for Initiating Block Assessment:
The third issue, raised by the assessee in its cross objection, questioned the jurisdiction of the Assessing Officer to issue a notice for initiating block assessment. Given that the Tribunal allowed the first ground of the cross objection, deeming the assessed income not to be undisclosed, this issue became infructuous and was not addressed further.

Conclusion:
The Tribunal dismissed the revenue's appeals and allowed the assessee's cross objection, affirming the CIT(A)'s decision to grant deductions under section 80-IA for profits from manufacturing done by LLMs, even if the LLMs were not independently eligible. The Tribunal also ruled that the assessed income did not constitute undisclosed income under section 158B(b) and, consequently, did not address the jurisdictional issue.