2007 (6) TMI 303 - AT - Income Tax

Computation of deduction u/s 33AC - income generated during the course of business of operation of ships - Preliminary expenses - Whether business of operation of ships are considered to be industrial undertaking ? - HELD THAT - If the FDRs are purchased to obtain the credit limit or on account of business exigencies the interest generated thereon certainly be business income and is eligible for deduction u/s 33AC. In case surplus funds were put in FDRs and interest was generated thereon that interest income would not qualify to business income of the assessee and also would not be eligible for deduction u/s 33AC of the Act. So far as sale of scrap is concerned it is certainly generated during the course of business of operation of ships. Sale proceeds of it will certainly be an income derived from the business of shipping operation and, as such, eligible for deduction u/s 33AC of the Act. Since the relevant information with regard to insurance claim and interest earned on FDRs are not available on record we restore the matter to the file of the Assessing Officer to readjudicate the issue in terms indicated above. If he comes to the conclusion that the insurance claim and interest on FDRs were received during the course of business of shipping operation of the assessee, deduction be allowed otherwise it would be treated as income from other sources. So far as variation in the figures of Return Income and assessee s income are concerned we are of the view that assessee is entitled for deduction u/s 33AC on the finally assessed income from business of operation of ships. In this regard the CIT(A) has also issued directions for rectification by the Assessing Officer. As such no further direction is required. We, however, of the view that the deduction is always available on the assessed income and not on the Returned income. Disallowance of claim u/s 35D - incurred public issue expenses - industrial undertaking - Whether business of operation of ships are considered to be industrial undertaking ? - HELD THAT - In a common parlance the industrial undertaking means an undertaking engaged in the business of manufacture or processing of goods. The words industrial undertaking has been defined in the case of CIT v. Textile Machinery Corpn. 1970 (7) TMI 15 - CALCUTTA HIGH COURT in which they have held that the words industrial undertaking in the Income-tax Act, 1922 should be interpreted to mean any venture or enterprise which a person undertakes to do which has relation to some industry or has some industrial consequences. The notion of any undertaking basically means that it has got complete, concrete and tangible nature in the part of industry to make it industrial undertaking. To understand the real meaning of Industrial Undertaking one should go either to the plain or general meaning or the meaning adopted in various provisions of the Act. As per plain and general meaning, industrial undertaking should be an undertaking engaged in the manufacture or processing of goods. The similar definition is also in Explanation 1 to section 33B, according to which industrial undertaking means any undertaking which is mainly engaged in the business of generation of or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. We, therefore, do not find any merit in the arguments of the assessee. We, however, carefully examined the order of the lower authorities in this regard and we find that they have given valid reasons for treating business of operation of ships not to be an industrial undertaking. We therefore find no infirmity in the order of the CIT(A) and we confirm the same. Deduction u/s 80-IA or 80-IB - profit earned by other barges - HELD THAT - Following the judgment in the case of Ipca Laboratory Ltd. v. Dy. CIT 2004 (3) TMI 9 - SUPREME COURT , deductions are to be computed as per Chapter VI-A of the Act. In the light of these judgments we do not find any infirmity in the mode of computation adopted by the lower authorities. We, however, of the view that loss suffered by any of the barge will not be adjusted/set off against the profit earned by other barges which is eligible for deduction u/s 80-IB if the accounts are separately maintained but total deduction under this chapter should not exceed the gross total income of the assessee as held in Synco Industries Ltd. v. Assessing Officer 2001 (7) TMI 45 - BOMBAY HIGH COURT by the jurisdictional High Court. We, therefore, restore the matter to the file, the Assessing Officer to recompute deduction in terms indicated above. In the result, appeals of the assessee are partly allowed for statistical purpose and that of the revenue is dismissed.

Summary

Issues Involved:
1. Validity of reopening of assessment.
2. Computation of deduction under section 33AC.
3. Disallowance of claim under section 35D.
4. Deduction under section 80-IA or 80-IB in light of deduction claimed under section 33AC.
5. Allowance of commission paid and depreciation on labor charges capitalized.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment:
The first ground in appeal No. 8045/M/2003 concerns the validity of reopening of assessment. This ground was not pressed by the learned counsel for the assessee during the hearing and thus was dismissed as not pressed.

2. Computation of Deduction under Section 33AC:
The issue pertains to the computation of deduction under section 33AC. The assessee claimed deductions on interest income and miscellaneous income alongside business income from the operation of ships. The Assessing Officer disallowed these deductions, citing that the income was not derived from the operation of ships, a stance upheld by the CIT(A) referencing the Apex Court judgment in CIT v. Sterling Foods. The Tribunal, however, noted that the scope of eligible income under section 33AC is broader than sections 80-I and 80HH, encompassing profits derived from the business of operating ships. It was concluded that if the FDRs were purchased for business exigencies, the interest would qualify as business income eligible for deduction. The matter was remanded to the Assessing Officer to re-adjudicate based on whether the income was generated during the business of operating ships.

3. Disallowance of Claim under Section 35D:
The assessee claimed a deduction under section 35D for public issue expenses, which was disallowed by the Assessing Officer on the grounds that the business of operating ships does not qualify as an industrial undertaking. The CIT(A) upheld this view. The Tribunal examined various definitions and judicial precedents, concluding that the operation of ships does not fall within the general or statutory definitions of an industrial undertaking. The Tribunal confirmed the CIT(A)'s order, denying the deduction under section 35D.

4. Deduction under Section 80-IA or 80-IB in Light of Deduction Claimed under Section 33AC:
The assessee claimed deductions under section 80-IA or 80-IB for profits from specific barges, which the Assessing Officer disallowed, stating that deductions under Chapter IV-D should be deducted first to compute the gross total income. The CIT(A) upheld this approach. The Tribunal referenced the Supreme Court's judgment in CIT v. Canara Workshops (P.) Ltd., which allows independent computation of profits for eligible units without offsetting losses from other units. However, deductions under section 80-IB must be computed after allowing deductions under section 33AC, adhering to Chapter VI-A provisions. The matter was remanded to the Assessing Officer for recomputation in line with these principles.

5. Allowance of Commission Paid and Depreciation on Labor Charges Capitalized:
The revenue appealed against the CIT(A)'s decision to allow the entire commission paid to M/s. Muthu & Co. and depreciation on labor charges capitalized. The Assessing Officer had disallowed these claims due to a lack of details and the fact that Muthu & Co. was not assessed to tax. The CIT(A), after examining the evidence, allowed the claims. The Tribunal found no specific defects in the CIT(A)'s examination and thus confirmed the order, dismissing the revenue's appeal.

Conclusion:
The appeals of the assessee were partly allowed for statistical purposes, while the revenue's appeal was dismissed. The Tribunal provided detailed directions for re-adjudication and recomputation by the Assessing Officer on specific issues, ensuring adherence to the relevant statutory provisions and judicial precedents.