2007 (2) TMI 355 - AT - Income Tax

Deductions u/s 80-IB - New industrial undertaking - second hand machinery in excess of 20% of its total investment in plant - HELD THAT - It is not the case of the revenue that this second hand machinery was required to achieve its capacity of production. As seen from the statement of facts before the CIT(A), the assessee decided to purchase the platter machine to meet the additional requirement of its major customer M/s. Cipla. This fact has not been controverted by the revenue. Thus as rightly held by the CIT(A) in his order, it is not the intention of the Legislature that even after the formation of the industrial undertaking, it should not purchase any second hand machinery to meet its future demands. The only prohibition is against the formation of the industrial undertaking using the second hand machinery. In this view of the matter, we are not inclined to interfere with the order of the CIT(A). Further the Delhi High Court in the case of Orissa Cement Ltd. v. CIT 1992 (11) TMI 80 - DELHI HIGH COURT while dealing with deduction u/s 80J and the conditions precedent u/s 80A(4)(ii) has held that second hand machinery purchased from another party was new as far as the assessee is concerned and therefore the condition was fulfilled making the assessee entitled to deduction even without the help of Explanation 2 to section 80J(4). This view has further been reiterated by the Delhi High Court in the case of CIT v. Orissa Cement Ltd. 2001 (12) TMI 52 - DELHI HIGH COURT . In the result, appeal of the revenue stands dismissed.

Summary

Issues:

1. Interpretation of the term "formation of an undertaking" for claiming deduction under section 80-IB.
2. Relevance of acquiring second-hand machinery for an industrial undertaking.
3. Application of section 80-IB(2) in the case of purchasing second-hand machinery.

Issue 1: Interpretation of the term "formation of an undertaking" for claiming deduction under section 80-IB

The case involved a dispute where the revenue challenged the CIT(A)'s decision regarding the formation of an industrial undertaking under section 80-IB. The revenue contended that the formation of an undertaking is a continuous process until all necessary Plant & Machinery are in place. However, the CIT(A) interpreted that the conditions for deduction under section 80-IB are to be fulfilled only at the time of the formation of the new industrial undertaking. The Tribunal analyzed the facts and concluded that the industrial undertaking is considered formed when it starts production, not when all machinery is in place. The Tribunal upheld the CIT(A)'s decision, emphasizing that the legislative intent does not prohibit the acquisition of second-hand machinery after the formation of the industrial undertaking.

Issue 2: Relevance of acquiring second-hand machinery for an industrial undertaking

The Assessing Officer disallowed the deduction claim under section 80-IB based on the purchase of a second-hand cutting and creasing machine exceeding 20% of the total value of plant and machinery. However, the CIT(A) overturned this decision, stating that there is no restriction on subsequent additions to the industrial undertaking's capacity through the acquisition of second-hand machinery. The Tribunal supported this view, highlighting that the legislative intent does not prevent an industrial undertaking from purchasing second-hand machinery to meet future demands after its formation. The Tribunal emphasized that the prohibition is against using second-hand machinery during the formation of the industrial undertaking.

Issue 3: Application of section 80-IB(2) in the case of purchasing second-hand machinery

The Tribunal examined the application of section 80-IB(2) concerning the purchase of a second-hand platter machine after the commencement of production. The section prohibits the use of second-hand plant and machinery during the formation of the industrial undertaking claiming deduction under section 80-IB. The Tribunal clarified that the industrial undertaking was formed when production started, not when all machinery was acquired. Therefore, the purchase of second-hand machinery to meet additional requirements after the commencement of production does not violate the provisions of section 80-IB(2). Citing precedents, the Tribunal dismissed the revenue's appeal and upheld the CIT(A)'s decision in favor of the assessee.

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