2009 (3) TMI 645 - AT - Income Tax

Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings

Issues Involved:

1. Deduction under section 80-IA/80-IB.
2. Addition on account of MODVAT under section 145A.
3. Disallowance under section 14A.

Detailed Analysis:

1. Deduction under section 80-IA/80-IB:

The primary issue was whether the assessee's claim for deduction under section 80-IA/80-IB was valid. The Assessing Officer (AO) rejected the claim on the grounds that the machinery used by the assessee was hired from a sister concern and was previously used by that concern, thus forming the industrial undertaking by splitting up or reconstruction of an existing business. The CIT(A) upheld this view, emphasizing that the industrial undertaking should be formed with new machinery and not by transferring previously used machinery.

The assessee argued that the condition in sub-section (2)(i) of section 80-IB, which states that the industrial undertaking should not be formed by splitting up or reconstruction of an existing business, refers to the business of the assessee itself, not a sister concern. Additionally, the term 'transfer' in sub-section (2)(ii) should not include machinery taken on hire. The assessee relied on several judicial precedents to support this interpretation.

The Tribunal, after reviewing the arguments and relevant case laws, concluded that hiring machinery does not amount to a transfer of previously used machinery. The Tribunal noted that the assessee had indeed set up a new industrial unit with new machinery and buildings and only hired some machinery for operational purposes. Consequently, the Tribunal allowed the assessee's claim for deduction under section 80-IA/80-IB.

2. Addition on account of MODVAT under section 145A:

The AO added unutilized MODVAT credit to the closing stock value, as per the tax audit report, which indicated that the assessee followed an exclusive method of accounting. The CIT(A) confirmed this addition.

The Tribunal noted that the issue was covered by its earlier decision in the assessee's own case, which followed the ITAT Mumbai "A" Bench decision in Hawkins Cookers Ltd. The Tribunal explained that section 145A requires adjustments to include any tax, duty, cess, or fee actually paid or incurred. The Tribunal emphasized that adjustments should be made to both opening and closing stock to reflect the correct value and avoid double deductions.

The Tribunal remitted the matter back to the AO to verify the facts and ensure that the assessee had given effect to section 145A correctly, including the deduction under section 43B for excise duty paid before the due date of filing the return.

3. Disallowance under section 14A:

The AO disallowed 2% of the exempt dividend income as expenditure incurred to earn that income. The CIT(A) confirmed this disallowance.

The Tribunal referred to the ITAT Mumbai Special Bench decision in ITO v. Daga Capital Management (P.) Ltd., which provided a method for determining the expenditure related to exempt income under rule 8D of the Income-tax Rules. The Tribunal remitted the matter back to the AO to verify the assessee's working and decide the issue in light of the Special Bench decision, ensuring compliance with section 14A and rule 8D.

Conclusion:

The Tribunal allowed the assessee's appeals for statistical purposes, directing the AO to re-examine the issues of MODVAT credit and disallowance under section 14A as per the detailed guidelines provided. The claim for deduction under section 80-IA/80-IB was allowed based on the interpretation that hiring machinery does not constitute a transfer of previously used machinery.

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