2014 (2) TMI 1176 - AT - Income Tax

Eligibility of deduction u/s 80IB(5)(i)- whether the assessee is not involved in manufacturing or producing activity but is only carrying out the activity of assembling at its Silvassa Unit? - Held that - We are not inclined to interfere with the finding of CIT(A), who has allowed the claim of assessee u/s.80IB(5)(i) by holding that assembling of various components amounts to manufacturing. See case of Jackson Engineers 2009 (12) TMI 649 - Delhi High Court wherein held that the activity of assembling gensets from various components amounts to manufacture or production for the purpose of deduction under s. 80-IA - Decided in favour of assesse. Artificial inflation of profit of Silvassa Unit in order to claim higher deduction - Held that - there is no concrete evidence that the assessee has shifted the profit of Chakan Unit to Silvassa Unit at such a magniture and hence, the addition sustained by CIT(A) could not be sustained, as such, at the same time, the objection of revenue authorities on this point cannot be rejected as in toto. Taking into all the facts and circumstances in to consideration, the deduction of claim u/s.80IB(5)(i) is restricted to 15% as against done by the CIT(A). As a result, this issue is partly allowed in favour of assesse.

Summary

Issues Involved:
1. Deduction under Section 80IB(5)(i) for assembling versus manufacturing.
2. Profit inflation and allocation between units.
3. Service charges as part of profits for deduction under Section 80IB.
4. Charging of interest under Sections 234A, 234B, and 234C.
5. Penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Deduction under Section 80IB(5)(i) for Assembling versus Manufacturing:
The primary issue was whether the assessee's activity of assembling generator sets at the Silvassa unit qualifies as manufacturing for the purpose of claiming deduction under Section 80IB(5)(i). The Revenue argued that the activity was merely assembling and not manufacturing, citing that no sophisticated machinery or skilled manpower was involved. The CIT(A) allowed the deduction, holding that assembling various components amounts to manufacturing. The Tribunal upheld this view, referencing several judgments, including the Bombay High Court in Tata Locomotive and Engineering Company Ltd., and the Delhi High Court in Jackson Engineers, which recognized assembly as manufacturing. The Tribunal concluded that the assessee's activity met the criteria for manufacturing since the final product (generator sets) was distinct from the individual components.

2. Profit Inflation and Allocation Between Units:
The Assessing Officer (AO) observed that profits of the Silvassa unit were disproportionately high compared to the Chakan unit, suggesting artificial inflation to claim higher deductions. The CIT(A) recalculated the profits, applying the same net profit ratio to both units, and confirmed an addition of Rs. 1,38,75,693 instead of the original disallowance of Rs. 7,74,08,854. The Tribunal found that the AO's comparison of canopy prices was flawed due to differences in specifications and features. The Tribunal also noted that the AO incorrectly applied Section 80IA(10) instead of Section 80IA(8). The Tribunal partially accepted the assessee's arguments, reducing the disallowance to 15% of the claimed deduction.

3. Service Charges as Part of Profits for Deduction under Section 80IB:
The AO disallowed the inclusion of service charges in the profits eligible for deduction under Section 80IB. The CIT(A) and the Tribunal found that these service charges were integral to the business and should be considered part of the profits derived from the undertaking. Thus, the service charges were allowed to be included in the profits eligible for deduction.

4. Charging of Interest under Sections 234A, 234B, and 234C:
The assessee contested the charging of interest under Sections 234A, 234B, and 234C. The Tribunal noted that the charging of interest is consequential and dependent on the final tax liability determined after giving effect to the Tribunal's order.

5. Penalty Proceedings under Section 271(1)(c):
The AO initiated penalty proceedings under Section 271(1)(c) for concealment of income. The Tribunal deemed this issue premature, as the final determination of income was pending. Consequently, the penalty proceedings were dismissed at this stage.

Conclusion:
The Tribunal dismissed the Revenue's appeals and partly allowed the assessee's appeals. It upheld the CIT(A)'s decision that assembling amounts to manufacturing for the purpose of Section 80IB(5)(i) deductions, allowed the inclusion of service charges in the profits, and reduced the disallowance for profit inflation to 15%. The issues related to interest and penalty were treated as consequential and premature, respectively.