2014 (9) TMI 1003 - AT - Income Tax

Eligibility of deduction under sections 80I and 80HH - contention of the assessee is that during the period AYs 1988-89 to 1990-91 the machineries were put to use and no commercial production was made except the trial run - Held that - The onus was on the assessee to demonstrate the quantum of input used in all three years when the depreciation is claimed and also the quantity of production produced in the trial run . Since the trial run has been made in all the three years, it was incumbent upon the assessee to explain that how many days trial run was carried out and how much electricity was consumed, whether raw-material was used or not, whether any finished products were produced and what was the accounting treatment of these goods, etc. and nothing has been placed on record by the assessee. The Revenue has demonstrated that there is substantial increase in the production turnover of the old Unit and as per the Revenue, such increase in the production was not possible when the production made in the new Unit is utilized by the old Unit. It is not disputed that the machinery used by the two Units are different, but the product remained same except the length of the product. It is not coming out from the record that what was the nature of the product sold by the assessee during AYs 1988-89 to 1990-91. In the absence of such details and also coupled with the facts that the assessee has not explained under what circumstances trial run was necessary for all the three years. Therefore, we are of the considered view that the issue to be restored to the file of AO for verification, whether there was only trial run of the machinery as claimed by the assessee or the assessee carried out any commercial production from New Unit during AYs 1988-89 to 1990- 91. In case, the assessee is able to prove its claim of trial run in that event the AO would allow the claim of deduction as made by the assessee. - Decided in favour of statistical purposes.

Summary

Issues Involved:

1. Disallowance of the claim under Section 80I and 80HH of the Income Tax Act.
2. Determination of whether the appellant set up a new industrial undertaking or merely expanded/modified an old unit.
3. The eligibility period for claiming deductions under Sections 80I and 80HH.
4. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of the claim under Section 80I and 80HH of the Income Tax Act:

The Assessee's appeals were directed against the orders of the Commissioner of Income Tax (Appeals) confirming the disallowance of deductions under Sections 80I and 80HH. The Tribunal had previously restored the issue to the Assessing Officer (AO) for a fresh examination. The AO, after providing an opportunity for a hearing, rejected the claim again, stating that the machinery purchased for the new unit was used for the old unit's business purposes in the preceding years. This usage invalidated the claim for deductions under Sections 80I and 80HH as per the provisions of the Income Tax Act. The AO's findings were based on the fact that depreciation was claimed and allowed for these machineries in the years 1988-89 to 1990-91, indicating their use in the business.

2. Determination of whether the appellant set up a new industrial undertaking or merely expanded/modified an old unit:

The Tribunal had observed that the matter required factual determination, including whether the machinery was used for the business purposes of the old unit before being used for the new unit. The AO concluded that the new machinery was integrated with the old machinery and used for production before the new unit was set up, thus constituting an expansion/modification rather than a new undertaking. The AO cited substantial increases in production turnover during the relevant years as evidence against the claim of "trial production." The CIT(A) upheld the AO's decision, agreeing that the new unit did not qualify as a separate, independent undertaking eligible for deductions under Section 80I.

3. The eligibility period for claiming deductions under Sections 80I and 80HH:

The AO and CIT(A) both determined that the eligibility period for claiming deductions under Section 80I had expired, as the new industrial undertaking was deemed to have been established in the assessment year 1983-84. Therefore, the deductions under Section 80I were only available up to the assessment year 1990-91. For Section 80HH, the eligibility extended up to the assessment year 1992-93. The Tribunal noted that the assessee failed to provide sufficient evidence to prove that the new unit was established in the assessment year 1991-92 and thus eligible for deductions.

4. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act:

The initiation of penalty proceedings under Section 271(1)(c) was challenged by the assessee. However, the Tribunal deemed this ground premature and did not adjudicate on it, rejecting it as such.

Conclusion:

The Tribunal concluded that the assessee failed to provide adequate evidence to support the claim of "trial production" and the establishment of a new industrial undertaking for the relevant assessment years. The matter was restored to the AO for verification of whether the production was indeed "trial" or "commercial" during the years 1988-89 to 1990-91. If the assessee could prove the "trial run" claim, the AO was directed to allow the deductions under Sections 80I and 80HH. The appeals were partly allowed for statistical purposes, with the penalty proceedings ground rejected as premature.