2011 (3) TMI 1667 - AT - Income Tax

Issues Involved:

1. Allowability of deduction under Section 80IB of the Income-tax Act, 1961.
2. Employment of 10 or more workers.
3. Existence of laboratory testing facilities at Silvassa.
4. Outsourcing of manufacturing process to Ahmedabad.
5. Splitting of Ahmedabad unit to form Silvassa unit.
6. Relevance of statements recorded during the survey.
7. Whether crushing, grinding, and sieving at Silvassa amounts to manufacturing.
8. Additional issues for AY 2005-06: Excise income, interest on FD and LC, insurance claim, depreciation on motor car, DEPB income.

Detailed Analysis:

1. Allowability of Deduction under Section 80IB:

The main issue across multiple assessment years (AY 2000-01 to 2005-06) was whether the deduction under Section 80IB was allowable for the activities carried out at the Silvassa unit. The Assessing Officer (AO) had disallowed the deduction, arguing that the Silvassa unit was not engaged in manufacturing activities, but the Commissioner of Income-tax (Appeals) [CIT(A)] allowed the deduction. The Tribunal upheld the CIT(A)'s decision, concluding that the activities at Silvassa constituted manufacturing. The Tribunal noted that the process at Silvassa involved crushing, grinding, and sieving of Ferro Molybdenum Alloy (FMA) slabs into lumps, chips, and powder, which were distinct products with different uses and chemical compositions.

2. Employment of 10 or More Workers:

The AO argued that the Silvassa unit did not employ 10 or more workers, a requirement under Section 80IB. The CIT(A) found that the unit employed more than 10 workers, including casual workers and supervisory staff, and the Tribunal upheld this finding. The Tribunal referred to judicial precedents that casual and supervisory workers should be counted for this purpose.

3. Existence of Laboratory Testing Facilities at Silvassa:

The AO contended that no laboratory testing was done at Silvassa, which was necessary for the manufacturing process. The Tribunal found that the assessee failed to produce evidence of any laboratory testing at Silvassa, such as primary records or equipment. However, the Tribunal held that the absence of laboratory testing did not negate the fact that the activities carried out at Silvassa amounted to manufacturing.

4. Outsourcing of Manufacturing Process to Ahmedabad:

The AO argued that the main manufacturing was done at Ahmedabad, and Silvassa only performed minor activities. The Tribunal found that the process at Ahmedabad was an intermediate stage, and the final manufacturing was completed at Silvassa. The Tribunal held that the activities at Silvassa were integral to the manufacturing process and could not be dismissed as mere outsourcing.

5. Splitting of Ahmedabad Unit to Form Silvassa Unit:

The AO suggested that the Silvassa unit was formed by splitting the Ahmedabad unit. The Tribunal rejected this argument, finding no evidence of machinery transfer from Ahmedabad to Silvassa. The Tribunal noted that new machinery was purchased for Silvassa, and the unit was not a result of splitting the Ahmedabad unit.

6. Relevance of Statements Recorded During the Survey:

The AO relied on statements recorded during a survey to argue that no manufacturing was done at Silvassa. The Tribunal found these statements inconclusive and noted that they were retracted by the employees. The Tribunal emphasized that statements alone could not determine the nature of activities without supporting evidence.

7. Whether Crushing, Grinding, and Sieving at Silvassa Amounts to Manufacturing:

The Tribunal analyzed whether the activities at Silvassa constituted manufacturing. It found that the processes resulted in distinct products (lumps, chips, and powder) with different physical and chemical properties and uses. The Tribunal concluded that these activities met the criteria for manufacturing, as they transformed the raw material into new products with distinct commercial identities.

8. Additional Issues for AY 2005-06:

- Excise Income: The Tribunal held that excise duty refund should be considered as part of the profit derived from the industrial undertaking, following the Delhi High Court's decision in Dhevchand Premchand.
- Interest on FD and LC: The Tribunal rejected the claim that interest on FD and LC was derived from the industrial undertaking but allowed netting off interest expenditure against interest income, subject to establishing a direct nexus.
- Insurance Claim: The Tribunal allowed the insurance claim for damages on goods, following the Delhi High Court's decision in CIT vs. Sportkind India Ltd.
- Depreciation on Motor Car: The Tribunal upheld the CIT(A)'s decision to allow depreciation on a motor car purchased in the name of the Director but used for business purposes.
- DEPB Income: The Tribunal disallowed the claim that DEPB income was derived from the undertaking, following the Supreme Court's decision in Liberty India vs. CIT.

Conclusion:

The Tribunal upheld the CIT(A)'s decision to allow the deduction under Section 80IB for the Silvassa unit, finding that the activities carried out there constituted manufacturing. The Tribunal also addressed additional issues for AY 2005-06, allowing some claims and rejecting others based on relevant judicial precedents.

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