2014 (1) TMI 1782 - AT - Income Tax

Deduction u/s 80IB - whether the activities of the units do not constitute manufacture or production of any articles or things as specified in section 80-IB? - Held that - ITAT has been consistently granting relief to the assessee by holding that the activity of the assessee is a manufacturing activity and therefore, it is eligible for deduction u/s 80IA of the Act. As well, no contrary material has been brought to our notice by the Revenue to take a different view than that of the earlier views taken by the ITAT. Therefore, in these circumstances, following the principle of consistency, we are of the considered opinion that the assessee should get relief and accordingly the grounds raised by the Revenue are dismissed. Income derived on the margin money for obtaining bank guarantee - nature of Income - Held that - Interest derived on margin money for the purpose of obtaining bank guarantee should be assessed as business income instead of income from other sources . Benefit of netting off of interest income against the expenditure - Held that - Both the parties stated that the said claim of the assessee needs to be considered in favour of the assessee in view of the binding judgment of the Hon‟ble Apex Court in the case of ACG Associated Capsules P. Ltd vs. CIT 2012 (2) TMI 101 - SUPREME COURT OF INDIA wheren held Ninety per cent of not the gross interest/rent but only the net interest/rent, which has been included in the profits of the business of the assessee as computed under the heads PGBP is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business. Accordingly, we direct the AO to apply the said judgment on considering the facts of the present case after reasonable opportunity of being heard to the assessee as per the principles of the natural justice.

Summary

Issues Involved:
1. Deduction under Section 80IB regarding profits from new industrial undertakings.
2. Classification of interest income as "income from other sources" versus "profits and gains of business."
3. Tax avoidance through shifting profits between units.
4. Netting off interest income against interest expenses.

Issue-wise Detailed Analysis:

1. Deduction under Section 80IB:
The Revenue challenged the CIT (A)'s decision to allow the deduction under Section 80IB for profits from three new industrial undertakings, arguing that these activities did not constitute manufacturing or production. The Tribunal referred to previous decisions in the assessee's favor, where it was consistently held that the activities qualified as manufacturing. The Tribunal upheld the CIT (A)'s order, dismissing the Revenue's appeal, emphasizing consistency and lack of contrary evidence.

2. Classification of Interest Income:
The assessee contested the CIT (A)'s decision to classify interest income as "income from other sources," thereby denying Section 80IB deduction. The Tribunal addressed different types of interest income:
- Interest from customers for delayed payments: The Tribunal remanded the issue to the AO for fresh adjudication, considering various judicial precedents that supported treating such interest as part of sales consideration.
- Interest from loans and advances to staff: The Tribunal directed the AO to re-examine if this interest, being connected to the industrial undertaking, qualifies for Section 80IB deduction.
- Interest from fixed deposits for bank guarantees: The Tribunal agreed with the assessee that this should be treated as "business income" based on higher judiciary decisions, overriding the AO's classification as "income from other sources."

3. Tax Avoidance through Shifting Profits:
The Revenue argued that converting Unit-1 to a job work unit and shifting profits to Units 2 and 3 was a tax avoidance scheme. The Tribunal referred to earlier decisions, confirming that Units 2 and 3 were independent and not extensions of Unit-1. It was noted that significant investments were made in these units, and there was no evidence of profit manipulation. The Tribunal upheld the CIT (A)'s order, dismissing the Revenue's appeal.

4. Netting off Interest Income:
The assessee argued that if interest income does not qualify for Section 80IB deduction, the exclusion should be net interest (interest income minus interest expenses) rather than gross interest. The Tribunal, citing the Supreme Court's decision in ACG Associated Capsules P. Ltd vs. CIT, directed the AO to apply this principle, allowing the netting off of interest income against expenses.

Conclusion:
The Tribunal dismissed the Revenue's appeals and partly allowed the assessee's appeals, remanding certain issues for fresh adjudication by the AO. The decisions were based on consistency with previous rulings and higher judiciary precedents, ensuring that the correct classification and deductions were applied as per the law.