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2016 (11) TMI 1470 - AT - Income TaxClaim of deduction under section 80-IB(5) and 80-IE - whether manufacturing of poultry feeds amounts to manufacture or not? - Held that - Every year the scrutiny assessment order was passed u/s 143(3) of the Act from AYs 2005-06 to 2010-11. In this search assessment order passed u/s. 143(3) r.w.s. 153A, AO has disallowed the deduction claimed u/s. 80IB(5)/80IE of the Act without bringing on record any evidence or documents found during the search. The search party did not find any incriminating document or any new document during the search action. In the absence of any new document/incriminating document how the assessee can be denied for deduction U/s 80-IB/80IE. The assessee has submitted a synopsis of manufacturing process of poultry feeds which amounts to manufacture considering the above cited judicial precedents cited in para 6.3 above. It is also clear from the details filed with the end product that poultry feeds cannot be reversed back to its original content/material. It is clear that the poultry feed is a distinct product and amounts to manufacture . It is clear that the process of producing poultry feeds involves the process of manufacturing. The assessee s eligible undertaking itself was independently carrying out the complete activity i.e. from mixing, grinding till the pelletisation. The raw materials once consumed cannot be reconverted into the same position. Its utility gets changed. Apart from this, keeping the principle of consistency and the process of manufacturing, the action of the Assessing Officer of making disallowance u/s. 80-IB(5)/80IE of the Act, in respect of manufacturing of poultry feeds is not justified. - Decided in favour of assessee. Disallowance u/s 14A - Held that - The assessee had in its books of accounts available capital as per schedule A of ₹ 40,00,200/- and reserve and surplus as per schedule B of ₹ 26,65,12,677/- (totalling ₹ 27,05,12,877/-). Thus, it is clear that the assessee has enough funds of its own and no borrowed fund seems to have been utilised in order to earn exempted income. Regarding Rule 8D(2) (iii), the assessee has given a calculation for average investments as (41,361,527 38,416,565)/2 Rs.39,889,046/-. As per assessee the disallowance under Rule 8D(2)(iii) comes at (0.5% of ₹ 39,889,046/-) ₹ 1,99,445. Therefore, total disallowance under Rule 8D(2) (i) (ii) (iii) is ₹ 1,99,445/- less amount paid by the assessee ₹ 1,00,000/-, ₹ 99,445/-. MAT - disallowance u/s 14A on the book profit of the assessee determined U/s 115JB - Held that - The disallowance made U/s 14A is by the Assessing Officer in the impugned assessment order only. Thus, the conditional stipulation applies. The adjustment cannot be made.The important thing to note here is that for the purpose of applicability of section 14A read with Rule 8D, the computation of total income has to be under some heads in chapter - IV of the I.T. Act, 1961. Section 14A clearly says for the purpose of computing the total income under this chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act . Whereas the computation of total income u/s 115JB falls under chapter -XIIB of the I.T. Act,1961. Therefore, it is very clear that the disallowance/computation for section 14A read with rule 8D will not be applicable for the purpose of calculation of income u/s 115JB.
Issues Involved:
1. Whether the process of manufacturing poultry feeds amounts to "manufacture" under Section 80-IB(5) and Section 80-IE of the Income Tax Act, 1961. 2. Whether the CIT(A) was justified in allowing the claim of deduction under Section 80-IB(5). 3. Whether the disallowance made under Section 14A was justified. 4. Whether the disallowance under Section 14A can be added while computing book profit under Section 115JB. Issue-wise Detailed Analysis: 1. Manufacturing of Poultry Feeds: The primary issue was whether the process of manufacturing poultry feeds qualifies as "manufacture" under Section 80-IB(5) and 80-IE of the Act. The Assessing Officer (AO) denied the deduction, arguing that the process involved mere mixing of ingredients like maize, soya, and rice bran with vitamins and minerals, which did not result in a new product with a different chemical composition or structure. The AO cited various judicial precedents to support the view that the process did not amount to manufacture. 2. CIT(A)'s Justification for Allowing Deduction: The CIT(A) allowed the assessee's appeal, noting that the assessee had been claiming the deduction under Section 80-IB(5) since AY 2005-06, and the scrutiny assessments for those years had allowed the deduction. The CIT(A) emphasized that the end product, poultry feed, could not be reversed back to its original raw materials, indicating a manufacturing process. The CIT(A) also relied on various judicial precedents, including cases like DCIT vs. Amricon Agrovest and Komrala Feeds vs. DCIT, which supported the view that producing poultry feed involves manufacturing. 3. Disallowance under Section 14A: The AO disallowed an amount under Section 14A for earning exempt income. The CIT(A) accepted the revised calculation submitted by the assessee, which showed sufficient own funds to make the investments without using borrowed funds. The CIT(A) also noted that the AO had not disallowed any amount under Rule 8D(2)(i) and that the disallowance under Rule 8D(2)(iii) was calculated correctly by the assessee. 4. Disallowance under Section 14A and Section 115JB: The AO disallowed an amount under Section 14A while computing the book profit under Section 115JB. The CIT(A) deleted this disallowance, relying on the Supreme Court judgments in Apollo Tyres vs. CIT and CIT vs. HCL Connect Systems & Services Ltd., which held that disallowances under Section 14A cannot be added while computing book profit under Section 115JB. The CIT(A) noted that the permissible adjustments under Section 115JB are specific and listed in Explanation 1, and the disallowance made under Section 14A by the AO did not fall under these permissible adjustments. Conclusion: The Tribunal upheld the CIT(A)'s order, confirming that the process of producing poultry feeds amounts to "manufacture" and thus qualifies for deductions under Section 80-IB(5) and 80-IE. The Tribunal also agreed with the CIT(A) on the disallowance under Section 14A and its non-applicability while computing book profit under Section 115JB. All appeals filed by the Revenue were dismissed.
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