2017 (4) TMI 1313 - AT - Income Tax

Deduction u/s 80IB - process of manufacturing of poultry feeds - whether assessee is engaged in the manufacture of a production of an article so that it may be eligible for deduction u/s 80IB? - Held that - 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 could not be reconverted into the same position. Its utility gets changed. The prime raw materials such as, maize, soya oil, rice bran, etc. can no more be regarded to be the rice bran, soya oil, maize. Respectfully following the decision of the Coordinate Bench of this Tribunal in assessee s own case the finding of CIT(A) on this issue stands confirmed and the grounds of appeal raised by the Revenue in all the appeals on this issue are dismissed Interest on fixed deposits - AO held that deduction u/s 80IB(5) of the Act is to be allowed only on profits derived from the eligible business which clearly indicated that there should be a direct or immediate nexus between the income and business of the assessee - Held that - The interest income and the interest expenses had a direct nexus and therefore netting of interest income against the interest expenses had to be allowed. Since the interest expenses was much more than the interest income no interest income can be excluded from the profits on which deduction u/s 80IB(5) of the Act ought to be allowed.

Summary

Issues Involved:
1. Interpretation of the term 'manufacture' under Section 80-IB of the Income Tax Act.
2. Eligibility for deduction under Section 80-IB(5) for the production of poultry feed.
3. Netting off interest income against interest expenses for computing deduction under Section 80-IB(5).

Issue-wise Detailed Analysis:

1. Interpretation of the term 'manufacture' under Section 80-IB:
The Revenue contended that the CIT(A) erred in accepting that the term 'manufacture' does not require the end product to be completely different from the ingredients in terms of chemical composition, integral structure, or use. The CIT(A) had accepted that the process of manufacturing poultry feeds involves more than mere mixing of ingredients and constitutes production of an article. The Tribunal noted that this issue was previously decided in favor of the assessee in its own case for AY 2005-06 and in a similar case involving M/s. Amrit Feeds. The Tribunal held that the process of producing poultry feed involves mechanical, chemical, and electrical processes, resulting in a product distinct in shape, character, and end-use, known commercially as 'poultry feed'. The Tribunal reiterated that the poultry feed industry, notified by the Central Government as eligible for deduction under Section 80-IB(4), should also be considered eligible under Section 80-IB(5).

2. Eligibility for deduction under Section 80-IB(5) for the production of poultry feed:
The AO had rejected the claim for deduction under Section 80-IB(5), arguing that there was no change in the chemical composition of the end product. However, the AO did not support this conclusion with scientific data or technical reports. The CIT(A) allowed the deduction, relying on the Tribunal's earlier decision in the assessee's own case. The Tribunal confirmed this view, noting that the process involved in producing poultry feed results in a new product recognized by trade and statutory authorities as distinct from the raw materials used. The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision that the assessee is engaged in the manufacture or production of an article and thus eligible for the deduction.

3. Netting off interest income against interest expenses for computing deduction under Section 80-IB(5):
The issue of excluding interest income from the profits of the business for the purpose of deduction under Section 80-IB(5) arose only for AY 2012-13. The AO had excluded the interest income from fixed deposits, arguing it had no nexus with the eligible business. The assessee contended that the fixed deposits were security for credit facilities, directly linked to the business, and thus the interest income should be netted off against interest expenses. The CIT(A) agreed with the assessee, referencing the Supreme Court's decision in ACG Associated Capsules (P) Ltd Vs CIT, which supported netting off interest income against interest expenses. The Tribunal upheld the CIT(A)'s decision, confirming that the interest income and expenses had a direct nexus and should be netted off. Since the interest expenses exceeded the interest income, no interest income was to be excluded from the profits eligible for deduction under Section 80-IB(5).

Conclusion:
The Tribunal dismissed all the appeals by the Revenue, confirming the CIT(A)'s decisions on all issues. The Tribunal upheld the eligibility of the assessee for deduction under Section 80-IB(5) for the production of poultry feed and allowed the netting off of interest income against interest expenses for computing the deduction. The order was pronounced in the open court on 05.04.2017.