2010 (8) TMI 1103 - AT - Income Tax

Summary

Issues Involved:
1. Entitlement to deduction under Section 80IC of the Income Tax Act, 1961.
2. Disallowance of depreciation on machinery.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction under Section 80IC of the Income Tax Act, 1961:

The first issue revolves around whether the assessee is entitled to deduction under Section 80IC of the Income Tax Act, 1961. The Assessing Officer (AO) denied the deduction for the assessment year 2006-07, asserting that the assessee was not engaged in manufacturing but merely in the supply of furnished goods to government agencies. The AO's observations during a visit to the Parwanoo unit indicated that the unit was not involved in manufacturing activities but was engaged in basic activities and trading. The AO noted the absence of machinery and the low consumption of electricity, concluding that the assessee was not manufacturing but only programming and testing the transceivers and power supply equipment.

The CIT(A) overturned the AO's decision, holding that the activities carried out by the assessee, such as frequency synthesization for transceiver sets and laying transformers and resistors for power supply equipment, amounted to manufacturing. The CIT(A) emphasized that the assessee's activities were integral to the manufacturing process and that the assessee was entitled to the deduction under Section 80IC. The CIT(A) also noted that the principle of consistency should apply, as the deduction had been allowed in previous years.

The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee's activities constituted manufacturing. It emphasized that for claiming deduction under Section 80IC, it is not necessary to carry out every step of the manufacturing process. The Tribunal also noted that the AO's reliance on the number of workers and the machinery present during the inspection was misplaced, as the situation during the inspection could not be applied retroactively to the assessment year in question.

2. Disallowance of Depreciation on Machinery:

The second issue pertains to the disallowance of depreciation on machinery. The AO disallowed the depreciation claim of Rs. 9,32,258, citing the absence of machinery at the Parwanoo unit during the inspection. The assessee contended that the machinery had been transferred to the Panchkula unit due to a lack of orders and reduced production.

The CIT(A) accepted the assessee's explanation and allowed the claim of depreciation, noting that the investment in plant and machinery had been accepted in previous years and that the machinery had been transferred to the Panchkula unit due to reduced manufacturing activities at the Parwanoo unit.

The Tribunal upheld the CIT(A)'s decision, agreeing that the machinery's transfer to the Panchkula unit and the investment in machinery in previous years justified the depreciation claim. The Tribunal found no reason to disallow the depreciation and dismissed the revenue's appeal on this ground.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on both issues. The Tribunal confirmed that the assessee was entitled to the deduction under Section 80IC and allowed the depreciation claim on the machinery. The Tribunal emphasized the importance of consistency in tax assessments and the need to consider the integral nature of the assessee's manufacturing activities.