2011 (1) TMI 128 - AT - Income Tax

Deduction - Deduction in respect of profits and gains derived from business - standing charges received by the assessee are reimbursement of expenses incurred by the assessee - standing charges are in the nature of ancillary profits, which at the best can be treated as attributable to the business of industrial undertaking - standing charges will not be eligible for deduction under section 80-IC of the Act Appeal dismissed

Summary

Issues Involved:
1. Confirmation of the addition of Rs. 1,05,09,877 on account of claim under section 80-IC of the Income-tax Act.
2. Misapplication of provisions of section 80-IC by CIT (Appeals).
3. Maximum disallowance under section 80-IC should not exceed Rs. 10,79,096.
4. Misapplication of mind by CIT (Appeals) leading to incorrect confirmation of the disallowance.
5. Eligibility of Rs. 1,05,09,877 as derived from manufacturing activities for section 80-IC.
6. Erroneous reliance on the Supreme Court decision in Liberty India Ltd. v. CIT.
7. Upholding of interest charged under section 234-B of the Income-tax Act.

Detailed Analysis:

1. Confirmation of the addition of Rs. 1,05,09,877 on account of claim under section 80-IC of the Income-tax Act:
The assessee, engaged in manufacturing plastic bottles, caps, and closures, claimed a deduction under section 80-IC for the amount of Rs. 1,05,09,877 received as standing charges from Hindustan Lever Ltd. (HLL). The AO disallowed this claim, categorizing the standing charges as ancillary profits rather than direct profits from manufacturing, citing the Supreme Court's decision in Liberty India.

2. Misapplication of provisions of section 80-IC by CIT (Appeals):
The CIT (Appeals) upheld the AO's decision, stating that the standing charges were not derived directly from manufacturing activities but were compensation for idle time and conversion costs. The CIT (Appeals) concluded that such receipts are ancillary profits and not eligible for section 80-IC deduction.

3. Maximum disallowance under section 80-IC should not exceed Rs. 10,79,096:
The assessee argued that even if the standing charges were disallowed, the maximum disallowance should be Rs. 10,79,096, the amount actually claimed in the return of income. The AO erroneously added the entire Rs. 1,05,09,877 to the taxable income, resulting in double taxation of Rs. 94,30,731.

4. Misapplication of mind by CIT (Appeals) leading to incorrect confirmation of the disallowance:
The assessee contended that the CIT (Appeals) failed to appreciate that the standing charges were a mechanism to balance production costs and should be considered part of the selling price, thus qualifying for section 80-IC deduction.

5. Eligibility of Rs. 1,05,09,877 as derived from manufacturing activities for section 80-IC:
The assessee maintained that the standing charges were directly related to the manufacturing operations and should be considered first-degree income. However, the CIT (Appeals) and the Tribunal concluded that these charges were reimbursements for idle time and did not have a direct nexus with manufacturing activities.

6. Erroneous reliance on the Supreme Court decision in Liberty India Ltd. v. CIT:
The CIT (Appeals) relied on the Liberty India case, which held that profits eligible for deduction under section 80-IC must be directly derived from manufacturing activities. The Tribunal agreed, stating that the standing charges were ancillary profits and not eligible for deduction.

7. Upholding of interest charged under section 234-B of the Income-tax Act:
The CIT (Appeals) upheld the charging of interest under section 234-B, and this issue was not separately contested in detail in the Tribunal's judgment.

Conclusion:
The Tribunal dismissed the appeal, agreeing with the CIT (Appeals) that the standing charges were ancillary profits and not directly derived from manufacturing activities. Consequently, the assessee was not entitled to the deduction under section 80-IC for the amount of Rs. 1,05,09,877. The order of the CIT (Appeals) was confirmed, and the appeal was dismissed.