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2011 (8) TMI 380 - AT - Income TaxDeduction u/s. 80-IB - Whether income from repairing and maintenance at par with the income from manufacturing for the purpose of Sec.80-IB - Held that the definition of manufacture under section 10AA read with section 2(r) of SEZ Act 2005 can not be borrowed to section 80IB. Regarding job work charges as well as repairs and maintenance which are included in job work charges - Held that - assessee is entitled for deduction u/s. 80-IB on income earned from job work charges but excluding repairs and maintenance charges. Our answer to second question referred is that the income from repair and maintenance cannot be treated at par with the income from manufacturing for the purposes of deduction u/s. 80-IB of the Act. - Matter remanded back to AO to determine the amount of job work charges to allow deduction u/s 80IB.
Issues Involved:
1. Whether the CIT(A) erred in allowing deduction u/s 80-IB on income earned from 'job work' which comprises repairs and maintenance. 2. Whether the CIT(A) erred in treating income from repairing and maintenance at par with income from manufacturing for the purpose of Sec. 80-IB. Detailed Analysis: Issue 1: Deduction u/s 80-IB on Income Earned from 'Job Work' Comprising Repairs and Maintenance The assessee, a manufacturer of moulds for ball pens, claimed deduction u/s 80-IB on job work charges, including repairs and maintenance. The Assessing Officer (AO) disallowed the deduction, stating that repairs and maintenance do not constitute manufacturing activity and do not result in the creation of a new article or thing. The AO's decision was based on the precedent set by the Hon'ble Apex Court in CIT Vs. Gem India Manufacturing Co. (2001) 249 ITR 307 (SC), which held that mere repairs do not amount to manufacturing. The CIT(A) allowed the deduction, relying on previous Tribunal orders for assessment years 2003-04 and 2004-05, which were in favor of the assessee. However, the revenue appealed, arguing that repair and maintenance are not ancillary activities of the assessee and that the nature of job work charges remained vague due to the lack of detailed records, which were destroyed in a fire. The Tribunal examined the facts and held that the income from job work charges, excluding repairs and maintenance, qualifies for deduction u/s 80-IB. It was noted that the assessee failed to produce detailed records due to the fire incident, and the AO had completed the assessment u/s 144 based on available materials. The Tribunal concluded that while job work charges qualify for deduction, repairs and maintenance charges do not, as they do not have a direct nexus with the industrial undertaking's essential activity. Issue 2: Income from Repairing and Maintenance vs. Manufacturing for Sec. 80-IB The Tribunal analyzed whether income from repairing and maintenance could be treated at par with income from manufacturing for the purpose of Sec. 80-IB. The revenue argued that repair and maintenance do not constitute manufacturing and cited several case laws, including Tamil Nadu State Transport Corporation Ltd v CIT (2001) 252 ITR 883 (SC), which held that retreading of tyres does not amount to production. The assessee argued that after-sales service, including repairs and maintenance, is an integral part of manufacturing and should qualify for deduction. The Tribunal referred to the definition of "manufacture" in Section 10AA of the Act, which includes repair as a parameter. However, it concluded that this definition cannot be applied to Section 80-IB, as Section 10AA is a code in itself and the definition is specific to that section. The Tribunal held that repairs and maintenance charges cannot be equated with manufacturing income for the purposes of Section 80-IB. It emphasized that only profits directly derived from the industrial undertaking's essential activity qualify for deduction. The Tribunal referred to the Hon'ble Apex Court's decision in Pandian Chemicals Ltd. Vs. CIT (2003) 262 ITR 278, which distinguished between profits "derived from" and "attributable to" an industrial undertaking. Conclusion: The Tribunal concluded that: 1. The assessee is entitled to deduction u/s 80-IB on income earned from job work charges, excluding repairs and maintenance. 2. Income from repairs and maintenance cannot be treated at par with income from manufacturing for the purpose of deduction u/s 80-IB. Given the destruction of records due to the fire, the Tribunal deemed it reasonable to consider 50% of the job work charges as eligible for deduction u/s 80-IB, while the remaining 50% (attributed to repairs and maintenance) does not qualify for the deduction. The appeal by the revenue was allowed in part.
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