2009 (12) TMI 649 - HC - Income Tax

Whether Tribunal was justified in law in allowing deduction under section 80-IA of the Act in disregard of the fact that the activity carried on by the assessee did not qualify as manufacturing activity for the purpose of section 80-IA Held that - assessee after plucking or receiving the raw coffee berries makes it undergo nine processes to give it the shape of coffee beans. The net product is absolutely different and separate from the input. The change made in the article results in a new and different article which is recognized in the trade as a new and distinct commodity. The coffee beans have an independent identity distinct from raw material from which it was manufactured. A distinct change comes about in the finished product, question is thus answered in favour of the assessee and against the Revenue Whether Tribunal was justified in law in holding that the incidental business income derived by the assessee in the shape of interest income and advances from customers was eligible for deduction under section 80-IA of the Act Held that - Commissioner of Income-tax (Appeals) rightly held that it was not derived from any goods or services produced by the said unit and that it arose from the absence of any goods having been produced and supplied by the Daman unit. The ratio of Liberty (2009 - TMI - 34471 - SUPREME COURT) applied squarely, decision in favour of the Revenue holding that Rs.44,45,508 received as advance from the customers and forfeited by the assessee would not be eligible for deduction under section 80-IA of the Act. The appeal stands disposed of in the aforesaid manner

Issues Involved:
1. Whether the activity carried on by the assessee qualifies as "manufacturing activity" for the purpose of section 80-IA of the Income-tax Act.
2. Whether the incidental business income derived by the assessee in the form of interest income and advances from customers is eligible for deduction under section 80-IA of the Income-tax Act.

Issue-wise Detailed Analysis:

Issue 1: Manufacturing Activity under Section 80-IA
Facts and Arguments:
- The assessee assembles diesel generating sets at its Daman unit and claimed a deduction under section 80-IA for the profit derived from this unit.
- The Assessing Officer disallowed the deduction, arguing that assembling gensets does not amount to manufacture or production of any article or thing.
- The Commissioner of Income-tax (Appeals) and the Tribunal held that the activity amounts to manufacturing, relying on the detailed description of the assembly process and previous Tribunal orders in the assessee's favor.

Judgment:
- The Court affirmed that the activity of assembling diesel generating sets amounts to manufacturing. It referenced the Supreme Court judgment in Aspinwall and Co. Ltd. v. CIT, which explained that manufacturing involves producing articles from raw or prepared materials by giving them new forms, qualities, or combinations.
- Applying these principles, the Court concluded that the assessee's activity qualifies as manufacturing, thus allowing the deduction under section 80-IA.

Conclusion:
- The question was answered in favor of the assessee, confirming that the activity qualifies as manufacturing for the purpose of section 80-IA.

Issue 2: Incidental Business Income and Section 80-IA Deduction
Facts and Arguments:
- The assessee had shown other income from its Daman unit, including interest from fixed deposits, interest from customers, and advances from customers that were forfeited.
- The Assessing Officer denied the deduction for these incomes, arguing they were not "derived from" the industrial undertaking.
- The Tribunal remitted the case back to the Assessing Officer for the interest from fixed deposits but allowed the deduction for interest from customers and forfeited advances.

Judgment:
- Interest from Customers:
- The Court clarified that under section 80-IA, the income must be "derived from" the industrial undertaking, not merely "attributable to" it.
- The Court referred to the Supreme Court judgment in Liberty India v. CIT, which emphasized the need for a direct nexus between the income and the industrial activity.
- If the interest from customers was due to delayed payments, it would be considered part of the sales price and thus derived from the business. The case was remitted back to the Assessing Officer to determine the nature of this interest.

- Forfeited Advances:
- The Court upheld the Assessing Officer's and Commissioner of Income-tax (Appeals)'s view that forfeited advances should be treated as trading receipts, referencing the Supreme Court's judgment in CIT v. T. V. Sundaram Iyengar and Sons Ltd.
- The Court concluded that since the forfeited advances were not derived from any goods or services produced by the Daman unit, they do not qualify for deduction under section 80-IA, applying the principles from Liberty India.

Conclusion:
- The interest income from customers was remitted back to the Assessing Officer to determine its nature.
- The forfeited advances were held not eligible for deduction under section 80-IA, answering this question in favor of the Revenue.

Final Disposition:
- The appeal was disposed of with the Court ruling in favor of the assessee on the manufacturing activity issue and in favor of the Revenue on the forfeited advances issue. The matter regarding interest from customers was remitted for further examination.

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