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2010 (2) TMI 936 - AT - Income TaxWhether there is requirement of manufacturing or producing the articles by the assessee itself or the assessee can get part of these activities done from outsiders and still be entitled to deduction under s. 80-IB - assessee, on its own, does not have necessary wherewithal to undertake all activities for manufacturing the pedals - Merely because some raw material is readily purchased from the market and some raw material is got manufactured by outsourcing, but when the final product is made by the assessee himself, it cannot be said that the assessee is not engaged in the manufacturing, assessee is entitled for deduction under s. 80-IB, AO directed to allow the deduction to the assessee as claimed under s. 80-IB - Decided in favor of assessee. However, exemption u/s 80IB denied in respect of interest earned of Rs. 73,844 on performance guarantee bond and earnest money deposit.
Issues Involved:
1. Eligibility for deduction under Section 80-IB(2). 2. Employment of requisite number of workers. 3. Compliance with statutory requirements. 4. Treatment of interest income for deduction purposes. Issue-wise Detailed Analysis: 1. Eligibility for Deduction under Section 80-IB(2): The assessee claimed a deduction of Rs. 30,93,429 under Section 80-IB for the assessment year 2001-02, which was denied by the AO. The AO concluded that the assessee did not fulfill the basic conditions of Section 80-IB(2), specifically the lack of requisite machinery and the employment of the minimum number of workers. The AO observed that the assessee only had office equipment worth Rs. 7,000 and no other machinery, thus failing to qualify as an industrial undertaking. Additionally, the AO noted that the assessee did not employ the minimum required workers and did not use power in the manufacturing process. The CIT(A) upheld the AO's decision, emphasizing that the assessee did not meet the statutory requirements for deduction under Section 80-IB. 2. Employment of Requisite Number of Workers: The AO and CIT(A) both determined that the assessee did not employ the required number of workers, which is 10 or more if power is used in manufacturing, or 20 or more if no power is used. The CIT(A) noted that the number of workers varied monthly, dropping as low as 9 in March 2001, and only meeting the minimum requirement in April and September 2000. The CIT(A) also pointed out that the assessee did not make statutory deductions like PF or ESI, indicating that the workers were not in regular employment. 3. Compliance with Statutory Requirements: The AO highlighted that the assessee did not comply with various statutory requirements such as the Minimum Wages Act and other labor laws, and did not maintain proper records like muster rolls or statutory documents to prove the employment of 20 or more workers. The CIT(A) concurred, stating that without fulfilling these statutory obligations, the assessee could not be considered to have met the conditions for deduction under Section 80-IB. 4. Treatment of Interest Income for Deduction Purposes: The assessee also claimed a deduction for interest income earned on performance guarantee bonds and earnest money deposits. However, the CIT(A) and AO denied this deduction, stating that the interest income was not derived from the industrial undertaking. The Supreme Court's decision in Liberty India v. CIT was cited, which clarified that deductions under Sections 80-IA and 80-IB are only for profits derived from the eligible business and not for other sources of income. Conclusion: The Tribunal examined the facts and precedents cited by both parties. It was determined that the assessee was indeed engaged in manufacturing water purification systems, despite outsourcing some components. The Tribunal referenced several cases supporting the view that manufacturing can include outsourced components if the final product is made by the assessee. The Tribunal also found that the assessee substantially complied with the requirement of employing 20 or more workers, as evidenced by records showing compliance in several months. However, the Tribunal upheld the denial of the deduction for interest income, aligning with the Supreme Court's interpretation that such income is not derived from the industrial undertaking. Consequently, the Tribunal directed the AO to allow the deduction under Section 80-IB, except for the interest income. Result: The assessee's appeal was partly allowed.
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