2012 (6) TMI 683 - AT - Income Tax

Disallowance of claim of deduction u/s 80IB - Both the units of assessee were integrated as one unit - the assessee claimed deduction in respect of pellet feed division, for which separate computation of income was filed submitting that conversion of mash feed into pellet feed amounts to manufacturing and not processing and both are commercially two distinct products having their own peculiar features and advantages and disadvantages - Held that - Examining the stages through which the mash feed is converted into pellet feed there has been only processing while the production of pellet feed is done by following various stages, namely, i) batch weighing, ii) grinding, iii) mixing, iv) conditioning with steam, v) pelleting, vi) cooling, vii) crumbling and, finally, viii) packing - doing something to the goods to change or alter their form can be termed as processing and does not amount to manufacture -CIT v. Casino (P.) Ltd. 1972 (10) TMI 17 (HC) - doing something to substance to change or alter their form can be termed as processing and does not amount to manufacture as a production of a new substance does not mean merely to produce some change in the substance -decided against assessee. Disallowance of foreign travel expense - Held that - As the assessee failed to prove that the expenditure incurred towards foreign travelling expenses of two persons is wholly and exclusively for the purpose of its business by way of documentary evidence, dis allowance is warranted - against assessee. Levy of interest u/s 234D - Held that - As the provisions of section 234D having been inserted with effect from 1st June 2003, applicable only from the assessment year 2004-05. Since the assessment year under consideration is 2003-04 interest charged u/s 234D need to be deleted - in favour of assessee. Validity of the reopening of the assessment u/s 147 - Held that - As the assessee has to initially file a return and after that the assessee can ask reasons for issuing the notices for re-assessment, but in the present case, the assessee has not at all filed the return of income in the first place to seek for reasons recorded and hence the reopening u/s 148 is valid - against assessee.

Issues Involved:
1. Denial of claim for relief under Section 80IB of the Income-tax Act, 1961.
2. Calculation of deduction under Section 80IB.
3. Disallowance of foreign travel expenses.
4. Legality and validity of reopening of the assessment under Section 147.
5. Levy of interest under Section 234D.

Issue-wise Detailed Analysis:

1. Denial of Claim for Relief under Section 80IB:
The primary grievance of the assessee in all appeals was the denial of its claim for relief under Section 80IB. The assessee derived income from the production and sale of poultry feed, claiming deductions under Section 80IB for its pellet feed division. The Assessing Officer (AO) inspected the factory premises and concluded that the conversion of mash feed to pellet feed did not constitute "manufacture" but merely "processing," as there was no change in the composition of the feed. The AO referenced the Supreme Court decision in Venkateswara Hatcheries, which stated that mechanical methods alone do not always result in manufacture. The AO's decision was upheld by the CIT(A), who emphasized that the feed, whether in powder or pellet form, remained the same commodity, thus not qualifying as a new and distinct commercial product. The Tribunal agreed with the lower authorities, concluding that the process involved did not amount to manufacture but was merely processing, thus disallowing the claim under Section 80IB.

2. Calculation of Deduction under Section 80IB:
The assessee also contested the reduction of Rs. 15,47,946 from the deduction claimed under Section 80IB, arguing that the amount was derived from the industrial undertaking. The Tribunal noted that the AO had correctly reduced the amount, as it was not derived solely from the pellet feed unit. The Tribunal upheld the AO's calculation, emphasizing that the deduction should be based on profits attributable to the specific unit for which the deduction was claimed.

3. Disallowance of Foreign Travel Expenses:
The AO disallowed foreign travel expenses of Rs. 6,65,977, incurred by two individuals who were neither employees nor partners of the assessee firm. The assessee argued that the expenses were incurred for business purposes, but the AO and CIT(A) found no evidence to substantiate this claim. The CIT(A) noted that the individuals had no connection with the firm's business activities. The Tribunal upheld the disallowance, agreeing that the assessee failed to justify the expenditure as being incurred wholly and exclusively for business purposes.

4. Legality and Validity of Reopening of the Assessment under Section 147:
For the assessment year 2002-03, the AO reopened the assessment under Section 147, citing the lack of documentary evidence to support the claim under Section 80IB and discrepancies in reported income. The assessee contended that the reopening was invalid as the AO did not dispose of the objections raised by the assessee. The Tribunal referred to the Supreme Court decision in GKN Driveshafts (India) Ltd., which mandates that the AO must dispose of objections by passing a speaking order. However, the Tribunal found that the assessee had not filed a return initially to seek reasons for reopening, thus upholding the validity of the reopening under Section 147.

5. Levy of Interest under Section 234D:
For the assessment year 2003-04, the AO levied interest under Section 234D. The assessee argued that the provision was introduced with effect from 01/06/2003 and should not apply to the assessment year 2003-04. The Tribunal agreed, referencing the Delhi Special Bench decision in ITO v. Ekta Promoters (P) Ltd., which held that Section 234D applies only from the assessment year 2004-05. Consequently, the Tribunal deleted the interest charged under Section 234D for the assessment year 2003-04.

Conclusion:
The Tribunal dismissed the appeals for the assessment years 2001-02, 2002-03, 2004-05, and 2005-06, upholding the disallowance of the claim under Section 80IB and the foreign travel expenses. The appeal for the assessment year 2003-04 was partly allowed, with the deletion of interest charged under Section 234D.

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