2012 (9) TMI 320 - AT - Income Tax

Deduction u/s 80IC - partial dis-allowance - assessee engaged in the business of steel fabrication and manufacturing of prefabricated structure, mainly supplied to the Defence and Paramilitary Organization - units at both Chandigarh and Baddi - profits of the Baddi unit claimed as deduction u/s 80IC - deduction claimed u/s 80IC restricted partially on account of three components - apportionment of administrative and general expenses in certain ratio between the Chandigarh unit and the Baddi unit - ineligibility of deduction u/s 80IC on ground of profit earned from civil works contract - Trading vs. Manufacturing activities Held that - In view of the admission of the assessee during the assessment proceedings as evidenced by the recalculation of the allocation of the ratio between Baddi unit and Chandigarh unit, addition to the extent of Rs.4,03,445/- is upheld. Further allocation of Rs.2,02,213/- to the Baddi unit on account of exclusion of excise duty from the sales turnover of Chandigarh unit for computing percentage ratio is also upheld. Consequently, the deduction u/s 80IC being reduced to the extent of Rs.6,05,658/- is upheld. Profit earned from civil works contract - Admittedly, assessee is not entitled to deduction u/s 80IC on the profits arising on civil contract work carried out by the assessee. However, following the principles of natural justice, we remit this limited issue back to the file of the AO to determine the profits from work contract. Trading vs. Manufacturing activities - Held that - Merit is found in the plea of the assessee that the assessee was engaged in the business of manufacturing of prefabricated sheets/cabins as per order received from the Ministry of Defence. The said items were being manufactured at the specification of the customers and certain items were not manufactured by it, but were put together for supply the complete unit, i.e. certain paints were bought and supplied alongwith manufactured items, final coat of paints was not put on the sheds as the said items were being transported for a long distance and only on being erected the paints were put by the army itself and the said items were not sold by the assessee, but were part of the contract deal of supply of the manufactured items. Therefore, it is held that assessee is entitled to benefit of claim of deduction on the said bought out items and there is no need to rework the deduction u/s 80IC Dis-allowance u/s 40(a)(ia) - non-deduction of tax at source from payment of erection charges - Held that - In case amount has been paid as on the close of the year, no disallowance is warranted u/s 40 a(ia) in view of the ratio laid down in case of ACIT V. Merilyn Shipping & Transports (2012 (4) TMI 290 - ITAT VISAKHAPATNAM). However, in case the said payment has been made after the close of the year then the said amount is dis-allowable. Further, where the amount is disallowed, the said is added back to the profits of the business and the assessee is entitled to the claim of deduction u/s 80IC on the said profits being eligible profits for claiming the said deduction. Matter remitted back to file of AO for requisite verification

Issues Involved:
1. Addition of Rs. 50,642/- under Section 40(a)(ia).
2. Deduction under Section 80IC for Baddi Unit.
3. Allocation of expenses between Chandigarh and Baddi Units.
4. Profits from civil works contract.
5. Trading vs. manufacturing activities.
6. Disallowance under Section 40(a)(ia) for various payments.
7. Employees' share of PF not deposited within the prescribed limits.

Issue-wise Detailed Analysis:

1. Addition of Rs. 50,642/- under Section 40(a)(ia)
The assessee admitted that no tax was deducted at source from the payment to Shri Rattan, invoking provisions of Section 40(a)(ia). The Tribunal noted that if the payment was made as on the close of the year, no disallowance is warranted per the Vishakhapatnam Tribunal's decision in ACIT Vs. Merilyn Shipping & Transports. The issue was remitted back to the Assessing Officer for verification.

2. Deduction under Section 80IC for Baddi Unit
The assessee's deduction under Section 80IC was reduced by the Assessing Officer on three counts:
1. Allocation of expenses between Chandigarh and Baddi Units.
2. Profits from civil works contract.
3. Trading vs. manufacturing activities.

The Tribunal upheld the reduction in deduction due to reallocation of expenses and exclusion of excise duty from sales turnover. However, it remitted the computation of profits from civil works back to the Assessing Officer for re-evaluation. For the trading vs. manufacturing issue, the Tribunal found merit in the assessee's claim that bought-out items were integral to the manufacturing process, referencing Mihir Engineers Ltd. Vs. JCIT, and directed the Assessing Officer to allow the deduction under Section 80IC.

3. Allocation of Expenses between Chandigarh and Baddi Units
The Tribunal upheld the reallocation of expenses, noting the assessee's admission during assessment proceedings. The reworked ratio of 55.97% (Baddi) to 49.03% (Chandigarh) was accepted, leading to a reduction in the deduction under Section 80IC by Rs. 6,05,658/-.

4. Profits from Civil Works Contract
The Tribunal agreed that the assessee was not entitled to deduction under Section 80IC for profits from civil works at Jaipur. However, it remitted the computation of these profits back to the Assessing Officer to consider the actual expenditure and re-evaluate the profits.

5. Trading vs. Manufacturing Activities
The Tribunal found that the assessee's activities, including the supply of bought-out items, constituted manufacturing. It referenced several cases, including Mihir Engineers Ltd. Vs. JCIT, to support this view. The Tribunal directed the Assessing Officer to allow the deduction under Section 80IC for profits from these activities.

6. Disallowance under Section 40(a)(ia) for Various Payments
The Tribunal noted that disallowance under Section 40(a)(ia) should only apply to amounts payable at the close of the financial year, per the Vishakhapatnam Tribunal's decision in ACIT Vs. Merilyn Shipping & Transports. The issue was remitted back to the Assessing Officer to rework the profits eligible for deduction under Section 80IC after adding the disallowed amounts.

7. Employees' Share of PF Not Deposited Within Prescribed Limits
The Tribunal upheld the CIT (Appeals) decision, referencing the Punjab & Haryana High Court's ruling in CIT Vs. M/s Nuchem Ltd., which allowed the claim if the amounts were deposited within the grace period or before the due date of filing the return of income.

Conclusion
The assessee's appeal was partly allowed, and the Revenue's appeal was partly allowed, with several issues remitted back to the Assessing Officer for re-evaluation based on the Tribunal's directions.

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