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2012 (12) TMI 863 - AT - Income TaxDeduction u/s 80-IB - disallowance as assessee not engaged in production or manufacture of mineral oil - AY 2002-03 - assessee is a joint venture between HPCL and M/s. Colas SA France - CIT(A) confirmed disallowance - Held that - The assessee has claimed to manufacture/produce products such as bitumen emulsion, cutback bitumen and modified bitumen using bitumen as raw material. In terms of the Board Circular No. 57 dated 23.3.1971, not only crude petroleum but also the liquid products derived from crude petroleum i.e. motor spirit, kerosene etc. which are in the nature of mixture of hydrocarbons have to be considered as mineral oil. Bitumen is the base material produced on refining of crude petroleum. It has not been examined whether bitumen can be considered as liquid product having viscosity recognized for liquids. If bitumen is not found to be mineral oil then the products produced by assessee using bitumen cannot be considered as mineral oil as these have no connection with the mineral base oil. However, in case bitumen is found to be a mineral oil in terms of the definition given by CBDT in Circular No.57 dated 23.03.1971, it is further required to be seen whether bitumen emulsion, cutback bitumen and modified bitumen produced from bitumen can be considered as mineral oil. These products have been held to be mixture of hydrocarbons in the opinion given by IIT Chennai but it is not clear whether these can be considered as liquid products. Further, in case these products are found to be mineral oil, it is further required to be examined whether these have been produced by refining of mineral oil or otherwise because in case of refining of mineral oil, deduction under section 80IB (9) is available only when the refining begins on or after 1.10.1998. But in case of manufacture or production of mineral oil, deduction is available if commercial production begins on or after 1.4.1997. The assessee has claimed that it is a producer of mineral oil and not refiner of mineral oil which has not been examined. This is a highly technical area on which we are unable to arrive at any particular conclusion and matter is required to be referred to IIT Chennai, again as it failed to give opinion whether the products were mineral oil, after giving necessary details regarding the raw material, the products produced and process employed. Therefore, send back the issue to the file of CIT(A) for passing fresh order after obtaining expert opinion and after necessary examination - in favour of assessee for statistical purposes. The assessee admittedly is manufacturing/producing value added products by using bitumen as raw material after applying certain processes. Therefore, it cannot be accepted that the assessee is not an industrial undertaking. The word undertaking used in sub-section (9) is a wider term which also includes industrial undertakings. Since the assessee itself has claimed that it is producing commercial products using bitumen as raw material the assessee is to be considered as industrial undertaking. Therefore, the conditions prescribed in section 80IB(2) will be applicable in the case of the assessee. Assessee had not fulfilled the conditions relating to the minimum engagement of workers and use of new plant and machinery - Held that - The fact whether new plant and machinery have been used in setting up the unit has to be examined in the year in which unit had been set up and in case in that year assessee used new plant and machinery the claim has to be allowed in all subsequent years in which assessee is eligible. In this case, the assessee had not claimed deduction in the earlier years and therefore, this aspect could not be examined. Since assessee has claimed deduction in assessment year 2002-03 onwards it is required to be examined whether in the year of setting up, assessee had used new plant and machinery. Therefore, restore this issue also to CIT(A) for necessary examination and finding after allowing opportunity of hearing to the assessee. Disallowed the claim of deduction u/s 80IB to other income such as interest income and foreign exchange gain etc - Held that - As decided in Liberty India Ltd. v. CIT 2009 (8) TMI 63 - SUPREME COURT deduction is allowable only in respect of profit having direct nexus with the eligible business. The section does not cover profit from sources beyond first degree in view of the word derived mentioned therein. Profit attributable to business or incidental profit will not be eligible for deduction under section 80IB - The source of interest income is FDR and not the eligible business of the undertaking and therefore FDR pledged for the purpose of business deduction under section 80IB will not be available. The eligibility of foreign exchange gain will depend upon the fact whether foreign exchange gain is in relation to transactions which are integral part of the operation of the eligible business. The eligibility in respect of other items of income details of which have not been given is also required to be examined therefore, restore this issue to the file of CIT(A) for fresh decision Deduction u/s 35AB - disallowance of deduction claimed of technical know-how fees - assessee had not claimed deduction under section 80IB - petition before CIT under section 264 for claiming deduction - Held that - AO had allowed the claim u/s 35AB in the original assessment. Subsequently, the assessee filed petition under section 264 before CIT making claim of deduction under section 80IB which the assessee had omitted to make in the original return. CIT in the order dated 12.12.2007 passed under section 264 restored the issue regarding allowability of claim under section 80IB to AO by setting aside assessment order. CIT in the order under section 264 made it clear that while passing fresh assessment, AO shall consider claim of deduction under section 80IB(9). It is thus clear that CIT had set aside the assessment only to consider claim under section 80IB. Assessment had not been set aside to make fresh assessment denovo. CIT under order 264 had no power to pass any order prejudicial to the interest of the assessee denying any claim already allowed to the assessee. Therefore, do not agree with the arguments of the DR that in the fresh assessment proceedings AO could also consider matters in addition to claim of deduction under section 80IB. Disallowance of deduction u/s 80IB - AY 2003-04 & 2004-05 - Held that - As the assessee here has not made the claim of deduction in the return of income will be covered under the provisions of sub-section (5) of section 80A inserted by the Finance Act, 2009 w.e.f. assessment year 2003-04, as per which claim of deduction could not be allowed in case assessee failed to make claim in the return of income the disallowance is therefore, confirmed on the legal ground Disallowance of Deduction u/s 35AB - Held that - Assessee has incurred the liability on account of technical know how fees in the year of signing the agreement which was before 1.4.98. Normally an expenditure is allowable as deduction in the year in which liability is incurred even if the payment is made later, but in case of technical know-how fees, the deduction has been spread over a period of six years in view of specific provision of section 35AB. And on proper interpretation of the amended provisions of section 35AB, deduction under section 35AB will be allowable even in respect of payments made after 1.4.1998 if the technical know-how has been acquired before 1.4.1998. Therefore hold that deduction will be allowable under section 35AB in respect of payments made after 1.4.1998 as technical know how had been acquired prior to 1.4.1998. The order of CIT(A) is accordingly set aside and the claim of the assessee is allowed.
Issues Involved:
1. Allowability of deduction under section 80IB of the Income Tax Act, 1961. 2. Allowability of deduction under section 35AB of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Allowability of Deduction under Section 80IB: 1.1. Background and Claim: The assessee, a joint venture between HPCL and Colas SA France, engaged in manufacturing bitumen emulsions, cutback bitumen, and modified bitumen, claimed deductions under section 80IB for the assessment years 2002-03, 2003-04, and 2004-05. The claim was initially disallowed by the AO and CIT(A) based on non-fulfillment of conditions under section 80IB(2). 1.2. Conditions for Deduction: The AO noted that the conditions under section 80IB(2) include: - The industrial undertaking should not be formed by splitting up or reconstruction of an existing business. - It should not be formed by transferring previously used machinery or plant. - It should manufacture or produce articles or things not listed in the Eleventh Schedule. - It should employ a minimum number of workers. 1.3. AO's Findings: The AO disallowed the claim on the grounds that: - The products manufactured (bitumen emulsions, cutback bitumen, modified bitumen) were not considered mineral oil. - The number of workers employed was less than the required minimum. - The plant and machinery used were not new. - Certain other incomes (interest income, foreign exchange gain) were not derived from the industrial undertaking. 1.4. CIT(A) and Tribunal's Observations: CIT(A) upheld the AO's findings. The Tribunal noted that the term "mineral oil" was not defined in the Act but referred to CBDT Circular No. 57 and IIT Chennai's opinion, which indicated the products were mixtures of hydrocarbons. However, the Tribunal found the issue technical and referred it back to CIT(A) for expert opinion and further examination. 1.5. Section 80IB(2) Applicability: The Tribunal observed that the conditions under section 80IB(2) apply to industrial undertakings, and since the assessee's activities involved manufacturing, these conditions were relevant. The Tribunal restored this issue to CIT(A) for further examination, including the engagement of workers and the use of new plant and machinery. 1.6. Other Income: The Tribunal directed CIT(A) to re-examine the eligibility of other income for deduction under section 80IB in light of the Supreme Court's judgment in Liberty India Ltd. v. CIT, which states that only profits directly derived from the business are eligible for deduction. 2. Allowability of Deduction under Section 35AB: 2.1. Background and Claim: The assessee claimed deduction under section 35AB for technical know-how fees paid in installments over several years. The AO allowed the claim in the original assessment, but CIT(A) disallowed it on the grounds that payments made after 1.4.1998 were not eligible for deduction under the amended section 35AB. 2.2. Tribunal's Observations: The Tribunal noted that the amendment to section 35AB was intended to allow depreciation under section 32(1)(ii) for technical know-how acquired on or after 1.4.1998. However, this created an anomaly as technical know-how acquired before 1.4.1998 but paid for after this date was neither eligible for deduction under section 35AB nor for depreciation under section 32(1)(ii). 2.3. Interpretation and Decision: The Tribunal held that for harmonious interpretation, deduction under section 35AB should be allowed for payments made after 1.4.1998 if the technical know-how was acquired before this date. This interpretation aligns with the definition of "paid" in section 43(2) and avoids unjust results contrary to legislative intent. The Tribunal set aside CIT(A)'s order and allowed the assessee's claim. Conclusion: The appeals were partly allowed, with the Tribunal restoring several issues to CIT(A) for further examination and allowing the deduction under section 35AB for technical know-how fees paid after 1.4.1998.
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