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2013 (11) TMI 724 - AT - Income TaxDeduction u/s 80IB of the Income tax act - Assessee is engaged in the business of manufacturing aluminum foil for flexible packaging materials - The unit is located in Daman which began its manufacturing activities prior to 31-3-2004 thereby being eligible for deduction under section 80IB of the Act - Manufacturing activities had commenced before 31.3.2004 - Deduction claimed under section 80IB was denied by the AO on the ground that the assessee commenced production after 31.3.2004 Held that - The Assessing Officer has not been able to establish that there was no production and no sales/job work claimed to have been made before March 2004 by the appellant. The job work carried out in the months of February 2004 and March, 2004 is duly shown in Sales Tax returns filed by the Firm. The Sales Tax authorities have completed the assessment also. In the appellant s case, It was further seen that the goods produced at the factory in the months of February 2004 and March 2004 were sold to various pharma companies by M/s. Flex Art Goa after paying the excise duty and all these sales are recorded in the Excise records and excise returns have been filed by M/s. Flex Art Goa. It is also a fact that Ess Dee Aluminium was having factory license prior to commencement of this business. The partnership Firm has permanent registration as 831 and registration with Sales Tax Authorities. In summary, what is required to be fulfilled for eligible deduction u/s.80-IB is not in dispute Decided in favor of Assessee. Incomes not eligible for deduction u/s 80IB of the Income Tax Act - Assessee claimed deduction under section 80IB without excluding the interest income - Assessee contended that he has also incurred interest expenses, and therefore, only net interest, if any, ought to be excluded for computing the business income derived from eligible industrial undertaking, and therefore, not eligible for deduction under section 80IB of the Act Held that - Interest on FDRs cannot be held as income derived from industrial undertaking in view of the decision of the Hon ble Supreme Court in the case of Pandian Chemicals Ltd. Vs Commissioner of Income-tax, 2003 (4) TMI 3 - SUPREME Court - The only contention by the assessee before us is netting of interest income with the interest expenditure of the assessee - When deposit in FDRs is made with the borrowed funds, then, only net income can be said to be the interest income derived from FDRs - In the instant case, the AO has categorically recorded that the assessee has brought no material before him to show that borrowed funds were utilized for making the FDRs - Assessee could not bring any material to show that there was any nexus between the interest expenditure and the interest income earned on FDRs. by the assessee Decided against the Assessee. Debts written back are eligible for deduction under section 80IB of the Act - Assessee has written off sundry credit balance, and added the same to the income of the current year. The assessee has claimed deduction under section on the same income Held that - Sundry credit balance written back are the amounts payable to the creditors for purchases made by the assessee for raw-material used in the production of the goods for the eligible undertaking of the assessee - Thus, in the year of purchases, the income from the eligible undertaking of the assessee is reduced, on account of the purchases debited in the profit & loss account, and the corresponding credit, as payable to the sundry creditors. Therefore, in the year of writing back of these liabilities, as not payable, and credited the same amount in the profit & loss account, the character of the receipt remains to be profit to the eligible undertaking, and hence, eligible for deduction under section 80IB of the Act Reliance has been placed on the decision of the Hon ble jurisdictional High Court in the case of CIT Vs. Prathan Developers, 2013 (8) TMI 112 - GUJARAT HIGH COURT Decided in favor of Assessee.
Issues Involved:
1. Eligibility for deduction under section 80IB of the Income Tax Act, 1961. 2. Commencement of manufacturing activities before 31.03.2004. 3. Admissibility of evidence and statements. 4. Calculation and inclusion of interest income for deduction under section 80IB. 5. Eligibility of DEPB incentives for deduction under section 80IB. 6. Exchange rate difference as income derived from industrial undertaking. 7. Sundry balances written back as income derived from industrial undertaking. Detailed Analysis: 1. Eligibility for Deduction under Section 80IB: The primary issue revolves around the eligibility of the assessee for deduction under section 80IB of the Income Tax Act, 1961. The assessee claimed deductions for the assessment years 2005-2006, 2006-2007, and 2007-2008. The Assessing Officer (AO) denied this claim, stating that the manufacturing activities did not commence before 31.03.2004. The CIT(A) and the Tribunal, however, found that the assessee had indeed commenced production before the cutoff date, making them eligible for the deduction. 2. Commencement of Manufacturing Activities before 31.03.2004: The AO contended that the assessee's manufacturing activities began after 31.03.2004, citing various observations such as no opening balance of assets, PF contributions shown as NIL for certain months, and discrepancies in director's reports. The assessee argued that the manufacturing activities started on 03.03.2004 by the erstwhile partnership firm, M/s. Ess Dee Aluminum. The CIT(A) and the Tribunal accepted the assessee's submissions, supported by documentary evidence, including sales tax returns, excise records, and job work bills indicating manufacturing activities before the cutoff date. 3. Admissibility of Evidence and Statements: The AO relied on statements from an employee of Shri Khemchand Dhingra, which contradicted the assessee's claims. The CIT(A) and the Tribunal found these statements inadmissible, citing the Supreme Court decision in Kishinchand Chellaram v. CIT, which mandates that evidence relied upon by the AO must be presented to the assessee for cross-examination. Since the AO did not allow the assessee to cross-examine Shri Khemchand Dhingra, the Tribunal disregarded these statements. 4. Calculation and Inclusion of Interest Income for Deduction under Section 80IB: The assessee claimed that only net interest income (after deducting interest expenditure) should be excluded for calculating the income eligible for deduction under section 80IB. The AO and the CIT(A) rejected this claim due to a lack of evidence showing that borrowed funds were used for making FDRs. The Tribunal upheld this decision, noting the absence of material evidence linking borrowed funds to the FDRs. 5. Eligibility of DEPB Incentives for Deduction under Section 80IB: The assessee conceded that DEPB incentives are not eligible for deduction under section 80IB, in light of the Supreme Court decision in Liberty India Ltd. v. CIT. Consequently, this part of the assessee's claim was dismissed. 6. Exchange Rate Difference as Income Derived from Industrial Undertaking: The AO treated exchange rate differences as speculation profit, not eligible for deduction under section 80IB. The CIT(A) and the Tribunal disagreed, citing the Bombay High Court decision in CIT v. Rachna Udyog and the Gujarat High Court decision in CIT v. Amba Impex, which held that exchange rate fluctuations related to export sales are part of the sale price and thus eligible for deduction. 7. Sundry Balances Written Back as Income Derived from Industrial Undertaking: The AO disallowed the deduction for sundry balances written back, considering them as cessation of trading liability under section 41(1). The CIT(A) and the Tribunal allowed the deduction, reasoning that these balances were initially deducted from the profit of the eligible undertaking, and their write-back should similarly be eligible for deduction under section 80IB. Conclusion: The Tribunal upheld the CIT(A)'s decision, granting the assessee deductions under section 80IB for the relevant assessment years. The Tribunal found that the assessee had commenced manufacturing activities before 31.03.2004, and the evidence presented by the AO was inadmissible. Additionally, the Tribunal confirmed that exchange rate differences and sundry balances written back are eligible for deduction, while DEPB incentives and certain interest incomes are not.
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