2015 (1) TMI 467 - AT - Income Tax

Deduction u/s 80IE - manufacturing process - AO did not find correspondence purchase of raw material to evidence manufacture - AO further observed that less consumable stores have been used, less expenses were incurred during the course of manufacturing process. - Held that - The conversion of gold bullion or gold bar to the gold chlorate powder is a manufacturing process, in the circumstances and facts of the present case since, the final and manufactured product is new and distinct object with different name character and use which is not possible in the case of raw material. Since, the purchase have not been doubted by the AO or the learned CIT(A) and arguments of learned DR at this stage that no purchases have been made cannot be help the revenue. As satisfied with the explanation of the assessee and therefore, the arguments of learned DR that the case does not inspire confidence cannot help the revenue. Thus in view of findings where assessee s activities have been held to be manufacturing activity and accordingly assessee is eligible for deduction u/s.80IE of the Act. Central Excise Duty Refund - Held that - As regards assessee s claim of deduction with regard to excise duty refund the explanation submitted by the assessee in this regard is found to be convincing and in view of the scheme of the Union Government with regard to North Eastern State which is akin to and similar to the one in the case of Shree Balaji Alloys(2011 (1) TMI 394 - Jammu and Kashmir High Court) and therefore, in the present circumstances and facts of the case, we are bound by the decision of Shree Balaji Alloys(supra) and the said receipts are held to be capital receipts. Disallowance of interest - Held that - As assessee explained that a sum of ₹ 24 lac was paid to Smt. Meena Kumari Pradhan for the purposes of land which was not materialized which has been returned back to the assessee company and interest was paid on capital borrowed for purchase of shares, thus since both the investments were made for the business purposes and the assessee company had earned more than investment made. Thus CIT(A) is not justified in disallowance of interest. Appeal of the assessee is allowed.

Issues Involved:
1. Validity of disallowance of deduction under section 80IE of the Income Tax Act, 1961.
2. Classification of Central Excise Duty Refund as a capital or revenue receipt.
3. Disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961.
4. Charging of interest under sections 234B and 234C of the Income Tax Act, 1961.

Detailed Analysis:

1. Validity of Disallowance of Deduction under Section 80IE:
The assessee claimed a deduction of Rs. 1,33,10,413/- under section 80IE of the Income Tax Act, 1961, for its Sikkim manufacturing unit. The Assessing Officer (AO) disallowed this deduction, citing several reasons, including negligible electricity expenses, low wages and salaries, minimal consumables, and the improbability of manufacturing activities with such low inputs. The AO concluded that the assessee was primarily engaged in trading activities rather than manufacturing.

The assessee argued that the manufacturing activity was conducted for only two months, resulting in low expenses. The electricity charges were paid in a subsequent year due to delayed billing by the department. The assessee provided evidence of the manufacturing process, which involved converting gold bullion into gold chloride powder, a distinct commercial product with different applications.

The CIT(A) rejected the assessee's explanations, emphasizing that the conversion process did not constitute manufacturing as defined by law. However, the Tribunal found that the assessee's detailed manufacturing process and the transformation of gold bullion into a new product with distinct uses met the definition of "manufacture" under section 2(29BA) of the Income Tax Act, 1961. The Tribunal held that the assessee was entitled to the deduction under section 80IE.

2. Classification of Central Excise Duty Refund:
The assessee received a Central Excise Duty Refund of Rs. 82,48,402/-, which it claimed as a deduction under section 80IE. The AO treated this refund as a revenue receipt, not derived from manufacturing activities, and added it to the assessee's income. The assessee argued that the refund was a capital receipt, citing the decision of the J&K High Court in the case of Shree Balaji Alloys, where such refunds were held to be capital receipts.

The Tribunal agreed with the assessee, noting that the incentive scheme for the North Eastern States, including Sikkim, was similar to the one in the Shree Balaji Alloys case. The Tribunal held that the excise duty refund was a capital receipt and not subject to tax, allowing the assessee's claim.

3. Disallowance of Interest under Section 36(1)(iii):
The AO disallowed Rs. 2,29,550/- of interest claimed by the assessee under section 36(1)(iii), arguing that the interest-free advances made by the assessee were not for business purposes. The assessee contended that the advances were for purchasing land and shares for business purposes and that the interest was allowable under section 36(1)(iii).

The Tribunal found the assessee's explanation convincing and noted that the investments were made for business purposes. The Tribunal allowed the interest deduction under section 36(1)(iii), reversing the disallowance made by the AO and CIT(A).

4. Charging of Interest under Sections 234B and 234C:
The assessee contested the interest charged under sections 234B and 234C, arguing that no reasonable opportunity of being heard was provided. The Tribunal noted that the charging of interest under these sections is consequential and mandatory, thus upholding the interest charges.

Conclusion:
The Tribunal allowed the appeal of the assessee, granting the deduction under section 80IE, classifying the excise duty refund as a capital receipt, allowing the interest deduction under section 36(1)(iii), and upholding the interest charges under sections 234B and 234C as consequential.

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