2015 (11) TMI 791 - AT - Income Tax

Entitlement to deduction u/s 80 IC - initial assessment year - Held that - From the meaning of Initial assessment year it can be seen that whenever any undertaking or the enterprise begins its commercial manufacturing and production of articles it comes under the purview of Section 80IC of the Income Tax Act, 1961. Though, the assessee company has shown the pre-operative expenditure in respected of its Dehradun Unit & claimed that it was under trial run and there was no commercial production took place during the year, but the facts are different altogether. In fact, the assessee since the beginning of the said unit/plant was taking purchase orders from various parties and complying with the said purchase orders in the usual manner and there was no defect or complaint made by the purchasers at any point of time Delhi High Court in case of CIT vs. Nestor Pharmaceuticals (2009 (12) TMI 215 - DELHI HIGH COURT) clearly mentioned the difference between trial production and commercial production. The instance of the sale along with the documentary evidence clearly shows in the present case that, though the assessee is claiming the activity of Dehradun Unit as a trial production, the same is not at all a trial production but the commercial production from December 2003 onwards. Selling the product to particular parties continuously also shows that it is a commercial production and not of a trial production. The case laws submitted by the assessee are on different footings and was rightly distinguished by the DR. Thus, the first ground of the Revenue is sustained and the Ld. CIT(A) s order is set aside to that effect. As relates to the second ground, the same is consequential and the AO is directed to determine the deduction u/s 80HHC of the Income Tax Act, 1961 for the A.Y 2004-05. - Decided in favour of revenue.

Summary

Issues Involved:
1. Entitlement to deduction under Section 80IC of the Income Tax Act, 1961.
2. Entitlement to deduction under Section 80HHC of the Income Tax Act, 1961.
3. Determination of the initial assessment year for the purpose of Section 80IC.

Issue-wise Detailed Analysis:

1. Entitlement to deduction under Section 80IC of the Income Tax Act, 1961:

The primary issue was whether the Uttranchal Unit of the assessee company was entitled to deduction under Section 80IC of the Income Tax Act, 1961, from the assessment year 2005-06 or 2004-05. The Assessing Officer (AO) held that the initial assessment year for the purpose of Section 80IC was 2004-05, based on the unit's substantial material consumption and sales during that year. The AO argued that the unit had begun to manufacture or produce articles or things, thus meeting the criteria for the initial assessment year under Section 80IC.

The assessee contended that the unit was only under trial production during 2004-05 and that commercial production commenced in 2005-06. The Ld. CIT(A) accepted this argument, noting the high percentage of wastage and the need for a commercially sustainable production chain to qualify as manufacturing under Section 80IC.

However, the Tribunal found that the assessee's activities during 2004-05, including substantial sales and regular transactions with various parties, indicated commercial production rather than trial production. The Tribunal concluded that the initial assessment year for the purpose of Section 80IC was indeed 2004-05, as the unit had begun to manufacture and produce articles or things during that period.

2. Entitlement to deduction under Section 80HHC of the Income Tax Act, 1961:

The second issue was whether the sales from the Uttranchal Unit should be included in the total turnover for the purpose of computing deduction under Section 80HHC of the Income Tax Act, 1961. The AO included these sales in the total turnover, while the Ld. CIT(A) excluded them, based on the premise that the unit was under trial production and not commercial production.

Given the Tribunal's finding that the unit was engaged in commercial production during 2004-05, it followed that the sales from the Uttranchal Unit should be included in the total turnover for the purpose of Section 80HHC. The AO was directed to determine the deduction under Section 80HHC accordingly.

3. Determination of the initial assessment year for the purpose of Section 80IC:

The determination of the initial assessment year was crucial for both the above issues. The AO argued that the initial assessment year was 2004-05, based on the unit's substantial activities during that year. The Ld. CIT(A) disagreed, citing the high wastage and the need for a commercially sustainable production chain.

The Tribunal, however, found that the unit's activities during 2004-05, including substantial sales and regular transactions, indicated that it had begun commercial production. Thus, the initial assessment year for the purpose of Section 80IC was 2004-05. This finding impacted the determination of deductions under both Sections 80IC and 80HHC.

Conclusion:

The Tribunal allowed the revenue's appeal, setting aside the Ld. CIT(A)'s order and holding that the initial assessment year for the purpose of Section 80IC was 2004-05. Consequently, the sales from the Uttranchal Unit were to be included in the total turnover for the purpose of computing deduction under Section 80HHC for the assessment year 2004-05. The cross-objection by the assessee was dismissed as not pressed.