2017 (8) TMI 1569 - AT - Income Tax

Deduction u/s. 80IB(4) - Whether the activity carried out by the assessee at Silvasa unit amounts to manufacture or production? - HELD THAT - As decided in own case 2015 (2) TMI 1317 - ITAT PUNE activity involving assembling of various components and achieving a final product of a generator amounts to manufacture or production of an article or thing with the meaning of section 80-IB of the Act. Moreover in the case of Tata Locomotive and Engineering Company Limited 1967 (2) TMI 22 - BOMBAY HIGH COURT has also held that assembling of various components which results into a different product which is distinct then the individual components such an activity amounts to manufacture or production. As a consequence we therefore do not agree with the first objection of the AO to deny assessee s claim for deduction u/s. 80-IB (4) of the Act. Thus on this aspect assessee succeeds Disallowance u/s.14A - HELD THAT - Since no exempt income has been earned during the period relevant to the assessment year under appeal and since it is no ones case that any interest expenditure was incurred for making investments by the assessee therefore no disallowance u/s 14A is warranted. Accordingly ground No. 2 raised in the appeal by the assessee is allowed. Amended provisions of section 40(a)(ia) - TDS u/s 194A - disallowance u/s. 40(a) (ia) - payment of interest for delayed payments to creditors - HELD THAT - Without going into the merits whether the interest paid by the assessee is in the nature of trade payment or payment of interest falling within the ambit of section 194A we deem it appropriate to consider the alternate submission of the assessee. The provisions of section 40(a)(ia) have been amended by the Finance Act 2012 w.e.f 01.04.13. The second proviso to section 40(a)(ia) have been inserted according to which no disallowance u/s 40(a)(ia) of the Act would be made if the assessee is not deemed to be an assessee in default under first proviso to section 201(1) of the Act. In the light of amended provisions of section 40(a)(ia) and case of M/S. SHREE SAI TRADERS VERSUS ITO WARD-2 BEED 2016 (11) TMI 1512 - ITAT PUNE we deem it appropriate to restore the issue back to the file of Assessing Officer with direction to give opportunity to the assessee to substantiate with evidence that payee has already included interest income in its return and has paid tax thereon. Accordingly ground No. 3 raised in the appeal by the assessee is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Allowability of deduction under section 80IB(4) of the Income Tax Act, 1961.
2. Disallowance of expenses under section 14A of the Income Tax Act.
3. Disallowance of interest payment under section 40(a)(ia) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Allowability of Deduction under Section 80IB(4):
The assessee claimed a deduction under section 80IB(4) for profits derived from its unit located at Silvasa. The Assessing Officer (AO) disallowed the claim, arguing that the unit did not start manufacturing activities before the specified date of 31.03.2004 and that the activities did not amount to manufacturing or production. The Tribunal had previously addressed similar disallowances for the assessment years 2005-06 and 2008-09, concluding that the activities at the Silvasa unit did constitute manufacturing or production. The Tribunal cited judgments from the Hon’ble Delhi High Court and the Hon’ble Bombay High Court, which supported the view that assembling components into a generator qualifies as manufacturing. However, regarding the start date of manufacturing, the Tribunal had remitted the issue back to the AO for further factual verification, especially concerning the transporter's statements and the evidence of transportation. The Tribunal directed the AO to allow the assessee an opportunity for cross-examination and to make a fresh determination. Consistently, the current issue was also remanded back to the AO with similar directions.

2. Disallowance of Expenses under Section 14A:
The AO disallowed Rs. 4,33,500 under section 14A, related to expenses incurred for earning exempt income. The assessee argued that no exempt income was earned from the investments, and the investments were made from own funds, not borrowed funds. The Tribunal referenced the Hon’ble Delhi High Court's decision in Cheminvest Ltd. v. CIT, which held that no disallowance under section 14A is warranted if no exempt income is earned. The Tribunal also cited its own earlier decision in Ram Infrastructure Ltd. v. JCIT, which supported the same view. Consequently, the Tribunal directed the AO to delete the disallowance under section 14A, as the assessee had not earned any exempt income during the relevant period.

3. Disallowance of Interest Payment under Section 40(a)(ia):
The AO disallowed Rs. 80,03,105 under section 40(a)(ia) for non-deduction of TDS on interest payments for delayed payments to creditors. The assessee contended that such interest payments were in the nature of trade payments and not subject to TDS under section 194A. Alternatively, the assessee argued that if the payee had included the interest income in their return and paid taxes, no disallowance should be made under section 40(a)(ia). The Tribunal, without delving into the nature of the interest payments, considered the alternate submission. Referring to the amended provisions of section 40(a)(ia) and the Tribunal's decision in M/s. Shree Sai Traders v. ITO, the Tribunal remanded the issue back to the AO. The AO was directed to verify if the payee had included the interest income in their return and paid taxes accordingly, and to make a fresh determination based on this verification.

Conclusion:
The appeal was partly allowed. The issue of deduction under section 80IB(4) was remanded back to the AO for further verification and fresh determination. The disallowance under section 14A was deleted. The issue of disallowance under section 40(a)(ia) was also remanded back to the AO for verification and fresh determination.