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2017 (4) TMI 1612 - AT - Income TaxDeduction u/s.80IB(5) - manufacture of a production of an article - profits derived by the Assessee from manufacture and sale of poultry feed - Whether profit derived from the activity of manufacture of poultry feed was entitled to deduction u/s.80IB(5) ? - HELD THAT - This issue has duly been decided by this Bench in assessee's own case in which, the similar issue has arisen held in the case that the assessee is engaged in manufacturing of poultry feeds and that the assessee is engaged in the manufacture or production of an article. Tribunal considered the decision rendered in the case of Venkateswara Feeds 2012 (6) TMI 683 - ITAT HYDERABAD and held that the assessee in that case had claimed deduction under section 80IB on the activity of merely converting poultry mash feed into pellet feed and therefore that Bench has held that there was no change in the basic component or new or different article came into existence. As such, conversion was processing activity not manufacturing. The Tribunal held that the case of the assessee Amrit Feeds (supra) was entirely different. The assessee's eligible undertaking itself was independently carrying out the complete activity i.e. from mixing, grinding till the pelletisation. The raw materials once consumed could not be reconverted into the same position. Its utility gets changed. The prime raw materials such as, maize, soya oil, rice bran, etc. can no more be regarded to be the rice bran, soya oil, maize. We are of the view that the issue in the Revenue's appeal is squarely covered against the revenue by the decision of the Coordinate Bench of this Tribunal in assessee's own case for the earlier years - grounds of appeal raised by the Revenue in all the appeals on this issue are dismissed. Interest income should be excluded from the profits of the business on which deduction u/s 80IB(5) - Interest income and the interest expenses had a direct nexus and therefore netting of interest income against the interest expenses had to be allowed. Since the interest expenses was much more than the interest income no interest income can be excluded from the profits on which deduction u/s 80IB(5) of the Act ought to be allowed. We therefore uphold the order of CIT(A) on this issue and dismiss ground nos. (iv) and (vi) raised by the revenue. Disallowance u/s 14A read with rule 8D(2)(ii) and 8D(2)(iii) only on the investment in the shares of Punjab National Bank - HELD THAT - As rightly held by CIT(A) disallowance under Rule 8D(2)(ii) (indirect interest expenditure) cannot be sustained in the light of the uncontroverted finding of the CIT(A) that assessee had sufficient interest free funds which were more than the value of investments which are likely to yield tax free income. As far as disallowance under Rule 8D(2)(iii) is concerned it is only the investment which yield dividend income that should be considered for the purpose of applying the formula as held by this tribunal in the case of REI Agro Ltd. 2014 (4) TMI 713 - CALCUTTA HIGH COURT which has since been affirmed by the Jurisdictional Calcutta High Court. In view of the above we find no merits in the ground raised by the revenue. Accordingly we dismiss ground no.(vii) raised by the revenue.
Issues Involved:
1. Eligibility for deduction under section 80IB(5) of the Income Tax Act, 1961, for the manufacture and sale of poultry feed. 2. Netting off interest income against interest expenses for the purpose of computing deduction under section 80IB. 3. Disallowance under section 14A read with Rule 8D(2)(ii) and 8D(2)(iii) for expenses incurred in earning exempt income. Detailed Analysis: 1. Eligibility for Deduction under Section 80IB(5): The primary issue was whether the Assessee's activity of manufacturing poultry feed qualifies as "manufacture or production of an article" under section 80IB(5) of the Income Tax Act, 1961. - Revenue's Argument: The Revenue contended that the process of manufacturing poultry feed did not change the chemical composition of the ingredients, hence it should not be considered as "manufacture." - Assessee's Argument: The Assessee argued that the process involved mechanical, chemical, and electrical processes using sophisticated machinery, resulting in a product distinct in shape, character, and end-use known commercially as 'poultry feed'. The Assessee also cited previous ITAT decisions in their favor. - Tribunal's Decision: The Tribunal upheld the CIT(A)’s decision, referencing its earlier judgment in the Assessee's own case, which recognized the activity as manufacturing. The Tribunal emphasized that the poultry feed industry is recognized by the Central Government for deductions under section 80IB(4), implying it is engaged in manufacturing. The Tribunal also noted that the Revenue did not provide scientific data to support its claim. 2. Netting Off Interest Income Against Interest Expenses: The second issue was whether the interest income should be excluded from the profits of the business for the purpose of deduction under section 80IB(5). - Revenue's Argument: The Revenue argued that the interest income had no direct nexus with the business of manufacturing poultry feed and should be excluded from the profits eligible for deduction. - Assessee's Argument: The Assessee contended that the interest income arose from fixed deposits used as securities for credit facilities necessary for the business. The Assessee had paid more interest on loans than it earned from deposits, justifying netting off. - Tribunal's Decision: The Tribunal agreed with the CIT(A) that the interest income and expenses had a direct nexus. Since the interest expense exceeded the interest income, no interest income should be excluded from the profits eligible for deduction under section 80IB(5). 3. Disallowance under Section 14A read with Rule 8D(2)(ii) and 8D(2)(iii): The third issue involved the disallowance of expenses incurred in earning exempt income under section 14A read with Rule 8D. - Revenue's Argument: The AO disallowed a sum of Rs.66,678/- and Rs.59,170/- as expenses incurred in earning exempt income, invoking section 14A read with Rule 8D. - Assessee's Argument: The Assessee argued that the investments were primarily in group companies for strategic business purposes, not merely to earn tax-free dividend income. The Assessee also claimed that investments were made out of its own funds, not borrowed funds. - Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, which found that the Assessee had sufficient interest-free funds to cover the investments. The CIT(A) directed the AO to compute disallowance under Rule 8D only for the investment in Punjab National Bank shares, amounting to Rs.34,100/-. The Tribunal agreed that only investments yielding dividend income should be considered for disallowance under Rule 8D(2)(iii). Conclusion: The Tribunal dismissed the Revenue's appeal, confirming the Assessee's eligibility for deduction under section 80IB(5) for manufacturing poultry feed, allowing netting off interest income against interest expenses, and limiting disallowance under section 14A to specific investments. The decision emphasized the importance of a liberal interpretation of incentive provisions to promote economic and industrial growth.
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