2016 (6) TMI 124 - AT - Income Tax

Claiming deduction u/s 80IB - Deduction u/s 10B - Held that - The pre-condition for claiming deduction u/s 80IB is (i) manufacturing activity, (ii) employed more than 10 workers, and (iii) usage of brand new machinery for the new industrial undertaking. Admittedly, the assessee has established a new industrial unit at Pondichery. The Assessing Officer disallowed the claim of the assessee on the ground that the assessee s activities do not amount to manufacturing. The Assessing Officer has also found that the assessee employed less than 10 workers. The Assessing Officer further found that the old machinery exceeded 40% and the prescribed limit is only 20%. The CIT(A) found that the assessee has employed two sets of workers. The first set of workers are permanent employees and another set of workers and contract employees. The CIT(A) found that the permanent employees are 6 in number and contract employees are 15 in number totalling to 21 employee. This fact is not available before the Assessing Officer. Referring to the old plant and machinery and the new one, the Assessing Officer came to the conclusion that the old plant and machinery was 40% which is more than the permitted limit of 20%. The CIT(A) found that the observation of the Assessing Officer was factually incorrect by saying that the Assessing Officer adopted the opening written down value as on 1.4.2005 and compared with the addition of plant and machinery made during the financial year 2005-06. The Assessing Officer came to the conclusion that the new machinery claimed to be purchased by the assessee is only a storage tank. The CIT(A), without referring to the nature of the plant and machinery said to be purchased, found that the machinery purchased upto 31.3.2005 are new machineries. The fact that the storage tank is a machinery or not was not considered by the CIT(A). From the materials available on record, it appears that the assessee-company is engaged in the business of producing varnish, thinner and wood polish. It also needs to be considered whether producing, varnish, thinner and wood polish would amount to manufacturing activity or not. The assessee appears to have produced new material for evidencing the payment of PF before the CIT(A). The CIT(A), without calling for any remand report from the Assessing Officer, accepted the details filed by the assessee. In those circumstances, this Tribunal is of the considered opinion that the matter needs to be reexamined by the Assessing Officer after considering all the material facts which are relevant. Accordingly, the orders of the lower authorities for the assessment years 2006-07 and 2007-08 are set aside and the entire claim of deduction u/s 10B of the Act is remitted back to the file of the Assessing Officer - Decided in favour of revenue for statistical purposes.

Summary

Issues:
- Eligibility for deduction u/s 80IB based on plant and machinery
- Requirement of employing a specific number of workers for claiming deduction u/s 80IB
- Consideration of contract workers as employees for deduction u/s 80IB
- Assessment of manufacturing activity for claiming deduction u/s 80IB

Eligibility for deduction u/s 80IB based on plant and machinery:
The Revenue appealed against the Commissioner of Income-tax (Appeals) order concerning assessment years 2006-07 and 2007-08, focusing on the deduction u/s 80IB claimed by the assessee. The Revenue contended that the storage tank added to the plant and machinery was not eligible for deduction as it did not meet the criteria of being considered as plant and machinery for the business. The Revenue further argued that the ratio of old machinery to new machinery exceeded the permissible limit of 20%, rendering the assessee ineligible for the deduction. The Revenue emphasized the requirement of forming a new business and engaging in manufacturing activity to qualify for the deduction u/s 80IB. The Revenue also highlighted the necessity of employing a specific number of workers depending on the use of power in the manufacturing process.

Requirement of employing a specific number of workers for claiming deduction u/s 80IB:
The Departmental Representative pointed out that the Assessing Officer found the assessee had employed less than 20 workers, thus challenging the eligibility for deduction u/s 80IB. However, the Commissioner of Income-tax (Appeals) determined that the assessee had a total of 21 employees, including both permanent and contract workers, meeting the required criteria for the deduction.

Consideration of contract workers as employees for deduction u/s 80IB:
The Commissioner of Income-tax (Appeals) relied on legal precedents to establish that contract workers engaged through labor contractors should be considered as "workers" for the purpose of claiming deduction u/s 80IB. This interpretation played a crucial role in determining the eligibility of the assessee for the deduction based on the total number of employees.

Assessment of manufacturing activity for claiming deduction u/s 80IB:
The Tribunal analyzed the manufacturing activity of the assessee to determine eligibility for the deduction u/s 80IB. The Tribunal observed discrepancies in the Assessing Officer's findings regarding the number of workers employed and the classification of plant and machinery. The Tribunal emphasized the need for a thorough reexamination by the Assessing Officer to consider all relevant facts before making a decision on the deduction claim. Consequently, the Tribunal set aside the lower authorities' orders and remitted the issue back to the Assessing Officer for a fresh assessment in accordance with the law.

In conclusion, the judgment highlighted the intricate criteria and considerations involved in determining the eligibility for deduction u/s 80IB, emphasizing the importance of fulfilling specific conditions related to plant and machinery, employment of workers, and the nature of manufacturing activity.