2016 (7) TMI 187 - AT - Income Tax

Eligibility for deduction u/s 80HH and 80I - non maintenance of separate book of accounts - quantum of deduction - Held that - In the present case the gross total income of the assessee includes income from manufacturing activity of an industrial undertaking irrespective of the fact that the activities is being carried out either at small scales or large scale and such activity was significant or not compared to total turnover of the assessee including income of the business which is not eligible for such deduction. In view of above we hold that the assessee is eligible for deduction u/s 80HH of the Act on the income from manufacturing activity. On careful consideration above it was the duty and onus on the shoulder of the assessee to show that he was also engaged in manufacturing activities and the gross total income declared by it also include income from manufacturing activity and on the basis of foregoing discussion we have held that the assessee is entitled for deduction u/s 80HH and 80I of the Act on the part of income earned from manufacturing activities. However, for want of adequate material on the record of the Tribunal, it is not possible for us to calculate quantum of deduction and thus we find it appropriate to send the issue for limited purposes i.e. for calculation of deduction u/s 80HH on the income earned from manufacturing activities during the relevant periods under consideration for all five assessment years. Hence, we direct the AO to calculate the quantum of deduction for all the five assessment years under consideration.

Issues Involved:
1. Eligibility for deduction under Sections 80HH and 80I of the Income Tax Act for income derived from manufacturing activities.
2. Differentiation between construction activities and manufacturing activities for tax deduction purposes.
3. Adequacy of records and separate accounts for construction and manufacturing activities.

Detailed Analysis:

1. Eligibility for Deduction under Sections 80HH and 80I:
The primary issue revolves around whether the assessee is eligible for deductions under Sections 80HH and 80I of the Income Tax Act for income derived from manufacturing activities. The Tribunal noted that the High Court had previously ruled that the assessee is not eligible for deductions concerning income from construction activities. However, the High Court left open the possibility of deductions for income derived from manufacturing activities, which needed re-examination by the Tribunal.

2. Differentiation between Construction and Manufacturing Activities:
The Tribunal examined the distinction between construction and manufacturing activities. The High Court, referencing the Supreme Court's decision in N.C. Budhiraja, clarified that construction activities, such as laying railway lines, do not qualify as manufacturing or producing articles. Conversely, the assessee argued that it was engaged in manufacturing various items used in railway track installation, which should qualify for deductions under Sections 80HH and 80I.

3. Adequacy of Records and Separate Accounts:
The Tribunal considered whether the assessee maintained separate accounts for its construction and manufacturing activities. The assessee admitted to not maintaining separate books of accounts, which complicated the calculation of income derived from manufacturing activities. Despite this, the Tribunal directed the Assessing Officer (AO) to calculate the quantum of deduction based on the available records.

Tribunal's Conclusion:
The Tribunal held that the assessee is eligible for deductions under Sections 80HH and 80I for income derived from manufacturing activities. The Tribunal emphasized that the manufacturing activity was an integral part of the assessee's operations, even if it was not the primary activity. The Tribunal rejected the revenue's contention that the manufacturing activity was insignificant and not eligible for deductions.

Directions to Assessing Officer:
The Tribunal directed the AO to calculate the quantum of deductions for the relevant assessment years based on the income derived from manufacturing activities. This calculation is to be done despite the lack of separate accounts, ensuring that the assessee's eligibility for deductions is appropriately addressed.

Final Decision:
All appeals filed by the assessee were allowed, with specific instructions to the AO to compute the deductions for the income derived from manufacturing activities for the assessment years 1984-85 to 1987-88 and 1991-92.

Order Pronouncement:
The order was pronounced in the open court on 1st July 2016.

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