2017 (9) TMI 1234 - HC - Income Tax

Entitlement to deduction under Section 80 IB - Whether the activity of galvanization would amount to manufacture? - Held that - The appellant is admittedly engaged in the manufacture of black pipes as well as galvanized iron pipes. The appellant also undertakes to manufacture all galvanized iron pipes by galvanization of raw pipes of customers on job work basis. The pipe is required to undergo the processes of prickling, rinsing, fluxing, drier, zinc tank and water quenching for the purpose of galvanization of iron pipe. After the completion of the entire processes, the end product which comes into existence is called galvanized iron pipe which is a different commercial commodity than iron pipe. A galvanized iron pipe is sold at a higher price than an iron pipe and a galvanized iron pipe is used for laying water lines, manufacture of different machinery and plants and for other purposes for which iron pipes cannot be used. Thus, galvanized iron pipe is a different commercial commodity than a iron pipe, therefore the activity of galvanization in our considered opinion amounts to manufacture. - Decided in favour of the assessee and against the Revenue. Accepting interest subsidy received by the appellant being reimbursement of the interest paid to the Bank on working capital advances for increasing the production of the industrial undertaking as income derived from such industrial undertaking and is entitled to deduction under Section 80 IB. See Commissioner of Income Tax v. Meghalaya Steel Ltd 2016 (3) TMI 375 - SUPREME COURT - Decided in favour of assessee. Non allowing the deduction of EPF u/s 43B - EPF was deposited before the date of filing of return under Section 139(1) - Held that - Substantial question of law is no longer res integra as is covered by the decision of CIT v. Alom Extrusions Ltd 2009 (11) TMI 27 - SUPREME COURT wherein held that relaxation allowed by 1st proviso to Section 43B of the Act was restricted only to tax, duty, cess and fee, and did not apply to contributions to labour welfare funds. Since the second proviso to Section 43B resulted in implementation problems, it was deleted by Financial Act, 2003, thereby equating tax, duty, cess and fee with contributions to welfare funds. It was further held that the aforesaid amendment operates retrospectively, that is, w.e.f. 01.04.1988, i.e. the date of insertion of the 1st proviso. - Decided in favour of the assessee.

Summary

Issues Involved:
1. Whether the activity of galvanization amounts to manufacture.
2. Whether the interest subsidy received by the appellant qualifies as income derived from the industrial undertaking and is entitled to deduction under Section 80 IB of the Income Tax Act.
3. Whether the deduction of EPF under Section 43B of the Income Tax Act should be allowed if EPF was deposited before the date of filing of return under Section 139(1) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Whether the activity of galvanization amounts to manufacture:

The appellant argued that the process of galvanization leads to the creation of a new commodity with a distinct name, character, and use, thus qualifying as manufacture under Section 80 IB of the Income Tax Act. The appellant is engaged in manufacturing black and galvanized iron pipes and also performs galvanization as a job work for others. The Income Tax Officer, relying on a Kolkata High Court decision, held that galvanization does not amount to manufacture. This decision was upheld by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal.

The court referred to several Supreme Court decisions, including Empire Industries Ltd., Ujagar Printers, and Laminated Packings (P) Ltd., which established that a process resulting in a new commodity fit for use amounts to manufacture. The court also considered Circular No.528 issued by the Department, which stated that manufacture implies bringing in something new with a distinct name, character, or use.

The court concluded that the process of galvanization transforms raw iron pipes into galvanized iron pipes, a different commercial commodity used for purposes where raw iron pipes cannot be used. Thus, the activity of galvanization amounts to manufacture, and the first substantial question of law was answered in favor of the assessee.

2. Whether the interest subsidy qualifies as income derived from the industrial undertaking and is entitled to deduction under Section 80 IB:

The appellant claimed that the interest subsidy received as reimbursement for interest paid on working capital advances should be considered income derived from the industrial undertaking and eligible for deduction under Section 80 IB. The court referred to the Supreme Court decision in Commissioner of Income Tax v. Meghalaya Steel Ltd., which established that subsidies reimbursing costs related to manufacturing or selling products have a direct nexus with the industrial undertaking's profits and gains.

The court held that the interest subsidy received by the appellant is directly related to the business's manufacturing and selling activities. Therefore, it qualifies as income derived from the industrial undertaking and is entitled to deduction under Section 80 IB. The second substantial question of law was answered in favor of the assessee.

3. Whether the deduction of EPF under Section 43B should be allowed if EPF was deposited before the date of filing of return under Section 139(1):

The appellant argued that the deduction of EPF should be allowed under Section 43B since the EPF was deposited before the filing date of the return under Section 139(1). The court referred to the Supreme Court decision in CIT v. Alom Extrusions Ltd., which held that the relaxation allowed by the first proviso to Section 43B applies retrospectively from 01.04.1988 and includes contributions to welfare funds.

The court concluded that the amendment to Section 43B operates retrospectively, allowing the deduction of EPF if deposited before the filing date of the return. Therefore, the third substantial question of law was answered in favor of the assessee.

Conclusion:

The court quashed the orders passed by the Income Tax Officer, Commissioner of Income Tax (Appeals), and the Income Tax Appellate Tribunal. The appeal was allowed, and all three substantial questions of law were answered in favor of the assessee.