2018 (3) TMI 468 - AT - Income Tax

Deduction U/S 80-IB - scope of term manufacture occurring in the context of section 80-IB - profits derived by the Assessee from manufacture and sale of poultry feed - Held that - As decided in assessee s own case 2017 (4) TMI 1316 - ITAT KOLKATA in the light of the admitted factual position that the income in question had direct nexus with the business of the assessee, the same was rightly held by CIT(A) to be eligible for the purpose of claiming deduction u/s 80IB(5). We do not find any ground to interfere with the order of CIT(A). Disallowance of expenses u/s.14A r.w.r. 8D(2)(ii) & (iii) - Held that - As far as disallowance under Rule 8D(2)(iii) is concerned, we are of the view that it is only the investment which yield dividend income that should be considered for the purpose of applying the formula as confirmed in in the case of REI Agro Ltd. 2014 (4) TMI 713 - CALCUTTA HIGH COURT . As far as investments made in subsidiaries is concerned, such investments made in subsidiaries would fall under the category of strategic investments as they are admittedly made only for the purpose of obtaining controlling interest in the said companies and not for the purpose of earning dividend income which is exempt. Hence they would stand differently from other regular investments. - Decided against revenue

Summary

Issues Involved:
1. Eligibility of the assessee for deduction under section 80IB(5) of the Income Tax Act, 1961.
2. Treatment of interest income for the purpose of deduction under section 80IB(5).
3. Disallowance of expenses under section 14A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80IB(5):

The Revenue's grounds (i) to (iii) challenged the CIT(A)'s decision to allow the assessee's deduction claim under section 80IB(5) for profits derived from manufacturing and selling poultry feed. The Revenue argued that the process did not change the chemical composition of the ingredients, thus not qualifying as "manufacture." However, the Tribunal noted that this issue had been previously decided in favor of the assessee in earlier years (AY 2007-08 and AY 2010-11) and in a similar case (Amrit Feeds). The Tribunal emphasized that the process involved mechanical, chemical, and electrical steps, resulting in a distinct product known as poultry feed, which was different in shape, character, and end-use from the raw materials. The Tribunal upheld the CIT(A)'s decision, confirming that the assessee's activity constituted "manufacture" and was eligible for the deduction under section 80IB(5).

2. Treatment of Interest Income for Deduction under Section 80IB(5):

Grounds (iv) to (vi) addressed whether interest income earned on FDRs (Fixed Deposit Receipts) should be considered as income derived from eligible business for section 80IB(5) deduction. The CIT(A) had found that the interest income had a direct nexus with the business, as the FDRs were used as security for credit facilities. The CIT(A) directed the AO to net off the interest income against interest expenses. The Tribunal agreed with the CIT(A), citing similar decisions (e.g., BMW Industries) and the jurisdictional Calcutta High Court's ruling in Warren Tea Ltd. The Tribunal upheld the CIT(A)'s decision, confirming that the interest income was eligible for deduction under section 80IB(5).

3. Disallowance of Expenses under Section 14A:

Ground (vii) concerned the disallowance of expenses under section 14A read with Rule 8D(2)(ii) & (iii). The AO had disallowed ?26,080 for interest expenses and other expenses related to exempt income (dividends). The CIT(A) found that the investments primarily in group companies did not produce tax-free income in all cases and that strategic investments were made for management control, not for earning dividends. The CIT(A) relied on the jurisdictional Calcutta High Court's decision in REI Agro Ltd and other cases, concluding that no disallowance was warranted for investments in associate & subsidiary companies for strategic purposes. The Tribunal agreed, citing the affirmed decision in REI Agro Ltd and the principle that only dividend-yielding investments should be considered for disallowance. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all issues. The assessee's activities were deemed to constitute "manufacture," the interest income was correctly treated for deduction purposes, and the disallowance under section 14A was appropriately handled. The order was pronounced in the open court on 01.03.2018.