1983 (12) TMI 94 - AT - Income Tax

Assessment Year, Industrial Undertaking In Backward Area, Manufacture And Sale, Profits And Gains, Setting Up

Issues Involved:
1. Computation of capital for the purpose of section 80J of the Income-tax Act, 1961.
2. Deduction claimed under section 80HH of the Income-tax Act, 1961.
3. Levy of interest under section 215 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Computation of Capital for the Purpose of Section 80J:

For the assessment year 1978-79, the assessee contended that borrowed capital should be considered as capital employed for the purpose of section 80J. This contention was rejected due to the retrospective amendment of section 80J. Similarly, for the assessment year 1979-80, the assessee's claim was again rejected for the same reasons.

2. Deduction Claimed Under Section 80HH:

Assessment Year 1978-79:
The assessee's claim for deduction under section 80HH was deemed academic because there was no gross total income due to past losses.

Assessment Year 1979-80:
The assessee claimed deduction under section 80HH for profits from an industrial unit in Hoshiarpur, a recognized backward area. The Income-tax Officer (ITO) rejected the claim, asserting that the profits were inflated to gain the deduction, invoking sub-section (7) of section 80HH. The ITO argued that the business arrangement between the assessee and its holding company produced more than ordinary profits for the assessee.

The Commissioner (Appeals) acknowledged the close connection between the assessee and its holding company and found that the profits were inflated. However, he directed the ITO to determine the profits assuming the rates charged by the assessee were at the same level as those charged by Thakur Metal Industries (TMI).

Appeals:
Both the assessee and the department appealed. The department's appeal was based on the misconception that the Commissioner (Appeals) directed the ITO to allow an unabsorbed relief under section 80HH to be carried forward. However, the Commissioner (Appeals) had only directed that the allowable deduction under section 80HH should be granted and any remaining balance considered for the purpose of deduction under section 80J.

The assessee argued that the business arrangement was not designed to produce abnormal profits and that the rates charged had been progressively reduced. The assessee also pointed out that the holding company's dependence on TMI was reduced due to TMI's inability to meet the full demands, justifying the formation of the subsidiary.

The tribunal concluded that the onus was on the department to prove that the profits were inflated. It was determined that the course of business must be considered over a longer period, not just one or two years. The tribunal found that the dominant motive was not to transfer profits but to reduce dependence on TMI. Therefore, the assessee was entitled to the deduction under section 80HH, and the provisions of sub-section (7) were not applicable.

3. Levy of Interest Under Section 215:

The ITO had levied interest under section 215 due to the assessee's shortfall in advance income-tax payment. The Commissioner (Appeals) canceled the levy, stating that the liability arose from controversial additions in the assessments and that the levy of interest was appealable.

The department appealed, arguing that the levy of interest was not appealable. The tribunal held that the levy of interest was appealable since the assessee claimed there was no income for the year, only a loss, making them not assessable to advance income-tax. The tribunal directed that the levy of interest be recalculated based on the final assessed figure after accounting for past losses and reductions granted in the appeals.

Conclusion:
The departmental appeal for the year 1979-80 was partly allowed, and the assessee's appeals for 1978-79 and 1979-80 were partly allowed.

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