2007 (3) TMI 286 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of disallowance of expenses incurred at Aurangabad unit.
2. Disallowance of ex gratia payment to Aurangabad unit workers.
3. Disallowance of depreciation on assets of Aurangabad unit.
4. Exclusion of interest income and sales-tax refund from profits u/s 80-IB.

Summary:

1. Deletion of Disallowance of Expenses Incurred at Aurangabad Unit:
The Department appealed against the CIT(A)'s decision to delete the disallowance of Rs. 12,81,710 incurred by the assessee at the Aurangabad unit, where no business activity occurred during the year. The assessee argued that the manufacturing activity was only suspended due to labor problems and efforts were made to recommence operations. The CIT(A) allowed the expenses, stating they were for business purposes. The Tribunal confirmed this, noting that the expenses were necessary to maintain the basic infrastructure and pay salaries until the unit was officially closed on 1st Feb., 2000.

2. Disallowance of Ex Gratia Payment to Aurangabad Unit Workers:
The assessee contested the disallowance of Rs. 2,29,744 paid as ex gratia to workers due to the closure of the Aurangabad unit. The assessee argued that the manufacturing activity at Aurangabad was part of a larger business carried on at other units. The Tribunal agreed, citing cases like CIT vs. Diesel Engineer and CIT vs. P.I. Simon, which supported the view that retrenchment compensation is allowable if the closed unit is part of the same business. The Tribunal deleted the addition, recognizing the unity of control and management across the units.

3. Disallowance of Depreciation on Assets of Aurangabad Unit:
The assessee appealed against the disallowance of Rs. 7,72,903 in depreciation for assets at the Aurangabad unit, which were not used during the year. The Tribunal upheld the CIT(A)'s decision, referencing the case of Asstt. CIT vs. Rishiroop Polymers (P) Ltd., which stated that depreciation is not allowable on assets not put to actual use, even if they are ready for use.

4. Exclusion of Interest Income and Sales-Tax Refund from Profits u/s 80-IB:
The assessee claimed deduction u/s 80-IB for interest income and sales-tax refund. The Tribunal upheld the CIT(A)'s decision to exclude these from the deduction. Citing Pandian Chemicals Ltd. vs. CIT, the Tribunal noted that interest income from bank deposits is not derived from the business of the industrial undertaking. Regarding the sales-tax refund, the CIT(A) found that it did not form part of the cost of goods manufactured, thus not qualifying for deduction u/s 80-IB. The Tribunal confirmed this finding.

Conclusion:
The Departmental appeal was dismissed, and the assessee's appeal was partly allowed.