2008 (2) TMI 445 - AT - Income Tax

Deduction under section 80-I/80-IA - Undertaking II and Undertaking III - Worked out the profits and gains of each of its undertakings - treated undertakings as separate and independent - whether the unit in question is engaged in the production or manufacture of specified articles or things in its own right - HELD THAT - In our view, the term 'undertaking' has to be approached teleologically focusing on the subject-matter the unit in question is concerned with. In order to constitute an 'undertaking', the unit must undertake the specified task. In the context of section 80-I or section 80-IA, the obligation or task to be undertaken by a unit is the manufacture or production of articles or things specified in that section. The 'undertaking' envisaged by the aforesaid provisions is the one which undertakes to manufacture or produce the articles or things in its own right and consequently derives the profits or gains therefrom. In our view, a unit qualifies to be called an 'undertaking' when it undertakes the production or manufacture of articles or things in its own right and produces such articles or things by itself as a separate and independent unit. It should not only be a separate and independent unit but a well integrated unit capable of undertaking the manufacturing or production of articles or things. As held in Textile Machinery Corporation Ltd.'s case 1977 (1) TMI 3 - SUPREME COURT , an undertaking claiming deduction must be a new integrated unit by itself where articles or things are manufactured or produced. The findings recorded by the learned CIT(A) that the unit in question is separately and independently engaged in the production of capsules on its own have not been shown to be incorrect or based on no material. It is also not in dispute that each undertaking has not only produced the capsules but also derived the profits and gains from them. The Department has also not rebutted the assessee's submission that it has treated each undertaking as separate and independent in its accounts. It is also not the case of the Department that any of the negative tests laid down in section 80-I(2) is attracted in the case before us. We therefore endorse the findings recorded as also the order passed by him in this behalf and consequently dismiss Ground No. 1 taken by the Department.

Issues Involved:
1. Deduction under section 80-I and 80-IA of the Income-tax Act for separate undertakings.
2. The status of multiple units as separate undertakings.
3. Compliance with conditions stipulated under section 80-I/80-IA.
4. Department's survey findings and their implications.
5. Legal precedents and their applicability.

Detailed Analysis:

1. Deduction under section 80-I and 80-IA of the Income-tax Act for separate undertakings:
The primary issue was whether the assessee was entitled to deductions under section 80-I and 80-IA for Undertaking II and III. The Department contended that the learned CIT(A) erred in allowing deductions of Rs. 65,76,300 under section 80-I for Undertaking II and Rs. 55,17,158 under section 80-IA for Undertaking III. The Department argued that the capsule manufacturing process should be treated as one integrated process, and the undertakings should not be considered separate.

2. The status of multiple units as separate undertakings:
The Assessing Officer denied the relief on the grounds that all four undertakings were located in the same premises and produced the same product, capsules. The Department's survey under section 133A revealed that all undertakings were in the same factory and engaged in capsule production. The Department argued that the undertakings were essentially one and not separate for the purpose of deductions.

3. Compliance with conditions stipulated under section 80-I/80-IA:
The CIT(A) visited the factory and observed that each undertaking was clearly demarcated and operated independently. The CIT(A) noted that power consumption was recorded separately, and the air-conditioning could be controlled independently for each undertaking. The supply of raw materials was also controlled and monitored separately for each machine and undertaking. The CIT(A) concluded that each undertaking was a separate and independent unit eligible for deductions under section 80-I/80-IA.

4. Department's survey findings and their implications:
The Department's survey findings were primarily based on the physical location of the undertakings and common facilities like power, air-conditioning, and raw material procurement. However, the CIT(A) found that these commonalities did not negate the independent operation of each undertaking. The CIT(A) emphasized that each undertaking had distinctive features and operated independently, even if certain post-manufacturing activities were common.

5. Legal precedents and their applicability:
The Tribunal considered the principles laid down in the Supreme Court judgment in Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195 (SC). The Tribunal held that an undertaking must be a new integrated unit by itself, producing articles or things and deriving profits from them. The Tribunal found that the CIT(A) correctly applied these principles and concluded that each undertaking was separate and independent. The Tribunal dismissed the Department's appeal, upholding the CIT(A)'s order.

Conclusion:
The Tribunal concluded that each undertaking in the assessee's factory was a separate and independent unit eligible for deductions under section 80-I/80-IA. The Tribunal endorsed the CIT(A)'s findings and reasoning, dismissing the Department's appeal. The Tribunal emphasized that organizational features like common management or location were not sufficient to deny the status of separate undertakings if they operated independently and met the conditions stipulated under section 80-I/80-IA.

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