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2008 (3) TMI 365 - AT - Income TaxEligibility for deduction under s. 80-IB - Income from industrial undertaking - conversion charges derived from the industrial undertaking - profit on sale of scrap generated during the course of manufacturing activity - Interest on delayed payments. Inclusion of conversion charges derived from the industrial undertaking - HELD THAT - From the judgment of the apex Court in the case of K. Ravindranathan Nair 2007 (11) TMI 10 - SUPREME COURT , it is obvious that the income shall be derived from export of goods and merchandise for the purpose of claiming deduction under s. 80HHC. However, for the purpose of claiming deduction under s. 80-IA/80-IB, the income has to be derived from the industrial undertaking, as held by the apex Court in the case of Sterling Foods 1999 (4) TMI 1 - SUPREME COURT and Liberty Shoes Ltd 2006 (8) TMI 163 - PUNJAB AND HARYANA HIGH COURT . In the case of Liberty Shoes Ltd. before the Punjab Haryana High Court also, the assessee exported goods manufactured by third parties and, therefore, it was held that there was no nexus between the profit and the industrial undertaking. In this case, the assessee manufactured and processed raw material supplied by third parties in its own undertaking by utilising the same machinery and labour. Therefore, there was direct nexus. Therefore, we do not find any infirmity in the order of the lower authority. Accordingly, we confirm the same. Profit on sale of scrap for the purpose of deduction under s. 80-IB - scrap generated during the course of manufacturing activity - The profit on sale of the scrap material has a direct nexus with the manufacturing activity of the assessee and receipt of income. In other words, unless the assessee manufactured the goods, the scrap would not have been generated at all. Therefore, in our opinion, the income on sale of scrap is derived from the industrial undertaking and eligible for deduction under s. 80-IB. As we have discussed, the income received from sale of scrap may not have any relation with export of goods and it may not be eligible for deduction u/s 80HHC. However, it has a direct nexus with the industrial undertaking and, therefore, it is eligible for deduction under s. 80-IB. Thus, we do not find any infirmity in the order of the lower authority. Interest on delayed payments - We find that this issue was considered in the case of Madras Motors Ltd. 2002 (3) TMI 10 - MADRAS HIGH COURT and it was held that interest on delayed payments of purchase money is directly related to the industrial undertaking and, therefore, eligible for deduction u/s 80HH. A similar view was taken in the case of Rane (Madras) Ltd. 1998 (2) TMI 68 - MADRAS HIGH COURT , and in the case of Nirma Industries Ltd. vs. Dy. CIT 2006 (2) TMI 92 - GUJARAT HIGH COURT . Therefore, we do not find any infirmity in the order of the lower authority. Accordingly, we confirm the same. In the result, the appeal of the Revenue stands dismissed.
Issues Involved:
1. Inclusion of conversion charges for the purpose of deduction under Section 80-IB of the IT Act, 1961. 2. Profit on sale of scrap for the purpose of deduction under Section 80-IB. 3. Interest on delayed payments for the purpose of deduction under Section 80-IB. Detailed Analysis: 1. Inclusion of Conversion Charges for Deduction under Section 80-IB: The primary issue in this appeal is whether conversion charges received by the assessee qualify for deduction under Section 80-IB of the IT Act, 1961. The Revenue argued that these receipts are not derived from an industrial undertaking and thus are ineligible for deduction under Section 80-IB. The Departmental Representative cited several judgments, including CIT vs. Shiva Distilleries Ltd., Asstt. CIT vs. K.S. International, and Liberty Shoes Ltd. vs. CIT, to support the contention that the receipts are not related to manufacturing activities or industrial undertakings. Conversely, the assessee's counsel argued that the conversion charges were part of the manufacturing activity, as the assessee used its machinery and facilities to process raw materials supplied by third parties. The counsel relied on the judgment of CIT vs. K. Ravindranathan Nair, clarifying that this case pertains to Section 80HHC and not Section 80-IB. Additionally, the counsel cited CIT vs. Rane (Madras) Ltd. and Dy. CIT vs. Harjivandas Juthabhai Zaveri & Anr., which supported the view that job work charges are derived from the industrial undertaking. The Tribunal, after considering the rival submissions and relevant judgments, concluded that the conversion charges have a direct nexus with the manufacturing activity. The Tribunal held that the income derived from job work by utilizing the same machinery and labor is eligible for deduction under Section 80-IB. The Tribunal found no infirmity in the CIT(A)'s order, which allowed the deduction. 2. Profit on Sale of Scrap for Deduction under Section 80-IB: The next issue was whether the profit on the sale of scrap generated during manufacturing is eligible for deduction under Section 80-IB. The Revenue relied on the judgment of Shiva Distilleries Ltd., which dealt with Section 80HHC and held that scrap sales should not form part of the total turnover for computing deductions. The Tribunal noted that the judgment in Shiva Distilleries Ltd. was specific to Section 80HHC and not applicable to Section 80-IB. It was undisputed that the scrap was generated during the manufacturing process. The Tribunal held that the profit from the sale of scrap has a direct nexus with the industrial undertaking and is thus eligible for deduction under Section 80-IB. 3. Interest on Delayed Payments for Deduction under Section 80-IB: The final issue was whether interest on delayed payments qualifies for deduction under Section 80-IB. The Tribunal referred to the judgments in Madras Motors Ltd., Rane (Madras) Ltd., and Nirma Industries Ltd. vs. Dy. CIT, which held that such interest is directly related to the industrial undertaking and eligible for deduction. The Tribunal found no infirmity in the CIT(A)'s order, which allowed the deduction for interest on delayed payments under Section 80-IB. Conclusion: The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s order on all issues. The conversion charges, profit on the sale of scrap, and interest on delayed payments were all deemed eligible for deduction under Section 80-IB of the IT Act, 1961.
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