2024 (5) TMI 1133 - HC - Income Tax

Deduction u/s 80IB - profits derived from repairs and maintenance service of the moulds manufactured in the appellant industrial undertaking - assessee submits that the activity of repairs and maintenance of moulds was closely related to the activity of manufacture of moulds manufactured in the industrial undertaking in question and as such deduction u/s 80IB cannot be denied to the appellant HELD THAT - The deduction is available for five assessment years beginning with the initial assessment year and thereafter 25% of the profits and gains derived from such industrial undertaking manufacturing or producing any article or thing. Thus the basic eligibility criteria under the aforesaid sub-sections 80IB is that the assessee must be an industrial undertaking fulfilling all the conditions specified in sub-section 2 it must derive profits and gains from business under subsection 4. Therefore an industrial undertaking in an industrially backward State specified in the 8th Schedule to be eligible for deduction u/s 80IB must be manufacturing or producing any article or thing and the profits and gains derived from such activity of manufacture or production of any article or things. In the present set of facts we find that undisputably the receipt on account of repair and maintenance does not relate to profits and gains derived by the industrial undertaking from the business of manufacture or production of any article or thing. It is neither the case of the appellant/assessee that repairs of moulds was a necessary condition of contract of sale of moulds nor any evidence in the form of such contract of sale or any other documentary evidence were produced by the appellant/assessee at any stage of the proceedings from assessment upto Tribunal stage. Under the circumstances receipts from repairs and maintenance of moulds by the appellant/assessee cannot be said to be eligible for deduction under section 80IB of the Act 1961 particularly when there was no direct nexus to the profits and gains derived from repairs and maintenance with the manufacturing of moulds by the industrial undertaking. Thus on true construction of sub-Sections (1) (2) and (4) of Section 80IB of the Act 1961 and in view of the law laid down in the case of Saraf Exports 2023 (4) TMI 420 - SUPREME COURT an industrial undertaking which becomes eligible for deduction on satisfying sub-Section (2) would be entitled to deduction under sub-Section (1) only to the extent of profits derived from manufacture or production of any article or thing by such industrial undertaking. Thus the industrial undertaking eligible for deduction under Section 80IB shall be entitled for deduction only from the profits and gains derived from industrial undertaking by manufacturing or producing article or thing and not from profits attributable to industrial undertaking. There is nothing on record to show that the repairs and maintenance charges have a direct nexus with the business activity of manufacture and sale of moulds by the appellant/assessee. Therefore profits and gains derived by the appellant/assessee (industrial undertaking) from repairs and maintenance is not eligible for deduction u/s 80IB since such profits and gains have not been derived by the industrial undertaking from the manufacture or production of any article or thing as provided under sub-Section (2).

Summary

Issues Involved:
1. Entitlement to deduction under section 80IB of the Income Tax Act, 1961 on profits derived from repairs and maintenance service of the moulds manufactured in the appellant's industrial undertaking.

Analysis of Judgment:

Entitlement to Deduction under Section 80IB:
Facts:
The appellant/assessee, an HUF engaged in manufacturing moulds, claimed deduction under section 80IB for the assessment year 2005-06. The dispute arose over the sum of Rs. 96,01,410/- received for job work charges and repairs and maintenance services. The assessing officer denied the deduction for this amount, which was later partially allowed by the ITAT, granting deduction on job work charges but not on repair and maintenance charges.

Submissions:
The appellant argued that the repair and maintenance activity was closely related to the manufacturing activity and thus should qualify for the deduction under section 80IB. The respondent supported the ITAT's decision.

Discussion and Findings:
- Section 80IB Provisions: The court reiterated the conditions under sub-sections (1), (2), and (4) of Section 80IB, emphasizing that the deduction applies to profits derived from manufacturing or producing any article or thing by an industrial undertaking in an industrially backward state.
- Eligibility Criteria: The court noted that the primary eligibility for deduction under section 80IB is that the profits must be derived from the manufacturing or production activity of the industrial undertaking.
- Analysis of Receipts: The court found that the receipts from repairs and maintenance did not relate to profits derived from the manufacturing or production of any article or thing. There was no evidence to show that repairs of moulds were a necessary condition of the sale of moulds or had a direct nexus with the manufacturing activity.
- Distinguishing Precedents: The court distinguished the case from the Supreme Court's judgment in *Meghalaya Steels Limited*, noting that the latter dealt with subsidies aimed at improving trade and commerce, not directly related to manufacturing profits.
- Support from Saraf Exports: The court referred to *Saraf Exports*, where it was clarified that deductions under section 80IB are restricted to profits derived from the industrial undertaking's manufacturing or production activities, not attributable profits.

Conclusion:
The court concluded that profits from repairs and maintenance did not qualify for deduction under section 80IB as they were not derived from the manufacturing or production activity. The appeal was dismissed, and the substantial question of law was answered in favor of the revenue.