DEDUCTION UNDER SECTION 80-IA OF INCOME TAX ACT, 1961 IS NOT ALLOWED IN RESPECT OF THE PROFITS DERIVED FROM BUSINESS OF TRADING GOODS

[Mr. M. GOVINDARAJAN]

In ‘Liberty Shoes Limited V. Commissioner of Income Tax’ (2007) 2006 (8) TMI 163 - PUNJAB AND HARYANA HIGH COURT it was held that an assessee would not be entitled for deduction under Section 80-IA of the Act in respect of the profits derived from business of trading goods.                 

In ‘Arisudana Spinning Mills Limited V. Commissioner of Income Tax’ – 2012 (9) TMI 268 - SUPREME COURT the appellant is a limited company engaged in the business of manufacture of knitted cloth from raw wool and trading of the goods produced. The appellant filed its return for the assessment year 1998-99 at Rs.36,27,866/-.The said return was processed under Section 143(1)(a) of the Act. The said case was selected for scrutiny for which notice under Section 143(2) was issued. The Assessing Officer found that the appellant company was engaged in the business of manufacturing of yarn and also engaged in the trading of raw wool and knitted cloth, which in addition were being manufactured by the appellant. The appellant claimed deduction under Section 80IA. Notice was issued  to the appellant. The Assessing Officer held that income may fall within the head ‘business income’ but in so far as its eligibility for deduction under Section 80-IA of the Act is concerned, it is only the income derived by the assesee from the industrial undertaking which could be eligible for deduction under Section 80-IA of the Act. The Assessing Officer further held that the profits derived from the trading of goods was not eligible to qualify because it could not be considered as ‘derived from the industrial undertaking’ within the meaning of Section 80-IA of the Act.

The appellant filed appeal before Commissioner of Income Tax (Appeals).The Commissioner (Appeals) held that the Assessing Officer, while concluding his finding has stated that the facts and circumstances of the case regarding the claim of deduction under Section 80-IA are similar to the facts of the assessment year 1997-98 but as the appellate decision in the preceding year has not been accepted, deduction was not allowed.  In view of detailed discussion in the appellate order for the preceding assessment year, the Assessing Officer is directed to allow the said deduction under Section 80-IA and accordingly allowed the appeal.

The Revenue filed appeal against the order of Commissioner (Appeals) before the Tribunal. The Tribunal relied on the law laid down by the Supreme Court in ‘Pandian Chemicals Limited V. Commissioner of Income Tax’ – 2003 (4) TMI 3 - SUPREME COURT allowed the appeal filed by the Revenue. The Tribunal held that the industrial undertaking of the assessee is engaged in the manufacture of yarn and its on sale thereof. Additionally the industrial undertaking also derives income by way of purchase and sale of goods manufactured by other concerns and derives income there from. Although such trading profits would certainly constitute the business income yet it cannot be said to have been derived from the business of an industrial undertaking which is of manufacturing of yarn only. The stand of the assessee was that the goods traded in were its raw material for the manufacturing process and the stocks which were not immediately required were sold and the resultant profits. That, therefore, such profits be considered as a part and parcel of the profits derived from the business of industrial undertaking. In the view of the Tribunal, the provisions of Section 80-IA of the Act when read as a whole do not leave any scope for ambiguity that it is only the profits and gains derived from the actual conduct of business of an undertaking i.e., carrying on of manufacture of production of articles or things which alone are eligible for claim of deduction under Section 80-IA of the Act. The Tribunal upheld the order of the Assessing Officer and set aside the order of Commissioner (Appeals).

The High Court did not found no question of law, much less a substantial question of law warranting admission of the appeal would arise. The High Court held that the Tribunal has rightly allowed the appeal filed by the Revenue following the law laid down by the Supreme Court in ‘Pandian Chemicals Limited’ (supra) which are fully applicable to the instant appeals.

The Supreme Court heard both sides. The Supreme Court found that the appellant company derived, during the relevant assessment year, a gross total income of Rs.51,82,666 from what it called ‘manufacturing activity’. It denied that it had undertaken any trading activity during the year in question. On the said sum the appellant claimed deduction @ 30% under Section 80-IA of the Act amounting to Rs.15,54,800. The Assessing Officer found that the assessee has not maintained separate trading and profit and loss account for the goods manufactured. In the assessment year in question, it appears that the assessee had sold raw wool, wool waste and textile and knitting cloths. When a query was raised, the assessee contended that, for certain business exigencies in the assessment year in question, it had sold the above items. However, according to the assessee, the sale of raw wool, wool waste etc., would not disentitle it from claiming the benefit under Section 80-IA of the Act on the total sum of Rs.51,82,666 @ 30%.The Department found that the assessee has not maintained the accounts for manufacture of yarn actually produced as a part of industrial undertaking. The Assessing Officer worked out, on his own, the manufacturing account, giving a bifurcation in terms of quantity of raw wool produced.

The Supreme Court held that the assessee ought to have maintained a separate account in respect of raw material which it had sold during the assessment year. If the assessee had maintained a separate account, then, in that event, a clear picture would have emerged which would have indicated the income accrued from the manufacturing activity and the income accrued on the sale of raw material. The Supreme Court dismissed the appeal filed by the appellants.