2014 (10) TMI 177 - AT - Income Tax

Deduction u/s 80JJA - Cutting and polishing of diamond does not amount to manufacture or not Held that - What is required to be examined is the process undertaken for conversion of raw / rough diamonds into superior or polished diamond - the assessee has duly placed on record the entire process and the stages through which the rough diamond undergoes for becoming the polished diamond, which is a separate and distinct product and has a different usage - Such a process has neither been rebutted by the Revenue nor any other counter opinion have been sought to contradict the assessee s version of the process - once the entire process of cutting and polishing of diamond have not been rebutted and also the fact that the rough and polished diamond are two distinct commodity having different usage, not only in the common parlance but also in real sense, then it has to be understood that the cutting and polishing of diamond amounts to manufacturing or production of article or thing as envisaged for the purpose of claiming deduction under section 80-IC following the decision in M/s. Flawless Diamond (India) Ltd. Versus Addl. Commissioner of income tax 2014 (9) TMI 261 - ITAT MUMBAI - the cutting and polishing of diamond is a manufacturing or production of article or thing for claiming deduction u/s 80JJAA of the Act thus, the AO is directed to allow the deduction u/s 80JJAA of the Act to the assessee Decided in favour of assessee. Liability to deduct TDS u/s 194I Held that - The expenses was disallowed by the AO by invoking provisions of Section 40(a)(ia) on the ground that the assessee failed to deduct tax at source on the aforesaid expenses which the assessee was liable to deduct u/s 194C or 194H of the Act as per the AO - CIT(A) found that the assessee was not liable to deduct tax thereon u/s 194C as well as 194H of the Act - no disallowance of any expense was made by the CIT(A) - disallowance made u/s 40(a)(ia) was deleted in its entirety by the CIT(A) - there remains no real grievance of the assessee Decided against assessee. Disallowance deleted by invocation of section 40(a)(ia) Commission paid on contract payment Held that - No material has been brought on record by the Revenue to show that the payment in question was made by the assessee for carrying out any work including supply of labour for any work by M/s. Tirupati Organisers Private Limited - No details of any work actually carried out by M/s. Tirupati Organisers Private Limited in consideration of the payment in question were brought on record - the finding of the CIT(A) that the payment in question was not covered by provisions of section 194C of the Act is upheld Decided against revenue. Conveyance and traveling expenses Held that - CIT(A) was rightly of the view that the disallowance of expenditure was made without pointing out any defect in vouchers or completeness of the vouchers for expenses maintained by the assessee - disallowance made is unsustainable the order of the CIT(A) is upheld Decided against revenue.

Issues Involved:

1. Disallowance of deduction under section 80JJAA.
2. Joint Business Agreement (JBA) and applicability of TDS under section 194I or 194C.
3. Ad-hoc disallowance of conveyance and traveling expenses.
4. Disallowance of computer expenses as capital expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 80JJAA:

The primary issue was whether the cutting and polishing of rough diamonds amount to manufacturing activity to qualify for deduction under section 80JJAA. The Assessing Officer disallowed the deduction, arguing that the business was formed by transferring old assets from the K. Girdhar Group, making it ineligible for the deduction. The CIT(A) upheld the disallowance, citing the Supreme Court's decision in Gem India Manufacturing Co., which stated that polished diamonds are not new articles or things resulting from manufacture. However, the ITAT, referencing the Mumbai Bench's decisions, concluded that cutting and polishing diamonds do constitute manufacturing, thus entitling the assessee to the deduction under section 80JJAA. Consequently, the ITAT set aside the lower authorities' orders and directed the Assessing Officer to allow the deduction.

2. Joint Business Agreement (JBA) and Applicability of TDS under Section 194I or 194C:

The second issue involved the nature of payments made under a Joint Business Agreement (JBA) with Tirupati Organisers Pvt. Ltd. (TOPL). The Assessing Officer disallowed expenses under section 40(a)(ia) for non-deduction of TDS under sections 194C or 194H. The CIT(A) found that the payment was not for any contract work but for providing infrastructure, thus falling under section 194I as rent. However, since section 194I was included in section 40(a)(ia) only from AY 2006-07, the CIT(A) deleted the disallowance. The ITAT upheld the CIT(A)'s decision, noting that the payment was not commission or contract payment and thus not covered under sections 194H or 194C.

3. Ad-hoc Disallowance of Conveyance and Traveling Expenses:

The Assessing Officer made an ad-hoc disallowance of 10% of conveyance and traveling expenses, amounting to Rs. 4,08,388/-, citing the high amount claimed. The CIT(A) deleted the disallowance, stating it was made without any basis or evidence. The ITAT agreed with the CIT(A), noting that the disallowance was unsustainable without pointing out specific defects in the vouchers or records.

4. Disallowance of Computer Expenses as Capital Expenditure:

The assessee's appeal included a ground against the disallowance of computer expenses treated as capital expenditure. However, the assessee did not advance any arguments on this issue during the hearing. Consequently, the ITAT dismissed this ground for want of prosecution.

Conclusion:

The ITAT allowed the assessee's appeal regarding the deduction under section 80JJAA and upheld the deletion of disallowance under section 40(a)(ia) for payments made under the JBA. The ad-hoc disallowance of conveyance and traveling expenses was also deleted. However, the appeal concerning the disallowance of computer expenses was dismissed for lack of prosecution.

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