2014 (11) TMI 842 - AT - Income Tax

Allowability of deduction u/s 80IB - Assessee was having factory license before it started manufacturing activities or not Commencement of business activity on or before 31.03.2004 or not Held that - CIT(A) rightly held that factory license is not a necessary condition for eligibility of deduction u/s 80IB - assessee is entitled to the benefit of Section 80IB of the Income Tax Act, 1961 - the AO did not doubt about raw material consumption, power consumption, sales and employment of workers for the purposes of denying the benefit of section 80IB - for the purpose of Section 80IB of the Act, what is essential is that the assessee should manufacture or produce an article or thing and if there is any violation of any provisions of any other statutes then the assessee has to explain the same to the authorities implementing those Acts/Statutes and the same cannot be the basis of denial of benefit under Section 80IB of the said Act the order of the CIT(A) is upheld Decided against revenue. Disallowance of remuneration to partners deleted Held that - CIT(A) rightly held that the clause is vague in nature and does not even prescribe the method of calculating the remuneration - remuneration cannot be thrust upon the appellant so this ground of appeal is allowed - though Assessee had not claimed remuneration to partners, AO had allowed the same - the clause relating to remuneration in the partnership deed is vague in nature and does not prescribe the method of calculation of remuneration - Revenue has not brought any contrary binding decision in its support nor has been able to distinguish the judgments relied upon by the CIT(A) the order of the CIT(A) is upheld Decided against revenue. Deletion of disallowance u/s 40(a)(ia) Disallowance in next year on payment basis amounts to double benefit to assessee or not Held that - CIT(A) rightly was of the view that the deduction u/s.80-IB was not granted to the appellant on the disallowance made on technical ground - the deduction u/s.80-IB has to be granted on the computed income derived from the industrial undertaking - any addition/disallowance made during the course of assessment do not lose the characteristic of being derived from the industrial undertaking as its original source the order of the CIT(A) is upheld Decided against revenue. Expenses on labour charges u/s 40A(2)(b) Held that - CIT(A) rightly allowed the claim of Assessee has held that the labour charges paid by the Assessee was for different gauge specification of finished goods and therefore the wages rates are different - Revenue has not been able to controvert the findings of CIT(A) nor could controvert the submissions of Assessee the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues Involved:

1. Deduction under Section 80IB of the Income Tax Act.
2. Remuneration to partners.
3. Disallowance under Section 40(a)(ia) of the Income Tax Act.
4. Deduction under Section 80IB(10) of the Income Tax Act.
5. Disallowance under Section 40A(2)(b) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deduction under Section 80IB of the Income Tax Act:

The Revenue contended that the assessee was not entitled to the deduction under Section 80IB because the factory license was issued after the prescribed date and the assessee failed to prove that it commenced manufacturing activities before 31.03.2004. The CIT(A) allowed the deduction, stating that the factory license is not a necessary condition for eligibility under Section 80IB. The Tribunal upheld this view, referencing the decision in the case of Samarth Healthcare, which held that violations of other statutes do not affect eligibility for deductions under the Income Tax Act. The Tribunal also noted that the jurisdictional High Court for Daman is the Bombay High Court, which had previously ruled in favor of the assessee on similar facts.

2. Remuneration to Partners:

The A.O. had allowed remuneration to partners based on a clause in the partnership deed, even though the assessee had not claimed it. The CIT(A) found the clause vague and held that remuneration cannot be thrust upon the assessee. The Tribunal agreed, citing the decision in the case of Mundra Packaging Industries, which established that remuneration cannot be imposed if not claimed or credited by the assessee.

3. Disallowance under Section 40(a)(ia) of the Income Tax Act:

The A.O. disallowed certain payments for labor and transportation charges due to non-deduction of TDS. The CIT(A) deleted this disallowance, stating that such disallowances do not lose their characteristic of being derived from the industrial undertaking and are thus eligible for deduction under Section 80IB. The Tribunal upheld this view, referencing decisions from the Tribunal in similar cases.

4. Deduction under Section 80IB(10) of the Income Tax Act:

The A.O. denied the deduction under Section 80IB(10) for A.Y. 06-07, arguing that the return was filed beyond the due date. The CIT(A) allowed the deduction, noting that the due date for filing returns was extended for the State of Gujarat, which includes Daman under the jurisdiction of ITO Vapi. The Tribunal upheld this decision, referencing the case of Ajanta Packaging, which confirmed that the extended due date applies to assessees in Daman.

5. Disallowance under Section 40A(2)(b) of the Income Tax Act:

The A.O. disallowed labor charges paid to a sister concern, alleging that the assessee paid less to increase profits and claim excess deduction under Section 80IB. The CIT(A) found that the labor charges were for different specifications of finished goods and allowed the claim. The Tribunal upheld this decision, noting that the Revenue failed to provide contrary evidence.

Conclusion:

The Tribunal dismissed the appeals of the Revenue for both A.Y. 05-06 and A.Y. 06-07, upholding the decisions of the CIT(A) on all grounds. The Tribunal emphasized that the assessee's eligibility for deductions under Section 80IB was in accordance with the law and supported by relevant judicial precedents.