2014 (12) TMI 1060 - AT - Income Tax

Disallowance of claim of deduction u/s 80IB deleted job work done by the assessee amounted to carrying out manufacturing activity by an industrial undertaking or not - Held that - The assessee s claim for deduction u/s 80IB is mainly on account of job work which was carried out from the plant and machineries installed by the assesse for its own manufacturing purposes - the only requirement for claim of deduction u/s 80IB is that, income should be derived from the industrial undertaking and assessee is liberty to manufacture the goods for itself or for others - The section does not make any difference for the purpose of claiming deduction u/s 80IB - If the job work has been done from the raw material supplied by the customers and assessee has manufactured the goods from those raw materials, then it amounts to manufacturing from the industrial undertaking - CIT(A) noted that the plant and machinery were used for manufacturing of plastic bags and polypropylene sheets to carry out the job work for others - The only difference is that assessee instead of its own raw material, has used raw material supplied by others - Thus such an income from job work is nothing, but income derived from industrial undertaking as per the provisions of section 80IB CIT(A) is upheld Decided against revenue. Disallowance on sale if manufactured product to be treated as trading receipt deleted Held that - The genesis of the controversy started when the AO noted that in the P&L Account, the assessee as debited more labour charges has compared to the labour charges shown in the TDS certificate - When required to reconcile the difference, the assessee submitted that the amount of ₹ 98,08,414/- was not on account of labour charges but on account of trading receipts - such a reconciliation statement given before the AO was not correct as the correct position is that, the said amount represents sales of manufactured goods and no trading receipt - the assesse had shown income from two kind of activities, one form job work of manufacturing and sale of manufactured goods and other on account of trading activities - under the head manufacturing, the assesse had shown opening stock of manufactured goods as on 31.07.2007 at ₹ 95,57,961/-The sale of manufactured goods was shown at ₹ 3,13,34,736/- which also included sale on account of job charges out of ₹ 2,15,25,722/- The amount was finally reconciled in the accounts - Though there has been some misrepresentation of facts before the AO, CIT(A) has duly verified the same from sales register and also copy of sale memos and has given a categorical finding that it pertains to sale of manufactured goods and not trading receipts - Thus such a finding of fact appears to be correct from the material placed on record, thus, there was no reason to disturb such a finding of fact Decided against revenue. Disallowance of reallocation of expenditure such as interest charges, repairs & maintenance and insurance charges between trading and manufacturing activity deleted Determination of net profit by AO Held that - The finding of the Ld.CIT(A) appears to be correct, firstly, the assessee has maintained separate books of account, one for the manufacturing activity and other for trading account - The book results of manufacturing and trading activity has not been disturbed by the AO in as much as, no discrepancy with regard to the allocation of the expenses by the assessee - The entire basis of the AO for reallocation of expenses is based on presumption that certain expenses are more in the job work activity - so far as the major component of interest expenditure, the CIT(A) has analyzed the loan taken from the bank and the purpose of which the loans were taken - the finding of the CIT(A) is upheld decided against revenue.

Issues Involved:
1. Disallowance of claim of deduction under Section 80IB.
2. Classification of job work as manufacturing activity for eligibility under Section 80IB.
3. Treatment of sales of manufactured products as trading receipts.
4. Reallocation of expenditures between trading and manufacturing activities.

Detailed Analysis:

1. Disallowance of Claim of Deduction under Section 80IB:
The Assessing Officer (AO) disallowed the assessee's claim for deduction under Section 80IB, asserting that the income generated from job work did not qualify for this deduction. The assessee contended that the job work involved manufacturing activities using the same machinery utilized for its own manufacturing, thus eligible for Section 80IB deduction. The AO relied on the Special Bench decision in the case of B.T. Patil and Sons to support the disallowance.

2. Classification of Job Work as Manufacturing Activity:
The assessee argued before the Commissioner of Income Tax (Appeals) [CIT(A)] that it carried out three activities: manufacturing of plastic bags, trading, and job work for manufacturing plastic and BOPP films. The CIT(A) noted that the same plant and machinery were used for both the assessee's manufacturing and job work. The CIT(A) reviewed several High Court decisions, concluding that job work income qualifies as "derived income" from an industrial undertaking under Section 80IB. The CIT(A) thus allowed the deduction under Section 80IB, stating that the section does not differentiate between income derived from own manufacturing or job work.

3. Treatment of Sales of Manufactured Products as Trading Receipts:
The AO identified a discrepancy between the labour charges reported in the Profit & Loss (P&L) account and the TDS certificates, leading to the reclassification of Rs. 98,08,414 as trading receipts instead of labour charges. The assessee clarified before the CIT(A) that this amount was from the sale of manufactured goods, not trading receipts. The CIT(A) verified the sales register and invoices, confirming the sales were from manufactured goods and directed the AO to accept the gross profit declared by the assessee and allow the deduction under Section 80IB.

4. Reallocation of Expenditures:
The AO reallocated expenses such as interest, repairs, and maintenance between trading and manufacturing activities, suspecting the assessee had disproportionately allocated expenses to inflate job work profits. The CIT(A) found the AO's reallocation arbitrary and based on presumption. The CIT(A) noted that the assessee maintained separate books for manufacturing and trading, and the accounts were audited without discrepancies. The CIT(A) directed the AO to reallocate expenses based on actual turnover ratios (87:13) and provided a detailed analysis of interest allocation, concluding that the AO's apportionment was incorrect.

Conclusion:
The Tribunal upheld the CIT(A)'s findings on all issues. The Tribunal confirmed that the job work income qualifies for deduction under Section 80IB, the sale of manufactured goods should not be treated as trading receipts, and the reallocation of expenses by the AO was arbitrary. The appeal filed by the Revenue was dismissed.

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