2015 (4) TMI 673 - AT - Income Tax

Deduction u/s 80IC - Deduction denied on account of job work - No separate accounts prepared for manufacturing activity and job works - Depreciation on passive use of assets - Depreciation disallowed on the basis of individual assets in block of assets - Held that - An industrial unit manufacturing or producing articles or things cannot be denied exemption u/s 80-IC merely on the ground that it is deriving profit by carrying out job work. Job work also tantamount to manufacture if otherwise the conditions required to classify the activity carried out by the undertaking result in manufacture of an article or thing. In Warren Laboratories (P) Ltd. 2005 (5) TMI 548 - ITAT MUMBAI ,it has been held that Clauses (a) and (b) of section 80IC(2) does not say that the assessee company would be entitled to deduction, if it manufactures or produces articles or things, exclusively belonging to it. Therefore, when the goods belonging to others are manufactured by the assessee company and it derives a profit by way of job work charges, it is entitled to deduction under section 80IC. There is no requirement under law for maintaining separate books of account for manufacturing and non-manufacturing activities of an undertaking. Where Assessee Company carries on both manufacturing and non-manufacturing activity in its undertaking the assessing officer ought to have allowed deduction under section 80IC of the Act on some logical, rational and scientific basis as all the applicable conditions for allowability of deduction under section 80IC of the Act have been met by the said unit of the assessee company. It appears that there is no denial of deduction u/s. 80-IC in case of manufacturing activities in the nature of job works, work contract etc. In the background of the aforesaid detailed discussions and precedents relied upon by the Ld. CIT(A) in his order as well as by the assessee, as aforesaid, we are of the view that no interference is called for in the well reasoned order passed by the Ld. CIT(A), hence, we uphold the same by rejecting the grounds no. 1, 2 & 3 filed by the Revenue in its Appeal. We find that the Ld. CIT(A) has rightly held that the receipts of the unit has direct nexus with the operations of the unit and being operational income from main business activity of the unit, it would be eligible for deduction u/s.80IC of the IT Act. The assessee was required to keep its unit in ready for production stage at all times and the fixed minimum guarantee received by it was not possible without keeping the plant of the undertaking in ready for production stage throughout the year. The Hon'ble Delhi High Court in the case of Capital Bus Service Pvt.Ltd. 1980 (2) TMI 69 - DELHI High Court has recognized that even passive use of assets is entitled for depreciation. In Sanghvi Movers (P) Ltd. 2007 (8) TMI 401 - ITAT PUNE-A , it was held that depreciation is to be allowed even for passive use, i.e., while it is kept ready for use. Thus, the income derived by the assessee has sufficient nexus and is incidental to the main business of the industrial undertaking and is, therefore, eligible for deduction. We find that Ld. CIT(A) has rightly held that the Written Down Value of each block of assets is a single figure and due to this fact and because of the method of calculating WDV for the block of assets, it is not possible to work out the WDV for individual assets falls within the block of assets. We also find that this view is also buttressed by the finding of the Hon'ble Delhi High Court in the case of Bharat Alumunium Co. Ltd. 2009 (10) TMI 505 - DELHI HIGH COURT , wherein, it was held that once a particular block of assets falls within the block, it is added to the Written Down Value and depreciation is to be allowed on the block. The individual asset loses its identity and the question whether an individual asset is put to use in a particular year or not is irrelevant inasmuch as the requirement of law is to establish the use of the block of assets and not the use of particular asset. - Decided against the revenue.

Summary

Issues Involved:

1. Deduction under Section 80IC for job work receipts.
2. Deduction under Section 80IC without separate accounts for manufacturing and job works.
3. Classification of job work receipts as manufacturing activity under Section 80IC.
4. Allowance of depreciation on assets not put to use.
5. Calculation of Written Down Value (WDV) for individual assets within a block of assets.

Detailed Analysis:

1. Deduction under Section 80IC for Job Work Receipts:

The Tribunal considered the eligibility of job work receipts for deduction under Section 80IC. The assessee had two units, Mahaan Multipack and Mahaan Healthcare, both eligible for Section 80IC deductions. The assessee manufactured products for itself and third parties. The Tribunal found that job work charges had a direct nexus with the manufacturing activity, as the same machinery and labor were used. The Tribunal upheld the CIT(A)'s decision that job work receipts should be treated as manufacturing activity under Section 80IC, rejecting the Revenue's contention that job work does not qualify as manufacturing.

2. Deduction under Section 80IC without Separate Accounts:

The Tribunal addressed whether separate books of account were necessary for manufacturing and job work activities. The assessee did not maintain separate books for these activities, arguing that Section 80IC does not require separate books for eligible and non-eligible activities. The Tribunal agreed, noting that the law does not mandate separate accounts for different types of manufacturing activities within the same unit. The CIT(A)'s decision to allow the deduction was upheld.

3. Classification of Job Work Receipts as Manufacturing Activity:

The Tribunal examined whether job work receipts could be classified as manufacturing activity under Section 80IC. The assessee's job work involved transforming raw materials into new products, which qualifies as manufacturing. The Tribunal referenced several precedents supporting the view that job work constitutes manufacturing. It concluded that the job work charges received by the assessee were derived from manufacturing activities and thus eligible for deduction under Section 80IC.

4. Allowance of Depreciation on Assets Not Put to Use:

The Tribunal considered the disallowance of depreciation on assets of Mahaan Multipack, which were allegedly not put to use. The assessee argued that the unit was kept in a ready-for-production state, and the fixed minimum charges received were due to this readiness. The Tribunal cited precedents that passive use of assets, such as keeping them ready for use, qualifies for depreciation. It upheld the CIT(A)'s decision to allow the depreciation, noting that the unit's income had a direct nexus with its operational readiness.

5. Calculation of WDV for Individual Assets within a Block of Assets:

The Tribunal addressed the AO's method of calculating WDV for individual assets within a block of assets. The Tribunal noted that once assets are part of a block, they lose their individual identity, and WDV should be calculated for the entire block. The Tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's judgment in CIT v. Bharat Aluminium Co. Ltd., which supports the view that depreciation is to be allowed on the block of assets, not on individual assets.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s well-reasoned order on all grounds. The Tribunal confirmed that job work receipts qualify for deduction under Section 80IC, separate books of account are not required for different manufacturing activities, passive use of assets qualifies for depreciation, and WDV should be calculated for the entire block of assets. The appeal was dismissed in favor of the assessee.