2015 (7) TMI 481 - HC - Income Tax

Entitlement to deduction under Section 80IB - Tribunal held that the Financial Year 1994-95 relevant to Assessment Year 1995-96 constituted the initial Assessment Year and accordingly, the appellant was not entitled to deduction under Section 80IB - whether assessee had begun to manufacture or produce articles on commercial basis in the Financial Year 1994-95 (relevant to Assessment Year 1995-96) or in the Financial Year 1995-96 (relevant to Assessment Year 1996-97)? - Held that - In the matter on hand, even before the products were sold to the group companies in the month of March 1995, the machines were exhibited in public at New Delhi. As aforementioned, there was lot of appreciation for the machines and in fact during the exhibition, bookings took place. The assessee could have as well sold the products to the third parties viz. intending buyers. However, instead of doing so, the assessee chose to sell the machines to its group companies. Therefore, it cannot be said that the machines were not available for sale. Merely because the assessee has sold three (3) machines to its group companies, it cannot be said that there was no commercial transaction. In the matter on hand, admittedly the three (3) machines were sold by the assessee, of course, to its group companies for consideration. Hence, it cannot be said that the machines were manufactured only on trial basis and not for commercial purposes in the Financial Year 1994-95 relevant to Assessment Year 1995-96. Tribunal was right holding that the appellant was not entitled to deduction under Section 80IB - Decided in favour of revenue.

Summary

Issues Involved:
1. Determination of the initial Assessment Year for deduction under Section 80IB of the Income Tax Act, 1961.
2. Whether the production of machines during the Financial Year 1994-95 was commercial or trial-based.

Detailed Analysis:

1. Determination of the Initial Assessment Year for Deduction under Section 80IB:
The primary issue revolves around whether the Financial Year 1994-95 or 1995-96 should be considered the initial Assessment Year for the purpose of claiming a deduction under Section 80IB of the Income Tax Act, 1961. The assessee argued that the initial Assessment Year should be 1996-97, claiming that the production in 1994-95 was for trial purposes and not commercial. The Income Tax Appellate Tribunal, however, held that the initial Assessment Year was 1995-96, as the production in 1994-95 was deemed commercial.

2. Nature of Production During Financial Year 1994-95:
The second issue is whether the production of three machines in the Financial Year 1994-95 was commercial or merely for trial purposes. The assessee contended that the machines were prototypes sold to group companies for field trials to identify and rectify any technical faults. The authorities, including the Tribunal, concluded that the production was commercial, citing the sale of the machines to group companies and the exhibition of these machines at IMTEX-95, where they received significant appreciation and generated demand.

Judgment Summary:
The High Court examined the facts and arguments presented by both parties. The assessee's contention was that the machines produced in 1994-95 were for trial and not commercial purposes, and thus the initial Assessment Year should be 1996-97. The Revenue argued that the production was commercial, supported by the sale of the machines to group companies and the positive reception at the exhibition.

The Court noted that the Annual Report for 1994-95 indicated that the production of machines started in 1994, and the machines were displayed at IMTEX-95, receiving significant appreciation and orders from reputed customers. Despite the assessee's claim that the machines were sold to group companies for field trials, the Court found that the transactions were commercial, as the machines were sold for consideration and used by the group companies for profit.

The Court referred to several judgments cited by the assessee, which emphasized that the year of commercial production is relevant and not the year of trial production. However, the Court distinguished these cases, noting that in the present case, there was an element of sale of finished products for consideration, which indicated commercial production.

Ultimately, the Court held that the production in Financial Year 1994-95 was commercial and not merely for trial purposes. Therefore, the initial Assessment Year for the purpose of claiming deduction under Section 80IB was 1995-96, and the assessee was not entitled to the deduction for the Assessment Year 2005-06. The substantial questions of law were answered in favor of the Revenue, and the appeal was dismissed.