2015 (12) TMI 107 - AT - Income Tax

Rejection of claim for deduction u/s 80IB - tax authorities have taken the view that the assessee has not actually manufactured goods - Held that - Perusal of the documents filed in paper book would show that the assessee has obtained permanent SSI certificate, which is normally given after commencement of production only that too after physical inspection. Further, the assessee has also furnished copies of registration made under Central Excise Act, Sales tax Act, Pollution control committee, import & export code, electricity payment bills, labour register etc. Further, the books of accounts also support the claim of manufacture of goods. With regard to the purchase of machineries, the assessee has furnished copies of relevant bills supporting the claim of purchase of machinery and also the particulars of payments made. We notice that none of these evidences were not examined by the tax authorities. Thus, we notice that the tax authorities have drawn adverse inference only on the basis of denial of supply of machinery to the assessee s personal name by the supplier. In view of the over whelming evidences furnished by the assessee to support the claim of manufacture and sale of goods, we are of the view that the tax authorities are not justified in holding that the assessee was not manufacturing goods.Accordingly, we set aside the order of Ld CIT(A) and direct the AO to allow the claim for deduction u/s 80IB of the Act to the assessee. - Decided in favour of assessee. Disallowance of interest expenditure on unsecured loan - Held that - This disallowance was made by following the decision taken by the AO for AY 2003-04. The Ld CIT(A) has also observed that there has been no fresh assessment in the set aside proceedings. However, he proceeded to examine this issue of genuineness of laons in AY 2004-05. However, there is no dispute with regard to the fact that the assessee had availed loans in the year relevant to AY 2003-04 and hence the disallowance of interest expenditure would depend upon the decision taken in AY 2003-04 on examination of loans in terms of sec. 68 of the Act. Accordingly, we are of the view that the Ld CIT(A) was not justified in examining the loans in AY 2004-05, which were taken in AY 2003-04. Accordingly, we set aside his order on this issue. However, since the assessment order for AY 2003-04 was not passed, we are of the view that no adverse decision could be taken on this issue in AY 2004-05. Accordingly, we direct the AO to allow the interest claim. - Decided in favour of assessee. Disallowance of depreciation on the machinery purchase - Held that - We have noticed that the claim of purchase of machinery was rejected only on the ground that the supplier has denied supply of machinery in the name of assessee s personal name. However, the assessee has furnished copies of bills, particulars of payment, the list of machineries approved under SSI Act etc. Further the assessee has manufactured goods by using the machineries and sold the same. The registration under Sales tax Act and Central Excise Act also shows that the assessee was furnishing necessary returns under those Act. The said In view of the evidences furnished by the assessee, we are of the view that there is no reason to suspect the purchase of machinery. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to allow the depreciation.- Decided in favour of assessee.

Summary

Issues Involved:

1. Deduction under Section 80IB of the Income Tax Act.
2. Disallowance of interest paid on unsecured loans.
3. Disallowance of depreciation on Plant and Machinery.

Issue-wise Detailed Analysis:

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

The assessee's claim for deduction under Section 80IB was rejected by the Assessing Officer (AO) on the grounds that the undertaking violated conditions prescribed in Section 80IB, specifically that it was formed by splitting up or reconstruction of an existing business and by transferring used machinery to a new business. The AO doubted the purchase and installation of machinery worth Rs. 3,43,200, which led to further doubts about the existence of the undertaking as a Small Scale Industry (SSI) and the employment of the specified number of employees.

In the appeal, the assessee argued that the conversion of the partnership firm into a proprietary concern did not constitute splitting up or reconstruction, citing case laws such as CIT Vs. Gaekwad Foam & Rubber Co. Ltd and CIT Vs. Hindustan General Industries. The CIT(A) upheld the AO's decision, accepting the view that the assessee failed to prove the purchase of machinery and the manufacturing of goods.

However, the Tribunal observed that the facts showed only a change in management from a partnership firm to a proprietary concern, which did not amount to splitting up or reconstruction. The Tribunal also noted that the tax authorities did not examine the evidence provided by the assessee, such as the permanent SSI certificate, registration under various acts, and books of accounts supporting the claim of manufacturing goods. The Tribunal concluded that the tax authorities were not justified in holding that the assessee was not manufacturing goods and directed the AO to allow the deduction under Section 80IB.

2. Disallowance of Interest Paid on Unsecured Loans:

The disallowance of interest expenditure on unsecured loans was based on the AO's decision for the assessment year 2003-04. The CIT(A) examined the genuineness of the loans in the assessment year 2004-05, despite acknowledging that the loans were availed in the year relevant to the assessment year 2003-04. The Tribunal held that the disallowance of interest expenditure should depend on the decision taken in the assessment year 2003-04 and that the CIT(A) was not justified in examining the loans in the assessment year 2004-05. Since the assessment order for the assessment year 2003-04 was not passed, no adverse decision could be taken on this issue in the assessment year 2004-05. The Tribunal directed the AO to allow the interest claim.

3. Disallowance of Depreciation on Plant and Machinery:

The disallowance of depreciation on machinery was based on the AO's rejection of the purchase of machinery worth Rs. 3,43,200, due to the supplier's denial of supplying machinery in the assessee's personal name. The Tribunal noted that the assessee provided copies of bills, particulars of payment, and other relevant documents supporting the purchase of machinery. The Tribunal concluded that there was no reason to suspect the purchase of machinery and directed the AO to allow the depreciation.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, setting aside the orders of the CIT(A) and directing the AO to allow the claims for deduction under Section 80IB, interest expenditure, and depreciation on machinery. The judgment emphasized the importance of examining all relevant evidence and adhering to legal provisions and precedents.