2017 (7) TMI 537 - HC - Income Tax

Additions made by the Settlement Commission under the head of unaccounted production - Held that - The factors taken into account by the Settlement Commission, which in our opinion were relevant, were that registers relating to the manufacturing unit of the company which were found, established unaccounted production, admission by the employees that the company was engaging in such unaccounted production, the number of employees at the time of search being found far in excess of what was recorded in the books of accounts and the statement of the employees that the registers for the earlier periods were destroyed under the instructions of the management. Based on such facts, if the Commission made a projection of the available figure of unaccounted production over the entire period by adopting what can, at best, be stated as a conservative figure and by recording proper reasons, it would not be possible for us to interfere with such ultimate conclusion of the Settlement Commission. Disallowance of claim of deduction under section 80IB - Held that - The process of manufacturing jarikasab commenced from acquisition of jumbo rolls of metalized lacquered polyester film. Such raw material undergo processes which can be broadly classified into three categories before the final product of jarikasab would come into existence. The entire process was one integrated manufacturing process. By no stretch of imagination a single integrated manufacturing process can be sub-divided or bifurcated into different parts for ascertaining whether at a particular stage a new article or thing had come into existence through manufacturing process. The approach of the Settlement Commission was wholly erroneous. When a single integrated manufacturing activity is shown to bring into existence entirely new and a distinct mercantile product through the human and mechanical intervention, it was simply not open for the Settlement Commission to segregate a portion of such manufacturing process to hold that since no new marketable product came into existence, such process did not amount to manufacturing. Even within the narrow confines of our judicial review, in the order of Settlement Commission on this issue, we must intercept. This issue is therefore decided in favour of the assessee. Expenditure towards higher studies expenses of the Directors of the company - Held that - The higher education of a partner of a firm or director of a company may have different parameters and ramification. In a case if it is aimed at improving the efficiency of the firm or the person concerned is expected to contribute better with the acquisition further knowledge, it may be open for the assessee to claim the deduction. However, simply because a director is sent abroad for further education by itself would not sufficient to establish such a claim without establishing other relevant facts and circumstances. The entire issue is factual in nature. Since no perversity is established we refuse to interfere.

Summary

Issues Involved:
1. Additions made by the Settlement Commission for manufacturing units at Kim (Surat) for assessment years 2003-04 to 2006-07.
2. Disallowance of ?34.24 lacs under section 80IB of the Income Tax Act.
3. Disallowance of ?39.30 lacs under section 37 of the Income Tax Act for higher studies expenses of the Directors.

Issue-wise Detailed Analysis:

Issue No. 1: Additions for Manufacturing Units at Kim (Surat)
The petitioner challenged the additions made by the Settlement Commission for its manufacturing units at Kim (Surat) for the assessment years 2003-04 to 2006-07, arguing that these additions were made without corresponding material found during the search. During the search operation, the department recovered laboratory registers (B1-13 to B1-16) and another register (B1-19), which were used to estimate unaccounted production. The Assessing Officer compared these registers with excise registers and estimated the unaccounted production, proposing significant additions. The Settlement Commission, however, trimmed down the additions to only the Kim-1 unit, discarding the data from registers B1-13 to B1-16 and focusing only on B1-19. It adopted a conservative figure of 40% for unaccounted production for the assessment years 2007-08 to 2009-10 and made further conservative estimates for earlier years. The petitioner argued that no incriminating material was found for the earlier years, and thus, no additions should be made. However, the court held that the Settlement Commission's approach was justified based on the available evidence and the conservative estimates made.

Issue No. 2: Disallowance under Section 80IB
The second issue pertained to the disallowance of ?34.24 lacs under section 80IB of the Income Tax Act. The assessee contended that the entire manufacturing process of jarikasab, which involved three stages, constituted a single integrated process. The Settlement Commission, however, disallowed the claim for the first stage, arguing that it did not amount to manufacturing. The court found that the Settlement Commission erred in bifurcating the integrated manufacturing process and held that the entire process should be considered as manufacturing. Therefore, the disallowance under section 80IB was set aside.

Issue No. 3: Disallowance under Section 37 for Higher Studies Expenses
The third issue involved the disallowance of ?39.30 lacs claimed under section 37 of the Income Tax Act for higher studies expenses of the Directors. The court noted that such expenses could be deductible if they aimed at improving the efficiency of the firm or if the director's further education contributed to the business. However, the court found no perversity in the Settlement Commission's factual findings and refused to interfere with the disallowance.

Conclusion:
The petition was allowed in part. The court set aside the disallowance under section 80IB for ?34.24 lacs, while upholding the Settlement Commission's decisions on the other two issues. The Revenue was directed to give effect to the modification regarding section 80IB. The petition was disposed of accordingly.