2021 (7) TMI 185 - AT - Income Tax

Deduction u/s 80IC - whether process of deriving the finished products amount to manufacture? - HELD THAT - It is very much clear that the assessee is a manufacturer of finished products eligible for deduction under section 80IC of the Act. The revenue has not controverted the various factual findings of Commissioner (Appeals) regarding the manufacturing process undertaken by the assessee. In any case of the matter, it is a fact on record that the aforesaid manufacturing activity is being carried on by the assessee from the preceding assessment years. As decided in own case 2020 (5) TMI 683 - ITAT MUMBAI applying the tests laid down by this Court in CIT Vs. N.C. Budharaja and Co. 1993 (9) TMI 6 - SUPREME COURT to the facts of the present cases, we are of the view that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emergence of a new and distinct commodity. The original block does not remain the marble block, it becomes a slab or tile. In the circumstances, not only there is manufacture but also an activity which is something beyond manufacture and which brings a new product into existence and, therefore, on the facts of these cases, we are of the view that the High Court was right in coming to the conclusion that the activity undertaken by the respondents-assessees did constitute manufacture or production in terms of Section 80IA of the Income Tax Act, 1961. Also If the contention of the Department is to be accepted, namely that the activity undertaken by the respondents herein is not a manufacture, then, it would have serious revenue consequences. As stated above, each of the respondents is paying excise duty, some of the respondents are job workers and the activity undertaken by them has been recognized by various Government Authorities as manufacture. To say that the activity will not amount to manufacture or production under Section 80IA will have disastrous consequences, particularly in view of the fact that the assessees in all the cases would plead that they were not liable to pay excise duty, sales tax etc. because the activity did not constitute manufacture. Keeping in mind the above factors, we are of the view that in the present cases, the activity undertaken by each of the respondents constitutes manufacture or production and, therefore, they would be entitled to the benefit of Section 80IA of the Income Tax Act, 1961 Thus we hold that assessee is engaged in manufacturing and production of an article and therefore, the assessee shall be entitled for the deduction available u/s 80IC - Decided in favour of assessee.

Summary

Issues Involved:
1. Assessee's claim of deduction under section 80IC of the Income Tax Act.
2. Disallowance under section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Assessee's Claim of Deduction under Section 80IC:
The primary issue revolves around the assessee's eligibility for deduction under section 80IC of the Income Tax Act, 1961. The assessee, engaged in manufacturing odoriferous compounds, claimed this deduction. The Assessing Officer (AO) disallowed the claim, arguing that the process did not constitute manufacturing and that the finished products were classified as organic/inorganic chemicals, which are not eligible for deduction under section 80IC.

The First Appellate Authority overturned the AO's decision, emphasizing that the AO relied heavily on an employee's statement during a search operation, while ignoring the assessee's detailed explanation of the manufacturing process. The Commissioner (Appeals) noted that similar deductions had been allowed in previous years for both the assessee and a sister concern, M/s Khushbu Industries, under the rule of consistency as established by the Supreme Court in Radhasoami Satsang vs CIT (193 ITR 321). The Commissioner (Appeals) also found that the finished products were classified under Chapter 33 of the Central Excise Tariff, not Chapters 28 or 29, thus making them eligible for deduction.

The Tribunal upheld the Commissioner (Appeals)'s decision, citing consistency with previous years where similar claims were allowed. The Tribunal also referenced various judicial precedents and detailed factual analyses confirming that the assessee’s process constituted manufacturing, and the finished products were not classified as organic/inorganic chemicals.

2. Disallowance under Section 14A:
The second issue pertains to the disallowance of expenditure under section 14A of the Income Tax Act, which deals with expenditure incurred in relation to income not includible in total income. The AO noticed substantial investments in shares/securities by the assessee, which generated exempt income. The AO, therefore, computed a disallowance under section 14A r.w.r. 8D, amounting to ?2,58,24,377/-.

The Commissioner (Appeals) deleted this disallowance, accepting the assessee's argument that the shares/securities were held as stock in trade and not as investments. This decision was challenged by the revenue, citing the Supreme Court's ruling in Maxopp Investment Ltd. vs. CIT [2018] 402 ITR 640 (SC), which held that disallowance under section 14A applies even to shares held as stock in trade.

The Tribunal found that the AO had not erred in rejecting the assessee's claim, as the Supreme Court's ruling in Maxopp Investments mandated disallowance even for shares held as stock in trade. However, the Tribunal noted that the AO should exclude investments that did not yield any exempt income during the year when computing the disallowance. Consequently, the Tribunal set aside the Commissioner (Appeals)'s order on this issue and remanded the matter back to the AO for recomputation, ensuring that only investments generating exempt income were considered.

Conclusion:
The Tribunal's decision upheld the assessee's claim for deduction under section 80IC, affirming the Commissioner (Appeals)'s findings and emphasizing consistency with previous years' rulings. However, on the issue of disallowance under section 14A, the Tribunal directed the AO to recompute the disallowance, excluding investments that did not yield exempt income, in line with the Supreme Court's ruling in Maxopp Investments. The appeals were partly allowed for statistical purposes.