2021 (12) TMI 20 - HC - Income Tax

Deduction u/s 80IA - Proof of industrial undertaking that manufactured a product - assessee used to procure unprocessed or raw seeds and the final product which comes out is different commodity - HELD THAT - The various stages indicate that the raw seeds which could be the subject matter of human consumption, after undergoing the various process stages, ceased to be edible and the said seeds could only be used for cultivation. Even applying the commercial test, the ITAT, on the facts, found that even in the market, the said final output was known to be used only for cultivation. In the circumstances, in the present case, on the facts the ITAT was right in coming to the conclusion that a different commodity emerged after the raw seeds underwent the above different stages. We concur with the opinion of ITAT that there is no merit in the stand taken by the Revenue that the activity carried by respondent in its industrial undertakings does not amount to manufacture or production of articles or things. Whether the ITAT was justified in allowing the deduction under Section 80IA when the assessee had declared loss under the head profits and gain of business? - An industry entitled to the benefit of s. 80E could have its profits wholly wiped out on adjustment against a heavy loss suffered by another industry, and thus be totally denied the relief which should have been its due by virtue of its profits. In our opinion, each industry must be considered on its own working only when adjudging its title to the deduction under s. 80E. It cannot be allowed to suffer because it keeps company with some other industry in the hands of the assessee. To determine the benefit under s. 80E on the basis of the net result of all the industries owned by the assessee would be, moreover, to shift the focus from the industry to the assessee. We hold that in the application of s. 80E the profits and gains earned by an industry mentioned in that section cannot be reduced by the loss suffered by any other industry or industries owned by the assessee. In the circumstances, we hold that the scope of deduction under Section 80IA of the Act is limited to determination of quantum of deduction by treating eligible business as the only source of income. Therefore, the deduction cannot be denied because the deduction under Section 80IA has to be computed unit wise and not for the business as a whole. Deduction for interest u/s 36(1)(iii) as allowable only if the assets acquired out of the borrowed capital has been put to use - HELD THAT - The judgment of the Apex Court in Deputy Commissioner of Income Tax V/s. Core Health Care Ltd. 2008 (2) TMI 8 - SUPREME COURT squarely covers this question and the Apex Court has held that such interest is allowable under Section 36(1)(iii). The Apex Court has held that interest on moneys borrowed for the purposes of business is a necessary item of expenditure in a business. For allowance of a claim for deduction of interest under the said section, all that is necessary is that firstly, the money, i.e., capital, must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business; and, thirdly, the assessee must have paid interest on the borrowed amount. The Apex Court has also held that all that is germane is whether the borrowing was, or was not, for the purpose of business

Issues Involved:
1. Deductibility of travel expenses as a binding contract liability.
2. Eligibility for deduction under Section 80IA for an industrial undertaking.
3. Deduction of interest under Section 36(1)(iii).

Detailed Analysis:

1. Deductibility of Travel Expenses:
The first issue revolves around whether the travel expenses of ?6.15 crores could be allowed as a deductible liability. The respondent announced a travel scheme for dealers/distributors as an incentive for achieving specific sales targets. The Assessing Officer and CIT (A) disallowed the expenses, deeming them contingent liabilities. However, the ITAT allowed the deduction, recognizing it as an accrued liability under the mercantile system of accounting. The court upheld ITAT's decision, referencing the Apex Court's judgment in Calcutta Co. Ltd. v. Commissioner of Income Tax, which clarified that expenses under the mercantile system are deductible when the liability is incurred, regardless of actual payment. Thus, the court concluded that the travel expenses were an accrued liability and deductible.

2. Eligibility for Deduction Under Section 80IA:
The second issue is bifurcated into two parts: whether the respondent qualifies as an industrial undertaking and whether the deduction under Section 80IA is applicable even if the business declared a loss.

a. Industrial Undertaking:
The respondent argued that its activities of processing raw seeds into a commercially different product qualified as manufacturing under Section 80IA. The ITAT agreed, noting the various stages of processing that transformed the raw seeds into a distinct product only usable for cultivation. The court concurred, referencing the Apex Court's judgment in Commissioner of Income Tax v. Jalna Seeds Processing and Refrigeration Co. Ltd., which supported the view that processed seeds are a different commodity from raw seeds.

b. Deduction Despite Declared Loss:
The respondent claimed a deduction under Section 80IA despite declaring a loss under business income. The Assessing Officer denied the deduction, arguing that the absence of profit from the industrial undertakings disqualified the respondent. The court disagreed, referencing the Apex Court's judgment in Commissioner of Income Tax (Central) v. Canara Workshops (P) Ltd., which established that each industrial unit should be considered independently for deductions under Section 80IA. The court ruled that the deduction must be computed unit-wise, not based on the overall business performance.

3. Deduction of Interest Under Section 36(1)(iii):
The third issue concerns the deductibility of interest on borrowed capital under Section 36(1)(iii). The Revenue argued that the deduction was allowable only if the assets acquired with the borrowed capital were put to use. The court referred to the Apex Court's judgment in Deputy Commissioner of Income Tax v. Core Health Care Ltd., which clarified that interest on borrowed capital is deductible if the capital is used for business purposes, irrespective of the asset's usage. The court upheld the ITAT's decision, confirming that the interest was deductible under Section 36(1)(iii).

Conclusion:
The appeal was dismissed, affirming the ITAT's decisions on all three issues. The travel expenses were deemed an accrued liability and deductible. The respondent qualified for deduction under Section 80IA as an industrial undertaking, and the deduction was applicable even with declared business losses, computed unit-wise. Lastly, the interest on borrowed capital was deductible under Section 36(1)(iii).

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