2021 (12) TMI 943 - HC - Income Tax

Deduction u/s 80IA - claim denied as assessee was not engaged in the process of manufacture, but only assembling the parts procured from others - ITAT allowed the claim - HELD THAT - As decided in ELGI ULTRA INDUSTRIES LIMITED 2012 (8) TMI 809 - MADRAS HIGH COURT assessee himself is not personally engaged in the manufacture, would not disentitle the assessee from claiming the relief as one engaged in manufacturing activity, for, so long as the assessee exercises control in the work entrusted to job workers, the assessee would be entitled to the relief under Section 80IA of the Act. Being a deduction provision, taking note of the present day outsourcing of various activities, we need to give a meaningful expression to assessee engaged in the manufacturing process , to hold that so long as the effective involvement of the assessee is there in the form of quality control or supply of material and dyes for the manufacture of parts of the grinders or machinery, even in the case of assembling done through job work, the assessee would be entitled to have the benefit under Section 80IA of the Act. In the circumstances, guided by the decision of RAMALINGAM 1994 (11) TMI 14 - MADRAS HIGH COURT we hereby rejecting the Revenue's appeal, thereby, confirming the order of the Tribunal. Addition of bad debts written off - conditions laid down under section 36(1)(vii) read with section 36(2) were not satisfied by the assessee - claim for deduction was disallowed by the assessing officer on the ground that the debts have been taken over from the sister concerns voluntarily only as a measure of support to it and knowing fully well that the same was irrecoverable and hence, the same was liable to be denied - ITAT allowed the claim - HELD THAT - Tribunal taking note of the position that the Memorandum and Articles of Association permitted the assessee to carry on the business of money lending and the transactions in question have been held to be in the realm of business activity. When there is no dispute raised on the aforesaid factual position, this court finds no reason to differ with the view taken by the Tribunal. In view of the same, the second substantial question of law is also answered in favour of the assessee and against the Revenue.

Summary

Issues involved:
1. Eligibility for relief under section 80IA of the Income Tax Act for an assessee engaged in assembling parts procured from others.
2. Allowance of bad debts written off in the books of accounts under section 36(1)(vii) of the Income Tax Act.

Detailed Analysis:

1. Eligibility for relief under section 80IA:
The first substantial question of law in the case revolved around whether the assessee, engaged in assembling parts procured from others, was eligible for relief under section 80IA of the Income Tax Act. The High Court referred to a previous order in a similar case where it was established that even if the assessee did not personally engage in manufacturing but exercised control over the job work, they could qualify for the relief. The court emphasized the importance of control exercised by the assessee over the manufacturing process, including supervision and quality control. Citing various precedents, the court concluded that as long as the assessee effectively controlled the manufacturing process, they were entitled to the benefit under section 80IA. Based on this reasoning, the court rejected the Revenue's appeal, confirming the Tribunal's order in favor of the assessee.

2. Allowance of bad debts written off:
The second substantial question of law dealt with the allowance of bad debts written off in the books of accounts under section 36(1)(vii) of the Income Tax Act. The court noted that the assessing officer had disallowed the claim for deduction, arguing that the debts were taken over voluntarily from sister concerns and were known to be irrecoverable. However, the Commissioner of Income Tax (Appeals) and the Tribunal allowed the claim, considering the transactions as part of the assessee's business activity permitted by the Memorandum and Articles of Association. Since there was no dispute over the factual position, the court upheld the Tribunal's decision, answering the second substantial question of law in favor of the assessee. Additionally, the court highlighted a previous order in favor of the assessee for the assessment years 2002-03 and 2003-04, further supporting the dismissal of the tax case appeal.

In conclusion, the High Court upheld the decisions in favor of the assessee on both issues, emphasizing the importance of control in the manufacturing process for claiming relief under section 80IA and allowing the deduction for bad debts written off in the books of accounts under section 36(1)(vii) of the Income Tax Act.