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2022 (7) TMI 1018 - HC - Income TaxDeduction u/s 80IC - whether the process undertaken by the assessee in its industrial unit at Parwanoo amounted to manufacture or production of the Anchors so as to qualify the requirements of Section 80IC - AO and CIT(A) concurrently held that since the substantial process involved in production of Anchors was being got done by the assessee from Ludhiana on work order basis and only a small part of it was being done at Parwanoo, the assessee could not be said to have the necessary qualification to avail deduction under Section 80IC - ITAT allowed the deduction - HELD THAT - Section 80IC of the Act allows deduction from the profits and gains in computing the total income of the assessee in specific cases enumerated in said provision. The assessee should be an undertaking or enterprises, which had begun to manufacture or produce any article or thing not being an article or thing specified in 13th schedule, between 07.01.2003 to 01.04.2012 in an Industrial Area notified by the CBDT. In the State of Himachal Pradesh, the industrial area of Parwanoo was so notified by the CBDT vide Notification No. 273/2003 dated 04.11.2003. The purpose of incorporation of Section 80IC manifestly was to invite long term investment, entrepreneurship etc. in the areas which were industrially backward. The incentive of deduction from the income generated from such enterprise for the limited years could not be used to negate the very purpose of the inclusion of Section 80IC. This facility could not be allowed to be used to camouflage the production by making only small investment in the areas specified in Section 80IC on one hand and abandon the production after lapse of incentive period on the other. The very small quantum of capital investment made by the assessee in establishing its unit at Parwanoo had also weighed with the Assessing Officer as one of the reasons to hold as above. The term manufacture or produce used in Section 80IC has to be construed in the true context of the object and purpose of the said provision. The ITAT has failed to consider this important aspect which, in our considered view, necessarily was mixed question of fact and law required to be decided by the Appellate Tribunal in exercise of jurisdiction vested in it under law. The substantial questions of law at Serial No. 1 and 2 are answered accordingly. Entire profit declared by the assessee was allowable as deduction u/s 80IC - Whether ITAT has misconstrued and misunderstood the facts on record while setting aside the clear finding that the profit had been inflated by the assessee for the purpose of deduction u/s 80IC - HELD THAT - ITAT being the final fact finding authority, in our considered view, has drawn the conclusions on the basis of records. There is nothing in the order of Assessing Officer that the books of account of assessee were rejected. In the Assessment Order passed for Assessment Year 2006-07 the Assessing Officer had only observed that such books were not reliable, which cannot be taken to compliance of Section 145 of the Act. Further, the orders passed by Assessing Officer with respect to capping of profits earned by the assessee at 7% only on the alleged basis of comparison of accounts of Kay Pee Industries coupled with deduction of amount equivalent to 10% of the total sales towards non-payment of know how charges and towards usage of goodwill etc. have rightly been rejected by the ITAT being without any legal material or evidence. The Appellate Tribunal found nothing on record which could warrant the conclusions drawn by the Assessing Officer. To that extent, we are in agreement with the findings recorded by the ITAT. Questions No. 3 and 4 are answered accordingly.
Issues Involved:
1. Whether the process of threading and painting of anchor rods carried out by the assessee at Parwanoo amounted to manufacture or production, and consequently whether the assessee was eligible for deduction u/s 80IC of the Income Tax Act. 2. Whether the making of anchor rods by third parties on a job work basis could be considered as part of the manufacturing operations of the assessee, especially when such job work was not carried out under the direct control and supervision of the assessee. 3. Whether the ITAT disregarded the mandate of section 80IA (10) read with section 80IC(7) of the I.T. Act and erroneously held that the entire profit declared by the assessee was allowable as deduction u/s 80IC. 4. Whether ITAT has misconstrued and misunderstood the facts on record while setting aside the clear finding that the profit had been inflated by the assessee for the purpose of deduction u/s 801C. Issue-wise Detailed Analysis: Questions Nos. 3 and 4: The Assessing Officer (AO) found that the assessee declared a significant profit margin in the assessment year 2006-07, which led to the conclusion that the profits were inflated. The AO compared the assessee's sales and expenses with another entity, M/s Kay Pee Industries, and determined that the assessee had not fully debited expenses, leading to inflated profits. Consequently, certain deductions were made from the assessee's profits, including amounts for technical know-how and goodwill, leading to an assessed income from undisclosed sources. The AO also found that the threaded rods were produced by a sister concern, indicating a possible split or reconstruction of an existing business, violating Section 80IC(4)(i). For the assessment year 2007-08, the AO denied deductions on the premise that the process did not qualify as 'manufacture' or 'production'. The CIT(A) upheld the AO's findings, but the ITAT reversed these conclusions, stating that the AO's conclusions were based on estimations without rejecting the books of accounts under Section 145. The ITAT found no legal basis for the AO's deductions and concluded that the AO's findings were based on conjectures and surmises. The High Court agreed with the ITAT, noting that the ITAT's findings were based on records and there was no rejection of the assessee's books of accounts. Questions No. 3 and 4 were thus answered in favor of the assessee. Questions Nos. 1 and 2: The AO did not consider the process undertaken by the assessee to be 'manufacture' or 'production' because it involved only threading and assembly, with most of the work done outside Parwanoo. The CIT(A) concurred for AY 2006-07 but reversed for AY 2007-08. The ITAT held that the process was indeed 'manufacture' and 'production'. The High Court referred to precedents, including Aspinwall and Co. Ltd. v. Commissioner of Income Tax and Commissioner of Income Tax-V, New Delhi vs. Oracle Software India Limited, which defined 'manufacture' as a process that changes the original commodity into a new and distinct commodity. The Court noted that the process undertaken by the assessee involved multiple steps that transformed raw steel rods into foundation anchors for windmills, thus qualifying as 'manufacture'. However, the AO had found that substantial work was outsourced to Ludhiana, and only minimal work was done at Parwanoo, which did not meet the requirements of Section 80IC. The ITAT concurred with the factual findings but still held the process to be 'manufacture'. The High Court emphasized that the term 'manufacture' or 'produce' in Section 80IC should be construed in the context of the provision's objective, which was to promote long-term investment in industrially backward areas. The Court held that the ITAT failed to consider the small quantum of work done at Parwanoo and its implications. Conclusion: The High Court partially allowed the appeals, setting aside the ITAT's findings that the assessee was involved in 'manufacture' or 'production' without considering the minimal work done at Parwanoo. The cases were remanded back to the ITAT for a fresh decision in light of the observations made by the High Court. All pending miscellaneous applications were also disposed of.
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