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TMI Blog2012 (12) TMI 863X X X X Extracts X X X X X X X X Extracts X X X X ..... of the definition given by CBDT in Circular No.57 dated 23.03.1971, it is further required to be seen whether bitumen emulsion, cutback bitumen and modified bitumen produced from bitumen can be considered as mineral oil. These products have been held to be mixture of hydrocarbons in the opinion given by IIT Chennai but it is not clear whether these can be considered as liquid products. Further, in case these products are found to be mineral oil, it is further required to be examined whether these have been produced by refining of mineral oil or otherwise because in case of refining of mineral oil, deduction under section 80IB (9) is available only when the refining begins on or after 1.10.1998. But in case of manufacture or production of mineral oil, deduction is available if commercial production begins on or after 1.4.1997. The assessee has claimed that it is a producer of mineral oil and not refiner of mineral oil which has not been examined. This is a highly technical area on which we are unable to arrive at any particular conclusion and matter is required to be referred to IIT Chennai, again as it failed to give opinion whether the products were mineral oil, after giving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of business deduction under section 80IB will not be available. The eligibility of foreign exchange gain will depend upon the fact whether foreign exchange gain is in relation to transactions which are integral part of the operation of the eligible business. The eligibility in respect of other items of income details of which have not been given is also required to be examined therefore, restore this issue to the file of CIT(A) for fresh decision Deduction u/s 35AB - disallowance of deduction claimed of technical know-how fees - assessee had not claimed deduction under section 80IB - petition before CIT under section 264 for claiming deduction - Held that:- AO had allowed the claim u/s 35AB in the original assessment. Subsequently, the assessee filed petition under section 264 before CIT making claim of deduction under section 80IB which the assessee had omitted to make in the original return. CIT in the order dated 12.12.2007 passed under section 264 restored the issue regarding allowability of claim under section 80IB to AO by setting aside assessment order. CIT in the order under section 264 made it clear that while passing fresh assessment, AO shall consider claim of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 2004-05. The disputes raised in these appeals relate to allowability of deduction under section 80IB and under section 35AB of the Income tax Act, 1961. These appeals which were heard together and also involve common issues are being disposed of by a single consolidated order for the sake of convenience. 2. We first take up the appeal of the assessee in ITA No. 6829/M/10 for the assessment year 2002-03. The assessee has raised disputes on two different grounds which relate to deduction under section 80-IB and under section 35AB of the Income tax Act. 2.1 We fist take up the issue relating to allowability of deduction under section 80IB of the Act. The assessee is a joint venture between Hindustan Petroleum Corporation Ltd.(HPCL) and M/s. Colas SA France formed vide agreement dated 25.11.1994. The joint venture had been created for manufacture of various products such as bitumen emulsions; cutback bitumen and modified bitumen. Bitumen is a by-product produced from refining of crude oil or crude petroleum. The assessee purchases bitumen from HPCL and other parties and uses the same as raw material for production of bitumen emulsions; cutback bitumen and modified bitumen after a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for a period of seven consecutive assessment years including the initial assessment year: Provided that where the undertaking is located in North-Eastern Region, it has begun or begins commercial production of mineral oil before the 1st day of April, 1997 and where it is located in any part of India, it begins commercial production of mineral oil on or after the 1st day of April, 1997 : Provided further that where the undertaking is engaged in refining of mineral oil, it begins refining on or after the 1st day of October, 1998." 2.1.3 During the assessment proceedings, the AO asked the assessee to give justification for treating the assessee as industrial undertaking producing/manufacturing mineral oil. The assessee submitted that it was producing bitumen emulsions; cutback bitumen and modified bitumen which were mixture of hydrocarbons which had to be treated as mineral oil in view of Circular No. 57 dated 23.3.1971 of CBDT (F.No.156(26)/71-TPL). The assessee also filed the opinion dated 27.11.2006 of IIT Chennai given in reference to letter dated 23.11.2006 of the assessee in which it was mentioned that the products manufactured by the assessee were a mixture of hydrocarb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so not eligible for deduction on the ground that it had started commercial production of mineral oil from 26.3.1998 whereas as per section 80IB(9), the refining of mineral oil had to begin after 1.10.1998. Therefore, Bahadurgarh Unit was not eligible for deduction on this additional ground also. 2.1.5 The AO further noted that the assessee had also claimed deduction under section 80IB in respect of certain other income such interest income, foreign exchange gain etc. It was observed by him that deduction under section 80IB was available only in respect of profit derived from business of the industrial undertaking. These receipts were not income derived from industrial undertaking but were incidental to business of undertaking and were thus not eligible for deduction under section 80IB. The AO placed reliance on the judgment of Hon'ble Supreme Court in the case of CIT v. Sterling Food [1999] 237 ITR 579 and some other judgments. He accordingly held that the assessee was not entitled to deduction in respect of other income mentioned above. 2.1.6 In appeal CIT(A) agreed with the finding recorded by the AO that the assessee was not engaged in production or manufacture of mineral oi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -04 in ITA No.97/Ahd./07 in support of the above proposition. As regards, the number of workers, it was also pointed out that casual workers and contract workers were required to be taken into account and not only the regular employees as held by Hon'ble High Court of Bombay in case of CIT v. Jyoti Plastic Works (P.) Ltd. [2011] 339 ITR 491. Taking into account the casual/contract workers, the assessee did fulfil the condition of requisite number of workers being fulfilled. Coming to the allowability of deduction in respect of other income, it was submitted that market development incentive was financial assistance provided by HPCL and was integral part of business and should be eligible for deduction under section 80IB. Similarly income from job work from HPCL, income from HPCL hospitality, recovery of drums and foreign exchange gain were integral part of the business of the undertaking and should be eligible for deduction under section 80IB. 2.1.9 Ld. Departmental Representative on the other hand supported the orders of authorities below and placed reliance on the findings given in the respective orders that the products produced by the assessee were not eligible for deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liquid products derived from crude petroleum which are in the nature of mixture of hydrocarbons, namely, motor spirit, kerosene and other allied articles. The assessee has also referred to the opinion dated 27.11.2006 given by IIT Chennai in which it has been opined that bitumen emulsion, cutback bitumen and modified bitumen are mixture of hydrocarbons. Accordingly it has been argued that products manufactured by the assessee are mineral oil eligible for deduction under section 80IB. 2.1.12 The word "mineral oil" has not been defined in the Income tax Act. However, the interpretation of the said word had come up for consideration before the Hon'ble High Court of Bombay in case of Caltex India Ltd. (supra). In that case the assessee was producing lubricating oil by processing/ blending mineral base oil and issue was whether lubricating oil could be considered as mineral oil. The Hon'ble High Court held that mineral oil referred to oil that is extracted from the earth. It was also held that any article produced using mineral base oil could not be considered as mineral oil. It was accordingly held that lubricating oil was not mineral oil. In that case the Circular No.57 dated 23.3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and in our view matter is required to be referred to IIT, again as it failed to give opinion whether the products were mineral oil, after giving necessary details regarding the raw material, the products produced and process employed. It is also required to be examined whether the process employed by the assessee is refining of bitumen or manufacture/production of new products using bitumen as raw material. We, therefore, send back the issue as to whether assessee is producer or refiner of mineral oil to the file of CIT(A) for passing fresh order after obtaining expert opinion and after necessary examination. Needless to say that assessee will be given opportunity of hearing before taking the final decision. 2.1.14 The authorities below have also rejected the claim of deduction under section 80IB on the ground that the assessee had failed to fulfill the conditions prescribed under section 80IB(2) relating to engagement of certain minimum number of brokers and setting up of industry by using new plant and machinery. The conditions to be fulfilled under section 80IB(2) have been mentioned in para 2.1.1 earlier. Ld. AR for the assessee argued that conditions under section 80IB(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the definition of the term discussed earlier. The assessee admittedly is manufacturing/producing value added products by using bitumen as raw material after applying certain processes. Therefore, it cannot be accepted that the assessee is not an industrial undertaking. The word "undertaking" used in sub-section (9) is a wider term which also includes industrial undertakings. The word "undertaking" has been used because sub-section refers not only to production of mineral oil but also refining of mineral oil which may not be an industrial undertaking. Therefore, the word "undertaking" used in section 80IB(9) has to be interpreted in the context of business being done. Since the assessee itself has claimed that it is producing commercial products using bitumen as raw material the assessee is to be considered as industrial undertaking. Therefore, in our view, the conditions prescribed in section 80IB(2) will be applicable in the case of the assessee. The decisions of the Tribunal relied upon by the assessee cannot be accepted as a binding precedent as various aspects mentioned above have been omitted to be considered in the said cases. We, therefore, hold that provisions of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... berty India Ltd. v. CIT [2009] 317 ITR 218 in which it has been held that deduction is allowable only in respect of profit having direct nexus with the eligible business. The section does not cover profit from sources beyond first degree in view of the word derived mentioned therein. Profit attributable to business or incidental profit will not be eligible for deduction under section 80IB. The source of interest income is FDR and not the eligible business of the undertaking and therefore, interest income even if received from FDR pledged for the purpose of business, deduction under section 80IB will not be available. The eligibility of foreign exchange gain will depend upon the fact whether foreign exchange gain is in relation to transactions which are integral part of the operation of the eligible business. The eligibility in respect of other items of income details of which have not been given is also required to be examined in the light of the judgment of Hon'ble Supreme Court in the case of Liberty India Ltd. (supra). We, therefore, restore this issue to the file of CIT(A) for fresh decision after necessary examination in the light of observations made above and after allowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven if actual payments were made after 1.4.1998. The assessee also referred to the judgment of Hon'ble High Court of Bombay in case of Addl. CIT v. Buckau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751, in which it was held that technical know-how fee paid in instalments even if not provided in books of account was eligible for deduction. Alternatively, it was also argued that assessee should be allowed depreciation under section 32(1)(ii) treating the amount as intangible asset. CIT(A) however did not accept the contentions raised. It was observed by him that the words used in section 35AB were unambiguous and clear and, therefore, literal meaning had to be followed as held by Hon'ble High Court of Bombay in the case of Indian Rayon Corpn. Ltd. v. CIT [1998] 231 ITR 26. It was accordingly held that payments made after 1.4.1998 would not be eligible for deduction under section 35AB. The assessee had also claimed deduction on account of foreign exchange fluctuation which was disallowed on the ground that foreign exchange fluctuation would only go to add or reduce cost of capital asset under section 43A and could not be allowed as deduction. It was also held that foreign exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade it clear that while passing fresh assessment, AO shall consider claim of deduction under section 80IB(9). It is thus clear that CIT had set aside the assessment only to consider claim under section 80IB. Assessment had not been set aside to make fresh assessment denovo. In fact as rightly pointed out by ld. A.R, CIT under order 264 had no power to pass any order prejudicial to the interest of the assessee. Therefore, CIT could not have passed any order under section 264 denying any claim already allowed to the assessee. We, therefore, do not agree with the arguments of the ld. DR that in the fresh assessment proceedings AO could also consider matters in addition to claim of deduction under section 80IB. The judgment of Hon'ble Supreme Court in the case of Nirbheram Daluram (supra), relied upon by the Ld. DR is not applicable to the facts of the present case. AO was correct in not considering any issue other than the claim of deduction under section 80IB made by the assessee in the application under section 264 before CIT as he had no such jurisdiction. No doubt it is true that CIT(A) while deciding an appeal has plenary power and can also consider any issue which has been omitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examined the claim on merit and disallowed the claim, CIT(A) confirmed the disallowance for detailed reasons which we have already discussed while dealing with the appeal for the assessment year 2002-03. Aggrieved by decision of CIT(A), the assessee is in appeal before the Tribunal in both the years. 3.1.1 We have heard both the parties in the matter. Ld. AR for the assessee very fairly pointed out that in these years the assessee had also to cross an additional hurdle created by the provisions of sub-section (5) of section 80A inserted by the Finance Act, 2009 w.e.f. assessment year 2003-04, as per which claim of deduction could not be allowed in case assessee failed to make claim in the return of income. The said provisions of sub-section (5) of section 80A are reproduced below as ready reference: "80A(5) Where the assessee fails to make a claim in his return of income for any deduction under section 10A or section 10AA of section 10B or section 10BA or under any provisions of the Chapter VIA under the heading "C" --- Deductions in respect of certain incomes," no deduction shall be allowed to him." 3.1.2 Part "C" of Chapter VI-A relating to deduction in respect of certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed. The ld. AR has argued that the assessee had made the claims before the relevant provisions of section 80A(5) were inserted in 2009 and therefore, the right of the assessee to make claim could not be taken away by the amended provisions. We, are however, not convinced by the arguments advanced. In our view making claim is different from allowing the claim. No doubt before the new provisions were inserted in 2009, the assessee was entitled to make the claim but the claim had to be considered under the provisions of law. Since provisions of section 80A(5) have retrospective application from assessment year 2003-04, these provisions will apply for the years under consideration and the claim of the assessee cannot be allowed. 3.1.6 The ld. AR for the assessee has placed reliance on the judgment of Hon'ble High Court of Bombay in the case of Onkarmal Meghraj (HUF) (supra) but the said case in our view is distinguishable. The case related to re-opening of the assessment under the old Act. Section 34(3) of the old Act had been amended on 24.5.1953 with retrospective effect from 1.4.1952. It was a case of limited retrospective effect as per which amendment did not enable ITO to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guous and clear the literal meaning has to be followed as per which payments made after 1.04.1998 are not eligible for deduction under section 35AB. The assessee argued that under provisions of section 43(2) the word "paid" meant amount actually paid or incurred according to method of accounting based on which profit/gains were computed and therefore, payments made after 1.4.1998 were also eligible for deduction as liability for which were incurred prior to 1.4.1998. Assessee also referred to the judgment of the Hon'ble High Court of Bombay in the case of Buckau Wolf New India Engg. Works Ltd. (supra) as per which in case assessee had paid the technical know-how fee in installments, the assessee is entitled to claim of expenditure even if the same were not provided in the books of account. The arguments were rejected by authorities below who held that following literal meaning, the claim was not allowable as payments had been made after 1.4.1998. The assessee also raised an additional ground that in case claim of deduction under section 35AB was not allowed, the assessee should be allowed depreciation as the technical know-how was an intangible asset under the provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given in the respective orders. 3.2.3 We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of claim of deduction on account of payment made for acquisition of technical know-how. The assessee had acquired the technical know-how in terms of agreement dated 25.11.1994 and payments were made in installments over the period 1998-99 to 2001-02. Under the provisions of section 35AB, any payment made for acquisition of technical know-how is allowable as deduction in equal installments over a period of six years including previous year in which the payment had been made. The Finance Act 1998 amended section 35AB as per which payments made after 1.4.1998 will not be eligible for deduction under section 35AB. This amendment was made in view of the simultaneous amendment made to section 32(1) as per which technical know-how was treated as an intangible asset and depreciation was allowable in respect of any intangible asset acquired on or after 1.9.1998. The intention of the legislature for making amendment to section 35AB was to not allow deduction under section 35AB in respect of any technical know-how acquired on or after 1.4. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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