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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 ..... p 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 applying certain processes. After joint venture agreement was signed, the assessee set up various units from time to time details of which are given as under :- S. No. Location Date of establishment 1 Bahadurgarh, Haryana 26th March, 1998 2 Irugattukottai, Near Chennai 24th February, 2000 3 Savli, Near Vadodara 6th February, 2003 4 Visakh 24th June, 2004 5 5 Mangalore 31st December, 2004 2.1.1 The assessee for the assessment year 2002-03 had not claimed deduction under section 80IB of the Act in the original assessment. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 hydrocarbons. It was accordingly submitted that the products were mineral oil eligible for deduction under section 80IB. The AO however, did not accept the contentions raised. It was observed by him that raw material i.e. bitumen was already manufactured from crude oil and therefore further processing of this raw material into modified bitumen, bitumen emulsions and cut back bitumen was not eligible for deduction under section 80IB. The AO also observed that the assessee in the letter dated 23.11.2006 had referred to two issues to IIT Chennai viz. (i) whether bitumen emulsion, cutback bitumen and modified bitumen were mixtures of hydrocarbons. (ii) and whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 oil and also did not satisfy the conditions mentioned in section 80IB(2). CIT(A) also upheld the disallowance in respect of other income. He, therefore, confirmed the disallowance made by AO aggrieved by which the assessee is in appeal before the Tribunal. 2.1.7 Before us, the ld. AR for the assessee reiterated the submissions made before the lower authorities and argued that the assessee was in the business of production of mineral oil. The assessee was producing bitumen emulsion, cutback bitumen and modified bitumen by using bitumen as raw material. These products were a mixture of hydrocarbons as mentioned in the report of IIT-Chennai. The assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under section 80IB. The ld. DR also referred to the heading of section 80IB which reads as :- "deduction in respect of profit and gains from certain industrial undertaking other than infrastructure development undertakings" which showed that the word "industrial undertaking" applied to all sub sections and not only to sub-section (3), (4) and (5). Therefore, conditions mentioned under sub-section (2) were applicable to all the businesses mentioned in other sub-sections. Since these conditions were not fulfilled in the case of the assessee, deduction under section 80IB was not allowable. He also supported the stand of the AO that items of other income were no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 23.3.1971 had been referred before the Hon'ble High Court. The Hon'ble High Court observed that even the said Circular did not come to the rescue of the assessee as the lubricating oil was not mixture of hydrocarbons. It was not mineral oil as extracted or refined. The claim was thus rejected. 2.1.13 In the present case, the assessee had referred two issues before IIT-Chennai - (i) Whether products manufactured by the assessee were mixture of hydrocarbons; (ii) whether these could be characterized as mineral oil. IIT-Chennai answered only the first query and held that these products were mixture of hydrocarbons but was silent on the other issue. In terms of the Boa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nity 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) are required to be fulfilled in case of industrial undertakings whereas, the assessee had claimed deduction under section 80IB(9) which applies to undertakings. Therefore, the conditions mentioned in section 80IB(2) are not applicable in the case of the assessee. Reliance has been placed on the decision of the Tribunal in the case of Nikko Resources Ltd. (supra), and on the decision of the Tribunal in the same case for assessment year 2003-04 in ITA No.97/Ahd/07. 2.1.15 We have carefully considered the issue. The phrase "industrial undertaking" has not been defined in section 80IB. The phrase "industrial undertaking" has been defined in the Explanation to sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 section 80IB(2) will be applicable in case the assessee is found to be producer of mineral oil. 2.1.16 The authorities below have held that the assessee had not fulfilled the conditions relating to the minimum engagement of workers and use of new plant and machinery in setting up of industrial undertaking as required in section 80IB(2). The ld. AR for the assessee has argued that authorities below had not taken into account the casual workers and contract workers which are also required to be considered for the purpose of minimum number of workers engaged in view of the judgment of Hon'ble High Court of Bombay in case of Jyoti Plastic Works (P.) Ltd. (supra). In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end 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 opportunity of hearing to the assessee. 2.1.18 We have restored back the various issues to the file of CIT(A) so that issues can be decided promptly. CIT(A) may obtain remand report wherever required. 2.2 The second dispute is regarding disallowance of deduction claimed under section 35AB in respect of technical know-how fees. The assessee as pointed out earlier is a joint venture company between HPCL and Colas SA France and in terms of joint venture agreement dated 25.11 1994, the French Company had made transfer of technical know how for manufacturing of certain products. In terms of the said agreement, the assessee had paid know how fees in instalments over a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 loss was not allowable as business expenditure. Accordingly, claim was disallowed. Aggrieved by the said decision, the assessee is in appeal before the Tribunal. 2.2.2 Before us, the ld. AR submitted that assessment had been set aside under section 264 only to consider claim of assessee under section 80IB and therefore, in the fresh assessment, AO had jurisdiction to consider only deduction under section 80IB. This was the reason, the AO had not considered any other aspect. However, CIT(A) has disallowed the claim under section 35AB which had been allowed by the AO in the original assessment. It was pointed out that though CIT(A) had plenary power, he could not go be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim 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 omitted by the AO. But he cannot consider any issue which is beyond the jurisdiction of AO. In the fresh proceedings, the AO had no jurisdiction to consider any issue other than the claim of deduction under section 80IB and, therefore, it cannot be said that in not considering the claim under section 35AB, the AO had failed to do something which was necessary in the assessment. CIT(A) has no power to act on any issue on which AO has no jurisdiction. CIT(A) can intervene only if AO had jurisdiction of considering any matter which he had failed to do so which is not so in the present case. We are therefore, unable to sustain the order of CIT(A) disallowing the claim of deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake 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 incomes applies to sections starting from 80 HH to 80TTA. Therefore, section 80IB will fall under part "C" of Chapter VIA. Thus claim of deduction under section 80IB would be hit by provisions of sub-section (5) of section 80A, which means that, in case, assessee has failed to make claim in return of income, claim cannot be applied. 3.1.3 Ld. AR argued that at the time of making the claim for both the years, the provisions of sub-section (5) of section 80A were not on the statute and, therefore, assessee was entitled to make the claim. The amendment, therefore, could not take away the vested right of the assessee to make claim under section 80IB. Accordingly it was submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 take action where the period mentioned therein had expired before 1.4.1952. It was accordingly held that the action was barred by limitation. The present case is different. In this case provisions of section 80A(5) are applicable from assessment year 2003-04 without any limitation. Moreover, the proceedings for assessment years 2003-04 and 2004-05 are still alive and are not barred by any limitation. Therefore in these proceedings which are still alive and pending in appeal, the provisions of section 80A(5) have to be applied and following which the claim of the assessee has to be disallowed. The disallowance is therefore, confirmed on the legal ground. We, therefore, do not consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 32(1)(ii). This alternate claim was also rejected on the ground that provisions of section 32(10)(ii) were applicable only in respect of intangible assets acquired on or after 1.4.1998, whereas in case of the assessee technical know-how had been acquired in the year 1994. Aggrieved by the said decision of CIT(A) confirming the disallowance, the assessee is in appeal in both the years. 3.2.2 Before us, the Ld. AR of the assessee argued that the amendment to section 35AB by the Finance Act 1998 had withdrawn the deduction under section 35AB in respect of payments made after 1.4.1998 as technical know-how by the Finance Act, 1998 was treated as intangible asset on which depreciation w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents 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 1.4.1998 as the same was entitled to depreciation. However, the language used in section 35AB provided that no deduction will be allowable in case payment is made after 1.4.1998. This has resulted into an anomalous situation as in respect of technical know-how acquired prior to 1.4.1998 assessee will neither be eligible for deduction under section 35AB in respect of payment made after 1.4.1998 nor depreciation under section 32(1)(ii) can be allowed as the asset was acquired prior to 1.4.1998. This was not the intention of the legislature. Therefore, the plain and literal meaning of the amended provisions of section 35AB has resulted into manifestly unjust result which was not the intention ..... X X X X Extracts X X X X X X X X Extracts X X X X
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