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TMI Blog2018 (3) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... uction thereon in earlier years, it was denied for the year under appeal also . This has nothing to do with the search proceedings so as to fall within the ambit of undisclosed income and consequential levy of penalty u/s 271AAB of the Act. - Decided against revenue X X X X Extracts X X X X X X X X Extracts X X X X ..... earing it was submitted by the learned counsel for the Assessee that the aforesaid issue regarding the eligibility of the Assessee for deduction u/s 80IB(5) of the Act has already been decided by the ITAT Kolkata bench in Assessee's own case for A.y 2005-06 in I.T.A. No. 748/Kol/2008 order dated 07.08.2008 and this Tribunal following the decision rendered in the case of M/s Amrit Feeds in I.T.A. No. 1505/Kol/2007 for A.y. 2003-04 decided the issue in favour of the assessee holding that the profit derived from the activity of manufacture of poultry feed was entitled to deduction u/s 80IB(5) of the Act. 2.2. It was the plea of the Assessee that the process of producing poultry feed involved mechanical, chemical & electrical processes for which the Assessee used sophisticated Plant & Machinery. In the course of production of poultry feed raw materials which exceeded 30 in number, lost individual identity and the emerging product was distinct and separate in shape, character and end-use. The raw materials consumed in production of poultry feed could be individually used for different purposes, but the end product at the end of integrated production process was known to trade by its di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Tribunal observed as under vide para 15 to 18 of its order. "15. Sec 80IB(2) (iii) requires the eligible Industrial undertaking to be engaged in manufacture of production of an article'. The said section however does not define the expression "manufacture or production of' an article. In fact this expression is not defined .in the Act also. The Ld. CIT (A) extensively analysed meaning or the said expression with reference to judicial decision discussed in his order. The test laid down by the Courts is whether the emerging new product is known to the trade, industry and commerce by its own name having its own application use and has a market of its own. Applying the criteria as laid down in these judicial decisions we find that in physical appearance, colour and shape the. Poultry feed vastly differs from the input materials. The poultry reed is manufactured in a scientific and systematic manner with the use and assistance of sophisticated plant and machinery acquired at a substantial cost. Poultry feed is recognized not only by trade and commerce but also by the statutory authorities under Central Excise, Sales Tax etc. as independent products Applying the ratio laid d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... try under sub sections (3) and (5), of Sec 80IB. With reference to same set of facts the revenue cannot hold the poultry feed industry as manufacturing industry if situated in North Eastern states and a 'processing industry" if situated in any other states Such an interpretation will only lead to an absurd legal position. 18. For the reasons as set out herein before therefore we do not find any infirmity in the order or Ld. CIT(A) holding the assessee to be engaged in manufacture or production of an article. We are therefore of the considered opinion that the assessee satisfies the conditions of Sec 80IB(2) (iii) of the Act and is therefore eligible for deduction u/s 80IB. We therefore uphold the order Ld. CIT(A) directing A 0 to allow deduction u/s 80IB to the assessee." 2.7. In Assessee's own case this Tribunal in ITA No.748/Kol/2018 for AY 2005- 06 by order dated 7.8.2008 allowed similar claim of the Assessee. From perusal of the said decisions of this Tribunal. it is apparent that this Tribunal has categorically held in the Case that the assessee is engaged in manufacturing or poultry feeds and that the assessee is engaged in the manufacture or production of an ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that in the case of Amrit Feeds (supra), the Hon'ble ITAT had considered and distinguished the decision rendered in the case of Venkateswara Feeds (supra) by ITAT Hyderabad Bench. 2.11 We have given a careful consideration to the rival submissions. In the case of Amrit Feeds (supra), the Tribunal considered the decision rendered in the case of Venkateswara Feeds (supra) and held that the assessee in that case had claimed deduction u/s 80IB on the activity of merely converting poultry mash feed into pellet feed and therefore that Bench has held that there was no change in the basic component or new or different article came into existence. As such, conversion was processing activity not manufacturing. The Tribunal held that the case of the assessee Amrit Feeds (supra) was entirely different. The assessee's eligible undertaking itself was independently carrying out the complete activity i.e. from mixing, grinding till the pelletisation. The raw materials once consumed could not be reconverted into the same position. Its utility gets changed. The prime raw materials such as maize, soya oil, rice bran, etc. can no more be regarded to be the rice bran, soya oil, maize. We are of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Fixed Deposits and those deposits yielded interest income in question. It was submitted that in the given circumstances the fixed deposits maintained by the assessee was inextricably linked with the business of the assessee. The aforesaid interest earned from the fixed deposits went on to effectively reduce the overall cost of borrowing of the assessee. In view of the above the assessee submitted that the interest expense as well as interest income both have a proximate relationship with the business of the assessee. The interest income earned has direct corelation with the business funds of the assessee and accordingly it should be considered for the purpose of computing deduction u/s 80IB of the Act. 3.2 Without prejudice to the above, the assessee further submitted that interest income and interest expense are two sides of the same coin. It was submitted that the interest expense and interest income deserves to be netted off and only the net effect after set off should be considered for the purpose of section 80IB of the Act. It was argued that the ld. AO on one hand treated the interest expense in its entirety as expenditure incurred in connection with the eligible industri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of DCIT vs. BMW Industries Limited (I.T.A. No. 2115/Kol/2007) dated 29.02.2008 had similarly held that for the purpose of computation of deduction u/s 80IB the interest income was liable to be netted off against interest expenses and only the net interest expenditure was required to be allowed in arriving at qualifying profits of the eligible undertaking u/s 80IB of the Act. I also find that the principle of netting off of interest income against interest expense has been upheld by jurisdictional Calcutta High Court in the case of Warren Tea Ltd. (374 ITR 6) for the purposes of interpreting & computing business income in the context of Rule 8 applicable to tea companies. Following the ratio laid down in these decisions, I hold that the ld. AO should net off the interest income credited in the profit and loss account eligible against the interest expense debited in the said profit and loss account. If net result thereof is expenditure, the same shall be considered to be the expenditure relatable to eligible undertaking. However, if the net result, after set off is income, then the assessee will not be eligible to claim deduction u/s 80IB in respect of such net income. The ld. AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the I.T. Act, 1961 on account of disallowance of deduction u/s 80IB, as the assessee did not manufacturing any articles or things. iv) That the Department craves the right to add, modify or abrogate the grounds of appeal during the course of hearing of the case. 5.1. The brief facts of this issue is that the search and seizure operation was conducted in the "Amrit Group" u/s 132 of the Act on 30th / 31st August 2012. The assessee is one of the companies in the said group. The search was conducted at the office premises and residential premises of the promoters of the assessee. Survey operations u/s 133A of the Act were also conducted at the factories. The assessee was having huge stock of poultry feeds spread across various locations and hence thought it fit to carry out stock audit for the same. The Stock Auditor submitted his report on 20.8.2012 pursuant to his physical verification . Neither in the course of search nor in the survey proceedings, any of the authorized officers conducted physical stock verification. No physical inventory of raw materials or finished goods was taken nor the stock records verified by the search parties at any of the manufacturing units of Amri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f approximately ₹ 2192 lacs, compared with stock records. Report of M/s Damle Dhandhania & Co. was found & seized from my office which is identified as Pages 42 to 44 in ID: AF/3. I submit that excess stock found in the course of physical inspection will be offered as income o[the Group Companies in the current year and the appropriate tax on such income will be paid in due course." From the above facts, it shall therefore be observed that physical stock taking exercise was voluntarily carried out by the assessee through a firm of Chartered Accountant in the regular course of its business. The report contained findings with regard to excess/shortage of stock found on physical inspection at the various factories vis-a-vis the stock records. The said report was issued by the Chartered Accountants on 20.08.2012, and was received by the appellant on 23.08.2012. Admittedly appropriate entries in the stock records were passed on 31st August 2012 incorporating the findings of the Chartered Accountants and bringing the stock on material at pat with physical quantities found on physical inspection. Understandably the valuation of inventory was to be carried out & incorporated in. th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time basis and these are updated simultaneously. In particular the need for real time supervision and control of manufacturing operations at different plant locations was found necessary in view of the rapid growth which Amrit Group was witnessing since FY 2010-11. From perusal of the audited accounts of Amrit Group of Companies for the year ended 31st March 2013, your goodself will note that the sales turnover achieved by the main three operating companies viz., Amrit Feeds Limited, Amrit Hatcheries Limited and Amricon Agrovet Pvt Ltd for the Financial Year 2012-13 was ₹ 1169.13 crores, ₹ 704.47 crores & ₹ 240.48 crores respectively. The total turnover of these three operating companies for the FY 2012-13 amounted to ₹ 2114.08 crores. The turnover of these three companies for the immediate preceding year was however only ₹ 1511.66 crores; meaning thereby in the FY 2012-13 the Amrit Group had achieved substantial quantum increase in its turnover. Moreover the production activities were carried on by the Group at more than 10 locations and therefore it was absolutely essential that the Head Office of the Group at Kolkata exercised tighter control over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountant had submitted its report prior to the date of search in which they had reported variations between the quantities of raw material items as per stock records and as found on physical inspection. The excesses and shortages of stocks noted on physical inspection were reported by the said Auditor. The Auditor had also recommended steps to be taken for correcting the stock records. On receipt of the stock audit report the management of the appellant had issued necessary instructions to the factory managers to reconcile the stock records and incorporate the correct quantitative details in the stock records in compliance with the fmdings of the stock auditor as contained in the stock audit report. On 31st August 2012, appropriate entries were also passed in the stock records and the excess quantities physically found by the stock auditor were suitably increased in the stock records at 'NIL' cost. In course of resumed search operation on 29.10.2012 report of M/s. Damle Dhandhania & Co., Chartered Accountant dated 20.08.012 in respect of physical verification of stock undertaken at different places was found and seized [ID Mark AF /3, Pages 42 to 441 by the Investigation au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st August 2012 itself and formed part of the regular books of account. Copies of the journal entries were also furnished before the AO. After the stock records were reconciled with the report of the stock auditor; there remained no discrepancy between the two. Accordingly when the inventory was valued by the company as at 31.03.2013; the value of the excess quantity reported in audit report was included. Being satisfied with the submissions of the appellant, the AO accepted the stock records and the valuation of closing stock and no adverse inference-was drawn in this regard. 5.3. The assessee pleaded that in view of the aforesaid facts, the following facts emerge in the assessee's case:- No stock taking exercise was ever conducted by the Department nor was any excess stock was detected by the Department either at the time of search or at any other point of time. Stock report of Damle Dhandhania & Co. was obtained by the assessee in the regular course of business. The said stock audit report containing findings with regard to difference in stock found on the physical inspection vis-à-vis the stock records was obtained prior to conducting of search u/s 132. The stock repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of income, it is necessary for the authority to prove that sum of ₹ 2,73,38,000/- in fact constituted assessee's 'undisclosed income' and further such income was unearthed or detected as a result of the search u/s 132 conducted against the assessee. In the present case admittedly no such incriminating material was unearthed by the Investigation Wing in the course of search nor was any excess physical stock was found by the IT authorities. The difference in stock had been duly incorporated in the regular stock records prior to the date on which the stock audit report was found and declaration u/s 132(4) was recorded from the Director. The assessee thus submits that the income of ₹ 2,73,38,000/- which it incorporated in its books for the financial year 2012-13 did not in any manner represent 'undisclosed income' of the assessee as contemplated by sec 271AAB of the Act. In the present case the sum of ₹ 2,73,38,000/- was incorporated by the assessee in the regular books of accounts. The assessee had already decided to incorporate the difference in stock found on the physical inspection prior to the date on which stock audit report was seized by the Authorized Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner or [ Principal Commissioner or] Commissioner before the date of search; or ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of accounts or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted." 6.1. We find that the director of assessee company in his statement u/s 132(4) of the Act had explained that the stock verification was carried out by the independent chartered accountant since the company was in the process of implementing an integrated ERPSAP system of accounting. Since in the records, it was deemed necessary by the management that physical inventory should tally with stock records at the time when ERP system was being implemented. On taking physical inventory of raw materials and finished goods, the auditor had reported in his report discrepancies which he had found between the physical quantities of materials and their corresponding stock records. These discrepancies were presented to the management in tabular form in the repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partake the character of undisclosed income for the purpose of section 271AAB of the Act alone. 6.3. The ld AR argued that if the version of the ld AO is to be accepted, then any person who has been subjected to search u/s 132 of the Act in a year and who had not properly updated the accounts probably due to the absence of his accountant for few days just prior to the search, can it be said that the unupdated transactions in the regular books of accounts or other documents would be construed as 'undisclosed income' for the purpose of section 271AAB of the Act. In our considered opinion, the remedy is available to the assessee in such a situation, to clearly mention in the statement recorded u/s 132(4) of the Act by explaining the fact of absence of the accountant and also adduce evidences by showing the relevant purchases, sales, proof of movement of goods and expenses bills that are not recorded in the books of accounts, wherein from the relevant papers, it is possible to arrive at the true profits / losses of the assessee on that date for the unrecorded period. What is required to be seen is that the assessee had maintained the relevant papers which would enable him to record th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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