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TMI Blog2017 (4) TMI 1612X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 the view that the issue in the Revenue's appeal is squarely covered against the revenue by the decision of the Coordinate Bench of this Tribunal in assessee's own case for the earlier years - grounds of appeal raised by the Revenue in all the appeals on this issue are dismissed. Interest income should be excluded from the profits of the business on which deduction u/s 80IB(5) - Interest income and the interest expenses had a direct nexus and therefore netting of interest income against the interest expenses had to be allowed. Since the interest expenses was much more than the interest income no interest income can be excluded from the profits on which deduction u/s 80IB(5) of the Act ought to be allowed. We therefore uphold the order of CIT(A) on this issue and dismi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he A.O. to net off the interest income credited in the profit and loss account of the eligible undertaking against the interest expense debited in the said profit and loss account without the appreciating the facts and circumstances of the case supported by the decision of Hon'ble Supreme Court in the case of Pandian Chemicals Limited Vs. CIT,[2003] 129 TAXMAN 539 (SC) and the decision of High Court of Jammu and Kashmir in the case of Asian Cement Industries Vs Income Tax Appellate Tribunal, [2012] 28 TAXMAN 290(Jammu Kashmir) (vi) That the Ld. CIT(A) has erred in directing the A.O. to recompute the income of the eligible undertaking and re-compute the deduction u/s 80IB after netting off the interest income credited in the profit and loss account of the eligible undertaking against the interest expense debited in the said profit and loss account. 3. Grounds No.(i) to (iii) raised by the Revenue is with regard to the issue as to whether the CIT(A) was justified in allowing the claim of the Assessee for deduction u/s.80IB(5) of the Income Tax Act, 1961 (Act) on the profits derived by the Assessee from manufacture and sale of poultry feed. 4. At the time of heari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an authentic technical finding, the AO however did not refer to any scientific data or scientific experiments or technical report to support his conclusion. The AO accordingly rejected the claim of the Assessee for deduction u/s.80IB(5) of the Act. 7. On appeal by the Assessee, the CIT(A) held that the Assessee was eligible for deduction u/s.80IB(5) of the Act and in doing so relied on the decision rendered in Assessee s own case by the Tribunal referred to in the earlier part of this order. 8. Aggrieved by the order of the CIT(A), the revenue is in appeal before the Tribunal. 9. We have heard the rival submissions. The issue to be decided is as to whether the assessee is engaged in the manufacture of a production of an article to be eligible for deduction under section 80IB. This issue has duly been decided by this Bench in assessee's own case in ITA No.1505/Kol/2007 in the case of ACIT-vs- Amrit Feeds Ltd., Kolkata, in which, the similar issue has arisen. While deciding the similar issue, this Tribunal observed as under vide para 15 to 18 of its order. 15. Sec 801B (2) (iii) requires the eligible Industrial undertaking to be engaged in 'manufacture of produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st be engaged in manufacture or production of an article. If this condition is not fulfilled no deduction is permissible under any of the sub sections of Sec 801B. The industrial undertakings notified and approved by the Central Govt. and situated in North Eastern States are eligible for tax holiday for period of 10 years' as against period of 5 years available to other backwards states. In Notification No. SO 627 (E) dated 04.08.1999 the Central Government has recognised poultry and cattle feed industry, to be an eligible industry u/s 80 IB (4). Once the Central Government notified the poultry 'feed industry u/s 80 IB (4) then there is a tacit admission that it is engaged in manufacture or production of an article . This is so because unless poultry feed industry does not manufacture an article; no deduction can be permissible u/s 80IB. Once the Central Govt. accepted in principle that poultry feed is an eligible industry u/s 80IB(4); then the very same industry cannot be considered as non manufacturing industry under sub sections (3) and (5) ' of Sec 801B. With reference to same set of facts the revenue cannot hold the poultry .feed industry as manufacturing industry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of the important criteria is that the end product of the manufacturing process is to be completely different from the ingredients, as regards its chemical composition, integral structure or its use and such factor is missing in the case of the Assessee. It was also submitted that the activity carried out by the Assessee was mere mixing together of different ingredients, without involving any change in the chemical composition of the ingredients and therefore, the decisions rendered on this issue have overlooked this aspect. It was submitted that the decision rendered in Assessee s own case did not consider the decision of the Hyderabad Bench of ITAT in the case of Venkateswara Feeds (supra) and therefore the decision requires reconsideration. 12 . The learned DR filed before us a chart explaining the process carried out by the Assessee, which is as follows: Raw materials (corn, soya meal, rice bran, cassava, others Quality inspection (aflatcocin, moisture, energy, protein, etc. Hatch weighing (per formulation) G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (vi) raised by the revenue is concerned the issue for consideration is as to whether interest income should be excluded from the profits of the business on which deduction u/s 80IB(5) of the Act has to be allowed. The case of the AO is that interest income had no direct nexus with the business of manufacture and sale of poultry feed and therefore the said income cannot be considered as part of profits of the eligible business for the purpose of allowing deduction u//s 80IB(5) of the Act. The CIT(A) however found that the interest income arose out of fixed deposits which were securities for availing credit facilities by the assessee in the course of its business of manufacture and sale of poultry feed. The FDs were made only for the purpose of offering them a security for credit facilities availed from the banks and such a condition was also imposed by the banks for extending credit facilities. The CIT(A) further found that the assessee had earned interest income of Rs.25,46,860/- and had paid interest on loans and credit facilities of Rs.39,22,489/-. Taking note of all these facts the CIT(A) came to the following conclusion :- I have considered the finding of the AO in the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be offered as a security and therefore interest expenditure and the interest income had a direct nexus and hence netting of interest income with the interest expenses was rightly allowed by CIT(A). 18. We have considered the rival submissions and are of the view that the interest income and the interest expenses had a direct nexus and therefore netting of interest income against the interest expenses had to be allowed. Since the interest expenses was much more than the interest income no interest income can be excluded from the profits on which deduction u/s 80IB(5) of the Act ought to be allowed. We therefore uphold the order of CIT(A) on this issue and dismiss ground nos. (iv) and (vi) raised by the revenue. 19. Ground No.(vii) raised by the revenue reads as follows :- (vii) That the Ld. CIT(A) has erred in directing the A.O. to compute the disallowance u/s 14A read with rule 8D(2)(ii) and 8D(2)(iii) only on the investment in the shares of Punjab National Bank amounting to Rs.34,100/-. 20. The AO disallowed a sum of Rs.66,678/- and Rs.59,170/- as expenses incurred in earning exempt income and accordingly made additions of the aforesaid sum by invoking the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me which are exempt income in the hands of assessee. Assessee also claimed various expenses under the head Profit and Gain of Business or Profession. As, it is not possible to segregate portion of these expenses incurred for earning exempt income i.e. Dividend and others, hence it has been decided that provisions of section 14A would apply in the case of the assessee for the assessment year 2010-11. The next question that arises is the quantum of disallowance. The only basis of quantification of disallowance is the one provided in Rule 8D(2)(iii), i.e., 0.5% of the average investment. Accordingly, disallowance under Rule 8D(2)(iii) is worked at 0.5% of (B) above: Disallowance 8D(2)(iii) u/s 14A r.w.r 0.5% of 1,18,34,000/- 59,170/- 3.4 In view of the aforesaid paragraph, an amount of Rs.59,170/- is disallowed u/s 14A read with Rule 8D. Hence Disallowance added to the total income of assessee. 21. Before CIT(A) the assessee submitted that the investments primarily comprised of investments in shares of subsidiaries and group companies. The details of investments held by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for making such investments. Reliance in this regard is placed on the decision of the Hon'ble Bombay High Court in the case of Reliance Utilities Power Ltd (313 ITR 340) wherein the assessee made investment of RS.389.60 crs in shares on which tax free dividend income was received. It was the case of the assessee that there were sufficient funds available in the form of share capital (180 crs), reserve surplus (215crs) for making investment in shares. On the other hand, the revenue contended that share capital and reserves etc. had already been invested in acquiring in fixed assets. On appeal, the Hon'ble High court following the decision of the Supreme Court in the case of East India Pharmaceutical Works (224 ITR 627) observed as follows: If there be interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available. Attention was also drawn to the decision of the Bombay High Court in the case of CIT Vs HDFC Bank Ltd [ITA No. 330 of 2012 dated 23.07.2014 affirmed the decision of the coordinate Bench in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne script i.e. from Punjab National Bank. Total investment in the shares of the Punjab National Bank is an old investment i.e. Rs.34100/-. Accordingly, the AO is directed to compute disallowance u/s 14A read with rule 8D(2)(ii) and 8D(2)(iii) for this investment only. Thus, assessee's appeal on grounds no 7 and 8 are partly allowed. 26. Aggrieved by the order of CIT(A) the revenue has raised ground no.(vii) before the Tribunal. 27. We have heard the rival submissions. The ld. DR placed reliance on the order of AO and the ld. Counsel for the assessee apart from reiterating the submissions made before CIT(A) and the order of CIT(A) also placed reliance on the decision of the Hon ble Bombay High Court in the case of HDFC Ltd 366 ITR 505 (Bombay) wherein it was laid down that if there is interest free funds available to an assessee sufficient to meet the investments and at the same time the assessee has also raised a loan it can be presumed that the investments were from the interest free funds. The ld. Counsel relied on the findings of CIT(A) where the CIT(A) has found that the assessee had interest free funds sufficient to meet the investments which are likely to yield t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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