M/s. National Lamination Ind., Nani Daman V. The ACIT., Vapi Circle, Vapi

CO 261/AHD/2010

• Counselvise Citation: [2011] 122 COUNSELVISE.COM (IT) 5547 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 month(s) 22 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 07-01-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2007-2008
• Appeal Filed On: 16-08-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SR MALIK

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D BEFORE SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER AND SHRI A.N. PAHUJA, ACCOUNTANT MEMBER DATE OF HEARING : 31/12/2010 DRAFTED ON: 03 /01/2011 ITA NO.2235/AHD/2010 ASSESSMENT YEAR : 2007-08 ASST.CIT VAPI CIRCLE VAPI VS. M/S.NATIONAL LAMINATION IND. PLOT NO.H/102 & G-3 MAHATMA GANDHI INDUSTRIAL ESTATE DABHEL, DAMAN PAN/GIR NO. : AACFN 4402 D ( APPELLANT ) .. ( RESPONDENT ) AND CO NO.261/AHD/2010 A.Y. 2007-08 M/S.NATIONAL LAMINATION IND. VS. THE ACIT, VAP I DABHEL, DAMAN (CROSS OBJECTOR) .. (RESPONDENT) REVENUE BY : SHRI S.R. MALIK, D.R. ASSESSEE BY: SHRI S.N. SOPARKAR, A.R. O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THE REVENUE IS IN APPEAL AND THE RESPONDENT-ASSESS EE IS IN CROSS OBJECTION ARISING FROM THE ORDER OF LEARNED CIT(APP EALS)-VALSAD, DATED 23/03/2010 PASSED FOR ASSESSMENT YEAR 2007-08. 2. FIRST, WE SHALL TAKE UP THE REVENUES APPEAL AND THE ONLY GROUND READS AS FOLLOWS:- I TA NO.2235/AHD/2010 (BY REVENUE) & CO NO.261/AHD/2010 (BY ASSESSEE) THE ACIT VAPI VS. NATIONAL LAMINATION IND. ASST.YEAR 2007-08 - 2 - 1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT THE INCOME FROM SCRAP SALES OF RS.3,15,18,715/- IS ELIGIBLE FOR DEDUCTION U/S.80IB WITHOUT CONSIDERING FACT THAT IT HAS NO DIRECT OR IMMEDIATE NEXUS WITH THE MANUFACTURING ACTIVITY OF THE ASSESSEE. 2. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDING ASSESSMENT ORDER PASSED U/S.143(3) OF THE I.T. ACT, 1961 DATED 25/0 9/2009 WERE THAT THE ASSESSEE IS IN THE BUSINESS OF CUTTING OF COLD ROLL ED GRAIN ORIENTED ROLLS INTO VARIOUS SIZES OF SHEETS. BEFORE THE LOWER AUT HORITIES IN RESPECT OF CLAIM OF DEDUCTION U/S.80IB OF THE I.T.ACT, THE ASS ESSEE HAS EXPLAINED THE MANUFACTURING ACTIVITY WHICH CAN BE REPRODUCED AS FOLLOWS:- FOR THE PURPOSE OF MANUFACTURING OUR FINAL PRODUCT I.E. TRANSFORMER CORE/LAMINATION WE IMPORT RAW MATERIAL CALLED CRGO ELECTRICAL STEEL SHEETS/COIL/STRIPS IN PRIME A ND SECONDARY QUALITY. THE MATERIAL USED FOR PRODUCTION OF TRANS FORMER CORES IS COLD ROLLED GRAIN ORIENTED ELECTRICAL STEEL. THE M ATERIAL COMES IN THICKNESS OF 0.23, 0.27, 0.30 AND 0.35 MM. THE ELECTRICAL STEEL COMES IN VARIOUS GRADES WITH EACH GRADE HAVING A SP ECIFIC IRON LOSS ALSO CALLED CORE LOSS, WHICH IS GUARANTEED. C ORE LOSS IS THE ELECTRICAL POWER LOST IN TERMS OF HEAT WITHIN THE C ORE OF ELECTRICAL EQUIPMENT WHEN CORES ARE SUBJECTED TO A C MAGNESTIS ING FORCE. IT IS COMPOSED OF SEVERAL TYPES OF LOSSES. HYSTRESSES LOSS, EDDY CURRENT LOSS WITHIN INDIVIDUAL LAMINATIO NS AND INTER LAMINAR LOSSES THAT MAY ARISE IF LAMINATIONS ARE SU FFICIENTLY INSULATED FROM EACH OTHER. EVERY TYPE OF STEEL HAS GRAINS, WHICH CONSISTS OF DOMAINS. THESE DOMAINS ARE ELECTRICAL CHARGES ORIENTED IN ANY RANDOM DIRECTION. THEREFORE IF A T RANSFORMER WHERE TO BE MADE OF MILD STEEL USED AS CORE MATERIA LS, THE CORE LOSS WOULD BE APPROX. WILL BE 16 TO 17 W/KG AT 1.5T /150HZ AND THE SIZE OF THE TRANSFORMER WILL BE APPROX 18 TO 20 TIM ES THE SIZE OF THE TRANSFORMER MANUFACTURED WITH CRGO SHEET. I TA NO.2235/AHD/2010 (BY REVENUE) & CO NO.261/AHD/2010 (BY ASSESSEE) THE ACIT VAPI VS. NATIONAL LAMINATION IND. ASST.YEAR 2007-08 - 3 - FOR THE PURPOSE OF MANUFACTURING PROCESS FOLLOWING MACHINES ARE REQUIRED AND USED BY US. 1) GRINDING MACHINE. (USED IN TOOLS ROOM FOR GRINDING OF DYES AND TOOLS) 2) SHEARING MACHINE. 3) SLITTING LINE 4) POWER PRESS FOR HOLING & NOTCHING. 5) DECOILERS 6) ANNEALING FURNACE 7) LABORATORY EQUIPMENT LIKE EPSTEIN TESTER, FRANKLIN TESTER, STACKING FACTOR MEASURING INSTRUMENT, ETC. CRGO STEEL IS A DELICATE STEEL TO BE HANDLED WITH T HE CARE AS THE MAGNETIC PROPERTIES OF THE STEEL AND NOT THE TENSIL E STRENGTH IS THE IMPORTANT QUALITY REQUIRED. IT IS IMPERATIVE THAT GREAT CARE IS TO BE TAKEN IN HANDLING, STORING AND PROCESSING OF THIS S TEEL. IF THEY ARE NOT DONE PROPERLY ULTIMATELY LEADS TO HIGHER LOSSES AND THE RESULT ARE NOT AS PER THE DESIGN. WE ARE MAINTAINING A FU LLY EQUIPPED LABORATORY WITH THE LATEST MEASURING EQUIPMENT. TH E TEST IS CARRIED OUT IN THIS LABORATORY TO CONFIRM THE IRON LOSS AT PARTICULAR INDUCTION, WHICH IS GUARANTEED FOR THE GRADE TO BE USED. AFTER THE TESTING IS OVER MATERIAL IS SENT FOR SLITTING MACHI NE TO CUT THE COILS TO THE REQUIRED WIDTH AS PER THE PROGRAM FROM THE P LANNING DEPARTMENT. AFTER THE COILS ARE SLIT IT GOES FOR S HEARING ON SHEARING MACHINE WHERE THE REQUIRED LENGTH OF LAMIN ATION IS CUT. THE NEXT PROCESS IS CALLED NOTCHING THAT IS CALLED CENTER V NOTCH WHICH IS DONE ON POWER PRESS/PRESS BRAKE. AFTER TH IS THE NEXT PROCESS IS HOLING OF THE MATERIAL. HOLES ARE MADE IN THE MATERIAL AS PER THE CUSTOMERS SPECIFICATION. THE NEXT PROC ESS IS A VERY IMPORTANT PROCESS, WHICH IS CALLED ANNEALING. THE PROCESS IS DONE IN ELECTRICALLY OPERATED ANNEALING FURNACE. IN THI S PROCESS ALL INDIVIDUAL LAMINATIONS ARE ANNEALED AT 820-DEGREE T EMPERATURE. THIS PROCESS OF ANNEALING BRINGS A VAST CHARACTERIS TIC CHANGE IN THE COMPOSITION OF THE MATERIAL. BY THIS PROCESS M OST OF THE PLASTIC AND ELECTRIC STRESSES ARE RELIEVED FROM THE MATERIA L. THIS ANNEALING ACTIVITY ALSO IMPROVES THE MAGNETIC VALUE OF THE MATERIAL, WHICH IN TURN IMPROVES THE CONDUCTIVITY. THE ANNEALING ACTIVITY ALSO REDUCES IRON LOSS CONSIDERABLY. IN O THER WORDS THE I TA NO.2235/AHD/2010 (BY REVENUE) & CO NO.261/AHD/2010 (BY ASSESSEE) THE ACIT VAPI VS. NATIONAL LAMINATION IND. ASST.YEAR 2007-08 - 4 - ACTIVITY OF ANNEALING CONSIDERABLY CHANGES THE CHAR ACTERISTIC OF THE ORIGINAL COMMODITY. FURTHER IT INCREASES THE DURAB ILITY OF THE TRANSFORMER. 3. AS FAR AS THE ELIGIBILITY OF CLAIM OF DEDUCTION U/S.80IB OF THE I.T.ACT FOR THE ASSESSEES MANUFACTURING ACTIVITY I S CONCERNED, THE SAME IS NOT IN DISPUTE BEFORE US. BUT THE DISPUTE AS RAI SED BY THE REVENUE IS IN RESPECT OF ELIGIBILITY OF DEDUCTION U/S.80IB PERTAINING TO THE SALE OF SCRAP . IT WAS NOTICED BY THE ASSESSING OFFICER THAT AN AMOUNT OF RS.3,15,18,715/- WAS RECEIVED ON SALE OF SCRAP. AS PER ASSESSING OFFICER, THE SCRAP WAS NOT GENERATED AS A BY-PRODUC T DURING THE COURSE OF MANUFACTURING PROCESS, HENCE, THE INCOME ARISING F ROM THE SALE OF SCRAP WAS NOT DERIVED FROM INDUSTRIAL UNDERTAKING. ON THE OTHER HAND, THE ASSESSEE HAS VEHEMENTLY CONTESTED THAT THE SCRAP HA S GENERATED AS WELL AS EMANATED FROM THE MANUFACTURING PROCESS AS DESCRIBE D AND IN SUPPORT FEW CASE LAWS HAVE BEEN CITED. HOWEVER, ASSESSING OFFICER WAS NOT CONVINCED AND BY REFERRING AN UNREPORTED DECISION O F THE TRIBUNAL AS ALSO A DECISION OF HON'BLE MADHYA PRADESH HIGH COURT IN THE CASE OF D P AGRAWAL VS. CIT REPORTED AS [2005]272 ITR 118 (M.P .), IT WAS HELD THAT THE IMPUGNED SCRAP INCOME WAS TO BE EXCLUDED FROM T HE PROFITS ELIGIBLE FOR THE DEDUCTION U/S.80IB OF THE I.T.ACT. 4. WHEN THE MATTER WAS CARRIED BEFORE THE FIRST APP ELLATE AUTHORITY, THE LEARNED CIT(APPEALS) HAS FOUND THAT THE ISSUE O F ELIGIBILITY OF INCOME ARISING FROM SALE OF A SCRAP WHICH WAS DERIV ED FROM INDUSTRIAL UNDERTAKING WAS COVERED BY HARJIVANDAS JHUTHABHAI ZAVERI AND ANOTHER REPORTED AS 258 ITR 785 (GUJ.). FOLLOWING THE SAID DECISION OF HON'BLE HIGH COURT THE ISSUE WAS DECIDED IN FAVO UR OF THE ASSESSEE. I TA NO.2235/AHD/2010 (BY REVENUE) & CO NO.261/AHD/2010 (BY ASSESSEE) THE ACIT VAPI VS. NATIONAL LAMINATION IND. ASST.YEAR 2007-08 - 5 - 5. WITH THIS BACKGROUND, WE HAVE HEARD BOTH THE SID ES AT SOME LENGTH. THE ONLY OBJECTION OF LEARNED DEPARTMENT AL REPRESENTATIVE SHRI S.R. MALIK WAS THAT THE GENERATION OF SCRAP WA S NOT LINKED WITH THE MANUFACTURING ACTIVITY AS NOTED BY THE ASSESSING OF FICER, THEREFORE, THE ISSUE WAS NOT COVERED BY THE DECISION OF HON'BLE HI GH COURT. ON THE OTHER HAND, LEARNED AUTHORISED REPRESENTATIVE HAS S TRONGLY OPPOSED THE SAID OBSERVATION PRIMARILY ON THE GROUND THAT WITHO UT VERIFYING THE CORRECT FACTS OF THE CASE, THE ASSESSING OFFICER H AD ARBITRARILY HELD THAT THE PRODUCTION OF A SCRAP WAS NOT A BY-PRODUCT OF T HE MANUFACTURING ACTIVITY. IT HAS ALSO BEEN STATED THAT THOUGH THER E WAS NO CHANGE IN THE MANUFACTURING ACTIVITY OF THE ASSESSEE; AND THAT TH ERE WAS NO CHANGE IN THE PRODUCTION OF SCRAP COMPARING THE PAST RECORDS OF THE CASE; AND THAT THE DEDUCTION ON SALE OF A SCRAP HAS ALWAYS BEEN AL LOWED IN THE PAST, HENCE THERE WAS NO OCCASION ON THE PART OF THE ASSE SSING OFFICER TO DISTURB THE ALREADY ACCEPTED STAND OF THE REVENUE. IN SUPPORT OF THE CLAIM FOLLOWING CASE LAWS HAVE ALSO BEEN RELIED UPO N:- SL.NO(S) DECISION IN THE CASE OF REPORTED IN 1. DY.CIT VS. HARJIVANDAS JUTHABHAI ZAVERI & ANOTHER [2002] 258 ITR 785 (GUJ.) 2. DY.CIT VS. CORE HEALTHCARE LTD. [2009] 308 ITR 263 (GUJ.) 3. NIRMA INDUSTRIES LTD. VS. ACIT [2005] 95 ITD 119 [AHD.] (SB) 4. FENNER (INDIA) LTD. VS. CIT [2000] 241 ITR 803 (MAD.) I TA NO.2235/AHD/2010 (BY REVENUE) & CO NO.261/AHD/2010 (BY ASSESSEE) THE ACIT VAPI VS. NATIONAL LAMINATION IND. ASST.YEAR 2007-08 - 6 - 6. THE ADMITTED FACTUAL POSITION IS THAT THE ASSESS EE IS USING RAW- MATERIAL CALLED AS CRGO ELECTRICAL STEEL SHEETS. T HE STEEL SHEETS ARE IN VARIOUS SHAPES WHICH ARE CUT INTO VARIOUS SIZES. DURING THIS PROCESS, SIGNIFICANT SCRAP IS GENERATED, HENCE, THE VEHEMENT CLAIM IS THAT THE SCRAP OF STEEL CREATED ON CUTTING OF STEEL SHEETS NATURAL LY HAS A DIRECT LINK AS WELL AS NEXUS WITH THE MANUFACTURING ACTIVITY. WE ARE OF THE VIEW THAT THE TOTALITY OF THE CIRCUMSTANCES THUS, WARRAN TS TO HOLD THAT THE INCOME GENERATED ON SALE OF SCRAP WAS DERIVED FROM THE INDUSTRIAL MANUFACTURING ACTIVITY OF THE ASSESSEE, THEREFORE, QUALIFIES FOR THE DEDUCTION AS PRESCRIBED UNDER THE ACT. RESULTANTLY , THE LEARNED CIT(APPEALS) HAS RIGHTLY FOLLOWED THE DECISION OF T HE HON'BLE JURISDICTIONAL HIGH COURT AND HIS VIEW IS HEREBY AF FIRMED. THIS GROUND OF THE REVENUE IS DISMISSED. 7. NOW, WE SHALL TAKE UP THE CROSS OBJECTION NO.2 61/AHD/2010 (ARISING OUT OF ITA NO.2235/AHD/2010) FILED BY THE ASSESSEE. 8. GROUND NO.1 READS AS UNDER: 1. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACT S IN CONFIRMING DISALLOWANCE OF DEDUCTION U/S.80IB ON INTEREST INCOME BY HOLDING THAT THE INTEREST INCOME IS NOT DERIVED FROM THE IN DUSTRIAL UNDERTAKING. ALTERNATIVELY, LD CIT(A) OUGHT TO HAV E ALLOWED NETTING OF INTEREST EXPENSES FROM THE INTEREST INCO ME. 8.1. AS FAR AS CLAIM OF DEDUCTION IN RESPECT OF INT EREST INCOME IS CONCERNED, THE SAME WAS NOT PRESSED BECAUSE ADMITTED LEGAL AS WELL AS FACTUAL POSITION IS THAT THE INTEREST INCOME BEING INCOME UNDER THE HEAD OTHER SOURCES CANNOT BE SAID TO BE AN INCOME DERI VED FROM THE I TA NO.2235/AHD/2010 (BY REVENUE) & CO NO.261/AHD/2010 (BY ASSESSEE) THE ACIT VAPI VS. NATIONAL LAMINATION IND. ASST.YEAR 2007-08 - 7 - INDUSTRIAL UNDERTAKING. HOWEVER, AN ALTERNATE CL AIM OF THE ASSESSEE IS THAT NETTING OF INTEREST BE DIRECTED FOR SUCH DISAL LOWANCE. IN THIS REGARD, FOLLOWING CASE LAWS ARE RELIED UPON: SL.NO(S) DECISION IN THE CASE OF REPORTED IN 1. CIT VS. SHRI RAM HONDA POWER EQUIP & ORS [2007] 289 ITR 475(DEL) 2. CIT VS. NAGPUR ENGINEERING CO.LTD. [2000] 245 ITR 806(BOM) 3. DY.CIT & ORS VS. MIRA INDUSTRIES & ORS. [2003] 87 ITD 475(AHD-ITAT- ABENCH) 9. CONSIDERING THE CIRCUMSTANCES OF THE CASE AND TH E CASE LAWS RELIED UPON, WE ARE OF THE CONSCIENTIOUS VIEW THAT THIS AS PECT HAS NOT BEEN CHALLENGED EITHER BEFORE THE ASSESSING OFFICER OR B EFORE THE LEARNED CIT(APPEALS). THE QUESTION OF NETTING OF INTEREST HAS TO BE ASCERTAINED AFRESH IN THE LIGHT OF THE VARIOUS DECISIONS, INCL UDING THOSE REFERRED TO ABOVE AFTER DUE VERIFICATION , HENCE, IN THE ABSENC E OF RELEVANT FACTS, IT IS JUSTIFIABLE TO RESTORE THIS PART OF THE GROUND FOR READJUDICATION BY THE ASSESSING OFFICER AS PER LAW. GROUND IS PARTLY ALL OWED. 10. GROUND NO.2 READS AS UNDER: 2. THE LEARNED AO ERRED IN LAW AND IN ACTS IN MAKI NG APPLICABLE PROVISIONS OF SECTION 40(A)(IA) R.W.S. 194 OF THE ACT FOR DEFAULT IN MAKING PAYMENT OF TDS AND THUS DISALLOWING EXPENDIT URE OF RS.16,03,912/-. 10.1. THIS GROUND IS HEREBY DISMISSED BEING NOT PRE SSED. 11. GROUND NO.3 READS AS UNDER: I TA NO.2235/AHD/2010 (BY REVENUE) & CO NO.261/AHD/2010 (BY ASSESSEE) THE ACIT VAPI VS. NATIONAL LAMINATION IND. ASST.YEAR 2007-08 - 8 - 3. THE LEARNED AO ERRED IN LAW AND IN FACTS IN MA KING ADHOC DISALLOWANCE OF 10% FROM SUNDRY EXPENSES OF RS.8,63,129/- WITHOUT APPRECIATING VARIOUS EVIDENCES AND SUBMISSI ONS MADE BY THE APPELLANT. 11.1. AT THE OUTSET, LEARNED DEPARTMENTAL REPRESENT ATIVE HAS INFORMED THAT THIS GROUND WAS NOT CONTESTED BEFORE THE LEARN ED CIT(APPEALS), THEREFORE, THE SAME CANNOT BE CHALLENGED THROUGH CR OSS OBJECTION BEFORE THE TRIBUNAL. FROM THE RECORDS IT APPEARS THAT THIS GROUND WAS CONCEDED BY THE ASSESSEE BEING NOT CHALLENGED BEFORE THE FIRST APPELLATE AUTHORITY, THEREFORE, THIS PRIMARY OBJECTION OF THE REVENUE DEPT IS HEREBY SUSTAINED AND GROUND IS DISMISSED. 12. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED AND CROSS OBJECTION FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 7 / 1 /2011. SD/- SD/- ( A.N. PAHUJA ) ( MU KUL KR. SHRAWAT ) ACCOUNTANT MEMBER JUDICIAL MEMBE R AHMEDABAD; DATED 7 / 1 /2011 T.C. NAIR, SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE ASSESSEE. 2. THE DEPA RTMENT. 3. THE CIT CONCERNED. 4. THE LD. CIT(A PPEALS)-VALSAD 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD