COMMISSIONER OF INCOME TAX V. PARAS MOTORS MFG CO

TAXAP/1226/2010

AI Insights

The case revolves around the eligibility of income from scrap sales for deductions under Section 80IB of the Income Tax Act. The Commissioner of Income Tax appealed against the ITAT's decision, which had upheld the CIT(A)'s ruling that the income from scrap sales by Paras Motors MFG Co. was eligible for deductions. The ITAT and CIT(A) had relied on the decision of the Gujarat High Court in the case of DCIT vs. Harjivandas Juthabhai Zaveri & Anr, which supported the assessee's position. The High Court of Gujarat, in this judgment, affirmed the lower authorities' decisions, dismissing the appeal by the Commissioner of Income Tax.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 744373 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 21-12-2013
• Assessment Year: misc
• Other Referred Cases: DCIT vs. Harjivandas Juthabhai Zaveri & Anr, Commissioner of Income Tax vs. Sadhu Forging Limited
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: SWATI SOPARKAR
• Assessee Lawyers: S UDHIR M EHTA
• Keywords: Assessing Officer; Deduction under section 80IB; Income from scrap sales; Income tax appellate tribunal; Manufacturing activity
• Section: 80IB

Judgement Text

"O/TAXAP/1226/2010 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1226 of 2010 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE M.R. SHAH ­ sd/­ and HONOURABLE MR.JUSTICE R.D.KOTHARI ­ sd/­ ============================================= 1. Whether Reporters of Local Papers may be allowed to see the judgment ? NO 2. To be referred to the Reporter or not ? NO 3. Whether their Lordships wish to see the fair copy of the judgment ? NO 4. Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? NO 5. Whether it is to be circulated to the civil judge ? NO ============================================= COMMISSIONER OF INCOME TAX....Appellant(s) Versus PARAS MOTORS MFG CO....Opponent(s) ============================================= Appearance: MR SUDHIR M MEHTA, ADVOCATE for the Appellant(s) No. 1 MRS SWATI SOPARKAR, ADVOCATE for the Opponent(s) No. 1 ============================================= CORAM: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE R.D.KOTHARI Date : 21/12/2013 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) 1.0. Feeling aggrieved and dissatisfied with the impugned judgment and order dated 17.12.2009 passed by the learned Income Tax Appellate Tribunal (hereinafter referred to as the “ITAT”) in ITA No.1618/AHD/2009 for AY 2006­07, the revenue has preferred the Page 1 of 6 O/TAXAP/1226/2010 JUDGMENT present Tax Appeal to consider the following substantial question of law. “Whether on the facts and circumstances of the case and in law, the Appellate Tribunal was right in holding that the income from scrap sales of Rs. 24,32,339/­ of unit I and Rs.90,07,489/­ of unit II 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?” 2.0. That the assessee who was engaged in the manufacturing of Electric Motors filed return of income for AY 2005­06 and 2006­07 declaring total income of Rs.99,26,200/­. That the assessee claimed deduction of Rs.24,32,339/­ of unit I and Rs. 90,07,489/­ of unit II under Section 80IB of the Act related to sell of scrap. In spite of the said income from sale of scrap, the Assessing Officer held that only such profits which are directly derived from the business of Industrial undertaking shall be allowable under the deduction under Section 80IB of the Act. The Assessing Officer has also observed and held that there was no direct nexus between the profits and gains and the industrial undertaking, accordingly the Assessing Officer has held that the sale of scrap is not derived from the manufacturing activity and is therefore, not entitled to deduction under Section 80IB of the Act. 2.1. Feeling aggrieved and dissatisfied with the order passed by the Assessing Officer in making deduction under Section 80IB of Rs.24,32,339/­ of unit I and Rs. 90,07,489/­ of unit II, the same being related to sale of scrap being an amount not eligible for deduction under Section 80IB on the ground that the same is not an income derived by the assessee from the industrial undertaking, the assessee preferred appeal before the learned CIT(A) and by order dated 27.02.2009 the Page 2 of 6 O/TAXAP/1226/2010 JUDGMENT learned CIT(A) allowed the said appeal deleting the disallowance of deduction under Section 80IB of Rs.24,32,339/­ of unit I and Rs. 90,07,489/­ of unit II. 2.2. Feeling aggrieved and dissatisfied with the order passed by the CIT(A) in making deletion of disallowance of deduction under Section 80IB of Rs.24,32,339/­ of unit I and Rs. 90,07,489/­ of unit II, the same being related to scrap, the revenue preferred appeal before the learned ITAT and by impugned judgment and order relying upon the decision of the Division Bench of this Court in the case DCIT vs. Harjivandas Juthabhai Zaveri & Anr reported in 258 ITR 785 (Guj), the learned ITAT has dismissed the said appeal confirming the order passed by the learned CIT(A) deleting the disallowance of the deduction under Section 80IB of Rs.24,32,339/­ of unit I and Rs. 90,07,489/­ of unit II. 2.3. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned ITAT, the revenue has preferred the present Tax Appeal to consider the following the substantial question of law. ““Whether on the facts and circumstances of the case and in law, the Appellate Tribunal was right in holding that the income from scrap sales of Rs. 24,32,339/­ of unit I and Rs.90,07,489/­ of unit II 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?” 3.0. Heard Shri Sudhir Mehta, learned advocate for the revenue and Shri Soparkar, learned advocate for the assessee. Page 3 of 6 O/TAXAP/1226/2010 JUDGMENT 4.0. The short question which is posed for consideration of this Court is whether on the facts and circumstances of the case and in law the Appellate Tribunal is right in holding that the deduction under Section 80IB is allowable from the income from sale of scrap? It is also required to be noted at this stage that while passing the impugned judgment and order, the learned ITAT has relied upon the decision of the jurisdictional High Court in the case of Harjivandas Juthabhai Zaveri and Anr (supra). In the case of Harjivandas Juthabhai Zaveri and Anr (supra) while answering the question whether the Appellate Tribunal is right in law and on facts in allowing deduction under Section 80IB of the Act on the items (i) Job work receipt, (ii) sale of empty soda ash bardana, (iii) sale of empty barrels and (iv) sale of plastic waste. The Division Bench has observed and held as under: “So far as question No. 5 is concerned, learned counsel Mr. Soparkar drew our attention to section 80.I of the Act and submitted that this section is meant for deduction in respect of profit and gains from industrial undertakings. With regard to the question raised by the Revenue that the amount received on sale of jute bags, barrel etc. ought to have been deducted from the cost of the material, Mr. Soparkar, learned advocate for the assessee submitted that it would not make any difference if the amount received by the sale of empty barrel or ‘bardan’ (jute bags) is deducted from the cost of the raw material. He submitted that if the cost is reduced by deducting the sum so received, the profit will increase and ultimately, the total would be the same. He submitted that the Commissioner of Income Tax (Appeals) and the Tribunal has rightly come to the conclusion that the items covered by question No. 5 are covered by section 80.I of the Act inasmuch the amount received can be said to have been received from the activities undertaken by the Assessee. He submitted that no question of law is raised, more particularly, when a Division Bench of this Court in Income Tax Application No. 70 of 1997 had considered a similar question and held that “it was, however, found that the items of kasar and sale of empty soda ash bardans, as directly connected with the manufacturing activities of the assessee and should be allowed”. It is required to be noted that if the Assessee was not engaged in industrial activities, there was Page 4 of 6 O/TAXAP/1226/2010 JUDGMENT no question of empty barrels or bardans. Instead of manufacturing if the assessee was doing trading activities I.e. dealing in raw material and if the assessee had sold the material on retail basis and earned amount by sale of bardans, then obviously this section will not apply.” 5.0. The decision of this Court in the case of Harjivandas Juthabhai Zaveri and Anr (supra) has been subsequently considered by the Delhi High Court in the case of Commissioner of Income Tax vs. Sadhu Forging Limited reported in (2011) 336 ITR 444 (Delhi) and it is held that receipt of sale of scrap part and parcel of industrial activity and therefore, deduction under Section 80IB is allowable. In the said decision, the Delhi High Court has held that the industrial undertaking set up by the assessee was for the purpose of manufacture of steel forging, transmission gears and part and accessories of motor vehicles and the scrap of these items was stated to be a by product of manufacturing process. The activity of forging was “manufacturing” within the ambit of section 80IB. It was immaterial that the assessee was doing the job of forging also for customers and was charging them on job work basis or on the basis of labour charges. It would still be qualified as carrying on eligible business under Section 80­IB. The activities of the assessee were in giving heat treatment for which it had earned labour charges and job work charges. It could thus be said that the assessee had done a process on the raw material which was nothing but a part and parcel of the manufacturing process of the industrial undertaking. These receipts could not be said to be independent income of the manufacturing activities of the undertaking of the assessee and thus could not be excluded from the profits and gains derived from the industrial undertaking for the purpose of computing deduction under Section 80­IB. These were gains derived from the industrial undertaking and so entitled for the purpose of computing deduction under Section 80­IB. There could not be any two opinions that manufacturing activity Page 5 of 6 O/TAXAP/1226/2010 JUDGMENT of the type of material being undertaken by the assessee would also generate scrap in the process of manufacturing. The receipts from sale of scrap being part and parcel of the activity and being proximate thereto would also be within the ambit of gains derived from the industrial undertaking for the purpose of computing deduction under Section 80­ IB. 6.0. Applying the ratio / law laid down by this Court in the case of Harjivandas Juthabhai Zaveri and Anr (supra) as well as Delhi High Court in the case of Sadhu Forging Ltd (supra), to the facts of the case on hand, it cannot be said that the learned Tribunal has committed any error in holding that the deduction under Section 80­IB of the Act is allowable for the income from sale of scrap. Under the circumstances, substantial question of law raised is answered against the revenue. Hence, present appeal deserves to be dismissed and is accordingly dismissed. sd/­ (M.R.SHAH, J.) sd/­ (R.D.KOTHARI, J.) Kaushik Page 6 of 6 "