• Aug
  • 15
  • 2011

When the assessee carries out jobwork as a sub-contract to make article marketable, it is entitled to claim Sec 80HH benefits

M/s Sundaram Fasteners Ltd Vs CIT (Madras HC) – As far as placing reliance on the decision of the Apex Court  in the case of Pandian Chemicals Ltd. Vs. Commissioner of Income Tax) reported in [2003] 262 ITR 278 is concerned, we do not find, the said decision, in any manner, goes against the case of the assessee.  The Unit at Krishnapuram is stated to be the only unit having  hot forging machine.  It is stated that the assessee, based at Krishnapuram, received bolts and nuts from Padi, manufactured using cold forging.  The Krishnapuram unit completes hot forging and after the process comes to Padi where there is further value addition and after assembling nuts and bolts, they are marketed. Thus only after the process carried on by the Krishnapuram Unit, that the commodities reach a stage of marketability.  The assessee states that the process of hot forging involves heating of raw materials to 1100 :C, cutting, forming and piercing.  These nuts are then cooled and tapped.  The nuts are then subject to head treatment and surface coating, depending on customer’s requirement to withstand higher stress. Thus given the nature of the processing done at Krishnapuram Unit, the deduction was rightly considered by the Commissioner of Income Tax (Appeals) in the assessee’s favour.  We agree with the assessee’s contention.

Sundaram Fasteners Limited versus The Commissioner of Income Tax-II

Madras High Court

DATED: 13.07.2011

T.C.(A) Nos.752 and 753 of 2004

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PRAYER: Tax Case Appeals against the order of the Income Tax Appellate Tribunal, ‘A’ bench, Chennai, dated 21st October 2003 in ITA No.350/mds/1996 and 900/mds/1996 respectively.

JUDGMENT

(Judgment of the Court was delivered by CHITRA VENKATARAMAN,J.)

The above appeals are filed by the assessee relating to the assessment years 1989-90 and 1992-93 respectively.  The following substantial question of law was raised by the assessee in T.C.No.752 of 2004:

” Whether the Appellate Tribunal is right in excluding the receipts of Rs.34,37,154/- from sub contract for the assessment year 1989-90 in the computation of eligible business income for the purpose of computation of relief under Section 80 HH of the Income Tax Act, 1961?

2. The following substantial question of law was raised by the assessee in T.C.No.753 of 2004:

” Whether the Appellate Tribunal is right in excluding the receipts of Rs.1,29,40,847/- from sub contract for the assessment year 1992-93 in the computation of eligible business income for the purpose of computation of relief under Section 80 HH of the Income Tax Act, 1961? “

3. The assessee herein is a company engaged in the manufacture and sale of High Tensile Fasteners, Cold Extruded parts, Powder Metal Parts, Precision Forged Gears, Hot and Warm Precision Forged Products, Radiator Caps etc.  The assessee has a unit at Krishnapuram at Aruppukottai Taluk in Virudhunagar District, a notified backward area, which manufactures fasteners and sockets.  In respect of forging work done in the Krishnapuram Unit on the products manufactured in Padi, on the admitted fact that the Unit is located in a backward area, the assessee claimed deduction under Section 80 HH of the Income Tax Act in respect of the receipt which it called as sub contract receipts.  In the assessment made for the assessment year 1989-90 as well as for assessment year 1992-93, while computing the profits and gains of business, the Assessing Officer,  however, rejected the claim for the deduction under Section 80HH in respect of the Krishnapuram Unit, which the assessee was entitled to.

4. In the appeal filed as regards the assessment year 1989-90, the commissioner of Income Tax (Appeals) directed the Assessing Officer to consider the claim for the purpose of determination of relief under Section 80HH receipts.

5. As regards the assessment year 1992-93 (T.C.No.753 of 2004), the Assessing Officer pointed out in his order of assessment that the deduction under Section 80HH would have to be computed after setting off the losses of the same units for the immediate previous year, in which event, there would be no positive income for auto unit at Krishnapuram Unit and Precision Forgings Unit at Hosur.  Consequently, the Officer held that the assessee would not be entitled to the deduction under Section 80 HH of the Act.  Although he pointed out that the benefit under Section 80 HH of the Act was to be granted while arriving at the profit of the undertaking of the assessee at Krishnapuram Unit and Hosur, while computing the relief in the annexure, the Assessing Authority herein failed to carry out the reasoning in the manner in which it deserved.  Consequently, the assessee went on appeal before the Commissioner of Income Tax (Appeals).  The Commissioner of Income Tax (Appeals) pointed out that the Officer had merely discussed about the principle without granting the relief under Section 80HH and 80I of the Act.  In the circumstances, he directed the Assessing Officer to allow the relief in accordance with law.

6. As against the orders of the Commissioner of Income Tax (Appeals), the Revenue went on appeal before the Tribunal.  By a common order, the Tribunal allowed the Revenue’s appeals, following the decision of the Supreme Court in the case of Pandian Chemicals Ltd. Vs. Commissioner of Income Tax) reported in [2003] 262 ITR 278.  The Tribunal viewed that the words ‘derived from’ in Section 80 HH of the Act must be understood as profits having a direct or immediate nexus with the assessee’s industrial undertaking.  The Tribunal pointed out that the receipt on sub contract could not be treated as income derived from the industrial undertaking for the purpose of granting of relief under Section 80 HH of the Act.  Thus, the order passed by the Commissioner of Income Tax (Appeals) was set aside. Aggrieved by the ssame, the assessee has preferred these on appeals before this Court.

7. Learned counsel appearing for the assessee submitted that it is admitted by the Revenue that Krishnapuram Unit of the assessee is located in a backward area and that the assessee had positive income in respect of both the assessment years.  He submitted that the Tribunal, however, misdirected itself in placing reliance on the decision of the Apex Court in the case of Pandian Chemicals Limited Vs. Commissioner of Income Tax reported in [2003] 262 ITR 278, which has no bearing to the claim in the present case. Given the fact that the Unit at Krishnapuram, located in a backward area, is engaged in the production of articles, the receipts made by the said units qualified for deduction under Section 80 HH of the Act.  Thus placing reliance on the decision of this Court reported in [1999] 238 ITR 540 – CIT Vs. T.N. Heat Treatment and Fetting Services and  [2007] 288 ITR 92 – CIT Vs. Taj Fire Works Industries, learned counsel submitted that in the light of the law declared by this Court, the order of the Tribunal has to be set aside and the direction of the Commissioner of Income Tax (Appeals) be given effect to.

8. Per contra, learned Standing Counsel appearing for the Revenue, however, submitted that given the fact that the receipts are in the nature of sub contract receipts, the assessee is not entitled to the relief.  He pointed out that even though Krishnapuram Unit is located in the backward area, the receipt being in the nature of sub contract receipt, no exception could be taken to the order of the Tribunal.

9. Heard learned counsel appearing for the assessee and the learned Standing Counsel appearing for the Revenue.

10. As already pointed out, the Revenue does not deny the fact that the Unit at Krishnapuram is located in a backward area.  The Assessing Officer pointed out that the unit at Krishnapuram is an independent unit and the loss of one unit should be set off against the profits of the same unit in later years.

11. It is not denied by the Assessing Officer that the unit at Krishnapuram is a profit making unit.  Hence, in principle, the benefit of Section 80 HHC of the Act cannot be denied to the assessee.  However, the Assessing Officer viewed the receipt being one on sub contract, the assessee is not entitled to the relief.  In this connection, the reliance placed by the assessee to the decision of this Court reported in [1999] 238 ITR 540 – CIT Vs. T.N. Heat Treatment and Fetting Services merits to be seen.

12. The decision reported in [1999] 238 ITR 540 – CIT Vs. T.N. Heat Treatment and Fetting Services is a case falling under Section 80 HH and 80-I of the Income Tax Act.  This Court pointed out that the assessee receiving from its client untreated crankshafts, forgings, castings etc., and subjecting them to heat treatment, in order to toughen them to the requisite standards so that they could be sold in the market is a manufacturing activity, entitled to claim the deduction under Sections 80 HH and 80-I of the Income Tax Act, 1961.  In so holding, this Court followed the decision of this Court reported in [1999] 238 ITR 540 – CIT Vs. T.N. Heat Treatment and Fetting Services (P) Limited, pertaining to the same assessee relatable to the assessment years 1984-85 to 1986-87, wherein, this Court viewed that the assessee’s case could not be anything other than the one relatable to manufacturing activity, entitling it to claim necessary deductions under Sections 80HH and 80-I of the Income Tax Act.  Thus, in a case of job work, this Court upheld the claim of the assessee as a sub contractor to have the relief granted under Sections 80HH and 80-I of the Income Tax Act.  The law declared in the above stated case has direct relevance to the facts of the present case.

13. In the subsequent decision reported in [2007] 288 ITR 92 – CIT Vs. Taj Fire Works Industries, a case where the assessee doing job work claimed the benefit of Section 80 HH and 80I, this Court applied the decision of the Apex Court reported in [1993] 204 ITR 412 – CIT Vs. N.C.Budharaja and Co., holding that Sections 80 HH and 80-I of the Income Tax Act, 1961, having a beneficent object, merited a liberal interpretation, of course without doing any violence to the plain language.  The assessee therein carried on business in fire works on job work basis out of the raw materials supplied by its customers.  This Court pointed out that the assessee therein satisfied the test of manufacture by producing the new materials, viz., crackers and also satisfied the test of industrial undertaking. Since the assessee therein was involved in a systematic activity, organised by the employer for the production and distribution of goods, following a series of decisions as mentioned therein, this Court held that the assessee was entitled for the benefit of Sections 80 HH and 80-I of the Income Tax Act.

14. Rightly the Commissioner of Income Tax (Appeals) directed the Officer who had laid down the correct legal principles, to work out the relief under Sections 80 HH and 80-I of the Income Tax Act to the assessee herein.  Even though learned Standing Counsel appearing for the Revenue sought for remand in this case, we do not find any ground to remand the matter, since there is no controversy as regards the facts.

15. As far as placing reliance on the decision of the Apex Court  in the case of Pandian Chemicals Ltd. Vs. Commissioner of Income Tax) reported in [2003] 262 ITR 278 is concerned, we do not find, the said decision, in any manner, goes against the case of the assessee.  The Unit at Krishnapuram is stated to be the only unit having  hot forging machine.  It is stated that the assessee, based at Krishnapuram, received bolts and nuts from Padi, manufactured using cold forging.  The Krishnapuram unit completes hot forging and after the process comes to Padi where there is further value addition and after assembling nuts and bolts, they are marketed. Thus only after the process carried on by the Krishnapuram Unit, that the commodities reach a stage of marketability.  The assessee states that the process of hot forging involves heating of raw materials to 1100 :C, cutting, forming and piercing.  These nuts are then cooled and tapped.  The nuts are then subject to head treatment and surface coating, depending on customer’s requirement to withstand higher stress. Thus given the nature of the processing done at Krishnapuram Unit, the deduction was rightly considered by the Commissioner of Income Tax (Appeals) in the assessee’s favour.  We agree with the assessee’s contention.

16. It is to be further noted that the assessee’s unit at Krishnapuram has its own accounts maintained separately as an independent unit and that out of the production process, it has derived income therein.  Thus, it satisfied the test as given under Section 80 HH of the Income Tax Act, which qualifies for deduction in respect of receipts on job work done at the Krishnapuram Unit.  Following the decisions reported in [1999] 238 ITR 540 – CIT Vs. T.N. Heat Treatment and Fetting Services and [2007] 288 ITR 92 – CIT Vs. Taj Fire Works Industries, we set aside the order of the Tribunal.  Accordingly, the Assessing Officer is directed to give effect to the direction of the Commissioner of Income Tax (Appeals).

17. In the circumstances, the above Tax Case Appeals are allowed and the question of law is answered in favour of the assessee.  No costs.


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