• Dec
  • 30
  • 2012

Whether casual contract workers can be considered as regular workers u/s. 80-IB(2)

IN THE ITAT MUMBAI BENCH ‘I’

Hindustan Colas Ltd.

Versus

Assistant Commissioner of Income-tax

IT APPEAL NOS. 3981 & 5498 (MUM) OF 2008 AND 6829 (MUM.) OF 2010

[ASSESSMENT YEARs 2002-03 to 2004-05]

OCTOBER 19, 2012

ORDER

Rajendra Singh, Accountant Member

These appeals by the assessee are directed against different orders of CIT(A) dated 11.3.2010, 1.5.2008 and 28.3.2006 respectively for assessment years 2002-03, 2003-04 and 2004-05. The disputes raised in these appeals relate to allowability of deduction under section 80IB and under section 35AB of the Income tax Act, 1961. These appeals which were heard together and also involve common issues are being disposed of by a single consolidated order for the sake of convenience.

2. We first take up the appeal of the assessee in ITA No. 6829/M/10 for the assessment year 2002-03. The assessee has raised disputes on two different grounds which relate to deduction under section 80-IB and under section 35AB of the Income tax Act.

2.1 We fist take up the issue relating to allowability of deduction under section 80IB of the Act. The assessee is a joint venture between Hindustan Petroleum Corporation Ltd.(HPCL) and M/s. Colas SA France formed vide agreement dated 25.11.1994. The joint venture had been created for manufacture of various products such as bitumen emulsions; cutback bitumen and modified bitumen. Bitumen is a by-product produced from refining of crude oil or crude petroleum. The assessee purchases bitumen from HPCL and other parties and uses the same as raw material for production of bitumen emulsions; cutback bitumen and modified bitumen after applying certain processes. After joint venture agreement was signed, the assessee set up various units from time to time details of which are given as under :-

S. No.  Location Date of establishment
1  Bahadurgarh, Haryana 26th March, 1998
2  Irugattukottai, Near Chennai 24th February, 2000
3  Savli, Near Vadodara 6th February, 2003
4  Visakh 24th June, 2004 5
5 Mangalore 31st December, 2004

2.1.1 The assessee for the assessment year 2002-03 had not claimed deduction under section 80IB of the Act in the original assessment. The assessee made claim under section 80IB in respect of Bahadurgarh Unit and Irugattukottai Unit in application under section 264 before CIT. CIT in the order dated 12.12.2007 passed under section 264 set aside the assessment for passing fresh assessment order to consider the claim under section 80IB. During the fresh assessment proceedings, the AO noted that the claim of deduction had been disallowed in assessment years 2003-04 and 2004-05. The AO also noted that for claim of deduction under section 80IB, the conditions mentioned in section 80IB(2) were required to be satisfied as under :-

 (i)  The industrial undertaking should not be formed by splitting up or reconstruction of a business already in existence;

(ii)  It is not formed by transfer to a new business of machinery or plant previously used for any purpose;

(iii)  It manufactures or produces any article or thing not being any article or thing specified in list of Eleventh Schedule or operates one or more cold storage plant or plants in any part of India;

(iv)  In a case where industrial undertaking manufactures or produces articles or things, the undertaking employees ten or more workers in manufacturing process carried on with the aid of power or employees twenty or more workers in manufacturing process carried on without aid of power.

2.1.2 The AO also noted that the claim of deduction by the assessee was under section 80IB(9) which applies to manufacture/production of mineral oil or refining of mineral oil. The said provisions of section 80IB are reproduced below as ready reference:-

“The amount of deduction to an undertaking which begins commercial production or refining of mineral oil shall be hundred per cent of the profits for a period of seven consecutive assessment years including the initial assessment year:

Provided that where the undertaking is located in North-Eastern Region, it has begun or begins commercial production of mineral oil before the 1st day of April, 1997 and where it is located in any part of India, it begins commercial production of mineral oil on or after the 1st day of April, 1997 :

Provided further that where the undertaking is engaged in refining of mineral oil, it begins refining on or after the 1st day of October, 1998.”

2.1.3 During the assessment proceedings, the AO asked the assessee to give justification for treating the assessee as industrial undertaking producing/manufacturing mineral oil. The assessee submitted that it was producing bitumen emulsions; cutback bitumen and modified bitumen which were mixture of hydrocarbons which had to be treated as mineral oil in view of Circular No. 57 dated 23.3.1971 of CBDT (F.No.156(26)/71-TPL). The assessee also filed the opinion dated 27.11.2006 of IIT Chennai given in reference to letter dated 23.11.2006 of the assessee in which it was mentioned that the products manufactured by the assessee were a mixture of hydrocarbons. It was accordingly submitted that the products were mineral oil eligible for deduction under section 80IB. The AO however, did not accept the contentions raised. It was observed by him that raw material i.e. bitumen was already manufactured from crude oil and therefore further processing of this raw material into modified bitumen, bitumen emulsions and cut back bitumen was not eligible for deduction under section 80IB. The AO also observed that the assessee in the letter dated 23.11.2006 had referred to two issues to IIT Chennai viz. (i) whether bitumen emulsion, cutback bitumen and modified bitumen were mixtures of hydrocarbons. (ii) and whether the same could be categorized as mineral oil. IIT-Chennai however answered only the first issue and did not reply the second issue which was crucial for deciding the allowability of deduction. The AO also referred to the judgment of Hon’ble High Court of Bombay in case of CIT v. Caltex (India) Ltd. [1989] 177 ITR 239 in which the Court had taken the view that lubricating oil produced by processing or blending of mineral base oil could not be considered as mineral oil. The AO, therefore, did not accept the claim that the assessee was engaged in the commercial production or refining of mineral oil and accordingly held that assessee was not eligible for deduction under section 80IB.

2.1.4 The AO further observed that the assessee was also not entitled for deduction under section-80IB on account of non-fulfillment of conditions of section 80IB(2). He referred to the reply dated 18.11.2006 of the assessee in which it was submitted that number of employees engaged in the manufacturing process were six in case of Bahadurgarh unit and seven in case of Irugattukottai Unit. Thus, number of employees engaged in the manufacturing unit was less than 10 which disentitled the assessee for deduction under section 80IB. The AO also observed that the assessee did not fulfill the condition of new plant and machinery being used for the undertaking. It was observed by him that the units had started production from 1998 to 2000 and deduction had not been claimed in the initial years. Therefore in the year 2001-02 in which claim was made, plant and machinery had already been used in India and therefore, assessee did not fulfil the condition in respect of Irugattukottai Unit and Bahadurgarh unit. Further, the Bahadurgarh unit was also not eligible for deduction on the ground that it had started commercial production of mineral oil from 26.3.1998 whereas as per section 80IB(9), the refining of mineral oil had to begin after 1.10.1998. Therefore, Bahadurgarh Unit was not eligible for deduction on this additional ground also.

2.1.5 The AO further noted that the assessee had also claimed deduction under section 80IB in respect of certain other income such interest income, foreign exchange gain etc. It was observed by him that deduction under section 80IB was available only in respect of profit derived from business of the industrial undertaking. These receipts were not income derived from industrial undertaking but were incidental to business of undertaking and were thus not eligible for deduction under section 80IB. The AO placed reliance on the judgment of Hon’ble Supreme Court in the case of CIT v. Sterling Food [1999] 237 ITR 579 and some other judgments. He accordingly held that the assessee was not entitled to deduction in respect of other income mentioned above.

2.1.6 In appeal CIT(A) agreed with the finding recorded by the AO that the assessee was not engaged in production or manufacture of mineral oil and also did not satisfy the conditions mentioned in section 80IB(2). CIT(A) also upheld the disallowance in respect of other income. He, therefore, confirmed the disallowance made by AO aggrieved by which the assessee is in appeal before the Tribunal.

2.1.7 Before us, the ld. AR for the assessee reiterated the submissions made before the lower authorities and argued that the assessee was in the business of production of mineral oil. The assessee was producing bitumen emulsion, cutback bitumen and modified bitumen by using bitumen as raw material. These products were a mixture of hydrocarbons as mentioned in the report of IIT-Chennai. The assessee was therefore producer of mineral oil in terms of CBDT Circular No.57 dated 23.3.1971 and was thus entitled for deduction under section 80IB(9). The ld. AR for the assessee also submitted that the word “production” had wider connotation than the word “manufacture”. Production brings into existence new goods by a process which may or may not amount to manufacture. He referred to the judgment of Hon’ble Supreme Court in the case of CIT v. Sesa Goa Ltd. [2009] 271 ITR 331 in which it was held that extraction and processing of ore was production though the mined ore need not necessarily be a new commercial product. The said judgment it was pointed out was followed by the Hon’ble Supreme Court in the case of ITO v. Arihant Tiles & Marbles (P.) Ltd. [2010] 320 ITR 79 in which cutting of marble blocks into slabs and tiles was held as production of goods entitled for deduction under section 80IB.

2.1.8 The ld. AR further argued that the assessee had claimed deduction under section 80IB(9) which was applicable to an undertaking and not industrial undertaking. It was pointed out that only sub-sections (3), (4) and (5) of section 80IB related to industrial undertakings. Since the various conditions imposed under section 80IB(2) related to industrial undertakings, these conditions were not applicable in case of the assessee which was covered by section 80IB(9). Therefore, the disallowance of claim by AO on other grounds such as lesser number of workers or plant and machinery being old was not justified. He referred to the decision of the Tribunal in the case of Asstt. CIT v. Niko Resources Ltd. [2009] 123 TTJ 310 (Ahd.) for assessment year 2001-02 and the decision of the Tribunal in the same case for assessment year 2003-04 in ITA No.97/Ahd./07 in support of the above proposition. As regards, the number of workers, it was also pointed out that casual workers and contract workers were required to be taken into account and not only the regular employees as held by Hon’ble High Court of Bombay in case of CIT v. Jyoti Plastic Works (P.) Ltd. [2011] 339 ITR 491. Taking into account the casual/contract workers, the assessee did fulfil the condition of requisite number of workers being fulfilled. Coming to the allowability of deduction in respect of other income, it was submitted that market development incentive was financial assistance provided by HPCL and was integral part of business and should be eligible for deduction under section 80IB. Similarly income from job work from HPCL, income from HPCL hospitality, recovery of drums and foreign exchange gain were integral part of the business of the undertaking and should be eligible for deduction under section 80IB.

2.1.9 Ld. Departmental Representative on the other hand supported the orders of authorities below and placed reliance on the findings given in the respective orders that the products produced by the assessee were not eligible for deduction under section 80IB. The ld. DR also referred to the heading of section 80IB which reads as :- “deduction in respect of profit and gains from certain industrial undertaking other than infrastructure development undertakings” which showed that the word “industrial undertaking” applied to all sub sections and not only to sub-section (3), (4) and (5). Therefore, conditions mentioned under sub-section (2) were applicable to all the businesses mentioned in other sub-sections. Since these conditions were not fulfilled in the case of the assessee, deduction under section 80IB was not allowable. He also supported the stand of the AO that items of other income were not derived from the business of the undertaking and, therefore, not eligible for deduction.

2.1.10 In reply, ld. AR for the assessee submitted that marginal note could not control interpretation of the section as held by the Hon’ble Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597. It was submitted that it is the actual use of words or phrases in the section which will be decisive in proper interpretation of the section and not the head note or marginal note . It was pointed out that in section 80IB, both the words “industrial undertaking” and “undertaking” had been used and since the conditions mentioned in section 80IB(2) related to industrial undertakings, the same would not apply to undertakings appearing in other sub-sections such as sub-section(9) which was applicable to the assessee.

2.1.11 We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of deduction under section 80IB of the Income-tax Act, 1961 (the Act). The assessee has claimed to manufacture/produce products such as bitumen emulsion, cutback bitumen and modified bitumen using bitumen as raw material. The assessee used bitumen as raw material and produced the above products after applying certain processes. The issue is whether such products can be considered as mineral oil as the assessee has claimed deduction under section 80IB(9) which is available in respect of manufacture/production of mineral oil or refining of mineral oil. The raw material i.e. bitumen used by the assessee is a by-product produced on refining of crude oil or crude petroleum. The assessee has referred to Circular No. 57 dated 23.3.1971 as per which mineral oil covers both crude oil or liquid products derived from crude petroleum which are in the nature of mixture of hydrocarbons, namely, motor spirit, kerosene and other allied articles. The assessee has also referred to the opinion dated 27.11.2006 given by IIT Chennai in which it has been opined that bitumen emulsion, cutback bitumen and modified bitumen are mixture of hydrocarbons. Accordingly it has been argued that products manufactured by the assessee are mineral oil eligible for deduction under section 80IB.

2.1.12 The word “mineral oil” has not been defined in the Income tax Act. However, the interpretation of the said word had come up for consideration before the Hon’ble High Court of Bombay in case of Caltex India Ltd. (supra). In that case the assessee was producing lubricating oil by processing/ blending mineral base oil and issue was whether lubricating oil could be considered as mineral oil. The Hon’ble High Court held that mineral oil referred to oil that is extracted from the earth. It was also held that any article produced using mineral base oil could not be considered as mineral oil. It was accordingly held that lubricating oil was not mineral oil. In that case the Circular No.57 dated 23.3.1971 had been referred before the Hon’ble High Court. The Hon’ble High Court observed that even the said Circular did not come to the rescue of the assessee as the lubricating oil was not mixture of hydrocarbons. It was not mineral oil as extracted or refined. The claim was thus rejected.

2.1.13 In the present case, the assessee had referred two issues before IIT-Chennai – (i) Whether products manufactured by the assessee were mixture of hydrocarbons; (ii) whether these could be characterized as mineral oil. IIT-Chennai answered only the first query and held that these products were mixture of hydrocarbons but was silent on the other issue. In terms of the Board Circular No. 57 dated 23.3.1971, not only crude petroleum but also the liquid products derived from crude petroleum i.e. motor spirit, kerosene etc. which are in the nature of mixture of hydrocarbons have to be considered as mineral oil. Bitumen is the base material produced on refining of crude petroleum. It has not been examined whether bitumen can be considered as liquid product having viscosity recognized for liquids. If bitumen is not found to be mineral oil then the products produced by assessee using bitumen cannot be considered as mineral oil as these have no connection with the mineral base oil. However, in case bitumen is found to be a mineral oil in terms of the definition given by CBDT in Circular No.57 dated 23.03.1971, it is further required to be seen whether bitumen emulsion, cutback bitumen and modified bitumen produced from bitumen can be considered as mineral oil. These products have been held to be mixture of hydrocarbons in the opinion given by IIT Chennai but it is not clear whether these can be considered as liquid products. Further, in case these products are found to be mineral oil, it is further required to be examined whether these have been produced by refining of mineral oil or otherwise because in case of refining of mineral oil, deduction under section 80IB (9) is available only when the refining begins on or after 1.10.1998. But in case of manufacture or production of mineral oil, deduction is available if commercial production begins on or after 1.4.1997. The assessee has claimed that it is a producer of mineral oil and not refiner of mineral oil which has not been examined. This is a highly technical area on which we are unable to arrive at any particular conclusion and in our view matter is required to be referred to IIT, again as it failed to give opinion whether the products were mineral oil, after giving necessary details regarding the raw material, the products produced and process employed. It is also required to be examined whether the process employed by the assessee is refining of bitumen or manufacture/production of new products using bitumen as raw material. We, therefore, send back the issue as to whether assessee is producer or refiner of mineral oil to the file of CIT(A) for passing fresh order after obtaining expert opinion and after necessary examination. Needless to say that assessee will be given opportunity of hearing before taking the final decision.

2.1.14 The authorities below have also rejected the claim of deduction under section 80IB on the ground that the assessee had failed to fulfill the conditions prescribed under section 80IB(2) relating to engagement of certain minimum number of brokers and setting up of industry by using new plant and machinery. The conditions to be fulfilled under section 80IB(2) have been mentioned in para 2.1.1 earlier. Ld. AR for the assessee argued that conditions under section 80IB(2) are required to be fulfilled in case of industrial undertakings whereas, the assessee had claimed deduction under section 80IB(9) which applies to undertakings. Therefore, the conditions mentioned in section 80IB(2) are not applicable in the case of the assessee. Reliance has been placed on the decision of the Tribunal in the case of Nikko Resources Ltd. (supra), and on the decision of the Tribunal in the same case for assessment year 2003-04 in ITA No.97/Ahd/07.

2.1.15 We have carefully considered the issue. The phrase “industrial undertaking” has not been defined in section 80IB. The phrase “industrial undertaking” has been defined in the Explanation to section 33B as per which it means an undertaking which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in manufacture or processing of goods or in mining. Thus the phrase “industrial undertaking” among other things means an undertaking manufacturing or producing any goods. Section 80IB applies to various businesses as mentioned in sub section (3) to sub section (11B) some of which relate to industrial undertakings producing certain article or goods not being article or thing listed in the Eleventh Schedule while others relate to non-manufacturing businesses such as business of shipping, running of hotel, multiplex theatre, scientific research etc. The sub-sections (3) to sub section (11B) give rate of deduction depending upon status of the assessee, nature of business carried on and also mentions the period for which deduction is available. The sub-sections (3) to (5) are applicable to industrial undertakings meaning thereby undertakings manufacturing or producing article or things. In sub-section (11) also, the phrase “industrial undertaking” has been used as it refers to setting up and operation of cold storage plant, which has been referred to as individual undertaking in sub-section (2). In other sub-sections, the word “industrial undertaking” has not been mentioned. In sub-section (9), the word “undertaking” has been used and in this sub-section rate of deduction as well as period for which it is allowable has been given in respect of commercial production of mineral oil, natural gas or refining of mineral oil. Any undertaking producing mineral oil or gas has to be considered as industrial undertaking in terms of the definition of the term discussed earlier. The assessee admittedly is manufacturing/producing value added products by using bitumen as raw material after applying certain processes. Therefore, it cannot be accepted that the assessee is not an industrial undertaking. The word “undertaking” used in sub-section (9) is a wider term which also includes industrial undertakings. The word “undertaking” has been used because sub-section refers not only to production of mineral oil but also refining of mineral oil which may not be an industrial undertaking. Therefore, the word “undertaking” used in section 80IB(9) has to be interpreted in the context of business being done. Since the assessee itself has claimed that it is producing commercial products using bitumen as raw material the assessee is to be considered as industrial undertaking. Therefore, in our view, the conditions prescribed in section 80IB(2) will be applicable in the case of the assessee. The decisions of the Tribunal relied upon by the assessee cannot be accepted as a binding precedent as various aspects mentioned above have been omitted to be considered in the said cases. We, therefore, hold that provisions of section 80IB(2) will be applicable in case the assessee is found to be producer of mineral oil.

2.1.16 The authorities below have held that the assessee had not fulfilled the conditions relating to the minimum engagement of workers and use of new plant and machinery in setting up of industrial undertaking as required in section 80IB(2). The ld. AR for the assessee has argued that authorities below had not taken into account the casual workers and contract workers which are also required to be considered for the purpose of minimum number of workers engaged in view of the judgment of Hon’ble High Court of Bombay in case of Jyoti Plastic Works (P.) Ltd. (supra). In view of the judgment of the jurisdictional High Court, we hold that casual workers/contract workers if regularly engaged have also to be considered. This issue is also restored to CIT(A) for fresh decision after necessary examination of the claim of the assessee. The authorities below have also held that the Bahadurgarh Unit and Irugattukottai Unit had been set up in the years prior to 31.3.2000. Therefore, in the assessment year 2002-03 onwards, in which claim of deduction has been made by the assessee, the plant and machinery no longer remained new. Therefore, there was violation of provision of section 80IB(2). In our view, the fact whether new plant and machinery have been used in setting up the unit has to be examined in the year in which unit had been set up and in case in that year assessee used new plant and machinery the claim has to be allowed in all subsequent years in which assessee is eligible. In this case, the assessee had not claimed deduction in the earlier years and therefore, this aspect could not be examined. Since assessee has claimed deduction in assessment year 2002-03 onwards it is required to be examined whether in the year of setting up, assessee had used new plant and machinery. We, therefore, restore this issue also to CIT(A) for necessary examination and finding after allowing opportunity of hearing to the assessee.

2.1.17 The authorities below have also disallowed the claim of deduction under section 80IB in relation to other income such as interest income and foreign exchange gain etc. Full details of other income have not been given. The issue regarding allowability of deduction under section 80IB is now settled by the judgment of Hon’ble Supreme Court in the case of Liberty India Ltd. v. CIT [2009] 317 ITR 218 in which it has been held that deduction is allowable only in respect of profit having direct nexus with the eligible business. The section does not cover profit from sources beyond first degree in view of the word derived mentioned therein. Profit attributable to business or incidental profit will not be eligible for deduction under section 80IB. The source of interest income is FDR and not the eligible business of the undertaking and therefore, interest income even if received from FDR pledged for the purpose of business, deduction under section 80IB will not be available. The eligibility of foreign exchange gain will depend upon the fact whether foreign exchange gain is in relation to transactions which are integral part of the operation of the eligible business. The eligibility in respect of other items of income details of which have not been given is also required to be examined in the light of the judgment of Hon’ble Supreme Court in the case of Liberty India Ltd. (supra). We, therefore, restore this issue to the file of CIT(A) for fresh decision after necessary examination in the light of observations made above and after allowing opportunity of hearing to the assessee.

2.1.18 We have restored back the various issues to the file of CIT(A) so that issues can be decided promptly. CIT(A) may obtain remand report wherever required.

2.2 The second dispute is regarding disallowance of deduction claimed under section 35AB in respect of technical know-how fees. The assessee as pointed out earlier is a joint venture company between HPCL and Colas SA France and in terms of joint venture agreement dated 25.11 1994, the French Company had made transfer of technical know how for manufacturing of certain products. In terms of the said agreement, the assessee had paid know how fees in instalments over a period of time. In respect of instalments paid during the year, the assessee had claimed deduction under section 80IB @ 1/6th of the payment made. The payments had been made during the financial years 1998-99 to 2001-02. During the year under consideration, the assessee had claimed deduction of Rs. 32,99,024/- which had been allowed by the AO in the original assessment made under section 143(3)(ii) dated 31.1.2005. In the original assessment the assessee had not claimed deduction under section 80IB. The assessee therefore filed petition before CIT under section 264 for claiming deduction. CIT vide order dated 12.12.2007 under section 264 held that since assessee had made fresh claim under section 80IB(9) in relation to Bahadurgarh Unit and Irugattukottai Unit the same was sent to AO for adjudication in accordance with law. The AO in the fresh assessment disallowed the claim of deduction under section 80IB and computed total income at Rs. 2,91,25,510/- i.e. same income determined in the original assessment.

2.2.1 In appeal CIT(A) suo motu disallowed the claim of deduction under section 35AB on the ground that the payment for technical know-how fees had been made after 1.4.1998 whereas under the provisions of section 35AB, deduction was allowable only in respect of payments made prior to 1.4.1998. CIT(A) followed the decision taken in assessment year 2004-05. In assessment year 2004-05, assessee had argued that in view of provisions of section 43(2), the word “paid” meant actually paid or incurred according to method of accounting on the basis of which profit/gain were computed. It was argued that since liability had been incurred in earlier years, deduction under section 35AB had to be allowed even if actual payments were made after 1.4.1998. The assessee also referred to the judgment of Hon’ble High Court of Bombay in case of Addl. CIT v. Buckau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751, in which it was held that technical know-how fee paid in instalments even if not provided in books of account was eligible for deduction. Alternatively, it was also argued that assessee should be allowed depreciation under section 32(1)(ii) treating the amount as intangible asset. CIT(A) however did not accept the contentions raised. It was observed by him that the words used in section 35AB were unambiguous and clear and, therefore, literal meaning had to be followed as held by Hon’ble High Court of Bombay in the case of Indian Rayon Corpn. Ltd. v. CIT [1998] 231 ITR 26. It was accordingly held that payments made after 1.4.1998 would not be eligible for deduction under section 35AB. The assessee had also claimed deduction on account of foreign exchange fluctuation which was disallowed on the ground that foreign exchange fluctuation would only go to add or reduce cost of capital asset under section 43A and could not be allowed as deduction. It was also held that foreign exchange loss was not allowable as business expenditure. Accordingly, claim was disallowed. Aggrieved by the said decision, the assessee is in appeal before the Tribunal.

2.2.2 Before us, the ld. AR submitted that assessment had been set aside under section 264 only to consider claim of assessee under section 80IB and therefore, in the fresh assessment, AO had jurisdiction to consider only deduction under section 80IB. This was the reason, the AO had not considered any other aspect. However, CIT(A) has disallowed the claim under section 35AB which had been allowed by the AO in the original assessment. It was pointed out that though CIT(A) had plenary power, he could not go beyond the jurisdiction of AO to assess any particular income. In the fresh proceedings, AO had no jurisdiction to consider any other aspect. Therefore, in appeal CIT(A) could not consider deduction under section 35AB. It was accordingly argued that denial of deduction under section 35AB by CIT(A) was beyond jurisdiction and had to be set aside.

2.2.3 Ld. Departmental Representative on the other hand, submitted that CIT(A) had plenary power and he could also do what AO had omitted to do and, therefore, action of CIT(A) in denying the claim of deduction under section 35AB was justified. He placed reliance on the judgment of Hon’ble Supreme Court in the case of CIT v. Nirbheram Deluram [1997] 224 ITR 610. It was pointed out that CIT(A) had set aside the assessment for making fresh assessment and, therefore, AO was entitled to look into claims other than deduction under section 80IB. AO however failed to disallow the claim of deduction under section 35AB which was not allowable to the assessee and, therefore, CIT(A) was correct in disallowing the claim.

2.2.4 We have perused the records and considered the matter carefully. The dispute is regarding disallowance of claim of deduction under section 35 AB of the Act in respect of technical knowhow fees. The AO had allowed the claim in the original assessment. Subsequently, the assessee filed petition under section 264 of the Act before CIT making claim of deduction under section 80IB which the assessee had omitted to make in the original return. CIT in the order dated 12.12.2007 passed under section 264 restored the issue regarding allowability of claim under section 80IB to AO by setting aside assessment order. CIT in the order under section 264 made it clear that while passing fresh assessment, AO shall consider claim of deduction under section 80IB(9). It is thus clear that CIT had set aside the assessment only to consider claim under section 80IB. Assessment had not been set aside to make fresh assessment denovo. In fact as rightly pointed out by ld. A.R, CIT under order 264 had no power to pass any order prejudicial to the interest of the assessee. Therefore, CIT could not have passed any order under section 264 denying any claim already allowed to the assessee. We, therefore, do not agree with the arguments of the ld. DR that in the fresh assessment proceedings AO could also consider matters in addition to claim of deduction under section 80IB. The judgment of Hon’ble Supreme Court in the case of Nirbheram Daluram (supra), relied upon by the Ld. DR is not applicable to the facts of the present case. AO was correct in not considering any issue other than the claim of deduction under section 80IB made by the assessee in the application under section 264 before CIT as he had no such jurisdiction. No doubt it is true that CIT(A) while deciding an appeal has plenary power and can also consider any issue which has been omitted by the AO. But he can not consider any issue which is beyond the jurisdiction of AO. In the fresh proceedings, the AO had no jurisdiction to consider any issue other than the claim of deduction under section 80IB and, therefore, it cannot be said that in not considering the claim under section 35AB, the AO had failed to do something which was necessary in the assessment. CIT(A) has no power to act on any issue on which AO has no jurisdiction. CIT(A) can intervene only if AO had jurisdiction of considering any matter which he had failed to do so which is not so in the present case. We are therefore, unable to sustain the order of CIT(A) disallowing the claim of deduction under section 35AB which had already been allowed in the original assessment. Order of CIT(A) is set aside on this issue.

3. Appeals of the Assessee in ITA No. 5498/Mum/2008 & ITA No. 3981/Mum/2008 for assessment year 2003-04 & 2004-05.

In these appeals also assessee has raised disputes on two different grounds which relate to disallowance of claim of deduction under section 80IB of the Act and disallowance of claim under section 35AB of the Act.

3.1 We first take up the dispute relating to allowability of claim of deduction under section 80IB of the Act. The claim has been made in respect of activity relating to manufacture and production of mineral oil. The facts are identical to the claim in assessment year 2002-03 which we have already discussed in the earlier part of this order. The only distinguishing feature in these years is that in these years the assessee had not made claim of deduction in the return of income. In assessment year 2003-04, the assessee had neither made claim in return of income nor during assessment proceedings. The claim was made only before CIT(A) by filing an additional ground which was not entertained by CIT(A) for the detailed reasons given in appellate order dated 1.5.2008 for assessment year 2003-04. CIT(A) in assessment year 2003-04 also rejected the claim on merit following the decision taken in assessment year 2004-05 vide order dated 28.03.2008. In assessment the year 2004-05, the assessee had not made the claim in the original return of income. The claim was made in the revised return of income filed on 9.11.2006. The AO noted that the revised return could have been filed only within the statutory time limit which expired on 31.3.2006. The AO also examined the claim on merit and disallowed the claim, CIT(A) confirmed the disallowance for detailed reasons which we have already discussed while dealing with the appeal for the assessment year 2002-03. Aggrieved by decision of CIT(A), the assessee is in appeal before the Tribunal in both the years.

3.1.1 We have heard both the parties in the matter. Ld. AR for the assessee very fairly pointed out that in these years the assessee had also to cross an additional hurdle created by the provisions of sub-section (5) of section 80A inserted by the Finance Act, 2009 w.e.f. assessment year 2003-04, as per which claim of deduction could not be allowed in case assessee failed to make claim in the return of income. The said provisions of sub-section (5) of section 80A are reproduced below as ready reference:

“80A(5) Where the assessee fails to make a claim in his return of income for any deduction under section 10A or section 10AA of section 10B or section 10BA or under any provisions of the Chapter VIA under the heading “C” — Deductions in respect of certain incomes,” no deduction shall be allowed to him.”

3.1.2 Part “C” of Chapter VI-A relating to deduction in respect of certain incomes applies to sections starting from 80 HH to 80TTA. Therefore, section 80IB will fall under part “C” of Chapter VIA. Thus claim of deduction under section 80IB would be hit by provisions of sub-section (5) of section 80A, which means that, in case, assessee has failed to make claim in return of income, claim cannot be applied.

3.1.3 Ld. AR argued that at the time of making the claim for both the years, the provisions of sub-section (5) of section 80A were not on the statute and, therefore, assessee was entitled to make the claim. The amendment, therefore, could not take away the vested right of the assessee to make claim under section 80IB. Accordingly it was submitted that since claims were made prior to insertion of section 80A(5), the claim of the assessee should be allowed. Ld. AR placed reliance on the judgment of Hon’ble Supreme Court in the case of CIT v. Onkarmal Meghraj (HUF) [1974] 93 ITR 233 in support of the claim.

3.1.4 Ld. DR on the other hand, strongly supported the disallowance made by authorities below. It was submitted that since section itself denied claim if not made in the return of income, the claim could not be allowed.

3.1.5 We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of claim of deduction under section 80IB of the Act for assessment years 2003-04 and 2004-05. There is no dispute that the assessee had not made the claim in assessment year 2003-04 either in the original return or in the revised return. The claim had been made only before CIT(A) by filing additional ground. In assessment year 2004-05 also claim was not made in original return. Claim was made in the revised return which was filed after the limitation period and therefore, revised return has to be considered as invalid. Thus, in assessment year 2004-05 also, the assessee had neither made the claim in the original return nor in revised return. The provisions of section 80A(5) inserted by Finance Act 2009 which are applicable retrospectively from assessment year 2003-04, clearly provide that in case assessee fails to make a claim in the return of income, the claim cannot be allowed. For assessment years 2003-04 and 2004-05, the provisions of section 80A(5) were applicable. Therefore, in our view, in view of these provisions which are quite unambiguous and clear, claim of the assessee cannot be allowed. The ld. AR has argued that the assessee had made the claims before the relevant provisions of section 80A(5) were inserted in 2009 and therefore, the right of the assessee to make claim could not be taken away by the amended provisions. We, are however, not convinced by the arguments advanced. In our view making claim is different from allowing the claim. No doubt before the new provisions were inserted in 2009, the assessee was entitled to make the claim but the claim had to be considered under the provisions of law. Since provisions of section 80A(5) have retrospective application from assessment year 2003-04, these provisions will apply for the years under consideration and the claim of the assessee can not be allowed.

3.1.6 The ld. AR for the assessee has placed reliance on the judgment of Hon’ble High Court of Bombay in the case of Onkarmal Meghraj (HUF) (supra) but the said case in our view is distinguishable. The case related to re-opening of the assessment under the old Act. Section 34(3) of the old Act had been amended on 24.5.1953 with retrospective effect from 1.4.1952. It was a case of limited retrospective effect as per which amendment did not enable ITO to take action where the period mentioned therein had expired before 1.4.1952. It was accordingly held that the action was barred by limitation. The present case is different. In this case provisions of section 80A(5) are applicable from assessment year 2003-04 without any limitation. Moreover, the proceedings for assessment years 2003-04 and 2004-05 are still alive and are not barred by any limitation. Therefore in these proceedings which are still alive and pending in appeal, the provisions of section 80A(5) have to be applied and following which the claim of the assessee has to be disallowed. The disallowance is therefore, confirmed on the legal ground. We, therefore, do not consider it necessary to go into the merits of the case. The orders of CIT(A) disallowing the claim are confirmed.

3.2 The second dispute raised in these appeals is regarding claim of deduction under section 35AB of the Act relating to technical know-how fees. The technical know-how fees had been paid by the assessee in terms of joint venture agreement dated 25.11.1994 with Colas SA, France. Though, technical know-how had been acquired by the assessee in the earlier year, payments in terms of agreement had been made in installments during the period 1998-1999 to 2001-02. The details relating to technical know-how fee have already been discussed earlier in para-2.2 of this order. Under the provisions of section 35AB where the assessee has paid in any previous year any lumpsum consideration for acquiring any know-how for use for the purpose of business, 1/6th of the amount so paid will be allowed as deduction in that previous year and balance amount in five immediate succeeding assessment years in equal installments. Since the assessee had made payments in installments, in respect of each installment, it had claimed deduction over six years under provisions of section 35AB. The provisions of section 35AB were amended by Finance Act, 1998 w.e.f. assessment year 1999-2000 as per which deduction under section 35AB could be allowed only in case amount is paid in previous years relating to assessment year 1998-99 or in earlier years. Following this amendment, the authorities below have not allowed the claim in respect of payments made after 1.4.1998, which is subject matter of dispute in these appeals.

3.2.1 The authorities below have held that the language used in section 35AB being unambiguous and clear the literal meaning has to be followed as per which payments made after 1.04.1998 are not eligible for deduction under section 35AB. The assessee argued that under provisions of section 43(2) the word “paid” meant amount actually paid or incurred according to method of accounting based on which profit/gains were computed and therefore, payments made after 1.4.1998 were also eligible for deduction as liability for which were incurred prior to 1.4.1998. Assessee also referred to the judgment of the Hon’ble High Court of Bombay in the case of Buckau Wolf New India Engg. Works Ltd. (supra) as per which in case assessee had paid the technical know-how fee in installments, the assessee is entitled to claim of expenditure even if the same were not provided in the books of account. The arguments were rejected by authorities below who held that following literal meaning, the claim was not allowable as payments had been made after 1.4.1998. The assessee also raised an additional ground that in case claim of deduction under section 35AB was not allowed, the assessee should be allowed depreciation as the technical know-how was an intangible asset under the provisions of section 32(1)(ii). This alternate claim was also rejected on the ground that provisions of section 32(10)(ii) were applicable only in respect of intangible assets acquired on or after 1.4.1998, whereas in case of the assessee technical know-how had been acquired in the year 1994. Aggrieved by the said decision of CIT(A) confirming the disallowance, the assessee is in appeal in both the years.

3.2.2 Before us, the Ld. AR of the assessee argued that the amendment to section 35AB by the Finance Act 1998 had withdrawn the deduction under section 35AB in respect of payments made after 1.4.1998 as technical know-how by the Finance Act, 1998 was treated as intangible asset on which depreciation was allowable under section 32(1)(ii) from assessment year 1999-2000. However, an anomalous situation has been created because under section 32(1)(ii) depreciation in respect of intangible asset is allowable only when the intangible asset is acquired on or after 1.4.1998. In respect of intangible asset acquired prior to 1.4.1998, deduction under section 35AB is allowable but because of amendment made to section 35AB by Finance Act 1998, deduction under section 35AB cannot be allowed in case installment payment is after 1.4.1998. The intention of the legislature was to allow deduction under section 35AB in respect of technical know-how acquired before 1.4.1998 and to allow depreciation in respect of technical know-how acquired on or after 1.4.1998. But because of the language used in section 35AB, deduction in respect of technical know-how acquired prior to 1.4.1998 cannot be allowed if the payment is made after 1.4.1998. The literal interpretation is therefore, leading to unjust result which was not the intention of the legislature. In such cases, it was argued, that the language of the section is required to be modified so as to achieve the desired intention or to produce a rational result. Reliance for the said proposition was placed on the judgment of Hon’ble Supreme Court in the case of CIT v. J.H. Gotla [1985] 156 ITR 323. It was accordingly argued that in case of intangible assets acquired prior to 1.4.1998 on which depreciation under section 32(1)(ii) was not allowable, deduction under section 35AB should be allowed even if part of the payment is made after 1.4.1998. The Ld. D.R on the other hand, supported the orders of authorities below and placed reliance on the findings given in the respective orders.

3.2.3 We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of claim of deduction on account of payment made for acquisition of technical know-how. The assessee had acquired the technical know-how in terms of agreement dated 25.11.1994 and payments were made in installments over the period 1998-99 to 2001-02. Under the provisions of section 35AB, any payment made for acquisition of technical know-how is allowable as deduction in equal installments over a period of six years including previous year in which the payment had been made. The Finance Act 1998 amended section 35AB as per which payments made after 1.4.1998 will not be eligible for deduction under section 35AB. This amendment was made in view of the simultaneous amendment made to section 32(1) as per which technical know-how was treated as an intangible asset and depreciation was allowable in respect of any intangible asset acquired on or after 1.9.1998. The intention of the legislature for making amendment to section 35AB was to not allow deduction under section 35AB in respect of any technical know-how acquired on or after 1.4.1998 as the same was entitled to depreciation. However, the language used in section 35AB provided that no deduction will be allowable in case payment is made after 1.4.1998. This has resulted into an anomalous situation as in respect of technical know-how acquired prior to 1.4.1998 assessee will neither be eligible for deduction under section 35AB in respect of payment made after 1.4.1998 nor depreciation under section 32(1)(ii) can be allowed as the asset was acquired prior to 1.4.1998. This was not the intention of the legislature. Therefore, the plain and literal meaning of the amended provisions of section 35AB has resulted into manifestly unjust result which was not the intention of the legislature. In such cases as held by Hon’ble Supreme Court in the case of J.H. Gotla (supra), the courts are entitled to modify the language used by the legislature so as to achieve the intention of the legislature and to produce a rational result. Therefore, in our view, for harmonious interpretation of provisions of section 32(1)(ii) and 35AB, it will be reasonable to hold that in respect of technical know-how acquired prior to 1.4.1998, the expenditure will be allowed even if payment is made after 1.4.1998. Such interpretation is in conformity with the definition of the word “paid” given in section 43(2) as per which “paid” means actually paid or incurred according to the method of accounting on the basis of which profit and gains are computed. In this case the assessee has incurred the liability on account of technical know how fees in the year of signing the agreement which was before 1.4.98. Normally an expenditure is allowable as deduction in the year in which liability is incurred even if the payment is made later, but in case of technical know-how fees, the deduction has been spread over a period of six years in view of specific provision of section 35AB. In our view on proper interpretation of the amended provisions of section 35AB, deduction under section 35AB will be allowable even in respect of payments made after 1.4.1998 if the technical know-how has been acquired before 1.4.1998. We, therefore hold that deduction will be allowable under section 35AB in respect of payments made after 1.4.1998 as technical know how had been acquired prior to 1.4.1998. The order of CIT(A) is accordingly set aside and the claim of the assessee is allowed.

4. In the result, all the appeals of the assessee are partly allowed.


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