ITAT explains Conditions for allowing deduction under Section 80I and Section 80IA of Income Tax Act

What is relevant is whether the unit in question is engaged in the production or manufacture of specified articles or things in its own right. It is not in dispute that the units in question in the assessee-company are engaged in the production of capsules and has also produced the capsules in the year under appeal. The assessee has been denied deduction on the sole ground that all the units are also producing capsules and are therefore part of the same undertaking. Learned CIT(A), after examining the relevant materials on record, has held that the unit in question is not only a well integrated unit producing capsules on its own but also has separate and distinct identity of its own. He has given detailed reasoning in his appellate order for coming to the conclusion that each unit in the assessee-company is engaged in the production of capsules in its own right. Organizational features, such as the legal status of the unit or the fact that they are controlled or managed by common management or located in the same premises where existing units are located to derive certain advantages or are producing similar goods as the existing ones are hardly relevant to decide whether a unit is in the nature of undertaking. Likewise, the fact that procurement of raw materials is common or certain post-manufacturing activities are centrally carried out or drawing certain facilities from a common source are not {as rightly pointed out by the learned CIT(A), sufficient enough to hold that each unit is not engaged in manufacturing or producing the articles or things or is not independent or separate from others. The findings recorded by the learned C1T(A) that the unit in question is separately and independently engaged in the production of capsules on its own have not been shown to be incorrect or based on no material. It is also not in dispute that each undertaking has not only produced the capsules but also derived the profits and gains from them. The Department has also not rebutted the assessee’s submission that it has treated each undertaking as separate and independent in its accounts. It is also not the case of the Department that any of the negative tests laid down in section 801(2) is attracted in the case before us. We therefore endorse the findings recorded as also the order passed by him in this behalf and consequently dismiss Ground No.1 taken by the Department.

IN THE INCOME TAX APPELLATE TRIBUNAL:

‘I’ BENCH, MUMBAI

BEFORE S/SHRI K P T THAN GAL, VP and D K SRIVASTAVA, AM

I.T.A. No. 3215/MUM/2000

(Assessment Year: 1994-95)

 I.T.A. No. 193/MUM/2000

(Assessment Year: 1995-96)

C. O. No 45/M/2000

(Arising out of ITA No. 193/MUM/2000)

(Assessment Year: 1995-96)

I.T.A. No. 3216/MUM/2000

(Assessment Year: 1996-97)

C.O. No 171/M/2000

(Arising out of ITA No. 3216/MUM/2000)

(Assessment Year: 1996-97)

 I.T.A. No. 3214/MUM/2000

(Assessment Year: 1997-98)

C.O. No 172/M/2000

(Arising out of ITA No. 3214/MUM/2000)

(Assessment Year: 1997-98)

 Revenue by : Shri Bharat Bhushan

Assessee by: Shri J D Mistry and Shri M D Inamdar

O   R   D   E   R

Per Bench: Most of the issues involved in the present bunch of appeals filed by the Department and the memoranda of cross-objections filed by the assessee are common. We therefore find it convenient to dispose off all of them together by a consolidated order.

2. We shall first take up the Department’s appeal for AY 1995-96 as the learned CIT(A) has passed speaking order for the said assessment year which he has followed in other years.

ITA No. 193/M/2000: A Y 1995-96: Department’s Appeal

3. Ground NO.1 taken by the Department reads as under:

“1. (i) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the A.O. to allow deduction of Rs. 65,76,300/- u/s 80I of the I.T. Act in respect of Undertaking II and Rs.55,17,158/- u/s 80-IA of the I.T. Act in respect of Undertaking III.

(ii) WIthout prejudice to the above and on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the A.O. has erred in denying the deduction u/s 80-I/80-IA to the assessee and further erred in holding that the assessee satisfies all the 4 requisites stipulated for eligibility for deduction u/s 80I/80-IA without appreciating the facts of the case that capsule manufacturing process involving various steps is to be treated as one integrated process and accordingly, feeding of gelatin sorting, printing, processing etc. should have been independent of old unit.

(iii) Without prejudice to the above and on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that undertaking II/III are separate, independent undertaking ,entitled to deduction u/s 80-I/80-IA of the Income Tax Act without fully appreciating the facts of the case that the capsule manufacturing machine may be the most important part of an integrated process, but it is not the whole.

(iv) Without prejudice to the above and on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that it is regally permissible and factually possible for the same company to have a number of undertaking and the fact of having a common licence for the company/factory cannot detract the independent and separate existence of the undertakings functioning under one and the same company.

(v) Without prejudice to the above and on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that even though the electricity bill have been discharged together and there are some common brief manufacturing and post manufacturing activities the same is not germane to the issue of granting deduction u/s 80-I/80-IA of the Act.”

4. Briefly stated, the facts of the case are that the assessee has been engaged in the business of production of empty hard gelatine capsules and their sale to the pharmaceutical companies since 1960. The manufacturing activities are carried out by the assessee with the help of capsule manufacturing machines. Commensurate with the growth of the business, the assessee kept on adding new undertakings to its existing undertakings. In the assessment year under appeal, the assessee had 17 capsule manufacturing machines installed in 4 separate undertakings. Machine Nos.1 to 5 were installed in Undertaking No. I set up in 1978-79, Machine Nos. 6 to 9 were installed in Undertaking No. II set up in 1987-88, Machine Nos. 10 to 13 were installed in Undertaking No. III set up in 1992-93, and Machine Nos. 14 to 17 were installed in Undertaking No. IV set up in 1994-95 at the factory of the assessee-company. The assessee did not claim any relief u/s 80I in the year under appeal in respect of Undertaking No. I as the statutory period up-to which relief was admissible had already expired. The assessee, however, claimed relief u/s 80I in respect of Undertaking No. II ‘as it had commenced production in the previous year relevant to AY 1988-89 and. was thus eligible for deduction up-to AY 1995-96. The assessee claimed relief in respect of Undertaking No. III also as it had commenced production in the previous year relevant to AY 1993-94 and was thus ‘eligible for relief u/s 80IA up to A Y 2003-04. The relief sought for by the assessee u/s 80I and 80IA was however turned down by the AO this year mainly for the reason that since the product manufactured by the assessee in all the four undertakings was capsules and that too in the units located in the same premises and hence all the four undertakings would constitute one undertaking and not four separate undertakings as claimed by the assessee.

5. Perusal of the record shows that the Department had carried out a survey u/s 133A of the Income-tax Act at the factory premises of the assessee-company at the time of survey, existence of all the four undertakings located in the same premises of the factory was noticed. It was also noticed that all of them were involved in the production of capsules. The AO held the view that all the four undertakings claimed by the assessee to be separate and independent from each other for the purpose of relief u/s 80I and 80IA were essentially one undertaking as all of them were engaged in the production of the same article, namely, capsules in the same factory of the assessee-company. Based on the results of survey, he formed the belief that Undertaking Nos. II and III could not be regarded as separate and independent undertakings for the purpose of relief u/s 80I and 80IA and accordingly denied the relief claimed by the assessee. The AO has given, in brief, the following reasons to support his conclusion:

(i) The machines involved in the manufacturing of capsules in all the undertakings/departments are located in the same building.

(ii) The source of power for all the units is one in as there is one electricity bill for the factory.

 (iii) There is one licence for all units.

(iv) Air-conditioning plant for all the units is common.

(v) Annual Report is silent on the establishment of new units.

(vi) Certain ancillary activities, pre and post manufacturing, are common.

6. The assessee carried the matter in appeal before the learned CIT(A). Learned CIT(A) considered the materials brought on record by the AD, his findings in the assessment order and the submissions made by both the parties before him. The learned CIT(A) also visited the factory of the assessee-company at Kandiva!i to verify as to whether all the undertakings were separate and independent of each other. His observations are recorded in para 11 of his appellate order which, in brief, are as under:

 (i) Though all the machines and undertakings involved in the manufacturing of the same article, namely, capsules are located in the same premises, the area of each of the four undertakings is clearly demarcated and separated from each other.

ii) Though the main source of power in the entire factory is common, the power consumed by each machine in each undertaking is clearly and separately recorded.

iii) Centralised air conditioning facility is provided to all the undertakings but it can be shut off in any undertaking without affecting others.

iv) Melted gelatine is supplied for production by pouring the same into different feed tanks but each feed tank is dedicated to a specified capsule machine, which, in turn, is clearly identified with a given undertaking. Besides, quantity control of gelatine poured in each feed tank is properly maintained. Gelatine is also identified with a specific batch number. Batch number directly identifies the machine and undertaking with which the feed tank is attached. When gelatine mix in feed tank is ready in all respects, the feed tank is attached to the gelatine dip tank of the respective hard capsule manufacturing machine. In other words, the supply of raw material is controlled and monitored machine-wise and also undertaking-wise.

v) The machines in each undertaking have distinctive features, for example, Undertakings III and IV have heat recovery system which does not exist in the machines installed in Undertakings I and II. Learned CIT(A) has mentioned several distinctive features in the machines used in each undertaking.

vi) Online sorting of capsules is carried out machine-wise.

vii Sorting and packing operations are common operations for all the undertakings but they are in the nature of post manufacturing operations.

viii) In terms of operational independence, each of the four undertakings is working independently of the other undertakings. He observed that production continued uninterruptedly in Undertaking IV even after the closure of Undertaking III.

7. Based on his observations and also on perusal of the materials available on recorded, the learned CITA (A) held that each of the undertaking was separate and independent and was producing capsules in its own right. Following the principles laid down in Textile Machine Corporation, 107 ITR 195, the learned CIT(A) held that the profits and gains derived from each undertaking was eligible for deduction under section 80I/80IA of the Income-tax Act.

 8. Aggrieved by the order of the CIT(A), the Department is now in appeal before this Tribunal. In support of appeal, the learned DR relied upon the findings recorded in the assessment order. His main submission was that each of the unit might be separate but it was not an undertaking within the meaning of section 80I/80IA of the Income Tax Act. His submissions in brief are as under: –

(i) All the machines involved in the manufacturing of capsules are located in the same premises.

(ii) There was only one power connection for the entire factory.

(iii) Air conditioning unit for all the machines was common. Though the assessee claimed that he had setup units 2, 3 & 4 in August, 1997, March 1993 and October 1994, there was no mention about the establishment of the aforesaid units in the annual report placed before the shareholders.

(iv) The basis on which the assessee had clubbed the machines and identified them with a particular undertaking was not clear.

(v) There is only one licence for all the units as one factory.

(vi) The regular information sent to the Central Excise Department could not be treated as amounting to setting up of a new industrial undertaking.

(vii) Gelatine preparation wing is commonly maintained.

(viii) Procurement of raw material is common for all the units.

9. On the strength of the aforesaid facts, the learned DR contended that all the four undertakings were in fact four units of the same undertaking. According to him, relief under 80I/80IA was admissible in respect of an industrial undertaking and not in respect of each unit in an industrial undertaking. In support of his submissions, he relied upon the following judgements: –

i) Textile Machinery Corporation, 107 ITR 173 (SC)

ii) Periyar Chemicals Ltd 226 ITR 467 (Kerala)

 iii) Saurashtra Cement Industrial Ltd., 260 ITR 181 (SC)

10. In reply, the learned counsel for the assessee supported the appellate order passed by the learned CIT (A). He submitted that each unit was independent and separate from other units which was evident from the findings recorded by the learned CIT (A) that any of the undertaking could be shut or run without affecting the other units. He submitted that one licence was obtained in terms of the provisions of Industrial Development Regulation Act as each company could obtain only one licence under the said Act and not multiple licences for each of its undertakings. He submitted that the assessee had to maintain only one packing department because of the requirements under the Drugs and Cosmetic Act which required production to be linked with the batches produced. He submitted that unit-wise production details, unit-wise consumption of gelatine, unit-wise record of workers, etc. were maintained by the assessee and hence it could not be said that all the units were one undertaking only because of the fact that all of them were located in the same premises or because all of them had certain things in common. He further submitted that the assessee had treated each of its undertakings separately in the books of account on the basis of which it had worked out the profits and gains of each of its undertakings for claiming relief u/s 80I/80IA. According to him, the Department too had treated the undertakings as separate and independent and accordingly allowed relief in the past u/s 80I.

11. We have heard the parties and considered their submissions including the authorities referred to by them. Relief under section 80I/80IA is admissible in respect of the profits and gains derived from, inter alia, an industrial undertaking. Sub-section (2) of Section 80I enumerates the conditions which an industrial undertaking claiming the benefit of Section 80I must satisfy. They are: one, the industrial undertaking should not have been formed by the splitting up, or the reconstruction of the business already in existence; two, it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; three, it manufactures or produces any article or thing, not being any article or thing specified in the 11^th Schedule; and, four, it employs 10 or more workers in the manufacturing processes carried on with the aid of power, or employs 20 or more workers in a manufacturing process carried on without the aid of power.

12. It is quite apparent on bare perusal of section 80I/80IA that the notion of ‘undertaking’ is a core jurisdictional element for the application of section 80I/80IA. Other conditions stipulated by section 80I/80IA can be satisfied only when there is an “undertaking”. However, mere existence of an “undertaking” is not sufficient. The “undertaking” should also be new in the sense that it should have bequn to manufacture or produce specified articles or things after the prescribed time schedule. It is evidently a condition sine qua non that, for the above provisions to apply, there must primarily be manufacture or production of articles or things involving a new undertaking or undertakings. As observed by the Hon’ble Supreme Court in Textile Machinery Corporation, there is no difficulty in holding that the benefit of section 80I is applicable to an absolutely new industrial undertaking started for the first time by the assessee. However, controversies do arise in cases, as it has arisen in the present case, where the old business is being carried on by the assessee and the new activity is launched by him by establishing new plants and machinery by investing substantial funds to produce the articles or things which are same as those of the old business or produce some distinct marketable products which may feed the old business. These articles and products may be consumed by the assessee in his old business or sold in the open market, The Revenue in such cases generally contends that the establishment of a new unit manufacturing the same product as the existing ones is not a new “undertaking” eligible for tax incentives whereas an assessee setting up such a new unit always contends that the new unit is an undertaking notwithstanding that it produces or manufactures the same product as the existing ones or that it is located in the same premises where the existing ones is located.

 13. There is no doubt that the benefit of section 80I/80IA is not available to a unit or new unit unless the unit is in the nature of an “undertaking”. The term “unit”, according to The New Oxford Dictionary of English, signifies an individual thing or person regarded as single and complete, especially for purposes of calculation. It also signifies a “device that has a specified function.” The term “undertaking”, on the other hand, is defined in the same Dictionary as “task that is taken on” and also as “the action of undertaking to do something.” In Black’s Law Dictionary, the term “undertaking” is defined to mean, inter-alia, “to take on an obligation or task”. The Income-tax Act does not define the term “undertaking” though the term “industrial undertaking” is defined in section 33B of the Income-tax Act as “any undertaking which is mainly engaged in the business of …. or in the manufacture or processing of goods …” In the absence of a precise statutory definition of the term “undertaking”, the crucial question of whether a unit is to be considered as an undertaking within the meaning of the section 80I/80IA is left to be answered by the courts and tribunals. In our view, the term “undertaking” has to be approached teleologically focusing on the subject matter the unit in question is concerned with. In order to constitute an “undertaking”, the unit must undertake the specified task. In the context of section 801 or section 80IA, the obligation or task to be undertaken by a unit is the manufacture or production of articles or things specified in that section. The “undertaking” envisaged by the aforesaid provisions is the one which undertakes to manufacture or produce the articles or things in its own right and consequently derives the profits or gains there-from. In our view, a unit qualifies to be called an “undertaking” when it undertakes the production or manufacture of articles or things in its own right and produces such articles or things by itself as a separate and independent unit. It should not only be a separate and independent unit but a well integrated unit capable of undertaking the manufacturing or production of articles or things. As held in Textile Machinery Corporation, an undertaking claiming deduction must be a new integrated unit by itself where articles or things are manufactured or produced. The relevant tests in this behalf have been laid down by the Hon’ble Supreme Court in the said judgment as under:

i) Investment of substantial fresh capital in the industrial undertaking set up;

ii) Employment of requisite labour therein.

iii) Manufacture or production of article in the said undertaking.

iv) Earning of profits clearly attributable to the said new undertaking; and

v) Above all, a separate and distinct identity of the industrial unit set up.

14. Thus what is relevant is whether the unit in question is engaged in the production or manufacture of specified articles or things in its own right. It is not in dispute that the units in question in the assessee-company are engaged in the production of capsules and has also produced the capsules in the year under appeal. The assessee has been denied deduction on the sole ground that all the units are also producing capsules and are therefore part of the same undertaking. Learned CIT(A), after examining the relevant materials on record, has held that the unit in question is not only a well integrated unit producing capsules on its own but also has separate and distinct identity of its own. He has given detailed reasoning in his appellate order for coming to the conclusion that each unit in the assessee-company is engaged in the production of capsules in its own right. Organizational features, such as the legal status of the unit or the fact that they are controlled or managed by common management or located in the same premises where existing units are located to derive certain advantages or are producing similar goods as the existing ones are hardly relevant to decide whether a unit is in the nature of undertaking. Likewise, the fact that procurement of raw materials is common or certain post-manufacturing activities are centrally carried out or drawing certain facilities from a common source are not {as rightly pointed out by the learned CIT(A), sufficient enough to hold that each unit is not engaged in manufacturing or producing the articles or things or is not independent or separate from others. The findings recorded by the learned C1T(A) that the unit in question is separately and independently engaged in the production of capsules on its own have not been shown to be incorrect or based on no material. It is also not in dispute that each undertaking has not only produced the capsules but also derived the profits and gains from them. The Department has also not rebutted the assessee’s submission that it has treated each undertaking as separate and independent in its accounts. It is also not the case of the Department that any of the negative tests laid down in section 801(2) is attracted in the case before us. We therefore endorse the findings recorded as also the order passed by him in this behalf and consequently dismiss Ground No.1 taken by the Department.

15. Paragraphs 15 to 55 are not to be published.

Order pronounced on 5^th February 2008

NF