SSI situated in ‘industrially backward State’ eligible for deduction u/s. 80-IB, even if it manufactures items specified in 11th Schedule

ITAT CHENNAI BENCH ‘C’

Deputy Commissioner of Income-tax

versus

Eye Photonics India (P.) Ltd.

IT Appeal NO. 1473 (Mds.) of 2012
[ASSESSMENT YEAR 2009-10]

JANUARY  30, 2013

ORDER

Challa Nagendra Prasad, Judicial Member

This is an appeal by the Revenue against the order of Commissioner of Income Tax (Appeals)-XII, Chennai dated 26.4.2012 in ITA No.310/2011-12 for the Asst. Year 2009-10.

2. The first issue in the grounds of appeal of the Revenue is that the Commissioner of Income Tax (Appeals) erred in holding that the assessee is entitled for deduction under sec.80IB of the Act.

3. The facts of the case are that the assessee is a company engaged in the manufacture and sale of ophthalmic Instruments and equipments. The assessee is located in Pondicherry and registered as a small scale industry with the Directorate of Industries and Commerce, Pondicherry. For the Asst. Year 2009-10, the assessee filed its return of income on 29.9.2009 declaring total income at Rs. 13,25,78,530/- after claiming deduction under sec.80IB of the Act at Rs. 5,68,19,369/- The assessment was completed under sec.143(3) of the Act on 14.12.2011 by the Assessing Officer determining total income of the assessee at Rs. 19,01,41,030/-. While completing he assessment the Assessing Officer denied deduction claimed by the assessee under sec.80IB of the Act. While denying deduction claimed by the assessee, the Assessing Officer held that the assessee is manufacturing ophthalmic equipment, an item included in the XI Schedule of the Act. According to the Assessing Officer, in order to classify an industry as a small scale industry, the assessee should be engaged in manufacturing the items listed in Schedule III of Industries (Development and Regulation Act, 1951 as specified in Licensing Notification S.O.477(E) dated 25.7.1991. Since the assessee is manufacturing item of ophthalmic equipment which is not included in Schedule III of Industries (Development and Regulation Act, 1951, the assessee could not be treated as small scale industry. Therefore, the Assessing Officer felt that the assessee is not covered within the definition of SSI and hence not eligible for deduction under sec.80IB of the Act.

4. On appeal, the Commissioner of Income Tax (Appeals) did not agree with the view of the Assessing Officer that the manufacturers of things or articles specified in XI Schedule are not eligible for deduction under sec.80IB of the Act. The Commissioner of Income Tax (Appeals) held that there are exceptions to the said condition and the exceptions are provided in proviso to clause (iii) of sub-sec.(2) of sec.80IB of the Act and even if they are manufacturing items specified in XI Schedule. Against this order of the Commissioner of Income Tax (Appeals) the Revenue is in appeal before us.

5. The Counsel for the Assessee supported the order of the Commissioner of Income Tax (Appeals) and submits that the assessee is entitled for deduction under sec.80IB of the Act even though it is not manufacturing an article or thing which is mentioned in Schedule XI of the Act since the assessee is located in an industrially back-ward area. He submits that, in fact, the item manufactured is not falling under Schedule XI at all.

6. The Departmental Representative supported the order of Assessing Officer.

7. We have heard both sides, perused the material on record and the orders of the lower authorities. The Commissioner of Income Tax (Appeals) examined the provisions of sec.80IB of the Act in detail and the applicability of such provisions to the assessee’s case and held that the assessee is entitled for deduction under sec.80IB of the Act as the assessee complied with the provisions of sec.80IB of the Act. While holding so, the Commissioner of Income Tax (Appeals) held as under :-

“I have considered the assessee’s submissions carefully. The deduction u/s.80-IB is available for the assesses who being to manufacture or produce things or article specified in the section and subject to the conditions laid down therein. The provisions of sec.80-IB are:

Sec.80-IB. (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section.

(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :- (i) It is not formed by splitting up, or the reconstruction, of a business already in existence :

Provided that this condition shall not apply in respect of an industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;

(ii) It is not formed by the 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 the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India :

Provided that the condition in this clause shall, in relation to a small scale industrial undertaking or an industrial undertaking referred to in sub-section (4) shall apply as if the words “not being any article or thing specified in the list in the Eleventh Schedule” had been omitted.

Explanation 1 : For the purposes of clause (ii), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely :-

(a)          Such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;

(b)          Such machinery or plant is imported into India from any country outside India; and

(c)          No deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.

Explanation 2 : Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with;

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

(3) The amount of deduction in the case of an industrial undertaking shall be twenty-five per cent (or thirty per cent where the assessee is a company), of the profits and gains derived from such industrial undertaking for a period of ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) beginning with the initial assessment year subject to the fulfilment of the following conditions, namely :-

(i)           It begins to manufacture or produce, articles or things or to operate such plant or plants at any time during the period beginning from the 1st day of April, 1991 and ending on the 31st day of March, 1995 or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular undertaking;

(ii)          Where it is an industrial undertaking being a small scale industrial undertaking, it begins to manufacture or produce articles or things or to operate its cold storage plant not specified in sub-section (4) or sub-section (5) at any time during the period beginning on the 1st day of April, 1995 and ending on the 31st day of March, 2000.

(4) The amount of deduction in the case of an industrial undertaking in an industrially backward State specified in the Eighth Schedule shall be hundred per cent of the profits and gains derived from such industrial undertaking for five assessment years beginning with the initial assessment year and thereafter twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from such industrial undertaking :

Provided that the total period of deduction does not exceed ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) subject to fulfilment of the condition that it begins to manufacture or produce articles or things or to operate its cold storage plant or plants during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March, 2004 :

Provided ……….”

From the above provisions, it is clear that before claiming the deductions, one has to fulfil the requirements laid down in sub-section (2) of Sec.80-IB of the Act. Once the said conditions laid down in the sub-section (2) are fulfilled the assesses are eligible for deduction under various sub-sections (3) to (11B) of sec.80-IB of the Act based on the activities carried out by them.

In the instant case, the following are the undisputed facts:

(a)          The assessee’s unit is engaged in manufacturing of ophthalmic instruments and equipments,

(b)          The assessee’s manufacturing unit is located in the state of Pondicherry. The state of Pondicherry is an ‘industrially backward state’ (as included in 8th Schedule at Sl.No.16),

The assessee has been registered as a “Small Scale Industry'(SSI) vide SSI Registration 34/02/00698 on 27.03.2004 by the Director of Industries and Commerce, Pondicherry.

(a)          The assessee’s manufactured item ‘ophthalmic instruments & equipments’ is included in the 11th Schedule of the IT Act.

Based on the above facts and the requirements of the sec .80-IB of the Act let us examine whether the assessee is eligible for claiming the deduction u/s.80-IB of the Act.

The first and foremost requirement is the fulfilment of four conditions stipulated in sub-section (2) of sec.80-IB of the Act. These conditions are –

(i)           It is not formed by splitting up, or the reconstruction, of a business already in existence ;

(ii)          It is not formed by the 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 the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India ;

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

The fulfilment of the conditions mentioned at clauses (i), (ii) and (iv) above, are not under dispute. The only dispute is regarding the fulfilment of condition in clause (iii) above, wherein the Assessing Officer held that the item “ophthalmic instruments and equipments” manufactured by the assessee is the thing or an article specified in Schedule 11 of the IT Act and hence not eligible for deduction under section 80-IB of the Act.

The above observation of the Assessing Officer that the manufacturer of things or artic les specified in 11th Schedule are not eligible for deduction u/s.80-IB, is not totally correct. As per the clause (iii) above, only the assessees who manufacture things/articles, other than those specified in 11th Schedule, are eligible for deduction u/s.80-IB. However, this condition is not absolute and total. This condition is embedded with certain exceptions, as provided in the proviso. There is a proviso to the clause (iii) provided for certain exceptions, as under :

Proviso to clause (iii) of sub-section (2) of sec.80-IB

Provided that the condition in this clause shall, in relation to a small scale industrial undertaking or an industrial undertaking referred to in sub-section (4) shall apply as if the words “not being any article or thing specified in the list in the Eleventh Schedule” had been omitted.

Thus, there are two exceptions to the conditions laid down in clause (iii) above. One exception is the Small Scale Industries (SSI) and the other exception is industrial undertaking referred to in sub-section (4). The industrial undertaking referred to in sub-section (4) means an industrial undertaking situated in an industrially backward State specified in the Eighth Schedule.

Thus, in the case of a “SSI” or “industrial undertaking situated in an industrially backward State”, the assessees will be eligible for deduction u/s.80-IB even if they are manufacturing items specified in 11th Schedule. This particularly so because the words “not being any article or thing specified in the list in the Eleventh Schedule” are to be omitted from the clause (iii) if it was a SSI or industrial undertaking situated in an industrially backward State, as per the proviso to the said clause.

Further, if either of these two (and not necessarily both) situations are fulfilled, i.e. if it was SSI or if located in an industrially backward State, the assessee is eligible for deduction u/s.80-IB of the Act even on the items (manufactured) specified in 11^th schedule.

The assessee claimed its deduction us/.80-IB(4) of the Act, the provisions of which are as under :

Sec.80-IB : (4) The amount of deduction in the case of an industrial undertaking in an industrially backward State specified in the Eighth Schedule shall be hundred per cent of the profits and gains derived from such industrial undertaking for five assessment years beginning with the initial assessment year and thereafter twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from such industrial undertaking :

Now, let us examine the assessee case. The assessee’s manufacturing unit is located in the State of Pondicherry, which is an “industrially backward State” as notified in 8th Schedule (at Sl.No.16). There is no dispute regarding this position. Therefore, the assessee’s case is covered by the second limb of proviso to clause (iii) of sub-section (2) of sec.80-IB of the Act. Hence, the words “not being any article or thing specified in the list in the Eleventh Schedule” stands omitted from the language of clause (iii) of the Act. Manufacturing of any article or thing (including those specified in 11th Schedule) is sufficient for claiming deduction u/s.80-IB of the Act in such a case. On this account alone the instant assessee, being located in an “industrially backward State” of Pondicherry, is eligible for deduction u/s.80-IB of the Act.

The deduction u/s. SO-IB in the case of an industrial undertaking an industrially backward State specified in the Eighth Schedule is governed by the provisions of sub-sec.(4). The only requirement in such cases is that the industrial undertaking should be located in an industrially backward State. It makes no difference whether such undertaking is a small scale industry or not. In other words, once the industrial undertaking is located in an industrially backward State, all units (whether SSI or non-SSI) are equally eligible for deduction u/s.80-lB of the Act.

On the other hand, all the Small Scale Industries (SSI) can also take exception to clause (iii) of sub-sec.(2) of sec.8O-lB, i.e. from the words “not being any article or thing specified in the list in the Eleventh Schedule”, if they fulfil all the norms prescribed under the SSI guidelines Industries (Development and Regulation) Act 1951. Once the requirements of SSI are fulfilled, the assessee falls under the first limb of exceptions of proviso to clause (iii). In such a case, the assessee is eligible for deduction even if they manufacture items specified in 11th schedule. And they are eligible for deduction irrespective of the location of the undertaking i.e. whether located in an industrially backward State or other states.

Thus, the assessees whose industrial undertakings are recognized as “Small Scale Industries” or “located in an industrially backward State” are eligible for deduction under section 80-IB of the Act, even if they manufacture ‘article or thing specified in the list in the Eleventh Schedule’.

Further, as stated earlier, the exceptions specified in the proviso to clause (iii) i.e. being “Small Scale Industries” or “located in an industrially backward State” are independent of each order. The assessees need not fulfil both of these two conditions. If anyone of these two requirements is fulfilled the assessee is eligible for deduction, irrespective of the fulfilment of the other condition.

Thus, in the instant case, the assessee is located in the State o Pondicherry which is in an industrially backward State. There is no dispute regarding this. Hence, the assessee is eligible for deduction under the sub-section (4) of sec.80-IB of the Act,

On all the article/things (including those mentioned in 11th Schedule) manufactured by it. In also make no difference whether the undertaking is a SSI or not .

Once, the industrial undertaking is located in an industrially backward State the assessee is eligible for deduction is s.80-IB(4) of the Act. In such a situation there is no need to fulfil the requirements of ‘SSI’ nature. If the assessee wants to claim deduction u/s.80-IB of the Act, being in the nature of ‘SSI’ (i.e. if wants to claim exception as per the first limb of proviso to clause (iii)), then only the assessee has to prove that it is recognised as a SSI and all the relevant conditions are fulfilled.

In the instant case, as the assessee’s industrial undertaking is ‘located in an industrially backward State of Pondicherry’, there is no need to fulfil the requirements of SSI. The assessee is eligible for deduction vi ] s.80-IB(4) of the Act.

In view of the above, examination of assessee’s recognition as SSI and the fulfilment of the necessary conditions therein is of only academic significance, as the fulfilment or non-fulfilment of this requirement will not have any adverse impact on the eligibility of deduction under sub-section (4) of sec.80-IB of the Act.

In any case and for the sake of academic discussion, the small scale industries are defined at clause (g) of sub-section (14), which is reproduced as under:

80-IB(14)(g) “small-scale industrial undertaking” means an industrial undertaking which is, as on the last day of the previous year, regarded as a small-scale industrial undertaking under section 11B of the Industries (Development and Regulation) Act, 1951 (65 of 1951).

In the instant case, the assessee has been registered as a “Small Scale Industry” (SSI) vide SSI Registration 34/02/00698 on 27.03.2004 by the Director of Industries and Commerce, Pondicherry. Once, the assessee is recognised as a SSI by the concerned authorities, the assessee is eligible for deduction even if it manufactures the things or articles specified in 11th schedule. If the condition of manufacturing the articles “included in schedule-HI” of the notification in S.0.477(E) dated 25.07.1991, (of Industries (Development and Regulation) Act, 1951) is to be taken in to consideration, the very purpose of creating exception in the proviso to clause (iii) of 80-IB(2) will be lost.

In any case, as the assessee is also eligible for deduction u/s.80-IB(4) of the Act, being ‘located in an industrially backward State’ of Pondicherry, there is no need to fulfil the requirements of SSI.”

8. On going through the order of the Commissioner of Income Tax (Appeals), it can be seen that the Commissioner of Income Tax (Appeals) came to the conclusion that the assessee is entitled to deduction under sec.80IB of the Act since the assessee unit is located in an industrially back-ward State specified in VIII Schedule and is governed by the provisions of sub-sec. (iv) of Sec.80IB of the I.T. Act. Further, the Commissioner of Income Tax (Appeals), by analyzing the provisions of the Act held that the assessees, whose industrial undertakings are recognized as “Small Scale Industries” or located in an industrially back-ward state are eligible for deduction under sec.80IB of the Act even if they manufacture articles or things specified in the list in XI Schedule. The Revenue could not rebut any of the findings of Commissioner of Income Tax (Appeals) with any supporting material. In the circumstances, we feel that there is no good and valid reason to interfere with the reasoning of the Commissioner of Income Tax (Appeals) in allowing the claim of the assessee under sec.80IB of the Act. Therefore, we confirm the order of the Commissioner of Income Tax (Appeals) on this issue. The grounds taken by the Revenue on this issue are rejected.

9. The next issue in the grounds of appeal of the Revenue is that the Commissioner of Income Tax (Appeals) erred in deleting the disallowance made under sec.40(a)(1a)of the Act.

10. At the time of hearing, the Counsel for the Assessee submits that the Assessing Officer made disallowance under sec.40(a)(1a) on the ground that the assessee has not deducted TDS on certain payments made to various parties. The Counsel for the Assessee submits that the assessee had deducted TDS and remitted the same into the Govt., account in subsequent Asst. Years and, therefore, he prays that a direction be given to Assessing Officer to consider the claim in the subsequent years. He, in fact, filed written submissions stating as under :-

“Adverting to ground Nos.9 & 10 by the Department before this Hon’ble Tribunal, I submit that tax had been fully deducted subsequently and remitted to the Department, the details of which are as under :-

We pray that the order of the CIT(A) may be reversed and disallowed sustained this year; subject however to a direction to the A.O. to allow it in the respective years (audit fee in A.Y:2011-12 and other payments in A.Y:2013-14). To sum up, we pray that the order of the CIT(A) be confirmed in respect of the deduction u/s.80IB and reversed in respect of disallowance u/s.40(a)(ia).”

11. In view of the above submissions made by the Counsel for the Assessee we allow the grounds of appeal of the Revenue on this issue. We also direct the Assessing Officer to consider the said payments made to various parties as allowable expenses in the subsequent years since the assessee has deducted TDS on the said amount and remitted the same to the Govt. account, subject to verification.

12. In the result, the appeal of the Revenue is partly allowed.