If Assessee without challenging S. 14A computed disallowance, it cannot object to addition U/s. 14A

ITAT CHENNAI BENCH ‘B’

Deputy Commissioner of Income-tax

Versus

Vinbros & Co.

IT Appeal NO. 1581 (Mds.) of 2012
C.O. No. 152 ( MDS.) OF 2012
[ASSESSMENT YEAR 2009-10]

JANUARY  29, 2013

ORDER

S.S. Godara, Judicial Member

This appeal by the Revenue and Cross Objections at the behest of the assessee, emanate from the order of the Commissioner of Income Tax (Appeals) XII, Chennai dated 23.05.2012 in ITA No. 326/2011-12 for assessment year 2009-10. The assessment was framed under section 143(3) of the Income Tax Act 1961 [in short the “Act”].

2. The Revenue has raised following grounds in the appeal:

“1.          The learned Commissioner of Income Tax (Appeals) has erred in law and facts of the case in holding that the assessee is entitled for deduction u/s 80-IB of the I.T. Act.

2.            The learned Commissioner of Income Tax (Appeals) has erred in law and facts of the case in not appreciating the fact that the assessee claiming to be a Small Scale Industrial Undertaking has to satisfy all the conditions laid down in the IDR Act for being categorised as a Small Scale Industrial Undertaking.

3.            The learned Commissioner of Income Tax (Appeals) has erred in law and facts of the case in not appreciating the fact that the assessee could not be held to be a Small Scale Industrial Undertaking under the IDR Act as it has not satisfied all the conditions laid down for it in the IDR Act.

4.            The learned Commissioner of Income Tax (Appeals) has erred in law and facts of the case in not appreciating the fact that the deduction u/s 80lB is to be allowed to the assessee on the basis of the declarations made by it in Form No.10CCB filed by it.

5.            The learned Commissioner of Income Tax (Appeals) has erred in law and facts of the case in not appreciating the fact that the assessee has availed all the benefits granted by the State Government to Small Scale Industrial Undertaking located in the State on the basis of its claim of being a Small Scale Industrial Undertaking.

6.            The learned Commissioner of Income Tax (Appeals) has erred in law and facts of the case in not appreciating the fact that as the assessee has not satisfied the conditions laid down in the IDR Act for being a Small Scale Industrial Undertaking, the item manufactured by it being covered by the Eleventh Schedule disentitles the assessee from being granted deduction u/s 80IB of the I.T. Act.

7.            The learned Commissioner of Income Tax (Appeals) has erred in law and facts of the case in not appreciating the ratio of the Hon’ble Supreme Court laid down in 114 STC 7,8 (SC).

8.            The learned Commissioner of Income Tax (Appeals) has erred in law and facts of the case in not appreciating the ratio of the Hon’ble Supreme Court laid down in 217 ITR 746 (SC), 234 ITR 472 (SC) and 256 ITR 177 (SC).

9.            The learned Commissioner of Income Tax (Appeals) has erred in law and facts of the case in not appreciating the fact that the act of the assessee in taking different positions before different authorities has resulted in ‘Unjust Enrichment’ to it which is not permissible in law.

10.          For these and other grounds that may be adduced at the time of hearing, the Order of the Commissioner of Income-tax (Appeals) may be set aside and that of the Assessing Officer restored.”

Whereas, assessee’s cross objections read as under:

(i)           The Order of the Commissioner of Income Tax (Appeals) dated 23.05.2012 is contrary to law, facts and circumstances of the case and opposed to the principles of natural justice.

(ii)          The Commissioner of Income Tax (Appeals) erred in making the disallowance u/s 14A notwithstanding the fact that the investment has not yielded any income during the current year. Sec.14A is attracted only in a situation where the total income of an assessee includes income that is exempt. In so far as the investment has not yielded any income, there is no exempt income included in the total income of the appellant. Accordingly, the provisions of Sec.14A would not apply.

(iii)         The Commissioner of Income Tax (Appeals) erred in not considering the case of Dy. CIT vs. Jindal Photo Ltd which held that the provisions of Rule 80 cannot be invoked mechanically by the authorities, hence the addition is liable to be cancelled.

(iv)         The Commissioner of Income Tax (Appeals) erred in relying on the decision of the Special Bench of the ITAT in making the disallowance u/s 14A. The decision is not applicable to the facts and legal position involved in the present case.

(v)          The Commissioner of Income Tax (Appeals) erred in arbitrarily disallowing a sum of Rs. 4,83,414/- u/s 14A of the Act r/w Rule 8A of the Rules. In fact, no expenditure has been incurred by the appellant on earning the dividend.

(vi)         Levy of Interest under Sec. 234B, 234C is liable to be cancelled as the same is arbitrary, high and contrary to law.

(vii)        Any other ground raised at the time of personal hearing.”

3. On behalf of the Revenue, it has been vehemently argued that the CIT(A) has wrongly interfered in the findings of the Assessing Officer qua disallowance of assessee’s claim under section 80IB of the “Act”. In support of the arguments, the DR has also reiterated the submission raised in the grounds and prayed for acceptance of the appeal.

4. Opposing the Revenue, the assessee has contended that the CIT(A) has rightly held that the assessee’s claim under section 80IB is liable to be accepted. In addition to this, the AR representing the assessee has argued that so far as the CIT(A) order qua disallowance under section 14A is concerned, the same has wrongly confirmed the findings of the Assessing Officer.

5. In rebuttal, the Revenue argues on the one hand with its prayer is liable to be accepted qua disallowance claimed under section 80IB, on the other hand, it has strongly supported the order of the CIT(A) qua disallowance under section 14A which was made by the Assessing Officer and confirmed in appeal.

6. We have heard both parties at length and perused relevant findings of the Assessing Officer as well as CIT(A) and also cross objections of the assessee. Undisputed facts of the case are that the assessee is a firm engaged in manufacture and sale of IMFL [Indian Made Foreign Liquor]. On 29.09.2009, it had e-filed its ‘return’ and declared total profits and gains from the business in question as Rs. 8,11,70,927/-. The assessee had also claimed deduction under section 80IB of Rs. 2,02,92,732/- @ 25%. The Assessing Officer disallowed assessee’s claim by holding that the assessee had been manufacturing IMFL which was an item included in the Schedule II of the licensing notification No. S.O. 477(E) dated 25.07.1991 issued under Industries [Development and Regulation] Act, 1951 and under the provisions of the said “Act” Small Scale Industry alike the assessee is prohibited from manufacturing IMFL falling under Schedule XI of the Act. Similarly, the Assessing Officer also held in the assessment order dated 16.12.2011 that the assessee was not even a small scale industry under IDR Act (supra) for a small scale industry, the cap on investment amount was fixed at Rs. 1 crore and the assessee’s investment stood more than that. In the light of the observations, the Assessing Officer disallowed assessee’s claim of deduction under section 80IB of the “Act” and added the amount of Rs. 2,02,92,732/- in assessee’s total income.

7. Similarly, in the assessment proceedings, the Assessing Officer noticed that the assessee had claimed dividend income of Rs. 10,61,830/- as ‘exempt’ income under section 10(35) of the “Act”. Therefore, the Assessing Officer invoked section 14A read with Rule 8D. On this, the assessee is stated to have itself worked out the disallowance at Rs. 4,83,414/- which was added by the Assessing Officer in the assessment order. Accordingly, the assessee’s total income was computed at Rs. 8,60,32,030/-.

8. Aggrieved by both above disallowances, the assessee carried the matter in appeal. On the ground of deduction under section 80IB of the “Act”, the CIT(A) has accepted assessee’s contentions. Per Revenue, the CIT(A) has held as under:

“(i)          From the above provisions. it is clear that claiming the deductions, one has to fulfil the requirements laid down in sub-section (2) of Section 80-IB of the Act. Once the said conditions laid down in the sub-section (2) are fulfilled the asses sees are eligible for deduction under various sub-sections(3) to (11B) of Sec.801B of the Act, based on the activities carried out by them.

(ii)          Once the industrial undertaking is located in an industrially backward State, all units (whether SSI or non-SS I) are equally eligible for deduction u/s 80lB of the Act.

(iii)         Thus, the assessees whose industrial undertakings are recognised as “Small Scale Industries” or “located in an industrially backward State” are eligible for deduction u/s 80-1 B of the Act, even if they manufacture “article or thing specified in the list in the Eleventh Schedule”.

(iv)         Once, the industrial undertaking is located in an industrially backward State, the assessee is eligible for deduction u/s 80IB(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 of clause (iii)}, then only the assessee has to prove that it is recognised as a SSI and all the relevant conditions are fulfilled.

(v)          In the instant case, as the assessee’s industrial undertaking is “located in an industrially backward State” of Pondicherry, there is no need to fulfill the requirements of SSI. The assessee is eligible for deduction u/s 80-IB of the Act.

(vi)         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.”

At the same time, we find that the CIT(A) has uphold the disallowance made by the Assessing Officer under section 14A of the “Act” (supra).

In this background of the facts, the Revenue is aggrieved against the order of the CIT(A) qua assessee’s claim of deduction under section 80IB of the “Act”. Similarly, the grievance of the assessee is that the disallowance under section 14A had wrongly been affirmed by the CIT(A).

9. So far as the Revenue’s appeal is concerned, it is noticed that the CIT(A) has held that the assessee’s entitled for claim of deduction under section 80IB of the “Act” [providing deduction in respect of profits and gains from certain industrial undertaking other than infrastructural development undertaking] being a small scale industrial undertaking under the provisions of the “Act” and also because it is carrying its business from Pondicherry i.e. industrially backward State under section 80IB(4) of the “Act”. We deem it appropriate to reproduce the provisions itself which reads as under:

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 41[(11), (11A) and (11B)] (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 subsection (5)] at any time during the period beginning on the 1st day of April, 1995 and ending on the 31st day of March, [2002].

(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 ………………. “

A perusal of the above provision makes it clear that for claiming deduction, certain conditions are to be necessarily satisfied. At the same time, it is also clear that the conditions above said do not apply in case the undertaking in question is either a small scale industry or it operates from an industrially backward region and if any of the above said condition is satisfied, the concern undertaking becomes eligible for claiming deduction. The CIT(A) in the order has accepted assessee’s contention on both above counts. We find that the pleadings of the Revenue only challenge the status of the assessee as small scale industry and the findings of the CIT(A) that the place of assessee’s business is in an industrially backward State i.e. Pondicherry, have nowhere been disputed. Meaning thereby, even if we hold that the assessee is a small scale industry, still it is entitled for claim of deduction in view of section 80IB(4) of the “Act” since it is operating from an industrially backward State. Hence, we observe that the assessee satisfies the relevant provision of section 80IB(4) of the “Act” and arguments of the Revenue that it is not a small scale industry or it manufacture an item contained in Schedule XI of the “Act” do not hold any ground. Therefore, we hold that once the assessee satisfies the condition in section 80IB(4) of the “Act”, the arguments of the Revenue only carry academic significance. Hence, we opine that the CIT(A) has rightly accepted assessee’s argument qua claim of deduction under section 80IB of the “Act” which does not warrant any interference.

10. Coming to the cross objections of the assessee, as already mentioned hereinabove, the assessee had declared exempt income and on asking of the Assessing Officer, it had itself computed the disallowance amount of Rs. 4,83,414/- under Rule 8D of the Income Tax Rules and exactly the same very amount has been disallowed. In our opinion, once the assessee itself computed the disallowance, instead of challenging the very applicability of the provisions, we do not find any force in the cross objections preferred by the assessee. Consequently, we do not find any merit either in the appeal filed by the Revenue or Cross Objections at the behest of the assessee.

11. To sum up, the appeal filed by the Revenue and Cross Objections filed by the assessee are dismissed.