Scrap in the nature of bye-product of industrial operations, would qualify for deduction u/s 80IB

Mamania Family Trust Vs ACIT (ITAT Mumbai)- Where scrap has direct nexus with the industrial operations thereby implying that to the extent scrap is in the nature of bye-product of industrial operations, the same would qualify for deduction under section 80IB, since it is not clear as to how the scrap was generated and therefore, in order to verify whether the scrap had direct nexus with the industrial operation or its was scrap of other nature, we restore this issue to the file of the AO for necessary verification.

IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES, ‘B’, MUMBAI

BEFORE S/SHRI D.K.AGARWAL (JM) AND RAJENDRA SINGH(A.M)

ITA No. 2134/Mum/2009

(Assessment Year: 2006- 07)

Mamania Family Trust Vs

The Assistant Commissioner of Income Tax

Date of Hearing :                  09.08.2011

Date of Pronouncement : 24.08.2011

Mamania Family Trust, C/o Appolo Plastics, 33-Huges, 3rd Floor, Opp.Prempuri Ashram, N.S.Patkar Marg,Grant Road (West), Mumbai-400007 PAN:AAAAM1 339D		V/s		The Assistant Commissioner of Income Tax ,Central Circle-14, Aayakar Bhavan, M K Road, Mumbai-400020
APPELLANT				RESPONDENT
Date of Hearing                 : Date of Pronouncement :	9.8.2011 24.08.2011

Appellant by                    : Mrs.Aarti A.Sathe

Respondent by             : Shri A.K.Nayak

O R D E R

PER D.K.AGARWAL (JM)

This appeal preferred by the assessee is directed against the order dated 3.3.2009 passed by the Learned Commissioner of Income Tax (A) for the assessment year 2006-07.

2. Briefly stated facts of the case are that the assessee, is a family trust and carrying on the business activities under the name and style of M/s Apollo Plastics, having two units at Daman engaged in the  activity of manufacturing of Electrical Goods and Plastic  Moulding articles, Fans, Brass and Copper parts of electrical goods. The return was filed declaring total income of Rs.NIL. The AO after processing the return under section 143(1) of the Income Tax Act, 1961 (in short the Act) selected the case for scrutiny and accordingly issued notices under section 143(2) and 142(1). During the course of assessment proceedings, the AO, from the details filed with the return of income, noted that the assessee has credited Rs.76,88,500/- as Scrap Sales from Unit –II and claimed deduction under section 80IB(4) of the Act. On being asked as to why the scrap sales should not be disallowed for the purpose of deduction under section 80IB(4), it was submitted by the assessee that the scrap has been generated during the manufacturing process and hence the same is allowable under section 80IB of the Act. The reliance was also placed on the decisions in (1) CIT V/s Sundaram Clayton Ltd.(1982) 133 ITR 34 (Madras), (2) CIT V/s Wheels India Ltd.(1983) 141 ITR 745 (Madras) and (3) CIT V/s Mansinghka Oil Mills Private Ltd.(1988) 169 ITR 158(Bom). However, the AO was of the view that the sale of scrap does not form part of business income as the same is not derived  out of business  activity of the industrial undertaking for the purpose of deduction under section 80IB(4) of the Act. The AO after relying on the decision in CIT V/s Siddaganga Oil Extractions Pvt.Ltd.(1993) 201 ITR968(Kar.) and Sterling Foods V/s CIT (1984) 150 ITR 292 (Kar.), held that the assessee’s claim for scrap sales amounting to Rs.76,88,500/- is not allowable for the purpose of deduction under section 80IB. of the Act. Apart from this the AO further noted that the assessee has credited Rs.5,980/- as interest income from bank in respect of Unit – II and claimed deduction under section 80IB(4) of the Act. The AO after relying on the decision of the Honourable Supreme Court in Tuticorin Alkali Chemicals And Fertilizers Ltd. V/s CIT (1997) 227 ITR 172, the decision of the Honourable Bombay High Court in CIT V/s Ravi Ratna Exports (P.) Ltd. (2000) 246 ITR 443 (Bom) and the decision of the Honourable Madras High Court in South India Shipping Corporation Ltd. V/s CIT (and vice versa) (1999) 240 ITR 24 (Madras) assessed the interest receipt of Rs. 5,980/- under the head income from other sources and accordingly completed the assessment at an income of Rs. 76,94,480/- vide order  dated 24.11 .2008 passed under section 143(3) of the Act. On appeal, the learned Commissioner of Income Tax (A) while agreeing with the views of the AO confirmed the additions made by the AO and dismissed the appeal.

3. Being aggrieved by the order of the learned Commissioner of Income Tax (A), the assessee is in appeal before us taking following grounds of appeal:

“1. The learned CIT(A) erred in disallowing deduction under section 80IB(4) in respect of Scrap Sales of Rs. 76,88,500/- by treating the same as income not derived out  of business activity of the industrial undertaking for the purposes of deduction under section 80IB(4);

2. The learned CIT(A) erred in disallowing deduction under section 80IB(4) in respect of interest received on bank Fixed Deposits amounting to Rs. 5,980/- by treating the same as “Income from other sources”.

4. At the time of hearing, both the parties have agreed that the issues in Ground No.1 and 2 are covered by the order of the Tribunal in assessee’s own case in Mamania Family Trust V/s ACIT in ITA No.7142/Mum/2008(AY-2005- 06), 6084/Mum/2007 (AY-2004-05) and 909/Mum/2007 (AY-2003-04) dated 30.11.2010, therefore, following the same, the Ground No.1 taken by the assessee in respect of the scrap sales is to be set aside to the file of the AO and Ground No.2 taken by the assessee in respect of the interest receipt on bank deposits is to be dismissed.

5. Having carefully heard the submissions of the rival parties and perusing the material available on record, we find merit in the submissions of the parties that both the grounds are covered by the order of the Tribunal in the assessee’s own case (supra). In ground No.1, which is in respect of scrap sales, the Tribunal vide paragraph 8 of its order has held as under :

“8. From the orders of the lower authorities, it is not clear as to how the scrap was generated and therefore, in order to verify whether the scrap had direct nexus with the industrial operation or its was scrap of other nature, we restore this issue to the file of the AO for necessary verification. To the extent, the scrap has direct nexus with the industrial operations thereby implying that to the extent scrap is in the nature of bye-product of industrial operations, the same would qualify for deduction under section 80IB. In the result, ground No.3 for A.Y. 2003- 04 and ground No.1 for A.Ys. 2004- 05 and 2005- 06 are allowed for statistical purpose.”

6. In ground No. 2, which in respect of interest income, the Tribunal vide paragraph 4 of its order has held as under:

“4. Having heard both the parties, we do not find any reason to interfere with the order of the learned CIT(A) in view of the decision of the Honourable Supreme Court in the case of Liberty India V/s CIT (2009) 317 ITR 218 (SC), wherein it was held that section 80IB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The connotation of the words “derived from” is narrower as compared to that of the words “attributable to”. By using the expression “derived from” Parliament intended to cover sources not beyond the first degree. Therefore, ground Nos.1 & 2 raised by the assessee are dismissed.”

7. In the absence of any distinguishing feature brought on record by the parties, we respectfully following the order of the Tribunal (supra) set aside the issue of scrap sales to the file of the AO to decide the same afresh in the light of the directions given by the Tribunal in paragraph 8 of the said order and according to law after providing reasonable opportunity of being heard to the assessee. Accordingly, Ground No.1 taken by the assessee is partly allowed for statistical  purposes.

8. With regard to the interest income of Rs.5,980/-, we respectfully following the order of the Tribunal (supra), and the decision of the Hon’ble Supreme Court in the case of Liberty India (supra) hold that the interest income is not derived    from the eligible business and accordingly the assessee is not entitled to the deduction under  section 80IB of the Act. The ground taken by the assessee is, therefore, rejected.

9. In the result, the assessee’s appeal stands partly allowed for statistical purposes.