Case Law Details
Brief of the Case
ITAT Chandigarh held In the case of M/s Shree Dhanwantri Herbals vs. The ITO that the careful reading of the form 10CCB, in a serial order would clearly show that the assessee is required to inform the location of the Industry and column (c) specifically ask the assessee to state whether business is a new business and Column (d) clearly ask the assessee whether existing business has under taken substantial expansion, therefore, there are two categories of business and substantial expansion is possible only in case of existing business. In our opinion, the CIT (A) has correctly adjudicated this issue. Hence assessee is entitled only deduction @ 25% as available to assessee in case of substantial expansion in later years, who has already availed full deduction u/s 80IC.
Facts of the Case
ITA NO. 501/Chd/2015
The Assessee derives income from the manufacturing and sale of herbal medicines. During the year under consideration the assessee firm had declared gross sales at Rs. 18,34,74,346/ -. The Assessing officer noticed that assessee was carrying out its business activity at two places one at Amritsar and the other at Kishanpura (Baddi ) , H.P. According to assessing officer, the profits derived from Kishanpura unit has been claimed as deduct ion u/s 80IC whereas no such deduction is available to the Amritsar unit of the assessee. The Assessing officer further noted that there was huge difference of GP and NP ratio in Amritsar and Kishanpura unit i.e. GP and NP ratio of Amritsar Unit was 43.62% and 1.63% as compared to Kishanpura unit having ratio of 52.21% and 11.99%. Considering the above facts, the Assessing officer invoked the provisions of section 80IC read with section 80IA (10) and considering that Kishanpura unit being a new unit should have incurred expenditure on technical know-how and goodwill.
The Assessing officer further opined that the assessee has transferred to the eligible business technology and goodwill without any consideration. The Assessing officer has further observed that partners have agreed to provide technical know-how and services to the assessee’s eligible unit free of cost. Thus, the Assessing officer reduced the profit eligible u/s 80IC by invoking the provisions of sect ion 80IC (7) read with sect ion 80IA (1). Accordingly, the Assessing officer disallowed deduction claimed u/s 80IC to the extent of Rs. 45,80,728/- @ 10% of the turnover on account of non incurrence of expenditure towards royalty / fee for technical knowhow services and further disallowance of 2% turnover on account of claim of goodwill i .e Rs. 30,53,918/- . Consequently, the Assessing officer made the addition of Rs. 76,34,546/ -.
ITA No. 502/Chd/2015
Deduction u/s 80IC on substantial expansion
The assessee started its business activity / operation on 25.7.2005 and initial assessment year for claim of deduction u/s 80IC was 2006-07. The assessee claimed that it has made substantial expansion during the financial year 2010-11 and claimed 100% deduct ion u/s 80IC from assessment year 2011-12 re- fixing it as initial assessment year . According to Assessing officer, the assessee has already claimed this deduct ion to the extent of 100% of the eligible profit for 5 years period from assessment year 2006-07 to 2010-11. Thus, the Assessing officer noticed that assessee firm again claimed deduct ion u/s 80IC @ 100% against eligible profit for this assessment year which is sixth year of product ion of the firm. The Assessing officer disallowed the claim of 100% deduct ion u/s 80IC and restricted it to 25% of profits of the business thereby disallowing a sum of Rs. 1,55,55,717/- .
Contention of the Assessee
Deduction u/s 80IC on substantial expansion
The ld counsel of the assessee submitted that the issue involved in the above ground is squarely covered against the assessee by the decision of ITAT, Chandigarh Benches in the case of Hycron Electronics, Baddi , Solan v ITO & Others in ITA No. 798/Chd/2012 relating to assessment year 2009-10 & others. The Tribunal vide its order dated 27.5.2015, held that the careful reading of the form in a serial order would clearly show that the assessee is required to inform the location of the Industry and column (c) specifically ask the assessee to state whether business is a new business? Column (d) clearly ask the assessee whether existing business has under taken substantial expansion, therefore, there are two categories of business and substantial expansion is possible only in case of existing business. In our opinion, the Ld. CIT (A) has correctly adjudicated this issue. We hold that the assessee before us i .e. M/s Hycron Electronics in ITA No. 798/Chd/2012 is entitled to only 25% of deduction during the present year because the assessee has already availed the period of full deduct ion @ 100% in the earlier five years i.e. from assessment years 2004-05 to 2008-09.
Held by CIT (A)
The CIT (A) upheld the order of assessing officer in both the appeals.
Held by ITAT
ITA NO. 501/Chd/2015
We find that both the above issues are squarely covered in favour of the assessee and against the Revenue by the decision of ITAT, Chandigarh Bench in the case of M/s Shree Dhanwantri Herbal , Solan vs ITO in ITA No. 117/Chd/2010 relating to assessment year 2006-07. It was decided in this case that the assessing officer has not found any evidence to support his proposition that there is any arrangement or business transaction between the assessee and the sister concern with respect to obtaining of technical knowhow ,customer base or goodwill owned by the sister concern and therefore the assertion of the AO that the assessee has obtained the use of aforesaid items without incurring any expenditure , is only a bald assertion based on surmises and conjectures. Accordingly, ground no. 1 related to invoking of section 80IA (10) read with section 80IC (7) by the AO is hereby set aside. Further the action of the lower authorities in estimating the net profits of 10 % of the turnover is also set-aside.
The facts of the present case are similar to the facts of the above case. Respectfully, following the order of the Tribunal referred to above, we allow both the grounds of appeal and delete the impugned additions.
ITA No. 502/Chd/2015
Deduction u/s 80IC on substantial expansion
In the case of Hycron Electronics, Baddi, Solan v ITO & Others, ITA No. 798/Chd/2012, it was held that Sub sect ion (1) of section 80IC is a general provision and does not require any interpretation. Sub Sect ion [2] is the enabling provision which provides for the types of under takings and circumstances where deduct ion under section 80IC would be allowed. It allows deduction to various under takings which have either begun or begins manufacturing of any article or things not being any article or thing specified in Schedule xiii and also under takes substantial expansion. These deductions were available in different states during different window periods which have been refer red to in clause ( i ) , ( ii ) & (iii ) of this sub sect ion. The content ion on behalf of the assessee is that since deduction is available to the under taking which under takes substantial expansion and since there is no restriction in this sub section itself , therefore, the deduction was available on substantial expansion by old under takings as well as new under takings during the window period.
However, there is no force in this interpretation. Sub sect ion (2) begins with the expression “this section applies to any under taking or enterprise which has begun or begins” this itself shows that provision made even the existing under takings entitled for the deduct ion because the express ion ‘begun’ would refer to the under taking which were already existing and began the manufacture before the window period mentioned in the sub sect ion. The last line of the sub sect ion reads “and under takes substantial expansion during the period beginning……. .”. This would naturally refer to the under taking which were already existing. If it is read the way the Ld. counsel of the assessee would like us to read then the provision would become unworkable because i f there is an under taking which is established during the window period then the same cannot possibly under takes substantial expansion also simultaneously. The expression ‘and” would refer to the cumulative condition that is both parts of the conditions need to be complied. The expression ‘and’ can be joined only with the expression ‘begun’. This is because ‘begun’ refers to something which has already started in the past whereas ‘begins’ connotes something which would commence in the present. Therefore, the expression ‘and’ can be correlated only with existing unit because as we have already seen a new unit which has been set up and begins production cannot simultaneously undergo substantial expansion also so as to become eligible for deduction under this section.
At this stage, it can be said that sect ion has some confusion and some effort is required to understand the correct intention of the Legislature by keeping various principles of interpretation. Therefore, various principles of interpretation needs to be looked into. This provision was brought into the statute indisputably in the light of the “incentive package” announced by the Union Cabinet. Through this incentive package not only income tax concession but excise concessions and some subsidies like transport subsidy and capital subsidy were also provided to various industries in the hilly stated comprising states of Himachal Pradesh, Uttaranchal , Sikkim and North-Eastern states to boost the economies of these hilly states
A Circular No.7 was issued by the CBDT on 5.9.2003 in this respect the circular makes it clear that sect ion 80IC was inserted to give effect to the new package announced by the Union Cabinet. The Circular further clarifies that this sect ion provides for deduct ion for a period of 10 years from the profits of new under taking or enterprise or existing under taking or enterprise on their substantial expansion (see highlighted port ion of the circular). The contention of the Ld. Counsel of the assessee was that word ‘existing’ qualifies only the under taking or enterprises and does not mention any particular date for carrying out substantial expansion. We find no merit in this content ion.
The careful reading of the form in a serial order would clearly show that the assessee is required to inform the location of the Industry and column (c) specifically ask the assessee to state whether business is a new business? Column (d) clearly ask the assessee whether existing business has under taken substantial expansion, therefore, there are two categories of business and substantial expansion is possible only in case of existing business. In our opinion, the CIT (A) has correctly adjudicated this issue.
Respectfully following the order of the Tribunal passed in the case of Hycron Electronics, Baddi , Solan v ITO & Others ITA No. 798/Chd/2012 , we dismiss this ground.
Accordingly appeal of the assessee partly allowed.
