By TIOL News Service

CHENNAI, JULY 19, 2017: THE ISSUE BEFORE THE COURT IS - Whether the fact that source of investment are common to two of its units, would by itself disentitle the Assessee from claiming deduction qua second unit, if Assessee has engaged separate labour and is engaged in manufacture and production of articles. NO is the verdict.

Facts of the case:

The Assessee is a partnership firm. It was in the business of manufacturing High Tensile Precision Fasteners (Fasteners) which are extensively used in the automobile industry. During the period relevant for A.Y. 1998-99, the Assessee purchased two Nut former machines. This was followed by the Assessee purchasing in May, 2002, one more Nut Former machine, though, via the import route. For the next five (5) years, relevant for A.Ys.1998-99 and 2002-03, the Assessee claimed deduction at the rate of 100% of the profits derived by it for conducting the business of manufacturing fasteners/nuts. The Assessee claims that it set up a second Unit and, started commercial production qua the said Unit on 23.10.2003. Since, the second unit was set up, the Assessee claimed deduction vis-a-vis Unit -II at the rate of 100% of the profits derived in respect of the said unit, with effect from A.Y. 2004-05. According to the Assessing Officers, Unit -I and Unit -II were not, by themselves, "integrated units". He was of the view that the units were formed by splitting and/or reconstructing existing business. He concluded that the Assessee manipulated inter-group transactions only for the purpose of claiming tax benefits. He rejected the claim of the Assessee for deduction under Section 80IB of the 1961 Act, both for Unit - I and Unit-I.With regard to deduction claimed by the Assessee under Section 80IA, Assessing Officer adjusted the losses incurred by its one wind mill division, albeit, for earlier years, against profits of the A.Ys. in issue, while calculating the total taxable income.

On appeal, the HC held that,

++ it is to be noted that when the tests under the provision are employed, it is quite clear that in so far as Unit II is concerned, the Assessee has employed a substantial amount of fresh capital. The fact that the source of investment, i.e., are common to Units I and II, by itself, would not disentitle the Assessee from claiming deduction qua Unit II on this score. Furthermore, CIT(A)s orders itself show that moneys have also been borrowed from banks, such as, SBI and HDFC, to fund Unit II. The Assessee has engaged separate labour and is engaged in manufacture and production of articles. The only condition that the Assessee, in this behalf, is required to fulfill is that, they should manufacture and produce an article or thing. Sub-clause (iii) of sub-section (2) of Section 80IB of the 1961 Act does not require that, in order to claim deduction, the article or any manufacture must be commercially different from that which is manufactured under the aegis of the existing business. In so far as the aspect of transfer of machinery is concerned qua Unit I, the CIT(A)s and the Tribunal have accepted the fact that the machinery, if transferred is below the permissible limit of 20% of the total value of plant and machinery, it cannot be viewed as violation of the conditions prescribed under Section 80IB of the 1961 Act for claiming deduction. However, when it came to putting to test the said proposition, vis-a-vis Unit II, the Authorities below construed such transfer as manipulation, only to claim deduction under Section 80IB of the 1961 Act, by keeping the value of the transferred machinery below the permissible limit of 20% of the total value of the plant and machinery of the recipient unit, i.e, Unit II. There is no discussion, either in the order of the Tribunal, or in the order of the CIT(A)s, as to how this would amount to manipulation, as long as the machinery transferred to Unit II was within the permissible limit of 20%, as set out in Explanation 2 to sub-section (2) of Section 80IB. This could not form the basis for declining the deduction claimed by the Assessee;

++ the condition stipulated in sub-clause (ii) of subsection (2) of Section 80IB disentitle the Assessee from claiming a deduction, only, if, the formation of the new business takes place via transfer of machinery and/or plant, previously used for any purpose. Therefore, it is not a mere transfer of plant and machinery, which is used previously for some purpose, but the fact that transfer is of such nature that it enables the formation of the undertaking qua which deduction is sought by an Assessee. It is not the Revenue's case that the transferred machinery enabled the formation of Unit II. The four nut former machines were imported specifically for setting up Unit II. Furthermore, the record shows that the value of the transferred machines were below 20%. Therefore, there was no basis for declining the claim for deduction made by the Assessee under Section 80IB on the ground that it had manipulated the transfer of machinery in such a manner that its value was kept below 20% of the total value of the plant and machinery installed in Unit II. The mere fact that nut blanks were purchased from Unit I cannot be a reason to deny deduction under Section 80IB, vis-a-vis Unit II. The deduction is made available to the Assessee, vis-a-vis Unit II, as it fits the attributes of an industrial undertaking and not to the Assessee per se. As long as the Assessee has invested a substantial amount in setting up an industrial undertaking, which is separate and distinct, it is entitled to claim the said deduction. The substantial expansion of Unit I or even, if, Unit II is concerned as an expanded form of Unit I, which, for the reasons given above, is clearly substantial, it cannot be denied deduction under Section 80IB of the 1961 Act. The fact that it has used raw material, i.e., nut blanks, which have been supplied by Unit I, cannot come in the way of one reaching a conclusion that it is a separate and independent unit;

++ both CIT(A)s as well as the Tribunal were wrong in concluding that the Assessee could not claim deduction under Section 80IB of the 1961 Act vis-a-vis Unit II. The Assessing Officer has done two things: firstly, it has treated two separate power divisions as one undertaking; and secondly, set off the losses of earlier years against profits of the years in issue. If, once the Assessee has exercised the option of choosing the initial Assessment year, only losses of the years beginning from the initial Assessment Year can be brought forward. The Revenue cannot notionally bring forward losses of earlier years, which have been set off against other income of the Assessee. The approach adopted by the Assessing Officer in the two Assessment Orders of treating two separate power generating divisions as a single undertaking is not the right approach. In computing the deduction claimed by the Assessee under Section 80 IA of the 1961 Act, the Assessing Officer ought to have treated the two power divisions as a separate undertakings and furthermore, desisted from setting off the losses of earlier years against the profits of the Assessment Years in issue, by bringing them forward notionally, despite the fact that they had already been set off, as claimed by the Assessee in the earlier years. The Assessee will, accordingly, be entitled to claim deduction under Section 80IB of the 1961 Act in respect of Unit II as well, apart from the claim for deduction in respect of Unit I.

(See 2017-TIOL-1330-HC-MAD-IT)