Https://Hcservices.ecourts.gov.in/Hcservices v. Commissioner Of Income Tax) Reported In [2003] 262 Itr 278.The Tribunal View

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 13.07.2011 CORAM: THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMANandTHE HONOURABLE MR.JUSTICE M.JAICHANDREN M/s.Sundaram Fasteners Limited98A, 7th FloorDr.Radhakrishnan SalaiMylaporeChennai-600 004...Appellant in both the appeals The Commissioner of Income Tax-IINungambakkam High RoadChennai-600 034...Respondent in both the appeals PRAYER: Tax Case Appeals against the order of the Income TaxAppellate Tribunal, 'A' bench, Chennai, dated 21st October 2003 inITA No.350/mds/1996 and 900/mds/1996 respectively. i. Against theorder of the Commissioner of Income Tax Appeal VII, Madras, dated24.11.95 made in appeal No.25/94-95, against the order of the DeputyCommissioner of Income Tax, Special Range II, Madras, dated 21.3.94,made in Pan 47/066-CT-3050, for the assessment year 89-90 (in TC (A)752/04), ii. Against the order of the Commissioner of Income Taxappeal VII, Madras, dated 27.2.96 made in Appeal Nos.57/93-94/26/94-95/274/95-96, against the order of the Deputy Commissioner of IncomeTax Special Ranage II, Madras, dated 24.3.95, made in Pan 47-066-CT-3050 9 (in TC (A) 753/04) The above appeals are filed by the assessee relating to theassessment years 1989-90 and 1992-93 respectively. The following https://hcservices.ecourts.gov.in/hcservices/ substantial question of law was raised by the assessee in T.C.No.752of 2004: " Whether the Appellate Tribunal is right inexcluding the receipts of Rs.34,37,154/- from subcontract for the assessment year 1989-90 in thecomputation of eligible business income for thepurpose of computation of relief under Section 80HH of the Income Tax Act, 1961? 2. The following substantial question of law was raised by theassessee in T.C.No.753 of 2004:" Whether the Appellate Tribunal is right inexcluding the receipts of Rs.1,29,40,847/- fromsub contract for the assessment year 1992-93 inthe computation of eligible business income forthe purpose of computation of relief under Section80 HH of the Income Tax Act, 1961? " 3. The assessee herein is a company engaged in the manufactureand sale of High Tensile Fasteners, Cold Extruded parts, Powder MetalParts, Precision Forged Gears, Hot and Warm Precision ForgedProducts, Radiator Caps etc. The assessee has a unit at Krishnapuramat Aruppukottai Taluk in Virudhunagar District, a notified backwardarea, which manufactures fasteners and sockets. In respect offorging work done in the Krishnapuram Unit on the productsmanufactured in Padi, on the admitted fact that the Unit is locatedin a backward area, the assessee claimed deduction under Section 80HH of the Income Tax Act in respect of the receipt which it called assub contract receipts. In the assessment made for the assessmentyear 1989-90 as well as for assessment year 1992-93, while computingthe profits and gains of business, the Assessing Officer, however,rejected the claim for the deduction under Section 80HH in respect ofthe Krishnapuram Unit, which the assessee was entitled to. 4. In the appeal filed as regards the assessment year 1989-90,the commissioner of Income Tax (Appeals) directed the AssessingOfficer to consider the claim for the purpose of determination ofrelief under Section 80HH receipts. 5. As regards the assessment year 1992-93 (T.C.No.753 of 2004),the Assessing Officer pointed out in his order of assessment that thededuction under Section 80HH would have to be computed after settingoff the losses of the same units for the immediate previous year, inwhich event, there would be no positive income for auto unit atKrishnapuram Unit and Precision Forgings Unit at Hosur.Consequently, the Officer held that the assessee would not beentitled to the deduction under Section 80 HH of the Act. Althoughhe pointed out that the benefit under Section 80 HH of the Act was tobe granted while arriving at the profit of the undertaking of the 5. As regards the assessment year 1992-93 (T.C.No.753 of 2004),the Assessing Officer pointed out in his order of assessment that thededuction under Section 80HH would have to be computed after settingoff the losses of the same units for the immediate previous year, inwhich event, there would be no positive income for auto unit atKrishnapuram Unit and Precision Forgings Unit at Hosur.Consequently, the Officer held that the assessee would not beentitled to the deduction under Section 80 HH of the Act. Althoughhe pointed out that the benefit under Section 80 HH of the Act was tobe granted while arriving at the profit of the undertaking of the assessee at Krishnapuram Unit and Hosur, while computing the reliefin the annexure, the Assessing Authority herein failed to carry outthe reasoning in the manner in which it deserved. Consequently, theassessee went on appeal before the Commissioner of Income Tax(Appeals). The Commissioner of Income Tax (Appeals) pointed out thatthe Officer had merely discussed about the principle without grantingthe relief under Section 80HH and 80I of the Act. In thecircumstances, he directed the Assessing Officer to allow the reliefin accordance with law. 6. As against the orders of the Commissioner of Income Tax(Appeals), the Revenue went on appeal before the Tribunal. By acommon order, the Tribunal allowed the Revenue's appeals, followingthe decision of the Supreme Court in the case of Pandian ChemicalsLtd. Vs. Commissioner of Income Tax) reported in [2003] 262 ITR 278.The Tribunal viewed that the words 'derived from' in Section 80 HH ofthe Act must be understood as profits having a direct or immediatenexus with the assessee's industrial undertaking. The Tribunalpointed out that the receipt on sub contract could not be treated asincome derived from the industrial undertaking for the purpose ofgranting of relief under Section 80 HH of the Act. Thus, the orderpassed by the Commissioner of Income Tax (Appeals) was set aside.Aggrieved by the ssame, the assessee has preferred these on appealsbefore this Court. 7. Learned counsel appearing for the assessee submitted that itis admitted by the Revenue that Krishnapuram Unit of the assessee islocated in a backward area and that the assessee had positive incomein respect of both the assessment years. He submitted that theTribunal, however, misdirected itself in placing reliance on thedecision of the Apex Court in the case of Pandian Chemicals LimitedVs. Commissioner of Income Tax reported in [2003] 262 ITR 278, whichhas no bearing to the claim in the present case. Given the fact thatthe Unit at Krishnapuram, located in a backward area, is engaged inthe production of articles, the receipts made by the said unitsqualified for deduction under Section 80 HH of the Act. Thus placingreliance on the decision of this Court reported in [1999] 238 ITR 540- CIT Vs. T.N. Heat Treatment and Fetting Services and [2007] 288ITR 92 - CIT Vs. Taj Fire Works Industries, learned counsel submittedthat in the light of the law declared by this Court, the order of theTribunal has to be set aside and the direction of the Commissioner ofIncome Tax (Appeals) be given effect to. 8. Per contra, learned Standing Counsel appearing for theRevenue, however, submitted that given the fact that the receipts arein the nature of sub contract receipts, the assessee is not entitledto the relief. He pointed out that even though Krishnapuram Unit islocated in the backward area, the receipt being in the nature of subcontract receipt, no exception could be taken to the order of theTribunal. 9. Heard learned counsel appearing for the assessee and thelearned Standing Counsel appearing for the Revenue. 8. Per contra, learned Standing Counsel appearing for theRevenue, however, submitted that given the fact that the receipts arein the nature of sub contract receipts, the assessee is not entitledto the relief. He pointed out that even though Krishnapuram Unit islocated in the backward area, the receipt being in the nature of subcontract receipt, no exception could be taken to the order of theTribunal. 9. Heard learned counsel appearing for the assessee and thelearned Standing Counsel appearing for the Revenue. 10. As already pointed out, the Revenue does not deny the factthat the Unit at Krishnapuram is located in a backward area. TheAssessing Officer pointed out that the unit at Krishnapuram is anindependent unit and the loss of one unit should be set off againstthe profits of the same unit in later years. 11. It is not denied by the Assessing Officer that the unit atKrishnapuram is a profit making unit. Hence, in principle, thebenefit of Section 80 HHC of the Act cannot be denied to theassessee. However, the Assessing Officer viewed the receipt beingone on sub contract, the assessee is not entitled to the relief. Inthis connection, the reliance placed by the assessee to the decisionof this Court reported in [1999] 238 ITR 540 - CIT Vs. T.N. HeatTreatment and Fetting Services merits to be seen. 12. The decision reported in [1999] 238 ITR 540 - CIT Vs. T.N.Heat Treatment and Fetting Services is a case falling under Section80 HH and 80-I of the Income Tax Act. This Court pointed out thatthe assessee receiving from its client untreated crankshafts,forgings, castings etc., and subjecting them to heat treatment, inorder to toughen them to the requisite standards so that they couldbe sold in the market is a manufacturing activity, entitled to claimthe deduction under Sections 80 HH and 80-I of the Income Tax Act,1961. In so holding, this Court followed the decision of this Courtreported in [1999] 238 ITR 540 - CIT Vs. T.N. Heat Treatment andFetting Services (P) Limited, pertaining to the same assesseerelatable to the assessment years 1984-85 to 1986-87, wherein, thisCourt viewed that the assessee's case could not be anything otherthan the one relatable to manufacturing activity, entitling it toclaim necessary deductions under Sections 80HH and 80-I of the IncomeTax Act. Thus, in a case of job work, this Court upheld the claim ofthe assessee as a sub contractor to have the relief granted underSections 80HH and 80-I of the Income Tax Act. The law declared inthe above stated case has direct relevance to the facts of thepresent case. 13. In the subsequent decision reported in [2007] 288 ITR 92 -CIT Vs. Taj Fire Works Industries, a case where the assessee doingjob work claimed the benefit of Section 80 HH and 80I, this Courtapplied the decision of the Apex Court reported in [1993] 204 ITR 412- CIT Vs. N.C.Budharaja and Co., holding that Sections 80 HH and 80-Iof the Income Tax Act, 1961, having a beneficent object, merited aliberal interpretation, of course without doing any violence to theplain language. The assessee therein carried on business in fireworks on job work basis out of the raw materials supplied by its customers. This Court pointed out that the assessee thereinsatisfied the test of manufacture by producing the new materials,viz., crackers and also satisfied the test of industrial undertaking.Since the assessee therein was involved in a systematic activity,organised by the employer for the production and distribution ofgoods, following a series of decisions as mentioned therein, thisCourt held that the assessee was entitled for the benefit of Sections80 HH and 80-I of the Income Tax Act. customers. This Court pointed out that the assessee thereinsatisfied the test of manufacture by producing the new materials,viz., crackers and also satisfied the test of industrial undertaking.Since the assessee therein was involved in a systematic activity,organised by the employer for the production and distribution ofgoods, following a series of decisions as mentioned therein, thisCourt held that the assessee was entitled for the benefit of Sections80 HH and 80-I of the Income Tax Act. 14. Rightly the Commissioner of Income Tax (Appeals) directedthe Officer who had laid down the correct legal principles, to workout the relief under Sections 80 HH and 80-I of the Income Tax Act tothe assessee herein. Even though learned Standing Counsel appearingfor the Revenue sought for remand in this case, we do not find anyground to remand the matter, since there is no controversy as regardsthe facts. 15. As far as placing reliance on the decision of the Apex Courtin the case of Pandian Chemicals Ltd. Vs. Commissioner of Income Tax)reported in [2003] 262 ITR 278 is concerned, we do not find, the saiddecision, in any manner, goes against the case of the assessee. TheUnit at Krishnapuram is stated to be the only unit having hotforging machine. It is stated that the assessee, based atKrishnapuram, received bolts and nuts from Padi, manufactured usingcold forging. The Krishnapuram unit completes hot forging and afterthe process comes to Padi where there is further value addition andafter assembling nuts and bolts, they are marketed. Thus only afterthe process carried on by the Krishnapuram Unit, that the commoditiesreach a stage of marketability. The assessee states that the processof hot forging involves heating of raw materials to 1100 ºC, cutting,forming and piercing. These nuts are then cooled and tapped. Thenuts are then subject to head treatment and surface coating,depending on customer's requirement to withstand higher stress. Thusgiven the nature of the processing done at Krishnapuram Unit, thededuction was rightly considered by the Commissioner of Income Tax(Appeals) in the assessee's favour. We agree with the assessee'scontention. 16. It is to be further noted that the assessee's unit atKrishnapuram has its own accounts maintained separately as anindependent unit and that out of the production process, it hasderived income therein. Thus, it satisfied the test as given underSection 80 HH of the Income Tax Act, which qualifies for deduction inrespect of receipts on job work done at the Krishnapuram Unit.Following the decisions reported in [1999] 238 ITR 540 - CIT Vs. T.N.Heat Treatment and Fetting Services and [2007] 288 ITR 92 - CIT Vs.Taj Fire Works Industries, we set aside the order of the Tribunal.Accordingly, the Assessing Officer is directed to give effect to thedirection of the Commissioner of Income Tax (Appeals). 17. In the circumstances, the above Tax Case Appeals are allowedand the question of law is answered in favour of the assessee. Nocosts. Sd/ Asst. Registrar /true copy/ Sub Asst.Registrar bg/ksv 1. The Commissioner of Income Tax-II, Nungambakkam High Road, Chennai-600 034. 2. The Income Tax Appellate Tribunal, 'A' Bench, Chennai. 3. The Commissioner of Income Tax Appeal VII, Madras-34 4. The Deputy Commissioner of Income Tax, Special Range II, Madras 5. The Registrar Income Tax Appellate Tribunal, Rajaji Bhavan, III Floor, Besant Nagar, Chennai-90 2 ccs To Mr.T.Ravikumar, Advocate, SR.41865 1 cc To Mr.C.V.Rajan, Advocate, SR.41463 T.C.(A) Nos.752 and 753 of 2004RS (CO)RH (1.8.11)