I.t.a.nos. 273 Of 2002 & Connect. Cases v. Commissioner Ofincome-Tax, West Bengal(107 I.t.r. 195) Andcommissioner Of Income Tax, West Bengal-Iv

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN TUESDAY, THE 3RD JUNE 2008 / 13TH JYAISHTA 1930 ITA.No. 273 of 2002() --------------------- ITA.226/COCH/2000 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT: ---------------------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL,GOI(TAXES) SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENT: APPELLANT: ------------------------------------------ M/S. KERALA CHEMICALS AND PROTEINS LTD., PANAMPILLY NAGAR, COCHIN-36. BY ADV. SRI.P.BALACHANDRAN (SR.) SMT.PREETHA S.NAIR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 03/06/2008 ALONG WITH ITA NO. 233 OF 2002, ITA NO. 234 OF 2002, ITA NO. 255 OF 2002 AND ITA NO.256 OF 2002, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR & V.K.MOHANAN, JJ. --------------------------------------------- I.T.A.Nos.273, 256, 255, 234 & 233 of 2002 --------------------------------------------- Dated this the 3[rd] day of June, 2008 J U D G M E N T Ramachandran Nair,J: These appeals filed by the Revenue arise fromthe common order of the Income Tax Appellate Tribunal,Cochin Bench disposing of the assessee's appeals for theassessment years 1993-94 to 1997-98. 2.We have heard the Senior Counsel Sri.P.K.R.Menon appearing for the appellant and theSenior Counsel Sri.P.Balachandran appearing for therespondent. 3.The common issue raised for all the years iswhether the assessee was entitled to deduction underSection 80-IA of the Income Tax Act, 1961 (hereinaftercalled 'the Act') in respect of the 'third series' of plant putup for production of ossein. In the course of assessment,the Assessing Officer conducted an inspection of the newplant for which Section 80-IA relief was claimed and hefound that the plant is not a distinct and separate industrial unit inasmuch as certain common facilities areused for the new plant like conveyor system for rawmaterials, storage tanks etc. So far as storage tank fornew plant is concerned, though the Assessing Officerhas stated that he had difficulty to locate it, he has notstated that there was no separate storage tank for rawmaterials. In the appeal filed by the assessee, theTribunal reversed the finding of the Assessing Officerand the Commissioner of Income Tax (Appeals), holdingthat the plant set up by the assessee is separate anddistinct one entitling for relief under Section 80-IA ofthe Act. The Tribunal was of the view that theinvestment attributable to common facilities of the oldplant utilised in the new plant is very insignificant whencompared to the total investment in the new plant. TheTribunal therefore allowed the assessee's appeals byfollowing two decisions of the Supreme Court, TextileMachinery Corporation Ltd. v. Commissioner ofIncome-Tax, West Bengal(107 I.T.R. 195) andCommissioner of Income Tax, West Bengal-Iv. :-3-: Indian Aluminium Co.Ltd.(108 I.T.R. 367). :-3-: Indian Aluminium Co.Ltd.(108 I.T.R. 367). 4.The contention of the Revenue is that thecommon facility utilised by the assessee for running thenew plant is part of and is indispensable for the existingplant and so much so, balance new plant is not a newindustry. The specific case of the Revenue is that thenew industry cannot function on it's own and so muchso, it is not entitled to relief under Section 80-IA of theAct. The Senior counsel appearing for the assessee, onthe other hand, contended that the new plant is separateand distinct in itself and the use of all facilities likeconveyor system for raw materials, water storage tanketc. does not make it part of the old industry. Hespecifically referred to substantial investment made,increase in production capacity etc. as factors provingfor the setting up of a new plant. Reference is invited tothe test laid down by the Supreme Court in TextileMachinery Corporation Ltd.'s case (cited supra) fordeciding as to whether the industry set up in respect ofwhich relief claimed under Section 80-IA is a new I.T.A.Nos. 273 of 2002 & connect. cases :-4-: industry or not. The Tribunal has addressed on the testslaid down by the Supreme Court and came to theconclusion that all the tests are satisfied. The Revenue,however, is contesting the finding of fact by the Tribunalby stating that if the Tribunal wanted to enter into afinding different from what the Assessing Officer hasdone after inspection, they should have themselvesvisited the factory and physically verified the existenceof the new plant. We have noticed from para 3 of theTribunal's order that the assessee was engaged inproduction in the existing two plants by using rawmaterial that is, bone pieces of specified dimensions. Itis further stated by the Tribunal that the 'third series'plant was first put up to make the product from yetanother dimension of bone pieces which appears to us tobe smaller in size than the size that is used in the otherexisting two plants. If raw materials of differentdimensions are used in the new plant, then such itemscould not be used in the existing plant. Thus, the sameitself is indicative of setting up of a new industry. Even :-5-: though the contention of counsel for the Revenue thatthe new plant is only an expansion of the existingbusiness, is correct, we find from theIndianAluminium Companiescase decided by the SupremeCourt that the industry set up under an expansionscheme also is entitled to the benefit. In the normalcourse, we should accept the finding of facts by theTribunal pertaining to the set up of new industry if it isbased on cogent and acceptable evidence. However,since the Assessing Officer has conducted an inspectionand disallowance is made, based on findings, we feel, itwould have been desirable for the Tribunal also to haveverified the facts by itself by conducting an inspection. 5. The Senior counsel for the Revenue contendedthat the Tribunal has no new material to arrive at aconclusion different from what the Assessing Officer hasrecorded. He has therefore pressed for requirement ofinspection by the Tribunal to enter into a finding as towhether the claim of setting up of a new industry by theassessee is correct or not. It is not known, whether, in 5. The Senior counsel for the Revenue contendedthat the Tribunal has no new material to arrive at aconclusion different from what the Assessing Officer hasrecorded. He has therefore pressed for requirement ofinspection by the Tribunal to enter into a finding as towhether the claim of setting up of a new industry by theassessee is correct or not. It is not known, whether, in the course of time, there is re-structuring of the industryor whether there is any change that will make it difficultfor the Tribunal to ascertain the position pertaining to14 years back now. In any case, since counsel for theRevenue has pressed for inspection by the Tribunalbefore rendering a decision and since no new materialsare brought forward apart from the inspection report bythe officer which in our mind is not full and complete,we feel that an inspection by the Tribunal is desirable.We therefore, set aside the orders of the Tribunalpertaining to granting of allowance under Section 80-IAof the Act and the Tribunal is directed to conduct aninspection with notice to the parties. The Assessee'stechnical staff should render assistance to the Tribunalto identify the new plant i.e., the 'third series' osseinplant in respect of which Section 80-IA relief is claimedand will explain the process of manufacture and the roleof the equipments to the Tribunal. It would be open tothe Department to render assistance to the Tribunal byrendering technical expert to inspect the plant. The I.T.A.Nos. 273 of 2002 & connect. cases Tribunal is directed to conduct an inspection and issuecopies of the report of findings to both the assessee andthe Revenue. The Tribunal will decide the matterafresh, without any delay. 6.Additional issues raised by the Revenuepertain to the assessment year 1997-98. The first issueis disallowance of R & D Cess of Rs.2,51,594/- paid tothe Central Government under the R & D Cess Act. Theclaim was disallowed by the Assessing Officer, since theassessee has shown the payment as 'the expenditurepending allocation' in its accounts. Since the conditionslaid down in Section 43B have been satisfied in thiscase, the Tribunal allowed the claim following thedecision of the Supreme Court in Tuticorin AlkaliChemicals and Fertilizers Ltd.v. C.I.T. (227 I.T.R.172). The finding of the Tribunal is that whatever be thepattern of accounting of the amount, the assessee hasincurred a statutory liability. In fact, there was liabilityto pay the cess and the same was, in fact, paid in theprevious year relevant to the assessment year. We find that the payment is under a central legislation and is inthe nature of cess which is rightly allowed by theTribunal under Section 43B of the Act. We thereforedecline to interfere with the finding of the Income TaxAppellate Tribunal on this issue. 7.The next issue pertains to disallowance ofdeduction claimed under Section 35-AB of the Act forthe technical know-how fees paid for the expansion ofproject for setting up of a plant for production ofgellatin. Here again, the Assessing Officer noticed thatexpenditure was capitalised by the assessee under thehead 'expenditure pending allocation'. TheDepartment's case is that the technical know-how feepaid is capital in nature and the assessee has shown it soin the account and therefore, they are not entitled todeduction. However, the contention of the assessee isthat the two conditions for allowance under Section35-AB are that the payment is in the nature of technicalknow-how fee and is for business purposes. TheTribunal entered into a finding that the technical service 7.The next issue pertains to disallowance ofdeduction claimed under Section 35-AB of the Act forthe technical know-how fees paid for the expansion ofproject for setting up of a plant for production ofgellatin. Here again, the Assessing Officer noticed thatexpenditure was capitalised by the assessee under thehead 'expenditure pending allocation'. TheDepartment's case is that the technical know-how feepaid is capital in nature and the assessee has shown it soin the account and therefore, they are not entitled todeduction. However, the contention of the assessee isthat the two conditions for allowance under Section35-AB are that the payment is in the nature of technicalknow-how fee and is for business purposes. TheTribunal entered into a finding that the technical service fee paid by the assessee for acquiring the know-how wasfor setting up the project for manufacturing of gellatinefrom ossein. Since the gellatine is the final product ofthe assessee and the know-how acquired for setting upthe plant for production of article is for businesspurpose, we are of the view that the Tribunal hasrightly referred to the similar provisions contained inSection 36(1)(iii) of the Act and held that theexpenditure is for the purpose of business. We,therefore, do not find any ground to interfere with theorder of the Tribunal. 8.The last ground raised pertains to thedisallowance of cash payment made in excess ofRs.20,000/- in terms of Section 40 A(3) of the Act. TheAssessing Officer made disallowance by adding all thepayments in cash made to same party. However, theTribunal held that disallowance should be made only inrespect of each and every payment made aboveRs.20,000/- other than through cheque or demand draft.Since the amendment authorising clubbing of expenditure for the purpose of disallowance is to takeplace in the next financial year, the Tribunal's order tomake the disallowance with reference to the individualpayments is perfectly correct. We therefore decline tointerfere with the Tribunal's order on this issue. 9.The last contention raised pertains todisallowance of total sum of Rs.6,56,070/- which is anexpenditure relating to scrapped K.P.gelatine projectand expenditure for gel bone development. TheTribunal's finding is that the part of expenditure isincurred in the form of payment towards consultant'sfees for conducting the feasibility study. Since theexpenditure was incurred for conducting feasibilitystudy for expansion of the business, it was allowed. Weconcur with the finding of the Tribunal that both itemsof expenditure are in the nature of business expenditureallowable under the Income Tax Act. Consequently, theTribunal's order for 1993-94 is sustained except on theissue pertaining to Section 80-IA of the Act. Similarly,I.T.A.No.255 of 2002 pertaining to the year 1997-98 will I.T.A.Nos. 273 of 2002 & connect. cases :-11-: stand dismissed, except on the issue pertaining todeduction under Section 80-IA of the Act which standsremanded along with other case. The Tribunal isdirected to dispose of the appeals afresh after inspectionand within a period of three months from the date ofreceipt of a copy of this judgment. C.N.RAMACHANDRAN NAIR, Judge V.K.MOHANAN, Judge MBS/ I.T.A.Nos. 273 of 2002 & connect. cases :-12-: C.N.RAMACHANDRAN NAIR &V.K.MOHANAN, JJ.-------------------------------------------- I.T.A.Nos. 273,256,255, 234 & 233 of 2002 --------------------------------------------- - J U D G M E N T DATED: 03-06-2008 P.R.RAMAN & I.T.A.Nos. 273 of 2002 & connect. cases :-14-: V.K.MOHANAN, JJ. -------------------------------------------- O.P.NO. OF 2001 ------------------------------------ J U D G M E N T DATED: -2007 I.T.A.Nos. 273 of 2002 & connect. cases