2005 (2) TMI 750 - AT - Income Tax

Revision - Of orders prejudicial to interest of revenue Deductions - Profits and gains from industrial undertakings etc. after certain date

Issues Involved:
1. Validity of the CIT's invocation of Section 263 of the IT Act.
2. Eligibility of trading profits for deduction under Section 80-IA.
3. Deduction eligibility of income from oil cake processing division under Section 80-IA.
4. Calculation of deduction under Section 80-IA considering export profit and trading profit.

Detailed Analysis:

1. Validity of the CIT's invocation of Section 263 of the IT Act:
The CIT found the assessment order dated 29-12-1997 erroneous and prejudicial to the interests of the Revenue, as the Assessing Officer (AO) did not exclude the profit earned from trading in vegetable oils while allowing the deduction under Section 80-IA. The CIT issued a notice under Section 263, calling upon the assessee to explain why the assessment order should not be revised. The assessee argued that there was a direct nexus between the trading business and the industrial undertaking, hence the profit should not be excluded. However, the CIT disagreed, finding the AO's order erroneous and prejudicial to the Revenue, and set aside the assessment order for a fresh assessment.

2. Eligibility of trading profits for deduction under Section 80-IA:
The assessee contended that the trading in edible oil was a part of the industrial undertaking's business activities and thus eligible for deduction under Section 80-IA. The CIT DR argued that the AO did not make any enquiry or discussion on this crucial issue, rendering the order erroneous and prejudicial to the Revenue. The Tribunal upheld the CIT's order, stating that the AO's non-application of mind on this important issue justified the invocation of Section 263.

3. Deduction eligibility of income from oil cake processing division under Section 80-IA:
The assessee maintained that the oil cake processing division was an integrated activity of the industrial undertaking, and the income from this division should be eligible for deduction under Section 80-IA. The AO, in the fresh assessment, found that the income from the oil cake processing division was not eligible for deduction and applied a rule of thumb to disallow 50% of the deduction originally allowed. The Tribunal disagreed with this finding, stating that the income from the oil cake processing division, being a by-product of the industrial undertaking's manufacturing activity, had a direct nexus with the industrial undertaking and was thus eligible for deduction under Section 80-IA.

4. Calculation of deduction under Section 80-IA considering export profit and trading profit:
In the fresh assessment, the AO calculated the trading income at Rs. 2,19,681 and found it ineligible for deduction. The AO also allowed a separate deduction under Section 80HHC for export profit, calculating it at Rs. 44,534. The Tribunal directed that the export profit and trading profit should be excluded from the profit of the industrial undertaking before allowing the deduction under Section 80-IA. The AO was instructed to reduce the profit by the sum of Rs. 2,64,115 (comprising Rs. 44,534 export profit and Rs. 2,19,681 trading profit) and recalculate the deduction under Section 80-IA accordingly.

Conclusion:
The Tribunal dismissed the appeal concerning the CIT's invocation of Section 263 and the eligibility of trading profits for deduction under Section 80-IA. However, it partly allowed the appeal regarding the deduction eligibility of the income from the oil cake processing division and directed the recalculation of the deduction under Section 80-IA after excluding the export profit and trading profit.

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