2003 (1) TMI 247 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of deduction under Section 80-I.
2. Inclusion of certain incomes for the purpose of deduction under Section 80-I.
3. Disallowance of management expenses while computing deduction under Section 80M.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 80-I:

The first issue raised in the appeal is the disallowance of deduction under Section 80-I of the Income Tax Act, 1961. The assessee claimed a deduction of Rs. 3,64,65,000 under Section 80-I, asserting that a substantial expansion program had been undertaken, increasing the production capacity from 12,000 to 25,000 units. The expansion involved a new industrial unit with substantial investment in plant and machinery. However, the Assessing Officer (AO) disallowed the claim on the grounds that the assessee did not maintain separate books of accounts for the new unit, and the profits could not be accurately bifurcated. The AO also noted that the expansion was merely a modernization of the existing unit, not a new industrial undertaking.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the expansion was a re-endorsement of the original industrial license and not a new unit. The CIT(A) also noted that the new machinery was installed in the same premises as the old machinery, and no separate building was constructed for the new unit. Therefore, it was not possible to determine which part of the production was attributable to the new unit.

The Tribunal, however, disagreed with the CIT(A) and AO. It noted that the assessee had invested a significant amount in new plant and machinery and had increased production capacity substantially. The Tribunal cited the Punjab and Haryana High Court's judgment in the assessee's own case for the assessment year 1980-81, where a similar expansion was considered a new industrial undertaking eligible for deduction under Section 80-I. The Tribunal also referred to the Supreme Court's judgments in Textile Machinery Corporation Ltd. vs. CIT and CIT vs. Indian Aluminium Co. Ltd., which supported the view that substantial expansion could qualify for deduction under Section 80-I. Consequently, the Tribunal directed the AO to recompute the deduction under Section 80-I, treating the expanded capacity as a new industrial undertaking.

2. Inclusion of Certain Incomes for the Purpose of Deduction under Section 80-I:

The second issue pertains to the inclusion of certain incomes, such as interest on bank deposits, income-tax refund, loans to employees, interest on HDFC bonds, recovery of insurance claims, and profit on the sale of fixed assets, for the purpose of computing deduction under Section 80-I. The AO excluded these incomes, stating that they were not derived from the industrial undertaking.

The Tribunal upheld the AO's decision regarding the exclusion of interest on bank deposits, income-tax refund, loans to employees, and interest on HDFC bonds, citing the Supreme Court's judgment in CIT vs. Sterling Foods, which emphasized that only income with a direct nexus to the industrial undertaking qualifies for deduction under Section 80-I. However, the Tribunal allowed the inclusion of recoveries of insurance claims and profits on the sale of fixed assets, as these were directly connected to the industrial undertaking.

3. Disallowance of Management Expenses while Computing Deduction under Section 80M:

The final issue involves the disallowance of management expenses while computing deduction under Section 80M. The AO estimated management expenses at Rs. 1 lakh and reduced this amount from the gross dividend income to compute the deduction under Section 80M. The CIT(A) upheld this disallowance, relying on appellate orders for previous assessment years.

The Tribunal found no justification to interfere with the CIT(A)'s order, as the assessee did not provide details of the dividend income to support the claim that the estimated expenses were excessive. Consequently, the Tribunal confirmed the disallowance of management expenses.

Conclusion:

The Tribunal partly allowed the appeal, directing the AO to recompute the deduction under Section 80-I, including recoveries of insurance claims and profits on the sale of fixed assets, while excluding other incomes not derived from the industrial undertaking. The Tribunal upheld the disallowance of management expenses while computing deduction under Section 80M.