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2015 (7) TMI 481 - KARNATAKA HIGH COURT

2015 (7) TMI 481 - KARNATAKA HIGH COURT - [2016] 380 ITR 432 - Entitlement to deduction under Section 80IB - Tribunal held that the Financial Year 1994-95 relevant to Assessment Year 1995-96 constituted the initial Assessment Year and accordingly, the appellant was not entitled to deduction under Section 80IB - whether assessee had begun to manufacture or produce articles on commercial basis in the Financial Year 1994-95 (relevant to Assessment Year 1995-96) or in the Financial Year 1995-96 (rel .....

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its group companies. Therefore, it cannot be said that the machines were not available for sale. Merely because the assessee has sold three (3) machines to its group companies, it cannot be said that there was no commercial transaction.

In the matter on hand, admittedly the three (3) machines were sold by the assessee, of course, to its group companies for consideration. Hence, it cannot be said that the machines were manufactured only on trial basis and not for commercial purposes in .....

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the Income Tax Appellate Tribunal dated 31.07.2009 in ITA No.257/BNG/2009 under which the order of CIT-(A) came to be confirmed. 2. In this appeal we were called upon to answer the following Substantial Questions of Law: (i) Whether the Tribunal was right in holding that the Financial Year 1994-95 relevant to Assessment Year 1995-96 constituted the initial Assessment Year and accordingly, the appellant was not entitled to deduction under Section 80IB for the assessment year 2005-06? (ii) Whether .....

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hibition viz., IMTEX-95 conducted by the Indian Machine Tool Manufacturers Association held in New Delhi during January-1995 and the three machines were displayed at the exhibition. They were conferred "Best Design" and "Best Exhibit" awards at the exhibition. According to the appellant, the three machines so manufactured were prototype. According to the appellant, in order to have field trial being conducted, it sold said three machines to group companies in March-1995. Two .....

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income for ₹ 12,46,00,990/- for the Assessment Year 2005-06 on 30.09.2005. The case was selected for scrutiny by issuing notice under Section 143(2) dated 17.10.2006, assessment order came to be passed under Section 143(3) of the Act. The assessee was asked to furnish details and in response, assessee filed details vide letters dated 11.10.2007 and 15.11.2007. 5. The assessee had claimed ₹ 5,34,00,426/- as deduction under Section 80IB (3) of the Income Tax Act, 1961 and had enclosed .....

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the profit derived from the undertaking for a period of 10 consecutive years beginning from the initial Assessment Year. Under Section 80IB(14)(c)(i) the initial Assessment Year is defined as the initial Assessment Year relevant to the previous year in which the industrial undertaking begins to manufacture or produce article on things. It is not in dispute that the assessee had produced three (3) machines in the Financial Year 1994-95 relevant to Assessment Year 1995-96. According to assessee, t .....

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itled for claiming adjudication under section 80IB(3) of the Act by passing the assessment order dated 30.11.2007. Being aggrieved by the same, appeal came to be filed before CIT(A) and Appellate Authority by order dated 13.01.2009 dismissed the appeal filed by the assessee. Assessee carried the matter further in appeal before Income Tax Appellate Tribunal and Tribunal by order dated 31.07.2009 dismissed the appeal filed by the assessee and affirmed the order passed by the CIT(A). Hence, this ap .....

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ssee, was for trial purposes and not for commercial purposes. According to the assessee, even though there was a demand from outside customers to buy the machines, it was decided to sell these three (3) machines produced in the year 1994-95 to its group companies only, to conduct field trials and also to get feedback on its performance. Accordingly, one machine of MCV-400 was sold to Ace Designers and one machine each of MCV-400 and MCV-320 were sold to M/s.Pragati Engineering Works. It is furth .....

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, according to assessee, though three (3) machines were manufactured in January' 1995, all the three (3) were sold to its group companies in order to get feedback on performance in the month of March' 1995. Thus, according to the assessee the production of three (3) machines in the Financial Year 1994-95 was not on commercial basis but it was on trial basis. 9. All the Authorities as well as Tribunal on facts have concluded that the production of three (3) machines by the assessee in the .....

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nes which were manufactured by the assessee were sold to the group companies only, in order to conduct the field trials and also to get feedback on performance. He further submits that after getting the orders from intending buyers and after rectifying the defects found in the three (3) machines, actual production for commercial purposes commenced in the Financial Year 1995-96 (relevant to Assessment Year 1996-97) and therefore, assessee would be entitled to get the benefit of 10 years as contem .....

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n held in Pragati Maidan, New Delhi in the month of January' 1995 and there was tremendous response and praise for the products manufactured by the assessee and as there was lot of appreciation by the participants in respect of compact product design and aesthetic view, the three (3) machines were sold to the group companies. He further draws the attention of the Court that at the time of exhibition itself, orders came to be placed for purchase of those machines by 12 intending purchasers an .....

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t is not in dispute and as is clear from the Annual Report 1994-95 of the assessee that the production of machines started from the year 1994. Thus, in a period of three months, the three (3) machines were built and were displayed at IMTEX' 95 held from 15th to 22nd January 1995 at Pragati Maidan, New Delhi. The Annual Report further discloses that both products viz. MCV-400 and MCV- 320 received tremendous appreciation in the IMTEX' 95 for its specifications, features and technical inno .....

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orking for 2 shifts per day continuously for four months and working of the machines was to the satisfaction of the other customers. At the time of the exhibition itself the booking of machines took place. Several reputed customers like M/s.Widia (India) Limited, M/s.Technico, M/s. Hindustan Hyderabad, M/s.Hero Honda, M/s.Mico, M/s.Delta Corporation, etc. were interested to buy the machines and as such, they have placed orders. However, the machines were launched in the market in the month of Au .....

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were sold to group companies, it cannot be said that the transaction is not commercial. There is transfer of title in respect of machines from the assessee to its group companies. Admittedly, the group companies which had purchased the three (3) machines started making use of those machines and were earning profit. It is not in dispute that those machines were working in 2 shifts per day continuously from the date of sale without any technical problem. 14. The learned Advocate appearing for the .....

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ITR 893 (vi) Commissioner of Income-Tax v. Himalyan Magnesite Ltd. - (2005) 276 ITR 56 to contend that the year of commercial production is relevant and not the year wherein the products were manufactured on trial basis. There cannot be any dispute with regard to said proposition of law. A provision in a statue must be interpreted with regard being had to the object for which the section was enacted namely with a view to encouraging the establishment of new industrial undertakings by granting e .....

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formality to say that it had started manufacture or production of articles simply because trial products are prepared with a view to verify whether they can be ultimately used in preparation of final products. 15. In the matter on hand, even before the products were sold to the group companies in the month of March' 1995, the machines were exhibited in public at New Delhi. As aforementioned, there was lot of appreciation for the machines and in fact during the exhibition, bookings took place .....

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shed product for consideration as is obtained in the facts on hand. 16. In the case of COMMISSIONER OF INCOME-TAX, POONA V. HINDUSTAN ANTIBIOTICS LTD. reported in (1974) 93 ITR 548, there was a requirement in law that a "crude penicillin" produced by the assessee was to be tested either in USA or UK for obtaining certificates as to their qualities. After obtaining such certificates as to their qualities, the assessee was permitted to produce the final product i.e., "sterile penici .....

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