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2016 (7) TMI 187 - ITAT DELHI

2016 (7) TMI 187 - ITAT DELHI - [2016] 50 ITR (Trib) 161 - Eligibility for deduction u/s 80HH and 80I - non maintenance of separate book of accounts - quantum of deduction - Held that:- In the present case the gross total income of the assessee includes income from manufacturing activity of an industrial undertaking irrespective of the fact that the activities is being carried out either at small scales or large scale and such activity was significant or not compared to total turnover of the ass .....

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sion we have held that the assessee is entitled for deduction u/s 80HH and 80I of the Act on the part of income earned from manufacturing activities. However, for want of adequate material on the record of the Tribunal, it is not possible for us to calculate quantum of deduction and thus we find it appropriate to send the issue for limited purposes i.e. for calculation of deduction u/s 80HH on the income earned from manufacturing activities during the relevant periods under consideration for all .....

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ICIAL MEMBER These appeals have been filed by the assesee against the order of the CIT(A)-I, Delhi passed in respective appeals for assessment years 1984-85 to 1987-88 and 1991-92. 2. It is pertinent to note that these appeals have been set aside by the Hon ble High Court of Delhi order dated 27.4.2009 passed in ITA No. 222 of 2006 and other appeals( For short High Court order) to the Tribunal for limited purpose i.e. for re-examination of the sole issue emerging from paras 31 to 34 of the order .....

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besides construction work of railway line the assessee company being a public sector company incorporated under companies Act and under administrative control of Ministry of Railways also engaged in the manufacturing of large no. of items and this fact has also been noted by the Tribunal at page 2 of last para for assessment year 1983-84 dated 20.8.1991 (hereinafter the Tribunal order). The Ld. Counsel vehemently pointed out that as per the Hon ble High Court order (supra), it has been decided t .....

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ng aside the issue to the file of the AO as the assessee is not carrying any manufacturing activity and even if some small manufacturing activity is being carried out, the assessee did not maintain separate accounts for construction and manufacturing activity hence, there is no requirement for sending the case to the file of the AO for this purpose. The Ld. CIT(DR) also drawn our attention towards Hon ble High Court Order (supra) paras 31 to 34 and order u/s 263 of the Act dated 7.2.1989 for ass .....

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lish that the assessee is an industrial undertaking eligible for deduction u/s 80HH and 80I of the Act. Hence, there is no requirement for sending this issue to the file of the AO for computation of deduction. The Ld. CIT(DR) also pointed out that as per order of the Tribunal dated 28.4.2006 which was challenged by the same before the Hon ble High Court, in para 6 the Tribunal has also observed that manufacturing activity of the assesee was not very significant compared to the total turnover of .....

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this deduction claimed by the assessee cannot be allowed. The Ld. CIT(DR) also placed reliance on the decision of Hon ble High Court of Delhi in the case of CIT vs. Minocha Brothers Pvt. Ltd. (1986) 160 ITR 134(Del) which has been subsequently upheld by Hon ble Supreme Court, contended that construction is not a manufacturing activity and when the assessee is purely engaged in the construction activity then it is not eligible for deduction u/s 80HH and 80I of the Act. The Ld. CIT(DR) contended t .....

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thics of court arguments as the ability of High Court officer can not be challenged on doubted by the lower court officer appearing before the Tribunal on behalf of the Department. The Ld. Counsel also pointed out that the assessee claimed entire 100% income as deduction u/s 80HH & 80I of the Act but the claim regarding construction activity has been denied by the Hon ble High Court, however, the claim of deduction in respect of manufacturing activities has been held as acceptable by the Hon .....

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ty. 7. On careful consideration of above submissions, from the order of Hon ble High Court order (supra) paras 31 to 34 we observe that the issue has been set aside to the Tribunal for re-examination of the claim of the assessee for deduction u/s 80HH & 80I of the Act keeping in view the parameters laid down by the Hon ble Supreme Court in the case of N.C. Budhiraja (Supra). The relevant para 28 to 34 are being respectfully reproduced below for the sake of completeness in this order : 28. Th .....

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applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the, total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof'. Sub-section (2) say that section 80HH applies to any industrial undertaking which fulfils at the four conditions prescribed therein. 29. Thereafter, sub-section (2) of Section 80-HH was set out by the Apex Court, which lays down the conditions for the applica .....

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e , production and articles and held as under :- The word "production" or "produce" when used in juxtaposition with the word "manufacture" takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the byproducts, intermediate products and residual products which emerge in the course of manufacture of goods. The next word to be considered is "articles", occurring in the said clause. What does it .....

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, a bridge, a building, a road, a canal and so on? We find it difficult to say so. Would any person who has constructed a dam say that he has manufactured an article or that he has produced an article? Obviously not. If a dam is an article, so would be a bridge, a road, an underground canal and a multi-storeyed building. To say that all of them fall within the meaning of the word "articles" is to overstrain the language beyond its normal and ordinary meaning. It is equally difficult to .....

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; are normally associated with movables - articles and goods, big and small - but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road or a building. (emphasis supplied) 30. It is dear from the above that: (i) while interpreting the words 'manufacture' or 'production, the Court drew distinction between manufacture/produce on the one hand and 'construction' on the other hand; (ii) th .....

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go into the construction of the said end product. 31. Applying the aforesaid test. when we examine the case of the assessee in the context of end product, it is difficult to come to the conclusion that the activity of laying railway line can amount to 'manufacture' or 'produce'. It would definitely be a construction activity. 32. We may, however, note the argument of learned counsel Appearing for the assessee, who sought to draw a fine distinction by making a submission that the .....

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that the respondent is himself manufacturing some of the articles like gates, windows and doors which go into the construction of a dam but that makes little difference to the principle. The petitioner is not claiming the deduction provided by section 8OHH on the value of the said manufactured articles but on the total value of the dam as such. In such a situation. it is immaterial whether the manufactured articles which go into the construction of a dam are manufactured by him or purchased by .....

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nstruction of dam as such and not on the value of manufactured articles which go into the construction of a dam. At the same it is also clear that the Court" did not express any opinion as to whether such a claim which is made on the manufacture of articles which go into the construction of a dam would be admissible or not. Obviously, it was left open. 34. Be that as it may, the issue in question has not been examined by the ITAT from this angle at all. Simply relying upon its order in resp .....

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no answer. 8. In view of above observations and conclusion of Hon ble High Court Order (supra) in our humble understanding, the Hon ble High Court categorically held that the activity of lying railway line cannot amount to activity of manufacture or produce and the same is construction activity and an income earned by the assessee therefrom is not eligible for deduction u/s 80HH and 80I of the Act. However, the Hon ble High Court in the light of observations of the Hon ble Supreme Court in the c .....

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at the Hon ble Supreme Court in the decision of N.C. Budhiraja (supra) did not express any opinion as to whether such a claim which is made on the manufacture of articles which go or used for construction, would be admissible or not and the same was left open. Subsequently, in para 34 of the Act the Hon ble High Court set aside the issue to the Tribunal for re-examination of the issue in view of the parameters laid down by the Hon ble Apex Court in the case of N.C. Budhiraja (supra). 9. On the b .....

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submitted its detailed reply to the said notice vide its communication to the CIT dated 24th of March, 1988. In paragraph of this communication it has been submitted that the company manufactures or produces various articles such as, ballast, concrete sleepers, specialized mechanical track laying/relaying equipments, railway panels, steel roof panels, columns, gentry, girders, wind girdles, frames, dressings, erection towers, tackles etc. track laying equipment, cantilever assemblies, terminatio .....

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llows : 2. The assessee, namely, Indian Railway Construction Company Ltd. is a public sector company incorporated under the Companies Act and is under the administrative control of the Ministry of Railways. It is engaged in the manufacturing of large number of items such as ballast, concrete sleepers, specialised mechanical track laying/relaying equipments, railway panels, steel roof panels, columns, gentry, girders, wind girdles, frames, dressings? erection towers, tackles, etc., track laying e .....

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ground gears etc., all of which are used in the fabrication and installation of railway tracks. 12. From the above it is vivid that besides construction activity and lying of railway line the assessee during the relevant financial periods was engaged in manufacturing activity as an industrial undertaking. These facts have not been controverted by the AO or by the CIT(A) and obviously onus lies on the assessee to show that besides construction and lying of railways line it was also engaged into m .....

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ion activity the assessee is also engaged in manufacturing of large number of various items which are used in the installation and fabrication of railway tracks. 14. We decline to accept vehement contention of Ld. CIT(DR) that since the entire claim of the assessee of deduction u/s 80HH & 80I of the Act has been dismissed by the High Court then there is no point to decide eligibility of same on the manufacturing activities. Because in our humble understanding of the ratio of Hon ble High Cou .....

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ion of Ld. Counsel for the assesse that the Hon ble High Court held that the assessee is not entitled for deduction in respect of income accrued to it from construction activities such as lying of railway line / tracks. However, subsequently the Hon ble High Court observed that since the issue of allowability of deduction u/s 80HH of the Act was left open by the Hon ble Supreme Court in the case of N.C. Budhiraja (supra) as noted by Hon ble High Court in para 32 (as reproduced above in this orde .....

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this fact was not disclosed or placed before AO and CIT but we decline to accept this contention of the as from para 3 at page 2 of the order of CIT dated 7.2.1989 passed u/s 263 of the Act, we note that vide written submission dated 27.9.1988 the assessee submitted this fact that the assessee company is suppose to manufacture various articles like cement concrete sleepers, track lying equipment, rail penal etc. which shows that the fact of manufacturing activity was informed to lower authoriti .....

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ed manufacturing activity during the relevant period. 16. Further keeping in view the dicta laid down by Hon ble Supreme Court in the case of N.C. Budhiraja (supra) we respectfully note that their Lordship speaking for the Hon ble Apex Court clearly held that the assessee is not entitled for deduction u/s 80HH and 80I of the Act for income earned from construction activities but their Lordship refrain themselves from expressing any opinion on the question that what would be the position if the r .....

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andates as follows :- 2180HH. (1) Where the gross total income of an assessee includes any profits and gains derived22 from an industrial undertaking22, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof. xx xx xx 4) The deduction specified in sub-section (1) shall be .....

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to fulfillment of certain conditions as provided in sub section (2) of the said provision. In the case in hand it is not the case of the AO that the assessee is not entitled for deduction because it is not fulfilling conditions mentioned in subsection (2) but the case of the AO is that the assessee is primarily engaged in the business of construction and lying of railways track / line and hence it is not entitled for deduction of u/s 80 HH & 80I of the Act. The CIT has in order u/s 263 of th .....

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e the end product after the execution of the project is a Railway track or a bridge. As already explained, they do not constitute an article or a thing being immovable in character. There might be a minor activity of manufacture of articles but the purpose of this activity is to complement the main project i.e laying of Railway track. In view of this, the arguments of the assessee company are devoid of any substance and, therefore, the same are rejected. It would not be out of place to mention t .....

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t also dismissed prayer of deduction on manufacturing activities. We are not agree with the contention the Ld. CIT(A) and subsequently raised by Ld. CIT(DR) that there might be a minor activity of manufacture of articles buy the purpose of the activity is to complete the main project of laying railways track / line as when the provisions of the Act mandates that the assessee is eligible for deduction pertains to income accrued from manufacturing activities then in our considered view, the manufa .....

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e gross total income of the assessee includes income from manufacturing activity of an industrial undertaking irrespective of the fact that the activities is being carried out either at small scales or large scale and such activity was significant or not compared to total turnover of the assessee including income of the business which is not eligible for such deduction. 19. In view of above we hold that the assessee is eligible for deduction u/s 80HH of the Act on the income from manufacturing a .....

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