TMI Blog2018 (3) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... to be allowed. Since the interest expenses was much more than the interest income no interest income can be excluded from the profits on which deduction u/s 80IB(5) of the Act ought to be allowed. We therefore uphold the order of the Ld. CIT(A) on this issue. We find that this tribunal in assessee’s own case for the Asst Years 2008-09, 2010-11 to 2012-13 vide order dated [2017 (4) TMI 1313 - ITAT KOLKATA] had held in the aforesaid manner. Penalty u/s 271AAB(1)(a) on account of disclosure made u/s 132(4) at the time of search on undisclosed stock - Held that:- There is no escape from the rigor of Sec.271AAB(1) if income of the specified previous year emanates from the material found in the course of search and such income or transaction has not been records in the books of accounts maintained by the Assessee. The legislature has given sanctity to entries made in the Books of accounts maintained in the ordinary course of business on the premise that it is maintained contemporaneously. If there is excess stock physically found than what is recorded in the books of accounts, then Sec.69 of the Act (Unexplained investments not recorded in the books), comes into play. Therefore such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 2304/Kol2016 Quantum appeal The revenue has raised the following grounds of appeal for the Asst Year 2013-14 for the quantum appeal:- 1. That the Ld. CIT(A) has erred in accepting that the term manufacture occurring in the context of section 80IB does not necessarily require that the end product of the manufacturing process is to be completely different from the ingredients, as regards its chemical composition, integral structure or its use, 2. That the Ld. CIT(A) has erred in accepting that the process of manufacturing of poultry feeds does not amount to mere mixing together of all different ingredients, without involving any change in the chemical composition of the ingredients, 3. That the Ld. CIT(A) has erred in accepting that the process of preparation of poultry feeds amount to production of an article within the meaning of section 80IB, 4. That the Ld. CIT(A) has erred in allowing the entire amount of ₹ 1,09,01,866/- claimed as deduction u/s 80IB. 5. That the Ld. CIT(A) has erred in directing the AO to net off the interest income credited in the profit and loss account of the eligible undertaking against the interest income debi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... feed. It could only be consumed by only one class of consumer i.e. poultry none else. It was the claim of the Assessee the end product was known as poultry feed in the trade, commerce and industry and was considered as separate and distinct from various materials consumed in the process of its production. The assessee also pleaded that poultry feed manufacturing industry was notified by the Central Government to be eligible for claiming deduction for consecutive period of 10 years u/s 80IB(4) of the Act where the undertaking was located in any of the North Eastern States. It was the plea of the Assessee that deduction both u/s 80IB(4) (5) could be allowed only if newly set up industrial undertaking was engaged in manufacture and production of an article an different poultry feed industry was considered eligible by the Central Government for claiming deduction u/s 80IB(4) then the same industry should be considered to be eligible for deduction u/s 80IB(5) of the Act also on the ground at it was engaged in manufacture or production of an article. 2.3. The ld. AO however was of the view that in the production process explained by the assessee there was no change in chemical co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons discussed in the order of CTT(A) we have no hesitation in- holding that the assessee is engaged in manufacture or production of an article, contemplated in Sec 80IB(2)(iii); 16. We also find on the identical facts the Bangalore Bench of ITAT in the case of Kamrala Feeds -- Vs- DCIT 74 ITD 65 held that activity of producing poultry feed amounts to manufacture and therefore eligible for deduction u/s 80I, section 80I and Section 80IB are parameteria because conditions for part of deduction are same and therefore the said decision is equally applicable in the present case. . 17. Section 80IB is an incentive provision or the Income Tax Act enacted by the Legislature to promote economic and industrial growth in backward districts and states. In the case of Bajaj Tempo Ltd --Vs. CIT (196 ITR 188) the Supreme Court has Opined that a provision of taxing statute granting incentives for promoting growth and development should be construed liberally and since a provision for promoting economic growth has to be interpreted liberally the restriction thereon too has to be construed so as to advance the objective of the provision and not to frustrate it. Conditions of sec. 80IB(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.8. The learned DR however submitted that in the decisions rendered by the Tribunal, the decision rendered by the Hyderabad Bench of ITAT in the case of Venkataswara Feeds vs. ACIT 22 Taxmann.com 234(Hyd.) was not properly considered and therefore the decision rendered in Assessee s own case requires reconsideration. In this regard it was submitted that the Tribunal in the case of Venkateswar Feeds (supra) found that various feed ingredients such as maize, rice bran, de-oiled soya etc. along with certain feed premixes are mixed in different proportions and then ground to form a course powdered material which was called mash feed. Such feed underwent a certain kind of physical changes and was converted into small pellets. The actual process involved was that the mash feed was carried through an elevator to a pellet making machine where it got mixed with steam and then forced through a press containing small holes to convert the feed into small pellets. It was held that there was no change of composition in the mash feed and the pellet feed. Hence, conversion of physical shape of the feed involves only processing and not manufacture. 2.9 The learned DR filed before us a chart e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are of the view that the issue in the Revenue s appeal is squarely covered against the revenue by the decision of the Co-ordinate Bench of this Tribunal in assessee s own case for the earlier years which was based on the decision rendered in the case of Amrit Feeds (supra). Respectfully following the decision of the Co-ordinate Bench of this tribunal in assessee s own case the finding of Ld. CIT(A) on this issue stands confirmed. We find that this tribunal in assessee s own case for the Asst Years 2008-09, 2010-11 to 2012-13 vide order dated 5.4.2017 had held in the aforesaid manner. In view of the aforesaid findings and respectfully following the judicial precedent relied upon hereinabove, we dismiss the Grounds (i) to (iv) raised by the revenue before us for the Asst Year 2013-14. 3. As far as Ground Nos. (v) (vi) raised by the revenue for the Asst Year 2013-14 are concerned, the facts are that the assessee had received interest on fixed deposits of ₹ 5,53,210/-. The ld. AO held that deduction u/s 80IB(5) of the Act is to be allowed only on profits derived from the eligible business which clearly indicated that there should be a direct or immediate nexus between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligible industrial unit u/s 80IB of the Act. However, on the other hand he treated the interest income in isolation and on gross basis making it fully chargeable to tax under the Income Tax Act, 1961. The assessee submitted that such action of the ld. AO was grossly unjustified in facts and also in law. The assessee placed reliance on the decision of the Hon'ble Supreme Court in the case of ACG Associated Capsules (P) Ltd. vs. CIT (18 Taxmann.com 137) . In the aforesaid decision, the question before the High Court was whether net interest or gross interest was to be considered for the purposes of computing deduction in respect of profits from export business under section 80HHC of the Act. It was the Department s contention that the gross interest income was to be excluded from profits of business for the purposes of calculating deduction u/s 80HHC. On assessee s appeal, the Hon'ble Supreme Court held that it was not the gross amount but only the net amount, if any, which was to be excluded under Explanation (baa) to Section 80HHC. The Hon'ble Supreme Court accepted the assessee s contention that interest expense had to be netted of against the interest income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et income. The ld. AO shall accordingly re-compute the income of the eligible undertaking and re-compute the deduction u/s 80IB. Thus, assessee s appeal on grounds no. 3 to 6 are allowed. 3.4. Aggrieved, by the order of Ld. CIT(A) the revenue has preferred ground nos. (iv) and (v) before the Tribunal. 3.5 The ld. DR relied on the order of the ld. AO. The ld. counsel for the assessee reiterated the submissions made before Ld. CIT(A) and relied on the order of the Ld. CIT(A). He also brought to our notice that the bank as a condition for giving credit facility insisted that the FDRs should be offered as a security and therefore interest expenditure and the interest income had a direct nexus and hence, netting off interest income with the interest expense was rightly allowed by the Ld. CIT(A). 3.6. We have considered the rival submissions and are of the view that the interest income and the interest expenses had a direct nexus and therefore netting off interest income against the interest expenses had to be allowed. Since the interest expenses was much more than the interest income no interest income can be excluded from the profits on which deduction u/s 80IB(5) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties at any of the manufacturing units of Amrit Group as is evident from the panchanamas drawn up at the end of search operations at various premises. Since the search operations were continuing for more than 36 hours, Prohibitory Orders u/s 132(3) were placed at various locations/rooms with a view to resume the search operations at a later date. The prohibitory orders inter alia included the same chambers at the Head office of the Amrit Group at Infinity Benchmark Block EP GP, Sector-V, 6th Floor, Saltlake, Kolkata-700091. The search proceedings resumed on 29.10.2012; when the Prohibitory Order u/s 132(3) was revoked. In the course of resumed search conducted at the Head Office of the assessee on 29.10.2012 a report of M/s Damle Dhandhania Co. (Chartered Accountants) was found, which contained their findings to the management of the appellant in respect of physical verification of the stock carried out at the factories of the assessee as well as sister concerns/group companies. The Stock taking exercise was conducted by the firm of Chartered Accountant in the ordinary course of appellant s book keeping. In their report the Chartered Accountant reported that few items o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of inventory was to be carried out incorporated in. the financial books only at the time of closing of the accounts as on 31st March 2013. Accordingly the excess physical stock found by the Chartered Accountants at the appellant's factory premises was incorporated in the stock records in August 2012 at NIL . The excess stock incorporated in stock records at zero cost was considered by the appellant when the inventory valuation was carried out at the time of preparation of annual financial statements for the year ended 31.03.2013. In the assessment order for AY 2013-14 passed u/s 143(3) the AO did not find any infirmity either with the quantity or inventory or with its valuation. In fact in the assessment order u/s 143(3) the AO admitted that excess stock reported in the Auditors' report was properly accounted in the appellant's books and accordingly the AO had accepted the assessee's declaration before the Authorized Officer. In any business organization, the stock records are maintained separate and distinct from the financial books. The stock records are maintained at the plant level whereas financial records are maintained at the administrative offices. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad Office of the Group at Kolkata exercised tighter control over the inventories since the consumption of material constituted more than 85% of the cost of sales and therefore managing material consumption was the major challenge for achieving better productivity as well as profitability for the Group. In that view of the matter the management of the company had deemed it necessary to implement more sophisticated SAP software at all plant levels aligning the production records with financial books. In pursuance of the management decision taken for implementing SAP Software the task of stock taking was assigned to MI s Damle Dhandhania Co., Chartered Accountants who in their stock report reported variation between the balances as per stock records and physical quantities of various materials found at different manufacturing locations. As per the stock audit report the auditors reported excess stocks valued at ₹ 17.61 crores for Amrit Feeds Limited, ₹ 1.58 crores for Amrit Hatcheries Limited and ₹ 2.73 crores for Amricon Agrovet Pvt Ltd. Although the quantum of variation in absolute numeric terms may aggregate to ₹ 21. 92 crores and the same may look very su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and seized [ID Mark AF /3, Pages 42 to 441 by the Investigation authorities. With reference to the said audit report Shri Harish Bagla was asked to furnish his explanations. In response in his sworn statement u/s 132(4), Shri Harish Bagla, Director of the appellant had clarified that with reference to the findings of the stock taking report, appropriate entries in the stock registers were being incorporated and effect thereof would be given in the financial accounts. For the FY 2012-13 Shri Harish Bagla in his statement admitted that the findings of the report prepared by the Chartered Accountant would result in increase in the profit for the FY 2012-13 and that the same was being incorporated in the books of the appellant company. However nowhere in his statement the Director of the appellant had admitted that the excess quantity of stock reported in the audit report represented appellant's undisclosed or unexplained stock. Shri Bagla had only clarified that with reference to stock adjustment accounted in the appellant's books amounting to ₹ 2, 73,38,800 / -; income of Amrit Group will stand increased and the same would form part of the disclosure of ₹ 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s was obtained prior to conducting of search u/s 132. The stock report was found in the course of search operations on October, 2012 by which time stock records had already been updated. Appropriate Reconciliation Entries pursuant to the stock audit report were passed in the regular stock Records incorporating the difference in stock on 31st August, 2012 at NIL cost. In the statement u/s 132(4), nowhere did the Director of the Appellant admitted that the difference in physical stock represented undisclosed stock . Instead it was categorically mentioned that the difference in stock was found on physical inspection vis- -vis stock records by Stock Auditor; and the findings reported by them shall be incorporated in the regular financial books of the assessee for assessment year 2012-13. No undisclosed income or undisclosed stock was ever found by the Department nor was any such allegation leveled by the Department against the assessee either in the course of search operations or assessment proceedings. In the explanation dated 09.03.2015 filed in proceedings u/s 143(3) the assessee reiterated that the differences repeated by the stock auditor had been incorporated in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date on which stock audit report was seized by the Authorized Officer u/s 132 on 29.10.2012. In the statement u/s 132(4) dated 29.10.2012, the assessee had merely admitted that the income with reference to excess quantities reported in the stock audit report would be included in taxable income for the assessment year 2013-14 and the same was to be part of income declared in the statement recorded u/s 132(4) on 31.08.2012 cannot be construed to be undisclosed income of the company for the purposes of levy of penalty u/s 271AAB of the Act. The assessee pleaded that the sum of ₹ 2,73,38,000/- assessed as assessee s income for the relevant year did not represent any unexplained money, bullion, jewellery, valuable article or any other asest , for the simple reason that no such asset had been identified by the ld AO and no undisclosed asset came to light as a result of the search conducted by the investigation authorities. Accordingly, the sum of ₹ 2,73,38,000/- does not come within the first limb of the definition of undisclosed income as mentioned in section 271AAB of the Act. Similarly the assessee pleaded that its case does not fall under any of the limb of defin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding stock records. These discrepancies were presented to the management in tabular form in the report submitted to the management of the company. Accordingly, the director with reference to the said report had stated that as per the stock audit report the physical stock found was in excess of stock as per stock records and the value of excess stock in the case of the assessee was ₹ 2,73,38,000/-. It is crucial at this juncture to note that the excess stock found in the stock audit report represents investment made by the assessee out of the books of the assessee which would take the colour of undisclosed income. Without making purchases, how could there be excess physical stock. Hence the element of undisclosed income enters the scenario at this juncture towards unexplained investment made towards purchases. This would be irrespective of the fact that the assessee would have entered the excess quantity in the stock register by increasing the quantity alone with Nil value attached to it. The moment the excess stock is found physically when compared to the quantity reflected in the stock register, the undisclosed income theory sets into motion. This would not undergo any chan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be seen is that the assessee had maintained the relevant papers which would enable him to record the same in the regular books of accounts which might be recorded with some timing difference. 6.4. It appears that there is no escape from the rigor of Sec.271AAB(1) of the Act, if income of the specified previous year emanates from the material found in the course of search and such income or transaction has not been records in the books of accounts maintained by the Assessee. Situations contemplated in paragraph 6.3 of this order would be determinative in such cases as to ascertain whether the Assessee would have attempted not to disclose income. The legislature has given sanctity to entries made in the Books of accounts maintained in the ordinary course of business on the premise that it is maintained contemporaneously. If there is excess stock physically found than what is recorded in the books of accounts, then Sec.69 of the Act (Unexplained investments not recorded in the books), comes into play. Therefore such income does not have any source as the source is unexplained. It is also undisclosed because it is not recorded in the books of accounts of the Assessee. 6.5. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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