TMI Blog2014 (1) TMI 1883X X X X Extracts X X X X X X X X Extracts X X X X ..... to its own exempt unit is to be disallowed following the ratio laid down in CIT Vs Abhishek Industries [ 2006 (8) TMI 123 - PUNJAB AND HARYANA HIGH COURT] - we find merit in the contention of the assessee that in addition to the said interest bearing loans, it had certain interest free loans and the average cost ratio of the interest expenditure is to be considered for computing the disallowance of interest expenditure in the hands of the assessee. Accordingly, we direct the Assessing Officer to compute disallowance of interest expenditure attributable to the advances made to Unit No. II at Baddi by applying average cost ratio. Second advance considered by the Assessing Officer was to M/s B.K.Varun Co. no merit in the order of the Assessing Officer in charging any interest on the debit balances as the net balance available with the assessee is to be considered for making any disallowance under section 36(1)(iii) - the said aspect, whether the assessee has credit balance throughout the year, has not been verified by the Assessing Officer and in order to adjudicate the issue, we deem it fit to restore this issue back to the file of Assessing Officer who shall verify the stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the ratio laid down in CIT Vs Impel Forge Allied Industries Ltd. [ 2008 (12) TMI 370 - PUNJAB HARYANA HIGH COURT] wherein it has been held that where the assessee is engaged in any manufacturing activity and in addition carries on the same activity on job work basis, the assessee is eligible for the claim of deduction under section 80IB of the Act. Following the same parity of reasoning, we hold that the assessee is entitled to the claim of deduction under section 80IC of the Act on its total profits. Assessee has not incurred any expenditure for carrying out the said manufacturing activity - Assessee during the course of hearing was directed to produce the electricity bills and some of the bills have been produced which relate to the Baddi Unit II i.e. manufacturing unit. Merely because the entries have not been correctly posted in the manufacturing account but have been debited to the Profit Loss Account by the assessee does not disentitle the assessee to the claim of deduction under section 80IC of the Act. We find no merit in the order of the Assessing Officer in this regard. The Commissioner of Income Tax (Appeals) has allowed the claim of the assessee in view o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the I.T. Act, 1961 and the Cross Objection has been filed by the assessee against the appeal filed by the revenue. 2. Both the appeal filed by the revenue and the Cross Objections filed by the assessee were heard together and are being disposed of by this consolidated order for the sake of convenience. 3. The revenue has raised under mentioned grounds of appeal: 1. On the facts and in the circumstances of the case, the Ld. CIT(A) has gravely erred in deleting the addition of ₹ 14,24,481/- made by the AO as per section 36(1)(iii) of the Income Tax Act, 1961 after considering the judgment of Hon'ble High Court of Punjab Haryana in the case of Abhishek Industries Ltd., 2. That on the facts and circumstances of the case and in law Ld. CIT(A) has gravely erred in deleting the addition of ₹ 15,13,623/- on account of disallowance under section 80 1C of the Income Tax Act 1961 pertaining to Unit-ll Baddi. 3. The appellant craves to add or amend any ground any grounds of appeal before the appeal is heard or disposed off. 4. It is prayed that the order of the Ld. CIT(A) be cancelled and that of the assessing officer may be restored. 4. The assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,24,481/-, i.e. the interest expenditure claimed by the assessee. 7. Before the Commissioner of Income Tax (Appeals), the assessee made elaborate submissions which are incorporated under para 21 at pages 14 to 16 of the appellate order and deleted the addition in view of the similar issue being decided in assessment year 2006-07 vide appellate order dated 30.03.2010. The revenue is in appeal against the said deletion of the addition. 8. The ld. DR for the revenue placed reliance on the order of the Assessing Officer. The ld. AR for the assessee placed reliance on the order of the Commissioner of Income Tax (Appeals) and the submissions made before the Commissioner of Income Tax (Appeals) explaining each of the debit entry. 9. We have heard the rival contentions and perused the record. The assessee during the year under consideration had declared income from business as sole proprietor of B.K. Raman Co. Chandigarh and Unit II at Baddi. In the Chandigarh office, the assessee had claimed interest expenditure of ₹ 14,24,481/- on account of the interest paid on secured loans. As against this, the assessee had shown certain debit balances on which no interest was charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer and in order to adjudicate the issue, we deem it fit to restore this issue back to the file of Assessing Officer who shall verify the stand of the assessee in this regard and in case the assessee has net credit balance from month to month, then no disallowance is to be made in the hands of the assessee. However, where the assessee has debit balance in the account of M/s B.K.Varun Co. in any of the months, then the disallowance of interest is to be worked out on average cost ratio. 11. Now coming to the third interest free advance made by the assessee to M/s Singal Polymer against whom there is a debit balance of ₹ 370,627/- in the books of account of the assessee. Though the said concern is a business associate of the assessee i.e. to whom goods have been sold by the assessee but that does not justify the advancement of interest free loan to the said concern. Accordingly, we hold that interest relatable to such interest free advance is to be disallowed in view of the provisions of section 36(1)(iii) of the Act. However, the rate of interest to be applied in such case is to be on the basis of average cost ratio i.e. taking into consideration the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Baddi Unit reflected that no expenses relating to manufacturing activity were debited as only purchases, freight and cartage and the tax was debited to the manufacturing account. The Profit Loss Account below manufacturing account reflected the salary and wages of ₹ 262,800/- and water and electricity expenditure of ₹ 868,244/- were debited. The Assessing Officer was thus, of the view that the assessee had not undertaken any manufacturing activity. The Assessing Officer further held that it was an admitted fact that the assessee was engaged in the business of plastic mouldings at Baddi Unit and the 13 t h Schedule of the Income Tax Act specifically mentions plastic and articles thereof as an item falling under the Schedule. Since the plastic items were prohibited under the 13 t h Schedule, the assessee was held to be not eligible for deduction under section 80IC of the Act. 15. The Commissioner of Income Tax (Appeals) after deliberating upon the definition of the term manufacturing and the various judicial pronouncements on the issue observed that a liberal view on the meaning of manufacture has been taken by various courts and in the absence of any definiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turing unit wherein the assessee carries on the business of manufacturing of plastic bottles and plastic measuring cups. The assessee had claimed deduction under section 80IC of the Act in respect of the profits of the Unit No. II at Baddi. The Assessing Officer had in the first instance re-allocated the expenses of Chandigarh and Baddi Unit to the exempt unit resulting in an addition of ₹ 411,787/- against which the assessee has raised ground No. 2 in its Cross Objections. Further, the benefit of deduction under section 80IC of the Act was denied to the assessee on two accounts i.e. it was held by the Assessing Officer that in the absence of any manufacturing expenses and also because of the fact that the assessee was engaged in the manufacturing of banned items under 13 t h Schedule of the Act, the assessee was not engaged in any manufacturing activities. Further it was noted by the Assessing Officer that the assessee was carrying on similar activity on job work basis on which the assessee was not entitled to any deduction under section 80IC of the Act. The Commissioner of Income Tax (Appeals), on the other hand, had allowed the claim of the assessee in entirety. The fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tries, Baddi and is also provided under the Customs Tariff Schedule III Chapter 13 as referred to by us in the paras herein above. As per the said custom tariff, Schedule 3 Chapter 13, the assessee is covered by item No. 3923 which provides articles for the conveyance or packing of goods, of plastics, stoppers, lids, caps and other closers of plastics. Under Schedule 13 of the Income Tax Act, the plastics and articles thereof which are enlisted are as per the excise classification of item No. 3909 to 3915. The items manufactured by the assessee falling under item No. 3923 is thus, outside the provisions of the 13 t h Schedule to Income Tax Act. Under such circumstances, it cannot be said that the assessee was engaged in the manufacture of items which are prohibited under the 13 t h Schedule to Income Tax Act. In view thereof, we hold that once assessee is engaged in an activity of manufacture, which is not prohibited under the 13 t h Schedule of the Income Tax Act, then it cannot be said that the assessee was not engaged in any manufacturing. The assessee has declared income from carrying on of such activity and in addition the assessee had carried on the said activity on job wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by the allocation of expenses to the exempt unit which have been debited to the Chandigarh trading unit of the assessee. The expenses had been found to be in relation to the Baddi manufacturing unit and some of the common expenses have been attributed to the Baddi manufacturing unit. Admittedly, the unit at Baddi is exempt from tax and profits of the Chandigarh unit are taxable. In the entirety of the facts and circumstances, and the elaborate discussions made by the Assessing Officer and by the Commissioner of Income Tax (Appeals), we are in conformity with the order of the authorities below in allocating the common expenditure and also the particular expenditure of the Baddi unit to the exempt unit. Accordingly, we find no merit in the ground No. 2 raised by the assessee in its Cross Objection. 22. Now coming to the ground No. 1 raised by the assessee in the Cross Objection. The claim was in respect of the deduction under section 54F of the Act. The assessee during the year under consideration had declared long term capital gains on sale of a flat against which it had claimed to have made investment for the purchase of another flat in Amaravati Aggarwal Builders Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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