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TMI Blog2022 (8) TMI 596X X X X Extracts X X X X X X X X Extracts X X X X ..... round of appellate proceedings before the Tribunal. Earlier, the Co-ordinate Bench in its order dated 02.01.2017 in ITA No.763/C/2016 had set aside the order of the ld.CIT(A) with a direction to decide the same on merits irrespective of the fact as to whether permission u/s.153D of the Act, was taken or not before passing the fresh assessment order by the AO as per the directions of the ld.CIT(A) u/s.263 of the Act. The ld CIT(A) has since passed the order in the set-aside proceedings and against the said order and findings contained therein, the assessee is again in appeal before us. 4. In Ground No.1, the assessee has challenged the sustenance of disallowance of deduction of Rs.41,79,868/- u/s.80IB of the Act. During the course of hearing, the ld. AR submitted that the assessee is an SSI Unit engaged in the manufacture of forgings, tractor and auto parts. It was submitted that the assessee was carrying on the manufacturing operations using its own raw material which was sold as finished goods and also carried out manufacturing activities on raw materials supplied by others, against which the labour job bills were raised. It was submitted that all these activities form part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 3rd parties for carrying out manufacturing operations thereon, in the same manner as in case of components manufactures for itself. That the labour income has been received by the assessee, by utilizing its plant and machinery installed in the undertaking, gave rise to income which had a direct nexus with the assessee's industrial undertaking. That when the assessee is entitled to claim exemption in respect of income derived from such processes doing for itself, there is no reason as to why he would not be entitled to so merely because the raw material component was being supplied by other customers and for whom the assessee was doing the job. In fact, deduction under Section 80-IB is given on the profits derived from the manufacturing process, being undertaken by the assessee which qualify for deduction. That in the case of CIT v. Tamil Nadu Heat Treatment & Fetting Services (P) Ltd., 238 ITR 529 (Mad), it was held that the process of heat treatment to crankshaft, etc. were absolutely essential for rendering it marketable. Automobile parts, as crankshafts, need to be subjected to heat treatment to increase the wear and tear resistance to remove the inordinate stress an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad), it was held that the process of heat treatment to crankshaft, etc. were absolutely essential for rendering it marketable. Automobile parts such as crankshafts, need to be subjected to heat treatment to increase the wear and tear resistance to remove the inordinate stress and increased tensile strength. Complete machining of Bull Gears:-This involves conversion of bull gear forgings in to finished Bull Gear to make it marketable. Forging of Bull Gears is intermediate product. Upon machining it becomes final product ready for use. Prior to machining, the component is called by different name and falls under different tariff head under Central Excise and after machining it is called by different name and falls under different tariff head under Central Excise. Hence it amounts to manufacture as held in case of Impel Forge & Allied Industries Ltd. (Supra) Machining - Other components:-This is the process done on raw material which is nothing but a part and parcel of the manufacturing process of industrial undertaking. As held by Hon'ble Delhi High Court in case of Sadhu Forgings Ltd. (Supra), these receipts cannot be said to be independent of the manufacturing activities of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , there is no reason why it should not be allowed because the raw material was supplied by other customers. It was also claimed that if it was not a manufacturing activity then the whole of the receipt cannot be treated as income as the assessee has incurred expenditure like power, wages, deprecation etc. It is thus a fact that the assessee has carried out only the job work for others in respect of these receipts and has not been able to show that the 'labour income' of Rs.1,39,32,894/- is in the nature of manufacturing activity by the assessee for making it eligible for deduction u/s.80IB. The AO has relied upon the judgment of jurisdictional High Court for the disallowance after the case was set-aside u/s.263. The AR has not been able to demonstrate that the order passed u/s.263 was successfully challenged by the assessee. On the facts and circumstances of the case and in view of the judgment relied upon by the AO, the disallowance made by the AO on account of labour charges by way of denial of deduction u/s 80IB, is found sustainable and hence, confirmed." 7. We have heard the rival contentions and purused the material available on record. The assessee company is engage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en made in the impugned order of the Tribunal with regard to Dnishaw Frozen Foods Ltd. (supra) viz. that the assessment in that case has been completed under Section 143(3) of the Act in initial year and it is only in such cases that the Revenue be barred from denying the claim for deduction in the subsequent Assessment Years, unless the claim for deduction has been withdrawn in the initial year when deduction was claimed and allowed unlike an assessment which is completed under Section 143(1) of the Act. We have perused the decision of this Court in Dinshaw Frozen Food Ltd. Nagpur (supra) which in turn has followed the decision Paul Brothers (supra). We note that there is no finding in the two orders to the effect that the in the initial year the claim under Section 80IA/IB of the Act was granted by virtue of an order passed under Section 143(3) of the Act. Nothing has been brought on record to indicate that there has been some change in manufacturing process from that existing when the claim was allowed in the initial year i.e. Assessment Year 1996- 1997 and subject Assessments. The intent/object of the deduction under Section 80IA/IB of the Act is to encourage setting up of indu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veri Stock Brokers (supra) was rendered in the context of reopening of assessments. As against that the decisions of this Court in Paul Brothers (supra) and Dinshaw Frozen Food Ltd. Nagpur (supra) were while dealing with deduction under Chapter VIA of the Act. This Court in the above two cases has very categorically held that in absence of relief/deduction for the initial year being withdrawn, the relief under Chapter VI-A of the Act (Section 80IA/80IB of the Act) in case of Dinshaw Frozen Food Ltd., Nagpur (supra) cannot be withheld for the subsequent years. The manner in which the relief has been granted in the initial Assessment Year is not determinative for withholding the relief in the subsequent Assessment Years. In-fact, in Paul Brothers (supra), our Court had occasion to observe the deduction allowed in the initial year i.e. Assessment Year, 1980-1981 was without any discussion. (m) According to us, the decision of this Court in Paul Brothers (supra) and the Dinshaw Frozen Food Ltd. Nagpur (supra), conclude the issue in favour of the appellant - Assessee and against the Revenue. (n) Thus, the substantial questions of at No.1 is answered in the affirmative i.e. in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest is paid, in respect of capital borrowed for acquisition of asset, then such interest which is relatable to the period beginning from the date of on which the capital was borrowed for acquisition of asset till the date on which such asset is first put to use, shall not be allowed as deduction. The Hon'ble ITAT Chandigarh in case of DCIT vs Samrat Forging ltd. in ITA No.975/Chd/2011 has supported the aforesaid view. b) The Ld. AO has unlawfully rejected the submission of the assessee simply with the remark "The explanation of the assessee has been considered and found no merits in it". Further Ld. AO has placed reliance on the judgment of Punjab & Haryana High Court in case of Abhishek Industries Ltd. wherein the concept of common pool of funds has been applied. The fact that assessee is paying huge amount of interest on other borrowings cannot form the basis for disallowance u/s.36(l)(iii). Further It has been held by Punjab & Haryana High Court in case of CIT vs. Kudu Industries [2015] 62 taxmann.com 191 (Punjab & Haryana) that The various amounts advanced to the assessee get merged into a common pool. There is no justification then either for the assessee or for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Rs. 4,21,198/- during the Financial year ending 31.03.2007 totaling to Rs.37,24,839/- and to finance the above investment, the assessee had obtained a loan of Rs.15 lakhs from PNB on 19.01.2016 and the rest of the investment was made out of cash accruals during the respective years. It was submitted that interest amounting to Rs.31,808/- and Rs.1,61,249/- were capitalized during the FY 2005-06 and FY 2006-07 respectively as per the provisions of Sec.36(1)(iii) of the Act. It was submitted that despite the same, the AO has worked out the disallowance on the entire investment made during the preceding year @12% p.a. and after deducting the interest already disallowed by the assessee, disallowed a sum of Rs.2,66,629/- on the ground that the assessee is paying huge amount of interest and other borrowings by relying upon the decision of the Punjab & Haryana High Court in case of Abhishek Industries Ltd. It was submitted that various decisions relied on by the assessee during the course of appellate proceedings have neither been considered nor distinguished by the ld.CIT(A) and therefore, relying on the same, the assessee prayed for deleting the disallowance so sustained by the ld.C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the disallowance under section 36(1)(iii). Needless to say, the assessee be given credit for interest already capitalized in the books of accounts. In the result, the ground of appeal is allowed for statistical purposes. 13. In the result, the appeal of the assessee is disposed off in light of aforesaid directions. ITA No.101/Chd/2020 14. The sole ground of the appeal relates to sustenance of disallowance of Rs.36,86,676/- u/s.36(1)(iii) of the Act by the ld.CIT(A). 15. In this regard, the ld.AR submitted that the facts and circumstances of the case are identical as in ITA No. 100/CHD/2020 and reiterated the submissions made before the ld.CIT(A) which are contained at para nos.3 & 4 of the impugned order, which reads as under: "a) That during the course of de-novo assessment proceedings it was submitted as under:- Copies of account of various fixed assets under construction/erection/installation are enclosed. On a perusal of the same your honour will kindly observe that the assessee has already capitalized interest on amounts borrowed against the same. Calculation of interest capitalized against amount borrowed has been duly given in each asset count. Rest of the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied u/s 36(l)(iii), average rate of interest on which funds have been borrowed by the assessee should have been applied for working out disallowance u/s.36(1)(iii), not 12% as has been done in this case. c) That the concept of common pool of funds can be applied only when the funds of business are used for non business purposes. For investments generating exempt income disallowance has to be made u/s 14A. In this case investment in fixed assets has been made out of commercial expediency. Therefore, no disallowance can be made u/s.36(1)(iii) as per law laid down by Hon'ble Supreme Court of India in case of S.A. Builders Ltd. vs. CIT 288 ITR 1 (SC). d) That Section 36(l)(iii) specifically deals with interest paid in respect of capital borrowed for acquisition of an asset. Proviso to Section 36(1)(iii) reads as under:- [Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset [for extension of existing business or profession](whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ab & Haryana High Court in case of CIT vs. Kudu Industries as reported in [2015] 62 taxmann.com 191 wherein it was held various amounts advanced to the assessee get merged into a common pool. Therefore, there is no justification either for the assessee or for the department to take into consideration the rate of interest in respect of a particular advance or advances to the assessee. The only logical approach is to take into consideration the average interest rate at which the assessee has availed of the advances. In this case the Hon'ble Court specifically observed that the judgment of this Court in Commissioner of Income Tax-l, Ludhiana, vs. M/s.Abhishek Industries, Ludhiana (supra) does not deal with the question of the rate of interest to be applied in cases where the assessee has mixed funds available with it. Hence even if this judgment is applied u/s.36(1)(iii), average rate of interest on which funds have been borrowed by the assessee should have been applied for working out disallowance u/s.36(1)(iii), not 12% as has been done in this case. In view of the foregoing, it is prayed disallowance made on this score may kindly be deleted." 17. Per contra, the ld. DR relie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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