Commissioner of Income Tax vs Jikar A. Saiyed

M.R. Shah, J.—Feeling aggrieved and dissatisfied with the impugned judgment and order dated 02.03.2007 passed by the learned Income Tax Appellate Tribunal (hereinafter referred to as the "ITAT") in ITA No. 2816/AHD/2003 for AY 2001-02, the revenue has preferred the present Tax Appeal to consider the following substantial question of law.

Whether on the facts and circumstances of the case and in law was the Appellate Tribunal right in holding that deduction u/s. 80IB is allowable from the income from sale of scrap?

That the assessee filed return of income for A.Y. 2001-02 declaring total income at Rs. 21,34,149/- and agricultural income of Rs. 1,92,558/-. That the assessee is manufacturing card board boxes of various sizes and supplies the same to various parties. During the year, the appellant had also earned income from sale of scrap to the tune of Rs. 3,20,508/- In spite of the said income from sale of scrap the Assessing Officer held that only such profits which are directly derived from the business of Industrial undertaking shall be allowable under the deduction u/s 80IB of the Act. The Assessing Officer also observed and held that there was no direct nexus between the profits and gains and the industrial undertaking, accordingly the Assessing Officer has held that the sale of scrap is not derived from the manufacturing activity and is therefore, not entitled to deduction u/s 80IB of the Act.

1.1 Feeling aggrieved and dissatisfied with the order passed by the Assessing Officer in making deduction u/s 80IB of Rs. 3,20,508/-, the same being related to sale of scrap being an amount not eligible for deduction u/s 80IB on the ground that the same is not an income derived by the assessee from the industrial undertaking, the assessee preferred appeal before the learned CIT(A) and by order dated 28.03.2003 the learned CIT(A) allowed the said appeal deleting the disallowance of deduction u/s 80IB of Rs. 3,20,508/-.

1.2 Feeling aggrieved and dissatisfied with the order passed by the CIT(A) in making deletion of disallowance of deduction u/s 80IB of Rs. 3,20,508/-, the same being related to scrap, the revenue preferred appeal before the learned ITAT and by impugned judgment and order relying upon the decision of the Division Bench of this Court in the case Deputy Commissioner of Income Tax Vs. Harjivandas Juthabhai Zaveri, , the learned ITAT has dismissed the said appeal confirming the order passed by the learned CIT(A) deleting the disallowance of the deduction u/s 80IB of Rs. 3,20,508/-.

1.3 Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned ITAT, the revenue has preferred the present Tax Appeal to consider the following the substantial question of law.

Whether on the facts and circumstances of the case and in law was the Appellate Tribunal right in holding that deduction u/s. 80IB is allowable from the income from sale of scrap?

Heard Shri Sudhir Mehta, learned advocate for the revenue and Shri B.D. Karia, learned advocate appearing for Shri R.K. Patel, learned advocate for the assessee.

The short question which is posed for consideration of this Court is whether on the facts and circumstances of the case and in law the Appellate Tribunal is right in holding that the deduction u/s 80IB is allowable from the income from sale of scrap? It is also required to be noted at this stage that while passing the impugned judgment and order, the learned ITAT has relied upon the decision of the jurisdictional High Court in the case of Harjivandas Juthabhai Zaveri (supra). In the case of Harjivandas Juthabhai Zaveri (supra) while answering the question whether the Appellate Tribunal is right in law and on facts in allowing deduction u/s 80IB of the Act on the items (i) Job work receipt, (ii) sale of empty soda ash bardana, (iii) sale of empty barrels and (iv) sale of plastic waste. The Division Bench has observed and held as under:

So far as question No. 5 is concerned, learned counsel Mr. Soparkar drew our attention to section 80I of the Act and submitted that this section is meant for deduction in respect of profit and gains from industrial undertakings. With regard to the question raised by the Revenue that the amount received on sale of jute bags, barrel etc. ought to have been deducted from the cost of the material, Mr. Soparkar, learned advocate for the assessee submitted that it would not make any difference if the amount received by the sale of empty barrel or ''bardan'' (jute bags) is deducted from the cost of the raw material. He submitted that if the cost is reduced by deducting the sum so received, the profit will increase and ultimately, the total would be the same. He submitted that the Commissioner of income tax (Appeals) and the Tribunal has rightly come to the conclusion that the items covered by question No. 5 are covered by section 80I of the Act inasmuch the amount received can be said to have been received from the activities undertaken by the Assessee. He submitted that no question of law is raised, more particularly, when a Division Bench of this Court in Income Tax Application No. 70 of 1997 had considered a similar question and held that "it was, however, found that the items of kasar and sale of empty soda ash bardans, as directly connected with the manufacturing activities of the assessee and should be allowed". It is required to be noted that if the Assessee was not engaged in industrial activities, there was no question of empty barrels or bardans. Instead of manufacturing if the assessee was doing trading activities i.e. dealing in raw material and if the assessee had sold the material on retail basis and earned amount by sale of bardans, then obviously this section will not apply.

The decision of this Court in the case of Harjivandas Juthabhai Zaveri (supra) has been subsequently considered by the Delhi High Court in the case of The Commissioner of Income Tax Vs. Sadhu Forging Ltd., and it is held that receipt of sale of scrap part and parcel of industrial activity and therefore, deduction u/s 80IB is allowable. In the said decision, the Delhi High Court has held that the industrial undertaking set up by the assessee was for the purpose of manufacture of steel forging, transmission gears and part and accessories of motor vehicles and the scrap of these items was stated to be a by product of manufacturing process. The activity of forging was "manufacturing" within the ambit of section 80IB. It was immaterial that the assessee was doing the job of forging also for customers and was charging them on job work basis or on the basis of labour charges. It would still be qualified as carrying on eligible business u/s 80IB. The activities of the assessee were in giving heat treatment for which it had earned labour charges and job work charges. It could thus be said that the assessee had done a process on the raw material which was nothing but a part and parcel of the manufacturing process of the industrial undertaking. These receipts could not be said to be independent income of the manufacturing activities of the undertaking of the assessee and thus could not be excluded from the profits and gains derived from the industrial undertaking for the purpose of computing deduction u/s 80IB. These were gains derived from the industrial undertaking and so entitled for the purpose of computing deduction u/s 80IB. There could not be any two opinions that manufacturing activity of the type of material being undertaken by the assessee would also generate scrap in the process of manufacturing. The receipts from sale of scrap being part and parcel of the activity and being proximate thereto would also be within the ambit of gains derived from the industrial undertaking for the purpose of computing deduction u/s 80IB. Applying the ratio/law laid down by this Court in the case of Harjivandas Juthabhai Zaveri (supra) as well as Delhi High Court in the case of Sadhu Forging Ltd. (supra), to the facts of the case on hand, it cannot be said that the learned Tribunal has committed any error in holding that the deduction u/s 80IB of the Act is allowable for the income from sale of scrap. Under the circumstances, substantial question of law raised is answered against the revenue. Hence, present appeal deserves to be dismissed and is accordingly dismissed.