The Commissioner Of Income Tax ??? ... vs Sadhu Forging Ltd.
2011 Latest Caselaw 2993 Del

*             IN THE HIGH COURT OF DELHI AT NEW DELHI


+                             ITA No.167/2011

                                         Reserved On:09.05.2011
%                                    Date of Decision: 03.06.2011

The Commissioner of Income Tax - III         .... APPELLANT
              Through: Ms.Rashmi Chopra with Mr.Chandramani
                        Bhardwaj, Advocates

                                Versus

Sadhu Forging Ltd.                            .... RESPONDENT
               Through: Dr.Rakesh    Gupta    with  Mr.Ashwani
                        Taneja, Ms.Poonam Ahuja, Ms.Rani Kiyala
                        and Mr.Johnson Bara, Advocates

                                  AND

+                             ITA No.351/2011

                                         Reserved On:13.05.2011
%                                    Date of Decision: 03.06.2011

The Commissioner of Income Tax - III         .... APPELLANT
              Through: Ms.Rashmi Chopra with Mr.Chandramani
                        Bhardwaj, Advocates

                                Versus

Sadhu Forging Ltd.                            .... RESPONDENT
               Through: Dr.Rakesh    Gupta    with  Mr.Ashwani
                        Taneja, Ms.Poonam Ahuja, Ms.Rani Kiyala
                        and Mr.Johnson Bara, Advocates


CORAM:
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA




ITAs No.167/2011 & 351/2011                            Page 1 of 12
 1.    Whether reporters of Local papers be                 YES
      allowed to see the judgment?
2.    To be referred to the reporter or not?               YES

3.    Whether the judgment          should   be            YES
      reported in the Digest?


M.L. MEHTA, J.

*

1. Both these appeals arise out of the orders of the Income Tax

Appellate Tribunal (hereinafter referred to as the "Tribunal")

dated 30th April, 2010 pertaining to the assessment year 2004-

2005.

2. During the relevant assessment year, the assessee has shown

gross-receipts, which apart from goods sales of `1,55,26,740/-

also included scrap sales of `79,45,411/-, labour charges of

`20,82,637/- and job work charges of `11,86,895/- and claimed

to be a part of the profit for the purposes of deduction under

Section 80 IB of the Income Tax Act, 1961 (for short "the Act").

The Assessing Officer held that as per the provisions of Section

80IB, which emphasize "profit and gains derived from such

industrial undertaking", the assessee‟s industrial undertaking set

up for the purpose of manufacture of steel, forging, transmission

gears and parts and accessories of motor vehicles, cannot be

permitted deduction on sale of scrap, job work and labour

charges as the same are attributable to the business carried on

by the assessee, but not derived from the profits of industrial

undertaking. He held that the aforesaid receipts may form a part

of the profits and gains of the business, and can be said to be

derived from other activities, but the immediate source of these

cannot be an industrial undertaking. In other words, the AO held

that the scrap sale charges and job work/labour charges are to

be excluded for the purpose of giving effect to deduction under

Section 80 IB of the Act.

3. Aggrieved by this, the assessee preferred appeal before the

CIT(A) on various grounds including deductions relating to sale of

scrap, job work and labour charges. With regard to the claim of

deduction on sale of scrap, the CIT(A) held that the scrap

generation at various stages of manufacturing process was part

of the manufacturing activity of an industrial unit and thus

represented profits and gains derived on this account were from

the industrial undertaking. Consequently, it recorded a finding in

this regard in favour of the assessee and allowed its appeal.

The Revenue carried the matter in appeal before the Tribunal,

which came to be dismissed vide the impugned order, holding

that scrap was generated through the process of manufacturing

and thus was a part and parcel of manufacturing process of

industrial undertaking, and thus profits on sale of scrap

represented profits and gains derived from industrial

undertaking. This was based on the premise that there was an

immediate and proximate connection with the manufacturing

process of industrial undertaking. The Revenue is in appeal

against this part of the impugned order in ITA No.351/2011.

4. With regard to the claim of deduction on job work and labour

charges, CIT(A) disallowed the appeal of the assessee and held

that the job charges not derived from the exports are to be

categorized as independent income and has to be deducted from

gross profits to calculate profits derived from the exports. He,

however, held that the assessee was eligible for deduction under

Section 37 on `6,53,906/- which would work out to `1,96,172/- on

account of expenses relating to earning of these job work, labour

charges. He accordingly directed the AO to reduce the claim of

the deduction under Section 80IB of the Act to an amount of

`1,96,172/-. The assessee preferred appeal against the order of

the CIT(A), which came to be allowed by the impugned order by

the Tribunal, who held that job works/labour charges income

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, and thus

entitled to claim of deduction under Section 80IB of the Act. The

Revenue is in appeal against this part of the impugned order in

ITA No.167/2011.

5. ITA 167/2011 was admitted on the following substantial

questions of law:

(i) Whether income received from job work/labour charged on work done based on material supplied by the customers qualifies for deduction under Section 80IB of the Income Tax Act, 1961.

(ii) Whether income received from job work/labour charges on work done on material supplied by the customers is profits derived from industrial undertaking to be eligible for deduction u/S 80IB of the Income Tax Act, 1961.

6. ITA 351/2011 stands admitted on the following substantial

question of law:

(i) Whether on the facts and in the circumstances of the case, the ITAT erred in law and on merits in holding that scrap sale generated is eligible for deduction u/s 80IB of the Income Tax Act, 1961?

7. With the consent of the counsel for the parties, we have heard

the matter finally. To answer the questions in both the appeals,

we need to consider, firstly, as to whether the scrap, generated

at various stages of manufacturing process, was part of

manufacturing activity of the industrial unit and thus represented

profits and gains derived from the industrial undertaking on this

account were entitled to deduction under Section 80IB.

Secondly, as to whether the receipts by the assessee on account

of job work and labour charges are attributable to business

carried on by it of the industrial undertaking.

8. Section 80IB of the Act provides for deduction in respect of

profits and gains from certain industrial undertakings other than

infrastructure development undertakings. Sub-Section (2)

thereof provides for deduction to any industrial undertaking,

which fulfills all the following conditions, namely:

"S.80-IB (2)

(i) ....

              (ii)      .....

              (iii)     It manufactures or produces any article or thing, not being

any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India:"

9. From a plain reading of this Section, it would be seen that the

only essential requisite is that the eligible industrial undertakings

should be carrying out manufacture or production of articles or

things. This may take us to the question as to whether the

activity of the assessee was to be that of manufacture or

production of article or thing as envisaged under this clause (iii)

of sub-Section (2) of Section 80-IB. 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

bye-product of manufacturing process. Learned counsel for the

assessee explained in detail the process involved in forging and

in this regard he drew our attention to the finding of the Tribunal

based on the records that the assessee was involved in

manufacturing of forging which involved purchase of steel,

cutting the same, making of forging parts, giving heat treatment

and machining. Die making was stated to be the primary

process and is a separate industry by itself. It was noted, and

rightly so, that each of the above process could be done in

separate industrial undertaking, whereas assessee had

undertaken all these processes in its units. The issue was also

that the assessee was doing these works on job basis for other

undertakings, by getting the raw material from them. When the

assessee was entitled to claim exemption in respect of income

derived from such processes doing for itself, we do not see any

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.

10. The heat treatment is one of the processes through which the

forgings are given the desired temperature and then cooled in

different manner which results in changing the mechanical

properties desired by the customers. We are given to

understand that there are various industrial undertakings which

are specialized only in the heat treatment processes. Learned

counsel for the assessee informed us, without refutation from the

Revenue, that the forging involves heating to a desired

temperature and then soaking the material at that temperature

until the structure become uniform throughout the section and

then cooled in a different manner to achieve the desired

mechanical and molecular bonding properties. The cooling of

the material at some predetermined rates causes the formation

of desired structure within the metal for the desired properties

with the aim (i) to improve the mechanical property such as

tensile strength, hardness, deductibility, shock resistance, etc.

(ii) improve machinability, (iii) increase resistance to heat and

corrosion (iv) relieve stresses developed due to hot and cold

working, (v) modify electrical, magnetic & molecular bonding

properties, etc. The heat treatment toughens the forged part for

being used as automobile parts. The process of heat treatment

is absolutely essential for rendering them marketable. Without

the heat treatment, the material is not fit for automobile

industry. The learned counsel relied upon CIT v. Tamil Nadu

Treatment & Fetting Services (P) Ltd., 238 ITR 540 (Mad)

wherein activity carried out by the assessee consisted of

receiving from its clients untreated crankshafts, forgings,

castings, etc. and subjecting them to heat treatment in order to

toughen them to the requisite standards, so that they could be

sold in the market. The activity was held to be manufacturing

and entitled to claim deductions. Similarly 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 and increased tensile

strength. The raw untreated crankshafts and the like can never

be used in an automobile industry. Thus, in the crankshafts

subjected to the process of heat treatment, etc. a qualitative

change is effected, to be fit for use in automobiles, although

there is no physical change in them. In such state of affairs, it

cannot at all be stated that the crankshaft, subjected to heat

treatment, etc., cannot at all change the status of new products

of different quality for a different purpose altogether. In this

view of the matter, the activities of the assessee in relation to

raw or untreated crankshafts being subjected to heat treatment,

etc., is definitely a "manufacturing activity" entitling it to claim

"investment allowance" under S.32A.

11. In the case of India Cine Agencies v. CIT, 308 ITR 98 (SC), the

conversion of jumbo rolls of photographic films into small flats

and rolls in desired sizes amounts to manufacture or production

eligible for deduction under Sections 80HH and 80I. In another

case titled CIT v. Oracle Software India Ltd., 320 ITR 546

(SC), it was observed that if an operation/process renders

commodity or article fit for use for which it was otherwise not fit,

the operation/process falls within the meaning of the word

"manufacture" - in the instant case, the assessee undertakes an

operation which renders a blank CD fit for use for which it was

otherwise not fit - by the duplication process undertaken by the

assessee, the recordable media which is unfit for any specific use

gets converted into the programme which is embedded in the

master media and, thus, blank CD gets converted into recorded

CD by an intricate process - Said supplicating process changes

the basic character of a blank CD, dedicating it to a specific use -

therefore, processing of blank CDs constitutes manufacture in

terms of S.80-IA(12)(b) r/w explanation to S.33 B - Marketed

copies of CDs being goods, the process by which they become

goods certainly falls within the ambit of S.80-IA(12)(b) r/w

explanation to S.33B.

12. Thus, in view of above, we have no hesitation in arriving at the

conclusion that 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 will still be qualified as carrying eligible business

under Section 80IB. Same is the ratio of the decisions in the

cases of (i) Commissioner of Income Tax v. Metalman Auto

(P) Ltd., (2011) 52 DTR (P&H) 385; (ii) Commissioner of

Income Tax v. Vallabh Yarns (P.) Ltd., (2011) 51 DTR (P&H)

236; (iii) CIT v. Impel Forge & Allied Industries Ltd., (2010)

326 ITR 27 (P&H), (iv) CIT v. Rane (Mad) Ltd., 238 ITR 377

(Mad), and (v) Dy. CIT v. Harjivandas Juthabhai Zaveri &

Another, 258 ITR 785 (Gujarat).

13. Keeping in view the activities of the assessee in giving heat

treatment for which it had earned labour charges and job-work

charges, it can thus be said that the appellant 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 cannot be said to be independent

income of the manufacturing activities of the undertakings 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 under Section 80IB. These were gains

derived from industrial undertakings and so entitled for the

purpose of computing deduction under Section 80IB. There

cannot 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 of

sale of scrap being part and parcel of the activity and being

proximate thereto would also be within the ambit of gains

derived from industrial undertaking for the purpose of computing

deducting under Section 80IB.

14. From our above discussion, we answer the questions in favour of

the assessee and against the Revenue in both the cases and

consequently, dismiss both the appeals.

                                                   M.L.MEHTA
                                                    (JUDGE)



                                                   A.K. SIKRI
June 03, 2011                                       (JUDGE)
„Dev‟