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Income Tax Appellate Tribunal (ITAT) Hyderabad in a recent judgment has held that scrap sales income derived as part of the manufacturing process of the industrial undertaking and insurance income derived due to loss of manufactured finished goods are entitled to claim benefit u/s 80IB of the Income tax Act, 1961.

Case Details:
ITA No. 503/Hyd/2012 AY: 2008-09
M/s Visaka Industries Ltd (Appellant) vs Addl. Commissioner of Income-tax  (Respondent)
Date of Order: 27-11-2015

Case Laws referred:
ACIT Vs. Biotech Medicals (P) Ltd., 119 ITD 143 (Hyd)
CIT Vs. Sadhu Forging Ltd., 336 ITR 444 (Del.)

Brief Facts of the Case:
The assessee was engaged in the business of manufacture of asbestos sheets, synthetic blended Yarn and Garments. The Assessing Officer (AO) completed the u/s 143(3) and made addition holding that ‘Other income’ can not be considered for allowing deduction u/s 80IB.

The AO noticed that while calculating the profits eligible for deduction u/s 80IB, the assessee had considered the other income of Rs. 22,56,743/- as eligible income u/s 80IB also. He opined that since such other income was not derived from the business of the assessee, the same was not eligible for claim of deduction u/s 80IB. The assessee contended that the other income was generated out of normal course of business. However, the AO did not accept the said contention opining that in view of various court pronouncements, other income is not to be considered as derived from the business. Accordingly, he computed the deduction u/s 80IB at Rs. 2,53,07,225 as against Rs. 2,59,84,248 claimed by the assessee and disallowed the excess claim of Rs. 6,77,023

Before CIT(Appeals), the assessee contended that the other income constituted receipt from sale of scrap, broken/damaged sheets, gunnies etc., which were derived from the normal business and therefore the same should have been included for the purpose of calculation of deduction u/s 80IB. The CIT(A) following the decisions of the ITAT and the decision of the Supreme Court, held that since the assessee could not establish that the scrap or broken/damaged sheets were generated from the industrial operations of the assessee company only, the other income on this account cannot be considered as eligible for deduction u/s 80IB.

Important Excerpts from ITAT Judgment

We have heard the arguments of both the parties and perused the material on record as well as the orders of revenue authorities. We have also applied our mind to the decisions cited. The AO disallowed the claim of assessee u/s 80IB by holding that other income was not derived from the business of assessee. The CIT(A) confirmed the action of the AO.

The cases referred by the assessee and the ratios laid down in these judgments were, 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. The receipts like job work, scrap and labour charges 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. Those were gains derived from the industrial undertaking and so, entitled for the purpose of computing deduction u/s 80IB.

Coming to the income from insurance, the undertaking claimed loss from insurance company, it is nothing but compensation for the finished goods lost after manufacturing in the undertaking and during transit. It is similar to the scrap sales income derived as part of the industrial process. Similarly, the insurance income derived due to loss of manufactured finished goods. Hence, it is entitled to claim benefit u/s 80IB.

With respect to other income like interest, which is not part of industrial activities or manufacturing, hence, it is not entitled for the benefit u/s 80IB. In the result, assessee is allowed to claim benefit on scrap sales and insurance income

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ITAT- Scrap sales of industrial undertaking manufacturing process and insurance income for loss of manufactured finished goods entitled for deduction u/s 80IB | 28-11-2015 |