IN THE HIGH COURT OF KERALA AT ERNAKULAM
ITA.No. 273 of 2002()
1. THE COMMISSIONER OF INCOME TAX, COCHIN
... Petitioner
Vs
1. M/S. KERALA CHEMICALS AND PROTEINS LTD.,
... Respondent
For Petitioner :SRI.P.K.R.MENON,SR.COUNSEL,GOI(TAXES)
For Respondent :SRI.P.BALACHANDRAN (SR.)
The Hon'ble MR. Justice C.N.RAMACHANDRAN NAIR
The Hon'ble MR. Justice V.K.MOHANAN
Dated :03/06/2008
O R D E R
C.N.RAMACHANDRAN NAIR
& V.K.MOHANAN, JJ.
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I.T.A.Nos.273, 256, 255, 234
& 233 of 2002
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Dated this the 3rd day of June, 2008
J U D G M E N T
Ramachandran Nair,J:
These appeals filed by the Revenue arise from
the common order of the Income Tax Appellate Tribunal,
Cochin Bench disposing of the assessee’s appeals for the
assessment years 1993-94 to 1997-98.
2. We have heard the Senior Counsel
Sri.P.K.R.Menon appearing for the appellant and the
Senior Counsel Sri.P.Balachandran appearing for the
respondent.
3. The common issue raised for all the years is
whether the assessee was entitled to deduction under
Section 80-IA of the Income Tax Act, 1961 (hereinafter
called ‘the Act’) in respect of the ‘third series’ of plant put
up for production of ossein. In the course of assessment,
the Assessing Officer conducted an inspection of the new
plant for which Section 80-IA relief was claimed and he
found that the plant is not a distinct and separate
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industrial unit inasmuch as certain common facilities are
used for the new plant like conveyor system for raw
materials, storage tanks etc. So far as storage tank for
new plant is concerned, though the Assessing Officer
has stated that he had difficulty to locate it, he has not
stated that there was no separate storage tank for raw
materials. In the appeal filed by the assessee, the
Tribunal reversed the finding of the Assessing Officer
and the Commissioner of Income Tax (Appeals), holding
that the plant set up by the assessee is separate and
distinct one entitling for relief under Section 80-IA of
the Act. The Tribunal was of the view that the
investment attributable to common facilities of the old
plant utilised in the new plant is very insignificant when
compared to the total investment in the new plant. The
Tribunal therefore allowed the assessee’s appeals by
following two decisions of the Supreme Court, Textile
Machinery Corporation Ltd. v. Commissioner of
Income-Tax, West Bengal (107 I.T.R. 195) and
Commissioner of Income Tax, West Bengal-I v.
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Indian Aluminium Co.Ltd. (108 I.T.R. 367).
4. The contention of the Revenue is that the
common facility utilised by the assessee for running the
new plant is part of and is indispensable for the existing
plant and so much so, balance new plant is not a new
industry. The specific case of the Revenue is that the
new industry cannot function on it’s own and so much
so, it is not entitled to relief under Section 80-IA of the
Act. The Senior counsel appearing for the assessee, on
the other hand, contended that the new plant is separate
and distinct in itself and the use of all facilities like
conveyor system for raw materials, water storage tank
etc. does not make it part of the old industry. He
specifically referred to substantial investment made,
increase in production capacity etc. as factors proving
for the setting up of a new plant. Reference is invited to
the test laid down by the Supreme Court in Textile
Machinery Corporation Ltd.’s case (cited supra) for
deciding as to whether the industry set up in respect of
which relief claimed under Section 80-IA is a new
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industry or not. The Tribunal has addressed on the tests
laid down by the Supreme Court and came to the
conclusion that all the tests are satisfied. The Revenue,
however, is contesting the finding of fact by the Tribunal
by stating that if the Tribunal wanted to enter into a
finding different from what the Assessing Officer has
done after inspection, they should have themselves
visited the factory and physically verified the existence
of the new plant. We have noticed from para 3 of the
Tribunal’s order that the assessee was engaged in
production in the existing two plants by using raw
material that is, bone pieces of specified dimensions. It
is further stated by the Tribunal that the ‘third series’
plant was first put up to make the product from yet
another dimension of bone pieces which appears to us to
be smaller in size than the size that is used in the other
existing two plants. If raw materials of different
dimensions are used in the new plant, then such items
could not be used in the existing plant. Thus, the same
itself is indicative of setting up of a new industry. Even
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though the contention of counsel for the Revenue that
the new plant is only an expansion of the existing
business, is correct, we find from the Indian
Aluminium Companies case decided by the Supreme
Court that the industry set up under an expansion
scheme also is entitled to the benefit. In the normal
course, we should accept the finding of facts by the
Tribunal pertaining to the set up of new industry if it is
based on cogent and acceptable evidence. However,
since the Assessing Officer has conducted an inspection
and disallowance is made, based on findings, we feel, it
would have been desirable for the Tribunal also to have
verified the facts by itself by conducting an inspection.
5. The Senior counsel for the Revenue contended
that the Tribunal has no new material to arrive at a
conclusion different from what the Assessing Officer has
recorded. He has therefore pressed for requirement of
inspection by the Tribunal to enter into a finding as to
whether the claim of setting up of a new industry by the
assessee is correct or not. It is not known, whether, in
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the course of time, there is re-structuring of the industry
or whether there is any change that will make it difficult
for the Tribunal to ascertain the position pertaining to
14 years back now. In any case, since counsel for the
Revenue has pressed for inspection by the Tribunal
before rendering a decision and since no new materials
are brought forward apart from the inspection report by
the officer which in our mind is not full and complete,
we feel that an inspection by the Tribunal is desirable.
We therefore, set aside the orders of the Tribunal
pertaining to granting of allowance under Section 80-IA
of the Act and the Tribunal is directed to conduct an
inspection with notice to the parties. The Assessee’s
technical staff should render assistance to the Tribunal
to identify the new plant i.e., the ‘third series’ ossein
plant in respect of which Section 80-IA relief is claimed
and will explain the process of manufacture and the role
of the equipments to the Tribunal. It would be open to
the Department to render assistance to the Tribunal by
rendering technical expert to inspect the plant. The
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Tribunal is directed to conduct an inspection and issue
copies of the report of findings to both the assessee and
the Revenue. The Tribunal will decide the matter
afresh, without any delay.
6. Additional issues raised by the Revenue
pertain to the assessment year 1997-98. The first issue
is disallowance of R & D Cess of Rs.2,51,594/- paid to
the Central Government under the R & D Cess Act. The
claim was disallowed by the Assessing Officer, since the
assessee has shown the payment as ‘the expenditure
pending allocation’ in its accounts. Since the conditions
laid down in Section 43B have been satisfied in this
case, the Tribunal allowed the claim following the
decision of the Supreme Court in Tuticorin Alkali
Chemicals and Fertilizers Ltd. v. C.I.T. (227 I.T.R.
172). The finding of the Tribunal is that whatever be the
pattern of accounting of the amount, the assessee has
incurred a statutory liability. In fact, there was liability
to pay the cess and the same was, in fact, paid in the
previous year relevant to the assessment year. We find
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that the payment is under a central legislation and is in
the nature of cess which is rightly allowed by the
Tribunal under Section 43B of the Act. We therefore
decline to interfere with the finding of the Income Tax
Appellate Tribunal on this issue.
7. The next issue pertains to disallowance of
deduction claimed under Section 35-AB of the Act for
the technical know-how fees paid for the expansion of
project for setting up of a plant for production of
gellatin. Here again, the Assessing Officer noticed that
expenditure was capitalised by the assessee under the
head ‘expenditure pending allocation’. The
Department’s case is that the technical know-how fee
paid is capital in nature and the assessee has shown it so
in the account and therefore, they are not entitled to
deduction. However, the contention of the assessee is
that the two conditions for allowance under Section
35-AB are that the payment is in the nature of technical
know-how fee and is for business purposes. The
Tribunal entered into a finding that the technical service
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fee paid by the assessee for acquiring the know-how was
for setting up the project for manufacturing of gellatine
from ossein. Since the gellatine is the final product of
the assessee and the know-how acquired for setting up
the plant for production of article is for business
purpose, we are of the view that the Tribunal has
rightly referred to the similar provisions contained in
Section 36(1)(iii) of the Act and held that the
expenditure is for the purpose of business. We,
therefore, do not find any ground to interfere with the
order of the Tribunal.
8. The last ground raised pertains to the
disallowance of cash payment made in excess of
Rs.20,000/- in terms of Section 40 A(3) of the Act. The
Assessing Officer made disallowance by adding all the
payments in cash made to same party. However, the
Tribunal held that disallowance should be made only in
respect of each and every payment made above
Rs.20,000/- other than through cheque or demand draft.
Since the amendment authorising clubbing of
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expenditure for the purpose of disallowance is to take
place in the next financial year, the Tribunal’s order to
make the disallowance with reference to the individual
payments is perfectly correct. We therefore decline to
interfere with the Tribunal’s order on this issue.
9. The last contention raised pertains to
disallowance of total sum of Rs.6,56,070/- which is an
expenditure relating to scrapped K.P.gelatine project
and expenditure for gel bone development. The
Tribunal’s finding is that the part of expenditure is
incurred in the form of payment towards consultant’s
fees for conducting the feasibility study. Since the
expenditure was incurred for conducting feasibility
study for expansion of the business, it was allowed. We
concur with the finding of the Tribunal that both items
of expenditure are in the nature of business expenditure
allowable under the Income Tax Act. Consequently, the
Tribunal’s order for 1993-94 is sustained except on the
issue pertaining to Section 80-IA of the Act. Similarly,
I.T.A.No.255 of 2002 pertaining to the year 1997-98 will
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stand dismissed, except on the issue pertaining to
deduction under Section 80-IA of the Act which stands
remanded along with other case. The Tribunal is
directed to dispose of the appeals afresh after inspection
and within a period of three months from the date of
receipt of a copy of this judgment.
C.N.RAMACHANDRAN NAIR,
Judge
V.K.MOHANAN,
Judge
MBS/
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C.N.RAMACHANDRAN NAIR &
V.K.MOHANAN, JJ.
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I.T.A.Nos. 273,256,255, 234
& 233 of 2002
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J U D G M E N T
DATED: 03-06-2008
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P.R.RAMAN &
I.T.A.Nos. 273 of 2002 & connect. cases
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V.K.MOHANAN, JJ.
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O.P.NO. OF 2001
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J U D G M E N T
DATED: -2007
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