Zeon Lifesciences Ltd., New Delhi vs Department Of Income Tax

This appeal of the Revenue is directed against the Order dated 29.1.2010 passed by the Ld. Commissioner of Income Tax (Appeals), Ghaziabad pertaining to assessment year 2006-07, on the following grounds:-

"1. On the facts and in the circumstance of the case, Ld. CIT(A) has erred in allowing deduction u/s. 80IC on job works receipts in respect of the unit 'Mahhan Multipack'

2. On the facts and in the circumstances of the case, Ld. CIT(A) has erred in allowing deduction u/s. 80IC in respect of the unit 'Mahaan Healthcare' especially when no separate accounts are prepared for manufacturing activity and job works.

3. Without prejudice to the ground no. 2 above, on the facts and in the circumstances of the case, Ld. CIT(A) has erred in allowing deduction u/s. 80IC in respect of the unit 'Mahaan Healthcare' on job works receipts of Rs. 1,25,32,704/- which was 'works contract' and not a manufacturing activity.

4. On the facts and in the circumstances of the case, Ld. CIT(A) has erred in allowing depreciation amounting to Rs. 43,80,673/- in respect of the assets of 'Mahaan Multipack'when the assets were not put to use.

5. On the facts and in the circumstances of the case, Ld. CIT(A) has erred in holding that the AO was not correct in arriving at a ITA NO. 1650/Del/2010

figure of WDV for individual assets failing within each of the block of assets of the assessee company while disallowing depreciation ignoring the fact that the assessee has itself attributed depreciation of Rs. 43,80,673/- to the assets of 'Mahann Multipack'."

2. The facts in brief as noted by the ld CIT(A) are that in this case Return declaring taxable income at 'NIL'; However, tax has been paid on Book Profit of Rs. 1,01,40,312/- u/s. 115JB of the Income Tax Act, 1961 (herein after 'the Act') was filed on 15.1.2006. The same was processed u/s. 143(1) of the Act. The case was selected for scrutiny. Notice u/s. 143(2) was issued within the stipulated time, which was also served in time. In response thereto, assessee's authorized representative appeared from time to time and filed the details as asked for. AO examined the said details and books of accounts were examined on test check basis. Thereafter, AO completed the assessment u/s. 143(3) of the Act. Vide his order dated 24.12.2008 the AO, assessed the income at Rs. 52,55,750/- by making various disallowances.

3. Being aggrieved with the assessment order dated 24.12.2008, assessee appealed before the Ld. CIT(A), who vide impugned order dated 29.1.2010 has partly allowed the appeal of the assessee for statistical purposes.

4. Now the Revenue is aggrieved against the impugned order dated 29.1.2010 and filed the present appeal before the Tribunal.

5. At the time of hearing Ld. DR relied upon the order of the AO and reiterated the contentions raised by the Revenue in the grounds of appeal.

6. On the contrary, Ld. Counsel of the assessee relied upon the order of the Ld. CIT(A) and submitted that the same may be upheld.

7. We have heard both the parties and perused the relevant records available with us.

7.1 With regard to ground nos. 1, 2 & 3 are concerned, we find that the assessee company has two undertakings eligible for deduction u/s 80lC of the Act, i.e., (i) Mahaan Multipack, and (ii) Mahaan Healthcare. In Mahaan Multipack the assessee company manufactures 'Instant Sweetened Juice

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Powder' for other companies on contract manufacturing/job work basis. In Mahaan Healthcare the assessee company manufactures Health & Nutritional Foods, Protein Powders and food supplements etc. These are manufactured by the assessee company either as its own products and / or for other companies on job work / contract manufacturing basis. For its unit Mahaan Healthcare the assessee company maintains separate books of account. However, as per the ld AR, separate books have not been maintained by the assessee company for the manufacturing activities carried out for self and on job work/contract manufacturing, as section 80IC does not require separate books for eligible and non eligible activity of a unit. According to the ld AR, even in the absence of separate books for manufacturing and non manufacturing activity deduction u/s. 80IC should have been allowed on some rationale basis. While the term 'manufacture or produce' was not defined under the Act, section 10 (29BA) has been introduced w.e.f. 01.04.2009. According to him, both activities i.e., manufacturing for own self or for any third party fall under the definition of 'manufacture or produce' in terms of the provisions of the Act. So according to him the assessing officer has wrongly not allowed deduction under section 80lC of the Act with reference to manufacturing activities carried out on contract/ job work basis in the said unit allegedly for the reason that the assessee has shown Job Work Charges of Rs. 1,25,32,704/- in Mahaan Healthcare, which according to AO is not a manufacturing activities as prescribed u/s 80-IC of the Act. The assessing officer further erroneously disallowed the entire claim of deduction under section 80lC of the Act for the entire unit including for the manufacturing activities carried out by the assessee company on its own account allegedly for the reason that since no separate profit & loss account for manufacturing and other activities has been submitted, no deduction under 80-IC is available to the assessee for the year under consideration. The ld AR pointed out that in its unit / undertaking of Mahaan Healthcare the assessee company achieved a turnover of Rs. 8,35,11,233 during financial year 2005-06. This turnover according to him included job work charges amounting to Rs. 1,25,32,704. In the opinion of the 3 ITA NO. 1650/Del/2010

assessing officer however job work is not a manufacturing activity. And according to the ld AR, it is not the case of the assessing officer that job work charges had not been derived from the said undertaking or that assessee company did not utilize its machinery and labourers for earning the job work charges. Further it was submitted by the ld AR that the assessing officer has not brought on record any reason as to how or why Job Work is not a manufacturing activity. According to him section 80lC does not define what is or is not a manufacturing activity. We find that the assessee company manufactures Health and Nutritional Foods, Protein Powders and food supplements etc. These are manufactured by the assessee company either as its own products and or for other companies on job work / contract manufacturing basis. The process of manufacturing for own self and job work is same i.e. dry blending of various raw materials under controlled conditions. Both types of manufacturing activities i.e., for own self or for any third party would fall under the definition of 'manufacture'. The job work charge had a direct nexus with the manufacturing activity of the assessee since the assessee did the job work by utilizing its machinery and labourers. The manufacturing process resulted in transformation of raw material into a new and distinct product. It was also the submission of the assessee's counsel that when the goods belonging to third party were manufactured by the assessee the same is also covered under Excise Rules as manufacturing activity and section 80IC does not specify that manufacturing has to be of own goods/ product only and accordingly, the Explanation to Section 80IA (13) is not applicable to Section 80IC of the Act.

7.2 We further find considerable cogency in the assessee's contention that that the production activity was not suspended in the current year and unit was kept ready for production stage at all times; and production did not take place as there was no work order from CCIPL; And even fixed minimum charges derived are income from and have direct nexus with the business of the undertaking. It is a well settled that for the purpose of claiming deduction under section 80lC of the Act, the income has to be derived from the

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undertaking. Therefore, if there is nexus between the receipt of income and undertaking, it has to be treated as income derived from the undertaking. The immediate source of job charges received was from the undertaking itself. The job work charges have to be treated as income derived from the undertaking itself. The job work charges received by the assessee had a direct nexus with the manufacturing activity of the assessee since the assessee did the job work by utilizing its own machinery and labourers. Where the goods belonging to others were manufactured by the assessee and it derived profit by way of job charges, the assessee is entitled to deduction u/s 80-IC as the same tantamount to manufacture in terms of Excise rules, Income tax Act and all other applicable statutes. An industrial unit manufacturing or producing articles or things cannot be denied exemption u/s 80-IC merely on the ground that it is deriving profit by carrying out job work. Job work also tantamount to manufacture if otherwise the conditions required to classify the activity carried out by the undertaking result in manufacture of an article or thing. ACIT v. Biotech Medicals (P) Ltd.(2009) 310 ITR (AT) 47 (Hyd.), CIT v. Northern Aromatics Ltd. ClOOS) 196 CTR 479 (Del), ACIT v. Food & Health Care Specialties (2007) ITA No. 2389/De1/03.

7.3 In Warren Laboratories (P) Ltd. v. DCIT (2005) 3 SOT 638 (Mum) it has been held that Clauses (a) and (b) of section 80IC(2) does not say that the assessee company would be entitled to deduction, if it manufactures or produces articles or things, exclusively belonging to it. Therefore, when the goods belonging to others are manufactured by the assessee company and it derives a profit by way of job work charges, it is entitled to deduction under section 80le.

7.4 We find force in the submission of the ld AR that explanation after section 801A(13) is not applicable to section 801C. This explanation which related to applicability of section 80lA to a works contract, was inserted by Finance Act, 2007 w..e.f 01.04.2000 and has been amended by Finance Act (No. 2), 2009. While provisions of section 80IA(5) and 80lA (7) to (12) are applicable to section 801C, the said explanation has not been made 5 ITA NO. 1650/Del/2010

applicable to section 801C. The legislature's intention on applicability of section 80lC to job work charges is thus clear. We find that in the audit report as per the statute read with section 80IA(7) (Form No. 10CCB) w.r.t. the unit / undertaking namely M/s. Mahaan Healthcare, the Chartered Accountants has clearly mentioned that he has examined the balance sheet, profit and loss account of the industrial undertaking which were in agreement with the books of account maintained. As such separate books of account of the undertaking have been maintained by the assessee company. Unit wise Balance Sheet and Profit account were filed vide letter dated 15.12.2004 of the assessee. There is no requirement under law for maintaining separate books of account for manufacturing and non-manufacturing activities of an undertaking. Where Assessee Company carries on both manufacturing and non-manufacturing activity in its undertaking the assessing officer ought to have allowed deduction under section 80lC of the Act on some logical, rational and scientific basis as all the applicable conditions for allowability of deduction under section 80IC of the Act have been met by the said unit of the assessee company.

7.5 In view of the above, we find that Ld. CIT(A) has rightly held that the assessee job work charges have to be treated as manufacturing activity, and it is not envisaged u/s. 80-IC to maintain separate books of account for manufacturing on his own account and for job work. While an explanation has been added after section 80-IA(13) which states that nothing contained in this section, i.e., section 80-IA shall apply in relation to business which is in the nature of work contract etc, section 80-1C(7) only talks about the application of sub-section (5) and sub-section (7) to (12) of 80-IA. Thus, it appears that there is no denial of deduction u/s. 80-lC in case of manufacturing activities in the nature of job works, work contract etc. In the background of the aforesaid detailed discussions and precedents relied upon by the Ld. CIT(A) in his order as well as by the assessee, as aforesaid, we are of the view that no interference is called for in the well reasoned

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order passed by the Ld. CIT(A), hence, we uphold the same by rejecting the grounds no. 1, 2 & 3 filed by the Revenue in its Appeal.

8. With regard to ground no. 4 is concerned, we find during the hearing Ld. Counsel of the assessee submitted that the unit had started manufacturing operation w.e.f. 25.2.2004 (A.Y. 2004-05); he further submitted that assessee received job charges as unit is in existence and is in running condition; in the absence of work orders the unit was kept in ready for production stage throughout the year; as per Income Tax Act depreciation allowable on active and passive user of assets; he further submitted that in the financial year 2004-05 unit's production was 352.99 MT; assessee claimed depreciation in asstt. year 2006-07 on these assets as the same are included in the block of assets; Assessee claimed deprecation since AY 2004-05 for this unit and was allowed in earlier asstt. year. Ld. Counsel of the assessee further submitted that the it is not mandatory under the Company Law to charge depreciation in books. We also find that during the year under consideration the assessee company had an agreement with Coca-Cola India (P) Ltd. (CClPL) for manufacturing on job work/contract basis through its undertaking named Mahaan Multipack. As per term of the contract the assessee company was to receive from CCIPL job work charges based on quantum of production subject to a fixed minimum guaranteed charge. However, the assessee company was required to keep its unit in 'ready for production' stage at all times. Since there were no work orders from CCIPL during the year therefore the assessee company did not carry out any manufacturing activity at this unit. However, as required the plant was kept in production ready stage at all times. The assessee company received the fixed minimum guaranteed charge amounting to Rs. 65,25,300/-. Accrual of this amount was not possible without keeping the plant of the undertaking in 'ready for production' stage throughout the year. This amount was shown as the turnover of this unit for the year under consideration. Keeping the unit/plant in production ready stage means that the assets of unit were put to use specially when production was not carried out for lack of orders. The

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assessing officer did not allow depreciation amounting to Rs.43,80,673/- relating to assets of the unit allegedly for the reason that:-

"It was also observed that the assessee. company has not claimed any Depreciation as per Companies Act, 1961 in the case of M/s. Mahaan Multipack whereas Depreciation as per IT Act of Rs.43,80,673/- has been claimed in Computation of Assessable Income.

On perusal of assessee's reply it is found that Unit under consideration has not been put to use and the same fact has been admitted by the assessee itself. Since Unit has not been put to use, the question of producing articles/things, goods as the case may be does not arises. However, assessee company has claimed Depreciation in this unit as per IT Act which is self contradictory as no asset is put to use. Accordingly claim of the assessee company of Depreciation of Rs.43,80,673/- is disallowed".

8.1 We find that the Ld. CIT(A) rightly observed that even though the Assessing officer had wrongly disallowed depreciation claimed by the said unit, once he had disallowed the depreciation, the profits of the unit increased automatically and such increased profits of the undertaking should have been considered by the assessing officer for calculating deduction available under section 80IC of the Act. The assessee company derived income from its undertaking named Mahaan Multipack during the year under consideration. This unit had started manufacturing operations w.e.f. 25.02.2004. Deduction under section 80IC of the Act was claimed in the return of income for A. Y. 05-06 and was allowed in the assessment for the year. The said fixed minimum guarantee amount received by the undertaking from M/s Coca-Cola India Private Limited would contribute towards profits derived by the undertaking. Once an undertaking is eligible for deduction uls 80lC of the Act, it is not material whether production was actually carried out in a subsequent period (provided period falls within the tax holiday period) as long as there are profits derived by the undertaking. In any case the assessee company had kept the unit ready for production based on its contract with M/s. Coca-Cola India Private Limited. The profits of the undertaking had a direct nexus with the manufacturing activity of the undertaking. The assessing officer has erroneously not allowed deduction

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under section 80lC of the Act for the profits derived by the undertaking allegedly for the reason that:-

"As assessee company has accepted that no production activities has been done at this unit due to production was suspended by the Coco-Cola India Private Limited and only minimum Fixed Job Charges of Rs. 65,25,300/- has been received. Since no manufacturing activities has been done at this unit, no deduction U/s 80-IC of the IT Act, 1961 is available and allowable to the assessee company for the year under consideration and claim of the assessee company that otherwise also profit of this unit is eligible for deduction uls 80-IC of the IT Act, 1961 is rejected".

8.2 We find force in the Ld. CIT(A)'s remarks that the assessing officer was wrong in stating that the assessee company has accepted that there was no production in the said unit during the year due to suspension of production by Coca-Cola India Private Limited. The assessee company did not state at any stage that production had been suspended by the said Coca-Cola India Private Limited. The allegation made by the assessing officer in the impugned assessment order is factually incorrect. The criteria for charging of depreciation and rates of depreciation are different under Companies Act, 1956 and Income tax Act, 1961. In terms of provisions of Companies Act, providing depreciation on year to year basis is not mandatory. Arrears of depreciation need to be provided before declaration of dividend in terms of section 205(1). This shows that there is a possibility of Companies not providing depreciation on year to year basis. Similarly depreciation has to be provided in terms of and for the purposes of section 349 of the Companies Act, 1956. In fact under Companies Act. it is possible to revalue upwards the written down value of a fixed asset depending upto facts and circumstances of each case.

8.3 We find that Ld. CIT(A) observed that in terms of Explanation 5 to section 32, the provisions of section 32 are applicable even if the assessee has not claimed depreciation while computing his total income. Deprecation has to be allowed for the active as well passive use of the asset. It has been held in the case of Sanghvi Motors (P) Ltd. v. DCIT reported in (2008) 110 ITD 1 9 ITA NO. 1650/Del/2010

(Pune) (TM) that depreciation has to be allowed not only for active use of an asset but also for its passive use. Even passive use of an asset i.e. while it is kept ready for use, it would tantamount to use of the asset for the purposes of the business and assessee would be entitled to depreciation thereon. It has been held in the case of Siv Industries Ltd. v. DCIT reported in (2008) 306 ITR 114 (Mad.) that any machinery may not have been used on all days and every single day right throughout the year for it to be eligible to claim depreciation. It has been held by the hon'ble Delhi High Court in the case of Capital Bus Service (P) Ltd., v. CIT (1980) 123 ITR 404 that even passive use of an asset entitles it to depreciation. The Hon'ble Delhi High Court had relied on the decision of Bombay High Court in the case of CIT v. Viswanath Bhaskar Sathe (1937) 5 ITR 621, wherein the Court held that the assessee was entitled to depreciation notwithstanding that the plant and machinery did not actually work during the previous year in question. The court, while holding so, interpreted the word "used" found in section 10(2)(vi) of the 1922 Act, as under:

"But, I think that the word 'used' in this section may be given a wider meaning and embraces passive as well as active user. Machinery which is kept idle may well depreciate,' particularly during the monsoon season. It seems to me that the ultimate test is, whether, without the particular user of the machinery relied upon the profits sought to be taxed could have been made; and as I read the agreement in the case, the profits of the assessee during the year under assessment could not have been earned except by his maintaining his factory in good, working order, and that involves the user of the factory and the machinery".

8.4 We also rely on the judgment of Hon'ble P & H High court in the case of CIT v. Pepsu Road Transport Corpn. Reported in 253 ITR 303.The receipts of unit Mahaan Multipack amounting to Rs. 65.50 lacs had direct nexus to the operations of the unit and being operational income from the main business activity of the unit it would be eligible for deduction under section 8OIC of the Act (Sony India (P) Ltd., v. DCIT) reported in (2008) 114 ITD 448 (Delhi).

8.5 In view of the above, we find that the Ld. CIT(A) has rightly held that the receipts of the unit has direct nexus with the operations of the unit and 10 ITA NO. 1650/Del/2010

being operational income from main business activity of the unit, it would be eligible for deduction u/s.80IC of the IT Act. The assessee was required to keep its unit in ready for production stage at all times and the fixed minimum"

guarantee received by it was not possible without keeping the plant of the undertaking in "ready for production stage" throughout the year. The Hon'ble Delhi High Court in the case of Capital Bus Service Pvt.Ltd. Vs. CIT ( 1980) 123 ITR 404 has recognized that even passive use of assets is entitled for depreciation. In Sanghvi Motors (P) Ltd. Vs. DCIT (2008), 110 ITD 1 (Pune) (TM), it was held that depreciation is to be allowed even for passive use, i.e., while it is kept ready for use. Thus, the income derived by the assessee has sufficient nexus and is incidental to the main business of the industrial undertaking and is, therefore, eligible for deduction u/s.80-IA. In Pancharatna Cement P.Ltd. Vs. Union of India (2009) 317 ITR 259, the Gauhati High Court, inter alia, held that the language of section 80-IC is of wider import and amplitude than that of section 80HH and the profits and gains to be allowable for deduction have to be derived from the business in which the industrial undertaking is engaged. Such profits and gains need not essentially be derived from the industrial undertaking. Though there has to be a direct and perceptible nexus between the profits and gains and the business of the industrial undertaking from which they are derived, the rigor of the essentiality of correlation with the industrial undertaking is not a stolid imperative as in section 80HH. In the background of the aforesaid detailed discussions and precedents relied upon by the Ld. CIT(A) in his order as well as by the assessee, as aforesaid, we are of the view that no interference is called for in the well reasoned order passed by the Ld. CIT(A), hence, we uphold the same by rejecting the grounds no. 4 filed by the Revenue in its Appeal.

9. With regard to ground nos. 5 is concerned, we find that that the total assets of all undertakings / units of the assessee company form part of its block of assets for the purposes of claiming depreciation under section 32(1) of the Act. Any assessee can have only single block of assets for assets falling within a class of assets. Multiple block of assets, for assets falling within a class

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of assets, is not possible. Once an asset forms part of any block of assets, as defined under section 2(11) of the Act, such asset losses its independent written down value. The written down value as defined under section 43(6) of the Act is for the entire / whole of the block of assets and is a single value. This can't be broken into independent value for individual assets. The written down value for each block of assets is a single figure. Due to this fact and because of the method of calculating WDV for the block of assets it is not possible to work out the written down value for individual assets falling within that block of assets. As such the assessing officer erred in law and on facts in arriving at a figure of WDV for individual assets falling within each of the block of assets of the assessee company while disallowing depreciation amounting to Rs. 43,80,673/-.

9.1 We find that that it has been held by Hon'ble Delhi High Court ( vide its judgment dated 15.10.2009, in case of CIT v. Bharat Aluminium Co. Ltd. in ITA No. 532 of 2006, that once a particular assets falls within the block, it is added to WDV and depreciation is allowed on the block. The individual assets losses its identity and the question whether an individual assets is put to use in a particular year is not relevant in as much as the requirement of law is to establish the use of block of assets and not the use of a particulars assets.

9.2 In view of the above, we find that Ld. CIT(A) has rightly held that the Written Down Value of each block of assets is a single figure and due to this fact and because of the method of calculating WDV for the block of assets, it is not possible to work out the WDV for individual assets falls within the block of assets. We also find that this view is also buttressed by the finding of the Hon'ble Delhi High Court in the case of CIT Vs. Bharat Alumunium Co. Ltd. ITA No.532 of 2006, wherein, it was held that once a particular block of assets falls within the block, it is added to the Written Down Value and depreciation is to be allowed on the block. The individual asset loses its identity and the question whether an individual asset is put to use in a particular year or not is irrelevant inasmuch as the requirement of law is to establish the use of the block of assets and not the use of particular asset. Thus, the AO erred in 12 ITA NO. 1650/Del/2010

arriving at a figure of WDV for individual assets falls within each of the block of assets of the assessee company while disallowing depreciation. The AO failed to understand that it is only in the first year, when the particular asset is acquired, the user of the asset is required. In the background of the aforesaid detailed discussions and precedents relied upon by the Ld. CIT(A) in his order as well as by the assessee, as aforesaid, we are of the view that no interference is called for in the well reasoned order passed by the Ld. CIT(A), hence, we uphold the same by rejecting the grounds no. 5 filed by the Revenue in its Appeal.

10. In the result, the appeal of the Revenue is dismissed.

Order pronounced in the open court on 27.03.2015.

-Sd/- -Sd/- (R.S. SYAL (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated:27/03/2015 A K Keot

Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi

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