Facts of the Case

The assessee company, Nirja Publishers & Printers Pvt. Ltd., was engaged in the business of printing, publishing, and binding of books. The company claimed deduction under Section 80IC of the Income Tax Act, 1961 for its eligible industrial undertaking located in a notified area.

During the assessment proceedings, the Assessing Officer (AO) disallowed the deduction claimed under Section 80IC on the ground that no manufacturing activity was carried out at the eligible unit. The AO alleged that the assessee received materials from its holding company and did not manufacture a new product at the undertaking.

Further, the AO treated the trade discount given to its holding company (S. Chand & Co. Ltd.) as commission and held that the assessee failed to deduct tax at source under Section 194H, thereby invoking Section 40(a)(ia) and making disallowances.

However, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the claim of the assessee and held that the deduction under Section 80IC was valid. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)’s order.

Aggrieved by the decision, the Revenue filed an appeal before the Delhi High Court under Section 260A of the Income Tax Act. 

Issues Involved

  1. Whether printing and binding of books constitutes a manufacturing activity eligible for deduction under Section 80IC of the Income Tax Act, 1961.
  2. Whether the trade discount provided to the holding company should be treated as commission, requiring deduction of tax at source under Section 194H.
  3. Whether disallowance under Section 40(a)(ia) is justified for non-deduction of TDS on such trade discount.
  4. Whether the High Court should interfere with factual findings of the ITAT in absence of perversity. 

Petitioner’s Arguments (Revenue)

  • The ITAT failed to consider that no new product was manufactured after the assessee received materials from its holding company.
  • Therefore, the assessee was not eligible for deduction under Section 80IC.
  • The payments shown as trade discount were actually commission payments to the holding company.
  • Since the assessee had not deducted TDS under Section 194H, the amount was liable to disallowance under Section 40(a)(ia) of the Income Tax Act. 

Respondent’s Arguments (Assessee)

  • The activities of printing, cutting, and binding books were actually carried out at the eligible industrial undertaking.
  • These processes constitute manufacturing activity, thereby qualifying for deduction under Section 80IC.
  • The discount offered to the holding company was purely a trade discount and not commission.
  • Since the payment was not commission, Section 194H relating to TDS on commission was not applicable, and therefore Section 40(a)(ia) disallowance could not be invoked. 

Court Findings

  • The ITAT had recorded clear findings of fact that the assessee carried out printing and binding activities at the eligible undertaking.
  • These findings were supported by evidence and were not shown to be perverse or erroneous.
  • The trade discount allowed to the holding company was rightly treated as discount and not commission, hence TDS under Section 194H was not required.
  • Consequently, disallowance under Section 40(a)(ia) could not be sustained.
  • In appeals under Section 260A, the High Court will not re-appreciate facts unless there is a substantial question of law. 

Court Order

  • Printing and binding of books amount to manufacturing activity, making the assessee eligible for deduction under Section 80IC.
  • Trade discount cannot be treated as commission, and therefore Section 194H and Section 40(a)(ia) were not applicable.

Important Clarification

  1. Printing and binding of books constitute manufacturing activity for the purpose of claiming deduction under Section 80IC.
  2. Trade discounts cannot be treated as commission unless the nature of the transaction clearly establishes an agency relationship requiring TDS under Section 194H.

 Sections Involved

  • Section 80IC – Deduction for profits from industrial undertakings in specified areas
  • Section 194H – TDS on commission or brokerage
  • Section 40(a)(ia) – Disallowance for failure to deduct TDS
  • Section 260A – Appeal to High Court  

Link to download the order - https://delhihighcourt.nic.in/app/showFileJudgment/60810012024ITA10212019_154728.pdf 

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.