Facts of the Case

The appellant-assessee, INTEC Corporation, filed its return for Assessment Year 2008–09 declaring income and claiming deduction of ₹3.13 crores under Section 80-IC of the Income Tax Act on account of a newly established industrial unit at Selaqui, Uttarakhand.

Previously, the assessee was engaged in manufacturing roof-mounted air conditioning units for Indian Railways at Kala Amb, Himachal Pradesh, which had already availed benefits under Section 80-IC.

The assessee claimed that it established a new unit at Selaqui and transferred certain machinery along with minimal tools and equipment. However, the Assessing Officer disallowed the deduction on the ground that previously used machinery exceeded the permissible limit of 20% and conditions under Section 80-IC were not satisfied.

The Commissioner of Income Tax (Appeals) allowed the deduction, but the ITAT reversed the order, holding that the new unit was not genuinely engaged in manufacturing activities.

Issues Involved

  1. Whether the Selaqui unit qualified as a “new industrial undertaking” eligible for deduction under Section 80-IC.
  2. Whether transfer of old machinery beyond 20% violated Section 80-IC(4).
  3. Whether actual manufacturing activity was carried out at the new unit.
  4. Whether the unit was formed by splitting or reconstruction of an existing business.

Petitioner’s Arguments

  • The assessee contended that manufacturing activity was carried out at the Selaqui unit, though not labour-intensive.
  • It argued that minimal workforce was sufficient considering the nature of assembly operations.
  • The machinery transferred was either new or insignificantly used and did not violate statutory limits.
  • It was submitted that high turnover could not be doubted merely due to low expenditure on wages.
  • The assessee also relied on evidence of purchase, movement of goods, and manufacturing processes including assembly of components.

Respondent’s Arguments

  • The Revenue argued that the assessee transferred used machinery exceeding 20% of total plant and machinery, violating Section 80-IC(4).
  • It contended that the Selaqui unit lacked infrastructure, manpower, and operational expenses necessary for manufacturing.
  • The negligible wages and absence of expenses such as travel, communication, or utilities indicated that no real manufacturing activity took place.
  • The Revenue also argued that the unit was merely a restructuring or extension of the existing Kala Amb unit.

Court’s Findings / Order

  • The Delhi High Court upheld the ITAT’s findings and dismissed the appeal.
  • It held that:
    • The ITAT had thoroughly analyzed the evidence and factual matrix.
    • The inference that no genuine manufacturing activity occurred at Selaqui was justified.
    • The transfer of machinery beyond permissible limits violated Section 80-IC conditions.
    • The Tribunal’s findings were neither perverse nor unreasonable.
  • The Court ruled that no substantial question of law arose under Section 260A.
  • Consequently, the appeal was dismissed.

Important Clarification

  • Mere establishment of a unit is insufficient; actual manufacturing activity must be demonstrated with credible evidence.
  • Low operational expenses, absence of manpower, and lack of infrastructure can lead to denial of tax benefits.
  • Transfer of old machinery must strictly comply with the 20% threshold under Section 80-IC(4).
  • ITAT findings on facts carry significant weight and are rarely interfered with unless perverse.

Sections Involved

  • Section 80-IC of the Income Tax Act, 1961
  • Section 80-IC(4)(ii) – Conditions regarding use of old machinery
  • Section 260A – Appeal to High Court

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:561-DB/PRJ28012019ITA722019.pdfTop of Form

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