Facts of the Case

The Revenue filed appeals before the Delhi High Court under Section 260A of the Income-tax Act against the common order passed by the Income Tax Appellate Tribunal (ITAT) for Assessment Years 2006-07, 2007-08, and 2008-09.

The assessee, Wings Pharmaceuticals Pvt. Ltd., was engaged in manufacturing pharmaceutical products including allopathic and ayurvedic medicines. The company established a manufacturing unit at Baddi, Himachal Pradesh, which was located in a tax holiday area and accordingly claimed deduction under Section 80-IC of the Income-tax Act.

During a search and seizure operation conducted on 14 February 2008, the Department alleged that the assessee had obtained accommodation bills from certain parties belonging to Dinesh Sharma of Ghaziabad for purchase of machinery. According to the Department, old machinery from the Delhi unit situated at D-6, Udyog Nagar had been shifted to the Baddi unit and falsely shown as new machinery through bogus bills.

The Assessing Officer denied deduction under Section 80-IC on the ground that the assessee violated the prescribed condition relating to the ratio of old machinery to new machinery.

 Issues Involved

  1. Whether the assessee was eligible for deduction under Section 80-IC despite alleged shifting of old machinery from the Delhi unit to the Baddi unit.
  2. Whether the machinery purchased through alleged accommodation bills constituted old machinery exceeding the permissible limit under Section 80-IC.
  3. Whether the findings of the CIT(A) and ITAT were perverse so as to raise a substantial question of law under Section 260A.

 Petitioner’s Arguments (Revenue)

The Revenue contended that:

  • The assessee procured accommodation bills from entities controlled by Dinesh Sharma without actual supply of machinery.
  • Old machinery from the Delhi unit was shifted to the Baddi unit and shown as new machinery.
  • The assessee failed to satisfy the statutory condition under Section 80-IC requiring that old machinery should not exceed the prescribed limit.
  • The valuation report and statements recorded during search established that the machinery installed at Baddi was substantially old machinery.
  • The deduction claimed under Section 80-IC was therefore liable to be disallowed.

 Respondent’s Arguments (Assessee)

The assessee submitted that:

  • The Baddi unit was a genuine manufacturing unit established in a notified tax holiday area.
  • Even if some old machinery had been shifted from Delhi to Baddi, the percentage of old machinery remained within the permissible limit prescribed under Section 80-IC.
  • The Department’s valuation report suffered from factual inaccuracies and relied upon unverifiable quotations.
  • The valuation exercise was conducted by a person who was not an approved valuer.
  • Documentary evidence, supplier affidavits, and books of account established that the ratio of old machinery to total machinery was below the statutory ceiling.

Court Order / Findings

The Delhi High Court upheld the findings of the CIT(A) and the ITAT and dismissed the Revenue’s appeals.

The Court observed that both the CIT(A) and the ITAT had extensively examined the evidence, statements, valuation reports, affidavits, and other documents on record.

The Court noted that although some old machinery had been shifted from the Delhi unit to the Baddi unit, the ratio of old machinery to total machinery was only 9.09%, which was well within the permissible limit of 20% prescribed under Explanation 2 to Section 80-IC.

The Court further held that:

  • The findings recorded by the CIT(A) and ITAT were purely factual in nature.
  • No perversity could be shown in the appreciation of evidence by the appellate authorities.
  • No substantial question of law arose for consideration under Section 260A.

Accordingly, the appeals filed by the Revenue were dismissed.

Important Clarification

The judgment clarifies that:

  • Mere presence or transfer of some old machinery does not automatically disentitle an assessee from claiming deduction under Section 80-IC.
  • The decisive factor is whether the percentage of old machinery exceeds the statutory threshold prescribed under the Act.
  • Findings based on appreciation of evidence by the CIT(A) and ITAT ordinarily cannot be interfered with by the High Court unless perversity is demonstrated.
  • Allegations relating to accommodation bills must be substantiated with reliable and legally sustainable evidence.

Sections Involved

  • Section 80-IC of the Income-tax Act, 1961
  • Section 153A of the Income-tax Act, 1961
  • Section 143(3) of the Income-tax Act, 1961
  • Section 260A of the Income-tax Act, 1961

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:11361-DB/SMD11082015ITA7322014_141837.pdf

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