IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN TUESDAY, THE 3RD JUNE 2008 / 13TH JYAISHTA 1930 ITA.No. 273 of 2002() --------------------- ITA.226/COCH/2000 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT: ---------------------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL,GOI(TAXES) SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENT: APPELLANT: ------------------------------------------ M/S. KERALA CHEMICALS AND PROTEINS LTD., PANAMPILLY NAGAR, COCHIN-36. BY ADV. SRI.P.BALACHANDRAN (SR.) SMT.PREETHA S.NAIR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 03/06/2008 ALONG WITH ITA NO. 233 OF 2002, ITA NO. 234 OF 2002, ITA NO. 255 OF 2002 AND ITA NO.256 OF 2002, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: Kss C.N.RAMACHANDRAN NAIR & V.K.MOHANAN, JJ. --------------------------------------------- I.T.A.Nos.273, 256, 255, 234 & 233 of 2002 --------------------------------------------- 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 I.T.A.Nos. 273 of 2002 & connect. cases :-2-: 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. I.T.A.Nos. 273 of 2002 & connect. cases :-3-: 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 I.T.A.Nos. 273 of 2002 & connect. cases :-4-: 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 I.T.A.Nos. 273 of 2002 & connect. cases :-5-: 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 I.T.A.Nos. 273 of 2002 & connect. cases :-6-: 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 I.T.A.Nos. 273 of 2002 & connect. cases :-7-: 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 I.T.A.Nos. 273 of 2002 & connect. cases :-8-: 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 I.T.A.Nos. 273 of 2002 & connect. cases :-9-: 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 I.T.A.Nos. 273 of 2002 & connect. cases :-10-: 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 I.T.A.Nos. 273 of 2002 & connect. cases :-11-: 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/ I.T.A.Nos. 273 of 2002 & connect. cases :-12-: C.N.RAMACHANDRAN NAIR & V.K.MOHANAN, JJ. -------------------------------------------- I.T.A.Nos. 273,256,255, 234 & 233 of 2002 --------------------------------------------- - J U D G M E N T DATED: 03-06-2008 I.T.A.Nos. 273 of 2002 & connect. cases :-13-: P.R.RAMAN & I.T.A.Nos. 273 of 2002 & connect. cases :-14-: V.K.MOHANAN, JJ. -------------------------------------------- O.P.NO. OF 2001 ------------------------------------ J U D G M E N T DATED: -2007 I.T.A.Nos. 273 of 2002 & connect. cases :-15-: