Section 40a (ia) contemplates disallowance only where tax has not been deducted or where, after deduction, it is not paid.

Conditions laid down under Section 40(a) (ia ) requires addition  to the income if

–       tax is deductible at source and

–       such tax has not been deducted.

If both the conditions are satisfied then such payment can be disallowed under Section 40(a)(ia ).

Provisions of Section 40(a)(ia) have two limbs,

1. Assessee has to deduct tax and
2. Where after deducting tax, the assessee has to pay into Government Account.

There is nothing in the said section to treat the assessee as defaulter where there is a shortfall in deduction.

The Section 40(a) (ia) refers only to the duty to deduct tax and pay it to the Government Treasury.

 If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under any of the TDS provisions, assessee can be declared to be an assessee-in-default under Section 201 and no disallowance can be made by invoking the provisions of Section 40(a )(ia)

ASSISTANT COMMISSIONER OF INCOME TAX vs. PIXIE ENTERPRISES*

ITAT, ITAT, CHENNAI ‘C’ BENCH

Hari Om Maratha, J.M. & Abraham P. George, A.M.

ITA No. 1555/Mad/2009

23rd April, 2010

(2010) 29 CCH 0346 ChenTrib

(2011) 10 ITR 0744

Legislation Referred to

Section 40(a)(ia), 80-IB

Case pertains to

Asst. Year -,

Decision in favour of:

Assessee, matter remanded

Deduction under s. 80HHC—Eligibility—Conversion of printed aluminium sheets into pilferage proof caps, is a process which can be called a manufacturing activity—For deciding the question whether process carried on by assessee amounts to manufacture, what is to be seen is the ultimate commodity that is brought into existence—Pilferage proof caps were entirely different material, from the raw material which were printed aluminium sheets—Assessee’s process constituted a manufacturing activity and therefore, assessee qualifies for deduction under s. 80-IB

Held:

The processes carried on by the assessee on the printed aluminium sheets are specified above. For deciding the question whether such process amounts to manufacture, what is to be seen is the ultimate commodity that is brought into existence. By the different processes that were being done by the assessee here the ultimate commodity was definitely different from the raw material used. The raw material used which was printed aluminium sheet, were through such processes converted to pilferage proof caps which was an entirely different product, having different commercial use than from the printed aluminium sheet. The aluminium sheet as such cannot serve the purpose of closing a bottle in a pilfer proof manner. The process involved in converting such aluminium sheet to pilfer proof caps, would not be such that there was only a change in the form of raw material and nothing else. In any view of the angle, the pilferage proof caps were entirely different material, from the raw material which were printed aluminium sheets. Here, steps involved cannot be compared to simple roasting and powdering. Thus, there is noerror in the order of the CIT(A) warranting any interference.—India Cine Agencies vs. CIT (2008) 220 CTR (SC) 223 : (2008) 15 DTR (SC) 121 : (2009) 308 ITR 98 (SC) relied on.

(Para 9)

Conclusion:

Conversion of printed aluminium sheets into pilferage proof caps, is a process which can be called a manufacturing activity, and therefore, the assessee qualifies for deduction under s. 80-IB.

In favour of:

Assessee

Disallowance under s. 40(a)(ia)—Shortfall in TDS—According to the assessee, against 2.244 per cent tax which it was bound to deduct for payments made, deduction was only 2.20 per cent and hence it had to make suo motu disallowance of Rs. 17,90,003 under s. 40(a)(ia)—AO was of the opinion that disallowance needed to be proportionate to the tax actually deducted at source—Therefore, he scaled down the disallowance to Rs. 33,390, for a reason that the assessee could have claimed deduction of the amounts, in later years, as and when it remitted the short fall in deduction—CIT(A) was bound to look into the aspect whether the disallowance suo motu done by the assessee was justified after analysing s. 40(a)(ia) and the effect of allowing such claim, in future years when the assessee made good the shortfall in deduction of tax- view of the CIT(A) that the exercise is futile is not correct since it will have ramifications in future years, when allowances are claimed by the assessee after remitting the shortfall—Matter remanded

Held:

The assessee had made suo motu disallowance and the AO had scaled down such disallowance. Such scaling down was obviously for a reason that the assessee could have claimed deduction of the amounts, in later years, as and when it remitted the short fall in deduction. The CIT(A) had reinstated the disallowance as made by the assessee on a reasoning that the exercise done by the AO resulted in a loss to the revenue and it was a futile one. However, the line of reasoning adopted by the CIT(A) is incorrect. He was bound to look into the aspect whether the disallowance suo motu done by the assessee was justified after analysing s. 40(a)(ia) and the effect of allowing such claim, in future years when the assessee made good the shortfall in deduction of tax. The disallowance contemplated under s. 40(a)(ia) is where tax has not been deducted or where, after deduction, it is not paid. Whether such disallowance can be done even when deduction has been effected but at a rate lower than the prescribed one has not been looked into by the CIT(A). The view of the CIT(A) that the exercise is futile is not correct since it will have ramifications in future years, when allowances are claimed by the assessee after remitting the shortfall. Hence the matter was not properly adjudicated by the CIT(A). Therefore, in the interest of justice, the order of the CIT(A) is set aside in this regard and it is remitted back to him, for disposal in accordance with law after giving assessee an opportunity to explain its case. In the result, the appeal of the Revenue in ITA No. 1555/Mad/2009 is dismissed whereas that in ITA No. 1557/Mad/2009 is partly allowed for statistical purposes.

(Paras 13 & 14)

Conclusion:

Whether disallowance under s. 40(a)(i) can be done even when tax deduction has been effected but at a rate lower than the prescribed one has not been looked into by the CIT(A), therefore, matter is remanded to him for fresh adjudication.

In favour of:

Matter remanded

Case referred to

CIT vs. Taj Fire Works Industries (2006) 204 CTR (Mad) 108 : (2007) 288 ITR 92 (Mad)

Sacs Eagles Chicory vs. CIT (2002) 175 CTR (SC) 201 : (2002) 255 ITR 178 (SC)

Counsel appeared:

Tapas Kumar Dutta, for the Revenue : K. Saravana Kumar, for the Assessee

ORDER

ABRAHAM P. GEORGE, A.M.: :

ORDER

These are appeals filed by the Revenue pertaining to different assessees, of which one of the issues raised is similar. Since the fact situation giving rise to such issue is also similar, we are disposing of these appeals by a consolidated order.

2. The common issue in both these appeals raised by the Revenue is whether conversion of printed aluminium sheets into pilferage proof caps, is a process which can be called a manufacturing activity. The learned CIT(A) had held in favour of the assessee that this constituted a manufacturing activity and therefore, the assessees qualified for deduction under s. 80-IB of the IT Act, 1961 (in short, ‘the Act’). According to the Revenue, the learned CIT(A)’s decision was contrary to the ruling of the Hon’ble apex Court in the case of Sacs Eagles Chicory vs. CIT (2002) 175 CTR (SC) 201 : (2002) 255 ITR 178 (SC) and that of the hon’ble jurisdictional High Court in the case of CIT vs. Taj Fire Works Industries (2006) 204 CTR (Mad) 108 : (2007) 288 ITR 92 (Mad).
3. As is clear from the ground itself, the assessee was engaged in the production of pilferage proof caps from printed aluminium sheets. The AO was of the opinion that it did not constitute manufacture but only a change in the form of the same commodity. The AO also relied on the decision of Taj Fire Works Industries (supra) for coming to this conclusion and effectively denied the claim for deduction under s. 80-IB of the Act made by the assessees.
4. In its appeal before the learned CIT(A), it was argued by the assessees that the process carried on by it was manufacture. According to the assessees, one M/s Hi-wide Enterprises (P) Ltd. was processing materials for them on job work basis and such processes carried on by M/s Hi-wide Enterprises (P) Ltd. were as under :

(i) aluminium sheet which is soft in nature, is heated and toughened through coating of varnish;

(ii) on the aluminium sheet so toughened, printing as required, is done; and

(iii) printed sheets are varnished so that the printed matter remained permanent.

5. Thereafter, it was submitted by the assessee that it was making further processing on printed aluminium sheets and the end product made, viz., pilferage proof caps were different and distinct. The steps involved were given by assessee as under :

(i) The printed aluminium sheets were slitted into strips;

(ii) The aluminium strips were punched to get pilfer proof cap shells;

(iii) The cap sheets so obtained were knurled, i.e., threads were formed for proper fixation on the bottle mouth and edges of the caps were frilled;

(iv) The knurled pilfer proof cap were fixed with wads; and

(v) The pilfer proof caps were packed into various quantities and were dispatched.

6. The learned CIT(A) held in favour of the assessee.
7. Now before us, the learned Departmental Representative strongly assailed the order of the learned CIT(A). According to him, the work done by the assessee would not qualify to be called “manufacture” and hence deduction under s. 80-IB of the Act could not be given to it. Reliance was again placed on the decision of the Hon’ble apex Court in the case of Sacs Eagles Chicory vs. CIT (supra) and that of the Hon’ble jurisdictional High Court in the case of Taj Fire Works Industries (supra).
8. Per contra, the learned Authorised Representative supported the order of the learned CIT(A).
9. We have heard the rival submissions and perused the orders. The processes carried on by the assessee on the printed aluminium sheets are specified at para 5 above. For deciding the question whether such process amounts to manufacture, what is to be seen is the ultimate commodity that is brought into existence. By the different processes that were being done by the assessee here the ultimate commodity was definitely different from the raw material used. The raw material used which was printed aluminium sheet, were through such processes converted to pilferage proof caps which was an entirely different product, having different commercial use than from the printed aluminium sheet. The aluminium sheet as such cannot serve the purpose of closing a bottle in a pilfer proof manner. The process involved in converting such aluminium sheet to pilfer proof caps, would not be such that as we could say, there was only a change in the form of raw material and nothing else. In any view of the angle, the pilferage proof caps were entirely different material, from the raw material which were printed aluminium sheets. In our opinion, the reliance placed by the Revenue on the decision of the Hon’ble jurisdictional High Court in the case of Taj Fire Works Industries (supra) and that of the Hon’ble apex Court in the case of Sacs Eagles Chicory (supra) are misplaced. In the former case, the question before the Hon’ble jurisdictional High Court was whether production of fire works on job work basis, where the assessee was producing crackers from raw material supplied by another concern, would satisfy the test of an industrial undertaking. The Hon’ble jurisdictional High Court held that it was an organised activity of production and the assessee was entitled for deduction under ss. 80HHC and 80-I of the Act. We are afraid that this decision would not help the Revenue in any manner for the reason that only up to the printing of aluminium sheets, an outside agency was engaged, whereafter all the processes necessary for converting such aluminium printed sheets to pilferage proof caps were done by the assessees themselves. As for the reliance placed on the Hon’ble apex Court decision in Sacs Eagles Chicory (supra), there the assessee was only making chicory powder from chicory roots after roasting them. The Hon’ble apex Court held that there was no manufacture or production involved since there were only two processes involved which were roasting of chicory roots and thereafter powdering them. Here on the other hand, steps involved cannot be compared to simple roasting and powdering. Hence we are afraid that this decision also would not help the Revenue in any manner. On the other hand, the Hon’ble apex Court in the case of India Cine Agencies vs. CIT (2008) 220 CTR (SC) 223 : (2008) 15 DTR (SC) 121 : (2009) 308 ITR 98 (SC) has clearly held that even conversion of jumbo rolls of photographic films into small flats and rolls would amount to manufacture or production. Thus, we find no error in the order of the learned CIT(A) warranting any interference.
10. The only other issue which arise in the case of Diplomat Enterprises, which is assessee in the Revenue’s appeal in ITA No. 1557/Mad/2009 is regarding the learned CIT(A) allowing disallowance under s. 40(a)(ia) of the Act.
11. The short facts apropos are that the assessee had made a suo motu disallowance of Rs. 17,90,003 under s. 40(a)(ia) of the Act. According to the assessee, against 2.244 per cent tax which it was bound to deduct for payments made, deduction was only 2.20 per cent and hence it had to make suo motu disallowance. The AO was of the opinion that disallowance needed to be made only proportionately, i.e., in other words, proportionate to the tax actually deducted at source. Therefore, he scaled down the disallowance to Rs. 33,390. The assessee objected to this before the learned CIT(A) who was of the opinion that the issue was purely academic since the assessee was eligible for deduction under s. 80-IB of the Act for 100 per cent of the profits. Therefore, according to him, there was no logic in the action taken by the AO for making such a type of adjustment. He, therefore, reinstated the working done by the assessee.
12. Now before us, the learned Departmental Representative strongly assailed the order of the learned CIT(A). Per contra, the learned Authorised Representative argued that the learned CIT(A) was justified in reinstating the disallowance suo motu made by the assessee.
13. As aforesaid, the assessee had made suo motu disallowance and the AO had scaled down such disallowance. Such scaling down was obviously for a reason that the assessee could have claimed deduction of the amounts, in later years, as and when it remitted the short fall in deduction. The learned CIT(A) had reinstated the disallowance as made by the assessee on a reasoning that the exercise done by the AO resulted in a loss to the revenue and it was a futile one. However, we are afraid that he line of reasoning adopted by the learned CIT(A) is incorrect. He was bound to look into the aspect whether the disallowance suo motu done by the assessee was justified after analysing s. 40(a)(ia) and the effect of allowing such claim, in future years when the assessee made good the shortfall in deduction of tax. The disallowance contemplated under s. 40(a)(ia) is where tax has not been deducted or where, after deduction, it is not paid. Whether such disallowance can be done even when deduction has been effected but at a rate lower than the prescribed one has not been looked into by the learned CIT(A). The view of the learned CIT(A) that the exercise is futile is not correct since it will have ramifications in future years, when allowances are claimed by the assessee after remitting the shortfall. Hence we are of the opinion that the matter was not properly adjudicated by the CIT(A). Therefore, in the interest of justice, we set aside the order of the learned CIT(A) in this regard and remit it back to him, for disposal in accordance with law after giving assessee an opportunity to explain its case.
14. In the result, the appeal of the Revenue in ITA No. 1555/Mad/2009 is dismissed whereas that in ITA No. 1557/Mad/2009 is partly allowed for statistical purposes.
15. Ordered accordingly.