Industrial Undertaking Eligible For Deduction U/s 80IB On Compensation For Destruction Of Goods Before Sale Took Place: Mumbai ITAT

On finding profits and gains derived from an industrial undertaking within the meaning of an expression under section 80-IB, the Mumbai ITAT directed the Assessing Officer to allow deduction u/s 80-IB of the Income Tax Act, 1961

The Member of the ITAT comprising of Kavitha Rajagopal (Judicial Member) and Prashant Maharishi (Accountant Member) observed that “the assessee is eligible for deduction u/s. 80IA/80IB of the Act on compensation received due to destruction of goods before sale had taken place. We find that on destruction of raw materials, the assessee was paid insurance claim, the cost of raw material is already considered as 'cost' while working out the profit of eligible undertaking and the claim tantamount to sale of raw materials. As regards to loss of goods at franchisee and the amount paid by such franchisee would also be sale of goods”. (Para 16)

As per the brief facts of the case, the assessee's return was selected for scrutiny and the assessment order was passed by the AO after making a disallowance u/s. 80IB, being the insurance claim and compensation received by the assessee along with the other disallowances. The CIT(A) deleted the disallowance on appeal. On further appeal, the ITAT remanded the issue back to the file of AO, who in the second round of proceeding had disallowed the claim of the assessee made u/s. 80IB vide order passed u/s. 143(3) r.w.s.254 towards the insurance claim and compensation and added 30% of the same to the total income of the assessee. This time the CIT(A) upheld that the addition made by AO on the ground that the insurance/compensation claimed cannot be considered for computing the eligible profit and gains derived from the industrial undertaking of the assessee.

The Bench noted that the compensation received by the industrial undertaking from insurance company on account of loss of raw material and finished goods would be eligible for deduction u/s. 80IA of the Act.

The Bench stated that “At the outset while determining the meaning to be attributed to this expression, one must keep in mnind that section 80-A is a part of fasciculus of provisions whereby benefits are granted to certain industrial undertakings, businesses etc. including those which are located in certain special locations/ areas”.

The Bench further made clear from sub section (2) of section 80-1A that such businesses are not considered for tang advantage of the deduction under section 80-IA if either it is formed from spting up of an existing business or by use of machinery or plant previously used and so on.

The Bench observed that the assessee in the present case has received compensation for destroyed and lost goods from the insurance company and from the franchisees which the Revenue claims to be not from the industrial undertaking and shall not be the profits and gains of the business of the assessee.

Relying on the judgment of Delhi High Court under case of CIT vs. Sportking India Ltd. [2010] 324 ITR 283, the Bench stated that such compensation received from insurance company for the damage incurred by the assessee would be the profit/loss from such industrial undertaking, for the reason that if not for such loss, the assessee would have earned income which is otherwise eligible for deduction u/. 80IB of the Act.

Therefore, on finding both the sums are profits derived from industrial undertaking business eligible for deduction, the Bench directed the Assessing Officer to allow deduction u/s. 80IB on both the amounts.

Counsel for Appellant/ Taxpayer: Madhur Agrawal

Counsel for Respondent/ Department: H. M. Bhatt

Case Title: Colorplus Realty Limited Verses Dy. CIT

Case Number: ITA No.2616/Mum/2023

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