2010 (6) TMI 645 - AT - Income Tax

Deduction for handmade wooden handicrafts under export-linked schemes upheld; manufacturing status and DEPB income allowed, motor car disallowed reduced.

The tribunal found that processing of unfinished wooden articles by employed and contract artisans-sanding, handcarving, fitting, staining, painting, ... Deduction u/s 10BA and 80-IB - Handmade articles - Special provisions in respect of export - Non manufacture of eligible articles - whether the assessee is entitled to deduction u/s 10BA and 80-IB under the circumstances, the assessee purchased unfinished wooden articles and carried out various artistic value processes? - AO has disallowed deduction u/s 10BA and 80-IB mainly on three grounds, namely, (1) the AO alleges that the assessee’s business activities cannot be considered as manufacturing, (2) the assessee did not employ more than 20 skilled employees, and (3) deduction u/s 10BA cannot claim on DEPB license income and duty drawback. HELD THAT:- The various processes so carried out by the assessee at its factory premises through their own employed workers/artisans as well as through contract workers/artisans inter alia including the process of ‘sanding’, ‘handcarving’, ‘fitting’, staining’, ‘painting’, ‘polishing’, ‘spraying’, antiquing’ and ‘packing’, etc. Such processes are carried out by various artisans in the assessee’s factory. Such finished wooden handicraft items so processed, manufactured and produced in the assessee’s factory by various artisans displays the Indian art and craftsmanship. The handmade handicraft wooden articles or things so manufactured/produced displays the Indian art, traditional culture and heritage and are purchased by foreign buyers only because of attractive artistic value of such articles. From the activities carried out by the assessee it is clear that the said activities would come within the meaning of the words ‘manufactures’ or ‘produces’ articles or things which are of artistic value, thus, the assessee satisfied the main condition for entitle to deduction under sections 10BA and 80-IB of the Act in respect of the respective articles/goods. As regards conditions stipulated in sub-section (2)(d) of section 10BA that ninety per cent or more of its sales during the previous year relevant to the assessment year are by way of exports of the eligible articles or things. We find that the CIT(A) calculated eligible items only in respect of wood purchased which is not correct. The assessee is 100 per cent exporter of eligible items. Since the first issue regarding that the assessee produces eligible articles, therefore, this objection of CIT(A) is not sustainable. The objection of AO and CIT(A) are that the only 16 workers involved in processing the items. In the light of various decisions cited by the learned AR, the order of CIT(A) is not sustainable. The assessee satisfied the conditions laid down in sub-section (2)(e) of section 10BA as 71 workers were employed. In this year the assessee also claimed deduction under section 80-IB on iron items. The Assessing Officer rejected assessee’s claim under section 80-IB on the ground that the assessee is not manufacturer. As per detailed discussion made by us in above Paras we find that the assessee satisfied all the conditions including that the assessee is manufacture/produce the articles. In the light of that finding the claim of assessee is allowed. Deduction under section 10BA in respect of DEPB - As we find that sub-section (4) of section 10BA defines profits derived from eligible articles. Section 28(iiic), (iiid) and (iiie ) provides that these income are profits and gains of business - we find that the assessee is entitled to deduction under section 10BA on DEPB as in accordance with section 28 of the Act these are business income. Disallowance of motor car expenses - AO disallowed 20 per cent on account of personal used which has been confirmed by the CIT(A) - HELD THAT:- We agree with view of the revenues that personal use of vehicle cannot be ruled out therefore to that extend vehicles were not used for the purpose of business. However, disallowances are on higher sides therefore, disallowance is restricted 10 per cent instead of 20 per cent disallowed by the Assessing Officer. The Assessing Officer is directed, accordingly. Issues Involved:1. Deduction under sections 10BA and 80-IB of the Income-tax Act.2. Compliance with the conditions under section 10BA(2)(a), (b), (c), (d), and (e).3. Eligibility of DEPB income for deduction under section 10BA.4. Charging of interest under sections 234A, 234B, and 234C.5. Disallowance of motor car expenses.Detailed Analysis:1. Deduction under sections 10BA and 80-IB of the Income-tax Act:The primary issue was whether the assessee qualified for deductions under sections 10BA and 80-IB. The Assessing Officer (AO) and CIT(A) denied the deduction on the grounds that the assessee was not engaged in manufacturing but was a trader or middleman. The AO relied on previous court decisions, concluding that the assessee's activities did not meet the definition of 'manufacture' as required by section 10BA(2)(a). The Tribunal examined the specific language and requirements of section 10BA and concluded that the assessee's activities, which involved purchasing semi-finished goods and adding substantial artistic value, constituted 'manufacture' or 'production' under the Act. The Tribunal referred to various judicial precedents, including the Supreme Court's decision in CIT v. Sun Engg. Works (P.) Ltd., and other relevant cases, to support their decision.2. Compliance with the conditions under section 10BA(2)(a), (b), (c), (d), and (e):The Tribunal analyzed whether the assessee met the conditions laid down in section 10BA(2). The conditions include:- Section 10BA(2)(a): The Tribunal found that the assessee's activities of adding artistic value to semi-finished wooden articles qualified as 'manufacture' or 'production.'- Section 10BA(2)(b) and (c): The Tribunal agreed with the ITAT Jaipur Bench's decision in Manglam Arts, concluding that the assessee's undertaking was not formed by splitting up or reconstruction of an existing business and did not involve the transfer of previously used machinery or plant.- Section 10BA(2)(d): The Tribunal noted that the assessee was a 100% exporter of eligible items, thus satisfying the requirement that 90% or more of its sales were by way of exports.- Section 10BA(2)(e): The Tribunal found that the assessee employed more than 20 workers, including casual labor, as confirmed by PF records and muster records.3. Eligibility of DEPB income for deduction under section 10BA:The Tribunal addressed the objection regarding DEPB income, noting that section 28(iiic), (iiid), and (iiie) of the Act classify these incomes as business income. The Tribunal concluded that DEPB income is eligible for deduction under section 10BA, as the entire profit of the business, including DEPB income, is considered for the purpose of allowable deduction.4. Charging of interest under sections 234A, 234B, and 234C:The Tribunal noted that the issue of charging interest under sections 234A, 234B, and 234C is consequential in nature. The AO was directed to adjust the interest charges accordingly.5. Disallowance of motor car expenses:The Tribunal reviewed the disallowance of motor car expenses, which was initially set at 20% for personal use by the AO and confirmed by the CIT(A). The Tribunal found the disallowance to be on the higher side and reduced it to 10%, directing the AO to adjust the disallowance accordingly.Conclusion:The appeals were partly allowed, with the Tribunal granting deductions under sections 10BA and 80-IB, including DEPB income, and reducing the disallowance of motor car expenses. The Tribunal also directed the AO to adjust the interest charges under sections 234A, 234B, and 234C as per the revised calculations.