2015 (2) TMI 989 - AT - Income Tax

Tribunal Upholds Commissioner's Order Allowing Deduction

The ACIT. Circle VII, and The Income Tax Officer Ludhiana Versus M/s Octave Exports

The Tribunal upheld the Commissioner of Income-tax (Appeals)'s order, allowing the deduction under section 80-IC(2)(a)(ii) and dismissing the Revenue's ... Disallowance of deduction under section 80-IC - assessee was not carrying on any manufacturing activity as held by AO - complete procedure was not being carried out in Himachal Pradesh, the assessee was not entitled to the claim of deduction under section 80-IC of the Act - CIT(A) deleted part addition - Held that:- In the totality of the facts and circumstances, we are in conformity with the findings of the Commissioner of Income-tax (Appeals) that the old machinery held by the assessee has been transferred from Ludhiana to Parwanoo which in-turn was used for the manufacturing process undertaken by the assessee and the total value of the said plant and machinery transferred was of ₹ 9,500 only. In the first year of start of business, the assessee had established plant and machinery totalling ₹ 3,94,500 and the value of ₹ 9,500 being less than 20 per cent. cost of machinery, we find no merit in the plea of the Assessing Officer in this regard and upholding the observations of the Commissioner of Income-tax (Appeals), we hold that the assessee was entitled to claim of deduction under section 80-IC of the Act. The manufacturing activity undertaken by the assessee is excisable and complete details in this regard were maintained by the assessee and no discrepancy has been found by the excise team in the sales declared by the assessee. The assessee had further furnished the sales tax assessment orders for the assessment year 2003-04 and 2004-05. The manufacturing activity carried out by the assessee has been accepted. Accordingly, we find no merit in the observation of the Assessing Officer in this regard that the assessee was not carrying on any manufacturing activity. During the appellate proceedings, evidence was filed by the assessee that only 5 per cent. of the total manufactured goods were subjected to printing and bleaching process which admittedly was being carried out at Ludhiana. The learned Departmental representative for the Revenue failed to controvert the said findings of the Commissioner of Income-tax and in the absence of the same, we find no merit in the order of the Assessing Officer in holding that the assessee was not entitled to the claim of deduction under section 80-IC of the Act. As during the relevant period, the assessee was engaged in carrying on of manufacturing activity and merely because the unit was closed on a subsequent date, the claim of deduction under section 80-IC of the Act cannot be denied. In view of the discrepancies in mentioning the numbers of various vehicles and also co-relating the information received from the Commissioner Excise and Taxation, Himachal Pradesh, with the facts of the case, we, accordingly uphold the order of the Commissioner of Income-tax (Appeals) and in view of the fact that the assessee has failed to reconcile the passage of vehicle through the barrier carrying the raw material, certain disallowance of deduction under section 80-IC is merited in the case. The total cost of raw material claimed to be transported through such vehicles was ₹ 45,33,495 and the same corresponds to sales of ₹ 67,66,410. The assessee had declared gross profit rate of 37 per cent. and applying the same to the sales, the profit works out to ₹ 25,03,572.Therefore, we hold that the profits of the eligible business are to be reworked and profits to the extent of ₹ 25,03,572 are not liable for claim of deduction under section 80-IC of the Act. However, deduction under section 80-IC(2)(a)(ii) of the Act is to be allowed to the assessee on the balance sales of ₹ 97,34,564. - Decided against revenue. Issues Involved:1. Deletion of addition on account of disallowance of deduction under section 80-IC.2. Evidence of manufacturing activities at Parwanoo.3. Delivery of raw materials and transportation discrepancies.4. Job work of printing and bleaching.5. Installation of machinery and electricity consumption.6. Cross-examination and statements of witnesses.7. Comparison with sister concern.8. Claim under section 80-IC(2)(a)(ii) vs. section 80-IC(2)(b).Detailed Analysis:1. Deletion of Addition on Account of Disallowance of Deduction under Section 80-IC:The Revenue challenged the deletion of Rs. 97,34,564 out of Rs. 1,22,38,136 by the Commissioner of Income-tax (Appeals) (CIT(A)), who allowed the deduction under section 80-IC. The CIT(A) reworked the deduction based on the evidence provided by the assessee, which indicated that manufacturing activities were indeed carried out at Parwanoo.2. Evidence of Manufacturing Activities at Parwanoo:The Assessing Officer (AO) doubted the manufacturing activities at Parwanoo, citing insufficient machinery and labor, low electricity consumption, and discrepancies in the transportation of raw materials. The CIT(A) considered the evidence provided by the assessee, including the installation of additional machinery, and concluded that manufacturing activities were indeed carried out. The CIT(A) also noted that the AO did not allow cross-examination of witnesses, which weakened the AO's case.3. Delivery of Raw Materials and Transportation Discrepancies:The AO questioned the delivery of raw materials to Parwanoo, noting that some materials were delivered to Ludhiana. The assessee explained that raw materials were inspected at Ludhiana before being sent to Parwanoo to ensure quality and save on freight costs. The CIT(A) accepted this explanation and found no fault in the delivery process. However, the CIT(A) noted discrepancies in the transportation records, leading to a partial disallowance of Rs. 25,03,572.4. Job Work of Printing and Bleaching:The AO argued that printing and bleaching were essential parts of the manufacturing process and were carried out at Ludhiana, not Parwanoo. The CIT(A) found that only 5% of the T-shirts required printing and bleaching, which was not integral to the manufacturing process. The CIT(A) accepted the assessee's explanation and supporting evidence, concluding that the AO's rejection of the manufacturing activity was not proper.5. Installation of Machinery and Electricity Consumption:The AO noted that the assessee initially reported 13 machines but later installed additional machinery. The CIT(A) accepted the evidence of additional machinery and transportation receipts. The AO also cited low electricity consumption as evidence of no manufacturing activity. The CIT(A) referenced a Tribunal decision, stating that lower electricity expenses alone could not justify denying the deduction under section 80-IC.6. Cross-examination and Statements of Witnesses:The AO relied on the statement of Shri Kapil Sood, who claimed that only 10-12 workers were employed, and the unit was often closed. The CIT(A) found this statement unreliable as the assessee was not allowed to cross-examine the witness. The CIT(A) emphasized the importance of cross-examination for fair assessment and dismissed the AO's reliance on this statement.7. Comparison with Sister Concern:The AO compared the expenses and profits of the assessee with its sister concern, Octave Apparels, and found discrepancies. The CIT(A) noted that the profit margin was higher for exports and that expenses in Himachal Pradesh were lower than in Punjab. The CIT(A) concluded that the AO's comparison was not justified and upheld the results declared by the assessee.8. Claim under Section 80-IC(2)(a)(ii) vs. Section 80-IC(2)(b):The AO denied the deduction under section 80-IC(2)(b) as the manufactured goods were included in Schedule XIV. The assessee argued that it was entitled to deduction under section 80-IC(2)(a)(ii) for units in Himachal Pradesh. The CIT(A) accepted this explanation, stating that a mere typographical error in the audit report should not deny the legitimate claim of deduction.Conclusion:The Tribunal upheld the CIT(A)'s order, allowing the deduction under section 80-IC(2)(a)(ii) and dismissing the grounds of appeal raised by the Revenue. The Tribunal also dismissed the assessee's appeal and cross-objections. The Tribunal concluded that the assessee was entitled to the deduction under section 80-IC, except for the partial disallowance of Rs. 25,03,572 due to discrepancies in the transportation records.