2008 (2) TMI 473 - AT - Income Tax

Tribunal Upholds Deduction for Tile Manufacturing; Allows Additional Claim for Export Deduction Under Income Tax Act.

The Tribunal upheld the CIT(A)'s decision, allowing the assessee's deduction under section 80-IB of the Income Tax Act, as the activities of transforming ... Eligibility for deduction u/s 80-IB - Mining of slate and sand stone boulders and sales of slates and sand stones is 'Manufacture or production activities or not' - return of income filed declaring nil income u/s 143(1) - Assessee not aware of the technicalities and complexities of the tax laws - Alternate claim for allowing the benefit of deduction u/s 80HHC. HELD THAT:- It is seen that it was the sand stone/slate excavated from the mines in the form of boulder which was used as raw material and it was consumed by the assessee firm. The finished products are mainly tiles also murals, medallion etc. In our opinion, certainly, these finished products are having separate and distinct commercial identity in the market in comparison to the original raw material, which was sand stone boulders, excavated from the mines. Though the various brand names under which these finished products are sold as stated by the assessee, will not have much relevance in the context of deciding as to what is being sold as finished product, but nevertheless it is clear that the finished product is certainly a separate and distinct commercial identity in the market and named as sand stone tiles/slate tiles. The word sand stone or slate has been used as prefix before the word tile/slabs to signify the origin and the material constituting the tile and also to distinguish and differentiate these tiles or another material like 'marble tiles'. Another aspect is also worth consideration that the term production is wider than the term manufacture. The distinction between manufacture and production was noticed and explained by the Supreme Court in CIT vs. N.C. Budharaja & Co. & Anr. Etc. [1993 (9) TMI 6 - SUPREME COURT]. The apex Court clearly opined that all activities falling within the ambit of manufacture result in production but converse is not true. Thus, even assuming that the activities of the assessee are not treated as manufacturing, the same in any case have to be treated as production. We also find that in AY 2002-03 also, the assessee made a claim under s. 80-IB on exactly same facts and circumstances and the Department accepted such a claim. The assessment stood completed, though under s. 143(1), however the statutory period for the issuance of a notice under s. 143(2), having already expired, the assessment so made attained finality and is binding upon the Revenue. There is no allegation of any change in the facts and circumstances of the case from the past and no other reason has been shown, hence, the AO could not have departed from the settled position in the past. We also find substance in the contention of the ld AR, that liberal interpretation is required for incentive provision. While interpreting taxing statutes, the Supreme Court in Bajaj Tempo Ltd. vs. CIT [1992 (4) TMI 4 - SUPREME COURT] held: 'A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it.' Therefore, fully satisfied the activities carried on by the assessee were manufacturing or production and hence entitled to deduction under s. 80-IB of the Act - AO is therefore, directed to allow the same as claimed. Thus the solitary ground of the Revenue is dismissed. Alternate claim made by the assessee of allowing the benefit of deduction u/s 80HHC - The assessee was advised and therefore remained under the impression that once deduction of the entire business income is already to be allowed under s. 80-IB, there was no necessity of making a separate claim of deduction under s. 80HHC in the computation of total income. Rather such a claim may weaken its case under s. 80-IB. In any case, however the basic fact that the assessee was an exporter, was well known to the AO. The AO was also aware of the fact that the assessee did comply with all the requirements in law to allow the deduction under s. 80HHC of the Act, except the fact of obtaining an audit report by the assessee under s. 80HHC of the Act. No doubt, the assessee was assisted by the services of a chartered accountant yet a bona fide confusion prevailed over that once the assessee is entitled to the claim of deduction of entire business income of the undertaking under s. 80-IB, it was not further required to pursue the claim under s. 80HHC, to which, otherwise, the assessee was duly and fully entitled to. Moreover in AY 2002-03 also similar claim under s. 80-IB only was made and no claim under s. 80HHC was made. It is under this background that neither the assessee nor the ld AR could make a specific claim of deduction under s. 80HHC of the Act. Therefore such a failure appears to be not willful or unreasonable. In Jute Corporation of India Ltd. vs. CIT [1990 (9) TMI 6 - SUPREME COURT], the Hon'ble Supreme Court held that an appellate authority has all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the powers of the AAC in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the ITO. However the learned CIT(A) neither referred to the decision of Jute Corporation nor distinguished the same and being a binding precedent, the learned CIT(A) was obliged to follow the same. In view of the arguments of the ld AR and decisions relied upon and circumstances and facts of the case, the learned CIT(A) was not justified in refusing to admit the additional ground taken before him. In the interest of justice, the same is admitted. However, the matter has to be examined by the AO. Therefore, we direct the AO to consider the claim in accordance with law but by providing adequate opportunity of being heard to the assessee and to file the necessary documents. Therefore, ground No. 2 of the C.O. of the assessee is allowed for statistical purposes. The ground No. 3 of the assessee is with regard to charging of interest which is mandatory and is consequential in nature. In the result, the appeal of the Revenue is dismissed and the C.O. of the assessee is partly allowed. Issues Involved:1. Eligibility for deduction under section 80-IB of the Income Tax Act.2. Admission of additional ground for deduction under section 80HHC.Detailed Analysis:1. Eligibility for Deduction under Section 80-IB:Facts and Arguments:- The assessee, engaged in the manufacturing and sale of slate and sandstone, claimed a deduction under section 80-IB of the Income Tax Act, 1961.- The main business activities involved mining, cutting, calibrating, and polishing slate and sandstone boulders into tiles, which were then sold, primarily for decorative purposes.- The Assessing Officer (AO) disallowed the deduction, arguing that the activities did not amount to manufacturing or production as per the definitions and judicial interpretations.- The AO relied on several judicial precedents, including CIT vs. Lucky Mineral (P) Ltd., CIT vs. Vijay Granites (P) Ltd., and CIT vs. Gem India Manufacturing Co., which held that similar activities did not constitute manufacturing or production.CIT(A) Decision:- The CIT(A) allowed the deduction, referring to the decision in CIT vs. Mysore Minerals Ltd., which was affirmed by the Supreme Court in CIT vs. Sesa Goa Ltd. The CIT(A) concluded that the activities amounted to manufacturing or production, thus qualifying for deduction under section 80-IB.Tribunal's Findings:- The Tribunal upheld the CIT(A)'s decision, emphasizing that the transformation of raw slate and sandstone boulders into tiles involved significant processing, resulting in a new and distinct commercial product.- The Tribunal referenced the recent decision in Arihant Tiles & Marbles (P) Ltd. vs. ITO, which held that converting marble blocks into slabs and tiles amounted to manufacturing.- The Tribunal also noted that the term 'production' has a wider connotation than 'manufacture,' as explained in CIT vs. N.C. Budharaja & Co. & Anr., and thus the activities of the assessee could be considered as production.Conclusion:- The Tribunal directed the AO to allow the deduction under section 80-IB, as the activities of the assessee were deemed to constitute manufacturing or production.2. Admission of Additional Ground for Deduction under Section 80HHC:Facts and Arguments:- The assessee requested the admission of an additional ground for deduction under section 80HHC during the appellate proceedings before the CIT(A).- The assessee argued that it was entitled to the deduction as it complied with all necessary conditions, including obtaining an audit report and receiving sale proceeds within the stipulated time.- The CIT(A) rejected the additional ground on the basis that the claim was not made in the return of income and the necessary audit report was not filed with the return.Tribunal's Findings:- The Tribunal noted that the powers of the first appellate authority are wide and co-terminus with those of the AO, and the CIT(A) should have considered the additional ground.- The Tribunal referenced several judicial precedents, including Jute Corporation of India Ltd. vs. CIT and CIT vs. Kanpur Coal Syndicate, which support the admission of additional grounds at the appellate stage.- The Tribunal also highlighted that filing an audit report along with the return is not mandatory and can be filed later, as held in CIT vs. Gupta Fabs and CIT vs. Magnum Export (P) Ltd.Conclusion:- The Tribunal admitted the additional ground and directed the AO to consider the claim for deduction under section 80HHC, providing the assessee with an opportunity to submit the necessary documents.Final Order:- The appeal of the Revenue was dismissed.- The cross-objection of the assessee was partly allowed, with the AO directed to consider the claim for deduction under section 80HHC.