TaxTMI 
TaxTMI 
2015 (7) TMI 872
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....5) Ignoring the definition of manufacture u/s. 2(29BA) of the I.T. Act, 1961. (B) The assessee craves leave to add, alter or amend the grounds of appeal at and before the hearing. 2. The brief facts of the case are that assessee filed its Return of Income declaring income of Rs. 2,22,215/- on 27.10.2005 which was processed u/s.143(1) of the Income Tax Act, 1961 (hereinafter called the "I.T. Act") on 18.12.2006. The case was subsequently selected for scrutiny under CASS and Assessing Officer issued notice u/s 143(2) of the IT Act on 25.10.2006 and the same was served upon the assessee. In response to the same, Authorised Representative of the assesse attended the proceedings from time to time and filed the requisite details. Assessee is involved in the business of manufacturing and export of Mosquito Repellent, Medicines etc. The assessee has registered a turnover of Rs. 41.44 lakhs as against Rs. 1.56 crores in the previous year. Assessee has also earned a gross profit of Rs. 21.88 lacs as against Rs. 49.04 lacs in the previous year. After claiming deduction u/s 80IC of the I.T. Act a net taxable income of Rs. 2.22 lacs has been declared. Assessee has not filed the copy of au....
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....as submitted by the AR. If these were to be true, then machinery worth Rs. 10,400/- odd is being used at Kala Amb. So it can be visualized what portion of the complete manufacturing process is being carried out at Kala Amb. 2.3 Assessing Officer further observed that detail of electricity bills reveal that as much as Rs. 35,124/- were incurred for electricity in Delhi whereas a paltry sum of Rs. 3153/- has been incurred on electricity at Kala Amb. Even for Rs. 3153/- there are no bills of electricity company. Only payments to some Sh. Rajinder Singh and Inderjit Singh have, been made. This also goes to support the fact that no manufacturing activity or negligible manufacturing activity is being carried out Kala Amb. Major operations are still being carried out in Delhi. The "substantial expansion" at Kala Amb. has clearly been stage-managed to unduly avail of the benefit of deduction uls 80IC. 2.4 On the issue of substantial expansion, AR only provided certain figures without enclosing bills for plant and machinery Which were acquired during F.Y. 03-04 when the substantial expansion was said to have taken place. Moreover, in view of negligible plant and machinery installed at....
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....ates so that backward areas and inhabitants of such states find employment. The entire backward area flourishes by creation of a climate favourable for industrial and economic activity and benefits of the same permeating down to the local population. If such aims are not achieved then there is no purpose in extending benefits like 100% deduction u/s 80IC to various assesees. 2.7 Lastly, he submitted that assessee was claiming deduction u/s 80 HHC by virtue of being an exporter. With phasing out of deduction u/s 80HHC, the assessee has tried to wrongly seek the benefit of deduction u/s 80lC to avoid paying taxes. The noninclusion of the auditor's report with the return also stands explained in view of the dubious claim of deduction u/s 80IC and he disallowed the claim of deduction u/s 80IC by assessing the income of Rs. 15,19,222/- and completed the assessment u/s. 143(3) of the I.T. Act, 1961 on 28.12.2007. 3. Aggrieved with the aforesaid assessment order dated 28.12.2007 passed by the Assessing Officer u/s. 143(3) of the I.T. Act, but assessee filed an Appeal before the First Appellate Authority who vide impugned order dated 26.8.2013 upheld the order of the Assessing Of....
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....ligible manufacturing activity is being carried out there. IV. Only a sum of Rs. 3,153/- has been incurred on electricity at Kala Amb for which also there are no bills of electricity company but payments have been made to some Sh Rajinder Singh and Inderjit Singh. V. The substantial expansion at Kala Amb has clearly been stage managed to unduly avail of the benefit of deduction u/s 80IC. VI. Since virtually no plant and machinery exists at Kala Amb the question of substantial expansion having taken place is completely ruled out and accordingly the condition laid out in Sub Section 2(b) of the said Section has not been satisfied. 5.2 Ld. Counsel of the assessee submitted that assessee is a partnership firm. Its head office is situated at 186, Sainik Vihar, Pitampura, Delhi - 110034 and its undertaking which deals with its work and manufacturing is situated at Village - Moginand, Tehsil - Nahan, Post - Kala Amb, Disti: - Sirmor, Himachal Pradesh. The firm was constituted on 01.06.1994 with the following partners and respective profit sharing ratios Name of Partner Shares in Profit/Loss Ms. Angela Bhasin 60% Mr. Narinder Sachdeva 20% Ms. Namrita Sachde....
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.... for grant of certificate to commence industrial activity as 551, Assessee has submitted that it will employ 12 workers and will be having a rented premise for its business. Assessee has done the same work as it has submitted in its Project report. Assessees also have provided in course of Assessment proceedings the rent agreement of the premises at Kala Amb. He invited the attention towards clause '5' of the said agreement which states that - "That the premises have been let out for the purpose of Industry only and the tenant shall not use premises for a purpose other than Business/ Industry". 5.7 Ld. AR further submitted that Assessee has also got the consent of HP State Environment Protection & Pollution Control Board had via its letter Dated 08.11.2003 and 15/06/2006. A certificate from Himachal Predesh State Electricity Board, Electrical Sub Division, Kala Amb "HPSEB/KESD/PRC/2009-10" dated 03.12.2009 has also been submitted along with bills to state the fact that a commercial electricity connection of 5.200 KW has been released to the Assessee as SSI. Copy of Electricity Bills. 5.8 He stated that the undertaking of the assessee firm situated at Kala Amb is in....
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....onclusion on the basis of following submissions made by the Ld AR during the Assessment Proceedings "The main parts of the Machine are - 1. Cabinet 2. Plug 3. Heater 4. Resistance and 5. Led a) Cabinet is manufactured from Plastic Dana by Moulding Machines, done at Delhi on job work and then dispatched to Kala Amb. The Plastic Dana is procured at Delhi. b) Plug is manufactured from Plug Dana by Moulding Machines at Kala Amb and pins are used for the same. Pins are procured from Jam Nagar & Delhi. c) Heater is manufactured at Kala Amb from Porcelain procured from Gujarat by fitting in MOR (Metal Oxide Resistance). Resistance and LED are procured from Delhi and sent to Kala Amb. d) The complete machine gets shape and assembly is done at Kala Amb for final sale. 5.11 It was submitted that in situation like this where different types of equipments made of different material is required for making of a Mosquito Repellant Machine it is quite obvious and natural that different parts of the machine has to be sourced from different places. In the current situation Assessee is just doing the same which has been stated supra. It cannot be expected from any business establ....
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....g through the entire process explained in the foregoing Para what we manufacture is a product of distinct physical character with a distinct name known as 'Mosquito Repellant Machine'. The question of what is manufacturing has to be taken by in the simplest form. Assessee submitted that this process is without any IOTA of doubt being carried out only at Kala Amb and therefore the manufacturing of the Mosquito Repel/ant Machines is taking place at Kala Amb and no other place. In this behalf, he invited our attention to the decision of Hon'ble Supreme Court in case of CIT Vs N C Budharaja 204 ITR 412 wherein while analyzing the meaning of word "Manufacture" it has been enunciated that - "..... the test evolved for determining whether manufacture can be said to have taken place is, whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognized in the trade as a new and distinct commodity. ... " In this behalf, Ld Counsel of the assessee submitted that the Hon'ble Supreme Court has followed the spirit of above judgment on numerous occasions without any exception; some of them are being quoted belo....
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....randum explaining Finance Bill (2)2009 is also important which states that - "A number of tax concessions under the Income-tax Act are provided for encouraging manufacture of articles or things. However, the term "manufacture" has not been defined in the statute. therefore, it has been the subject matter of dispute and resultant judicial review in a number of cases. In order to remove any kind of ambiguity which may still persist in this regard, it is proposed to insert a new clause (29BA) in section 2 so as to provide that 'manufacture' with its ......." 5.15 Ld. Counsel further assessee submitted that in light of above provision it is crystal clear that manufacturing is taking place in Kala Amb and not at any other place. Before being used in the manufacture of Electronic Mosquito Repellant Machine the Cabinet, Plug, Heater, Resistance and Led the different parts and Raw materials being used as explained in foregoing paragraphs are not only distinct in name. Character and Use but they bring out altogether different integral structure as envisaged by the statute in 29(BA) of section 2 of the Income Tax Act 1961. 5.16 Ld. Counsel of the assessee stated that the mem....
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....ectricity at subsidized rate than other industrial connections. 5.19 He submitted that the Assessing Officer has also alleged in his assessment order that there are no bills of Electricity Company and in the books of account only payments has been made to Mr. Rajender Singh & Mr. Inderjit Singh. In this regard he was submitted that Bills of electricity have been submitted not only during the Assessment Proceedings but also during appeal proceedings. The payments made to the above persons are in the nature of imprest which was paid to them to further pay it to Electricity Department receipts of the same have already been submitted. He further submitted that it is a title law that mere entry in the books of account or, nomenclature of the head of account is in no way determinative of true nature of transaction. For this proposition, he referred the case law in the case CIT Vs India Discount Company, 75 ITR 191 (SC), CIT Vs Provincial Farmer Pvt. Ltd, 108 ITR 219 (CAL), KCP Ltd Vs CIT, 245 ITR 421. He submitted that what have to be seen is actual nature of transaction which is in the current case can be verified from receipt of the Electricity Bill Payments. 5.20 Ld. Counsel of ....
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....e has begun to manufacture Mosquito Repel/ant Machines during the specified period. Ld. Counsel of the assessee that "Substantial Expansion" is necessary to claim this deduction. Said word has been very well defined in the act and it clearly says that increase in investment in Plant and Machinery by at least 50% of the book value of the Plant & Machinery. Now the question that needs to be answered that how an entirely new manufacturing unit which has been created from a scratch is going to be tested on the clause of Substantial Expansion. He stated that it is not possible because for calculation of 50% of the Book value of the Plant & Machinery, you need to have a Book Value from which you will calculate 50% which did not exist in case of an entirely new undertaking. He stated that as stated in foregoing paragraphs Assessee was doing its entire manufacturing since 1998 on Job work basis, the current undertaking has been established from the scratch in the State of Himachal, Pradesh. Its sole purpose is to manufacturing the product i.e. Mosquito repellant Machine in a cost effective and quality controlled manner. Even if Rs. 5,000/- is being invested in an undertaking which is....
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....bstantial Expansion is mandatory for claiming the deduction U/sec. 80 IC than we must consider all the investments which have been made for the manufacturing of the said product at Kala Amb. The Dyes & Moulds which have been bought by Assessee are only being used for Manufacturing of parts of the said machine which is necessary for the running and production of Mosquito Repel/ant Machines at undertaking of the Assessee at Kala Amb. As stated supra the Manufacturing is only happening at Kala Amb and hence the Investments made for the said manufacturing process comes under definition of Substantial Expansion it/sec 80 IC (8) (ix). It was further submitted that the Unit of the Assessee was established in the Kala Amb in the Financial Year 2003-04 relevant to A. Y. 2004-05 and the addition in the Plant & Machinery in the same year aggregated to Rs. 2,71,016/- for undertaking the expansion. The opening WOV of the Plant & Machinery stood at Rs. 4,02,972/- as on 01.04.2003. The proportion of addition to the Plant & Machinery stood at 62.72% which is more than the prescribed limit of 50% and as such the condition of substantial expansion as specified in the Sub - Section 2(b) read toget....
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....nsfer to a new business of machinery or plant previously used for any purpose. " It is quite clear from the above, that law specifically bars deduction to undertakings which has been formed via splitting up or a reconstruction of a business already in existence. In view of the fact that the only reason which led the ITO to this conclusion is that Assessee is in same business since 1998. Assessee submitted that law does not bars any person from his eligibility to claim deduction under this Section just because he is in the same business since last many years. Ld. Counsel of the assessee submitted that the Assessing Officer has not spared even a single word to give any reasons to believe that the Assessee firm has formed its undertaking by splitting up or reconstruction of its already existing business. He also invited to the decision of Honorable Supreme Court in case of Textile Machinery Corporation Vs CIT (1977) 107 ITR 195 (SC) wherein it has been enunciated that - ... The true test is not whether the new industrial undertaking connotes expansion of the existing business of the Assessee but whether it is all the same a new and identifiable undertaking ... " " .... ....
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....on account of exports, the stringency and mandatory nature provided under that the section should be viewed in the light of the purpose intended to be served. Filing of the certificate along with the return though statutory, belongs to the area of procedure, thus this condition for the grant of exemption could not be so strictly construed as to prevent the Assessee of his legitimate claim of deduction. As the certificate required U/sec. 80 HHC (4) had been filed during the course of assessee proceedings, the Assessee was entitled to the deduction claimed u/s. 80HHC. Further support to the above view is governed from the following judicial pronouncements - - CIT vs. G. Krishnan Nair (2003) 259 ITR 727 (Ker.) - CIT vs. Berger Paints (India) Ltd. (2002) 254 ITR 503 (Cal) - CIT Vs Gupta Fabs [(2005) 274 ITR 620 (P & H) - Murli Export House & Others Vs CIT [(1999) 238 ITR 257 (Cal)] Ld. Counsel of the assessee further submitted that the above judgments have been rendered in the context of Sec 80 HHC but would apply with equal force to see 80 IC since both the sections are pari - materia in the respect. He submitted that the default in filing the audit report in the pre....
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....derjit Singh have, been made. This evidence proved that no manufacturing or negligible manufacturing activity is being carried out at Kala Amb and major portion are still being carried out in Delhi. The "substantial expansion" at Kala Amb. has clearly been stage-managed to unduly avail of the benefit of deduction uls 80IC I.T. Act. Ld. DR further submitted that assessee has not produced any Bill for plant and machinery which was acquired during FY 2003- 04 when the substantial expansion was said to have been taken place. The negligible plant and machinery installed at Kala Amb, the aspect of substantial expansion automatically stands disproved. It is established beyond any doubt that no plant and machinery exists at Kala Amb. The question of substantial expansion is completely ruled out. Hence, the conditioin laid down in sub-section 2(b) has also not been satisfied by the assessee, therefore, on this count also claim of deduction u/s 80lC I.T. Act is rightly been denied by the Assessing Officer. 6.1 Ld. DR finally stated that keeping in view of the arguments advanced by the Ld. Counsel of the assessee and the orders passed by the Revenue Authorities, after discussing the eviden....
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....ked by the AO to explain the satisfaction of the eligibility in sub-section 4(ii) regarding machinery being used previously for other purposes. In response to these queries the assessee filed its submission dated 12.12.2007 explaining therein the issue of manufacturing activities being carried out at Kala Amb. In the said reply dated 12.12.2007 assessee submitted that the firm is in the business of Exports and Balances outstanding at the end of year with Foreign Buyers are tallied in foreign currency. The difference in the rate of Foreign Currency at the end of the year and the time when transactions have been carried out, results in the Difference due to Foreign Exchange rate variation. Assessee submitted that the manufacturing activity has already been explained in detail in the earlier submission made as explained earlier only the cover part of the machine is got done by job work at Delhi and then sent to Kala Amb (H.P.). This is due to the reason that Tool Room facility does not exist at Kala Amb (HP) and as the die and moulds for the same are very heavy roughly the 100-200 kg. each, the movement of same is restricted. All the major working parts of the machine are made at Kala....
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....isallowed by the AO and confirmed by the Ld. CIT(A). We are of the considered view that the Revenue Authorities has given a sufficient opportunity to the assessee for filing the Satisfaction Note for filing the eligibility condition for claiming deduction u/s. 80IC of the I.T. Act, with the proof of documentary evidence. The assessee failed to produce the sufficient evidence before the revenue authorities. It is necessary to refer the relevant extract of section 80IC(2)(b) of the I.T. Act. "Section 80-IC(2)(b) "Which has begun or begins to manufacture or produce any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule, or which manufactures or produces any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule and undertakes substantial expansion during the period of beginning." (ii) On the 7th day of January, 2003 and ending before the 1st day of April, 2012, in the State of Himachal Pradesh or the State of Uttranchal." 7.6 Keeping in view of the aforesaid provisions, we are of the view that in reply dated 12.12.2007 assessee itself admitted as under:- "As e....
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....investment in such states so that backward areas and inhabitants of such States find employment. The entire backward area flourishes by creation of a climate favorable for industrial and economic activity and benefits of the same permeating down to the local population. If such aims are not achieved then there is no purpose in extending benefits like 100% deduction u/s. 80IC of the I.T. Act to various assesses. For the sake of convenience, section 80IC(4) and 80IC(8)(ix) are extracted below:- "80IC(4) This section applies to any undertaking or enterprise which fulfills all the following conditions, namely:- (i) It is not formed by splitting up, or the reconstruction, of a business already in existence. (ii) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose." 80IC(8)(ix) "Substantial expansion" means increase in the investment in the plant and machinery by at least fifty per cent of the book value of plant and machinery (before taking depreciation in any year), as on the first day or the previous year in which the substantial expansion is undertaken." 7.7.1 On the issue of substantial expansion, the assessee....
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....o Kala Amb. Therefore, it is a reconstruction of the existing business and assessee has failed to establish its claim before the revenue authorities. The company at Delhi is doing major part of the work and the unit at Kala Amb gets the article in the same condition in which it is to be sold. The cabinet or the main part of the machine is made at Delhi. The plug is made in the moulding machines and the pins in the plug are procured. The resistance wire and LED are procured from Delhi and the machinery is assembled at Kala Amb (H.P.). The main machines for making this item are moulds which are used to give shape to the plugs and heaters. Therefore conditions uls 80IC 4(i)& (ii) are not satisfied. 7.9. To support our contention, we draw support from the case of Textile Machinery Corporation Ltd. Vs. CIT(1977) 107 ITR 195 (SC), wherein it was stated : "In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit" 7.10 It is to be seen whether there is substantial expansion. The gross block of Plant & Machinery as on 1st day....