TaxTMI 
TaxTMI 
2018 (10) TMI 1260
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....assessee was simply assembled without use of sophisticated machinery. Our attention was invited to various pages of the paper book. It was claimed that wage register is also maintained. The Ld. counsel further asserted that manufacturing started on 27/03/2010 and the Ld. Assessing Officer has not disputed the books and purchase of raw materials. Plea was also raised that the assessee also filed sales tax and excise returns, which were accepted by the respective department. 2.1. On the other hand, the Ld. DR, Ms. N. Hemalatha, defended the addition made by the Ld. Assessing Officer by advancing arguments, which are identical to the ground raised. The crux of the argument is that actually no manufacturing activity was done by the assessee and merely the paper work has been done. Our attention was invited to the observation made in the assessment order. 2.2. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is an individual engaged in the business of manufacturing of watches at the manufacturing unit claim to be established at Parwanoo which is a notified industrial area for the purpose of section 80....
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....of the Act. Before adverting further, we are reproducing hereunder the uncontroverted finding recorded by the Ld. Commissioner of Income Tax (Appeal) for ready reference and analysis:- "2.3.2. The AO has stated that the Audit Report in Form No.CCB Col. No.25(f) has been stated. yes', with regard to article or things specified, in 14th Schedule. The appellant has stated that its auditor has made a mistake in The Audit Report , that it was covered under section 80IC(2)(b)(ii), although it was covered under section 80IC(2)(a)(ii).Hence mere typographical error cannot be held responsible for denial of deduction. In fact the Hon'ble Bombay High Court in the case of Sanchit'Software and Solutions Pvt, Ltd vs. CIT (2012) ITR as held that the Income tax Department cannot take advantage of assessee's mistakes in not claiming exemption in return and not giving him exemption. The entire object of administration of tax is to secure the revenue for the development of the country and not to charge assessee more tax than which is due and payable by the assessee. In the case of the appellant there has been a claim of deduction although under wrong sub section due to error ....
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....n should be calculated for the subsequent number of years taking this fact into account. Ground is partly allowed." 2.4. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, before adverting further, we are expected to analyze section 80IC of the Act, therefore, it is reproduced hereunder:- "Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (2), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains, as specified in sub-section (3). (2) This section applies to any undertaking or enterprise,- (a) which has begun or begins to manufacture or produce any article or thing, not being any article or thing specified in the Thirteenth Schedule, or which manufactures or produces any article or thing, not being any article or thing speci....
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....rprise referred to in sub-clauses (i) and (iii) of clause (a) or sub-clauses (i) and (iii) of clause (b), of sub-section (2), one hundred per cent of such profits and gains for ten assessment years commencing with the initial assessment year; (ii) in the case of any undertaking or enterprise referred to in sub-clause (ii) of clause (a) or sub-clause (ii) of clause (b), of sub-section (2), one hundred per cent of such profits and gains for five assessment years commencing with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains. (4) This section applies to any undertaking or enterprise which fulfils all the following conditions, namely:- (i) it is not formed by splitting up, or the reconstruction, of a business already in existence : Provided that this condition shall not apply in respect of an undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; ....
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....uch centres, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government; (vii) "North-Eastern States" means the States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura; (viii) "Software Technology Park" means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and Industry; (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 of the previous year in which the substantial expansion is undertaken; (x) "Theme Park" means such parks, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government." 2.5. If the provision of section 80IC of the Act is analyzed, it speaks about gross total income of the assessee, which includes any profit & gains "derived by", an undertaking or an enterprises from "any busine....
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..... 15,49,230/-, after claiming deduction of Rs. 6,63,956/- u/s 80IB of the Act in its return filed on 25.2.2004. The return was selected for scrutiny, therefore, pursuant to notice u/s 147 vide order dated 27.2.2010 the income was determined at Rs. 2,91,61,870/- (including disallowance of deduction of Rs. 6,63,956/-). However, under section 154 of the Act, necessary correction was made by the AO himself by restricting the disallowance to Rs. 6,63,956/- as claimed by the assessee. On appeal, the learned CIT(A) affirmed the disallowance which is under challenge before the Tribunal. 3.1 Before coming to any conclusion, we are reproducing hereunder the relevant portion from the impugned order :- "2.3 I have carefully examined the issue in dispute. Soap is a product which has passed through evolution in many centuries. The process for making soap, has evolved with generations. Earlier it was prepared by mixing fatty acid with caustic soda and sodium silicate in a chemical process. After learning the process of synthesizing natural oil a new product called linear alkyl benzene (LAB) was developed which is used in making of modern day soap known as detergent soap. The che....
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....ifferent steps because in the industrial processes described each of these is done over several process steps, but in principle it could be done in the three steps outlined here. Step 1 - Saponification A mixture of tallow (animal fat) and coconut oil is mixed with sodium hydroxide and heated. The soap produced is the salt of a long chain carboxylic acid. Step 2 - Glycerine removal Glycerine is more valuable than soap, so most of it is removed. Some is left in the soap to help make it soft and smooth. Soap is not very soluble in salt water, whereas glycerine is, so salt is added to the wet soap causing it to separate out into soap and glycerine in salt water. Step 3 - Soap purification Any remaining sodium hydroxide is neutralised with a weak acid such as citric acid and two thirds of'the remaining water removed. Step 4 - Finishing Additives such as preservatives, colour and perfume are added and mixed in with the soap and it is shaped into bars for sale. Detergents are similar in structure and function to soap, and for most uses they are more efficient than soap and so are more commonly used. In addition to the actual 'detergent' molecule, detergen....
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....and lathering, so the ratios of the oils used are closely monitored to produce a blend with the most desirable characteristics for the most reasonable cost. However, pure soap is hard and easily oxidised, so various additives are added to correct this and to make a more aesthetically pleasing product. The first such "additive" is glycerine, which is produced in the saponification reaction. Glycerine makes the soap smoother and softer than pure soap. However, it is also much more valuable than soap itself, so only a minimum of glycerine is left in the soap and the remainder is extracted, purified and sold. The glycerine is extracted from the soap with lye2 - a brine solution that is added to the soap at the saponification stage. Wet soap is soluble in weak brine, but separates out as the electrolyte concentration increases. Glycerine, on the other hand, is highly soluble in brine. Wet soap thus has quite a low electrolyte concentration and is about 30% water (which makes it easily pumpable at 70°C). To remove the glycerine, more electrolyte is added, 1 Surface active agent. 2 Pronounced "lee" in the UK and New Zealand and "lie" in the US. ....
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....its glycerine at this stage, and this is removed with fresh lye in a washing column. The column has rings fixed on its inside surface. The soap solution is added near the bottom of the column and the lye near the top. As the lye flows down the column through the centre, a series of 'rotating disks keeps the soap / lye mixture agitated between the rings. This creates enough turbulence to ensure good mixing between the two solutions. The rate of glycerine production is calculated and the rate at which fresh lye is added to the washing column then set such that the spent lye is 25 - 35 % glycerine. Glycerine is almost infinitely soluble in brine, but at greater than 35% glycerine the lye no longer efficiently removes glycerine from the soap. The soap is allowed to overflow from the top of the column and the lye ("half spent lye") is pumped away from the bottom at a controlled rate and added to the reactor. Step 4 - Lye separation The lye is added at the top of the washing column, and the soap removed from the column as overflow. As the lye is added near the "overflow pipe the washed soap is about 20% fresh lye, giving the soap unacceptably high water and caustic ....
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....spent lye from the washing stage (see below) and a caustic soda solution. The mix is heated and then left to settle into two layers. The neutral lye (which is now rich in glycerine) is pumped off and the mixture of soap and unreacted oils which has risen to the top is left in the pan. More caustic liquor is added to this and the mix reheated to saponify the remaining free oils. Step 3 - Washing The crude soap is then pumped to a divided pan unit (DPU) where it is washed by a counter-current of lye. This lye is a mixture of fresh brine solution and nigre lye (see below). The washed soap comes out the far end of the DPU and is sent to the fitting pans, while the lye comes out the near end and is pumped back into one of the saponification pans. Step 4 - Fitting Here the remaining unwanted glycerine is removed from the soap by reboiling with water, NaCl and a small amount of NaOH solution. The electrolyte concentration in the water is such that the soap and water to separate out into two layers. The top layer is 'neat' wet soap, which is pumped off to be dried. The bottom layer is known as the 'nigre' layer, and consists of a solution of soap, glycerin....
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....n separated by an atomiser into finely divided droplets. These are sprayed into a column of air at 425°C, where they dry instantaneously. The resultant powder is known as 'base powder', and its exact treatment from this point on depends on the product being made. Step 3 - Post dosing Other ingredients are now added, and the air blown through the mixture in a fluidiser to mix them into a homogeneous powder. Typical ingredients are listed in Table 3. XI - Detergents- A - Soap-S Table 2- The ingredients of detergent base powder Solids Ingredient Function Sodium tripolyphsophate (STP) Water softener, pH buffer (to reduce alkalinity). Sodium sulphate Bulking and free-flowing agent. Soap noodles Causes rapid foam collapse during rinsing. Zeolite Water softener (absorbs Ca2+ and Mg2+) in contries where STP is not used; granulating agent for concentrated detergents. Sodium carboxymethyl cellulose Increases the negative charge on cellulosic fibres such as cotton and rayon, causing them to repel dirt particles (which are positively charged). Liquids I....
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....tains a small quantity of dissolved soap which must be removed before the evaporation process. This is done by treating the spent lye with ferrous chloride. However, if any hydroxide ions remain the ferrous ions react with them instead, so these are first removed with hydrochloric acid: HCI + NaOH NaCl + H2O The ferrous chloride is then added. This reacts with the soap to form an insoluble ferrous soap: FeCl2 + 2RCOONa 2NaCl + (RCOO)2Fe This precipitate is filtered out and then any excess ferrous chloride removed with caustic: 2NaOH + FeCl2 Fe(OH)2 (s) + 2NaCl This is filtered out, leaving a soap-free lye solution. Step 2 - Salt removal Water is removed from the lye in a vacuum evaporator, causing the salt to crystallise out as the solution becomes supersaturated. This is removed in a centrifuge, dissolved in hot water and stored for use as fresh lye. When the glycerin content of the solution reaches 80 - 85% it is pumped to the crude settling tank where more salt separates out. XI - Detergents-A -Soap-I 0 Step 3 - Glycerine purification A small amount of caustic soda is added to the crude glycerine an....
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.... aminimum. Continuous measurements of key properties such as electrolyte levels and moisture both ensure that the final product is being made to spec, and ensures the manufacturing process is working as it was designed to. Hence the losses in the plant will indirectly be minimised because the process itself is being monitored. Synthetic detergent biodegradability There has recently been a strong move away from the environmentally hazardous biologically stable detergents used in the past to biodegradable ones. The sulphonic acid and nonionic detergents used in New Zealand to produce both liquid and powder detergents are fully biodegradable and comply with the relevant Australian standard. The sulphonic acid is made from a highly linear alkylbenzene, mainly dodecylbenzene, and the nonionics are ethoxylated long chain alcohols. The sodium lauryl ether sulphates also used in liquid XI-Detergents-A-Soap-ll detergents and shampoos a're highly biodegradable, being made from either natural or synthetic linear C12 - C15 alcohols. Phosphates from detergent products used in New Zealand are independently monitored and have been found to not be an environ....
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....alidate their process then the need for many routine or expensive tests can be reduced or eliminated. . In most cases quality testing is performed at the process, by the process operators. The laboratory hold samples of every batch of finished goods for twelve months, so that if there are any consumer complaints, an original sample can be tested against the defect sample to determine the cause of the complaint. Tests carried out on some particular products are listed below. XI - Detergents-A -Soap-12 18 Batch process soap The incoming tallow and coconut oil are tested for colour (after bleaching) and free fatty acid content. The neat liquid soap is tested for free alkali, salt content and glycerol content, while the soap chips are tested to moisture and fatty acid content. Detergent powder On-line tests are continuously carried out on density and moisture. The laboratory also tests for the concentrations of active detergent, sodium tripolyphosphate, moisture, soda ash, enzymes and bleach, and monitors physical properties such as dynamic flow rate, compressibility, particle size, colour and perfume. Liquid detergent The product i....
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....see is allowed." 2.5. If the ratio laid down in the aforesaid decision, is analyzed, now question arises whether assembling of parts can be said to be manufacturing. Now, we shall deal with the issue of manufacturing with the help of certain cases which are analyzed hereunder:- i. Ms Delna Rushtam Boyce (2009) 318 ITR 455 (AAR) New Delhi, wherein the assessee was deriving profit from business of squeezing of juice from fruits and vegetables and etc was eligible for deduction u/s 80IB of the Act to be holding the same to be manufacturing. ii. Identically Esquire Transland Industries 344 ITR 308 (Mad.), wherein, conversion of electric steel in to lamination was held to be manufacturing for the purposes of section 80IB of the Act. iii. Likewise, Hon‟ble Gujarat High Court in Innovative Industries (2012) 207 taxman 189 (Guj.) held that process undertaken by assessee in producing air freshener would amount to manufacturing. iv. In CIT vs Business information processing services (2012) 345 ITR 548 (Raj.) held that computer data processing and sale of computer stationery amounts to manufacturing. v. The Hon‟ble Punjab & Haryana H....
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....uring. xx. In Tarai Development Corporation 120 ITR 342 Hon‟ble Allahabad High Court even held that processing of seeds is a process which amounts to manufacture or production. xxi. Hon‟ble Apex Court in ITO vs Arihant Tiles & Marvels Pvt. Ltd. (2010) 186 taxman 439 held that conversion of marvels blocks into slabs and tiles amounts to manufacturing. xxii. Likewise, in CIT vs Janakraj Bansal 229 CTR (HP) 89 conversion of lime stone into lime powder was held to be manufacturing activity. xxiii. In CIT vs M R Gopal 58 ITR 598 (Mad.) held that conversion of boulders into stones is a manufacturing. xxiv. Even in Punam Chandra Prem Raj vs CIT 207 ITR 895 (Raj.) High Court held that ginning of cotton is process, thus entitled to deduction. 2.6. There are certain contra decisions also, which are discussed hereunder:- a) Addl. CIT vs Southern Structural Ltd. 110 ITR 164 (mad.) wherein it was held that production of proto type will not amount to manufacturing. b) Hon‟ble Apex Court in Tamilnadu State Transport Corporation Ltd. vs CIT 252 ITR 883 (SC) held that tyre retreading is not manufacturing. c....
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....rein the assessee intend to start a tractor manufacturing industry in the state of Himachal Pradesh, wherein, the primary job was to provide, milling, tooling and grinding of surface of rear cover etc, which are important part of tractor, it was held that the activities amounts to manufacture or production of an article difference from raw castings, thus, entitled to deduction u/s 80IC of the Act. So far as, assembling is concerned, the Ld. counsel for the assessee gave a live demonstration in the court room with respect to the process of assembling, wherein, only some screw were tightened up of already manufactured parts and the end product resulted into a watch. At this stage, the Ld. counsel for the assessee, stated that the assessee is merely screwing up some parts/components, used for manufacturing of the watches. So far as, consumption of electricity is concerned, it was explained that the electricity is used only for light purposes and it is not the case that some machinery used in the process rather broadly the screw drivers are used. The Ld. Counsel also explained that clearance is granted by the check post by the Excise and the VAT department for raw material as well as f....