2007 (11) TMI 441 - AT - Income Tax

Denial of deduction u/s 80-IB - Manufacturing or production of perfumery components is Manufacturing or Production activities or not ? - C onsumption of electricity is very small amount - Assessee did not employ ten or more workers in the manufacturing process - scope of term workers Manager and the Assistant could be categorized as workers? - Addition u/s 69C - Unexplained expenditure. Engaged in manufacturing or production - HELD THAT - We find that the finished products are chemically and commercially different from the raw materials used in the making of such finished products, hence, as settled by various judicial decisions, the assessee can be said to be engaged in the manufacture and, thus, it qualifies on this account. Even otherwise, the section has also used the term production and the term production is certainly wider than the term manufacture . The Three Judge Bench of Hon ble Apex Court in the case of CIT v. Sesa Goa Ltd. 2004 (11) TMI 14 - SUPREME COURT held that where human efforts were involved in the making of a product, then, such product fell within the term production and even it was not necessary that such product should be commercially different and, therefore, the assessee was entitled for exemption under section 80-I of the Act. Thus, assessee s claim for deduction u/s 80-IB cannot be rejected as there is a production of a thing and human efforts along with mechanical process are also involved. Consumption of electricity - Assessee has submitted the bill of the meter installed in connection with the machinery used for manufacturing, hence, if the consumption is low due to the involvement of machinery in the processing activity, the same cannot be a valid ground for denying the deduction u/s 80-IB of the Act and for holding that the assessee is carrying manufacturing activities without aid of power, hence, required to employ 20 or more workers particularly when the Legislature has not prescribed any minimum criteria for consumption of electricity in the manufacturing process. Employment of workers in the manufacturing process - We find that both the term workers and manufacturing process , as used in section 80-IB(2)( iv ) of the Act, have not been defined in the Act. We also find that it is one of the four conditions which are required to be complied with by the assessee for claiming deduction u/s 80-IB of the Act. We also find that the principal object of this section is to encourage the setting up of industrial undertaking by offering tax incentives so as to attain the objective of economic development which, as such, comprises of investment, economic size and employment generation and if all the conditions are read together then, these all the above three parameters would be found implied, as a result of these conditions, in section 80-IB(2) of the Act. It is also true that it is an incentive provision, hence, it should be interpreted in a manner so as to advance the objective of the provision and not to frustrate it. In this background, we shall firstly look at the aspect of manufacturing process. Manufacturing process has got two words manufacturing and process . Thus, we are of the considered opinion that Factory Manager and Assistant looking after various activities of a unit should be considered as workers, employed in the manufacturing process. Thus, the assessee also fulfils the condition regarding employment of minimum number of workers. Accordingly, we hold that the assessee is entitled for deduction u/s 80-IB of the Act and we direct the Assessing Officer to accept the claim of the assessee in this regard. Thus, ground Nos. 2, 3 and 4 of the assessee stand allowed. Addition u/s 69-C - Unexplained expenditure - HELD THAT - From the perusal of the cash/factory book, we find that it contain entries relating only to cash inflow by way of transfer from head office or withdrawal from HDFC Bank. It is also noted that employees wages have been paid mostly at the end of the each month except in the case of the month of June, 2003 and there is a corresponding withdrawal of cash from bank on that date. It is also noted that assessee is a Pvt. Ltd. Co. and managed by independent persons other than owners, hence, normally, there cannot be a situation where the wages being a regular payment, which has been duly recorded in the books of account would be disbursed through unaccounted cash. We also find that there is no dispute regarding the quantum of wages nor any statements have been obtained from the workers in this regard. Thus, taking into account the entire facts, it appears to be a case of accounting mistake only, hence, in our opinion, no addition is warranted. Accordingly, we accept this ground of assessee. In the result, appeal filed by the assessee stands allowed.

Summary

Issues Involved:
1. Proper opportunity of hearing by the Assessing Officer.
2. Denial of deduction under section 80-IB of the Income Tax Act.
3. Classification of Factory Manager and Assistant as workers under section 80-IB.
4. Determination of manufacturing activity.
5. Use of electricity in manufacturing.
6. Addition under section 69-C of the Income Tax Act.

Detailed Analysis:

1. Proper Opportunity of Hearing by the Assessing Officer:
- Issue: The assessee claimed that no proper opportunity of hearing was given by the Assessing Officer.
- Judgment: This ground was not pressed by the assessee and hence, dismissed as not pressed.

2. Denial of Deduction under Section 80-IB:
- Issue: The assessee was denied deduction under section 80-IB for not meeting the conditions specified.
- Facts: The assessee, engaged in manufacturing perfumery components, was required to explain its activities and prove the employment of a minimum of 10 workers. The Assessing Officer found discrepancies in the workers' records and questioned the provisional certificate of registration and low electricity consumption.
- Appellate Proceedings: The assessee contended that the statute did not require the same set of workers throughout the tax holiday period and provided evidence of manufacturing activities and electricity consumption. The CIT(A) upheld the Assessing Officer's decision, stating that the Manager and Assistant could not be categorized as workers and the processing did not constitute manufacturing.
- Judgment: The Tribunal found the finished products to be chemically and commercially different from raw materials, qualifying as manufacturing. It also accepted the electricity bill submitted by the assessee. The Tribunal concluded that the assessee met the criteria for deduction under section 80-IB.

3. Classification of Factory Manager and Assistant as Workers:
- Issue: Whether the Factory Manager and Assistant could be considered workers under section 80-IB.
- Arguments: The assessee argued that the Manager and Assistant were involved in activities integral to the manufacturing process. The CIT(A) disagreed, stating they could not be categorized as workers based on dictionary definitions.
- Judgment: The Tribunal held that the term "workers" should include those involved in all parts of the manufacturing process, including input and output stages. The Tribunal concluded that the Factory Manager and Assistant should be considered workers for the purposes of section 80-IB, fulfilling the condition of employing a minimum of 10 workers.

4. Determination of Manufacturing Activity:
- Issue: Whether the production of perfumery compounds constituted manufacturing.
- Arguments: The assessee argued that the finished products were commercially and chemically different from raw materials, supported by lab reports and judicial decisions.
- Judgment: The Tribunal found that the assessee was engaged in manufacturing as the finished products were distinct from raw materials. The Tribunal also noted that human efforts and mechanical processes were involved, qualifying the activity as production under section 80-IB.

5. Use of Electricity in Manufacturing:
- Issue: Whether the low electricity consumption indicated a lack of manufacturing activity.
- Arguments: The assessee submitted a consolidated electricity bill for machinery operation, arguing that low consumption should not disqualify the deduction.
- Judgment: The Tribunal accepted the electricity bill and stated that the low consumption was not a valid ground for denying the deduction, as the legislature did not prescribe a minimum electricity usage for manufacturing.

6. Addition under Section 69-C:
- Issue: Addition of Rs. 22,493 under section 69-C for negative cash balance.
- Facts: The Assessing Officer found a negative cash balance and disallowed the amount, questioning the cash flow entries.
- Arguments: The assessee explained that the negative balance was due to an accounting mistake and provided details of withdrawals and payments.
- Judgment: The Tribunal found that the negative balance resulted from an accounting error and not from unaccounted cash. The Tribunal accepted the assessee's explanation and deleted the addition.

Conclusion:
The appeal filed by the assessee was allowed, with the Tribunal directing the Assessing Officer to accept the claim for deduction under section 80-IB and deleting the addition under section 69-C.