2015 (2) TMI 1199 - AT - Income Tax

Exemption U/s 10BA - Held that - As decided in assessee s own case for A.Y. 2004-05, 2005-06 and 2006-07 1% labour expenses are incurred on private labourer engaged by the assessee on job work got done by the assessee, otherwise the assessee has its own manufacturing premises where permanent employees are employed and if this expenditure is taken into consideration then it is not 1% but it is substantial expenditure. This aspect has also been examined by the ld. CIT (A) and found that the assessee has incurred substantial expenditure on its manufacturing activity. Statements of 12 persons were recorded by AO during remand proceedings and those persons have categorically stated that they sold unfinished goods to the assessee and major portion of work on those goods have been done by the assessee itself in their premises. Neither the facts narrated by the supplier were found incorrect nor there was any other evidence to hold that the assessee is only doing manufacturing process. On similar facts, the Tribunal in case of Mangalam Arts 2008 (6) TMI 248 - ITAT JAIPUR-A has held that the assessee is entitled for deduction under section 10BA. We are of the considered view that the assessee was in manufacturing of goods and eligible for deduction U/s 10BA of the Act - Decided in favour of assessee

Summary

Issues Involved:
1. Exemption under Section 10BA of the Income Tax Act.
2. Consideration of facts found during a survey.
3. Substantial manufacturing activity requirement under Section 10BA.
4. Proportion of raw wood purchase to total purchases.
5. Nature of business activities and purchases from handicraft showrooms.
6. Depreciation of factory building.

Detailed Analysis:

1. Exemption under Section 10BA of the Income Tax Act:
The primary issue revolves around whether the assessee qualifies for exemption under Section 10BA of the Income Tax Act. The Assessing Officer (AO) had disallowed the exemption, arguing that the goods exported were not manufactured by the assessee, which is a primary condition for the exemption. The AO observed that the assessee was primarily engaged in trading activities, purchasing readymade furniture, and exporting it after minor polishing and finishing, which does not constitute manufacturing as per Section 10BA.

2. Consideration of Facts Found During Survey:
The AO did not consider the facts found during a survey conducted at the assessee's business premises, which indicated that the assessee was not carrying out substantial manufacturing activities. The AO used this as a basis to disallow the exemption under Section 10BA.

3. Substantial Manufacturing Activity Requirement:
The AO argued that for claiming exemption under Section 10BA, substantial manufacturing activity must be carried out. The AO contended that activities like polishing and fitting do not suffice for the purpose of Section 10BA. The AO noted that the assessee had purchased raw wood amounting to only 15.90% of total purchases, with the remaining 84.10% being polishing material, packing material, and semi-finished goods, indicating no substantial manufacturing activity.

4. Proportion of Raw Wood Purchase:
The AO highlighted that the assessee's purchase of raw wood was only 15.90% of the total purchases, with the rest being polishing materials, packing materials, and semi-finished goods. This was used to argue that the assessee did not engage in substantial manufacturing activities, which is a primary condition for exemption under Section 10BA.

5. Nature of Business Activities:
The AO found that the assessee was engaged in purchasing readymade furniture from handicraft showrooms and exporting it after minor polishing and finishing. This was supported by the list of sundry creditors, which included major creditors supplying readymade furniture with artistic work. The AO concluded that this activity does not qualify as manufacturing under Section 10BA.

6. Depreciation of Factory Building:
In the cross-objection, the assessee argued that the CIT(A) erred in not allowing depreciation of Rs. 84,181 for the factory building at Jhotwara.

Judgment Analysis:

Exemption under Section 10BA:
The CIT(A) allowed the exemption under Section 10BA, referencing the Jaipur Tribunal's earlier decision in the assessee's favor for previous assessment years (2004-05, 2005-06, and 2006-07). The Tribunal had found that the assessee was engaged in substantial manufacturing activities, converting semi-finished goods into finished products with artistic value. The Tribunal emphasized that the assessee's activities involved substantial value addition and transformation, qualifying as manufacturing under Section 10BA.

Consideration of Survey Facts:
The CIT(A) and the Tribunal both noted that the survey conducted did not provide adverse findings against the assessee's claim of manufacturing activities. The Tribunal observed that the statements recorded during the survey supported the assessee's claim of substantial manufacturing activities.

Substantial Manufacturing Activity:
The Tribunal reiterated that the assessee's activities involved significant manufacturing processes, including grooving, brass work, inlay work, metal work, and carving, which transformed semi-finished goods into finished products with artistic value. This qualified as manufacturing under Section 10BA.

Proportion of Raw Wood Purchase:
The Tribunal found that the assessee's purchase of semi-finished goods and subsequent substantial value addition through manufacturing processes qualified as manufacturing. The Tribunal noted that the assessee's activities involved significant direct expenses related to manufacturing, supporting the claim of substantial manufacturing activities.

Nature of Business Activities:
The Tribunal upheld the CIT(A)'s findings that the assessee's activities involved substantial manufacturing processes, transforming semi-finished goods into finished products with artistic value. The Tribunal emphasized that the assessee's activities were not merely trading but involved significant manufacturing efforts.

Depreciation of Factory Building:
The assessee's cross-objection regarding depreciation of the factory building was not pressed by the assessee's representative and was dismissed by the Tribunal.

Conclusion:
The Tribunal confirmed the CIT(A)'s order, allowing the exemption under Section 10BA to the assessee, and dismissed the revenue's appeal. The Tribunal also dismissed the assessee's cross-objection regarding depreciation of the factory building. The judgment emphasized that the assessee's activities qualified as substantial manufacturing, meeting the requirements of Section 10BA.