2010 (4) TMI 710 - AT - Income Tax

Addition of income - During the course of assessment proceedings the AO had noticed that assessee had shown purchases of finished goods of Rs.1,96,19,168 - AO, not satisfied with the claim, rejected it and proposed an addition of Rs.49,04,782/- being 20% of the purchases of Rs.96,19,168 - In this regard, the AO has held that exemption under section 10B is not available on trading activities - Auditors have certified that assessee is entitled to exemption under section 10B on the items manufactured by it and exported - It is undisputed fact that it was ascorbic acid which was imported and put for processing and what was resulted was also ascorbic acid but of finer quality - In absence of any material to the effect that the use of ascorbic acid FCC grade IV and ascorbic acid IP are different and ascorbic acid FCC grade IV could not be used in place where ascorbic acid IP is used Held that no manufacturing or production of any new article or thing has taken place from import of finished goods of ascorbic acid FCC grade IV - decided against the assessee Section 43B - The issue is now covered by the decision of Hon. Supreme Court in CIT vs. Alom Extrusion (2009 - TMI - 35073 - SUPREME COURT) according to which contributions to PF made before due date of filing the return are allowable as deduction - This ground of assessee is accordingly allowed Disallowance u/s 35D - Public issue expenses - AO to decided the issue in accordance with the decision taken in the preceding year.

Summary

Issues Involved:
1. Denial of exemption under section 10B for profit earned from manufacturing Ascorbic Acid IP.
2. Disallowance under section 40A(3) for expenses other than business promotion.
3. Addition under section 43B for ESIC and PF payments.
4. Disallowance under section 35D.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 10B:
The Tribunal addressed the appellant's claim for exemption under section 10B for profits from manufacturing Ascorbic Acid IP. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated the activity as trading rather than manufacturing, denying the exemption. The appellant argued that Ascorbic Acid FCC Grade IV was processed into Ascorbic Acid IP through various manufacturing steps, including mixing with chemicals, centrifuging, and drying, resulting in a product with a different shelf life and quality. The Tribunal examined whether this process constituted "manufacture" or "production" under section 10B. They concluded that despite the processing, the end product remained Ascorbic Acid, and there was no new article or thing produced. Thus, the Tribunal upheld the denial of the exemption, stating that the activity did not meet the criteria for manufacturing or production under section 10B.

2. Disallowance under Section 40A(3):
The AO disallowed certain expenses under section 40A(3) due to cash payments exceeding the prescribed limit. The CIT(A) confirmed the disallowance for expenses other than business promotion, which the appellant accepted. The appellant contested the disallowance for ESIC and telephone expenses. The Tribunal deleted the disallowance for ESIC payments, recognizing them as payments to a government department, thus covered under exceptions to section 40A(3). However, the disallowance for telephone expenses was upheld due to a lack of satisfactory explanation from the appellant.

3. Addition under Section 43B for ESIC and PF Payments:
The Tribunal noted that the issue of disallowance under section 43B for ESIC and PF payments was settled by the Supreme Court in CIT vs. Alam Extrusion, which allowed such deductions if payments were made before the due date for filing the return. The Tribunal directed the AO to allow all payments made before the filing of the return, thus ruling in favor of the appellant on this issue.

4. Disallowance under Section 35D:
The appellant contested the disallowance of Rs. 2,78,917 under section 35D for preliminary expenses. The Tribunal noted that in previous years, the issue had been remitted to the AO for reconsideration with specific instructions. Following the same approach, the Tribunal restored the issue to the AO for a fresh decision based on detailed examination and adherence to the previous year's directions.

Conclusion:
The appeal was partly allowed, with the Tribunal upholding the denial of exemption under section 10B, partly allowing the appeal on section 40A(3) disallowance, fully allowing the appeal on section 43B addition, and remitting the section 35D disallowance back to the AO for reconsideration.