2012 (9) TMI 592 - HC - Income Tax

Disallowance of exemption u/s 10B - CIT(A) allowed it approving the admission of the additional evidence - Held that - As far as the first objection raised by the AO that the assessee was formed by the splitting up, or the reconstruction, of a business already in existence is not acceptable as mere reconstitution of the partnership firm can hardly be said to amount to the splitting up, or the reconstruction, of the partnership business which was already in existence. There is no dispute that after the partnership was reconstitued, the reconstituted firm had started a new business with an amendment to the partnership deed enabling the firm to carry on the manufacture and export of handicrafts items. Prior to the reconstitution the firm was authorized to merely carry on trading and exports of handicrafts etc. That apart the balance sheet as on 31st March, 2006 undisputedly shows that the assessee had acquired tools and the machinery, which were not with the firm prior to the reconstitution. Even the profit and loss accounts drawn up after the reconstitution showed manufacturing expenses and wages.Thus unable to appreciate how the Revenue can contend that the undertaking owned by the assessee was formed by the splitting up or reconstruction of the erstwhile partnership business. The contention is contrary to the facts on record - in favour of assessee. COU - Scope of term manufacture - One of the main objections of the AO was that the EOU was directed to be custom-bonded which was not complied with by the assessee. The CIT(Appeals) held that custom-bonding was required only where imports as per notification No.53/97 customs dated 3rd June, 1997 are contemplated and since the assessee-firm did not plan to import any materials to be used in the manufacture of ingredients, the EOU was not custom-bonded - in favour of assessee. Disregard to Rule 46 A as no reasonable opportunity was given to the AO before approving the admission of the additional evidence by the CIT(A) - ITAT stated that AO took 15 months and more to submit the remand report - Held that - The appeals before the CIT(Appeals) were filed by the assessee on 18.1.2010. It was in the course of the appeal proceedings that additional evidence had been produced and a remand report was called for by the CIT(Appeals). The appeals were eventually disposed of by the CIT(Appeals) by a common order dated 30.03.2010. Thus the entire appeal proceedings had taken less than three months for completion. In this background, it is not understandable as to how the Assessing Officer can be blamed to have delayed his remand report beyond 15 months - As the claim of the assessee based on the additional evidence had to be properly verified by the AO restore this issue to the file of the Assessing Officer to enable him to process the claim of the assessee afresh - in favour of revenue.

Summary

Issues Involved:
1. Justification of ITAT's confirmation of CIT(A)'s order in regard to Rule 46A of the Income Tax Rules, 1962.
2. Admission of additional evidence by CIT(A) despite the remand report by AO.
3. Granting exemption under Section 10B of the Income Tax Act.
4. Perceived perversity of the ITAT's order in facts and law.

Issue-wise Detailed Analysis:

1. Justification of ITAT's Confirmation of CIT(A)'s Order in Regard to Rule 46A of the Income Tax Rules, 1962:
The Revenue challenged the ITAT's confirmation of the CIT(A)'s order, alleging non-compliance with Rule 46A. The CIT(A) admitted additional evidence, concluding it was clarificatory rather than new. The Tribunal upheld this, noting the AO had ample opportunity to examine the evidence but delayed the remand report by over 15 months. The court found the CIT(A)'s admission of additional evidence justified, emphasizing that the AO could have conducted an inquiry during this period.

2. Admission of Additional Evidence by CIT(A) Despite the Remand Report by AO:
The CIT(A) admitted additional evidence, which included documents and samples/exhibits, to support the assessee's manufacturing claim. The AO objected, citing the need for further examination. However, the CIT(A) overruled this, noting the evidence was clarificatory and the AO had sufficient time for verification. The Tribunal agreed, stating the AO had taken over 15 months for the remand report, thus justifying the admission of additional evidence.

3. Granting Exemption Under Section 10B of the Income Tax Act:
The Revenue contested the exemption under Section 10B, arguing the assessee did not fulfill the conditions, particularly the custom-bonding requirement. The CIT(A) and Tribunal disagreed, noting custom-bonding was unnecessary as no imports were involved. The Tribunal also found the assessee engaged in manufacturing, transforming raw or semi-finished goods into distinct commercial commodities. However, the court remitted the issue to the AO for re-examination, emphasizing the need for a thorough verification of the manufacturing claim.

4. Perceived Perversity of the ITAT's Order in Facts and Law:
The Revenue argued the ITAT's order was perverse, both factually and legally. The court, however, upheld the ITAT's findings, except for the manufacturing claim under Section 10B. The court noted the AO did not have ample opportunity to verify the additional evidence and remitted the matter for re-examination. The court emphasized the need for a detailed assessment to determine if the assessee met the manufacturing criteria under Section 10B.

Conclusion:
The court affirmed the ITAT's decisions regarding Rule 46A compliance and the admission of additional evidence. However, it remitted the issue of the Section 10B exemption to the AO for a detailed examination, highlighting the need for thorough verification of the assessee's manufacturing activities. The appeals were partly allowed, with specific directions for re-assessment on the manufacturing claim.