2013 (5) TMI 225 - AT - Income Tax

Re opening of assessment - disallowance of exemption u/s 10B - Held that - It is crystal clear that the assessee was not considered to be a manufacturer and eligible for exemption u/s 10B only on the basis of the judgment of Lucky Minmat Pvt. Ltd. vs CIT (2000 (8) TMI 6 - SUPREME Court). However, AO did not consider this vital fact that conversion of Marble Blocks into slabs and tiles i.e. the activity in which the assessee was engaged was held to be a manufacturing activity in the case of Arihant Tiles & Marbles Pvt. Ltd. vs ITO (2007 (5) TMI 132 - HIGH COURT, RAJASTHAN). In the said judgement, earlier judgment of Hon ble Supreme Court in the case of Lucky Minmat Pvt. Ltd. vs CIT (supra) was considered, subsequently the Hon ble Supreme Court affirmed the judgemnt of Hon ble Rajasthan High Court and held in the case of ITO vs Arihant Tiles and Marbles Pvt. Ltd. (2009 (7) TMI 403 - CESTAT, MUMBAI) that conversion of Marble Blocks into polished slabs and tiles constitutes manufacture or production as it results in emergence of a new and distinct commodity. In the present case, the only basis with the AO for initiating reassessment proceedings was the judgment of Hon ble Supreme Court in the case of Lucky Minmat Pvt. Ltd. vs CIT (supra) wchich was considered by in the case of Arihant Tiles & Marbles Pvt. Ltd. vs ITO (supra), thereafter it was held that process of cutting and sizing or polishing of Marble Blocks into slabs and tiles which results into making raw marble usable amounts to manufacturing. Therefore, the reopening by the Assessing Officer was not sustainable. Rectification made u/s 154 for the disallowance u/s 40(a)(ia) - Held that - Credit balance written off were the balances not payable by the company due to various reasons. On the similar issue, the decision of in the case of Wipro Ltd. vs DCIT, (2002 (7) TMI 752 - ITAT BANGALORE) was held in favour of the assessee therefore, it can be said that the issue was highly debatable. Similarly, the applicability on reimbursement of the expense in the case of exporters i.e. Ocean Freight paid and other expenses was highly debatable, therefore, it cannot be said that there was a mistake apparent on record particularly when the AO examined the issue in detail during original assessment proceedings u/s 143(3) and excluded the amount under consideration for determining the disallowance u/s 40(a)(ia) - it can be said that this issue was also debatable issue and it is well settled that rectification u/s 154 cannot be made for the issue which is debatable.

Issues Involved:
1. Reopening of assessment under Section 147 read with Section 148 of the Income Tax Act.
2. Disallowance of exemption under Section 10B of the Income Tax Act.
3. Disallowance of transport expenses and other trading profits.
4. Disallowance under Section 40A(3) of the Income Tax Act.
5. Disallowance of salary paid.
6. Addition under Section 41(1) of the Income Tax Act.
7. Disallowance under Section 40(a)(ia) of the Income Tax Act.
8. Eligibility of certain incomes for deduction under Section 10B of the Income Tax Act.

Detailed Analysis:

1. Reopening of Assessment under Section 147 read with Section 148 of the Income Tax Act:
The assessee challenged the reopening of the assessment on the grounds that the Assessing Officer (AO) should have "reasons to believe" and not merely "reasons to suspect" that any income chargeable to tax had escaped assessment. The AO had reopened the assessment based on the Supreme Court's judgment in the case of Lucky Minmat Pvt. Ltd., which held that mere cutting of marble blocks into slabs and tiles did not amount to manufacturing. However, the CIT(A) and the Tribunal found that the AO did not consider the decision of the Rajasthan High Court in the case of Arihant Tiles & Marbles Pvt. Ltd., which was affirmed by the Supreme Court, holding that conversion of marble blocks into slabs and tiles constitutes manufacturing. Consequently, the reopening of the assessment was quashed as it was based on an overruled judgment.

2. Disallowance of Exemption under Section 10B of the Income Tax Act:
The AO disallowed the exemption under Section 10B claiming that the assessee was not engaged in manufacturing. However, the Tribunal found that the assessee's activity of converting marble blocks into slabs and tiles constituted manufacturing as per the Supreme Court's decision in the case of Arihant Tiles & Marbles Pvt. Ltd. Thus, the exemption under Section 10B was allowed.

3. Disallowance of Transport Expenses and Other Trading Profits:
The CIT(A) confirmed the disallowance of Rs. 50,000 representing transport expenses out of a lump sum addition of trading profit of Rs. 1,00,000 made by the AO. The Tribunal, following its earlier order, held that even if the disallowance was sustained, the assessee was eligible for exemption under Section 10B of the Act.

4. Disallowance under Section 40A(3) of the Income Tax Act:
The CIT(A) confirmed the disallowance of Rs. 14,472 made by the AO under Section 40A(3) of the Act. The Tribunal did not specifically address this issue separately, implying that the disallowance stood confirmed.

5. Disallowance of Salary Paid:
The AO disallowed the salary paid to Smt. Pratibha Karnawat amounting to Rs. 96,000. The Tribunal, following its earlier order, held that even if this disallowance was sustained, the assessee was eligible for exemption under Section 10B of the Act.

6. Addition under Section 41(1) of the Income Tax Act:
The AO made an addition of Rs. 1,18,960 under Section 41(1) on account of cessation of trading liability. The Tribunal remanded this issue back to the AO for verification, stating that if the liability was paid in the subsequent year, the addition was not justified.

7. Disallowance under Section 40(a)(ia) of the Income Tax Act:
The AO disallowed Rs. 72,76,680 under Section 40(a)(ia) for non-deduction of TDS on reimbursement of expenses. The CIT(A) deleted the disallowance, stating the issue was debatable and not a mistake apparent from the record. The Tribunal upheld the CIT(A)'s decision, noting that the issue was examined in detail during the original assessment proceedings and was highly debatable.

8. Eligibility of Certain Incomes for Deduction under Section 10B of the Income Tax Act:
The AO disallowed Rs. 5,80,976, consisting of miscellaneous credit balance written off, CST refund, etc., from being eligible for deduction under Section 10B. The CIT(A) deleted the disallowance, noting that the issue was debatable and not a mistake apparent from the record. The Tribunal upheld the CIT(A)'s decision.

Conclusion:
The Tribunal allowed the appeals of the assessee for the assessment years 2002-03, 2004-05, and 2007-08, quashing the reopening of the assessments and allowing the exemptions under Section 10B. The Tribunal also upheld the CIT(A)'s decisions on various disallowances and remanded the issue of addition under Section 41(1) back to the AO for verification. The Department's appeals were dismissed.

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