2014 (12) TMI 96 - AT - Income Tax

Allowability of deduction u/s 10B Business activity carried by assessee amounts to manufacture or not Applicability of section 10B(7) r.w.s.80IA(10) - Held that - The word industry has a wide import, where there is a systematic activity, organized by cooperation between employer and employee (the direct and substantial element is commercial), for the production and/or distribution of goods and services calculated to satisfy human want and wishes (not spiritual or religious but inclusive of material things or services geared to celestial bliss), prima facie there is an industry in that enterprise - The true focus is functional and the decisive test the nature of activity - manufacturing and processing are not clearly demarcated fields - The test of manufacturing lies in the answer to the question whether what is processed or produced as the end product is commercially known differently from the raw material out of which the end product is produced - various items are mixed in a specified quantity with the help of man power and machine and the end product is commercially known differently, therefore, it can be said that the assessee is manufacturing unit. The observation made in the assessment order is that in comparison to sales of ₹ 5,83,65,060/- the total manufacturing expenses are merely ₹ 2,66,913/- which is only 0.45% of the sales expenses - the assessee is mixing the perfumery compounds in a specified required ratio with the help of man power and machine, therefore, it is always not necessary that manufacturing can be said to be complete only when there is comparatively high manufacturing expenses - It is like blending of compounds Decided against revenue. Adoption of profit earned by the sister concern - Restriction of claim u/s 10B to 19.06% of sales Held that - In the case of sister concern net profit was earned/disclosed @ 19.03%, which is having the same management and also having same activity, whereas the net profit disclosed by the assessee at 38.86% and if the foreign exchange gain is excluded then the net profit comes to 25.09% - the assessee has disclosed more profit than the ordinary profit which might be expected to arose in such business more specifically when the sister concern M/s Pragati Aroma Oil distillers Pvt. Ltd. is dealing in the same business, itself shows the profit @ 19.03%, also having similar management and is not claiming any exemption - the assessee is supporting the conclusion of the CIT(A) itself, where the benefit was extended to the assessee and in the same breath opposing the conclusion on the taxability of profit, more specifically in the case of sister concern, in identical market conditions/management the net profit was disclosed at 19.03% - the assessee disclosed more profit, with different intention, which can be expected from a similar line of business without bringing any cogent material on record. Computation of capital gains in the hand of Successor Company conversion of a firm in Part-IX Company - resultant company is further merged with another company - violation of proviso to sec. 47 (xiii) r.w.s 47A(3) - Held that - The capital gain shall be assessed in the hands of successor company in the previous year in which violation had taken place - the successor company is liable for capital gain, if any and not the assessee - the computations made by the AO in respect of estimated sale consideration, cost of acquisition and tenure of holding of assets so as to constitute as short term capital gain or long term capital gain are no hypothetical basis only CIT(A) held that the capital gain, if any, shall be liable to be assessed in the hand of the successor company, in the previous year in which violation took place - since, the assessee was not held liable therefore, how the assessee is aggrieved is not known the order of the CIT(A) is upheld Decided against assessee.

Issues Involved:
1. Deduction under Section 10B of the Income-tax Act, 1961.
2. Manufacturing activity versus processing activity.
3. Comparison of profit margins with a sister concern.
4. Computation of capital gains in the hands of the successor company.

Detailed Analysis:

1. Deduction under Section 10B of the Income-tax Act, 1961:
The Revenue contended that the CIT(A) erred in allowing the deduction under Section 10B by classifying the assessee's business activity as manufacturing without considering the applicability of Section 10B(7) read with Section 80IA(10). The Tribunal noted that the assessee's activity of mixing perfumery compounds resulted in a product commercially known differently from the raw materials, thus qualifying as manufacturing. The Tribunal upheld the CIT(A)'s decision, citing the jurisdictional High Court's ruling in favor of the assessee for a previous year.

2. Manufacturing activity versus processing activity:
The Revenue argued that the assessee's activity of mixing perfumery compounds should be considered processing, not manufacturing, due to the low manufacturing expenses (0.45% of sales). The Tribunal found that the assessee's activity met the criteria for manufacturing, as the end product was commercially different from the raw materials. The Tribunal dismissed the Revenue's ground, noting that lower manufacturing expenses resulting in higher profits should not be a cause for grievance unless positive material evidence suggests otherwise.

3. Comparison of profit margins with a sister concern:
The assessee contested the CIT(A)'s direction to restrict the claim under Section 10B to 19.06% of sales, excluding foreign exchange gain, based on the profit margins of a sister concern. The Tribunal found that the sister concern, under similar management and business conditions, disclosed a net profit of 19.03%, whereas the assessee disclosed 38.86% (25.09% excluding foreign exchange gain). The Tribunal upheld the CIT(A)'s decision, stating that the assessee disclosed more profit than ordinary, indicating a different intention, and no comparable case was examined by the Assessing Officer.

4. Computation of capital gains in the hands of the successor company:
The assessee challenged the CIT(A)'s observation regarding the computation of capital gains in the hands of the successor company, arguing that the CIT(A) had no jurisdiction to make such observations. The Tribunal noted that the Assessing Officer found the assessee firm merged with another company and then with a third company, violating the conditions of Section 47(xiii). The CIT(A) held that any capital gains should be assessed in the hands of the successor company under Section 47A(3). The Tribunal found no infirmity in the CIT(A)'s conclusion, affirming that the issue was raised before the CIT(A) and his direction was within the legal framework.

Conclusion:
Both the appeals of the Revenue and the assessee were dismissed. The Tribunal upheld the CIT(A)'s decisions on all grounds, finding no merit in the arguments presented by either party. The order was pronounced in the open Court on 25th November 2014.

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