2017 (2) TMI 1008 - AT - Income Tax

Disallowance of deduction u/s 80IB - proof of manufacturing activity - Held that - The facts emerge, the Audit Report/From No.10CCB issued by the CA is unsigned and undated. There is no other evidence placed by the assessee on the paper-book to corroborate the fact that the manufacturing activity of the assessee concern commenced from 28.03.2004. Besides, according to survey reports, the assessee could not demonstrate any manufacturing activity. Due to unsigned and unverified 10CCB certificate of CA, the verification of schedule D of fixed asset also could not be made. The survey statement has not been filed by the assessee in the paper-book. Therefore, it could not be ascertained as to whether the assessee or its employees narrated any facts at the time of survey. Unless the facts of the case are properly verified, the ratio of ITAT judgment in the case of M/s. Subhalachal Print & Pack 2009 (12) TMI 961 - ITAT AHMEDABAD wherein held activity of slitting itself involves different processes by which the character of the material is transformed into a different nature. The fact that the assessee is outsourcing certain processing activities does not disqualify the assessee to be placed in the status of a manufacturer, cannot be applied. In considered view, the facts of the case have not been properly appreciated which needs to be verified in order to arrive at proper finding of facts. Set aside the Revenue appeals back to the file of the ld. CIT(A) to decide the same afresh after verifying the relevant facts, survey material and statements, if any.

Summary

Issues Involved:
1. Deletion of disallowance of deduction under Section 80IB.
2. Allowance of deduction under Section 80IB on disallowance under Section 40(a)(ia).

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Deduction under Section 80IB:

The Revenue appealed against the deletion of disallowance of deduction under Section 80IB for the assessment years (AY) 2005-06, 2006-07, and 2007-08 for two group concerns. The Assessing Officer (AO) had disallowed the deduction on the grounds that the assessees did not carry out any manufacturing activity at the claimed premises. During a survey conducted on 17.03.2006, it was observed that only Division-II was operational, and no activities were conducted at Division-I. The AO found that the assessees did not employ the requisite number of workers and were merely preparing sales vouchers without actual production. The AO also noted discrepancies in the commencement date of manufacturing operations as certified by the Chartered Accountant (CA) and the actual operations, leading to the conclusion that no manufacturing activity was conducted.

The assessees contended that the factory was closed during the survey due to the Holi festival and provided documentary evidence, including electricity bills and wage registers, to support their claim of manufacturing activities. The CIT(A) allowed the deduction, stating that the records clearly established manufacturing activities and that the AO’s proposal to disallow profits based on average working was incorrect. The CIT(A) also noted that the payment of excise duty corroborated the manufacturing activities.

The Revenue argued that the CA’s certification of the commencement date was inconsistent and that the CIT(A) did not verify the change in the commencement date. The Revenue also contended that the survey evidence and impounded materials indicated no manufacturing activities and that the payment of excise duty did not conclusively prove manufacturing by the assessees.

The Tribunal observed that the audit report/Form No. 10CCB issued by the CA was unsigned and undated, and there was no corroborative evidence of the commencement date. The Tribunal noted that the facts were not properly verified and set aside the appeals to the CIT(A) for fresh consideration after verifying the relevant facts and survey materials.

2. Allowance of Deduction under Section 80IB on Disallowance under Section 40(a)(ia):

The Revenue also appealed against the CIT(A)’s direction to allow deduction under Section 80IB on the disallowance under Section 40(a)(ia) for non-deduction of TDS. The AO had disallowed the payments made to M/s. Honey Paper Tube (HPT) for job work, arguing that the assessees did not deduct TDS, indicating that the transactions were not genuine. The CIT(A) allowed the deduction, stating that the disallowance would result in an enhancement of manufacturing and business profits, which would still be eligible for deduction under Section 80IB.

The Revenue argued that the non-deduction of TDS indicated that the assessees were not engaged in genuine manufacturing activities and that the disallowance was rightly made. The Tribunal, noting that the facts were inter-connected with the allowability of deduction under Section 80IB, set aside the appeals to the CIT(A) for fresh consideration along with the main issue of deduction under Section 80IB.

Conclusion:

The Tribunal set aside all the Revenue’s appeals to the CIT(A) for fresh consideration after verifying the relevant facts, survey materials, and statements. The Tribunal directed the CIT(A) to decide the issues afresh, considering the proper verification of facts and evidence. All the Revenue’s appeals were allowed for statistical purposes.