2018 (4) TMI 982 - AT - Income Tax

Granting deduction u/s 10B - scope of manufacturing activities - Held that - The assessee was given deduction u/s 10B of the Act by the revenue commencing from Asst Years 2003-04 to 2010-11. In fact based on the assessment framed for the Asst Year 2011-12, the assessments for the earlier years were reopened wherever possible, based on the same reasoning given in Asst Year 2011-12, and in the re-assessments completed, the ld AO had granted deduction u/s 10B of the Act to the assessee. Hence we hold that the very basis on which the ld AO had held that assessee is not a manufacturer and consequentially not eligible for deduction u/s 10B of the Act stands nullified by his own re-assessment orders passed for the Asst Years 2007-08, 2008-09 and 2010-11. For the Asst Year 2009-10, though the AO again took a different stand and denied the benefit of deduction u/s 10B of the Act to the assessee, the same was duly granted to the assessee by the ld CITA vide his order dated 24.6.2016. The ld AR stated that this order of ld CITA has been accepted by the revenue by not preferring further appeal to this tribunal. Hence the very basis or foundation on which the ld AO denied the benefit of deduction u/s 10B of the Act stood nullified by his own orders or the order of his higher authority. These facts were not controverted by the revenue before us. The facts for the year under appeal are not different from the earlier years wherein relief was granted to the assessee. Assessee is indeed entitled for deduction u/s 10B of the Act for the Asst Year 2011-12 also and the same has been rightly granted by the ld CITA and accordingly we do not deem it fit to interfere with the order of the ld CITA. Accordingly, the grounds raised by the revenue are dismissed.

Issues Involved:
1. Eligibility for Deduction under Section 10B of the Income Tax Act.
2. Existence of Manufacturing Activity.
3. Formation of the Unit by Splitting or Reconstruction.
4. New Facts Established from Survey Operation.
5. Application of the Principle of Consistency.

Detailed Analysis:

1. Eligibility for Deduction under Section 10B of the Income Tax Act:
The primary issue is whether the Commissioner of Income Tax (Appeals) [CITA] was justified in granting the deduction under Section 10B of the Income Tax Act. The assessee, a partnership firm engaged in the manufacturing and export of readymade garments, claimed a deduction of ?7,26,56,048 under Section 10B. The Assessing Officer (AO) denied this deduction, arguing that the assessee did not engage in manufacturing activities. However, the CITA granted the deduction, observing that the assessee had the necessary infrastructure and recognition as a 100% Export Oriented Unit (EOU) by the Development Commissioner, Falta Exports Processing Zone, and had complied with the basic requirements for manufacturing and exporting.

2. Existence of Manufacturing Activity:
The AO contended that the assessee was not engaged in manufacturing, as it merely purchased T-shirts from a sister concern and exported them after adding tags. The CITA, however, found that the assessee undertook significant manufacturing processes, including design development, embroidery, fixing accessories, final sewing, industrial pressing, testing, packing, and labeling. The CITA cited various judicial precedents to support the view that these activities constituted manufacturing, leading to a new and distinct product.

3. Formation of the Unit by Splitting or Reconstruction:
The AO suggested that the assessee's unit was formed by splitting or reconstructing an existing business, which would disqualify it from claiming the deduction under Section 10B. The CITA rejected this argument, noting that the unit had been approved as a 100% EOU and had undergone changes in name and address without reconstitution. The CITA found no evidence of splitting or reconstruction.

4. New Facts Established from Survey Operation:
The AO conducted a survey under Section 133A and concluded that the assessee was not engaged in manufacturing. The CITA noted that the survey was conducted more than two years after the unit had ceased manufacturing activities and found no new evidence from the survey to support the AO's conclusions. The CITA emphasized that the presence of the parent concern in the same business and the change of name were already disclosed in past assessments.

5. Application of the Principle of Consistency:
The CITA highlighted the principle of consistency, noting that the assessee had been granted the deduction under Section 10B in previous assessment years (2003-04 to 2010-11) without dispute. The AO had reopened assessments for earlier years based on the same reasoning but ultimately granted the deduction in reassessments for 2007-08, 2008-09, and 2010-11. The CITA cited judicial precedents to argue that once a deduction is allowed in the initial years, it should not be denied in subsequent years unless there are significant changes in facts.

Conclusion:
The Tribunal upheld the CITA's decision to grant the deduction under Section 10B, dismissing the revenue's appeal. The Tribunal found that the assessee was engaged in manufacturing activities and had been consistently granted the deduction in previous years. The AO's basis for denying the deduction was nullified by reassessment orders and the CITA's findings. The principle of consistency and the lack of new evidence from the survey operation further supported the assessee's claim for the deduction.

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