2018 (10) TMI 1260 - AT - Income Tax

Deduction u/s 80IC - proof of manufacturing activity - as per revenue assessee failed to prove that actually 8,57,826 watches were manufactured in a year with just 13 employees, who are not professionally qualified and just with minimal electric consumption - CIT-A allowed claim - Held that - We find that the resultant end product is commercially known differently in the trading world, therefore, certainly it can be said that the activity of the assessee amounts to manufacture, consequently, entitled to deduction u/s 80IC because, assembling of various parts in a specified manner and the net results into watches which are used by the public at large for different purposes and is commercially known differently, therefore, it amounts to manufacturing. The resultant end product is outcome of combination of efforts with the help of men and machine. So far as, assembling is concerned, the assessee gave a live demonstration in the court room with respect to the process of assembling, wherein, only some screw were tightened up of already manufactured parts and the end product resulted into a watch. At this stage, the assessee, stated that the assessee is merely screwing up some parts/components, used for manufacturing of the watches. So far as, consumption of electricity is concerned, it was explained that the electricity is used only for light purposes and it is not the case that some machinery used in the process rather broadly the screw drivers are used. Also explained that clearance is granted by the check post by the Excise and the VAT department for raw material as well as for finished watches/end product and the sales tax returns and excise returns filed by the assessee for every quarter has been accepted by the receptive Department. The assessee, during hearing before us, also filed the photocopy of the wages register to demonstrate that employees were employed and due wages were paid, therefore, it cannot be said that the assessee is not dong manufacturing activity. So far as, carrying forward losses of the unit eligible for 80IC deduction is concerned, the issue has been dealt with in para 2.3.7 of the impugned order in which also, we find no infirmity. Thus, the stand of the Ld. Commissioner of Income Tax (Appeal) is affirmed.- Decided against revenue.

Issues Involved:
1. Eligibility for deduction under section 80IC of the Income Tax Act, 1961.
2. Actual manufacturing activity conducted by the assessee.
3. Consumption of electricity and number of employees.
4. Typographical error in the audit report.
5. Carry forward of losses from the unit eligible for 80IC deduction.

Detailed Analysis:

1. Eligibility for Deduction under Section 80IC:
The primary issue was whether the assessee was eligible for the deduction under section 80IC of the Income Tax Act, 1961. The assessee claimed a deduction amounting to ?1,98,73,453/- under this section, which was initially denied by the Assessing Officer (AO) on the grounds that no actual manufacturing activity was conducted. The Commissioner of Income Tax (Appeal) [CIT(A)] reversed this decision, allowing the deduction. The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee's unit was located in a notified industrial area and engaged in manufacturing activities, thereby qualifying for the deduction under section 80IC.

2. Actual Manufacturing Activity Conducted by the Assessee:
The AO contended that the manufacturing of 8,57,826 watches with just 13 employees and minimal electric consumption was not feasible, suggesting that no manufacturing activity was actually conducted. However, the CIT(A) and the Tribunal found that the assessee was merely assembling parts of watches, which did not require sophisticated machinery or high electricity consumption. The Tribunal noted that the end product, watches, was commercially known differently from its components, thus qualifying as manufacturing. The Tribunal cited several judicial precedents to support the view that assembling parts to produce a commercially distinct product constitutes manufacturing.

3. Consumption of Electricity and Number of Employees:
The AO argued that the low electricity consumption and the small number of employees indicated that no manufacturing activity was conducted. The assessee countered that the manufacturing process involved simple assembly work, which did not require significant electricity usage. The Tribunal accepted the assessee's explanation that the unit operated for only eight hours a day, leading to lower electricity consumption. The Tribunal also noted that the assessee maintained a wage register and provided evidence of raw material purchases and sales, supporting the claim of manufacturing activity.

4. Typographical Error in the Audit Report:
The AO pointed out a typographical error in the audit report, where the auditor mistakenly mentioned that the unit was covered under section 80IC(2)(b)(ii) instead of 80IC(2)(a)(ii). The CIT(A) and the Tribunal held that this typographical error could not be a basis for denying the deduction. The Tribunal referenced the Bombay High Court's decision in Sanchit Software and Solutions Pvt. Ltd. vs. CIT, which stated that the Income Tax Department should not take advantage of an assessee's mistakes to deny legitimate claims.

5. Carry Forward of Losses from the Unit Eligible for 80IC Deduction:
The CIT(A) directed the AO to adjust the carried forward losses from the unit eligible for 80IC deduction against the profits of the current year before allowing the deduction. The Tribunal found no infirmity in this direction and upheld the CIT(A)'s decision.

Conclusion:
The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s order, allowing the deduction under section 80IC. The Tribunal concluded that the assessee's activities constituted manufacturing, the typographical error in the audit report was not a valid ground for denial, and the adjustment of carried forward losses was correctly directed. The decision emphasized the principle that beneficial provisions of the tax law should be interpreted in favor of the assessee when the conditions are substantially met.

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