2017 (3) TMI 1951 - HC - Income Tax

Exemption u/s 10BA - as argued assessee was not fulfilling the required conditions which was proved during the course of survey proceedings and was evident from the purchases made through form No.17 of sales tax - ITAT allowed exemption - HELD THAT - The contentions which are raised by the department regarding error being committed by the Tribunal, in our opinion, is not sustainable. The analogy which has been adopted by the tribunal is required to be affirmed and decision of earlier judgment of Supreme Court in Arihant Tiles Marbles 2009 (12) TMI 1 - SUPREME COURT and the other judgments are to be followed. We are of the opinion that issue is required to be answered in favour of the assessee and against the department.

Summary

Issues Involved:
1. Eligibility for exemption under Section 10BA of the Income Tax Act.
2. Factual determination of manufacturing activity.
3. Interpretation of "manufacture" and "production" under tax laws.
4. Compliance with conditions specified under Section 10BA.
5. Reliance on previous judicial decisions.

Detailed Analysis:

1. Eligibility for exemption under Section 10BA of the Income Tax Act:

The appellant claimed exemption under Section 10BA for profits from the business of manufacturing and trading wooden furniture. The Assessing Officer (AO) disputed this, arguing that the appellant was not engaged in manufacturing but merely polishing and packing readymade furniture for export. The Tribunal, however, held that the appellant was eligible for the exemption under Section 10BA, interpreting the rule and form requirements liberally to support the appellant's claim.

2. Factual determination of manufacturing activity:

The AO's assessment included a detailed analysis, showing that 76% of the expenditure was on packing and polishing, indicating that no new items were manufactured. The Tribunal countered this by stating that the appellant was entitled to make changes to the products to make them exportable, thus engaging in manufacturing activities. The Tribunal emphasized that the use of machinery for wood preparation was a preparatory stage before artisans' handwork, which qualified as manufacturing.

3. Interpretation of "manufacture" and "production" under tax laws:

The Tribunal and subsequent judgments relied on the broader interpretation of "production" as compared to "manufacture." Citing the Supreme Court's decision in Arihant Tiles & Marbles, the Tribunal noted that activities resulting in a new and distinct commodity, such as converting marble blocks into polished slabs and tiles, constituted manufacturing or production. This interpretation was pivotal in affirming the appellant's eligibility for the exemption.

4. Compliance with conditions specified under Section 10BA:

The survey conducted under Section 133A at the appellant's premises indicated non-compliance with Section 10BA conditions. However, the Tribunal found that the appellant had employed more than 20 workers throughout the year, as required under Section 10BA(2)(e), and that the activities undertaken constituted manufacturing. The Tribunal dismissed the Revenue's reliance on sales tax laws, focusing instead on the Income Tax Act's provisions and the factual matrix of the appellant's operations.

5. Reliance on previous judicial decisions:

The Tribunal and the High Court relied heavily on previous decisions, particularly the Supreme Court's ruling in Arihant Tiles & Marbles, which supported a liberal interpretation of incentive provisions under tax laws. The High Court also referenced its own decision in Commissioner of Income Tax, Jaipur-II vs. M/s Manglam Arts, affirming that the processes described by the Tribunal fell within the scope of Section 10BA. Other judgments cited, such as Grace Exports vs. ITO and Income Tax Officer vs. Arihant Tiles & Marbles (P) Ltd., reinforced the view that activities adding value to raw materials constituted manufacturing.

Conclusion:

The High Court dismissed the appeal, affirming the Tribunal's decision that the appellant was eligible for the exemption under Section 10BA. The court emphasized the need for a liberal interpretation of incentive provisions and upheld the Tribunal's findings on the factual and legal aspects of the case. The appeal was decided in favor of the assessee, reinforcing the broader interpretation of "manufacture" and "production" under the Income Tax Act.