2000 (9) TMI 217 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility for exemption under Section 10A(2) of the Income-tax Act.
2. Whether the assessee engaged in manufacturing, production, or processing activities.
3. Validity of sales to partners and subsequent claims under Section 80HHC.
4. Compliance with government notification dated 6-4-1984 for Section 10A benefits.
5. Assessment of profits in the hands of the assessee-firm versus partners.

Detailed Analysis:

1. Eligibility for exemption under Section 10A(2) of the Income-tax Act:
The Revenue contended that the assessee did not fulfill the conditions stipulated in Section 10A(2). The Tribunal observed that the purpose of Section 10A was to promote industrial activity in under-developed areas and not to impose unnecessary restrictions. The Tribunal cited Circular No. 308 dated 29-6-1981, which emphasized the goal of economic development and industrialization of backward areas. The Tribunal concluded that the assessee met the conditions under Section 10A(2), and no additional conditions should be imposed.

2. Whether the assessee engaged in manufacturing, production, or processing activities:
The Revenue argued that the assessee did not engage in manufacturing activities. The Tribunal examined the manufacturing process described by the assessee, which involved converting terry towel and bed-sheeting fabric into finished products. The Tribunal referred to Section 10A(8) Explanation (iii) and relevant case laws, including CIT v. N.C. Budharaja & Co. and CIT v. J.R. Kharwar & Sons, to conclude that the activities performed by the assessee constituted "manufacture" as defined in the Act. The Tribunal noted that the assessee incurred significant expenses on materials and fabrication, supporting the claim of manufacturing activity.

3. Validity of sales to partners and subsequent claims under Section 80HHC:
The Revenue argued that the assessee sold goods to its partners, who then claimed benefits under Section 80HHC, thus disqualifying the assessee from claiming exemption under Section 10A. The Tribunal referred to the decision in Jindal Exports (P.) Ltd v. Asstt. CIT, which held that deduction under Section 80HHC could not be denied simply because the assessee enjoyed a tax holiday under Section 10A. The Tribunal emphasized that the claim under Section 80HHC by the partners did not affect the assessee's eligibility for exemption under Section 10A.

4. Compliance with government notification dated 6-4-1984 for Section 10A benefits:
The Revenue contended that the assessee did not comply with the conditions specified in the government notification dated 6-4-1984. The Tribunal noted that the requirements for availing benefits under Section 10A were clearly laid out in the Act and relevant circulars. The Tribunal concluded that the conditions in the notification were for different benefits and did not affect the assessee's claim under Section 10A. The Tribunal emphasized that the administrative requirements of different ministries should not be conflated with the conditions under the Income-tax Act.

5. Assessment of profits in the hands of the assessee-firm versus partners:
The Revenue challenged the CIT(A)'s decision to assess profits in the hands of the assessee-firm substantively. The Tribunal upheld the CIT(A)'s decision, noting that the assessee met the conditions for exemption under Section 10A and that the profits should be assessed in the hands of the assessee-firm. The Tribunal rejected the Revenue's contention that the profits belonged to the partners.

Conclusion:
The Tribunal dismissed the appeals of the Revenue, confirming that the assessee was eligible for exemption under Section 10A, engaged in manufacturing activities, and that the profits should be assessed in the hands of the assessee-firm. The Tribunal also clarified that compliance with the government notification dated 6-4-1984 was not necessary for claiming benefits under Section 10A.