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2006 (10) TMI 193 - AT - Income TaxExemption u/s 10B Or Deduction u/s 80HHC - Manufacture Or Production - manufacturing/exporting of Iron/Wooden Handicrafts - 100% Export Oriented Undertaking - Exim Policy 1997-2002 - Revision u/s 263 - whether the ld. CIT was justified in holding that the assessee had not manufactured or produced any article or thing and hence the claim for exemption u/s 10B was not sustainable? - HELD THAT - We find that the assessee has purchased fully manufactured but unpolished handicraft items, such as dining table, almirah, T.V. cabinet etc., on which it undertook the processes of surface smoothening, drying and polishing etc. On careful consideration we find that the activities carried out by the assessee are in the nature of different stages of polishing and packing. Thus, the activities carried out by the assessee though amount to 'processing', but fall short of 'manufacture or producing an article or thing'. If the contention of the ld. A.R. for adoption of term 'manufacture' given by Exim Policy is accepted, and such a wider meaning is assigned to include the processing not amounting to manufacture within its purview, the provisions of Explanation 4 to section 10B would be rendered a nullity, which obviously cannot be the case. The presence of Explanation 4 in this section makes it explicitly clear that the word 'manufacture' has to be read in the sense excluding the mere processing of goods, that does not amount to manufacturing or bringing a new article in existence. In the like manner, the further contention that under the Sales Tax Act the term 'manufacture' has been used in a different manner does not hold good when the term 'manufacture' comes up for interpretation in the context of section 10B. Similar view has been expressed in the case of Arihant Tiles Marbles (P.) Ltd. 2006 (6) TMI 157 - ITAT JODHPUR in the context of section 80-IA. We, therefore, hold that the assessee was not manufacturing or producing any article or thing as contemplated u/s 10B but was simply engaged in the polishing and finishing of the fully manufactured items purchased by it. Consequently, the benefit of exemption u/s 10B was rightly not available to the assessee and the ld. CIT was fully justified in his view on this aspect of the matter. Conditions of section 10B(2)(ii) and (iii) - Here we find that an incorrect finding has been recorded- by the ld. CIT for the reason that the assessee was in existence since 1997 and was doing business of purchase and sale of items by getting the processing done from outside parties. It is in the preceding year that the assessee claimed to have set up its own unit, obtained certificate from competent authority on 28-3-2000. We have further gone through the relevant material on record from which it is manifest that the assessee was already in existence as can be seen from the copy of trading, P L account etc., for assessment years 1999-2000 and 2000-01. On the contrary, M/s. Kwal Pro International, taken note of by the ld. CIT as having been availing deduction under section 80HHC in the past, in fact came to be established only on 11-8-2000 as is evident from the copy of its partnership deed onwards of the PB. The ld. D.R. has not controverted this factual position. Thus, we find no difficulty in holding that the ld. CIT erred in coming to the conclusion that the second condition laid down in section 10B was not fulfilled. The ld. D.R. can elucidate the points considered by the ld. CIT, but no new point, different from those considered by the ld. CIT can be argued at the appellate stage to drive home the contention that the assessment order is erroneous, as it would amount to the ld. D.R. stepping into the shoes of the ld. CIT. Hence we refuse to consider this aspect of the matter. We, therefore, find that out of the three issues, on the basis of which revisional proceedings were started and order was passed u/s 263, the latter two are without any force but the impugned order is sustainable on the non-fulfilment of first condition, viz., no manufacture or production of an article or thing by the assessee. Whether the revisional power was properly exercised - We reiterate the settled legal position that in order to take action u/s 263, the order of the Assessing Officer should not only be erroneous but also prejudicial to the interest of the Revenue. The twin conditions are to be satisfied simultaneously. First condition is that the order passed by the Assessing Officer should be erroneous. By erroneous we refer not only to the wrong decision by the Assessing Officer but also to the instances in which he has not applied his mind to the material placed before him before accepting the assessee's claim. The Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT 2000 (2) TMI 10 - SUPREME COURT held that an incorrect assumption of facts or an incorrect application of law will satisfy the requirements of the order being erroneous. We, therefore, hold that the ld. CIT was fully justified in assuming revisional jurisdiction. Exemption u/s 10B v. Deduction u/s 80HHC - We are not inclined to accept the opinion of the ld. CIT for denying deduction u/s 80HHC simply on the ground that the assessee had claimed exemption u/sn 10B, which was not allowed by him. We further note that the parameters for the grant of deduction u/s 80HHC are different from those of section 10B. Moreover, the ld. CIT has himself mentioned in the impugned order that the assessee was allowed deduction u/s 80HHC in the past. By setting aside the impugned order on this score and without expressing opinion on the availability of deduction, we direct the ld. CIT to examine the assessee's claim for the benefit u/s 80HHC subject to the fulfilment of the conditions laid down under the section. Needless to say the assessee would be allowed reasonable opportunity of being heard. In the result, the appeal is partly allowed for statistical purposes.
Issues Involved:
1. Denial of exemption under section 10B of the Income Tax Act. 2. Conditions of section 10B(2)(ii) and (iii). 3. Whether the revisional power was properly exercised. 4. Exemption under section 10B vs. Deduction under section 80HHC. Issue-wise Detailed Analysis: I. Denial of Exemption under Section 10B of the Act: The primary issue is whether the assessee is entitled to exemption under section 10B. The CIT denied the exemption, arguing that the assessee was not engaged in manufacturing or producing any article or thing, but was merely trading. The CIT noted that the assessee's activities, such as grinding, surface smoothing, chemical dipping, drawing, polishing, and packaging, did not amount to manufacturing or production. The CIT relied on precedents from CIT v. Sacs Eagles Chicory and CIT v. Lucky Mineral (P.) Ltd., which emphasized that mere processing does not equate to manufacturing. The CIT also observed that the assessee's major expenses were towards packaging and no wages were shown, concluding that the assessee was engaged in trading activities. The assessee argued that it was a 100% Export Oriented Unit (EOU) registered with Noida Export Processing Zone and that its processes amounted to manufacturing. The assessee cited the Exim Policy 1997-2002 and the Supreme Court decision in Vadilal Chemicals Ltd v. State of A.P., which defined 'manufacture' broadly to include processes like repacking and polishing. However, the Tribunal held that the assessee's activities did not result in a new product with a distinct commercial identity. The Tribunal cited various legal precedents, including the Supreme Court's decisions in Pio Food Packers and Indian Hotels Co. Ltd. v. ITO, which clarified that 'manufacture' involves a transformation resulting in a new and distinct product. The Tribunal concluded that the assessee's activities amounted to processing, not manufacturing or production, and thus did not qualify for exemption under section 10B. II. Conditions of Section 10B(2)(ii) and (iii): The CIT also considered whether the assessee's unit was formed by splitting or reconstructing an existing business, which would disqualify it from exemption under section 10B(2)(ii). The CIT noted that the unit was created on paper to switch from section 80HHC to section 10B benefits. However, the Tribunal found that the assessee was in existence since 1997 and was not formed by splitting the business of Kwal Pro International, which was established only in 2000. Thus, the Tribunal held that the CIT erred in concluding that the second condition was not fulfilled. Regarding the condition under section 10B(2)(iii) that the undertaking should not be formed by transferring old machinery, the CIT argued that the assessee had no machinery of its own. The Tribunal found that the assessee had acquired new machinery worth Rs. 3,23,941 in the preceding year, thus fulfilling this condition. III. Whether the Revisional Power was Properly Exercised: The assessee contended that the CIT exceeded his revisional powers under section 263, as the Assessing Officer (AO) had taken a plausible view. The Tribunal noted that for the CIT to exercise revisional power, the AO's order must be both erroneous and prejudicial to the revenue. The Tribunal found that the AO had accepted the assessee's claim without proper inquiry into whether the assessee's activities amounted to manufacturing or production. The Tribunal cited the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT, which held that an order passed without applying mind is erroneous. Thus, the Tribunal upheld the CIT's exercise of revisional power. IV. Exemption under Section 10B vs. Deduction under Section 80HHC: The assessee argued that if exemption under section 10B was denied, it should be allowed deduction under section 80HHC. The CIT rejected this, stating that the assessee could not switch claims after assessment completion. The Tribunal disagreed, stating that if a larger benefit is denied, a smaller benefit should be considered if legally permissible. The Tribunal directed the CIT to examine the assessee's claim for deduction under section 80HHC, subject to the fulfilment of conditions laid down under that section. Conclusion: The Tribunal partly allowed the appeal for statistical purposes, upholding the CIT's denial of exemption under section 10B but directing the CIT to consider the assessee's claim for deduction under section 80HHC.
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