2013 (8) TMI 587 - AT - Income Tax

Deduction u/s 80IC - Manufacturing activity - CIT allowed deduction - Held that - The assessee has detailed the procedure followed to bring into existence the final product. The process being carried out by the assessee in assembling of Torch Light amounts to manufacturing activity. A new and distinct product comes into existence after integration of various small components into one product having distinct name, character and use - Therefore assessee is carrying a manufacturing activity - Decided against Revenue. Deduction u/s 80IC - Manufacturing activity in Dehradun - Held that - The assessee in order to claim benefit u/s. 80IC of the Act, has either invoiced finished goods manufactured at Chennai from Dehradun or has debited the expenses relating to Dehradun unit to Chennai unit - Despite the fact that there are two units at Chennai, the volume of sales from Dehradun unit is seven times more than the combined sale of units at Chennai - assessee is misusing the benevolent provisions of law at the cost of Government exchequer. The deduction u/s. 80IC is being granted to the units set up in certain specified areas which are industrially backward - assessee is invoicing majority of finished goods from Dehradun whereas that substantial production is carried out at Chennai. The assessee has adopted colourable devise to take undue advantage of benevolent provisions of the Act - Decided in favour of Revenue.

Summary

Issues Involved:
1. Whether the assessee is carrying on any manufacturing activity.
2. Whether the manufacturing activity, if any, is carried out at Chennai or Dehradun unit.

Detailed Analysis:

1. Whether the assessee is carrying on any manufacturing activity:

The primary issue to determine was if the assessee was engaged in manufacturing activities. The term 'Manufacture' is defined under Section 2(29BA) of the Income Tax Act, 1961, which includes transformation of an object into a new and distinct object having a different name, character, and use, or bringing into existence a new object with a different chemical composition or integral structure.

The assessee detailed the process of assembling components to produce 'Torch Lights,' which included multiple steps involving riveting, soldering, heat sealing, and testing. The Tribunal concluded that the process described by the assessee met the definition of 'Manufacture' as it resulted in a new and distinct product, thus affirming that the assessee was indeed engaged in manufacturing activity.

2. Whether the manufacturing activity, if any, is carried out at Chennai or Dehradun unit:

The second issue was to ascertain whether the substantial manufacturing activity was conducted at the Dehradun unit, which is eligible for tax exemption under Section 80IC, or at the Chennai unit. The Assessing Officer provided a detailed break-up of sales and expenses for both units, highlighting significant disparities in cost of production, power consumption, and machinery value between the Chennai and Dehradun units.

The Tribunal noted that the cost of production at the Chennai unit was higher than its sales, while the Dehradun unit showed higher sales with significantly lower production costs and expenses. The Tribunal found the explanations provided by the assessee for these discrepancies unconvincing, particularly regarding the lower power consumption and maintenance costs at Dehradun despite its higher sales volume.

The Tribunal concluded that the assessee was likely transferring finished goods from Chennai to Dehradun to claim the tax deduction under Section 80IC, thereby misusing the provisions intended for industrially backward areas. Consequently, the Tribunal held that the assessee was not entitled to the deduction under Section 80IC and set aside the orders of the Commissioner of Income Tax (Appeals).

Conclusion:

The Tribunal ruled that the assessee was engaged in manufacturing activities but was not entitled to claim deductions under Section 80IC as the substantial manufacturing was not carried out at the Dehradun unit. The appeals filed by the Revenue were allowed, and the orders of the CIT(Appeals) were set aside.