2019 (11) TMI 603 - HC - Income Tax

Deduction u/s 80IB - Whether process undertaken by its industrial undertakings during the Assessment Year 2002-03 was not manufacturing process but only a process of testing optical fiber cable or trial production? - HELD THAT - ITAT upon appreciation of entire material on record has noted that the finished products manufactured and sold by the Appellant during the AY 2002-03 were in fact manufactured on the basis of purchase orders already received. Admittedly, the price at which the Appellant procured the material and the price at which the Appellant sold the material after value additions to the purchasers on the basis of purchase orders is almost double. ITAT has also noted that absolutely there is no evidence was produced on record that the processes undertaken in AY 2002-03 were in the nature of testing or trial production. No contemporaneous report of such trial production or testing were produced by the Appellant. No reports of production staff for testing were ever produced. According to us, all this material is more than sufficient to sustain the findings of fact recorded by the Assessing Officer and ITAT. It is not possible for us to say that the finding of fact recorded by the two authorities is vitiated by perversity or that the inferences drawn by the two authorities are not legal inferences that could have been drawn in the matter of this nature. In fact, the material on record suggests that prior to the amendment by Finance Act, 2002 in Section 80IB(4), the Appellant had declared the date that the Appellant's industrial undertakings began manufacture was 26th March, 2002. After the amendment of extended date for beginning of manufacture upto 31st March, 2004, the Appellant sought to contend that the manufacture began for the first time at its industrial undertakings only on 1st February, 2003. The ITAT has rightly observed that the Appellant has been shifting the stances. Such shifting of stances clearly amounts to approbation and reprobation. Even if the returns filed by the Appellant or declarations made by the Appellant are to be excluded from consideration, rest of the material on record also does not support the Appellant's contention that the processes undertaken during the Assessment Year 2002- 03 were in the nature of testing or trial run is only involvement, there is no element of manufacture. Accordingly, the first substantial question of law is required to be answered against the Appellant and in favour of the Revenue. Taking into consideration the findings of fact recorded by the AO and the ITAT that the manufacturing in the present case actually commenced in the AY 2002-03 and not in the Assessment Year 2003-04. Even this substantial question of law will have to be decided against the Appellant and in favour of the Revenue. It is pertinent to note that the findings of fact is not at all vitiated by any perversity and therefore, it cannot be said that the ITAT was not justified in holding that the Assessment Year 2002-03 is the final Assessment Year as contemplated under clause (c) of sub-section 14 of Section 80IB of IT Act. Third substantial question of law is again required to be answered against the Appellant and in favour of the Revenue because the substantial question of law seems to proceed on the basis that there was no dispute that the process of purchasing the material by the Appellant from open market was only for the purpose of testing optical fiber cable. The material on record as noted earlier establishes that there was manufacture involved and the process undertaken by the Appellant during the Assessment Year 2002-03 was not restricted to mere testing or trial run. The findings of fact in this regard are amply borne out from the material on record and consequently are not vitiated by any perversity or absurdity.

Summary

Issues Involved:
1. Justification of the Appellate Tribunal's decision regarding the manufacturing process under Section 80IB of the Income Tax Act.
2. Determination of the initial Assessment Year under Section 80IB of the Income Tax Act.
3. Classification of the testing process of optical fiber cables as manufacturing.

Issue-wise Detailed Analysis:

1. Justification of the Appellate Tribunal's Decision Regarding the Manufacturing Process:
The primary issue was whether the process of testing optical fiber cables amounted to manufacturing under Section 80IB of the Income Tax Act. The Assessee argued that the activities in the Assessment Year (AY) 2002-03 were merely for testing or trial production, not manufacturing. They cited "CIT Vs. Hindustan Antibiotics Ltd." to support their claim that trial production does not constitute manufacturing. However, both the Assessing Officer (AO) and the Income Tax Appellate Tribunal (ITAT) found that the Assessee's activities in AY 2002-03 involved actual manufacturing and sale of finished products for profit, based on purchase orders received. The court concluded that the findings of fact by the AO and ITAT were not perverse and were supported by substantial evidence, including declarations made by the Assessee to various authorities indicating the commencement of manufacturing in AY 2002-03.

2. Determination of the Initial Assessment Year:
The second issue was whether AY 2002-03 or AY 2003-04 should be considered the initial Assessment Year under Section 80IB. The AO and ITAT determined that manufacturing began in AY 2002-03 based on the Assessee's own declarations and the sale of finished products. The Assessee contended that actual manufacturing started in AY 2003-04, but the court found no evidence to support this claim. The court noted that the Assessee had shifted its stance over time, which amounted to approbation and reprobation. Thus, the court upheld the ITAT's finding that AY 2002-03 was the initial Assessment Year.

3. Classification of the Testing Process as Manufacturing:
The third issue involved whether the testing of optical fiber cables purchased from the open market and their subsequent sale constituted manufacturing. The Assessee argued that these activities were merely for testing purposes. However, the AO and ITAT found that the Assessee had made significant value additions to the purchased materials, resulting in the production of finished goods sold for profit. The court observed that there was no evidence to suggest that the activities were limited to testing or trial production. Consequently, the court concluded that the activities in AY 2002-03 amounted to manufacturing, and the substantial question of law was answered against the Assessee.

Conclusion:
The court dismissed the appeal, holding that the findings of fact by the AO and ITAT were not perverse and were supported by substantial evidence. The court emphasized that the Assessee's activities in AY 2002-03 constituted manufacturing, and AY 2002-03 was the initial Assessment Year under Section 80IB. The appeal was dismissed with no order as to costs.