2022 (5) TMI 668 - AT - Income Tax

Deduction u/s 10AA - Denial of claim as appellant is not carrying on the activity of manufacturing - as argued appellant is carrying on the activity of assembling and contract manufacturing at the factory. The word assembling is covered under definition of manufacturing as per SEZ rules, 2005 - HELD THAT - Undoubtedly, finished goods have moved out from the SEZ units only for the purpose of exports. We observe that the assessee has imported the key materials and sourced the local material thru their Mumbai unit and assembled the solar lantern, Ld AR demonstrated sample parts which goes into the lantern which consist of battery and other components which includes several tiny parts, which was assembled in the SEZ unit following a standard process. We observe that as per the definition of the manufacture, assemble or process which bring into existence, more of hands and less of machine work in the case of the assessee, new product namely solar lantern, which is distinct from the raw material used in the assembling of the lantern. Therefore, the process demonstrated by the Ld AR and process sheet shown by the assessee falls within the established definition of the Manufacture. The AO has raised doubt on the existence of the proper machinery compared to Mumbai units, we observe that the assembling process does not need much of the machinery except tools which is used to assemble the lantern. Ld AR demonstrated the purchase of tools in the expenses booked under the head consumables. Ld AR has elaborately addressed all the issues raised by AO and CIT(A). CIT(A) casually observed that import and export transactions are carried out on the basis of self-declaration, under mining the appointment of inspector for movement of various goods inside or outside the SEZ, without the knowledge and verification of the custom documents, nothing can be removed or deposited. There is fixed system and formalities prescribed in the SEZ manual. Revenue authorities cannot undermine the Customs formalities. Further we observe that the Mumbai unit has produced 68190 pcs during this year compared to 75680 pcs in the previous AY. It clearly shows that the Mumbai unit worked almost full capacity this year under consideration and presuming that the quantity exported by the SEZ unit must have produced in Mumbai unit is farfetched. As such, we are of considered view that the CIT(A) was not justified in denying the deduction under section 10AA. Further, the decisions relied upon by the Department Representative are actually distinguishable particularly on the aspect of assembly and process aspect. Accordingly, we direct the Assessing Officer to allow the deduction claimed under section 10AA Disallowance of labour charges - HELD THAT - We do not find any merit in the action of the Assessing Officer inasmuch as the assessee has actually availed the labour services for which necessary labour charges have been paid. The Assessing Officer and the Ld.CIT(A) has not disputed the aforesaid fact, however, made the disallowance only for the reason that some bills were raised in the name of husband. Further, the Assessing Officer has not allowed the assessee opportunity of cross examination and as such there is gross violation of principles of natural justice. Accordingly, we direct the Assessing Officer to delete the aforesaid disallowance. Appeal of assessee allowed.

Summary

Issues Involved:
1. Disallowance of the appellant's claim of ?10,94,26,870 under section 10AA.
2. Disallowance of labour charges amounting to ?13,91,286.

Issue-Wise Detailed Analysis:

1. Disallowance of the appellant's claim of ?10,94,26,870 under section 10AA:

The appellant, engaged in manufacturing and exporting portable plastic solar lanterns, claimed a deduction under section 10AA, which was disallowed by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO's reasons included the low value of fixed assets at the SEZ unit compared to the Mumbai unit, the SEZ unit's lack of sufficient infrastructure, and evidence suggesting that significant manufacturing activities were carried out at the Mumbai unit rather than the SEZ unit.

The CIT(A) agreed with the AO, emphasizing that there was no concrete evidence of actual manufacturing or assembly activities at the SEZ unit during the financial year. The CIT(A) also noted that the additional documents provided by the appellant did not convincingly demonstrate the nature and extent of the assembly activities at the SEZ unit. Furthermore, the CIT(A) observed that significant processes leading to the final product were carried out at the Mumbai unit, and the SEZ unit lacked the necessary infrastructure to be considered an independent manufacturing unit.

The appellant argued that the definition of "manufacture" under section 10AA includes "assemble," and they had indeed assembled various components to create the final product at the SEZ unit. They provided a detailed process of manufacturing solar lanterns, including procurement, inspection, sub-assembly, printing, final assembly, quality checks, and packaging. The appellant also highlighted that the SEZ unit primarily procured raw materials through imports and local purchases, and the manufacturing process required minimal machinery.

Upon reviewing the submissions and evidence, the Tribunal observed that the appellant had provided sufficient proof of manufacturing activities at the SEZ unit, including employee expenses, payment of provident fund, and transportation of raw materials and finished goods. The Tribunal noted that the assembly process did not require significant machinery, and the tools used were expensed under consumables. The Tribunal concluded that the appellant's activities at the SEZ unit met the definition of "manufacture" under section 10AA and directed the AO to allow the deduction of ?10,94,26,870.

2. Disallowance of labour charges amounting to ?13,91,286:

The AO disallowed labour charges of ?13,91,286 based on a sworn statement from Shri Hemant Shigwan, who denied carrying out any job work for the appellant and identified himself as a car driver. The AO concluded that the appellant had obtained bogus bills for claiming expenses. The CIT(A) upheld the disallowance, noting the lack of evidence to support the job work and the internal arrangement between Ms. Harshada Shigwan and her husband.

The appellant contended that Ms. Harshada Shigwan had indeed carried out the job work from her home after resigning from the company, and the bills were prepared by the manager due to her inability to do so in the prescribed format. The appellant argued that the AO did not provide an opportunity for cross-examination of Mr. Hemant Shigwan, which violated principles of natural justice.

The Tribunal found merit in the appellant's argument, noting that the appellant had actually availed the labour services and paid the necessary charges. The Tribunal observed that the AO and CIT(A) did not dispute the fact of availing labour services but disallowed the expenses solely based on the name on the bills. The Tribunal directed the AO to delete the disallowance of ?13,91,286, citing the violation of natural justice principles.

Conclusion:

The Tribunal allowed the appeal filed by the appellant, directing the AO to allow the deduction under section 10AA of ?10,94,26,870 and to delete the disallowance of labour charges amounting to ?13,91,286. The judgment emphasized the importance of adhering to principles of natural justice and the necessity of concrete evidence in tax assessments.