9911796707
TMI Blog2011 (10) TMI 499X X X X Extracts X X X X X X X X Extracts X X X X ..... uirements of S80-IB(2)(i)and (ii) respectively, is directly covered in favour of the appellant by ITAT, in the appellant's own case for A.Y. 2005-06 Conditions of S10BA(2)(d) - Held that:- Explanation (d) to S10BA requires the use of wood" as the main raw material, which means that there is no prohibition for some use of the other materials (other than the wood) in the manufacturing/production of the eligible articles or things. It is also observed that none of those articles/goods was found to be made up of metal alone. Further, requirement of aforesaid clause is that 90% or more of the "sales" during the relevant previous year should be by way of exports of the eligible articles or things and not the "sale proceeds received in convertible foreign exchange" during that year. Therefore, C&F expenses related to the forwarding of goods in India upto the sea port were to be included in the export turnover, thereby fulfilling requirement of 90% of export sales. Thus it is held that the appellant fulfilled the conditions of Sec 10BA(2)(a),(b),(c)&(d) hence, the appellant was entitled to the claimed deduction u/s 10BA - Decided in favor of assessee. Trading addition - rejection of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, vide letter dated 3.11.2008, the relevant part of which has been reproduced by the AO on pages 4 to 9 of the assessment order wherein the assessee claimed that he was fulfilling all the aforesaid conditions of S. 10BA of the I.T. Act. However, after considering the assessee's replies/explanations, the A O (as per his detailed discussion, contained in paras 5 to 5.6, on pages 10 to 29 of the assessment order), held that the assessee was not entitled to the claimed deduction of Rs. 62,72,439/- u/s 10BA of the I.T. Act. In this regard, it is observed that the AO made the said impugned disallowance of Rs. 62,72,439/-, because of the following reasons (summarized in brief): ( i ) As per clause (a) in S. 10BA (2) of the I.T. Act, it is required that the concern undertaking should manufacture or produce the eligible articles or things without the use of imported raw materials. However, the facts gathered from the assessment records of the assessee, enquired at the time of survey on 23.9.2008 and found during the course of assessment proceedings, showed that; ( a ) The assessee purchased finished goods and sold them. This fact was also mentioned in the audit report filed with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange in the nature of business and its modus operandi, except slight change in brand name from M/s Indian Art Palace to M/s The Art Palace. ( iii ) As per clause (c) of S. 10BA(2) of the I.T. Act, it was required that the undertaking should not have been formed by the transfer to a new business of machinery or plant previously used for any purpose. However, this condition was not fulfilled in this case because right from the beginning, the assessee had been using the machinery, which was previously used by M/s Indian Art Palace. In this regard, the relevant details proved the fact that use of old hired machinery was much more than the new machinery purchased by the assessee. ( iv ) Clause (d) of S. 10BA(2) of the I.T. Act required that 90% or more of assessee's sales, during the previous year relevant to the assessment year, were by way of exports of the eligible articles or things. Further, as per the definition of eligible goods, the goods must be made of wood, as raw material, but in the, case of the assessee, goods exported were not all of wood, as raw material. Many of the exported items were exclusively made of iron. Such export sales, approximately, amounted to Rs. 76,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earing to assessee cancelled the said assessment order vide his order dated 16-2-09 holding it as erroneous prejudicial to the interest of revenue giving reason that the A.O. allowed exemption u/s 80-IB of the I. T. Act, 61 to the assessee inspite of the fact that the assessee did not satisfy the conditions laid down in clause (i) and (ii) of sub-section (2) of section 80-IB of the I. T. Act. The Ld. A. O. also initiated proceedings u/s 147/148 of I. T. Act, 61 for A. Y. 2003-04 2004-05 for the same reason that exemption u/s 80-IB was wrongly allowed to assessee and completed reassessment u/s 147/148 vide assessment order(s) dated 27-08-09 and also completed de novo assessment for A. Y. 2005-06 pursuant to order of CIT - III, Jaipur u/s 263 vide assessment order dated 27-07-09 and disallowed claimed deduction u/s 80-IB in all the three assessment years. The assessee appealed to Hon'ble ITAT, Jaipur Bench, Jaipur against the order u/s 263 passed by CIT - III, Jaipur and Hon'ble ITAT vide its order dated 26-2-10 (in ITA No. 589/JP/2009) held that assessee fulfils all the conditions laid down in section 80-IB (i) and (ii) and so the A. O. rightly allowed deduction u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses mostly finished goods and exported them. A few purchases are made by the assessee of semi finished raw goods. On these goods the assessee carried out some artistic polishing, sanding, painting other work of art made them wooden handicraft of artistic value as per the specifications of foreign buyers. Assessee is simply carrying out trading activity and that cannot be considered as manufacturing activity. It is submitted that any process is a manufacturing process when it brings out a complete transformation for the whole component so as to produce a commercially different article or commodity. But that process itself may consist of several processes which may or may not bring about any change at every intermediate stage. But the activities or the operations may be so integrally connected that the final result is the production of a different commercially article. Therefore, the Supreme Court held that any activity or operation which is the essential requirement and is so related to the further operations for the end result would also be a process in or in relation to the manufacture. In the nutshell it can be concluded that any activity incidental or ancillary to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered as manufacturing done by assessee. In this connection it is submitted that these semi finished wooden articles were also got manufactured by assessee from contractors according to specifications given by him as per export orders received and thus those contractors were manufacturing these articles on behalf of assessee. As regards the artistic value of products manufactured by the assessee, it was found that the carpenter, workmen and craftsmen, etc., employed by the assessee through contractors were very creative, skilful and talented and they used to carve out new models on wooden boxes and wooden containers, etc. to be exported by the assessee and, thus, the aid of machines in said activity was secondary and real role was that of expert creative workmen with their dexterity, in view of above facts and circumstances, it was to be held that the assessee was manufacturing items of artistic value even after getting some process done on piece or job basis from outside but under his control and items so produced or manufactured would be treated as manufacture or production by the assessee. The reliance is placed on the decision of ITAT, Jaipur Bench, Jaipur in case of DCIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith other sentences of the note and with para - I of audit note suggests that it should be read as 'unit mostly exports finished goods'. In any case the facts on record supported with documents cannot be brushed aside simply due to an inadvertent audit note in report u/s 10BA(5). In support of our contention we have also obtained a clarification from accountant who prepared the said report u/s 10BA(5) and the same is submitted herewith. The second part of the condition mentioned in clause (a) of the sub-section (2) is that the manufacture or production must be of eligible articles or things. In para no. 5.1 (i), (ii), (iii), (iv) and (v) of assessment order, the Ld. A. O. alleged that the articles or things exported by the assessee are not covered by the definition of eligible articles or things as they are not handmade, are not of artistic value, they are simple furniture items available in any other reputed showroom some articles are made of iron. Ld. AO also alleged that almost entire ranges of goods exported by assessee are ordinarily furniture items which are commonly used in hotels or in daily use i.e. of utility purpose. The Ld. AO's contention that the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not possible to accomplish with hand, for that specific purpose manufacturing is done with machineries. It is a well known fact that no machine can give an antique look or create an artistic value of a product, ultimately what is required is that skills are need to be applied by the labour who are efficient enough to do so and if any work is done by qualified labour it cannot be said that it is machine made. Out the entire production expenses incurred during the year major portion is of wages which clearly indicates that the manufacturing process has been carried out by the assessee. The Ld. A.O.'s contended that Rs. 8,92,476/- are debited on account of electricity and Rs. 14,71,161/- are debited on account of gas and fuel. However Rs. 8,92,476/- does not includes electricity used by the machines. It also includes electricity consumed by other equipments in the factory. Further Rs. 1,47,116/- are debited on account of gas and fuel. As the production is carried out on large scale. It is not possible to carry out diminutive works like cutting, drying, smoothening, etc. by labour as it would be very time consuming and orders need to be completed within time frame given by the importer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be a decorative piece which is kept in museums or Art Galleries. The Oxford Advanced Learners Dictionary defines the word artistic as "Connected with art of artistic. Showing a natural skill in or enjoyment of art, especially being able to paint or draw well. Done with skill and imagination, attractive or beautiful" The Ld. A. O. is not a technical expert hence could not define art in any particular sense. The word artistic gives emphasis on art, creativity, and innovative work not on the purpose for which it is use. The goods so exported by the assessee have artistic value and a lot of precious and antique work has been carried out on them as its apparent from the photographs of the products. As per section 10BA there is no restriction on the use of goods. Though the goods may be Coffee table with shelf Dining Table, etc. but section does not provide that such goods cannot be exported. Only things that is to be taken care according to section 10BA is that the goods should be of artistic value. However, the utility element was included in the goods so produced because the goods will be demanded in the international market only if it contains some utility. Therefore in ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) of section 10BA is as under: - ( b ) It is not formed by splitting up or the reconstruction of a business already in existence. The A.O. stated that "This condition is not fulfilled because the business of assessee is only an extension of a very old existing business in the name of M/s Indian Art Palace, M/s Indian Act Palace was an old partnership firm in which family members of assessee were partners. In nutshell, the same business continued in the name of M/s The Art Palace, as proprietary concern of the assessee. The feature characteristic of the continuance of the old business is that: ( i ) The business was started in the same business premises and is still continuing, primarily in the same premises. ( ii ) The business was started with the same machinery and is still using the old machinery of the old concern M/s Indian Art Palace, with routine addition to the old machinery every year. ( iii ) Many of the workers and employees who worked with M/s Indian Art Palace continued and are still working with the assessee concern, M/s The Art Palace. ( iv ) There was no change in the name of business and its modus operandi except slight change in brand name from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ern M/s Indian Art Palace" is without any substance and based on no material or evidence on record. The finding of Ld. A. O. that many workers and employees who worked with M/s Indian Art Palace continued and are still working with the concern is also not supported with any evidence on record and based on surmises and conjectures. The assessee submits detail of its employees labourers and also submits that most of manufacturing work of the unit of assessee was got done on job basis. The statements recorded in course of survey in F. Y. 2008-09 from employees of factory cannot be relied upon as they have no evidentiary value and were recorded under coercion behind the back of assessee. The alleged statements recorded in F. Y. 08-09 in course of survey after elapse of about 6 years after setting up of industrial undertaking of assessee cannot be relied without any evidence therefor on record. The assessee places reliance on judgment in case of CIT v. S Khader Khan Sons [2008] 300 ITR 157 (Mad.) and Paul Mathews and Sons v. CIT [2003] 263 ITR 101 where it was held that statement recorded in survey u/s 133A is not conclusive piece of evidence. The assessee submits that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition in clause (d) of sub-section (2) of section 10BA is as under: ( d ) Ninety per cent or more of its sales during the previous year relevant to the assessment year are by way of exports of the eligible articles or things. The allegation made by Ld. A. O. are wrong as already said above that assessee issuing only the small quantity of iron in them the basic material was wood only. The iron is not used as main raw material in the production by the 6 firm. The artistic work needs to be done on the product in order to make the product exportable which has got value in the commercial market and is recognized by the importers outside India. The articles or the things which were excluded by the Ld. A. O. are almost those articles which though includes' iron element, but the basic element was wood only. The export turnover of assessee is 90.3% of total sales as given in assessment order (Page - 25 of assessment order). The Ld. A. O. excluded items picking from export invoice where iron was used with wood but for better identification iron was mentioned in export invoices and also items of wood where iron jali etc. were used for looking the article as artistic. We submit herewith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 62,72,439/-. 7. Now the department is in appeal here before the Tribunal. 8. The ld. D/R has placed reliance on the order of AO. 9. On the other hand, the ld. Counsel of the assessee has placed reliance on the order of ld. CIT(A). 10. After considering the submissions and perusing the material on record, we find no infirmity in the finding of ld. CIT(A) as he has considered all the aspects and found that all the conditions are satisfied. The ld. CIT(A) further noted that similar claim was disallowed for assessment year 2005-06 and Tribunal has allowed the appeal of the assessee. This finding has been noted by ld. CIT(A) in his order. Finding of ld. CIT(A) have been recorded in para 2.3 to 2.3.6 at pages 15 to 23 of his order are as under :- "2.3. I have carefully considered the facts of the case and submissions of Ld. AR. On perusal of the relevant record, I find that the main issue involved in this ground of appeal is as to whether the appellant is entitled to the claimed deduction of Rs. 62,72,439/- u/s 10BA of the I.T Act. In this regard, Ld. AO has held that the appellant does not fulfil the conditions, as mentioned in clauses (a), (b), (c) (d) of sub-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity of the appellant has to be treated as manufacturing activity, which is supported by the decision of the Hon'ble Supreme Court in the case of ITO v. Arihant Tiles Marbles Pvt. Ltd. [2010] 320 ITR 79 (SC). ( iii ) During the year, the appellant has made purchases of semi finished goods, amounting to Rs. 1,10,70,580/-. However, on perusal of the relevant details and documents on record, it is seen that the appellant had placed the order to various persons, engaged in the work of producing handicraft items, for the supply of raw wooden moulds/Skeletons of various articles I things, as per the given requirements and specifications, which were in accordance with the requirements and specifications of the export orders received from the foreign buyers. Further, it is seen that, thereafter, the remaining work on those raw wooden moulds and skeletons, such as, carving, grooving work, nail work, brass work, stone work, metal work, polish work etc. was done by the appellant himself. Hence, I find merit in the contention of Ld. AR that, on those facts, it was to be held that the assessee was manufacturing those articles/things, even though the process of making the raw wooden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the appellant, on record. On perusal of the said photographs, I find that there is substance in the aforesaid contention of Ld. AR because the articles I goods produced by the appellant appear to be quite artistic, involving several different designs and hence, there are elements of innovation, imagination and creativity therein. Therefore, I find that those articles I goods were having artistic value. In view of the above observations/findings, I find that the appellant has fulfilled the conditions/requirements of clause (a) of S. 10BA(2) of the I.T. Act. 2.3.2 As far as the requirements of the clause (b) of S. 10BA(2) of the I.T. Act that the undertaking should not be formed by splitting up, or the reconstruction, of a business already in existence, is concerned, the Ld. AO has held that the appellant did not meet the requirements of that clause on the basis of the reasoning, as noted in para 2.1(u) above. On the other hand, Ld. AR has contested the same, as per the contentions/arguments noted in para 2.2 above. In this regard, Ld. AR has also pointed out that the requirements I conditions of clause (b) of S. 10BA(2) of the I.T. Act were identical to clause (i) of S. 80-IB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue in the assessment order, as well as, the submissions/contention of the Ld. AR, I find that the issue in hand, as to whether the appellant fulfils the requirements of clause (c) of S. 10BA(2) of the I.T. Act, which are identical to the requirements of clause (ii) of S. 80-IB(2) of the I.T. Act, is directly covered in favour of the appellant by the aforementioned decision of the Hon'ble ITAT, Jaipur Bench, in the appellant's own case for A.Y. 2005-06. Therefore, respectfully following the said decision of Hon'ble Jurisdictional Bench of the ITAT, it is held that the appellant is fulfilling the conditions of clause (c) of S. 10BA(2) of the I.T. Act. 2.3.4. As far as the issue as to whether the appellant is meeting the requirements of clause (d) of S. 10BA(2) of the I.T. Act is concerned, on perusal of the relevant details/documents, I find substance in the contentions I arguments of Ld. AR. In this regard, it is observed that: ( a ) The Ld. A.O. has noted that the appellant had used exclusively metal, as raw material, in the goods exported, worth Rs. 76,51,285/-. On the other hand, Ld. AR has pointed out that the appellant has not produced any article or good made exclusively o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re to be included in the export turnover, because the same were not related to the delivery of goods outside India. Hence, in view of the above discussion, it is held that the appellant fulfilled. the conditions of clause (d) of S. 10BA(2) of the I.T. Act. 2.3.5. As far as the remark of the auditors, as noted by the Ld. AO, which is referred to in para 2.1 above, is concerned, I find merit in the clarification/explanation given by the Ld. AR that the said remark was an inadvertent remark and that the same was contrary to the facts on record, which is noticed in detail in pare 2.2 above and which is also 'supported by the details/documents placed on record. In this regard, it is observed that in the same audit report, the same auditor i.e. Shri Prahlad Jhuria, CA has mentioned that the appellant was entitled to deduction of Rs. 62,72,439/- u/s 10BA of the I.T. Act and further that the same Shri Prahlad Jhuria, CA, argued, in his capacity as the AR of the appellant, during the assessment proceedings also that the appellant was, entitled to the aforesaid deduction u/s 10BA of the I.T. Act and, thus, it is evident that there is contradiction in the above referred remark of the au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at (i) the appellant was not maintaining any stock register; (ii) not maintaining day to day manufacturing account i.e. physical record of raw material at different stages of production was not maintained ; (iii) no inventory of opening stock or closing stock was maintained and not furnished during the assessment proceedings and (iv) payments were made in contravention of provisions of S. 40A(3) of the I.T. Act. Thereafter, the AO applied the GP rate of 17.20% (equal to the GP rate declared for A.Y.2005-06) on the estimated sales of Rs. 12,85,80,000/- (against the declared sales of Rs. 12,61,80,155/- and made the impugned trading addition of Rs. 28,24,170/-." 14. Submissions filed by the assessee have been reproduced by ld. CIT(A) in para 5.2 of his order are as under :- "The Ld. A. O. invoked provisions of Section 145(3) and rejected books of account of assess e on the grounds '(i) that no Stock - Register is maintained, (ii) no day to day manufacturing account i.e. physical record of raw material at different stage of production not maintained, (iii) No stock inventor,' or closing stock inventory maintained and furnished in assessment proceedings, and (iv) payments were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "5.3 I have carefully considered the facts of the case and submissions of Ld. AR. However, on perusal of relevant records, I find that the Ld. AO was fully justified in rejecting the appellant's books of account u/s 145(3) of the I.T. Act, in view of the specific defects found in the appellant's books of account, as noted by the Ld. AO in para 8, 8.1. 8.2 of the assessment order, particularly in the absence of the quantitative details of the raw material consumed, semi finished goods and finished goods and in the absence of any stock register I the inventory of closing stock. Therefore, the said action of the Ld. AO is confirmed. Further, I find that the Ld. AO was also justified in applying the GP rate of 17.20% in the appellant's case in this year, on the basis of appellant's own past history, whereby the appellant had himself declared the GP rate of 17.20% in the immediately preceding A.Y. 2005-06. Therefore, the said action of the Ld. AO in estimation of the GP rate of 17.20% in the appellant's case in this year is also confirmed. However, I find that the Ld. AO was not justified in estimating the sales of the appellant at Rs. 12,85,80,000)-, against the declared sales of R ..... X X X X Extracts X X X X X X X X Extracts X X X X
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