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TMI Blog2012 (9) TMI 592X X X X Extracts X X X X X X X X Extracts X X X X ..... in utter disregard to the remand report submitted by the AO? C. Whether the ITAT was justified in the eyes of law in granting the exemption u/s 10B of the Act to the assessee, when the assessee doesn't fulfil the preliminary condition applicable for the grant of the exemption? D. Whether the impugned order passed by the ITAT is perverse both in facts and law?" 2. The brief facts leading up to the filing of the present appeals may be noted. The assessee is a partnership firm engaged in the business of export of handicrafts items. We may first refer to the facts relating to the assessment year 2006-07 since the assessment order for that year was passed earlier on 15th December, 2008. In the return of income filed for that year, the assessee declared business income of Rs.57,42,645/- and claimed the entire business income to be exempt under Section 10B of the Act. The Assessing Officer examined the claim and noted that the claim was made for the first time. He further noted that the firm came into existence under a partnership deed dated 1st October, 1993 with two partners and later on another partner was taken in under a fresh partnership deed dated 18th may, 2005 which was given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier period, he noted that there was no supervisory staff engaged by the assessee, though in its application to the Development Commissioner, SEZ, it had mentioned that about 150 such staff were proposed to be employed. Moreover the assessee did not also disclose any plant and machinery in the second period as was proposed in the application to the Development Commissioner. Except one computer for Rs.40,660/-, scooter for 37,762, office equipment for Rs.5,900/- and machinery of Rs.35,100/-, there was no other fixed asset. Even the machinery of Rs.35,100/- was only of general nature commonly used in normal business activities. Furthermore the manufacturing expenses incurred in the second period were only Rs.1,37,978/- and the electricity expenses were only Rs.75,629/- in the second period. There was no registration under Directorate of Industries, PF and ESI. Further, from the photocopies of the few purchase bills produced before the Assessing Officer to show purchase of raw material, he found that what was purchased was not raw material but were finished items of handicrafts etc. and the sales invoices showed that they mentioned only similar item or items containing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... litting up or reconstruction of business already in existence. It was submitted that the ownership, management and custody of the assets of the firm continued to remain with the partners, both before and after the approval given by the Development Commissioner, SEZ, Noida. On the point as to whether the assessee was carrying on any manufacturing activity it was submitted that it was engaged in the manufacture of wood and brass articles, chess boards etc. for which unfinished and semi-finished articles were got manufactured from various artisans as per specific instructions, that these semi-finished products were converted into finished products by the EOU after applying several manufacturing and mechanical processes such as rubbing the raw material by sand paper, buffing, carving, pasting velvet cloth on wooden boxes etc. Similar processes, it was urged, were undertaken on the brass items which were then assembled and polished. Evidence for purchase of raw material was furnished before the CIT(Appeals) in the form of a paper book. Several authorities were cited to show that what the assessee was doing amounted to a manufacturing activity thus satisfying the requirement of clause(i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her clarification and not independent evidence. The mistake that had occurred in the note that the date of commencement of production was 22nd September, 2006 in the letter issued by the Development Commissioner was also pointed out to the CIT(Appeals) and it was submitted that all these facts were made known to the Assessing Officer at the time of the assessment proceedings; but he did not prefer to wait for the clarifications and proceeded to complete the assessment on 15th December, 2008, even though 15 more days were available to him for completing the assessment. Thus, it was claimed, that the Assessing Officer did not afford adequate opportunity to the assessee to adduce evidence which justified the admission of the additional evidence before the CIT(Appeals). 12. The CIT (Appeals) admitted the documents adduced as additional evidence on the ground that they only clarified the assessee‟s claim which was not exclusively based on those documents. He considered the approval given by the Development Commissioner for starting manufacturing operations as crucial as also the clarification issued on an application made under the Right to Information Act. He noted that the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormalities entailed in the said LOP are also fulfilled. However these procedural formalities were relevant for the competent authority, which are empowered to even cancel or revoke the approval, if such essential conditions were not met. However, for the purpose of claiming deduction under section 10 B, it is sufficient that the letter of permission is issued for setting up the hundred percent, EOU. Since the relevant competent authorities have duly issued the necessary approval and have also sorted out the procedural formalities subsequently in their own way, e.g., even though the appellant did not require the facility of custom warehouse, prevailed upon him to have a custom-bound warehouse, prevailed upon him to have a custom-bound warehouse and based on that, have not revoke or cancelled the approval, therefore, the delay in meeting these conditions, did not have any bearing on the status of 100% EOU. Therefore, the observations of the learned AO that the legal agreement was 24th of July 2006 and based on which, in the record of the Development Commissioner, the commencement date was recorded at 22 September 2006, were not relevant for determining whether 100% EOU, in terms of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is clearly engaged in the business of manufacturing for which it purchased several finished and unfinished material on which further, processing was carried out to make it saleable in the international market. Therefore in view of the - above facts, it cannot be denied that the appellate firm had not done any "manufacturing" activity during the year for the purpose of export of handicrafts items." 17. Turning to the other condition of Section 10B(2), namely, that the undertaking owned by the assessee should not have been formed by the splitting up or the reconstruction of an existing business and dealing with the objection of the Assessing Officer that on reconstitution of the firm, there was a reconstruction or splitting up of the existing business, the CIT (Appeals) held that what happened on 18.5.2005 was merely that Gaurav Arora was inducted as a new partner and the existing partner Umesh Arora was divested of 50% of his share in the profits in favour of the new partner. This according to the CIT (Appeals) did not amount to splitting up of or reconstruction of an existing business. The reconstituted firm had started an altogether new business of manufacture and export of han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undisputedly shows that the assessee had acquired tools and the machinery, which were not with the firm prior to the reconstitution. Even the profit and loss accounts drawn up after the reconstitution showed manufacturing expenses and wages. We are, therefore, unable to appreciate how the Revenue can contend that the undertaking owned by the assessee was formed by the splitting up or reconstruction of the erstwhile partnership business. The contention is contrary to the facts on record. 21. The other objection of the Assessing Officer that the assessee did not fulfill the conditions prescribed by Development Commissioner in his letter dated 5th May, 2005 also does not appear to us to be of any substance. One of the main objections of the Assessing Officer was that the EOU was directed to be custom-bonded which was not complied with by the assessee. The CIT(Appeals) held that custom-bonding was required only where imports are contemplated and since the assessee-firm did not plan to import any materials to be used in the manufacture of ingredients, the EOU was not custom-bonded. It appears to us from the copy of the notification No.53/97 -customs dated 3rd June, 1997, that custom-b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The Assessing Officer submitted remand report which was allegedly after a lapse of 15 months. The remand report was also commented upon by the assessee in its rejoinder. The Assessing Officer had objected to admission of the additional evidence, but the CIT(Appeals) overruled it as the additional evidence was only clarificatory in nature and the assessee‟s case was not exclusively based on it. He pointed out that the Assessing Officer could have carried out an enquiry before submitting a remand report and could have gone on a visit to the assessee‟s unit to carry out an inspection and see for himself the nature of the activity carried on by the assessee. The CIT(Appeals) held that the request of the Assessing Officer that he should be given one more opportunity of examining the evidence and the affidavits of the suppliers by summoning the deponents was not reasonable since the Assessing Officer had already taken more than 15 months to comply with the remand. He, therefore, held that it was not in the interest of justice to delay the proceedings further by giving further opportunity to the Assessing Officer. In this view of the matter he admitted the additional eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar in foreign countries. According to the Tribunal the items purchased by the assessee were totally distinct and different from the items exported and this amounted to manufacture of articles or things. In coming to this conclusion the Tribunal noted the definition of the word "manufacture" given in the circular issued by the central excise department as meaning to make, produce, fabricate, assemble, process, calibrate by hand or by machine to bring out a new product having a distinct name, character or use. The definition included various processes such as cutting, polishing, blending, repacking, labeling, refurbishing etc. The Tribunal also placed strong reliance on the fact that the additional evidence adduced by the assessee before the CIT(Appeals) was sent to the Assessing Officer for filing a remand report which was sent by the Assessing Officer after a lapse of 15 months, during which period he could have examined the exhibits/samples, affidavits, purchase bills issued by the suppliers etc., and verified whether the assessee‟s claim that it was engaged in the carrying out of various activities amounting to manufacture was correct or not. It was thus held by the Tribuna ..... 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