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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 ..... ages.Thus 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 - in favour of assessee. COU - Scope of term manufacture - One of the main objections of the AO 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 as per notification No.53/97 –customs dated 3rd June, 1997 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 - in favour of assessee. Disregard to Rule 46 A as no reasonable opportunity was given to the AO before approving the admission of the additional evidence by the CIT(A) - ITAT stated that AO took 15 months and more to submit the remand report - Held that:- The appeals before the CIT(Appeals) were filed by the assessee on 18.1.2010. It was in the course of the appeal proceedings that additional evidence had been produced and a remand report was called for by the CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess 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 effect from 1st April, 2005. This firm continued the same name and style and the same business, accounts etc. The assessee had applied, prior to the reconstitution, to the Development Commissioner, SEZ, Noida for setting up of a 100% Export Oriented Unit(EOU). A letter of permission ( LOP ) was granted to the assessee by the Development Commissioner on 5th May, 2005 subject to certain conditions which are as under:- (1) The unit shall export its entire production in the domestic tariff area as per the Export Oriented Undertaking Scheme for a period of five years for which an undertaking should be given. (2) Import/local purchase of all items except those listed in the prohibited list will be permitted. (3) The unit may procure indigenous wood from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 a small change in the specification, but substantially the products purchased and the products sold were the same. 5. From the above facts the Assessing Officer came to the conclusion that there was no manufacture or production of any article or thing as required by clause (i) of sub-section (2) of Section 10B of the Act. He, therefore, issued a show cause notice to the assessee to explain why the claim made under Section 10B should not be disallowed. In response to the same the assessee claimed that the processes of assembling, arranging, labelling and repacking would come within the definition of manufacture and that the processes to which the items were subjected were necessary to make them complete as finished goods for export purposes. The attention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) of sub-section 2 of Section 10B. 8. As regards the evidence for manufacture is concerned, the assessee also drew the attention of the CIT(Appeals) to the purchase of machinery for Rs.35,100/- consisting of various tools and the fact that the depreciation was actually allowed in the assessment for the assessment year 2005-06 and 2006-07 which established the claim that the machinery was used for the purpose of manufacturing operations. The attention of the CIT(Appeals) was also drawn to the various amounts debited as manufacturing expenses, wages etc. 9. The submissions of the assessee along with evidence adduced before the CIT(A) were sent to the Assessing Officer to enable him to submit a remand report after scrutiny. The Assessing Officer was also pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessing Officer had been given adequate opportunity to examine the additional evidence and file a remand report and in fact the Assessing Officer had taken more than 15 months to send the remand report. He referred to the clarification issued by the Development Commissioner, SEZ, Noida in which there was clear reference to the letter of approval as on 5.5.2005 to the export-oriented unit and opined that in the light of this, the Assessing Officer should have appreciated that the EOU was in existence from the date of issue of the letter of permission and therefore no further approval from any authority was required. This position, according to the CIT(Appeals), was clarified by the CBDT by instruction No.2/2009 issued on 9th March, 2009. In this view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased 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 the Foreign Trade Policy and the provisions of section 10 B of the I.T Act, 1961, was in existence or not w.e.f. 5.5.2005. 15. The CIT (Appeals) also held that the assessee had commenced the manufacturing operations required by Section 10B. New machinery for ₹ 35,100/- was acquired during the previous year ended 31.3.2007. There was, according to the CIT (Appeals) a distinction between the manner in which the business activity of the firm was carried on prior to 1.4.2005 and after that date. Earlier to the said date, the activity of the firm was restricted to trading of handicrafts items. After the said date, under the new partnership deed, the scope of the business was enlarged to include manufacturing for the purpose of export of handicraf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 handicrafts items while the erstwhile firm was engaged merely in trading activity. The CIT (Appeals) perused the balance sheet of the reconstituted firm as on 31.3.2006 and found that the firm had acquired tools for the purpose of manufacturing for export of handicraft items. No such machinery was owned by the erstwhile firm. The erstwhile firm did not also incur any wages or manufacturing expense which was incurred by the reconstituted firm. In this view of the matter, the CIT (Appeals) held, agreeing with the assessee, that there was no reconstruction or splitting up of a business already in existence in order to form the undertaking owned by the assessee. 18. In the aforesaid view of the matter the CIT (Appeals) held that for both the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing 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-bonding is required only where imports are contemplated for the purposes of manufacture, production, packaging etc. for the purposes of export of goods or services out of India. The notification was issued in exercise of the powers conferred by Section 25(1) of the Customs Act, 1962. It has not been shown by the Revenue that the assessee imported any materials either of unfinished or semi-finished or in raw form, which it used in the manufacture or export of handicrafts. In this view of the matter, we do not see any purpose being served by insisting on the custom-bonding of the EOU. A reasonable way of construing the condition imposed by the Development Commissioner would be to understand the same as necessary only when imports are contemplated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould 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 evidence. 24. The Tribunal dealt with this issue in paragraph 5 of its order. It noted that the additional evidence consisted of only the following:- (i) Copy of RTI Application dated 11.01.2010 addressed to Ministry of Commerce and Industry, Udvoy, Biawan. New Delhi. (ii) Copy of reply dated 19.01.2010 received from EOU Section, Ministry of Commerce and industry, Government of India. (iii) Affidavits of suppliers confirming about supplying the unfinished, unassembled and incomplete goods to the Assessee. (iv) Exhibits 01 and 02 as Raw Chess Board and Raw Chess Pieces respectively and also Exhibits 03 and 04 as Finished Chess Board and Finished Chess Pieces respectively. The Tribunal also found that all other evidence was part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Tribunal that ample opportunity had been given to the Assessing Officer and despite this he had submitted only a half-hearted remand report . 26. The difficulty in accepting the findings of the Tribunal is that it has erroneously proceeded on the footing that the Assessing Officer had ample opportunity to examine and verify the additional evidence adduced by the assessee before the CIT(Appeals). The Tribunal, as noted earlier, has stated that the Assessing Officer had delayed the remand report beyond 15 months. We are unable to see the basis of this statement. The appeals before the CIT(Appeals) were filed by the assessee on 18.1.2010. It was in the course of the appeal proceedings that additional evidence had been produced and a remand report ..... X X X X Extracts X X X X X X X X Extracts X X X X
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