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TMI Blog2015 (7) TMI 872X X X X Extracts X X X X X X X X Extracts X X X X ..... o it can be visualized what portion of the complete manufacturing process is being carried out at Kala Amb. We fully agree with the findings given by the revenue authorities. Secondly, the assessee has also not produced the electricity bill issued by the concerned electricity department. After examining the details of electricity bill, we find that as much as ₹ 35,124/- were incurred for electricity in Delhi whereas as paltry sum of ₹ 3135/- has been incurred on electricity at Kala Amb. For this also assessee has not produced any electricity bills received from the electricity department. In our considered view that no manufacturing activity is being carried out at Kala Amb. If there is any activity i.e. neglible activity was carried out. Therefore, the Revenue Authorities has rightly denied the deduction u/s. 80IC of the I.T. Act to the assessee. Assessee has not filed any documentary evidence for substantial its claim before the Assessing Officer, Ld. CIT(A) as well as before us establishing that assessee is in manufacturing of Mosquito Repellant machines etc. The entire machine was not made at Kala Amb. Only assembling of machine was done at Kala Amb (HP). The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or amend the grounds of appeal at and before the hearing. 2. The brief facts of the case are that assessee filed its Return of Income declaring income of ₹ 2,22,215/- on 27.10.2005 which was processed u/s.143(1) of the Income Tax Act, 1961 (hereinafter called the I.T. Act ) on 18.12.2006. The case was subsequently selected for scrutiny under CASS and Assessing Officer issued notice u/s 143(2) of the IT Act on 25.10.2006 and the same was served upon the assessee. In response to the same, Authorised Representative of the assesse attended the proceedings from time to time and filed the requisite details. Assessee is involved in the business of manufacturing and export of Mosquito Repellent, Medicines etc. The assessee has registered a turnover of ₹ 41.44 lakhs as against ₹ 1.56 crores in the previous year. Assessee has also earned a gross profit of ₹ 21.88 lacs as against ₹ 49.04 lacs in the previous year. After claiming deduction u/s 80IC of the I.T. Act a net taxable income of ₹ 2.22 lacs has been declared. Assessee has not filed the copy of auditor's report in Form No.10CCB with the return. Assessing Officer asked to file note on satisfa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e very heavy so their movement is restricted, as submitted by the AR. If these were to be true, then machinery worth ₹ 10,400/- odd is being used at Kala Amb. So it can be visualized what portion of the complete manufacturing process is being carried out at Kala Amb. 2.3 Assessing Officer further observed that detail of electricity bills reveal that as much as ₹ 35,124/- were incurred for electricity in Delhi whereas a paltry sum of ₹ 3153/- has been incurred on electricity at Kala Amb. Even for ₹ 3153/- there are no bills of electricity company. Only payments to some Sh. Rajinder Singh and Inderjit Singh have, been made. This also goes to support the fact that no manufacturing activity or negligible manufacturing activity is being carried out Kala Amb. Major operations are still being carried out in Delhi. The substantial expansion at Kala Amb. has clearly been stage-managed to unduly avail of the benefit of deduction uls 80IC. 2.4 On the issue of substantial expansion, AR only provided certain figures without enclosing bills for plant and machinery Which were acquired during F.Y. 03-04 when the substantial expansion was said to have taken place. Mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te like Himachal Pradesh, by encouraging investment in such states so that backward areas and inhabitants of such states find employment. The entire backward area flourishes by creation of a climate favourable for industrial and economic activity and benefits of the same permeating down to the local population. If such aims are not achieved then there is no purpose in extending benefits like 100% deduction u/s 80IC to various assesees. 2.7 Lastly, he submitted that assessee was claiming deduction u/s 80 HHC by virtue of being an exporter. With phasing out of deduction u/s 80HHC, the assessee has tried to wrongly seek the benefit of deduction u/s 80lC to avoid paying taxes. The noninclusion of the auditor's report with the return also stands explained in view of the dubious claim of deduction u/s 80IC and he disallowed the claim of deduction u/s 80IC by assessing the income of ₹ 15,19,222/- and completed the assessment u/s. 143(3) of the I.T. Act, 1961 on 28.12.2007. 3. Aggrieved with the aforesaid assessment order dated 28.12.2007 passed by the Assessing Officer u/s. 143(3) of the I.T. Act, but assessee filed an Appeal before the First Appellate Authority who vide i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch no manufacturing activity is being carried out there and if at all only negligible manufacturing activity is being carried out there. IV. Only a sum of ₹ 3,153/- has been incurred on electricity at Kala Amb for which also there are no bills of electricity company but payments have been made to some Sh Rajinder Singh and Inderjit Singh. V. The substantial expansion at Kala Amb has clearly been stage managed to unduly avail of the benefit of deduction u/s 80IC. VI. Since virtually no plant and machinery exists at Kala Amb the question of substantial expansion having taken place is completely ruled out and accordingly the condition laid out in Sub Section 2(b) of the said Section has not been satisfied. 5.2 Ld. Counsel of the assessee submitted that assessee is a partnership firm. Its head office is situated at 186, Sainik Vihar, Pitampura, Delhi - 110034 and its undertaking which deals with its work and manufacturing is situated at Village - Moginand, Tehsil - Nahan, Post - Kala Amb, Disti: - Sirmor, Himachal Pradesh. The firm was constituted on 01.06.1994 with the following partners and respective profit sharing ratios Name of Partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roved Project Report in its Chapter where manufacturing process has been explained. 5.6 He further submitted that true test to determine whether any industrial undertaking is situated or not is the certificate from DIC, which has been produced before the Revenue Authorities. It is also to be noted that in the Project report which was submitted to the DIC Nahan along with the application for grant of certificate to commence industrial activity as 551, Assessee has submitted that it will employ 12 workers and will be having a rented premise for its business. Assessee has done the same work as it has submitted in its Project report. Assessees also have provided in course of Assessment proceedings the rent agreement of the premises at Kala Amb. He invited the attention towards clause '5' of the said agreement which states that - That the premises have been let out for the purpose of Industry only and the tenant shall not use premises for a purpose other than Business/ Industry . 5.7 Ld. AR further submitted that Assessee has also got the consent of HP State Environment Protection Pollution Control Board had via its letter Dated 08.11.2003 and 15/06/2006. A certif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also to be noted that that almost all sales of the Assessee are export for which documentary evidences are available in the form of Invoices, bill of lading etc and it decisively points out that the Goods are being manufactured at Kala Amb. He stated that the Assessing Officer is in opinion that the major part of Manufacturing Activity is being carried out outside Kala Amb. He came to this conclusion on the basis of following submissions made by the Ld AR during the Assessment Proceedings The main parts of the Machine are - 1. Cabinet 2. Plug 3. Heater 4. Resistance and 5. Led a) Cabinet is manufactured from Plastic Dana by Moulding Machines, done at Delhi on job work and then dispatched to Kala Amb. The Plastic Dana is procured at Delhi. b) Plug is manufactured from Plug Dana by Moulding Machines at Kala Amb and pins are used for the same. Pins are procured from Jam Nagar Delhi. c) Heater is manufactured at Kala Amb from Porcelain procured from Gujarat by fitting in MOR (Metal Oxide Resistance). Resistance and LED are procured from Delhi and sent to Kala Amb. d) The complete machine gets shape and assembly is done at Kala Amb for final sale. 5.11 It was su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter and Cabinet were assembled together and Electronic Mosquito Repellant Machine comes in existence. IX. Above manufactured product is tasted for quality. X. Final/y Tested products got packed and labeled and dispatched directly to the Inland Container Depot from where the Electronic Mosquito Repel/ant Machine got exported. 5.14 Assessee submitted that in the current case after going through the entire process explained in the foregoing Para what we manufacture is a product of distinct physical character with a distinct name known as 'Mosquito Repellant Machine'. The question of what is manufacturing has to be taken by in the simplest form. Assessee submitted that this process is without any IOTA of doubt being carried out only at Kala Amb and therefore the manufacturing of the Mosquito Repel/ant Machines is taking place at Kala Amb and no other place. In this behalf, he invited our attention to the decision of Hon ble Supreme Court in case of CIT Vs N C Budharaja 204 ITR 412 wherein while analyzing the meaning of word Manufacture it has been enunciated that - ..... the test evolved for determining whether manufacture can be said to have taken place is, whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... article or thing,- a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure . It was submitted that in the backdrop of above definition the memorandum explaining Finance Bill (2)2009 is also important which states that - A number of tax concessions under the Income-tax Act are provided for encouraging manufacture of articles or things. However, the term manufacture has not been defined in the statute. therefore, it has been the subject matter of dispute and resultant judicial review in a number of cases. In order to remove any kind of ambiguity which may still persist in this regard, it is proposed to insert a new clause (29BA) in section 2 so as to provide that 'manufacture' with its . 5.15 Ld. Counsel further assessee submitted that in light of above provision it is crystal clear that manufacturing is taking place in Kala Amb and not at any other place. Before being used in the manufacture of Electronic Mosquit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facture has taken place or not. It depends on the level of mechanization and the product which is being manufactured. The Assessing Officer has compared the amount in Rs which has been spent on electricity not the units of electricity which has been consumed. The rate of Electricity per unit is much higher in Delhi than in Himachal Pradesh available to an SSI Unit. SSI units generally get electricity at subsidized rate than other industrial connections. 5.19 He submitted that the Assessing Officer has also alleged in his assessment order that there are no bills of Electricity Company and in the books of account only payments has been made to Mr. Rajender Singh Mr. Inderjit Singh. In this regard he was submitted that Bills of electricity have been submitted not only during the Assessment Proceedings but also during appeal proceedings. The payments made to the above persons are in the nature of imprest which was paid to them to further pay it to Electricity Department receipts of the same have already been submitted. He further submitted that it is a title law that mere entry in the books of account or, nomenclature of the head of account is in no way determinative of true natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of Himachal Pradesh. II. It's never been in Himachal before and basically this is a very first manufacturing unit of the Assessee which has been established there. III. It has also been proved on the basis of facts stated supra that manufacturing is taking place at Kala Amb where the Assessee has its manufacturing unit. IV. Evidences on record also make it clear that Assessee has begun to manufacture Mosquito Repel/ant Machines during the specified period. Ld. Counsel of the assessee that Substantial Expansion is necessary to claim this deduction. Said word has been very well defined in the act and it clearly says that increase in investment in Plant and Machinery by at least 50% of the book value of the Plant Machinery. Now the question that needs to be answered that how an entirely new manufacturing unit which has been created from a scratch is going to be tested on the clause of Substantial Expansion. He stated that it is not possible because for calculation of 50% of the Book value of the Plant Machinery, you need to have a Book Value from which you will calculate 50% which did not exist in case of an entirely new undertaking. He stated that as stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . A charging section has to be construed strictly. If a person has not been brought within the ambit of the charging section by clear words, he cannot be taxed at all. It was further submitted that in the light of above definition of Substantial Expansion which has been defined in the said Section should be interpreted in the similar manner and it should not be concluded in a different form. If Substantial Expansion is mandatory for claiming the deduction U/sec. 80 IC than we must consider all the investments which have been made for the manufacturing of the said product at Kala Amb. The Dyes Moulds which have been bought by Assessee are only being used for Manufacturing of parts of the said machine which is necessary for the running and production of Mosquito Repel/ant Machines at undertaking of the Assessee at Kala Amb. As stated supra the Manufacturing is only happening at Kala Amb and hence the Investments made for the said manufacturing process comes under definition of Substantial Expansion it/sec 80 IC (8) (ix). It was further submitted that the Unit of the Assessee was established in the Kala Amb in the Financial Year 2003-04 relevant to A. Y. 2004-05 and the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in 80IC (4)(i) also remains unfulfilled. Ld. Counsel of the assessee further invited the attention towards the Sub Section 4 of the said Section Section 80 lC(4) This section applies to any undertaking or enterprise which fulfils all the following conditions, namely:- (i) it is not formed by splitting up, or the reconstruction, of a business already in existence: (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. It is quite clear from the above, that law specifically bars deduction to undertakings which has been formed via splitting up or a reconstruction of a business already in existence. In view of the fact that the only reason which led the ITO to this conclusion is that Assessee is in same business since 1998. Assessee submitted that law does not bars any person from his eligibility to claim deduction under this Section just because he is in the same business since last many years. Ld. Counsel of the assessee submitted that the Assessing Officer has not spared even a single word to give any reasons to believe that the Assessee firm has formed its undertaking by splitting up or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of assessment proceedings. While filing of Audit Report is mandatory the time of filing thereof is not mandatory. In this connection he invited to the judgment of Delhi Bench of Hon'ble ITAT in the case of Sudha Sherme Vs ITO [1993 44 ITD 351 (Del)] has held that - .. although U/s, 80 HHC (4), furnishing of a certificate from an accountant along with return of Income is condition precedent for the allowance of claim on account of exports, the stringency and mandatory nature provided under that the section should be viewed in the light of the purpose intended to be served. Filing of the certificate along with the return though statutory, belongs to the area of procedure, thus this condition for the grant of exemption could not be so strictly construed as to prevent the Assessee of his legitimate claim of deduction. As the certificate required U/sec. 80 HHC (4) had been filed during the course of assessee proceedings, the Assessee was entitled to the deduction claimed u/s. 80HHC. Further support to the above view is governed from the following judicial pronouncements - - CIT vs. G. Krishnan Nair (2003) 259 ITR 727 (Ker.) - CIT vs. Berger Paints (India) Ltd. (2002) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y heavy so their movement is restricted Only machinery ₹ 10,400/- is being used at Kala Amb. Ld. DR further stated that after examining the details of electricity bills, it revealed that as much as ₹ 35,124/- were incurred for electricity in Delhi whereas a paltry sum of ₹ 3153/- has been incurred on electricity at Kala Amb. Even for ₹ 3153/- there are no bills of electricity company. Only payments to some Sh. Rajinder Singh and Inderjit Singh have, been made. This evidence proved that no manufacturing or negligible manufacturing activity is being carried out at Kala Amb and major portion are still being carried out in Delhi. The substantial expansion at Kala Amb. has clearly been stage-managed to unduly avail of the benefit of deduction uls 80IC I.T. Act. Ld. DR further submitted that assessee has not produced any Bill for plant and machinery which was acquired during FY 2003- 04 when the substantial expansion was said to have been taken place. The negligible plant and machinery installed at Kala Amb, the aspect of substantial expansion automatically stands disproved. It is established beyond any doubt that no plant and machinery exists at Kala Amb. The q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confronted to the assessee with these facts vide his Note dated 27.11.2007 and specifically asked the assessee to verify as to how in sub-section 2(b) of Section 80IC of the I.T. Act is satisfied. Further the Assessing Officer also asked the assessee to clarify the satisfaction of the eligibility conditions laid down in subsection 4(i) of section 80IC of I.T. Act regarding business not being form by splitting up or reconstruction of an existing business. Assessee was also asked by the AO to explain the satisfaction of the eligibility in sub-section 4(ii) regarding machinery being used previously for other purposes. In response to these queries the assessee filed its submission dated 12.12.2007 explaining therein the issue of manufacturing activities being carried out at Kala Amb. In the said reply dated 12.12.2007 assessee submitted that the firm is in the business of Exports and Balances outstanding at the end of year with Foreign Buyers are tallied in foreign currency. The difference in the rate of Foreign Currency at the end of the year and the time when transactions have been carried out, results in the Difference due to Foreign Exchange rate variation. Assessee submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee u/s. 80IC of the I.T. Act. 7.4 We find that Ld. CIT(A) has upheld the finding of the AO by holding that hardly any manufacturing activity was being carried out at Kala Amb, the place where the plant of the assessee was located. Secondly, the assessee has not filed Auditor Report in Form 3CD and 10CCB. The deduction claimed by the assessee was not supported in any way by the auditors. 7.5 We have perused the orders passed by the revenue authorities, especially the impugned order passed by the Ld. CIT(A) on the issue of deduction u/s. 80IC of the I.T. Act amounting to ₹ 12,97,007/- which has been disallowed by the AO and confirmed by the Ld. CIT(A). We are of the considered view that the Revenue Authorities has given a sufficient opportunity to the assessee for filing the Satisfaction Note for filing the eligibility condition for claiming deduction u/s. 80IC of the I.T. Act, with the proof of documentary evidence. The assessee failed to produce the sufficient evidence before the revenue authorities. It is necessary to refer the relevant extract of section 80IC(2)(b) of the I.T. Act. Section 80-IC(2)(b) Which has begun or begins to manufacture or p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer is of the view that assessee has tried to portray, if any substantial expansion in a backward State, it is entitled for deduction u/s. 80IC of the I.T. Act. We are of the view that if such hollow and superfluous claims of deduction are to be allowed then the entire purpose of enacting such provisions will stand defeated. Deductions and exemptions have been brought on statute in order to fulfill the role of the government in equitable development of various parts of the country. Deduction u/s. 80IC is meant for encouraging industrial activity in industrially and economically backward state like Himachal Pradesh, by encouraging investment in such states so that backward areas and inhabitants of such States find employment. The entire backward area flourishes by creation of a climate favorable for industrial and economic activity and benefits of the same permeating down to the local population. If such aims are not achieved then there is no purpose in extending benefits like 100% deduction u/s. 80IC of the I.T. Act to various assesses. For the sake of convenience, section 80IC(4) and 80IC(8)(ix) are extracted below:- 80IC(4) This section applies to any u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant machines etc. The entire machine was not made at Kala Amb. Only assembling of machine was done at Kala Amb (HP). The assessee has also not furnished any purchase bills of machinery to show that it was a new purchase. The assessee was in the business of manufacturing of Mosquito Repellant machine from the year 1998, that means the business of manufacturing and export of Mosquito Repellant was already in existence. A unit was set up at Kala Amb where the same activity or rather part of the activity was done. The entire machine was not made in Kala Amb. Only the assembly of the machine was done at Kala Amb. The same business was continued but only a part was shifted to Kala Amb. Therefore, it is a reconstruction of the existing business and assessee has failed to establish its claim before the revenue authorities. The company at Delhi is doing major part of the work and the unit at Kala Amb gets the article in the same condition in which it is to be sold. The cabinet or the main part of the machine is made at Delhi. The plug is made in the moulding machines and the pins in the plug are procured. The resistance wire and LED are procured from Delhi and the machinery is assembled at ..... X X X X Extracts X X X X X X X X Extracts X X X X
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