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TMI Blog2015 (11) TMI 791X X X X Extracts X X X X X X X X Extracts X X X X ..... in the present case that, though the assessee is claiming the activity of Dehradun Unit as a trial production, the same is not at all a trial production but the commercial production from December 2003 onwards. Selling the product to particular parties continuously also shows that it is a commercial production and not of a trial production. The case laws submitted by the assessee are on different footings and was rightly distinguished by the DR. Thus, the first ground of the Revenue is sustained and the Ld. CIT(A)'s order is set aside to that effect. As relates to the second ground, the same is consequential and the AO is directed to determine the deduction u/s 80HHC of the Income Tax Act, 1961 for the A.Y 2004-05. - Decided in favour of revenue. - ITA No. 390/Del/2009, CO. No. 21/Del/2009 - - - Dated:- 23-10-2015 - R. S. Syal, AM And Suchitra Kamble, JM For the Petitioner : Smt Nandita Kanchan CIT (DR) For the Respondent : Shri Shashwat Bajpai, Adv ORDER Per Suchitra Kamble, JM This appeal is filed by the Revenue against order dated 20/10/2008 passed by Ld. CIT(A), Ghaziabad. 2. The grounds of appeal are as follows:- 1. The Ld. CIT(A) has erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n its accounts the assessee has shown that this unit is under trail run. For the purpose of convenience the relevant provisions of Section 80IC of the Income Tax Act, 1961 are reproduced as under:- Section 80IC of the Income Tax Act (8) (v) initial assessment year means the assessment year relevant to the previous year in which the undertaking of the enterprise begins to manufacture or produce articles or things, or commences operation or completes substantial expansion. 4. The assessee company has shown that the pre-operative expenditure in respect of its Dehradun Unit reopening for capitalization as the unit has been claimed to be under trial run. The details of such expenditure were shown in Schedule 19 of the accounts of the company. The same are as follows: Nature of expenses/income Amount Cost of material consumed 3,98,74,811 Repair Maintenance 8,17,879 Power Fuel 18,36,446 Depreciation 6,66,805 Insurance Charges 71,313 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction during the year, and therefore, the year under consideration should not be treated as first year of deduction Section 80IC (3) (ii) of the Income Tax Act, 1961. The assessee further submitted before the AO that the assessee was entitled to claim deduction for 100 percent of profit and gains for 5 assessment years commencing that the initial assessment year and thereafter 30%. The assessee company further submitted that commercial production of CF Lamps were not taken place in the year under consideration, but only trial production took place. The assessee further submitted that there was a huge wastage which caused a loss of ₹ 90,98,986/- in the year of trial production i.e. A.Y 2004-05. The assessee submitted before the Assessing Officer that the trial production was made in the previous year relevant to A.Y 2004-05 was also evident from the extent of turnover which was only ₹ 3,13.26 lacs in the trial run, which increased to ₹ 5159.50 lacs and ₹ 8988.40 lacs in subsequently next two financial years when commercial production commenced. To support this, the assessee company submitted a certificate for starting up commercial production from Chartered E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and the total stock of finished goods (3.13 Crores + 1.46 Crores= 4.49 Crores) further strengthens the case that it cannot be the case of the assessee that the Unit is showing substantial wastage. The mere fact that the unit has some initial losses does not make the period as prior to commencement of production. Moreover the term used in the section is begins to manufacture and not commencement of commercial production. The two terms are clearly distinguishable and no sale can ever take place if a unit does not begin to manufacture. The stage at which a unit starts commercial production is later than the stage at which it begins to manufacture. Though in this case the quantum of sale and that too over a limited period of one to one and a half month shows that the unit has ever commenced commercial production. vi) Points (ii) to (v) clearly reveal that the Unit has begin to manufacture and produce Article or Things. Therefore, there is no question that this year is not the initial assessment year for the Uttranchal Unit for the purpose of Section 80 IC. vii) Thus it is held that assessment year 2004-05 is the initial assessment year for the Uttranchal Unit for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of being sold by the assessee in the context of tax incentive, and article can be said to have manufactured only when it comes from commercially sustainable production changed and only at this stage article is capable of being sold. The Ld. CIT(A) further held that, in view of high percentage of wastage, the manufacturing in the period under consideration cannot be said to be able to sustained manufacturing in commercial sense. Therefore, the Ld. CIT(A) held that (i) the AO was not justified in holding that assessment year 2004-05 i.e. the year under consideration is, the initial assessment year for the Uttrakhand Unit for the purpose of Section 80IC of the Income Tax Act and (ii) the AO was also not justified in including the sale from this unit in its total turnover for the purpose of computation of deduction u/s 80HHC of the Income Tax Act, 1961. The AO was accordingly directed to give consequential relief. 9. The revenue filed the present appeal. 10. The DR submitted that there were only 9.41 lacs manufacturing units and the cost of manufacturing of per piece was ₹ 30. The DR further submitted that the percentage of wastage during the trial production was as follows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 157,159 160) wherein the defects in respect of CFL Lamps was pointed out and submitted that the machinery and the trial run production took place during the period December 2003 up till January 2004. The assessee also submitted that because of these defects, there was more than 30% wastage and the loss was incurred due to the same. To take benefit of his submissions as relates to the non-application of Section 80IC of the Income Tax Act, the AR submitted that the wastage value during the present assessment year was too high and this amounts to trial production. In fact, as per asssessee, the commercial production started after January 2004 and thus the same could not be treated as commercial production for the period 2004-05 in respect of December 2003 till January 2004. To support this, the AR has submitted various charts along with invoices. The assessee also submitted various case laws on the issue that the trial production cannot be treated as commercial production. The case laws submitted by the AR as follows: 1. Orient Cosmetics Ltd. Vs. DCIT [2000] 74 ITD 135 (Mad) 2. Metropolitan Springs Pvt. Ltd.Vs. CIT[1981]132 ITR 893 (Bom) 3. Madras Machine Tools Manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. The quantum of commercial sale would be immaterial. With sale of those articles marketable quality was established, more particularly when assessee failed to show that the dealer returned those goods on the ground that there was any defect in the Water Cooler or aircondition produced and sold by the assessee to the dealer. Things would have been different, if that had happened. The DR further submitted that this case law clearly states that the wastage is not a whole and sole criteria for a trial production. The improvements made by the assessee during the year that would have come under the purview of trial production but it fails further test of trial, when it has become an eligible product and actual sale took place. The purchasers had not returned the articles which are defective and the same cannot be termed as trial production. 15. We have perused all the records and heard submissions made by both the parties. Section 80IC (8)(v) of the Income Tax Act reads as under:- Section 80IC (8)(v) Initial assessment year means the assessment year relevant to the previous year in which the undertaking or the enterprise begins to manufacture or produce articles or things, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies and those companies were repeatedly giving orders to the assessee company. So this cannot be termed as a trial production when there is a continuous sale to a particular company for example in the assessee's case there was 34 transactions/invoices mentioned in the ledger to Bajaj Electricals Ltd. for the period 22nd December 2003 till 24th February 2004 and there was no specific mention that the product/CF Lamps which were sold to Bajaj Electricals were of defective or of any sort of wastage to the assessee company. Thus, the benefit of trial production cannot be claimed by the assessee company and Section 80IC is clearly attracted in case of assessee company. Secondly, the huge wastage will also be not a criteria for determining for non-applicability of 80IC of the Income Tax Act in assessee's case. The wastage was not particularly higher than the actual saleable production of the assessee company. The Hon'ble Delhi High Court held that the provisions of I.T Act use the word manufacture' trial production is not regarded as beginning to manufacture or to produce articles because of the reason that the assessee has to produce trial production to verify whether ..... X X X X Extracts X X X X X X X X Extracts X X X X
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