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TMI Blog2010 (1) TMI 1174X X X X Extracts X X X X X X X X Extracts X X X X ..... -2001 by the assessee, engaged in the manufacture of 2.2Dithio-di benzoic acid, was taken up for scrutiny with the issue of notice u/s 143(2) of the Income-tax Act,1961[hereinafter referred to as the 'Act'].During the course of assessment proceedings, the Assessing Officer[AO in short] noticed that the assessee claimed deduction u/s 10B of the Act in respect of profits of its export orient unit, even when in the preceding assessment years 1998-99 to AY 2000-01,it claimed deduction u/s 80HHC of the Act. The AO was of the opinion that the provisions of section 10B(2) of the Act were available to the new undertakings only and reconstruction or conversion of business already in existence does not entitle the assessee for the benefit u/s 10B of the Act . The AO further observed that it was incumbent upon the assessee to prove that its plant and machinery was not used earlier for any purpose subject to explanation below section 10B(2) of the Act. According to the AO ,it will be self defeating exercise if the legislation having introduced a sunset clause in section 80HHC(4) of the Act contemplates deduction u/s 10B to the same industrial undertaking. In response to a show cause notice, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n dated 25-10-2000 to DGFT and the relevant para of the said application reads as under: "We are a private limited company manufacturing and exporting above mentioned product since last five years. As we have sizeable export, we propose to fully convert our existing unit into EOU. For this purpose we have already sent application dated 3-7- 2000, however by oversight we have mentioned it as for setting up of a new unit." 2.2 According to the AO, explanation 2 to section 80I(2) of the Act defines "newly established industrial undertaking" and such undertaking has to satisfy the requirement of restriction of 20% of the machinery used in previous undertaking. Since the assessee admitted that all plant and machinery were already installed prior to the date on which the letter of permission dated 06-01-2001 was received and even the plant and machinery added during the year were also installed prior to the "conversion" of the assessee's existing unit into an EOU, the AO recorded the statements of assessee's, representative Shri SS Patel, NRI, Managing Director, Shri DG Patel, Alternate Director to the said SS Patel and Shri RC Patel, Chief Chemist, in charge of installation, productio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssistance, was only after clearance of the proposal by the Board of Approval. Therefore, the Letter of Permission No.PER:1(2001) EOB/98/2000 dated 16-01-2001 issued to M/s.Abbey Chemical Pvt.Ltd. is with the approval of the Board of Approval, constituted under Section 14 of Industries (Development and Regulation) Act, 1951. The ld. CIT(A) confronted this evidence to the Departmental Officers, and in view of the clear cut language of the above letter it was accepted that the permission was sufficient U/s.14 of the Industries (Development & Regulation) Act, 1951, and for the purposes of provisions of section 10B, explanation 2(iv). Accordingly, the ld. CIT(A) observed that as per the evidence available, it is clear that the existing DTA unit of the assessee clearly falls under the category of EOU with effect from 16-1-2001. 3.1 The assessee further submitted that the unit was formed neither by splitting up nor by reconstruction of a business already in existence. There was no "transfer" of any ' plant & machinery previously used for any purpose. Therefore, as none of these conditions existed, it has to be treated as a newly established undertaking. It was pointed out t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... block of 8 years. It is further stated as follows: " The above tax holiday was not available to a hundred per cent export oriented undertaking. Such undertakings were eligible only for deduction out of their export profits under section 80HHC of the Income Tax Act. With a view to providing further incentive for earning foreign exchange, a new section 10B has been inserted by the Act so as to secure that the income of a hundred per cent export-oriented undertaking shall be exempt from tax for a period of five consecutive assessment years falling within the block of eight assessment years". 2.17 From the above it would appear that undertakings which were getting benefits u/s 80HHC could now avail of benefit of Section 10B so as to provide further incentive for earning foreign exchange. Subsequently, w/hen the section was amended, Circular/No 794 dated 8-9-2000 was issued in which it was stated that Section 10B allowed a ten year tax holiday to export oriented undertakings, and with a view to rationalising the provisions of Sec.l0A & 10B they haye been substituted by new provisions. The new provisions state that the deduction would be granted with reference to the Assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot;splitting up" or "reconstruction" of any other unit, or that it has utilized machinery which was earlier utilized by another unit. This narrows down the debate to the issue whether it would be considered as a "new undertaking" for claiming the benefit of section 10B. The section itself is not at all explicit on this point. The word "new" was in the title when the section was first introduced. It is however not defined. However, the intention of legislature was to give benefits to EOUs in a way similar to those in the Free Trade Zones. Existing units i.e. old units availing benefits of section 80HHC could avail of this benefit, provided they were not formed by splitting, reconstruction and utilization of old machinery. This is tantamount to saying that the "old units" referred to in the Board's Circular also have the same characteristics as the so called 'new' units. This draws us to the conclusion that the unit itself should be new at the time it was formed regardless of whether it was formed as an EOU or not. It is the point at which it was formed that a decision has to be taken as to whether it' was formed by reconstruction/splitting or u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and local sales, and thus continued to avail of deduction U/S.80HHC. 2.23 In the appellant's case, it is clear from the record and also from the figures available in the Assessing Officer's order, that even prior to the years when it has become an EOU, the appellant was in any case doing only export business, and the entire production formed the export turnover. Therefore, this is not a case of mixed production, where any bifurcation restructuring or conversion from one kind to another kind of unit has been done. This is a clear cut case of a company doing export, but claiming EOU status at a later date, and this is not sufficient to debar the unit from the benefits of Section 10B. If the intention of the legislature had been to limit the benefits of the Section to only absolutely newly set up- units which should start manufacture only when they were made into EOUs, then like Sections 801 & 10A, specific clauses would have been included regarding the same. The absence of these clauses in Section 10B is very material. Even otherwise, the appellant is free to obtain whichever claim is more beneficial to him so long as it is otherwise eligible. As examined above, I would ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Free Trade Zones. The existing units availing benefits u/s 80HHC of the Act could avail of benefit of deduction u/s.l0B of the Act provided these were not formed by splitting, reconstruction and utilization of old machinery and had obtained an EOU certificate. As found out by the ld. CIT(A) in the instant case, the undertaking of the assessee, was absolutely "new" and utilized only new machines which had not been used elsewhere, and was doing export business. It had been claiming deduction u/s.80HHC hitherto while being registered as DTA unit, and it applied for the EOU status only subsequently. With the amendment of section 10B by the Taxation Laws (Second Amendment) Act of 1998, operative from assessment year 1999-00, the assessee was already entitled to a larger period of tax holiday; when the new section was substituted, there was already an unexpired portion of tax holiday to be availed by it. Section 10B was substituted by the Finance Act 2000 w.e.f 01.04.2001. The first proviso to the substituted section 10B provides that the unit shall be eligible to the tax holiday under the new section for the unexpired period of 10 years beginning with the assessment year r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industrial Development, Ministry of Industry, Government of India, New Delhi vide letter dated 28th Oct., 1994. Admittedly, Arihant Spinning Mills Unit-II (ASM-II) came into operation as DTA unit for the first time at Malerkotla, Distt. Sangrur (Punjab) during the asst. yr. 1991-92 and was eligible for deduction under s. 80-I of the Act and during the financial year relevant for the asst. yr. 1995-96 the said unit was got registered as 100 per cent EOU. The whole controversy is that the assessee claimed deduction under s. 80-I during the assessment proceedings and claimed exemption under s. 10B of the Act after its conversion as 100 per cent EOU. In such a situation, it has to be analysed in the light of both the sections, i.e., ss. 10B and 80-I, and their requirement. 8. After going through the record of the case, the Tribunal has given a finding of fact that the unit of the assessee was entitled to the benefit under s. 10B of the Act. Admittedly, the Circular No. 1 of 2005 is clarificatory in nature and the same is also binding upon the Department. " 6.2 In view of the foregoing and the view taken by the Hon'ble Punjab & Haryana High Court in their aforesaid decision, especiall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it became 67.49 i.e. less by 2 pound sterling. If multiplied by the sales, there is straightaway a difference of ₹ 30 lakhs. Secondly, the cost in comparison to sales was higher by 11% as compared to the previous year mainly due to cost of transportation from South India. The AO however, after considering the submissions of the assessee found the exchange rate difference of only ₹ 5,10,611. The assessee's argument, therefore, was held to be leading to a paradoxical situation presupposing that goods would be supplied at a pre-determined rate over the years. He observed that there was only one buyer, viz. Super Patco having an address in London, and the residential address of the NRI shareholder of the company was the same. In all probability, it was an associated enterprise and therefore, there was a strong possibility of price rigging and siphoning off profits. Therefore, a casual explanation generalizing exchange rate variation cannot be accepted and the arguments regarding supplies from South India remains unsubstantiated as the assessee is paying transport charges to the concerns of alternative Directors. According to the AO, the reduction in the profit is due to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear STG Pound value Export Value(Rs.) Realized Value (Rs.) Average Realized price per pound sterling 1999-2000 1638750 112715600 114181278 69.67584 2000-2001 1520550 102710350 102226940 67.23024 3.8 The appellant has further submitted as under: "Áppellant exported materials worth $ 15.20 lacs and the average exchange rate in terms of Pound Sterling to Rupee fell by ₹ 2/- approximaterly as compared to the previous year which straightway affected the company by ₹ 30/- lacs approximately. This is the reality. Now, the LAO mixes up this reality with exchange rate difference of ₹ 5.10 lacs which has been included in Sales. When exports are made, they are credited in books at a rate prevailing on the day of export but when the same is paid by the customer, the actual price received becomes the real price. And at this time, an adjusting entry is passed either debiting or crediting the export sales which is called as exchange rate difference. The LAO refers to this but it has nothing to do with the average rate of Pound Sterling realized during the year. Hence, the fact remains that the company realized around ₹ 30/- lacs less due to fluctua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... average of preceding and succeeding assessment years. The appellant, on the other hand, has produced sufficient evidence to show prima facie that the expenditure debited is correct, that the sales realization is correct and therefore, any allegation that the situation may be conducive to price rigging or inflation of expenses is not proved. 3.11 The Assessing Officer has also not made any observation regarding rejection of books, but has merely estimated a higher profit. This can not be done without pointing out specific defects, shortfalls, or earning of excess income. The apparent state of affairs should be taken as real, unless there are compelling reasons to show that the apparent is not true. Case law is available from 2 ITR onwards to state that additions can not be made on suspicion, surmises and conjectures. Exact circumstances for rejection of accounts have to be available and not mere guess work. The Gujartat High Court in the case of CIT Vs. Amitbhai Gunvantbhai (129 ITR 573)) held that "if there was no challenge to the transaction represented in the books, then it is not open to revenue to contend that what is shown by the entries is not the real state of affairs". Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a and therefore, there was no justification for the figure of 9% of sales taken as G.P. except that it was an average of preceding and succeeding assessment years. The Revenue have not placed before us any material , controverting these findings of the ld. CIT(A) .Undisputedly and as observed by the ld. CIT(A) in the impugned order the AO did not point out any defects in the books of account while ignoring the book results. Hon'ble Gauhati High Court in Aluminium Industries (P) Ltd. v. CIT (I.T.R. No. 12 of 1990) observed that a lower rate of profit declared by the assessee as compared to the previous year, would not in itself be sufficient to justify any addition. The mere fact that the percentage of loss or gross profit is high or low in a particular year does not necessarily lead to inference that there has been suppression. Low profit is neither a circumstance nor material to justify addition of profits. The ratio of the judgments in Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 (SC); Raghubir Mandal Harihar Mandal v. State of Bihar [1957] 8 STC 770 (SC); State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC); State of Orissa v. Maharaja Shri B.P. Singh Deo [1970] 76 I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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