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TMI Blog2010 (8) TMI 1103X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed despite the fact that the assessee has failed to prove with evidences the existence of machinery and such machinery was used for manufacturing or production during the year under consideration. 3 The first issue raised in the present appeal is against the allowability of claim of deduction u/s 80 IC of IT Act. 4 The brief facts of the case are that the assessee was engaged in the business of supplying communication equipment mainly to Govt agencies. The assessee was operating from two units - one at Panchkula and second at Parwanoo. The assessee was claiming deduction u/s 80 IC of IT Act against profits of the Parwanoo unit since Assessment Year 2004-05. The assessee was allowed deduction u/s 80 IC of IT Act relating to Assessment Years 2004-05 and 2005-06. However, the said deduction was denied by Assessing Officer in Assessment Year 2006-07. The reasons for denial of the said deduction in the year under appeal were the observations of the Assessing Officer pursuant to the visit to the Parwanoo unit, during the conduct of assessment proceedings. The Assessing Officer has mentioned that the business of the assessee was of manufacturing of communication equipments whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,429/= for a total turnover of ₹ 5.92 crore too low to justify production in comparison with consumption of electricity at Panchkula Unit. The Assessing Officer also took photographs of the activity at the Unit and observed that transceiver, power supply and other accessories are purchased in a finished stage and only programming and testing of transceiver is done as per requirements of customers. The raw material needed for manufacturing the highly sophisticated products were not found available at the factory premises and only finished goods purchased from outside were found lying at the premises. The Assessing Officer thus held that assessee was not carrying on manufacturing activities at Parwanoo Unit but was doing basic activity and carrying out trading activity. The Assessing Officer compared the activities carried on by the assessee at its two units and on basis of various parameters at Page 22 of assessment order observed that expenses booked at Parwanoo unit are much less than those booked at Panchkula Unit. As per the Assessing Officer the assessee had reduced expenses at Parwanoo Unit to claim higher deduction u/s 80 IC of IT Act. The Assessing Officer also noted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... registered with Ministry of Communication, Govt. of India. As regards, the transceiver sets, the Counsel argued that the appellant has carried out the third activity of frequency synthesization which the most relevant activity without which the equipment can not be sold and which amounts to manufacture. The Ld. Counsel argued that the Assessing Officer herself admitted that the third activity has been carried out by the appellant and this activity is an integral part of manufacturing process of the transceivers but has held that the appellant is not carrying out manufacturing activity. The counsel argued that as regards manufacturing of transmitters and manufacturing of receivers, these components were imported and cannot be manufactured by the appellant since they are highly technical and sophisticated items. Similarly, for the power supply equipment the appellant has carried out the activity of laying of transformers, registers etc., which is an integral part of manufacturing process as admitted by the Assessing Officer in the assessment order. The counsel further argued that the number of workers working during inspection has been mentioned as 7 to 8 by the Assessing Officer bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssembly itself amounts to manufacture or production. The Ld. Ld. Counsel for the assessee has placed reliance on the decision in the case of CIT Bombay V Telco, 68 ITR 325 and Aspinwall V CIT, 251 ITR 323 (S.C). Similar is the position with regard to the power supply in which the Ld. Counsel argued that the writing of the PCBs is again a very hi-tech job and the appellant cannot manufacture the same and the activity of laying the transformers, resistors is itself manufacturing activity. I find force in the arguments of the Ld. Counsel that the activities carried out by the appellant amount to manufacture/production as required for the purposes of Section 80IC. It is not necessary that for manufacture to be complete transmitters, receivers and PCBs should also be manufactured by the appellant. The Assessing Officer has held that the appellant is not carrying out manufacturing activity on the wrong presumption that for the activity to be complete all the steps should be performed by the appellant. It is therefore, held that the activity of the appellant of frequency synthesization for transceiver sets and the activity of lying of transformers, resistors etc. for power supply equipmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an assessee other than at market rate because the Assessing Officer has totally disallowed the deduction u/s 80IC of the IT Act. Since, the deduction has now been allowed, the Assessing Officer is directed to examine the applicability of sub-section 9 of the Section 80IA in this case and take necessary action. This ground of appeal is allowed. 9. The Ld. CIT(A) also allowed the claim of depreciation on plant and machinery accepting the plea of assessee of transfer of assets to Panchkula unit and list of fixed assets and investment being accepted in earlier years. The assessee had claimed depreciation on plant machinery at Parwanoo Unit at ₹ 3,10,275/- and not ₹ 9,32,258/- as disallowed by the Assessing Officer. 10 The Ld. D.R. for the revenue placing reliance on the order of the Assessing Officer pointed that the assessee had imported the parts and assembled them and such activity is not manufacture. The low consumption of electricity at factory premises proves no manufacturing activity being carried on. The Ld. D.R. for the revenue relied on the case of V.M. Salgaocar Bros (P) Ltd V. CIT (1996) 217 ITR 849 (Kar) for the proposition that improving of marketabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturer at pages 33 to 38 (Annexure F) and copy of Technical qualification Certificate of Staff (Skilled staff) at page 39 of the paper book (Annexure-G). The assessee had established the Unit in State of Himachal Pradesh and products manufactured being covered by 14th Schedule, the eligibility of the Unit for deduction u/s 80IC of the Act was claimed by the assessee. 13. The plea of the assessee that after the requisite registrations being allowed by the different Departments, the manufacturing activity being carried on by the industrial understanding stands proved. We are of the view that in order to start is manufacturing activity, the assessee needs registration / approval from different departments to establish its unit for carrying on the manufacturing activities. The Unit being registered with various authorities only establishes the intention of the assessee to start its manufacturing activity. Whether the activity carried on by the assessee is manufacturing, entitling it to the benefit of deduction u/s 80IC of the Act, is altogether a different aspect to be decided independent of Registration. 14. Now, coming to the manufacturing process undertaken by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer admits in para 1 on page 9 of the assessment that the above said activities are integral part of the manufacturing process of power supply equipment and the two have to be carried out before the product is in a condition for use. The Assessing Officer further mentioned that writing of PCB has not been carried out by the assessee and only the laying of transformers, registers etc. has been carried out. The second activity, undertaken by the assessee transforms the PCBs into Power Supply Equipments and is marketable to end user. The said activity is considered by the Assessing Officer to be the integral part of manufacturing process and admittedly the assessee is carrying on the second activity. Once, it has been found that the assessee is carrying out the integral part of manufacturing process, the contention of the assessee that it is involved in manufacturing activities stands proved. 15. For claiming deduction u/s 80IC of the Act, the basic condition is that the gross total income should include profits and gains from any business undertaken by the undertaking or enterprise, which is engaged in the manufacture or production of any article or thing, not being an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion u/s 80IC of the Act in Assessment Year 2004-05 and 2005-06 and the same were allowed to the assessee vide orders passed u/s 143 (3) of the Income Tax Act. Though the principle of res judicata does not apply to the Income Tax proceedings, yet the rule of consistency demands that under similar situations, the claim of the assessee be not disturbed. In the entirety of the facts and circumstances referred by us in the paras herein above, we uphold the order of CIT(A) in allowing the claim of deduction u/s 80IC of the Act in respect of the profits of Parwanoo Unit. We also confirm the order of CIT(A) in directing the Assessing Officer to examining the applicability of section 80 IA(9) of the Act in respect of transfer of stock of ₹ 2,25,45,879/- from the Panchkula unit to Parwanoo Unit. Accordingly, the ground No.1 raised by the Revenue is dismissed. 17. The learned DR for the Revenue had placed reliance on the ratio laid down by the V.M. Salgaocar Bros (P) Ltd V. CIT (1996) (supra) for the proposition that improving marketability of article does not constitute manufacture or production. The test of marketability stands approved by the ratio laid down by the Hon'ble Ape ..... X X X X Extracts X X X X X X X X Extracts X X X X
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