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TMI Blog2006 (10) TMI 193X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as exempt under section 10B of the Act. It was opined that the Assessing Officer had not examined this aspect properly as to whether the income from fluctuation of foreign exchange fell under which head. It was further noted that the Assessing Officer had not examined the issue regarding exemption under section 10B properly as to whether or not the assessee complied with the conditions laid down in this section. A show-cause notice was issued in response to which it was stated on behalf of the assessee that it was 100 per cent Export Oriented Unit registered and approved by the Joint Development Commissioner, Noida. It was also explained that the assessee was a manufacturer-cum-exporter of handicrafts items as it was buying semi-finished goods, i.e., the structures of specified items from the market and after subjecting such goods to so many processes, was exporting them. The ld. CIT observed that the requirement of section 10B is that the undertaking must produce or manufacture an article or thing etc. Since in his opinion the assessee had only exported the goods purchased from local market without doing manufacturing or production, the exemption was not available. In reaching ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under section 10B, which rendered his order erroneous and prejudicial to the interest of revenue. He, therefore, denied exemption already allowed amounting to Rs. 11,19,910. 3. Before us it was contended by the ld. AR that the assessee is a 100 per cent EOU registered with Noida Export Processing Zone for manufacturing/exporting of Iron/Wooden Handicrafts items as per certificate granted by the competent authority, copy placed at page 24 of the P.B. It was explained that though complete manufacturing of each item was not possible in-house, the assessee purchased semi finished goods and subjected them to various processes such as grinding, surface smoothing, chemical dipping, drawing, polishing and packaging etc. It was emphasized that the said processes amounted to manufacture or production of the goods and hence the claim was rightly made and allowed by the Assessing Officer. By referring to Exim Policy 1997-2002, copy placed at page 60 of the P.B., it was argued that the term 'manufacture' has been defined in a wide sense to include processes such as repacking, polishing, labelling and also agriculture, animal husbandry etc. It was explained that major investment in in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as stated that such amount represented the transactions of the non 100 per cent EOU unit, which was availing benefit under section 80HHC till last year. It was, therefore, put forth that the said amount did not represent the income of the present assessee because the trading activity was started only in this year inasmuch as the certificate 100 per cent EOU was granted by the competent authority only at the fag end of the preceding year, viz., on 28-3-2000. This amount, being a major chunk representing 95 per cent of the total income, was claimed to be not the income derived from eligible undertaking and hence at the very outset was ineligible for exemption under section 10B, if any. Further referring to page 65 of the P.B. it was contended that the assessee had purchased only 2 items of machinery in this year amounting to Rs. 10,989, which included air compressor and hand grinder. It was, therefore, argued that no undertaking can claim to carry out the manufacturing activity with these items. He further referred to the fact that there occurred a change in constitution of the present assessee firm, which made it ineligible for exemption. It was also stated that the assessee-firm wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any articles or things or computer software; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation.- The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section. Explanation 2- For the purposes of this section: (iv) 'hundred per cent export-oriented undertaking' means an undertaking which has been approved as a hundred per cent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ging have been performed. Now the question arises as to whether performing of these processes would amount to manufacture or production of an article or thing so as to make the assessee eligible for exemption under section 10B. 9. To test the factual matrix of the case on the prescription of this section, it is sine qua non to understand the meaning of the term 'manufacture' and 'production'. The word 'manufacture' has not been defined precisely in the Act. Black's Law Dictionary explains the expression 'manufacture' as under: "The process of operation of making goods or any material produced by hand by machinery or by other agency; anything made from raw materials by the hand, by machinery, or by art. The production of articles for use from raw and prepared material by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine." The term 'manufacture' came up for consideration before the Hon'ble Supreme Court in the case of Dy. CIT v. Pio Food Packers [1998] 198 Suppl. SCC 174. After considering several cases on the point, the Hon'ble Supreme Court gave the test for determining t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use. Mere giving of new name by the seller to what is really the same product is not manufacture of a new product. 11. The Hon'ble Jurisdictional High Court in the case of Lucky Mineral (P.) Ltd. considered a case in which the assessee was doing business of mining of lime stones and marble blocks and thereafter cutting and sizing the same before being sold in the market. The assessee claimed itself to be an industrial undertaking for the purposes of section 80HH of the Act. When the matter came up before the Hon'ble High Court, it did not accept the assessee's contention on the ground that the marble stones did not lose the original identity by simply undergoing process of cutting into slabs and, therefore, came to the conclusion that it was not entitled to deduction under section 80HH. The said decision of the Hon'ble High Court stands affirmed by the Hon'ble Supreme Court in the case of Lucky Mineral (P.) Ltd. Recently, the Jodhpur Bench of the Tribunal in a Third Member order rendered in the case of Arihant Tiles & Marbles (P.) Ltd. v. ITO [2006] 10 SOT 225, has also denied the benefit of deduction under section 80-IA vide its order dated 30-6-2006, by holdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion' has a wider connotation than the word 'manufacture'. While every production can be characterized as production, every production need not amount to manufacture." It is no doubt true that the word 'produce' is wider than 'manufacture' but the question that when production is said to take place has also been replied by the Hon'ble Apex Court in the above case in the following terms: "The word 'production' or 'produce' when used in juxtaposition with the word 'manufacture' takes in bringing into existence new goods by a process which mayor may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods." The ld. counsel for the assessee has laid a lot of emphasis on the decision of the Hon'ble Apex Court in the case of CIT v. Sesa Goa Ltd. [2004] 271 ITR 331 in which case extraction and processing of ore was held to amount to production. The said decision was cited before the Jodhpur Bench of the Tribunal in the case of Arihant Tiles & Marbles (P.) Ltd. After considering the ratio decidendi of this case it was held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt to production. It is further in this context that the Jodhpur Bench of the Tribunal in the case of Arihant Tiles & Marbles (P.) Ltd. has held the process of conversion of marble block by sawing into slabs and tiles and polishing as not amounting to production or manufacture because it lacked the first ingredient mentioned in the case of Sesa Goa Ltd., being the extraction of marble blocks. Examined in the light of the above legal position we hold that the activities performed by the assessee in question did not yield a new product and basically there is no difference in the identity between the original and processed items of handicrafts exported by it and hence the case cannot be cabined in the expression 'Production'. 17. Here it would be relevant to consider another word 'processing' falling in this family of terms, which means a sequence of operations. The term 'processing' has to be distinguished from 'manufacturing' in the sense that a mere processing does not ordinarily make the thing to undergo a change loosing its original identity, whereas in 'manufacturing' the original article loses its identity and a thing differently known ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture or produce articles. This section was not intended to be applied to industrial undertakings which are engaged in "processing of goods" not amounting to manufacture or production of articles. There may be processes undertaken by an industrial undertaking, which may result in conversion of the article into a new commercial commodity or may change the nature and character of the article in such a manner that it may lose its original identity and get transformed into an entirely new commodity. In such cases "manufacture" can be said to have taken place. But in cases where no such transformation takes place, each and every process applied to an article cannot be tantamount to "manufacture or production" of goods or articles. The true test for determining whether there is any manufacture is: whether the commodity subjected to the process of manufacture can no longer be regarded as the original commodity but is recognized in the trade as a new and distinct commodity. The three expressions "processing", "manufacture" and "production" used in various taxing statutes, are not interchangeable expressions. Though often used in juxtaposition, they convey different concepts and refer to dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an industrial undertaking eligible for deduction under section 80J by contending that its activity amounted to manufacture or production. By repelling the assessee's contention, the Hon'ble Apex Court held as under: "For getting benefit of deduction under section 80J or investment allowance, the requirement is-the assessee-company must be engaged in the business of manufacture or production of any article or thing. In a case of preparing food packages or selling the same or preparing foodstuffs for serving in the hotel there is no question of manufacture or production. The raw material is at the most processed so as to make it eatable. The word "manufacture" has various shades of meaning but unless defined under the Act it is to be interpreted in the context of the object and the language used in the sections. In the context of the provisions which deal with grant of investment allowance or deduction under section 80J it is apparent that it is used to mean production of a new article or bringing into existence some new commodity by an industrial undertaking. It would not be applicable in cases where only processing activity is carried out. Further, such production activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the case, we find that the assessee has purchased fully manufactured but unpolished handicraft items, such as dining table, almirah, T.V. cabinet etc., on which it undertook the processes of surface smoothening, drying and polishing etc. On careful consideration we find that the activities carried out by the assessee are in the nature of different stages of polishing and packing. When the Hon'ble Supreme Court in Gem India Mfg. Co.'s case held the activities of polishing and cutting of diamonds as not manufacture or production, how the polishing alone done by the assessee on handicraft items can be named as 'manufacture or production'? The items purchased by it retained the same character and nomenclature before and after the processes performed over them. Such items which were hitherto unpolished and/or rough, got finished. For example, the dining table purchased by the assessee, remained the dining table after polishing and finishing done on it. We, therefore, hold that the activities carried out by the assessee though amount to 'processing', but fall short of 'manufacture or producing an article or thing'. If the contention of the ld. A.R. fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee claimed to have set up its own unit, obtained certificate from competent authority on 28-3-2000. We have further gone through the relevant material on record from which it is manifest that the assessee was already in existence as can be seen from the copy of trading, P&L account etc., for assessment years 1999-2000 and 2000-01. On the contrary, M/s. Kwal Pro International, taken note of by the ld. CIT as having been availing deduction under section 80HHC in the past, in fact came to be established only on 11-8-2000 as is evident from the copy of its partnership deed placed at page 107 onwards of the PB. The ld. D.R. has not controverted this factual position. In the light of these facts, we find no difficulty in holding that the ld. CIT erred in coming to the conclusion that the second condition laid down in section 10B was not fulfilled. 23. Similar is the position regarding the third condition under section 10B(2)(iii). On this aspect the ld. CIT stressed on the need to have plant and machinery by industrial undertaking of its own, which should not have been used by somebody else for some other purpose. He held that since the assessee did not have the machinery of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xport oriented undertaking; (ii) It must produce or manufacture articles or things or computer software; (iii) It should not be formed by splitting/reconstruction of business; (iv) It should not be formed by transfer of old machinery; (v) There must be repatriation of sale proceeds into India; (vi) Audit report should be submitted in the prescribed form; (vii) It must not transfer ownership or beneficial interest in undertaking. All the conditions as set out above are to be satisfied simultaneously. If any of the conditions is not fulfilled, the benefit of exemption under section 10B does not stand. Since we have held that the assessee was not producing or manufacturing articles or things, there is no scope for allowing benefit of this exemption provision. (III) WHETHER THE REV1SI0NAL POWER WAS PROPERLY EXERCISED 27. The ld. counsel for the assessee has contended that the ld. CIT was not within his power to overturn the action of the Assessing Officer in the revisional proceedings. According to him, where one possible view exists which the Assessing Officer has taken, the power of the ld. CIT gets ousted. Sounding a contra note, the ld. D.R. submitted that the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word "erroneous" in section 263 emerges out of this context. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct." 30. Similar view has been taken in the following cases: 1. Jagdish Kumar Gulati v. CIT [2004] 269 ITR 71 (All.) 2. Ashok Leyland Ltd v. CIT [2003] 260 ITR 599 (Mad.) 3. CIT v. Export House [2002] 256 ITR 603 (P&H). The Jodhpur Bench of the Tribunal in a recent order dated 31-82006 passed in the case of Udailal Anjana v. CIT [IT Appeal No. 140 (Jodh.) of 2006] has held that where the Assessing Officer did not make proper investigation, this rendered the assessment order to be erroneou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground that once the assessee had preferred to claim exemption under section 10B, then it was not open for it to change its position after completion of assessment. We are not convinced with the view taken by the ld. CIT for the reason that what is material to be examined is the satisfaction of the conditions laid down under section 80HHC. If larger benefit has been denied to the assessee, but a smaller benefit is otherwise available as per law, the assessee cannot be shown the door simply on the ground that his claim for larger benefit stands rejected. The Hon'ble Punjab and Haryana High Court in the case of CIT v. Rewari Central Cooperative Bank Ltd. [2003] 263 ITR 598 considered a case in which the assessee had not made claim for deduction under section 80P before the Assessing Officer. The ld. CIT(A) allowed the claim. The Hon'ble High Court held that failure of the assessee to raise the plea of exemption before the Assessing Officer cannot disentitle it to the benefit of statutory exemption. In view of the foregoing discussion, we are not inclined to accept the opinion of the ld. CIT for denying deduction under section 80HHC simply on the ground that the assessee had c ..... 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