TMI Blog2012 (5) TMI 309X X X X Extracts X X X X X X X X Extracts X X X X ..... e process carried on by the assessee, as such, definitely amounts to manufacture - held that the learned CIT(A) has gone wrong in sustaining the non-allowance of the exemption claimed by the assessee under s. 10B of the Act, with regard to the assessee's new EOU - Decided in favor of the assessee - ITA Nos. 747 and 915/Del/2009; - - - Dated:- 30-11-2011 - A.D. Jain, Shamim Yahya, JJ. Anil Chopra and V.K. Garg for the Appellant Y.K. Kakkar for the Respondent ORDER A.D. Jain, Judicial Member:- 1. These are assessee's appeals for asst. yrs. 2002-03 and 2003-04. The issues involved being common, the facts have been taken from ITA No. 747/Del/2009. 2. The effective grounds of appeal are as under:- "1. That the learned AO has erred on facts and in law in reopening the assessment. The reopening of the assessment is unlawful and without jurisdiction and as such the same deserves to be quashed. The learned Commissioner of Income-tax (Appeals) (learned CIT(A)] has erred in not quashing the assessment. 2. That the learned AO has erred in not allowing exemption under s. 10B of the IT Act ('Act') in respect of the new eligible EOU. The learned CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried on by using old infrastructure without addition of any new plant and machinery in spite of turnover of Rs. 3.09 crores; that the assessee had utilized the infrastructure of its sister concern; and that the old stock had been carried forward as opening stock. 6. The learned CIT(A) upheld the aforesaid findings of the AO. It was further held that the assessee had violated the criteria laid down under s. 10A(2) of the Act, as mentioned by the AO; that the assessee had not purchased any machinery, required for manufacture of the items, after the establishment of the new EOU; that the contention that no new machinery was required, was not correct; that the assessee had got most of the work done from outsiders as job work; that there was no value addition by the assessee company; that the assessee had used the premises at Gurgaon, taken on lease/rent, as a mere godown, rather than as a facility for manufacture/processing; that the assessee had also not fulfilled the conditions laid down by the Development Commr. in approval letter dt. 28th March, 2000; and that the assessee had not proved manufacturing or processing of articles/things. 7. The assessment order was, in this ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n existence; that the law does not impose any bar on an assessee from having separate additional new undertaking to manufacture and produce the same items as manufactured earlier; that what is important for the purpose of s. 10B of the Act is a new EOU and it is not important or necessary that a new company be formed; that what is essential is that a new undertaking be established; that in the present case, there was no business in the old unit for more than five years; that therefore, the authorities below have erred in observing that the assessee formed the new undertaking by reconstructing or splitting up of the business already in existence; that the provisions of . s. 10B specifically require that in order to be called a hundred per cent EOU, an undertaking is to be approved as such by the board appointed in this behalf by the Central Government in exercise of the powers conferred by s. 14 of the Industries (Development and Regulation) Act, 1951 and the Rules framed thereunder; that the EOU of the assessee was registered as a one hundred per cent EOU vide letter dt. 28th March, 2000 by the Development Commr., NEPZ; that therefore, the authorities below have erred in observing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate office or head office and the EOU and it is a normal practice to consolidate all these accounts in one balance sheet and P and L a/c, as was done by the assessee; that the EOU was not formed by the transfer of old machinery and the old machinery was never used in the EOU; that therefore, the EOU was not formed by transfer of machinery used in any other business, to the new business; that therefore, the requirement of s. 10B in this regard was never violated; that the authorities below have also erred in observing that the assessee had utilized the infrastructure of its sister concern, without there being anything on record to this effect; that M/s Taurus Exports, the said sister concern, of the assessee, was a partnership firm; that it was independently exigible to tax as a separate entity; that it was obvious from the separate lease deeds, that these two entities, i.e., the assessee and M/s Taurus Exports operated from separate premises; that the assessee, as a separate and independent unit, never utilized the infrastructure of M/s Taurus Exports; that the assessee had its own expenses and operations, as available on record and as also noted-by the learned CIT(A); that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased Gurgaon premises not only merely as a godown, but also for finishing and packing of the finished goods under the supervision and control of the assessee's employees and contract labour, for which, the expenses were claimed under the head of "Expenses and salaries"; that it has also been wrongly observed that the assessee has not fulfilled the conditions laid down by the Development Commr. in the approval letter dt. 28th March, 2000; that had it been so, the EOU would never have remained registered and approved as a new undertaking under the one hundred per cent EOU scheme throughout the years under appeal; that moreover, the learned CIT(A) has made this cryptic observation without specifying as to which conditions have remained unfulfilled and as to how the assessee has not fulfilled them; that on the contrary, the assessee has duly fulfilled all the conditions laid down in the letter of approval dt. 20th March, 2000 issued by the Development Commr. of NEPZ; that moreover, the Development Commr., NEPZ, is a specialized authority in his field and the learned CIT(A) is not authorized to make adverse comments with regard to the field of the Development Commr., particularly when t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s taken on lease at Gurgaon was used merely as a godown and not for the purpose of any manufacturing or processing of any article or thing; that the assessee has remained unable to prove otherwise; that the conditions laid down by the Development Commr. in the approval letter dt. 28th March, 2000 were not fulfilled and the assessee cannot get away by just saying that it is the Development Commr. who is the prescribed authority and not the IT authorities; and that no material has been brought on record by the assessee to show that any manufacture or processing of articles or things was done by the assessee. 12. The learned Departmental Representative has placed reliance on the following case law:- 1. A.G.S. Tiber and Chemicals Industries (P) Ltd. vs. CIT (1997) 141 CTR (Mad) 467 : (1998) 233 ITR 207 (Mad); 2. Kerala State Cashew Development Corporation vs. CT (1993) 113 CTR (Ker) 266 : (1994) 205 ITR 19 Ker); 3. Asstt. CIT vs. Varma Mukherji (P) Ltd. (1997) 61 ITD 462 (Bom); 4. CIT vs. Veena Textiles (P) Ltd. (1984) 40 CTR (Mad) 233 : (1985) 155 ITR 794 (Mad). 13. We have heard the parties and have perused the record. The issue is as to whether deduction clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of manufacture and export of hand-made quilts and bed spreads in the asst. yr. 2002-03. This new unit was registered as a one hundred per cent EOU vide letter dt. 28th March, 2000 of the Development Commr., NEPZ, a copy whereof is at assessee's paper book 71. As per this letter, the assessee was extended all the facilities and privileges admissible and subject to the provisions of the EOU scheme, as envisaged in the Export Import Policy 1997-2002, for the establishment of a new undertaking at 405, Udyog Vihar, Phase IV, Gurgaon for 10,000 pieces annual capacity manufacture of bed spreads, subject to the conditions mentioned in the letter. The new EOU commenced its business in the asst. yr. 2002-03. The assessee received a licence for private bonding of licenced EOU from 31st March, 2000. On 3rd Aug., 2005, i.e., subsequent to the assessment years under consideration, there was a final debonding of the new EOU undertaking of the assessee. Vide lease deed dt. ast April, 2001, the assessee took on lease a premises for its new EOU at 405, Udyog Vihar, Phase IV, Gurgaon. The EOU was registered under the local Sales-tax Act on 12th June, 2001. On the same date, it was, also regis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom them and the assessee was treating each unit as a separate and independent unit in its accounts, the new units could not be held to be part of the existing business; and that the assessee was entitled to deduction under ss. 80-I and 80-IA of the Act. 17. Further, the existence of business is a presupposition for the formation of a new undertaking by the reconstruction or the splitting up thereof. In the present case, there had been no business in the old unit of the assessee for over five years before the start of production by the new EOU. That being so, the new EOU of the assessee cannot, in any manner, be said to be formed by the reconstruction or splitting up of a business already in existence. Then, the authorities below have observed that mere registration as a one hundred per cent EOU is not the sole criterion for grant of deduction under s. 10B of the Act. This observation itself amounts to an admission of the unit being registered as a one hundred per cent unit with the Development Commr., NEPZ. Explanation 2(iv) to s. 10B of the Act provides for a one hundred per cent EOU to mean an undertaking which has been approved as a one hundred per cent EOU by the board app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on by using old infrastructure without addition of any new plant and machinery, despite the fact that the turnover was of Rs. 3.09 crores. Moreover, the books do not show the assets, owned by the assessee prior to the set up of the new unit, to have been either transferred to or used in the new unit. The plant and machinery shown was of a meager sum of Rs. 26,190. This has been stated to be old and never transferred to the new unit, nor used by the new unit, as it was not required by the new unit. It remained as part of old head office assets rather than being treated as part of the independent new EOU. These facts have not been controverted. 20. Further, it is seen that for eligibility for deduction under s. 10B of the Act, it is nowhere the requirement of the section that plant and machinery must be used for manufacture or production of goods or articles. As observed, the Department has not been able to show, contrary to the assessee's claim of only needles and scissors being required for the manufacture of hand-made quilts and bed spreads, that any other "plant and machinery" was either required for such manufacture or was actually used by the assessee for such manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but when it is "formed" by such transfer; that this is the key to the interpretation; that the formation should not be by such transfer; that therefore, it is not every transfer of building or material, but one which can be held to have resulted in the formation of the new undertaking, that results in denial of the relief under s. 15C(1); that therefore, even if the new undertaking is established by transfer of building, plant or machinery, but it is not formed as a result of such transfer, the assessee cannot be denied the benefit; and that the transfer, to take the new undertaking out of the purview of s. 15C(1), must be such that, but for the transfer, the new undertaking would not have come into being. 23. The present case squarely attracts the said ratio in Bajaj Tempo Ltd. (supra). Herein, it has not been shown by the Department that there was such transfer of plant and machinery to the new EOU from the old unit, as would render the new EOU as not having come to be, if such transfer had not been there. 24. Otherwise too, as laid down in Bajaj Tempo Ltd. (supra), the provision in a taxing statute granting incentives for promoting growth and development should be const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Then, the AO observed that the old stock had been carried forward as opening stock. In this regard, the assessee has maintained that the opening stock of raw materials lying with the company was very old and obsolete and was of no use to the new EOU of the company; and that such stock was also actually never used in the business of the new undertaking. This stock has been carried forward, as such in the balance sheet of the company, as head office assets. The closing stock of Rs. 4,48,701, as mentioned by the AO, was also the opening stock. It has been asserted that this was also never transferred to the new EOU, nor used by it and it remains the same in the opening and closing stock in both the years involved. The new EOU, an independent undertaking of the company, with independent accounts, has shown inventories, in which, this position is clear. In this regard, copies of audited balance sheet and P and L a/c for financial years 1997-98 to 2000-01 are at assessee's paper book 27 to 41, 43 to 45, 46 to 47, 50 to 51 and 52 to 65, respectively. As per the old inventory in the head office, the stock is of Rs. 4,51,701 as on 31st March, 1997, and Rs. 48,701 as on 31st March, 2001, 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there in the new EOU. Expenses under the head "Salary" in the asst. yr. 2002-03 was of Rs. 7,00,117, as compared to that of Rs. 12,000 in the year preceding that. Further, in the asst. yr. 2002-03, contract labour under "finishing expenses" was of Rs. 11,12,086 as compared to rupees 'nil' in the earlier year. The new EOU was getting quilts and made-ups manufactured from fabricators on job works, for which, the EOU provided its own raw material, accessories, designing, supervising, management, packing and finishing and quality control. This has nowhere been denied or controverted. It was the EOU which incurred all relevant expenses for the manufacture. These expenses included expenses on fabrication, dyeing and printing, job work, establishment, finishing, packing, clearing and forwarding, etc. This has, again, remained unrebutted. 33. Another objection of the CIT(A) is that the premises at Gurgaon, taken on lease/rent was used merely as a godown, rather than as a facility for manufacturing or processing. In this regard, the submission of the assessee has been that this observation of the learned CIT(A) is incorrect; and that the premises at Gurgaon was not used merely as a god ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,19,364 10-2001 Cr Marshal Security Enterprises Journal 284 1,34,394 12-2001 Cr Marshal Security Enterprises Journal 339 1,18.369 -2002 Cr Marshal Security Enterprises Journal 369 92,910 -2002 Cr Marshal Security Enterprises Journal 414 1,02,919 Cr Marshal Security Enterprises Journal 420 1,00,564 Cr Marshal Security Enterprises Journal 429 82,565 Dr. Closing balance 11,12,086 11,12,086 35. These expenses show that the premises at Gurgaon was not used merely as a godown. 36. The learned CIT(A) has further objected that the assessee has not fulfilled the conditions laid down by the Development Commr. in the approval letter dt. 28th March, 2000. In this regard, it is seen that though the learned CIT(A) has reproduced the aforesaid letter dt. 28th March, 2000, it has not been made out as to which of the conditions mentioned therein have been violated by the assessee. In fact, it remains und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a publisher of books, it would not be doing more than getting the manuscript and preparing the same for printing and book binding; that yet, the fact that printing and book binding were done by someone else did not imply that someone else was the manufacturer; and that it was the business of the assessee to get the books manufactured by getting the manuscript, designing the nature of the book, finishing the anticipated product and then selling the product after getting it made. 39. In Griffon Laboratories (P) Ltd. vs. CIT (1979) 119 ITR 145 (Cal), it was held that a manufacturer may hire plant and machinery and employ hired labour and manufacture the goods; that, however, to earn the benefit of concessional rate of tax as industrial company, the company must mainly engage itself in the manufacture or processing of goods either itself or by someone under its supervisory control or direction; and that the Tribunal erred in holding that the assessee company must own or possess the manufacturing plant or machinery before it could be said to be a manufacturer of goods. 40. In CIT vs. Anglo French Drug Co. (Eastern) Ltd. (1991) 95 CTR (Bom) 176 : (1991) 191 ITR 92 (Bom), it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... row India Ltd. (1991) 188 ITR 485 (Bom), it was held that where the assessee had engaged the services of V. Company for fabrication of goods and things mentioned in the agreement under its supervision and control with the help of technical know-how supplied by it and the assessee had also supplied all the raw materials to V. Company, which acted only as labour contractors with the assessee, the assessee was engaged in the business of manufacturing and processing of goods. In the present case, it is seen that the taxing authorities have themselves allowed deduction under s. 80HHC of the Act to the assessee as a manufacturer-exporter, thereby admitting the assessee to be a manufacturer. 43. Coming to the case law sought to be relied on by the Department, in A.G.S. Tiber and Chemicals Industries (P) Ltd. vs. CIT (supra), deficiency of profits and carry forward thereof under s. 80J were involved, which is not the subject-matter here. In Kerala State Cashew Development Corporation vs. CIT (supra), it was a case again concerning s. 80J of the Act, where there was taking over and running of existing sick cashew factory. No new industrial undertaking was there. This case, as such, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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