TMI Blog2015 (3) TMI 766X X X X Extracts X X X X X X X X Extracts X X X X ..... for both the CIT (A) and ITAT to be satisfied that in fact the two units in question functioned.- Also whether the activity carried out in Malanpur and Namoli amounted to manufacturing goes, the fact that the assessee claimed and was granted modvat credit under Rule 57H of the Central Excise Rules at the relevant time itself is indicative that for purposes of excise, “the assembling of cassettes amounted to manufacture”. It goes without saying that the goods in question, i.e. Audio Video Tapes are manufactured in bulk - as in the present instance in Noida, which in turn constitute the raw materials for the ultimate assembly of the marketable products into cassettes in which several intervening stages would be involved. These would be cutting of the tapes into requisite levels, their placement in cassettes shells, packaging of such finished cassettes and labelling etc. In these circumstances, the Revenue’s argument that no manufacturing activity was involved in the assembling of cassettes is unsustainable - Decided in favour of assessee. Depreciation claims for the Namoli unit - Held that:- In view of the concurrent findings of the CIT (A) and the ITAT that in fact Namoli un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bhatia and Mr. P. Roy Choudhary, Advocates. For the Respondent : Mr. Satyen Sethi with Mr. Arta Trana Panda, Advocates. JUDGMENT S. Ravindra Bhat, J. (Open Court) 1. The following questions of law are urged: - 1. Did the ITAT fall into error in holding that the claim under Section 80HH in respect of Namoli Unit and 80I in respect of Malanpur Unit were admissible (common to ITA Nos.220/2007 232/2007)? 2. Did the ITAT err in regard to the assessee s depreciation claim in respect of Namoli Unit (common to both appeals ITA 220 232/2007)? 3. Was the suppression of sale to the tune of ₹ 1.79 crores as alleged by the Revenue for AY 1994-95 (ITA 232/2007) justified? 4. Did the ITAT fall into error in its findings of loss with regard to the Unit No.1 at Noida? (in ITA 232/2007) 5. Did the ITAT fall into error in respect of the claim for foreign exchange fluctuation made by the assessee?(in ITAT 232/2007) Question nos.1 2 2. The brief facts are that the assessee engages itself in the manufacturing, inter alia, of cassettes. At the relevant time, i.e., 1994-95 and 1995-96, the assessee had owned five production units. Two were located at Noida ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eous and contrary to the record. It was emphasized that mere assembling of tapes would not constitute manufacturing. Learned counsel relied upon the decision in Krishak Bharti Cooperative Ltd. v. Deputy Commissioner of Income Tax (ITA 1248/2010, decided on 24.07.2013) to urge that the expression derived from is narrower in connotation as compared to the expression attributable to which occurs in other provisions. It was submitted that ownership by the assessee of an industrial undertaking, has to necessarily be established. It was also contended that the losses claimed by the Noida unit and profits claimed correspondingly by the Malanpur and Namoli units also should disclose that there was a functional integrality and that the latter units which claimed exemption were in fact entirely derived from the manufacturing activity carried on by the Noida unit. 6. The AO s findings in regard to the functionality are extracted below: - A) The expenditure pertaining to vehicles have not been debited by the units having ownership of their on. The use of the vehicles is not confined to the units having ownership. But the depreciation is claimed by the owner units declared. B) The emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterials placed before him rather elaborately. These materials included inter alia the employees details in the form of 14 reports and documents including factory inspection reports for the period 1992-97. These reports as well as other materials established that the units in question in Malanpur and Namoli were employing substantial number of workers - between 95-108; the electricity billing patterns for the said period and the amounts paid were also taken into consideration. Furthermore, the CIT (A) noticed that the sales tax assessments for the period 1991-96 also substantiated the assesee s claim of second manufacturing activity for the said two units. The CIT (A) also took note of the fact that the AMT produced and marketed by the assessee became excisable and that the application had been made on 5.8.1997 to the Assistant Commissioner of Excise, Noida claiming Modvat under Rule 57H. There was physical verification of the inventory at Namoli and the Excise Department had in fact granted credit to the assessee under the Modvat scheme. Furthermore, other co-lateral material in the form of show cause notice issued by the Excise Department and the correspondence with the Sales Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sider the production of cassettes as a manufacturing activity as can be seen from the fact that audio cassettes became an excisable product from 28.02.1997. Though this date falls outside the accounting year relevant to the assessment year 1995-96 it supports the findings that the activity amounts to manufacturing activity and was brought into the excise net only from February, 1997. We, therefore, hold that the assembly of the cassettes from the finished components does amount to manufacturing and agree with the CIT (A). 10. The ITAT also affirmed the findings with regard to the actual functioning of the two units which claimed exemptions during the relevant previous years in the following terms: - In support of the contention, that these two units actually functioned during the relevant previous year, the assessee adduced copious materials and evidence before the CIT (A) which were sent to the AO by the CIT (A) by letter dated 13.04.1999 and he was asked to give his comments in respect of them. The A.O. gave his comments by letter dated 16.04.1999 stating that the evidence had been created by the assessee and also questioning the claim of the assessee by pointing out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of inspection out of 199 employees on the pay roll. Some reports also mention the number of employees with the aid of power. There were enquiries about the storage of chemicals and gases in the factory at Namoli. The Central excise authority had also conducted physical verification of the inventory available at Namoli on 28.02.1997 and allowed modvat benefit to the assessee. Various other evidence such as the attendance register, bonus register, factory act register, employment exchange returns, returns of statistics etc. have also been maintained by the assessee. All this evidence is adverted to by the CIT (A) between pages 23 31 of his appellate order, viii) The Inspector of income-tax had submitted a report dated 18.04.1998 in which he has stated that Namoli unit was not functional. The assessee s claim was that the Inspector never visited the unit and in support of the claim the visitors register was produced before the CIT (A). The assessee also challenged the Inspector to mention the name of the guard, who had allegedly told him that no production was carried on in the Namoli unit. The names of the Guards present on 18.11.1998 at the Namoli unit were furnished to the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployee s rolls, periodic sales tax and excise returns, evidence of electricity payments etc. was decisive enough for both the CIT (A) and ITAT to be satisfied that in fact the two units in question functioned. 12. This Court, therefore, is of the opinion that there is no infirmity with the factual findings of the ITAT in the assessee s favour. 13. So far as the question whether the activity carried out in Malanpur and Namoli amounted to manufacturing goes, the fact that the assessee claimed and was granted modvat credit under Rule 57H of the Central Excise Rules at the relevant time itself is indicative that for purposes of excise, the assembling of cassettes amounted to manufacture . It goes without saying that the goods in question, i.e. Audio Video Tapes are manufactured in bulk - as in the present instance in Noida, which in turn constitute the raw materials for the ultimate assembly of the marketable products into cassettes in which several intervening stages would be involved. These would be cutting of the tapes into requisite levels, their placement in cassettes shells, packaging of such finished cassettes and labelling etc. In these circumstances, the Revenue s argum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction and sales were ignored, the fixed cost attributable to the unit were substantial. These costs were in the nature of the employees wages, bonus, compensation, electricity, water charges, repairs and maintenance etc. Consequently, the disallowance to the extent of ₹ 26,80,087/- was sustained. What was allowed to the assessee was ₹ 39,45,798/-. The facts in respect of this were noticed in paragraph 44 of the ITAT s order which is reproduced below: - 44. The assessee is engaged in the production of audio magnetic tape (AMT) since 18.07.1985 in unit-I. From the details of the production relevant to the financial year 1985-86 relevant to the assessment year 1986-87 and all the subsequent years (see table in para 6.1 of the order of the CIT (A), the AO noted a decline in the production of AMT which altogether stopped in the assessment year 1994-95 and later on picked up and reached a figure of 1175 million running meters in the financial year 1997-98. The assessee had explained that the production at the unit was stopped with effect from 01.04.1993 for major repairs and renovation and regular production was resumed only from 06.05.1996. During the above period of mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure which is in any case allowable, the details of which have already been noticed. On an overall survey of the order the CIT (A) and the material on which his conclusions are based we are unable to say that he has taken an erroneous view of the matter. We accordingly affirm his decision to allow the loss to the extent of ₹ 39,45,798/- and to sustain the balance loss of ₹ 26,80,087. Thus both the grounds taken by the department and those taken by the assessee in respect of this point stand dismissed. 20. Apart from stating that the findings are erroneous, the Revenue has not pointed out either perversity or unreasonableness or that any of these findings were not based upon the inference that could not have been drawn in the circumstances of the case. Consequently, no substantial question of law arises. Question no.5 21. On account of foreign exchange fluctuation, the purchase costs of raw materials increased by ₹ 29,36,000/-. The AO was of the view that this could not be allowed as revenue expenditure. The CIT (A) and ITAT reversed that finding. It is not disputed that this head of expense was correctly treated as falling in the revenue strea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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