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2015 (3) TMI 766 - DELHI HIGH COURT

2015 (3) TMI 766 - DELHI HIGH COURT - [2015] 375 ITR 431 (Del) - Admissibility of claim under Section 80HH in respect of Namoli Unit and 80I in respect of Malanpur Unit - CIT(A) and ITAT allowed claim - Held that:- Both the CIT (A) and the ITAT carried out an elaborate factual analysis about the existence of manufacturing activity at Namoli and Malanpur. Based on this analysis, these fact finding authorities concurrently ruled in favour of the assessee. In contrast, the AO - as is evident from t .....

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factory register, employee’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.-

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 purp .....

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ssettes 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 unit actually functioned during the relevant year, the depreciation was correctly allowed. - Decided in favour of assessee.

Alleged suppressio .....

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ed video cassettes at the price of ₹ 104. The concurrent findings of fact are that there was no suppression of sale prices since 83% of the total video cassettes sales was exported at an average price of ₹ 27.79/-. The CIT (A) held that these exports are substantial enough and that the allegations that there was under-invoicing of exports by the assessee could not be validly returned. These findings were affirmed by the ITAT. Again being entirely factually in nature, the Court sees n .....

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case. Consequently, no substantial question of law arises. - Decided partly in favour of assessee.

Disallowance of foreign exchange fluctuation - CIT (A) and ITAT allowed the claim - Held that:- It is not disputed that this head of expense was correctly treated as falling in the revenue stream in view of the decision of this Court in CIT vs. Woodward Governor India P. Ltd. (2007 (4) TMI 118 - HIGH COURT , DELHI) also affirmed by the Supreme Court in CIT v. Woodward Governor India (P. .....

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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 wit .....

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ction process entails manufacturing of Audio Magnetic Tapes (AMT) in bulk - an activity carried out in the two Noida units. These articles were thereafter transported to the other Units - in the present instance Namoli and Malanpur where final products - marketed by the assessee were assembled. The assessee had claimed the benefit of Section 80HH and 80I in respect of Namoli Unit and Section 80IA in respect of Malanpur Unit which had been granted from the years 1991-92. In the course of assessme .....

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indicate functional integrality of all the units. 3. On the basis of these findings, the AO disallowed the claims under Section 80HH, 80I and 80IA (the latter being in respect of Malanpur unit) and brought to tax the deductions claimed. The assessee appealed to the CIT (A) who, in his elaborate order, considered the entire materials on record with respect to the different nature of activities carried on in the units in question; the lack of evidence to show that goods sold or transferred to the .....

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e Revenue. The ITAT by its own elaborate order considered the matter and the entire factual matrix and affirmed the order of the CIT (A). 5. Regarding question no.1, the Revenue urges that findings of the CIT (A) and the ITAT in this case with respect to the units being separate and not functionally the same are erroneous 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 Coope .....

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se 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 .....

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) No separate bank account for each and every unit except Malanpur are maintained. The profits and the accumulated funds of any unit is not marked separately, whereas the company makes such demarcation in respect of inter transfer of various raw materials. In order to arrive the correct and factual income of any unit, it is necessary to account for the utilization of funds also. However, it would not amount to change the ultimate final results of the company as a whole. It is also relevant to no .....

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are declared independent the assessee company would have to take separate registration of unit. But it was not so. E) Unit-II has acted as mediator even for procurement of raw material by a so called independent unit namely Namoli and Malanpur. This fact is evident from the information that all the audio components worth ₹ 36.50 lacs have been transferred to Malanpur Unit and audio components worth ₹ 128.61 lacs to Namoli Unit. Though unit-II has not manufactured even single compone .....

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e 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 .....

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how cause notice issued by the Excise Department and the correspondence with the Sales Tax Department, bonus registers, and returns of statistics filed with the Government authorities etc. were all taken into consideration. 8. The CIT (A) also extracted charts indicating number of workers engaged by the assessee based upon the records produced by it; these are found at paragraph 11 of the order. The CIT (A) made a detailed comparison of the price of similar goods manufactured by other producers. .....

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producers have been filed in the course of appeal proceedings and the Assessing Officer has not had the opportunity to examine them, the Assessing Officer may do so before giving effect to this order. In case the Assessing officer finds that the sale bills of comparable producers filed by the assessee do not indicate the correct market prices of the relevant products, he may ascertain the correct market prices of those products independently, and may make further necessary adjustment to the pro .....

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in details presumably because he addressed himself in great details, to the question whether the Namoli unit did actually function during the relevant previous year and produced cassettes. It seems to us that implicit in the findings that the Namoli unit did function during the relevant previous year, is the finding that the assembly also amounts to manufacture. Even otherwise, the finding can be supported by the fact that the central excise authorities did consider the production of cassettes a .....

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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 comme .....

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pect of the Period 26.03.1990 to 02.12.1998 and includes the accounting year under consideration. ii) the assessee also produced photographs of the electricity cable, electricity pole, energy meter, tube box etc., iii) the Namoli unit mainly relied on captive power generation and incurred a total expenditure of ₹ 2,97,360/- on the purchase of HSD and mobile oil during the year, iv) the assessee also filed a copy of an order dated 06.03.1998 passed by the Commissioner of Sales Tax, Lucknow .....

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Namoli unit. The AO had commented that this evidence had been created by the assessee by taking the goods to the sales tax checkpost, getting the invoices stamped and then taking the goods back to Noida instead of taking them to Namoli. This allegation of the AO was not supported by any evidence and the CIT (A) himself felt that it would be impossible for anyone to collude with an entire Government Department regularly for seven years and that the comment had been made in a sweeping and an incr .....

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at 162 employees were found at the time 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 ac .....

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essee 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 (A) and the duty register was also produced. The Inspector was not able to mention the name of the guard in his report. The assessee also produced the guards who were on duty on the date of inspection before the CIT (A) and the CIT (A) called upon the inspec .....

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produce the articles which resulted in the profits. He accordingly directed the AO to allow the deduction. On a careful consideration of the findings of the CIT (A) and the material placed before him, which were all compiled in the paper book filed before us, we are of the view that no interference is required in his decision. No material or evidence was produced before us to contradict the findings of the CIT (A) or to impeach the authenticity of the evidence adduced before the CIT (A). The fin .....

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fact finding authorities concurrently ruled in favour of the assessee. In contrast, the AO - as is evident from the extracts of his order - based his decision entirely on assumptions. Those assumptions stemmed out of his belief that the claim for losses of the Noida unit could not co-exist with the profits derived from the Namoli and Malanpur units. We also noticed that the AO s order did not take into account the materials which were ultimately considered by the CIT (A). The latter, in fact, t .....

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uestion 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 .....

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ty for the proposition that the expression derived from , is with respect to the activity and not the ownership of the unit. This Court is of the opinion that the said decision has no relevance in the circumstances of the present case. 14. Having regard to the above conclusion, the first question is answered against the Revenue and in favour of the assessee. 15. The second question framed in these cases pertains to the depreciation claims for the Namoli unit. In view of the concurrent findings o .....

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ears in question, i.e., 1993-94 and 1994-95. The reduced excise duty led to fall in the price of video cassettes. Consequently, the average market price also went down. In order to compensate the Malanpur unit, M/s Super Cassettes Industries purchased video cassettes at the price of ₹ 104. The concurrent findings of fact are that there was no suppression of sale prices since 83% of the total video cassettes sales was exported at an average price of ₹ 27.79/-. The CIT (A) held that th .....

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see in respect of Noida unit goes, the AO disallowed it in entirety. The CIT (A) in his order - as was noticed earlier, made an elaborate and detailed analysis of the facts and held that even if total production 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 s .....

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he 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 more than 3 years the following repairs and additions were carried out to the plant & machinery o .....

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assessment year 1995-96 despite the stoppage of production the assessee continued to incur expenditure under various heads such as raw materials, manufacturing expenses, excise duty, selling & distributing expenses, depreciation, financial charges etc., aggregating to ₹ 133.87 Lakhs. The gross income came to ₹ 56.00 Lakhs including the income from production of magnetic tapes. The result was a loss of ₹ 77.86 Lakhs in the Unit-I. 19. The ITAT noticed that after the unit wa .....

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iew of the circumstance that electricity connection was in fact surrendered on 25.7.1994 and, therefore, it was not clear how trial production could have commenced in February/March, 1995. In view of these findings, the ITAT held as follows: - 50. However, we also agree with the CIT (A) that the entire book results cannot be rejected u/s 145 (2) merely because the trial production was not proved. In our opinion, he has rightly re-cast the profit & loss account of the unit and has allowed the .....

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