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ACIT, Noida Range, Noida Versus Phonix Lamps India Ltd. And Vica-Versa

2015 (11) TMI 791 - ITAT DELHI

Entitlement to deduction u/s 80 IC - initial assessment year - Held that:- From the meaning of ‘Initial assessment year' it can be seen that whenever any undertaking or the enterprise begins its commercial manufacturing and production of articles it comes under the purview of Section 80IC of the Income Tax Act, 1961. Though, the assessee company has shown the pre-operative expenditure in respected of its Dehradun Unit & claimed that it was under trial run and there was no commercial production t .....

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ercial production. The instance of the sale along with the documentary evidence clearly shows in the present case that, though the assessee is claiming the activity of Dehradun Unit as a trial production, the same is not at all a trial production but the commercial production from December 2003 onwards. Selling the product to particular parties continuously also shows that it is a commercial production and not of a trial production. The case laws submitted by the assessee are on different footin .....

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T (DR) For the Respondent : Shri Shashwat Bajpai, Adv ORDER Per Suchitra Kamble, JM This appeal is filed by the Revenue against order dated 20/10/2008 passed by Ld. CIT(A), Ghaziabad. 2. The grounds of appeal are as follows:- "1. The Ld. CIT(A) has erred in law and on facts by holding that the Uttranchal Unit of the assessee company is entitled to deduction u/s 80 IC of the Income Tax Act 1961 w.e.f A. Y 2005-06, being the initial assessment year of the purpose of 80 IC I.T. Act and not fro .....

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ht out by the Assessing Officer in the assessment order. 3. The order of the Ld. CIT(A) may be set-aside and the order of the A.O be restored." 3. The assessee company manufactures Compact Florescent Lamp (CF Lamps), Halogen Lamp, Metal Halide Lamps for which purpose it has three units. Unit-I was in NEPZ area and was claiming deduction u/s 10A of the Income Tax Act till financial year 2001-02. The second unit was outside the NEPZ area. The third unit was started during the Assessment Year .....

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the assessee the following additions disallowances were made to the assessee's total income by the AO. During the year under consideration the assessee has started a new unit at Dehradun. This unit is located in the export proceeding zone in the state of Uttrakhand. Thus the special provision in respect of certain undertakings in certain special category states as laid down in Section 80IC of the Income Tax Act, 1961 were applicable to this area as per the Assessing Officer. However, the ass .....

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aking of the enterprise begins to manufacture or produce articles or things, or commences operation or completes substantial expansion." 4. The assessee company has shown that the pre-operative expenditure in respect of its Dehradun Unit reopening for capitalization as the unit has been claimed to be under trial run. The details of such expenditure were shown in Schedule 19 of the accounts of the company. The same are as follows: Nature of expenses/income Amount Cost of material consumed 3, .....

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Interest Others 1,64,709 Freight & Insurance 4,37,159 SUB TOTAL 5,92,79,956 Less: Sales 3,13,26,073 Stock of Finished Goods 1,46,38,996 Exchange Variation 38,15,901 SUB TOTAL 4,97,80,970 TOTAL 94,98,966 5. This schedule shows that the assessee company has purchased and consumes material consumed of ₹ 3,98,74,811/-. During the year, expenditure incurred on salary, wages, welfare and even on repair maintenance. The company from this unit has incurred sales amounting to ₹ 3,13,26,0 .....

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ondly, the company was asked why for the purpose of Section 80HHC of the Income Tax Act, 1961, the sales made by the assessee company from its Uttrakhand Unit not be included in the total turnover. 6. The assessee replied that the unit was only trial run and not had commercial production during the year, and therefore, the year under consideration should not be treated as first year of deduction Section 80IC (3) (ii) of the Income Tax Act, 1961. The assessee further submitted before the AO that .....

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ssee submitted before the Assessing Officer that the trial production was made in the previous year relevant to A.Y 2004-05 was also evident from the extent of turnover which was only ₹ 3,13.26 lacs in the trial run, which increased to ₹ 5159.50 lacs and ₹ 8988.40 lacs in subsequently next two financial years when commercial production commenced. To support this, the assessee company submitted a certificate for starting up commercial production from Chartered Engineer dated 4/4 .....

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eration all these factors held that the initial assessment year for the purpose of Section 80IC of the Income Tax Act, 1961. The Assessing Officer has given detailed reasons which are reproduced hereinbelow: "The assesseee's contention in this regard is not accepted because i) The initial assessment year for the purpose of Section 80IC has been defined in the Section itself in Sub-Section 8(5) as the initial assessment year means the assessment year relevant to the previous year in whic .....

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, the assessee Company from its Uttranchal Unit undertaken sales of 3.13 Crores and also has stock of finished goods valued at 1'.46 Crores. This further strengthens the fact that not only manufacturing activity has been undertaken at the Unit but substantial sales have also been made from the Unit. It is important to note that the total turnover of the assessee company which was established about 12 years back is 165 Crores approximately, thus the sales from this small Unit over a very shor .....

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the assessee that the Unit is showing substantial wastage. The mere fact that the unit has some initial losses does not make the period as prior to commencement of production. Moreover the term used in the section is begins to manufacture and not commencement of commercial production. The two terms are clearly distinguishable and no sale can ever take place if a unit does not begin to manufacture. The stage at which a unit starts commercial production is later than the stage at which it begins t .....

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ssment year for the Uttranchal Unit for the purpose of Section 80IC. Deduction under this section can now be claimed by the assessee Company for the remaining years as per provisions of the Section. Since assessment year 2004-05 is the initial assessment year for the Unit, therefore, the depreciation on the fixed assets would deems to have been allowed however the same would not be allowed to be adjusted against profit of the other Units in lieu of Sub-Section 80IC (7) as per which Sub-Section 5 .....

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eligible to claim deduction u/s 80 IC." 7. The Assessing Officer held that the unit is covered under Section 80IC of the Income Tax Act, 1961 and would have no impact on the taxable income in the year under consideration but would have effect on the remaining year for which the unit would be eligible to claim deduction under Section 80IC of the Income Tax Act. 8. Aggrieved by the order of the Assessing Officer, the assessee filed appeal before the Ld. CIT(A). The Ld. CIT(A) while deciding i .....

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mmercial since in the context of the provision manufacturing means production in a commercially sustainable production changed. While analyzing these premises the Ld. CIT(A) considered the relevant case law decided by Hon'ble Madras High Court (110 ITR 168) wherein it has been laid down that without applying this test by manufacturing the proto type, the assessee could not be said to have manufactured and article which was capable of being sold by the assessee in the context of tax incentive .....

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ideration is, the initial assessment year for the Uttrakhand Unit for the purpose of Section 80IC of the Income Tax Act and (ii) the AO was also not justified in including the sale from this unit in its total turnover for the purpose of computation of deduction u/s 80HHC of the Income Tax Act, 1961. The AO was accordingly directed to give consequential relief. 9. The revenue filed the present appeal. 10. The DR submitted that there were only 9.41 lacs manufacturing units and the cost of manufact .....

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assessee, wherein the audit annual report though mentioned that competition of net profit includes trial run production of 91.41 lacs, but there was no bifurcation given as to how much wastage was incurred during trial production. As per the assessee, the trial run was started on December 2003. The DR submitted that the assessee's submissions that the wastage is of far more then the actual production should not be taken into consideration. As the same will not be a criteria for deciding whe .....

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ention that there was a technical defect and because of which there was lot of wastage does not sustain. The DR further submitted that the invoice submitted before the authorities and before this Tribunal has not mentioned that these are the trial productions. Submissions of details in respect of Excise and Customs authorities does not amount to any finding that there was no sale prior to commercial productions. The sale totally reflected in the books of accounts and Section 80IC of the Income T .....

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tion took place during the period December 2003 up till January 2004. The assessee also submitted that because of these defects, there was more than 30% wastage and the loss was incurred due to the same. To take benefit of his submissions as relates to the non-application of Section 80IC of the Income Tax Act, the AR submitted that the wastage value during the present assessment year was too high and this amounts to trial production. In fact, as per asssessee, the commercial production started a .....

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1981]132 ITR 893 (Bom) 3. Madras Machine Tools Manufacturers Ltd Vs. CIT[1975 ]98 ITR 119 (Mad) 4. Addl. CIT Vs. Southern Structural Ltd. [1977] 110 ITR 164 (Mad) 5. CIT Vs. Hindustan Antibiotics Ltd.[1974 ]93 ITR 548 (Bom) 6. Hero Honda Motors Ltd. Vs. Jt. CIT [2006] 103 ITD 157 (Del) 7. Western India Vegetable Products Ltd. Vs. CIT [1954] 26 ITR 151 (Bom) 8. CIT Vs. Ennore Foundries Ltd. [1985] 21 Taxman 349 (Mad) 9. CIT Vs. Webbing & Belting Factory Ltd [1968] 68 ITR 186 13. All the prese .....

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ot be taken in this case as it is totally on the different footings. The case of Metropolitan Springs Pvt. Ltd Vs. CIT[1981]132 ITR 893 (Bom) is related to the trial production, first wherein trial production has been dealt with testing and sampling. But in present case there was no testing or sampling on record to show that this amounts to trial production. In the case of Madras Machine Tools Manufacturers Ltd. Vs. CIT [1975] 98 ITR 119 (Mad), the DR submitted that the wastage was too small and .....

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Nestor Pharmaceuticals Ltd. (2010) 322 ITR 631 wherein, it was held that trial production is different from commercial production. In this case, the Hon'ble Delhi High Court held that "the assessee had sold one Water Cooler and one Air Condition before April 1998. Thus, the stage of trial production had been crossed over and the assessee had come out with the final saleable product which was in fact sold as well. The quantum of commercial sale would be immaterial. With sale of those art .....

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that would have come under the purview of trial production but it fails further test of trial, when it has become an eligible product and actual sale took place. The purchasers had not returned the articles which are defective and the same cannot be termed as trial production. 15. We have perused all the records and heard submissions made by both the parties. Section 80IC (8)(v) of the Income Tax Act reads as under:- "Section 80IC (8)(v) "Initial assessment year" means the assessm .....

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ive expenditure in respected of its Dehradun Unit & claimed that it was under trial run and there was no commercial production took place during the year, but the facts are different altogether. In fact, the assessee since the beginning of the said unit/plant was taking purchase orders from various parties and complying with the said purchase orders in the usual manner and there was no defect or complaint made by the purchasers at any point of time. The parties whom the assessee supplied con .....

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ee was having regular transactions since December, 2003 to March 2004 and in fact it shows from the records that they were having large quantity of orders from these purchasers. Stage of trial production is only preparatory in nature and a product has to go through many process as well as trial and error before it is given a final sheet. Such product is also offered to the market with a view to deciding their acceptability in the market and on the basis of feed back from the market. In the prese .....

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inuous transaction/sale to various companies and those companies were repeatedly giving orders to the assessee company. So this cannot be termed as a trial production when there is a continuous sale to a particular company for example in the assessee's case there was 34 transactions/invoices mentioned in the ledger to Bajaj Electricals Ltd. for the period 22nd December 2003 till 24th February 2004 and there was no specific mention that the product/CF Lamps which were sold to Bajaj Electrical .....

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