TMI Blog2008 (10) TMI 642X X X X Extracts X X X X X X X X Extracts X X X X ..... lly contains moisture, thickness plaining and cutting. Further the objections as regards the shortfall of workers the required number i.e. 20 u/s 10BA(2)(e) also not factually correct. A perusal of copies of the wages registers submitted to assessing officer (paper book 23-72) clearly show that there were more than 20 workers in any case throughout the year engaged in the manufacturing activities. There apart the other karigars being paid on piece rate basis are also the persons engaged and deserve consideration for this purposes. Even the learned Commissioner (Appeals) has also now recorded a finding that the assessee had employed more than 20 workers as required u/s 10BA. The heavy reliance placed by the revenue on the decision of Kwal Pro Exports [ 2006 (10) TMI 193 - ITAT JODHPUR] is also misplaced, the Tribunal placed reliance upon the Third Member decision in case of Arihant Tiles Marbles (P) Ltd. v. ITO[ 2006 (6) TMI 157 - ITAT JODHPUR] . However, the same now stands reversed in the case of Arihant Tiles Marbles (P) Ltd. v. ITO [ 2007 (5) TMI 132 - HIGH COURT, RAJASTHAN] . Moreover, there is a specific definition of the eligible article u/s 10BA, which is not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled to appreciate that the gross profit rate declared by the assessee during the impugned year was 21.35 per cent as compared to gross profit rate of 19.68 per cent in the immediately preceding year. The increase in expenditure on account of firewood expenses and seasoning charges has been duly explained which has not been taken into consideration by the assessing officer. Therefore, the assessing officer is not justified in making addition in the income of the assessee. The same is directed to be allowed. Thus ground No. 1 of the assessee is allowed. Disallowance of depreciation claimed on car purchased and delivery - put to use after duly provisionally registered with RTO and deposit of road tax - HELD THAT:- The assessing officer has ignored the explanation given by the assessee that the car was taken in possession on 28-3-2003 as per delivery note on record. The assessee has also provided the copy of the cover note of insurance dated 29-3-2003. The copy of the bill for fuel purchased and used to run the vehicle dated 29-3-2004 was also produced and is on record. In the circumstances and facts of the case, the asset is considered as put to use in the impugned year and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es inasmuch as there was no manufacturing involved therein and the furniture purchased as such, was exported without doing anything thereupon. There are some other allegations also as mentioned in the assessment order. The conclusions of the assessing officer are at pp. 11 to 16, who finally denied the entire claim so made by the appellant. In the first appeal, the learned Commissioner (Appeals) also confirmed the same. 5. Shri Mahendra Gargieya, advocate learned Counsel for the assessee vehemently argued that the assessee was fully entitled to the claim of exemption under Section 10BA of the Act. He assailed the various objections raised by the authorities below. He drew our attention towards some specific part of the provision of Section 10BA relevant for this purpose. A bare perusal of the provision and a comparison of the other similar provisions shall make it evidently clear that the legislature did not intend or stress upon the very manufacturing or production in a deep technical sense, since if the little above Section 10BA is compared with the titles of Section 80HH, Section 80HHA, Section 80-1, Section 80-IA and Section 80-IB. He further submitted that however, the mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a proposition by defining these two words, therefore, have again to be understood and read in the context of Section 10BA and more particularly with reference to the definition of eligible articles or things and not beyond that. He submitted that the major objection of the learned assessing officer therefore, that the appellant made purchases of routine furniture i.e., dining table, TV cabinet and almirah etc. which remained the same even after the activities carried out by the appellant and they are known even by the same name, is a misconception. In view of the assessing officer, the activities being carried out by the appellant, i.e., surface smoothening, drying and mere polishing and cutting, is not manufacturing or production as the character of the item purchased and nomenclature remain the same. What the appellant does is the processing but it falls short of manufacturing or production. In fact all these findings of the learned assessing officer are nothing but reproduction of the decision from Kwal Pro Exports v. Asstt. CIT ITA No. 633/Jd/2005 and a verbatim copy thereof but no independent finding of fact of the present case has been recorded. 6. After referring to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turing or production activities and that is why these expenses were incurred. Thereafter he referred to the allegations of the assessing officer at pp. 11 and 12 of the assessment order to the effect that such contentions were not correct inasmuch as substantial amount of Rs. 80,24,854 was spent on polishing and packing which constituted 74 per cent of the total expenditure hence it cannot be said that the appellant was engaged in manufacturing, which is a purported confusion as firstly polishing charges are only of Rs. 44,74,467, secondly, this was, wages paid to the expert artisans for creating artistic value. Therefore, the assessing officer wrongly concluded that it was a mere process as against manufacturing or production. Hence the reliance placed by him over Gem India is totally misplaced. Otherwise when the subjected article is required to have artistic value, polishing plays important role. The assessing officer is not a technical expert hence could not have kept this expenditure out of the manufacturing cost. As submitted earlier the definition of manufacture or produce in the present context do require the polishing also to be an integral part for the reason that the leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible item. Otherwise also such an allegation is factually incorrect inasmuch as the name of the raw material is mostly different than the name of the final product exported. To support the contentions the learned Counsel referred to the copies of some purchase and sale bills at paper book pp. 136 to 138. He also drew our pointed attention towards the fact of verification even by the customs authorities, as evident from the fact that on every export bill, there is a specific certification after due examination of the goods, to the effect that goods are artistic handmade wooden handicrafts , copies of export invoices at paper book pp. 136 to 139 at the back and also a few submitted during the course of arguments, which bear such certification, given by the Inspector, Customs Division and countersigned by the Superintendent also. He submitted that such certification is available on the backside of each and every export invoice and also on the examination report of the factory stuffed container. Strangely, the assessing officer has not at all whispered a single word to rebut these binding evidences. He further submitted that the various Government departments and agencies have also tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter having made on the spot inspection and finding that the appellant was manufacturing only handcraft items made by the export artisans by hand. Reference letter dated 27th Feb., 2006 and 25th Oct., 2006 (paper book 129-130). As a matter of the prevailing practice and procedure, the conclusion or verdict of the DC, handicraft is final, in case there is doubt and dispute by any other Government/semi-Government agencies on the question whether the unit is a handicraft manufacturer or not. Moreover the assessee has recently been awarded for highest growth of wooden handicraft exporter on dated (sic) by the Ministry of Textiles and Handicraft sponsored by the Export Promotion Council for handicrafts (paper book 127-128). 7. The learned Counsel for the assessee Shri Mahendra Gargieya, advocate thereafter made detailed submission on the various other allegations labelled in the assessment order. With regards to the allegations of purchase made by the appellant of Rs. 5,56,43,422 against sales-tax 17B Form, the objection was that on inquiry from sales-tax authorities it was found that the appellant purchased goods worth Rs. 3,97,31,487 against sales-tax Form 17B. The condition for ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hase order number, challan number etc. He further referred to the allegation that most of the work has been done with the help of machineries which again is a misconception. In fact the role of the machinery is only to prepare the wood purchased by the appellant with a view to make it fit for further steps nothing but a preparatory stage, before handwork is commenced. The machine work is confined to seasoning of wood which normally contains moisture, thickness plaining and cutting. The entire expenditure incurred, of negligible share out of manufacturing cost. Therefore, it is implied that substantial expenditure, is on handmade work only. The assessing officer further alleged at p. 16 that the machines used by the appellant were not confined to normal working but the same were used to make furniture of different sizes and the carving work was also done with the help of those machines. The assessing officer appears to have made this contention without factually verifying the facts and technical detail. Factually such machines were confined only to the seasoning. Further, with regard to the allegation of the assessing officer alleged in para 3.3 p. 3 that the assessee surrendered hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to make payment of wages accordingly. Hence the fact of absence of bifurcation of 22 employees is not relevant. Further, factually number of such persons is 37 as evident from the copies of wages register already filed and not 22 as wrongly mentioned. Not only this, in fact there are various other Karigars employed by the appellant (apart from these in wages register) and to whom payments are being made on piece rate basis. Such Karigars are equally employed by the appellant however, simply because of the manner of payment they are not covered by the provisions of PF and ESI Act and hence do not find place in the wage register. Again to clarify still however, they are all workers of the appellant. To clarify, we may submit that such expenditure, however has been booked under the head Polishing charges only as an accounting treatment. The learned assessing officer however at p. 16 (k) alleged that the supervisor cannot be treated to be a worker engaged in manufacture/production. It is submitted that the appellant employed 37 workers including 1 supervisor which, if excluded still the figure remains 36 workers and in any case is above 20 workers whether on the role of the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed and the appellant be held fully entitled to the deduction, as claimed. 9. On the other hand, the learned departmental Representative opposed the claim of the assessee made under Section 10BA of the Act and prayed that under the circumstances and facts of the case, the ground taken by the assessee be rejected. He strongly relied upon the orders of the authorities below. 10. We have carefully considered the pleadings of the parties in the light of the material placed, before us and various judicial pronouncements referred to by them. Before proceeding further it is better to refer the provisions of Section 10BA: 10BA. Special provisions in respect of export of certain articles or things.- (1) Subject to the provisions of this Section a deduction of such profits and gains as are derived by an undertaking from the export out of India of eligible articles or things, shall be allowed from the total income of the appellant. Provided than where in computing the total income of the undertaking for any assessment year deduction under Section 10A or Section 10B has been claimed, the undertaking shall not be entitled to the deduction under this section. (a) it manufactures o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n have not been defined under the Act we need to have the guidance laid down by the various judicial pronouncements of the Hon'ble High Court including the Hon'ble Rajasthan High Court, which is recently available. The Hon'ble Supreme Court in the case of Dy. CST v. Pio Food Packers (supra), considered the meaning of the word manufacture with reference to several decisions and stated the test in the following words: There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether the article produced is regarded in the trade by those who deal in it as distinct in identity from the commodity involved in its manufacture. Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed activities one or more must reach to a point where commercially it can no longer be regarded as the original commodity but recognised as a new and distinct article. In any case, the Hon'ble court is CIT v. Sesa Goa (supra) has already held that production is a much wider term as compared to manufacturing. We are of the firm view that while interpreting the golden rule is that the given word has to be given a contextual meaning. In this regard, the learned Authorised Representative had rightly cited the decision of the Hon'ble Supreme Court in CIT v. Sun Engineering Works (supra) wherein the Hon'ble court was dealing with the interpretation of a judgment of a court and held that it is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context.... and therefore, one is required to see the context or the question with which he is seized. Here also the import of the words manufacturing/production, has to be seen in the context of specific definition given under Expln. (b) below Section 10BA of eligible articles, reproduced hereunder: eligible articles or things means all handmade articles or thing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of additions made by the appellant after the purchase of the raw material, which was in the shape of sometime pure wood, sometime in semi-finished/partly made up e.g. table top only without legs, artistic designs, brass fittings, inlay carving etc. which brings beauty to the subjected articles or things. The authorities below vaguely alleged that the appellant purchased the furniture and exported the same simpliciter. They swayed away by the nomenclature being used in common parlance e.g. centre table, TV cabinet, dining table, almirah etc. The authorities below did not apply their mind to this important aspect that it is not the name, which was important, what was important was whether the subjected furniture were handmade articles of wood having artistic value. What the appellant did was the addition of wood and the artistic value and for this sole reason, the appellant was able to have a substantial amount of export turnover. The addition of inlay, wooden knitting, glass and iron item and fittings to Counsel that there is no warrant to draw adverse inference simply because of the fact that purchases were made against sales-tax 17B Form. Rule 23(1)(b) is being reproduced her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which has been discussed in detail in the earlier part. There was no warrant to jump to the provisions of the sales-tax laws which otherwise do not support the case of the revenue. We find the contention of the learned CIT departmental Representative contradictory inasmuch with regard to the certification by the customs authorities as to the nature of the export of the disputed articles of being of artistic value, whereas by drawing inferences only, it is argued that no activity was carried out and it was a matter of simple purchases. Such an approach of the revenue is disapproved. We further agree with the contention of the learned Counsel that the use of the machinery is only to prepare the wood purchased by the appellant with a view to make it fit for further technical steps to be carried out by artisans. It is nothing but a preparatory stage, before handwork is commenced. The machine work is confined to seasoning of wood which normally contains moisture, thickness plaining and cutting. Further the objections as regards the shortfall of workers the required number i.e. 20 under Section 10BA(2)(e) also not factually correct. A perusal of copies of the wages registers submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence the appellant is fully entitled to get the deductions. The assessing officer is therefore directed to allow the same. Thus ground No. 2 of the assessee is allowed. Ground No. 3: The deduction claimed under Section 80HHC reduced by Rs. 23,66,404 from Rs. 29,58,782. 15. The brief facts of the case that the assessee first claimed deduction under Section 80HHC at Rs. 29,58,782 and also separately made a claim of deduction under Section 80-IB of Rs. 24,64,324 with reference to the same amount of eligible profits. The assessing officer computed profits of business of Rs. 85,53,001, however, reduced the amount of deduction under Section 80-IB of Rs. 21,38,250 from the eligible profits of export business, which came to Rs. 64,14,751 and allowed the deduction under Section 80HHC @ 30 per cent, which came to Rs. 23,66,404 as against the claim of Rs. 29,58,782. In other words, he first allowed deduction under Section 80-IB and thereafter under Section 80HHC but did not compute separately. For this he relied upon Section 80-IA(9) and did not follow decision of Tribunal, Jaipur in Toshica Creations. The contention of the appellant was that deduction under Section 80HHC should be comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Section 80-IB of the Act by supplementing the order of the assessing officer that the amount of duty drawback cannot be said as derived from the such business. 19. We have heard the rival contentions and perused the facts of the case. Although, we have already held the entire income of the assessee exempt under Section 10BA of the Act hereinbefore. However, since the assessee has taken an alternative ground for deduction under Section 80-IB of the Act for the sake of completeness. We proceed to decide the issue. The said issue in this ground before us is directly covered up by the decision of Hon'ble Gujarat High Court in the case of CIT v. India Gelatine Chemicals Ltd. (2005) 275 ITR 284 (Guj) which followed the Tribunal, Jaipur Bench in the case of Vyay Industries v. Income Tax Officer (2007) 112 TTJ (Jp) 353. Therefore, following the same, the assessee is entitled to the deduction also on the amount duty drawback. Thus ground No. 4 of the assessee is allowed. Ground No. 5: Disallowance of interest payment of Rs. 77,946 under Section 40A(2)(b) of the Act. 20. The brief facts of the case are that the assessee paid interest of Rs. 3,68,634 to the persons spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be exempt by us under Section 10BA of the Act, hereinbefore, therefore, no addition under this ground will remain. Thus ground No. 6 of the assessee is allowed. Ground No. 7: Disallowance of various expenses of Rs. 73,909. 24. The brief facts of the case are that the assessing officer has made certain disallowances @ 20 per cent of the claim on account of conveyance and depreciation on account of personal user. The learned Commissioner (Appeals) confirmed the action of the assessing officer. 25. We have heard the rival contentions and perused the facts of the case. We concur with the views of the learned Commissioner (Appeals) in confirming the disallowance. Since the assessee has not established that all the expenses have been incurred wholly and exclusively for the purposes of business. However, since whole of the income of the assessee has been held to be exempt by us under Section 10BA of the Act, hereinbefore, therefore, no addition under this ground will remain. Thus ground No. 7 of the assessee is allowed. 26. Ground No. 8 of the assessee is mandatory (sic) and is consequential in nature. ITA No. 1000/Jp/2008 (Revenue) and ITA No. 797/Jp/2008 (Assessee) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad admitted that such exemption was wrongly claimed for assessment year 2006-07. However, in respect of such claim for assessment year 2005-06, it was made clear that his claim of exemption under Section 10BA was correct. The assessing officer has stated in the order that out of total purchases in this year of Rs. 6,52,73,340, the purchase of Rs. 2,25,97,771 was made against sales-tax Form No. 17B and such purchases consists of 355 purchases. With this background, as per para 3.3 of the assessment order, a show cause was given that how the assessee was not fulfilling various conditions as specified under Section 10BA and a show cause was issued before denying the exemption claimed under Section 10BA of the Act. Thereafter, in para 4 of the assessment order, the reply furnished was reproduced by the assessing officer. As per para 5.1 of the assessment order, the assessing officer has not considered the said explanation as satisfactory. According to the assessing officer, when the goods is purchased against sales-tax Form No. 17B, it means that the exporter has to export such goods purchased against Form No. 17B without making any changes. He has relied upon Supreme Court judgment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed. The learned Commissioner (Appeals) is not justified in partly denying the exemption. Thus the solitary ground of the revenue is dismissed and the solitary ground of the assessee is allowed. ITA No. 964/Jp/2007 (Assessee) Ground No. 1 of the assessee: The learned Commissioner (Appeals) erred of firewood expenses Rs. 5,13,024 and out of seasoning charges Rs. 3,05,162. 30. The brief facts of the case are that the assessee was a manufacturer and exporter of handicraft items. The assessing officer has found that no stock register was maintained and no quantity details for closing stock could also be furnished. Thereafter the assessing officer has noticed that as compared to proceedings assessment year there was disproportionate increase in the claim of firewood purchase and in the claim of seasoning charges, therefore, after giving and opportunity, he invoked the provisions of Section 145(3) of the Act and a disallowance of Rs. 5,13,024 was made out of firewood purchase and a disallowance of Rs. 3,05,162 was made out of seasoning charges claimed. 31. We have heard the rival contentions and perused the facts of the case. The assessee has not maintained the stock regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ground No. 3 of the assessee: The learned Commissioner (Appeals) has erred confirming disallowance out of interest @ 18 per cent of following persons specified under Section 40A(2)(b). Shri Avinash Singhal Rs. 32,748 Smt. Bhagwani Devi Rs. 20,532 Smt. Leela Devi Rs. 12,600 34. The brief facts of the case are that the assessing officer after giving an opportunity had given a finding that interest rate exceeding 12 per cent was considered excessive in respect of such interest payment to 3 specified persons for which total disallowance of interest was worked out to Rs. 65,950. The learned Commissioner (Appeals) confirmed the action of the assessing officer. 35. We have heard the rival contentions and perused the facts of the case. On identical facts in assessees own case in ITA No. 200/Jp/2008 for the assessment year 2004-05. the claim of the assessee has been allowed by Tribunal, Jaipur Bench. Following the same, the claim of the assessee is allowed. Thus ground No. 3 of the assessee is allowed. Ground No. 4 of the assessee: The learned Commissioner (Appeals) has erred in confirming disallowance as vehicle running and petrol expenses Rs. 20,000. Ground No. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction under Section 57(iii) of the Act. However, since whole of the income of the assessee has been to be exempt by us under Section 10BA of the Act, hereinbefore, therefore, no addition under this ground will remain. Thus, ground No. 6 of the assessee is allowed. Ground No. 7 of the assessee: The learned Commissioner (Appeals) has erred in confirming the view taken by the assessing officer in allowing deduction under Section 80HHC after reducing the available deduction under Section 80-IB of the Act, i.e. Rs. 16,28,403. 40. The brief facts of the case are that the assessing officer by referring the provisions of Sections 80-IB(13) and 80-1(9) has given a finding that deduction under Section 80HHC can be allowed only after reducing available deduction under Section 80-IB of the Act. He also specified the Tribunal, Jaipur Bench decision in the case of Toshica Creation was not accepted and departmental appeal is pending in Hon'ble Rajasthan High Court. The learned Commissioner (Appeals) confirmed the action of the assessing officer. 41. We have heard the rival contentions and perused the facts of the case. On identical facts in assessees own case for the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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