TMI Blog2013 (5) TMI 925X X X X Extracts X X X X X X X X Extracts X X X X ..... evance of the revenue with regard to the finding of the CIT(A) that the entire profits derived by the assessee from manufacture or production of iron ore was entitled to deduction u/s. 10B of the Act and that the findings of the AO that the assessee was doing trading in iron ore was incorrect. We deem it convenient to deal with both these issues together. 4. The assessee is a company. It is engaged in the business of mining and export of minerals. The assessee set up an EOU during 2004 after getting all the necessary permissions from the concerned authorities. The assessee claimed deduction u/s. 10B in respect of profits derived from export oriented unit, which was mining and exporting iron ore. For the first time in A.Y. 2005-06, the assessee claimed deduction u/s. 10B of the Act in respect of the profits derived from the activity of extraction and processing of mining ore and exporting the same. The revenue in that assessment year took a stand that the activity of extraction and processing of mining ore does not amount to manufacture and therefore the assessee was not entitled to deduction u/s. 10B of the Act. The issue was ultimately decided by the Tribunal in assessee s favo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction of articles or thing is thus held to be not justified. It is also seen that A.O. in para 40 of assessment order himself has observed that assessee is engaged in production of iron ore. In view of above A.O. was not justified in holding that there is no manufacture and production of article or thing in the case of assessee. 5. Thus the issue whether the Assessee is entitled to deduction u/s.10B of the Act for AY 05-06 got settled pursuant to the order of the Tribunal. However, the AO issued notice u/s. 148 of the Act for the A.Y. 2005-06 on 11.05.2009. Under the provisions of Sec.10B of the Act a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export for articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. Section 10B(2) of the Act lays down some of the conditions subject to which deduction u/s.10B(1) of the Act would be allowed and one su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowed and added back to the Total Taxable Income. 8. In response to the aforesaid notice, the assessee submitted that it had set up EOU at Habbige gudda Mines HGM and Red Hill Mines (RH) after obtaining necessary approval from the Government of India under the scheme framed by central government as per the guidelines issued and vide approval LOP no.1/44/2003: PER:EOU:KR:CSEZ dt. 21.11.2003. That the EOU was set up in the year 2004-05 and first time deduction U/s. 10B of the income tax act was claimed for the A.Y.2005-06 and in subsequent years and how the same was allowed by the ITAT. The Assessee pointed that the presumption drawn by the AO that PurchasesROM as reflected in the Profit and Loss Account was purely trading turnover and that the said purchases were directly sold without undergoing the process of manufacture or by any value addition or without undergoing through any process was incorrect. The brought to the notice of the AO that Purchases - ROM as reflected in profit and loss account is not a purchase of finished product but actually represents the raw material consumed for the manufacture of the iron ore. The Assessee highlighted that in addition to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear difference between the input and output and that the assessee should bring new thing into existence from its raw material or elements as a result of process. Thereafter the AO analysed the various purchases made by the assessee apart from iron ore extracted by the assessee from its own mine. From an analysis of the purchase bills, the AO found that the Fe content of some of the ROM was 61.52%. The AO therefore concluded that the impugned purchase by the assessee was of iron ore and not ROM. Similarly, the AO examined some of the sales made by the assessee and he found that Fe content of the iron ore was between 60.60 to 60.77%. From the above, the AO concluded that the Fe content of iron ore between the purchase and sale did not contain any value addition, thereby proving the case of the revenue that there was no manufacture or production of article or thing, insofar as it relates to purchases of iron ore made by the assessee, in contra-distinction to iron ore extracted by the assessee from its own mine. Based on the above analysis, the AO came to the conclusion that the assessee did not purchase ROM, but purchased only iron ore fines and that the assessee does not carry out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process wholly unsaleable. 10. For the above reasons, the AO restricted the claim of the assessee to deduction u/s. 10B of the Act to ₹ 19,82,20,958 as against the claim which was originally allowed at ₹ 21,33,00,869. Aggrieved by the order of the AO, the assessee preferred appeal before the CIT(A). 11. Amongst other grounds, the assessee also raised a ground regarding validity of initiation of reassessment proceedings u/s. 147 of the Act. With regard to the aforesaid ground regarding validity of initiation of reassessment proceedings, it transpired that in the course of scrutiny proceedings for the A.Y. 2007-08, the AO observed that apart from extracting iron ore from assessee s own mine and processing the same before export, the assessee was also purchasing iron ore fines. According to the AO, purchase of iron ore made was directly exported without any processing and it was only a trading activity for which deduction u/s. 10B of the Act cannot be claimed. The AO therefore claimed that he had reason to believe that taxable income has escaped assessment and therefore issued notice u/s. 148 of the Act for making an assessment u/s. 147. The assessee relied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (d) The registers maintained clearly established the fact that the purchase of ROM were transferred for manufacturing activity and ultimately recorded in the production register also. (e) Such records/registers maintained by the Assessee proved that the purchase of ROM after having undergone various processes is classified into iron ore fines and lumps to match the required grade for exports. (f) The input is run of the mines raw materials and output is iron ore fines and lumps. (g) ROM itself does not have export or ready made market and only after processing and manufacturing iron ore fines/lumps. It becomes fit enough for export. (h) The records maintained for the purposes of the requirement of the customs authorities also indicate that it is a manufactured product. Each of the purchases of ROM is recorded in daily ROM arrival register and routed to daily ROM feed production register, production register and the daily finished stock register and is a part of the production register. (i) The A.O s finding that it is not ROM purchases and it is fines of iron ore is contradicted by his own finding in para 11.8 and 11.9 wherein he has concluded that it R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. DR and are of the view that the fact that the assessee was extracting iron ore from its own mine as well as purchasing iron ore from outside and both the quantities of iron ore were being processed before the export. This fact is already available on record. The fact that the AO did not look into the same cannot be the basis to initiate reassessment proceedings u/s. 147 of the Act. If the AO is permitted to have recourse to section 147, in such circumstances that would be giving a power of review to the AO, which is not permissible. In fact, no new material came to the possession of the AO based on which the AO entertained a belief regarding escapement of income. We are therefore of the view that the CIT(A) was fully justified in holding that initiation of reassessment proceedings were not valid. Consequently ground No.2 raised by the revenue is dismissed. 17. As far as the question whether the assessee was only exporting purchased iron ore or was purchasing ROM and processing the same before its export, the AO started with the presumption that what the assessee purchased was iron ore fines and not ROM. This presumption of the AO is without any basis. The only basis as st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign currency. The AO was of the view that the expenses incurred in foreign currency should be excluded from the export turnover in view of the definition of export turnover as contained in Explanation 2(iii) of the Act, which lays down that export turnover means consideration in respect of export of articles or things brought into India by the assessee in convertible foreign exchange, but does not include freight, telecommunication charges or insurance attributable to the delivery of articles or things or computer software outside India or expenses incurred in foreign exchange in providing technical services outside India. The AO accordingly excluded from the export turnover the aforesaid items of expenses and computed deduction u/s. 10B as follows:- 12.3 Further, on calling for the details, it was stated by the assessee that these expenses were incurred in respect of EOU. The same was verified. After due verification, the above two items are reduced from the value of export turnover. Export Turnover = ETO as declared by the Assessee (-) Travelling expenses (-) Supervision charges incurred in foreign currency. = 61,22,23,629 5,55,808 15,30,870 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar nature, being intangible assets, acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed- (i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed; (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed : The Finance Act, 2002, with effect from 1st April, 2002 has inserted a new sub-clause (iia) in sub-section (1) of section 32 to provide that in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2002, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to fifteen per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii). Such further deduction of fifteen per cent shall be allowed to a new industrial undertaking during any previous year in which such un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciation specified in Appendix IA, at its option, be allowed depreciation under sub-rule (1) read with Appendix I, if such option is exercised before the due date for furnishing the return of income under sub-section (1) of section 139 of the Act, (a) for the assessment year 1998-99, in the case of an undertaking which began to generate power prior to 1st day of April, 1997; and (b) for the assessment year relevant to the previous year in which it begins to generate power, in case of any other undertaking: Provided also that any such option once exercised shall be final and shall apply to all the subsequent assessment years. 26. Generally, Rule 5(1) Appendix I is applicable to Section 32(1)(i) Rule 5(1A) Appendix IA is applicable to Section 32(1)(ii). However by virtue of second proviso to Rule 5(1A), there is an option available to an undertaking falling under 32(1)(i) to claim depreciation as per Appendix I, if such option is exercised before the due date for furnishing the return of income under Sec 139(1). The assessee claimed before the AO that it had exercised the above option and had claimed the regular depreciation on windmills as per Appendix I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollows: 5. In the case on hand, the assessee is stated to have set up a windmill at a cost of ₹ 5,85,60,000. It is true that the assessee is a company engaged in the business of manufacture of textile goods. As far as application of s. 32(1)(iia) of the Act, is concerned, what is required to be satisfied in order to claim the additional depreciation is that the setting up of a new machinery or plant should have been acquired and installed after 31st March, 2002 by an assessee, who was already engaged in the business of manufacture or production of any article or thing. The said provision does not state that the setting up of a new machinery or plant, which was acquired and installed upto 31st March, 2002 should have any operational connectivity to the article or thing that was already being manufactured by the assessee. Therefore, the contention that the setting up of a windmill has nothing to do with the power industry, namely, manufacture of oil seeds etc. is totally not germane to the specific provision contained in s. 32(1)(iia) of the Act. According to the CIT(A), the facts of the Assessee s case and that of the case before the Hon ble Madras High Court were id ..... 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