TMI Blog2021 (4) TMI 1017X X X X Extracts X X X X X X X X Extracts X X X X ..... hat A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally. Since a provision intended for promoting economic growth has to be interpreted liberally the restriction on it too has to be construed so as to advance the objective of the section and not to frustrate it. Under clause (i) of sub-section (2) of section 15C formation of the undertaking by splitting up or reconstruction of an existing business by transfer to the undertaking of building, raw material or plant used in any previous business results in denial of the benefit contemplated under sub-section. In this case, on perusal of facts available on record, we find that there is no change in facts prevailing at the time when deduction was allowed to the assessee in the assessment year 2004-05 and in the assessment year 2009-10 when deduction was denied. Therefore, we are of the considered view that unless there is change in facts, the AO cannot take a different view for denying deduction claimed u/s.10B of the Act. Hence, we are of the considered view that the assessee is entitled for deduction u/s.10B of the Act in respect of profit derived from 100% export or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f expenses is eligible for deduction under exemption / deduction provisions by various section of IT Act, 1961. Therefore, we are of the considered view that assessee is entitled for deduction towards enhanced profits. But, fact remains that the issue has not been adjudicated by the ld.CIT(A) and hence, the issue has been set aside to the file of the CIT(A) and direct him to reconsider the issue in light of our findings given herein above. Exclusion of expenses from export turnover and total turnover - HELD THAT:- We find that the issue of exclusion of expenses from export turnover and total turnover is squarely covered in favour of the assessee by decision of Hon ble Supreme Court in the case of CIT vs. HCL Technologies Ltd.,[ 2018 (5) TMI 357 - SUPREME COURT] as held that export turnover is a numerator and also forms a constituent element of the denomination in as much as it forms part of the total turnover. Hence, the export over as numerator must have the same meaning as the export turnover which is a constituent element of the total turnover in the denominator and hence, needs to be excluded from total turnover. Therefore, we are of considered view that the AO is erred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld fall within the meaning of the term 'production' for the purposes claiming the deduction u/s.10B. 6. For that the Commissioner of Income Tax (Appeals) failed to appreciate that having fulfilled all the conditions for claiming deduction u/s.10B in the first year and having allowed the claim in that year, the appellant should be allowed deduction in the subsequent years. 3. The brief facts of the case are that the assessee company is engaged in the business of production and export of pasteurized crab meat. In the process of production of crab meat from a dead crab, a non-living object into pasteurized crab meat, an edible food product, the assessee engages various process of manufacturing to bring in to dead crab into a pasteurized crab meat. The conversion of dead crab (non-living thing) into pasteurized crab meat results in transformation of deal crab into a distinct object with a different name (pasteurized crab meat), character (free from bacteria and has added taste) and use (edible food product with a shelf life). It also brings in to existence of new and distinct object with a different chemical composition or integral structure. The assessee claims that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction u/s.10B of the Act, then there cannot be a different view in subsequent years unless there is change in activity carried out by the assessee. 4. The AO after considering relevant submissions of the assessee and also taken note of newly inserted definition of manufacture by sub-clause (29BA) of section 2 of the Act, observed that activity carried out by the assessee, i.e. production and export of pasteurized crab meat does not come under the definition of manufacture as per the new term inserted by the Finance Act, 2009 w.e.f. 01.04.2009 and hence, even if the assessee was allowed benefit of deduction u/s.10B of the Act for earlier years, but from the present assessment year, deduction cannot be allowed because of change in law by insertion of term manufacture by the Finance Act, 2009 and hence there is no merit in the arguments taken by the assessee that the activity carried by the company comes under the definition of manufacture even after amendment by the Finance Act, 2009 by insertion of clause (29BA) to section 2 of the Act. The ld.AO has also rejected various case laws cited by the assessee on the ground that those case laws are rendered before insertion of the w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s accepted the fact that the assessee was engaged in the activity of manufacture or production of goods, articles or things then the same cannot be treated as no manufacturing activity merely for the reason that the term manufacturing has been defined by insertion of new definition u/s. 2(29BA) of the Act, unless there is change in activity carried out by the assessee. 6. The ld.CIT (A) after considering relevant submissions of the assessee and has also taken note of newly inserted word manufacturing by the Finance Act, 2009 w.e.f. 01.04.2009 observed that in the activity carried out by the assessee, there was no transformation of the object into a new and distinct object and hence there was no manufacture or production as such was involved in the process which qualifies for deduction u/s.10B of the Act. The ld.CIT(A) further observed that if at all the activity carried out by the assessee involves any change into a new, distinct and separate object then the same can be considered as a processing of goods which is not considered as manufacture after definition of the word manufacture in section (2) sub- section (29BA) of the Act. The real meaning of manufacture is a change fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch undergoes series of test starting from receiving of dead crab at the factory to process it at various stages to make it finally a pasteurized crab meat, which is altogether a distinct object with a different name, character and use. The ld.AR for the assessee further referring to the manufacturing process submitted that it is not a simple process of extraction of crab meat from a dead crab, but it involves a serious of process starting from mixing of measured quantities of chemical (Sodium Acid Pyrid Phosphate) as per the standards from Virginia Institute, USA and certificate from CIFT, Cochin. The process of pasteurization insofar as that the crab meat is free of all bacterial, thus making it safe for human consumption. The pasteurized product is next stored in cold rooms maintaining temperature of +1 C to 3 C till the time of shipment. The production facility is approved by USFDA and the production is carried out as per HACCP norms. From the above, it is clear that the dead crab which is not suitable for human consumption passes through a series of manufacturing activities involving extensive labour and machine, controlled activities to transform into pasteurized crab meat mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause the term production having wider scope as per which conversion of any item into a different and distinct marketable product amounts to production which is eligible for deduction under the Act. The ld.AR for the assessee further submitted that even assuming for a moment the activity carried out by the assessee is neither manufacturing nor production as per the new narrowed scope definition as per section 2(29BA) of the Act, but deduction claimed for the impugned assessment year cannot be denied because the Department has accepted the activities carried out by the assessee as manufacture and has allowed deduction for past seven years starting from assessment year 2004-05 to assessment year 2008-09. Further only from impugned assessment year, the AO has denied benefit of deduction by virtue of insertion of the term manufacture u/s. 2(29BA) by the Finance Act, 2009 but without any changes in process employed by the assessee in the year 2004-05 when the deduction was first allowed u/s.10B of the Act and when the deduction was denied in the year 2009-10. The ld.AR for the assessee further referring to series of decisions submitted that once the business activity of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction, the Government is discharging, it is subject to the rule of promissory estoppels. Therefore, the privilege granted to the assessee u/s.10B of the Act cannot be withdrawn by subsequent clarification or amendment due to the doctrine of promissory estoppels. In this case, the activity undertaken by the assessee was recognized as a manufacturing or production activity which qualifies for deduction u/s.10B and as such, deduction was allowed for seven years. It is an admitted fact as per provisions of section 10B of the Act, that newly established 100% EOU are eligible for 100% tax deduction for 10 consecutive years. In this case, the assessee was allowed deduction for seven years but such deduction was denied from 8th year onwards by taking note of the amended term manufacture as per section 2(29BA) without there being any changes in physical activities carried out by the assessee in its manufacturing facility. Therefore, principles of doctrine of estoppels as well as doctrine of legitimate expectations demands that the authority which is performing its function while discharging the statutory functions should bound to understand the purpose and intention of allowing benefit to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crab and then process into chemical mixed pasteurized crab meat in a series of manufacturing process in the facility. The assessee claims that activity undertaken by the company in their facility is a manufacturing activity even under the new definition of manufacture as per section 2(29BA) of the Act, because it results in transformation of object (dead crab) into a new distinct object (pasteurized crab meat) having different name, character and use. The assessee further claims that it brings into existence a new and distinct object with a different chemical composition or integral structure. The raw material used for manufacturing activity is dead crab (non-living thing) which qualifies as a non- living physical object or article or thing and hence fulfills the condition prescribed u/s.2(29BA) of the Act. Since, new product is developed as a result of deployment of men and machinery and what emerges is a commercially different product, it would constitute manufacture. The assessee has taken support from series of decisions of various High courts and Supreme Court to support its arguments and argued that the pasteurized crab meat is a product of human activity or effort and furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. As we have already stated in our earlier paragraph, we are not on the point whether the activity carried out by the assessee fits into the new term manufacture as per section 2(29BA) of the Act. Although, earlier the term manufacture was not defined under the Income Tax Act, 1961, but definition of manufacture was imported either from some other deduction / exemption provisions or other similar provisions which govern SEZ / EOU units. Further as per activities undertaken by the assessee, said activity was considered as manufacture or production for the purpose of deduction u/s.10B of the Act. Therefore, when there is no change in physical activities carried out by the assessee when deduction was denied for the impugned assessment year, and facts present at the time deduction was first allowed in the year 2004-05, can the AO deny such deduction merely for the reason that new definition inserted in the statute has disentitled the assessee from claiming deduction provided u/s.10B of the Act. Admittedly, the purpose of Section 10B of the Act is to give effect to EXIM policy. Therefore, the statute has provided deduction all units established as 100% EOU as per EXIM Policy u/s 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of amended definition of manufacture by Finance Act, 2009 w.e.f., 01.04.2009. Therefore in our considered view, if at all activity carried out by the assessee is not considered as manufacturing or production as per new definition of manufacture but benefit of deduction can be denied to only those units which are set up after 01.04.2009, but said benefit cannot be denied to units which have already set-up their units before amendment by the Finance Act, 2009 and such units which have already claimed deduction for certain years, because provisions of section 10B of the Act provides for uninterrupted deduction for 10 consecutive years if the assessee has fulfilled the conditions prescribed therein. In this case, except by bringing a new amended term manufacture AO has not made out a case that the assessee is neither fulfilled conditions prescribed therein nor activities undertaken by the assessee is substantially changed. Unless the AO has brought out clear facts to the effect that activities undertaken by the assessee were substantially changed during the impugned assessment year, deduction provided u/s.10B of the Act to a newly established 100% EOU cannot be denied by taking note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less there is change in facts, the AO cannot take a different view for denying deduction claimed u/s.10B of the Act. Hence, we are of the considered view that the assessee is entitled for deduction u/s.10B of the Act in respect of profit derived from 100% export oriented undertakings and accordingly, direct the AO to allow benefit of deduction. 15. In the result, appeal filed by the assessee for assessment year 2010-11 is allowed. ITA Nos.422/Chny/2020 1228/Chny/2018 16. The next issue that came up for our consideration for assessment years 2009-10 2011-12 is exchange gain / loss fluctuation is part of export turnover or not. The AO has excluded export fluctuation gain on conversion of export proceed held in EEFC account from business proceeds for computing deduction u/s.10B of the Act and the same was added under the head Income from other sources resulting in double addition. 17. The ld.AR for the assessee submitted that exchange fluctuation is attributable to exports affected and ultimately goes to increase or reduce the figure of export turnover and therefore is part of export turnover. However, he fairly agreed that this issue has not been adjudicated by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable on record and gone through orders of the authorities below. The issue whether enhanced profit on account of disallowance of expenses is eligible for deduction under deduction / exemption provisions of the Act is no longer res-integra. Various high courts have taken a consistent view that enhanced profit on account of disallowance of various expenses goes to increase business profit and to that extent would be eligible for deduction under deduction / exemption provisions of the Act. The Hon ble High Court of Bombay in the case of CIT vs. Gem Plus Jewellery India Ltd., supra, has considered an identical issue and held that enhanced profit on disallowance of expenses is eligible for deduction u/s.10B or 10A of the Act. The CBDT has accepted legal position and issued a Circular No.37/2016 dated 02.11.2016, where it was clarified that enhanced profit on account of disallowance of expenses is eligible for deduction under exemption / deduction provisions by various section of IT Act, 1961. Therefore, we are of the considered view that assessee is entitled for deduction towards enhanced profits. But, fact remains that the issue has not been adjudicated by the ld.CIT(A) and hence, ..... 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