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TMI Blog2021 (4) TMI 1017X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case to the extent prejudicial to the interests of the appellant and is opposed to the principles of equity, natural justice and fair play. 2. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the order of the Assessing Officer is without jurisdiction. 3. For that the Commissioner of Income Tax (Appeals) erred in upholding the disallowance of claim of Rs. 2,07,40,554/- made u/s.10B. 4. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the appellant is carrying out manufacturing activity as defined u/s. 2(29BA). 5. For that without prejudice to the above, the Commissioner of Income Tax (Appeals) failed to appreciate that even if the activity does not fall within the meaning of the term 'manufacture', it would 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 sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has satisfied the definition of manufacture as provided in Section 2(29BA) of the Act. The assessee further submitted that it has commenced a newly established 100% export oriented undertaking in the year 2004 and has claimed deduction towards profit derived from the undertaking from assessment year 2004- 05 and such deduction has been allowed for past seven years. Therefore, unless there is change in facts and activity carried out by the assessee for the impugned assessment year, no different view can be taken merely for the reason that the Act has been amended by insertion of definition of manufacture into the statute. The assessee has also challenged the action of the AO in light of the principles of consistency and doctrine of legitimate expectations and argued that once the assessee is treated as a qualified unit eligible for claiming 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 activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been reproduced at page No.2 to 25 of ld.CIT(A) order. The sum and substance of arguments of the assessee before the ld.CIT(A) are that conversion of dead crab into pasteurized crab meat amounts to manufacture as per definition u/s.2(29BA) of the Act, because the manufacturing starts only after the crab dies i.e., only after the same becomes a non-living physical thing and hence it fulfills the condition prescribed u/s.29BA that there must be a change in the non-living physical object or article or thing. Further, it results in transformation of the object into a new and distinct object. The assessee has also challenged the reason given by the AO for rejection of deduction claimed u/s.10B of the Act, on the ground of principles of consistency and doctrine of principles of legitimate expectations and argued that once the Department has 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction claimed u/s.10B of the Act in respect of profit derived from a newly established 100% export oriented undertaking without appreciating the fact that activities carried out by the assessee for production and export of pasteurized crab meat is a manufacturing activity eligible for deduction u/s.10B of the Act. The ld.AR for the assessee further submitted that the assessee's business activity is to process dead crab (non-living thing) which is not suitable for human consumption into pasteurized meat crab which is suitable for human consumption through a series of manufacturing activities involving extensive labour and machinery. The ld.AR for the assessee referring to the process of manufacture submitted that the assessee employed more than 10 to 11 stages of process to make it a final product of pasteurized crab meat which 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 extr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r produced then the processing of pasteurized crab meat cannot be regarded as not manufactured goods or articles or things. The ld.AR for the assessee referring to series of decisions of various High Courts and Supreme Courts including the decision of Hon'ble Supreme Court in the case of ITO v. Arihant Tiles & Marbles (P) Ltd., supra, submitted that any activity which involved in emergence of new and distinct commodity can be considered as manufacture or production and hence, when a person engaged in processing of commodity, i.e. fresh crab into pasteurized crab meat definitely comes within the ambit of term 'manufacture'. 9. The ld.AR for the assessee without prejudice to his first argument submitted that assuming for a moment but not accepting the assessee activity does not amount to manufacture, but it is certainly a production because 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 producti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in section 2(r) of Special Economic Zone Act, 2005. The definition u/s.2(r) in a liberal sense which is why reference was made to this section in section 10AA. The assessee claiming deduction u/s.10B cannot be put to a disadvantage only because a different narrower definition is applicable for EOU unit. 10. The ld.AR for the assessee further referring to various decisions on the issue of Doctrine of promissory estoppels submitted that when deduction u/s.10B of the Act was allowed in first year, the AO ought to have allowed such deduction in subsequent years by following the principles of Doctrine of promissory estoppels. The ld.AR for the assessee referring to the decision of Hon'ble Supreme Court in the case of Motilalal Padampat Sugar Mills Limited v. State of UP [1979] 118 ITR 326 submitted that whatever be the nature of function, 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the activities carried out by the assessee does not qualify for deduction u/s.10B of the Act. The AO as well as the ld.CIT(A) have rightly rejected deduction claimed u/s.10B of the Act towards profit derived from newly established 100% EOU undertaking and their orders should be upheld. 12. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The facts borne out from record indicate that the assessee is engaged in the business of production and export of pasteurized crab meat right from assessment year 2004-05 onwards. The activity undertaken by the assessee starts from picking up dead crab to the factory premises and ends up with processed pasteurized crab meat. The assessee employed 10 to 11 stages of processing right from procurement of non-living dead 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... things. The assessee is also registered under the Central Excise Act, 1944 as a manufacturer and the goods manufactured by the assessee are treated as distinct commodities under Customs and GST laws. It is also an admitted fact that the Department has accepted the activities carried out by the assessee as a manufacturing or production of goods or article or thing, which qualifies for deduction u/s.10B of the Act and further deduction has been allowed for past 7 years right from assessment year 2004-05 to assessment year 2008-09. It was also an admitted fact that there is no change in activities carried out by the assessee in the year 2004-05 when the deduction was first allowed and in the year 2009-10 when the deduction was rejected by the AO by virtue of new word 'manufacture' inserted under clause 29BA of section 2 of the 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 deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, if you consider the case of the assessee in light of doctrine of legitimate expectations when a person set-up or establishes unit under any policy of a Government on the legitimate expectation that the Government will fulfill its promises then such person is entitled for the promises made by the Government or the expectation of the person even in a situation where the law has been amended / disentitles the person from claiming such benefit. In this case, the assessee has set up a new 100% EOU on the legitimate expectation that it will get deduction towards profit derived from such unit for 10 consecutive years as per provisions of section 10B of the Act. But, the AO has denied such benefit for last three years even though there is no change in activities performed by the assessee in its production facility by virtue 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 14. 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 oriented undertakings and accordingly, direct the AO to allow benefit of deduction. 15. In the result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds provision written back, disallowance of expenses u/s.37 of the Act and disallowance of expenses u/s.40A(7) of the Act. 20. The ld.AR for the assessee submitted that the next consequences of any disallowance is increasing business profit and to that extent enhanced profit is eligible for deduction u/s.10B of the Act. In this regard, he has relied upon the circular issued by the CBDT in Circular No.37/2016 dated 02.11.2016. The assessee has also relied upon decision of Hon'ble High Court of Bombay in the case CIT vs. Gem Plus Jewellery India Ltd. [2011] 330 ITR 175. However, fairly agreed that the ld.CIT(A) has not adjudicated the issue and hence, the assessee has filed a petition u/s.154 of the Act and said petition is pending for adjudication. 21. We have heard both the parties, perused materials available 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 busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver in the denominator and hence, needs to be excluded from total turnover. Therefore, we are of considered view that the AO is erred in not bexcluding expenses from total turnover for computing deduction u/s.10B of the Act. But, fact remains that the issue has not been considered by the ld.CIT(A) and hence, assessee has filed a petition u/s.154 of the Act and said petition is pending for adjudication. Therefore, the issue has been set aside to the file of the ld.CIT(A) and direct him to reconsider the issue in light of decision of Hon'ble Supreme Court in the case of CIT vs. HCL Technologies Ltd. 25. The next issue that came up for our consideration for assessment year 2009-10 is disallowance of expenses u/s.40(a)(iii) of the Act for Rs. 50,00,000/-. The ld.AR for the assessee at the time of hearing submitted that assessee does not want to press the ground challenging disallowance of expenses u/s.40(a)(iii) of the Act. Hence, ground taken by the assessee is dismissed as not pressed. 26. The next issue that came up for our consideration for assessment year 2011-12 is disallowance of expenditure u/s.14A r.w.rule 8D of the Income Tax Rules, 1962. The ld.AR for the assessee submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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