D. Karunakara Rao, AM.
1. There are three appeals under consideration. Out of three appeals, two appeals are filed by the assessee and one appeal is filed by the Revenue. I.T.A. NO.751/M/2008 and ITA No. 2436/M/2008 for the AY: 2004-2005 are the cross appeals and they are filed against the order of CIT (A)-III, Mumbai dated 5.12.2007. The other appeal I.T.A. NO.2591/M/2008 again relates to the AY:2004-2005k but it has genesis in the proceedings u/s 154 of the Act.
2. Briefly stated, relevant facts of the case are that the assessee engaged in the business of trading and manufacturing of dyes, menthol based products etc. Assessee filed its return of income declaring the income of Rs. 17.8 Cr (rounded off to nearest lakhs) after claiming deduction u/s 80-HHC of the Act amounting to Rs. 2.91 Cr, deduction u/s 80-IB of the Act amounting to Rs. 1,21,211/- and finally the deduction u/s 80-G the Act amounting to Rs. 93.8 lakhs. In the scrutiny assessment, the assessed income was determined at Rs. 19,07,57,770/-. AO made disallowance section 14A in respect of interest free dividend income of Rs. 37,58,670/-, disallowance on account of interest amounting to Rs. 1,48,13,426/-, application of dividend stripping of provisions of section 94(7) of the Act, interest receipts earned out of the FDR and KDR, claim of deduction u/s 80-IB relating to new project set up at Daman to Rs. 1,27,211/-, re-computation of deduction u/s 80-HHC, DEPB and duty draw back etc. Aggrieved with the order of the AO, the assessee approached the first appellate authority. As a result, the assessee's appeal was partly allowed by the CIT (A). Therefore, both the parties filed the appeals before the Tribunal vide ITA No. I.T.A. NO.751/M/2008 and ITA No. 2436/M/2008. Appeal wise and ground wise adjudication of these cross appeals is given in the following paragraphs. Firstly, we shall take-up the revenue's appeal and the grounds raised in this appeal read as under:
"i). On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in holding that the ratio of non-taxable income to total receipts is a sound basis for making disallowance u/s 14A without giving reasons why the method adoptee by the AO of disallowing 10% of income earned as being expenses attributable to income is not justified.
ii). Without prejudice to ground No.1, the CIT (A) erred in considering only administrative expenses for disallowance u/s 14A and not taking into consideration interest debited to PandL A/c.
iii) On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in deleting the disallowance made by the Assessing Officer u/s 36(1)(iii) of the IT Act, 1961 in respect of interest expenditure of Rs. 1,27,52,426/- without appreciating the fact that the assessee has incurred interest expenditure in respect of loan taken from Canara Bank and given interest free advances to Ashish Ship Breaking Ltd (Rs. 40 lacs), B.V. Metals (Rs. 23 lacs), Jupiter Enterprises (Rs 10 lacs) and Tien Yuan India P. Ltd (Rs. 51.10 Crores).
iv) On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in holding that section 94(7) cannot be invoked on the ground that NAVs are not controlled without considering the provisions of section 94(7) which provided for disallowance where units are purchased and sold within a specific period.
v) On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in directing the Assessing Officer that amount of Rs. 4,76,437/- representing the sundry balances written back should form part of the profit of the business for purpose of computing deduction allowable u/s 80HHC."
3. Grounds (i) and (ii) relate to the applicability of provisions of section 14A of the Act. In this regard, relevant facts are that the assessee earned exempt income of Rs. 37,58,670/- and the details are that (i) interest income out of US-64 Bonds amounting to Rs. 27,19,896/- and (ii) dividend income of Rs. 10,38,774/- from units of Kotak Mahindra Mutual Fund. As per assessee, expenditure relatable to such exempt income is only Rs. 21,223/-. AO did not accept the same and following the CBDT Circular No.621, dated 19.12.1991, Assessing Officer disallowed 10% of the tax free income and added sum of Rs. 3,75,867/- as expenditure attributable to earning of tax free interest and dividend income. During the first appellate proceedings, the disallowances is restricted to 50,020/- based on the principle of proportion between non-taxable income qua the gross receipts of the assessee. Aggrieved with the relief, the Revenue is in appeal vide ground no.1. Against the sustenance of the addition, the assessee is in appeal vide ground no.1 in its appeal. Thus, ground no.1 in both the appeals relates to the common issue and therefore, the same are being disposed of here.
4. Before us, Ld DR relied on the order of the AO and he is critical of the decision of the CIT(A) in restricting to only Rs 50,020. Per contra, Shr J.D. Mistry and Niraj Seth, Ld Counsels for the assessee mentioned that the assessee received only two cheques for depositing in the assessee's account. Therefore, the expenses relatable to these two cheques will not be at high as Rs. 3,75,867/- as disallowed by the AO or Rs. 50,020/- as decided by the CIT (A). As per the assessee's counsel, there are no other direct expenses except Rs. 21,223/- as informed by the assessee.
5. We have heard both the parties in the dispute. The undisputed facts are that the instant AY relates to the period prior to the amendment to section Rule 8D of the I T Rules, 1962. Reasonable basis is the mantra to be followed by the AO after rejecting the basis adopted by the assessee. In this case, the AO has rejected the assessee figure of Rs 21,223/- before resorting to disallowing adopting the flat rate of 10% of the exempt income. This order of the AO suffers from reasoning as to why adhocism and also why flat rate of 10%. In our opinion, making disallowances based on a fixed percentage of the dividend income is not fair as such percentage is very wild and inappropriate to the present case which is with the case of merely with two dividend cheques. We have also examined the reasoning given by the CIT(A) for arriving at the figure of Rs 50,020/- and find the same arrived at with some basis. Considering the peculiar facts of the present case, which involves only a passive earning of income by way of couple of cheques, we are of the opinion that the grounds raised by the Revenue need to be dismissed. In our opinion, the disallowance of Rs. 50,020/- in respect of Rs. 21, 223/- appears to be fair and reasonable. Therefore, ground nos. (i) and (ii) raised by the Revenue are dismissed.
5.1 Further, we find from the appeal of the assessee, the ground nos.1, 2 and 3 raised by the assessee revolve around the same issue of disallowance invoking the provisions of section 14A of the Act. On examining the said grounds, in our opinion, they have to be dismissed considering our decision above in respect of the ground 1 of the revenue appeal. AO is directed accordingly.
6. Ground no.(iii) of the Revenue's appeal relates to disallowance of interest u/s 36(1)(iii) of the Act. In this regard, relevant facts are that the assessee debited gross amount of Rs. 1,58,86,221/- which includes Rs. 31,33,795/-, the interest relatable to the interest free advances given to the group concerns. AO held that this is the case diversion of interest bearing funds to the benefit of the sister concerns, should not be allowed. The persons involved here are (i) Ashish Ship Breaking Ltd (Rs. 40,00,000/-); (ii) B.V. Metals (Rs. 23,00,000/-); (iii) Jupiter Enterprises (Rs. 10,00,000/- and (iv) Tien Yuan India Pvt. Ltd (Rs. 51,10,42,438/-) totaling to Rs. 51,83,42,438/-. CIT (A) deleted the same as per the discussion given in para 5 of his order which reads as under:
"I have perused the facts of the case and I find that the facts in the present appeal are identical to the facts in the earlier years. The issue was analysed in great details by the Appellate Commissioner in the order for assessment 2002-2003 as well as 2003-2004. After detailed discussion the disallowance made was deleted. Since, the facts are the same and in view of the decision of Hon'ble Supreme Court of India in the case of SA Builders it is held that the disallowance made is not justified and is accordingly deleted."
7. Before us, Ld Counsel brought to our notice an identical issue raised in appeal before the Tribunal vide ITA No.37/M/2007 for the assessment year 2003-2004 by the Revenue. Further, he brought to our notice the contents of para 16 and mentioned that the advances in question are the same and the parties involved are also the same. Factual matrix are also broadly comparable considering the discussion given in para 19 and 19.1. Assessee was given relief, confirming the order of the CIT (A). He mentioned that the order of the CIT (A) in this regard sustaining in view of the finding of the Hon'ble Supreme Court judgment in the case of SA Builders reported in 288 ITR 1.
8. On the other hand, Ld DR relied on the order of the AO.
9. We have heard both the parties, perused the orders of the Revenue Authorities as well as the contents of para 19 of the order of the Tribunal for AY 2003-2004 in the context of Revenue's appeal where the assessee was given relief and the disallowance of interest was finally deleted. Relevant para 19 is reproduced here under:
"19. We have heard the rival submissions and considered them carefully. We have also gone through the case laws on which out attentions were drawn by the respective parties. After considering the submissions and also taking into consideration the various case laws, we find that there is no infirmity in the findings of the Ld CIT (A). The contention of the assessee that interest free advances were given to the sister concern for business purposes neither is incorrect nor false. The assessee advances money on account of purchase of goods from sister concerns. The details of purchases and the purpose for giving advance free loans were explained before the CIT (A)and also before the AO. The AO merely disallowed the claim of the assessee following the decision of the jurisdictional High Court in the case of Phalton Sugar Works Ltd reported in 208 ITR 989 wherein it has been held that any funds given to the sister concern on interest free, the interest can be disallowed u/s 36(1)(iii). The decision of the Hon'ble Bombay High Court in the case of Phalton Sugar Works Ltd has been reversed by the Hon'ble Supreme Court in the case of SA Builders in 288 ITR 1 =(2006-TIOL-179-SC- IT). The Hon'ble Supreme Court has categorically held that if funds given to the sister concern or its subsidiary for the purpose of own business or their business, then no disallowance can be made u/s 36(1)(iii) as it has to be taken into consideration that those funds are to be treated as used for business purposes. The ratio of the decision of the Supreme Court is squarely applicable on the facts of the present case. Moreover, the assessee has its own funds on which no interest has been paid and they are much more than the amount given to its sister concern as interest free advances.
The CIT (A) has considered this aspect then only came to the conclusion that the disallowance made by the AO was not justified.
19.1. The contentions of the Ld DR that the funds available should be taken on day to day basis and not on the basis of closing balance at the end of the year; in our view, is not well founded on the facts of the present case. It has to be taken into consideration that what is the amount available with the assessee on the first day of the accounting year and what is the amount has been given to its sister concern and thereafter what is the closing balance at the end of the year. Therefore, in our considered view, the contention of the Ld Counsel of the assessee that totality of the circumstances has to be taken into consideration and not on day to day basis utilization of the funds. Moreover, as stated above, the department could not prove that these funds were not given for the purpose of business. Therefore, in view of these facts and circumstances, we confirm the finds of the Ld CIT (A) on this issue."
10. Considering the above settled nature of the issue, we are of the opinion that the ground raised by the Revenue is required to be dismissed. Accordingly, ground no.(iii) of the Revenue's appeal is dismissed.
11. In continuation of the above, on the issue of taxability of interest income of Rs. 8,15,29,357/- under the head "income from other sources", Ld Counsel stated that this issue also stands covered by the order of the Tribunal in assessee's own case vide ITA No. 139/M/2007 for the AY 2003-2004 and para 8 and its sub- paras are relevant in this regard. Ld Counsel mentioned that the interest income was claimed as business income of the assessee and however, the same was taxed by the AO as 'income from other sources'. The Tribunal upheld the claim of the assessee treating the said income as business income considering the jurisdictional High Court judgment in the case of Indo Swiss Jewels Ltd, reported in 284 ITR 389. The relevant discussion is given from para 8 to 11 and the same read as under:
"8. Ground nos 6 to 8 relate to confirming the action of the AO in treating the interest income as income from other sources as against business income and without prejudice, only 90% of the net interest has to be reduced for the purpose of claiming deduction u/s 80-HHC.
8.1 The AO treated the interest income of Rs. 7,37,51,962/- under the head income from other sources against business income shown by the assessee. By treating interest income as income from other sources, the AO disallowed the deduction u/s 80-HHC on the basis of reasoning given by him in earlier assessment order and placing reliance on the decision of Raviratna Exports Ltd reported in 246 ITR 443.
8.2. It was submitted before the CIT (A) that the assessee has been carried out financial activity and therefore, interest earned from the same is operational income. It was further submitted that the assessee is an Exporter and it has to keep FDRs with banks for obtaining various credit facilities on which interest income has been earned. It was also submitted that it has been held by various Courts and Tribunals that when FDRs were kept with bank for obtaining credit facilities for export, the interest income has to be treated as income from business and not income from other sources. Reliance was placed on the decision of the Tribunal in the case of Jetin and Co decided in ITA No. 1112/M/2004, dated 12.6.2006 and in the case of Opera clothing decided in ITA No. 3250/M/2002 dated 28.3.2006. Reliance was also placed on the decision of the Hon'ble Bombay High court in the case of Indo Swiss Jewels Ltd reported in284 ITR 389. It was submitted that in this case it has been held that interest earned on the amounts kept aside for import of machinery and invested in short term corporate deposits were assessable as business income.
8.3. The CIT (A) after considering the submissions and other material on record found that the decision of the Supreme Court in the case of Tuticorn Alkali Chemicals and Chemicals and Fertilizers Ltd in 227 ITR 172 (SC) wherein it has benheld that interest earned on short term deposits out of surplus funds is assessable under the head income from other sources. Reliance was placed on the decision of Hon'ble Kerala High court in the case of K. Rajendranathan Nair in 265 ITR 35 (Ker) and various other decisions where it has been held that income from other sources cannot be considered for the purpose of deduction u/s 80-HHC. The decision relied upon by the Ld Counsel of the assessee in the case of Jatin and Co and in the case of Opera Clothing (supra) were found distinguishable. Accordingly, the action of the AO was confirmed by the CIT (A).
9. Contention raised before the Ld CIT (A) were reiterated by the Ld Counsel of the assessee before the Tribunal. It was further submitted that in a recent decision, the Hon'ble Bombay High Court in the case of Lok Holdings reported in 308 ITR 356 held that even on surplus funds, interest earned has to be treated as income from business. Alternatively, it was submitted that netting of interest has to be allowed as income on account of interest and expenditure on account of interest on account of the same activity. The Ld DR, on the other hand place strong reliance on the orders of the authorities below.
10. After considering the submissions and perusing the material on record, we find that the assessee deserves to succeed in this ground. Major portion of interest income is on account of margin money given by the assessee as FDRs which were obtained for the purpose of availing overdraft facility. Therefore, earning of interest has direct nexus with business activity of the assessee. Accordingly, in view of the decision of the Hon'ble Bombay High court in the case of Indo Swiss Jewels Ltd and in the case of Lok Holding (supra), the interest income has to be treated as income from business.. The decision of the jurisdictional High Court is binding on the facts of the present case.
10.1. We further noted that the decision relied upon by the Ld CIT (A) in the case of Tuticorn Alkali Chemicals and Chemicals and Fertilizers Ltd (supra) is distinguishable on facts. In that case, manufacturing was not started and the funds were kept in FDRs; therefore, they were treated as income from other sources.
11. In the present case, the funds were required for business purposes and as per pre-conditions of the Bank; margin money was deposited in the shape of FDRs for availing overdraft facility and therefore, it has direct nexus with business activity and accordingly, it has to be treated as income from business and since there is a direct nexus between the earning of interest and expenditure of interest then netting of interest has also to be allowed in view of the decision of the Special Bench in the case Lalsons Enterprises reported in 89 ITD 25. Therefore, these grounds of the assessee are allowed and the AO is directed to recalculate the deduction u/s 80-HHC accordingly."
12. Thus, from above, it is evident that the interest receipts of the kind constitute 'business income' as claimed by the assessee. AO is directed to give effect to the said order of the Tribunal considering the principles laid down by the Tribunal (supra). Accordingly, ground no.(iv) of the assessee's appeal is allowed.
13. Further, referring to ground nos. 12 to 14 of the assessee's appeal, Ld Counsel mentioned that these grounds are connected to the above ground of the revenue's appeal and the issues have to be decided, considering the Hon'ble Supreme Court judgment in the case of ACG Associated Capsules (P.) Ltd. vs. CIT343 ITR 89 (SC). Considering the binding judgment of the Hon'ble Supreme Court, the AO is directed to give effect to the same while granting deduction u/s 80- IA in respect of the interest income of Rs. 8,15,29,357/-. Accordingly, for this limited purpose, relevant grounds are remitted to the files of the AO for necessary action. We order accordingly.
14. Ground no.(iv) of the Revenue's appeal relates to applicability of provisions of section 94(7) of the Act. In this regard, CIT (A) held that the AO erroneously applied the said provisions when the scheme involved is declaration of dividend on day-to-day basis. There is no dividend stripping in this case, where day-to-day investment of dividend is involved in the said transactions. The losses result on the basis of prevailing NAV on the date of purchase of the units and the date of withdrawal from the scheme will not attract the provisions of section 94(7) of the Act. CIT(A) granted relief to the assessee after giving detailed reasoning in the impugned order. We agree with the same, therefore, ground no.(iv) raised by the Revenue is dismissed.
15. Ground no.(v) in Revenue's appeal relates to the claim of balances written back amounting to Rs. 4,76,437/-, which are not considered as part of the business profits for the purpose of the computation of deduction u/s 80-HHC of the Act.
16. At the outset, Shri J.D. Mistry and Niraj Seth brought to our notice that an identical issue was adjudication by the Tribunal in the assessee's own case vide ITA No.37/M/2007 for the assessment year 2003-2004 in the Revenue's appeal, where para 20 to 20.4 are relevant and the same read as under:
"20. The remaining round in appeal of a the department is against directing the AO that amount of Rs. 5,92,237/- representing sundry balances written back should form part of the profit of the business for the purpose of computing deduction allowable u/s 80-HHC.
20.1 During the assessment proceedings, the AO notices that the assessee has shown a sum of Rs. 5,92,237/- under the head 'other income'. The AO reduced 90% of other income amounting to Rs. 5,92,237/- while working out the profits of business for the purpose of computing deduction u/s 80-HHC.
20.2. It was submitted before the CIT (A) that the income of Rs. 5,92,237/- has arisen to the assessee in the course of carrying on the business activity and hence needs to be considered for computing the profits of business. Since the income earned in the course of business, it should be treated as operational income in view of the decision in the case of Bangalore Clothing reported in 260 ITR 371.
20.3 After considering the submissions and perusing the other material on record, the Ld CIT (A) found that more than 95% of this amount relates to write back of sundry creditors which are the business liabilities of the assessee as at the time of creation of these sundry creditors, the income of the assessee went down since these credits represents purchases. Therefore, the income arisen to the assessee from writing back of these balance should form part of the profits of the assessee as these are intimately connected with the business of the assessee. Accordingly, the AO was directed to consider the amount of sundry balances written back as profit of the assessee for the purpose of computing deduction u/s 80-HHC.
20.4 The findings of the Ld CIT (A) neither could be controverted nor any other material was brought on record to establish otherwise. Therefore, we see no reason to interfere with the findings of the Ld CIT (A). Accordingly, we confirm these findings of the Ld CIT (A) on this issue also."
17. On perusal of the above, it is evident that the Tribunal directed the AO to consider the sundry balances written back as profits of business of the assessee for the purpose of computation allowable deduction u/s 80-HHC of the Act. We find, no reason to deviate from the above, therefore, ground no.(v) of the Revenue's appeal is dismissed.
18. In the result, the Revenue's appeal is dismissed.
I.T.A. NO.751/M/2008 (AY: 2004-2005)
(Assessee's appeal)
19. While dealing with the Revenue's appeal, we have so far adjudicated ground nos. 1 to 4. At the outset, in connection with ground nos. 8 to 11, which relate to recalculation of deduction u/s 80-HHC in respect of DEPB licenses amounting to Rs. 3,06,16,894/-, Ld Counsel mentioned that the said issue is covered in favour of the assessee by the judgment of the Hon'ble Supreme Court in the case of Topman Exports Ltd reported in 342 ITR 49. Considering the Apex Court judgment which was decided in favour of the assessee, we direct the Assessing Officer to grant relief to the assessee in this regard, complying with the above cited binding judgment of Supreme Court. Accordingly, ground nos. 8 to 11 raised by the assessee are allowed.
20. Ground nos. 12 to 14 relates to the taxability of interest income of Rs. 8,15,29,357/- treated as non-eligible for deduction u/s 80-HHC. While adjudicating the Revenue's appeal, we have already decided these grounds in this order vide para 13 wherein we have remitted the matter back to the files of the AO for taking necessary action in compliance with the binding judgment of the Hon'ble Supreme Court in the case of ACG Associated Capsules (surpa). Accordingly, ground nos. 12 to 14 are set aside.
21. Ground nos. 15 to 18 are said to be consequential in nature which should be dismissed as infructuous. It is held considering the likely relief to the assessee when the binding judgment of the Hon'ble Supreme Court in the case of Topman Exports Ltd vs. CIT 342 ITR 49 is applied carefully. We direct the AO accordingly. Accordingly, these grounds are dismissed as in fructuous.
22. Grounds 5 to 7: The issue relating to denial of deduction u/s 80-IB of the Act emanates from ground no.5 to 7 of the Appeal by the assessee. Relevant facts in this regard are that the assessee started a new unit at Daman in the year under consideration and claimed commencement of manufacturing activity before 31.3.2004. Per contra, AO concluded that assessee could not have started this manufacturing before 31.3.2004 considering the requirements or approvals from the Pollution Control Committee (PCC) and also the relevant paper filed by the assessee before him. As per the AO, assessee did not get the proper registration but only got a provisional registration dated 29.1.2004. AO also mentioned that the PCC granted consent on 12.3.2004. Further, elaborating the same, as per the AO, the 'Consent to Operate' certificate was issued by the PCC only on 31.3.2004. During the said approvals on 31.3.2004, the assessee would not have obtained or fabricated requisite machinery to produce the product before 31.3.2004. Other reasons mentioned by the AO for reduction of deduction u/s 80-IB of the Act are summarized in the paras 13 and the 14 of the impugned order which read as under:
"13. Assessing Officer has also relied upon circumstantial evidence to establish that manufacturing was not commenced during the previous year under consideration. These are enumerated below:
1. Copy of the permanent SSI certificate has not been filed by appellant despite specific request made.
2. Appellant's manufacturing activity requires consumption of water on a large scale and it did not have the facility of boring to provide adequate water facility. The Assessing Officer has also argued that the boring bill produced by the assessee is not in the name of the appellant but is in the name of Jindal Photo Industries and therefore cannot be relied upon.
3. According to Assessing Officer, appellant has no evidence towards any workers engaged in the manufacturing activity during the previous year under consideration. He has argued that the labour contractor bill produced by the assessee from M/s. Ruteja Enterprises dated 6th April, 2004 for which payment has been made on 13th May, 2004, both dates being after close of the previous year, is specifically specified to be for "loading and unloading". He has concluded that appellant did not have any labour to run its manufacturing activity.
4. The Assessing Officer has also argued that appellant has not incurred any expenses on freight and transport of raw materials as well as finished products.
5. Lastly, according to the Assessing Officer, appellant did not have drums in which the finished product manufactured and claimed to have been sold on 31st March, 2004 could have been stored and sold.
14. On all these grounds the Assessing Officer has concluded manufacturing activity was not started during the previous year relevant to assessment year under consideration and has accordingly disallowed 80-IB claim."
23. There was discussion about the violation by the assessee with reference to the condition relating to the number of employees in the manufacturing activity unit at Daman. Assessee submitted lot of documentation ie books of account for the month of March, 2004; Form No. RG 23A and 23C, sale invoices of the electricity bills raised by the labour contractor ie Ruteja Enterprises, the PCC letters relating to 'consent to establish' and 'consent to operate' and various other registrations and bills in support of the purchase of raw material, dispatch of registered goods. It is the argument of the assessee that considering the nature of the items, mere provisional registration is enough for the assessee who happened to be Small Scale Industry (SSI). Assessee also justified the number of workers involved in the manufacturing process as per the discussion given in the assessment order from para 7 to 13. The Assessing Officer did not accept the same regarding employees and was of the opinion that they are actually borne in the registration of Ruteja Enterprises, the labour contractor and were not the employees of the assessee. These employees are merely used for loading and unloading and they are not capable of working in the manufacturing activity of the assessee. AO has some reservation about the packing material ie drums used for sales. The AO is of the opinion that assessee has not purchased single drum in the year under consideration and therefore, the assessee's explanation that the drums received carrying raw material were used for the purpose of sales is barely an afterthought by the assessee. Aggrieved with the above, assessee filed an appeal before the CIT (A).
24. During the proceedings before the CIT (A), assessee reiterated the similar submissions and paras 16 to 20 of the impugned order are relevant in this regard. As per the same, regarding the approvals from PCC, CIT (A) believed that assessee is not allowed to commence the manufacturing activity till "order of commencement to operate" was issued. The documentation furnished by the assessee related to Excise Duty and Sales Tax and PCC are self-serving documents and they did not constitute clinching evidences. Regarding number of employees used in the manufacturing activity, the CIT (A) was of the opinion that the said employees were engaged only for loading and unloading activity and not for manufacturing process. Finally, CIT (A) concluded and agree with the view of the AO vide para 19 of his order which reads as under:
"19. On consideration of the facts in favour of appellant and against appellant, I am of the considered opinion that manufacturing did not begin during the previous year under consideration. I am particularly guided by the fact that appellant does not have any direct evidence, a tool proof evidence, to establish manufacturing. In contrast, the evidence that the appellant has produced are either week or not reliable in terms of the contentions. I am also guided by the fact that the labour bill is specific for loading and unloading, and one of the key requirements for the claim of deduction is employment of labour in the manufacturing activity. This condition is not satisfied. On consideration of the totality of the facts, I am satisfied that this is not a case where deduction u/s 80-IB can be allowed."
25. CIT (A) also confirmed the AO's views for some other reasons which are narrated in para 20 and as per the same, assessee violated various laws, rules and requirements relating to Director of Industries and the Pollution Control Board to the extent that the extent that the set up of manufacturing activity was started well before the permission from the PCC "the consent to establish and consent to operate". As per the CIT (A), the rules for availing the benefit of deduction should be treated as the stricter laws. Matter travelled before the Tribunal.
26. During the proceedings before us, Shri J.D. Mistry and Niraj Seth, Ld Counsel for the assessee at the very outset brought our attention to the letter dated 7.11.2011 with a request for filing additional evidence by Shri G. Anil. As per the affidavit of Shri G. Anil, Director of Technip Engineering Works Pvt. Ltd., Navi Mumbai, he affirmed that he has fabricated and supplied distillation unit at Daman on 8th March, 2004 itself raising invoice for Rs. 4.16 lacs and also raising another invoice for the balance of Rs. 3.64 lacs. It was prayed that additional evidence may be accepted considering the various decisions cited in the said letter. Further, Ld Counsel also brought to our notice another additional supporting evidence relating to AO's allegation about reconciliation statement of drums and packing material used for the sales. In the said letter dated 21.8.2009, assessee relied on various decision for admitting the said evidences stating that reconciliation statement shall have accepted to reduce the number of allegations made by the AO relating to the commencement of manufacturing process at Daman unit. Further, Ld Counsel also brought to our notice another letter dated 7.11.2011 with a request for admitting supporting additional evidences for the assessment year 2004-2005, from pages 319 to 373 of the paper book, with a prayer that the said papers are additional supporting evidences and the same must be admitted in the interest of justice and decide the same on merits. These papers relate to confirmation from the sales parties ie Quest International India Limited, Colgate Palmolive (I) Limited, details of transport charges, details of electricity bills, details of diesel and duty drawback credit, DEPB rates and many other papers to prove the bona fides of sales and purchases of the unit at Daman unit. Further, at the same time Ld DR for the Revenue also filled additional evidences ie copies of the assessment orders, order of the CIT (A) for the AY 2005-2006, which had reference to the allegation relating to the number of employees in the light of the fresh findings of some inquiries done by the Assessing Officer related to AY 2005-2006. There are certain statements issued by the labour contractor Ruteja Enterprises.
27. We shall first decide the issue of admitting of additional evidences for adjudication of the issue in hand ie whether the manufacturing process has begun in the year under consideration or not. The additional evidences furnished by the assessee relates to (i) the genuineness of the sales and the other expenditure relating to electricity, diesel etc the confirmations issued by the purchasers of the manufacturing products (ii) the reconciliation statement dated 21.8.20009 for re-use of the drums without necessitating purchase of the drums, (iii) details o electricity consumption with supporting invoices for AY 2004-05 (pages 330-333 of the paper book) and transportation bills suggesting the sale to third parties (324 -329 of the paper book). It is the allegation of the AO that in the absence of purchase of drums, the sales shown in the books of account are doubtful. On perusal of the said papers, it is in the interest of the justice that these papers shall supplement for bringing out the truth relating to the manufacturing process of the products sold. The reconciliation relating to drums received along with the raw materials and the reuse claims should also help in adjudication of the issue raised before us. In our opinion, these evidences are necessary and they should be admitted. Regarding additional evidences furnished by the Ld DR for the Revenue, we find the same are relevant especially with reference to the AO's allegation relating to the genuineness of the number of workers as well as the nature of works rendered by them. The statement given by the labour contractor namely Uday Singh u/s 131 of the Act on 20.3.2007 also brought in x new information which will have bearing on the assessee's claim relating to commencement of the manufacturing process in the year under consideration. Thus, these papers furnished by the CIT-DR are also required considering the provisions of Rule 29 of the ITAT Rules, 1963 which provides discretion to the Tribunal considering the interest of justice. Now, having admitted the additional evidences by both the sides of the litigation, we have to consider whether the same should be taken into cognizance without fulfilling the 'principles of natural justice'. For the purpose, we have considered the magnitude of the evidence furnished before us and find the same is voluminous which requires attention of the Assessing Officer for comments on each of the claims of the assessee relating to various issues narrated above. For the purpose, in all fairness to both the sides of the litigation, we admit the said additional evidences and set aside the issue for fresh examination. On admission, the AO shall verify the said papers and adjudicate the issue afresh after granting reasonable opportunity of being heard to the assessee. While passing a speaking order, AO shall also consider our prima facie opinions given below on various specific arguments raised by the Ld Counsels of the parties.
28. On the issue relating to no possibility of commencement of manufacture without the approvals by the PCC, during the proceedings before us, Ld Counsel has extensively narrated the facts of the case and discussed the provisions of the AIR (Prevention and Control of Pollution) Act, 1981 and the Water (Prevention and Control of Pollution) Act, 1974 to prove that the said Acts do not have any adverse impact on commencement of business of the assessee. Ld Counsel also discussed various decisions for proving that the claim even in case of violation of any regulations, the claim of deduction cannot be denied. To elaborate, it is the claim of the assessee that the Air Pollution related Notification dated 9th June 2011 declaring the Daman and Diu as 'air pollution area', does not apply to the AY 2004-05 of the assessee. Regarding water Pollution also, it is the case of the assessee, being a non discharger of any industrial excretion, the assessee is not required to obtain any consent to establish and operate the unit. It was also submitted that the assessee is a case of 'green category' and requisite approval of the PCC was finally obtained on 12th March 2004.
29. From the above it is evident that (1) the assessee belongs to 'green category' and (2) the Notification dated 9th June 2011 does not apply to the AY 2004-05. Notwithstanding the above, it is noticed that the assessee finally obtained requisite approvals of PCC to establish or operate the unit during the year itself. So long as, the approvals are obtained before the end of the year, the delay noticed, being a procedural incursion, should not be used to deny the benefits of the beneficial provisions of section 80-IB of the Act. We also find that requisite approvals are finally obtained and the State Government has not charged the assessee with any violations of any provisions under Air and Water Acts. Accordingly, AO is directed.
30. Regarding AO's objections on the SSI-Registration issue, the case of the assessee is that the assessee's unit is the case of 'provisional registration' and it does not require issue of industrial license to commence business. Factually, the assessee is provisionally registered before setting up of factory and start of commercial production, which is a sufficient compliance and there is no breach of any law. On this issue, we find that it is not case of the revenue that the assessee unit requires issue of industrial license. In these circumstances, prima facie, we find that the case of the assessee fall in the category of cases of 'provisional registration'. Therefore, the argument of Ld counsel for the assessee raised on this aspect of dispute cannot be dismissed. Accordingly, AO is directed.
31. On the aspect of employees number engaged in the manufacturing unit of the assessee, it is the case of the assessee, that the assessee being mechanized and automated one, there is hardly any need for specialists or the experts or scientists or chemists who should be employed to the manufacturing or distillation of chemicals. Who are required for business commencement in the year are only the labourers / workers, who are capable of loading and unloading the chemicals to the boilers for distillation, as the case may be. Further the provisions of section 80IB of the Act refers to the expression "employs ten or more workers" and not specialists such as chemists, scientists etc. Regarding the role of Rituja Enterprises, Ld Counsel further mentioned that every allegation as made by the AO as well as the CIT (A), even after considering the findings of survey enquiries during the time of making assessment for the AY 2005-2006. Ld Counsel was also critical about the statement u/s 131 taken from the contractor and challenged AO to prove the said person is having warrant of every activity went on in the premises of the assessee of every day of manufacturing process as claimed by him. It is the case of the Ld Counsel that (i) the said workers do not have to continuously work for full year; (ii) contract or contingent workers also qualify to meet the requirements of the provisions of section 80-IB(2)(iv) of the Act. Ld Counsel only relied on various binding judgments to support the above. In our opinion, the above arguments merits acceptance. However, these issues are covered by the additional evidences filed for the first time before us and they require the attention of the AO. Therefore, we decline to offer any comments at this point of time.
32. Regarding the discrepancy with regard to the invoice bearing the name of Jindal Photo Industries, it is the argument of the assessee's counsel that the same constitutes an inadvertent mistake. On perusal of the page 125 of the paper book and also the confirmation of the said "Om Borewell", we find force in the claim of the assessee. AO is directed to not to rely on this for denial of deduction. Similarly, the quantity of consumption of electricity along cannot be the ground for rejection of the claim of deduction considering the undisputed fact relating to expenditure on purchase of diesel, which constitutes supplementary expenditure on power sources. Considering the volume of production, consumption of diesel and electricity bills for the month of March and also subsequent months, the arguments of the Ld Counsel merits acceptance. AO is directed accordingly.
33. Regarding description on packing material ie the Drums, it is the claim of the assessee that the assessee had adequate packing material for dispatch of finished products and relied on the reconciliation statement filed on 21.8.2009 the additional evidence. As held already in favour of the assessee, AO is directed to admit the above additional evidences and examine the correctness of the said statement before coming to final conclusion on the claim of the assessee. We are in favour of the assessee's argument that why should assessee show purchase of packing material when he has reconcilable packing material, if accepted by the AO in the set aside proceedings.
34. Regarding the AO's doubt on the source of the stocks sold to the parties, we find that the sales of the product is undisputed as the AO has taxed the profits earned on sale of the product to parties like Colgate Palmolive (I) Ltd and Quest International India Limited. Further, it is also not the case of the AO that the product was conclusively purchased from the open market and sold to the said parties for a margin of profit. At least, there is no incriminating document brought on to the file by the AO to suggest the same. In the absence of such documents, it is for the AO to suggest the source of the product sold to the said parties. Thus, AO has not made out any case against the assessee. In our opinion, the sales to Colgate Palmolive (I) Ltd, being a third party who does not have any interest to accommodate the assessee, cannot be suspected. If not the products sold are manufactured by the assessee, then, how the assessee generated the products sold to Colgate Palmolive (I) Ltd and Quest International India Limited. These third parties filed confirmations confirming the supply of the products and they assume very importance for coming to the conclusion relating to the manufacturing ability of the assessee in this year under consideration. In the factual matrix of the case where the AO has not brought any adverse material to suggest that the stock sold are outsourced and not manufactured in assessee's unit, the third party confirmation assume great significance. Unless, the contents of these confirmation are met by the AO, the claim of the assessee cannot be denied merely based on fringe issues ie electricity consumption, packing material, employees etc. How can we ignore so much of documentation filed before us suggesting the set up/ commencement of manufacturing activity in this year?. In our opinion, AO needs to weigh between the uncontroverted fact of sale of the product qua the fringe issues cited above before coming to the conclusion when comes to the applicability of the beneficial provisions such as section 80IB of the Act.
35. Therefore, AO is directed to make use of the additional evidences filed by both the parties and pass a speaking order. In the set aside proceedings, the AO shall follow the observations / conclusion of the Tribunal mentioned against each of the issues discussed in the paragraphs above. Although, there is prima facie case in favour of the assessee in view of unsuspected sales made to the parties and earning of the eligible profits, which are duly taxed in this year, no finality can be arrived at by us, pending the outcome on the additional evidences cited above. Therefore, we order AO to examine the issue of allowing deduction u/s 80IB of the Act strictly in accordance with the indications given above. In the set aside proceedings, we direct the Assessing Officer to make a speaking order on each of the issues raised by the Ld Counsel before us after granting reasonable opportunity to the assessee. Accordingly, the grounds raised are set aside.
36. In the result, the appeal of the assessee is partly allowed for statistical purposes.
I.T.A. NO.2591/M/2008 (AY:2004-2005)
(By assessee)
37. This appeal filed by the assessee on 15.4.2008 and in consequential to the outcome of the above files. Therefore, this appeal filed by the assessee is dismissed as consequential.
Order pronounced in the open court on this 15th day of February, 2013.