2. The first ground of objection (ground Nos. 1 to 3) taken by the assessee is directed against the order of the CIT (A) in disallowing the claim for exemption under Section 10A of the IT Act, 1961.
3. In this case the assessee filed the return on 22nd Oct., 2001 declaring income of Rs. 32,700 along with balance sheet, P&L a/c and auditors' report. The case was selected for scrutiny and notice was issued under Section 143(2) of the Act.
4. Assessee is engaged in the business of cutting, polishing and exporting diamonds, labour job in diamonds and dealer in computer hardware and software. Assessee claimed exemption of Rs. 25,87,826.50 under Section 10A of the Act, being a newly established undertaking in free trade zone. Assessee set up a new manufacturing unit at EPZ, Sachin in Gujarat. The nature of business in the requisite format, certified by the auditor, has been mentioned as "manufacturers and exporters of diamonds" and the date of commencement of manufacture/production was 31st March, 2000. When questioned, why the claim should not be disallowed, assessee stated vide reply dt. 9th Dec, 2002 and 18th Dec, 2003, briefly as under: Vide letter dt. 9th Dec, 2002 it was submitted that the assessee established a new undertaking in Surat Export Processing Zone (SEPZ), Sachin in the asst. yr. 2000-01 at plot No. 270, for manufacturing, importing and exporting of diamonds, for which permission has been obtained. The manufacturing activity commenced during the financial year 1999-2000 and export activity started during the said financial year as well. Assessee complied with the conditions laid down under Section 10A of the Act as the undertaking began manufacturing/ producing article or thing. The undertaking was formed not splitting up or reconstruction of business or by transfer of old machinery. All export proceeds have been realised within the prescribed time. Vide letter dt. 18th Dec, 2003 assessee further submitted that the unit had imported rough diamonds. Cut and polished diamonds were manufactured at this unit by consuming the imported rough diamonds and then EPZ unit exported the cut and polished diamonds. All import/export and manufacturing activities had been carried out at EPZ unit, hence eligible for exemption under Section 10A of the Act.
5. Assessee further submitted, assessee is a manufacturer as defined under Section 10A, Expln. (iii), which is an inclusive definition and includes any (a) process, or (b) assembling, or (c) recording of any disc, tape, perforated media or other information storage device. It was further submitted, in the light of Section 10A(3), which provides that the profits and gains referred to in Sub-section (1) shall not be included in the total income of the assessee in respect of any ten Consecutive assessment years, beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things. It was further submitted that the decision of the Hon'ble Supreme Court in the case of CIT v. Gem India Manufacturing Co. was in a different context and distinguishable. The Hon'ble Supreme Court was dealing with Section 80I for the asst. yrs. 1983-84 and 1984-85, where the term 'manufacture/produce' was not defined in that section. It was further submitted, the new establishment/ undertaking at SEPZ, Sachin, was established in accordance with the provisions of Export and Import Policy 1997-2002, which defines the term 'manufacture' as well. It was further submitted it is not the intention of the legislature to allow deduction in one assessment year and to withdraw the same in another assessment year given the same facts, once the assessee established a new undertaking. It is against the principles of equity, justice and stability. It was contended that the assessee established the new undertaking at SEPZ, Sachin and claimed and allowed deduction in the first and second year. To disallow the same on the same facts is against equity, justice and stability. Being an incentive or beneficial provision, it should be construed liberally it was contended.
6. Assessee also relied upon the decisions of the Hon'ble Supreme Court in the case of Aspinwall and Co. Ltd. v. CIT (2001) 170 CTR (SC) 68 : (2001) 251 ITR 323 (SC), Ujagar Prints v. Union of India and Empire Industries Ltd. . It was contended, cut and polished diamonds are not the same thing as raw or rough diamonds.
7. AO held, the contention taken by the assessee cannot be accepted.
Pie held that the assessee vide letter dt. 27th Nov., 2003 admitted that import and export for Section 10A unit have been made from and to M/s Niru Diamonds Israel (1987) Ltd., Diamond Exchange Building, 1 Jabotinsky Road, Ramat Gan, Israel. AO noticed that the assessee has not denied the fact that they imported rough diamonds and after cutting and polishing, exported to the same party. M/s Niru Diamonds Israel (1987) Ltd. is an associate concern of the assessee group and this is evidenced from the tax audit report of M/s Impex Diamonds. He held, therefore, the assessee had not made any real import and export and was not having manufacturing activity but only done labour work of cutting and polishing of diamonds, which does not amount to manufacturing. He held, the benefit under Section 10A is allowable only to an undertaking, which manufactures or produces articles or things and labour job does not amount to manufacturing or producing. AO relied upon the decision of the Hon'ble Supreme Court in the case of Gem India Mfg. Co. (supra) to hold that the polished diamond is not a new article or thing, which results in manufacture or production. Even after cutting and polishing, it remains the same, AO held. Hence, he disallowed the claim of the assessee. Aggrieved by the above order, assessee approached the first appellate authority.
8. CIT (A) relied upon the following observation of the Hon'ble Supreme Court in the case of Gem India Mfg. Co. (supra) and held that the assessee is not entitled for the benefit under Section 10A of the Act: There can be little difficulty in holding that the raw and uncut diamond is subject to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. There is no material on the record upon which such a conclusion can be reached.
Aggrieved by the above order, assessee is in appeal before the Tribunal.
9. The learned Counsel for the assessee submitted, briefly, assessee is in the field of cutting and polishing diamonds and (is) an exporter.
Assessee was getting the benefit contemplated under Section 10A of the Act, since this special provision in respect of newly established undertaking in free trade zone etc. held applicable to the assessee.
Assessee established the business in SEPZ, Sachm in the asst. yr.
2000-01 for manufacturing, importing and exporting of diamonds. Thus, according to the assessee, it had satisfied all the conditions for availing the benefit.
10. Subsequently the claim was disallowed for the reason that the assessee is not engaged in the manufacturing activity as AO held the view that cutting and polishing does not amount to manufacturing activity. Learned Counsel submitted, there was a change in law w.e.f.
1st April, 2001. A new sub-section was introduced with a proviso. Again there was a change w.e.f. 1st April, 2004, wherein Expln. 4 was introduced, which helps the assessee. As per the definition, assessee is a manufacturer. In view of the above, the learned Counsel for the assessee made the following submissions: The entire scheme of Section 10A is a beneficial section. Assessee established an undertaking at SEPZ, Sachin. There is no dispute that the assessee has satisfied all the conditions necessary to avail the benefit. Once the assessee established and gets the benefit contemplated under Section 10A, and according to Section 10A if the assessee is entitled for the benefit 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, there is no justification to deny the benefit only for a period intervening in between.
Hence the learned Counsel submitted, the denial of benefit for the year under consideration is not tenable in law. The section makes it clear that the benefit will be available to all those assessees who commenced the activities from the asst. yr. 2001-02 onwards.
11. Relying upon the following judgments, learned Counsel submitted, if the benefit is given to the assessee once satisfying all the conditions, the conditions unless breached, cannot be withdrawn by the Government.
(1) Saurashtra Cement and Chemical Industries Ltd. v. CIT Learned Counsel submitted, in the case of CIT v. Paul Brothers (supra), the Hon'ble Bombay High Court held, unless the deductions allowed on the same ground were withdrawn, they could not be denied for the subsequent years. Learned Counsel further submitted, in the case of Saurashtra Cement and Chemical Industries Ltd. v. CIT (supra), the Hon'ble Gujarat High Court has taken the same view.
12. Learned Counsel further submitted, the amendment brought in the section is clarificatory. Bringing our attention to paper book pp. 29 and 30, which is extract from CBDT Circular No. 495, dt. 22nd Sept., 1987 [(1988) 67 CTR (St) 1] explaining the provisions of Finance Act, 1987, learned Counsel submitted, the amendment to extend tax holiday to the units in free trade zones is clarificatory. It reads as under: 19.1 Section 10A of the IT Act provides a tax holiday to newly established industrial undertakings in free trade zones. The tax exemption is available for five consecutive assessment years out of the block of initial eight years. The section refers to units engaged in 'manufacture or production of articles or things'. There are several cases of units, set up in the free trade zones, which only assemble or process imported components for export, the benefit to the country being the value added. As an incentive for earning foreign exchange, Section 10A has been amended w.e.f. 1st April, 1981, when it was first introduced, to clarify that units that merely assemble or process goods for export would also get the benefit of the tax holiday. The amendment also covers units which carry out recording of programmes on any disc, tape, perforated media or other information storage device. In this regard, the Board had already issued instruction in November, 1986.
19.2 The amendment will come into force retrospectively from 1st April, 1981, and will, accordingly, apply in relation to the asst.
yr. 1981-82 and subsequent years.
13. Again bringing our attention to paper book p. 31, item No. 9, which deals with import of cut and polished diamonds upto 0.25 cts by export house; and also item No. 12, learned Counsel submitted, the benefit extended to the assessee cannot be withdrawn. Learned Counsel submitted, item No. 4 - Custom Notification showing different entry for rough diamonds and cut and polished diamonds, exhibited at paper book p. 31 and item No. 5 - i.e., Diamond, Gem & Jewellery Export Promotion Scheme (source Handbook of Procedures), exhibited at paper book pp. 32 to 35, establishing rough diamond and cut and polished diamond are different articles.
14. Learned Counsel further submitted, the decision relied upon by the AO is distinguishable on facts. The case was decided in a summary manner. In the instant case of the assessee, learned Counsel submitted, the assessee is giving details and evidences why that decision is not applicable as far as the assessee is concerned. Hence learned Counsel submitted, there is no justification in withdrawing the benefit extended to the assessee under Section 10A in the preceding year and it is available to the assessee also in the light of Expln. 4 brought into statute book w.e.f. 1st April, 2004 onwards by the Finance Act, 2003.
15. On the other hand, the learned Departmental Representative supported the orders of the Revenue authorities. Relying upon the decisions of the Hon'ble Supreme Court in the case of Gem India Mfg.
Co. (supra) and in the case of Reliance Jute & Industries Ltd. (supra), the learned Departmental Representative submitted, the orders of the Revenue authorities are liable to be upheld. The learned Departmental Representative submitted that in the case of Reliance Jute and Industries Ltd. v. CIT (supra), the Hon'ble Supreme Court held "it. is a cardinal principle of the tax law that the law to be applied is that in force in the assessment year unless otherwise provided expressly or by necessary implication" The mere fact that the assessee had received some benefit in the past does not give the assessee any guarantee to claim it for all subsequent years. The benefit may be extended to the assessee by virtue of subsequent events like the decision of the apex Court or by virtue of a subsequent change brought into the statute book, and that is also retrospective in operation, the learned Departmental Representative submitted. The learned Departmental Representative submitted, in the case of Sacs Eagles Chicory v. CIT Hon'ble Supreme Court held that conversion of chicory roots into chicory powder by roasting and powdering does not amount to manufacture and the assessee is not entitled for special deduction. Hence the learned Departmental Representative submitted, the orders of the Revenue authorities are liable to be upheld.16. The learned Departmental Representative further submitted, the alternate plea for deduction under Section 80HHC of the Act was not taken before the CIT (A) and the assessee cannot demand it now. He submitted, the assessee has not satisfied other mandatory requirement.
Hence, in view of the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT assessee now cannot take any alternate pleas. In support of the above contention, the learned Departmental Representative relied upon the decision of the Hon'ble Punjab and Haryana High Court in the case of CIT v. Jaideep Industries (1989) 180 ITR 81 (P&H) and also the decision of the Hon'ble. Bombay High Court in the case of CIT v. Shivanand Electronics .
17. Replying to the above, the learned Counsel for the assessee submitted, where the language of the statute is clear and there is no ambiguity in the provision, there is no need to go to other sources to gather the intention of the legislature. The learned Counsel relied upon the decision of the Hon'ble Bombay High Court in the case of Miss Kamla Khushaldas Teckchandani v. O.D. Mohidra for the above proposition.
18. We have heard the rival submissions and gone through the orders of the Revenue authorities and the decisions cited. We are of the view that the issue has to go in assessee's favour. It is to be seen that the unit at SEPZ, Sachin, was set up by the assessee in the financial year 1999-2000 relevant to asst. yr. 2000-01. Deduction under Section 10A was claimed and the same was allowed as per the IT Act for the asst. yr. 2000-01. Explanation (iii) to Section 10A for the relevant period in force defines "manufacture" as follows: (c) recording of programmes on any disc, tape, perforated media or other information storage device.
19. Section 10A(3), as it stood at the relevant point of time, reads as under: 10A(3) - The profits and gains referred to in Sub-section (1) shall not be included in the total income of the assessee in respect of any ten consecutive assessment years, beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things.
20. In the light of the above provisions, assessee, as mentioned above, claimed the benefit and it was allowed to the assessee. Subsequently, the Hon'ble Supreme Court in the case of Gem India Mfg. Co. (supra) held, cutting and polishing uncut raw diamonds does not amount to manufacture or production of article or thing and, therefore, deduction cannot be allowed. The AO withdrew the benefit. As rightly contended by the learned Counsel, the decision of the Hon'ble Supreme Court in the case of Gem India Mfg. Co. (supra) was relevant for the asst. yrs.
1983-84 and 1984-85 and the decision was rendered dealing with Section 80I, wherein the term "manufacture" has not been defined, as defined in Section 10A. It is true subsequently the Explanation/definition stood omitted.
21. Though the principle of promissory estoppel cannot strictly be imported into the IT Act, it also goes against the principle of natural justice and the principle of good governing that once the statute gives an incentive to an assessee for a number of fixed years and the assessee on the basis of that gets the benefit, subsequently abruptly the benefit is withdrawn and the assessee is deprived of the benefit and the promises and the inducement that made the assessee to venture into the new business. It is difficult to hold that it is the intention of the legislature to promise a deduction in one assessment year and withdraw the same on the same set of facts once the assessee established an undertaking on the basis of that promise. It is against the principles of equity, justice and stability. In the instant case, the assessee established an undertaking at SEPZ, Sachin and claimed the benefit of deduction and it was allowed to the assessee for two years.
The section was brought into the statute book to promote industrialization and to improve foreign exchange earnings for the country. Subsequent to the decision of the Hon'ble Supreme Court in the case of Gem India Mfg. Co. (supra), the legislature, for removal of doubt, amended Section 10A by Finance Act, 2003 and inserted a new Expln. 4 w.e.f. 1st April, 2004, which reads as under: Explanation 4 : For the purpose of this section, 'manufacture or produce' shall include the cutting and polishing of precious and semi precious stones.
22. It means assessee will be getting the benefit again from the financial year 2004-05 and onwards. Consequently, the assessee is deprived (of) the benefit in the intervening period, which can never be the intention of the legislature. We hold that Expln. 4 introduced w.e.f. 1st April, 2004 is clarificatory in nature and the assessee is entitled for the benefit in the intervening period of ten years as per Section 10A. This Explanation brought into the statute book is clarificatory in nature and retrospective in operation.Union of India v. Godfrey Philips India Ltd. held "the doctrine of estoppel is applicable against the Government in the exercise of its governmental, public or executive functions and the doctrine of executive necessity or freedom of future executive action cannot be invoked to defeat the applicability of the doctrine of promissory estoppel". However, their Lordships further observed "There can be no promissory estoppel against the legislature in the exercise of its legislative functions nor can the Government or public authority be debarred by promissory estoppel from enforcing a statutory prohibition. It is equally true that promissory estoppel cannot be used to compel the Government or a public authority to carry out a representation or promise which is contrary to law or which was outside the authority or power of the officer of the Government or of the public authority to make. The doctrine of promissory estoppel being an equitable doctrine, it must yield when the equity so requires. If it can be shown by the Government or public authority that having regard to the facts as they have transpired, it would be inequitable to hold the Government or public authority to the promise or representation made by it, the Court would not raise an equity in favour of the person to whom the promise or representation was made and enforce the promise or representation against the Government or public authority. The doctrine of promissory estoppel would be displaced in such a case, because on the facts, equity would not require that the Government or public authority should be held bound by the promise or representation made by it." 24. Again in the case of Asstt. Commr. of Commercial Taxes (Asst.) v.Dharmendra Trading Co. , the Hon'ble Supreme Court held "it is well-settled that if the Government wants to resile from a promise or an assurance given by it on the ground that undue advantage was being taken or misuse was being made of the concessions granted, the Court may permit the Government to do so but, before allowing the Government to resile from the promise or go back on the assurance, the Court would have to be satisfied that allegations by the Government about misuse being made or undue advantage being taken of the concessions given by it were reasonably well-established".
25. Of course, in both the above cases the facts were slightly different from the instant case of the assessee. In the case of Union of India v. Godfrey Philips India Ltd. (supra), the Hon'ble Supreme Court was dealing with a letter dt. 24th May, 1976, addressed by the CBEC; whereas in the case of Asstt. Commr. of Commercial Taxes v.Dharmendra Trading Co. (supra), it was a Government order dt. 30th June, 1969, sanctioning a concession by way of cash refund on all sales-tax paid by a new industry on raw materials purchased by it for the first five years from the date the industry goes into production.
In the instant case of the assessee the benefit was withdrawn by the Revenue on the basis of the decision of the Hon'ble Supreme Court dealing with a different section. In Section 80I, the word "manufacture" was not defined. As we noted hereinabove, Expln. 4 to Section 10A defines what amounts to manufacture. This Explanation makes clear that legislature for this section always intended it to be so. It never intended that the assessees who came forward and acted upon the promise should be deprived (of) their benefit subsequently.
26. In view of the above, we allow the appeal by the assessee for the year under consideration on this point.
27. The second effective ground (ground Nos. 4 and 5) urged by the assessee is directed against the order of the CIT (A) in disallowing deduction under Section 80HHC of the Act, on account of labour charges at Navsari unit.
28. It was the claim of the assessee that the job work activity is linked with diamond cutting and polishing activity at SEPZ, Sachin.
Assessee relied upon the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Bangalore Clothing Co. .
In this case the Hon'ble High Court held that the labour charges received to be part of operational income. However, CIT (A) held, the assessee being an exporter of cut and polished diamonds, the job work and computer related activities are not part of composite activity undertaken by the assessee. He held, this receipt is to be excluded for computing deduction under Section 80HHC of the Act. Being aggrieved, assessee is in appeal before the Tribunal.
29. Hearing the rival submissions and going through the orders of the Revenue authorities, we are of the view that the claim of the assessee is to be allowed. The job work undertaken by the assessee is to be treated as part of assessee's operational income in the light of the decision of the Hon'ble jurisdictional High Court in the case of Bangalore Clothing Co. (supra). Hence this ground by the assessee is allowed.
30. The next effective ground (ground Nos. 6 and 7) urged by the assessee is directed against the order of the CIT (A) in directing the AO to rework the disallowance under Section 43B of the Act.
31. It was the case of the assessee that though the payments were made beyond the due date but it was within the grace period and therefore the claim is to be allowed. The CIT (A) remanded the matter back to the file of AO for verification and to allow the claim of the assessee if it is found that the above claim is correct.
32. We find no flaw in the direction of the CIT (A) since the Tribunal is constantly taking the view that if the payment is made within the due date, the claim of the assessee is to be allowed.
Without prejudice to the appellant's claim for deduction under Section 10A of the IT Act, alternatively it is submitted that the appellant ought to be allowed a deduction under Section 80HHC of the IT Act, in respect of exports carried out at the Sachin unit.
34. Since we have decided the issue on the main ground in assessee's favour, it is not necessary for us to deal with this additional ground as such.
35. In the result, appeal of the assessee stands allowed for statistical purposes.