1. This appeal by the assessee is directed against the order passed by the CIT Under Section 263 on 23.08.2005 in relation to A.Y. 2001-02.
2. The main grievance projected by the assessee in its appeal is against the denial of exemption Under Section 10B of the Act by the ld.CIT which was earlier allowed by the A.O. The facts apropos of this issue are that an assessment order Under Section 143(3) was passed by the ACIT on 30.09.2003. On the perusal of the assessment record it was found by the ld. CIT that the assessee had shown income from business to the tune of Rs. 11,19,910/- including income from fluctuation of foreign exchange at Rs. 10,62,107/- and entire income of Rs. 11.19 lakhs was claimed as exempt Under Section 10B of the Act. It was opined that the A.O. had not examined this aspect properly as to whether the income from fluctuation of foreign exchange fell under which head. It was further noted that the A.O. had not examined the issue regarding exemption Under Section 10B properly as to whether or not the assessee complied with the conditions laid down in this section. A show cause notice was issued in response to which it was stated on behalf of the assessee that it was 100% Export Oriented Unit registered and approved by the Joint Development Commissioner, Noida. It was also explained that the assessee was a manufacturer cum exporter of handicrafts items as it was buying semi finished goods i.e. the structures of specified items from the market and after subjecting such goods to so many processes, was exporting them. The ld. CIT observed that the requirement of Section 10B is that the undertaking must produce or manufacture an article or thing etc. Since in his opinion the assessee had only exported the goods purchased from local market without doing manufacturing or production, the exemption was not available. in reaching this conclusion he took note of the fact that raw material worth Rs. 1,96,970/- was claimed to have been put into use for manufacturing, against which the sales have been shown at Rs. 1,66,31,317/-. By taking assistance from the case of CIT v. Sacs Eagles Chicory it was noted that there could be no manufacture without consumption of raw material. He further did not accept the contention of the assessee that the goods so purchased subjected to processes like grinding, surface smoothing, chemical dipping, drawing, polishing and packaging etc. amounted to the manufacture of an article or thing. For this proposition he relied on the decision of the Hon'ble Rajasthan High Court in CIT v. Lucky Mineral Pvt. Ltd. 226 ITR 245 (Raj.) affirmed by the Hon'ble Supreme Court in . He still further took note of the fact that the major expenses in manufacturing and trading account were towards packaging and no amount of wages was shown. In the background of these facts it was concluded that the assessee was engaged in trading activities, which could not be called as manufacturing or producing anything. The ld. CIT also considered the condition laid down Under Section 10B(2)(ii), being not forming of industrial undertaking by splitting up or the reconstruction of business already in existence. In this regard he noted that the unit under reference was simply created on papers in the same business premises, with same manpower and with the same existing machinery, in which the assessee was already doing business in earlier years. This was held to be a device to switchover to exemption Under Section 10B since deduction Under Section 80HHC was drastically reduced in the case of Kwal Pro International. He also considered condition under 10B(2)(iii) stipulating that the undertaking should not be formed by transfer to a new business of machinery or plant previously used for any purpose. In this direction it was noticed that the assessee had got no machinery of its own and the goods exported by it were manufactured and produced in the plant and machinery belonging to others, which had already been in use for so many years. After considering all these aspects, the ld. CIT came to the conclusion that the A.O. had not applied his mind before accepting assessee's claim qua the exemption Under Section 10B, which rendered his order erroneous and prejudicial to the interest of revenue. He, therefore, denied exemption already allowed amounting to Rs. 11,19,910/-.
3. Before us it was contended by the ld. AR that the assessee is a 100% EOU registered with Noida Export Processing Zone for manufacturing/exporting of Iron/Wooden Handicrafts items as per certificate granted by the competent authority, copy placed at page 24 of the P.B. It was explained that though complete manufacturing of each item was not possible in-house, the assessee purchased semi finished goods and subjected them to various processes such as grinding, surface smoothing, chemical dipping, drawing, polishing and packaging etc. It was emphasized that the said processes amounted to manufacture or production of the goods and hence the claim was rightly made and allowed by the A.O. By referring to Exim Policy 1997 - 2002, copy placed at page 60 of the P.B., it was argued that the term 'manufacture' has been defined in a wide sense to include processes such as repacking, polishing, labeling and also agriculture, animal husbandry etc. It was explained that major investment in industrial undertaking was made in the preceding year to set up new industrial undertaking and it was approved as 100% EOU on 28.03.2000. He relied on the decision of the Hon'ble Supreme Court in Vadilal Chemicals Ltd. v.State of A.P. reported in (2005) 5 VAT Reporter 123 (SC) to contend that the term manufacture/process has to be understood in the widest sense. He relied on certain other judgments in support of his claim, which we would discuss in the succeeding paras. It was also stated that though no wages were accounted for in the account books but the assessee had paid job charges for carrying out labour on piece rate basis. The sum and substance of his submissions was that the assessee was entitled to exemption Under Section 10B and alternatively if in any case the same was not allowed then deduction Under Section 80HHC be allowed as was claimed before the ld. CIT, who had unjustifiably rejected this contention.
4. In the opposition the ld. Sr. DR contended that the ld. CIT was fully justified in negativing the claim of the assessee for exemption Under Section 10B because the assessee was not engaged in any manufacture or production but was simply doing a trading activity. By relying on certain judicial pronouncements, which we would discuss infra, it was claimed that the activity carried out by the assessee did not amount to manufacture. It was elaborated that the assessee was purchasing fully manufactured handicraft items as was evident from copy of purchase bills placed at pages 14 to 26 of the Departmental Paper Book (D.P.B.) and it was simply exporting them without undertaking any manufacturing process. It was further argued that such purchases were made against Form Nos. 17B under the Sales Tax Act which evidenced that such goods were fully manufactured. For this proposition he relied on the decision of Jaipur Bench of the Rajasthan Tax Board in the case of M/s. Popular Art Palace Limited v. CTO reported in Tax World Vol. XXXI at page no. 48, copy placed at pages 34 onwards on the D.P.B. It was further contended that the foreign exchange fluctuation amounting to Rs. 10,62,107/- pertained to the preceding year because out of total export turnover of the assessee in this year amounting to Rs. 1.66 crores, a sum of Rs. 1.37 crores was outstanding as at the year end. In support of this submission he placed on record a copy of detail of outstanding bills as on 31^st March, 2001. In the light of this fact it was stated that such amount represented the transactions of the non 100% EOU unit, which was availing benefit Under Section 80HHC till last year. It was, therefore, put forth that the said amount did not represent the income of the present assessee because the trading activity was started only in this year in as much as the certificate 100% EOU was granted by the competent authority only at the fag end of the preceding year, viz, on 28.3.2000. This amount, being a major chunk representing 95% of the total income, was claimed to be not the income derived from eligible undertaking and hence at the very outset was ineligible for exemption Under Section 10B, if any. Further referring to page 65 of the P.B. it was contended that the assessee had purchased only 2 items of machinery in this year amounting to Rs. 10,989/-, which included air compressor and hand grinder. It was therefore, argued that no undertaking can claim to carry out the manufacturing activity with these items. He further referred to the fact that there occurred a change in constitution of the present assessee firm, which made it ineligible for exemption. It was also stated that the assessee firm was formed by splitting/reconstruction of its predecessor firm namely Kwal Pro International and hence was rightly not accepted by the ld. CIT to be a new industrial undertaking.
5. We have heard the rival submissions in the light of material placed before us and precedents relied upon. It is obvious that the assessee claimed exemption Under Section 10B for the first in this year after getting certificate from the competent authority on 28.03.2000. Prior to it, the assessee was claiming deduction Under Section 80HHC. The A.O. vide his order Under Section 143(3) dated 30.09.2003 accepted the assessee's claim for exemption Under Section 10B on the basis of certificate issued by Noida Export Processing Zone. The ld. CIT while exercising his revisional power Under Section 263 came to hold that the order passed by the A.O. was not only erroneous but also prejudicial to the interest of the revenue because the latter had not applied his mind and accepted the position as it is. He thereafter discussed the case from different angles and concluded that the exemption was erroneously claimed and allowed.
6. In order to appreciate the rival submissions, it would be appropriate to discuss the different facets of the case one by one.
The main issue to be decided is as to whether the ld. CIT was justified in holding that the assessee had not manufactured or produced any article or thing and hence the claim for exemption Under Section 10B was not sustainable. Before proceeding further it would be apt to note the relevant provisions of Section 10B, which are as under: 10B. Special provisions in respect of newly established hundred percent export-oriented undertakings.
(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent.
export-oriented undertaking from the export of articles or things or computer, software for a period of ten consecutive assessment years beginning with the assessment year relevant to the pervious year in which the undertaking begins to manufacture or produce articles or things or computer, software, as the cose may be, shall be allowed from the total income of the assessee: (2) This section applies to any undertaking which fulfils all the following conditions, namely: (i) it manufactures or produces any articles or things or computer software; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any under taking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in Section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Explanation.--- The provisions of Explanation 1 and Explanation 2 to Sub-section (2) of Section 80-I shall apply for the purposes of Clause (iii) of this Sub-section as they apply for the purposes of Clause (ii) of that sub-section.
(iv) "hundred per cent. export-oriented undertaking" means an undertaking which has been approved as a hundred per cent.
export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by Section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act; Explanation 4.- For the purposes of this section, "manufacture or produce" shall include the cutting and polishing of precious and semi-precious stones.
7. On going through the relevant portions of Section 10B extracted above, it is patent that this exemption is available only if the conditions specified in this section are fulfilled. The first and foremost condition is that the assessee should be 100% export oriented undertaking which manufacturers or produces any article or thing.
Explanation 2(iv) makes it abundantly clear that a 100% export oriented undertaking referred to in Sub-section (1) means an undertaking, which has been approved by the competent, authority. Thus the approval of the undertaking by a competent authority as 100% EOU is primary condition and after that such undertaking should be engaged in manufacture or production of any article or thing or computer software. Thus the mere recognition as 100% EOU by a competent authority does not enable the assessee to claim exemption Under Section 10B unless it satisfies other conditions, such as it manufactures or produces any articles or things or computer software. The contention of the ld. A.R. that since the competent authority has granted it a certificate to the effect that it was 100% EOU and hence exemption Under Section 10B would automatically come into force, does not withstand logic. It is only when such 100% EOU manufactures or produces any articles or things or computer software alongwith the fulfillment of other conditions stipulated in Sub-section (2) that the benefit of exemption can be sought.
8. In order to decide as to whether or not the assessee is manufacturing or producing any article or thing, it is in the fitness of things to know the business carried out by the assessee. Pages 14 to 26 of the Departmental PB are purchase bills of the assessee from M/s Marwar Handicrafts and M/s Laxmi Panel Doors, Industries, which show that the assessee had purchased items like coffee table, almirah, medical box, dining table, glass almirah, TV cabinet and stand. These items have been purchased by the assessee as such and then the processes of grinding, surface smoothening, chemical dipping and treatment, drying, heating, polishing, bar coding and tagging and primary packaging and final packaging have been performed. Now the question arises as to whether performing of these processes would amount to manufacture or production of an article or thing so as to make the assessee eligible for exemption Under Section 10B.9. To test the factual matrix of the case on the prescription OT this section, it is sine qua non to understand the meaning of the term 'manufacture' and 'production'. The word 'manufacture' has not been defined precisely in the Act. Black's Law Dictionary explains the expression 'manufacture' as under: The process of operation of making goods or any material produced by hand by machinery or by other agency; anything made from raw materials by the hand, by machinery, or by art. The production of articles for use from raw and prepared material by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine.
The term 'manufacture' came up for consideration before the Hon'ble Supreme Court in the case of Dy. CIT v. Pio Food Packers 198 Suppl. SCC 174. After considering several cases on the point, the Hon'ble Supreme Court gave the test for determining the scope of this term in the following words: There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the Commodity involved in its manufacture. Commonly manufacture is the end result of one or more processes through which the original commodity is made to pass.
The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or series of changes, takes the commodity to the point where commercially it can no loner be regarded as the original commodity but, instead, is recognized as a new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be regarded as still retaining its original identity.Union of India v. Delhi Cloth and General Mills [1977] ELT [J] 199 [SC] observed as under: Manufacture implies a change, but every change in the raw material is not manufacture although every change of an article is the result of treatment, labour or manipulation. In order to make a change amount to "manufacture" something more is necessary and that something more is such transformation of a production as brings into existence a new and different article having distinct name, character or uses.
10. Thus the essence of 'manufacture' is the change from one object to another for the purposes of making it marketable with the aid and employment of three Ms viz., Men, Machinery and Materia]. It should further be taken into consideration that every change in the raw material cannot be characterized as manufacture unless a new product, which has separate commercial identity in the market, comes into being.
There must be such a transformation that a new and different article must emerge having distinct name, character and use. Mere giving of new name by the seller to what is really the same product is not manufacture of a new product.CIT v. Lucky Mineral Pvt. Ltd. assessee was doing business of mining of lime stones and marble blocks and thereafter cutting and sizing the same before being sold in the market. The assessee claimed itself to be an industrial undertaking for the purposes of Section 80HH of the Act. When the matter came up before the Hon'ble High Court, it did not accept the assessee's contention on the ground that the marble stones did not lose the original identity by simply undergoing process of cutting into slabs and, therefore, came to the conclusion that it was not entitled to deduction Under Section 80HH. The said decision of the Hon'ble High Court stands affirmed by the Hon'ble Supreme Court in the case of Lucky Minmat Pvt. Ltd. v. CIT 245 ITR 830 [SC]. Recently, the Jodhpur Bench of the Tribunal in a Third Member order rendered in the case of Arihant Tiles and Marbles Pvt. Ltd. v. Income-tax Officer [ITA Nos. 86 and 87/JU/2004] has also denied the benefit of deduction Under Section 80IA vide its order dated 30.6.2006, by holding that the assessee's activity of sawing of the marble blocks into slabs and tiles by a mechanical process did neither mean manufacture nor production. The Hon'ble Jurisdictional High Court in the case of D.D. Shah and Bros. v. UOI and Anr.
had an occasion to consider a question as to whether the blending of different teas by a trader who purchased them would amount to manufacture. It held that the activity carried out would amount to processing of tea but not manufacturing or producing any article or thing within the meaning of Section 80IB. After making a microscopic analysis of the legal position and highlighting numerous judicial precedents directly on the point, the Hon'ble Jurisdictional High Court, in an exhaustive judgment, came to the conclusion that it did not amount to manufacture or producing any article or thing.
12. From the survey of the various decisions discussed above, it can be easily seen that the word 'manufacture' implies a change by which an earlier commodity loses its original identity and there emerges a different article having distinctive name and character or use from the original commodity. If the original commodity continues to remain the same after undergoing processes and is called by the same name, it cannot be said there is manufacture of an article or thing. Thus the main test is to decide whether the identity of the commodity, before and after undergoing various processes, changes or remains the same in the commercial world. We, therefore, hold that the assessee in the present case cannot be said to have manufactured any article or thing.
13. The next contention of the ld. A.R. is that the processes undertaken by the assessee, if not considered to be manufacture, may be considered as equivalent to producing an article or thing, since the scope of the latter term is wider than that of the former. We are fully agreeable with the point of view of the ld. A.R. that the term 'produce' is wider than 'manufacture'. The Hon'ble Supreme Court in the case of CIT v. N.C. Budhiraja & Co. and Anr. was required to decide as to whether construction of a dam could be characterized as manufacturing or processing of an article. It held that the word 'production' is wider than the word 'manufacture' with the following observations: The word 'production' has a wider connotation than the word 'manufacture'. While every production can be characterized as production, every production need not amount to manufacture.
it is no doubt true that the word 'produce' is wider than 'manufacture' but the question that when production is said to take place has also been replied by the Hon'ble Apex court in the above case in the following terms: The word "production" or "produce" when used in juxtaposition with the word "manufacture" takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods.
The ld. counsel for the assessee has laid a lot of emphasis on the decision of the Hon'ble Apex Court in the case of CIT v. Sesa Goa Ltd. [2004] 271 ITR 331 [SC] in which case extraction and processing of ore was held to amount to production. The said decision was cited before the Jodhpur Bench of the Tribunal in the case of Arihant Tiles and Marbles [supra]. After considering the ratio decidendi of this case it was held that mere cutting of marble blocks into slabs may not amount to manufacture or production of an article or thing. The only integrated activity of extracting granite, cutting the same into slabs/tiles, polishing and selling the end products in the market would amount to production of an article or thing.
14. The word 'produce' includes within its ambit not only activity of manufacturing the material by applying human endeavour on some existing raw material but also securing certain produce from natural element, for example, by growing plants on soil, or by operating mines and the like or for example by milching the cow the milkman produces milk though he has not applied any process on any raw material for the purpose of bringing into existence the thing known as milk. Hence it can be easily ascertained that the word 'production' includes within its purview the word 'manufacture' and also other activities, which have been noted above.
15. The Hon'ble Jurisdictional High Court in the case of D.D. Shah and Bros [supra] has held as under: In either case - manufacture or produce - brings into existence a new commodity either by altering the face of raw material, or by bringing into existence a new product from natural elements or process. It is immaterial whether the new product is a direct result or indirect result.
In either case, in order to fall within the meaning of the term 'manufacture' or 'produce', it must result in bringing into existence a thing or article which is new.
16. When we construe the term 'production' with reference to an article or thing in the context of an undertaking, it amounts to not less than manufacture of such article in any manner. To put it simply, though the term 'produce' is inclusive of manufacture with reference to an article or thing which is subjected to application of different processes to raw material as a result of which the end product is a commercially different and newly transformed commodity, yet it encompasses other things within its purview, such as, securing produce from natural element, that is, by growing plants on soil or by mining etc. It is in this context that the decision of the Hon'ble Supreme Court in the case of Sesa Goa Ltd [supra] has been rendered in which both extraction and processing of ore was held to amount to production. It is further in this context that the Jodhpur Bench of the Tribunal in the case of Arihant Tiles and Marble [supra] has held the process of conversion of marble block by sawing into slabs and tiles and polishing as not amounting to production or manufacture because it lacked the first ingredient mentioned in the case of Sesa Goa Ltd [supra], being the extraction of marble blocks. Examined in the light of the above legal position we hold that the activities performed by the assessee in question did not yield a new product and basically there is no difference in the identity between the original and processed items of handicrafts exported by it and hence the case cannot be cabined in the expression 'Production'.
17. Here it would be relevant to consider another word 'processing' falling in this family of terms, which means a sequence of operations.
The term 'processing' has to be distinguished from 'manufacturing' in the sense that a mere processing does not ordinarily make the thing to undergo a change loosing its original identity, whereas in 'manufacturing' the original article looses its identity and a thing differently known or recognized in common parlance comes into existence.
18. At this juncture, we are reminded of a celebrated decision rendered by the Hon'ble Bombay High Court in the case of CIT v. Sterling Fod [Goa] in which the question for consideration was as to whether the processing of prawns amounted to 'manufacture' or 'production' so as to qualify for benefit Under Section 80HH. It was contended on behalf of the assessee that "processing of prawns would amount to manufacture or production of an article" within the meaning of Section 80HH by relying on certain judicial precedents. Rejecting the assessee's contention the Hon'ble High Court held that the expression 'manufacture or produce articles' used in Section 80HHJias to be distinguished from the expression "in the manufacture or processing of goods" appearing in Section 33B as the Legislature has specifically used the word 'processing' in juxtaposition to 'manufacture' wherever it intended to extend the benefit to an industrial undertaking which is engaged in the processing of goods or articles and avoided using that expression in cases where it intended to confine the benefit only to industrial undertaking engaged in the 'manufacture or production of goods or articles'. It was further observed that the legislature has used a narrower expression in Section 80HH than the one used in Section 33B, which clearly indicated that 'manufacture or production of articles could not be considered as 'manufacture or processing of goods'.
Situated thus, two questions fell for determination. First, whether Section 80HH can be read in such a manner so as to include "processing" within the ambit of "manufacture or production" of articles as has been done by the Kerala High Court. Second, whether "processing of prawns" amounts to "manufacture or production of articles" within the meaning of Section 80HH of the Act. The language of Section 80HH being plain, clear and unambiguous, the legislative intent has to be gathered from the statute itself. In the instant case, on a careful reading of Section 80HH of the Act in the light of scheme thereof and other provisions of the Act referred to above, it is clear that the Legislature intended to extend the benefit of deduction under Section 80HH only to the industrial undertakings which manufacture or produce articles. This section was not intended to be applied to industrial undertakings which are engaged in "processing of goods" not amounting to manufacture or production of articles. There may be processes undertaken by an industrial undertaking, which may result in conversion of the article into a new commercial commodity or may change the nature and character of the article in such a manner that it may lose its original identity and get transformed into an entirely new commodity. In such cases "manufacture" can be said to have taken place. But in cases where no such transformation takes place, each and every process applied to an article cannot be tantamount to "manufacture or production" of goods or articles. The true test for determining whether there is any manufacture is: whether the commodity subjected to the process of manufacture can no longer be regarded as the original commodity but is recognized in the trade as a new and distinct commodity. The three expressions "processing", "manufacture" and "production" used in various taxing statutes, are not interchangeable expressions. Though often used in juxtaposition, they convey different concepts and refer to different activities.
"Processing" is a much wider concept. The nature and extent of processing may vary from case to case. Every process does not tantamount to "manufacture". It is only when the "process" results in the emergence of a new and different article having a distinctive name, character or use, that "manufacture" can be said to have taken place. Similarly, "production" is wider than "manufacture". As a result, every production need not amount to manufacture though every manufacture can be characterized as "production". The benefit of Section 8QHH is available to industrial undertakings, which "manufacture or produce articles". Industrial undertakings engaged in "processing of goods or articles" not amounting to "manufacture or production" are not entitled to the benefit of this section. So far as second aspect as to whether processing of prawns amounts to manufacture is concerned, it is clear that "processing of prawns" for making them fit for the market is not a process of manufacture.
No manufacture of articles or prawns takes place as a result of the process undertaken by the assessee.
This judgment has been approved by the Hon'ble Summit Court in CIT v.Relish Foods 19. The ld. A.R. has brought to our notice the Exim Policy 1997-2002 in which the term 'manufacture' has been defined in a very broad sense even including agriculture, animal husbandry, floriculture, horticulture, etc. It is on the strength of this definition that the ld. A.R. canvassed his view that the term 'manufacture' in Section 10B should not be granted a strict meaning so as to push away the activity carried out by the assessee from its ambit. We find this contention sans merit for the reason that the word 'manufacture' has not been defined in the Act and it has different shades of its meaning. It is to be interpreted in the context of the object and language used in the relevant section. When we view the term 'manufacture' in the setting of Section 10B it becomes crystal clear that it is used to mean production of a new article or bringing into existence some new commodity by an industrial undertaking. The Hon'ble Supreme Court in the case of Indian Hotels Co. Ltd and Ors. v. Incometax Officer and Ors.
considered a case in which the assessee operating as flight kitchen as ancillary to its business of hotel, claimed itself to be an industrial undertaking eligible for deduction Under Section 80J by contending that its activity amounted to manufacture or production. By repelling the assessee's contention, the Hon'ble Apex Court held as under: For getting benefit of deduction Under Section 80J or investment allowance, the requirement is the assessee-company must be engaged in the business of manufacture or production of any article or thing. In a case of preparing food packages or selling the same or preparing foodstuffs for serving in the hotel there is no question of manufacture or production. The raw material is at the most processed so as to make it eatable. The word "manufacture" has various shades of meaning but unless defined under the Act it is to be interpreted in the context of the object and the language used in the sections. In the context of the provisions which deal with grant of investment allowance or deduction under Section 80J it is apparent that it is used to mean production of a new article or bringing into existence some new commodity by an industrial undertaking. It would not be applicable in cases where only processing activity is carried out. Further, such production activity must be by an industrial undertaking and not by the assessee having mainly trading activity.
Thus we find that the term 'manufacture or produce' in Section 10B can be considered only when a commercially new and distinct product comes into existence after undergoing manufacturing activities. The simpliciter processing in a general sense, which does not amount to manufacture, has been taken away from its ambit. The intention of the Legislature becomes abundantly clear when we look to the language of Explanation 4 to Section 10B, which provides that for the purpose of this section 'manufacture or produce shall include the cutting and polishing of precious and semi precious stones'. With this Explanation, the Legislature has widened the purview of 'manufacture or produce' only in a restricted sense by including cutting and polishing of precious or semi precious stones within its ambit. If the intention had been to include 'processing' as understood generally as a condition precedent for granting exemption Under Section 10B, the words 'manufacturing or processing' would have been used instead of 'manufacture or produce'. Further Explanation 4 leaves nothing to doubt that barring the exception of process of polishing of precious and semi-precious stones all other processing of goods or articles, which do not result into transformation of new product have been kept away from benefit of exemption under this section. Here it is relevant to note that the Hon'ble Supreme Court in the case of CIT v. Gem India Manufacturing Co. considered a case in which the question was to decide as to whether the cutting and polishing of raw and uncut diamonds amounted to manufacture or production of goods. By repelling the assessee's contention it was held that the raw and uncut diamond subjected to a process of cutting and polishing yielded the polished diamond but that was not to say that the polished diamond was the result of manufacture or production. Though the cutting and polishing does not amount to manufacture or production of diamonds, but only Explanation 4 has brought the processing of diamonds within its sweep. By no stretch of imagination, it can be inferred that all processings, not amounting to manufacture of an article, can be made eligible for exemption Under Section 10B.20. Adverting to the facts of the case, we find that the assessee has purchased fully manufactured but unpolished handicrafts items, such as dining table, almirah, T.V. cabinet etc., on which it undertook the processes of surface smoothening, drying and polishing etc. On careful consideration we find that the activities carried out by the assessee are in the nature of different stages of polishing and packing. When the Hon'ble Supreme Court in Gem India [supra] held the activities of polishing and cutting of diamonds as not manufacture or production, how the polishing alone done by the assessee on handicraft items can be named as 'manufacture or production'? The items purchased by it retained the same character and nomenclature before and after the processes performed over them. Such items which were hitherto unpolished and/or rough, got finished. For example, the dining table purchased by the assessee, remained the dining table after polishing and finishing done on it. We, therefore, hold that the activities carried out by the assessee though amount to 'processing', but fall short of 'manufacture or producing an article or thing'. If the contention of the ld. A.R. for adoption of term 'manufacture' given by Exim Policy is accepted, and such a wider meaning is assigned to include the processing not amounting to manufacture within its purview, the provisions of Explanation 4 to Section 10B would be rendered a nullity, which obviously cannot be the case. The presence of Explanation 4 in this section makes it explicitly clear that the word 'manufacture' has to be read in the sense discussed above excluding the mere processing of goods, that does not amount to manufacturing or bringing a new article in existence. In the like manner, the further contention that under the Sales Tax Act the term 'manufacture' has been used in a different manner does not hold good when the term 'manufacture' comes up for interpretation in the context of Section 10B. Similar view has been expressed in the case of Arihant Tiles and Marbles [supra] in the context of Section 80IA.21. We, therefore, hold that the assessee was not manufacturing or producing any article or thing as contemplated Under Section 10B but was simply engaged in the polishing and finishing of the fully manufactured items purchased by it. Consequently, the benefit of exemption Under Section 10B was rightly not available to the assessee and the ld. CIT was fully justified in his view on this aspect of the matter.
22. The ld. CIT has further observed that another condition for allowing benefit of exemption Under Section 10B is that a new business must be started fresh and not by splitting up or reconstruction of existing business. He observed that the unit under reference was simply created on papers because the benefit of deduction Under Section 80HHC was drastically reduced in the case of M/s Kwal Pro International. He further noted that the purchase and sale of items in its name which were till then being done in the name of Kwal Pro International were shifted in the assessee's name and hence it was nothing more than a unit which came into existence by splitting the business of M/s Kwal Pro International, a sister concern. Here we find that an incorrect finding has been recorded by the ld. CIT for the reason that the assessee was in existence since 1997 and was doing business of purchase and sale of items by getting the processing done from outside parties.
It is in the preceding year that the assessee claimed to have set up its own unit, obtained certificate from competent authority on 28.3.2000. We have further gone through the relevant material on record from which it is manifest that the assessee was already in existence as can be seen from the copy of trading, P&L account etc., for A.Y.1999-2000 and 2000-01. On the contrary, M/s Kwal Pro International, taken note of by the ld. CIT as having been availing deduction Under Section 80HHC in the past, in fact came to be established only on 11.8.2000 as is evident from the copy of its partnership deed placed at page 107 onwards of the PB. The ld. D.R. has not controverted this factual position. In the light of these facts, we find no difficulty in holding that the ld. CIT erred in coming to the conclusion that the second condition laid down in Section 10B was not fulfilled.
23. Similar is the position regarding the third condition Under Section 10B(2)(iii). On this aspect the ld. CIT stressed on the need to have plant and machinery by industrial undertaking of its own, which should not have been used by somebody else for some other purpose. He held that since the assessee did not have the machinery of its own, then how the goods could be manufactured or produced. Here we find that the ld.CIT fell in error because the assessee has acquired new plant and machinery worth Rs. 3,23,941/- in the year ending as on 31.3.2000 whereas the opening balance under the head 'plant and machinery' in that year was only at Rs. 5668/-. The detail of machinery account has been placed at pages 62 and 63 of the PB from which it is can be found that the undertaking has not been formed by transfer to new business the plant and machinery used for any purpose.
24. The argument of the ld. D.R. regarding change in the constitution taking place in the assessee firm and hence disabling it to claim exemption Under Section 10B cannot be entertained at this juncture on the ground that the scope of the appeal is confined only to the points taken note of by the ld. CIT while esorting to Section 263 holding the assessment order to be erroneous and prejudicial to the interest of the Revenue. Allowing the raising of an additional ground by the ld. D.R.strengthening the order Under Section 263, would frustrate the scope of this section and amount to conferring the jurisdiction of the ld. CIT Under Section 263 upon the ld. D.R., which cannot be the case. The satisfaction of both the conditions of Section 263" viz., the erroneous order and prejudicial to the interest of the Revenue has to be judged by the competent authority alone, which is the CIT in the present context. The ld. D.R. can elucidate the points considered by the ld.CIT, but no new point, different from those considered by the ld. CIT can be argued at the appellate stage to drive home the contention that the assessment order is erroneous, as it would amount to the ld. D.R.stepping into the shoes of the ld. CIT. Hence we refuse to consider this aspect of the matter.
25. We therefore, find that out of the three issues, on the basis of which revisional proceedings were started and order was passed Under Section 263, the latter two are without any force but the impugned order is sustainable on the non fulfillment of first condition, viz., no manufacture or production of an article or thing by the assessee, which has been discussed in detail in the preceding paras.
26. It is observed that as per the provisions of Section 10B, an undertaking must fulfill the following main conditions: i) It must be an approved hundred percent export oriented undertaking; ii) It must produce or manufacture articles or things or computer software; iii) It should not be formed by splitting/reconstruction of business; vii) It must not transfer ownership or beneficial interest in undertaking.
All the conditions as set out above are to be satisfied simultaneously.
If any of the conditions is not fulfilled, the benefit of exemption Under Section 10B does not stand. Since we have held that the assessee was not producing or manufacturing articles or things, there is no scope for allowing benefit of this exemption provision.
27. The ld. counsel for the assessee has contended that the ld. CIT was not within his power to overturn the action of the Assessing Officer in the revisional proceedings. According to him, where one possible view exists which the Assessing Officer has taken, the power of the ld. CIT gets ousted. Sounding a contra note, the ld. D.R. submitted that the Assessing Officer had passed an order in a mechanical manner without applying his mind to the fulfillment of the conditions laid down in Section 10B and thus the benefit of exemption Under Section 10B came to be erroneously granted, which action was set right by the ld. CIT.28. Having regard to the facts of the instant case in the light of the rival submissions made, we have to examine and evaluate as to whether the ld. CIT was within his competence to take action Under Section 263.
At this stage, we reiterate the settled legal position that in order to take action Under Section 263, the order of the Assessing Officer should not only be erroneous but also prejudicial to the interest of the Revenue. The twin conditions are to be satisfied simultaneously.
First condition is that the order passed by the Assessing Officer should be erroneous. By erroneous we refer not only to the wrong decision by the Assessing Officer but also to the instances in which he has not applied his mind to the material placed before him before accepting the assessee's claim. The Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 held that an incorrect assumption of facts or an incorrect application of law will satisfy the requirements of the order being erroneous. It was further held that: In the same category fall orders passed without applying the principles of natural justice or without application of mind.
29. In the class of orders passed without application of mind, we find the classic judgment rendered by the Hon'ble Delhi High Court in the case of Gee Vee Enterprises v. Addl. CIT [Del] in which the CIT was held justified in exercising his revisional jurisdiction on the ground that the Income-tax Officer had not made sufficient enquires before granting registration to the firm. In this case it was held as under: The position and function of the Income-tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be accepted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence, which comes before it. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return, which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word "erroneous" in Section 263 emerges out of this context. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in Section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.
The Jodhpur Bench of the Tribunal in a recent order dated 31.08.2006 passed in the case of Udailal Anjana v. CIT In ITA No. 140/JU/2006 has held that where the Assessing Officer did not make proper investigation, this rendered the assessment order to be erroneous and prejudicial to the interest of the Revenue. The Hon'ble Jurisdictional High Court in the case of Kanhaiyalal v. CIT considered a case in which the Assessing Officer did not apply his mind to the various relevant facts relating to the construction of the house and assessment made by the Income-tax Officer was held to be erroneous and prejudicial to the interest of the Revenue. When the matter reached before the Hon'ble High Court, it held that the order passed by the ld.CIT revising assessment order to be perfectly justified.
31. Adverting to the factual position existing before us, we observe that the Assessing Officer in his effective one page order has discussed this aspect in a single para of seven lines by which the exemption was held to be available on the basis of certificate issued by the competent authority. Neither any endeavour was made to consider the activity carried on by the assessee as to whether or not it amounts to manufacture or production of an article or thing, nor the question of satisfaction of other conditions enshrined in Section 10B was looked into. Acceptance of the assessee's claim without peeping into the conditions laid down in Section 10B, what to talk of the investigation of the fulfillment by the assessee, certainly rendered the order erroneous and prejudicial to the interest of the Revenue. The case of the Jodhpur Bench of the Tribunal relied upon by the ld. A.R. is not applicable to the facts of the case in as much as in that case the Assessing Officer had taken a possible view on the facts prevailing therein which is not the case before us. It is important to mention that each case depends on its own facts. The ratio laid down in one case cannot be automatically applied to the other cases without testing it on the factual scenario existing in the later case because a single significant detail alters the entire aspect. We, therefore, hold that the ld. CIT was fully justified in assuming revisional jurisdiction.
32. We further observe that during the revisional proceedings it was claimed before the ld. CIT that if the assessee was held not eligible for exemption Under Section 10B then its claim for deduction Under Section 80HHC must be allowed. The ld. revisional authority did not accept the assessee's case on the ground that once the assessee had preferred to claim exemption Under Section 10B then it was not open for it to change its position after completion of assessment. We are not convinced with the view taken by the ld. CIT for the reason that what is material to be examined is the satisfaction of the conditions laid down Under Section 80HHC. If larger benefit has been denied to the assessee, but a smaller benefit is otherwise available as per law, the assessee cannot be shown the door simply on the ground that his claim for larger benefit stands rejected. The Hon'ble Punjab and Haryana High Court in the case of CIT v. Rewari Central Co-operative Bank Ltd. considered a case in which the assessee had not made claim for deduction Under Section 80P before the Assessing Officer. The ld. CIT[A] allowed the claim. The Hon'ble High Court held that failure of the assessee to raise the plea of exemption before the Assessing Officer cannot disentitle it to the benefit of statutory exemption. In view of the foregoing discussion, we are not inclined to accept the opinion of the ld. CIT for denying deduction Under Section 80HHC simply on the ground that the assessee had claimed exemption Under Section 10B, which was not allowed by him. We further note that the parameters for the grant of deduction Under Section 80HHC are different from those of Section 10B. Moreover, the ld. CIT has himself mentioned in the impugned order that the assessee was allowed deduction Under Section 80HHC in the past. By setting aside the impugned order on this score and without expressing opinion on the availability of deduction, we direct the ld. CIT to examine the assessee's claim for the benefit Under Section 80HHC subject to the fulfillment of the conditions laid down under the section. Needless to say the assessee would be allowed reasonable opportiunity of being heard.
33. in the result the appeal is partly allowed for statistical purposes.