Case Law Details

Case Name : Taurus Merchandising Pvt. Ltd. Vs ITO (ITAT Delhi)
Appeal Number : ITA Nos. 747 & 915(Del)2009
Date of Judgement/Order : 30/11/2011
Related Assessment Year : 2002- 03 & 2003- 04
Courts : All ITAT (4780) ITAT Delhi (1049)

It is not necessary for the assessee to produce its products so as to become eligible for claiming exemption under section 10B of the Income-tax Act, 1961

Taurus Merchandising Pvt. Ltd. Vs. ITO (ITAT Delhi)- It was  held that the new export-oriented unit of the assessee cannot be said to be formed by the reconstruction or splitting of a business already in existence. The Tribunal has also held that it is not necessary for the assessee to produce its products so as to become eligible for claiming exemption under section 10B of the Income-tax Act, 1961 (the Act).  While pronouncing the ruling, the Tribunal has observed that the provisions of section 10B of the Act do not place any bar on the assessee having a separate new undertaking for the manufacture and production of the same or similar goods, as done earlier. For the purposes of section 10B of the Act, what is important is a new undertaking. The Tribunal has also observed that ‘there is no legal bar against outsourcing of activities involved in manufacture or processing of goods. What is required is that the undertaking must mainly engage itself in the manufacture or processing of goods, either itself, or through some agency under its supervisory control or direction.

INCOME TAX APPELLATE TRIBUNAL , DELHI

ITA Nos. 747 & 915(Del)2009
Assessment years: 2002- 03 & 2003- 04

M/s. Taurus Merchandising Pvt. Ltd.

v.

Income Tax Officer,

ORDER

PER A.D. JAIN, J.M.

These are assessee’ s appeals for assessment years 2002-03 and 2003- 04. The issues involved being common, the facts have been taken from ITA No. 747(Del)2009.

2. The effective grounds of appeal are as under:-

“1. That the ld.Assessing Officer (ld.AO) has erred on facts and in law in re-opening the assessment. The reopening of the assessment is unlawful and without jurisdiction and as such the same deserves to be quashed. The ld. Commissioner of Income Tax(Appeals) [ld. CIT(A) has erred in not quashing the assessment.

2. That the ld. AO has erred in not allowing exemption u/s 10 B of the Income Tax Act (Act) in respect of the new eligible EOU. The ld. CIT(A) has erred in sustaining the said non-allowance of exemption.

3. That the ld. AO has erred on facts and in law in not allowing exemption u/s 10 B for the new EOU on the erroneous view that the EOU was formed by splitting up or reconstruction of the existing business. The ld. CIT(A) has erred in not rejecting this erroneous view.

4. That the non-allowance of exemption under section 10 B of the Act by the ld. AO and by the ld. CIT(A) is based on erroneous views, non-appreciation of the facts and law involved, and upon suspicion, conjectures and surmises.

5.  That the ld. CIT(A) has erred in sustaining the non-allowance of exemption u/s 10B in respect of the eligible EOU on erroneous adverse inferences adopted on aspects that have not adopted by the ld. AO and on which no proper lawful opportunity was provided to the appellant.

6. That the appellant is duly engaged in manufacturing a product which is a product separate and distinct from the raw materials with the use of labor, manufacturing and processing, for which manufacturing expenses have been incurred. The ld. CIT(A) has erred in holding that manufacturing or processing of articles/things was not proved or in making other erroneous averments without appreciating the facts, records, written submissions and case law before him. As such too the ld. CIT(A) has erred in not allowing the exemption under sec. 10B for the eligible EOU unit.

7. That the ld. AO and ld. CIT(A) have erred in not allowing exemption u/s 10B for the new EOU in view of the binding board’s circular No. 1 of 2005 dated 6.1 .2005 in favour of the appellant.”

3. At the outset, the learned counsel for the assessee has stated at the bar that he does not wish to press ground No.1. Rejected as not pressed.

4. Ground Nos. 2 to 7 are against non-grant of exemption u/s 10B of the I.T. Act in respect of new Export Oriented Unit(EOU).

5. The AO disallowed the exemption claimed, observing, inter alia, that the assessee had restarted its old business activity of export of the same items; that the assessee had merely reconstructed the existing business to avail of deduction u/s 80 B of the Act; that mere registration of a one hundred per cent EOU is not the sole criterion for deduction u/s 10 B of the Act; that the business was carried on by using old infrastructure without addition of any new plant and machinery in spite of turn over of Rs.  3.09 crores; that the assessee had utilized the infrastructure of its sister concern; and that the old stock had been carried forward as opening stock.

6. The ld. CIT(A) upheld the aforesaid findings of the AO. It was further held that the assessee had violated the criteria laid down u/s 10 A(2) of the Act, as mentioned by the AO; that the assessee had not purchased any machinery, required for manufacture of the items, after the establishment of the new EOU; that the contention that no new machinery was required, was not correct; that the assessee had got most of the work done from outsiders as job work; that there was no value addition by the assessee company; that the assessee had used the premises at Gurgaon, taken on lease/rent, as a mere godown, rather than as a facility for manufacture/processing; that the assessee had also not fulfilled the conditions laid down by the Development Commissioner in approval letter dated 28.3.2000; and that the assessee had not proved manufacturing or processing of articles/things.

7. The assessment order was, in this manner, confirmed by the ld. CIT(A).

8. Before us, the learned counsel for the assessee has argued that the assessee company was incorporated in assessment year 1993-94, on 10.8.92; that there was no business activity during assessment year 1993-94; that a new unit was started in assessment year 1994-95, for manufacture and export of fabric merchandise; that the assessee company did not have any sale from assessment year 1998-99 and the undertaking was stopped; that the assessee company, with effect from 1.4.96, became a partner in the firm, M/s. Taurus Exports; that w.e.f. assessment year 2002-03, on 1.4.01, the assessee company retired from the partnership of the said partnership firm of M/s. Taurus Exports; that a new one hundred per cent EOU was established for the business of manufacture and export of hand-made quilts and bed spreads; that this unit was registered as such on 28.3.2000, by the Development Commissioner, NEPZ; that the new EOU commenced its business in assessment year 2002-03; that the assessee received a licence for private bonding of licence EOU from 31.3.2000; that the said bonding came to an end w.e.f. 3.8.05; and that for the purpose of the newly established EOU, the assessee took the premises in Gurgaon on lease, vide lease deed dated 1.4.2001.

9. To substantiate these facts and the succeeding averments, the learned counsel for the assessee referred to the relevant portions of the Assessee’ s Paper Book (‘APB’ for short), which will be considered while discussing the merits of the case.

10. The learned counsel for the assessee has contended that the exemption u/s 10 B of the Act was claimed for the first time in assessment year 2002- 03; that the AO disallowed the claim, while allowing deduction u/s 80 HHC of the Act to the assessee as a manufacturer exporter; that the ld. CIT(A) has gone wrong in confirming the disallowance claimed; that while doing so, the ld. CIT(A) has failed to consider the facts vital to the claim of the assessee; that for the period from assessment year 2000-0 1 to 2003-04, the business of M/s. Taurus Exports continued to thrive; that the earlier undertaking started in assessment year 1994-95, stopped its sales w.e.f. 1998-99; that the new EOU was started in assessment year 2002-03; that in the interregnum, i.e., in the period from assessment year 1998-99 to assessment year 2001-02, there was no undertaking in existence; that the law does not impose any bar on an assessee from having separate additional new undertaking to manufacture and produce the same items as manufactured earlier; that what is important for the purpose of section 10 B of the Act is a new export oriented undertaking and it is not important or necessary that a new company be formed; that what is essential is that a new undertaking be established; that in the present case, there was no business in the old unit for more than five years; that therefore, the authorities below have erred in observing that the assessee formed the new undertaking by reconstructing or splitting up of the business already in existence; that the provisions of section 10 B specifically require that in order to be called a hundred per cent export oriented undertaking, an undertaking is to be approved as such 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 and the Rules framed there-under; that the EOU of the assessee was registered as a one hundred per cent EOU vide letter dated 28.3.2000 by the Development Commissioner, NEPZ; that therefore, the authorities below have erred in observing that mere registration as a one hundred per cent EOU is not the criterion for deduction u/s 10B of the Act; that the Authorities have also erred in observing that the business of the EOU was carried on by using old infrastructure without addition of any new plant and machinery, in spite of the turn over of Rs.  3.09 crores; that whileobserving so, it has not been taken into consideration that the business of the assessee was manufacture and export of hand-made quilts and bed spreads; that such manufacture does not require plant and machinery; that only needles and scissors are required, which are debited as consumable stores, under the head of fabrication charges; that moreover, much of the manufacturing process activities were out-sourced; that pertinently, the assets owned by the assessee prior to setting up of the new unit, had neither been transferred, nor used in the new unit; that the old minor plant andmachinery worth Rs. 26,190/- was neither transferred, nor used by the new unit, being not required; that it remained as part of the office assets of the old head office and never became part of the independent new EOU; that the provisions of section 10B of the Act nowhere require the use of plant and machinery as a must for manufacture or production of goods or articles, so as to render eligibility for deduction to the unit; that the old plant and machinery alleged to be transferred, on the other hand, was only of Rs.  26,190/-; that this very old machinery was never established to have been used in manufacture or production of the products manufactured by the assessee in the EOU; that further, the said old machinery has not been shown to have been necessarily manufacturing machinery only; that it includes office appliances and office machinery, etc., which too, has not been shown to have been used for manufacturing by the EOU; that the mere factum of the assesse having claimed depreciation as part of over all corporate office or company as separate from the EOU, could not have been made the basis of the unsustainable conclusion that the old machinery had been used in the EOU; that moreover, the assessee is not barred from continuing any assets and liabilities of the closed undertaking in the consolidated balance sheet or separate corporate office of the company as dead stock/assets of the company; that the assessee maintained separate accounts for its corporate office or head office and the EOU and it is a normal practice to consolidate all these accounts in one balance sheet and profit and loss account, as was done by the assessee; that the EOU was not formed by the transfer of old machinery and the old machinery was never used in the EOU; that therefore, the EOU was not formed by transfer of machinery used in any other business, to the new business; that therefore, the requirement of section 10B in this regard was never violated; that the Authorities below have also erred in observing that the assessee had utilized the infrastructure of its sister concern, without there being anything on record to this effect; that M/s. Taurus Exports, the said sister concern of the assessee, was a partnership firm; that it was independently exigible to tax as a separate entity; that it was obvious from the separate lease deeds, that these two entities, i.e., the assessee and M/s. Taurus Exports operated from separate premises; that the assessee, as a separate and independent unit, never utilized the infrastructure of M/s. Taurus Exports; that the assessee had its own expenses and operations, as available on record and as also noted by the ld. CIT(A); that the assessee and M/s. Taurus Exports were registered separately, under different statutes; that even after the EOU of the assessee was established, there was an increase in the production and sales of the sister concern, M/s. Taurus Exports, i.e., in the period from assessment year 2000-01 to 2003-04, the separate and independent business of M/s. Taurus Exports continued to increase; that the Authorities below have also wrongly observed that the old stock had been carried forward as opening stock; that the said stock, being obsolete, was of no use to the EOU and it was not shown to have been used in the business of the EOU; that it was being carried forward as such, in the over-all balance sheet of the assessee, as H.O. asset; that the EOU was an independent undertaking of the company, having distinct, separate and independent accounts; that it was only for the company’s consolidated balance sheet that these accounts were consolidated with the Head Office accounts; that the closing stock of Rs.  4,48,701/- as on 31.3.02 was never transferred to the new EOU, much less used by it; that the amount representing this stock in both the years under consideration, is exactly the same; that the new EOU had its new independent inventories; that the ld. CIT(A) has wrongly concluded that the contention of the assessee that no new machinery was required, was not correct; that the ld. CIT(A) has failed to substantiate this observation with anything on record; that the product manufactured by the assessee are quilts and bed spreads; that these are handicraft products, requiring no machinery other than needles and scissors; that moreover, the process was out-sourced and fabrication was got done from fabricators; that getting work done on job work basis has not been shown to be impermissible; that the ld. CIT(A) has wrongly stated that there has been no value addition by the assessee company, whereas various activities were carried out by the assessee and there was substantial salary and wages payment in the new EOU; that the EOU was involved in, inter alia, getting quilts and made-ups manufactured on job work basis, on its own raw-material, accessories, designing, management, supervision, packing, finishing and quality control, for which, the expenses were incurred; that the ld. CIT(A) has further gone wrong in not observing that the assessee had used the leased Gurgaon premises not only merely as a godown, but also for finishing and packing of the finished goods under the supervision and control of the assessee’ s employees and contract labour, for which, the expenses were claimed under the head of “expenses and salaries”; that it has also been wrongly observed that the assessee has not fulfilled the conditions laid down by the Development Commissioner in the approval letter dated 28.3.2000; that had it been so, the EOU would never have remained registered and approved as a new undertaking under the one hundred per cent EOU Scheme through-out the years under appeal; that more-over, the ld. CIT(A) has made this cryptic observation without specifying as to which conditions have remained unfulfilled and as to how the assessee has not fulfilled them; that on the contrary, the assessee has duly fulfilled all the conditions laid down in the letter of approval dated 20.3.2000 issued by the Development Commissioner of NEPZ; that moreover, the Development Commissioner, NEPZ, is a specialized authority in his field and the ld. CIT(A) is not authorized to make adverse comments with regard to the field of the Development Commissioner, particularly when the Development Commissioner has himself not made any adverse observation against the assessee; that the ld. CIT(A) has further gone wrong in observing that the assessee did not prove manufacturing or processing of articles/things; that as stated, the assessee had out-sourced the activities involved in the manufacturing or processing of goods, which is not forbidden by law; and that more-over, the Authorities below have themselves allowed deduction to the assessee u/s 80 HHC of the Act, as a manufacturer exporter, thereby admitting the assessee to be a manufacturer. In this manner, the learned counsel for the assessee has prayed that deduction u/s 10B of the Act, which is legally available to the assessee and has wrongly been declined to the assessee by the Authorities, be granted to it by allowing the assessee’ s appeals for both the years while cancelling the orders under appeal.

11. The ld. DR, on the other hand, has placed strong reliance on the impugned order. It has been contended that the assessee has violated the provisions of section 10B of the Act and therefore, the Authorities below have correctly denied deduction there-under to the assessee; that so as to avail deduction u/s 10B of the Act, the assessee merely reconstructed the existing business of export of the same items; that merely because the EOU of the assessee is registered as one hundred per cent EOU, that does not, by itself, entitle the unit for deduction u/s 10B of the Act; that while carrying on the business, the old infrastructure was used and there was no addition of Any new plant and machinery, in spite of the fact that the turn over was of Rs.   3.09 crores; that this has not been satisfactorily explained by the assessee, casting the shadow of a doubt; that the infrastructure utilized by the assessee was that of its sister concern, M/s. Taurus Exports; that the assessee has not been able to dislodge the concurrent finding that the old stock was carried forward as opening stock; that no machinery was purchased after the establishment of the EOU, leading to the irascible conclusion that the assessee did not carry out any manufacture or production of any article or thing in the EOU and it was only a charade to anyhow obtain the deduction u/s 10B of the Act; that more-over, there was no value addition by the assessee company; that the premises taken on lease at Gurgaon was used merely as a godown and not for the purpose of any manufacturing or processing of any article or thing; that the assessee has remained unable to prove otherwise; that the conditions laid down by the Development Commissioner in the approval letter dated 28.3.2000 were not fulfilled and the assessee cannot get away by just saying that it is the Development Commissioner who is the prescribed Authority and not the Income Tax Authorities; and that no material has been brought on record by the assessee to show that any manufacture or processing of articles or things was done by the assessee.

12. The ld. DR has placed reliance on the following case laws:-

  1. “A.G.S. Tiber And Chemicals Industries P.Ltd.”,233 ITR 207(Mad);
  2. “Kerala State Cashew Development Corporation v. CIT”, 205 ITR 19(Ker);
  3. “ACIT v. Varma Mukherji (P)Ltd.”, 61 ITD 462(Mum)
  4. “CIT v. Veena Textiles Pvt. Ltd.”, 155 ITR 794(Mad).

13. We have heard the parties and have perused the record. The issue is as to whether deduction claimed u/s 10B of the Act has rightly been refused to the assessee company. Section 10B(2) provides the conditions which undertaking has to fulfill so as to be eligible to avail exemption u/s 10B. Section 10B(2) reads as follows:-

“This section applies to any undertaking which fulfills 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 undertaking 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.”

14. Therefore, the conditions to be fulfilled are, inter alia, manufacture or production of, any article or thing, the formation of the undertaking not having come about by the splitting up or reconstruction of a business already in existence, and the formation of the undertaking not being by the transfer of machinery or plant previously used for any purpose, to a new business.

15. In the present case, the company was incorporated on 10.8.92, in the assessment year 93-94. A new unit was started by the company for manufacture and export of fabric merchandise. Assessment year 1994-95 was the first year of business of manufacture and export of the old unit, as there was no business activity during assessment year 93-94, as is evident from the balance sheet and profit and loss account as on 3 1.3.93 for F.Y. 92- 93 (APB 66 & 67). On 1.4.96, i.e., in the asstt.year 97-98, the company became a partner in the firm M/s. Taurus Exports. From assessment year 98-99, the company did not have any sales in the old unit. On 1.4.01, i.e., in the assessment year 2002-03, the company retired from the partnership of M/s. Taurus Exports. It set up a new one hundred per cent Export Oriented Unit(EOU) for the business of manufacture and export of hand-made quilts and bed spreads in the assessment year 2002-03. This new unit was registered as a one hundred per cent EOU vide letter dated 28.3.2000 of the Development Commissioner, NEPZ, a copy whereof is at APB 71. As per this letter, the assessee was extended all the facilities and privileges admissible and subject to the provisions of the Export Oriented Unit Scheme, as envisaged in the Export Import Policy 1997-2002, for the establishment of a new undertaking at 405, Udyog Vihar, Phase IV, Gurgaon for 10,000 pieces annual capacity manufacture of bed spreads, subject to the conditions mentioned in the letter. The new EOU commenced its business in the assessment year 2002-03. The assessee received a licence for private bonding of licence EOU from 3 1.3.2000. On 3.8.05, i.e., subsequent to the assessment years under consideration, there was a final debonding of the new EOU undertaking of the assessee. Vide lease deed dated 1.4.2001, the assessee took on lease a premises for its new EOU at 405, Udyog Vihar, Phase IV, Gurgaon. The EOU was registered under the local Sales Tax Act on 12.6.2001. On the same date, it was also registered under the Central Sales Tax Act. On 28.4.01, the assessee commenced production. It claimed deduction u/s 10B of the Act, for the first time, in the assessment year 2002-  03. The AO disallowed the assessee’s claim. Deduction u/s 80 HHC, as manufacturer exporter was, however, allowed. The ld. CIT(A) confirmed the dis allowance.

16. The first objection raised by the Authorities below is that the assessee restarted its old business activity of export of the very same items as earlier and that it had merely reconstructed the existing business just to avail deduction u/s 10B of the Act. In this regard, it is seen, that the earlier undertaking, started in the assessment year 1994-95, stopped its sales w.e.f. the assessment year .98-99. Thereafter, there was no undertaking and the new EOU was set up only in the assessment year 2002-03. A copy of the audited balance sheet and profit and loss account for F.Y. 97-98 is at APB 43 to 45. They do not show any sales of the old undertaking in the assessment year 98-99. Similar is the position with the balance sheet and profit and loss account for F.Ys. 98-99, 99-00 and 2000-01, respectively (copies at APB 46 to 47, 50 to 51 and 52 to 65). That apart, the provisions of section 10B do not place any bar on the assessee having a separate new undertaking for the manufacture and production of the same or similar goods, as done earlier. For the purposes of section 10B, what is important is a new undertaking. In “CIT v. Electric Lamp Manufacturers (India)(P)Ltd., 165 ITR 115(Cal), it has been held that it is not essential that a new company be formed to operate the new industrial undertaking; that the assessee may own several industrial undertakings, some of which may be eligible for claiming tax holiday benefit, whereas others may not; and that what is important is that the undertaking established must be a newly established undertaking. In “JCIT v. Associated Capsules P.Ltd.”, 304 ITR (AT) 85 (Mum), it has been held that where the assessee had established new plant and machinery at the same premises and was producing the same product as that done by the existing business, the new units were having separate and distinct identity of their own, profits and gains were derived from them and the assessee was treating each unit as a separate and independent unit in its accounts, the new units could not be held to be part of the existing business; and that the assessee was entitled to deduction u/ss 80 I and 80 IA of the Act.

17. Further, the existence of business is a pre-supposition for the formation of a new undertaking by the reconstruction or the splitting up thereof. In the present case, there had been no business in the old unit of the assessee for over five years before the start of production by the new EOU. That being so, the new EOU of the assessee cannot, in any manner, be said to be formed by the reconstruction or splitting up of a business already in existence. Then, the Authorities below have observed that mere registration as a one hundred per cent EOU is not the sole criterion for grant of deduction u/s 10B of the Act. This observation itself amounts to an admission of the unit being registered as a one hundred per cent unit with the Development Commissioner, NEPZ. Explanation 2 (iv) to section 10B of the Act provides for a one hundred per cent Export Oriented Undertaking to mean an undertaking which has been approved as a one hundred per cent EOU 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 and the Rules made there under. For facility, the said Explanation 2(iv) to section 10B is being reproduced as follows:-

“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.”

18. Therefore, registration as a one hundred per cent EOU is a sine qua non for claiming deduction u/s 10B of the Act. Further, as is available from the copy of registration of the unit as a one hundred per cent EOU (APB 71 to 74), the unit was duly approved by the Board appointed in this behalf by the Central Government. In “Tube Investments of India Ltd. V. ACIT”, 117 ITD 239 (Chennai) (TM), it has been held that a one hundred per cent Export Oriented Undertaking, as per Explanation 2(iv) to section 10B means an undertaking approved as a one hundred per cent EOU 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 and the Rules framed under that Act; and that it was not the case of the Department that approval as required under the statute had not been accorded to the assessee. Likewise, in the present case, the Department does not contend that the requisite approval, as above, has not been accorded to the present assessee.

19. The assessee, it is seen, exports hand-made quilts and bed spreads. The assessee’ s stand has been that the process of manufacture of the said items does not require plant and machinery and only needles and scissors are required for cutting, finishing and packing. These implements, the assessee states, are debited as consumable stores under the head “fabrication charges”. Further, much of the manufacturing activities are out-sourced. This remains undenied. Rather, even the ld. CIT(A) has taken this stand of the assessee under consideration. As such, no discrepancy can be found in the assessee’s stand that the business was carried on by using old infrastructure without addition of any new plant and machinery, despite the fact that the turn over was of Rs.  3.09 crores. Moreover, the books do not show the assets, owned by the assessee prior to the set up of the new unit, to have been either transferred to or used in the new unit. The plant and machinery shown was of a meager sum of Rs.  26,190/-. This has been stated to be old and never transferred to the new unit, nor used by the new unit, as it was not required by the new unit. It remained as part of old H.O. assets rather than being treated as part of the independent new EOU. These facts have not been controverted.

20. Further, it is seen that for eligibility for deduction u/s 10B of the Act, it is nowhere the requirement of the section that plant and machinery must be used for manufacture or production of goods or articles. As observed, the Department has not been able to show, contrary to the assessee’ s claim of only needles and scissors being required for the manufacture of hand­made quilts and bed spreads, that any other “plant and machinery” was either required for such manufacture or was actually used by the assessee for such manufacture. The old machinery shown at Rs. 26,190/- has been stated to include not necessarily manufacturing machinery to office supplies and office machinery, etc. The Department has not brought on record anything contrary to this assertion of the assessee. They have only gone by the entry of Rs. 26,190/- as plant and machinery. Even the items under this have never in fact, been transferred to the new unit, nor have they been shown to have been used by the new unit. It is, therefore, correct to assert, as done on behalf of the assessee, that it is only by way of conjecture and surmise that it has been concluded that any machinery, even the old machinery, was transferred to the new EOU. The mere factum of the assessee having claimed depreciation of over-all corporate office or company as separate from the eligible unit cannot lead to an inference that any old machinery was used in the new eligible EOU. Otherwise too, the assessee has maintained separate accounts for its corporate or Head Office and for its EOU. No legal bar has been brought to our notice on behalf of the Department against continuing of assets and liabilities of a closed undertaking in the over-all consolidated balance sheet of the company as deemed stock or stocks of the company. There is no denying the fact that in such like cases, the accounts of the companies are consolidated in one balance sheet and profit and loss account.

21. The requirement of the section per se is that the new industrial undertaking should not be formed by transfer of machinery used in other businesses, to the new business. So to say, the formation of the new EOU should not come about by transfer of old machinery. This is the requirement of section 10B(2)(iii) of the Act. For facility, the said section reads as follows:-

“10B(2):- This section applies to any undertaking which fulfils all the following conditions, namely,-

(i) …….. .                         .

(ii)…………………………….           .

(iv) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.”

22. In this regard, in “Bajaj Tempo Ltd. V. CIT”, 196 ITR 188(SC), it has been held, with reference to section 15 C(2)(i) of the I.T. Act, 1922, which corresponds to section 10 B of the I.T. Act, 1961, inter alia, that the restriction or denial u/s 15 C(2)(i) arises not by transfer of building or material to the new undertaking, but when it is “formed” by such transfer; that this is the key to the interpretation; that the formation should not be by such transfer; that therefore, it is not every transfer of building or material, but one which can be held to have resulted in the formation of the new undertaking, that results in denial of the relief u/s 15 C(1); that therefore, even if the new undertaking is established by transfer of building, plant or machinery, but it is not formed as a result of such transfer, the assessee cannot be denied the benefit; and that the transfer, to take the new undertaking out of the purview of section 15 C(1), must be such that, but for the transfer, the new undertaking would not have come into being.

23. The present case squarely attracts the said ratio in “Bajaj Tempo Ltd.”(supra). Herein, it has not been shown by the Department that there was such transfer of plant and machinery to the new EOU from the old unit, as would render the new EOU as not having come to be, if such transfer had not been there.

24. Otherwise too, as laid down in “Bajaj Tempo Ltd.”(supra), the provision in a taxing statute granting incentives for promoting growth and development should be construed liberally and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it. Indisputably, section 10B of the Act is a provision directed towards encouraging industrialization by permitting an assessee to set up a new industrial undertaking to claim relief from tax to the extent prescribed.

25. The next objection of the Department is that the assessee has utilized the infrastructure of its sister concern. This objection, we find, is also not justified. The said sister concern is M/s. Taurus Exports. It is a partnership firm – an independent taxable entity. The assessee firm and its said sister concern operated from separate premises. The assessee, for establishing the new EOU took a new premises on lease at Gurgaon. As to how it has been arrived at that the assessee utilized the infrastructure of its sister concern, has not been brought out. As discussed, the assessee is an entity separate and distinct from its sister concern. It is the assessee’ s categoric assertion that it did not utilize the infrastructure of its sister concern. The assessee has its own expenses and operations. The Authorities were duly informed in this regard. The ld. CIT(A), at pages 7 to 10 of the order under appeal, has taken note of the assessee’ s written submissions, which include specific submissions in this regard. Therein, the assessee has categorically stated that previously, it was a partner in Taurus Exports, but it totally retired from Taurus Exports from 31.3.01, i.e., before commencing the business with the new EOU; that the business of Taurus Exports continued and grew separately; that the assessee is a separate entity and grew with its own funds, resources, new unit and its own business; that Taurus Exports has several other partners and is a distinct separate entity; and that the assessee has several separate customers also, notwithstanding the fact that the assessee carries on the same business as that of Taurus Exports with substantially the same management. Besides, it has also been asserted that there has been an increase in production and sales of Taurus Exports after the establishment of a new EOU of the assessee. These assertions do not stand negated.

26. Therefore, this observation also carries no force.

27. Then, the AO observed that the old stock had been carried forward as opening stock. In this regard, the assessee has maintained that the opening stock of raw materials lying with the company was very old and obsolete and was of no use to the new EOU of the company; and that such stock was also actually never used in the business of the new undertaking. This stock has been carried forward, as such in the balance sheet of the company, as H.O. assets. The closing stock of Rs.  4,48,701/-, as mentioned by the AO, was also the opening stock. It has been asserted that this was also never transferred to the new EOU, nor used by it and it remains the same in the opening and closing stock in both the years involved. The new EOU, an independent undertaking of the company, with independent accounts, has shown inventories, in which, this position is clear.    In this regard, copy of audited balance sheet and profit and loss account for F.Ys 97-98 to 2000-0 1 are at APB 27 to 41, 43 to 45, 46 to 47, 50 to 51 and 52 to 65, respectively. As per the old inventory in the Head Office, the stock is of 45 1.701 as on 31.3.97, and 48,701 as on 31.3.01, 31.3.02 and 31.3.03, respectively. The new inventory in the new EOU shows ‘nil’ stock as on 31.3.97, and 31.3.01 and stock of Rs.  40,63,765/- as on 3 1.3.03.

28. This objection, as such, carries no weight.

29. The ld. CIT(A) has observed, besides confirming the aforesaid observations of the AO, that the assessee has violated the conditions laid down u/s 10B(2) of the Act. This observation is unsupported. The report u/s 10B of the Act in form No. 56 G was filed before both the Authorities below. A copy thereof is at APB 7 to 9. APB 8 shows the date of commencement of manufacture as 28.4.01. The asses see, as discussed, has amply complied with the three conditions laid down in section 10B(2). It manufactures articles or things. It has not been formed by splitting up or reconstruction of a business already in existence. It has not been formed by the transfer of plant or machinery previously used for any purpose, to the new business.

30. Apropos the CIT(A)’s observation that the assessee has not purchased any machinery required for manufacture after the establishment of the new EOU, it has been shown as hereinabove, that undeniably, the assessee manufactures hand-made quilts and bed spreads. It has not been shown that any plant and machinery is required for such manufacture. Needles and scissors are the tools or implements needed for making these items. Moreover, most of the fabrication of quilts and bed spreads made by hand has been out-sourced. In these facts, it has not been established that there was any requirement of any plant and machinery after the establishment of the new EOU. For the observation that it is not correct to contend that no new machinery is required, nothing of substance has been observed to the contrary by the ld. CIT(A).

31. Apropos the objection of the ld. CIT(A) that the assessee has got most of the work done from outsiders by way of job work, nothing in law has been either observed in the impugned order, or brought before us against such action of the assessee.

32. The ld. CIT(A) has also observed that there is no value addition by the assessee company. This has also been shown effectively by the assessee to be incorrect. Various activities are carried out by the assessee. Substantial salary and wages payment is there in the new EOU. Expenses under the head “salary” in the assessment year 2002-03 was of Rs.  7,00,117/-, as compared to that of Rs.  12,000/- in the year preceding that. Further, in the assessment year 02-03, contract labour under “finishing expenses” was of Rs.  11,12,086/- as compared to rupees ‘nil’ in the earlier year. The new EOU was getting quilts and made-ups manufactured from fabricators on job works, for which, the EOU provided its own raw material, accessories, designing, supervising, management, packing and finishing and quality control. This has nowhere been denied or controverted. It was the EOU which incurred all relevant expenses for the manufacture. These expenses included expenses on fabrication, dyeing and printing, job work, establishment, finishing, packing, clearing and forwarding, etc. This has, again, remained unrebutted.

33. Another objection of the CIT(A) is that the premises at Gurgaon, taken on lease/rent was used merely as a godown, rather than as a facility for manufacturing or processing. In this regard, the submission of the assessee has been that this observation of the ld.CIT(A)is incorrect; and that the premises at Gurgaon was not used merely as a godown, but was also used for finishing and packing of finished goods under the supervision and control of the assessee’ s employees and contract labour. The expenses for the same were booked under the head “finishing expenses” and “salaries” etc. In this regard, APB 119 contains the details of establishment. These are as follows:-

….page 119 of the paper book

34. Then, APB 123 is a copy of the ledger account of the finishing  expenses. These are as follows:

… page 123 of the paper book

35. These expenses show that the premises at Gurgaon was not used merely as a godown.

36. The ld. CIT(A) has further objected that the assessee has not fulfilled the conditions laid down by the Development Commissioner in the approval letter dated 28.3.2000. In this regard, it is seen that though the ld. CIT(A) has reproduced the aforesaid letter dated 28.3.2000, it has not been made out as to which of the conditions mentioned therein has been violated by the assessee. In fact, it remains undisputed that the assessee’s new EOU was registered and approved as a new undertaking under the one hundred per cent EOU Scheme, as per the prescribed requirement. This registration and approval was granted by the Development Commissioner, NEPZ. It has not been shown to have been withdrawn. The net foreign exchange earnings of the assessee are of more than the projected 20%. So is the export turn over. The assessee did not import plant and machinery, as no plant and machinery was required for manufacture, as discussed. Moreover, it was an enabling entitlement and choice to avail it was entirely with the assessee. The Development Commissioner did not raise any objection that the assessee had not fulfilled any of the conditions laid down. It was only thus, that the registration approval was granted to the assessee. Besides, the violation , if any, of the conditions is to be monitored by the Development Commissioner, as the prescribed Authority for the purpose. The ld. CIT(A) thus erred in taking the objection in this regard particularly, in the absence of any objection by the competent Authority – the Development Commissioner.

37. A further objection raised by the ld. CIT(A) is that manufacturing or processing of articles/things was not proved. In this regard, the ld. CIT(A) has observed that the value addition on account of job work charges is enormous. Now, this cannot be taken to go against the assessee at all. There is no legal bar against outsourcing of activities involved in manufacture or processing of goods. What is required is that the undertaking must mainly engage itself in the manufacture or processing of goods, either itself, or through some agency under its supervisory control or direction. In “ITO, Circle 16(2), New Delhi v. Techdrive (India) (P)Ltd.”, 25 SOT 152 (Del), it has been held that u/s 10B of the Act, it is not the requirement that the assessee company should itself own plant, machinery or equipment and manufacture or produce computer software on the same in order to be eligible for exemption. Likewise, in the present case, it is not necessary that the assessee must itself produce its products so as to become eligible for exemption u/s 10B. The factum of outsourcing has not been questioned.

38. In “Orient Longman Ltd. V. CIT, Delhi-II”, 130 ITR 477(Del), it was held that where the assessee was a publisher of books, it would not be doing more than getting the manuscript and preparing the same for printing and book binding; that yet, the fact that printing and book binding was done by some-one else did not imply that some-one else was the manufacturer; and that it was the business of the assessee to get the books manufactured by getting the manuscript, designing the nature of the book, finishing the anticipated product and then selling the product after getting it made.

39. In “Griffon Laboratories P. Ltd. V. CIT, West Bengal”, it was held that a manufacturer may hire plant and machinery and employ hired labour and manufacture the goods; that, however, to earn the benefit of concessional rate of tax as industrial company, the company must mainly engage itself in the manufacture or processing of goods either itself or by some-one under its supervisory control or direction; and that the Tribunal erred in holding that the assessee company must own or possess the manufacturing plant or machinery before it could be said to be a manufacturer of goods.

40. In “CIT v. Anglo French Drug Co.(Eastern) Ltd.”, 191 ITR 92(Bom), it has been held that to fall within the definition of “industrial company” in the relevant Finance Act and be entitled to the rebate in the rate of Income Tax, it is not necessary that the company must manufacture the goods by its own plant and machinery at its own factory; that if, in substance, the manufacturing company has employed another company for getting the goods manufactured by it under its own supervision or control, the assesseecan be considered as a company engaged in manufacturing of goods and, thus, an industrial company; that it is sufficient if, on an over-all view of the matter, it is found that it was the assessee company which was the real manufacturer and the assessee company merely employed the agency of some-one else, through whom, the goods were caused to be manufactured.

41. In “CIT, Bombay City-II v Neo Pharma Private Limited”, 137 ITR 879(Bom), the assessee company, which was incorporated mainly with the object of engaging itself in the business of manufacturing and processing pharmaceuticals, entered into an agreement with another company, “Pharmed”, to make available to the assessee their premises, plant, machinery and the services of the staff such as chemists and labourers to carry on the manufacturing activities for and on behalf of the assessee. Exercising the powers u/s 263 of the Act, the Commissioner held that an assessee could be said to be the manufacturer of goods or engaged in the manufacture or processing of goods only when it carried out all the operations involved in converting the raw-material into finished goods with the aid of machinery owned by itself and with labour in its direct supervision; and that since the machinery and services rendered for the conversion of raw-materials into finished goods in that case were provided by Pharmed, the assessee could not be said to be a manufacturer. The assessee’ s appeal was allowed by the Tribunal. The Hon’ble High Court affirmed the decision of the Tribunal, holding, inter alia, that although the plant and machinery employed for the purpose of manufacture belonged to Pharmed and the services of certain employees of Pharmed was also utilized in that process, the manufacturing activity was really that of the assessee and that therefore, it could not be said that it was not the assessee but Pharmed which manufactured the drugs and pharmaceuticals .

42. In “CIT v. Acrow India Ltd.”, 188 ITR 485(Bom), it was held that where the assessee had engaged the services of V. Company for fabrication of goods and things mentioned in the Agreement under its supervision and control with the help of technical know-how supplied by it and the assessee had also supplied all the raw-materials to V.Company, which acted only as labour contractors with the assessee, the assessee was engaged in the business of manufacturing and processing of goods.

In the present case, it is seen that the Taxing Authorities have themselves allowed deduction u/s 80 HHC of the Act to the assessee as a manufacturer – exporter, thereby admitting the assessee to be a manufacturer.

43. Coming to the case laws sought to be relied on by the Department, in “A.G.S. Tiber And Chemicals Industries P. Ltd. V. CIT”, 233 ITR 207(Mad), deficiency of profits and carry forward thereof u/s 80 J was involved, which is not the subject matter here. In “Kerala State Cashew Development Corporation v. CIT”, 205 ITR 19 (Ker), it was a case, again concerning section 80J of the Act, where there was taking over and running of existing sick cashew factory. No new industrial undertaking was there. This case, as such, is also different on facts. In “ACIT v. Varma Mukherji (P)Ltd.”, 61 ITD 462(Mum), the issue was investment allowance u/s 32 A of the Act and as to whether the process of dyeing and printing amounts to manufacture. In the present case, the manufacture of hand-made quilts and bed spreads has been allowed export deduction. In “CIT v. Veena Textiles Pvt. Ltd.”, 155 ITR 794(Mad), embroidery and dyeing was held not to be manufacture. In the present case, bed sheets, bed spreads and quilts are manufactured. According to “India Cine Agencies Vs. CIT”, 308 ITR 98(SC), it has been held that the word “production”, 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; and that it also takes in all the bye-products, being material products and residual products, which emerges in the course of manufacture of goods. The quilts, bed sheets, bed spreads and bed covers, etc., produced by the assessee are commodities different from the raw cloth or consumables out of which they are manufactured. The process carried on by the assessee, as such,definitely amounts to manufacture.

44. In view of the above discussion, ground Nos. 2 to 6 raised by the assessee are accepted. It is held that the ld. CIT(A) has gone wrong in sustaining the non-allowance of the exemption claimed by the assessee u/s 10 B of the Act, with regard to the assessee’s new EOU. The CIT(A)’s order is thus set aside in this regard and the claim of the assessee is allowed.

45. Ground No.7 has been taken as an alternative ground without prejudice to ground Nos. 2 to 6. Since the grievance of the assessee by way of ground Nos. 2 to 6 has been allowed as above, it is no longer necessary to adjudicate ground No.7.

46. Ground Nos. 8 to 10 are general.

47. Consequently, ITA No. 747 (Del)2009 for assessment year 2002-03 is allowed.

48. As noted at the beginning of this order, the facts in ITA No. 747(Del)2009, for the assessment year 2002-03, are in pari materia with those in ITA No. 915(Del)2009 for assessment year 2003-04. As such, our above observations are equally applicable to ITA No. 915(Del)2009. For the reasons recorded hereinabove, ITA No. 915(Del)2009 filed by the assessee for assessment year 2003-04 is also allowed.

49. In the result, both the appeals filed by the assessee are allowed. Order pronounced in the open court on 30.11.2011.

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