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:-
