Income Tax Appellate Tribunal - Pune
Income-Tax Officer vs Vanaz Engineers (P) Ltd. (Vanaz ... on 12 November, 1998
Equivalent citations: [1999]70ITD525(PUNE)
ORDER
K. C. Singhal, J.M.
1. Since common issue is involved in all these appeals, the same were heard together and are being disposed of by this common order for the sake of convenience.
2. This is a recalled matter as per the order of the Tribunal dt. 13th February, 1996, in MA Nos. 34 to 36/PN/95 and MA No. 2/PN/1996. The only issue before us relates to deduction under s. 80J. The assessment years involved are asst. yr. 1980-81 to 1983-84. In respect of asst. yr. 1980-81, the Revenue is in appeal against the order of CIT(A) while the assessee is in appeal in respect of asst. yrs. 1981-82 to 1983-84 against the order of CIT under s. 263.
3. The brief facts giving rise to these appeals are these. The assessee had been carrying on the business of manufacturing of valves, pressure regulators, die casting, non-ferrous forgings and vanfog machines since 1947. It had 3 Divisions namely die casting, and forging division, tool room and machine shop. The main business was carried on in the die casting and forging shop wherein the rough castings and forgings were produced after melting various matters. These rough castings and forgings were further processed in tool room and machine shop for giving them in the final shape.
4. The previous year adopted by the assessee was the calendar year. In 1978, the assessee prepared a plan to increase its production capacity in order to meet the demand of its customers, who were mainly oil companies (Govt. of India undertakings). To implement the plan, the assessee constructed the additional floor space of 356 sq. mtrs in 1978 and 254 sq. mtrs. in 1979. In the calendar year 1979 relevant to asst. yr. 1980-81, the assessee installed a new machinery in the forging and die casting shop which was valued at Rs. 12,99,500. This machine was a very sophisticated machine for producing the improved variety of pressure regulator. Besides this, some other machines worth Rs. 32,281 and Rs. 7,82,770 were also installed in tool room and machine shop respectively. In the subsequent years, no other machine was installed in forging and die casting shop. However, some machines were installed in tool room and machine shops in asst. yr. 1981-82 and asst. yr. 1982-83.
5. In respect of asst. yr. 1980-81 the assessee claimed deduction under s. 80J on the ground that new unit was formed for the production of improved quality of pressure regulator. Similar claim was made by the assessee in respect of asst. yrs. 1981-82 and 1983-84.
6. In respect of asst. yr. 1980-81, the AO rejected the claim of the assessee on two grounds namely :
(i) that assessee had not maintained separate set of accounts for the old and new units and the capital outlay for new business had not been worked out separately.
(ii) that as a matter of fact, there was only expansion of the existing business and no new unit was formed.
It appears from the record that no proper details were furnished by the assessee before the AO. However, in asst. yr. 1981-82, the assessee gave the detailed reply to the AO as per his letter dt. 11th January, 1984 and 7th February, 1984. The AO, after considering the details filed by the assessee, allowed the claim of the assessee under s. 80J. Similar claims were allowed for asst. yrs. 1982-83 and 1983-84.
7. For asst. yr. 1980-81, the matter was carried before the CIT(A). It was contended before him that substantial expansion was carried out by the assessee-company during the period 1978 to 1981 and a new latest technology machine was purchased and installed. Due to this, a new unit came into existence which was physically identifiable. According to the assessee, the production profitability had improved substantially. It was also claimed that AO had allowed a claim under s. 80J in asst. yr. 1981-82. In support of its contention, the reliance was placed heavily on the decisions of Supreme Court in the case of Textile Machinery Corporation vs. CIT (1977) 107 ITR 195 (SC) and in the case of CIT vs. Indian Aluminium Company Ltd. (1977) 108 ITR 367 (SC) and also the decision of Bombay High Court in the case of CIT vs. Associated Cement Corpn. (1979) 118 ITR 406 (Bom) and other decisions of various other High Courts. It was also the contention of the assessee that there was no requirement of law regarding maintenance of separate books of accounts. After considering the same, the CIT(A) allowed the claim of the assessee vide his order dt. 29th October, 1986.
8. As far as asst. yrs. 1981-82 to 1983-84 are concerned, revisionary jurisdiction was invoked by the CIT, Pune under s. 263 inasmuch as he was of the view that orders of AO were erroneous and prejudicial to the interest of Revenue, as according to him no new unit had come into existence. The notices under s. 263 were issued on 20th March, 1987, i.e., few days before the time-barring limit. After considering the submissions of the assessee, the CIT was of the view that increase in the production was not possible without the dependence of the old machines in the tool room and machine shop. He also held that no section was capable of producing of any article of its own, and therefore, it could not be said that any new industrial undertaking had come into existence despite the fact that substantial investment was made in the expansion. According to the learned CIT, it was a case of simple addition of the plant and machinery without bringing into existence separate industrial unit in any of the assessment years. The CIT also rejected the contention of the assessee to the effect that claim under s. 80J got merged with the order of CIT(A).
According to him, the claim under s. 80J in the years under consideration was not allowed on the basis of order of the CIT(A), but on the basis of the fresh material and submissions before the AO. Accordingly, he directed the ITO to withdraw the claim under s. 80J in all the years.
9. Aggrieved by the aforesaid orders, the Revenue is in appeal against the order of CIT(A) for asst. yr. 1980-81 while the assessee is in appeal against the order of CIT under s. 263.
10. The learned Senior Departmental Representative Mr. Hari Krishan vehemently opposed the order of the CIT(A) for asst. yr. 1980-81 by contending that no independent new unit came into existence in the asst. yr. 1980-81. He drew our attention to the fact that only one machine was installed in the die casting and forging section. According to him, it was installed in the old division and the production was not possible without depending on the old unit. He also pointed out that some other machines were installed in the old machine shop and the old tool room. There was no separate building for installing these machines. There was no separate power connection. The employees were common though number of employees increased considerably. There was no separate accounting system. The purchase of raw material was also common. In view of these facts, it could not be said that new industrial unit came into existence. Mere increase in the production is no ground for holding that new unit was formed. In support of his contention, he relied on the decisions of Kerala High Court in the case of Periyar Chemicals Ltd. vs. CIT (1997) 226 ITR 467 (Ker), in the case of CIT vs. Travancore Rayons Ltd. & Anr. (1987) 164 ITR 134 (Ker) and the decision of Karnataka High Court in the case of Canara Wire & Wire Products Ltd. vs. CIT (1992) 196 ITR 426 (Kar).
11. On the other hand, the learned counsel for the assessee Mr. Vora supported the order of CIT(A). It was contended by him that assessee wanted to increase the production by introducing the modern technology for manufacturing improved quality of pressure regulators which were to be supplied to Government undertakings. He drew our attention to p. 2 of the paper book to show that production of regulators considerably increased from 4.32 lakhs in asst. yr. 1979-80 to 9.66 lakhs in asst. yr. 1980-81 and 16.07 lakhs in asst. yr. 1982-83. He also drew our attention to the fact that number of employees increased from 446 to 681. He also drew our attention to various photographs of the machineries installed in various sections. He also referred to the layout of the factory to show that machinery was installed in a separate building. It was contended by him that in the course of the assessment proceedings for asst. yr. 1981-82, the AO had visited the factory premises of the assessee and found that machine was installed in the new premises. At this stage, the Bench wanted to know whether there was any report of the AO regarding the visit to the factory of the assessee. The learned counsel for the assessee was unable to point out any discussion about this fact. It was also submitted by him that article produced by the new machine was entirely different one from the old article and, therefore, the sales of such article was identifiable. In support of his contention, he relied on the decisions of the Supreme Court in the case of Textile Machinery Corpn. (supra) and in the case of Indian Aluminium Company (supra). He also referred to the decision of Bombay High Court in the case of ACC Ltd. (supra) for the proposition that claim of the assessee cannot be rejected merely on the ground that some facilities of the old unit were enjoyed.
12. In respect of appeal against the order of CIT under s. 263, it was contended by the learned counsel for the assessee that CIT could not legally assume jurisdiction under s. 263 inasmuch as there was no material on the record to show that order of the AO was erroneous. He drew our attention to the fact that at the time when the jurisdiction under s. 263 was assumed by the CIT, the order of CIT(A) for asst. yr. 1980-81 was in existence wherein the claim of the assessee had been claimed by holding that new industrial unit had come into existence. The AO had also considered on the relevant material which was produced before him and then, it was held by the AO that new unit had been come into existence. He, then, contended that issue whether the new unit was formed or not was merged in the order of CIT(A) for asst. yr. 1980-81 and therefore, this issue could not be considered again by the CIT invoking jurisdiction under s. 263. In this regard, he relied on decision of the Tribunal, Pune Bench in the case of Desai Bros. vs. Dy. CIT (1998) 61 TTJ (Pune) 527 : (1998) 66 ITD 203 (Pune), decision of the Bombay High Court in the case of CIT vs. Paul Bros. (1995) 216 ITR 548 (Bom), and the decision of Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. vs. CIT (1980) 123 ITR 669 (Guj). Regarding the issue of merger, he relied on the decision of Bombay High Court in the case of Ritz & Ltd. vs. Union of India (1990) 184 ITR 599 (Bom). He relied on the decision of Bombay High Court in the case of CIT vs. Gabriel India Ltd. (1993) 203 ITR 108 (Bom), for the proposition that jurisdiction under s. 263 cannot be invoked unless there is material on the record to hold that order of the AO was erroneous. In this regard, he also relied on the decision of Tribunal, Bombay Bench in the case of Jhulelal Land Dev. Corpn. vs. Dy. CIT (1996) 56 ITD 345 (Bom) and the decision of Delhi Bench in the case of Mannesmann Demag A.G. vs. Dy. CIT (1995) 53 ITD 533 (Del).
13. On the other hand, the learned Senior Departmental Representative has supported the order of CIT under s. 263 by submitting that it is not necessary that there must be new material for invoking the revisionary jurisdiction. Regarding the merger, it was submitted by him that merger was only for asst. yr. 1980-81 and therefore, it could not affect the subsequent years. It was also submitted by him that decision of this Bench in the case of Desai Bros. (supra) was not applicable to the facts of the case in as much as the dispute was still pending before the Tribunal.
14. Rival submissions of the parties have been considered carefully. First we shall take up the issue arising out of the appeal of the Revenue. The issue to be considered is whether a new unit came into existence in asst. yr. 1980-81, so that the assessee could claim deduction under s. 80J. The material placed before us has been considered carefully and on perusal of the same, the factual position emerges as under :
1. There is no material on the record to show that new forging machine was installed in a premises separate from the existing premises. The submission of Mr. Vora, learned counsel for the assessee, that AO verified this fact by visiting the factory premises cannot be accepted as there is no report of the AO in this regard. There is also no mention in the assessment order about the visit of the AO to the factory premises of the assessee. In the assessment order, it is mentioned by the AO that layout of the extended unit as well as the existing unit was given by the assessee. On the basis of such layout and other statistical figures furnished before him, he had allowed the claim of the assessee for asst. yr. 1981-82. But, that by itself, does not prove that machine was installed in a separate building. There is no submission by the assessee either before the AO or before the CIT(A) in the proceedings for asst. yr. 1980-81 to suggest that machinery was installed in a separate and distinct premises. On the contrary, the assessee in his letter dt. 11th January, 1984, to the ITO, Pune, has mentioned "under the expansion plan, one more new machine highly sophisticated and precision in the nature was purchased from M/s HMT Ltd. in the die-casting and forging section which had three times production capacity than the existing machine in terms of numbers". The above submission indicate that machine was installed in the existing die casting and forging section.
2. The other machines were also installed in asst. yr. 1980-81 in the existing tool room and machine shop as admitted by the counsel for the assessee, before us.
3. There was increase in the floor space to the extent of 254.64 sq. mtrs. in asst. yr. 1980-81 and 39.48 sq. mtrs. in asst. yr. 1981-82. Even prior to asst. yr. 1980-81 with which we are not concerned, there was increase in the floor space to the extent of 356.87 sq. mtrs. in asst. yr. 1979-80.
4. The capital employed in purchase of machineries was substantial i.e., Rs. 21,18,551, Rs. 14,20,970 and Rs. 19,35,100 in respect of asst. yrs. 1980-81 to 1982-83 respectively.
5. That electric connection for the existing as well as the new machines was common.
6. The number of employees increased considerably, but no specific employees were allotted the job on the new machines. The job was done by the common employees on the existing as well as new machines.
7. That there was no separate purchases of rawmaterials.
8. Articles produced by the new machine was different and identifiable.
9. That production increased considerably i.e., 4.32 lakhs regulators in asst. yr. 1979-80 to 9.66 lakhs in asst. yr. 1980-81 and 16.0 lakhs in asst. yr. 1982-83.
10. That there was common arrangement for the finance and accounts.
15. As far as legal position is concerned, it is settled by the decision of Supreme Court in the case of Textile Machinery Corporation vs. CIT (supra). The relevant portions of the observations of their Lordships which are necessary to dispose of this issue are set out as under :
"(i) Even if a new business is carried on by piercing the veil of the new business, it is found that there is employment of the assets of the old business, the benefit will not be available.
(ii) The true trust is not whether the new Industrial undertaking connotes expansion of the existing business of the assessee but whether it is of the same, a new and identifiable undertaking separate and distinct from the existing business there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is observed.
(iii) One thing is certain that the new undertaking must be an integrated unit by itself wherein articles are produced and atleast a minimum of 10 persons with the aid of power and an minimum of 20 persons without the aid of power have been employed."
16. If we apply the aforesaid legal position to the facts of the present case, then it is difficult for us to hold that separate and distinct undertaking was set up by the assessee. In the present case, there is no physically separate unit as there is no evidence on the records to show that new machines purchased by the assessee were installed in a physically separate building. Admittedly, the machines were installed in the existing premises of tool room and machine shop. The forging machine also appears to have been installed in the existing forging shop as there is no material to hold that the separate building was constructed for housing this machine. The only material available before us is the layout of the factory showing the construction of additional space. But, that by itself, does not prove that separate and distinct premises was constructed and new machines were installed in that premises. The submissions of the learned counsel for the assessee that AO visited the factory premises also is not borne out of record. Besides this, the production is dependent on the existing unit inasmuch as the machines were held with the aid of common electric connection and common employees. Moreover, the production of the new regulators were further processed by the machines installed in the existing tool room and machine shop. The raw materials purchased was also common. The accounting system and the financial arrangement were also common. In view of these facts, it cannot be said that there was emergence of separate and distinct unit. The circumstance that there was substantial employment of the capital and substantial increase in the production are not relevant because even if new machines are installed in the existing premises, these circumstances would be there. There is a distinction between expansion of business by installing machines in the old unit and expansion by installing of new machines in a physically separate and distinct industrial unit. It is only in the later case that benefit under s. 80J can be allowed. Since the present case is of the former category, the assessee is not entitled to the said deduction.
17. The contention of the learned counsel for the assessee that claim of the assessee under s. 80J should be allowed as facts of the present case are similar to the facts before the Supreme Court in the case of CIT vs. Indian Aluminium Co. Ltd. (supra) cannot be accepted. We find that full facts in the aforesaid case have been given in the judgment of the High Court reported as CIT vs. Indian Aluminium Co. Ltd. (1973) 88 ITR 257 (Cal). The facts of that case are reported at p. 271 of the report which for the benefits of our order are being reproduced as under :
"The facts of the present case, however, would show that there were substantial expansions to such an extent that the subsequent undertakings can be said to be virtually new industrial undertakings. Firstly, with respect to the subsequent establishment at Belur it appears that the capital employed exceeded Rs. 50 lakhs. It was established in six different buildings, the total accommodation of which is comprising an area of 27,560 sq. ft. It contained 12 different categories of machinery. The Government of India granted import licences and released foreign exchange in favour of the assessee at Belur. Similarly, at Alupuram the capital employed was more than Rs. 50 lakhs. Four separate buildings were constructed in an area of 21,360 sq. ft. Ten different categories of machinery were set up and used for which the Government of India granted import licences also and released foreign exchange. In the same way at Muri also we find that the new extension took place in three different buildings in an area of 19,000 sq. ft. with six different categories of machinery for which import licence was granted and foreign exchange were released by the Government of India."
From the facts stated above, it is very much clear that new units were established in various different buildings. Therefore, it cannot be said that facts of the present case are similar to the aforesaid case. This contention of the assessee is, therefore, rejected.
18. Much reliance was also placed by Mr. Vora on the judgment of Bombay High Court in the case of CIT vs. Associated Cement Cos. Ltd. (supra) for the proposition that claim of the assessee should not be disallowed merely because same facilities of the existing business were enjoyed by the new unit. In our opinion, that judgment does not help the assessee as we have come to the conclusion that there was no emergence of separate and distinct industrial unit. Even in the case before the Bombay High Court, four new kilns were commissioned at various places and there was material before the High Court in the form of certificate to the effect that the main auxiliary machineries such as crusher, raw-mill, coal mill, cement mill, compressors, transformers and quarry machines were installed together with the kiln. Therefore, there were independent units in that case. The Tribunal had observed that claim of the assessee could not be disallowed merely because that some old staff did the routine work in the new unit and some godown of those building of the old unit were available for the use of the products of the new units. This decision of the Tribunal was upheld by the High Court. In our view, that case is quite distinguishable on facts.
19. The view which we have taken is rather fortified by various decisions on which reliance was placed by the learned Departmental Representative. The first case is Periyar Chemicals Ltd. vs. CIT (supra). In this case, the Tribunal found that old and new units were housed in the same building, there was common pipeline, a common boiler house, common purchase of raw material and sale of finished product and nobody was assigned specific duty to any particular plant, deployment of workers was common to both the plants, common catering facilities and common workshop for both the units and there was common workshop for both the units and there was common licence and the electricity bill. On the basis of these facts, the Tribunal disallowed the claim of the assessee under s. 80J. The said decision of the Tribunal was affirmed by the High Court after following the decision of the Supreme Court in the case of Textile Machinery Corporation (supra).
20. The second case is Canara Wire & Wire Products Ltd. vs. CIT (supra). In this case, the assessee had installed a new transformer, a new furnace and a new motor in the existing factory premises which involved heavy investment. The licenced capacity increased from 5,000 to 6,200 MT per annum. The claim of the assessee was rejected by the AO as the assessee had not been able to establish that a new unit of manufacture was set up. This view was affirmed by the High Court after considering the Supreme Court decisions to which we have already referred.
21. The third decision is of Andhra Pradesh High Court in the case of Ashok Leyland Ltd. vs. CIT (1995) 83 Taxman 482 (AP). In this case, the assessee was manufacturer of iron castings. In view of the expansion programme, the assessee installed one additional furnace and two crucibles of the existing units thereby increasing capacity from 1,500 MT to 3,000 MT. The claim of the assessee under s. 80J was allowed by the AO. However, the CIT invoking jurisdiction under s. 263 held that expansion did not result in any new industrial undertaking. The Tribunal on physical inspection of the premises and material on record concluded that additions did not and could not result in any new independent separate industrial undertaking. On an application for reference under s. 256(2), the High Court following the decision of the Supreme Court in the case of Textile Machinery Corpn. (supra) hold that no question of law arose from the findings of the Tribunal.
22. In view of the above discussions, it is held that no new physically separate and distinct industrial undertaking came into existence in the asst. yr. 1980-81. Therefore, the CIT(A) was not justified in allowing the claim of the assessee. Consequently, we reverse the order of CIT(A) and restore the order of AO.
23. Now we will take up the appeals of the assessee against the common order of CIT under s. 263. The common question, arising out of these appeals whether the CIT validly assumed the jurisdiction under s. 263. It is well settled position of law that in order to assume jurisdiction under s. 263, the CIT must satisfy himself prima facie that the order of AO is erroneous and prejudicial to the interest of Revenue. Such satisfaction must be based on material on the record. The assumption of jurisdiction under s. 263 cannot be made in arbitrary manner or on the basis of suspicion and surmises. If there is no material on the record to satisfy him prima facie that aforesaid two conditions are present then, the provision of s. 263 cannot be invoked. This is what has been held by the Jurisdictional High Court in the case of Gabriel India Ltd. (supra). Therefore, in the present case, it has to be seen whether there was enough material to hold the belief prima facie that the order of the AO was erroneous and prejudicial to the interest of Revenue. An order of the AO can be said to be erroneous if it is passed not in accordance with the law or the conclusion of the AO is such which could not have been arrived at by a quasi-judicial authority on the basis of available material. Admittedly, the AO rejected the claim of the assessee under s. 80J in respect of asst. yr. 1980-81. Therefore, the AO could not have allowed such claim in subsequent years unless fresh materials were brought on record to show that earlier decision was wrong. We have gone through the material placed before the AO in the proceeding for asst. yr. 1981-82 and we do not find any new material except the layout of the factory. We have already discussed about this material and hold that this material itself cannot prove the emergence of new physically separate and distinct industrial unit. We have also observed that there was no material on the record to establish that AO visited the factory and verified the fact that new machines were installed in a separate and distinct premises. Therefore, in the absence of any fresh concrete material, the AO was not legally justified in departing from his earlier view rejecting the claim of the assessee. Therefore, in our opinion, the order of the AO was erroneous as well as prejudicial to the Revenue. Consequently, the CIT, validly assumed the jurisdiction under s. 263.
24. It had been contended by the learned counsel for the assessee that at the time of assuming jurisdiction under s. 263, there was in existence the order of CIT(A) allowing the claim of the assessee and, therefore, the issue which was merged in the order of CIT(A) could not be the subject-matter of revision. In our opinion, the law prohibits to revise only that order of the AO which was subject-matter of appeal. The order of AO for asst. yrs. 1981-82 to 1983-84 were never the subject-matter of the appeal. Hence, CIT could revise such orders within the ambit of the law.
25. We are also not inclined to agree with the learned counsel for the assessee that the issue is covered by the decision of this Bench in the case of Desai Bros. Ltd. vs. Dy. CIT (supra) and the decision of Bombay High Court in the case of CIT vs. Paul Bros. (supra). This Bench, in the case of Desai Bros. (supra) has held that once the issue is finally accepted in respect of a particular issue and parties have allowed that position to be sustained by not challenging the order, then such position could not be allowed to be changed in subsequent years. This view was taken after considering the decisions of Bombay High Court in the case of Paul Brothers (supra), and in the case of H. A. Shah & Co. vs. CIT/CEPT (1956) 30 ITR 618 (Bom) and in particular the decision of the Hon'ble Supreme Court in the case of Radhasomi Satsang vs. CIT (1992) 193 ITR 321 (SC). The relevant portion of the aforesaid decision of the Supreme Court on which reliance was placed by this Bench is set out as under :
"Strictly speaking, res judicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year, where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year."
In the case of Desai Bros. (supra), this Bench found that issue regarding setting up of new industrial undertaking became final in the earlier years and, therefore, it was held that said controversy could not be challenged in the subsequent years by CIT under s. 263. But, in the present case, the issue regarding the setting up of a new industrial undertaking had not become final as the Revenue had challenged the order of CIT(A) for asst. yr. 1980-81 before the Tribunal which we have now decided in favour of the Revenue. Therefore, it cannot be said that parties had allowed the position to be sustained by not challenging the order as held by the Supreme Court. Therefore, the said decision cannot be applied to the present case. For the similar reasons, it is held that decision of Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. vs. CIT, (supra), is distinguishable on facts.
26. According to the amended provision of s. 263, the CIT could assume the jurisdiction on the basis of material available before him. The fact that order of CIT(A) was subject-matter of further appeal before the Tribunal was very much available before the CIT and therefore, the CIT being representative of the Revenue was bound to consider the error committed by the AO without being influenced by the order of CIT(A). On facts, we have already held that there was no evidence to come to the conclusion that there was emergence of a new physically separate and distinct industrial undertaking. Consequently, the finding of the CIT that order of AO was erroneous and prejudicial to the interest of Revenue has to be accepted. Therefore, in our opinion, there is no infirmity in the order of CIT and the same is, therefore, upheld.
27. In the result, appeal of the Revenue for asst. yr. 1980-81 is allowed while the appeals of the assessee against the order of CIT under s. 263 are dismissed.