Income Tax Appellate Tribunal - Mumbai
Sunrise Metal Industries vs Income-Tax Officer on 21 November, 2002
Equivalent citations: [2004]89ITD406(MUM)
ORDER
Jaidev, A.M.
1. This appeal of the assessee is directed against CIT(A)'s order dated 22/1/2002.
2. The first ground of appeal is raised as under:-
"A) Disallowance of deduction Under Section 80IA of the Act - Rs. 1,29,86,160/-
1. The learned CIT(A) erred in sustaining the disallowance of deduction claimed Under Section 80IA of the Income Tax Act, 1961 without appreciating the fact that the appellant is engaged in the manufacturing of copper rods, segment section, wires, sheets, plates, etc. and has complied with all the provisions of the Section 80IA of the Act and hence, the provisions of the Section 80IA of the Act and hence, the deduction of Rs. 1,29,86,160/- is correctly claimed Under Section 80IA of the Act and may be allowed.
2. The learned CIT(A) failed to appreciate that entire income was derived from the industrial undertaking and that the manufacturing activity was done by the appellant and outside agencies for job work was mainly for hot rolling activities, which could not disentitle the appellant from claiming deduction Under Section 80IA and hence, the disallowance of deduction of Rs. 1,29,86,160/- Under Section 80IA of the Act may be deleted."
3. The assessee carries on the business of manufacturing copper rods, segment section, wires, flats sheets, profiles, earthing plates, DPC, DCC and copper components section, profiles as per the customers drawings and specifications. For the assessment year under appeal the assessee had claimed deduction Under Section 80IA amounting to Rs. 1,29,60,659/-. The AO observed that though the assessee had claimed to have carried out its own manufacturing activities, yet, on verification of the manufacturing/profit & loss account for the year of account it was seen that the assessee had paid labour charges of Rs. 2,734,771/- to various parties outside Daman. The AO further pointed out that the assessee had debited only Rs. 3,63,706/- as factory wages and Rs. 3,61,454/- as electricity charges to the manufacturing account as against labour charges of Rs. 27,34,771/- paid to outside parties. The assessee has explained that it is having a cold rolling mill in which manufacturing of copper rods, segment section, wires, flats sheets, profiles earthing plates etc. is done as per the customers drawings and specifications. The assessee had explained that its manufacturing activity consists of following processes-
i) Hot Rolling
ii) Pickling process
iii) Drawing in draw bench for different sizes
iv) Cold Rolling
v) Surface cleaning in Grinding Machines
vi) Annealing in Furnance
vii) Pickling It was pointed out that only hot rolling was done from outside agencies and the remaining stages of manufacturing activities were done in the assessee's own factory. It was further stated that after the above stages of manufacturing process, cutting, straighing and hardness testing is carried out. It was stated that only then the finished goods i.e. copper strips, pati flats, bus bars, rods, rounds, copper sections and other copper components become ready as per the orders of the customers. The AO observed that the activity done by the assessee would at most amount to processing and finishing and not manufacturing activity. To support his argument he AO pointed out that the assessee has spent more than Rs. 27 lakhs as labour charges for the hot rolling which was done through outside agencies, whereas in its own factory wages to the extent of only Rs. 3.63 lakhs were paid. The AO, therefore, disallowed the assessee's claim Under Section 80IA by observing that the assessee does not have manufacturing activities in its own factory but is only undertaking activities in the nature of processing/finishing. Being aggrieved, assessee carried the matter in appeal before the first appellate authority.
4. Before the CIT(A), the assessee pointed out that deduction Under Section 80IA has been denied only for the asstt. year under consideration and such deduction has been granted to the assessee during the earlier two years and also for the succeeding years. The ld.CIT(A) noted that the basic issue raised by the AO in the assessment order was that major expenditure has been incurred by the assessee by way of labour charges paid to outside parties and, on that basis, it was held that the assessee was not carrying out the manufacturing activities and hence was not eligible for deduction Under Section 80IA. Before the CIT(A) the assessee had relied upon the various documents/certificates, such as NOC of Pollution Control Committee, Daman, Excise Registration Certificate, SSI registration Certificate, Daman Sales tax & central Sales Tax Registration Certificates, Factory license issued by Chief Inspector of Factories, Daman, Power Sanction Letter, certificates of the Bombay Meal exchange Ltd. etc. The assessee also relied upon the judgment of Bombay High Court in the case of CIT v. Penwalt India Limited (196 ITR 813) wherein it was held that cutting machinery manufactured by somebody else under assessee's direct supervision and control entitles the assessee to the deduction Under Section 80I as the assessee can be said to be engaged in the manufacture of sugar and tea machinery. The assessee had also relied upon he decision of Ahmedabad Bench in the case of Rashron heavy Engg.(P) Ltd. v. TO 43 ITD 355 (Ahd) wherein the Learned Members have discussed the Board's Circular No. 347 dated 7/2/1982 which expressly lays down that for claiming deduction Under Section 801 it is not necessary that assessee should carry on the entire activities of manufacture and it is enough if such activities were carried on with the aid of other units under the supervision of the assessee. After considering the assessee's submissions, the ld.CIT(A) upheld the AO's order by observing as under= "After taking into account all the facts and circumstances of the case, though the assessee is found to be engaged in the manufacture of articles, it is apparent that substantial activities are being got done by the appellant from outside parties and the profits of the business declared by the appellant could not be said to have been derived from the business of manufacturing only."
5. The ld.counsel of the assessee adverted our attention to page 76 of the compilation wherein the assessment order passed Under Section 143(3) for the assessment year 1996-97 is available. It was shown from the order that deduction Under Section 80IA was duly allowed. Then the ld.counsel referred to circular No. 49/2001 dated 16th April 2001 by Bombay Metal Exchange limited and Circular No. 670/7/2001 dated 16th February 2001 of CBEC wherein it has been clarified that drawing of wire from wire rod amounts to manufacture (copies available at pages 72-73 of the paper book). The ld.counsel contended that copper wire bar was either imported by the assessee from Russia or from other countries or was brought from HCL and then given to outside parties for hot rolling. It was stated that hot rolled metal/pati is the raw material for the cold rolling mill of the assessee in Daman. The ld.counsel produced in the court samples of the material imported and given to hot rolling mills, samples of material produced by hot rolling mills and samples of the items manufactured by the assessee in the cold rolling hill in Daman. The ld.counsel explained that because of the assessee being a small scale industry and because of pollution control regulation in Daman, the assessee could not have carried on activity of hot rolling in Daman. It was stated that this was the reason that hot rolling had got to be done from the places outside Daman, viz. Valsad and Surat etc.. But the ld.counsel argued that the assessee exercised effective control and supervision over the job work done by outside agencies and thus it could ensure that the product coming out of Mills of outside agencies is of the same metal as was given to them. It was explained that, for instance, the assessee ensures that if it has given Russian Metal, the product received is also of Russian metal. The ld.counsel also adverted our attention to manufacturing/profit & loss account at page 11 of the paper book and it was shown that purchases amounting to Rs. 4,98,75,113/- debited therein represented raw material used in the assessee's cold rolling mill and amount of Rs. 27,34,771/- debited therein under the head 'labour charges paid' was for hot rolling activity which the assessee got done on job work basis from the outside parties. The ld.counsel then adverted our attention to page 44 of the paper book which gives the details of capital investments in land and buildings, plant and machinery, dies, electrical fittings and vehicles upto 31/3/98, the total capital investment comes to Rs. 38,75,350. Thus the case of the assessee is that the assessee had its own business of manufacturing in its own industrial undertaking in Daman and hence the assessee is entitled to deduction Under Section 80IA. The ld.counsel then adverted our attention to the manufacturing activity chart available at page 34 of the paper book and explained the activity carried on at each stage. The ld.counsel also adverted our attention to the note of Sh. K.P. Patiki Chartered Engineer available at page 49 of the paper book, relating to the manufacturing of copper bus bars/stripes. The ld.counsel also took us through the photos of the machinery available at pages 52-57 of the paper book. The ld.counsel then referred to page 62 of the paper book wherein there is a copy of the certificate of Asstt.Sales Tax Officer Daman certifying that assessee's activity is wholly manufacturing. The ld.counsel again pointed out that deduction Under Section 80IA has been allowed for all the succeeding years apart from allowing the same for the preceding two years. It was specifically pointed out that in the assessment year 1996-97 order allowing deduction Under Section 80IA was passed Under Section 143(3). The ld.counsel also referred to raw material purchase invoices available at pages 334-341 of the paper book and copy of the labour bill for hot rolling available at page 342 of the paper book. The ld.Counsel also relied upon the following decisions-
i) CIT v. Neo Pharma Pvt.Ltd. 137 ITR 879 (Bom)
ii) CIT v. Penwal India Ltd. 196 ITR 813 (Bom)
iii) Rashron Heavy Engg (P) Ltd. v. ITO 43 ITD 355 (Ahd) Further referring to the decision of Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. v. CIT 196 ITR 188 the ld.counsel contended that a provision in a taxing statute granting incentives for promoting growth and development should be construed liberally.
6. The ld.DR relied upon the order of the CIT(A) in which it has been stated that the assessee is a manufacturing concern carrying out manufacturing activity in its industrial undertaking at Daman. Thus, the Ld.DR conceded that the fact that assessee carries out manufacturing activity is not denied. The ld.DR contended that the only point to be considered is that when major activity of manufacturing is got done by the assessee from outside parties on job work basis,whether still it can be said that the assessee has carried out the manufacturing activity in its own unit. The ld.DR further contended that it was the intention of the legislature that new industrial undertakings located in a backward area which are carrying out the manufacturing activities are entitled to the incentives like deduction Under Section 80IA. Referring to page 5 of the assessment order ld.DR pointed out that almost 90% of the manufacturing activity was got done by the assessee from outside. Thus, according to the ld.DR, assessee is entitled to deduction Under Section 80IA. The ld.DR relied upon the following decisions-
i) CWT v. K. Lakshmi 142 ITR 656 (Mad)
ii) CIT v. V.O. Rama Lingam 216 ITR 566 (Mad)
iii) CIT v. A.N. Natarajan 234 ITR 363 (Mad)
iv) Textile Machinery Corpn.Ltd. 107 ITR 195 (SC)
v) CIT v. Orient Paper Mills Ltd. 176 ITR 110 (SC) With regard to the decisions relied upon by the ld.counsel of the assessee,the ld.DR submitted that the assessee could not have effectively supervised the hot rolling activity got done on job work basis as the job work was done by more than 10 concerns. The ld.DR again emphasized that deduction Under Section 80IA is intended to be given in a specified area for generation of employment. Hence according to the ld.DR, the factories of the concerns doing hot rolling activities should have been located in the backward area (i.e.Daman) and this being not the case in the instant case, deduction Under Section 80IA is not admissible to the assessee.
7. In his reply, the ld.counsel of the assessee contended that the judgments relied upon by the ld.DR are either distinguishable in facts or they in fact favour the case of the assessee. In this regard the ld.counsel contended that in the decision of Bombay High Court in the case of Penwalt India Ltd.(supra) relied upon by the assessee, the decision of Madras High Court in the case of CWT v. K. Lakshmi (supra) relied upon by the ld.DR has been referred. By reading the relevant extracts from the decision of Madras High Court in the case of K. Lakshmi (supra), the ld.counsel contended that this decision favour the case of the assessee in principle as it has been held that it is not necessary that every process upto the receipt of the end product should have been carried on by the assessee himself. The ld.counsel further contended that similarly the other judgments of the Madras High Court which were delivered in wealth tax cases and are relied upon by the ld.DR, help the case of assessee in principle. The ld.counsel further contended that the hot rolling activity was done by the outside agencies under the control and supervision of the assessee. It was stated that big orders were given to big companies and small orders were given to smaller companies which itself establishes that the assessee exercised effective supervision. The ld.counsel further contended that hot rolling mills could not have been located in Daman area because of pollution control regulations and hence assessee was left with no alternative but to get the hot rolling activities done from the outside agencies. The ld.counsel again emphasized that assessee's capital investment in the industrial undertaking in Daman amounted to Rs. 38.75 lakhs which included investment of Rs. 16.09 lakhs on plant and machinery. By referring to page 61 of the paper book the ld.counsel referred to the letter dated 13/3/96 of the government of Daman & Diu Department of Industries, in which permission was given to the assessee to manufacture various items including paper covered/ fiberglass/ cotton covered copper strips & wire copper tubes and pipes copper sections and profiles.
8. We have given a careful consideration to the rival submissions in the light of the material placed before us. The ld.CIT(A) has accepted that the assessee is engaged in the manufacture of articles but still he has denied the deduction Under Section 80IA on the ground that substantial activities were got done by the assessee from outside parties. It has been held by the Hon'ble Bombay High Court in the case of Penwalt India Ltd. (supra) that the assessee would be said to be engaged in the manufacturing activities if he is doing a part of the manufacturing activity by himself and, fr the rest of it, engages the services of somebody else on a contract other than a contract of purchase. Similarly, it has been held by the Bombay High Court in the case of Neo Pharma Pvt. Ltd. (supra) that where for the part of the manufacturing activity which is got done by the assessee by outside agencies, the accounts are kept by such agencies of all materials supplied by assessee and consumed in manufacture, risk for the entire manufacturing operation is undertaken by the assessee, products are manufactured at assessee's cost and were its properties, the operation amounts to manufacturing the products by the assessee and the assessee is an industrial company entitled to concessional rate of tax. It is also true that in 196 ITR 813 (Bom), which is relied upon by the ld.counsel of the assessee, reference has been made to 142 ITR 656 (Mad) which is relied upon by the ld.DR. After going through the relevant judgments, we are inclined to accept the argument of the ld.counsel of the assessee that even the judgments of Madras High Court assist the case of the assessee in principle. Moreover, we find that judgments of jurisdictional High Court relied upon by the ld.counsel of the assessment are the direct judgments on the point at issue. It is undisputed that assessee, as observed by the ld.CIT(A), is engaged in the manufacturing of articles. Simply because the hot rolling activity was done from the outside parties, we are of the opinion that the assessee cannot be denied the deduction Under Section 80IA particularly when the done under the direct supervision and control of the assessee and at the risk of the assessee. By exercising effective supervision, the assessee could ensure that the product coming out of the Mills/factories of outside agencies is of the same metal as was given to them for carrying out hot-rolling activity. For instance assessee ensures that if it has given Russian metal, the product received is also Russian metal. We, therefore, hold that it can be said that assessee is engaged in the manufacture of copper rods, segment section, wires, sheets, plates etc. and hence deduction Under Section 80IA is admissible to the assessee The order of the CIT(A) is, therefore, reversed on this issue and the AO is directed to allow deduction Under Section 80IA to the assessee. The appeal of the assessee succeeds on this issue.
9. The second ground of appeal pertains to CIT(A)'s action in sustaining the levy of interest under Sections 234B and 234C. The ld.counsel of the assessee accepted that this ground of appeal is not required to be argued separately and is only consequential in nature. After giving relief to the assessee as per first ground of appeal, the AO is directed to recalculate the interest leviable, if any, under Sections 234B/234C.
10. In the result, appeal of the assessee stands allowed.