Income Tax Appellate Tribunal - Chennai
Superfine Embroideries Ltd., ... vs Department Of Income Tax on 31 May, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH, CHENNAI
BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER
I.T.A. No. 700/Mds/2010
Assessment Year : 2004-05
The Assistant Commissioner of M/s Superfine Embroideries Ltd.,
Income Tax, 592, Cross Cut Road,
Company Circle I(3), v. Coimbatore - 641 012.
Coimbatore.
PAN : AAECS7750A
(Appellant) (Respondent)
C.O. No. 100/Mds/2010
(in I.T.A. No. 700/Mds/2010)
Assessment Year : 2004-05
M/s Superfine Embroideries Ltd., The Assistant Commissioner
592, Cross Cut Road, of Income Tax,
Coimbatore - 641 012. v. Company Circle I(3),
Coimbatore.
(Cross-objector) (Respondent)
Revenue by : Shri Shaji P. Jacob, Addl. CIT
Assessee by : Shri T. Banusekar, CA
Date of Hearing : 31.05.2012
Date of Pronouncement : 15.06.2012
O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
These are appeal filed by the Revenue and cross-objection filed by the assessee, both directed against order dated 5.3.2010 of Commissioner of Income Tax (Appeals) -I, Coimbatore, for the impugned assessment year.
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2. Appeal of the Revenue is taken up first for disposal. Two effective grounds have been taken by the Revenue. First one questions the quashing of assessment by the CIT(Appeals) for a reason that the reopening was done merely on change of opinion and second one questions the order of CIT(Appeals) insofar as he ruled that assessee was entitled to claim deduction under Section 80-IB of Income-tax Act, 1961 (in short 'the Act').
3. First issue is taken up being a question of jurisdiction.
4. Short facts apropos are that assessee doing embroidery works and supplying embroidery garments on job work basis, filed its return for the impugned assessment year on 25.10.2004 declaring total income of ` 18,49,914/-. In the return, it seems assessee had claimed a deduction of ` 7,59,396/- under Section 80-IA of the Act and ` 2500/- under Section 80G of the Act. Thereafter assessment was completed after scrutiny on 16.5.2006 under Section 143(3) of the Act, accepting the returned income. Appended to the assessment order was an income- tax computation form wherein it was mentioned that deduction of ` 7,61,896/- was being allowed to the assessee under Chapter VI-A of the Act. Thereafter, on 9.7.2008, a notice was issued under Section 148 of the Act proposing a re-assessment. To such a notice, assessee filed a letter dated 10.9.2008, mentioning that there was no change to the 3 I.T.A. No. 700/Mds/2010 C.O. No. 100/Mds/2010 income as returned originally. During the course of re-assessment proceedings, A.O. required the assessee as to why it could be considered as manufacturing unit entitled for deduction under Section 80-IB of the Act. Reply of the assessee was that it was an industrial undertaking manufacturing embroidery material and doing job work of embroidery garments. As per the assessee, in the process, it had consumed embroidery thread, bobbin thread, applique cloth, etc. and these items were specifically mentioned in Schedule 15 of its audited accounts submitted alongwith the return. According to the assessee, it was engaged in schematic and organized activity of production by engaging labourers to produce the end product, namely, embroidered material which was something different from the raw material used. Hence, it was submitted that it was entitled for deduction under Section 80-IB of the Act. Reliance was placed on the decision of Hon'ble jurisdictional High Court in the case of CIT v. Taj Fire Works Industries (204 CTR 108). However, the A.O. was not impressed. According to him, assessee was not engaged in any manufacturing process. In the statutory audit report filed by the assessee, it was stated that assessee was doing embroidery work and commission work. The commission income of the assessee came to ` 1,43,11,850/-, whereas, embroidery and other income came to ` 2,00,63,914/-. As per the A.O., assessee was not producing any product like crackers with the help of raw material 4 I.T.A. No. 700/Mds/2010 C.O. No. 100/Mds/2010 but doing only embroidery work on sarees and other cloth received from other parties. The work done simply resulted in some value addition and the end product remained nothing but sarees with such value addition. He, therefore, refused to consider the assessee as eligible to claim deduction under Section 80-IB of the Act. Such deduction earlier allowed was disallowed in the re-assessment and the re-assessment was completed accordingly.
5. Assessee, in its appeal before CIT(Appeals) assailing the reopening, submitted that the allowance under Section 80-IB of the Act was a subject matter of rectificatory proceedings initiated prior to the scrutiny proceedings and therefore, the A.O. was seized of the issue of claim of deduction under Section 80-IB of the Act. Original assessment was completed duly considering the claim under Section 80-IB. Further, as per the assessee, there was no additional information which would warrant a reopening, but only a change of opinion on the part of the Assessing Officer. Assessee also brought to the notice of the CIT(Appeals) that Section 147 stood amended from 1.4.1989, but, still mere change of opinion was not sufficient for reopening, even when the reopening was done within a period of four years from the end of the relevant assessment year. Reliance was placed on the decision of Hon'ble Apex Court interest CIT v. Kelvinator of India Ltd. (320 ITR 561). CIT(Appeals) was appreciative of these contentions. According to him, 5 I.T.A. No. 700/Mds/2010 C.O. No. 100/Mds/2010 Assessing Officer had initiated the reopening only based on change of opinion. There were no tangible materials justifying such reopening. He, therefore, held that reopening done under Section 147 of the Act as bad in law.
6. Insofar as second issue, which is regarding nature of activity of the assessee, argument of the assessee before CIT(Appeals) was that it was manufacturing embroidered products and in such process, raw materials like, cloth and thread were converted into final products. As per the assessee, these items had no resemblance with the original material. Reliance was once again placed on the decision of Hon'ble jurisdictional High Court in the case of Taj Fire Works Industries (supra). Assessee also produced certain samples of embroidered products before the CIT(Appeals) in the course of appellate proceedings. CIT(Appeals) came to a conclusion that what assessee did was not a simple value addition, but, on the other hand, the end product was completely different from raw materials consumed. As per CIT(Appeals), assessee was producing embroidered products like badges, stickers, special designs, pictures of Lord Ganapathy, Lord Venkatachalpathy, natural scenery, etc. He, therefore, held that assessee could be deemed as engaged in a manufacturing activity and directed the A.O. to allow the claim of deduction under Section 80-IB of the Act. 6 I.T.A. No. 700/Mds/2010 C.O. No. 100/Mds/2010
7. Now before us, learned D.R., strongly assailing the order of CIT(Appeals), submitted that in the original assessment completed on 16.5.2006, there was no consideration whatsoever regarding claim of the assessee under Section 80-IB of the Act, or the nature of business in which assessee was engaged. Nothing was mentioned in the assessment order regarding the claim of assessee under Section 80-IB of the Act. Not even Section 80-IB was mentioned by A.O. anywhere in the assessment order. Therefore, the Assessing Officer had never applied his mind on this aspect during the course of original assessment proceedings. He simply presumed that assessee was eligible under Section 80-IB of the Act and proceeded accordingly. No details were submitted by the assessee during the course of original assessment proceedings. Unless there was an opinion formed, there cannot be a change of opinion. According to him, decision of Hon'ble Apex Court in the case of Kelvinator of India Ltd. (supra) relied on by the CIT(Appeals) was misplaced since the question there was whether a reopening could be done based on a change of opinion. No doubt, as per the learned D.R., it was held by Hon'ble Apex Court that reopening could not be on a change of opinion. But, here since there was no opinion formed by the Assessing Officer at the time of original assessment proceedings. Thus, it was not a question of change of opinion at all. It was a total non- application of mind. Assessee was also not saved by Explanation to Section 147 of the Act since the reopening was admittedly done within 7 I.T.A. No. 700/Mds/2010 C.O. No. 100/Mds/2010 four years from the end of the relevant assessment year. Therefore, according to him, the re-assessment was perfectly done. As per learned D.R., assessments for earlier years were done under Section 143(1) of the Act summarily, and therefore, these could not be considered as a binding precedence, so as to accord similar deduction in the subsequent years also.
8. Insofar as claim of the assessee that it was a manufacturing company, reliance was placed by the learned D.R. on the decision of Hon'ble jurisdictional High Court in the case of CIT v. Veena Textiles P. Ltd. (155 ITR 794). As per the learned D.R., it was clearly held by the Hon'ble jurisdictional High Court that embroidery work resulted only in value addition. The embroidered products were not different from original raw material, and the process undertaken by the assessee did not result in any new or distinguishable product different from the original raw material which were cloth and thread. Reliance was also placed on the decision of Hon'ble jurisdictional High Court in the case of CIT v. S.S.M. Furnishing Centre (155 ITR 791). For his contention that earlier year's summary assessment wherein deduction under Section 80-IB was given, would not act as precedent, reliance was placed on the decision of co-ordinate Bench of this Tribunal in the case of Tamilnadu Chlorates v. JCIT (98 ITD 1). As for the reliance placed by the CIT(Appeals) on the decision of Hon'ble jurisdictional High Court in the 8 I.T.A. No. 700/Mds/2010 C.O. No. 100/Mds/2010 case of Taj Fire Works Industries (supra), learned D.R. submitted that this was erroneously done, since there what the assessee was doing was mere job work and processing of various raw materials used resulted in a new product which was crackers. Here, the assessee's work was entirely different since it was not using various raw materials and producing anything new. What the assessee had done was only making certain value addition to the cloth by doing some embroidery work. Reliance was also placed on the decision of Special Bench of this Tribunal in the case of ACIT v. Mahindra Holidays & Resorts (India) Ltd. [3 ITR (Trib) 600] for arguing that where no enquiry was made by the Assessing Officer during the course of original proceedings, the rule regarding "change of opinion" would not apply.
9. Per contra, learned A.R., supporting the order of CIT(Appeals), submitted that admittedly the reopening was done within four years. The only question was whether such reopening was based on a change of opinion. Learned A.R. brought to our notice that a notice was issued by the Assessing Officer on 17.5.2005 under Section 154 of the Act, wherein it was proposed to rectify a mistake in the 143(1) intimation. Such mistake was stated to be non filing of Form No.10CCB in support of the claim of deduction under Section 80-IA of the Act. As per the learned A.R., the original assessment was done on 16.5.2006 and Assessing Officer having already issued a notice under Section 154 of 9 I.T.A. No. 700/Mds/2010 C.O. No. 100/Mds/2010 the Act, prior to the date of completion of assessment, it could not be stated that he was not aware of the claim of deduction under Section 80- IB. The only claim made by the assessee under Chapter VI-A was the claim of ` 7,59,396/- under Section 80-IB of the Act and a sum of ` 2500/- under Section 80G of the Act, totalling to ` 7,61,896/-. The computation statement signed by the Assessing Officer clearly mentioned that a claim of ` 7,61,896/- was being allowed under Chapter VI-A. When a rectification notice stood already issued under Section 154 of the Act on the claim under Section 80-IA, pointing out non-filing of the audit report, it could not be stated that Assessing Officer was not at all aware about such deduction claimed by the assessee under Section 80-I of the Act or had not applied mind in this regard. When deduction is claimed under Section 80-IB and such claim is clearly spelt out in the return filed and when such deduction, effectively resulted in reduction of the gross total income of the assessee, the Assessing Officer doing an assessment under Section 143(3) of the Act, will in the normal course surely apply his mind to such claim. Unless and until the claim was found to be correct, we cannot say that Assessing Officer would have given such deduction to the assessee. Here, the Assessing Officer had prima facie accepted the claim of the assessee that it was a manufacturing unit. Therefore, he accepted the claim in the original assessment. What was endeavoured through the re-assessment was to 10 I.T.A. No. 700/Mds/2010 C.O. No. 100/Mds/2010 take a different view on a change of opinion. Reliance was once again placed on the decision of Hon'ble Apex Court in the case of Kelvinator of India Ltd. (supra). Insofar as the issue regarding nature of business of the assessee was concerned, learned A.R. pointed out that judgment of Hon'ble jurisdictional High Court in the case of Veena Textiles P. Ltd. (supra) stood reversed by the decision of Hon'ble Apex Court in the case of S.S.M. Bros. (P) Ltd. & Ors. v. CIT (243 ITR 483). Learned A.R. also submitted that in the case of Veena Textiles P. Ltd. (supra), the issue was grant of development rebate and the Revenue had all along argued that assessee was not doing any manufacturing activity, for being eligible for such rebate. Though the Hon'ble jurisdictional High Court held that assessee was not doing manufacturing activity, Hon'ble Apex Court reversed such decision and held that the activity of the assessee was nothing but manufacturing and assessee was eligible for development rebate under Section 33 of the Act. According to him, process by which assessee was producing embroidered goods was manufacturing. Thread was the main raw material, cloth was being supplied by customers. Thread was cut and embroidered on the cloth and thread could not be recouped in its original shape from the final product. He, therefore, prayed that order of the CIT(Appeals) to be confirmed.
11 I.T.A. No. 700/Mds/2010C.O. No. 100/Mds/2010
10. Ad libitum, learned D.R. submitted that just because proceeding under Section 154 of the Act was dropped, it would not mean that a re- assessment under Section 147 of the Act could not be initiated. Reliance was placed on the decision of Hon'ble Apex Court in the case of Honda Siel Power Products Ltd. v. DCIT (340 ITR 64).
11. We have perused the orders and heard the rival submissions. First we will consider the issue whether reopening of assessment was mandated or not. There is no dispute that in the return of income filed, assessee had claimed deduction under Section 80-IB of the Act. There is also no dispute that such a deduction under Section 80-IB of the Act was allowed by the Assessing Officer in the original assessment dated 16.5.2006 without any discussion. Assessing Officer had accepted the claim and the amount has been mentioned clearly in the computation form signed by the Assessing Officer and appended to the original assessment order. As stated by the assessee, it had made two claims under Chapter VI-A of the Act. One was for deduction ` 7,59,396/- under Section 80-IB and the other was for deduction ` 2500/- under Section 80G. The total profits of the business against which the claim made was ` 25,31,319/- as it comes out of the Tax Computation Form appended to the assessment order. The claim for deduction under Section 80G was negligible, coming to ` 2500/- only. The body of assessment order is reproduced hereunder:-
12 I.T.A. No. 700/Mds/2010C.O. No. 100/Mds/2010
"In this case the assessee company has filed a return of income u/s 139(1) of the Income-tax Act, 1961 declaring total income of Rs.18,42,914/- on 25.10.2004. This case was selected for scrutiny and notice u/s 143(2) was served on the assessed. In response Shri N. Ravishankar, FCA appeared and the case was discussed with him.
After discussion, the assessment is completed as under:
Income from House property : Rs 73,290
Income from Business : Rs 17,71,924
Rs 18,45,214
Less: Deduction u/s 80G Rs 2,500
Total Income Rs 18,42,714
Income-tax thereon Rs 6,44,949
Surcharge @ 2.5% Rs 16,124
Rs 6,61,073
Less: TDS Rs 1,05,093
Rs 5,55,980
Less: AT Rs 8,00,000
Refundable Rs 2,44,020
Less: Intt u/s 234C Rs 10,583
Refundable............ Rs 2,33,437
Add: Intt u/s 244 Rs 16,338
Rs 2,49,775
Refund already granted Rs 2,49,775
Balance NIL
It is clear from the above that Assessing Officer had specifically allowed 80G claim of ` 2500/-, separately in the body of the assessment order itself. When viewed from this angle, can we say that Assessing Officer would have been oblivious of the claim of deduction under Section 80-IB of the Act, that too when the amount of such claim was ` 7,59,396/- which was, under any circumstances, substantial vis-à-vis its business profit of ` 25,31,319/-. That Assessing Officer had applied his mind 13 I.T.A. No. 700/Mds/2010 C.O. No. 100/Mds/2010 sofar as deduction of ` 2500 was concerned, but had not applied it on a claim of deduction of ` 7,59,396/- would, in our opinion, be hard to believe. Especially so, since prior to the completion of original assessment on 16.5.2006, there was a proceeding initiated under Section 154 on 17.5.2006. The mistake proposed to be rectified has been mentioned as under in such notice (paper-book page 3):-
Particulars of mistake proposed to be rectified Form No.10CCB for claiming Ch. VI-A deduction under Sec. 80IA is not filed (Amounting to Rs. 759396/-) Form No.10CCB is the audit report required to be submitted in support of a claim of deduction under Section 80-I(7)/80-IA(7)/80-IB/80-IC. So, the only conclusion that is possible is that when the Assessing Officer was doing the original assessment on 16.5.2006, he was very well aware about the claim of the assessee under Section 80-IB and also aware that Form No.10CCB required for claiming of such deduction was not yet filed by the assessee. On the face of such facts, it is difficult to believe that the Assessing Officer had not formed any opinion regarding the claim of Section 80-IB deduction when he was framing the original assessment. Opinion was certainly formed though not expressed. Hon'ble Delhi High Court in the case of CIT v. Kelvinator of India Ltd. (256 ITR 1) (which was upheld by Hon'ble Apex Court), had held as under at para 23 of its order:-14 I.T.A. No. 700/Mds/2010
C.O. No. 100/Mds/2010
"23. We also cannot accept submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded on analysis of the materials on the record by itself may justify the A.O. to initiate a proceeding under s. 147 of the Act.
The said submission is fallacious. An order of assessment can be passed either in terms of sub-s. (1) of s. 143 or sub-s. (3) of s. 143. When a regular order of assessment is passed in terms of the said sub-s. (3) of s. 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of cl. (e) of s. 114 of the Indian Evidence Act the judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the A.O. to reopen the proceeding without anything further, the same would amount to giving premium to an authority exercising quasi judicial function to take benefit of its own wrong."
12. As for the reliance placed by the learned D.R. on the decision of Hon'ble Delhi High Court in the case of Honda Siel Power Products Ltd. v. DCIT (2012) 340 ITR 53 (later affirmed by Hon'ble Apex Court in 340 ITR 64), there the rectification proceedings were initiated after the original assessment was completed and it was for this reason their Lordships held that re-opening could not be assailed citing such rectification proceeding as application of mind. Here, on the other hand, rectification was attempted prior to original assessment, and hence, in our opinion, that decision will not further the case of the Revenue in any manner.
13. In the circumstances as mentioned above, in our opinion, the "presumption" as given under Section 114 of Indian Evidence Act will come to the aid of the assessee.
15 I.T.A. No. 700/Mds/2010C.O. No. 100/Mds/2010
14. First effective ground taken by the Revenue thus stands dismissed.
15. Now coming to the aspect whether assessee was doing a manufacturing activity or not, it is an admitted position that assessee was doing embroidery work on cloth. The A.O. himself has given a finding that assessee was doing embroidery work on cloth received from other parties. As per the A.O., the end product was same as the original item given by the parties. Assessee definitely would have used different materials for doing the embroidery work. It is not as though thread alone would be sufficient to do embroidery work. To consider the embroidered work or product as the same as raw material, will, in our opinion, be incorrect. There is a processing which has been done on cloth when embroidery work is done. A common man will view the non- embroidered cloth, which is the raw material and embroidered cloth which is the final product, differently. It is not a question of simple value addition. Not only has the original raw material undergone a qualitative change but in the process a number of materials have been used. The process cannot be reversed to obtain the original material back. We cannot obtain the thread or other items used back in original shape. To think that cloth in the original form and shape could have been retrieved, is an error. Further, the CIT(Appeals) has given a finding that assessee was not doing embroidery work on cloth, but, was also producing 16 I.T.A. No. 700/Mds/2010 C.O. No. 100/Mds/2010 badges, stickers, special designs, etc. on which also embroidery was done. We are of the opinion that the end product could not be considered as mere value addition or original material. Learned D.R. strongly relied on the decision of Hon'ble jurisdictional High Court in Veena Textiles P. Ltd.'s case (supra). However, as pointed out by the learned A.R., this decision stood reversed by Hon'ble Apex Court in the case of S.S.M. Bros (P) Ltd. (supra). The said appeal before Hon'ble Apex Court arose from two civil appeals, namely, Civil Appeal Nos.931 of 1991 and 1775 of 1992. Civil Appeal No.1775 emanated from the decision of jurisdictional High Court in T.C. No.146 of 1979 reported as CIT v. Veena Textiles (P) Ltd. (155 ITR 794). The other appeal emanated from the second case relied on by the learned D.R., the question raised before the Hon'ble jurisdictional High Court was whether assessee purchasing cloth and doing embroidery designs with machinery, could be considered as manufacturer or producer of textiles. Hon'ble jurisdictional High Court held that assessee was not indulging in any manufacturing activity and therefore, not entitled for higher rate of development rebate under Section 33(1)(b)(B)(i) of the Act. But, Hon'ble Apex Court while reversing this judgment of Hon'ble jurisdictional High Court, held that what assessee was doing was a manufacturing activity and it was entitled for development rebate. In the face of this, we are of the opinion that the decision of Hon'ble Apex Court in the case of S.S.M. Bros (P) Ltd. (supra) comes to the aid of the assessee. Assessee was 17 I.T.A. No. 700/Mds/2010 C.O. No. 100/Mds/2010 indeed engaged in manufacturing activity and eligible for deduction under Section 80-IB of the Act.
16. We are, therefore, of the opinion that this appeal of the Revenue has no merits.
17. Coming to the cross-objection filed by the assessee, since the appeal filed by the Revenue is dismissed, cross-objection has become infructuous.
18. To summarize the result, both, appeal of the Revenue and cross- objection of the assessee, are dismissed.
The order was pronounced in the Court on Friday, the 15th of June, 2012, at Chennai.
sd/- sd/-
(Challa Nagendra Prasad) (Abraham P. George)
Judicial Member Accountant Member
Chennai,
Dated the 15th June, 2012.
Kri.
Copy to: Assessee/Assessing Officer/CIT(A)-I, Coimbatore/ CIT-I, Coimbatore/D.R./Guard file