Income Tax Appellate Tribunal - Bangalore
Mineral Enterprises Ltd.,, Bangalore vs Assessee on 30 March, 2009
ITA.527,645,493 & CO.40/B/09 Page - 1
IN THE INCOME-TAX APPELLATE TRIBUNAL
BANGALORE BENCH 'A'
BEFORE SHRI. K. P. T. THANGAL, VICE PRESIDENT
AND
SHRI. K. K. GUPTA, ACCOUNTANT MEMBER
1. I.T.A.Nos.527/Bang/2009
(Assessment year : 2005-06)
M/s. Mineral Enterprises Ltd.,
300/B, 16th Cross Sadashivnagar,
Bangalore .. Appellant
v.
Deputy Commissioner of Income tax,
Central Circle -1(1), Bangalore .. Respondent
2-3. I.T.A.Nos.645 & 493/Bang/2009
(Assessment year : 2005-06 & 2006-07)
(By the Revenue)
4. Cross objection No.40/Bang/2009
(In ITA No.493/Bang/2009)
(Assessment Year : 2006-07)
(By the Assessee)
Appellant by : Shri. K. P. Diwane/Shri.P. Tiwari.
Respondent by : Shri. Jason P. Boaz
ORDER
PER K. P. T. THANGAL, VICE PRESIDENT :
The assessee as well as revenue have filed appeal in respect of order passed by Commissioner of Income Tax (Appeals) dated 30/3/2009.ITA No.527/Bang/2009
2. In Ground No. 1(a) & (b) assessee has challenged the addition made by A.O. in respect of transport expenses at Rs.98,61,526/-. A.O. has discussed the addition at para 52 of the ITA.527,645,493 & CO.40/B/09 Page - 2 assessment order. A.O. has observed that assessee has not been able to reconcile the difference with the concerned concerns and it is found that assessee has shown excess amount at Rs.98,61,526/- in respect of five persons. The aforesaid addition has been upheld by Commissioner of Income Tax (Appeals) by dismissing the ground of appeal raised in the appeal of assessee.
3. Before us the learned counsel of assessee has submitted that addition made by A.O. is unjustified, unwarranted and bad in law. It is submitted that complete details of transportation expenses claimed in respect of above parties were submitted before A.O. and CIT(A). No defect or mistake is found in the same and therefore addition made by A.O. and upheld by CIT(A) is not justified. Confirmation filed by assessee indicates that such parties are assessed to tax and Permanent Account No. is provided in the confirmations. A.O. on same lines has made addition of Rs.2,42,.219/- for Mama & Co. in Asstt. Year 2004-05. The said addition is deleted by CIT(A) in appeal of assessee for Asstt. Year 2004-05. Revenue has accepted the said decision and no appeal is filed challenging the decision of CIT(A) in Asstt. Year 2004-05. CIT(A) having accepted same confirmation (P- 105) in Asstt. Year 2004-05 had no justification to not to accept the same in Asstt.
ITA.527,645,493 & CO.40/B/09 Page - 3 Year 2005-06. Regular books of accounts are maintained and audited statements are not rejected by A.O. All payments are made by account payee cheques. On all payments tax is deducted at source and deposited to the account of Central Government. Payments of transportation charges are to unrelated parties. Quantitative details of transaction are not disputed. It is submitted that no addition can be made on conjuncture and surmises. The difference was explained to be on account of TDS not considered by the parties and only net amount of cheque received by parties was considered and difference in recording of dates of bills issued by such parties. In any case after having submitted confirmation of parties there remain no discrepancy in the claim of transportation charges. In view of above it is submitted that addition made in the case of assessee be directed to be deleted.
4, The learned Departmental Representative has strongly relied upon the order of lower authorities. It is submitted that assessee has not been able to reconcile the difference and therefore the addition made by A.O. and upheld by CIT(A) was correct and there is no merit in ground of appeal of the assessee and same is therefore liable to be dismissed.
ITA.527,645,493 & CO.40/B/09 Page - 4
5. We have considered the rival submissions and perused the evidence on record. It is seen that assessee has submitted complete details in respect of transport expenses claimed in respect of parties discussed at para 52 of the assessment order. Our attention was invited to the written submission made before CIT(A) which is placed in paper book at page 97 to 106. The assessee has engaged services of various transporters for transportation of ore from mines to the production plant and further to the port. The payment to various transporters has been made by account payee cheques and tax has been deducted at source in respect of various transport charges paid by the assessee. A.O. has not disputed the genuineness of transaction with regard to above parties. The assessee has also submitted confirmation of transaction for financial year under consideration from the recipients of transportation charges. Confirmation indicates Permanent Account Number of the parties to whom said transport charges are paid. It is seen that in respect of M/s Mama Associates confirmation of transaction is placed at page 105 of the paper book. The aforesaid confirmation related to transaction for the assessment year 2004-05 and 2005-06. In the aforesaid confirmation in respect of assessment year 2004-05 there was tax deducted at source at Rs.2,42,219/-. The same A.O. has made addition of Rs.2,42,219/-
ITA.527,645,493 & CO.40/B/09 Page - 5 in respect of transport expenses relating to Mama Associates. The aforesaid addition has been deleted by CIT(A) vide his order dated 24/01/2008 in para 14 & 15 at page 12 for the assessment year 2004-05. The Revenue Authorities have accepted that decision and same has not been challenged in appeal. We find that there is no justification for not accepting the same confirmation for the assessment year 2005-06 when the very same confirmation has been accepted by Revenue in the A.Y. 2004-05. The assessee has maintained regular books of account and payment of transport charges have been paid by cheques. The assessee has by submitting confirmation from parties have explained the claim of transport charges as recorded in its books of account. A.O. and CIT(A) has not found any difference in claim of expenses and as confirmed by various parties to whom transport charges have been paid. It was explained before us that difference between amount as shown by assessee and as recorded by various transporters is on account of TDS not considered by aforesaid parties as well as difference in recording the date of bills issued by such parties. It is also seen that quantity of transported goods is not disputed by A.O. The Quantitative details are accepted by A.O. The payment of transport charges is not to related parties. We therefore hold that assessee has explained satisfactorily the claim of expenses of ITA.527,645,493 & CO.40/B/09 Page - 6 transport charges as claimed in the return of income. We therefore hold that addition made by A.O. and upheld by CIT(A) in respect of transport expenses of Rs.98,61,524/- is unjustified. We therefore direct to delete the addition made by A.O. at Rs.98,61,524/-. The grounds of appeal are allowed.
6. In Ground No. 1(c) assessee has challenged the addition made by A.O. and upheld by CIT(A) out of closing stock at Rs.13,50,126/-. The A.O. has discussed the addition at para 45 to 51 at page 17 to 19 of the assessment order. A.O. has referred to certain loose papers seized at the time of search. It was explained before A.O. that aforesaid figures are not correct as there was error in software package of computer by which quantitative details and the value were sought to be integrated by assessee. A.O. has accepted the contention of assessee that there was error in software package. A.O. however by taking quantitative figure in respect of transportation and traded items computed the total quantity of 87476 MT as unaccounted stock and made addition of Rs.8,54,64,296/- as unaccounted closing stock as on 31/3/2005. The CIT(A) after accepting explanation of assessee partly restricted the addition to Rs.13.50,126/-. The aforesaid addition sustained by CIT(A) is contested in appeal filed by assessee and addition deleted ITA.527,645,493 & CO.40/B/09 Page - 7 by CIT(A) is challenged in Ground No.9 of the appeal of revenue in ITA No.645/Bang/2009.
7. Before us the learned counsel of the assessee submitted that addition made by A.O. is unjustified , unwarranted and bad in law. It is submitted that the figures mentioned in the seized documents (P- 114) are observed at para 47 of assessment order. It was explained that figures stated are on account of error in software. The A.O. has examined the contention and accepted the contention of assessee that there is error in software package as observed at para 48 of assessment order. The A.O. however proceeded to take very same figures to determine unaccounted stock of 87476 MT and made addition at Rs.854.64 lacs which is reduced by CIT(A) to Rs.13.50 lacs. In written submission before A.O. the complete details of stock as on 31/3/2005 was explained. A.O. has not found any defect in the same. At the time of search itself assessee had explained the computer print outs to be error of Software package. In extensive search neither any evidence of unrecorded turnover was found nor any transaction was found not recorded in books of accounts. The perusal of assessment order does not indicate that A.O. has found any transactions outside the books of accounts. Same A.O. while completing the assessment for Asstt. Year 2006-
ITA.527,645,493 & CO.40/B/09 Page - 8 07 in the case of assessee has taken opening stock as shown in the books at Rs.525.65 lacs. This itself indicate that closing stock as on 31/3/2005 could not be more than Rs.525.65 lacs. It is submitted that addition as made by A.O. and sustained by CIT(A) is unjustified. In the case of assessee quantitative details of stock production and sales for Asstt. Year 2004-05 and Asstt. Year 2006-07 have been accepted without adverse observation. The papers which have been accepted by A.O. to be on account of error in Software Package cannot be valid basis for making any addition at the hands of assessee. No corroborative evidence was found in search or is brought on record by A.O. in the assessment proceedings to show that assessee was in possession of stock more than as found recorded in books of accounts. As on date of search no excess stock was found as is evident from the assessment order for Asstt. Year 2006-07. Banks have accepted the stock as shown in books of accounts. The quantity of purchase of goods was also transported and was already part of quantity transported. The A.O. has aggregated the quantity transported and purchased which has resulted in to taking the same quantity twice which has been deleted by CIT(A). The minor variation in quantity details was explained to be weighment difference which is less than .3% of total quantity is fair and reasonable. The genuineness of ITA.527,645,493 & CO.40/B/09 Page - 9 transportation charges paid is not in dispute. Payment of transportation charges are to unrelated parties. It is submitted that there is no case for making any addition at the hands of assessee by raising inferences and presumption.
8. The learned D.R. has submitted that addition made by A.O. was correct and is on he basis of documents found during the course of search. The learned D.R. placed strong reliance on the order of A.O. and submitted that there is no merit in appeal of assessee and also there is no justification for CIT(A) to grant reduction in value of addition on account of closing stock. In view of above it was prayed that appeal of the assessee seeking relief in addition sustained by CIT(A) be dismissed and that as per Ground No.9 of departmental appeal relief granted by CIT(A) be reversed and addition as made by A.O. be sustained.
9. We have considered the rival submission and perused the evidence on record. It is seen that certain loose papers were inventorised during the course of search and at the time of search assessee itself explained that figures found in loose paper are on account of error in software package to the Dy. Director of Investigation Wing by its communication dated 17th September 2005 which is placed in paper book at page 112 to 113. The ITA.527,645,493 & CO.40/B/09 Page - 10 assessee has explained that value as shown in stock summary is incorrect and same is on account of error in software of computer. Similar explanation was also made before A.O. and same has been accepted by A.O. as is evident from his observation at para 48 of the order. A.O. has observed that contention of assessee that error in software is acceptable. It is seen from loose paper that quantity observed at 3,48,488.390 MT and 19.369.40 MT is in respect of transportation of fines and iron ore as is evident on page 115 and 116 of the paper book. The quantity of 57442 MT and 29167 MT is in respect of Traded fines and Traded lumps as is evident on Page 118 and 119. The CIT(A) has found that quantity in respect of Traded goods are included in the quantity of transportation noted on page No. 115 & 116. The CIT(A) has accordingly reduced the aforesaid quantity from unaccounted stock computed by A.O. We do not find any reason to interfere with finding as recorded by CIT(A) in this respect as we are of the opinion that transported quantity as mentioned in assessment order can not be aggregated with further quantity of Traded fines and lumps for the purpose of computing the stock as on 31/03/2005. We also find from the communication dated 19/11/2007 addressed to A.O. and placed in paper book at page 107 to 111 wherein complete details of valuation of closing stock along with quantitative details has been ITA.527,645,493 & CO.40/B/09 Page - 11 submitted before A.O. No mistake omission or defect in closing stock quantity as reported in financial statement and in details submitted before A.O. is found. The learned D.R. has also not been able to controvert the above finding of CIT(A) and submission of counsel before us. As regard to quantity of 1321.60 MT for which addition has been sustained by CIT(A) it is seen that aforesaid quantity works out to .3% of the total quantity transported by assessee in the course of carrying on business. It was explained that transport charges are paid at the time of weighment made at loading stage and same has to be transported from production plant to port. The difference of weight of vehicle has to be taken at different weigh bridges. The Iron Ore being natural produce contains moisture and there is minor pilferage during the transit of the goods and considering the same total quantity difference of 1321 MT is negligible and normal. We find substantial force in submission as made before us. It is also seen that in the case of assessee an action u/s 132(1) has been taken place on 22/07/2005 and in the course of search no excess stock was found. The search of the assessee has not yielded any unrecorded transaction in respect of purchase and sale as is evident from assessment order for the A.Y. 2005-06 as well 2006-07 for which appeal is before us. It is also seen that regular assessment for the A.Y. 2006-07 has been ITA.527,645,493 & CO.40/B/09 Page - 12 completed on 31/12/2007 by same A.O. wherein opening stock has been taken at Rs.525.65 lacs. A.O. having been taken the opening stock as on 01/04/2005 at Rs,525.65 lacs could not have made addition for closing stock as on 31/03/2005.The assessee has maintained regular books of account and same are duly supported by quantitative details maintained and submitted along with return of income. A.O. has not found any mistake or defect in audited books of accounts maintained and quantitative details as search had no justification to make separate addition on account of closing stock at the hands of assessee. We find there is no evidence on record to show that assessee was having excess quantity of stock than as shown in books on 31/3/2005. In the absence of any evidence for excess stock on record no addition can be made for unexplained investment in stock. We therefore hold that addition as made at Rs.854.64 lacs is unjustified and unsustainable. In view of above ground of appeal of assessee stands allowed. The addition made by A.O. and sustained by CIT(A) AT Rs.13,50,126/- is hereby directed to be deleted. The ground of appeal is allowed. Consequently Ground No. 9 of the appeal of the revenue is dismissed..
ITA.527,645,493 & CO.40/B/09 Page - 13
10. In Ground No. 2 assessee has challenged the validity of assessment framed on various legal facets as described in grounds of appeal.
11. Before us learned counsel of assessee submitted that similar grounds were raised before CIT(A) wherein detailed written submissions were made which have been reproduced in appellate order. The counsel of the assessee has placed reliance and submitted that he has nothing more to add than what has been submitted in written submission reproduced in the order of CIT(A). It is submitted that in the facts of present case no opportunity was granted by Addl. CIT before granting approval as provided u/s 153D of Income tax Act, 1961 and in view of above order passed in the case of assessee is bad in law. Reliance for this is placed on 1994 TAX L.R. 468 in case of Kamala Properties vs. Inspecting ACIT (Cal.). The assessee was being assessed by DCIT, Company Circle-12(1) and subsequently case was transferred to DCIT, Central Circle-(1), Bangalore. Order of transfer was not communicated to assessee nor opportunity of heard was provided to assessee before transfer of case and thus order passed is bad in law.
ITA.527,645,493 & CO.40/B/09 Page - 14
12. The learned D.R. on the other hand submitted that in the facts of the present case the jurisdiction has been transferred from one A.O. in the city of Bangalore to that with another A.O. in the same city. The learned D.R. inviting our attention to provisions of section 127(3) of I.T. Act 1961 submitted that there is no necessity of granting opportunity assessee on transfer of case from one A.O. to another in the same city. It was submitted in view of clear mandate of provisions of section 127(3) of I.T. Act 1961 the contention of assessee as raised in grounds of appeal is not justified and grounds of appeal of assessee deserves to be dismissed. The learned D.R. also invited our attention to para 6 of the appellate order wherein CIT(A) has recorded a finding that record shows that Additional CIT has approved the assessment order on 31/12/2007 in compliance to terms of section 153D of I.T. Act 1961. It is submitted that in view of clear finding as noted by CIT(A) in his appellate order there is no merit in appeal of assessee and therefore ground as raised in memo of appeal be dismissed.
13. We have considered rival submissions and perused the evidence on record. It is seen that similar legal grounds were raised before CIT(A) and detailed submissions as made by assessee before CIT(A) are recorded in appellate order. We have perused ITA.527,645,493 & CO.40/B/09 Page - 15 the order of CIT(A) and find that all legal facets of the assessment framed have been deliberated upon in light of the decisions referred to in the appellate order. We are of the opinion that grounds of appeal as raised before CIT(A) have been correctly dismissed and does not call for any interference. In view of above we are of the opinion that there is no merit in grounds of appeal of assessee and same are liable to be dismissed. Ground No. 2 raised in memo of appeal is dismissed having no merit in the same.
14. The appeal is partly allowed.
ITA No.645/Bang/2009
15. In Ground No. 1 to 8 of appeal of Revenue the relief allowed by CIT(A) with regard to claim of deduction u/s 10B has been challenged. A.O. has given various reasons for not accepting the claim of assessee in respect of deduction u/s 10B of I.T. Act 1961 of its income from 100% EOU. The CIT(A) after examining the details and considering the submission of assessee has accepted the claim of assessee u/s 10B of I.T. Act 1961 and directed to allow the claim of assessee u/s 10B as claimed in the return of income.
ITA.527,645,493 & CO.40/B/09 Page - 16
16. The learned D.R. submitted that various ground as raised in memo of appeal can be summarised into three issues for making disallowance u/s 10B of I.T. Act 1961. He submitted that assessee is not engaged in manufacture and production of an article or thing in its EOU Unit and is therefore not eligible for benefit of deduction u/s 10B. It is submitted that on the basis of fact and evidence on record 100% EOU is not a new unit of assessee and it formed by splitting up or reconstruction of existing business and therefore assessee is not eligible for benefit of deduction u/s 10B of I.T. Act 1961. It is thus submitted that the requisite conditions for grant of deduction u/s 10B of I.T. Act 1961 are not satisfied in the case of assessee. The claim of deduction u/s 10B of I.T. Act 1961 has been rightly denied by A.O. in the case of assessee. It is submitted that assessee inflated the profit of 100% EOU Unit and suppressed the profit in Non-EOU unit of assessee. It is submitted that A.O. has made detailed discussion in the assessment order and has therefore computed the profit independently in respect of EOU Unit and NON EOU in the assessment order. The learned D.R. placed strong reliance on the discussion as made in the assessment order at page 3 to 17 to support various submission made hereinabove. It is submitted that CIT(A) has accepted the explanation of assessee and directed to grant exemption u/s 10B of ITA.527,645,493 & CO.40/B/09 Page - 17 I.T. Act 1961 without correctly taking into consideration the reasons indicated in assessment order. It is submitted that relief granted by CIT(A) is unjustified and unwarranted under the facts and circumstance in the case of assessee. It was prayed that addition as made by A.O. be restored and that order of CIT(A) granting relief be reversed.
17. The learned counsel of assessee on the other hand relied upon order of Commissioner of Income Tax (Appeals) and submitted that relief granted by CIT(A) is in accordance with law. It was submitted on all three issues assessee had satisfactorily explained before CIT(A) that these are no valid reason for denial of benefit allowable under section 10B as claimed. It is submitted that mining of iron ore is production of an article or thing. Reliance for this is placed on (i) 271 ITR 331 (S.C.) CIT vs. Sesa Goa Ltd., (ii) 225 ITR 60 (Kar.) CIT vs. Gogte Minerals (iii) 266 ITR 126 (Bom.) CIT vs. Sesa Goa Ltd. It is submitted that A.O. at para 40 page 15 of assessment order himself has observed that assessee is engaged in production of Iron Ore. In the above para observation of A.O. that production is shifted from MEL (NON EOU) to MEL (EOU) is factually incorrect and contrary to evidence on record. It is submitted that ITA.527,645,493 & CO.40/B/09 Page - 18 decision of Tara Agencies reported at 292 ITR 444 (SC) referred to at para 38 of assessment order is in respect of purchase of tea and its blending. It is on these facts it was held that blending is processing and not production as it was case of purchase of tea. The facts are distinguishable as in the present case it is winning of iron ore from earth and it amounts to production of an article or thing. The decision of Apex Court reported at 271 ITR 331 (SC) is directly on the issue as mining of Iron Ore was under consideration for allowability of deduction u/s 80I of Income Tax Act, 1961 language in Sec. 80I and Sec. 10B is identical. The decision of Tara Agencies is distinguishable on facts and is inapplicable to the facts in the case of assessee. The observation of A.O. that activity in custom bonded area clearly falls short of even processing let alone manufacture or production is unjustified. In the case of assessee approval of 100% EOU is for entire undertaking of mining and observation of A.O. thus are unjustified. The observation of A.O. at para 32 that operational cost is less than 1% is factually incorrect. The mining and other operative expenses are Rs.3656.75 lacs. As is evident from page 31 of paper book being Profit & Loss Account of 100% EOU. In view of above assessee is engaged in production of iron ore and thus condition prescribed u/s 10B(2)(i) stands satisfied in the case of assessee. As regard to ITA.527,645,493 & CO.40/B/09 Page - 19 issue that 100% EOU is not formed by splitting up or reconstruction of a business already in existence, it is submitted that 100% EOU is established in 2003 and is holding requisite approval from Government. EOU is set up under Special Economic Zone and copy of approval is submitted in paper book at page 94 to 96. It is set up by installing new Plant & Machinery of Rs.283.49 lacs and aggregate value of fixed assets of Rs.300.14 lacs as is evident from P- 33 of paper book being schedule of fixed assets in respect of 100% EOU. . It is operating new mines obtained at Red Hill area from Shri K.P. Poddar on lease. The EOU has not used any old Plant & Machinery owned by assessee as is evident from separate audited accounts of EOU and NON EOU. It is submitted that there is no bar of any employee earlier working in another unit of assessee to work with EOU. It cannot be termed as reconstruction of business. Reliance for this is placed on: 115 ITD 95 (Chennai). A.O. has assessed the income of business other than EOU and thus earlier business is not closed. It is not the case of A.O. that existing unit is bifurcated. In old business the turnover is Rs.275.36 crores and in earlier year it was Rs.124.15 crores as is evident from P- 7 being Profit & Loss Account of NON EOU. This clearly demonstrate that no activity of the existing business is diverted or bifurcated. The assessee is ITA.527,645,493 & CO.40/B/09 Page - 20 holding approval of 100% Export Oriented Unit by CSEZ itself proves that it is a new industrial undertaking. One arm of the Government having recognized unit as 100% EOU the revenue authorities cannot say that benefit of exemption is not available to the assessee. The A.O. has accepted the genuineness of the agreement of mining lease obtained from Shri K.P. Poddar and allowed mining expenses of Rs.25 lacs. This itself suggests that a new undertaking has come into existence. The schedule of fixed assets of EOU & NON EOU undertakings clearly demonstrates that no existing asset is used by new undertakings and thus there is no case for revenue that there is reconstruction of business already in existences. Observation of A.O. at Para 43 that same machinery is used for mining is not based on any evidence on record and is factually incorrect. The entire Plant & Machinery owned by EOU is at production centre. The work of excavating earth with iron deposits from mine and its transport is done by contractors with their equipment. Reliance is placed on (i) 129 CTR (SC) 265 Municipal Commissioner vs. Century Enka Ltd. (ii) 2008 (TIDL) 302 HC DEL CIT vs. Mahaan Foods Ltd., (iii) 108 ITR 367 (S.C.) Indian Aluminum Co. Ltd. vs. CIT, (iv) 137 ITR 851 (Del.) CIT vs. Hindustan General Industries Ltd., (v) 92 ITR 160 (Mad.) CIT vs. Ganga Sugar Corporation Ltd. (vi) 125 ITR 361 ITA.527,645,493 & CO.40/B/09 Page - 21 (All.) CIT vs. Modi Spinning & Manufacturing Mills Co. Ltd. for the proposition that 100% EOU is not formed by splitting up or reconstruction of existing business. In view of above submissions condition provided u/s 10B(2)(ii) of Income Tax Act, 1961 also stand satisfied. As regard to variation in profit in 100% EOU unit and NON EOU unit it is submitted that assessee company has maintained separate books of accounts for MEL (EOU) undertaking and other undertakings of the company. The books of accounts of each undertaking are audited by Chartered Accountants and no adverse observation is given by the auditors of the assessee company. The MEL (NON EOU) has not supplied any goods or services to MEL (EOU) undertaking as is evident from the Audited Profit & Loss Account of MEL (EOU) placed in paper book at P- 28 to P-41. In view of observation of A.O. to the above effect at Para 19 to 21 are factually incorrect. Infact A.O. has not spelt out of a single service or goods supplied from MEL (NON EOU) to MEL (EOU). It is submitted that provisions of sec.10B(7) are inapplicable in the facts in the case of assessee. In the absence of any service or goods having been supplied from MEL (NON EOU) to MEL (EOU), the condition precedent for application of provisions of sec. 10B(7) r.w.s. 80IA(8) of Income Tax Act, 1961 is absent and thus determination of profit u/s 10B independent of ITA.527,645,493 & CO.40/B/09 Page - 22 audited Profit & Loss Account is unjustified. It is submitted that A.O. has not pointed out single item of expenditure which according to him relates to MEL (EOU) which has been debited in the books of MEL (NON EOU). In the absence of any defect or mistake in the books of account so as to justify invocation of Sec. 145 of Income tax Act, 1961 the profit as shown in the audited statement of account of MEL (EOU) cannot be disturbed. A.O. at para 11 has observed variation in G.P. and N.P. ratio of EOU & NON EOU undertaking as per books. NON EOU undertaking is having large scale trading activity whereas EOU unit is purely manufacturing unit. As the undertakings are not doing similar activities the results in the manner A.O. has sought to compare at para 11 of assessment order is unjustified. It is settled view that only likes can be compared in terms of financial results. Our attention was invited to written submission before CIT(A) as reproduced at para 17 page 12 & 13 of appellate order which clearly demonstrates that purchase cost of material in NON EOU is 24.18% of turnover and in EOU unit it is 7.07%. Similarly mining and other operative expenses are 56.27% of turnover in NON EOU unit and 59.61% of turnover in EOU unit. It is submitted that this clearly dispels the doubt of A.O. that expenses of EOU unit are sought to be transferred to NON EOU unit. It is the gross profit ITA.527,645,493 & CO.40/B/09 Page - 23 being more in EOU unit being manufacturing unit the quantum of profit is better. Bifurcation of total profit by A.O. on the basis of turnover of EOU & NON EOU at para 22 is unjustified as activity in both unit is not alike and no defect in separate audited books of each unit is found by A.O. Working at para 22 is as per book profits and not as per computation of income at page 1 to 3 and this indicates non application of mind of A.O. and entire calculation made by A.O. is unjustified. Reliance is placed on (i) 103 TTJ (Bang.) 329 Digital Equipment India Ltd. vs. CIT (ii) ITA No.105/Nag/98 & C.O. No. 67/Nag/99 DCIT vs. Manilal Dayaji & Co. vide order dated 12/9/2001 that when separate book of accounts are maintained for eligible unit the profit should not be disturbed in the absence of any defect in the same. Reliance is placed on W/s before CIT(A) reproduced at page 14 & 15 to show that none of the items discussed by A.O. at para 12 are material to disturb the results of audited statements. Keyman Insurance Policy is made out considering the profit of earlier years which are essentially of NON EOU undertaking as EOU undertaking has commenced during the year under consideration. It is for this reason that Keyman Insurance premium is for NON EOU unit. Moreover on surrender or claim of Keyman Insurance policy the income would be assessable and would be of ITA.527,645,493 & CO.40/B/09 Page - 24 NON EOU unit only. The turnover of NON EOU has increased from 124.15 crores to 275.36 crores during the year under consideration which fully justified the premium paid for Keyman.. Business promotion expenses, advertisement expenses, retainer charge, traveling expenses and staff welfare expenses are incurred for NON EOU unit alone and are debited in its books of accounts. Details were submitted and no item of expenditure is found to be relating to EOU unit. The total investment in EOU is 19.17 crores and company has capital, reserves and surplus at more than the above sum as is evident from the balance sheet of the company. It is not the case of A.O. that any borrowed amount of NON EOU unit is utilized for investment in EOU unit. Secured loan borrowed for EOU unit is shown in EOU unit and finance charges are shown in the EOU books itself. In NON EOU the finance charges include Exchange rate difference of Rs.157.18 lacs (P- 14) which is specifically related to NON EOU transactions. Mines maintenance of Rs.451.01 lacs is not appearing separately in Profit & Loss Account MEL (NON EOU) but in fact A.O. has aggregated certain expenses out of mining expenses claimed in NON EOU unit at Rs.2183.05 lacs (P- 25). A.O. is factually incorrect that no such expenses are in EOU unit. Mining expenses under similar heads are incurred at Rs.758.81 lacs in EOU unit (P- 40). The difference ITA.527,645,493 & CO.40/B/09 Page - 25 is on account of fact that quantity of mining in value and tons in both the units is different. In NON EOU unit the following other incomes are also shown which would go to reduce the mining expenses (a) Excavation and screening income Rs.425.27 lacs., (b) Raising charges Rs.177.01 lacs & (c) Road repair & maintenance income - Rs.212.84 lacs. The A.O. has totally overlooked the above aspect. The genuineness of expenditure incurred is not disputed by A.O. Considering above facts the reasons of A.O. to disturb the financial results of EOU and NON EOU are not justified. According to A.O. the activity of custom area bonded alone shall be taken as 100% EOU. It is submitted that undertaking is recognized as 100% EOU. It is submitted that mine area contains earth which has iron deposits. The earth containing iron ore is excavated and is brought to plant for producing iron ore. The earth containing iron ore is not a tradeable commodity. It is iron ore which is produced by assessee is a new article or thing produced. At mine only earth is excavated and brought for production of iron ore at production plant. Custom bonded area is made only at the production centre for supervision of excise/custom duty for Central Government. In every Industrial Unit it is the production centre which is classified as bonded area. The mines from which iron ore is produced belongs to 100% EOU ITA.527,645,493 & CO.40/B/09 Page - 26 and this fact is not in dispute. The classification of the mines by A.O. as part of NON EOU is not justified as observed at Para 15 to 18 of assessment order. The mines and production plants are not separate businesses of assessee. The activity of mining and production of Iron Ore is one integrated activity. The conclusion that mining and production facility are two separate business is an act of hair splitting by A.O. and is not justified. In Iron Ore Industry the activity of mining comprises of excavating earth and processing it into iron ore at production plant. Observation of A.O. thus are not justified. Considering the various submission made hereinabove it is submitted that CIT(A) has correctly directed to allow exemption u/s 10B of Income Tax Act, 1961 as claimed. There is no merits in various grounds of appeal of revenue and same be dismissed.
18. We have considered the rival submission and perused the evidence on record. The brief facts in the case of assessee are that assessee has set up 100% EOU which is engaged in production of iron ore. The assessee has received approval of 100% EOU from the Government. The certificate of approval is placed in paper book at page 94 to 96 . First we shall take objection of A.O. that assessee is not engaged in manufacture or production of article or ITA.527,645,493 & CO.40/B/09 Page - 27 thing. It is seen that such dispute is no more res integra in view of the decision of Apex Court in the case of CIT vs Sesa Goa Ltd. reported at 271 ITR 331 (S.C.). Hon'ble Apex Court in the said case has held that extraction and processing of iron ore amounts to production. Hon'ble Apex court has upheld the decision of Hon'ble Bombay High Court in the case CIT vs Sesa Goa Ltd. reported at 266 ITR 126 (Bom.) wherein it is held that winning and extracting of ore amounts to production of an article or thing. The activity of assessee company is identical to that in the case of Sesa Goa Ltd. The ratio laid down by Hon'ble Apex Court in the case of Sesa Goa Ltd. squarely applies to the facts in the case of assessee. As regard to decision reported at 292 ITR 444 (S.C.) referred to by A.O. in para 38 it is seen that aforesaid case pertains to purchase of tea of various qualities which were blended to make diverse grades of tea. It was held that it does not amount to manufacture or production of an article or thing. In fact in the aforesaid decision it has been observed that tea is produced in the tea garden and this first stage is called production of tea. These observations thus support the case of assessee. In the facts of the present case iron ore is extracted from mines and thus the facts in the case of assessee are distinguishable from the facts of the case Tara Agencies referred to by A.O. in assessment order. In view of ITA.527,645,493 & CO.40/B/09 Page - 28 above we hold that CIT(A) has correctly held that assessee is engaged in business of manufacture or production of iron ore and therefore condition for grant of exemption u/s 10B(2)(i) of I.T. Act 1961 stand fulfilled by assessee. The denial of deduction u/s 10B by A.O. for the reason that assessee is not engaged in manufacture and production of articles or thing is thus held to be not justified. It is also seen that A.O. in para 40 of assessment order himself has observed that assessee is engaged in production of iron ore. In view of above A.O. was not justified in holding that there is no manufacture and production of article or thing in the case of assessee.
19. As regard to observation of A.O. that there is splitting up or reconstruction of existing business. We are of the opinion that CIT(A) has correctly accepted the contention of assessee that assessee has set up separate 100% EOU Unit and there is no case of splitting up or reconstruction of existing business. In the case of assessee separate books of accounts have been maintained in respect of 100% EOU and its Profit & Loss Account and Balance Sheet is placed in paper book at page 28 to 41. The perusal of audited statement would indicate that 100% EOU is set up by installing plant & machinery of Rs.283.29 lacs during the year ITA.527,645,493 & CO.40/B/09 Page - 29 under consideration. The 100% EOU is approved by Government and necessary approvals is placed in paper book at page 89 to 96. The perusal of audited statement would indicate that no plant & machinery in respect of other undertaking of the assessee has been used for the purpose of production at 100% EOU. In the course of search no incriminating evidence or any other material was found nor has been brought on record by A.O. during assessment proceedings to demonstrate that existing business of assessee has been reconstructed to set up 100% EOU . We also find that existing business of assessee which has been titled as Non-EOU unit has also increased substantially as compare to earlier year. Separate books of accounts are maintained in respect of NON EOU activities and audited statement in respect of such transaction are placed in paper book at page 4 to 27. The profit & loss account of NON EOU activity in the paper book indicate that turnover of assessee has registered increase from 124.15 crores in A.Y. 2004- 05 to Rs.275.36 crores in A.Y. 2005-06. It is not that any of the existing activity has been bifurcated to carry on separate business. 100% EOU has been set up by obtaining lease of mines from Shri K.P. Poddar as is evident from record. In the case CIT vs Ganga Sugar Ltd. Reported at 92 ITR 160 the Hon'ble Delhi High Court has held as under
ITA.527,645,493 & CO.40/B/09 Page - 30 "The important question which arises for determination is whether the industrial undertaking in question was formed by the reconstruction of business already in existence. In the reconstruction of a business, as in the reconstruction of a company, there is an element of transfer of assets and or some change, however partial or restricted it may be, of ownership of the assets. The transfer, however, need not be of all the assets. It is nonetheless imperative that there should be continuity and preservation of the old undertaking though in an altered form. The concept of reconstruction of business would not be attracted when a company which is already running one industrial unit sets up another industrial unit. The new industrial unit would not lose its separate and independent identity even though it has been set up by a company which is already running an industrial unit before the setting up of the new unit. The object of s. 15C is to provide an incentive for the setting up of new industries so as to accelerate the process of industrialization. It does not appear to have been the intention of the legislature, as envisaged by s. 15C, that the benefit of the said section would be confined to the industrial undertaking of those parties who had not already set up such undertakings in the past but would not be extended to parties who have past experience of running similar undertakings."
The aforesaid decision of Hon'ble Delhi High Court has been approved by Hon'ble apex court in the case of Textile Machinery ITA.527,645,493 & CO.40/B/09 Page - 31 Corporation Ltd. Vs CIT reported at 107 ITR 195. The ratio of the said decision squarely applies to the facts in the case of assessee.
19.1 We are of the opinion that ratio laid down by following authorities relied upon by counsel referred to in the submission of assessee fully supports the case of assessee (i) 129 CTR (SC) 265 in the case of Municipal Commissioner vs. Century Enka Ltd. ,
(ii) 2008 (TIDL) 302 HC DEL I T in the case of CIT vs. Mahaan Foods Ltd., (iii) 108 ITR 367 (S.C.) in the case of Indian Aluminum Co. Ltd. vs. CIT , (iv) 137 ITR 851 (Del.) in the case of CIT vs. Hindustan General Industries Ltd. , (v) 92 ITR 160 (Mad.) in the case of CIT vs. Ganga Sugar Corporation Ltd.,
(vi) 125 ITR 361 (All.) in the case of CIT vs. Modi Spinning & Manufacturing Mills Co. Ltd. Respectfully following the same we hold that 100% EOU is not formed by splitting up or reconstruction of business already in existence.
19.2 Considering the totality of facts and circumstance and evidences on record we are of the opinion that assessee has set up 100% EOU unit which is a new unit of the company and there is no case for revenue to hold that there is splitting up or reconstruction of business. In view of above denial of exemption u/s 10B of I.T. Act 1961 for the above reason by A.O. is held to be not justified.
ITA.527,645,493 & CO.40/B/09 Page - 32 We hold that assessee having set up a new unit which is 100% EOU there is no violation of condition as provided u/s 10B(2)(ii) of I.T. Act 1961. We hold that CIT(A) has correctly held that there is no splitting up or reconstruction or already existing business.
20. As regard to computation of income u/s 10B of I.T. Act 1961 A.O. has held that the assessee has inflated profits in respect of 100% EOU unit and suppressed the profit in NON EOU unit. A.O. has therefore bifurcated the income by aggregating the profit in respect of two business activities and divided the same on the basis of turnover of the respective unit. In the facts and evidence on record it is evident that assessee has maintained separate books of account in respect of both the activities i.e. 100% EOU and Non- EOU. The books of account of each undertaking are audited by Chartered Accountant and no adverse observation is given by the auditors of the company with regard to profitability of each undertakings separately. It is also evident from audited statement that MEL NON EOU has not supplied any goods or service to MEL EOU undertaking. The aforesaid contention made by counsel of assessee before us has not been controverted by learned D.R. by placing any evidence on record. In view of above observations of A.O. in the assessment order at para 19 to 21 are held to be ITA.527,645,493 & CO.40/B/09 Page - 33 factually incorrect. We also find from perusal of the assessment order that A.O. has not pointed out any one item of goods or services supplied from MEL NON EOU to MEL EOU. In view of above we hold that provisions of section 10B(7) r.w.s. 80IA(8) are inapplicable. In view of above we do not find any justification for determination of profit u/s 10B independent of Profit & Loss Account as submitted by assessee. We also find that A.O. has not found any defect or mistake in books of account so as to justify invocation of section 145 of I.T. Act 1961. In fact A.O. has accepted the books profit as shown in respect of EOU Profit & Loss Account as well as that of NON EOU . A.O. has aggregated the profit and turnover of both the undertakings and redetermined profit on the basis of turnover. A.O. has not disputed the turnover as well as the net profit as shown by assessee in respective undertakings. In the absence of any defect in books of account there was no justification for redetermination of profit of EOU undertaking in the ratio of turnover by aggregating the profit shown in respect of two undertakings. We also find that CIT(A) has considered submissions of appellant that activity in Non-EOU is largely trading whereas in the case of 100% EOU it is manufacturing and production of an article or things. It is settled proposition of law that comparison of financial result have to be of ITA.527,645,493 & CO.40/B/09 Page - 34 like business. In the facts of the present case we are of the opinion that activity of Non-EOU and 100% EOU is not alike and therefore comparison of financial result in terms of percentage as made by A.O. is not justified. It is seen that purchases in NON EOU constitutes 24.18% of turnover as against 7.07% in EOU. It is further seen that mining and other operative expenses are 56.2% of turnover in Non-EOU and 59.61% of turnover in EOU Unit. We find that mining and other operative expenses in 100% EOU are more than in Non EOU unit of the assessee. This clearly belies the apprehension of A.O. that expenditure of 100% EOU is suppressed by assessee in order to avail a larger claim u/s 10B of I.T. Act 1961. We also find that bifurcation of total profit by A.O. is as per book profit and not as per computation made under provisions of Act which is not justified. The decision of co-ordinate bench of ITAT, Bangalore Bench in the case of Digital Equipments Ltd. Vs CIT reported at 103 TTJ 329 fully supports the submission of assessee. In the said case income shown in separate books of account has been accepted for grant of deduction u/s 10A. Similarly ITAT Nagpur Bench Nagpur in the case of DCIT vs Manilal Dayaji Jain in ITA No. 105/Nag/98 vide order dated 12/09/2001 has held that there is no justification for allocation of head office expenses to income of new industrial undertaking for ITA.527,645,493 & CO.40/B/09 Page - 35 the purpose of grant of deduction u/s 80HH & 80IA of I.T. Act 1961. The ratio as laid down by the said decision squarely applies to the facts in the case of assessee. A.O. has not recorded any finding that any specific item of expenditure relating 100% EOU is recorded in books is of NON EOU. A.O. has however observed that certain expenses debited in MEL (NON EOU) are disproportionate as compared to expenses shown in 100% EOU books of account. The aforesaid observation of A.O. was explained in details before CIT(A) which has been reproduced in Appellate Order of CIT(A) at page 14 - 15 of the order. The detailed reasoning given before CIT(A) and submissions made before us and recorded in this order hereinabove clearly explains the reasons of incurring of expenditure debited in respective activities of NON EOU and EOU undertakings. The explanation given by assessee with regard to each expenditure hereinabove is fair and reasonable. We are of the opinion that there is no justification for disturbing the book profit as shown in audited statement. The business of 100% EOU is that of production of iron ore. The aforesaid activity comprise of extraction of earth from mine which after screening and other process is converted in iron ore at production plant of 100% EOU. The activity of production of iron ore is conducted at production plant. Prior to the activity in ITA.527,645,493 & CO.40/B/09 Page - 36 production plant the assessee merely excavate earth from mine field containing iron deposit. The excavation of earth to be brought in production plant can not be considered as separate business activity. In view of above various observation of A.O. that activity before production plant is a separate business is not acceptable and is unjustified. Mines from which earth containing iron deposit is excavated is taken on lease by 100% EOU unit as is evident from record. In view of above we find no infirmity in claim of deduction u/s 10B as made by assessee in his return of income which is duly certified by Chartered Accountant in his statutory report as provided under provisions of Act. Considering the totality of facts and circumstances in the case of assessee various observation made by A.O. at para 10 to 21 of the assessment order are held to be not justified. We therefore hold that there is no merit in submission of revenue with regard to bifurcation of profit in between 100% EOU and Non-EOU undertaking of the assessee. Considering the totality of facts and circumstances and evidence on record we are of the opinion that claim of assessee u/s 10B as made in return of income stand fully substantiated and we do not find any mistake in the same. CIT(A) has correctly granted relief as prayed in appeal before him and we do not find any reason to interfere in the relief provided by CIT(A) ITA.527,645,493 & CO.40/B/09 Page - 37 in his order. We do not find any justification or merit in ground of appeal of Revenue. In view of above ground of appeal of revenue are dismissed.
21. In Ground No. 9 of appeal of revenue the addition deleted on account of closing stock is under challenge. CIT(A) in his appellate order has granted partial relief in respect of addition made by A.O. on account of closing stock. The assessee has contested the addition sustained by CIT(A) in Ground 1(c) of Appeal No.527/Bang/2009. The disputed issue is same and submission of the counsel of assessee and revenue were identical to that in ground 1(c) of ITA No.527/Bang/2009 referred to hereinabove. We have discussed in details and held that there was no case of any addition to be made at the hands of assessee in respect of valuation of closing stock as on 31/03/2005 for the detailed reasons indicated at para 9 of this order. We do not find merit in ground of revenue and same is accordingly rejected. The ground of appeal of revenue is dismissed.
ITA No.493/Bang/2009 - Asstt. Year : 2006-07
22. Ground No.1 to 8 of the appeal of revenue are identical to that raised by revenue in Asstt. Year 2005-06 in ITA ITA.527,645,493 & CO.40/B/09 Page - 38 No.645/Bang/2009. The counsel of the assessee and revenue have adopted arguments as made by them for appeal of revenue for Asstt. Year 2005-06 in ITA No.645/Bang2009. The facts and circumstances in the case of assessee in Asstt. Year 2006-07 are identical to that in Asstt. Year 2005-06. The reasons of A.O. for making disallowance of deduction u/s 10B and deletion by CIT(A) are also identical. For the detailed reasons indicated in our order on Ground No.1 to 8 of appeal of revenue in Asstt. Year 2005-06 in ITA No.645/Bag/2009 we are of the opinion that there is no reason to interfere with the findings recorded by CIT(A). CIT (A) has correctly directed to grant deduction u/s 10B as claimed in the return. Considering the totality of facts and circumstances in the case of assessee we find no merit in the grounds of appeal of revenue.
23. The grounds of appeal of revenue is dismissed. C.O.40/Bang/2009 - By the assessee - Assessment Year.2006-07:
24. Similarly grounds raised in Cross Objection are identical to ground No.2 raised in appeal of assessee for Asstt. Year 2005-06 in ITA No.527/Bang/2009. For the detailed reasons given at para.13 there is no merit in the grounds of cross objection of assessee and same are dismissed.
ITA.527,645,493 & CO.40/B/09 Page - 39
25. In the result, assessee's appeal in ITA.527/B/09 is partly allowed, Revenue's appeals in ITA.493 and 645/B/09 are dismissed and the cross objection by the assessee is dismissed. Pronounced in the open court on 9.10.2009.
Sd/- Sd/-
(K. K. GUPTA) (K. P. T. THANGAL)
ACCOUNTANT MEMBER VICE PRESIDENT
Bangalore
Dated : 9th October, 2009
MCN*
Copy to:
1. The assessee
2. The Assessing Officer
3. The Commissioner of Income-tax
4. Commissioner of Income-tax(A)
5. DR
6. GF, ITAT, New Delhi
7. GF, ITAT, Bangalore