Income Tax Appellate Tribunal - Chennai
Leo Fasteners, Pondicherry vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
CHENNAI BENCH 'B' : CHENNAI
[BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER
AND SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER]
I.T.A.Nos.171, 172, 749 & 750/Mds/2010
Assessment years : 2004-05,2005-06, 2006-07 & 2007-08
M/s Leo Fasteners vs The ACIT
A-27A, Industrial Estate Circle I
Thattanchavady Pondicherry
Pondicherry - 9
[PAN - AABFL0652 J]
(Appellant) (Respondent)
I.T.A.Nos.1083 & 1084/Mds/2010
Assessment years : 2006-07 & 2007-08
The ACIT vs M/s Leo Fastners
Circle I Pondicherry - 9
Pondicherry
(Appellant) (Respondent)
Assessee by : Smt Pushya Sitaraman(Sr.Counsel),
Ms.G.Vardini & J. Sree Vidya
Department by : Shri S.Senthamaraikannan, CIT-DR
ORDER
PER BENCH:
This is a bunch of six appeals. The assessee is in appeal for assessment years 2004-05, 2005-06, 2006-07 and 2007-08 whereas the Revenue is in appeal for assessment years 2006-07 and 2007-08 :- 2 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 only. In all these appeals, to a greater extent, identical issues are involved, therefore, for the sake of brevity and convenience, we proceed to decide them by a common order.
2. The facts pertaining to assessment year 2004-05 will give a profile of common facts for all the years. The assessee, M/s Leo Fasteners, is a partnership firm which is engaged in the business of making "High Tensile Precision Fasteners", which are used in automobile industry. This firm is also generating power from wind mills. For assessment year 2004-05, the assessee-firm filed return of income on 30.10.2004 admitting taxable income of ` 1,78,28,968/-. This income was arrived at after claiming sums of ` 1,92,84,795/- and ` 1,54,08,808/- as deduction u/s 80IB of the Income-tax Act, 1961 (hereinafter referred to as 'the Act' for short) in respect of the profits allegedly derived by the firm from two units viz. Unit-I and Unit-II . Action u/s 133A of the Act was undertaken in the group of cases of the assessee on 18.11.2004 and 19.11.2004. After survey, the assessee filed a revised return of income on 14.12.2004 offering additional income of ` 12,91,000/- on account of scrap sales which was found outside the books of account. In survey operation, various incriminating papers and documents were also found which were impounded. Statements of the partners were also recorded. The main :- 3 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 partners of this group of concerns are Shri L.M Shah and his son Shri A.L.Shah. They two have formed the following group entities:
• M/s Fastenex Pvt. Ltd • M/s Formex • M/s Leo Fasteners • M/s Brightenex Pvt. Ltd • M/s Toolex Pvt. Ltd • M/s Auro Engineering The above entities do the following processes:
Done by
(a) Wire rod pickling and
phosphating M/s. Brightnex
(b) Wire drawing -do-
(c) Nut forging using
" nut formers" M/s.Fastnex, M/s Formex I
& M/s.Leo Fastners
(d) Nut tapping do
(e) Plating M/s. Brightnex
The tools and dies required in the operations at (c) and (d) above are shown to have been supplied/ services rendered by M/s.Toolex Pvt.
Ltd. In addition to the above, some secondary operations like cap cutting, curling and drilling are also performed in the case of certain types of nuts by the group concerns namely FX, FOX and LFA
3. During the year under consideration, one unit known as Unit-II of the assessee-firm was also set up. On the basis of various documents found during survey operations, the Assessing Officer has concluded as under:
:- 4 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 During the year under consideration, as mentioned earlier, so called Unit-II of the assessee firm has also been set up. The total sales of nuts reflected in the Profit and loss account is ` 32,23,67,821/- and profit generated before depreciation is ` 12,69,34,916/- giving the overall profit margin at 39.37% on nut manufacture. As regards the raw materials consumed it is only about ` 4.50 crores. The secret behind these numbers is that service charges are paid and forged nuts are purchased from the sister concerns namely, FX and FOX. As regards stages (a),
(b) & (e) of the manufacturing process mentioned above, service charges are paid to M/s. Brightenex. Now the only stage which remains to be completed is the process of tapping of the nuts The tapping capacity has been created in LFA and subsequently in LFA Unit-II by manipulating and transferring the preexisting tapping machines of the group This is done by using the conduit of M/s.Toolex, another sister concern. It is seen that the Plant & Machinery (Tapping Machines) of M/s.FX/FOX have been transferred to LFA using the conduit of another sister concern - M/s Toolex during the years 1998-99 and 2003-04."
4. After mentioning various annexures found during survey, the Assessing Officer has come to the following conclusion:
"(i) All the Units namely FX, FOX, LFA, Toolex and Brightnex are situated adjacent to one another in the Industrial Estate at Thattanchavady Eventhough, the numbers of the blocks could be different, if a wall is to be built around all of these Units, they are enclosed together without any outsiders being included. Mr. AK. Shah, the finance Manager had also stated that they are all located in one compound.
.
(ii) As stated by Sri A.K.Shah, the Finance Manager, in his sworn statement, books of accounts of all the concerns are kept in A-25, Indl.Estate which is in the name of M/s.Fastenex. Mr.A.K.Shah, is the supervisor of Accounts of all the concerns and books of accounts are maintained by him. In fact the impounded materials also contain cash books with day to day entries of cash balances of all the concerns on a single page.
(iii) All the concerns are involved in the same business and are interrelated in the manufacturing process of nuts. As mentioned previously, M/s.Fastnex, M/s.FOX have been :- 5 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 manufacturers of nuts and had already availed of the tax benefits u/s.80lA They are now being shown as job workers for production of nut blanks from the wire rod. As regards Brightnex and Toolex, they are also part of the manufacturing process of nuts. M/s.Brightnex provides pickling/phosphating and plating services. M/s.Toolex provide services towards tools and dies. Therefore, the Shah Group has been shifting profits from one concern to another on the basis of mere book entries. Therefore, it is clear that LFA is not an independent production unit.
(iv) During the course of survey, it was found that the cash balance of all the concerns was mixed up and together.
The books of account were also not written for the past two months prior to the date of survey.
(v) The Survey team found that the 'net working computer systems' was being used by all the concerns, although it was in the name of M/s. Fastenex and the expenditure was being debited to its account. When asked whether the other concerns are paying any compensation for use of facility of M/is. Fastenex, Mr. AK. Shah, Finance Manager stated that it is a 'resource which in practice is commonly shared often by companies who are sister concerns. No compensation is paid. "
5. After discussing the various facts and referring to various decisions on this subject, he has finally denied claim of deduction made u/s 80IB of the Act and has computed the total taxable income at `5,40,88,931/-. Aggrieved, the assessee preferred appeal before the ld. CIT(A), who has dealt with the issue at length and reversed the finding of the Assessing Officer by holding that the profits of the firm would qualify for deduction u/s 80IB of the Act @ 25% only in respect of both the units put together.
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ITA 171, 172,749 & 750/10 1083 & 1084/10
6. Now, the assessee is aggrieved and has challenged the finding of the ld. CIT(A). On the direction of the Bench, concise grounds as per rules have been filed. The main grounds raised before us for this year are that the assessee is entitled to deduction @ 100% with respect to Unit-II and that Unit-II is not a part of Unit-I. On the contrary, the case of the Revenue is that the so called Unit-II is not a new industrial undertaking situated in notified industrially backward area but it is formed by splitting up/reconstructing the already existing business, and at best can be treated as the extension of the existing unit.
7. We have carefully circumspected the entire record available before us including the paper books, loose summary papers and cases relied on by the parties. We have also carefully perused the orders of Assessing Officer and of the ld. CIT(A) and have tried to carefully understand, with the help of oral submissions of the parties, the factual position of this case. We have analyzed the contention of the assessee as put forth, through its representative that the alleged new unit, known as 'Unit-II', is a distinct and separate unit. It was agreed that it has established by utilizing fresh capital introduced by the partners or through borrowings. The other arguments advanced are that entirely new labour force has been employed for the purpose of :- 7 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 conducting business in Unit-II, that the necessary activities relating to manufacture viz., nut forging, nut-tapping etc. are being performed by this unit only. The manufacturing is being done with the use of power and more than 10 persons have been employed in this unit which has not been formed by splitting up or by reconstructing of a business already in existence i.e Unit-I. It was categorically stated that the new unit is not the extension of the old unit. It was further contended that use of the machinery and the value of the machinery when found to be in order, depreciation claimed thereon has also been allowed. In so far as getting a part of the activity done through job workers, it was submitted that there is no such legal bar as the work done on job work basis is not an important part of the manufacturing activity of Unit-II.
In nut shell, the sum and substance of the submission of the ld.AR is that all the conditions specified in section 80IB of the Act stand fulfilled which entitle it to the impugned deduction. Per contra, it was argued by the ld.DR that on the basis of material gathered during the survey operations, the Assessing Officer has come to a definite conclusion that assessee-firm is not entitled to any deduction u/s 80IB in respect of profits of both the units i.e Unit-I and Unit-II for the following reasons:
:- 8 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 "i) M/s. Leo Fasteners had carried on certain processes partially in order to bring out the finished product, "nuts"
called "fasteners" and such activities carried on by the firm formed only a small part of the entire manufacturing process. So, the processes carried out by the firm being intermediary in nature, it had not actually produced the end product, 'nut' and therefore, its profits were not eligible for any deduction U/S 80-IB.
ii) It was found from the materials gathered during the course of survey that the firm had received on transfer certain machinery items belonging to its sister concerns with which it was performing 'tapping' and 'cap-cutting' operations only by arranging the machinery of other concerns.
iii) He had also observed that there had been shifting of profits amongst the group concerns and between the two units as well in order to avail deduction u/s 80-IB at higher rates.
iv) It was held that the conditions laid down in sec.80-IB(2)(i) and (ii) were not fulfilled.
v) Provisions ofsec.80-IB (13) r.w.S 80-IA (10) were also invoked.
vi) It was held that the firm had employed colourable devices/arrangement with the sole intention of misusing the incentive deductions granted by the Act."
8. On the basis of above the Assessing Officer has disallowed the claim of deduction u/s 80IB for both the units. In respect of Unit-I, the assessee has claimed deduction u/s 80IB for assessment year 2004-05 @ 25% of the profits whereas in respect of Unit-II, it has claimed deduction @ 100% of its profits. The Assessing Officer has denied both the claims of the assessee, in toto, by giving a finding that there was no manufacturing activity carried on by either of these units. The above finding is based on incriminating documents found during :- 9 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 survey indicating that there were transfer of second hand machinery items from the other concerns of the group to Unit-I and Unit-II and there were also inter-unit transactions not only by way of transfer of machinery but also by way of sales and purchases of 'nut blanks'. It was found by the Assessing Officer that various group concerns did different activities and if the activities done by Unit-I and Unit-II are judged separately, it would be found that no manufacturing activity was done by them separately. The Assessing Officer has found formation of the firm Leo Fasteners to be not a new industrial undertaking. In so far as unit-II is concerned, it is alleged that this is a ploy maneuvered by the assessee to shift the profits of one concern to the other to claim higher rate of deduction u/s 80IB by treating and claiming Unit-II in the same name as a new industrial undertaking.
The facts regarding work done by each entity found by the Assessing Officer have not been disputed by the assessee also, and are being enlisted hereinbelow:
(a) The processes of the wire rod pickling and phosphating and also wire drawing were done by M/s. Brightenex Pvt. Ltd.
The next stage of processing called forging was done in a shared manner by three concerns, viz., M/s. Fastenex, Formex and M/s. Leo Fasteners by using nut former machines.
(b) The next processing of nut tapping work was also done by the above three concerns in a shared manner.
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ITA 171, 172,749 & 750/10 1083 & 1084/10
(c) The final plating of the nuts was done by M/s. Brightenex Pvt. Ltd.
(d) Certain secondary operations like cap-cutting, curling and drilling were also done by the three concerns, M/s.
Fastenex, Formex and M/s. Leo Fasteners.
(e) The tools and dies required in the operations of nut forging and nut tapping were supplied by M/s. Toolex Pvt. Ltd. and certain other services were also rendered by this concern.
(f) The appellant firm had also shown certain payments having been made to other concerns in the Group for getting components and services which would make it clear that it had not carried on all the processes involved in the manufacturing of nuts.
9. On the basis of the above, the Assessing Officer has come to a conclusion that even Unit-I is not carrying out the requisite manufacturing process to produce 'nut blanks' which is known as 'fasteners', it was also found that this is produced by taking into consideration the various types of processing done by the other concerns of the group named above in the earlier part of this order that the finished product 'nut' could be produced. Only few limited activities are done by these units by which it cannot be said by any stretch of imagination that even Unit-I is producing 'nuts' to entitle it to deduction u/s 80IB. What the Assessing Officer has finally established is that the activities of the concerns put together show that they all are carrying on only one business by the father and son duo in Shah group. According to the Assessing Officer, although Unit-I has :- 11 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 been wrongly claiming deduction u/s 80IB right from the assessment year 1998-99, but owing to the facts that certain second hand machinery have been brought to this unit from other concerns of the group and many of the vital processes were carried on by other entities and not by this unit, the same had been formed by splitting up/reconstruction of an already existing business and therefore, the profits of this unit would not be eligible for deduction u/s 80IB. He has noted that it was one business as a whole having control by same management which is nothing but an amalgam of existing business and a new partnership firm floated by two persons enlarging the entire affairs. It was noted that the company, M/s Toolex Pvt. Ltd was being used as a conduit to effect the transfer of machinery items, whereas, in actuality, the unit had not carried on any manufacturing activity.
For Unit-II, it has been held that the profits of Unit-I have been shifted to Unit-II only with the object of claiming deduction at a higher rate.
It was also noted that certain inter-unit sale transactions were carried on apart from transfer of some major machinery items to this unit. i.e to Unit-II from Unit-I. Thus, he has finally held that the profits of both the units would not qualify for deduction u/s 80IB. After churning the entire facts, we cannot approve the action of the Assessing Officer in so far as unit-I is concerned which was claiming deduction u/s 80IB :- 12 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 right from the assessment year 1998-99. The Assessing Officer cannot suddenly change his opinion based on the same and similar facts based on the survey material in so far as Unit-I is concerned. The other reason to dispute the finding of the Assessing Officer with regard to Unit-I is that he has attempted to draw Profit & Loss statement and has not attempted to redistribute the profits amongst the group concerns according to the expenditure incurred by each of these concerns to show what would be the correct picture according to him.
He has simply listed various activities carried on by these group concerns. It is true that the firm M/s Leo Fasteners was formed as a partnership firm consisting of two partners namely Shri L.M Shah and his son, Shri A.L. Shah who were also shareholders/directors/ proprietors of five other concerns of this group which are engaged in the business of manufacturing and sale of nuts used in automobile industry and this firm has been doing manufacturing activities after commencing commercial production on 18.3.1998 and it started claiming deduction u/s 80IB at 100% of its profits for the initial five assessment years from 1998-99 to 2002-03 and for the subsequent assessment years it has been claiming deduction under this section @ 25% of its profits. This claim was initially accepted upto the assessment year 2003-04. In financial year 2003-04, Unit-II was :- 13 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 formed separately after obtaining separate licence, by making investments in plant and machinery and deploying new labour etc., and started claiming deduction u/s 80IB in respect of the profits of Unit-II at 100% from the assessment year 2004-05 onwards simultaneously claiming deduction u/s 80IB @ 25% of the profits of Unit-I. On the basis of facts found during survey which resulted into re-assessment u/s 148 in assessment years 2000-01 to 2003-04.
10. To our mind, nothing is contained in section 80IB which restricts an assessee from starting a new unit for the purpose of expansion of an already existing business without violating any of the conditions laid therein. There is nothing to indicate that Unit-I of the assessee-firm was formed by splitting up or reconstruction of an already existing industrial undertaking. When the firm M/s Leo Fasteners was formed or when its commercial production was commenced, no part of the capital of entities like Formex or M/s Fastenex Pvt. Ltd were transferred to this firm lock stock barrel. The other concerns were also continuing their business of manufacturing of nuts and were continuing to show huge turnover for all the accounting periods upto the period ending 31.3.2005. The assessee-firm had independent licence in its own name for the manufacture of "High :- 14 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 Tensile Steel Fasteners' and is subjected to Excise Duty and Sales Tax and also assessed under various laws as a manufacturing unit.
11. Now coming to the formation and functioning of Unit-II. Regarding the formation of Unit-II of the firm M/s Leo Fasteners, it commenced its commercial production, as per the assessee, with effect from 13.10.2003, falling within the accounting period relevant to the assessment year 2004-05. The assessee firm took benefit of 100% deduction for five years including initial assessment year namely 1998-
99. The assessee firm has claimed deduction @ 100% of the profits of Unit-II and @ 25% of the profits of Unit-I for both the assessment years i.e 2004-05 and 2005-06. As per the assessee, Unit-II is also engaged in the activity of manufacturing nuts and certain second-hand machinery items were transferred from Formex/Fastenex Pvt. Ltd to Unit II during the accounting period ending on 31.3.2004 and 31.3.2005 through M/s Toolex Pvt. Ltd. The Assessing Officer has not considered Unit-I even as industrial undertaking as discussed above, therefore, he has also denied the benefit of section 80IB in respect of profits of Unit-II. The specific reason for such a denial can be enumerated as under:
(i) There had been transfer of second-hand machinery items' from the connected concerns M/s. Fastenex Pvt. Ltd. to the tune of ` 1,18,500/- ,and from Formex to the value of ` :- 15 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 l,26,500/- during the accounting period ended 31.3.2004 to Unit-II. These machinery items had been routed through M/s. Toolex Pvt. Ltd.
(ii) In addition to the above, machinery worth ` 12,35,000/-
had also been transferred to Unit-II from' Unit-I during the accounting period ended 31.3.2004. That is, second-hand machinery had also been transferred to Unit-II from Unit-I during the impugned accounting period which would amount to Unit-II having been formed by the splitting up of the appellant firm as Unit-I and Unit-II.
(iii) Totally M/s Toolex Pvt. Ltd had sold second-hand machinery to LFA Unit-II to the tune of ` 24,68,440/- during the impugned accounting period.
(iv) From the inventory taken during the course of survey of the plant and machinery items belonging to the different concerns in the group, the Assessing Officer found that there were lots of items of machinery that were shifted to the three sheds in which Unit-II has been functioning. And this almost amounted to shifting of all plant and machinery to Unit-II lock stock and barrel practically stripping bare the other concerns. He had furnished the details of machinery items shifted to the premises at A-l3, A-14 and B-1. The number of some of the major machinery items as owned by the different concerns and units as furnished by the Assessing Officer in page NO.6 of the impugned order are noted below:
a) The Break-up details of machinery items deployed in all the concerns in the Group at the time of survey is as under:
Names of concerns Items Fastenex Formex LFA LFA Unit- LFA purchased Un II Unit-II it-I (A-13 (at B-1) &A14) Nut formers 3 5 3 5 -
Air 1 1 1 - - Compressor Genset 1 1 2 - - Power Press - - - 6 13 Tapping - - - 20 20 machine Cleaning - - - 1 - machine Power Press - - - - 13 Stored Energy - - - - 8 Welding Machine :- 16 -: ITA 171, 172,749 & 750/10 1083 & 1084/10 Drilling - - - - 3 machine Automatic - - - - 3 Drilling machine Air Leak -- - - - 6 Machine Tumbling - - - - 1 machine Bench - - - - 1 Grinder Compressor - - - - 2
b) Thus, it may be seen from the data given as above, the maximum number of machinery items were found only in LFA, Unit-II. The other concerns and LFA, Unit-I are having more or less the same items of machinery and in equal number. The other significant points that emerge on going through these details are:
c) There are no tapping machines shown in any of the other connected concerns or Unit-I of the appellant firm during the impugned accounting period. It has to be noted here that tapping of Nut Blanks is one of the important processes involved in the manufacture of nuts.
d) 'All the 'Power Press' numbering 19 are only in Unit-II and they are not found in Unit-I or 'in any of the other connected concerns.
e) There are five 'Nut Formers' deployed in Unit-II, whereas, in the other sister concerns and Unit-I there are only 3 or 5 'Nut Formers'.
f) There are new items of machinery shown in Unit-II viz.
cleaning machines, grinding machine, stored energy welding machines (8), drilling machines (3), Power Press (13), automatic drilling machine, Air leak machine, tumbling machine etc. Whereas, the other concerns and Unit-l do not appear to have been owning these items of machinery.
(v) As originally planned, the premises at B-1 owned by Shri L.M Shah was to be leased out to unit-I on 2.9.2002 but, however, the same was cancelled on 19.6.2003 just two months before unit-II was formed and started its operations. And on the same date agreement for release of this premises to Unit-II was entered into.
(vi) As already brought out in paragraph No. 4.1 (vii) above, it is because the profit margin of this Unit-II was as high as 39.37% in :- 17 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 respect, of sale of nuts, because, when compared to the consumption' of raw materials which was just ` 4.50 Crores, the total sales were ` .32,23,67,8211- and the net profit stood at ` .12,69,34,916/-, the Assessing Officer had held that the' appellant firm could achieve this much of turnover only by mere sale of nuts purchased from its sister concerns M/s. Fastenex Pvt. Ltd. and Formex. He came to this conclusion because huge sums were shown to have been paid to these two concerns during the accounting period ended 31.3.2004.
vii) The other connected concern, M/s. Brightenex Pvt. Ltd. was also paid certain service charges for carrying out certain processes and so, Unit-II could not have carried on the entire manufacturing processes.
viii) The most significant event dealt with by the Assessing Officer is the sale of components or nuts to the tune of ` 3.16 Crores by the Unit-I to Unit-II during the accounting period ended 31.3.2004.
The Assessing Officer had observed in page No.9 of the impugned order that a: turnover of ` 6.44 Crores could be achieved in Unit-II because of the diversion of the profits of Unit-I. That is, according to the Assessing Officer, it is because of the purchase of components to the tune of ` 3.16 Crores from Unit-I, the Unit-II could achieve a sales turnover of ` 6.44 Crores so that its profits could be considered for deduction u/s 80-IB at 100%. If this diversion had pot taken place, then, the profit on the sales turnover of ` 3.16 Crores in Unit-I would have been enjoying deduction u/s 80-IB only to the extent of 25%. But, by this transfer, the profit on such turnover would be enjoying deduction at a higher rate of 100%.
ix) As per the notings made in Page No. 68 - S1. No.1 of Annexure, VIII "Loose Sheets Pages 1 to 145", there had been transfer of "Nut Blanks" which is before the stage of tapping and these ,were being sold by the taxable entities with a higher incidence of tax. And in particular, such sale had been made by Formex to LFA during the impugned accounting period.
x) As per the notings made in Page No. 56- S1. No.1 of Annexure VIII "Loose Sheets Pages 1 to 1:45", there is only one business being carried on by Shri L.M. Shah, and his son ,Shri A.L Shah. And the notings indicate the modes operandi of planning manipulated intra-group, transactions only for the purpose, of tax benefits. The notings, referred to by the Assessing, Officer were regarding tax holiday and tax benefits and the possibility of exploring making investments in the setting up of bolt division and stud division in Unit-II.
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ITA 171, 172,749 & 750/10 1083 & 1084/10
xi) The Assessing Officer has cited the Supreme Court's decision in the case of Textile Machinery Corporation Ltd (137 ITR 197) wherein certain principles have been laid down as to what would constitute a 'new industrial undertaking'.
12. The contention of the assessee regarding Unit-II are that the partners had gained good experience over the years and they aimed at more production using latest technology to cater to the requirements of the automobile industry as regards fasteners or nuts are concerned. As per the assessee, the turnover of Unit-I was improving over the years yet it was never able to attain the peak on account of general lethargy attached to the system. The assessee's representative furnished certain details regarding the technological improvement that were effected both in items of plant and machinery as well as in final product i.e 'nut'. The specific details as furnished in the course of hearing before the ld. CIT(A) are being extracted hereinbelow:
'Technology improvisation:
The new undertaking used machinery with improved technology. To elucidate the improvement in technology some modifications in technology having far-reaching effect on machinery availability, efficiency and effectiveness of operations are given hereunder:
(1) Nut tapping machines:
(a) Increase in thickness and hardness of roller gauge to improve longevity of usage and avoiding break-downs / bottlenecks in production process.
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ITA 171, 172,749 & 750/10 1083 & 1084/10
(b) Spindle assembly of better quality and sophisticated technology has been used in the new machines so that break down of machinery is reduced by increasing the usage of ball bearings. The machines had been made vibration resistant. Once vibration and noise pollution is brought down; to a great extent level, improved efficiency of manpower is achieved due to lesser exhaustion.
(c) Head of spindles had been provided with covers so that nuts released from the machine do not hit the spindles and do not get damaged (bulged). This has resulted in improvement in the quality of the finished products as damaged nuts are rejected and could not be sold.
(d) Replacement of wire by polyurethane sheets in brushes used for cleaning the oil extracting machine resulting in better maintenance and longer useful life of the oil extracting machines.
(e) System of pushing nut upto the rotating spindle with appropriate parallel bars and bearings and Nut holding bracket made of cast iron. This had replaced the Alluminium brackets used earlier. This has resulted in upgradation to reduce friction and wear and tear and also in improved accuracy.
(f) The programmable logic control has been implemented and this has made the operations user friendly. I
(g) Variable speed drive technology has been adopted to set the speed digitally involving power saving, improving;
quality; of threads and increase productivity. .
(h) Change in type / size of nuts has been automated and as machine setting can be changed easily, machine, operating efficiency has improved.
(i) The parallelism jig had been implemented so that the;
blanks entering the guide do not get choked and result in stoppagejof production process.
(j) The nut seating step width had been adjusted appropriately so that tilting of nuts is avoided. The tilting' of blanks resulting in: nut moving crossly and choking the guide face get avoided and the production process stoppage due to this get avoided.
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ITA 171, 172,749 & 750/10 1083 & 1084/10 (2) Centrifugal Drier:
(a) The centrifugal drier replaced the shrink wrapping machinery. This has resulted in substantial reduction in the process time (almost fifteen times) and power consumption.
(3) Power press:
(a) The power press had been designed to suit the tools which can work on two caps and curl them at the same time.
Earlier, single cap curling was predominantly used. This modification has resulted in substantial improvement in efficiency.
(b) The design of the power press had been modified to avoid accidents by adopting hand operated processes in place of foot operated switches.
(4) Stored energy welder:
(a) Stored energy welder has replaced the spot welding equipments. This has resulted in continuance of operations even during a brown out.
(b) Further, the welding process had replaced the crimping method which has enabled mass production of cap nuts which has been explained in detail elsewhere in this submission. Further the unit boasts of being the only user of the welding technology in cap nut manufacture in the whole of India. It is pertinent to note that even units of theTVS group buy such nuts only from this unit despite having their own fasteners unit in their group.
6.2.7 This apart, the firm had imported from Taiwan, five brand new 'Nut Formers' in order to improve the quality of nuts by making use of the latest teleological advancements in the industry. These 'Nut Formers' were stated to have helped the firm to meet the ever growing demand for quality fasteners from the automobile industry. That is, it is the contention of the 'appellant's representative that with the help of the five Nut Formers that were imported and installed in Unit-II, the appellant firm was able to bring out nuts or fasteners that were qualitatively different from the nuts which the firm or rather Unit-I had been hitherto manufacturing. And therefore, it was contended that as Unit-II was formed to manufacture nuts which were qualitatively 'and commercially different 'from the raw materials used as well as ,from the :- 21 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 finished products of the other unit, this new unit must be considered as a "new industrial undertaking" in its own right and the profits derived therefrom must be given deduction at 100% u/s 80-IB for the assessment years 2004-05 and 2005-06.
6.2.8 During the course of hearing of the appeal, the appellant's representative has furnished complete details regarding the capital contribution made by the partners to Unit-II, the borrowed funds from banks, HDFC etc. that were utilised in making investments in fixed assets, details of labour employed by furnishing their names and ESI/PF account numbers, etc. And it was argued that in as much as the Unit-II of the firm was also formed by inducting fresh capital, purchase of fixed assets including plant and machinery of substantial value and by deployment of adequate labour force and further, the end product that was manufactured in this unit was of a different quality and specification, this unit should be considered as a new industrial undertaking whose prot1ts would qualify for deduction at 100% as envisaged u/s 80- IB.
6.2.9 At this juncture, it is considered necessary to have a closer look at the details furnished regarding the capital introduced, the statutory approvals given by the Government Departments, the nature of and source for the acquisition of fixed assets etc. It is further necessary to study the nature of transactions which the Unit-II is having with the other concerns in the group as also the Unit-l of the appellant firm.
Account Accountin period Accounting perio g ended ended d (` ) (` ) Capita! Account 58,50,000.00 58,50,000.00 Partners' Current A/c. 12,98,60,597.62 14,80,64,502.14 Loan from Shri C.A. Shah 21,74,850.90 21,74,850.90 Loan from Shri A.L. Shah 4,43,36,381.00 4,22,86,381.00 Loan from Shri L.M. Shah 6,00,000.00 ----
Term Loans 8,28,39,433.51 5,57,22,660.00
State Bank of India, 3,60,726.88 78,97,615.37
Siruthozhil
Loans Branch
against TOR 1,59,21,000.00 21,77,177.00
State Bank of India, 30,52,363.09 40,82,801.52
(Unit-II)
Term Loan - HDFC ---- 4,72,00,000.00
6.2.9.2 Out of the above, the details of capital contribution
and loans from partners that were made to Unit-II alone are as under:
:- 22 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 S.No Particulars As on (In ` lacs) 31.3.2003 31.3.2004
1. Capital 4.85 30.00 contribution from partners
2. Loans from -- 449.36 partners 6.2.9.3 The abstract of investments made in infrastructure (fixed assets) by the new unit is as hereunder:
Particulars Cost (in ` )
A. Machinerv - Imported
Nut formers 24453489.00
Total imported machinery (A) 24453489.00
B. Machinery - Indigenous:
Stored Energy Welder 1181814.80
Certrifugal Oil Cleaner 233906.40
Curling Machine 241390.00
Nut tapping machines 2507410.00
Power Press 95576.00
Variable Fire Drive 462099.48
Screw Compressor 446048.30
Knuckle Joint Press 2111088.00
Miscellaneous 154156.90
Total indigenous machinery (B) 7433489.88
Net Cenvat Credit & Adjustments
(481858.50)
towards Pre-operative
expenses (C)
Total investment in Plant & machinery 31405120.38
(A+B-C)
Furniture 1 1221.15
Office Equipment 249270.44
Electrification 603914.32
Testing Equipments 48850.86
Total investment in fixed assets 32318377.14
:- 23 -:
ITA 171, 172,749 & 750/10
1083 & 1084/10
13. After considering the rival submissions, the ld. CIT(A) has culled out the following facts in his order:
(i) Having accepted the stand that the firm m/s Leo Fasteners is a valid partnership formed in the year 1998 and it had gone into commercial production of nuts in that year, the Assessing Officer was not correct in questioning or doubting its very formation while dealing with its claim for deduction u/s 80-IB for the assessment year 2004-05.
(ii) Simply based on certain details gathered during the course of the survey operations regarding the transfer to the appellant firm of second-hand machinery items through the connected concern, M/s. Toolex Pvt. Ltd. the Assessing Officer was not correct in his inference that the machinery items were shifted just to show tapping capacity in the appellant firm and to shift the profits in order to claim deduction U/S 8o-IB. In so long as the law permits acquisition of secondhand machinery items up to 20% of the total value of plant and machinery each year what the appellant firm had done cannot be viewed as illegal or as amounting to violation of or circumventing any provision of law.
(iii) A device or a methodology adopted by the appellant firm intelligently III the course of its tax planning without violating any legal provision cannot be questioned.
(iv) The transactions between the appellant firm and the other connected concerns whereby those concerns had performed certain proceeses on job-work basis will not come in the way of the appellant firm claiming the deduction U/S 8o-IB as it had also performed certain vital processes - "nut tapping" which brings changes into the materials used or rather the 'nut blanks' to make them commercially different products - the 'nuts'. Without performing tapping, it will not be possible to bring out a nut.
(v) As far as Unit-II is concerned, it cannot be considered to be a new undertaking both in its formation as well as in its activities.
(vi) The formation of Unit-II by the appellant firm was with a view to divert its profits so that it could claim deduction :- 24 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 U/S 8o-IB not only at a higher rate but also for a longer period of time. That is, if Unit-II were to be accepted as a new industrial undertaking, then the appellant firm could have continued to claim the benefit of deduction U/S 8o- IB for a further period of ten years which deserves to be discouraged. This cannot be considered to be an act of tax planning. "
14. Apart from filing written submission, paper book and oral submissions, a detailed chart groundwise has been filed vide which each point taking by the authorities below to deny deduction u/s 80IB to the assessee has been challenged. After considering the findings given by the authorities below and the submissions of the parties, we are of the considered opinion that there is no necessity to interfere in the appellate finding as legally and factually no intermingling is warranted on our ends. The reasons for our above conclusion are as under:
The assessee firm was constituted in March 1998 and the assessee had claimed 100% deduction u/s 80IB of the Act from assessment year 1998-99 to 2002-03 and started again, a so-called Unit II on 23.10.2003 for nut manufacturing so as to claim 100% deduction u/s 80IB by splitting up of the existing unit, as if they are two different independent entities. Assessee group has inter-
transferred some of the machinery belonging to M/s Fastenex, Formex, Leo Fasteners through M/s Toolex Pvt. Ltd as a conduit for erecting :- 25 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 machinery for the manufacturing process. However, the value was always kept below 20% of the total value of he machinery. Assessee has not carried out entire manufacturing process, but intermediate processes carried out by other group concerns. M/s Fastenex & Forex have been manufacturers of nuts and availed tax benefit under section 80IA they are now job workers for production of nut blanks from wire rod. Shri L.N Shah and Shri A.L. Shah are partners directors in all the concerns doing nut manufacture since 1984. Creation of LFA Unit I and II as new undertakings is a colourable device. Preliminary stages of wire drawing, picking and phospating and wire drawing done by sister concerns. Plating where required also done by sister concerns.
Nut forging using nut forming and nut tapping done by LFA. Also secondary operations like cap cutting, curling and drilling in the case of certain types of nuts. The only stage which remains to be completed is the process of tapping of the nuts. Crucial machine required for production of nuts is 'nut former'. The tapping capacity has been created in LFA and subsequently in LFA Unit II by manipulating and transferring pre-existing tapping machines of the group, through Toolex during the years 1998-99 and 2003-04. Transfer of machinery from entities which had already availed Chapter VIA deductions to newly created entities proposed to be made eligible for tax benefits.
:- 26 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10 Value of machinery has been manipulated in such a way as to not cross 20%. 5 nut formers imported for Unit II. M/s Toolex has been used as a conduit for transferring tapping machines of existing business for last 15 years to the tax benefit availing entities. To shift the existing business on paper to new entity to avail tax benefit. Unity and control in the whole arrangement and amalgamation of existing businesses and a new partnership firm. Profits shifted from other concerns to LFA and then to LFA Unit II primarily to avail exemption u/s 80IB. Unit I has sold components worth ` 3.16 crores to Unit II, amounts to diversion of profits for availing 100% deduction. All the units are in the same Industrial Estate. Books of account of all the units maintained in the office of M/s Fastenex. All concerns are involved in the same business and are inter related in the manufacturing of nuts. LFA units are not entities which are separate and distinct from the existing business. In the year under consideration the forged nuts have been purchased from the existing business of the assessee group. Moreover, the additional processes claimed to have been carried on i.e tapping of nuts is done on the existing machinery of the sister concerns transferred to LFA unit-II in a disguised manner.
:- 27 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10
15. We do not find any force in the contention of the ld.AR that Unit-II is a separate Unit which has kept separate excise and other numbers and fresh capital was utilized in the erection of the same.
The decisions relied on the paper book and written submission are distinguishable, therefore, we are in agreement with the finding of the ld. CIT(A) and hence, we do not find any merit in the appeal of the assessee.
16. In the result, the appeal of the assessee for assessment year 2004-05 stands dismissed.
17. The facts and the issues raised in assessment year 2005-06 are exactly identical to the facts of assessment year 2004-05, therefore, this appeal is also dismissed.
18. For assessment years 2006-07 and 2007-08, cross appeals have been filed. In assessee's appeals one common ground for both years is regarding denial of deduction u/s 80IB. As discussed above, the assessee is not entitled to this deduction even in these years as the facts of these years are exactly identical to the assessment year 2004-
05. The reasons given for assessment year 2004-05 apply for these years as well. Therefore, we cannot allow this ground of assessee's appeals for assessment years 2006-07 and 2007-08.
:- 28 -:
ITA 171, 172,749 & 750/10 1083 & 1084/10
19. The other common issue raised in cross appeals is regarding computation of deduction u/s 80IA. As discussed above, we uphold the finding of the ld. CIT(A) in this regard and dismiss the grounds raised by the assessee as well as the Revenue on this issue.
20. In the result, the appeals both of the assessee and the Revenue pertaining to assessment years 2006-07 and 2007-08 are dismissed.
21. To summarize the result, all the appeals both of the assessee and that of the Revenue are dismissed.
The order pronounced in the open court on 12.11.2010.
Sd/- Sd/-
(ABRAHAM P GEORGE) ( HARI OM MARATHA )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 12th November, 10
RD
Copy to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR