Income Tax Appellate Tribunal - Chandigarh
Sond Bharat Pedals (India) vs Income-Tax Officer on 10 June, 2002
Equivalent citations: [2003]84ITD89(CHD)
ORDER
Joginder Pall, Accountant Member
1. By this order we shall dispose of this appeal of the assessee filed against the order of CIT(A), Ludhiana for assessment year 1990-91.
2. The only effective issue raised in this appeal is that the CIT(A) was not justified in sustaining the disallowance of claim under Section 80-I amounting to Rs. 29,616. The facts of the case are that in the return of income the assessee had claimed deduction of Rs. 29,616 under Section 80-I of IT Act. While completing the assessment under Section 143(3) the Assessing Officer allowed the claim. However, subsequently the Assessing Officer found that the assessee was not entitled to deduction for the same because the assessee was not carrying on business of manufacturing or producing of articles or things. Accordingly, the Assessing Officer reopened the assessment under Section 147 by issue of notice under Section 148. During course of re-assessment proceedings, the assessee submitted that it was purchasing MS rounds and MS wire from market on its own, which was given to outside fabricators for converting into pedal axles and pedal rods on payment of labour charges. Thereafter, finished components of pedal axles and pedal rods were sent to another fabricator for heat treatment of nickleplating. The assessee also purchased some more components i.e., pedal rubber, pedal cup, pedal cap, steel balls, washers etc. and thereafter all the components got manufactured and purchased are fed to power-driven machines, which tighten all the components resulting in production of complete bicycle pedal. It was, thus submitted that the assessee was manufacturing cycle pedals and as such was entitled to deduction under Section 80-I. However, the Assessing Officer was of the view that the assessee was not, itself, engaged in the manufacture or production of any article or thing as it got such manufacturing done from outside and therefore, the assessee was not entitled to deduction under Section 80-I. Accordingly, the Assessing Officer disallowed the claim of the assessee.
3. Aggrieved the assessee impugned the disallowance in appeal before the CIT(A). The assessee reiterated the submissions which were made before the Assessing Officer and it was contended that since the assessee was engaged in the business of manufacturing bicycle pedals, it was entitled to deduction under Section 80-I. However, the CIT(A) was not impressed with the submissions of the assessee. Ld. CIT(A) observed, no doubt the assessee had employed requisite number of employees to fulfil one of the conditions laid down in Section 80-I, yet the assessee owned machines worth Rs. 6,000 in 1985 which could not be considered as an industrial undertaking. Moreover, the assessee did not have sufficient space to carry on the business activities of an undertaking. Accordingly, the CIT(A) upheld the disallowance by recording the following finding at page 2, Para 2 of appellate order :-
In the course of appellate proceedings the appellant was also asked to give no. of employees, details of machinery used in the manufacturing process and other relevant information to ascertain whether it fulfilled the specified conditions laid down for getting deduction under Section 80-I. The no. of employees were above the limit specified but it was observed that the cost of the machinery purchased was only Rs. 6,000 in the year 1985 and the WDV during this year was very meagre. The no. of machines were two and it was highly doubtful that these two machines hardly cost Rs. 6,000 in 1985 could constitute an industrial undertaking. So called industrial undertaking was housed in one room which had been taken on hire from Shri Charan Singh, who was father of Shri Khem Raj Singh, partner and husband of Smt. Surjit Kaur, another partner. The other room was used for their office premises and the total covered area with the industrial unit was only 600 sq.ft. No rent was being paid for this building. Prior to this the premises were being used as godown. As far as the use of power is concerned there was no expenditure on power and the electricity charges were being borne by Shri Charan Singh, Landlord which was stated to be as per the original understanding. This also appears to be strange as no rent was being paid to Shri Charan Singh. Further enquiries were made to ascertain whether the machines bought were new or old and the appellant filed bills issued by M/s Ajanta Electronics dated 26-6-1985 indicated that the cost of each machine was not Rs. 6,000 but only Rs. 1,100 each and in the bill no sales-tax has been charged in respect of the sale and there was no evidence to show that these machines were new which was an essential condition for claiming deduction under Section 80-I. In these circumstances, I am of the opinion that no industrial unit had been set up which would be entitled to deduction under Section 80-I. Before I conclude this part of the order it may be mentioned that initial year for claiming deduction was 1986-87 and the appellant did not claim deduction in that year and neither it was claimed in the assessment year 1987-88, 1988-89 or 1989-90 and the claim was made only in this assessment year. Hence the claim of deduction under Section 80-I cannot be accepted and the appeal stands dismissed.
The assessee is aggrieved with the order of CIT(A). Hence this appeal before us.
4. Ld. counsel for the assessee reiterated the submissions which were made before the lower authorities. He submitted that the assessee was engaged in the business of manufacturing of articles or things. He submitted that the assessee was purchasing MS wire and MS rounds from market and thereafter it got the material converted into pedal axles and pedal rod through outside fabricators on payment of labour charges. These items were given to some outside agency for nickle plating and thereafter the assessee purchased pedal rubber, pedal cup, pedal cap, steel balls, washers etc. and all these components manufactured through outside fabricators were fed to power-driven machines which tighten all the components resulting in production of complete bicycle pedals. Thus it was submitted that all these activities led to manufacturing of articles which were different from raw material purchased by the assessee and therefore, the assessee was entitled to deduction under Section 80-I. Reliance was placed on the judgment of Gujarat High Court in the case of CIT v. J.B. Kharwar & Sons [1987] 163 ITR 394 : 30 Taxman 225 and Supreme Court in the case of Empire Industries Ltd. v. Union of India AIR 1986 SC 662 and Bombay High Court in the case of CIT v. Tata Locomotive & Engg. Co. Ltd. [1968] 68 ITR 325. It was also submitted that it was not necessary for the assessee to itself manufacture the goods, the assessee could get these goods manufactured through outside agency. Reliance in this regard, was placed on the judgment of Calcutta High Court in the case of Addl. CIT v. A. Mukherjee & Co. (P.) Ltd. [1978] 113 ITR 718 where job of book binding was also held to be a manufacturing activity. It was also submitted that such benefit should not have been denied to the assessee.
5. Ld. DR for the revenue, Smt. Mamta Bansal on the other hand, heavily relied on the orders of lower authorities.
6. We have heard both the parties at some length and carefully considered the rival submissions. We have also examined the evidence, facts and material on record and referred to various judgments to which our attention has been drawn. Section 80-I provides special deduction to an industrial undertaking which fulfils the following conditions :-
(i) it is not formed by the splitting up or reconstruction of a business already in existence;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose;
(iii) it manufactures or produces any articles or things other than specified in the List in the Xlth Schedule; and
(iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs 10 or more workers in a manufacturing process carried on with the aid of power or employs 20 or more workers in a manufacturing process carried on without the aid of power.
The Assessing Officer has not raised any objection to other conditions stipulated in Section 80-I. The only objection raised by the Assessing Officer for disallowing assessee's claim is that the assessee was not, itself, engaged in the manufacture or production of any 'article or thing as these activities were got done from outsiders. Thus the Assessing Officer admitted that the assessee otherwise fulfils all the conditions except that it does not manufacture or produce articles or things on its own. In other words he accepts that the assessee fulfils all the remaining conditions. As mentioned above the assessee purchased the raw material in the form of MS wire, MS rounds from market, got it converted into pedal axles and pedal rods through some outside fabricators on payment of labour charges, finished components of pedal axles and pedal rods were then sent to other fabricators for treatment and nickle plating and thereafter the assessee purchased other components in the form of pedal rubber, pedal cup etc. and all these components were fed to power driven machines for tightening of the components resulting in production of bicycle pedals. If all these activities are taken into account, the assessee can be said to be engaged in the business of manufacturing pedals as the final product i.e., pedals are different from the raw material like MS rounds and MS wire. It is not the same product. The Hon'ble Supreme Court has held in the case of Union of India v. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 791 that manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation, a new and different article must emerge having a distinctive character, name and use: Thus, it is clear that every process does not tantamount to manufacture and it is only when the process results in the emergence of a new and different articles having a distinctive name, character or use that 'manufacture' can be said to have taken place. In fact, 'production' is still wider than manufacture, though every manufacture can be characterized as a production. From the wording of Section 80-I, it is very clear that the intention of Legislature is to extend such benefit only to such industrial undertaking, which is engaged in the business of manufacture. In the present case the assessee being engaged in the manufacture of pedals which is a commodity different from the MS wire and MS rounds it can be said that the assessee fulfils the necessary condition for deduction under Section 80-I.
7. Now the next issue which required to be considered is that whether there is requirement of manufacturing or producing the articles by the assessee itself or the assessee can get part of these activities done from outsiders and still be entitled to deduction under Section 80-I. It is an admitted fact that the assessee, on its own, does not have necessary wherewithal to undertake all activities for manufacturing the pedals. This issue came up for consideration before the Hon'ble Calcutta High Court in the case of A. Mukherjee & Co. (P.) Ltd. (supra) where the assessee was carrying on business of publishing of books. The assessee did not own any press. It got the manuscript for publication, printed and bound from outsiders. The printing and binding was done by outside agency under direct supervision of assessee. In the light of these facts, Hon'ble High Court has held that the assessee was carrying on manufacturing and also processing of that goods and therefore, the assessee was entitled to be taxed at a concessional rate as an industrial undertaking.
Similar issue came up for consideration by the Hon'ble Bombay High Court in the case of CIT v. Neo Pharma (P.) Ltd. [1982] 137 ITR 879 : 10 Taxman 218 where the assessee company was engaged in the job of manufacturing and processing pharmaceuticals. The assessee entered into an agreement with another company to make available to assessee plant, a machinery and services of staff of other company to carry on its manufacturing activities. Manufacturing licence was held by the assessee. Items manufactured by other company were under the direct supervision of assessee's own quality control and raw material and packing materials were supplied by the assessee. The assessee paid service and hire charges to the other company. In the light of these facts, Bombay High Court held that the assessee was engaged in the business of manufacturing pharmaceuticals even though the plant and machinery employed for the purpose belonged to the outside party and therefore, the assessee was held to be an industrial company entitled to concessional rate of taxation. Apart from these judgments, following judgments of various High Courts further support the case of the assessee :-
(i) Griffon Laboratories (P.) Ltd. v. CIT [1979] 119 ITR 145 (Cal.) where the High Court held that the Tribunal was not correct in holding that assessee must own or possess the manufacturing plant or machinery before it could be said to be a manufacturer of goods.
(ii) CWT v. Smt. Premlatabai [1982] 137 ITR 329 (MP) in this case the assessee purchased raw cotton, got it ginned and pressed in factories through outside agencies and then packed the same into bales before putting them for sale. The MP High Court held that the undertaking need not itself carry out the entire processing of goods and part of the processing can be carried out by outside agency and, therefore, the assessee was entitled to exemption mentioned in Section 5(1)(xxxi) of the WT Act.
(iii) CWT v. Mubarakali Khan [1980] 123 ITR 101 : 3 Taxman 505 (All.) in this case, assessee was engaged in the business of manufacture of biris for which the assessee purchased tendu leaves and tobacco. These were given to contractors for getting the biris manufactured. On these facts the Allahabad High Court held that the assessee was an industrial undertaking for the purpose of Section 5(1)(xxxi).
(iv) CIT v. Indian Resins & Polymers [1999] 235 ITR 5 (Ker.) in this case, the assessee was engaged in business of export of cashew kernels and shell oil. The assessee purchased cashewnuts and entrusted to a third party for processing. Similarly, roasting and Dehusking of cashew Kernels was got done from a third party under assessee's own supervision. On these facts, it was held that assessee was an industrial undertaking entitled to special deduction under Section 80HH.
(v) CIT v. Anglo French Drug Co. (Eastern) Ltd. [1991] 191 ITR 92 : 57 Taxman 8 (Bom.) in this case also Bombay High Court has held that it is not necessary that the manufacturing activity should be undertaken by the assessee itself. The assessee can employ another company to manufacture goods under its supervision and control and the assessee was held to be an industrial undertaking.
8. Thus various judgments cited above support the case of the assessee that it is not necessary that the assessee should carry out all the manufacturing operations, itself, in order to be entitled to benefit of deduction under Section 80-1. Such operations can be got done from outside agencies on payment of labour/service charges. In fact certificate issued by the Punjab Government and placed at page 1 of paper book shows that assessee was registered as a Small Scale Industrial Unit and the trading account placed at page 9 of the paper book shows assessee's sales of Rs. 45.98 lakhs for the assessment year under reference. Since the assessee is engaged in the business of manufacturing cycle pedals, the assessee would be entitled to deduction under Section 80-1 even though part of such operations were got done from outsiders. In fact the CIT(A) has mis-directed himself in taking into account the facts which were not the subject matter of the dispute before the Assessing Officer. The facts like the value of machinery of power-driven machines owned by the assessee or the total area of space occupied by the assessee are not the material factors for deciding the issue whether the assessee is an industrial undertaking or not in view of the reasons discussed above. In any case, the assessee has produced evidence in the form of an affidavit of a partner placed at page 1 of the. paper book that the machines purchased from M/s Ajanta Electronics were new and first hand. This submission has not been controverted by the revenue. Thus the assessee fulfilled all the conditions laid down in Section 80-I and, therefore, was an industrial undertaking engaged in the business of manufacturing cycle pedals.
9. Having regard to these facts and circumstances of the case, we hold that the assessee is engaged in the business of manufacturing of bicycle pedals and, therefore, was an industrial undertaking entitled to deduction under Section 80-I. Accordingly, we set aside the order of CIT(A) and direct the Assessing Officer to allow deduction of Rs. 29,616 under Section 80-I. All the grounds of appeal are allowed.
10. In the result, appeal of the assessee is allowed.