Income Tax Appellate Tribunal - Mumbai
Asst Cit 5(2)(1), Mumbai vs Jabs International P.Ltd, Mumbai on 19 December, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL " J" BENCH, MUMBAI
BEFORE SRI MAHAVIR SINGH, JM AND SRI RAJESH KUMAR, AM
ITA No. 591/Mum/2016
(A.Y. 2003-04)
ITA No. 592/Mum/ 2016
(A.Y. 2004-05)
ITA No. 593/Mum/2016
(A.Y. 2005-06)
The Asst. Commissioner of Jabs International Pvt. Ltd.
Income Tax 5(2)(1), 14-A, Gangotri, Banganga
Room No. 571, 5 t h Floor, Vs. Talao, Malabar Hill,
Aayakar Bhavan, M.K. Road, Mumbai-400 006
Mumbai-400 020
Appellant .. Respondent
PAN No. AAACJ3768P
Revenue by : Aarju Garodia, DR
Assessee by : Anil Thakrar, AR
Date of hearing: 19-12-2017 Date of pronouncement : 19-12-2017
ORDER
PER MAHAVIR SINGH, JM:
These three appeals by the Revenue are arising out of the different orders of Commissioner of Income Tax (Appeals)-10, Mumbai, [in short CIT(A)] in appeal No. CIT(A)-10/ITAT/256,257&258/2014-15 even dated 29-10-2015. The Assessments were framed by the Deputy Commissioner of Income Tax, Circle 5(2), Mumbai (in short DCIT) for the assessment year 2003-04, 2004-05,2005-06 vide different orders of even dated 30-11- 2010 under section 143(3) read with section 147 of the Income Tax Act, 1961(hereinafter 'the Act').
2IT A No s . 5 91 ,5 9 2 & 5 93 / Mu m/2 0 1 6
2. The only issue in these three appeals of Revenue is against the order of CIT(A) in holding the re-opening of the assessment under section 147 read with section 148 of the Act for the purposes of disallowance of the claim of deduction under section 10B of the Act in respect of manufacturing and processing of the Oil Seeds, Spices, Cereals and Pulses as invalid. The Revenue has also raised the issue on merits. For this Revenue has raised the following grounds: -
""1 1(a). On the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding that the reopening of the assessment for the purpose of disallowing the exemption under section 10B was invalid.
1(b). On the facts and in the circumstances of the case, the Ld. CIT(A) failed to appreciate that the assessee by claiming exemption u/s 10B on an activity which did amount to manufacturing had made a patently wrong claim which was allowed by the Assessing Officer in the original assessment and therefore reopening of the assessment was rightly done as per the provisions of law.
1(c). On the facts and in the circumstances of the case and having clearly held that part of the activities of the assessee did not fit into the definition of manufacturing. the Ld. CIT(A) erred in holding that the reopening of the assessment for the purpose of disallowing exemption u/s 10B was not in order."3
IT A No s . 5 91 ,5 9 2 & 5 93 / Mu m/2 0 1 6 The facts and circumstances are exactly identical in all the three years and hence, we will deal with the issue by taking the facts from AY 2003-
04.
3. Briefly stated facts are that the assessee is engaged in the business of manufacturing and processing of Oil Seeds, Spices, Cereals and Pulses in their processed, wholesome or grounded forms. The assessee owns a hundred percent export oriented unit duly approved by the prescribed authority and its 90% profits are from articles or things produced therein. The assessee claimed deduction under section 10B of the Act. The assessee filed copies of audited statement of accounts and report in form No. 56G. The return was accepted under section 143(1) of the Act originally and after that assessment was completed under section 143(3) r.w.s 147 of the Act vide order dated 20-01-2006 accepting the claim of exemption under section 10B of the Act amounting to ₹ 42,45,491/-. Subsequently, the AO on perusal of the assessment records issued notice under section 148 of the Act and also recorded the reasons dated 30-03-2010 (these reasons pertain to AY 2005-06, but both assessee as well as learned Sr. DR conceded that reasons are identical in all the three assessment years) which reads as under: -
"In this case, assessment proceedings of the assessee was completed vide order u/s. 143(3) dated 22.10.2007 with an assessed income of Rs.1,18,44,280/-.
On perusal of the records it was found that the assessee has claimed exemption u/s.1OB of the IT. Act for A.Y. 2005-06. The assessee claimed exemption u/s.10B Rs.2,84,99,582/- which was incorrectly allowed.
The assessee procures indigenous and/or imported raw/whole spices which is brought to their 4 IT A No s . 5 91 ,5 9 2 & 5 93 / Mu m/2 0 1 6 EOU and clean the impurities and remove all the foreign particles then dry it. After the spices are dried, it is grounded in different sizes viz, coarse, medium, and also fine powder, after cleaning and sorting etc. the)' are packed in bags and undergo sterilization, and ultimately exported.
Ongoing through their submission, it is very clear that this process of making powder from whole spices does not constitute manufacture, within the meaning of section 10B of the I.T. Act. The words "manufacture" and 'production" have received extensive judicial attention both under this Act as well as the Central Excise Act and the various Sates Tax Laws. The word "production" has a wider connotation than the word "manufacture". While every manufacture can be characterized as production, every production need not amount to manufacture. The test evolved for determining whether manufacture can be said to have taken place is, whether the commodity which subjected to the process of manufacture. The test evolved for determining whether manufacture can be said to have taken place is, whether the commodity which subjected to the process of manufacture can no longer be regarded as the original commodity but is recognized in the trade as new and distinct commodity. Commonly, manufacture and result of none or more process through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage with each process 5 IT A No s . 5 91 ,5 9 2 & 5 93 / Mu m/2 0 1 6 suffered the original commodity experiences a change. But it is only in the change, or series of changes, takes the commodity to the point where commercial it can no longer be regarded as the original commodity but instead it is recognized as new and distinct article that a manufacture can be said to take place.
In this case there is no change in the constituents of the final product from that of original product as the only process involved in grinding of the whole spices into powder. Reliance is placed in the Hon'ble Supreme Court Judgment in the case of Aspinwall & Co. Ltd. V/s. CIT (251 ITR 323) wherein it is clearly explained the condition necessary as well as process amounts to manufacturing and what not. Similarly, in the case of Sacs Eagles Chicory Vs. CIT (255 ITR 178) wherein it was held that the business of just drying them (in this case it is spices) and then powdering it does not amount to manufacture but it is only processed which does not satisfy the condition of laid down by the Supreme Court for manufacturing process.
Thus in the above discussion assessee is not eligible for exemption u/s.10B of the IT Act and the same is needs to be disallowed. In view of the above I have reason to believe that income has escaped assessment for the A.Y. 2005-06 by the reasons of the failure on the part of the assessee to disclose fully and truly all material facts necessary for this assessment year."
4. The AO completed the assessment under section 143(3) read with section 147 of the Act, wherein he has doubted whether the assessee is 6 IT A No s . 5 91 ,5 9 2 & 5 93 / Mu m/2 0 1 6 in manufacturing activity or not and finally, he held that the assessee is not in the manufacturing activity by observing in Para 14 and 15 as under: -
"14. In common parlance manufacturing activity is Said to be carried out lithe change made in the article results in a new and different article. Further. lithe net product is absolutely different and separate from the input and the change made in the article results in a new and different article which is recognized in the trade as a non and distinct commodity, it can be easily said that manufacturing activity is carried out in bringing the change to the input article. The process is a manufacturing process when it brings out a complete transformation in the original article so as to produce a commercially different article or commodity. That process itself may consist of several processes and all these different processes are integrally connected with each other which results in the production of a commercially different article. If a commercially different article or community results after processing, then it would be a manufacturing activity.
15 All these facts prove beyond doubt that me assessee is not carrying out any manufacturing activity and hence not eligible for claiming exemption u/s. 10B of the I.T. Act Assessee's claim of exemption uls. 100 of the I.T. Act, is therefore, disallowed."
Aggrieved, assessee filed before CIT(A).
7IT A No s . 5 91 ,5 9 2 & 5 93 / Mu m/2 0 1 6
5. Before CIT(A), it was contended that original return was processed under section 143(1)(a) of the Act on 25-11-2003 and subsequently, case was re-opened and assessment was completed under section 143(3) read with section 147 of the Act vide order dated 20-01-2006. Subsequently, second time the assessment was reopened and assessment was completed under section 143(3) read with section 147 of the Act vide order dated 30-11-2010 (the impugned order) was against the original reopening and against assessment order dated 20-01-2006, assessee filed appeal and CIT(A) dismissed the appeal disallowing the claim of the assessee and assessee preferred the appeal before ITAT on the same. The ITAT vide its common order dated 03-06-2013 for all the three years set aside the matter to the file of the CIT(A). Even the assessee in second round also filed the appeal before CIT(A) and challenged the reopening of jurisdictional issue as well as on merits. The CIT(A) after examining the facts and circumstance of the case and recording reasons, quashed the reassessment proceedings by observing in Para 4.12 to 4.15 as under: -
"4.1.2 After careful examination of the facts of the case and the arguments raised by the learned AR it was noticed that the first assessment made u/s. 143(3) read with section 147 dated 20. 1. 2006 was to examine the claim of DEPB for 80HHC working and to examine allow-ability of section 10B on "other income". The 80HHC issue was decided based on Hon'ble Supreme Court in the case of IPCA Laboratory Ltd. and the issue of 108 was decided by withdrawing Rs.1,23,563/- from the claim of 10B as the amount credited was out of "other income" and it has not been derived from the manufacturing activity. The appellant has not preferred appeal on this order of the AO. However, the appellant has preferred appeal before the CIT (A) on the 8 IT A No s . 5 91 ,5 9 2 & 5 93 / Mu m/2 0 1 6 subsequent reopening done as per notice uls.148 on 31.03.2010 and the reassessment concluded u/s.143(3) r.w.s.147 on 30.11.2010 holding that the reassessment is beyond tour years and there is no furnishing of inaccurate particulars attributable to the appellant. As seen from the above that in the first order dated. 20.1.2006 itself the issue of allowability of 10B was examined and the "other income was removed from the working of 10B since it is not related to manufacturing activity and added back to the gross total income returned by the appellant. The relevant paras of the AO's order is reproduced as under-
5.1 I have carefully considered the submissions of the assessee The "other income" received by the assessee amounting to Rs.1,23,563/- the assessee company is not eligible for deduction u/s. 10 B, as this income is not generated on account of manufacturing activity. Any income which is eligible for deduction u/s 10B, has to be necessarily derived from the business of the assessee The source of such income has to be the business of the assessee. Any incidental income of the assessee is not includable in the profits eligible for deduction u/s10 B. The word "derived from" is distinct from the expression attributable to" Derived from has to be construed in a narrow fashion. In this regard, I'm here with discussing the meaning of the words derived from and attributable to......9
IT A No s . 5 91 ,5 9 2 & 5 93 / Mu m/2 0 1 6 5.2 The above income on which assessee company has claimed deduction u/s. 10 B, being business income, but in view of the discussion in the above paragraphs, the income on account of other income being received by the assessee for defective goods can at best be said to have been "attributable to" business but not 'derived from" the manufacturing activity. As the ratio of the above judgment and the fact of the case clearly shows that the other income described above cannot be related to the manufacturing activity of the assessee which is eligible for deduction u/s. 10 B. Accordingly the above income is excluded from the profit of the EOU unit for claiming deduction u/s. 10 B Accordingly, no deduction u/s. 10 B is allowed on the other income.
Thus it is evident from the order of the AO dt. 20.01.2006 that the issue of eligibility under section 10B was a matter of discussion in this order itself. Therefore, the subsequent reopening and concluding of assessment one more time u/s 143(3) r.w.s. 147 on 30.11.2010 is, in my considered opinion, uncalled for. It is uncalled for, firstly, the assessment pertains to A.Y.2003-04 and the four years from the end of the assessment year have already lapsed by 31.03.2008 and six years will lapse after 31 .03.2010. (As seen from the facts of the case the first reopening was done by issue of notice u/s148 on 10.02.2005 and the second reopening was done by issue of notice under section 148 on 31.03.2010). Secondly, there is no 10 IT A No s . 5 91 ,5 9 2 & 5 93 / Mu m/2 0 1 6 failure on the part of the appellant to disclose fully and truly the material facts necessary for its assessment. Thirdly, the issue was already a matter of discussion by the AO in its first reopened assessment order dt. 20.01.2006. Taking a comprehensive look at the above facts. I am of the opinion that the reopening at the second stage is not tenable as per law.
4.1.3 The third point raised by the ITAT is with regard to manufacturing activity of the appellant to make itself eligible for the claim of 10B. The AO has reopened the assessment for the second time and noticed that the appellant is not engaged in the manufacturing activity since some of the purchases were sold lock- stock- barrel without putting them to any manufacturing activity. The AO has also observed that the expenditure debited for such manufacturing activity such as grinding charges etc. are significantly low. He has also elaborately discussed in the assessment order the correspondence made with the appellant and the details obtained and the reasons for his adverse conclusions. In view of the above observations he has resorted to withdraw the claim of the 10B exemption. Convinced by the order of the AO my learned predecessor has confirmed the order of the AO 4.1.4 Before me the Ld. AR has objected for such disallowance and submitted that-
I) the company is engaged in the manufacturing activity since it was engaged 11 IT A No s . 5 91 ,5 9 2 & 5 93 / Mu m/2 0 1 6 in cleaning, grading of the material and powdering some spices.
ii) the debiting of expenditure under the head grinding is not the criteria to be see"
since the appellant has debited certain expenses under other heads of expenditure also such as labor charges, wages, depreciation of machinery etc. The appellant is also owner certain fixed assets meant for manufacturing activity.
iii) the appellant is claiming not only exports under EOU for 1 O purpose but also doing; export sales u/s.80HHC and local sales Some of the sates directly without putting them r manufacturing activity could be in the category of exports under BOHHC and local sales Therefore, sale of material as it is should not be viewed in the perspective that the appellate is not engaged in manufacturing activity.
iv) the appellant has furnished all the details required by the AO during the course of reassessment proceedings and also before the CIT(A).
V) the company is registered under SEZ Act as manufacturing unit.
vi) the definition of 'manufacture" was inserted as clause (298A) Of Section 2 of the A by the Finance Act. 2009 with retrospective effect from 1.4. 2009 and the appellant was 12 IT A No s . 5 91 ,5 9 2 & 5 93 / Mu m/2 0 1 6 not aware by the time the return of income was filed.
In view of the above, the Ld.AR has requested for relief by dismissing the order of the AO.
4.1.5 I have carefully examined the issue of manufacturing activity of the appellant No doubt the appellant has sold some of the spices without putting them into the manufacturing activity, it is evident that processing in the form of grading, removing moisture, powdering, mixing etc. was done. Even though these activities may not fit into the definition of manufacturing as per new clause 296A of Section 2, we cannot: ignore the fact that this clarification was not available to the appellant at the time of filing its return of income. Further, it is registered as a manufacturing unit with SEZ. It is also not out of context to say that the appellant is also engaged in local trade wherein he was selling the goods without putting them into manufacturing activity Whatever may be the issue of manufacturing activity of the appellant in true sense of the term, it is pertinent to note that the issue of exemption u/s. 10 B was already a matter of discussion before the AO and after careful examination of the issue the AO has disallowed Rs.1,23,563 from the claim of "other income" for the purpose of allowing 10 B. Therefore, in my considered opinion, reopening of the second time on 31.03.2010 for the purpose of disallowing exemption claimed u/s. 10 B is not in order. I therefore treat the reassessment done u/s. 143(3) read with section 147 dated 30. 11. 2010 as invalid. The ground is allowed."
13IT A No s . 5 91 ,5 9 2 & 5 93 / Mu m/2 0 1 6 Aggrieved, now Revenue is in appeal before us.
3. We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the learned Sr. DR vehemently contested the order of CIT(A) and heavily relied on the assessment order. We find that the assessee has filed complete details of manufacturing process adopted by the assessee during the course of original assessment proceedings and made claim under section 10B of the Act during original assessment in response to notice under section 143(2) of the Act. The relevant details include statement of calculation in support of exemption claimed under section 10B of the Act, detail of export sales and details in support of how manufacturing activity carried out by assessee. Even the assessee has filed letter of Joint Development Commissioner SEEPZ, Navi Mumbai i.e. letter of permission No. 245(1998)EOB/219/98 dated 21-12-1998 issued for the manufacture of processed spices and Oil seeds under 100% EOU Schemes vide letter No. SEEPZ/28/EOU/45/98-99/12089 dated 05-12-2000. The certificate was issued to the assessee vide Green Card No. 0001272 dated 31-03- 2004 and AO has raised query vide notice dated 08-02-2007 during original assessment proceedings vide question No. 2 (v) which reads as under:-
"(v) Please furnish details and evidences in support of exemption claimed under section 10B are being fulfilled in your case alongwith proof in support of manufacturing activities and foreign exchange realization within the prescribed limit. Please also give details of working of various figures as has been shown in Auditor's certificate under section 10B."
This was replied by the assessee vide letter undated, which is enclosed in assessee's paper book at pages 18-20.
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4. In view of the facts, we are of the view that the AO has formed an opinion during the course of original assessment proceedings and this reopening is merely on change of opinion, which is not permissible under section 147 of the Act in view of the decision of Hon'ble Supreme Court in the case of CIT Vs. Kelvinator of India Limited (2010) 320 ITR 561 (SC), wherein it is held as under: -
"On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re- opening could be done under above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re- open the assessment. Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of "mere change of opinion", which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re- assessment has to be based on fulfilment of certain pre-condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of re-opening the 15 IT A No s . 5 91 ,5 9 2 & 5 93 / Mu m/2 0 1 6 assessment, review would take place. One must treat the concept of "change of opinion" as an in- built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in Section 147 of the Act. However, on receipt of representations from the Companies against omission of the words "reason to believe", Parliament re-introduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No.549 dated 31st October, 1989, which reads as follows:
"7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression `reason to believe' in Section 147.--A number of representations were received against the omission of the words `reason to believe' from Section 147 and their substitution by the `opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, `reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission 16 IT A No s . 5 91 ,5 9 2 & 5 93 / Mu m/2 0 1 6 from section 147would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression `has reason to believe' in place of the words `for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same."
For the afore-stated reasons, we see no merit in these civil appeals filed by the Department, hence, dismissed with no order as to costs."
5. In view of the above decision of Hon'ble Supreme Court it is not permissible to reopen the assessment under section 147 of the Act in case of change of opinion. From the very reasons recorded by AO for reopening of assessment, it is clear that the AO was of the view that the AO was wrongly allowed on the ground that process of making power from whole Spices do not constitute manufacture within the meaning of section 10B of the Act. According to us, this is merely change of opinion and nothing else. Hence, respectfully following Hon'ble Supreme Court in the case of Kelvinator of India Limited (supra), we confirm the orders of the CIT(A) for all these three AYrs quashing the re-assessments. These appeals of Revenue are dismissed.
6. In the result, all the appeals of Revenue are dismissed.
Order pronounced in the open court on 19-12-2017.
Sd/- Sd/-
(RAJESH KUMAR) (MAHAVIR SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 19-12-2017
Sudip Sarkar /Sr.PS
17
IT A No s . 5 91 ,5 9 2 & 5 93 / Mu m/2 0 1 6
Copy of the Order forwarded to:
1. The Appellant
2. The Respondent.
3. The CIT (A), Mumbai.
4. CIT
5. DR, ITAT, Mumbai BY ORDER,
6. Guard file.
//True Copy//
Assistant Registrar
ITAT, MUMBAI