Income Tax Appellate Tribunal - Mumbai
Pushpam Synthetics (P) Ltd. vs Asstt. Cit. on 20 July, 2005
Equivalent citations: [2006]5SOT257(MUM)
ORDER
K.K. Boliya, A.M. These two appeals filed by the assessee and relating to Assessment years 1995-96 and 1996-97 are disposed off by this common order as issues involved are identical.
2. The first ground of appeal which is common for both the Assessment years pertains to disallowance of interest paid by the assessee to the bank on the ground that the assessee advanced interest-free loan to Maharashtra Trading Agency and, thus, the interest-bearing borrowed funds were diverted for non-business purpose. During the course of appellate proceedings before the learned Commissioner (Appeals) the assessee filed detailed written submissions claiming that the assessee was having interest-free funds to the extent of Rs. 67.64 lakhs. It was further pointed out that the assessee was having business transactions with M/s. Maharashtra Trading Agency. The assessee was making sales and was also doing job work on behalf of the aforesaid concern. The assessee was to receive job work charges from M/s. Maharashtra Trading Agency and substantial portion of the outstanding amount comprise of such job charges. During the course of business transactions the assessee gave trading advances of Rs. 22.43 lakhs to Maharashtra Trading Agency. The learned Commissioner (Appeals) rejected the submission and confirmed the disallowance for both the assessment years.
3. The learned counsel attending on behalf of the assessee reiterated similar arguments before us and pointed out that during the year no advances were made by the assessee to M/s. Maharashtra Trading Agency and that the outstanding amounts have been brought forward from earlier years. It is also contended that whatever amounts are outstanding are only on account of business transactions and further that interest-bearing borrowed funds have not been utilized for making any interest-free advances to Maharashtra Trading Agency. The learned Departmental Representative supported the orders of the revenue authorities.
4. After carefully considering the rival submissions, in our view this issue must go back to the assessing officer for proper verification and reconsideration. The disallowance of interest on borrowed funds can be made only when the borrowed funds have been utilized by the assessee for non-business purposes. The assessing officer must examine as to whether any interest-bearing borrowed funds have been diverted for making interest-free advances to Maharashtra Trading Agency which are not for business purposes. If the amounts outstanding are on account of job work charges receivable by the assessee, no disallowance of interest can be made. The assessing officer shall allow opportunity to the assessee to establish the source of any advances made to Maharashtra Trading Agency. After considering the entire facts the issue will be re-decided by the assessing officer.
5. Ground No. 2, which is also common for both the years, pertain to disallowance of deduction claimed by the assessee under sections 80HHA and 80-I. The assessee is engaged in sizing of yarn and the revenue authorities have held that the assessee is not engaged in manufacturing or production of any articles. On that basis the deductions claimed by the assessee were disallowed. The learned counsel appearing before us on behalf of the assessee contended that the assessee was engaged in manufacturing and producing the entirely different and commercially marketable article and therefore, the assessee was entitled to the deductions claimed. A technical note has been filed on warping and sizing, processing in which the assessee is engaged. In this note the various processes have been explained as under :
"1. M/s. Pushpam Synthetics (P) Ltd. is engaged in warping and sizing of cotton yarns and blended yarns (Polyester yarns).
2. Both cotton and blended yarns are purchased from spinning mills and the same are received on cones.
3. The said yarns, received on cones, cannot be used directly on the weaving looms for manufacture of cloth as the yarns do not have the requisite strength nor it has technical qualities or properties to run directly on the weaving looms. The said yarn does not have the strength to withstand the pressure of running on the looms where the pressure is very high.
4. In order to run the said yarns on the weaving looms, the yarns have to pass through two stages i.e. warping of yarns and sizing of yarns.
5. The first stage is Warping of Yarns wherein the yarns received on cones are put on Warping Machine-for example at a time 400 cones are put together on Warping Creel and Warping Yarn Roll of 400 yarn ends is prepared. Several such Warping Yarn Rolls are prepared at a time for next stage i.e. the sizing stage.
6. Such Warping Yarn Rolls are then put on Sizing Machine whereby 7 Warping Yarn Rolls are put together on the Sizing Machine.
7. The yarns from seven Warping Yarn Rolls i.e. 7 x 400 yarn ends-2,800 yarn ends are drawn together and passed through saw box containing sizing mixture.
8. The sizing materials and chemicals such as Maize starch, RAN 2000, PVA 123, Gower gum, water etc. are mixed together under pressure in sizing tanks and through pipeline are transferred to the saw box as per requirements.
9. The 2,800 yarn ends together pass through the sizing mixture contained in the saw box whereby the sizing mixture get wrapped around the yarns giving the yarn required strength, properties and qualities to withstand the weaving loom pressure. This process is known as sizing of yarns and is a must for any cotton/polyester cotton yarn to pass through before the same is used as warp yarn on the weaving loom.
10. The sized yarn, which has passed through the saw box on sizing machine and the sizing mixture has wrapped around it passed through 79 steam rollers whereby the excess water contents added in the saw box is dried out and then all the 2,800 yarn ends are together wound on sizing beam which is in commercial terms is known as sized yarn beam. These sized beams is are put on the weaving powerlooms for manufacturing of cloth.
11. The sized beam is a completely different commodity then the yarn received on cones and the sized yarn beams are commercially marketable and are being marketed by various mills like Morarjee Mills, Dawn Mills, Simplex Mills, NTC Mills etc.
12. As explained above, the yarns which come on cones and the sized beams prepared after the Warping and Sizing of Yarns are two completely different commodities in actual sense as well as in commercial parlance."
6. It is further submitted that the assessee is entitled to deduction under section 80HHA for a period of 10 years and that in the earlier assessment years the deduction have been duly allowed by the assessing officer. It is also submitted that the deductions claimed have been allowed in the subsequent assessment years as well. In support of this contention copy of the assessment order passed by the assessing officer under section 143(3) for assessment year 1998-99 has been filed at pages 25 and 26 of the paper book. In this order deduction under section 80HHA has been allowed by the assessing officer. It may be mentioned that the assessment year 1998-99 happens to be the 10th year and the last year of deduction as mentioned by the assessing officer in the assessment order. The learned counsel contended that the disallowance has been made by the assessing officer only in the assessments for the two assessment years under appeal. The learned counsel also relied on Mumbai ITAT decision in the case of Emptee Poy-Yarn (P) Ltd. (ITA No. 1324 (Mum) of 2000, dated 11-7-2000), copy of which has been filed. In this case the assessee was engaged in the business of texturing and twisting of yarn. The learned counsel invited our attention to the relevant part of the Tribunal's order which is extracted below from para 9 of the order :
"At the same time we cannot ignore the decisions of the Tribunal, wherein the issue was considered independently on merits in order to come to the conclusion that such activity is a manufacturing activity. In the case of Nishit Synthetics Pvt. Ltd. (cites supra) the Appellate Tribunal, Ahmedabad Bench has elaborately discussed the issue. Since it is a technical matter, the bench has taken aid of the experts opinion in order to appreciate as to whether 'POY' and 'TY' are two different commodities having distinct commercial name or not. For the sake of brevity we do not intend to extract the relevant paras from the experts opinion extracted by the Ahmedabad Bench as well as experts opinion furnished by the assessee before us. Suffice it to say that in respect of a marketable commodity which is not used by public at large in that form, commercial parlance test is the only proper test is the proper test which can be applied to appreciate as to whether the raw material and the end product are two commercially distinct and separate products or not. In the instant case the assessee satisfies this test and hence the processing of 'POY'to produce 'TY' can be considered as a manufacturing activity or atleast a production activity. The Ahmedabad Bench (cited supra) as well as Delhi Bench in the case of Varistha Udyog Ltd, were of the opinion that commercially different commodity emerges after the 'POY' is processed. As we are also of the same view, we respectfully follow the decision cited by the learned counsel and hold that the assessee is entitled to deductions stipulated under the Act. The decision relied upon by the C.I.T. (Appeals) are distinguishable on facts. At any rate no universal formula can be applied to analyse as to what amounts to production or manufacture, it depends on the facts and circumstances of each case. In the instant case revenue was consistently of the opinion that twisting of yarn is a manufacturing activity and in fact assessing officer has accepted the claim of the assessee in several years."
7. The learned Departmental Representative strongly supported the orders of the revenue authorities and relied on the following judgments :
1. CIT v. S.S.M. Sizing Center(1985) 155 ITR 782 (Mad)
2. CIT v. Natraj Processing Industries (1993) 203 ITR 833 (Pat)
8. We have given a careful consideration to rival submissions vis-a-vis facts of the case and have gone through the precedents cited before us. First of all the cases relied upon by the learned Departmental Representative may be referred to. In the case of S.S.M. Sizing Center the Hon'ble High Court was called upon to adjudicate as to whether the plant and machinery used for various processes of sizing of yarn, is entitled to higher development rebate under section 33 of the Income Tax Act. It was observed by the Hon'ble High Court that as per item No. 32 of Schedule V of the Income Tax Act higher development rebate was available where the plant and machinery has been used in manufacture of textiles specified in item No. 32, i.e., textiles made wholly or mainly of cotton yarn, hosiery and rope. In our view this case has no relevance of deciding the present controversy. Higher development rebate is available subject to the restrictions of Schedule V and on that ground it was held by the Hon'ble High Court that the assessee was not entitled to higher development rebate. The case of Natraj Processing Industries (supra), in our view also cannot be applied to the assessee's case. In that case the question arose as to whether the new industrial undertaking engaged in the process of calendering of gray cloth was entitled to deduction under section 80J of the Income Tax Act. The ratio of this decision is extracted below from the head note :
"Held, that, in the present case, the assessee purchased gray cloth and added to it various chemicals and thereafter put it in a damping machine. The cloth was thereafter folded according to the size and stamped according to its length and breadth and a specific brand name was printed on its top. The calendering process employed by the firm was such as to give temporary finish by pressing the fabric for making it marketable. No lasting change was brought about. The assessee was, therefore, not entitled to special deduction under section 80J." (p. 833)
9. In our view the calendering process cannot be equated with warping and sizing of the yarn. The Mumbai ITAT decision in the case of M/s. Emptee Poy Yarn (P) Ltd. in our view is nearer to the facts of the assessee's case. In our view the new commercially marketable commodity comes into existence after the process of warping and sizing. Further in all the earlier years orders the department has allowed the relevant deduction to the assessee. Even though the principle of res judicata does not apply to the income-tax proceedings, the rule of consistency must be followed when the facts and circumstances are identical. In view of the above we hold that the assessee is entitled to deduction under sections 80HHA and 80-I and accordingly, the assessing officer is directed to allow deduction as admissible in accordance with relevant provisions of the aforesaid sections.
10. In the result, both the appeals are allowed.