Income Tax Appellate Tribunal - Chandigarh
Little Bee Impex, Khanna vs Department Of Income Tax on 31 October, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCH 'B', CHANDIGARH
BEFORE SHR I T.R.SOOD, ACCOUNTANT MEMBER
AND Ms. SUSHMA CHOWLA, JUDICIAL MEMBER
ITA No.553/Chd/2011
(Assessment Year : 2006-07)
M/s Little Bee Impex, Vs. The D.C.I.T.,
Vill.Mallipur, GT Road, Doraha Circle
Ludhiana. Khanna.
PAN: AABFL9170D
ITA No.1210/Chd/2012
(Assessment Year : 2006-07)
&
ITA No.1211/Chd/2012
(Assessment Year : 2009-10)
M/s Little Bee Impex, Vs. The Assessing Officer,
GT Road, Khanna Circle
Vill.Mallipur, Doraha Khanna.
Ludhiana. Ludhiana.
PAN: AABFL9170D
&
ITA No.690/Chd/2011
(Assessment Year : 2008-09)
The A.C.I.T., Vs. M/s Little Bee Impex,
Circle GT Road, Doraha
Khanna. Ludhiana.
PAN: AABFL9170D
(Appellant) (Respondent)
Assessee by : Shri Ashwani Kumar
Department by : Dr. Amarveer Singh
Date of hearing : 31.10.2013
Date of Pronouncement : 03.01.2014
ORDER
PER SUSHMA CHOWLA, J.M, :
Out of these four appeals, the appeal in ITA No.553/Chd/2011 is filed by the assessee is against the order of the Commissioner of Income-tax-II, Ludhiana dated 2 4 . 3 . 2 0 1 1 r e l a t i n g t o a s s e s s m e n t ye a r 2 2006-07 against the order passed under section 263 of the Income Tax Act, 1961. The appeal in ITA Nos.1210 & 1211/Chd/2012 are filed by the assessee against the consolidated order of CIT (Appeals) dated 20.9.2012 against order passed under section 143(3) r.w.s. 263/143(3) o f t h e A c t r e s p e c t i v e l y. T h e a p p e a l i n I T A N o . 6 9 0 / C h d / 2 0 1 1 i s f i l e d b y the Revenue against the order of CIT (Appeals) dated 13.4.2011 against the order passed under section 143(3) of the Act. All the four appeal relating to the same assessee were heard together and are being disposed off by this consolidated order for the sake of convenience.
2. The assessee in ITA No.553/Chd/2011 has raised the following grounds of appeal:
"1. That order u/s 263 by the Ld. Commissioner of Income-tax-II, Ludhiana is against law and facts on the file in as much as the assessment framed by the Ld. Assessing Officer cannot be said to be erroneous in as much as prejudicial to the interest of revenue.
2. That the Ld. Commissioner of Income-tax failed to appreciate the import of detailed submissions made and facts and circumstances of the case while arriving at a conclusion that the assessment order passed by the Ld. Assessing Officer is erroneous in as much as prejudicial to the interest of revenue.
3. That the Ld. Commissioner of Income-tax was not justified to arbitrary set aside for fresh consideration the issue of exemption u/s 10B which had been allowed to the appellant by the Ld. Assessing Officer after due verification.
4. That the Ld. Commissioner of Income-tax was not justified to set aside the issue of claim of allowance of additional depreciation which had been allowed to the appellant by the Ld. Assessing Officer after due application of mind.
5. That the Ld. Commissioner of Income-tax was not justified to enhance the income of the appellant by Rs.2,57,88,457/- by negating the claim of deduction u/s 10B on the amount of incentive received by the appellant under "Vishesh Krishi Upaj Yozna".3
6. That the Ld. Commissioner of Income-tax was not justified to set aside the issue of claim of expenses amounting to Rs.27,43,200/- paid by way of commission to Sh.Parvinder Thapar."
3. The issue arising in the present appeal is against the order passed b y the Commissioner of Income Tax -II, Ludhiana under section 263 of the Income Tax Act.
4. The brief facts of the case are that the assessee had filed return of income declaring total income of Rs.10,20,443/- on 30.10.2006. Thereafter the assessment was completed under section 143(3) of the Act vide order passed dated 30.12.2008 under which certain disallowances/additions were made. The copy of the assessment order is available on record. The Commissioner of Income Tax on examination of the assessment record noted that the assessment order passed by the Assessing Officer was both erroneous and prejudicial to the interest of the Revenue. A c c o r d i n g l y, s h o w n o t i c e u n d e r s e c t i o n 263 of the Income Tax Act was issued to the assessee. The show cause notice issued to the assessee is incorporated at pages 1 to 3 of the order passed under section 263 of the Act. Subsequently another notice under section 263 of the Act was issued on 6.7.2009 which is reproduced at page 4 of the order of Commissioner of Income Tax, Ludhiana. The submission of the assessee are reproduced at pages 5 to 7 of the order passed under section 263 of the Act. One of the planks of arguments made by the learned counsel before the Commissioner of Income Tax was that similar claim of ex emption under section 10B of the Act has been decided by the Chandigarh Bench of the Tribunal in assessee's own case relating to assessment 4 years 2004-05 and 2005-06. The Commissioner of Income Tax, Ludhiana observed as under:
"Decision of Hon'ble ITAT, Chandigarh Bench dated 31.03.2009 mentioned above has been rendered in favour of the assessee on the ground that the Assessing Officer had adopted one view which was possible and that the CIT could not substitute his view in a subjective manner under the provisions of section 263 of the Act. However, in the case of the assessee for Assessment Year 2006-07, which is under consideration, as brought out in the notice dated 29.05.2009 reproduced above, my predecessor clearly brought out a number of issues different from those for Assessment Year 2004-05 and Assessment Year 2005-06. He has mentioned that the procedure employed by the AO to inspect the factory of the assessee by inspectors under section 133B of the Act was unauthorized in legal terms. Further, there was nothing on record to suggest that the Inspectors, who were asked to make spot enquiries during the assessment proceedings in this case, were qualified to adjudge the chemical properties as brought out by them in there reports. It is also clearly mentioned in the notice that nothing was brought on record such as any technical benchmarks or standards to substantiate the claim that the finished honey represented a distinct product at least in technical terms. The records, as further mentioned in the said notice, only could show that the transformation of honey in the undertaking of the assessee appeared to be only "processing of Honey" in such a manner and to the limited extent of making the honey fit for marketability and human consumption and that such transaction could not be called "manufacture" or "production". The CIT had also clearly mentioned that only the "processing" specifically mentioned in the provisions of section 10B of the Act (i.e. cutting and polishing of precious and semi precious stones) is eligible for deduction under these provisions and that processing of honey was not included for this concession."
5. The second distinction drawn by the Commissioner of Income Tax was that the Assessing Officer had ignored the law of precedence on the issue of allowability of claim of exemption under section 10B of the Act and had in turn followed the decision pertaining to deduction under section 80HH/80I of the Act. Further the Assessing Officer had failed to follow the directions issued by the Addl.CIT, Range Khanna under section 144A of the Act for following the ratio 5 laid down b y Hon'ble Supreme Court in CIT Vs. Relish Foods [237 ITR 59 (SC)] and in CIT Vs. Venkateshwara Hatcheries (P) Ltd. [237 ITR 174(SC)]. The Commissioner of Income Tax further held that while deciding the issue in the hands of the assessee relating to a s s e s s m e n t ye a r s 2 0 0 4 - 0 5 a n d 2 0 0 5 - 0 6 , C h a n d i g a r h B e n c h o f T r i b u n a l vide order dated 31.3.2009, had applied the decision of Hon'ble Supreme Court in India Cine Agencies Vs. CIT [308 ITR 98 (SC)], which was in respect of provisions of section 80HH/80I of the Act. As the assessee had failed to draw distinction between various judgments pointed out in the notice issued under section 263 of the Act and Assessing Officer's reliance on other decisions and also non-following of specific directions of Addl.CIT under section 144A of the Act, as per the Commissioner of Income Tax, makes the order erroneous and as the exemption resulted into reduction in tax liability of the assessee, the same was prejudicial to the interest of the Revenue. The Commissioner of Income Tax further noted that the assessment in the case was completed by the Assessing Officer in great haste as the main work of assessment and decision making was carried out on the last date i.e. 30.12.2008, when survey report under section 133B of the Act was also handed over to the Assessing Officer. As no survey under section 133A of the Act was carried out by the Assessing Officer, the Commissioner of Income Tax observed that further enquiry was necessary in the case and mere failure to make such enquiry makes the order erroneous. Further the Revenue has also filed an appeal against t h e o r d e r o f T r i b u n a l r e l a t i n g t o a s s e s s m e n t ye a r s 2 0 0 4 - 0 5 a n d 2 0 0 5 -
06. In view thereof, the Commissioner of Income Tax was of the view that the twin conditions of applicability of Section 263 of the Act in this case with regard to the issue of allowing of claim of exemption under section 10B of the Act are, therefore, very much satisfied. The 6 order of the Assessing Officer passed under section 143(3) of the Act for the Assessment Year 2006-07 is accordingly set aside with a direction to pass the order afresh in the light of above discussed observations and after making necessary inquiries/verification and taking into account latest legal position on the issue.
6. In respect of second issue 'whether the assessee is manufacturing or producing any article or thing?', the issue of allowance of additional depreciation was also set aside to the file of the Assessing Officer.
7. The next issue was in relation to deduction under section 10B of the Act on sale of incentives received from Ministry of Commerce, Government of In dia. The said receipt was claimed to be directly linked with the income from export of the articles by the assessee as t h e a s s e s s e e w a s 1 0 0 % e x p o r t o r i e n t e d u n i t . R e l yi n g o n t h e r a t i o l a i d down in Libert y In dia Vs. CIT [317 ITR 218 (SC)], the Commissioner of Income Tax held that such receipts could not be taken as income derived from industrial undertaking of the assessee and were not eligible for deduction under section 10B of the Act. The income on this account was held to be enhanced by Rs.2,57,88,457/- and Commissioner of Income Tax passed order of enhancement.
8. The last issue raised in the show cause notice issued under s e c t i o n 2 6 3 o f t h e A c t w a s i n r e l a t i o n t o p a ym e n t o f c o m m i s s i o n o f Rs.27,43,200/- to Shri Parvinder Thapar. T h e s a i d p a ym e n t w a s claimed to be made on account of exports to USA. As the Assessing Officer had failed to examine the genuineness of the said transaction, the order of the Assessing Officer on this issue was, therefore set aside with the direction to make necessary enquiries. The Assessing 7 Officer was also directed to disallow interest corresponding to interest f r e e a d v a n c e s g i v e n t o M / s G r e e n G r a m U d yo g & S o n s a t R s . 8 0 7 6 / - .
9. The assessee is in appeal against the order of the Commissioner of Income Tax. The ld. AR for the assessee pointed out that the assessee in the case was completed under section 143(3) of the Act vide order dated 30.10.2008 at total income of Rs. 77,84,513/-. It was further pointed out by the ld. AR for the assessee that thereafter show cause notice was issued b y the Commissioner of Income Tax is placed at pages 1 to 4 of the Paper Book and the reply of the assessee dated 09.02.2010 is placed at pages 6 to 10 of the Paper Book. In the said show cause notice issued, the learned A.R. for the assessee met with all the objections raised in show cause notice of the Commissioner of Income Tax parawise. In respect of first objection of claim of exemption under section 10B of the Act, the learned A.R. for the assessee pointed out that during the assessment proceedings, queries were raised to which reply was filed by the assessee and reference was made under section 144A of the Act and further replies were filed during the assessment proceedings. The Assessing Officer thereafter passed order under section 143(3) of the Act and invoking of the jurisdiction b y the Commissioner of Income Tax under section 263 of the Act on this account was claimed to be wrong. Further reliance was placed on the order of the Tribunal dated 31.3.2009 relating to a s s e s s m e n t ye a r s 2 0 0 4 - 0 5 a n d 2 0 0 5 - 0 6 w h e r e i n s i m i l a r b u s i n e s s w a s carried out and the assessee was held to be eligible for claim of ex emption under section 10B of the Act. It was further pointed out by the ld. AR for the assessee that registration with various government agencies i.e. under the Factories Act, with the Department of Industries and under the Central Ex cise Act was made by the assessee 8 as manufacturing unit. Further contention was that though the unit of the assessee was registered under the Excise Act but no excise duty w a s p a ya b l e a s i t w a s a n 1 0 0 % e x p o r t o r i e n t e d u n i t . It was stressed by the ld. AR for the assessee that facts of the present case were i d e n t i c a l t o t h e f a c t s o f t h e e a r l i e r t w o ye a r s a n d t h e d e d u c t i o n claimed under section 10B of the Act was allowable to the assessee. The ld. AR for the assessee further placed reliance on the under mentioned case laws :
i) Malabar Industrial Co. Ltd. Vs CIT 243 ITR 83 (S.C)
ii) CIT Vs Munjal Castings Ltd. 303 ITR 23 (P&H)
iii) Max India Ltd. 295 ITR 282 (S.C.)
10. It was the contention of the ld. AR for the assessee that where two views were possible, the Assessing Officer having adopted one view, cannot be super imposed b y the Commissioner of Income Tax with the other view. Further contention of the ld. AR for the assessee was that the Commissioner of Income Tax had tried to impose his opinion which was not permissible under the Act. In the facts of the present case, each and every argument was considered by the Assessing Officer. Reliance was placed on CIT Vs Gabrial India Ltd. 203 ITR 108 (Bom). The ld. AR further submitted that while claiming the deduction under section 80IC of the Act, list of items manufactured were provided under 14th Schedule and one of the items recognized was manufacture of honey under part-B at point 12 and under part 'C' at point 3 under the 14th Schedule to the Income Tax Act. In respect of the other query raised by the Commissioner of Income Tax under section 263 of the Act, the learned A.R. for the assessee pointed out that there was no claim of additional depreciation d u r i n g t h e ye a r u n d e r c o n s i d e r a t i o n . Our attention was drawn to the 9 query raised by the Assessing Officer and replies by the assessee. Third objection of the Commissioner of Income Tax was in respect of incentives received by the assessee. The learned A.R. for the assessee pointed out that the assessee is in the business of export and incentives received were by virtue of exports and the same is not disputed. The Assessing Officer had considered the replies of the assessee and allowed the claim, whereas the Commissioner of Income Tax has held the assessee not entitled to the claim of deduction under section 10B of the Act on the said incentives and income has been enhanced b y the Commissioner of Income Tax. It was pointed out b y the ld. AR for the assessee that on merits of the case, the assessee was entitled to the said deduction. Further contention of the learned A.R. for the assessee was that once the issue has been decided by the Assessing Officer, the Commissioner of Income Tax cannot super impose his view on the same. The learned A.R. for the assessee further submitted that in respect of commission, no specific query was raised though the assessee had produced books of account. However, the assessee had replied to the query raised in the show cause notice and complete details were furnished before the Commissioner of Income Tax. The learned A.R. for the assessee stressed that this was a case where basic invoking of the jurisdiction under section 263 of the Act needs to be struck down.
11. The learned D.R. for the Revenue in reply pointed out that there was non-application of mind by the Assessing Officer in respect of grant of exemption under section 10B of the Act and further the assessment was made in haste. The learned D.R. for the Revenue p o i n t e d o u t t h a t r a t i o l a i d d o w n b y t h e T r i b u n a l i n t h e e a r l i e r ye a r s i s not applicable to the facts of the case in the absence of any enquiry 10 r e p o r t u n d e r s e c t i o n 1 3 3 B o f t h e A c t i n t h e s a i d ye a r s . The ld. DR for the revenue pointed out that the Tribunal in the earlier order had only considered the test of marketability in isolation and had not considered the issue at length. In respect of the assessment proceedings, the ld. DR for the revenue pointed out that there was no discussion in the assessment order about said proceedings though there were lots of correspondence between the assessee and the Addl. Commissioner of Income Tax and also the Assessing Officer but the Assessing Officer relied upon the report of the Inspector. It was further contended by the ld. DR that there was no discussion by the Assessing Officer despite directions of the Addl. Commissioner of Income Tax and in the absence of the same and also there was no a p p l i c a t i o n o f m i n d b y t h e A s s e s s i n g O f f i c e r . C o n s e q u e n t l y, t h e o r d e r of the Commissioner of Income Tax holding the assessment order to be both erroneous and prejudicial to the interests of the revenue. Reliance was placed on the following case laws :
i) Malabar Industrial Co. Ltd. Vs CIT, 243 ITR 83 (S.C)
ii) CIT Vs Smt. Pushpa Devi, 173 ITR 445 (Patna)
iii) Swarup Vegetable Products Industries Ltd. Vs CIT, 187 ITR 412 (P&H).
iv) CIT Vs Relish Foods, 237 ITR 59 (S.C)
v) CIT Vs Venkateshwara Hatcheries P. Ltd., 237 ITR 174
(S.C)
vi) B.G.Chitale Vs DCIT 115 ITD 97 (SB) (Pune)
12. The ld. DR further submitted that what the assessee was doing c o l l e c t i n g h o n e y, p r o c e s s i n g a n d m a k i n g t h e s a m e m a r k e t a b l e a n d t h e same does not tantamount to manufacture. In respect of issue of additional depreciation, the learned D.R. for the Revenue pointed out that no directions were issued b y the Commissioner of Income Tax in 11 this regard. The next issue was the incentives received by the assessee and the same being eligible for deduction under section 10B of the Act. The learned D.R. for the Revenue pointed out that though the Assessing Officer had called for details but not discussed the legal position and the said legal position had been addressed by the Commissioner of Income Tax at page 13 in para 6 of his order. It was further pointed out by the ld. DR for the revenue that 5% of export value was given as license by DGFT and no money in cash was given.
The money was received b y the assessee on sale of licence. It was the submission of the ld. DR for the revenue that in case of all subsidies, the income derived was of second category and was taxable in view of the ratio laid down by Hon'ble Supreme Court in Libert y India 317 ITR 218 (S.C). In respect of the payment of commission, the learned D.R. for the Revenue stressed that no queries were raised by the Assessing Officer. The Commissioner of Income Tax having rightl y issued the notice of wrong application of law, the order of Commissioner of Income Tax passed under section 263 of the Act, as per the learned D.R. for the Revenue, merits to be upheld.
13. The learned A.R. for the assessee in rejoinder pointed out that the merits of the allowability of claim of exemption under section 10B of the Act has been deliberated upon by the Tribunal and it was held that the activity carried out by the assessee was production. It was further claimed by the learned A.R. for the assessee that the observations of the Commissioner of Income Tax that the assessment was done in haste, were not correct. Our attention was drawn to various notices issued in this case and thereafter provisions of section 144A of the Act and elaborate enquiries b y deputation of Inspector, the learned A.R. for the assessee stressed that the assessment was 12 getting time barred by limitation of 30.12.2008 and hence order was passed on that date.
14. The ld. AR for the assessee pointed out that the Assessing Officer had restricted the claim of deduction under section 10B of the Act to 90% and it could not be said that the Assessing Officer had not considered one leg of the said section. It was further pointed out b y the ld. AR for the assessee that the Hon'ble Supreme Court in India Cine Agencies (supra) had considered CIT Vs Ventakateshwara Hatcheries 237 ITR 174 (S.C) (supra). In respect of the ratio laid down in Relish Foods (supra), it was clarified by the ld. AR for the assessee that no details were filed before the Hon'ble High Court and it has been mentioned in the said judgement that in the absence of the said details, such view was being taken. The ld. AR for the assessee further submitted that there was no definition of the word 'manufacture' under section 10B of the Act but the definition as provided in Explanation 1 (iii) to section 10AA of the Act may be considered. The ld. AR for the assessee had furnished compilation of documents which would be considered in paras herein after. The copy of chart showing differences between raw honey and finished honey is also placed at pages 131 and 132 of the Paper Book.
15. The ld. DR for the revenue, after the close of the appellate proceedings vide letter dated 16/29.07.2013 had filed written submissions and it was pointed out that the fact of the case in a s s e s s m e n t ye a r 2 0 0 6 - 0 7 w e r e d i f f e r e n t f r o m t h a t i n a s s e s s m e n t ye a r 2 0 0 4 - 0 5 a n d 2 0 0 5 - 0 6 a s t h e o r d e r i n t h e a s s e s s m e n t ye a r 2 0 0 6 - 0 7 h a s been passed by the Assessing Officer without any enquiry and application of mind to both the issues and hence, the Commissioner of Income Tax was justified in invoking the provisions of section 263 of 13 the Act. Reliance is placed on various decisions for the said proposition. The ld. DR for the revenue further pointed out that the term 'manufacture' has been defined in section 2(29BA) of the Act w.e.f. 01.04.2009 and the meaning of the term 'manufacture' or ' p r o d u c t i o n ' f o r t h e ye a r p r i o r t o a s s e s s m e n t ye a r 2 0 0 9 - 1 0 h a d t o b e understood from the judicial rulings of Hon'ble Supreme Court.
16. The next contention of the ld. DR for the revenue was that the learned counsel has relied upon the definition of term manufacture given in clause (iii) of explanation below subsection (9) of section 10AA of the Income Tax Act. It provides that manufacture shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zones Act, 2005. However, section 10AA was incorporated in the Income Tax Act b y the Special Economic Zones Act, 2005 and bodily lifted from schedule-II of SEZ Act. Section 27 of the SEZ Act which provides for modification of Income Tax Act to the extent of second schedule of SEZ Act. Therefore, the definition of term manufacture in section 10AA of the Income Tax Act is applicable to the undertakings/enterprises having their business in SEZ only and has no application to other sections/provisions of the Income Tax Act. Hence, the meaning of term manufacture under the SEZ Act cannot be extended to section 10B of the Act but only for the purpose of section 10AA of the Income Tax Act. The ld. DR for the revenue further s t r e s s e d t h a t t h e m e r e m e n t i o n o f w o r d ' h o n e y' i n s c h e d u l e 1 4 o f t h e Income Tax Act would not lead to the inference that honey was manufactured product. Thereafter, reliance was made to the definition of term 'manufacture' under the Central Excise Act by the ld. DR for the revenue and it was pointed out that the scope of the term 'manufacture' in the first schedule to the Central Excise Tariff Act, 14 1 9 8 5 b y i n c l u d i n g o n l y a r t i f i c i a l h o n e y, w h e t h e r o r n o t m i x e d w i t h n a t u r a l h o n e y, b y t h e F i n a n c e B i l l , 2 0 0 2 . As per ld. DR for the revenue, the natural honey continue to be exempt from excise duty i.e. CENVAT and mere registration under the Central Excise or other government authorities for the purpose of administrative or statutory compliance was held to be not sufficient ground to conclude that the assessee was engaged in manufacture or production of h o n e y. Reliance was placed on series of decisions by the ld. DR for the revenue and it was further contended that if the change made in the article results in new and different article, then the same would a m o u n t t o m a n u f a c t u r i n g a c t i v i t y. Reliance was placed on the ratio laid down by the Hon'ble Mumbai Customs, Excise and Gold Tribunal in the case of Charak Pharnraceuticals India Pvt. Ltd. Vs. Commissioner of Central Excise (copy placed on record) wherein the Hon'ble bench has held that honey procured from apiaries and subjected to processing such as heating, cooling, staining, filtration and then packed in the containers for marketing does not amount to manufacture and not excisable.
17. We have heard the rival contentions and perused the record. Original assessment in the case of the assessee was completed under section 143(3) of the Income Tax Act and the assessee was held to be eligible for claim of deduction under section 10B of the Income Tax A c t o n m a n u f a c t u r e o f h o n e y. The assessee has placed on record the copy of correspondence before the Assessing Officer during the original proceedings. It was pointed out by the ld. AR for the assessee that the additional Commissioner of Income Tax vide letter dated 22.10.2008 had issued directions under section 144A of the Act during the course of scrutiny proceedings. The copy of the said 15 communication is placed at pages 58 to 64 of the Paper Book to decide various other queries raised, the Addl. Commissioner of Income Tax had vide point No.2 raised the issue of claim of deduction under section 10B of the Act and the assessee was asked to justify its claim on various conditions of section 10B of the Act and also in respect of the ratio laid down by the Hon'ble Apex Court in CIT Vs Ventakateshwara Hatcheries 237 ITR 174 (S.C) and Relish Foods 237 ITR 59 (SC) as per the relevant observations at pages 55 to 60 of the Paper Book. The reply of the assessee dated 28.11.2008 is placed at pages 65 to 72 of the Paper Book and the assessee explained the process of manufacture of honey in detail under para 2 and it was also pointed out that the said unit was established with new machinery and eligibility of claim of deduction under section 10B of the Act was explained. The copy of the said reply is placed at pages 65 to 72 of the Paper Book. The Addl. Commissioner of Income Tax, thereafter issued another letter dated 11.12.2008 which is placed at pages 73 to 77 of the Paper Book in which the issue raised by the Addl. Commissioner of Income Tax was whether the assessee was entitled to the deduction under section 10B of the Act @ 100% or 90% of the profits. The repl y of the assessee dated 22.12.2008 is placed at pages 78 to 81 of the Paper Book in which the assessee admitted that by an error, it had claimed the deduction under section 10B of the Act at 100% instead of 90% and on pointing out of the mistake, it deposited the income tax plus interest thereon suo-motto without any instructions from the income tax office. The Assessing Officer, thereafter issued a questionnaire dated 23.12.2008 which is placed at pages 82 to 83 of the Paper Book in which queries were raised in respect of the allowability of deduction under section 10B of the Act with respect to the concept of manufacturing. The reply of the 16 assessee dated 26.12.2008 in this regard is placed at pages 86 to 90 of the Paper Book in which the assessee explained various aspects of its manufacture and also pointed out that the definition of production and manufacture have been considered by the Hon'ble Supreme Court in India Cine Agencies Vs CIT (supra) and the term 'production' includes packing, labeling, re-labeling of containers; re-packing from bulk packages to retail packages and adoption of any other method to render the produce marketable. In view of the definition, as referred b y the Hon'ble Supreme Court in India Cine Agencies Vs CIT (supra), it was pointed out that the assessee was engaged in the manufacture/production of honey as the definition was wide enough to include all t yp e s of manufacturing activities undertaken by the assessee. The ld. AR for the assessee also pointed out that the finished honey was distinct in character and properties from the raw honey and various impurities, wax, moisture were reduced and after pasteurization, same were bottled, labeled and packed to make it marketable/exportable. It was also pointed out b y the assessee that various government agencies including Central Excise, ABEVA and NEPZ (Development Commissioner) had regarded the unit as engaged in manufacture of honey and the assessee was availing all the benefits available under the law. Another questionnaire was issued by the Assessing Officer vide letter dated 26.12.2008 placed at pages 84-85 of the Paper Book in which the assessee was asked to furnish specific reply regarding allowability of deduction under section 10B of the Act including pointing out the difference between raw honey and finished h o n e y. The reply of the assessee dated 29.12.2008 is placed at pages 91 to 96 of the Paper Book in which the assessee has included flow chart of manufacturing honey and also pointed out the change in c h a r a c t e r i s t i c s b o t h i n p h ys i c a l a n d c h e m i c a l a s p e c t s o f r a w h o n e y a n d 17 finished honey and also the various aspects of marketability of the two items. Another reply was furnished by the assessee on 30.12.2008 which is placed at pages 97 to 100 of the Paper Book. In the a b o v e s a i d r e p l y, t h e A s s e s s i n g O f f i c e r h a d p e r i o d i c a l l y r a i s e d t h e issue of claim of deduction on the receipts on account of the Vishesh Krishi Upaj Yogana and its taxability. It may be pointed out that during the pendency of the assessment proceedings, survey report was obtained by the Assessing Officer by deputing inspectors under section 133B of the Act which was also confronted to the assessee and various queries were raised in this regard. Thereafter, the assessment was completed by the Assessing Officer vide order dated 30.12.2008.
18. The Commissioner of Income Tax issued show cause notice under section 263 of the Income Tax Act as to wh y the exemption allowed under section 10B of the Act should not be withdrawn for the following reasons :
"A. First, the procedure employed to inspect the processing facilities by the Inspectors under section 133B was unauthorized in legal terms. The limited objective of the process under section 133B is to obtain the information stipulated specifically in form no 45 D which does not contemplate the inspection and submission of the report buy the Inspectors on the aspect of processing of honey. The procedure adopted is erroneous and subversive of the legally authorized inspection processes. Such unauthorized inspection procedures are prejudicial to the sanctity of the tax administration and any findings made there suffer from irregularity.
B. Secondly, to adjudge changes in the chemical properties, as found by the Inspectors, technical qualification and knowledge is obviously necessary. There is nothing on record to suggest that the Inspectors were so qualified. Therefore, the findings of the Inspectors should not have been taken into consideration by the AO in the process of adjudicating the claim for deduction under section 10B.
C. Thirdly, though it is claimed that the extent of transformation of raw honey results in the finished honey becoming a distinct commodity, nothing is brought on record such as any technical benchmarks or standards to substantiate the claim that the finished honey represents a distinct product at least in technical terms. The records do not indicate that the technical parameters of finished honey are distinct from those of raw honey. Mere variations in percentage terms of contents of sugar, moisture and micro biological properties cannot impart technical distinctiveness to finished honey.
D. Therefore, the only material on record to justify the transformation appears to be the processing of honey in such a manner and to the limited 18 extent of making the honey fit for marketability and human consumption. Such a limited change cannot be called manufacture or production. It is noteworthy that where the benefit is sought to be allowed under section 10 B on the basis of mere processing which does not result in total transformation of the input, a specific provision is made to this effect in the Explanation. Processing of honey is not allowed this concession.
E. It appears that the grant of exemption on the mere basis of marketability is based on the decision of Hon'ble Supreme Court in the case of Indian Cine Agencies. It Appears that the AO has agreed with contention that distinct nature of final output is not the condition for grant of deduction so long as the test of marketability is satisfied. The finding of the AO is erroneous for the following reasons:
1. The Hon'ble Supreme Court was concerned with the provisions of section 80HH/80I whereas the question in your case is the interpretation of Section 10 B, where among others, the condition of manufacture or production is made explicit by providing the benefit for mere processing in a restricted manner. Next the facts are not at all comparable.
2. The AO has ignored the law or precedents which stipulates that the decision of a bench of court with higher number of judges is a binding precedent vis-à-vis the judgement rendered by the bench of comparatively lower strength There are catena of the decisions rendered by Hon'ble compared to the bench of two judges in the case of India Cine Agencies where the distinctiveness of the final output has been held to be the condition production. The Assessing officer failed to take into consideration some of the decisions of the Hon'ble SC rendered by the Full Bench and Division Bench such as commissioner of income Tax V Relish Foods 237 ITR 59 (SC). Sterling Foods' case [1986] 63 STC 239 (SC), Indian Hotels company Ltd. Vs. ITO 245 ITR 538 (SC), Sacs Eagles Chicory vs. CIT 255 ITR 178 (SC)), CIT vs. Venkateshwara Hatcheries (P) Ltd,), CIT vs. Gem India Manufacturing Company 249 ITR 307 (SC), Lucky Minmat (P) Ltd. Vs. CIT 245 ITR 830 (SC), CIT vs. Tara Agencies 292 ITR 444 (SC.237ITR 174 (SC), CIT vs. Ka/a Cartoons (P) Ltd. 252 ITR 658 (SC), Commissioner of Income Tax v Tara Agencies 292 ITR 444 (SC) etc.
3. The Assessing Officer failed to take into consideration the decision of the Hon'ble SC in commissioner of Income Tax v Relish Foods 237 ITR 59 (SC) and CIT vs. Venkateshwara Hatcheries (P) Ltd. 237 ITR 174 (SC) which he was directed to do so by the Addl.CIT Range vide his direction u/s 144A issued on 22-10-2008. [Instruction. No-1].
In view of these facts I have reason to believe that the Assessing Officer has erred in law and on facts in allowing deduction u/s10B of Rs. 57959512/-. On the processing of honey done by you.
19. The issue arising before us is two fold. The first aspect of the issue raised before us is whether the assessee is engaged in the manufacturing activities which entitles it to the claim of exemption under section 10B of the Act. The second aspect of the issue is whether the exercise of revisionary jurisdiction by the Commissioner 19 of Income Tax under the provisions of section 263 of the Act has been correctly exercised.
20. We proceed to decide the first aspect of the issue that whether t h e a s s e s s e e i s e n g a g e d i n m a n u f a c t u r i n g o f h o n e y. I n t h e f a c t s o f t h e c a s e b e f o r e u s t h e a s s e s s e e c l a i m e d t o b e m a n u f a c t u r i n g v a r i o u s t yp e s of finished honey which is being produced from nectar (i.e. raw h o n e y) . T h e a s s e s s e e h a d e s t a b l i s h e d h u n d r e d p e r c e n t e x p o r t o r i e n t e d unit under which it had sought permission from various departments to m a n u f a c t u r e a n d e x p o r t h o n e y. The source of the activity carried on by the assessee is nectar (kacha h o n e y) and 96% of the manufacturing/production is out of the said nectar being procured from the market and only small portion from own bee keeping activities. It is not the case of the assessee that breeding of bees and collection of nectar was the first category of operation, which admittedly was natural phenomena and the assessee has not claimed it t o b e p r o c e s s i n g o r i t s m a n u f a c t u r i n g a c t i v i t y. T h e s a i d f a c t h a s b e e n accepted by the revenue. Reference is being made to the reply of the ACIT, dated 07.08.2012 bearing No.ACIT/Circle-Khanna/2012-13/117 filed before the CIT-III, Ludhiana in the appeal proceedings relevant t o a s s e s s m e n t ye a r 2 0 0 6 - 0 7 a n d 2 0 0 9 - 1 0 p l a c e d a t p a g e s 6 7 t o 7 2 o f the Paper Book. The assessee claimed that raw material purchased by it was tested for its quality parameters including moisture content, impurities, sucrose content etc. The processing involved cleaning, heating, filtration, moisture reduction, pasteurization, lab test for both raw and finished honey to know the parasites present in the raw material and finished product. B l e n d i n g o f d i f f e r e n t t yp e s o f r a w honey is being done to get the finished products of exportable quality o f h o n e y. The manufacturing and processing of honey is done mainly 20 to prevent fermentation and retard granulation. The finished product obtained after proper blending is uniform, consistent and of desired quality for export and to get right kind of colour and character according to the requirements/parameters prescribed by the overseas b u ye r s . Again finished honey is packed in bottles, labeled according to their brand name, packed in boxes, and loaded for their shipment into containers. The assessee has furnished on record the flow chart at pages 29 to 31 of the Paper Book which explains the activities carried on by the assessee for processing raw honey into finished h o n e y.
21. T h e G o v e r n m e n t o f I n d i a v i d e F o r e i g n T r a d e P o l i c y, 2 0 0 2 u n d e r Chapter 25 had formulated scheme for Export Oriented Units(EOUs). The purpose of the scheme was to boost the exports by creating a d d i t i o n a l p r o d u c t i o n c a p a c i t y. Under the scheme the exporters were willing to set up units with long term commitment to exports under customs bond operations and freedom was given to the said persons to set up the units at the places of choice and was not necessary to set up units in free trade zone/export processing zone. However, the benefits under the said scheme were provided as provided to the units set up in zone. The benefits which was extended to EOUs were provided to give them a competitive edge to compete in export market and the same were as follows:
I. EOUs are allowed to procure raw materials/capital goods duty free, either through import or through domestic sources;
II. Reimbursement of Central Sales Tax (CST);
III. Reimbursement of duty paid on fuels procured from
domestic oil companies;
IV. CENVAT credit on the goods and service and refund
thereof;
21
V. Fast track clearance facilities; and
VI. Exemption from Industrial Licensing for manufacture of
items reserved for SSI sector.
22. Under the said Foreign Trade Policy of 2000, the EOUs were entitled to import/procure locally duty free raw material, capital goods and office equipment etc., as per Customs Notification i.e. for duty free imports and Central Excise Notification dated 31.3.2003 for duty free procurements. In other words, the EOUs was given both the Customs and Central Excise exemption for setting up 100% EOU unit.
Under the scheme it was provided that the projects having a minimum investment of Rs.1 crore and above in building, plant and machinery were usually considered for establishment under EOU Scheme. Minimum investment criteria was to be fulfilled at the time of commencement of production by the unit. The minimum investment criteria does not apply for certain sectors like Electronic, Hardware, Technology Park unit, Software Technology Park unit, Hanndicrafts, Agriculture and Aquaculture. Setting up of trading units was not permitted under EOU scheme.
23. For setting up of EOU, an application in the prescribed form was required to be submitted to the Development Commissioner, who in t u r n i s s u e d a l e t t e r o f p e r m i s s i o n ( L O P / L O I ) s p e c i f yi n g t h e c a p a c i t y and the items of manufacture and export, capital goods permitted to be imported/procured. The LOP/LOI issued was to be construed as a licence for all purposes. Thereafter EOU unit was required to apply for a licence for private bonded warehouse and in bond manufacturing sanction order under provisions of sections 58 and 65 of the Customs Act respectively from the jurisdictional Assistant/Deputy Commissioner of Central Excise and Customs. The EOUs set up to function under the administrative control of the Development 22 Commissioner of the Special Economic Zones(SEZ), whose jurisdiction was notified by the Ministry of Commerce. The said Development Commissioners of the SEZ were the licencing authorities in respect of the units under the EOU scheme, as per specified territorial jurisdiction. Further the provisions of the Customs and Central Excise law in respect of the EOUs are administered by the Commissioner of Customs and Central Excise. On the policy front, all decisions relating to the EOUs were taken by the Board of Approvals set up under the Department of Commerce, which in turn is chaired by t h e S e c r e t a r y, M i n i s t r y o f C o m m e r c e . One of the requirements to set up a unit as an EOU was that the premises of EOU were to be approved as a customs bonded warehouse under the warehousing provisions of the Customs Act. The manufacturing and other operations were carried out under customs bond and the unit bore appropriate charges for officers on cost recovery basis. In case of units in Aquaculture, Horticulture, Floriculture, Granite q u a r r yi n g etc exemption from bonding was given for administrative reasons with certain other safeguards being put in place to check that duty free benefits where availed were not abused. The EOUs were required to execute m u l t i p u r p o s e b o n d w i t h s u r e t y/ s e c u r i t y w i t h j u r i s d i c t i o n a l C e n t r a l Ex cise and Customs officers (Refer Circular No.15/95-Cus. Dated 23.2.1995). Further under the EOU scheme, the units were allowed to i m p o r t o r p r o c u r e l o c a l l y w i t h o u t p a y m e n t o f d u t y, a l l t y p e s o f g o o d s including capital goods, raw materials, components, packing material, consumables, spares and various other specified categories of equipments like material handling equipments, UPSs, quality assurance equipments, captive power plants, central air conditioning e q u i p m e n t s , s e c u r i t y s ys t e m s , p o l l u t i o n c o n t r o l e q u i p m e n t s , m o d u l a r furniture and parts thereof etc. required for the production/job work 23 and other operation in terms of letter of permission (LOP). (Refer Circular No.17/2006-Cus dated 1.6.2006).
24. As per the scheme, Duty free import and procurement of export promotion material like brochures, literatures, pamphlets, hoardings, catalogues and posters of products to the extent of 1.5% of the value of exports of the previous year was also allowed. The export value of supplies of such promotional material shall not be counted towards fulfillment of NFE and for availing DTA entitlement as specified in para 6.8 of FTP. However, import of such promotional material shall be considered for computation of sum total of all imported goods for arriving at NFE. (Refer Circular No. 17/2006-Cus dated 1-6-2006). Under the scheme EOUs are private bonded warehouse under provisions of Section 58 of the Customs Act, 1962. To undertake manufacturing or other operations in the warehouse in relation to warehoused goods, the required permission was granted under Section 65 of the Customs Act, 1962, read with "Manufacture and Other Operations in Warehouse Regulations, 1966". The degree of supervision of the Departmental officers on movement of raw materials, components, finished goods and manufacturing process and accounting in an EOU is aimed at providing operational flexibility, easing restrictions and removing practical difficulties faced by EOUs. Accordingly, the manufacture was now allowed without any physical supervision of the Central Excise and Customs authorities, locking of the warehouse premises, control over the issue and return of imported goods. Further, all movements from and to the units like clearance of raw materials/ components to the job worker's premises, return of goods from the job worker's premises, clearance to other EOUs, export and sale into DTA could be made by the manufacturer subject to recording of each transaction in the records prescribed by the 24 Board/Commissioners or their private records approved by the Commissioner. (Refer Circular No. 88/98-Cus., dated 2-12-1998). Import/procurement of goods by an EOU for use in manufacture or in connection with production or packaging of goods for export is exempted from payment of customs and central excise duties. EOUs execute a general purpose B-17 bond along with surety or security covering the duty foregone on imported goods. This bond is prescribed under Notification No. 6/98-CE (NT) dated 02.03.1998 as General Bond to be executed by the EOUs for provisional assessment of goods to Central Excise d u t y, for export of goods and for a c c o u n t i n g / d i s p o s a l o f e x c i s a b l e g o o d s p r o c u r e d w i t h o u t p a ym e n t o f d u t y. T h i s b o n d a l s o t a k e s c a r e o f t h e i n t e r e s t o f r e v e n u e a g a i n s t r i s k s arising out of goods lost in transit, goods taken into Domestic Tariff Area for job work/ repair/ display etc but not brought back. Basically the B-17 bond is an 'all purpose' bond covering liabilities of the EOU both under Customs and Central Excise Acts. However, it does not cover the differential duty amount against advance DTA sale for which a separate bond is to be executed. The Development Commissioner is responsible for monitoring foreign exchange realization/remittances of EOUs in coordination with the concerned General Manager of RBI. (Refer RBI Circular No.COEXD.3109/05.62.05/1999-2000, dated 21.02.2000). With regard to clearance of import cargo, the EOUs are placed in a special category eligible for fast track clearance through the Customs on the strength of procurement certificate issued by the jurisdictional Assistant/Deputy Commissioner.
The assessee in order to set up its 100% EOU applied for and was granted registration by the Competent Authority i.e. Development Commissioner, NEPZ, Noida vide letter 25 No.11/183/2003)/100%EOU/7380 dated 24.11.2003 declaring it as manufacturer of Honey & Bee Wax, copy of which is placed at pages 127 and 128 of the Paper Book. Further the assessee was also issued Green Card No.1163 dated 11.12.2003 which mentions "Little Bee Impex has been approved under the special scheme of the GOI as a 100% Export Oriented Unit. The unit is entitled to top priority treatment from all concerned Central and State Government Departments in relation to all matters relating to the project". The copy of the said Green Card is placed at page 129 of the Paper Book. In addition the assessee registered itself under the Factories Act, VAT/CST Development Commissioner, NEPZ, Noida as 100% EOU for manufacturing of honey and bee wax. The assessee has placed on record the registration certificate dated 30.1.2004 issued by the office of Deputy Commissioner, Central Excise, Division Ludhiana under w h i c h i t h a s b e e n g r a n t e d r e g i s t r a t i o n f o r c a r r yi n g o n m a n u f a c t u r i n g process and other operations in the warehouse under section 65 of the Customs Act read with 'Manufacture and Other Operations in Warehouse Regulations, 1966". Under the said registration certificate the assessee i.e. M/s Little Bee Impex was registered as manufacturer of honey with annual capacity of 5000 MT and manufacturer of Bee Wax with capacity of 25 MT. It was provided under the said registration certificate that the holder of the certificate would be entitled to carry on manufacture in the bond of the scheduled cost, in the premises and from the imported materials described in the said application. The assessee has further placed the copy of the licence issued by the Deputy Commissioner, Central Excise Division-I, Ludhiana dated 20.4.2004 and Customs Bond Registration Certificate under which the assessee is authorized to be engaged in the m a n u f a c t u r e o f o t h e r o p e r a t i o n i n t h e m a n u f a c t u r e o f h o n e y, B e e W a x 26 sheets. Further the assessee at page 180 had placed on record Form RC i.e. Central Excise Registration Certificate issued by the Deputy Commissioner, Central Excise Division-I, Ludhiana on 30.1.2004 for registering the assessee for operating an export oriented undertaking at G.T. Road, Village Mallipur, Doraha, Ludhiana for the purpose of c a r r yi n g o n t h e a c t i v i t y f o r w h i c h a n a p p l i c a t i o n w a s m o v e d . The copy of registration-cum-partnership certificate issued by the Agricultural and Processed Food Products Export Development Authority (APEDA), Ministry of Commerce issued on 10.2.2004 is - placed at page 185 of the Paper Book under which also the assessee is registered and recognized as manufacturer. In order to establish its unit the assessee made investment in building and machinery and various other assets. The copy of details of addition made to the plant a n d m a c h i n e r y f r o m f i n a n c i a l ye a r s 2 0 0 3 - 0 4 t o 2 0 0 8 - 0 9 a r e f u r n i s h e d at pages 246 to 248 of the Paper Book. In addition, the assessee had also furnished copies of the Tax Audit Report alongwith copies of Balance Sheet, Profit & Loss Account and list of fixed asset for the f i n a n c i a l ye a r s 2 0 0 3 - 0 4 t o 2 0 0 8 - 0 9 a t p a g e s 1 9 1 t o 2 4 5 o f t h e P a p e r Book. In the above said facts and circumstances the issue raised before us is in relation to the claim of the assessee that it was engaged in manufacturing/processing of honey and was entitled to the benefit of exemption under section 10B of the Act.
25. The first objection raised by the authorities below to hold that the assessee is not entitled to the claim of exemption under section 10B of the Act flows from the conclusion that the raw honey and processed honey were not different. The second aspect of the issue was that the assessee was only collecting the honey after removing moisture from the same and hence was not engaged in any manufacturing activities. 27 The third aspect was that there was no quality difference between raw honey and finished honey and as such no new product came into existence after so-called manufacturing activities. The last objection of the authorities below was that the assessee had not established any manufacturing unit to carry out its manufacturing activities and it was onl y removing moisture from raw honey and re-packing the same, which in no circumstances could be called manufacturing activities.
26. After consideration of the totality of the facts and circumstances of the present case, we find that the claim of the assessee was that it had established a 100% EOU unit in order to avail exemption under section 10B of the Act. Under the provisions of section 10B of the Act it is provided that deduction out of such profits and gains as are derived by 100% export oriented undertaking, is to be allowed from the export of such articles or things or computer software, which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be. Such deduction is to be allowed from the total income of the assessee for a period of 10 c o n s e c u t i v e a s s e s s m e n t ye a r s b e g i n n i n g w i t h t h e a s s e s s m e n t ye a r r e l e v a n t t o t h e p r e v i o u s ye a r i n w h i c h t h e m a n u f a c t u r e o r p r o d u c t i o n is started by the undertaking. Under the provisions of section 10B of the Act exemption is allowed to such person who had established 100% EOUs under which it manufactures or produces articles or things or computer software.
As referred to before us in the paras hereinabove the scheme for establishment of EOUs has been formulated by the Foreign Trade P o l i c y, 2 0 0 2 w h i c h l a ys d o w n v a r i o u s p r o c e d u r e s t o b e f o l l o w e d i n addition various registrations to be obtained by the manufacturing unit and restrictions are placed upon the warehousing being customs 28 bonded warehouse. The assessee in the present case and as referred to before us in the paras hereinabove has been registered as 100% EOU. The purpose of the scheme itself reflects that establishment of such EOUs is basically to boost exports by creating additional production c a p a c i t y. So in order to recognize as an export oriented unit, the assessee has to be engaged in manufacture or production of any articles or things or computer software. The Statute has clearly laid down that the setting up of trading units is not permitted under the EOU scheme. The assessee before us has been given recognition by way of registration as an EOU unit by Deputy Commissioner, Central Ex cise Division-I, Ludhiana both under the Customs and Ex cise Act. Further the assessee had been registered with NEPZ, Noida, Agri. Processing & Export Development Agency (APEDA) and other a u t h o r i t i e s a s r e q u i s i t i o n e d u n d e r t h e F o r e i g n T r a d e P o l i c y, 2 0 0 2 which had enlisted the requirements for the establishment of export oriented units.
27. Now coming to the activity carried on by the assessee, the flow chart has been submitted by the assessee under which various steps were taken by the assessee to convert the raw honey into finished h o n e y. T h e f l o w c h a r t i s a s u n d e r : -
PROCESS FLOW CHART From Raw Honey to Finished Honey Reception of Raw Honey Sampling & Testing → Rejection → Kept in rejection area/Return to ↓ supplier Melting (Liquifaction of Raw Honey (nectar) & converted into liquid form) ↓ Heat Exchanger (breaking of micro crystals ) ↓ Primary filtration ↓ Moisture Control (Taking the extra moisture out of Nectar at temperature below 55°) ↓ Homogenization 29 (Blending of Honey) ↓ Settling (in tanks) (Removal of By-Products of honeybees/ organic acids & other undesirable chemical constituents) ↓ Flow Bed Technology (To remove contaminants / residual control) ↓ Pasteurization (Killing of micro organism, yeast, mould, salmundia etc) ↓ Microfiltration (removal of extra pollen & other micro particles of foreign or native) ↓ Packing/ filling In Drums & in house bottle ( Filling in consumer pack) The first step was sampling and testing of various varieties of raw honey procured from the market and blended to a certain extent.
Thereafter the said raw honey was liquefied, converted into liquid form which was the process of melting. After that there was breaking o f m i c r o c r ys t a l b y h e a t e x c h a n g e a n d p r i m a r y f i l t r a t i o n i s t h e n c a r r i e d out. The assessee thereafter does the process of moisture control wherein raw honey was kept at the temperature below 55 degree. In order to procure the finished product, the blending of different varieties of honey was carried out to homogeneous product.
Thereafter short steps of removal of contaminates/residual control, pasteurization i.e. killing of micro- filtration i.e. removal of extra pollens and other micro particles. Then the finished honey was packed in drums or bottles. The assessee was also engaged in the manufacture of packing material and also the labels, in which the final product was kept. The claim of the assessee was that raw honey had limited shelf life and the same contains various impurities, dust, dead bees, moisture and anti-biotic. Such honey was not acceptable in the market. In an y case, such raw honey could not be exported. Further the assessee besides being engaged in basic activities was also 30 engaged in mixing of various varieties of honey in order to give different varieties of finished product.
28. Another aspect to be considered is that the manufacture of honey is mentioned as an item to manufacture in Schedule XIV of the Income Tax Act. The said Schedule allows exemption to the units producing honey in the State of Himachal Pradesh and Uttranchal. As Schedule- XIV of Income Tax Act is meant for promotion for things/products which are manufactured and not for trading of items, the Schedule g i v e n u n d e r s e c t i o n 8 0 I C o f t h e A c t c a t e g o r i c a l l y l a ys d o w n t h a t t h e section applies to any undertaking or enterprise which has begun or begins to manufacture or produce any article or thing, not being any article or thing specified in the Thirteenth Schedule. Following the above said reasoning it could not be said that the assessee was not e n g a g e d i n t h e m a n u f a c t u r e o f h o n e y, t h o u g h n o t i n s t a t e o f H P .
29. The difference between raw honey & finished honey has been pointed out b y the assessee and there is change in characteristics i.e. b o t h t h e p h ys i c a l a n d c h e m i c a l a n d a l s o t h e p u r i t y a s p e c t s o f r a w h o n e y& f i n i s h e d h o n e y. All the aspects of both the raw honey and finished honey had been tabulated at page 188 of the Paper Book which are as under:
III. CHANGE IN CHARACTERISTICS: Physical, Chemical, Residual & Purity ASPECTS Sr. Parameter Raw Honey Finished Honey No. (Nectar) (Country/Buyer specific requirement maintained during manufacturing
1. Color 8mm -114 process) White -17 mm to 34 mm & above mm Extra Light - 35 mm to on P-fund 50 mm Amber Dark Amber -
scale 85mm to 114 mm Dark
- Above 114 mm
2. HMF 2 - 400 10 - 40 mg/kg
mg/kg or
more
3. F/G 0.80-1.48 0.9 - 1.18 (Country/Buyer
31
4. Sucrose 2 - 17% or Max. 5 % (In few cases 8%)
more
5. TRS 43 - 65 % Above 65 -82.5%
6. Moisture 23-28% 16.5 - 20%
7. Ash Up to 5% Less than 0.5%
8. C-4 Sugar(s) 2-85% Less than 7%
9. Proline 80 - 500 Less than 200
10. Glycerol 20- SOOppm (Max)
6500ppm
11. Lead 20 - 2500 Less than 100 ppb (EU,
ppm USA, CANADA)
12. Tetracycline(s) 9 - 2400 ppb (2 - 10) 10 ppb max.
13. Streptomycin 2 - 800 ppb (2 - 10) 10 ppb max.
14. Fluoroquinolones 2 - 1000 ppb 2-10 ppb
15. Sulphonamides 2 - 800 ppb 2 -100 ppb (10 ppb
max. Europe)
30. Further contention of the assessee was that the marketability of raw honey and finished honey was at variance and the details are furnished at page 189 of the Paper Book which are as under:
IV. MARKETABILITY
i). Raw Honey (Nectar) Finished Honey
Sold by Beekeepers/Traders Sold by Manufacturing and
at low rates exporting units at higher rates
to earn foreign exchange.
ii). Has no Branding It has brand value/name such
as Dabur, Aditya Birla, Spencer.
Reliance sold at 4 - 5 times of
the bee honey (Nectar) prices.
iii). Average rate varies between Average rate varies between Rs 50 to 100 Rs/Kg. 170 to 500 Rs/ Kg.
iv). No Overseas Buyers Has Overseas Buyers, as it meets their quality parameters & regulatory requirements.
Activity at field level by small large scale at factory level due Farmers/Beekeepers to testing, sophisticated Manufacturing plant & Technology and higher marketability.
32
31. The perusal of the above said details reflects that the product i.e. finished honey in the case of the assessee is at variance with the raw honey collected from the bee hives. The process carried out by t h e a s s e s s e e c h a n g e s b o t h t h e p h ys i c a l a n d c h e m i c a l c h a r a c t e r i s t i c o f raw honey to convert it into finished product and the said product is different in form i.e. raw honey and has better shelf life than raw h o n e y. Further finished honey is prepared on the specific r e q u i r e m e n t s o f t h e b u ye r s o r t h e r e s p e c t i v e c o u n t r y a n d t h e p r o d u c t has a different market than raw honey. We are of the view that the activities carried on by the assessee bring into form the product which has a different market and thus fulfills the test of marketability as laid down by the Hon'ble Supreme Court in the case of India Cine Agencies Vs. CIT (supra).
32. In view thereof, we hold that the assessee was engaged in the production of finished honey and the profits and gains arising from such activity were eligible for deduction under section 10B of the Act as the assessee fulfills the condition of being 100% export oriented unit and total sale proceeds were received in foreign exchange by the assessee. In the totality of the facts and circumstances, we are in conformity with the finding of the Assessing Officer that the assessee was eligible for the claim of deduction under section 10B of the Act.
33. We find that the Tribunal in assessee's own case in ITA No. 3 6 & 3 7 / C h d / 2 0 0 9 i n a s s e s s m e n t ye a r s 2 0 0 4 - 0 5 a n d 2 0 0 5 - 0 6 , v i d e order dated 31.3.2009, considered the issue of exercise of revisionary powers of the Commissioner under section 263 of the Income Tax Act and also took into consideration factual aspects of the activity carried out by the assessee as to whether the same amounted to 'manufacture' or 'production', or not. The Tribunal vide para 13 observed as under : 33
"13. The whole controversy can be gauged from the aforesaid. The substantive difference between the Commissioner and the Assessing Officer is on the issue as to whether the activity carried out by the assessee amounts to manufacture or production. The assessee successfully contended before the Assessing Officer that the product produced by it was a different marketable commodity than the raw material and therefore, it amounted to 'manufacture' or 'production'. Reference was made to the judgement of Hon'ble jurisdictional High Court in the case of East India Cotton Manufacturing Co. Pvt. Ltd. (supra) as is evident from the portion of the 'Office Note' extracted above. The argument of the Commissioner is that the activity carried out by the assessee cannot be treated as a 'm anuf act ure' or 'production' by applying a marketability test, but it is distinctiveness of the output in the commercial, sense, which has to be considered. In other words, in the opinion of the Commissioner, the question is not whether the process employed by the assessee renders the final product as marketable before us the question is as to whether the final product is a distinct commercial commodity vis-à-vis the raw material. According to the Commissioner, the test to be applied in this case is not the marketability test but the distinctiveness of the output in the commercial sense. In para 3(b) of his order, the Commissioner has pointed out this and according to him this basic issue has been overlooked. In the opinion of the Commissioner, the assessment order is rendered erroneous because it is based on the former proposition and not the latter proposition, which according to him was required to be applied. Now, the limited point which emerges for consideration is as to whether the action of the Assessing Officer in treating the process of the assessee as amounting to 'manufacture' or 'production' by applying the marketability test can be said to be erroneous within the meaning of Section 263 of the Act. This question has to be considered in the light of the proposition canvassed by the Commissioner that the test to be applied is as to whether the final product was distinct in commercial sense. We have carefully pondered over this aspect. We are reminded of the judgement of the Hon'ble Madras High Court in the case of Indian Cine Agencies, reported at 261 ITR 491 (Mad). The Hon'ble High Court held that the reduction of the size of jumbo photographic paper rolls into easily marketable desired sizes wit h the help of slitting machines did not amount t o e i t h e r ' m a n u f a c t u r e ' o r ' p ro d u ct i o n'. O s t en s i bl y, t h e assessee claimed before the Hon'ble M a d r a s H i g h C o u r t t hat , o n t h e b as i s of t h e m ar k et a bi l i t y t es t , t h e s l i t t i ng of j u m b o p h o t o g r a p h i c p a p e r i n t o s m a l l e r r o l l s a m o u n t e d t o 'manufacture' or 'production'. The Hon'ble High Court c o n s i d e r e d t h e m a r k e t a b i l i t y t e s t b e i n g p r o p o un d e d b e f o r e it and held that t h e s l i t t i n g of jumbo photographic papers into smaller rolls does not amount to 'manufacture'. In fact, seen in the present context, the case made out by the assessee before the Assessing Officer and which has been accepted by the Assessing Officer is on a parallel to that before the Hon'ble Madras High Court. The proposition did not find favour with the , Hon'ble Madras High Court. So however, the decision of the Hon'ble Madras High Court was carried before the Hon'ble Supreme Court and the proposition has since been 34 accepted by the Hon'ble Supreme Court in the case of Indian Cine Agencies reported in 308,ITR98(SC)and the judgement of the Hon'ble Madras .High Court stands overruled. The slitting o f jumbo photographic papers into smaller rolls has been held to be amounting to 'manufacture' or 'production'. From the aforesaid, a p r e m i s e w h i c h e m e r g e s i s t h at e v e n t h e m a r k e t a b i l i t y t e s t is a good test to evaluate whether or not an activity a m o u n t s t o ' m a n u f a c t u r e ' o r ' p r o d u c t i o n ' , If, on t h e t e s t of mar k et ab i l i t y of t h e c o mm od i t y b ei ng f i nal l y pr o du ce d, --- --
--i s r ender ed mar k et abl e, i t w oul d amount t o 'manufacture' or 'production'. Therefore, the test which has been applied by the Assessing Officer stands approved by t h e Hon'ble Supreme Court considered in the light of the p u r i t y of reasoning enunciated in the case of Indian Cine Agencies (supra). The moot question i s, can such action of the Assessing Officer be considered as erroneous within the meaning of Section 263 of the Act? In our considered opinion, the approach of the Assessing Officer cannot be considered as erroneous within the meaning of Section 263 of the Act. On this point, we may also make a mention that even on the commercial distinctiveness test sought to be applied by the Commissioner, there is no finding by the Commissioner as to how does it operate in contradiction to the final outcome, concluded by the Assessing Officer. Thus, this is a case where the view of the Assessing Officer is sought to be substituted by the Commissioner in a subjective manner, without recording a finding as to how the ultimate conclusion of the Assessing Officer is erroneous in law. For all the above reasons, in our considered opinion, Commission erred in invoking the provisions of Section 263 of the Act in holding, that the Assessing Officer was not correct in accepting the activity undertaken by the assesses as amounting to 'manufacture' or 'production'. "
34. It may be noted that the above decision has been rendered b y the Tribunal on the basis of Hon'ble High Court decision in India Cine Agencies reported in 261 ITR 491 (Mad). However as discussed earlier, this decision was later on confirmed by the Apex Court in 308 ITR 98 (SC) and one of the important test for manufacturing laid down i s t h a t o f t e s t o f m a r k e t a b i l i t y. T h e T r i b u n a l , o n t h e b a s i s o f t h e marketability test, held the assessee to be engaged in the production of honey and the exercise of power under section 263 of the Act by the Commissioner in holding that the Assessing Officer was not correct in accepting the activity undertaken by the assessee as amounting to 'manufacture' or 'production', was held to be not correct. After coming to the conclusion in respect of the application of test of marketability to the facts of the present case, another aspect 35 considered by the Tribunal was vide paras 15 & 16, which read as under :
"15. Before we part, we may also refer to the approach of the Commissioner as it emerges from a reading of the concluding lines of the Office Note appended to the assessment order. In this case, the 'Office Note' of the Assessing Officer clearly points out that the case was also discussed with the then Commissioner of Income- Tax, II Ludhiana, "in detail and the order is passed after taking verbal concurrence". During the hearing it was confronted to the Ld. DR as to when the assessment has been finalized with the concurrence of the Commissioner, such assessment could not be held to be 'erroneous' by the Commissioner subsequently by invoking the provisions of Section 263 of the Act. We find that there is no rebuttal in the impugned order with regard to the noting made by the Assessing Officer in the 'Office Note'. Therefore, in these circumstances, invoking of the provisions of Section 263 of the Act, in such a case is ex-facie impermissible and we are supported by the decision of the Hon'ble Jurisdictional High Court in the case of Hari Iron Trading Company (Supra). The Hon'ble High Court in somewhat similar circumstances has held as under:-
"Once the assessment order had been passed with the approval of the Commissioner of Income-Tax, we are afraid that the successor Commissioner of Income-Tax could not possibly say that the matter had been decided without application of mind by the Assessing Officer."
16. Following the aforesaid, we hold that the Commissioner was not justified in invoking his power of revision provided in section 263 of the Act to extent stated earlier."
35. In the facts of the case before the Tribunal, the Assessing Officer vide office note had discussed the issue with the then Commissioner of Income Tax -III, Ludhiana and passed consequent order and the Tribunal in the abovesaid circumstances, also held that the Commissioner was not justified in invoking power of revision under section 263 of the Act. The above shows that the Tribunal had, first decided the issue on merits of the case and thereafter, had also considered the administrative aspect of the decision being taken by the CIT and had held that the order passed under section 263 of the Act b y t h e C o m m i s s i o n e r r e l a t i n g t o a s s e s s m e n t ye a r 2 0 0 4 - 0 5 a n d 2 0 0 5 - 0 6 was not justified in the said facts and circumstances. 36
36. The learned D.R. for the Revenue has strongly objected t the submissions made by the learned A.R. for the assessee and has placed strong reliance on the observations of the Commissioner of Income Tax. The first grievance of the Department was that the Assessing Officer while passing the assessment order has ignored he directions of the Addl.CIT vis-à-vis the ground of ex emption under section 10B of the Act. It was pointed out b y the learned D.R. for the Revenue that the order passed by the Assessing Officer was erroneous in ignoring the ratio laid down by the Hon'ble Supreme Court in the case of CIT Vs. Venkateswara Hatcheries (P.) Ltd. & Others (supra) and CIT Vs. Relish Foods (supra)
37. In rejoinder the learned A.R. for the assessee pointed out that both the said decisions are not applicable to the facts of the case as in the facts of the case before the Hon'ble Supreme Court in CIT Vs. Venkateswara Hatcheries (P.) Ltd. & Others (supra) the activit y carried on by the assessee was the biological phenomena i.e. hatching of eggs and hence it was held that the assessee was not engaging in any manufacturing activities. On the other hand, the assessee was not engaged in any biological activities.
38. We find merit in the plea of the assessee as there are two steps involved in bringing into existence the finished product i.e. finished h o n e y. The process of formation of honey in the raw form is biological phenomena which is undertaken by the bees. Thereafter the said honey is collected by the farmers or bee-keepers from whom purchases are made by the assessee and the said product was then subjected to various processes to bring into existence the finished h o n e y a s p e r t h e s p e c i f i c r e q u i r e m e n t s o f t h e f o r e i g n b u ye r s . The second process of converting honey into finished honey cannot be 37 termed as biological as pointed out by us in the paras hereinabove. The process carried on by the assessee clearly reflects various steps undertaken by the assessee to bring into existence the finished product which is distinct from raw honey which is collected by the farmers/bee-keepers from the bee-hives. In view thereof, we find no merit in the reliance placed upon by the learned D.R. for the Revenue upon the ratio laid down by the Hon'ble Supreme Court in CIT Vs. Venkateswara Hatcheries (P.) Ltd. & Others (supra)
39. The learned D.R. for the Revenue further placed reliance on the ratio laid down b y the Hon'ble Supreme Court in CIT Vs. Relish Foods (supra) wherein the Hon'ble Supreme Court had held the assessee not engaged in manufacturing activities, on the basis complete facts were not available on record. Such reliance has no merit in the absence of details. In view thereof, we find no merit in the reliance placed by the learned D.R. for the Revenue.
40. Further the said issue was raised in the proceedings under section 144A of the Act, which was replied by the assessee and thereafter the Addl. CIT raised further queries vis-à-vis allowability of claim of deduction u/s 10B of the Act. In such circumstances, the Assessing Officer having taken a view in grant of exemption u/s 10B of the Act, cannot be said to have erred.
41. The learned D.R. for the Revenue has further placed reliance on the ratio laid down by the Hon'ble Mumbai Customs, Excise & Gold Tribunal in the case of Charak Pharmaceuticals India Pvt. Ltd. Vs. Commissioner of Central Excise delivered on 17.3.2006 wherein it has been laid down that manufacture of honey has been left out from the Central Excise tarrif as it is not a manufactured product, on which 38 excise duty could be charged. The Ld. AR has placed on record the Excise tariff list and honey is enlisted therein for the purpose of levy o f E x c i s e D u t y. I n v i e w t h e r e o f a n d o u r d e l i b e r a t i o n u p o n t h e i s s u e hereinabove, we find no merit in the stand of the Revenue in this regard as we have already held that the assessee is engaged in the processing of honey.
42. The issue rising in the present appeal is in relation to the exercise of reversionary powers by the Commissioner of Income Tax under section 263 of the Act. The CIT under section 263 of the Act is empowered to revise such order passed by the Assessing Officer which are erroneous and prejudicial to the interest of Revenue. The twin conditions of the order being erroneous and prejudicial to the interest of Revenue are to be satisfied simultaneousl y for the CIT to ex ercise his powers under section 263 of the Act. If either of the conditions are not satisfied, then the CIT cannot take recourse to section 263 of the Act.
43. The Hon'ble Supreme Court in Malabar Industries Company Ltd Vs CIT [243 ITR 83 (SC)] held as under:-
There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning, it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhov & Co. v. S.P. Jain [1957] 31 ITR 872 , the High Court of Karnataka in CIT v. T. Narayana Pai [1975] 98 ITR 422 , the High Court of Bombay in CIT v. Gabriel India Ltd. [1993] 203 ITR 208 and the High Court of Gujarat in CIT v. Smt. Minalben S. Parikh [1995] 215 ITR 81/ 79 Taxman 184 treated loss of tax as prejudicial to the interests of the revenue.
Mr. Abraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 129 interpreting 'prejudicial to the interests of the revenue'. The High Court held, "In this context, it must be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the Order 39 passed by the ITO, which might set a bad trend or pattern for similar assessments, which on abroad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration". In our view, this interpretation is too narrow to merit acceptance. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the ITO the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue.
The phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law.
44. T h e H o n ' b l e P u n j a b a n d H a r ya n a H i g h C o u r t i n CIT Vs Munjal Casting [303 ITR 23 (P&H)] had held as under:-
No question of law warranting admission of the appeal would arise because there would be no tax effect as the interest income realised from the capital invested by the partners was bound to be assessed in their hands. They could not in any case be taxed twice. Moreover, if the view taken by the Assessing Officer is one of the possible views, then it cannot constitute the basis for the Commissioner to brush aside that view in preference to his own view in exercise of jurisdiction under section 263. In that regard, the Tribunal had rightly placed reliance on a judgment of the Supreme Court in the case of Malabar Industrial Co. Ltd. (supra).
It was, thus, evident that the Assessing Officer had taken one view which was probable if the same was examined in the light of the judgment of the Supreme Court in the case of CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292. The Tribunal had also held that it might still be possible to take another view. Therefore, merely on the basis that another view is possible, the Commissioner cannot acquire revisional jurisdiction as contemplated by section 263. Therefore, the appeal could not be admitted and the same was to be dismissed.
45. In the totality of the above said facts and circumstances where the order of the Assessing Officer in coming to the conclusion that assessee is entitled to claim of deduction under section 10B of the Act, was erroneous, there was no merit in exercise of revisionary jurisdiction b y the Commissioner of Income Tax under section 263 of the Act. A c c o r d i n g l y, we cancel the directions issued by the Commissioner of Income Tax under section 263 of the Act in setting aside the assessment made by the Assessing Officer in this regard and 40 hold that there was no error in the order of Assessing Officer in granting exemption u/s 10B of the Act. The ground Nos.1 to 3 raised by the assessee are thus allowed.
46. The second issue raised by the Commissioner of Income Tax in exercise of the powers under section 263 of the Act was in respect of the allowance of additional depreciation of Rs.11,46,012/-. The Commissioner of Income Tax in view of holding that the assessee was not engaged in the manufacture or production of any article or thing, held that the assessee was not entitled to the claim of additional depreciation. The said issue is linked to the first issue raised by the Commissioner of Income Tax i.e. the issue of exemption allowable under section 10B of the Act. Where the assessee is engaged in the business of manufacture of things then the claim of additional depreciation is allowable as prescribed under the Act. However, in the facts of the case before us, the learned A.R. for the assessee had pointed out that during the assessment proceedings itself, the assessee had pointed out to the Assessing Officer that no additional d e p r e c i a t i o n h a d b e e n c l a i m e d d u r i n g t h e ye a r u n d e r c o n s i d e r a t i o n . Our attention was drawn to the questionnaire raised by the Assessing Officer placed at page 58 of the Paper Book and the reply of the assessee as placed at page 65 of the Paper Book. In view of there being no claim of additional depreciation during the year under consideration, the order of the Commissioner of Income Tax on this ground in holding the order of the Assessing Officer to be erroneous and prejudicial to the interests of the Revenue is invalid and the same is set aside. The ground No. 4 raised by assessee is thus allowed
47. The next issue raised by the Commissioner of Income Tax in the order passed under section 263 of the Act was in relation to the profits 41 on sale of incentives received from Ministry of Commerce, Government of India and whether the same were eligible for deduction under section 10B of the Act. The assessee under the scheme of Ministry of Commerce, Government of India titled as 'Vishesh Krishi Upaj Yojna' had received 5% of FOB value of exports and direct income of Rs.2,80,87,433/-. The assessee claimed that the said receipts were directly linked to the export of articles made by the assessee, against which the assessee claimed deduction under section 10B of the Act. The income from the said scheme computed at Rs.2,57,88,457/- was claimed to be derived from hundred per cent EOU. However, the Commissioner of Income Tax held the assessee not eligible for the said deduction under section 10B of the Act in view of the ratio laid down by the Hon'ble Supreme Court in Liberty India Vs. CIT (supra) and the income of the assessee was enhanced b y Rs.2,57,88,457/- by the Commissioner of Income Tax.
48. The assessee is in appeal against the said order of enhancement. The learned A.R. for the assessee pointed out that the Assessing Officer during the course of assessment proceedings had raised a query vide show cause notice placed at page 58 onwards of the Paper Book in this regard and the assessee vide its reply dated 28.11.2008 had explained the issue in detail which is placed at pages 65 and 66 of the Paper Book. It was further pointed out by the learned A.R. for the assessee that as per the CIT the assessee was not entitled to deduction under section 10B of the Act on the said incentives received. However, the assessee being in export was entitled to the incentives received by virtue of exports and the same was not disputed. Once the incentive received by the assessee is directly relatable to the export 42 made by the assessee, the claim of deduction under section 10B of the Act was allowable.
49. The learned D.R. for the Revenue fairly admitted that the Assessing Officer called for the detail but has not discussed the legal position and in view of the ratio laid down by the Hon'ble Supreme Court in Liberty In dia Vs. CIT (supra) and also the assessee being not eligible for deduction under section 10B of the Act, the said claim is not allowable in the hands of the assessee and the order of enhancement in the case has been correctly passed by the Commissioner of Income Tax.
50. We have heard the rival contentions and perused the record. The assessee during the ye a r under consideration had received incentives from Ministry of Commerce, Government of India under 'Vishesh Krishi Upaj Yojna' @ 5% of FOB value of exports. During t h e ye a r u n d e r c o n s i d e r a t i o n t h e a s s e s s e e h a s b o o k e d i n c e n t i v e s f o r t h e f i n a n c i a l ye a r 2 0 0 5 - 0 6 a n d 2 0 0 4 - 0 5 o n a c c r u a l b a s i s . The details of the incentives accrued/received were filed before the Assessing Officer during the course of assessment proceedings as is apparent from the letter dated 28.11.2008 placed at pages 65 to 72 of the Paper Book to which the details were annex ed as Annexure-I. The said licences are granted by the DGFT, Ministry of Commerce and is equivalent to 5% of FOB value of the exports made by the assessee, which in turn is calculated on the basis of shipping bills/BRCs filed with DGFT. The value of licences worked to Rs.2.23 crores on export sales of Rs.46.46 crores for financial year 2005-06 and Rs.76.33 lacs on export sales of 16.17 crores relating to financial year 2004-05. The said licences were sold by the assessee during the year under consideration for Rs.2.16 crores and Rs.61 lacs respectively totaling 43 Rs.2.78 crores. Further amount of Rs.30 lacs was provided on estimate basis for pending licenses and the income of Rs.2.80 crores was shown in the books of account on the basis of actual sale price of the licences/provision. The deduction under section 10B of the Act on the same had been claimed at Rs.2,57,88,457/-. In the first instance where the queries had been raised by the Assessing Officer, which in turn had been replied to by the assessee and the issue having been considered by the Assessing Officer and one possible view of allowing the deduction under section 10B of the Act having been passed, the issue arises, whether the same is open to revision under section 263 of the Act. The Hon'ble Courts have held that the Commissioner of Income Tax b y way of the proceedings initiated under section 263 of the Act is not empowered to substitute one view adopted by the Assessing Officer b y another view in this regard. In view thereof, the order of revision order passed under section 263 of the Act by the Commissioner of Income Tax is without jurisdiction or not is to be seen in line with the allowability of the said claim in the hands of the assessee.
51. Under the said section 10B of the Act it is provided that deduction of such profits and gains as are derived by a hundred per c e n t e x p o r t s o r i e n t e d u n d e r t a k i n g f r o m t h e e x p o r t o f a r t i c l e s o r t h i n gs f r o m t h e ye a r i n w h i c h t h e u n d e r t a k i n g b e g i n s t o m a n u f a c t u r e t h e articles or things, deduction is to be allowed on the total income of the assessee. The assessee is admittedly engaged into hundred per cent exports and is a hundred per cent EOU unit. We have already held the assessee to be entitled to the claim of deduction under section 10B of the Act in the above said paras. Now the only issue to be seen is whether the receipts as such i.e. the incentives received under 44 'Vishesh Krishi Upaj Yojna', which in turn is determined @ 5% and the FOB value of the export sales made by the assessee, is derived from the undertaking. Both the Commissioner of Income Tax and the learned D.R. for the Revenue have placed reliance on the ratio laid down b y the Hon'ble Supreme Court in Libert y India Vs. CIT (supra) to hold that the assessee is not entitled to the said deduction.
52. The perusal of the said decision reflects that the issue before the Hon'ble Supreme Court in Liberty India Vs. CIT (supra) was the claim of deduction u/ss 80I/80IA and 80IB of the Act which also provides for deduction with reference to the profits derived from eligible business. The Hon'ble Apex Court in Liberty India Vs. CIT (Supra) observed as under :
"The Income-tax Act, 1961, broadly provides for two types of tax incentives, viz., investment-linked incentives and profit- linked incentives. Chapter VI-A of the Act which provides for incentives in the form of deductions essentially belongs to the category of "profit-linked incentives". Therefore, when section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives:
what attracts the incentives under section 80-IA/80IB is the generation of profits (operational profits). It is for this reason that Parliament has confined deduction of profits derived from eligible business mentioned in sub-sections (3) to (11A). Each of the businesses mentioned in sub-sections (3) to (11A) constitutes a stand-alone item in the matter of computation of profits.
Sections 80-IB and 80-IA are a code by themselves as they contain both substantive as well as procedural provisions.
Section 80-IB provides for the allowing of deduction in respect of profits and gains derived from the eligible business. The connotation of the words "derived from" is narrower as compared to that of the words "attributable to". By using the expression "derived from" Parliament intended to cover sources not beyond the first degree.
Sections 80-I, 80-IA and 80-IB provide for incentives in the form of deductions which are linked to profits and not investment. On analysis of sections 880-IA and 80-Ib it becomes clear that any industrial undertaking which becomes eligible on satisfying sub-section (2) would be entitled to deduction under sub-section (1) only to the extent of profits derived from such industrial undertaking after the specified date. Apart from 45 eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of the profits. This is the importance of the words "derived from an industrial undertaking" as against "profits attributable to an industrial undertaking".
53. The Hon'ble Apex Court further observed as under:
"The word "derived from" are narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from", Parliament intended to cover sources not beyond the first degree."
On an analysis of sections 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub-section (2) would be entitled to deduction under sub-section (1) only to the extent of profits derived from such industrial undertaking after specified date(s). Hence, apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words "derived from industrial undertaking"
as against "profits attributable to industrial undertaking".
54. The Apex Hon'ble Court thus held as under:
"DEPB is an incentive. It is given under the Duty
Exemption Remission Scheme. Essentially, it is an export
incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export product. Under DEPB, an exporter may apply for credit as a percentage of the FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by the DGFT for import of raw materials, components, etc., DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore, in our view, DEPB/Duty drawback are incentives which flow from the schemes framed by Central Government or from section 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business under section 80-IB. They belong to the category of ancillary profits of such undertakings."
55. In view of the ratio laid down b y the Hon'ble Supreme Court in Libert y India Vs. CIT (supra) the issue to be considered is whether the incentives receipts under the 'Vishesh Krishi Upaj Yojna' are the receipts on first degree and entitled to the claim of deduction under section 10B of the Act. W h i l e d e n yi n g t h e b e n e f i t o f d e d u c t i o n u / s s 46 80I/80IA and 80IB of the Act on DEPB receipts, it was observed b y the Hon'ble Supreme Court in Libert y India Vs. CIT(supra) that the object behind DEPB is to neutralize the incidence of customs duty p a ym e n t on the import content of export product, which was provided for by way of credit to customs duty against export product. The exporter was entitled to apply for credit as a percentage of the FOB value of export under the incentive scheme of grant of DEPB. The said credit was available at rates specified by the DGFT for import of raw material/components etc. The Hon'ble Supreme Court further held that DEPB/Duty Drawback were incentives which flow from the schemes framed by Central Government.
56. In the present case before us the cop y of the scheme of 'Vishesh Krishi Upaj Yojna' is placed at pages 20 and 21 of the Paper Book. The objective of the said scheme was to promote the exports of Agricultural Produce and their value added products, Minor Forest P r o d u c e , G r a m U d yo g P r o d u c t s , F o r e s t B a s e d P r o d u c t s a n d o t h e r products which may be notified from time to time. The entitlement to the scheme as per clause 3.13.2 is as under:
"3.13.2 Duty Credit Scrip benefits as granted with an aim to compensate high transport costs and to offset other disadvantages.
Exporters of products notified in
Appendix 37A of HBPvl, shall be entitled
for Duty Credit Scrip equivalent to 5% of
FOB value of exports (in free foreign
exchange) for exports made from
27.8.2009 onwards."
57. Under clause 3.13.3 it is provided that Duty Credit Scrip
benefits under the scheme would be granted only at the reduced rate of 3% of FOB value of exports in cases where exporter has availed the benefit of:47
(i) Drawback at rates higher than 1% and/or
(ii) Specific DEPB rate (i.e. other than
Miscellaneous Category - Sr.Nos.22C & 22D
of Product Group 90%); and/or
(iii) Advance Authorization or Duty Free Import
Authorization Import of inputs (other than
catalyst, consumable and packing
materials)for the exported product for which
Duty Credit Scrip under VKGUY is being
claimed."
58. Further benefits are also given under the scheme, but the relevant benefits of the scheme vis-à-vis assessee are as referred to by us in the above para. In view of the scheme under which the assessee is entitled to the incentives which in turn are to compensate high transport cost and to offset other advantages to the exporters, and also in view of the fact that the incentives are to be allowed at reduced rates where the assessee is in receipt of Duty Drawback, DEPB, we are of the view that the incentives received by the assessee under the 'Vishesh Krishi Upaj Yojna' as an export incentive were given to the assessee to neutralize the incidence of high transport cost and also to offset other disadvantages. The said neutralization as in the case of Hon'ble Supreme Court in the case Libert y India Vs. CIT (supra) is linked to the FOB value of exports by way of Duty Credit Scrip. The said benefits are provided by DGFT in the case of the assessee and the said scheme being similar to the scheme of grant of Duty D r a w b a c k / D E P B a n d i n t u r n a p p l yi n g t h e r a t i o l a i d d o w n b y t h e Hon'ble Supreme Court in the case of Libert y India Vs. CIT (supra) we hold that the assessee is not entitled to the claim of deduction under section 10B of the Act on the said incentives. In view thereof, we uphold the order of enhancement passed by the Commissioner of Income Tax in exercise of its jurisdiction under section 263 of the Act. The ground No.5 raised by the assessee is thus dismissed.48
59. The last issue raised in the revisionary order passed under section 263 of the Act is in relation to the claim of expenditure of commission paid to Shri Parminder Thapar amounting to Rs.27,43,200/-. The Commissioner of Income Tax had set aside the issue observing that the Assessing Officer had accepted the expenses without making any verification and without application of mind. It is an admitted position that the Assessing Officer had raised queries with regard to the said expenditure and the assessee had furnished complete details in respect of the amount paid to Shri Parminder Thapar against exports made to USA. All these aspects are mentioned by the Commissioner of Income Tax in para 7 of the order passed under section 263 of the Act. Where the queries have been raised and in response the Assessing Officer had accepted the claim of the assessee merely because elaborate references were not made, while allowing the said expenditure to the assessee in the assessment order, it cannot be said that the Assessing Officer has not applied his mind because writing of the said order is not in the control of the assessee and in view thereof the order of the Assessing Officer being cryptic and non-
descriptive, cannot be said to be erroneous and prejudicial to the interests of the Revenue. We find no merit in exercise of jurisdiction under section 263 of the Act by the Commissioner of Income Tax in this regard. Reversing the same we hold that the order passed by the Assessing Officer in this regard is to be upheld. The ground No.6 raised by the assessee is thus allowed.ITA No.1210/Chd/2012 :: Assessment Year 2006-07
60. The assessee has raised the following grounds of appeal :49
"1. That the Ld. CIT (A) has erred in law and on the facts in confirming the disallowance of deduction u/s 10B of the Income Tax Act, 1961.
2. That the order of the Ld. CIT(A) not entertaining additional ground of appeal of allowing 100% of the deduction instead of 90% u/s 10B is illegal, arbitrary and against the facts of the case.
3. That assessee craves the right to add, amend, delete any ground/s of appeal.
4. Accordingly, it is humbly prayed to allow d e d u c t i o n u / s 1 0 B o f t h e A c t & 1 0 0 % &/ o r a n y other relief/s your honour may deem fit."
61. The assessee in ITA No.1210/Chd/2012 is in appeal against the order passed under section 143(3) read with section 263 of the Act. In view of our decision in paras 17 to 45 hereinabove, where we h a v e h e l d t h e a s s e s s e e t o b e e n g a g e d i n t h e p r o c e s s i n g o p f h o n e y, a n d entitled to claim of deduction under section 10B of the Act, the order of the CIT (Appeals) is thus reversed. The Assessing Officer is directed to allow deduction under section 10B of the Act to the assessee. The ground NO.1 raised by the assessee is allowed.
62. The issued vide ground of appeal No.2 is against the allowance of deduction under section 10B of the Act @ 100% instead of 90% allowed by the Assessing Officer. Under the provisions of section 10B of the Act the assessee is entitled to the claim of deduction of such profits and gains as are derived from 100% EOU Unit. The second proviso under section 10B of the Act provides that for the assessment ye a r b e g i n n i n g o n t h e f i r s t d a y o f A p r i l , 2 0 0 3 , t h e deduction shall be 90% of the profits and gains derived by an undertaking from the export of such articles or things or computer software. In view of the provisions of the Act wherein it has been p r o v i d e d t h a t f o r t h e a s s e s s m e n t ye a r b e g i n n i n g o n t h e f i r s t d a y o f April, 2003, the deduction would be restricted to 90% of the profits of 50 the EOU Unit, we find no merit in the claim of the assessee ad the same is rejected. The ground raised by the assessee is thus dismissed. ITA No.1211/Chd/2012 :: Assessment Year 2009-10
63. The assessee has raised the following grounds of appeal :
"1. That the Ld. CIT (A) has erred in law and on the facts in confirming the disallowance of deduction u/s 10B of the Income Tax Act, 1961 amounting to Rs.9,96,55,179/-.
2. That the order of the Ld. CIT(A) not entertaining additional ground of appeal of allowing 100% of the deduction instead of 90% u/s 10B is illegal, arbitrary and against the facts of the case.
3. That assessee craves the right to add, amend, delete any ground/s of appeal.
4. Accordingly, it is humbly prayed to allow d e d u c t i o n u / s 1 0 B o f t h e A c t & 1 0 0 % &/ o r a n y other relief/s your honour may deem fit."
64. The facts in ITA No.1211/Chd/2012 are identical to the facts in ITA No.1210/Chd/2012 and our decision in ITA No.1210/Chd/2012 shall appl y mutatis mutandi to the facts in ITA No.1211/Chd/2012. ITA No.690 /Chd/2011 :: Assessment Year 2008-09
65. The Revenue has raised the following grounds of appeal :
"1.(a) That the Ld. CIT (A)-II has erred in law and on the facts in deleting the addition of Rs.6,42,87,405/- on account of disallowance of deduction u/s 10B of the I.T. Act, 1961.
(b) That the Ld. CIT (A)-II has failed to appreciate that no new commodity is produced by the assessee and Honey remains Honey even after processing.
2. That the order of the CIT(A)-II be set aside and that of the A.O. be restored.
3. That the appellant craves leave to add or amend any ground of appeal before it is finally disposed."51
66. I n a s s e s s m e n t ye a r 2 0 0 8 - 0 9 , t h e C I T ( A p p e a l s ) h a d a l l o w e d t h e claim of the assessee in relation to the deduction under section 10B of the Act and in view of our decision in paras 17 to 45 hereinabove, we uphold the order of the CIT (Appeals) and dismiss the grounds of appeal raised by the assessee.
67. In the result, appeals in ITA No.553/Chd/2011, ITA Nos.1210 & 1211/Chd/2012 are partly allowed. The appeal in ITA No.690/Chd/2011 is dismissed.
Order Pronounced in the Open Court on 3 r d d a y o f J a n u a r y, 2014.
Sd/- Sd/-
(T.R.SOOD) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 3rd January, 2014
*Rati*
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
Assistant Registrar, ITAT, Chandigarh