Income Tax Appellate Tribunal - Chennai
L.J.International Limited, , Chennai vs Assessee on 12 September, 2012
IN THE INCOME-TAX APPELLATE TRIBUNAL
'B' BENCH, CHENNAI.
Before Shri N.S. Saini, Accountant Member &
Shri S.S. Godara, Judicial Member
I.T.A. No.1142/Mds/2012
Assessment Year : 2007-08
L.J. International Limited, The Deputy Commissioner of Income
60, Rukmani Lakshmipathy Salai, Vs. Tax, Company Circle II(4),
Egmore, Chennai 600 008. Chennai 600 034.
[PAN:AAACT1149C]
(Appellant) (Respondent)
Appellant by : Shri R.Meenakshisundaram, Advocate
Respondent by : Dr. S. Moharana, CIT - DR
Date of Hearing : 12.09.2012
Date of pronouncement : 05.10.2012
ORDER
PER BENCH This assessee's appeal has arisen from the order of Commissioner of Income Tax, Chennai -I, Chennai dated 30.03.2012 in C.No. 218(44)/CIT- I/263/2011-12 for the assessment year 2007-08 in proceedings under section 263 of the Income Tax Act 1961 [in short "Act"].
2. The brief facts of the case are that the assessee is a company engaged in the business of producing and exporting tissue culture plants. Regarding assessment year 2007-08, it filed its return of income on 29.09.2007 admitting income of `.1,35,58,850/-. As the record of the case 2 I.T.A. No.1 No.1142/M/ 142/M/12 /M/12 reveals, the Assessing Officer initiated 'scrutiny' proceedings and sought details from the assessee qua deduction and exemption involved under section 10A and 10B with all necessary particulars. The assessee submitted all the necessary details sought for by the Assessing Officer. Vide order dated 25.11.2009, the Assessing Officer finalized the assessee's assessment under section 143(3) of the "Act" as under:
"Income returned `. 1,35,58,850/-
Agricultural Income `. 7,41,316/-
Tax payable thereon `. 40,67,655/-
Add: Surcharge @ 10% `. 4,06,766/-
Education cess `. 89,488/-
`. 45,63,909/-
Less: TDS `.17,31,327/-
AT `.30,00,000/- `. 47,31,327/-
Balance refundable `. 1,67,418/-
Less: Int. u/s 234C `. 21,720/-
Balance refundable `. 1,45,698/-"
3. Thereafter, on 14.02.2011, the Assessing Officer issued notice to the assessee under section 154/155 of the "Act"; proposing rectification of mistake alleged to have been committed re assessee's claim under section 10B of the "Act" qua 'live plants' produced by the assessee through tissue culture as in his view, the same was concerned with "live article" or things. The assessee filed reply to the said notice on 17.02.2011 and tendered explanation in support of the assessment finalized. A perusal of the paper book reveals that thereafter the Assessing Officer did not pass any order 3 I.T.A. No.1 No.1142/M/ 142/M/12 /M/12 under section 154 of the "Act" either accepting assessee's explanation or rejecting it.
4. On 27.02.2011, the Commissioner of Income Tax issued notice to the assessee under section 263 of the "Act" for the reasons stated herein below:
"On perusal of the records, it was found that during assessment proceedings, the Assessing Officer had allowed exemption u/s. 10B to the tune of `.71,22,748/-. It is observed that the assessee had claimed exemption in respect of a Unit which was engaged in raising tissue culture plants and exporting the same. Since the product is live plants, it cannot be considered as article or thing for the purposes of section 10B of the Income-tax Act, 1961. As such the industrial undertaking of the assessee cannot be said to have satisfied the conditions prescribed in sub-section 2 of section 10B. The Assessing Officer did not examine the relevant facts before allowing the claim."
After receiving the notice, the assessee filed a detailed reply containing the details of its manufacturing and production exercise leading to the production of plants through tissue culture technique and submitted following documents.
"(a) Detailed note explaining the various processes involved in the development of Plants under tissue culture technology.
(b) Certificate issued by the Ministry of Commerce and Industry certifying the assessee's unit as EOU.
(c) Certificate issued by the Agricultural and Processed Food Products Export Development Authority.
(d) Extract from the Special Economic Zone Act, 2005.
(e) Extract from Chapter 6 of the Foreign Trade Policy 2004·2009 issued by the Ministry of Commerce, Government of India."4 I.T.A. No.1
No.1142/M/ 142/M/12 /M/12
5. However, the Commissioner of Income Tax was not convinced with assessee's reply. Therefore, vide impugned order, by exercising jurisdiction under section 263 of the "Act", the CIT has ordered revision of the assessee's assessment finalized by holding as under:
"5. I have carefully considered the explanation given by the assessee. The contention of the assessee that raising tissue culture plants is manufacture for the purpose of claiming deduction u/s 10B of the IT Act is not acceptable.
6. The word 'manufacture' is defined u/s 2(29BA) to mean changes in a non-living physical object or article or thing. Though, definition was inserted by the Finance (No.2) Act 2009, with retrospective effect from 1.4.2009, it did not in any way, confer the benefit to the assessee in the past as deduction u/s 10B is restricted to articles or things only.
7. To be eligible for deduction u/s 10B, excepting computer software, the article or thing should be "manufactured and the manufactured article or thing" should be exported. The assessee has not fulfilled the first condition. An "article" or "thing" even before insertion of sec.2(29BA) cannot be a living organism and hence raising plant through tissue culture cannot be termed as manufacture.
8. The Hon'ble Supreme Court in the case of CIT Vs. Relish Foods (1999) 237 ITR 59 (SC), much before the insertion of definition u/s 2(29BA), had held that culturing/living things like prawns is not manufacture.
9. A similar view was expressed by the Hon'ble Supreme Court in the case of CIT Vs. Venkateswara Hatcheries Pvt. Ltd., (1999) 237 ITR 174 (SC). Once, the apex court has held that for the purpose of the IT Act, 1961, the word 'manufacture' cannot consider 'living things' under its ambit, placing reliance on allied acts is ill founded and is not backed by proper reasons.
10. Having considered the above facts, I am of the view that the assessee is not entitled to deduction u/s 10B(2) of the, Income tax Act and his claim is eligible to be disallowed. In the above circumstances, the assessment order passed u/s.143(3) of Income Tax Act in this case 5 I.T.A. No.1 No.1142/M/ 142/M/12 /M/12 on 25.11.2009 is set aside. The AO is directed to disallow the claim of deduction u/s.10B (2) and pass consequential order." Therefore, the assessee is aggrieved and is in appeal before us.
6. The AR representing the assessee has made us to go through the grounds raising various pleas of jurisdiction, legality of Commissioner of Income Tax's order under section 263, assessee's claim of exemption under section 10B of the "Act" as well as necessary provisions of "Act" in contending that the Commissioner of Income Tax has wrongly revised the assessment finalized by the Assessing Officer. In support thereof, he has also cited case law 221 ITR 882 (Ker.) titled as CIT v. A.V. Thomas and the decision of the Special Bench of ITAT, Kolkata in the case of Madhu Jayanti International Ltd. Vs. DCIT reported as [2012] 137 ITD 377 and prayed for acceptance of the appeal.
7. Opposing the arguments, the DR had chosen to strongly support the Commissioner of Income Tax's order by relying on various findings contained therein as well as the case law relied upon by the Commissioner of Income Tax i.e. CIT v. Relish Foods (1999) 237 ITR 59 (SC) and CIT v. Venkateshwara Hatcheries Pvt. Ltd. [1999] 237 ITR 174 (SC) and prayed for upholding the Commissioner of Income Tax's order.
8. After considering the respective stands adopted by both the parties before us, we frame the following issue for our apt adjudication: 6 I.T.A. No.1
No.1142/M/ 142/M/12 /M/12 Whether the Commissioner of Income Tax has rightly revised the assessment finalized by the Assessing Officer on the ground that the assessee's unit engaged in production of plants through the technology of tissue culture is not entitled for exemption under section 10B of the Act. If so, whether the CIT's order deserves to be modified or confirmed per respective stands of the parties?
9. We have heard both parties at length and also perused the relevant findings, materials available in the paper book as well as case law cited by both parties. Admittedly, the assessee is in the business of 'production' and export of tissue cultured plants. Its unit is export oriented being approved by the Ministry of Commerce and Industry, Government of India. In the paper book of the case, the assessee has also enclosed the said certificate at page 19 & 20. We notice that since the assessee's unit is established in the State of Kerala, District Ernakulam, the State Government has also granted necessary permission under the provisions of Factory Act, 1948.
10. Coming to the details of assessee's alleged 'manufacturing' and 'production' activity of tissue culture, we notice from the paper book that the modern day technology of tissue culture is a multifaceted activity with the help of latest biotechnological tools, wherein from one mother plant the manufacturer/producer can get thousands of plant within a short span of time; with limited space and minimum other requirements. In the paper book, 7 I.T.A. No.1 No.1142/M/ 142/M/12 /M/12 we find that the assessee has highlighted following steps in the tissue culture activity, which are reproduced herein below:
"Manufacturing Process of Tissue culture plants:
Steps Involved
a) Initiation / Explant:
Cut-out Plant Tissue and Place in Tissue Culture Container. The first step is to obtain what is called an explant. This means to simply cut-out a very small piece of leaf or stem tissue, or even isolate individual cells, and place them in a tissue culture container. The tissue has to be sterilized so it will not have any contaminating bacteria or fungus. It is then placed inside the tissue culture containers on a gel called agar. In the agar is dissolved all the sugar, nutrients and hormones the plant needs. Explants can be pieces of any part of the plant (leaves, stems, flowers, etc.), or even individual isolated cells.
b) Multiplication: Tissue grows and produces small plants The tissue will begin to grow. It may make a big blob of tissue called callus, or it may make new shoots directly from the explant tissue that was inserted in the container. A mass of callus tissue is formed that is just starting to make new plantlets.
c) Rapid Multiplication by Transfer of Cultures Once the plantlets start developing, some can be removed and placed in new tissue culture containers. Thus, another "forest'" of plants is produced. This results. in a rapid multiplication of the cultures and many thousand of plants can be produced in a few months. Some of the small plantlets can be removed and transferred to new tissue culture containers. These will produce more shoots and fill the container:
d) Transplanting When the plantlets are large enough, they can be removed from the tissue culture container and transferred into pots with potting soil.
When the small plant clones are removed from the culture containers, they must be transplanted into some type of acclimation container or kept under a mist system until they acclimate to the ambient 8 I.T.A. No.1 No.1142/M/ 142/M/12 /M/12 environment. After acclimation, the young plants can be transplanted and grown in pots in a greenhouse to produce new plants. The entire tissue culturing production process is being carried out in a highly sterilized environment. Entry protocols of man and material are strictly controlled and done under extreme hygienic conditions. The process of initiation / multiplication is performed by the trained manpower in an equipment called laminar flow benches (LFB's). The manufacturing process of Tissue culture plants requires quality input materials and adequate trained personnel to work in the tissue culture factory (usually called tissue culture laboratory). The plants once multiplied will be moved into growth chambers / growth rooms which are supported / equipped with the facility of providing the light and temperature required for the growth of the plants. The requirements of temperature and lights for each variety of plants may vary and this is catered to by the support of lighting and cooling systems."
11. So far as the provisions of "Act" are concerned, we notice that sections 10A, 10AA,10B and 10BA provide incentives to concerned assessee engaged in various businesses in newly established undertakings in free trade zone, SEZ and 100% export oriented undertakings and so on. In the instant appeal, the principal reason cited by the Commissioner of Income Tax for denying the assessee deduction under section 10B of the "Act" is that the assessee's activity of producing plants through tissue culture does not amount to manufacturing exercise. Therefore, limiting our scope of adjudication, we find that the Legislature by way of Finance Act, 1988 had inserted section 10B in the "Act" for providing impetus to export oriented undertakings. In the said provision, section 10B(2)(1) contained inter alia, one of the condition for the concerned assessee that "it manufactures or 9 I.T.A. No.1 No.1142/M/ 142/M/12 /M/12 produces any article or thing". Further, in the explanation to the above statutory provisions, clause 3(a) explained the activity of 'manufacturing' to include in any "process". As the Legislative history of the provisions indicate, section 10B was substituted by the Finance Act, 2000 w.e.f. 01.04.2001. We find that the substituting provisions further enwidened the scope of conditions enumerated in the section 10B(2)(i), which this time read to be "it manufactures or produces any article or things or computer software". However, the Legislature did not define the word "manufacture" including any processing exercise alike the substituted provision (supra). Thereafter, the Finance Act, 2003 w.e.f. 01.04.2004 added explanation 4 to section 10B which stated that "manufacture or produce would also include cutting and polishing precious stone and semi precious stone". But, as already clarified, the word "manufacture" or produce did not find any definition in section 10B. During all this, the assessee filed its 'return' in question pertaining to the assessment year 2007-08. Thereafter, the Finance (No. 2) Act of 2009, the Legislature has chosen to incorporate definition of the word "manufacture" in section 2(29BA) of the Act as under:
"(29BA) "manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing.
(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure."10 I.T.A. No.1
No.1142/M/ 142/M/12 /M/12 It is also found that the said definition has been incorporated in the 'Act' by the Legislature with retrospective effect i.e. w.e.f. 01.04.2009. Meaning thereby that the Legislature itself has thought it appropriate not to incorporate the definition with retrospective effect for the period preceding 01.04.2009. This ultimately implies that the said definition does not cover the assessee's case re assessment year 2007-08. Therefore, the assessee's export business activity has to be judged under section 10B(2) of the "Act" independent of the definition under section 2(29BA) of the Act. So, we deem it proper to decide the issue in hand particularly, whether the assessee's tissue culture activity amounts to 'manufacture or produces' as provided under section 10B(2)(i) of the "Act".
12. As already stated herein above, the other corresponding provisions of various exempted income provided in section 10A and section 10AA of the "Act" also contain similar provisions. After perusing the said provisions, we find that in section 10A, the word "manufacture or produce" has nowhere been specifically defined. Whereas, in the other corresponding provisions i.e. section 10AA of the "Act" pertaining to SEZ's unit, the Legislature has duly defined the word "manufacture" in sub-section 9(iii) of the "Act" as "(iii) "manufacture" shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zones Act, 2005." 11 I.T.A. No.1
No.1142/M/ 142/M/12 /M/12 In the above reproduced provision, since the Legislature has itself defined "manufacture" to be the same under section 2(r) of the SEZ's Act, we also deem it appropriate to reproduce the said provisions herein below:
"(r) "manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, re-
engineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining."
In our opinion, and more so, in view of the facts that in the impugned assessment year, there is no specific definition of word "manufacture or produce", we hold that definition of 'manufacture' contained in the corresponding provisions of section 10AA of the "Act" would also apply qua the assessee's case vis-a-viz its manufacturing activity. Whilst coming to this conclusion, we find support from the ITAT Kolkata Special Bench's decision cited by the assessee, wherein it has been observed as follows:
"35. ................................................We are of the considered view that the contention of the assessee that the scheme of income tax exemption available to units in the SEZ u/s. 10A of the Act and units in the free trade zone provided u/s. 10AA of the Act and the exemption available to 100% EOU u/s. 10B of the Act are very similar in nature and the wordings of the statutory provisions are similar in nature is correct. ............................."
36. We, in view of the above, hold that when the products for which the assessee's unit is recognized as a 100% EOU are tea bags, tea in packets and tea in bulk packs and the assessee is exclusively engaged in blending and packing of tea for export may not be manufacturer or producer of any other article or thing in common parlance. However, for the purpose of Section 10A, 10AA and 10B, we have to consider the 12 I.T.A. No.1 No.1142/M/ 142/M/12 /M/12 definition of the word "manufacture" as defined in Section 2(r) of SEZ Act, Exim Policy, Food Adulteration Rules, 1955, Tea (Marketing) Control Order, 2003, etc. We also find that the definition of 'manufacture' as per Section 2(r) of the SEZ Act, 2005 is incorporated in Section 10AA of the Income-tax act with effect from 10.02.2006. Hon'ble Kerala High Court in the case of Girnar Industries (supra) had held such amendment in Section 10AA to be of clarificatory in nature. The definition of 'manufacture' under the SEZ Act, Exim Policy, Food Adulteration Rules and Tea (Marketing) Control Order is much wider than what is the meaning of the term 'manufacture' under the common parlance, and it includes processing, blending, packaging etc. ............" In our opinion, though the Special Bench had dealt with the case of assessment years 2003-04 and 2005-06, but at the same time, being conscious of the fact that in the said assessment years and well upto 2009, there was no definition of 'manufacture', therefore, we deem it appropriate to apply the said definition contained in section 10AA of the "Act" qua the present case of assessment year 2007-08 falling under section 10B(1) of the "Act". We conclude, in the light thereof, that the assessee's business activity of tissue culture is 'manufacture or produces' within the meaning of section 10B(2)(i) of the "Act" and Commissioner of Income Tax had wrongly held that since assessee's produce is "plant", which is a lively object, therefore, it is covered by section 2(29)BA) of the "Act". In our opinion, the Commissioner of Income Tax has not proceeded on the correct factual and legal interpretation of section 2(29BA) of the "Act" qua facts and circumstances of the instant case. As already explained hereinabove, the tissue culture is a modern day advanced technology of the 21st century, which has redefined the concept a plant's growth. 13 I.T.A. No.1
No.1142/M/ 142/M/12 /M/12 We also notice that the Commissioner of Income Tax has placed reliance on the case law of Hon'ble Supreme Court's decision of Relish Foods and Vekateshwara Hatcheries Pvt. Ltd. (supra). In our humble opinion, the said case law is not applicable qua the assessee's activity of plant production through tissue culture as we find that in those cases, there was no ultimate manufacture or production as in the first case the commodity was 'shrimp', which was not produced. Therefore, their Lordships of the Hon'ble Supreme Court did not accept the assessee's argument therein that the same amounted to any manufacture or production activity.
13. Similarly, in the case of Venkateshwara Hatcheries Pvt. Ltd.(supra), keeping in view the peculiar business activity of the assessee, the Hon'ble Apex Court had observed that there was no manufacture or production since the "chicks" were merely hatched which did not amount to manufacture or produce. Contrary to the facts of those cases, in the instant case the assessee is involved in tissue culture, which can in no way be called any activity other than 'manufacture or produce' because one mother plant is tissue cultured, which gives rise to production of voluminous number of plants by artificial processes and stages (supra). Hence, we hold that the peculiar facts and circumstances of the case before us are altogether different than those before the Hon'ble Apex Court. Accordingly, in our considered opinion, the Assessing Officer did not commit any 'error 14 I.T.A. No.1 No.1142/M/ 142/M/12 /M/12 prejudicial to the interest of Revenue in granting the assessee deduction under section 10B of the "Act" so as to give rise to exigibility of Commissioner of Income Tax's jurisdiction under section 263 of the "Act".
14. In the light of above discussion, we are of the opinion of the Assessing Officer in finalizing the assessment had rightly granted the assessee deduction under section 10B of the "Act". It was one of the 'possible view' as per law, which could not be revised by CIT under section 263 of the Act. Consequently, once we have held that the assessee's unit is entitled to be treated to be a qualifying unit under the provision of section 10B(2)(1) of the "Act", our conclusion is that the order of the Commissioner of Income Tax revising the assessment does not withstand the test of the law. In view of the same, we accept the assessee's appeal and nullify the CIT's order dated 30.03.2012 passed under section 263 of the "Act" revising the assessment order dated 25.11.2009 (supra).
15. Allowed.
Order pronounced on Friday, the 5th of October, 2012 at Chennai.
Sd/- Sd/- (N.S. SAINI) (S.S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 05.10.2012 Vm/- To: The assessee//A.O./CIT(A)/CIT/D.R.