Income Tax Appellate Tribunal - Mumbai
Karp Impex Ltd, Mumbai vs Assessee on 22 August, 2014
आयकर अपीलीय अिधकरण "ये
ये" Ûयाय पीठ,
पीठ, मुंबई मɅ।
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "A", MUMBAI
ौी बी आर बआसकरण
बआ ण, लेखा सदःय एवं ौी ǒववेक वमा[,Ûयाियक सदःय के सम¢।
BEFORE SHRI B R BASKARAN, ACCOUNTANT MEMBER
AND SHRI VIVEK VARMA, JUDICIAL MEMBER
आयकर अपील सं. : 3034/
3034/मुम/2012, िनधा[रणवष[ 2005-06
ITA No. : 3034/Mum/2012, AY 2005-06
Karp Impex Ltd., Vs DCIT -5(2),
1411, Prasad Chamber, Churchgate,
Opera House, Mumbai
Mumbai -400 004
ःथयी लेखा सं.:PAN: AABCK 1823 F
अपीलाथȸ(Appellant) ू×यथȸ(Respondent)
Appellant by : Mr. B V Jhaveri
Respondent by : Mr. Pitambar Das
सुनवाईकȧतारȣख /Date of Hearing : 14-08-2014
घोषणाकȧतारȣख/Date of Pronouncement : 22-08-2014
आ दे श
ORDER
ौी ǒववेक वमा[, Ûया.
Ûया. स.
PER VIVEK VARMA, J.M.:
The appeal is filed by the assessee against the order of CIT(A) 9, Mumbai, dated 16.02.2012, wherein, the following grounds have been taken:
"On the facts and circumstances, of the case and in law, the petitioner company states that the learned CIT Appeals has erred in:-
1. Confirming, the concealment penalty at Rs. 11,47,607/- u/s 271(1)(c) of the Act levied by AO although the Petitioner had supplied correct and true facts in respect of claim made u/s 80JAA of the income tax Act, 1961.
Your petitioner craves your leave to add/amend and or alter any of the grounds of appeal on or before the date of hearing".
2. The solitary issue pertains to the levy and sustaining the penalty of Rs. 11,47,607/- u/s 271(1)(c).
3. The facts are that the assessee company is engaged in trading, processing and exporting of cut and polished diamonds. The assessee, thus claimed a deduction u/s 80JJAA at Rs. 31,36,181/-. This deduction was denied by the AO and later by the CIT(A), following the decision rendered by 2 Karp Impex Ltd.
ITA 3034/M/2012 the Hon'ble Supreme Court in the case of CIT vs Gem India Manufacturing Co., reported in 249 ITR 307 (SC), wherein it was held that cutting and polishing of diamonds does not amount to manufacture or production of article and that it is only processing. On denial of deduction claimed by the assessee, the AO proceeded to levy the penalty u/s 271(1)(c).
4. In the penalty proceedings as well, the AO placed reliance on the case of Gem India (supra) and held that as per the ratio laid down by the Hon'ble Supreme Court, the assessee was not entitled for the deduction, as the wrong claim of deduction which was not available to the assessee, amounted to furnishing of inaccurate particulars.
5. In the appeal before the CIT(A), the assessee retreated its bona fides, but the CIT(A) sustained the observation of the AO with regard to furnishing of inaccurate particulars of income and, he, therefore sustained the levy of penalty.
6. Aggrieved, the assessee is now before the ITAT.
7. Before us, the AR submitted that the only ground for the levy of penalty was the decision of the Hon'ble Supreme Court in the case of Gem India (supra). The AR referred to the case of Sheetal Diamonds Ltd. vs ITO, reported in 47 SOT 75 (Mumbai), wherein the two decisions of the Hon'ble Supreme Court had been referred and dealt with, i.e. Gem India (supra) and Arihant Tiles Marbles (P) Ltd. reported in 320 ITR 79 (SC). In the case of Sheetal Diamonds Ltd., the coordinate Bench, dealing with the issue, (as extracted) "Coming to the second aspect whether cutting and polishing of diamonds would constitute manufacturing activity or not, he submitted that the decision of Hon'ble Supreme Court in the case of CIT vs. Gem India Mfg. Co. [2001] 249 ITR 307/117 Taxman 368 was rendered in peculiar circumstances. He read out from the head note and pointed out that Hon'ble Supreme Court has clearly observed that polishing or cutting of diamonds cannot be called manufacturing activity in the absence of any material. He further read from last para at page 308 wherein it is clearly observed that there was no material on record from which it could be concluded by the Tribunal that such activity 3 Karp Impex Ltd.
ITA 3034/M/2012 would constitute transfer. Thus, it is clear that this decision was rendered in the context where no material was produced before the Tribunal or lower authorities for coming to the conclusion that cutting and polishing of diamonds would constitute manufacturing activity. He vehemently argued that this decision is to be seen in the light of later decision of Hon'ble Supreme Court in the case of ITO v. Arihant Tiles & Marbles (P.) Ltd. [2010] 320 ITR 79/186 Taxman 439 wherein even the activity of cutting and polish of marble slabs was held to be of manufacturing nature".
it was observed "Now coming to the two decisions of Hon'ble Supreme Court, let us first go to the decision in the case of Gem India Mfg. Co (supra). The Hon'ble Supreme Court observed the facts of the case as under:
"Section 80-I gives a deduction in respect of profits and gains from industrial undertakings which, among other conditions, manufacture or produce any article or thing. The question, therefore, is whether the assessee, in cutting and polishing diamonds manufactures or produces any article or thing. The Tribunal took the view that it did because in "common parlance and commercial sense raw diamonds are not the same thing as polished and cut diamonds. The two are different entities in the commercial world. Though the chemical composition remains the same the physical characteristics of shape and class, etc., are substantially different". It would appear that no material had been placed on the record before the Tribunal upon which it could have reached the conclusion that, either in common or commercial parlance, raw diamonds were not the same thing as polished and cut diamonds, and that they were different entities in the commercial world. An ipse dixit of the Tribunal is not best foundation for a decision."
On the above facts, it was held by the Apex Court as under:
"There can be little difficulty in holding the raw and uncut diamond is subjected to a process of cutting and polish which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. There is no material on record upon which such a conclusion can be reached."
Thus, from the above, it is clear that the Hon'ble Supreme Court has held that cutting and polishing of uncut diamonds would not result in manufacture or production. But this conclusion seems to have been given on the basis that there was no material to hold otherwise.
In the case of Arihant Tiles & Marbles (P.) Ltd. (supra) again the Hon'ble Supreme Court observed whether manufacture/production of polished slabs and tiles would constitute manufacture for the purpose of section 80-IA. The head-note of the judgment reads as under:
"The assessee, which was basically a factory owner and not a mine owner, was engaged in producing polished slabs and tiles which were partly exported. The stepwise activities undertaken by the assessee were as follows: (i) raw marble blocks in
4 Karp Impex Ltd.
ITA 3034/M/2012 uneven shape were sorted out and marked; (ii) such blocks were processed on single blade/wire saw machines to square them by separating waste material; (iii) Squared up blocks were sawn for making slabs; (vi) sawn slabs were reinforced by filling cracks; (v) slabs were polished in polishing machines and cut into required dimensions/tiles; and (vi) polished slabs and tiles were buffed by shiners. The question was whether the assessee was entitled to the benefit of deduction under section 80-IA of the Income-tax Act, 1961. The High Court accepted the claim of the assessee that it was entitled to the claim of deduction under section 80-IA since the polished slabs were manufactured/produced from the marble blocks. On appeal to the Supreme Court:
Held, affirming the decision of the High Court, that this was not a case of merely cutting marble blocks into slabs. There was the further activity of polishing and ultimate conversion of the blocks into polished slabs and tiles. There were various stages through which the blocks had to go through before they became polished slabs and tiles. The original blocks did not remain marble block; it became a slab or tile. Blocks were converted into polished slabs and tiles resulting in the emergence of a new and distinct commodity. Such an activity was something beyond manufacture and brought a new product into existence. The stepwise activity constituted "manufacture or production" in terms of section 80-IA."
The Hon'ble Supreme Court has further observed at placitum 17, 18 [pages 86 & 87] of the report as under:
"In the present case, we have extracted in detail the process undertaken by each of the respondents before us. In the present case, we are not concerned only with cutting of marble blocks into slabs. In the present case, we are also concerned with the activity of polishing and ultimate conversion of blocks into polished slabs and tiles. What we find from the process indicated hereinabove is that there are various stages through which the blocks have to go through before they become polished slabs and tiles. In the circumstances, we are of the view that on the facts of the cases in hand, there is certainly an activity which will come in the category of "manufacture" or "production" under section 80-IA of the Income-tax Act. As stated hereinabove, the judgment of this court in Aman Marble Industries P. Ltd. [2003] 157 ELT 393 (SC) was not required to construe the word "production" in addition to the word "manufacture". One has to examine the scheme of the Act also while deciding the question as to whether the activity constitutes manufacture or production. Therefore, looking to the nature of the activity stepwise, we are of the view that the subject activity certainly constitutes "manufacture or production" in terms of section 80-IA. In this connection, our view is also fortified by the following judgments of this court which have been fairly pointed out to us by learned counsel appearing for the Department.
In the case of CIT v. Sesa Goa Ltd. [2004] 271 ITR 331 (SC), the meaning of the word "production" came up for consideration.
5 Karp Impex Ltd.
ITA 3034/M/2012 The question which came before this court was whether the Income-tax Appellate Tribunal was justified in holding that the assessee was entitled to deduction under section 32A of the Income-tax Act, 1961, in respect of machinery used in mining activity ignoring the fact that the assessee was engaged in extraction and processing of iron ore, not amounting to manufacture or production of any article or thing. The High Court in that case, while dismissing the appeal preferred by the Revenue, held that extraction and processing of iron or did not amount to "manufacture". However, it came to the conclusion that extraction of iron ore and the various processes would involve "production" within the meaning of section 32A(2)(b)(iii) of the Income-tax act, 1961, and consequently, the assessee was entitled to the benefit of investment allowance under section 32A of the Income-tax Act. In that matter, it was argued on behalf of the Revenue that extraction and processing of iron ore did not produce any new product whereas it was argued on behalf of the assessee that it did not produce a distinct new product. The view expressed by the High Court that the activity in question constituted "production" has been affirmed by this court in Sesa Goa's case [2004] 271 ITR 331 saying that the High Court's opinion was unimpeachable. It was held by this court that the word "production" is wider in ambit and it has a wider connotation than the word "manufacture". It was held that while every manufacture can constitute production, every production did not amount to manufacture.
In our view, applying the tests laid down by this court in Sesa Goa's case [2004] 271 ITR 331 and applying it to the activities undertaken by the respondents herein, reproduced hereinabove, it is clear that the said activities would come within the meaning of the word "production".
One more aspect needs to be highlighted. By the said judgment, this court affirmed the decision of the Karnataka High Court in the case of CIT v. Mysore Mineral Ltd., (No. 1) [2001] 250 ITR
725. In the case of CIT v. N.C. Budharaja and Co. [1993] 204 ITR 412 (SC), the question which arose for determination before this court was whether construction of a dam to store water (reservoir) can be characterized as amounting to manufacturing or producing an article. It was held that the word "manufacture" and the word "production" have received extensive judicial attention both under the Income-tax as well as under the Central excise and the sales tax laws. The test for determining whether "manufacture" can be said to have taken place is whether the commodity, which is subjected to a process can no longer be regarded as the original commodity but is recognized in trade as a new and distinct commodity. The word "production", when used in juxtaposition with the word "manufacture", takes in bringing into existence new goods by a process which may or may not amount to manufacture. The word "production" takes in all the bye-products, intermediate products and residual products which emerge in the course of manufacture of goods.
6 Karp Impex Ltd.
ITA 3034/M/2012 Applying the above tests laid down by this court in N.C. Budharaja's case [1993] 204 ITR 412 (SC) to the facts of the present cases, we are of the view that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emergence of a new and distinct commodity. The original block does not remain the marble block; it becomes a a slab or tile. In the circumstances, not only is there manufacture but also an activity which is something beyond manufacture and which brings a new product into existence and, therefore, on the facts of these cases, we are of the view that the High Court was right in coming to the conclusion that the activity undertaken by the respondents-assessee did constitute manufacture or production in terms of section 80-IA of the Income-tax Act, 1961.
Before concluding, we would like to make one observation. If the contention of the Department is to be accepted, namely, that the activity undertaken by the respondents herein is not a manufacture, then, it would have serious revenue consequences. As stated above, each of the respondents is paying excise duty, some of the respondents are job workers and the activity undertaken by them has been recognized by various Government authorities as manufacture. To say that the activity will not amount to manufacture or production under section 80-IA will have disastrous consequences, particularly in view of the fact that the assessee in all the cases would plead that they were not liable to pay excise duty, sales tax, etc. because the activity did not constitute manufacture. Keeping in mind the above factors, we are of the view that in the present cases, the activity undertaken by each of the respondents constitutes manufacture or production and, therefore, they would be entitled to the benefit of section 80-IA of the Income- tax act, 1961".
8. The coordinate Bench, thus concluded, "Thus from the above decision it is clear that processing or production of articles is also eligible for deduction u/s 80IA".
9. The AR also referred to the case of DCIT vs Unity Chopra (JV), ITA No. 320 to 324/Mum/2011 (where one of us was a party), it was observed, "We have heard both the parties, perused the orders of the Revenue authorities as well as the decisions relied upon by the Ld. Representatives of both the parties. It is an undisputed fact that the assessee company is under a bona fide belief that it is eligible for deduction u/s 80-IA of the Act and the same is evident from the conduct of the assessee, who has not filed appeal before the CIT(A) against quantum additions. From the above write up given by the assessee, it is evident that the assessee would have own the appeal on quantum additions if 7 Karp Impex Ltd.
ITA 3034/M/2012 were to file. Therefore, the attaining finality on the quantum additions against the assessee is no issue for confirming the penalties. As such there exists dispute on the debatable nature of the said provisions. As per the judgment of the Hon'ble Supreme Court in the case of CIT vs. Reliance Petroproducts Pvt. Ltd. (322 ITR 158), it is a settled law that no penalty should be levied when the issue is a debatable one and when the claim is wrongly made in the return of income. Considering the settled nature of the issue, CIT(A) has rightly deleted the penalty made by the AO u/s 271(1)(c) of the Act and it does not call for any interference. Accordingly, grounds raised by the Revenue in all the remaining four appeals are dismissed".
10. Likewise, the AR has referred to other decisions, which we have taken note of and pleaded that penalty was not leviable, thus needs to be deleted.
11. The DR on the other hand strongly defended the orders of the revenue authorities and submitted that at the time when the assessee filed its return, only Gem India (supra) was available and since the assessee went against the ratio laid down by the Hon'ble Supreme Court, it was a straight jacket case of furnishing of inaccurate particulars of incomes and, therefore, the revenue authorities were correct. The DR also submitted that there cannot be any case of two views, because, at the given point of time, only the view of Hon'ble Supreme Court was there in Gem India. Hence, the arguments of the AR that there could be two views, cannot stand.
12. The DR relied on the decisions of CIT vs Zoom Communications (P) Ltd. reported in 327 ITR 510 (Del), CIT vs Escort Finance Ltd., reported in 188 Taxman 87 (Del) to support his argument.
13. The AR in the rejoinder submitted that the time when Gem India (supra) was delivered, definition of the word 'manufacture' was not there. But the legislature, brought out an amendment and inserted Explanation 4 to section 10A w.e.f. 01.04.2004, giving the definition of the word manufacture, which included cutting and polishing of rough diamonds within its fold. The AR in all fairness accepted the fact that 8 Karp Impex Ltd.
ITA 3034/M/2012 no such definition was inserted in the impugned section, i.e. section 80JJAA, but he submitted that the insertion of Explanation clearly talks about cutting and polishing of rough diamonds would amount to manufacture and since the assessee was in the business of cutting and polishing of rough diamonds, the modus of the assessee amounted to manufacture and its facility would be an undertaking. The AR, finally submitted that the case of the assessee in any case is fortified by the decision of Hon'ble Supreme Court in the case of CIT vs Reliance Petro Products Ltd. reported in 322 ITR 158 (SC), wherein, the Hon'ble Supreme Court observed that penalty is not to be levied, in case all the facts were with and before the AO, even if the claim is legally unsustainable.
14. We have heard the arguments and have perused the orders and the case laws cited. The only question before us is whether penalty is exigible where the issue is covered by the Hon'ble Supreme Court, only because, Hon'ble Supreme Court interprets the law. The assessee being in the business of trading, processing and exporting of cut and polished diamonds had during the year under consideration, engaged new regular employees, to whom the assessee had paid additional wages and in that view of fact, claimed the deduction u/s 80JJAA on those additional wages. The revenue authorities, placing reliance on the decision of Gem India (supra), held that the assessee was not engaged in any activity of manufacture or production of article and since the business of the assessee was cutting and polishing of diamonds, it could not amount to manufacture or production, as per the decision of the Hon'ble Supreme Court of India in Gem India (supra). The AO, on this analogy, held that the deduction as claimed cannot be allowed, since there was no manufacture or production of any article by the undertaking. On the other hand, when the 9 Karp Impex Ltd.
ITA 3034/M/2012 deduction was claimed, i.e. in assessment year 2005-06, Explanation 4 to section 10A w.e.f. 01.04.2004, was already in the statute book, which read as, "For the purposes of this section, "manufacture or produce" shall include the cutting and polishing of precious and semi- precious stones".
15. The fact that the Finance Act, 2003 inserted Explanation 4 in section 10A of the Act w.e.f. 01.04.2004, the assessee was under bona fide belief that the said definition can be extended for claiming deduction u/s 80JJAA of the Act as well, as the business of the assessee was cutting and polishing of rough diamonds. Accordingly, the AR submitted that the assessee made the impugned claim, having a bona fide belief. Besides the above, the AR submitted that the question whether cutting and polishing of diamond is manufacturing or not was a dispute in many cases and the coordinate Bench of the ITAT, in the case of Sheetal Diamonds Ltd. (supra) where it was held the same to be manufacturing activity eligible for deduction u/s 80IA of the Act.
16. In these circumstances, the view as canvassed by the AR/assessee is well supported by Explanation 4, inserted in section 10A with effect from 01.04.2004 and also certain decisions, which are relied upon by the AR, has to be held to be bona fide. This is case where the claim made by the assessee u/s 80JJAA has only been rejected. It is not the case of the AO that the assessee has concealed the particulars of income, nor in the wake of Explanation 4 to section 10A, it can be held that the assessee had furnished inaccurate particulars of income. In our opinion, therefore, the explanation given by the assessee with regard to its belief for the claim of the impugned deduction cannot be said to be mala fide. The Hon'ble Supreme Court in the case of Reliance Petoproducts Pvt. Ltd. (supra) has succinctly 10 Karp Impex Ltd.
ITA 3034/M/2012 held that the claim made by the assessee, which cannot be sustained in law, will not give rise to penalty to section 271(1)(c) of the Income Tax Act.
17. Under these circumstances, we are of the view that penalty u/s 271(1)(c) is not exigible in respect of disallowance of claim of deduction, made by the assessee. Accordingly, we set aside the order of the CIT(A) and direct the AO to delete the penalty referred above.
18. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on 22nd August, 2014.
Sd/- Sd/-
(बी आर बआसकरण
बआ ण) (ǒववे
ǒववेक वमा[)
लेखा सदःय Ûयाईक सदःय
(B R BASKARAN) (VIVEK VARMA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Date: 22nd August, 2014
ूित/Copy to:-
1) अपीलाथȸ/The Appellant.
2) ू×यथȸ/The Respondent.
3) The CIT (A)-9, Mumbai.
4) आयकरआयुƠ -5, Mumbai/The CIT-5, Mumbai.
5) ǒवभागीयूितिनिध "A"आयकरअपीलीयअिधकरण,मुंबई The D.R. "A" Bench, Mumbai.
6) गाड[ फाईल Copy to Guard File.
आदे शानुसार/By Order
/ / True Copy / / [
उप/सहायकपंजीकार
आयकरअपीलीयअिधकरण,मुंबई
Dy./Asstt. Registrar
I.T.A.T., Mumbai
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