COMMISSIONER OF INCOME TAX vs. MS USHA INFRASYSTEMS

Respondent in both the appeals (hereinafter referred to as the ‘assessee’) had begun production of Foundation Anchor Rods for Windmills (for short, “Anchors”) w.e.f. 29.06.2004 in Industrial Area Parwanoo, District Solan, H.P.

The assessee, for the first time, claimed 100% deduction on the income under sub-clause (ii) of Sub Section (2) of Section 80IC of the Income Tax Act, 1961 (for short ‘the Act”) for the assessment year 2005-06. The 3

The point in issue in the aforesaid litigation was whether the process undertaken by the assessee in its industrial unit at Parwanoo amounted to ‘manufacture’ or ‘production’ of the Anchors so as to qualify the requirements of Section 80IC of the Act? Whereas, the Assessing Officer and CIT(A) concurrently held that since the substantial process involved in production of Anchors was being got done by the assessee from Ludhiana on work order basis and only a small part of it was being done at Parwanoo, the assessee could not be said to have the 4

The assessment proceedings for the assessment year 2006-07 also met the same fate before the AO, CIT(A) and ITAT. ITA No. 24/2010 arising therefrom is one of the matters under adjudication herein. The Assessing Officer again had held the assessee to be not entitled for the deduction under Section 80IC for the same reasons as were recorded in assessment order dated 30.11.2007. CIT(A) vide its order dated 06.11.2007 in ITA No. 244/08- 09/SML concurred with the assessment order dated 21.11.2008. The ITAT reversed the order of CIT(A) vide its order dated 29.01.2010 in ITA No. 1158/Chd/2009. 6. For the assessment year 2007-08 the Assessing Officer, vide his order dated 30.12.2009 again held the assessee not entitled to deduction under Section 80IC. The CIT(A), in appeal No. IT/503/2009-10/SML preferred before it by the assessee, this time reversed the assessment order dated 30.12.2009. The ITAT concurred with the order of CIT(A) and accordingly dismissed the ITA No. 78/Chd/2011 filed by the Revenue vide its order dated

2011. Revenue has further assailed the aforesaid order dated 03.03.2011 of ITAT in ITA No. 6/2012 before this Court, which is the other appeal decided herein.

The substantial questions of law framed by this Court in ITA No. 24 of 2010 and ITA No. 6 of 2012 are common and read as under: - 1) Whether the process of threading and painting of anchor rods carried out by the assessee at Parwanoo amounted to manufacture or production, and consequently whether the assessee was eligible for deduction u/s 80IC of the Income Tax Act ? 2) Whether the making of anchor rods by third parties in job work basis could be considered as part of the manufacturing operations of the assessee, especially when such job work was not carried out under the direct control and supervision of the assessee? 3) Whether the ITAT disregarded the mandate of section 80IA (10) read with section 80IC(7) of the I.T. Act and erroneously held that the entire profit declared by the assessee was allowable as deduction u/s 80IC? 4) Whether ITAT has misconstrued and misunderstood the facts on record while setting aside the clear finding that the profit had been inflated by the assessee for the purpose of deduction u/s 801C.

We have heard Mr. Vinay Kuthiala learned Senior Advocate with Mrs. Vandana Kuthiala Advocate for the appellants and Mr. Vishal Mohan Advocate learned counsel for the assessee and have also gone through the records. Questions Nos. 3 and 4

Questions Nos 3 and 4, as noted above, are being taken up for consideration by us in the first instance. The consideration of these questions requires us to briefly recapitulate the material on record.

The Assessing Officer had found that the assessee, in the assessment year 2006-07 had declared total sale of Rs. 15,63,28,569/- and had shown profit of Rs.6,10,30,054/- which gave gross profit rate at 39.04% and net profit rate at 32.54%. The Assessing Officer, by making a comparison between the assessee and M/s Kay Pee Industries in respect of their sales during the relevant year and expenses incurred, held that the assessee had not fully debited expenses and profit shown by the assessee was not acceptable. Further, it was held by the Assessing Officer that since nothing was shown to have paid by the assessee to its sister concern for the technical know-how and goodwill and marketing facilities, 5% each of the total sales of the assessee were ordered to be deducted as profits were shown by the assessee were held to 7

Further, a sum of Rs.2,40,000/- on account of salary to partners and Rs.20,71,949/- on account of interest on capital were reduced from the profit of the assessee. The Assessing Officer also found shortage in stocks worth Rs.39,948/- and the same was also treated as income of assessee for the year under consideration. In this manner, total income of the assessee was assessed at Rs.5,11,16,590/-.

While passing the assessment order dated 21.11.2008 for assessment year 2006-07, the Assessing Office had further held that the threaded rods along-with nuts and bolts were being manufactured by M/s Kay Pee Industries, a sister concern of assessee. The part relating to hardening, straightening and threading of rods had been transferred to the assessee by the sister concern which itself continued to 8

In his Assessment Order dated 30.12.2009 for AY 2007- 08, the Assessing Officer did not touch the above noted factors and had proceeded to deny the claimed deductions under section 80IC on the simple premise that the process undertaken by the assessee did not qualify to be either ‘manufacture’ or ‘production’.

The CIT(A) upheld the findings returned by the AO but ITAT reversed the same. Negating the applicability of Section 801A (10) of the Act to the facts of the case, ITAT held that the order of Assessing Officer to that effect was not sustainable as no discrepancy had been pointed out in the books of account and such books of account of the assessee had not been rejected under Section 145 of the Act. The Assessing Officer was held to have arrived at his conclusions merely on estimation. The basis for estimation of the GP & NP ratio that too in comparison with the M/s Kay Pee Industries was not held to be correct as there was no similarity in the products manufactured by two different concerns. The 9

Learned counsel for the appellant has not been able to show that findings recorded by the ITAT, as noticed above, were against the records or were perverse. The ITAT being the final fact finding authority, in our considered view, has drawn the conclusions on the basis of records. There is nothing in the order of Assessing Officer that the books of account of assessee were rejected. In the Assessment Order passed for Assessment Year 2006-07 the Assessing Officer had only observed that such books were not reliable, which cannot be taken to compliance of Section 145 of the Act. Further, the orders passed by Assessing Officer with respect to capping of profits earned by the assessee at 7% only on the alleged basis of comparison of accounts of Kay Pee Industries coupled with 10

Now coming to questions Nos. 1 and 2, the process undertaken by the assessee was not considered by assessing officer to be that of manufacture or production of Anchors for the reasons firstly that the process involved only threading of rods on both ends and its assembly with nuts and washers, therefore, the basic property of rod was not changed and secondly only small part of the entire process was undertaken at Parwanoo. Though the CIT(A) had concurred with the order of Assessing Officer for AY 2006-07, the said appellate authority had reversed the same for AY 2007-08. The ITAT, however, held the process undertaken by the assessee to be “manufacturing and production”

The Three Judges Bench of the Apex Court in case Aspinwall and Co. Ltd. v. Commissioner of Income Tax,

In Commissioner of Income Tax-V, New Delhi vs. Oracle Software India Limited, (2010) 2 SCC 677, the Hon’ble Apex Court has further expounded as under: -