C I T JAIPUR vs. M/S RAJDHANI CRAFTS

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 662 / 2009 Commissioner of Income Tax, Jaipur-II, Jaipur. M/s. Rajdhani Crafts, Plot No. 54-55, Shiv Vihar Colony, Opp. Power House, Road No.5, VKI Area Jaipur Connected With D.B. Income Tax Appeal No. 186 / 2011 Commissioner of Income Tax, Jaipur-II, Jaipur M/s Rajdhani Crafts, Plot No. 54-55, Shiv Vihar Colony, Opp. Power House, Road No.5, VKI Area, Jaipur D.B. Income Tax Appeal No. 403 / 2011 Commissioner of Income Tax, Jaipur-II, Jaipur. M/s. Rajdhani Crafts, Plot No. 54-55, Shiv Vihar Colony, Opp. Power House, Road No.5, VKI Area Jaipur D.B. Income Tax Appeal No. 142 / 2015 Principal Commissioner of Income Tax, Jaipur-2, Jaipur M/s Sanklp International, F-944, Road No.14, VKI Area, Jaipur _____________________________________________________ For Appellant(s) : Mr. R.B. Mathur with Mr. K.D. Mathur, Mr. Prateek Kedawat

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For Respondent(s) : Mr. Ajay Gupta _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Judgment 02/08/2017 1. In all these appeals common question of law and facts are involved hence they are decided by this common judgment. 2. By way of these appeals, the appellant have assailed the judgment and order of the Tribunal whereby tribunal has dismissed the appeal of the department and allowed the appeal of the assessee in appeal no.662/2009, in appeal no.186/2011 the appeal of the department was dismissed, in appeal no.403/2011, the appeal of the department was dismissed and assessee was allowed and in appeal no.142/2015, the appeal of the department was dismissed. 3. This court while admitting the appeals framed following substantial questions of law:- 3.1 Appeal No.662/2009 admitted on 26.2.2010 “Whether the assessee can claim the benefit of Section 10BA of the IT Act when it is not fulfilling the required conditions of the aforesaid provisions, more specially to show that it is manufacturing eligible articles as provided u/s 10 BA explanation (b).” 3.2 Appeal No.186/2011 admitted on 29.8.2012 “Whether in the facts and in circumstances of the case, the ITAT was justified in law in allowing exemption u/s 10B of the Act to the assessee despite of the facts that the

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condition laid down for the same are not satified and fulfilled by the assessee.” 3.3 Appeal No.403/2011 admitted on 21.12.2011 “Whether in the facts and in circumstances of the case, the ITAT was justified in law in holding that the assessee was eligible for exemption u/s 10BA of the IT Act despite of the fact that the assessee was not fulfilling the required conditions.” 3.4 Appeal No.142/2015 admitted on 26.9.2016 “Whether in the facts and circumstances of the case the ITAT was justified in law in directing to allow deduction u/s 10BA despite of the fact that the assessee was not fulfilling the conditions laid down in the Act for claiming the said deduction.” 4. Counsel for the appellant Mr. Mathur has taken us to the order of the Tribunal which reads as under:- “6 We have heard the rival contentions and perused the facts of the case. The assessee firm was constituted on 22-8-2000. There is nothing on record whether the first year of commencement of business was assessment year 2000-01 or not. From the perusal of the record and various submissions, it appears that the first assessment in the case of the assessee is for the assessment year 2001-02. The ld Counsel for the assessee Shri HM Singhvi has pointed out the assessment made u/s 143(3). From the assessment year 2001-02 and 2003-04 where it has been accepted by the Department in the assessment orders that the assessee is engaged in the manufacturing and export of wooden handicraft items. Though the assessee was entitled to deduction us 80IB for the assessment year 2000-01 to assessment year 2003-04 yet it was not claimed since the assessee had claimed deduction u/s 80HHC upto the assessment year 2003-04 and has claimed the deduction u/s 10BA in view of the newly inserted Provisions of Finance Act, 2003 we.f. assessment year 2004- 05. As per Section 10BA of the Act, 5 conditions have to be satisfied The first condition is that the assessee manufactures or produces eligible articles or things without the use of imported raw material. This is not the issue before any of the

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authorities below and before us, As regards the second condition, the undertaking of the assessee is not formed by splitting up or reconstruction, of a business already in existence and third condition is that it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. The condition no. 4 is that ninety per cent or more of its sales during the previous year relevant to the assessment year are by way of exports of the eligible articles or things. The AO in his order observed that the assessee is using various types of electrical run machines for the manufacture of various furniture items and even a single handmade item has been used. The items found are utility items. In this respect, it has been submitted by the ld AR Shri HM Singhvi, hereinbefore that the assessee purchased goods as logs, beams, cans, off cut and then seasoning of the wooden is got done which is cut in different sizes as per export order. Thereafter, the grinding, turning and clamping is done with the help of the tools which has been named by the AO as machines for the purpose of manufacturing of items manufactured by the assessee. It is only the ground work which has to be done manufactured with the help of the tools/small machines though electrically operated and there is no prohibition by the statute provided u/s 10BA of the Act. It was also submitted and available on record that the main work like punching, special branded nails made of brass/iron having artistic and antique look, caring, moulding, designing ornamental work, fitting of brass and iron items and making of Jallis of different sizes and designs, polishing is done by hand by the skilled labourers and the artists. Thereafter, the coating is done by chemical by the spray machine. All these items made of wood are pieces of art and decoration and having artistic value and cannot be said to be a utility items. The item is used by the customer but having the artistic value according to the likes of the buyer. The artistic and carving work of different type and polishing done by the artist is to make the product decorative and beautiful. The assessee has been recognized by the Department of Handicraft Export Council of India,

Central

Excise

Department, Industries Department, Sales Tax Department as manufacturer of wooden handicraft items and wooden handmade items having the artistic value

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and exports are made to the diverse buyers like Europe, USA, Japan, Australia etc. The goods are exported after appraisal and clearance by the custom authorities. The Photostat copies of the export invoices are on record mentioning the items as artistic India wooden handicraft. Such items as argued may not appear to be artistic to the AO but they are artistic to the foreign buryers being decorative. Nothing has been brought on record that such items are not of the artistic value which is the basic condition in Section 10BA of the Act. In such circumstances and facts of the case, we are of the view that the items produced are eligible for deduction u/s 10BA of the Act. The undertaking of the assessee is not formed by splitting up or reconstruction of the business already in existence and also not formed by transfer of business, machine or plant previously used for any purposes. Since the assessee firm constituted on 28-2-2000 and as per record has commenced the production from the assessment year 2001-02 of the same items i.e. wooden handicraft items. This is evident from the assessment order for the assessment year 2001-02 and 2003-04 u/s 143(3) (PB 96 to 112). Section 10BA of the Act does not provide that only new firm after introduction of Section can avail the exemption i.e, no cut off period for formation of undertaking is specified u/s 10BA of the Act whereas Section 10A, 10B, 80, 80IA, 80IB, 80IC provided for certain specific period i.e. the day on which manufacturing is started and deduction is made available oncertain percentage of profits as provided in such sections. Moreover, Shri H.M. Singhvi, CA has also invited our attention to the CBDT circular No. 01/2005 regarding tax holiday u/s 10B of the Act to the 100% EOU which clarifies that an undertaking set up in Domestic Tariff Area and deriving profit from export of articles or things or computer software manufactured or produced by it which is subsequently converted into EOU shall be eligible for deduction u/s 10BA of the Act on getting the approval as 100% EOU. However, the deduction shall be available for remaining period of ten consecutive assessment years from the year in which it has got approval as 100% EOU. On the same analogy, the deduction u/s 10B is allowable, it has been argued by the ld. AR Shri HM Singhvi, CA. It was also argued that employees/workers were employed prior to Section l0BA does not mean that unit has been

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formed by reconstruction of earlier business. We are convinced with the arguments made by the ld. AR that the present unit is not formed by splitting up or reconstruction by transfer of machinery or plant previously used for any purposes. The AO has also objected to the wages expenditure claimed by the assessee is not verifiable. The assessee submitted that the a fire occurred in the factory premises of the assessee on 16-4-2005 which is also mentioned at page 12 of the AO's order and therefore, such record of the wages could not be produced. The assessee submitted the comparative figures of the wages and books of account are audited and the trading and profit and loss account of the preceding years and the order in dispute was on record and both the years accounts are audited under statute. Therefore, in view of the decision of Hon'ble Delhi High Court in the case of ACIT Vs Jay Engg Works, 113, ITR 389, supra where it has been held that where the original books of account have been destroyed in fire, the Tribunal could rely upon the other materials consisting of auditor's report from which it could be inferred that deductions were properly supported by the relevant entries in the books of account. The ld. AR has also relied upon the decision on allowability of section 10B of the Act and ITAT Jaipur bench decision in the case of DCIT vs. Manglam Arts (ITA No. 815/JP/07 dated 20-6- 2008) and Goverdhan Prasad Singhal vs. I.T.O. (ITA No. 200/JP/08 dated 24-10-2008). In such circumstances and facts of the case and our findings mentoned hereinbefore and the decision of various courts of law relied upon by the ld. AR of the assessee, we are of the view that the assessee is eligible for deduction us 10BA of the Act. Therefore, the assessee in the present facts of the case satisfies the conditions No. 2, 3 and 4 as provided in Section 10BA of the Act. As regards the condition no. 5 for employment or more workers, there is no dispute before us. Therefore, in such circumstances and facts of the the assessee is eligible for deduction u/s 10BA of the Act. As per Section 10BA(6) of the Act where a deduction is allowed under this Section, no deduction is allowed under any other section i.e. 80HHC in respect of its export profit as directed by the ld. CIT (A). Thus Ground No. 1 of the assessee is allowed and Ground No. 1 of the Revenue is dismissed.

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Ground No. 2 of the assessee: The ld. CIT (A) has erred in confirming the action of the AO in disallowance to the extent of Rs 40,000/- made by the AO on adhoc basis out of the manufacturing expenses, office expenses, administrative expenses and selling and forwarding expenses. Ground No. 2 of the Revenue: The ld. CIT (A) has erred in allowing relief of Rs. 48,40,968/- on account of various expenses.” 4.1 He contended that the tribunal has wrongly followed the decision in DCIT vs. Manglam Arts (ITA No.815/JP/07 dt. 20.6.2008) and Goverdhan Prasad Singhal vs. ITO (ITA No.200/JP/08 dt. 24.10.2008) though condition no.2,3 & 4 are not fulfilled. 4.2 Mr. Mathur has taken us to the evidence and contended that condition as required under Section 10BA is that the unit is not formed by splitting up or the reconstruction of the business already in existence and since the said condition is not fulfilled, therefore the assessee is not entitled for exemption u/s 10BA. 4.3 Taking into account the judgment which sought to be relied by the tribunal in Manglam Arts and other judgment have been confirmed by this court in tax appeal no.25/2009 decided on 14.2.2017 wherein after considering evidence on record, this court held as under:- “6. Mr. Jhanwar, counsel for the respondent has taken us to the judgment of the Tribunal and contended that while considering the process which has been undertaken by the assessee, the Tribunal has observed as under:

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“The various activities carried out by the appellant, are as under:- (i) Firstly, the appellant purchases wood, semi finished material which requires further wood and other work of beautification and of artistic value. There apart, the other raw material, the wooden out of which is the main, and others i.e. grass, nails etc. are purchased. (ii) Thereafter various other items are added depending upon the designs, size, quality of the subjected item to be exported, (iii) After purchasing the semi finished goods and raw material, as stated above, the very first step is to assemble the same, if so required. Some time the semi finished furniture is required to be given further shape as per the desired exportable designs. (iv) Thereafter, punching is done by hammering nails by hand. It is pure labour work which can be done by experts only. It may be noted that the nails are of special type having artistic and antique look. (v) Fitting of brass and iron items again with a view to give artistic and antique look. (vi) Filling and filing with a view to smoothen the surface. (vii) Sanding (viii) Carving with a view to bring the artistic value and to show that these are antique items. (ix) And lastly polishing (x) Thereafter, various wooden items are fitted according to the need and design of the exportable wooden article, i.e. wooden moulding is fitted Inlay is done. ” 7. He contended that taking into consideration the observations made by the Supreme Court in the case of Income Tax Officer, Udaipur Vs. Arihant Tiles and Marbles (P) Ltd.- (2010) 320 ITR 79 (SC), the Supreme Court has observed as under: “16. In the case of Aman Marble Industries Pvt. Ltd. v. Collector of Central Excise reported in MANU/SC/0858/2003 : 157 ELT 393(SC), the question that arose for consideration was whether

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cutting of marble blocks into marble slabs amounted to manufacture for the purposes of Central Excise Act. At the outset, we may point out that in the present case, we are not only concerned with the word "manufacture", but we are also concerned with the connotation of the word "production" in Section 80IA of the Income Tax Act, 1961, which, as stated herein-above, has a wider meaning as compared to the word "manufacture". Further, when one refers to the word "production", it means manufacture plus something in addition thereto. The word "production" was not under consideration before this Court in the case of Aman Marble Industries Pvt. Ltd. (supra). Be that as it may, in that case, it was held that "cutting" of marble blocks into slabs per se did not amount to "manufacture". This conclusion was based on the observations made by this Court in the case of Rajasthan State Electricity Board (supra). In our view, the judgment of this Court in Aman Marble Industries Pvt. Ltd. (supra) also has no application to the facts of the present case. One of the most important reasons for saying so is that in all such cases, particularly under the Excise law, the Court has to go by the facts of each case. In each case one has to examine the nature of the activity undertaken by an assessee. Mere extraction of stones may not constitute manufacture. Similarly, after extraction, if marble blocks are cut into slabs per se will not amount to the activity of manufacture. 17. 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 herein-above 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 80IA of the Income Tax Act. As stated herein- above, the judgment of this Court in Aman Marble Industries Pvt. Ltd. was not required to construe the word "production" in addition to the word

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"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 80IA. 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. 18. In the case of Commissioner of Income Tax v. Sesa Goa Ltd. reported in MANU/SC/1123/2004 : 271 ITR 331 (SC), the meaning of the word "production" came up for consideration. The question which came before this Court was whether the ITAT 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 ore 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 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 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.” 8. He has contended that the word ‘production’ is to be construed as a wider meaning than ‘manufacture’ and in view of the observations

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made by the Supreme Court, the view taken by the Tribunal is just and proper. 9. Mr. Mathur has also contended that regarding second issue with regard to ESI and PF, however, the same is covered by the decision of this Court in the case of Commissioner of Income Tax Vs. M/s State Bank of Bikaner & Jaipur- D.B. Income Tax Appeal No.177/2011 decided on 06.01.2014 wherein it has been held as under: “Thus, we are of the view that where the PF and/or EPF, CPF, GPF etc., if paid after the due date under respective Act but before filing of the return of income under Section 139(1), cannot be disallowed under Section 43B or under Section 36(1)(va) of the IT Act.” 12. In view of the observations made by the Supreme court in the case of Income Tax Officer, Udaipur Vs. Arihant Tiles and Marbles (P) Ltd. (supra), we are of the opinion that the process which has been prescribed by the Tribunal in para 10 clearly covers the process and will cover under section 10BA. Therefore, in our view, the view taken by the Tribunal is just and proper and no interference in the judgment of the Tribunal is called for. The issue is answered in favour of the assessee and against the department.” 5. In that view of the matter, the issue is answered in favour of the assesee and against the department. The appeals stand dismissed. A copy of this judgment be placed in each file. (INDERJEET SINGH)J. (K.S.JHAVERI)J. Brijesh 141-144.