INCOME TAX OFFICER - 24(1)(1), MUMBAI, MUMBAI vs. FOCE INDUSTRIES, MUMBAI

Accordingly, the assessing officer rejected the claim for deduction u/s 80IE of the Act with the following observations:- “5.9 Subject to this it is established fact that the promoters of the HTCL i.e., the substantially interested persons are created the assessee firm booked artificial profit by splitting up of existing business of promoters of HTCL in contravention of the provision of Sec. 80-IE(3)(i) of the I T Act 1961. Also it is evident from the copy of the license received from the Guwahati Municipal Corporation that the assessee firm had never got license to set up a factory but to “sale of watch” in the residential complex of Aditya Enclave, Nayanpur and claim of the assessee that beginning of the factory within the stipulated period, i.e., before 31.3.2017 is considered as not genuine. Therefore, entire deduction u/s 80IE amounting to Rs.3,52, 95,142/- is disallowed and added to the total income in the hand of the assessee firm for the AY 2018-19..”

Before the Ld CIT(A), the assessee strongly refuted various deficiencies pointed out by the assessing officer. It reiterated following facts before Ld CIT(A):- “2.1.The appellant had fulfilled all the conditions prescribed u/s.80IE in understated manner:- a) The appellant had fulfilled the conditions prescribed u/s.80IE(2) in understated manner i) The appellant‟s undertaking is situated in North-Eastern State of Assam situated at Ground Floor, Aditya Enclave, Nayanpur. Kalyanpur, Kamrup Metro, Guwahati, Assam - 781006; ii) The appellant had begun the manufacture of watches and clocks which is an eligible article/thing prescribed u/s.801E(7)(iv) of the Act; iii) The appellant had begun the manufacture before 31/03/2017; b) The undertaking of the appellant had fulfilled the conditions prescribed u/s.80IE(3), in understated manner :- i) The appellant‟s undertaking is not formed by splitting-up or reconstruction of the business already in existence; ii) The assessee‟s undertaking is not formed by the transfer of a new business of machinery/ plant previously used for any purpose; c) The assessee had also fulfilled the conditions prescribed u/s.80IE(6) r.w.s.80IA(5) and (7) to (12) in understated manner :- i) The accounts of the assessee‟s undertaking has been audited by the Chartered Accountant and Audit report in form 10CCB had been furnished before the date prescribed u/s.44AB of the Act; ii) The transfer of goods had been made at the market value of such goods as on that date; iii) All other conditions prescribed under the statue had been satisfied. 2.2. In support of the above, the appellant relies on understated documents (copies enclosed) to justify the fulfillment of all conditions prescribed u/s.80IE, stated as under:- a) Certificate of Registration issued by District Industries & Commerce (DIC), Guwahati on 20/03/2017; b) Certificate of Manufacturing capacity issued by District Industries & Commerce (DIC), Guwahati on 20/03/2017 and renewal certificate dated 07/08/2018 issued w.e.f. 20/03/2017; c) Trade License issued by Commissioner of Guwahati Municipal Corporation on 05/01/2017 to the manufacturing unit of the appellant; d) Sales Tax Registration certificates (VAT & CST) dated 02/12/2016 granting permission for manufacturing of watches and clocks; e) Declaration issued by appellant to Pollution Control Board along with notification; f) Certificate issued by lessor Mr. Ajay Agarwal declaring that the premise is used by the appellant for manufacture of watches and clocks; g) Rent Agreements dated 15/12/2016 and 10/11/2017 of manufacturing unit situated at Aditya Enclave, Kalyanpur, Nayanpur Road, Ganeshguri, Guwahati; h) Photographs of watches and clocks manufactured in appellant‟s manufacturing unit; i) Excise Registration certificate granting the registration on exceeding the turnover of Rs.5 crores; j) Purchase bills of raw-materials made in earlier year and impugned year; k) Sale bills of finished goods made in earlier year and impugned year; l)Form 10CCB (Audit Report) issued by Chartered Accountant in earlier year and during impugned year; m) Assessment orders u/s 143(3) and Transfer Pricing (T.P) orders of subsequent years, wherein the deduction u/s 80IE had been allowed to the appellant without any variation. The various Authorities including District Industries & Commerce (DIC), VAT and CST Tax authority, Commissioner of Guwahati, etc had issued the certificates, license and permissions to the appellant to manufacture the watches and clocks which justifies the existence of appellant‟s manufacturing unit and commencement of production made prior to 01/04/2017. It is pertinent to note that such Government Authorities had conducted periodic inspection at assessee‟s manufacturing unit and thereafter, had issued the certificates, licenses and permission to the assessee which are valid and renewed till date. Further, in the assessment orders passed u/s 143(3) and Transfer Pricing (T.P) of subsequent years, the deduction u/s 801E had been allowed to the appellant without any variation. Accordingly, Ld. AO‟s allegation that the appellant is not engaged in manufacturing activity is grossly erroneous; 2.3 It is also pertinent to note that the Directorate General of Audit Central Taxes and Customs had conducted the physical inspection and audit at appellant‟s manufacturing unit situated at Guwahati and in their report dated December 2020 (served on 4/2/2021), the authority had recommended the extension of exemption till 28/03/2027 to avail the budgetary support.”

The assessee also contended that the AO was not correct in presuming that the Assam unit has been formed by splitting up the existing unit. It submitted that the splitting up of unit presupposes transfer of machineries from the existing unit or breaking up of the existing unit, which is not the case here. It was submitted that the Assam Unit has been formed without transferring any unit from the existing business of M/s HTCPL. It also submitted that there is no bar like that the unit should not manufacture products already manufactured by other undertakings of the group. In this regard, the assessee relied upon following decisions:- “a) CIT vs. Delhi Press Patra Prakashan Ltd 34 taxniann.com 3 (HC- Delhi) “Whether a new undertaking would not be treated as formed by splitting or reconstruction of a business already in existence and would not be disqualified under section 80-l(2)(i) simply for reason that activity carried on in a new undertaking was of a similar nature to one of activities being carried on in existing undertaking where new industrial undertaking is established in addition to existing one without transfer of any assets to newly formed undertaking - Held, yes.” b) Pr. CIT v. Kores India Ltd |2020] 119 taxmann.com 281 (Bombay) “Assessing Officer opined that construction of new building was extension of existing project and therefore, commencement of construction must be treated from 19-6-1997 as in case of original budding Whether since new project was independent from original housing project, there was no breach of condition of section 80-1 B( 10) which required commencement of construction only after 1-10-1998 - Held, yes. ” c) Pr. CIT v. Creen Fire Exports 12019| 106 taxmann.com 33 (SC) “Assessee-firm was carrying on business of manufacture and export of jewellery - It claimed deduction under section 10AA being a SEZ unit - Assessing Officer noticed that one of partners of assessee-firm was carrying on similar business as a sole proprietorship concern as well - He further found that there had been direct intake of capital by assessee-firm from said proprietorship concern - Assessing Officer thus taking a view that it was merely a case of reconstruction of business, rejected assessee's claim for exemption under section 10AA Tribunal, however, noted that apart from capital received from proprietorship concern, huge amount of fresh capital had also been introduced in assessee-firm - Moreover, assets appearing in balance sheet of old concern i.e. sole proprietorship, had not been shifted to assessee-firm - Tribunal thus taking a view that it could not be a case of reconstruction of business, allowed assessee's claim for exemption - High Court upheld order passed by Tribunal - Whether, on facts, SLP f iled against order of High Court was to be dismissed held, yes.‟‟ d)Textile Machinery Corporation Ltd. v. CIT 107 ITR 195 (SC) “Assessee, a heavy engineering concern, set up two separate new units to manufacture articles which were to be used by assessee rs existing units - Whether since new industrial undertakings were separate and independent production units in sense that commodities produced were commercially tangible products and undertakings could be carried on separately without complete absorption and losing their identity in old business, they were not to be treated as being formed by reconstruction of old business - Held, yes - Whether, therefore, assessee was entitled to exemption under section 15C of 1922 Act in respect of new units - Held, yes. ” e) FIL Industries Ltd. v. Addl CIT [2012] 23 taxmann.com 61 (Asr.) "It was held in the case of Textile Machinery Carp. Ltd. v. CIT [1977] (107 ITR 195 (SC) that the new industrial undertaking must he a new emergence of a physically separate industrial unit which may exist on its own as a viable unit and in order to do so following facts have to he established by the assessee ... It was also held that unit may produce its products of the old business or it may produce some other distinct marketable products even products which may feed the old business. It was held that true test is whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. There must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit.”

The AO had also expressed the view that the Assam unit cannot be considered as a manufacturing unit, since it is located in a residential building. In this regard, the assessee submitted as under:- “a) The appellant‟s manufacturing unit is a Micro Industrial Unit and is undertaking the manufacturing activities from the Ground floor of a residential building named “Aditya Enclave”. The upper floors (2nd and 3 rd floors) of the building is used for residential use of certain occupants (not related to the appellant), however, the Ground floor of the building is permitted to be used for commercial purpose. There is no prohibition prescribed by any authorities to conduct the manufacturing activity from Ground floor of such building. In fact, the appellant had been granted various Certificates, Permissions and licenses to undertake the manufacturing activities from the Ground floor of such building, thus Ld. AO had is not justified in assuming that the appellant had not carried the manufacturing activities from such premise; b) The Ld. AO ought to have considered the various Certificates, Permissions and licenses granted to the appellant to undertake the manufacturing activities from Ground floor of such building (Aditya Enclave), stated as under:- i) Certificate of Registration issued by District Industries & Commerce (DIC), Guwahati dated 20/03/2017; ii) Certificate of Manufacturing capacity issued by District Industries & Commerce (DIC), Guwahati dated 20/03/2017; iii) Renewal Certificate of Manufacturing capacity issued by District Industries & Commerce (DIC), Guwahati dated 07/08/2018: iv) Trade License issued by Commissioner of Guwahati Municipal Corporation on 05/01/2017 to the manufacturing unit of the appellant; v) Sales Tax Registration certificates (VAT & CST) dated 02/12/2016 granting permission for manufacturing of watches and clocks; vi) Declaration issued by appellant to Pollution Control Board along with notification; vii) Certificate issued by lessor Mr. Ajay Agarwal declaring that the premise is used by the appellant for manufacture of watches and clocks; viii) Excise Registration Certificate granting the registration; ix) Purchase bills of raw-materials made in earlier year and impugned year; x) Sale bills of finished goods made in earlier year and impugned year; It is pertinent to note that all above stated licenses and permissions had been granted by various authorities to the appellant to undertake the manufacturing activities from Ground floor of the said building (Aditya Enclave). The above stated documents conclusively proves that such premise (Aditya Enclave) had been used by the appellant to undertake its manufacturing activities. The Ld. AO, inspite of written request, had not issued the notice u/s. 133(6)/ 131 to the lessor and authorities to verify the existence of manufacturing unit operated from such premise (Aditya Enclave), thus the disallowance of deduction u/s 80IE is seriously unjustified; b) The Ld. AO is extremely unjustified in considering the unverified advertisement published in the website named “99 acres.com”, wherein the land lord had intended to let-out the 2 nd and 3 rd floor of the building for residential purpose. The Ld. AO erred seriously in ignoring the fact that the appellant is the occupant of the Ground floor of the premise used to undertake the manufacturing activities for which various permissions and licenses are in order. The Ld. AO had erred seriously in brushing aside the various licenses and permissions granted by various authorities to the appellant to undertake the manufacturing activities from Ground floor of the said building (Aditya Enclave). 3.4. The Ld. AO perused the trade license issued by Commissioner of Guwahati Municipal Corporation on 05/01/2017, which disclosed the words „Watch Sale‟ and incorrectly presumed that such license had been allotted for resale of goods and not to undertake the manufacturing activities and if at all the appellant had set-up the factory, then such factory is illegal. In this context the appellant submits as under:- a) As per the law of Municipal corporation, the trade licenses are allotted to undertake the commercial activities in the prescribed premise. The commercial activities would include the carrying of the manufacturing activities. The interpretation of the words „Watch Sale‟ would mean that the appellant is permitted to manufacture the watches and sell the manufactured watches from the prescribed premise. Thus, it is incorrect to hold that the appellant had not carried the manufacturing activities from such premise; b) In any case, Ld. AO ought to have considered the other Certificates, Permissions and licenses granted by other Government agencies to the appellant to undertake the manufacturing activities from Ground floor of such building (Adilya Enclave), stated herein above at para no- 2.4(b) above.”

With regard to the observation of the AO that the products have been purchased from and sold to associated enterprises, the assessee submitted that M/s Tulsi traders is not related to the assessee. Further, in respect of transactions entered with associated enterprises, they have been entered at arms’ length price. It was submitted that the Transfer pricing orders and the assessment orders of the subsequent years would prove these facts.

The Ld CIT(A) was convinced with the contentions of the assessee, since they are based upon many documentary evidences. Accordingly, he allowed the claim for deduction u/s 80IE of the Act with the following observations:- “5.2 The addition made by the Assessing Officer and the submissions of the appellant have been perused. The main issue involved in this case with regard to denying deduction u/s.80-IE of the Act. The AO in the assessment order held that the appellant firm has been created by splitting up of existing business of M/s. Heighten Trading Company (Pvt) Ltd and its all existing associated business who are the suppliers like R.B.Industries and setting up assembly line in backward state Assam is nothing but creating a colourable device so as to achieve of artificially high profit is in contravention of the provision of Section 80-IE. The AO also held that the license issued by the Guwahati Municipal Corporation to the appellant is only for Sale of watch not for running of factory in the residential area of Aditya Enclave. The appellant on the other hand contended that it had fulfilled all the conditions prescribed u/s.80IE of the Act. The said conditions as mentioned in the submissions are brought out supra. The appellant also submitted that it has newly created entity (firm) which had set-up the manufacturing undertaking in earlier year without any transfer of plant & machinery to manufacture the watches and clocks in the backward state of Assam at Guwahati. The appellant further submitted that the associate entity named M/s. Heighten Trading Co.Pvt.Ltd is engaged in trading of various goods such as watches and clocks in Mumbai, whereas the appellant is engaged in the manufacturing of watches & clocks from its manufacturing undertaking situated at Guwahati, Assam. Thus the contention of the AO is incorrect that its undertaking is formed by splitting up of the business of M/s.Heighten Trading Co.Pvt.Ltd in existence. The appellant also contended that there is no prohibition prescribed under Section 80IE which restricts it to manufacture a product from its newly set-up manufacturing unit, whose associate entity is engaged in marketing/distribution of same product and the intention of the legislation to grant the deduction u/s.80IE is to promote the industries in backward North Eastern States and the disallowance of deduction u/s.80IE made on flimsy reason is seriously unjustified. The appellant placed reliance on various decisions of Courts/Tribunals, which have been brought out supra. 5.2.1 I have gone through the details filed by the appellant. It is seen that the appellant had set up a unit in North Eastern State of Assam situated at Ground Floor, Aditya Enclave, Nayanpur, Kalyanpur, Kamrup Metro, Guwahati, Assam. The appellant had obtained certificate of manufacturing issued by the District Industries and Commerce (DIC), Guwahati on 20.03.2017. Trade License issued by Commissioner of Guwahati Municipal Corporation on 05.01.2017 for setting up a manufacturing unit by the appellant. It is also seen that the flat owner has given no objection for the proposed manufacturing of Force Industries, which the AO mentioned in the assessment order. The various authorities issued permissions to manufacture the watches and clocks by the appellant. The Central Excise Department had also issued Registration of Certificate to the appellant to manufacture goods on 23.05.2017. It is seen from the assessment order that the AO has not brought out any specific reason for denying deduction u/s.80-IE, when the appellant had set up a new unit in North Eastern State of Assam. The addition made by the AO is not backed by any documentary evidences gathered by him during scrutiny proceedings, except stating that the appellant‟s manufacturing activity was formed by splitting up the business of associate entity named M/s. Heighten Trading Co.Pvt.Ltd. The AO failed to show that there existed any arrangement between the appellant and its associate entity. 5.2.2 The question as to whether the new undertaking can be said to have been formed by splitting up of a business already in existence. I do not think that the present case comes within the words, "splitting up of the business already in existence." This expression indicates a case where the integrity of a business earlier in existence is broken up and different sections of the activities previously conducted are carried on independently. In the present case, there is no finding that the Unity and integrity of the business or associate of the appellant firm suffered in any manner as a result of the establishment of the new entity. The AO has not brought out any finding on this account. 5.2.3 In view of the above, it can be held that the appellant is eligible to claim deduction u/s.80IE of the Act as the appellant had established a new entity by obtaining licenses from various authorities and not by splitting of associate entity. Further, the AO was unable to show that there was any 'arrangement' in terms of Section 80IA(10) of the Act, the AO could not have invoked the deeming provision.” The Ld CIT(A) also noticed that the various case laws relied upon by the assessee are applicable to the facts of the present case. Accordingly, he allowed the claim for deduction u/s 80IE of the Act. The revenue is aggrieved.

We heard the parties and perused the record. We notice that the assessing officer has denied the deduction claimed by the assessee u/s 80IE of the Act on finding certain deficiencies. However, the various documents furnished before the tax authorities would show that the Assam unit of the assessee has been recognized as a manufacturing Unit by the Government departments. Though there was no transfer pricing study during the year under consideration, it is noticed that the Transfer pricing study has been conducted in the succeeding years and the transactions entered by the assessee with its associated enterprises were found to be at arms’ length. Further, the AO has relied upon certain information available in the Internet with regard to the location of the undertaking and also the sale prices of the products. There should not be any dispute that the information available in the internet is a generalized information and hence, it cannot be the sole basis to decide the issue before the AO. It may be a triggering point to conduct further enquiries, but in this case, the AO did not conduct any further enquiries. The assessee has set up a new undertaking for manufacturing wrist watches, time pieces etc. Even though the AO has taken the view that it was a case of splitting up of the existing factory of the M/s HTCPL, it is seen that none of the machineries of M/s HTCPL were transferred to the new undertaking. Further, the various case laws relied upon the assessee and Ld CIT(A) would show that the setting up of a new undertaking for manufacturing products that are already manufactured by the existing units cannot be considered as splitting up of the existing unit.

From the foregoing discussions, it can be seen that the Ld CIT(A) has considered each of the deficiencies pointed out by the AO and gave a categorical finding that those defects are either misconstrued or are not relevant for granting deduction u/s 80IE of the Act and his decision was based on the factual aspects supported by the credible documents. No material was placed before us by the revenue to contradict the factual findings given by the Ld CIT(A). Under these set of facts, we do not find any infirmity in the decision rendered by the Ld CIT(A) on this issue.

In the result, the appeal filed by the Revenue is dismissed.