ACIT, NEW DELHI vs. M/S. INTEC CORPORATION, NEW DELHI

The Appellant, Assistant Commission of Income-tax, Circle 23 (1), New Delhi (hereinafter referred to as ‘the Revenue’) by filing the present appeal sought to set aside the impugned order dated 05.10.2011, passed by the Commissioner of Income-tax (Appeals)-XXIII, New Delhi under section 143(3) of the Income- tax Act, 1961 (for short ‘the Act’) qua the assessment year 2008-09 on the ground that :-

Briefly stated facts of this case are : the return of income filed by the assessee declaring income of Rs.1,62,82,400/- qua Assessment Year 2008-09 was subjected to scrutiny and Shri Rajiv Mehra, CA and Shri Bharat, AR attended the proceedings and brought on record the necessary details. Assessee claimed deduction of Rs.3,13,09,690/- from its gross total income under section 80-IC of the Income-tax Act, 1961 (for short ‘the Act’) being the profit from a new industrial unit at Selaqui in Uttarakhand claimed to have commenced the manufacturing and production during the year under assessment. Assessee is into the manufacturing of roof mounted air-conditioning units for Indian Railways. The entire manufacturing of assessee was done upto AY 2007-08 from its industrial unit at Kala Amb, Himachal Pradesh and during the year under assessment, the manufacturing process has been split between the unit at Kala Amb and some part to be done at its newly set up unit at Selaqui, Uttarakhand. Assessee claimed that the semi-finished goods are now sent to Kala Amb factory for final assembly and testing. AO noticed from the bills and vouchers produced by the assessee during assessment proceedings that tools and equipments of Rs.1,59,241/- were transferred from Kala Amb unit to Unit at Selaqui. Assessee claimed to have purchased one ‘3 ton cap wire rope hoist’ on 23.04.2007 and one of the two “Map 1305 Hydraulic Pallets” purchased on 04.04.2007 were subsequently transferred to new unit on 07.07.2007 and in addition to that, old tools and equipments valued at Rs18,000/- were also transferred to the new unit.

Assessee carried the matter before the ld. CIT (A) by way of filing the appeal who has allowed the appeal. Feeling aggrieved, the revenue has come up before the Tribunal by way of filing the present appeal.

We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.

Ld. DR for the Revenue challenging the impugned order contended inter alia that the Selaqui unit of the assessee has never started production to be eligible for claiming deduction u/s 80-IC; that the purported activities carried out by the assessee do not amount to manufacturing; that the assessee has violated the provisions contained u/s 80-IC (3)(iii); that the unit is expansion of old manufacturing business owned by the assessee which amounts to substantial expansion; that CIT (A) relied upon the fresh piece of evidence by not complying with the provisions contained under Rule 46A.

However, in order to rebut the contentions raised by the ld. DR, the ld. AR for the respondent (hereinafter referred to as ‘the assessee’) contended inter alia that the ld. DR has set up entirely a new case that there was no manufacturing activity in the Selaqui unit; that the vendor of the property in question on which unit was set up was owner of the built-up property of the leasehold land underneath the same; that the assessee has set up a new industrial unit at Selaqui which was formed by splitting up of an existing business; that assessee is into assembling of various purchased components into RMPU air-conditioners which does not require high end machinery for manufacturing; that RMPU air- conditioners at Selaqui were sent to Kala Amb unit just for gas filling and testing which cannot be called semi-finished goods; that there was no transfer of previously used machinery in excess of 20%; that the assessee applied for and obtained VAT registration vide registration no.05006854433 and the assessee has also obtained registration of the new unit at Selaqui under Central Sales-tax Act on 21.12.2006; that the assessee has used plant and machinery worth Rs.3,50,563/- at the new unit at Selaqui at the end of 31.03.2008; that new wire rope hoist purchased for Selaqui was received at Kala Amb unit on 03.05.2007 and due to inclement weather, the assessee was forced to take the same inside which was never used at Kala Amb unit either during the period 03.05.2007 to 23.05.2007 or thereafter until it was transferred to Selaqui unit on 07.06.2007; that area based exemption u/s 80-IC should be given liberal interpretation; that activities carried out by the assessee amounted to manufacturing; that the respondent procures various components of RMPU like chassis, compressor, electric motor, copper pipe mounting plate ,sheet metal box and other inputs from various suppliers.

In the backdrop of the aforesaid facts and circumstances, arguments addressed by the ld. Representatives of the parties to the appeal and case laws relied upon, the first question arises for determination in this case is :

Undisputedly, the assessee has purchased the property whereupon Selaqui unit has been established by virtue of the Agreement to Sell dated 15.11.2006, available at pages 125 & 126 of the Paper Book-2 filed by the revenue. The ld. AR for the assessee while referring to para 3 of the Agreement to Sell contended that assessee has purchased “plot/built up property no. F-89, Selaqui Industrial Area, Dehradun measuring 1519.00 sq.mtrs. with leasehold rights” and when the assessee was owner of the built up property and leasehold land underneath the same, there was no need to construct the building.

However, bare scrutiny of Agreement to Sell (supra), the lease deed dated 16.12.2006 registered on 19.12.2006 entered into between UP Estate Development Corporation Ltd. and the assessee, available at pages 138 to 144 of the Paper Book-2, and site plan annexed with the lease deed, available at page 137 of the Paper Book-2, lead to the irresistible conclusion that the assessee has purchased vacant plot no.F-89, Selaqui Industrial Area, Dehradun and nomenclature in para 3 of the Agreement to Sell that vendor is owner of the “plot/built up property” is given in routine.

Furthermore, bare perusal of Schedule D to the balance sheet for the period 31.03.2008 shows that the total addition of Rs.32,67,070/- has been made under head ‘land’ and no addition is attributed to the building. Likewise, there is no addition under the head ‘building’ as per Annexure-3 to the Form No.3CD and the entire amount of Rs.32,67,070/- is attributed to the land.

When we further examine the contentions raised by ld. AR for the assessee that the assessee has purchased land/built up property in the light of the Schedule D to the balance sheet as on 31.03.2008 wherein capital WIP building is shown at Rs.35,23,345/-, the argument addressed by the ld. AR that there was no occasion for repair and maintenance lost its ground. The contention of the ld. AR that the revenue is not entitled to set up a new case by raising argument that, “when the building of the new unit was not in existence the question of carrying manufacturing activities therein does not arises”, is not tenable for the reason that when illegality of the order is under challenge before the Tribunal it being a fact finding forum is empowered to go into any argument addressed by the parties, though not addressed before the CIT (A), to achieve the ends of justice. So, we are of the considered view that there was no building with assessee at Selaqui unit during the period under assessment to carry out the manufacturing activities.

The second question for determination in this case is :-

Undisputedly, the total value of plant and machinery available at new unit at Selaqui as on 31.03.2008 was worth Rs.3,50,353/-. It is also not in dispute that the assessee took delivery of a ‘3 ton cap wire rope hoist machine’ worth Rs.1,27,233/- at its Kala Amb unit on 03.05.2007 and stated to have transferred to its Selaqui unit on 07.06.2007 due to non- availability of Form-XVI under Rule 26 (3) of Uttarakhand Unit Rules, 2005. It is also not in dispute that assessee has received two Hydraulic Pallet at Kala Amb on 05.05.2007 and the total machinery transferred from Kala Amb to Selaqui Unit was undisputedly worth Rs.1,59,241/-.

On the basis of aforesaid undisputed facts, the AO came to the conclusion that since the aforesaid machinery, which is more than 20% of the plant and machinery used in the new unit is old one, the assessee has failed to satisfy the provisions contained under section 80-IC (4)(ii) of the Act.

However, on the other hand, ld. CIT (A) by placing reliance on the affidavit filed by Shri R.S. Sidhu, Partner of the assessee company upset the findings returned by the AO and believed that the assessee has stored the aforesaid machinery at its Kala Amb unit and never used the same before its installation at Selaqui unit.

We are unable to agree with the ld. CIT (A) who has taken the affidavit filed by Shri R.S. Sidhu as a gospel truth even without insisting upon any evidence to support his findings. First of all, the affidavit of Shri R.S. Sidhu relied upon by the ld. CIT (A) is undated. Secondly, the CIT (A) has proceeded in haste in entertaining the undated affidavit in the evidence in violation of Rule 46A of the Income-tax Rules, 1962 (for short ‘the Rules’) to believe the averment made by the assessee in the affidavit as a gospel truth. Thirdly, there was no mention of telephone number, tele-fax and internet facility at the Selaqui unit because in the purchase order dated 05.07.2007 telephone number of Kala Amb unit is given and tele-fax number of Head Office, Delhi of the assessee has been given. Fourthly, documents for transporting the machinery purchased from Grip Engineers Pvt. Ltd., Ballabhgarh and ABB, Faridabad are not tallying with the material receipt dated 03.05.2007 regarding transportation of 21 electrical motors through truck no.DL1M1252 whereas 21 electrical motors were alleged to have been transported by ABB through truck no.HR35J5393 on 28.04.2007. All these facts go to prove that the Selaqui unit was just a drop box address and no manufacturing activities are being carried out in the same.

Assessee stated to have purchased the machinery from M/s.

Moreover, when this fact is examined in the light of the fact that no travelling allowance has been debited by the assessee to the P&L account during the year under assessment, it is difficult to believe that any manufacturing activities have been carried out at the Selaqui unit. Because earning the turnover of Rs.11.11 crores with profit of Rs.3.13 crores from the assembling / manufacturing unit is humanly not feasible without supervision of senior / junior functionaries of the assessee either from Kala Amb unit or from Head Office, Delhi nor any skilled worker has ever visited the Selaqui unit or proved to be engaged. So, all these facts strengthen the findings returned by the AO which have been overturned by the CIT (A) on the basis of whims and fancies. Since the assessee has transferred tools and machinery more than 20% of the total machinery employed at Selaqui unit from Kala Amb unit it is violation of section 80-IC(4)(ii) of the Act.

Furthermore, when we examine the factum of non- availability of the machinery at Selaqui unit in the light of the fact that no manpower was engaged by the assessee to carry out the manufacturing activities at Selaqui unit, the entire assessee’s case to claim exemption u/s 80-IC goes flat. Perusal of the P&L account statement, available at page 147 of the supplementary paper book, shows that the expenditure of Rs.1,35,388/- has been debited to the P&L account under the head wages, bonus, gratuity and other benefits which comes to roughly Rs.50,000/- per month of wages, PF, gratuity, etc. Annexure 4 annexed with the tax auditor’s report, available at page 54 of the paper book, shows the monthly contribution of Rs.2,000/- which leads to the irresistible conclusion that only one worker was hired for the Selaqui unit during the entire period under assessment.

The contention of the ld. AR for the assessee that since the assessee is carrying out the function of assembly of RMPU with the parts procured form different manufacturers like chassis, compressors, electric motors, copper wire, mounting plate sheet metal box, etc. by engaging requisite number of employees and they were paid at the rates prevailing in the State of Uttarakhand, whose wages cannot be compared with the wages of employees at Delhi, is not tenable because apart from the composite expenses of Rs.1,53,588/-, no other expenditure on account of wages/salary have been debited to the P&L account.

No doubt, assembling activities have been held to be manufacturing by the Hon’ble Supreme Court and ITAT, Delhi Bench in the judgments cited as – M/s. Narne Tulaman Manufacturers Pvt. Ltd., Hyderabad vs. Collector of Central Excise, Hyderabad – (1989) 1 SCC 172, Triveni Engineering & Industries Ltd. & Anr. Vs. Commissioner of Central Excise & Anr. – (2000) 7 SCC 29, BPL India Ltd. vs. Commissioner of Central Excise, Cochin – (2002) 5 SCC 167, Xerox Modicorp Ltd. vs. Commissioner of Central Excise – 2001 (130 ) ELT 219 (Tri.Del.) and (v) Majestic Auto Ltd. vs. Commissioner of Central Excise – 2001 (130) ELT 551 (Tri. Del.) but these judgments are of no support to the case of the assessee because there is not an iota of material on record if simple assembling work of RMPU has been carried out by the assessee at its Selaqui unit. Because a single worker cannot create / manufacture a new and different article i.e. RMPU air-conditioners even by way of assembling the numerous components procured by the assessee from different suppliers within a period of 10 months to achieve the turnover of Rs.11.11 crores and profit of Rs.3.13 crores.

Furthermore, when the factum of non-availability of the plant and machinery at Selaqui unit during the year under assessment is examined in the light of the written submissions made by the assessee before ld. CIT (A), available at pages 1 to 56 of the paper book having covering letter dated 23.02.2012, relevant pages 39 & 40, the assessee has added tools and machinery to the tune of Rs.29,70,370/- during the FYs 2008-09 and 2009-10 to the existing tools and machinery worth Rs.3,50,563/-, it again leads to the irresistible conclusion that no manufacturing activities much less assembling activities were being carried out at Selaqui unit during the year under assessment, otherwise if the plant and machinery worth Rs.3,50,563/- was enough for the assessee to achieve tremendous gross turnover of Rs.11.11 crores with profit of Rs.3.13 crores, then the assessee has no need to make substantive addition of tools and machinery worth Rs.29,70,370/-.

For argument’s sake, even if it is assumed that the new plant and machinery has been made available by the assessee at its Selaqui unit by transporting the same from its Kala Amb unit, as contended by ld. AR for the assessee, it is not humanly possible that massive manufacturing activities earning gross turnover of Rs.11.11 crores with profit of Rs.3.13 crores in a period of 10 months, has been carried out by just a one man army.

The last question arises for determination in the case is :-

No doubt, undisputedly the assessee was not having facility of gas filling and testing of RMPU air-conditioners at Selaqui unit for which the assessee stated to have sent the assembly unit to Kala Amb unit but prior to that the assessee has to bring on record the substantial evidence to prove the fact that the RMPU air- conditioners against which the assessee has earned turnover of Rs.11.11 crores were assembled at Selaqui unit, which the assessee has miserably failed as discussed in the preceding para.

The ld. AR for the assessee further contended that liberal interpretation is required to be given to section 80-IC and relied upon the judgment cited as State of Jharkhand & Ors. Vs. Tata Cummins Ltd. & Anr. – (2006) 4 SCC 57. No doubt the Hon’ble Apex Court in the case of State of Jharkhand vs. Tata Cummins Ltd. (supra) held that the exemption notification has to be given liberal interpretation keeping in mind the objects envisaged by the industrial policy and not in strict sense as the case of exemption from liability under the taxing statute. But we are of the considered view that the judgment in State of Jharkhand vs. Tata Cummins Ltd. (supra) is again of no support to the assessee because when unit itself has not been established at Selaqui unit rather the product purported to be produced at Selaqui unit were actually produced by Kala Amb unit as discussed in the preceding paras as the assessee is undisputedly producing same product for Indian Railway at its Kala Amb unit and the management of Selaqui unit as well as Kala Amb unit are the same.

The ld. DR for the revenue contended that the perusal of the sales-tax return filed by the assessee with Uttarakhand Sales-tax Authorities goes to prove that neither any purchases including capital goods have been made nor any consignment has been received from outside Uttarakhand which shows that Selaqui unit has never come in operation. However, ld. AR for the assessee contended that since the benefit of VAT input is not available to the assessee, it is not mandatory to mention purchases in the sales- tax return and this contention of the assessee has been accepted by the AO and now the ld. DR is not empowered to rack up this issue afresh. However, we are unable to agree with the contentions raised by the ld. AR for the assessee for two reasons : (i) that for the completeness of record and books of account each and every facts has to be brought on record by the assessee, which would have strengthened the case of the assessee to prove the huge purported turnover of Rs.11.11 crores from its Selaqui unit to achieve the cause of justice; (ii) that any issue can be raised before a fact finding authority particularly to prove the perversity of facts on record.

In view of what has been discussed above, we are of the considered view that CIT (A) has erred in deleting the addition of Rs.3,13,09,690/- made by the AO on account of disallowance made u/s 80-IC of the act. Consequently, appeal filed by the revenue stands allowed. Order pronounced in open court on this 16th day of January, 2017.