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IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 2ND DAY OF JUNE, 2015 PRESENT THE HON'BLE MR.JUSTICE MOHAN M SHANTANAGOUDAR AND THE HON’BLE MR. JUSTICE ARAVIND KUMAR ITA NO.793/2009
BETWEEN:
ACE MANUFACTURING SYSTEMS LIMITED PLOT NO.467-469, 12TH CROSS, 4TH PHASE, PEENYA INDUSTRIAL AREA, BENGALURU – 560 058 (REPRESENTED BY MR.P.RAMADAS, MANAGING DIRECTOR) …APPELLANT
(BY SRI.T.SURYANARAYANA FOR M/S.KING & PARTRIDGE, ADVOCATE)
AND:
THE ADDL. COMMISSIONER OF INCOME-TAX (LTU) JSS TOWERS, 100 FT. RING ROAD, BANSANKARI III STAGE, BENGALURU – 560 085 …RESPONDENT
(BY SRI.K.V.ARAVIND, STANDING COUNSEL)
THIS APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961 PRAYING TO FORMULATE
THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO.257/BNG/2009, DATED 31.07.2009, IN THE INTEREST OF JUSTICE AND EQUITY.
THIS APPEAL COMING ON FOR HEARING THIS DAY, MOHAN M SHANTANAGOUDAR J, DELIVERED THE FOLLOWING :
JUDGMENT
This appeal is filed by the assessee seeking for setting aside the order passed by the Income Tax Appellate Tribunal dated 31.07.2009 in ITA No.257/BNG/2009 under which the order of CIT-(A) came to be confirmed.
In this appeal we were called upon to answer the following Substantial Questions of Law: (i) Whether the Tribunal was right in holding that the Financial Year 1994-95 relevant to Assessment Year 1995-96 constituted the initial Assessment Year and accordingly, the appellant was not entitled to deduction under Section 80IB for the assessment year 2005-06?
(ii) Whether the Tribunal’s finding that the Appellant commenced commercial production during the Financial Year 1994-95 relevant to Assessment Year 1995-96 is perverse?
The brief facts of the case are that the assessee is in the business of manufacturing of machine tools. Assessee – company came to be incorporated in the year 1994 and it was registered as a small scale industry. At about the end of 1994, the appellant had manufactured three vertical Machining Centres. Appellant participated in an exhibition viz., IMTEX-95 conducted by the Indian Machine Tool Manufacturers Association held in New Delhi during January-1995 and the three machines were displayed at the exhibition. They were conferred “Best Design” and “Best Exhibit” awards at the exhibition. According to the appellant, the three machines so manufactured were prototype. According to the appellant, in order to have field trial being
conducted, it sold said three machines to group companies in March-1995. Two of the machines were sold to Pragati Engineering Works and one was sold to Ace Designers. It is the case of the appellant that the purpose of sale to such group companies was only to conduct field trial and to get feed back in order to know the technical faults, if any in the machines and to set right such defects. Thus, according to the appellant, the manufacture of three machines was for a trial production and same was not in the nature of commercial production.
Assessee filed its return of income for Rs.12,46,00,990/- for the Assessment Year 2005-06 on 30.09.2005. The case was selected for scrutiny by issuing notice under Section 143(2) dated 17.10.2006, assessment order came to be passed under Section 143(3) of the Act. The assessee was asked to furnish details and in response, assessee
filed details vide letters dated 11.10.2007 and 15.11.2007.
The assessee had claimed Rs.5,34,00,426/- as deduction under Section 80IB
(3) of the Income Tax Act, 1961 and had enclosed audit report in Form No.10CCB as prescribed under Rule 18BBB. The deduction had been computed at 30% of the profits and gains derived by the eligible business amounting to Rs.17,80,01,421/-. According to the assessee, the initial Assessment Year from which the deduction was being claimed is the Assessment Year 1996-97.
According to assessee, as per Provisions of Section 80IB (3) of the Income Tax Act, 1961, the deduction under Section 80IB for the industrial undertaking shall be 30% of the profit derived from the undertaking for a period of 10 consecutive years beginning from the initial Assessment Year. Under
Section 80IB(14)(c)(i) the initial Assessment Year is defined as the initial Assessment Year relevant to the previous year in which the industrial undertaking begins to manufacture or produce article on things. It is not in dispute that the assessee had produced three (3) machines in the Financial Year 1994-95 relevant to Assessment Year 1995-96. According to assessee, the initial Assessment Year is 1996-97 and deduction under Section 80IB (3) would be available to it for a period of ten (10) years from initial Assessment Year i.e., 1996-97 till the year ending 2005-06. The assessee was asked to justify the claim of deduction for the year ending 2005-06 vide letter dated 29.10.2007. After considering the reply furnished by the assessee and rejecting the same, the Assessing Officer held that the initial Assessment Year is 1995-96 and as such, assessee is not entitled for claiming adjudication under section 80IB(3) of the Act by passing the assessment order dated
30.11.2007. Being aggrieved by the same, appeal came to be filed before CIT(A) and Appellate Authority by order dated 13.01.2009 dismissed the appeal filed by the assessee. Assessee carried the matter further in appeal before Income Tax Appellate Tribunal and Tribunal by order dated 31.07.2009 dismissed the appeal filed by the assessee and affirmed the order passed by the CIT(A). Hence, this appeal under section 260A has been filed by the assessee contending interalia that the initial assessment year is to be construed as 1996-97 and not 1995-96 and has prayed for substantial question of law being answered in its favour.
The contention of the assessee is that the production of machines during the Financial Year 1994-95 relevant to the Assessment Year 1995-96 was only on a trial basis and not on commercial basis. In other words, the production of three (3) machines according to assessee, was for trial
purposes and not for commercial purposes. According to the assessee, even though there was a demand from outside customers to buy the machines, it was decided to sell these three (3) machines produced in the year 1994-95 to its group companies only, to conduct field trials and also to get feedback on its performance. Accordingly, one machine of MCV-400 was sold to Ace Designers and one machine each of MCV-400 and MCV-320 were sold to M/s.Pragati Engineering Works. It is further case of the assessee that the commercial production was carried out only in the Financial Year 1995-96 because the first sale other than to group companies was made in the December’ 1995.
Thus, the real question to be decided in this appeal is, as to whether assessee had begun to manufacture or produce articles on commercial basis in the Financial Year 1994-95 (relevant to Assessment Year 1995-96) or in the Financial Year
1995-96 (relevant to Assessment Year 1996-97). As aforementioned, according to assessee, though three (3) machines were manufactured in January’ 1995, all the three (3) were sold to its group companies in order to get feedback on performance in the month of March’ 1995. Thus, according to the assessee the production of three (3) machines in the Financial Year 1994-95 was not on commercial basis but it was on trial basis.
All the Authorities as well as Tribunal on facts have concluded that the production of three (3) machines by the assessee in the Financial Year 1994- 95 was on commercial basis and not on trial basis.
Sri.T.Suryanarayana, learned Advocate appearing on behalf of assessee taking us to the entire material on record more particularly the Annual Report of the assessee submits that manufacturing of three (3) machines by the assessee
in the Financial Year 1994-95, was only for conducting the field trials and not for commercial purposes of selling the same to the outsiders. In that view of the matter, all the three (3) machines which were manufactured by the assessee were sold to the group companies only, in order to conduct the field trials and also to get feedback on performance. He further submits that after getting the orders from intending buyers and after rectifying the defects found in the three (3) machines, actual production for commercial purposes commenced in the Financial Year 1995-96 (relevant to Assessment Year 1996-97) and therefore, assessee would be entitled to get the benefit of 10 years as contemplated under Section 80IB (3) of the Income Tax Act, 1961 from the Assessment Year 1996-97 i.e., till 2005-06.
Said submissions were opposed by Sri.K.V.Aravind, learned panel Advocate appearing for Income Tax contending that production of three (3)
machines by the assessee in the Financial Year 1994- 95 was on commercial basis. Inasmuch as, all the three (3) machines were sold to the group companies; before selling the machines to group companies, the machines were exhibited in the exhibition held in Pragati Maidan, New Delhi in the month of January’ 1995 and there was tremendous response and praise for the products manufactured by the assessee and as there was lot of appreciation by the participants in respect of compact product design and aesthetic view, the three (3) machines were sold to the group companies. He further draws the attention of the Court that at the time of exhibition itself, orders came to be placed for purchase of those machines by 12 intending purchasers and as such, assessee cannot contend that machines exhibited was not for sale. He further submits that instead of selling these three (3) machines to the group companies, the assessee would have as well sold to other intending buyers
inasmuch as, there was tremendous response in the exhibition itself and for its subsidiary companies assessee sold those three (3) machines. Thus, according to him the production has started in the Financial Year 1994-95, relevant to the Assessment Year 1995-96.
It is not in dispute and as is clear from the Annual Report 1994-95 of the assessee that the production of machines started from the year 1994. Thus, in a period of three months, the three (3) machines were built and were displayed at IMTEX’ 95 held from 15th to 22nd January 1995 at Pragati Maidan, New Delhi. The Annual Report further discloses that both products viz. MCV-400 and MCV- 320 received tremendous appreciation in the IMTEX’ 95 for its specifications, features and technical innovativeness and lower price. Due to the same, MCV-320 won both the PMT CMTI Trust Award for the “best design” and FIE Foundation Award as the
“best product” displayed at IMTEX’ 95. Undisputedly, the machines exhibited generated lot of demand. Even though there was demand from outside customers to buy the machines from the assessee, it was decided to sell these machines to its group companies i.e., to Ace Designers and M/s.Pragati Engineering Works. These machines started working for 2 shifts per day continuously for four months and working of the machines was to the satisfaction of the other customers. At the time of the exhibition itself the booking of machines took place. Several reputed customers like M/s.Widia (India) Limited, M/s.Technico, M/s. Hindustan Hyderabad, M/s.Hero Honda, M/s.Mico, M/s.Delta Corporation, etc. were interested to buy the machines and as such, they have placed orders. However, the machines were launched in the market in the month of August’ 1995.
The assessee has shown the closing stock of Rs.12,13,077/- including a closing work-in- progress of Machining Centre MCH-400 amounting to Rs.3,54,643/- as on March’ 1995. The assessee has also shown Rs.13,54,258/- as advance received from Ace Designers and Technico Engineering. Thus, it is evident that the so called prototypes manufactured by the assessee were tested and sold commercially during the Assessment Year 1995-96 itself. Merely because the machines were sold to group companies, it cannot be said that the transaction is not commercial. There is transfer of title in respect of machines from the assessee to its group companies. Admittedly, the group companies which had purchased the three (3) machines started making use of those machines and were earning profit. It is not in dispute that those machines were working in 2 shifts per day continuously from the date of sale without any technical problem.
The learned Advocate appearing for the assessee relied upon the following judgments: (i) Additional Commissioner of Income-Tax, Madras-II v. Southern Structurals Ltd. –
(1977) 110 ITR 164
(ii) Commissioner of Income-Tax, Poona v. Hindustan Antibiotics Ltd. – (1974) 93 ITR 548
(iii) Commissioner of Income-Tax v. Food Specialities Ltd. – (1958) 156 ITR 790
(iv) Commissioner of Income-Tax v. Nestor Pharmaceuticals Limited - (2010) 322 ITR 631
(v) Metropolitan Springs Pvt. Ltd. v. Commissioner of Income-Tax, (Central) Bombay – (1981) 132 ITR 893
(vi) Commissioner of Income-Tax v. Himalyan Magnesite Ltd. – (2005) 276 ITR 56
to contend that the year of commercial production is relevant and not the year wherein the products were manufactured on trial basis. There cannot be any dispute with regard to said proposition of law. A provision in a statue must be interpreted with regard being had to the object for which the section was enacted namely with a view to encouraging the establishment of new industrial undertakings by granting exemption from tax on profits derived from such undertakings during the first ten years. We are also clear in our mind that if the object is to give exemption of tax, that presupposes that the real object is that the profits are capable of being earned by the company. If such be the object, then until the assessee-company reaches a stage where it is in a position to decide that a final product, which could ultimately be sold in the market, could be manufactured or produced by it, it will be idle formality to say that it had started manufacture or
production of articles simply because trial products are prepared with a view to verify whether they can be ultimately used in preparation of final products.
In the matter on hand, even before the products were sold to the group companies in the month of March’ 1995, the machines were exhibited in public at New Delhi. As aforementioned, there was lot of appreciation for the machines and in fact during the exhibition, bookings took place. The assessee could have as well sold the products to the third parties viz. intending buyers. However, instead of doing so, the assessee chose to sell the machines to its group companies. Therefore, it cannot be said that the machines were not available for sale. Merely because the assessee has sold three (3) machines to its group companies, it cannot be said that there was no commercial transaction.
In none of the aforementioned cases, relied upon by the assessee,
there was a sale of the finished product for consideration as is obtained in the facts on hand.
In the case of COMMISSIONER OF INCOME-TAX, POONA V. HINDUSTAN ANTIBIOTICS LTD. reported in (1974) 93 ITR 548, there was a requirement in law that a “crude penicillin” produced by the assessee was to be tested either in USA or UK for obtaining certificates as to their qualities. After obtaining such certificates as to their qualities, the assessee was permitted to produce the final product i.e., “sterile penicillin”. In that regard the Bombay High Court has ruled that the year of production of crude penicillin cannot be the starting point. It is only after sterile penicillin was produced for commercial purposes, the time starts to run.
In the case of ADDITIONAL COMMISSIONER OF INCOME-TAX, MADRAS-II V. SOUTHERN STRUCTURALS LTD. reported in (1977)
110 ITR 164, there was a contract between the assessee and the purchaser that the railway wagons manufactured by the assessee were to be certified by the relevant authority. In that regard, the prototype wagons was manufactured by the assessee and was sent for certification. After getting the certificate from the concerned, the production of railway wagons for commercial purposes began. In that view of the matter, the Madras High Court in the case of Southern Structural Ltd. concluded that the year of production of the wagons for commercial purposes would be the year on which the wagons were manufactured after certification by the concerned.
Be that as it may. As aforementioned in none of the judgments mentioned supra there was no element of sale of the finished products by the assessee. In the matter on hand, admittedly the three
(3) machines were sold by the assessee, of course, to its group companies for consideration. Hence, it
cannot be said that the machines were manufactured only on trial basis and not for commercial purposes in the Financial Year 1994-95 relevant to Assessment Year 1995-96.
In that view of the matter, we do not find any ground to interfere with the impugned orders. The Substantial Questions of Law are answered accordingly in favour of the revenue and against the assessee.
Appeal stands dismissed.
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