M/S SHRI RAM CYLINDERS (UNIT II),CHANDIGARH vs. ITO, W-2(1), CHANDIGARH

आयकर अपीलीय अिधकरण,च"डीगढ़ "यायपीठ , च"डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH ‘B’ CHANDIGARH BEFORE: SHRI A.D.JAIN, VICE PRESIDENT AND SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER आयकर अपील सं./ to 605/CHD/2019 िनधा"रण वष" / A.Y. : 2011-12, 2012-13, 2013-14 & 2014-15 बनाम M/s Shri Ram Cylinders (Unit-II), The ITO, Plot No. 10, MW, Industrial Area-I, Ward 2(1), VS Chandigarh. Sector 17, Chandigarh. "थायी लेखा सं./PAN /TAN No: ABRFS3947G अपीलाथ"/Appellant ""यथ"/Respondent िनधा"रती क" ओर से/Assessee by : Shri Sudhir Sehgal, Advocate and Shri A.K.Sood, CA राज"व क" ओर से/ Revenue by : Shri Dharam Vir, JCIT, Sr.DR तारीख/Date of Hearing : 07.08.2024 उदघोषणा क" तारीख/Date of Pronouncement : 21/10/2024 PHYSICAL HEARING आदेश/ORDER PER A.D.JAIN, VICE PRESIDENT These are assessee's appeals for assessment year 2011-12, 2012-13, 2013-14 and 2014-15 against the common order dated 19.02.2019 passed by the Ld. CIT(A)-1, Chandigarh. As common issues are involved in all these appeals, these were heard together and are being disposed of by this common order.

2. The facts, for convenience, are being taken from ITA No.602/CHD/2024, for assessment year 2011-12. The assessee has taken the following grounds of appeal:

ITA 602 to 605/CHD/2019 A.Y.2011-12 to 2014-15 2 1. That the learned CIT (Appeals)-I, Chandigarh is not justified in confirming the rejection of claim of the assessee amounting to Rs 27,10,822/- on account of deduction u/s 80IC of the Income Tax Act, 1961 on the plea that the assessee M/s, Shri Ram Cylinders Unit-II does not fulfill the conditions as per clause (4)of Section 80IClof the IT Act, 1961 and also the unit does not have independent existence but has been found to have been constituted and formed by "Splitting up of from the earlier manufacturing-unit of Shri Ram Cylinders.

2. The learned CIT(Appeals)-I, Chandigarh has erred in law and facts by denying deduction u/s 80IC in the current year the basis of facts and statements recorded during survey on 26/27.02.2014 i.e. in the subsequent years as each year has to be considered separately and independently for that particular year and there is no adverse finding in the account during the current year.

3. The Ld CIT (Appeals)-I has erred in confirming reasons recorded u/s 148 as the reasons recorded for reopening of assessment u/s 148 dated 27.08.2014 are "income against the law and facts of the case and does not amount to chargeable to tax has escaped assessment" as the reasons for reopening of assessment are insufficient and invalid based on incomplete and wrong interpretation of facts during survey operations.”

3. At the outset, the ld. Counsel for the assessee has stated at the Bar that he does not wish to press Ground No.3. Rejected as not pressed.

4. Apropos Ground Nos. 1 and 2, the facts are that the assessee claimed deduction of Rs. 27,10,822/- under Section 80IC of the Income Tax Act. Vide re-assessment order dated 18.03.2016, the AO rejected this claim. The AO held that the assessee was asked vide questionnaire dated 09.02.2016 to furnish the documentary evidence regarding allocation of land and building for running of business/manufacturing activities by Shri Ram Cylinders Unit-I and Unit II ITA 602 to 605/CHD/2019 A.Y.2011-12 to 2014-15 3 separately. The assessee, in response thereto, furnished reply on 29.02.2016 (Para-I) which is reproduced as under:-

"The industrial unit started established independent manufacturing facilities in F.Y. 2009-10 at Hilltop Industrial Estate. Jharmairi. EPIP Phase-I (Ext.). Bhatolikalan Baddi. The plot on which the unit is operating belongs to Shri Gulshan Kumar Aggarwal. Shri Arun Kumar Aggarwal and Smt. Kamal Kanta as partners of Shri Ram Cylinders. Shri Ram Cylinders Unit II was established its manufacturing facility as a partnership firm with the same partners Shri Gulshan Kumar Aggrawal. Shri Arun Kumar Aggarwal and Smt. Kamal Kanta in F.Y. 2009-10. ... Being same partners in Shri Ram cylinders Unit-I and II the Unit-ll was allowed to establish independent manufacturing facility in front half portion of the plot with separate shed, separate machinery, separate gate, separate staff, separate power load and separate registrations under all other acts. There is no restriction on establishing more than one independent manufacturing facility in the same plot. A copy of site plan indicating independent units is enclosed" AO’s Observations 4.1 The reply of the assessee had been considered by the AO with reference to the material facts available on record and it was found that the assessee had not given any evidence regarding allocation of land and building for running of business/manufacturing activities by M/s Shri Ram Cylinders Unit-I and Unit-ll separately. As per the AO’s observations, moreover, the assessee had stated that the Unit started establishing independent manufacturing facility in F.Y. 2010-11, which was not true because during course ITA 602 to 605/CHD/2019 A.Y.2011-12 to 2014-15 4 of survey conducted on 26/27.02.2014 it was found that no separate land was earmarked and no separate building as well was constructed for running of the business of the firm M/s Shri Ram Cylinders Unit-ll. The assessee firm Unit-ll was formed and established on the land and in the building of firm M/s Shri Ram Cylinders known as Unit-I. No separate section/portion was earmarked for Unit-ll in the land and building of Unit-I for running the working of unit-ll. Even no rent had been paid by the assessee firm M/s Shri Ram Cylinders Unit-ll to M/s Shri Ram Cylinders Unit-I for using its land & building, as no claim of rent expenses paid stands claimed in P&L account in the return of income right from the A.Y. 2011-12, the 1st year of commencement of business.

4.2 Reply to Q.5 of statement of Arun Kumar recorded during survey shows that the assessee firm was created on the same land which was of unit-l.

4.3 Q.5 This premises has a single entry, single shed, common material store, common scrap, common back yard & common office. In view of this, this seems to be a single unit only. What do you have to say in this regard ?

Ans. The unit is owned by Shri Ram Cylinders with Sh. Arun Aggarwal, Gulshan Kumar Aggarwal & ITA 602 to 605/CHD/2019 A.Y.2011-12 to 2014-15 5 Smt. Kamal Kanta. 2 independent entities are operating from this shed/plot having 2 separate sheds. So many units can be operated from a single plot having different functional area. The managing partner himself has stated that the unit-l & unit-ll are merely having some different functional area. He has not been able to establish any independence of these two units as the premises was covered under survey u/s 133A of the Income Tax Act. The site plan is an afterthought because the assessee totally failed during survey operation to explain the independent occupation of land and building by each unit. Thus the contention of the assessee is not acceptable being devoid of facts.

"both the units are maintaining separate godowns for raw material, semi finished goods and finished goods. Both the units are maintaining separate stock for raw material and finished goods as there are marking of assessee's name on raw material coils and on finished goods which are easily identifiable. The finished goods are in the shape of cylinders with engraved marking in the shape of assessee's name. BIS Licence number, batch number, test date and continuous serial number. Every lot is passed by Bureau of India Standards authorities. The main raw material of the unit is MS Coils which are bulky and very big (average weight of MS Coil is 15 to 20 Tonnes per coil) and these are stored under the covered shed outside the manufacturing sheds near the circle cutting machines with distinct markings regarding weight, coil number, heat number which matches with the coil number, weight and serial number in the respective bill and test certificate. The semi finished goods are stored near the machines on ITA 602 to 605/CHD/2019 A.Y.2011-12 to 2014-15 7 which the process is done in respective manufacturing sheds and the finished goods in the form of Cylinders are stored in the godown area.

4.4 The AO held that the reply of the assessee was in contradiction to the statement of Sh. Arun Kumar Aggarwal, partner of the Firm recorded on the date of survey. The relevant portion is reproduced as under :

"Q.20 For all the small store items, there is a common store in main shed and a common godown outside whether the store and godown are maintained unit wise or commonly what do you have to say? Ans:- Yes, it is maintained for all the small hardware items commonly. Secondly, reply to question 14 of the statement of Sh. A.R. Nagvi quoted below also establish that stock and store room were common for both the unit i.e. Unit-I & Unit-ll and stock/store of each unit could not be bifurcated. Q.14. You have produced daily report with regard to stock position of all items which are signed by Mr. Navin. Can vou bifurcate the stock into both the units? If yes, put up/show stock register of each unit? Ans:- The daily report of stock position as per the register maintained by Mr. Navin are in respect of both the units w/hich cannot be bifurcated for each unit separately. Therefore, the stock register maintained and produced by Mr. Navin during the course of survey is written up to dated 30.06.2013 and the same is pending till the date of survey, as it is (stock register) is in respect of both the units. As above, the reply of the counsel of the assessee is misleading the facts already on record in the shape of statement of Sh. Arun Kumar Aggarwal and Sh. A.R. Nagvi. Thus on this issue the contention of the assessee is also not acceptable.

Reply given by Sh. A.R. Naqvi General Manager to question no. 3 of his statement- Q.No. 3 Please give brief profile of your job? Ans.: I am the overall technical incharge of this place for both the Unit-I & II since 2008. From the above quoted three question answers it is evident that the assessee firm was not having its employees separately but the employees of already existing unit-l were working for assessee firm Unit-ll also." Further, list of employees submitted during assessment proceedings is contradictory to the evidence in shape of statements recorded during survey. During course of assessment proceedings, list of the employees of the assessee for the period for the financial year 2011-12 was submitted which bears the name of Sh. A.R. Naqvi S/o Sh. Q.R. Naqvi resident of V.P.O. Sirsi, Distt. Muradabad. When the name of this employee is considered with reference to statement of this employee recorded during course of survey, it is found that in reply to question 2 of his statement he has stated- Q.2. How are you associated with M/s Shri Ram Cylinders, Baddi and since when? Ans:- I am working as General manager at M/s Shri Ram Cylinders since 2008. Further in reply to question 3 he has stated that- Q.No. 3:- Please give brief profile of your job? Ans:-1 am the overall incharge of this place for both the units- Unit-I & Unit-ll since 2008. This statement of Sh. A.R. Naqvi establish that he has been doing the work as overall technical incharge since 2008 when only unit-l was in existence and later on been working in both the Unit-I & Unit- ll since 2010( the year when the Unit-ll was attempted created). This evidence of statement of Sh. A.R. Naqvi discussed above and the non inclusion of the name of Sh. A.R. Naqvi in the list of employees provided for the period 1st April 2011 to 31st March 2012 for Sh.

ITA 602 to 605/CHD/2019 A.Y.2011-12 to 2014-15 9 Ram Cylinders Unit-I establish that the list of employees given by the assessee firm is including false particulars as the employee Sh. A. R. Naqvi of M/s Shri Ram Cylinders Unit-I since 2008 have been shown to be the employee of the assessee firm only. As such the list of the employees submitted for the period under consideration is not accepted but is rejected by holding that this manipulation made in preparing the list of employees by including the false particulars give rise to the factors that the assessee is not eligible for claiming deduction u/s 80IC.

CIT(A)’s Findings

5. By virtue of the impugned order dated 19.02.2019, the CIT(A) confirmed the assessment order and dismissed the assessee's appeal. While doing so, it was held that the AR’s submission that no machinery of Unit-ll is shared by Unit-I has been duly rebutted by the Ld.AO. If we peruse Page Nos. 13 & 19 of Annexure 47 of loose papers impounded during the course of survey establish that assessee firm Unit-ll was using the machinery of already existing firm Unit-I. It is pertinent to mention here that these pages are the letters written by assessee firm to Bureau of Indian standard (BIS) and approval given by Bureau of Indian standard, Parwanoo, Distt. Solan (H.P) for sharing the machinery of Unit-I by assessee firm Unit-ll. Both these letters dated: 03.03.2009 from assessee firm and dated 05.03.2010 from Bureau of Indian standard giving the approval form part of loose papers impounded during the course of survey as Annexure- 47. When an information was called from the BIS u/s 133(6) of the Act, the BIS submitted its reply vide dated ITA 602 to 605/CHD/2019 A.Y.2011-12 to 2014-15 14 31.12.2014 from where it is found that assessee firm Unit-ll has been mentioned to be in use (sharing of facilities) of the machinery of Unit-I since 08.03.2010 to 06.06.2011 and even more the test equipments of already existing Unit-I are still being shared by the assessee firm Unit-ll till date.

The CIT(A) held that the appellant has claimed that the first commercial manufacturing activity was started in the AY 2010-11 and most of the common machinery is minor machinery and has been used as a precautionary measure for not getting delayed in start of commercial production as there was a time gap between the placement of order and actually delivery of these machines. 'AO during the course of assessment proceedings of AY 2013-14 called for information of plant & machinery established during the period starting from establishment of assessee firm (Unit-ll). The AR submitted Copy of details of plant & machinery as date, supplier and bill detail from 01.04.2009 to 31.03.2011 alongwith copies of bills. The AO analysed assessee's submissions with reference to the list of manufacturing machinery of Shri Ram Cylinders (Unit-ll) forming part of impounded material-Annexure A-47 (loose papers) at page 34 and page 33 duly signed by Sh. A.R. Naqvi, Authorized Signatory and two other officials on 19.03.2010 which is deemed to be the machinery of assessee firm ITA 602 to 605/CHD/2019 A.Y.2011-12 to 2014-15 15 by 19.03.2010 the date on which it was signed under Seal and Stamp by the incharge officials of the assessee firm and should have been forming the part in the details of purchase of machinery of assessee firm Unit-ll as submitted, by the counsel of the assessee during assessment proceedings.

The CIT(A) held that on the basis of discussion of facts given above the AO has rightly concluded that the machinery as detailed at serial no. 1,2,6,11 and 20 of the page 34 and serial no. 23,24,25,27,28,31 and 32 of page 33 of impounded material referred above are important role performer in the manufacturing of the end products of the assessee firm Unit-ll, but these machines were not with the assessee firm Unit-ll and that assessee was giving result to the productions by using these machines of already existing sister concern of the partners of the assessee firm in the name of M/s Shri Ram Cylinders (Unit-I). Moreover, AR has not submitted all the bills of plant & machinery pertaining to from the inception of Unit-ll.

The CIT(A) held that further, AO has analysed an Inventory of common machinery used by the assessee firm Unit-ll and its already existing sister concern, prepared during survey operation also establishes that assessee firm was not valid in existence and in making production by using the machinery of Shri Ram ITA 602 to 605/CHD/2019 A.Y.2011-12 to 2014-15 16 Cylinders Unit-I. It is undisputed fact that during the course of survey proceedings Sh. Makhan Lal Verma Maintenance Foreman of the assessee firm made the survey party to prepare inventory of machinery at the business premises of M/s Shri Ram Cylinders Baddi, which was the common machinery being used by both the units that is Unit-I & Unit-ll commonly wherein year of purchase has also been mentioned.

The CIT(A) held that on perusal of Panchnama dated 20.04.2010 drawn on account of search conducted by the DGCEI Ludhiana Regional Unit, an observation has been made which reads as under:

"The said Unit was not working at the time of search ......................... Further, it was revealed Unit-ll has not implied any work force so far and they could not produce any attendance register of the same and most of the machinery installed was not affixed to any foundation in earth. On enquiry Sh. Naqvai informed that certain machinery are not required to be affixed to the ground." The CIT(A) held that it is clear that the assessee i.e. Unit- ll has not started its commercial manufacturing as on 20.04.2010. Assessee is misleading that Unit-ll has started its first commercial manufacturing as in Financial Year 2009-10 i.e. as on 31.03.2010. Meaning thereby that two different agencies have independently established the said facts that Unit-ll was not working on its own as no commercial manufacturing was found started as on 20.04.2010. There was no separate attendance ITA 602 to 605/CHD/2019 A.Y.2011-12 to 2014-15 17 register of Unit-ll. Above all most of the machinery was not found affixed to any foundation in earth. Assessee has created Second Empire on the foundation of Old Empire. The claim of Ld.AR that plant & machinery of Unit-ll was grouted in the floor does not hold good.

The CIT(A) held that the AO of the Unit-I in AY 2012-13 while disallowing depreciation has made following observations:

Above reply reveals that the machinery of the assessee firm which was used by the sister concern of the assessee is of plying main role in the process from start of manufacturing to the end of testing of the product and this machinery have been reported to be used by the sister concern of the assessee from 08.03.2010 to 06.06.2011 but the testing equipment are being used till the date of sending the reply by Bureau of Indian Standard. The value of the machinery detailed in above reply is calculated on the basis of facts on record as under:- 1) Deep Draw Hydrolic Press Rs. 14,00,000/- 2) Circle Cutting Machine Rs. 3,00,000/- 3) Joggling Machine Rs. 75,000/- 4) Hydrolic Decoiler Rs. 7,50,000/- 5) Roller Conveyer Rs. 1,00,000/- Rs. 26,25,000/- Tax Rs. 3,28,283/- Total value Rs. 29,53,283/- As the machinery was allowed to be used by the sister concern of the assessee up to June 2011, the depreciation cost of above machine @15% which comes to Rs.4,42,992/- for the year 2011- 12 relevant to assessment year 2012-13 is at least liable to be charged from the sister concern of the assessee to the extent of the use of machinery for three months which comes to Rs.1,10,740/-, specifically in view of the fact that assessee has established business in Himachal Pradesh to be eligible for deduction u/s 80IC for income from manufacturing activities. Assessee is held liable to charge hire charges for allowing the use of its machinery to its sister concern for Rs. 1,10,740/- as discussed above and subject it to tax. Accordingly an addition of Rs. 1,10,740/- is made to the income of the assessee on account of hire charges of machinery.

ITA 602 to 605/CHD/2019 A.Y.2011-12 to 2014-15 18 The CIT(A) held that if we peruse the details of fixed assets of Unit-ll as on 31.03.2010 or 01.04.2010 the total opening balance of Plant & Machinery etc amounts to Rs. 71,67,593/-. Meaning thereby that the percent of machinery used by the assessee unit of the Old Unit-I is at 41.20% which exceeds 20% of the total plant and machinery of the assessee. Hence, appellant is squarely hit by the provisions of section 80IC (4) of the Act. The CIT(A) held that the above factual positions establishes that when commercial production started in the AY 2010-11 as admitted by the AR, the above machinery pertaining to Unit-I was used by the assessee. Above discussed facts clearly prove that Shri Ram Cylinders Unit-ll has been formed/constituted by splitting up from the already existing firm- M/s Shri Ram Cylinders Unit-I the another firm of the partners of the assessee firm and has been found using plant & machinery being already used by unit-l. The AR of the appellant has failed to establish that the Unit-ll is not formed by splitting up of a business already in existence as per provisions of u/s 80IC(4) of the Act.

The CIT(A) held that the findings of the Ld.AO are further strengthened by the facts collected by the survey party and ITA 602 to 605/CHD/2019 A.Y.2011-12 to 2014-15 19 confronted to the appellant during assessment proceedings of all the years i.e. 2011-12 to 2014-15 which are as follows. The Land & Building was not earmarked in the case of Unit-ll. No rent has been paid by the current unit. If we peruse the balance Sheet of the appellant no such Land & Building is shown in the Fixed Asset Schedule. To say that Land & building is owned by the partners further strengthens AO's conclusions that the Unit has not started establishing independent manufacturing facility in F.Y. 2009-10 because during course of survey conducted on 26/27.02.2014 it was found that no separate land was earmarked and no separate building as well "was constructed for running of the business of the firm M/s Shri Ram Cylinders Unit- ll. The assessee firm Unit-ll was formed and established on the land and in the building of firm M/s Shri Ram Cylinders known as Unit-I. No separate space was earmarked for Unit-ll in the land and building of Unit-I for running the working of Unit-ll. Even no rent has been paid by the assessee firm M/s Shri Ram Cylinders Unit-ll to M/s Shri Ram Cylinders Unit-I for using its land & building, as no claim of rent expenses paid stands claimed in P&L account in the return of income right from the A.Y. 2010-11, the 1st year of commencement of business. The Managing partner Sh. Arun Aggarwal himself has stated during the survey operation that the unit-l & unit-ll are merely having ITA 602 to 605/CHD/2019 A.Y.2011-12 to 2014-15 20 some different functional area. Therefore, the site plan is an afterthought because the assessee totally failed during survey operation to explain the independent occupation of land and building by each unit. On perusal of Registered Deed executed and registered on 30.12.2005 with the