HEMANT KUMAR GODARA vs. ASST CIT 15(1),

We heard the parties and perused the record. This is second round of proceedings. The assessee is engaged in the business of manufacture and sale of stainless steel utensils. The original assessment was completed by the AO by rejecting the claim for deduction u/s 80IB of the 2 Act and also disallowing the interest expenditure on loan and depreciation on machinery. In respect of all these additions, the assessing officer followed the assessment order for assessment year 2003-04, wherein identical disallowances had been made.

The assessee preferred appeal for AY 2003-04 before Ld CIT(A) and then to the ITAT. The Tribunal, vide is order dated 25-11-2008 passed in ITA No.7144/Mum/2006, restored all the matters to the file of the assessing officer on the reasoning that the assessee was not given proper opportunity. When the appeal filed by the assessee for AY 2004-05 also reached the ITAT, the Tribunal, vide its order dated 26-06-2009 passed in ITA No.990/Mum/2008, restored all the matters again to the file fo the assessing officer by following the order passed by the Tribunal for AY 2003-04. Hence the impugned assessment order was passed by the AO in the set aside proceedings.

Since the assessing officer had made the impugned disallowances by following the order passed for assessment year 2003-04, a specific query was posed to both the parties as to the position of the assessment order passed by the AO in the set aside proceedings. The Ld A.R submitted that the assessee has not received any assessment order for AY 2003-04 so far. Hence the Ld D.R was directed to ascertain the factual position in this regard. In response, the Ld D.R filed a letter dated 02-11-2015 before the bench, wherein he has stated that the assessing officer has not furnished a reply to him so far. However, he has furnished a copy of notice dated 31.01.2014 issued u/s 142(1) of the Act calling for details relating to the identical disallowances made in AY 2003-04. Thus, we notice that the assessing officer has issued a notice u/s 142(1) of the Act for assessment year 2003-04 only on 31.01.2004 in pursuance of the order passed by the Tribunal on 25.11.2008. 3

The Ld A.R, during the course of hearing, had submitted that the time limit for passing assessment order for AY 2003-04 should have already expired, if the assessing officer had not passed the assessment order in the set aside the proceedings. Since the assessing officer has issued notice u/s 142(1) of the Act only on 31.01.2004, we examined the time limit available to the AO to pass the assessment order in the set aside proceedings. The time limit is prescribed in sub section (2A) of sec. 153 of the Act and the said provisions read as under:-

We have earlier noticed that the disallowances that are being contested in this appeal has been made on the basis of decision taken in AY 2003-04. However, the Tribunal had set aside all the issues in AY 2003-04 as well as in AY 2004-05 to the file of the AO. However, the assessing officer has failed to pass the assessment order in AY 2003-04 in the set aside proceedings. However, the AO has passed the assessment order in AY 2004-05 independently without ascertaining the facts that were found to be deficient in AY 2003-04. 7. The Assessing officer had rejected the claim for deduction u/s 80IB of the Act in AY 2003-04 on the ground that the undertaking of the assessee has violated the conditions prescribed in sec. 80IB of the Act, viz.,

In assessment year 2004-05, the assessing officer proceeded to confirm the disallowances again on the reasoning that the assessee did not furnish the details that were called for. Even though, the AO noticed that the assessment of AY 2004-05 had been set aside by ITAT on the basis of its order passed for AY 2003-04, yet he proceeded to complete the assessment of AY 2004-05 without completing the assessment of AY 2003-

In the appeal filed before the Ld CIT(A), the assessee has requested for admission of additional evidences u/r 46A of the Act. The AO reported that the notice could not serve upon the assessee as there was no such person in the given address. Accordingly, he refused to offer any comments. The assessee thereafter submitted his correct address and hence the Ld CIT(A) requested the AO to furnish remand report again, but the AO did not furnish any report. Hence the Ld CIT(A) proceeded to examine the additional evidences and adjudicate the issues.

With regard to the deduction claimed u/s 80IB of the Act, the Ld CIT(A) took the view that the assessee has failed to prove that he was manufacturing the goods. The Ld CIT(A) has also accepted the view of the AO that the assessee’s unit has been established by reconstruction, since the partnership firm has been converted into a proprietary concern. He also accepted the view of the AO that the assessee could not have purchased machinery from M/s Mahavir Mercantile Co., since the supplier has denied the sale to the assessee. The Ld CIT(A) also took the view that the assessee did not furnish any other evidence to support the claim of machinery. Accordingly, he upheld the rejection of claim for deduction u/s 80IB of the Act.

It is noticed that the undertaking eligible for deduction u/s 80IB of the Act was initially formed as a partnership concern consisting of the assessee herein and another person. That other person retired from partnership and hence the eligible undertaking became the proprietary concern of the assessee. Before the tax authorities, the assessee submitted that the conversion of partnership firm into a proprietary concern cannot be considered to a case of “Splitting up” or “reconstruction” of existing business. In support of this contention, the assessee has placed reliance on the following case law:- (a) CIT Vs. Gaekwad Foam & Rubber Co. Ltd (35 ITR 662)(Bom), wherein it was held that the take over of an undertaking by a company from partnership firm, by allotting shares to the partners did not amount to reconstruction. (b) CIT Vs. Hindustan General Industries (137 ITR 851)(Del), wherein it was held that the expression “Splitting up of the business already in existence” indicates a case where the integrity of a business earlier in existence is broken up and different section of the activities previously conducted are carried on independently.

The next defect pointed out by the tax authorities is that the purchase of machinery costing Rs.3,43,200/- was not proved by the assessee. As stated earlier, the assessing officer had issued notices to the supplier of the machinery during the course of assessment proceedings relating to AY 2003-04. The supplier, however, replied that he has not supplied any machinery to the assessee. With regard to the same, the assessee submitted that the AO had asked the supplier about the supplies made to the assessee’s personal name, whereas the machinery was purchased in the concern’s name M/s Master metals. This explanation of the assessee was not examined by the Ld CIT(A).

Since the machinery was held as not purchased, the tax authorities have taken the view that the assessee has not actually manufactured goods and hence the assessee was not eligible for deduction u/s 80IB of the Act. However, a perusal of the documents filed in paper book would show that the assessee has obtained permanent SSI certificate, which is normally given after commencement of production only that too after

Thus, we notice that the tax authorities have drawn adverse inference only on the basis of denial of supply of machinery to the assessee’s personal name by the supplier. In view of the over whelming evidences furnished by the assessee to support the claim of manufacture and sale of goods, we are of the view that the tax authorities are not justified in holding that the assessee was not manufacturing goods.

The assessee has furnished permanent SSI certificate and the labour register and hence the other deficiencies pointed out by the tax authorities are liable to be rejected. Accordingly, we set aside the order of Ld CIT(A) and direct the AO to allow the claim for deduction u/s 80IB of the Act to the assessee.

The next issue relates to the disallowance of interest expenditure on unsecured loan. This disallowance was made by following the decision taken by the AO for AY 2003-04. The Ld CIT(A) has also observed that there has been no fresh assessment in the set aside proceedings. However, he proceeded to examine this issue of genuineness of laons in AY 2004-05. However, there is no dispute with regard to the fact that the assessee had availed loans in the year relevant to AY 2003-04 and hence the disallowance of interest expenditure would depend upon the decision taken in AY 2003-04 on examination of loans in terms of sec. 68 of the 9 Act. Accordingly, we are of the view that the Ld CIT(A) was not justified in examining the loans in AY 2004-05, which were taken in AY 2003-04. Accordingly, we set aside his order on this issue. However, since the assessment order for AY 2003-04 was not passed, we are of the view that no adverse decision could be taken on this issue in AY 2004-05. Accordingly, we direct the AO to allow the interest claim.

The next issue relates to the disallowance of depreciation on the machinery purchase of Rs.3,43,200/-. We have noticed that the claim of purchase of machinery was rejected only on the ground that the supplier has denied supply of machinery in the name of assessee’s personal name. However, the assessee has furnished copies of bills, particulars of payment, the list of machineries approved under SSI Act etc. Further the assessee has manufactured goods by using the machineries and sold the same. The registration under Sales tax Act and Central Excise Act also shows that the assessee was furnishing necessary returns under those Act. The said In view of the evidences furnished by the assessee, we are of the view that there is no reason to suspect the purchase of machinery. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to allow the depreciation.

In the result, the appeal filed by the assessee is allowed.

DR, ITAT, Mumbai concerned गधर्ा पधईर / Guard file. 6. आदेशधनुसधय/ BY ORDER,सहधमक ऩंजीकधय (Asstt.