Commissioner Of Income Tax, Jaipur-Ii, Jaipur v. M/S. Manglam Arts, Govind Nagar, Amber Palace Road, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 6/2009 Commissioner of Income Tax, Jaipur-II, Jaipur ----Petitioner Versus M/s. Manglam Arts, Govind Nagar, Amber Palace Road, Jaipur ----Respondent _____________________________________________________ For Petitioner(s) : Mr. R.B. Mathur with Mr. K.D. MathurFor Respondent(s) : Mr. Sanjay Jhanwar with Ms. Archana _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGHJudgment 31/07/2017 By way of this appeal, the appellant has assailed thejudgment and order of the Tribunal whereby the Tribunal hasdismissed the appeal of the department. This court while admitting the matter framed the followingquestion of law:- “Whether in the facts and circumstances of thecase the ITAT was justified in law in allowing thedeductions u/s 80HHC to the assessee on thecounter sales to foreign tourists when the assesseehas failed to prove that the goods have undergonecustom clearance and whether such deduction canbe allowed u/s 80HHC in the light of explanation(aa) added with regard to counter sales withretrospective effect?” However, in view of the decision of this court in Income TaxAppeal No.25/2009 (Commissioner of Income Tax & Ors. vs. M/sManglam Arts & Ors.) decided on 14[th] February, 2017, wherein ithas been held as under:- “1. By way of these appeals, thedepartment has challenged the judgmentand order of the Tribunal whereby theTribunal in some of the matters hasdismissed the appeals of the department aswell as in some of the cases where crossobjections were filed by the assessee,dismissed the same. 2.This Court while admitting AppealNo.25/2009 on 11.04.2012 has framed thefollowing substantial question of law: “Whether in the fact and circumstances ofthe case the ITAT was justified in law indirecting to allow deduction u/s. 10BAinspite of the fact that the assessee was notfulfilling the conditions laid down in the Actfor claiming the said deduction?” 2.1. This Court while admitting AppealNo.2/2012 on 25.04.2012 has framed thefollowing substantial question of law: (i) “Whether in the facts and Circumstancesof the case, the ITAT was justified in holdingthat the assessee was eligible for exemptionu/s 10BA of the IT Act despite of the factthat the assessee was not fulfilling therequired conditions which was provedduring the course of survey proceedingsand was evident from the purchases madethrough form No. 17B of sales tax. (ii) Whether in the facts and circumstancesof law, the ITAT was justified in confirmingthe deletion of additions for depositing ESI& PF beyond the time prescribed withoutappreciating the provisions of section 36(1)(va) of the Act.” 2.2. This Court while admitting AppealNo.4/2012 on 25.04.2012 has framed thefollowing substantial question of law: i) “Whether in the facts and Circumstances of the case, the ITAT was justified in holdingthat the assessee was eligible for exemptionu/s 10BA of the IT Act despite of the factthat the assessee was not fulfilling therequired conditions which was provedduring the course of survey proceedingsand was evident from the purchases madethrough form No. 17B of sales tax. (ii) Whether in the facts and circumstancesof law, the ITAT was justified in confirmingthe deletion of additions for depositing ESI& PF beyond the time prescribed withoutappreciating the provisions of section 36(1)(va) of the Act.” 2.3. This Court while admitting AppealNo.17/2012 on 15.05.2012 has framed thefollowing substantial question of law: i) “Whether in the facts and Circumstances of the case, the ITAT was justified in holdingthat the assessee was eligible for exemptionu/s 10BA of the IT Act despite of the factthat the assessee was not fulfilling therequired conditions which was provedduring the course of survey proceedingsand was evident from the purchases madethrough form No. 17B of sales tax. (ii) Whether in the facts and circumstancesof law, the ITAT was justified in confirmingthe deletion of additions for depositing ESI& PF beyond the time prescribed withoutappreciating the provisions of section 36(1)(va) of the Act.” 2.3. This Court while admitting AppealNo.17/2012 on 15.05.2012 has framed thefollowing substantial question of law: (i) “Whether in the facts and Circumstancesof the case, the ITAT was justified in holdingthat the assessee was eligible for exemptionu/s 10BA of the IT Act despite of the factthat the assessee was not fulfilling therequired conditions which was provedduring the course of survey proceedingsand was evident from the purchases madethrough form No. 17B of sales tax. (ii) Whether in the facts and incircumstances of law, the ITAT was justifiedin confirming the findings of CIT (A) thatthe assesses was eligible for exemption u/s10BA of the IT Act, inspite of the fact thatthe goods exported were not manufacturedby the assesses which is the primarycondition for exemption u/s. 10BA.” 3.Mr. Mathur, while arguing for thedepartment has taken us to the order of theAssessing Officer and the CIT (A) andcontended that the tribunal has seriouslycommitted an error in dismissing theappeals preferred by the department up-holding the order of CIT (A) which haspartly allowed the appeal of the assesseeand modified the order of the assessingofficer. He has also taken us to theprovisions of Section 10BA which reads asunder: 10BA. Special provisions in respect ofexport of certain articles or things.- (1)Subject to the provisions of this section, adeduction of such profits and gains as are derived by an undertaking from the exportout of India of eligible articles or things,shall be allowed from the total income ofthe assessee : Provided that where in computing the totalincome of the undertaking for anyassessment year, deduction under section10A or section 10B has been claimed, theundertaking shall not be entitled to thededuction under this section : Provided further that no deduction underthis section shall be allowed to anyundertaking for the assessment yearbeginning on the 1st day of April, 2010 andsubsequent years. (2) This section applies to any undertakingwhich fulfils the following conditions,namely :— (a) it manufactures or produces the eligiblearticles or things without the use ofimported raw materials; (b) it is not formed by the splitting up, orthe reconstruction, of a business already inexistence : Provided that this condition shall not applyin respect of any undertaking which isformed as a result of the re-establishment,reconstruction or revival by the assessee ofthe business of any such undertaking as isreferred to in section 33B, in thecircumstances and within the periodspecified in that section; (c) it is not formed by the transfer to a newbusiness of machinery or plant previouslyused for any purpose. Explanation.—The provisions of Explanation1 and Explanation 2 to sub-section (2) ofsection 80-I shall apply for the purposes ofthis clause as they apply for the purposes ofclause (ii) of sub-section (2) of that section; (d) ninety per cent or more of its salesduring the previous year relevant to theassessment year are by way of exports ofthe eligible articles or things; (e) it employs twenty or more workersduring the previous year in the process ofmanufacture or production. (3) This section applies to the undertaking, (c) it is not formed by the transfer to a newbusiness of machinery or plant previouslyused for any purpose. Explanation.—The provisions of Explanation1 and Explanation 2 to sub-section (2) ofsection 80-I shall apply for the purposes ofthis clause as they apply for the purposes ofclause (ii) of sub-section (2) of that section; (d) ninety per cent or more of its salesduring the previous year relevant to theassessment year are by way of exports ofthe eligible articles or things; (e) it employs twenty or more workersduring the previous year in the process ofmanufacture or production. (3) This section applies to the undertaking, if the sale proceeds of the eligible articles orthings exported out of India are received inor brought into, India by the assessee inconvertible foreign exchange, within aperiod of six months from the end of theprevious year or, within such further periodas the competent authority may allow inthis behalf. Explanation.—For the purposes of this sub-section, the expression “competentauthority” means the Reserve Bank of Indiaor such other authority as is authorisedunder any law for the time being in force forregulating payments and dealings in foreignexchange. (4) For the purposes of sub-section (1), theprofits derived from export out of India ofthe eligible articles or things shall be theamount which bears to the profits of thebusiness of the undertaking, the sameproportion as the export turnover in respectof such articles or things bears to the totalturnover of the business carried on by theundertaking. (5) The deduction under sub-section (1)shall not be admissible, unless the assesseefurnishes in the prescribed form, along withthe return of income, the report of anaccountant, as defined in the Explanationbelow sub-section (2) of section 288,certifying that the deduction has beencorrectly claimed in accordance with theprovisions of this section. (6) Notwithstanding anything contained inany other provision of this Act, where adeduction is allowed under this section incomputing the total income of the assessee,no deduction shall be allowed under anyother section in respect of its export profits.(7) The provisions of sub-section (8) andsub-section (10) of section 80-IA shall, sofar as may be, apply in relation to theundertaking referred to in this section asthey apply for the purposes of theundertaking referred to in section 80-IA. Explanation.—For the purposes of thissection,— (a) “convertible foreign exchange” meansforeign exchange which is for the timebeing treated by the Reserve Bank of India as convertible foreign exchange for thepurposes of the Foreign ExchangeManagement Act, 1999 (42 of 1999), andany rules made thereunder or any othercorresponding law for the time being inforce; (b) “eligible articles or things” means allhand-made articles or things, which are ofartistic value and which requires the use ofwood as the main raw material; (c) “export turnover” means theconsideration in respect of export by theundertaking of eligible articles or thingsreceived in, or brought into, India by theassessee in convertible foreign exchange inaccordance with sub-section (3), but doesnot include freight, telecommunicationcharges or insurance attributable to thedelivery of the articles or things outsideIndia; (d) “export out of India” shall not includeany transaction by way of sale or otherwise,in a shop, emporium or any otherestablishment situate in India, not involvingclearance of any customs station as definedin the Customs Act, 1962 (52 of 1962).” (b) “eligible articles or things” means allhand-made articles or things, which are ofartistic value and which requires the use ofwood as the main raw material; (c) “export turnover” means theconsideration in respect of export by theundertaking of eligible articles or thingsreceived in, or brought into, India by theassessee in convertible foreign exchange inaccordance with sub-section (3), but doesnot include freight, telecommunicationcharges or insurance attributable to thedelivery of the articles or things outsideIndia; (d) “export out of India” shall not includeany transaction by way of sale or otherwise,in a shop, emporium or any otherestablishment situate in India, not involvingclearance of any customs station as definedin the Customs Act, 1962 (52 of 1962).” 4.He has contended that the word whichhas been used in the section ‘manufacturingor process’ is to be construed very strictlyand since it is an exemption, it should beequated with the provisions of Section 80Iwhich has been interpreted by the SupremeCourt in the case of Commissioner ofIncome-TaxVs.GemIndiaManufacturing Co.- (2001) 249 ITR 307,wherein it has been held as under: 4. The Tribunal took the view that it didbecause in "common parlance andcommercial sense raw diamonds are not thesame thing as polished and cut diamonds.The two are different entities in thecommercial world. Though the chemicalcomposition remains the same the physicalcharacteristics of shape and class, etc., aresubstantially different". It would appearthat no material had been placed on therecord before the Tribunal upon which itcould have reached the conclusions that,either in common or in commercialparlance, raw diamonds were not the samething as polished and cut diamonds, andthat they were different entities in the commercial world. An ipse dixit of theTribunal is not the best foundation for adecision. “5. The High Court, as aforestated,concluded that the case was covered by itsdecision in the case of CIT v. London StarDiamondCo.(I.)Ltd.:[1995]213ITR517(Bom) . It was notpointed out to the High Court that thequestion in that case was whether theassessee was an industrial company withinthe meaning of Section 2(8)of the FinanceAct, 1975, and that, in answering thatquestion, the High Court had held that rawdiamonds and cut and polished diamondswere different and distinct marketablecommodities having different uses ;therefore, a company engaged in cuttingand polishing raw diamonds for the purposeof export was engaged in the "processing ofgoods" to convert them into marketableform. The question that the High Court andwe are here concerned with is whether, incutting and polishing diamonds, theassessee manufactures or produces articlesor things. 6. There can be little difficulty in holdingthat the raw and uncut diamond issubjected to a process of cutting andpolishing which yields the polisheddiamond, but that is not to say that thepolished diamond is a new article or thingwhich is the result of manufacture orproduction. There is no material on therecord upon which such a conclusion can bereached. 7. The appeal is, therefore, allowed. Theorder under challenge is sot aside. Thequestion quoted above is answered in thenegative and in favour of the Revenue. Theassessee shall pay to the Revenue the costsof the appeal.” 5.He has contended that the view takenby the Tribunal is required to be reversed inview of the observations made by theSupreme Court. 6.Mr. Jhanwar, counsel for therespondent has taken us to the judgment ofthe Tribunal and contended that whileconsidering the process which has beenundertaken by the assessee, the Tribunalhas observed as under: “The various activities carried out by theappellant, are as under:- 7. The appeal is, therefore, allowed. Theorder under challenge is sot aside. Thequestion quoted above is answered in thenegative and in favour of the Revenue. Theassessee shall pay to the Revenue the costsof the appeal.” 5.He has contended that the view takenby the Tribunal is required to be reversed inview of the observations made by theSupreme Court. 6.Mr. Jhanwar, counsel for therespondent has taken us to the judgment ofthe Tribunal and contended that whileconsidering the process which has beenundertaken by the assessee, the Tribunalhas observed as under: “The various activities carried out by theappellant, are as under:- (i) Firstly, the appellant purchases wood,semi finished material which requiresfurther wood and other work ofbeautification and of artistic value. Thereapart, the other raw material, the woodenout of which is the main, and others i.e.grass, nails etc. are purchased. (ii) Thereafter various other items areadded depending upon the designs, size,quality of the subjected item to beexported, (iii) After purchasing the semi finishedgoods and raw material, as stated above,the very first step is to assemble the same,if so required. Some time the semi finishedfurniture is required to be given furthershape as per the desired exportabledesigns. (iv) Thereafter, punching is done byhammering nails by hand. It is pure labourwork which can be done by experts only. Itmay be noted that the nails are of specialtype having artistic and antique look. (v) Fitting of brass and iron items again with a view to give artistic and antique look. (vi) Filling and filing with a view tosmoothen the surface. (vii) Sanding (viii) Carving with a view to bring theartistic value and to show that these areantique items. (ix) And lastly polishing (x) Thereafter, various wooden items arefitted according to the need and design ofthe exportable wooden article, i.e. woodenmoulding is fitted Inlay is done.” 7.He contended that taking into consideration the observations made by theSupreme Court in the case of Income TaxOfficer, Udaipur Vs. Arihant Tiles andMarbles (P) Ltd.- (2010) 320 ITR 79(SC), the Supreme Court has observed asunder: “16. In the case of Aman Marble IndustriesPvt.Ltd.v. CollectorofCentralExcisereported in MANU/SC/0858/2003:157 ELT 393(SC), the question that arosefor consideration was whether cutting ofmarble blocks into marble slabs amountedto manufacture for the purposes of CentralExcise Act. At the outset, we may point outthat in the present case, we are not onlyconcerned with the word "manufacture",but we are also concerned with theconnotation of the word "production" inSection 80IAof the Income Tax Act, 1961,which, as stated herein-above, has a widermeaning as compared to the word"manufacture". Further, when one refers tothe word "production", it meansmanufacture plus something in additionthereto. The word "production" was notunder consideration before this Court in thecase of Aman Marble Industries Pvt. Ltd.(supra). Be that as it may, in that case, itwas held that "cutting" of marble blocksinto slabs per se did not amount to"manufacture". This conclusion was basedon the observations made by this Court inthe case of Rajasthan State ElectricityBoard (supra). In our view, the judgment ofthis Court in Aman Marble Industries Pvt.Ltd. (supra) also has no application to thefacts of the present case. One of the mostimportant reasons for saying so is that in allsuch cases, particularly under the Exciselaw, the Court has to go by the facts ofeach case. In each case one has to examinethe nature of the activity undertaken by anassessee. Mere extraction of stones maynot constitute manufacture. Similarly, afterextraction, if marble blocks are cut intoslabs per se will not amount to the activityof manufacture. 17. In the present case, we have extractedin detail the process undertaken by each ofthe respondents before us. In the presentcase, we are not concerned only withcutting of marble blocks into slabs. In thepresent case we are also concerned with the activity of polishing and ultimateconversion of blocks into polished slabs andtiles. What we find from the processindicated herein-above is that there arevarious stages through which the blockshave to go through before they becomepolished slabs and tiles. In thecircumstances, we are of the view that onthe facts of the cases in hand, there iscertainly an activity which will come in thecategory of "manufacture" or "production"under Section 80IAof the Income Tax Act.As stated herein- above, the judgment ofthis Court in Aman Marble Industries Pvt.Ltd. was not required to construe the word"production" in addition to the word"manufacture". One has to examine thescheme of the Act also while deciding thequestion as to whether the activityconstitutes manufacture or production.Therefore, looking to the nature of theactivity stepwise, we are of the view thatthe subject activity certainly constitutes"manufacture or production" in terms ofSection 80IA. In this connection, our view isalso fortified by the following judgments ofthis Court which have been fairly pointedout to us by learned Counsel appearing forthe Department. 18. In the case of Commissioner of IncomeTaxv. SesaGoaLtd. reportedin MANU/SC/1123/2004: 271 ITR 331(SC), the meaning of the word "production"came up for consideration. The questionwhich came before this Court was whetherthe ITAT was justified in holding that theassessee was entitled to deduction underSection 32Aof the Income Tax Act, 1961, inrespect of machinery used in mining activityignoring the fact that the assessee wasengaged in extraction and processing ofiron ore, not amounting to manufacture orproduction of any article or thing. The HighCourt in that case, while dismissing theappeal preferred by the Revenue, held thatextraction and processing of iron ore didnot amount to "manufacture". However, itcame to the conclusion that extraction ofiron ore and the various processes wouldinvolve "production" within the meaning ofSection 32A(2)(b)(iii)of the Income TaxAct, 1961 and consequently, the assesseewas entitled to the benefit of investmentallowance under Section32Aof the Income Tax Act. In that matter, it was argued onbehalf of the Revenue that extraction andprocessing of iron ore did not produce anynew product whereas it was argued onbehalf of the assessee that it did produce adistinct new product. The view expressedby the High Court that the activity inquestion constituted "production" has beenaffirmed by this Court in Sesa Goa's casesaying that the High Court's opinion wasunimpeachable. It was held by this Courtthat the word "production" is wider in ambitand it has a wider connotation than theword "manufacture". It was held that whileeverymanufacturecanconstituteproduction, every production did notamount to manufacture.” 8.He has contended that the word‘production’ is to be construed as a widermeaning than ‘manufacture’ and in view ofthe observations made by the SupremeCourt, the view taken by the Tribunal is justand proper. 9.Mr. Mathur has also contended thatregarding second issue with regard to ESIand PF, however, the same is covered bythe decision of this Court in the case ofCommissioner of Income Tax Vs. M/sState Bank of Bikaner & Jaipur- D.B.Income Tax Appeal No.177/2011decided on 06.01.2014 wherein it hasbeen held as under: “Thus, we are of the view that where the PFand/or EPF, CPF, GPF etc., if paid after thedue date under respective Act but beforefiling of the return of income under Section139(1), cannot be disallowed under Section43B or under Section 36(1)(va) of the ITAct.” 8.He has contended that the word‘production’ is to be construed as a widermeaning than ‘manufacture’ and in view ofthe observations made by the SupremeCourt, the view taken by the Tribunal is justand proper. 9.Mr. Mathur has also contended thatregarding second issue with regard to ESIand PF, however, the same is covered bythe decision of this Court in the case ofCommissioner of Income Tax Vs. M/sState Bank of Bikaner & Jaipur- D.B.Income Tax Appeal No.177/2011decided on 06.01.2014 wherein it hasbeen held as under: “Thus, we are of the view that where the PFand/or EPF, CPF, GPF etc., if paid after thedue date under respective Act but beforefiling of the return of income under Section139(1), cannot be disallowed under Section43B or under Section 36(1)(va) of the ITAct.” 10.However, SLP is pending against theaforesaid decision, therefore, both theparties will be bound by the decision of theSLP. 11.We have heard learned counsel for theparties. 12.In view of the observations made bythe Supreme court in the case of IncomeTax Officer, Udaipur Vs. Arihant Tilesand Marbles (P) Ltd. (supra), we are of the opinion that the process which has beenprescribed by the Tribunal in para 10 clearlycovers the process and will cover undersection 10BA. Therefore, in our view, theview taken by the Tribunal is just and properand no interference in the judgment of theTribunal is called for. The issue is answeredin favour of the assessee and against thedepartment. 13.The second issue is subject to decisionof the SLP. However, for the time being thesame is answered in favour of the assesseeand against the department. 14.All the appeals stand dismissed. In view of the above, the appeal stands dismissed. (INDERJEET SINGH),J. (K.S. JHAVERI),J. A.Sharma/