Commissioner Of Income Tax, Jaipur-Ii, Jaipur v. M/S. Rajdhani Crafts, Plot

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 662 / 2009 Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/s. Rajdhani Crafts, Plot No. 54-55, Shiv Vihar Colony, Opp.Power House, Road No.5, VKI Area Jaipur ----Respondent Connected With D.B. Income Tax Appeal No. 186 / 2011 Commissioner of Income Tax, Jaipur-II, Jaipur ----Appellant Versus M/s Rajdhani Crafts, Plot No. 54-55, Shiv Vihar Colony, Opp. Power House, Road No.5, VKI Area, Jaipur ----Respondent D.B. Income Tax Appeal No. 403 / 2011 Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/s. Rajdhani Crafts, Plot No. 54-55, Shiv Vihar Colony, Opp. Power House, Road No.5, VKI Area Jaipur ----Respondent D.B. Income Tax Appeal No. 142 / 2015 Principal Commissioner of Income Tax, Jaipur-2, Jaipur ----Appellant Versus M/s Sanklp International, F-944, Road No.14, VKI Area, Jaipur ----Respondent _____________________________________________________ For Appellant(s) : Mr. R.B. Mathur with Mr. K.D. Mathur, Mr. Prateek Kedawat For Respondent(s) : Mr. Ajay Gupta _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGHJudgment 02/08/2017 1. In all these appeals common question of law and facts areinvolved hence they are decided by this common judgment. 2.By way of these appeals, the appellant have assailed thejudgment and order of the Tribunal whereby tribunal hasdismissed the appeal of the department and allowed the appeal ofthe assessee in appeal no.662/2009, in appeal no.186/2011 theappeal of the department was dismissed, in appeal no.403/2011,the appeal of the department was dismissed and assessee wasallowed and in appeal no.142/2015, the appeal of the departmentwas dismissed. 3.This court while admitting the appeals framed followingsubstantial questions of law:- 3.1Appeal No.662/2009 admitted on 26.2.2010 “Whether the assessee can claim the benefit ofSection 10BA of the IT Act when it is notfulfilling the required conditions of theaforesaid provisions, more specially to showthat it is manufacturing eligible articles asprovided u/s 10 BA explanation (b).” 3.2Appeal No.186/2011 admitted on 29.8.2012 “Whether in the facts and in circumstances ofthe case, the ITAT was justified in law inallowing exemption u/s 10B of the Act to theassessee despite of the facts that the condition laid down for the same are notsatified and fulfilled by the assessee.” 3.3Appeal No.403/2011 admitted on 21.12.2011 “Whether in the facts and in circumstances ofthe case, the ITAT was justified in law inholding that the assessee was eligible forexemption u/s 10BA of the IT Act despite ofthe fact that the assessee was not fulfilling therequired conditions.” 3.4Appeal No.142/2015 admitted on 26.9.2016 “Whether in the facts and circumstances of thecase the ITAT was justified in law in directing toallow deduction u/s 10BA despite of the factthat the assessee was not fulfilling theconditions laid down in the Act for claiming thesaid deduction.” 4.Counsel for the appellant Mr. Mathur has taken us to the order of the Tribunal which reads as under:- condition laid down for the same are notsatified and fulfilled by the assessee.” 3.3Appeal No.403/2011 admitted on 21.12.2011 “Whether in the facts and in circumstances ofthe case, the ITAT was justified in law inholding that the assessee was eligible forexemption u/s 10BA of the IT Act despite ofthe fact that the assessee was not fulfilling therequired conditions.” 3.4Appeal No.142/2015 admitted on 26.9.2016 “Whether in the facts and circumstances of thecase the ITAT was justified in law in directing toallow deduction u/s 10BA despite of the factthat the assessee was not fulfilling theconditions laid down in the Act for claiming thesaid deduction.” 4.Counsel for the appellant Mr. Mathur has taken us to the order of the Tribunal which reads as under:- “6 We have heard the rival contentions andperused the facts of the case. The assessee firmwas constituted on 22-8-2000. There is nothingon record whether the first year ofcommencement of business was assessment year2000-01 or not. From the perusal of the recordand various submissions, it appears that the firstassessment in the case of the assessee is for theassessment year 2001-02. The ld Counsel for theassessee Shri HM Singhvi has pointed out theassessment made u/s 143(3). From theassessment year 2001-02 and 2003-04 where ithas been accepted by the Department in theassessment orders that the assessee is engagedin the manufacturing and export of woodenhandicraft items. Though the assessee wasentitled to deduction us 80IB for the assessmentyear 2000-01 to assessment year 2003-04 yet itwas not claimed since the assessee had claimeddeduction u/s 80HHC upto the assessment year2003-04 and has claimed the deduction u/s 10BAin view of the newly inserted Provisions ofFinance Act, 2003 we.f. assessment year 2004-05. As per Section 10BA of the Act, 5 conditionshave to be satisfied The first condition is that theassessee manufactures or produces eligiblearticles or things without the use of imported rawmaterial. This is not the issue before any of the authorities below and before us, As regards thesecond condition, the undertaking of theassessee is not formed by splitting up orreconstruction, of a business already in existenceand third condition is that it is not formed by thetransfer to a new business of machinery or plantpreviously used for any purpose. The conditionno. 4 is that ninety per cent or more of its salesduring the previous year relevant to theassessment year are by way of exports of theeligible articles or things. The AO in his orderobserved that the assessee is using various typesof electrical run machines for the manufacture ofvarious furniture items and even a singlehandmade item has been used. The items foundare utility items. In this respect, it has beensubmitted by the ld AR Shri HM Singhvi,hereinbefore that the assessee purchased goodsas logs, beams, cans, off cut and then seasoningof the wooden is got done which is cut indifferent sizes as per export order. Thereafter, thegrinding, turning and clamping is done with thehelp of the tools which has been named by theAO as machines for the purpose of manufacturingof items manufactured by the assessee. It is onlythe ground work which has to be donemanufactured with the help of the tools/smallmachines though electrically operated and thereis no prohibition by the statute provided u/s10BA of the Act. It was also submitted andavailable on record that the main work likepunching, special branded nails made ofbrass/iron having artistic and antique look,caring, moulding, designing ornamental work,fitting of brass and iron items and making ofJallis of different sizes and designs, polishing isdone by hand by the skilled labourers and theartists. Thereafter, the coating is done bychemical by the spray machine. All these itemsmade of wood are pieces of art and decorationand having artistic value and cannot be said tobe a utility items. The item is used by thecustomer but having the artistic value accordingto the likes of the buyer. The artistic and carvingwork of different type and polishing done by theartist is to make the product decorative andbeautiful. The assessee has been recognized bythe Department of Handicraft Export Council ofIndia,CentralExciseDepartment,Industries Department, Sales Tax Department asmanufacturer of wooden handicraft items andwooden handmade items having the artistic value and exports are made to the diverse buyers likeEurope, USA, Japan, Australia etc. The goods areexported after appraisal and clearance by thecustom authorities. The Photostat copies of theexport invoices are on record mentioning theitems as artistic India wooden handicraft. Suchitems as argued may not appear to be artistic tothe AO but they are artistic to the foreign buryersbeing decorative. Nothing has been brought onrecord that such items are not of the artisticvalue which is the basic condition in Section10BA of the Act. In such circumstances and factsof the case, we are of the view that the itemsproduced are eligible for deduction u/s 10BA ofthe Act. The undertaking of the assessee is notformed by splitting up or reconstruction of thebusiness already in existence and also notformed by transfer of business, machine or plantpreviously used for any purposes. Since theassessee firm constituted on 28-2-2000 and asper record has commenced the production fromthe assessment year 2001-02 of the same itemsi.e. wooden handicraft items. This is evident fromthe assessment order for the assessment year2001-02 and 2003-04 u/s 143(3) (PB 96 to 112).Section 10BA of the Act does not provide thatonly new firm after introduction of Section canavail the exemption i.e, no cut off period forformation of undertaking is specified u/s 10BA ofthe Act whereas Section 10A, 10B, 80, 80IA,80IB, 80IC provided for certain specific periodi.e. the day on which manufacturing is startedand deduction is made available oncertainpercentage of profits as provided in suchsections. Moreover, Shri H.M. Singhvi, CA hasalso invited our attention to the CBDT circularNo. 01/2005 regarding tax holiday u/s 10B of theAct to the 100% EOU which clarifies that anundertaking set up in Domestic Tariff Area andderiving profit from export of articles or things orcomputer software manufactured or produced byit which is subsequently converted into EOU shallbe eligible for deduction u/s 10BA of the Act ongetting the approval as 100% EOU. However, thededuction shall be available for remaining periodof ten consecutive assessment years from theyear in which it has got approval as 100% EOU.On the same analogy, the deduction u/s 10B isallowable, it has been argued by the ld. AR ShriHM Singhvi, CA. It was also argued thatemployees/workers were employed prior toSection l0BA does not mean that unit has been formed by reconstruction of earlier business. Weare convinced with the arguments made by theld. AR that the present unit is not formed bysplitting up or reconstruction by transfer ofmachinery or plant previously used for anypurposes. The AO has also objected to the wagesexpenditure claimed by the assessee is notverifiable. The assessee submitted that the a fireoccurred in the factory premises of the assesseeon 16-4-2005 which is also mentioned at page 12of the AO's order and therefore, such record ofthe wages could not be produced. The assesseesubmitted the comparative figures of the wagesand books of account are audited and the tradingand profit and loss account of the precedingyears and the order in dispute was on record andboth the years accounts are audited understatute. Therefore, in view of the decision ofHon'ble Delhi High Court in the case of ACIT VsJay Engg Works, 113, ITR 389, supra where ithas been held that where the original books ofaccount have been destroyed in fire, the Tribunalcould rely upon the other materials consisting ofauditor's report from which it could be inferredthat deductions were properly supported by therelevant entries in the books of account. The ld.AR has also relied upon the decision onallowability of section 10B of the Act and ITATJaipur bench decision in the case of DCIT vs.Manglam Arts (ITA No. 815/JP/07 dated 20-6-2008) and Goverdhan Prasad Singhal vs. I.T.O.(ITA No. 200/JP/08 dated 24-10-2008). In suchcircumstances and facts of the case and ourfindings mentoned hereinbefore and the decisionof various courts of law relied upon by the ld. ARof the assessee, we are of the view that theassessee is eligible for deduction us 10BA of theAct. Therefore, the assessee in the present factsof the case satisfies the conditions No. 2, 3 and 4as provided in Section 10BA of the Act. Asregards the condition no. 5 for employment ormore workers, there is no dispute before us.Therefore, in such circumstances and facts of thethe assessee is eligible for deduction u/s 10BA ofthe Act. As per Section 10BA(6) of the Act wherea deduction is allowed under this Section, nodeduction is allowed under any other section i.e.80HHC in respect of its export profit as directedby the ld. CIT (A). Thus Ground No. 1 of theassessee is allowed and Ground No. 1 of theRevenue is dismissed. Ground No. 2 of the assessee: The ld. CIT (A)has erred in confirming the action of the AO indisallowance to the extent of Rs 40,000/- madeby the AO on adhoc basis out of themanufacturing expenses, office expenses,administrative expenses and selling andforwarding expenses. Ground No. 2 of the Revenue: The ld. CIT (A) haserred in allowing relief of Rs. 48,40,968/- onaccount of various expenses.” 4.1 He contended that the tribunal has wrongly followed the decision in DCIT vs. Manglam Arts (ITA No.815/JP/07 dt.20.6.2008) and Goverdhan Prasad Singhal vs. ITO (ITANo.200/JP/08 dt. 24.10.2008) though condition no.2,3 & 4 are notfulfilled. 4.2Mr. Mathur has taken us to the evidence and contended that condition as required under Section 10BA is that the unit is notformed by splitting up or the reconstruction of the businessalready in existence and since the said condition is not fulfilled,therefore the assessee is not entitled for exemption u/s 10BA. 4.3Taking into account the judgment which sought to be reliedby the tribunal in Manglam Arts and other judgment have beenconfirmed by this court in tax appeal no.25/2009 decided on14.2.2017 wherein after considering evidence on record, this courtheld as under:- decision in DCIT vs. Manglam Arts (ITA No.815/JP/07 dt.20.6.2008) and Goverdhan Prasad Singhal vs. ITO (ITANo.200/JP/08 dt. 24.10.2008) though condition no.2,3 & 4 are notfulfilled. 4.2Mr. Mathur has taken us to the evidence and contended that condition as required under Section 10BA is that the unit is notformed by splitting up or the reconstruction of the businessalready in existence and since the said condition is not fulfilled,therefore the assessee is not entitled for exemption u/s 10BA. 4.3Taking into account the judgment which sought to be reliedby the tribunal in Manglam Arts and other judgment have beenconfirmed by this court in tax appeal no.25/2009 decided on14.2.2017 wherein after considering evidence on record, this courtheld as under:- “6. Mr. Jhanwar, counsel for the respondent hastaken us to the judgment of the Tribunal andcontended that while considering the processwhich has been undertaken by the assessee, theTribunal has observed as under:taken us to the judgment of the Tribunal andcontended that while considering the processwhich has been undertaken by the assessee, theTribunal has observed as under: “The various activities carried out by theappellant, are as under:- (i) Firstly, the appellant purchases wood, semifinished material which requires further wood andother work of beautification and of artistic value.There apart, 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 are addeddepending upon the designs, size, quality of thesubjected item to be exported, (iii) After purchasing the semi finished goods andraw material, as stated above, the very first stepis to assemble the same, if so required. Sometime the semi finished furniture is required to begiven further shape as per the desired exportabledesigns. (iv) Thereafter, punching is done by hammeringnails by hand. It is pure labour work which can bedone by experts only. It may be noted that thenails are of special type having artistic andantique look. (v) Fitting of brass and iron items again with aview to give artistic and antique look. (vi) Filling and filing with a view to smoothen thesurface. (vii) Sanding (viii) Carving with a view to bring the artisticvalue and to show that these are antique items. (ix) And lastly polishing (x) Thereafter, various wooden items are fittedaccording to the need and design of theexportable wooden article, i.e. wooden mouldingis fitted Inlay is done. ” 7. He contended that taking into considerationthe observations made by the Supreme Court inthe case of Income Tax Officer, Udaipur Vs.Arihant Tiles and Marbles (P) Ltd.- (2010) 320 ITR79 (SC), the Supreme Court has observed asunder: “16. In the case of Aman Marble Industries Pvt.Ltd. v. Collector of Central Excise reported inMANU/SC/0858/2003 : 157 ELT 393(SC), thequestion that arose for consideration was whether (vii) Sanding (viii) Carving with a view to bring the artisticvalue and to show that these are antique items. (ix) And lastly polishing (x) Thereafter, various wooden items are fittedaccording to the need and design of theexportable wooden article, i.e. wooden mouldingis fitted Inlay is done. ” 7. He contended that taking into considerationthe observations made by the Supreme Court inthe case of Income Tax Officer, Udaipur Vs.Arihant Tiles and Marbles (P) Ltd.- (2010) 320 ITR79 (SC), the Supreme Court has observed asunder: “16. In the case of Aman Marble Industries Pvt.Ltd. v. Collector of Central Excise reported inMANU/SC/0858/2003 : 157 ELT 393(SC), thequestion that arose for consideration was whether cutting of marble blocks into marble slabsamounted to manufacture for the purposes ofCentral Excise Act. At the outset, we may pointout that in the present case, we are not onlyconcerned with the word "manufacture", but weare also concerned with the connotation of theword "production" in Section 80IA of the IncomeTax Act, 1961, which, as stated herein-above, hasa wider meaning as compared to the word"manufacture". Further, when one refers to theword "production", it means manufacture plussomething in addition thereto. The word"production" was not under consideration beforethis Court in the case of Aman Marble IndustriesPvt. Ltd. (supra). Be that as it may, in that case,it was held that "cutting" of marble blocks intoslabs per se did not amount to "manufacture".This conclusion was based on the observationsmade by this Court in the case of Rajasthan StateElectricity Board (supra). In our view, thejudgment of this Court in Aman Marble IndustriesPvt. Ltd. (supra) also has no application to thefacts of the present case. One of the mostimportant reasons for saying so is that in all suchcases, particularly under the Excise law, the Courthas to go by the facts of each case. In each caseone has to examine the nature of the activityundertaken by an assessee. Mere extraction ofstones may not constitute manufacture. Similarly,after extraction, if marble blocks are cut into slabsper se will not amount to the activity ofmanufacture. 17. In the present case, we have extracted indetail the process undertaken by each of therespondents before us. In the present case, weare not concerned only with cutting of marbleblocks into slabs. In the present case we are alsoconcerned with the activity of polishing andultimate conversion of blocks into polished slabsand tiles. What we find from the process indicatedherein-above is that there are various stagesthrough which the blocks have to go throughbefore they become polished slabs and tiles. Inthe circumstances, we are of the view that on thefacts of the cases in hand, there is certainly anactivity which will come in the category of"manufacture" or "production" under Section 80IAof the Income Tax Act. As stated herein- above,the judgment of this Court in Aman MarbleIndustries Pvt. Ltd. was not required to construethe word "production" in addition to the word "manufacture". One has to examine the schemeof the Act also while deciding the question as towhether the activity constitutes manufacture orproduction. Therefore, looking to the nature of theactivity stepwise, we are of the view that thesubject activity certainly constitutes "manufactureor production" in terms of Section 80IA. In thisconnection, our view is also fortified by thefollowing judgments of this Court which havebeen fairly pointed out to us by learned Counselappearing for the Department. "manufacture". One has to examine the schemeof the Act also while deciding the question as towhether the activity constitutes manufacture orproduction. Therefore, looking to the nature of theactivity stepwise, we are of the view that thesubject activity certainly constitutes "manufactureor production" in terms of Section 80IA. In thisconnection, our view is also fortified by thefollowing judgments of this Court which havebeen fairly pointed out to us by learned Counselappearing for the Department. 18. In the case of Commissioner of Income Tax v.Sesa Goa Ltd. reported in MANU/SC/1123/2004 :271 ITR 331 (SC), the meaning of the word"production" came up for consideration. Thequestion which came before this Court waswhether the ITAT was justified in holding that theassessee was entitled to deduction under Section32A of the Income Tax Act, 1961, in respect ofmachinery used in mining activity ignoring thefact that the assessee was engaged in extractionand processing of iron ore, not amounting tomanufacture or production of any article or thing.The High Court in that case, while dismissing theappeal preferred by the Revenue, held thatextraction and processing of iron ore did notamount to "manufacture". However, it came tothe conclusion that extraction of iron ore and thevarious processes would involve "production"within the meaning of Section 32A(2)(b)(iii) of theIncome Tax Act, 1961 and consequently, theassessee was entitled to the benefit of investmentallowance under Section 32A of the Income TaxAct. In that matter, it was argued on behalf of theRevenue that extraction and processing of ironore did not produce any new product whereas itwas argued on behalf of the assessee that it didproduce a distinct new product. The viewexpressed by the High Court that the activity inquestion constituted "production" has beenaffirmed by this Court in Sesa Goa's case sayingthat the High Court's opinion was unimpeachable.It was held by this Court that the word"production" is wider in ambit and it has a widerconnotation than the word "manufacture". It washeld that while every manufacture can constituteproduction, every production did not amount tomanufacture.” 8. He has contended that the word ‘production’ isto be construed as a wider meaning than‘manufacture’ and in view of the observations made by the Supreme Court, the view taken bythe Tribunal is just and proper. 9. Mr. Mathur has also contended that regardingsecond issue with regard to ESI and PF, however,the same is covered by the decision of this Courtin the case of Commissioner of Income Tax Vs.M/s State Bank of Bikaner & Jaipur- D.B. IncomeTax Appeal No.177/2011 decided on 06.01.2014wherein it has been held as under: “Thus, we areof the view that where the PF and/or EPF, CPF,GPF etc., if paid after the due date underrespective Act but before filing of the return ofincome under Section 139(1), cannot bedisallowed under Section 43B or under Section36(1)(va) of the IT Act.” 12. In view of the observations made by theSupreme court in the case of Income Tax Officer,Udaipur Vs. Arihant Tiles and Marbles (P) Ltd.(supra), we are of the opinion that the processwhich has been prescribed by the Tribunal in para10 clearly covers the process and will cover undersection 10BA. Therefore, in our view, the viewtaken by the Tribunal is just and proper and nointerference in the judgment of the Tribunal iscalled for. The issue is answered in favour of theassessee and against the department.” 5.In that view of the matter, the issue is answered in favour of the assesee and against the department. The appeals stand dismissed. A copy of this judgment be placed in each file. (INDERJEET SINGH)J. (K.S.JHAVERI)J. Brijesh 141-144.