Commissioner Of Income Tax-Viii Appellantthrough: Mr. Kamal Sawhney, Senior Standingcounsel With Mr. Raghvendra K. Singh, Mr.shikhar Garg And Mr. Sharad Agarwal v. Bchanna Brothers

$~*IN THE HIGH COURT OF DELHI AT NEW DELHI18.+ITA 972/2015 COMMISSIONER OF INCOME TAX-VIII AppellantThrough: Mr. Kamal Sawhney, Senior Standingcounsel with Mr. Raghvendra K. Singh, Mr.Shikhar Garg and Mr. Sharad Agarwal, Advocates. versus 2a BCHANNA BROTHERS Respondent Through: Dr. Rakesh Gupta with Ms. PoonamAhuja and Mr. Rohit Kumar Gupta, Advocates. WITH ITA 967/2015 COMMISSIONER OF INCOME TAX-VIII AppellantThrough: Mr. Kamal Sawhney, Senior Standingcounsel with Mr. Raghvendra K. Singh, Mr.Shikhar Garg and Mr. Sharad Agarwal, Advocates. versus 4.+ KHANNA BROTHERS Respondent Through: Dr. Rakesh Gupta with Ms. PoonamAhuja and Mr. Rohit Kumar Gupta, Advocates. AND ITA 490/2015 PR. COMMISSIONER OF INCOME TAX-11 AppellantThrough: Mr. Rohit Madan, Senior Standingcounsel. Signature Not Verified ITA Nos.972, 967 & 490/2015 versus KHANNA BROTHERS Respondent Through: Dr. Rakesh Gupta with Ms. PoonamAhuja and Mr. Rohit Kumar Gupta, Advocates. CORAM:JUSTICE S. MURALIDHARJUSTICE RAJIV SHAKDHER ORDER%17.12.2015 CM No. 31181/2015 (for exemption! in ITA No. 972/2015 1. Exemption allowed subject to all just exceptions. 2. The application is disposed of. CM No. 31182/2015 (for condonation of delay in re-jBling the anpeaB inITA No. 972/2015 3. For the reasons stated in the application, the delay in re-filing the appealis condoned. 4. The application is disposed of. ITA Nos. 972/2015. 967/2015 & 490/2015 5. These are three appeals by the Revenue under Section 260A of theIncome Act, 1961 ('Act'). ITA Nos. 972 and 967 of 2015 are directedagainst the common order, dated 14^^ June 2013 passed by the Income TaxAppellate Tribunal ('ITAT') in ITA Nos. 397/Del/2010 and 2210/Del/2012for the Assessment Years ('AYs') 2006-07 and 2008-09 respectively. ITANos. 490 of 2015 is directed against the impugned order dated 13"^ February2015 passed by the ITAT in ITA No. 227/Del/2013 for the AY 2010-11. 6. The common question that is sought to be urged in three appeals concernsthe correctness of the order of the ITAT, upholding the order of theCommissioner of Income Tax (Appeals) ['CIT (A)'] holding that theAssessee was eligible to the deduction under Section 80IC of the Act anddeleting the disallowance ordered by the Assessing Officer (AO) for theAYs in question. 7. The facts leading to the filing of these appeals are that the Assessee,Khanna Brothers, is a partnership firm. The Assessee filed its return for theAY 2006-07 on 31®^ October 2006 declaring a total income of Rs. 24,17,034.The Assessee claimed deduction of Rs. 22,58,647.72 in the computation ofincome on account of net profit from the Agartala Branch (Tripura) of theAssessee. The Assessee submitted the profit and loss (P&L) account for theAgartala Branch for the period 1®^ April 2005 to 31®^ March 2006, thebalance sheet as on 31®^ March 2006 and the auditor's report in form Nos.3CD and lOCCB. The auditor's report certified that the Assessee's units didnot manufacture any article or thing specified in the 13^ Schedule. The dateof commencement of operation of the unit was 12'*^ July 2005. In the TaxAudit report in form No. 3 CD the business of the Assessee was described as'manufacturing and fabrication of steel structure'. The case was picked upfor scrutiny and notices under Sections 143 (2) and 143 (1) of the Act wereissued. 8. The Assessing Officer ('AO') in the assessment order dated 30^*"December 2008 noted that the AY 2006-07 was the first year in which claimfor deduction under Section 80IC of the Act had been made by the Assessee. 8. The Assessing Officer ('AO') in the assessment order dated 30^*"December 2008 noted that the AY 2006-07 was the first year in which claimfor deduction under Section 80IC of the Act had been made by the Assessee. In response to a query as to how it could claim to be a manufacturing unit,the Assessee submitted the purchase order dated 30^^ December 2004 issuedto it by M/s. Dharmpal Prem Chand Limited ('DPCL). The subject of thepurchase order was "fabrication, supply, shot blasting, painting and erectionof steel structures for picking line and HR coil storage building (G-H & H-1Boys) of our steel project at Agartala." It was further stated in the purchaseorder as under: "With reference to your offer and subsequent discussions with you on the above subject, we are pleased to place the order on you forfabrication, supply, shot blasting, painting and erection of 660 Ml +/-2% of Steel structures including roofing and wall cladding for PicklingLine and HR Coil Storage buildings of our steel project at Agartala. Thedetails of the building covered under your scope shallbe as follows : Total tonnage of 660 MT +/- 2% of fabricated steel structuresshall be sand/shot blasted and given two coats of epoxy primerand one coat of fmish plant prior to erection. The steel structuresshall be painted with one coat of finish paint after erection. Theentire work shall be executed strictly in conformity with theTechnical details as given at enclosed detail fabrication drawingsto be made available with you. The total fixed price for the scope of work mentioned above shall be Rs. 6.50 crores (Rupees Six Grores and Fifty lakhs only). The above mentioned price are on FOR site basis excluding Excise duty.Education Cess and Sales Tax (Inclusive of Freight and Transitinsurance). " 9. Before the AO, the Assessee contended that it had paid the requisiteexcise duty and that it was registered with the Central Excise Authorities formanufacturing of excisable goods. It was stated that the land/shed had beentaken from Tripura Industrial Development Corporation Limited in anotified industrial area. For the purpose of sales tax registration, the'business' was indicated as 'manufacturing'. The unit was also registeredunder the Factories Act as a steel manufacturer. It was claimed that thefabrication work was in fact done in the premises of the Assessee atAgartala. 10. The AO observed that that the tax auditor had not given any descriptionof finished goods as "no such article or thing manufactured or produced bythe Assessee could be ascertained." The AO referred to the decision of theSupreme Court in Commissioner of Income Tax v. N.C. Budhraja & Co.(1993) 204 ITR 412 (SC) and held that the fabrication work done by theAssessee and erected at the factory site of the contractee cannot be calledmanufacture. A reference was made to the decision of the Supreme Court inM/s. Builders Association of India v. Union of India (1994) 209 ITR 877(SC) where it was held that construction of a dam, building, bridge or roadand the like cannot be brought within the purview of the word 'article' or'thing' and therefore, investment allowance was not allowable under Section32 A of the Act. 11. Accordingly the AO added back to the income of the Assessee, for AY2006-07, the sum of Rs. 22,58,648 claimed as deduction under Section 80ICof the Act. 12. The Assessee then appealed before the CIT (A). By an order dated 27'^November 2009 while allowing the appeal of the Assessee, the CIT (A)disagreed' with the AO and held that the Assessee was engaged in'manufacture' of articles and was, therefore, eligible for deduction underSection 80IC of the Act. 11. Accordingly the AO added back to the income of the Assessee, for AY2006-07, the sum of Rs. 22,58,648 claimed as deduction under Section 80ICof the Act. 12. The Assessee then appealed before the CIT (A). By an order dated 27'^November 2009 while allowing the appeal of the Assessee, the CIT (A)disagreed' with the AO and held that the Assessee was engaged in'manufacture' of articles and was, therefore, eligible for deduction underSection 80IC of the Act. 13. The Assessee's return for AY 2008-09 was picked up for scrutiny andnotice under Section 143 (2) was issued on 6^^ August 2009. A referencewas made in the AO's order dated 31'^ December 2010 to the fact that on 9^^March 2010 a survey operation under Section 133 of the Act was conductedat the Faridabad, Chandigarh and Agartala branches of the Assessee. By thistime, the Chandigarh and Faridabad branches had been closed. During thecourse of the survey, the Assessee voluntarily offered undisclosed stock ofthe value of Rs. 1,01,17,491 for taxation. 14. In the order dated 31®' December 2010 for AY 2008-09, the AOconcluded that "during the course of survey operation, additional evidenceshave been gathered which prove that the Assessee was not a manufacturer ofcertain goods or articles which saleable independently in the open market,but it was mere a contractor for M/s. Dharampal Prem Chand Limited whowas establishing a Tobacco factory unit in Agartala." The AO accordinglyreached the same conclusion regarding ineligibility of the Assessee to claimdeduction under Section 80IC of the Act. 15. Aggrieved by the above order of the AO, the Assessee filed an appealbefore the CIT (A). By an order dated 30^^ January 2012 the CIT (A)allowed the Assessee's appeal by referring to the fact that survey operationhad been carried out on 9**^ March 2010 therein it was found that theAppellant had only two or three employees during the Financial Year ('FY')2006-07 and 2007-08 and there were only limited number of machinesfound at the factory which were no longer existed. On the issue of theAppellant being a manufacturer, the CIT (A) followed the order passed forthe earlier AY. The CIT (A) noted that the Assessee after procuring the rawmaterial had subjected it to various mechanical processes and transformedinto a 'something else'. Accordingly, it was held that the Assessee wasentitled to deduction under Section 80IC of the Act. 16. Against the above orders of the CIT (A) for the AYs 2006-07 and 2008-09, the Revenue filed appeals before the ITAT. By the impugned order dated14^*^ June 2013, the ITAT confirmed the order, of the CIT (A) and dismissedthe Revenue's appeals. 17. For AY 2010-11, a separate set of orders were passed by the AO and theCIT (A). The Revenue preferred another appeal before the ITAT, i.e., ITANo. 227/Del/2013. By the impugned order dated 13^^^ February 2015 theITAT followed its, earlier order and thereafter affirmed the order of the CIT(A). 18. The first issue that is required to be addressed is whether the Assesseeundertook any ma:nufacturing activities in the units at Agartala during the AYs in question. As noticed hereinbefore, the Assessee undertook the workof fabrication of steel for use by DPCL. Apart from fabrication, the workinvolved shot/sand blasting, painting and erection of the steel structures. Thedetailed fabrication drawings were provided by DPCL. 17. For AY 2010-11, a separate set of orders were passed by the AO and theCIT (A). The Revenue preferred another appeal before the ITAT, i.e., ITANo. 227/Del/2013. By the impugned order dated 13^^^ February 2015 theITAT followed its, earlier order and thereafter affirmed the order of the CIT(A). 18. The first issue that is required to be addressed is whether the Assesseeundertook any ma:nufacturing activities in the units at Agartala during the AYs in question. As noticed hereinbefore, the Assessee undertook the workof fabrication of steel for use by DPCL. Apart from fabrication, the workinvolved shot/sand blasting, painting and erection of the steel structures. Thedetailed fabrication drawings were provided by DPCL. 19. In Commissioner of Income Tax v. Beehive Engineering Co. & AlliedIndustries (P) Ltd. (1996) 221ITR 561 (AP), the Assessee was engaged inpurchasing MS angles, joints, channels, etc., cutting them into requiredsizes, thereafter welding, drilling the pieces with holes and fitting them withnuts, bolts etc., for manufacturing trusses. The question whether theAssessee was an industrial company within the meaning of Section 2 (7) (c)of the Finance Act, 1978 was answered in the affirmative by the AndhraPradesh High Court. It was held that "two things are clear, viz., (i) that for acompany to be an "industrial company" within the meaning of the abovesaid provision it is enough if the company is carrying on manufacturing ofgoods, and (ii) that the application of the Explanation would arise only in acase where the company is not mainly an industrial company; in such a case,if the income of that company from manufacture of goods exceeds 51 percent, it would be treated as industrial company." The decision in N.C.Budharaja {supra) was distinguished since in that case the question waswhether the construction of a dam in Orissa would be taken to bemanufacturing of an article or thing. The view taken by the Orissa HighCourt that the activity of constructing a dam was an industrial activity was,in those circumstances, reversed by the Supreme Court. The said decision is,therefore, distinguishable in its application to a situation where there is afinding of fact that a manufacturing activity is being carried out by an ^ Assessee. 20. As far as the present case is concerned, the fabrication of steel asundertaken by the Assessee, which involves several of the processes doesfall within the definition of 'manufacture' for the purposes of Section 80 ICof the Act. The decision in CIT v. Beehieve Engineering Co. {supra) fullysupports the case of the Assessee in this regard. 21. The question that next arises is whether during the AYs in question, itcould be said that the Assessee was in fact carrying out any manufacturingactivity in its units at Agartala? The case of the Revenue is that the CIT (A)and the ITAT failed to take note of the fact that a survey was undertaken on9^*^ March 2010 in which it transpired that the number of employees in theFinancial Years (FYs) 2006-07 and 2007-08 was three and in the FYs 2008-09 and 2009-10 it came down to two. The survey team found that one unitwas lying vacant covered with grass and shrubs with a deserted look and hadan old rusted shed. In the other unit some scrap materials like, angles, barsetc. were lying around in a scattered manner on the ground. The survey teamhad noted that unused corroded winch machines were lying in one comer ofthe compound. The question raised was whether it was possible toproduce/manufacture goods worth Rs. 8 crore in an FY with only threeregular employees and few machines. 22. The CIT (A) has, in his order for AY 2008-09, taken note of theexplanation offered by the Assessee that in one unit no work was beingcarried out for several years. As far as the second unit was concemed, the 22. The CIT (A) has, in his order for AY 2008-09, taken note of theexplanation offered by the Assessee that in one unit no work was beingcarried out for several years. As far as the second unit was concemed, the last order was completed sometime in July 2009 and thereafter no work wasdone. It was pointed out by the Assessee that this explained why the surveyteam in March 2010 did not find any manufacturing activity underway in thesaid unit. Further under Section 80IC of the Act, there was no requirementthat the Assessee had to directly employ a certain number of workers. In factthe manufacturing and fabrication work was done with the help of contractlabour and documents had been furnished to show that labour work chargesaggregating Rs. 1,66,17,876 was paid. The CIT (A), therefore, concluded inthe order dated SO^'' January 2012 that the Assessee had furnished adequateevidence of fabrication and assembly of the steel structure for the steelproject of DPCL at Agartala. 23. The ITAT has agreed with the factual findings of the CIT (A) for AY2008-09 in which there is an extensive discussion of the survey report. Thiswas followed for AY 2010-11. Therefore, it cannot be said that the ITATand the CIT (A) failed to take note of the survey report. 24. The Court finds that the Assessee furnished the requisite documents todemonstrate that it carried on the aforementioned manufacturing activity atits Agartala unit. The Assessee produced during the assessment proceedingsas well the appellate proceedings copies of the excise returns filed by itbefore the Central Excise authority at Agartala, the bills of machinery and ofraw material purchased, details of freight and cartage for purchase of rawmaterial, and details of job work paid. Documents to show that the Assesseepaid Rs. 1.66 crores for the fabrication work carried out with the help ofcontract labour were produced. Further, the documents of registration with the VAT, CST, Service Tax, and Central Excise Authorities were furnished.The Assessee also produced details of the rent paid to the Tripura IndustrialDevelopment Corporation Ltd., the bills of construction of the factory shedsand the details of payment of electricity charged to Tripura State ElectricityCorporation Ltd. The appellant has, produced the bills purchase of themachinery installed at the premises, comprising drilling machines, weldingmachines, motors, gas cutting machines.: air compressor, etc. It produceddetails and bills of purchase of raw material comprising nuts, bolts, rodsM.S. angles, channels, HR sheets metal etc. As rightly pointed out by theAssessee there was no requirement under Section 80 IC that the Assesseehad to employ 10 or more workers directly. In the circumstances thereappears to have been no justification for the AO to disallow the deductionunder Section 80IC of the Act for the AYs in question. 25. No substantial question of law arises for determination. 26. The appeals are dismissed but, in the facts and circumstances, with noorder as to costs. S. MURALIDHAR, J DECEMBER 17,2015 Rk RAJIV SHAKDHER, J