Ita/623/2007 Of The Commissioner Of Income Tax v. M/S Polyfex (India) Pvt., Ltd

IN THB HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 25 DAY OF FEBRUARY 2014 PRESENT THE HON'BLE MR.JUSTICE DILIP B.BHOSALE AND THE HON'BLE MR.JUSTICE B.MANOHAR ITA NO.623/2007 BBRITWRE 1. The Commissioner of Income-Tax,C.R.Building, Queens Road,Bangalore. 2. The Deputy Commissioner of Income-Tax,Central Circle -2 (1),C.R.Building, Queens Road,Bangalore.....Appellant(By Sri.K.V.Aravind, Advocate) AN): M/s. Polyfex (India) Pvt., Ltd.,No.116, Bommasandra Industrial Area,|Anekal Taluk,Bangalore — 560 099....Responden (By Sri.Kulkarni, Advocate for M/s.K.R.Prasad, Adv) This ITA filed u/S.260-A of I.T.Act, 1961 arisingOUToT order.dated16-03-2007.passed1NITA.No.994/Bang/2006 for the Assessment Year 2003-2004, praying that this Hon’ble Court may be pleased to 1.formulate the substantial questions of law|stated therein.stated therein. 11.allow the appeal and set aside the orderspassed by the ITAT, Bangalore in ITANo.994/Bang/2006 dated 16-03-2007 andconfirmthe.order.oT the AppellateCommissioner confirming order passed bythe Deputy Commissioner of Income Tax,Central Circle-2(2), Bangalore, in the interestof justice and equity.passed by the ITAT, Bangalore in ITANo.994/Bang/2006 dated 16-03-2007 andconfirmthe.order.oT the AppellateCommissioner confirming order passed bythe Deputy Commissioner of Income Tax,Central Circle-2(2), Bangalore, in the interestof justice and equity. This appeal coming on tor HEARING this day,the.courtdelivered the following: ORAL JUDGMENT (DILIP B BHOSALE.J) This income tax appeal is directed against theorder dated 16[th]March 2007 rendered by Income TaxAppellate Tribunal, (for short }the Tribunal’) in ITANo.994/Bang/2006 pertaining to the assessment year2003-04, whereby the Tribunal allowed the appeal filedby the assessee. The appeal before the Tribunal was_directed against the order passed by the Commissionerof Income Tax (Appeals)-VI (for short °the CIT(A)’) dated 08-11-2006. By this order, the CIT (A) confirmed theassessment order dated 14-03-2006 passed by theAssessing Authority. 2.|The substantial questions of law raised by the Revenue in this appeal read thus: 1.Whether the Tribunal was correct in holding|that the assessee’s claim for deduction|under Section SOIB of the Act is not hit by|the exception provided in Section SOIB(2)(it)|read with Schedule 11[th](Item 25) to the)Income-Tax Act, as polyutherim foam usedby the assessee in the manufacture of|automobile seat results in commercially|different product then that mentioned in the|IT[th]schedule?|that the assessee’s claim for deduction|under Section SOIB of the Act is not hit by|the exception provided in Section SOIB(2)(it)|read with Schedule 11[th](Item 25) to the)Income-Tax Act, as polyutherim foam usedby the assessee in the manufacture of|automobile seat results in commercially|different product then that mentioned in the|IT[th]schedule?| ? Whether the assessee is entitled to claim|deduction under Section SOIB of the Act in|respect of a product manufactured by it|which is listed in the 11[th]schedule of theIncome-Tax Act?deduction under Section SOIB of the Act in|respect of a product manufactured by it|which is listed in the 11[th]schedule of theIncome-Tax Act? 3.The very same question, though was not framed inso many words, was considered by the Tribunal,alongwith other questions. The Tribunal, answered thefirst question in favour of the assessee and against the ? Whether the assessee is entitled to claim|deduction under Section SOIB of the Act in|respect of a product manufactured by it|which is listed in the 11[th]schedule of theIncome-Tax Act?deduction under Section SOIB of the Act in|respect of a product manufactured by it|which is listed in the 11[th]schedule of theIncome-Tax Act? 3.The very same question, though was not framed inso many words, was considered by the Tribunal,alongwith other questions. The Tribunal, answered thefirst question in favour of the assessee and against the Revenue holding that it cannot be stated that theassessee is engaged in the manufacture or production of‘polyurethane foam’ (for short ‘the PT foam’). TheTribunal also held that one has to see the end productfor holding whether the industrial undertaking isentitled to deduction under Section 80O-IB(2)(i11) of theIncome Tax Act, 1961 (for short ‘the Act‘). Then theTribunal observed that the end product, in the presentcase, 1s commercially different from the item mentionedin the Eleventh Schedule and so observing granteddeduction under Section 80-IB of the Act. Further, theTribunal on the question whether the assessee is asmall Scale Industrial Undertaking remanded thematter to the Assessing Officer. This part of the order isnot challenged by the Revenue. Learned counselappearing for the Revenue fairly submitted that theyhave no objection for the order of remand passed by theTribunal to decide the issue of Small Scale Industry andwhether the assessee is entitled to the benefit otf deduction under Section. 80-IB of the Act claiming to bea Small Scale Industrial Undertaking.| a |The respondent-assessee filed its return of incomeOT]29-1] Q-JOOdeclaringthetotalincomeOT Rs.2,/73,90,293/-. The same was processed and takenup for scrutiny by issuing notice under Section 143(2) ofthe Act. In the course of assessment, it was noticed|that the assessee had claimed deduction under Section|80-IB to the extent of Rs.28,98,051/- i.e., 30% benefitavailable on Pune Unit as it was granted in the earlieryear. In the course of assessment, the ManagingDirector of the assessee was examined and on the basisof the materials placed by the assessee on record, theAssessingOfficerheldthat|during|therelevant.assessment year the assessee manufactured the PTfoam. In other words, the Assessing Officer held that.the claim of the assessee that they do not manufacturethe PT foam was just to claim benefit under Section 80- IB of the Act. The order of the Assessing Officer wasconfirmed by the CIT(A) and in the second appeal by theassessee, the Tribunal reversed the same. The relevantObservations made by the Tribunal find place inparagraph 12 of the order, which read thus: “12. As per section SOIB (2) (ut),deduction u/s.SOIB is not allowable tf the|industrialundertakingmanufactures:Orproduces an article or thing specified in theIT[th]- schedule. In the instant case, the|aSSCUWSSECCOIMlLDP1S manufacturingautomobile seats, in which poly urethane|foam along with other chemicals is also beingused. It cannot be said that industrialundertaking is engaged in the manufacture or production of poly urethane foam. Theassessee company received orders for the|supply of automobile seats. Under the sales-tax, the assessee is putting sales-tax on the|products styled as automobile seats for two.and four wheelers. One has to see the end|product for holding that the industrialsundertaking is entitled to deduction or not. In|theinstantCASEand.end.product1S|commerciallydifferentfromthe|itemmentioned in the 11[th]schedule. Therefore, thededuction u/s.8O0IB cannot be dented on theground that the assessee is manufacturing anitem listed in the 11[th]schedule.” 5section 8Q-IB(2)(111) 1s relevant for our purpose.This Section applies to any industrial undertakingwhich fulfills, insofar as the present appeal isconcerned, the condition that it manufactures orproduces any article or thing, not being any article orthing specified in the list in the Eleventh Schedule, inany part of India Provided that the condition in thisclause,1n relationTO asmallscale.industrialundertaking or an industrial undertaking referred to insub-section (4), shall apply as if the words “not beingany article or thing specified in the list in the Eleventhschedule” had been omitted. The remaining part of thisprovision is not relevant for our purpose. In theEleventh Schedule, we are concerned with Entry 29.which reads as follows: “Latex Foam, Sponge andPolyurethane foam”. 6. From bear perusal of clause (111) of sub-Section (2)of Section 8O0-IB read with Entry 25 in Eleventh ochedule, it is clear that if any industrial undertakingmanufactures or produces any article or thing, notbeing any article or thing specified in the list in theBleventhSchedule, 1S liable to be taxed. In other words,deductionas provided for under Section 80-IB is not.allowable if themanutactureror producer of any articleOTthing, manutacturesOTproducesthearticles mentioned in)Entry 25 in the Eleventh Schedule.It 18 1nthis backdrop, learned counsel appearing tor theRevenuesubmitted that what theasse€ssemanutacturesis the PI foam which is covered by Entry|25 in the!BKBleventh Scheduand are, therefore, not entitled for|deduction. He submitted that the Tribunal misdirected|itself and held that the.aSSecSSeis not engaged in.manufacture or production of the PI foam. In otherwords, he submitted that the Tribunal wrongly held thatthe end product i.e. automobile seats, is the productionot theaSSeSSee, and therefore, it is not covered by Entry|29. He submitted that the Tribunal lost sight of the fact that the assessee produces the PI foam or PT foam inthe shape of seats for different vehicles such as cars,two wheelers, auto rickshaws etc. TS|On the other hand, Mr.Kulkarni, learned counselappearing for the respondent-assessee submitted thatwhat is important for allowing the deduction undersection 80-IB is the end product and not raw materials.He submitted that the PI foam is used by the assesseeas a raw material for manufacturing seats, andtherefore, it cannot be stated that it is covered by Entry20 in the Eleventh Schedule. In support of hiscontention he placed reliance upon the _ followinjudgments: (i) COMMISSIONER OF INCOME-TAX v/s.M/s.VINBROS AND COMPANY (2012) 349 ITR 697 (SC);(1)COMMISSIONEROFINCOMB-TAXv/s.MALBOROUGH POLYCHEM P.LTD (2009) 309 ITR 43—(Raj);(i1)JCOMMISSIONEROFINCOMBE-TAXv/s. PRABHUDAS KISHORDAS TOBACCQ PRODUCTS P| LTD. (2006) 282 ITR 568 (Gu)}). 8S.In the present case, it is not in dispute that theassessee manufactures the PT foam in different shapesof automobile seats. Over and above, manutacturing/producing the PT foam in different shapes of seats theydo not carry on any further process in respect thereof.In other words the assessee manufactures/ produces thePT form, indifferent shapes of seats and do not make|or undertake any further process to change its originalcharacter as PI foam. It remains as PI foam. It is notthe case of assessee that after producing PI foam theycarryout any further process, to change its originalcharacter as PT foam. The Managing Director of theassessee in his evidence confirmed that with the use ofother components/ingredients, what they manufacture isPT foam, in the shapes as per theirrequirement.OneoT thequestionsthatC(" C(" put to the Managing Director and his reply to the same is relevant, which reads thus: “Q.2: Please state if the item producedconstitutes|polyurethanefoam.which1Sfurther added by other components to make aseat then why the item produced should; notbe stated to be covered in eleventh schedule|of Income-tax Act, 1961? C(" put to the Managing Director and his reply to the same is relevant, which reads thus: “Q.2: Please state if the item producedconstitutes|polyurethanefoam.which1Sfurther added by other components to make aseat then why the item produced should; notbe stated to be covered in eleventh schedule|of Income-tax Act, 1961? Ans: | am not conversant with Income-tax Act, 1961 so Icannot comment the legalityof it. I will consult the auditor and other|experts and furnish you the reply.” QO Though it was possible for the witness to state that they either add any other component or chemical tomake a seat from the PT toam, he simply answered thequestion that he is not conversant with the Act andtherefore cannot comment on the question. It is notdemonstrated before us or pointed out to us that apartfrom manufacturing the PT foam in different shapes ofautomobile seats, they carry on any further process soas to change its original character as “polyurethane foam“, What is required for seeking deduction under Section SQO-IB is that one should not manufacture orproduce any article or thing, not being any article orthing specified in the list in the Eleventh Schedule. —Having regard to the admitted position that the assessee_manutactures the PT foam, it cannot be stated that it isnot a part of the Eleventh Schedule. The Tribunal forno valid reason has recorded a finding that the assesseeis not engaged in the manufacture or production of thePT foam. We fail to understand as to why, in thepresent case, the end product could be calledcommercially different from the PI foam as mentionedin the KBleventh Schedule. The assessee is not involved|in any further process including stitching of seat covers. —It simply produces the PT foam seats which are used formaking end product to be fixed in different vehicles.Admittedly the assessee do not manutacture the endproduct, namely seats to be fixed in vehicles. 10.|The Hon’ble Supreme Court in VINBROS andCompany while considering the question whether on thefacts and in the circumstances of the case, the Tribunalwas right in holding that blending and bottling of IMFLwould amount to %manufacture’~ for the purpose of)claiming deduction under Section 80O-IB?. Whileconsidering the question, the Hon’ble Supreme Courtagreed with the decision of the Tribunal which observedthat the end product is totally different and iscommercially different commodity than the major inputrectified spirit which is not fit for human consumption.Hence, the changes made to the original product resultsin a new different commercial commodity which isrecognized as to in the trade. In our case, what theassessee manufactures is the foam in the shape of seatsand therefore it cannot be stated that new product withthe help of the PT foam comes into existence by anyprocess. Similar is the view taken by Guyjarath High 14 Court1n PRABHUDASKISHORDASTOBACCO.PRODUCTS P. LTD. 11.)Mr.Kulkarni, learned counsel appearing for theassessee also placed reliance upon the judgment ofRajasthan High Court in MALBOROUGH POLYCHEM P..LTD. in support of his contention that on two earlieroccasions, i.e. for the assessment years 1999-2000 and2001-2002, the benefit under Section 80-IB was givenTOtheaSSCSSEFEandtheretoretheprinciple|oT|consistency ought to be followed for the subsequentassessment years. With respect, we do not agree withthis view. In our opinion, if the Assessing Authority has.committed any error of law in allowing the deduction ontwo earlier occasions, it is not necessary that theyshould extend similar benefit in the subsequent yearsand allow the illegality to perpetuate. In our view, thesejudgments are of no avail to the respondent-assessee. 12.In the circumstances, we answer the first question in favour of the Revenue and against the assessee. The second question|aS|rightly|submitted by|Mr.K.V.Aravind, need not be answered since it overlapse with the first. In the result, the appeal is allowedwith no order as to costs. Sd/-.JUDGE Sd/-| JUDGE| “x mpk/