Ita/793/2009 Of Ace Manufacturing Systems Limited v. The Addl. Commissioner Of Income-Tax

1| IN THE HIGH COURT OF KARNATAKA, BENGALURUDATED THIS THE 2 DAY OF JUNE, 2015 PRESENT THE HON'BLBE MR.JUSTICK MOHAN M SHANTANAGOUDAR ANIL THR HON’BLE MR. JUSTICK ARAVIND KUMAR ITA NO.793 /200 BETWEEN: ACK MANUFACTURING SYSTEMS LIMITEDPLOT NO.467-469, 12 CROSS,$ PHASE, PEENYA INDUSTRIAL AREA,BENGALURU —-— 560 058(REPRESENTED BY MR.P.RAMADAS,MANAGING DIRECTOR) _ APPELLANT (BY SRIT.SURYANARAYANA FOR M/S.KING &|PARTRIDGE, ADVOCATE, AND: THE ADDL. COMMISSIONER OF|INCOME-TAX (LTU)JSS TOWERS, 100 FT. RING ROAD,BANSANKARI III STAGE, |BENGALURU —-— 560 O85 _ RBSPONDENT (BY SRI.K.V.ARAVIND, STANDING COUNSEL). THIS APPBAL IS FILED UNDER SBCTION 260-A OF.INCOME TAX ACT, 1961 PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW) STATEDTHREREIN AND ALLOW THERE APPEAL AND SEI ASITHR ORDER PASSED BY THR [TAT BANGALORE IN ITA|NO.257/BNG/2009,DATHD.31.07.2009,IN-THERINTEREST OF JUSTICE AND EQUITY. THIS APPBKBAL COMING ON FOR HRARING THIDAY,MOHAN M SHANTANAGOUDAR JDDELIVEREDTHERE FOLLOWING JUDGMENT This appeal is filed by the assessee seeking forsetting aside the order passed by the Income Tax|AppellateTribunaldated|31.07.2009|1nITANo.25/7/BNG/2009 under which the order of CIT-(A)came to be confirmed. | 2 |In this appeal we were called upon to| answer the following Substantial Questions of Law: (1)Whether the Tribunal wasright1nholdingthat|the.FinancialYear1994-95|relevant to Assessment Year1995-96|constitutedtheinitial Assessment Year andaccordingly, the appellant wasnotentitled|TO deductionunder Section SOIB tor theassessment year 2005-06?right1nholdingthat|the.FinancialYear1994-95|relevant to Assessment Year1995-96|constitutedtheinitial Assessment Year andaccordingly, the appellant wasnotentitled|TO deductionunder Section SOIB tor theassessment year 2005-06? ° 3.|The brief facts of the case are that the|assessee iS in the business of manutacturing ofmachine tools. Assessee — company came to be|incorporated in the year 1994 and it was registered|as a small scale industry. At about the end of 1994,the appellant had manufactured three _ verticaMachining Centres. Appellant participated in an_|exhibition viz., IMTEX-95 conducted by the Indian|Machine Tool Manutacturers Association held in New|Delhi during January-1995 and the three machines|were displayed at the exhibition. They were conferred|“Best Design” and “Best Exhibit” awards at the|exhibition. According to the appellant, the three|machines so manutactured were prototype. According|to the appellant, in order to have field trial being| 4 conducted, it sold said three machines to group|companies in March-1995. Two of the machines were.sold to Pragati Engineering Works and one was sold|to Ace Designers. It is the case of the appellant that|the purpose of sale to such group companies was|only to conduct field trial and to get feed back in|order to know the technical faults, if any in the|machines and to set right such defects. Thus,|according to the appellant, the manufacture of three|machines was for a trial production and same was.not in the nature of commercial production. 4Assessee filed its return of income forRs.12,46,00,990/- for the Assessment Year 2005-06|on 30.09.2005. The case was selected for scrutiny by issuingnoticeunderSection|143(2)dated17.10.2006, assessment order came to be passed|under Section 143(3) of the Act. The assessee was|asked to furnish details and in response, assessee. 5 filed details vide letters dated 11.10.2007 and|15.11.2007. | 5 |TheAaAsSsSEShadclaimedRs.9,34,00,426/- as deduction under Section S8OIB(3) of the Income Tax Act, 1961 and had enclosed|audit report in Form No.1OCCB as prescribed underRule 18BBB. The deduction had been computed at |30% of the profits and gains derived by the eligible|bUSINESSamounting|TO Rs.17,80,01,421/-. |According to the assessee, the initial Assessment|Year from which the deduction was being claimed is the Assessment Year 1996-97. 5 filed details vide letters dated 11.10.2007 and|15.11.2007. | 5 |TheAaAsSsSEShadclaimedRs.9,34,00,426/- as deduction under Section S8OIB(3) of the Income Tax Act, 1961 and had enclosed|audit report in Form No.1OCCB as prescribed underRule 18BBB. The deduction had been computed at |30% of the profits and gains derived by the eligible|bUSINESSamounting|TO Rs.17,80,01,421/-. |According to the assessee, the initial Assessment|Year from which the deduction was being claimed is the Assessment Year 1996-97. 6. According to assessee, as per Provisions otsection 8OIB (3) of the Income Tax Act, 1961, the|deduction under Section SOIB tor the industrial|undertaking shall be 30% of the profit derived from|the undertaking for a period of 10 consecutive years|beginning from the initial Assessment Year. Under| 6 section 8O0IB(14)(c)(i) the initial Assessment Year isdefined as the initial Assessment Year relevant to theprevious year in which the industrial undertaking|begins to manufacture or produce article on things. —It is not in dispute that the assessee had produced|three (3) machines in the Financial Year 1994-99|relevant to Assessment Year 1995-96. According to |assessee, the initial Assessment Year is 1996-97 and.deduction under Section 8OIB (3) would be available|to it for a period of ten (10) years from initial|Assessment Year 1.e., 1996-97 till the year ending|2005-06. The assessee was asked to justify the claimof deduction for the year ending 2005-06 vide letter|dated|29.10.2007..After|consideringthereplyfurnished by the assessee and rejecting the same, theAssessing Officer held that the initial Assessment|Year is 1995-96 and as such, assessee is not entitled|for Claiming adjudication under section 8OIB(3) of theActbypassing.theassessmentorder.dated T| 30.11.2007. Being aggrieved by the same, appeal|came to be filed before CIT(A) and Appellate Authorityby order dated 13.01.2009 dismissed the appeal filed|by the assessee. Assessee carried the matter further|in appeal before Income Tax Appellate Tribunal and|Tribunal by order dated 31.07.2009 dismissed the|appeal filed by the assessee and affirmed the order|passed by the CIT(A). Hence, this appeal under|section 260A has been filed by the assessee|contending interalia that the initial assessment year|is to be construed as 1996-97 and not 1995-96 and|has prayed for substantial question of law being|answered in its favour. [|The contention of the assessee is that the|production of machines during the Financial Year|1994-95 relevant to the Assessment Year 1995-96|was only on a trial basis and not on commercial|basis. In other words, the production of three (3)|machines according to assessee, was for trial| 8 PULTPOSscandnotforcommercial PUTpPpOscs.According to the assessee, even though there was a|demandfromoutsidecustomers|TO buythe.machines, it was decided to sell these three (3)|machines produced in the year 1994-95 to its group|companies only, to conduct field trials and also to get|feedback on its performance. Accordingly, one|machine of MCV-400 was sold to Ace Designers and|one machine each of MCV-400 and MCV-320 were|sold to M/s.Pragati Engineering Works. It is further|case of the assessee that the commercial production|was carried out only in the Financial Year 1995-96|because the first sale other than to group companies|was made in the December’ 1995. | 3.|Thus, the real question to be decided in|this appeal is, as to whether assessee had begun to manufacture or produce articles on commercial basis|1n theFinancialYear1994-95(relevant.TO Assessment Year 1995-96) or in the Financial Year| 9 1995-96 (relevant to Assessment Year 1996-97). As|aforementioned, according to assessee, though three|(3) machines were manutactured in January 1996,|all the three (3) were sold to its group companies in order to get feedback on performance in the month otfMarch’ 1995. Thus, according to the assessee the|production of three (3) machines in the Financial|Year 1994-95 was not on commercial basis but it wason trial basis. 3.|Thus, the real question to be decided in|this appeal is, as to whether assessee had begun to manufacture or produce articles on commercial basis|1n theFinancialYear1994-95(relevant.TO Assessment Year 1995-96) or in the Financial Year| 9 1995-96 (relevant to Assessment Year 1996-97). As|aforementioned, according to assessee, though three|(3) machines were manutactured in January 1996,|all the three (3) were sold to its group companies in order to get feedback on performance in the month otfMarch’ 1995. Thus, according to the assessee the|production of three (3) machines in the Financial|Year 1994-95 was not on commercial basis but it wason trial basis. OQ All the Authorities as well as Tribunal on)facts have concluded that the production of three (3)machines by the assessee in the Financial Year 1994-Q5 was on commercial basis and not on trial basis. 10.|ori.T.Suryanarayana,learnedAdvocateappearing on behalf of assessee taking us to the|entire material on record more particularly the|AnnualReportOT theAaAsSESSEsubmitsthat.manutlacturing of three (3) machines by the assessee 10 in the Financial Year 1994-95, was only for|conducting the field trials and not for commercial|purposes of selling the same to the outsiders. In thatview of the matter, all the three (3) machines which|were manufactured by the assessee were sold to the|esroup companies only, in order to conduct the fieldtrials and also to get feedback on performance. He|further submits that after getting the orders from|intending buyers and aiter rectifying the defects|found in the three (3) machines, actual production forcommercial purposes commenced in the Financial|Year 1995-96 (relevant to Assessment Year 1996-97)and therefore, assessee would be entitled to get the|benefit of 10 years as contemplated under Section|SOIB (3) of the Income Tax Act, 1961 from the|Assessment Year 1996-97 1.e., till 2005-06. 11.)Said.submissionsWETE|opposedby| ori.K.V.Aravind, learned panel Advocate appearing forIncome Tax contending that production of three (3)| machines by the assessee in the Financial Year 1994-95 was on commercial basis. Inasmuch as, all the.three (83) machines were sold to the group companies;before selling the machines to group companies, the|machines were exhibited in the exhibition held in|Pragati Maidan, New Delhi in the month of January ’1995 and there was tremendous response and praisefor the products manufactured by the assessee and|as there was lot of appreciation by the participants inrespect of compact product design and aesthetic view,the three (3) machines were sold to the group|companies. He further draws the attention of the|Court that at the time of exhibition itself, orders came|to be placed tor purchase of those machines by 12 intending purchasers and as such, assessee cannot|contend that machines exhibited was not for sale. He)further submits that instead of selling these three (3)machines to the group companies, the assessee|would have as well sold to other intending buyers| inasmuch as, there was tremendous response in the|exhibition itself and for its subsidiary companies|assessee sold those three (3) machines. Thus,|according to him the production has started in the|Financial Year 1994-95, relevant to the Assessment|Year 1995-96. 12.)It is not in dispute and as is clear from|the Annual Report 1994-95 of the assessee that the|production of machines started from the year 1994. |Thus, in a period of three months, the three (3)|machines were built and were displayed at IMTEX’ 995held from 15[<1]to 22[>9]January 1995 at PragatiMaidan, New Delhi. The Annual Report further|discloses that both products viz. MCV-400 and MCV-320 received tremendous appreciation in the IMTEX’|95 for its specifications, features and technical.innovativeness and lower price. Due to the same,MCV-320 won both the PMI CMTI Trust Award for|the “best design” and FIE Foundation Award as the| 12.)It is not in dispute and as is clear from|the Annual Report 1994-95 of the assessee that the|production of machines started from the year 1994. |Thus, in a period of three months, the three (3)|machines were built and were displayed at IMTEX’ 995held from 15[<1]to 22[>9]January 1995 at PragatiMaidan, New Delhi. The Annual Report further|discloses that both products viz. MCV-400 and MCV-320 received tremendous appreciation in the IMTEX’|95 for its specifications, features and technical.innovativeness and lower price. Due to the same,MCV-320 won both the PMI CMTI Trust Award for|the “best design” and FIE Foundation Award as the| “best|product”|displayed altIMTEX?O5.Undisputedly, the machines exhibited generated lot ofdemand. Even though there was demand from|outside customers to buy the machines from the|assessee, it was decided to sell these machines to its|SIOUDcompanies1.€.,.CO AceDesignersandM/s.Pragati Engineering Works. These machines|started working for 2 shifts per day continuously for|four months and working of the machines was to thesatistaction of the other customers. At the time of theexhibition itself the booking of machines took place.|several reputed customers like M/s.Widia_ (India)Limited, M/s.Technico, M/s. Hindustan Hyderabad,M/s.Hero Honda, M/s.Mico, M/s.Delta Corporation,|etc. were interested to buy the machines and as|such, they have placed orders. However, the|machines were launched in the market in the month|of August’ 1990. 14 13.|The assessee has shown the closing stock|of Rs.12,13,077/- including a closing work-in-progress of Machining Centre MCH-400 amounting toRs.3,94,643/- as on March’ 1995. The assessee has.also shown Rs.13,94,258/- as advance received from|Ace Designers and Technico Engineering. Thus, it is |evident that the so called prototypes manufactured|by the assessee were tested and sold commercially|during the Assessment Year 1995-96 itself. Merely|because the machines were sold to group companies,it cannot be said that the transaction is not'commercial. There is transfer of title in respect of|machines from the assessee to its group companies. —Admittedly,|theSTOUPcompanieswhich>hadpurchased the three (3) machines started making usSeof those machines and were earning profit. It is not|in dispute that those machines were working in 2|shifts per day continuously from the date of sale|without any technical problem. 15 14.|The learned Advocate appearing for the| assessee relied upon the following judgments: )2*Additional Commissioner of Income-Tax,|Madras-lII v. Southern Structurals Ltd. —Madras-lII v. Southern Structurals Ltd. — (19777110 ITR 164 )22*Commissioner of Income-Tax, Poona v.|Hindustan Antibiotics Ltd. —(1974) 93ITR 548Hindustan Antibiotics Ltd. —(1974) 93ITR 548 )222*Commissioner oft I[Income-lTax v. Fspecialities Ltd. —(1958) 156 ITR 790specialities Ltd. —(1958) 156 ITR 790 )2G*Commissioner of Income-lTax v. NestorPharmaceuticals Limited -'(2010) 322ITR 631Pharmaceuticals Limited -'(2010) 322ITR 631 )G*Metropolitansprings Pvt.Ltd.V.Commissioner of Income-Tax, (Central)|Bombay —|(1981)132 ITR 893Commissioner of Income-Tax, (Central)|Bombay —|(1981)132 ITR 893 )G2*Commissioner of Income-Tax v. Himalyan| Magnesite Ltd. —(2005) 276 ITR 56 assessee relied upon the following judgments: )2*Additional Commissioner of Income-Tax,|Madras-lII v. Southern Structurals Ltd. —Madras-lII v. Southern Structurals Ltd. — (19777110 ITR 164 )22*Commissioner of Income-Tax, Poona v.|Hindustan Antibiotics Ltd. —(1974) 93ITR 548Hindustan Antibiotics Ltd. —(1974) 93ITR 548 )222*Commissioner oft I[Income-lTax v. Fspecialities Ltd. —(1958) 156 ITR 790specialities Ltd. —(1958) 156 ITR 790 )2G*Commissioner of Income-lTax v. NestorPharmaceuticals Limited -'(2010) 322ITR 631Pharmaceuticals Limited -'(2010) 322ITR 631 )G*Metropolitansprings Pvt.Ltd.V.Commissioner of Income-Tax, (Central)|Bombay —|(1981)132 ITR 893Commissioner of Income-Tax, (Central)|Bombay —|(1981)132 ITR 893 )G2*Commissioner of Income-Tax v. Himalyan| Magnesite Ltd. —(2005) 276 ITR 56 to contend that the year of commercial production isrelevant and not the year wherein the products were|manufactured on trial basis. There cannot be any|dispute with regard to said proposition of law. A|provision in a statue must be interpreted with regard|being had to the object for which the section was|enacted namely with a view to encouraging the|establishment of new industrial undertakings by|eranting exemption from tax on profits derived from|such undertakings during the first ten years. We arealso clear in our mind that if the object is to give|exemption of tax, that presupposes that the real|object is that the profits are capable of being earned|by the company. If such be the object, then until theassessee-company reaches a stage where it is in a|position to decide that a final product, which could.ultimatelybesold1Nthemarket,couldbemanufactured or produced by it, it will be idle|formality to say that it had started manufacture or production of articles simply because trial products|are prepared with a view to verify whether they can|be ultimately used in preparation of final products. 15.In the matter on hand, even before the|products were sold to the group companies in the|month of March’ 1995, the machines were exhibited|in public at New Delhi. As aforementioned, there waslot of appreciation for the machines and in fact|during the exhibition, bookings took place. The|assessee could have as well sold the products to the.third parties viz. intending buyers. However, instead|of doing so, the assessee chose to sell the machines|to its group companies. Therefore, it cannot be said|that the machines were not available for sale. Merely|because the assessee has sold three (3) machines to its group companies, it cannot be said that there washhocommercialtransaction. In|noneoT|theaforementioned cases, relied upon by the assessee,| 18 there was a sale of the finished product for|consideration as is obtained in the facts on hand. | 16.|IntheCASEot COMMISSIONEROFINCOME-TAX, POONA V. HINDUSTAN ANTIBIOTICS|LTD.reported in.(1974) 93 ITR 548, there was arequirement in law that a “crude penicillin” producedby the assessee was to be tested either in USA or UK|for obtaining certificates as to their qualities. After|obtaining such certificates as to their qualities, the|assessee was permitted to produce the final productl.e., “Sterile penicillin”. In that regard the Bombay|High Court has ruled that the year of production otcrude penicillin cannot be the starting point. It is|only|attersterilepenicillinWaSproducedforcommercial purposes, the time starts to run. 1/.|IntheCASEot ADDITIONAL COMMISSIONER OF INCOME-TAX, MADRAS-II_ V.SOUTHERN STRUCTURALS LTD.reported in(1977) 16.|IntheCASEot COMMISSIONEROFINCOME-TAX, POONA V. HINDUSTAN ANTIBIOTICS|LTD.reported in.(1974) 93 ITR 548, there was arequirement in law that a “crude penicillin” producedby the assessee was to be tested either in USA or UK|for obtaining certificates as to their qualities. After|obtaining such certificates as to their qualities, the|assessee was permitted to produce the final productl.e., “Sterile penicillin”. In that regard the Bombay|High Court has ruled that the year of production otcrude penicillin cannot be the starting point. It is|only|attersterilepenicillinWaSproducedforcommercial purposes, the time starts to run. 1/.|IntheCASEot ADDITIONAL COMMISSIONER OF INCOME-TAX, MADRAS-II_ V.SOUTHERN STRUCTURALS LTD.reported in(1977) 110 ITR 164, there was a contract between the)assessee and the purchaser that the railway wagonsmanutiactured by the assessee were to be certified bythe relevant authority. In that regard, the prototype|wagons was manufactured by the assessee and was|sent for certification. After getting the certificate fromthe concerned, the production of railway wagons for|commercial purposes began. In that view of the|matter, the Madras High Court in the case of|southern Structural Ltd. concluded that the year ofproduction of the wagons for commercial purposes|would be the year on which the wagons were|manufactured aiter certification by the concerned. 18.|Be that as it may. As aforementioned in none of the judgments mentioned supra there was noelement of sale of the finished products by the|assessee. In the matter on hand, admittedly the three(3) machines were sold by the assessee, of course, to its group companies for consideration. Hence, it| cannot be said that the machines were manutacturedonly on trial basis and not for commercial purposes|in the Financial Year 1994-95 relevant to Assessment|Year 1995-96. | 19.|In that view of the matter, we do not find|any ground to interfere with the impugned orders.|The Substantial Questions of Law are answered|accordingly in favour of the revenue and against the|ASSECSSEE. Appeal stands dismissed. Sd/- JUDGE Sd/-| JUDGE