Itta/206/2006 Of The Commissisoner Of Income Tax-Iii, Hyderabad v. M/S. Srinivasa Cystine Limited

IN THE HIGH COURT FOR THE STATE OF TELANGANAAT HYDERABAD WEDNESDAY,THE FOURTEENTH DAY OF DECEMBERTWO IHOUSAND AND TWENTY TWO PRESENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYANANDTHE HON'BLE SRI JUSTICE C.V. BHASKAR REDDY INCOME TAX TRIBUNAL APPEA,L NO: 206 OF 2006 Appeal Under Section 260A of the lncome Tax Act 1961 against theorder dated 29-07-2005 in ITA No. 3401 Hydl 2001 ( Asst. Year 1997-98 ) on thefile of the lncome Tax Appellate Tribunal, Hyderabad Bench - B, Hyderabadorder dated 29-07-2005 in ITA No. 3401 Hydl 2001 ( Asst. Year 1997-98 ) on thefile of the lncome Tax Appellate Tribunal, Hyderabad Bench - B, Hyderabadpreferred against the order of the Commissioner of lncome Tax ( Appeals)Vijayawada dated 08-02-2001 in ITA No. 148/ JCSR 4l HYdl CIT (A) MA IVijayawada dated 08-02-2001 in ITA No. 148/ JCSR 4l HYdl CIT (A) MA I2000-01 Old ITA No. 15/ JCSR 4/ CIT (A) ll / 2000-01 preferred against the orderof the Joint Commissioner of lncome Tax ( Assts )., Special Range -4 ,Hyderabad dated 31/03/2000 in PAN / GIR No. -134.of the Joint Commissioner of lncome Tax ( Assts )., Special Range -4 ,Hyderabad dated 31/03/2000 in PAN / GIR No. -134. Between: ...APPELLANT The Commissioner Of lncome Tax-lll, Hyderabad.AND M/s. Srinivasa Cystine Limited, G-2, Concorde Apartments, D.No.6-3-638,Somajiguda, Hyderabad-500082 ...RESPONDENT Counsel for the Appellant: Ms. K. MAMATA CHOUDARY SENIOR SC FOR .SRI J.V. PRASAD, SC FOR INCOME TAX DEPT. Counsel for the Respondent: NONE APPEAREDThe Court delivered the following: JUDGMENT THEHO_] AND THE H,)N'BLE SRI IUSTICE C.V.BHASKAR REDDYI.T.T.A.No.206 of 2006 DGI\{EN]" (Per t, e Hon'bb the Chitl|Nrn Llial Bhtgan) Fleard Mr. I(.Mamata Choudary, learned Senior StandingCounsel appelrtng on behalf oF Mr. J.V.Prasad, learned SeniorStanding [(ioun ];cl, lncome T'ax Department for the appellant.N<>nc has appe , red for the respondents. 2. This app::r[ has becn filed by the revenue lrs the appellantundcr Section 2 60A ol thc Income Tax Act, 1961 @riefly 'the Act'hcreinafter) agrinst the ordcr dared 29.01 .2005 passed by theIncome ['fax ],.\';pcllate Tribunal, Hyderabad Bcnch 'B', Hyderabad(briefly 'the [-l'ribunal' ]hcreinalter) in ITA.No.340/HYd/2001 torthe assessment vezr 1997 -98. 3. On 03.(8.2006, this [(.ourt ]had admitted the appeal forhcaring on the lollowing substant-ial questions o[ law: 1. \X4l thcr on the facts and in the circumstances of thecase, tl e finding of the fribunal that the expansion of theexistinll unit o[ the assessee is to be treatcd as newlyestablir hed i007o export odented undenaking is not vitiated in law for non-consideradon of televant facts onrecord mentioned in the assessment order ?2. On the facts and in the circumstances of the case,whether the assessee is entided for exemption u/s. 108 ofthe Act for the televant assessment yeat ? 4. Respondent is an assessee under the Act having the status ofacompany. Assessment year under consideralion is 1997-98.Respondent carries on the business of manufacruring liquidcrystine, which is a crystalline am-ino acid extracted from humanhair. \Vhile filing its return o[ income for the afotesaid assessmentyear, respondent claimed deduction under Section 10B of the Actin respect of additional unit. By the assessment otderdatcd 31.03.2000 passed under Section U3Q) of the Act, assessingofficer took the vieu'that there was only an addition of machineriesand electrical installations to the existing unit, which did not resultinto a separate, severable and independent undertaking and suchaddition of machineries elr., amounted to reconstruction of existingtusiness only; it couid not be construed as a flew industrial unit.Therefore, it was held that respondentwas noteligrble for dcduction under Section 108 of the Acl Consequendy, the claimwas tejected. dcduction under Section 108 of the Acl Consequendy, the claimwas tejected. 5. Responderrt assailed the above decision of the assessingoffrcer belore the Commissioner of Income Tax (Appeals),Viiayawada @r:i,:fly 'the CIT(A)' hereinafter). By the appellateorder datcd 03.02.2001, CI'I( ) referred to letters of therespondent dat,d 27.12.1989 as well as dated 31.12.1992 andthereafter camc to the conclusion that respondent was endded toclaim exempti()lr in terms of Scction 10B of the Act for the incomed<:rived lrom [] rit-lI. 6. Against ,,uch order ol CIT(A), reveflue preferrcd appealbelore the Trirunal. By thc order dated 29.01 .2005, Tribunalupheld the or.ler of CIT(A) and dismissed the appeal of thefevenue. 1 . Be fore r s, Iearncd Senior Standing Counsel, Income TaxDepartment l.r s referred to the order of the asscssing officer and [\]submits that atter meticulous perusal oF the record and inspection oF site, assessing ofFrcer had reached the conclusion that the ncrvunit claimed by the respondents as hundred perceot export-oriented unit was flothiflg but an addition of machinery andelectrical installations to the exisring unit; an extension of theexisting unit. He had referred to decisions in this regard passed bythe Supreme Court as weil as by the High Court that there must beaseparate, severable, integrated and independent industrialundertaking to claim bcnefit under Section 10B of the Act.Therefore, view taken by the assessing offtcer is fuily justified.Adverting to the otder passed by CIT(A), she submits that CIT(A)misconstrued communications dated 27.12.1,989 and 31,.12.7992 olthe respondent while reversing the view taken by the assessingofficer. 8. As we have akeady noted above, the relevant assessmeflt yearis i997-1998. Section 10B of the Act as it stood at the relevantpoint of time, reads as under: 10B. Special provision in respect of newly established hundtedper ceflt expert-odented undertakings:-per ceflt expert-odented undertakings:- ,] (i) Subject [.o ]the provisions of this section, any pro6ts andgains derive,l by an assessee from a hundred per cent export-oriented un,lertaking (hereafter in this section referred to asthe undertaking) to which this section applies shall not beincluded in rhe total income oI the assessee (2) This secrion applies to any undertaking which frrlfils all thefollowrng cr,nditions namely:- (i) it mar:ufacrures or produces any article or thing (ia) in relation to an undertaking which begins tomanufac ture on produce any article or thing on or afterthe 1* day of April, 1996, its exports of such atticles andth.ings ale not less than seventy-five pcr cent of the totalsales thr reof during the previous year; (ii) it s not formed by the sp[tting up, or thereconstruction, of a business already in existencc : Provided that this condition shall not apply inrespect of anv undertaking which is formed as arespect of anv undertaking which is formed as atesult of the re-cstablishment, reconstruction orrevival by the assessee of the business of anysuch industrial undertaking as is referred to insuch industrial undertaking as is referred to insection 33B, in the circumstances and withinthe period specified in that section;the period specified in that section; (iii) it is not formed by the transfer to a new businesso[ ma chinery or plant previously used for anypufPose. \\ Explat,ation:- The provisions of Expknation I andExplat;ation 2 to sub-section (2) of section 80-I shallapp\' for the purposes of clause (iii) of this sub- section as they apply for the purposes of clause (t) ofthat sub-section (3) The profits and gains referred to in sub-section (1) shall notbe included in the total income of the assessee in respect ofany tefl consecufive assessment yeas, beginning with theassessment year rclevant to the previous yeat in which theundetaking begins to manufacture ot produce articles orthirgr. (iii) it is not formed by the transfer to a new businesso[ ma chinery or plant previously used for anypufPose. \\ Explat,ation:- The provisions of Expknation I andExplat;ation 2 to sub-section (2) of section 80-I shallapp\' for the purposes of clause (iii) of this sub- section as they apply for the purposes of clause (t) ofthat sub-section (3) The profits and gains referred to in sub-section (1) shall notbe included in the total income of the assessee in respect ofany tefl consecufive assessment yeas, beginning with theassessment year rclevant to the previous yeat in which theundetaking begins to manufacture ot produce articles orthirgr. (4) Norwithstanding anything contained in any other provisionof this Act, in computing the toal income of the assessee ofthe previous year relevant to the assessment year immediatelysucceeding the last of the relevant assessment years, or of anyprevious year relevant to any subsequent assessment year- (i) section 32, sectjon 32A, section 33 andclause (ix) of sub-section (1) of section 36 shallapply as if every allowance ot deductiontefered to therein and telating to or allowable fot any of the televant assessmentyears, in relation to any building, machinery,plant or futniture used fot the purposes of thebusiness of the undetaking in the previous yeatrelevant to such assessment ye r ot Lnyexpenditure incured for the pqposes of suqhbusiness in such previous yeast had been givenfoll effect to for that assessment yeat itself andaccotdingly sub-section (2) of Section [32, ][clause](ii) of sub-section (3) of section 32A, [clause ][(ii)]of sub-section (2) of section 33 ot the second I I proviso to clause (ix) of sub-section (1) ofsection 36, as thc case may be, shall not apply inreiarion to anv such a owance ot deducrion;ii) no loss referred to in sub-section (1) ofsection 72 or sub-section (1) or sub-section (3)of section 74, in so far as such loss telates to thebusiness of the undertaking, shall bc carriedforward or set off where such loss relates to anyoI the televant assessment years; (iii) no deduction shall be allowed under section80HH or section 8OHFIA or section 80-I orsection 80-lA or section 80-lB in relation to theprofits and gains of the undertaking; and (iv) in computing the depreciation allowanceunder section 32, the written down of any assetused for the purposes of the business of theundetaking shall be computed as if the assesseehad claimed and been actually allowed thededuction in respect of depteciation for each ofthe relevant assessment years. (5) Whert the ur-rdertaking has begun to manufacture orproduce atticles or things in previous year relevant to theassessmen: year corfinencing before the 1"' day of 1989, theassessee m^y, Lt his option, before the due date for furnishing/the rerurn o[ his incomc under sub-section (1) of section 139for the assessment year commencing on the 1" day of April,1989, furnish to the Assessing Of6cer a declararion in writingthat the p: ovisions of sub-secrion (1) may be made applicable to him for any Eve consecutive assessment years falling withina period o[ eight years beginning with the assessment yearcommencing on the 1"' day of April, 1989, and if he does so,then, the provisions of sub-section (1) shall apply to him foreach of such assessment years and the provisions of sub-section (4) shall also apply in computing the totai income oftlre assessee for the assessment year immediately succeedingthe last of such assessment years and any subsequentassessment yeaf. (6) The provisions of sub-section (8) and sub-section (9) ofsection 80-I shall, so far as rr.:ay be, apply in relation to thesection 80-I shall, so far as rr.:ay be, apply in relation to theundertaking referred to in this section as they apply for thepurposes o[ the industrial undertaking referred to in section80-r.80-r. to him for any Eve consecutive assessment years falling withina period o[ eight years beginning with the assessment yearcommencing on the 1"' day of April, 1989, and if he does so,then, the provisions of sub-section (1) shall apply to him foreach of such assessment years and the provisions of sub-section (4) shall also apply in computing the totai income oftlre assessee for the assessment year immediately succeedingthe last of such assessment years and any subsequentassessment yeaf. (6) The provisions of sub-section (8) and sub-section (9) ofsection 80-I shall, so far as rr.:ay be, apply in relation to thesection 80-I shall, so far as rr.:ay be, apply in relation to theundertaking referred to in this section as they apply for thepurposes o[ the industrial undertaking referred to in section80-r.80-r. (7) Notwithstanding anything conta-ined in the foregoingprovisions of this section, when the assessee, befote tlle duedate fot furnishing the return of his income under sub-section(1) of section 139, furnishes to the Assessing Officer adeclaration in writing that the provisions of this section maynot be made applicable to him, the provisions of this sectionshall not apply to him for any of the relevant assessment years.Explanation:- For the purposes of this section,- (, "hundted per cent export-orientedundertaking" means an undetaking which has beenapptoved as a hundred per cent expon-odentedundertaking by the Board appohted in this behalfby the Central Government in exetcise of thepowers confetred by section 14 of the Industries (Development and Regulation) Act, 1951 (65 of1951), and the rulcs made under that Act:(ii) "relevant assessment years" means the tenconsecudve assessment years refened to in sub-section (3): (iii; "manufacrurc" includes any- (a) process, or (b) assembling, or (c) tecording of ptogranlmes on any disc, tape, perforated media or other information storage device; (rv) "produce, in relation to any articlc or thingreferred to in clause (i) of sub section (2) includesproduction of computer programmes." 8.1. Section 1 lB deals with special provision in respect o[ newlyestablishcd hunlred percent export-oriented undertakings. As persub-section (1 ) hereof, subject to the proyisions of the said sectionanv profits an I gains derivecl by an assessee ftom a hundredpcrcent cxport oriented undertaking shall not be included in thetotal incomc of the assessee. Sub-Section (2) thereof lays down theconditions whi( h must be fulfilled for claiming the tbove bene Frt. 8.2. We may :cfer to sub-section @ thereof, rvhich is relevant forour present deriberation. Sub-section [) as extracted above says - that notwithslanding aflything contained in the foregoing "a provisions of Secdon 10B of the Act when the assessee, before thedue date for furnishing the rerurn o[ his income undersub-section (1) of Section 139, furnishes to the assessing officet, adeclaration in writing that the provisions of this section may not bemade applicable to him, the provisions of this Section shall notapply to him for any of the relevant assessment years. !7hat thissub-sect-ion therefore contemplates is that the assessee may waiveoff the benefit of Se ction 10B of the Act by making a declaration inrvriting that the said provision may not be made applicable to him.8.3. Explanation (i) below sub-section (7) clarifies that "hundredpercent export-oriented undertaking" means an undertaking whichhas been proved as a hundrcd percent export-orierited undertakingby the Board appointed in this behalt by the Central Governmentin exercise of the powers conferred by Section 14 of the Industries@evelopment [and ][Regulation) ][Act, ][1951 ][and ][the ][ruies ][framed]thereunder -I'hereflore, 9. from a careful analysis o[ the aforesaid provision,it is discernible that a hundrcd percent export-oriented undertaking -I'hereflore, 9. from a careful analysis o[ the aforesaid provision,it is discernible that a hundrcd percent export-oriented undertaking would mean an rndertal ng u,hich has been approved as a hundrcdpercent export-(,riefltcd undertaking by the Board appointed in thisbchalf by the Central Gor.ernment under Section 14 of the- -his aforesaid A ct. would imply that once an approval is receivedfrom thc Iloatd that an r:ndcrtaking is a hundred percent export-oriented underaking, it would not be open to the assessingauthoriry to taht a conffary vicw that the unit or the additional unitof an assessee rs not a hundred percent export-oriented undertakingand thereft;re! assessce is not entided to the benefit underSection 10B of t he Act 10. [-I'his ]asp,'ct was gone into by the Tribunal whereafterTribunal held as follows: Gor crnmcnt of India, vide letter dated 5-9-1997,which i; at p^ge 23 of papet book, confumed asfollows: \\ "l am directed to refer to your letterdated 18 August, 1997 on the above subject andto con firm that all the facilitjes and privilegesunder 10002b Export Oriented Scheme asstipulated in the permission letter No.NPER:490.119)/ (C) dared 22 April, 1989 admissible toM/s. Sivas Cystine Ltd. for effecting substantial I l I expansion for the manufacture o[ L-Cystine attheir additional unit ^t A[ar^t^ Village,Chandragiri Mandal, Chittoor Disttict, AndhraPradesh. This is subject to the condition thatcompany fulfills all the conditions contained intheir above mentioned permission letter."company fulfills all the conditions contained intheir above mentioned permission letter." A perusal of the application made by the assessee,which is p^ge 24 of the paper book, shows that the^t assessee had written to Government of India statingthat it had undefiaken substantial expansion byinstalling a second line of production and that thisshould be declared as an additional unit. ThisconfLmation dated 5-9-1997 was issued after seekingclarification from the assessee, ,ride letterdated 12-8-1997. Moreover, as stated by the CIT (A),the permission for substantial expansion of theexisting i 00% EOS u/as given on the followingconditions reproduced in the order of the CIT (A):- (1) The entire (100%) ptoduction shall beexported; (2) You shall undettake to expott the entireptoduction (100%) excluding tejects norexceeding 5 (hve) percent fot a period of 10(en) years. Fot this purpose, you wiil furnishthe requisite lcgal agreement/bank [guarantee.]Aftet the export obligation pedod [is ]over theexceeding 5 (hve) percent fot a period of 10(en) years. Fot this purpose, you wiil furnishthe requisite lcgal agreement/bank [guarantee.]Aftet the export obligation pedod [is ]over the unit shall bc allorvcd to produce for domesticmarket in the light of Industrial Policy in forceat the dme in relauon to manufacture of itemsreserved For small scale sector; (3) The value addition shall be a minimum of33.9o/o (hirty three point nine percent).Conditron No. 14 of Annexure-Il standsmodified to this extent; (4) It is notcd that you requfue imported capitalgoods rvorth Rs.63.90 lakhs (R.upees sixty thteepoint nine zcro lakhs) cif for the proiect as petlist attached (Anncxure 1). A plrin look at these conditions cleadydemonstrates that the assessee company is required tofteat this substantial expansion as a separate anddistinct unit and the Govt. of India Eeated tltssubstandal expansion as a separate unit. It is nobody'scase th rt the conditions specified by the Govt. ofIndia are violated by the assessee.. No doubg the expansion was only by way ofinstallat,on of additional plant and machinery in thesame pr emises of the existing unit by using all existingfacilitje:. The AO had also pointed our thar to rJreprocess of manufacruring L-Cystine, which involvesdifferen t sections like (a) NeutralizadLon section, (b)Reactiorr secrion, (c) Filtcr secrion, (d) Drier secrionetc., addirion of planr and machinery was made A plrin look at these conditions cleadydemonstrates that the assessee company is required tofteat this substantial expansion as a separate anddistinct unit and the Govt. of India Eeated tltssubstandal expansion as a separate unit. It is nobody'scase th rt the conditions specified by the Govt. ofIndia are violated by the assessee.. No doubg the expansion was only by way ofinstallat,on of additional plant and machinery in thesame pr emises of the existing unit by using all existingfacilitje:. The AO had also pointed our thar to rJreprocess of manufacruring L-Cystine, which involvesdifferen t sections like (a) NeutralizadLon section, (b)Reactiorr secrion, (c) Filtcr secrion, (d) Drier secrionetc., addirion of planr and machinery was made section $/ise for increasing the capacity. From alayman's point of view, it would appear that this isnot a case of putting up an addition'al 100% ExportOriented undertaking, but only a mere expansion ofan existing unit. However, as 100% Export Oriented Undertakingfor the pulpose of sec.10B has been de6ned and asthe Board appointed in this behalf by CentralGovernment is empowered to approve the same andas the Centtral Government has recognised this as anadditional unit, we have no other alternative but touphold the order of the CIT (A) and hold that theassessee is entided to claim exemption under sec. 10Bof the Act. Coming to the reliance placed by the AO as wellas the learned DR on the [judgment ]of Hon'bleSupreme Court in the case of Textile MachinesCorporation Ltd. (supra), we hold that the same isnot applicable to the facts of the case in the case ofsec.10B the power vests with the CentralGovernment recognising additional units. In the result, the order of the CIT (A) is upheldand the appeal of the Revenue is dismissed. 71. [\We ]are in conformiry with the views [expressed ]by [the]Tribunal that thc assessing officer was not [justiFred ]in turning down \ the claim of the respondent that the additional unit was a hundredpercent export-{ )rientcd unit and rvas entrded to tl'rc benefit underSection 108 of thc Act 12. In view tlrercof, the sr.rbstanrial questions o[ law framed areanswered again;t thc appcliant/rcvenue and lnfavour o[ thetespondent/ass( ssee. 13. Consequertly, thc appcal rs dismissed. No costs. As a se.1rrel, miscellaneous petitions, pending if any, standdismissed. \ \sd/- M. VIJAYA [bHAgr'nn]JOINT [REGIqIRAR]//rRUE coPY/' tEcrloN otrrcee To, 1. The lncome [Tax ][Appellate ][Tribunal' ][Hyderabad Bench ][- ][B' ][Hyderabad] 2. The Commissic'ner [of ][lncome Tax ][( ][Appeals) ][Vijayawada] 3. The [Joint ][Commissioner of ][lncome ][Tax ][( ][Assts ][)'' ][Special ][Range ]['4 ][']HyderabadHyderabad 4. One CC to [J.V' ][PRASAD' ] [l'T' DEPT' ] ] 5. Two [CoPies;] ,\.- I HIGH COURT HCJ & CVBRJDATED:1411212C22 JUDGMENTITTA.No.206 of 2006 DISMISSING THE ITT \WITHOUT COSTSWITHOUT COSTS @$'Aa[Ye] L.'.t'ie.\J!ltt')^-?N'oc.boa*3 l.lo