M/S Kwal Pro Exports v. The Asst.commissioner Of Income Tax, Circle-1, Jodhpur

HIGH COURT OF JUDICATURE FOR RAJASTHAN ATJODHPUR D.B. Income Tax Appeal No. 30 / 2008 M/S Kwal Pro Exports, 12, Kamal Apartments, Circuit House Road,Jodhpur. ----Appellant Versus The Asst.Commissioner Of Income Tax, Circle-1, Jodhpur ----Respondent Connected With D.B. Income Tax Appeal No. 44 / 2010 Commissioner of Income Tax-I, Jodhpur ----Appellant VersusM/S Kwal Pro Exports, 12, Kamal Apartment, Circuit House Road, Jodhpur. ----Respondent _____________________________________________________ For Appellant : Mr.Anjay Kothari. For Respondent : Mr.KK Bissa (appellant in ITA No.44/2010) Mr.Anil Bhansali. _____________________________________________________ HON'BLE MR. JUSTICE K. S. JHAVERI HON'BLE DR. JUSTICE PUSHPENDRA SINGH BHATI Judgment / Order 25/01/2018 1.These two appeals - one appeal by the assessee and another by the department have been preferred challenging the judgmentand order of the Tribunal whereby, the Tribunal has partly allowedthe appeal of the assessee for statistical purposes. 2.While admitting the appeals, this Court framed followingsubstantial questions of law :- D.B. Income Tax Appeal No. 30 / 2008 “1.Whether the activities carried out by the appellantassessee in converting wooden articles into handicraft articles involving processes of grinding, surface smoothing,chemical dipping, drawing, polishing, packaging etc. amountto manufacture or production of an article so as to make theassessee eligible for exemption under Section 10B of theIncome Tax Act, 1961? 2.Whether on the facts and in the circumstances of thecase, the Commissioner of Income Tax was justified ininvoking the provisions of Section 263 of the Income Tax Act,1961?” D.B. Income Tax Appeal No. 44 / 2010 “1.Whether the activities carried out by the appellantassessee in converting wooden articles into handicraftarticles involving processes of grinding, surface smoothing,chemical dipping, drawing, polishing, packaging etc. amountto manufacture or production of an article so as to make theassessee eligible for exemption under Section 10B of theIncome Tax Act, 1961? 2.Whether on the facts and in the circumstances of thecase, the Commissioner of Income Tax was justified ininvoking the provisions of Section 263 of the Income Tax Act,1961?” 3.Now the issues are covered by the decision of this Court in D.B. Income Tax Appeal No.299/2009 (C.I.T. vs. Goverdhan Prasad) decided on 2.3.2017, which reads as under :- "5. Counsel for the respondent Mr. Gargiya has taken us tothe order of the tribunal which reads as under:- “A perusal of the rule 23 (1) (b) show that there is noprohibition on the buyer exporter debarring it frommaking changes in the products to be exported. Acombined reading of the Rule along with the said Formexempt a buyer exporter from the levy of the sales tax,to the extent an exporter makes purchases and exportsthe same. The only condition being exports and inabsence of specific prohibition, the appellant exporter isall entitled to carry out certain working and changestherein, with a view to make value addition therein andto make it exportable. The buyer gives a categoricalcertificate in Form ST 17B certifying that the goods sosupplied to it have been sold. Thus, a combined readingof Rule 23(1)(b) with Form ST17B makes it clear thatto claim exemption one has to obtain a declaration andto ensure that the buyer shall use such goods forexport sale only. The spirit of the law thus, is very clearthat if the purchase is meant for a further export sale,the dealer (seller) is entitled not to make payment ofsale tax on such goods. The use of such goods is simplyto identify the goods sold by the dealer (seller) and the one exported by the buyer – appellant are the same.There is no requirement as such in the Rule and Formthat the goods so purchased by the buyer appellant hasto be exported as such i.e. in the same condition inwhich it was purchased without any change. Suchgoods can not he read as the same. The certificatepage 14 given by the buyer appellant in Form ST 17Balso supports this interpretation wherein the goodspurchased by the buyer appellant has to be identifiedwith reference to purchase order no., challan no. Etc.Otherwise also, instead of drawing inference to reach tothe conclusion whether the activities tantamount tomanufacturing/production, the better course for theauthorities below was, to consider the various activatesundertaken by the appellant after the purchases of theraw material, which has been discussed in detail in theearlier part. There was no warrant to jump to theprovisions of the Sales Tax laws which otherwise do notsupport the case of the Revenue. We find thecontention of the ld. CIT DR contradictory in as muchas with regard to the certification by the customauthorities as to the nature of the export of thedisputed articles of being of artistic value, whereas bydrawing inferences only, it is argued that no activitywas carried out and it was a matter of simplepurchases. Such an approach of the Revenue isdisapproved. We further agree with the contention ofthe ld. Counsel that the use of the machinery is only toprepare the wood purchased by the appellant with aview to make it fit for further technical steps to becarried out by artisions. It is nothing but a prepatorystage, before handwork is commenced. The machinework is confined to seasoning of wood which normallycontains moisture, thickness planning and cutting.Further the objection as regards the short fall ofworkers the required number i.e. 20 u/s 10BA (2) (e) isalso is not factually incorrect. A perusal of copies of thewages registers submitted to AO (PB 23-72) clearlyshow that there more than 20 workers in any casethroughout the year engaged in the manufacturingactivities. There apart the other kargirs being paid onpiece rate bases are also the person engaged anddeserves consideration for this purposes. Even the ld.CIT(A) has also now recorded a finding that theassessee had employed more than 20 workers asrequired u/s 10BA. The heavy reliance placed by theRevenue on the decision of Kwal Pro Export (supra) isalso misplaced in as much as in para 13, the ITATplaced reliance upon the Third Member decision in caseof Arihant Tiles & Marbles 104 TTJ 149(JD). However,the same now stands reversed in the case of M/sArihant Marble Tiles Pvt Ltd vs ITO (2007) 295 ITR148(Raj.). Moreover, there is a specific definition of the eligible article u/s 10BA, which is not the case u/s 10Bwith which Kwal Pro Export (supra) was concerned.Therefore, the said decision can’t be applied beingtotally distinguishable. It has been held that anincentive provision has to be construed liberally as heldin Bajaj Tempo Ltd. v/s CIT 188 ITR 196 (SC). Thepresent case also helps achieving the avowed object.Once the underlying purpose of an enactment isserved, there is no reason why the deduction should berestricted on one pretence or other. Recently in CIT vsBaby Marine Exports 160 Taxman 160 (SC), the Hon’bleSupreme Court strongly advocated for a liberalinterpretation at pg 168 & 169 vide paras 26 & 27. Itwas held that Section 80HHC was incorporated with theobject of granting incentive to earners of foreignexchange. This court is Sea Pearl Industries vs CIT(2001)2 SCC 33 also observed that the object ofselection 80HHC is to grant incentive to earners offoreign exchange. In IPCA Laboratory Ltd vs Dy.CIT(2004) 12 SCC 742 this court has taken the sameview. This court in the said judgment observed that S.80 HHC has been incorporated with a view to provideincentive to export house and this section must receiveliberal interpretation. The totality of facts andcircumstances and in view of the factual position andevidences, we are fully satisfied that the appellant wasengaged in the manufacturing and production of theeligible articles under the provision of 10BA and hencethe appellant is fully to entitled to get the deductions.The AO is therefore directed to allow the same. ThusGround No. 2 of the assessee is allowed.” 6. He further contended that in view of the decision of thiscourt in D.B. Income Tax Appeal No.25/2009 & otherconnected cases (Commissioner of Income Tax, Jaipur-II vs.M/s Manglam Arts ), decided on 14.2.2017 wherein it hasbeen held as under:- “In view of the observations made by the Supremecourt in the case of Income Tax Officer, Udaipur Vs.Arihant Tiles and Marbles (P) Ltd. (supra), we are ofthe opinion that the process which has been prescribedby the Tribunal in para 10 clearly covers the processand will cover under section 10BA. Therefore, in ourview, the view taken by the Tribunal is just and properand no interference in the judgment of the Tribunal iscalled for. The issue is answered in favour of theassessee and against the department.” 7. He also relied upon the following decisions:- (i) In Income Tax Officer vs. Arihant Tiles & Marbles (P) Ltd.reported in (2010) 320 ITR 0079 (SC) holding as under:- reported in (2010) 320 ITR 0079 (SC) holding as under:- “At the outset, we may point out that in numerousjudgments of this Court, it has been consistently heldthat the word “production” is wider in its scope as compared to the word “manufacture”. Further,Parliament itself has taken note of the ground realityand has amended the provisions of the IT Act, 1961 byinserting s. 2(29BA) vide Finance Act, 2009, w.e.f. 1stApril, 2009. 7. He also relied upon the following decisions:- (i) In Income Tax Officer vs. Arihant Tiles & Marbles (P) Ltd.reported in (2010) 320 ITR 0079 (SC) holding as under:- reported in (2010) 320 ITR 0079 (SC) holding as under:- “At the outset, we may point out that in numerousjudgments of this Court, it has been consistently heldthat the word “production” is wider in its scope as compared to the word “manufacture”. Further,Parliament itself has taken note of the ground realityand has amended the provisions of the IT Act, 1961 byinserting s. 2(29BA) vide Finance Act, 2009, w.e.f. 1stApril, 2009. In the case of Aman Marble Industries Pvt. Ltd. v.Collector of Central Excise reported in 157 ELT393(SC), the question that arose for consideration waswhether cutting of marble blocks into marble slabsamounted to manufacture for the purposes of CentralExcise Act. At the outset, we may point out that in thepresent case, we are not only concerned with the word"manufacture", but we are also concerned with theconnotation of the word "production" in Section 80IA ofthe Income Tax Act, 1961, which, as statedhereinabove, has a wider meaning as compared to theword "manufacture". Further, when one refers to theword "production", it means manufacture plussomething in addition thereto. The word "production"was not under consideration before this Court in thecase of Aman Marble Industries Pvt. Ltd. (supra). Bethat as it may, in that case, it was held that "cutting" ofmarble blocks into slabs per se did not amount to"manufacture". This conclusion was based on theobservations made by this Court in the case ofRajasthan State Electricity Board (supra). In our view,the judgment of this Court in Aman Marble IndustriesPvt. Ltd. (supra) also has no application to the facts ofthe present case. One of the most important reasonsfor saying so is that in all such cases, particularly underthe Excise law, the Court has to go by the facts of eachcase. In each case one has to examine the nature ofthe activity undertaken by an assessee. Mere extractionof stones may not constitute manufacture. Similarly,after extraction, if marble blocks are cut into slabs perse will not amount to the activity of manufacture.” In the present case, we have extracted in detail theprocess undertaken by each of the respondents beforeus. In the present case, we are not concerned only withcutting of marble blocks into slabs. In the present casewe are also concerned with the activity of polishing andultimate conversion of blocks into polished slabs andtiles. What we find from the process indicatedhereinabove is that there are various stages throughwhich the blocks have to go through before theybecome polished slabs and tiles. In the circumstances,we are of the view that on the facts of the cases inhand, there is certainly an activity which will come inthe category of "manufacture" or "production" underSection 80IA of the Income Tax Act. As stated herein-above, the judgment of this Court in Aman MarbleIndustries Pvt. Ltd. was not required to construe theword "production" in addition to the word "manufacture". One has to examine the scheme of theAct also while deciding the question as to whether theactivity constitutes manufacture or production.Therefore, looking to the nature of the activitystepwise, we are of the view that the subject activitycertainly constitutes "manufacture or production" interms of Section 80IA. In this connection, our view isalso fortified by the following judgments of this Courtwhich have been fairly pointed out to us by learnedCounsel appearing for the Department. "manufacture". One has to examine the scheme of theAct also while deciding the question as to whether theactivity constitutes manufacture or production.Therefore, looking to the nature of the activitystepwise, we are of the view that the subject activitycertainly constitutes "manufacture or production" interms of Section 80IA. In this connection, our view isalso fortified by the following judgments of this Courtwhich have been fairly pointed out to us by learnedCounsel appearing for the Department. Applying the above tests laid down by this Court inBudharaja's case (supra) to the facts of the presentcases, we are of the view that blocks converted intopolished slabs and tiles after undergoing the processindicated above certainly results in emergence of a newand distinct commodity. The original block does notremain the marble block, it becomes a slab or tile. Inthe circumstances, not only there is manufacture butalso an activity which is something beyondmanufacture and which brings a new product intoexistence and, therefore, on the facts of these cases,we are of the view that the High Court was right incoming to the conclusion that the activity undertakenby the respondents-assessees did constitutemanufacture or production in terms of Section 80IA ofthe Income Tax Act, 1961.“ (ii) In Arihant Tiles & Marbles (P) Ltd. vs. ITO (2007) 295ITR 0148 (Raj.) holding as under:- ITR 0148 (Raj.) holding as under:- “We also find that even under the Income Tax Rules,1962 assessee under Section 44AB read with Rule 6G isrequired to furnish report of audit of his accounts andalso required to furnish statement of particulars in formNo. 3CD provided under the Rules which includefurnishing information about the nature of businesscarried on by the assessee in Part B of the Annexure tobe appended to the statement of particulars in whichthe 'marble & granite' has been classified under themanufacturing industry sector. Thus, for the purpose ofincome tax, under the rules, marble & granite industryhas been considered to be manufacturing industry. Under the rules governing the compulsory audit inrespect of various businesses also, marble and graniteindustry has been included in the sector ofmanufacturing industry. This goes to show that so faras the authorities under the Income Tax entrusted withthe task of its implementation are concerned and theframers of the Rules have considered the cutting ofmarble and granite blocks into slabs and polishing themfor bringing them to the stage of usability as an activityof industrial undertaking engaged in manufacture andproduction of articles or things. Rules framed under theAct are statutory and became part of Statute. Thus under the Scheme of Income Tax Act and Rules framedthereunder for the purpose of said Act cutting andpolishing of marble and granite blocks have been heldto be an industrial activity of manufacture. As a block,it is not of any use and has been held to be amanufacturing industry for the purpose of Income TaxAct. It may be pertinent to notice that even as per itscircular, the Central Board of Direct Taxes (vide CircularNo. 729 dt: 1st November, 1995) has consideredgranite as a mineral, and any process applied makes itvaluable marketable commodity. Board has clarifiedthat: The Board is, therefore, of the view that white granitecan alone be considered as mineral, any processapplied to granite would deprive the quality of roughmineral from the dimensional blocks of granite, which isa value added marketable commodity. It may be pertinent to notice that even as per itscircular, the Central Board of Direct Taxes (vide CircularNo. 729 dt: 1st November, 1995) has consideredgranite as a mineral, and any process applied makes itvaluable marketable commodity. Board has clarifiedthat: The Board is, therefore, of the view that white granitecan alone be considered as mineral, any processapplied to granite would deprive the quality of roughmineral from the dimensional blocks of granite, which isa value added marketable commodity. As we have already noticed that the interpretationgiven under Excise Act cannot ipso facto be broughthere while interpreting the expression under theIncome Tax Act. Apart from that, we find that evenunder the Central Excise Act, the Legislature quicklyintervened and inserted in Chapter XXV Note 6declaring that process of cutting, sawing, sizing orpolishing or any other process of converting block intoslabs and tiles shall amount to manufacture. Thus, theactivity of cutting marble blocks into slabs under theCentral Excise Act too now governed by Statutoryprovisions, and amounts to manufacturing. The principle aptly applies to present case. Here also,the original commodity namely marble block could notbe used for building purposes as such until it is cut intodifferent sizes to be used as building material. It is onlyby the process of cutting the marble block into slabsand tiles that it is made marketable. The marble blockcannot be used for the same purpose as the marbleslab or tile can be used and after the marble bock hasbeen cut into different sizes, the end product by puttingit simultaneously cannot be used as a block. Theprinciple in Kores India Ltd., case supports thecontention of appellant. On parity of reasoning, this principle can be extendedto the facts of present case. Marble blocks as a mineralproduced from earth by itself is not usable for anypurpose, therefore, to make it usable, variousprocesses which could be applied to bring it to thatstage would amount to manufacturing. After it hasbeen brought to that stage, further processing itmerely for the purpose of making it marketability easyor smooth would not amount to manufacturing process. Accordingly, appeals are allowed and we hold that inthe facts and circumstances of the case, conversion ofmarble blocks into slabs and tiles amounts tomanufacture of thing or article within the meaning ofSection 80IA/ 80IB of the Income Tax Act and appellantis entitled to claim deduction thereunder.” (iii) In Grace Exports vs. ITO (2012) 254 CTR 0449 (Raj.)wherein it has been held as under:- “The counsel for the appellant-assessee has submittedthat the view as taken by the ITAT cannot be sustainedfor the authoritative pronouncement of the Hon’bleSupreme Court in the case of Income-Tax Officer Vs.Arihant Tiles and Marbles P. Ltd.: (2010) 320 ITR 79(SC) holding, inter alia, that step-wise activity ofcutting marble blocks and converting into the polishedslab and titles constitute manufacture or production interms of Section 80-IA of the Act. The learned counselfor the revenue is not in a position to controvert thesubmissions so made on behalf of the assesseeappellant. Having gone through the decision of theHon’ble Supreme Court in Arihant Tiles and Marbles(Supra), the view as taken by the ITAT cannot besustained. Accordingly, the Tribunal was not justified in disallowingthe benefit available to the assessee under Section 10-B of the Income Tax Act; and the view as taken by theTribunal does not stand in conformity with the lawdeclared by the Hon’ble Surpeme Court in the case ofIncome Tax Officer Vs. M/s Arihant Tiles & Marbles P.Ltd. (2010) 320 ITR 79. Accordingly, the appeal as filedby the revenue before ITAT (ITA No.357/JU/2008) forthe assessment year 2004-05 shall stand dismissed asregards the claim under Section 10-B of the Act.” Accordingly, the Tribunal was not justified in disallowingthe benefit available to the assessee under Section 10-B of the Income Tax Act; and the view as taken by theTribunal does not stand in conformity with the lawdeclared by the Hon’ble Surpeme Court in the case ofIncome Tax Officer Vs. M/s Arihant Tiles & Marbles P.Ltd. (2010) 320 ITR 79. Accordingly, the appeal as filedby the revenue before ITAT (ITA No.357/JU/2008) forthe assessment year 2004-05 shall stand dismissed asregards the claim under Section 10-B of the Act.” 4.In that view of the matter, the issues are answered in favourof the assessee and against the department. 5.Appeal No.30/2008 preferred by the assessee is allowed and Appeal No.44/2010 preferred by the department stands dismissed. (DR. PUSHPENDRA SINGH BHATI)J. (K. S. JHAVERI)J. S.Phophaliya/-30-31