Tax Appeal v. C. V. Bhadang, Jj.date:- 5Th November, 2019

1 IN THE HIGH COURT OF BOMBAY AT GOA TAX APPEAL NO.27 OF 2011 M/s Teracom LimitedPlot No.249-250,Kundaim Industrial Estate,Kundaim,Goa 403 115…Appellant Versus Assistant Commissioner of Income Tax Circle 2(1), Panaji Goa,having his office at Room No.208,1st Floor, Aayakar Bhavan, Panaji,Goa 403 001.…Respondent Mr. S. R. Rivankar, Advocate for the Appellant. Ms. A. Razaq, Standing Counsel for the Respondent. Coram:- M. S. SONAK & C. V. BHADANG, JJ.Date:- 5th November, 2019 Oral Judgment ( Per M. S. Sonak, J) Heard Mr. S. R. Rivankar, learned counsel for the Appellantand Ms. A. Razaq, learned Standing Counsel for the Respondent. 2.This appeal was admitted on 15th February, 2012 on thefollowing substantial questions of law :- 2 (i) Whether the Appellate Tribunal is justified in law byallowing the appeal of the Revenue thereby setting aside theorder passed by the CIT(A) on the ground that process oftesting of optical fiber cable amount to manufacturing ascontemplated under Section 80IB of the Income Tax Act, contrary to the view taken by our High Court in "CIT Vs. Hindustan Antibiotics Ltd", reported in (93 ITR 548) (Bom)? (ii) Whether the Appellate Tribunal is justified in law by holding that Assessment Year 2002-03 is the initial Assessment Year, as contemplated under clause (c) of sub-section 14 of Section 80IB of the Income Tax Act ? (iii) Whether the Appellate Tribunal is justified in law by holding that the testing of optical fiber cable purchasedfrom open market and then selling it after testing, in marketamount to production of optical fiber cable? 3. The Assessee is a Public Limited Company engaged in the business of manufacturing and trading of optical fiber cable and accessories,insulated wires and power cable and other telecommunication equipment.On 14th November, 2007, the Appellant filed return of income for theth November, 2007, the Appellant filed return of income for the November, 2007, the Appellant filed return of income for the On 14th November, 2007, the Appellant filed return of income for theth November, 2007, the Appellant filed return of income for the November, 2007, the Appellant filed return of income for theAssessment Year (AY) 2007-08 declaring the income of Rs. Nil, afterclaiming deduction of Rs.15,98,63,200/- under Section 80IB of theIncome Tax Act, 1961 ( IT Act). 4.This return was selected for scrutiny and notice under Sections142(1) and 143(2) of the IT Act came to be issued to the Appellant. The Appellant filed responses on 4th December, 2009, 14th December, 2009 and22nd December, 2009. Upon consideration of the same, the AssessingOfficer allowed deduction of only 30% of the profit under Section 80IB ofthe IT Act as against 100% claimed by the Appellant. This is clear fromthe Assessment Order dated 30th December, 2009. 5.In the order dated 30th December, 2009, the Assessing Officerheld that the Appellant began manufacture at the industrial undertakingsset up by it at Kundaim Goa in the Assessment Year 2002-03 and therefore,in the Assessment Year 2007-08, which was beyond five years from the yearin which the manufacturing began, the Appellant was entitled to deductionof only 30% of the profit and not 100% of profit as claimed by theAppellant. 6.The Appellant aggrieved by the Assessment Order dated 30[th]December, 2009, appealed to the Commissioner (Appeals) on or about 27[th]January, 2010. The Commissioner (Appeals) by order dated 10th November,2010, allowed the Appellant's appeal and set aside the Assessment Orderdated 30th December, 2009, thereby allowing deduction of 100% of theprofit for Assessment Year 2007-08. 7.The Revenue appealed to the Income Tax Appellate Tribunal(ITAT) against the order dated 10th November, 2010. The ITAT by order dated 31st May, 2011 allowed the Revenue's appeal, set aside the orderdated 10th November, 2010 and restored the Assessment Order dated 30thDecember, 2009. Hence, the present appeal against the ITAT's order dated31st May, 2011. 6.The Appellant aggrieved by the Assessment Order dated 30[th]December, 2009, appealed to the Commissioner (Appeals) on or about 27[th]January, 2010. The Commissioner (Appeals) by order dated 10th November,2010, allowed the Appellant's appeal and set aside the Assessment Orderdated 30th December, 2009, thereby allowing deduction of 100% of theprofit for Assessment Year 2007-08. 7.The Revenue appealed to the Income Tax Appellate Tribunal(ITAT) against the order dated 10th November, 2010. The ITAT by order dated 31st May, 2011 allowed the Revenue's appeal, set aside the orderdated 10th November, 2010 and restored the Assessment Order dated 30thDecember, 2009. Hence, the present appeal against the ITAT's order dated31st May, 2011. 8. Mr. Rivankar, learned counsel for the Appellant submits thatthe findings recorded in the Assessment Order dated 30th December, 2009and ITAT's order dated 31st May, 2011 are vitiated by perversity because onthe basis of the material on record, only conclusion possible was that theAppellant began to manufacture its industrial undertakings in theAssessment Year 2003-04 and not in the Assessment Year 2002-03. Hesubmits that both the Assessing Officer as well as the ITAT have totallymisconstrued the returns filed or declarations made by and on behalf of theAppellant before the Sales Tax Authority or Excise Authority, which returns,in any case were made for different purposes and in different context. Hesubmits that the material on record overwhelmingly establishes that in theAssessment Year 2002-03 the Appellant purchased some material fromoutside sources solely for the purposes of testing or trial. He submits thatmerely because such material may have ultimately been sold for some paltryamount after some value additions, there was no scope to conclude that theAppellant's industrial undertakings began manufacturing in the AssessmentYear 2002-03. He relies on Commissioner of Income Tax, Poona Vs 5 Hindustan Antibiotics Ltd.1to submit that the trial production orproduction for the purpose of testing does not amount to manufacture forthe purpose of Section 80IB of the IT Act. He submits that inasmuch asthis aspect has not been considered by both the Assessing Officer and theITAT in its proper legal perspective, the substantial questions of law asframed, are required to be answered in favour of the Appellant and againstthe Revenue. 9.Mr. Rivankar submits that both the Assessing Officer as well asthe ITAT have failed to appreciate that the object of the provisions inSection 80IB was to encourage the establishment of new industrialundertakings in backward areas and in that sense the provisions in Section80IB are the provisions of beneficial to the Assessee. He submits that theAssessing Officer as well as the ITAT should therefore have adopted theprinciples of beneficial and construction in the matter, even when it cameto appreciating the material on record, which clearly establishes that theactual manufacture at the industrial undertakings established by theAppellant began only in the Assessment Year 2003-04. He relies onHindustan Antibiotics Ltd ( supra ), CIT Vs Himalayan Magnesite Ltd.,2in support of this proposition. 10. Mr. Rivankar submits that in the Assessment Year 2007-08 1 93 ITR 548 (BOM) 2276 ITR 56 (ALL ) 6 10. Mr. Rivankar submits that in the Assessment Year 2007-08 1 93 ITR 548 (BOM) 2276 ITR 56 (ALL ) 6 expression “manufacture” was not defined under the IT Act and therefore,it was necessary to adopt its ordinary meaning. He submits that though theterm 'manufacture' implies change, but, every change is not manufacture.He submits that this is the ratio of decision in Commissioner of Income3Tax Vs Emptee Poly-Yarn P. Ltd.,. He submits that the material onrecord clearly establishes that there was no manufacturing in theAssessment Year 2002-03 and factually manufacturing began only in theAssessment Year 2003-04. He submits that in fact this position was neverdisputed by the Revenue when it came to assessment in the AssessmentYears 2003-04 to 2006-07. He submits that only in the Assessment Year2007-08, the Revenue has chosen to take a different view in the matter,which is clearly impermissible. He submits that on these grounds theimpugned orders are required to be set aside. 11.Ms. Razaq, learned counsel for the Respondent defends theimpugned orders on the basis of the reasonings reflected therein. Shepoints out that when the ITAT has evaluated the entire evidence on recordand arrived at the findings of fact that the manufacture in the present casebegan in the Assessment Year 2002-03. She submits that such findings offact is borne out from the material on record and there is no case ofperversity made out. She submits that the material on record bears out thepurchase orders were received by the Appellant during the Assessment Year 7 2002-03 and in pursuance of the same, the Appellant manufacturedfinished products and sold them to the purchasers for a profit. She pointsout that the Appellant themselves filed returns and made declarationsbefore the several authorities like Director of Industries, Sales Tax Authorityand Excise Authority making it clear that the manufacture had commencedin Assessment Year 2002-03. The findings of fact recorded by the AssessingOfficer as well as the ITAT is therefore borne out by the ample materialreferred to by the two authorities and there is absolutely no case is madeout to warrant inference in the impugned orders. 12.Ms. Razaq points out that the substantial questions of lawurged by the Appellant proceed on the basis that the manufacturingactivities and the production of finished goods in Assessment Year 2002-03was admitted to be on trial basis or for the purpose of testing by theRevenue. She submits that such position was never admitted but on thecontrary it was consistent case of the Revenue that the manufacturingbegan in the Assessment Year 2002-03. Accordingly, she submits that thedecisions in Hindustan Antibiotics Ltd., ( supra ), Himalayan MagnesiteLtd.,(supra ) and Emptee Poly-Yarn P. Ltd., ( supra ) are clearlydistinguishable and inapplicable. 13. Ms. Razaq relies on Income Tax Officer, Udaipur Vs Arihant 8 Tiles and Marbles (P) Ltd.,4to submit that even the conversion ofmarble blocks by sawing into slabs and tiles and polishing amounts tomanufacture or production of articles or thing under Section 80IA of theIT Act. She submits that the material on record clearly establishes that theAppellant made value additions to the material procured from outsidesources and thereafter finished products were sold in terms of purchaseorders already received. She submits that in these circumstances, theAuthorities were entirely justified in concluding that the manufacturecommenced in Assessment Year 2002-03 and not in the Assessment Year2003-04 as claimed by the Appellant. For all these reasons, Ms. Razaqsubmits that this appeal may be dismissed. 14. The rival contentions now fall for our determination. Tiles and Marbles (P) Ltd.,4to submit that even the conversion ofmarble blocks by sawing into slabs and tiles and polishing amounts tomanufacture or production of articles or thing under Section 80IA of theIT Act. She submits that the material on record clearly establishes that theAppellant made value additions to the material procured from outsidesources and thereafter finished products were sold in terms of purchaseorders already received. She submits that in these circumstances, theAuthorities were entirely justified in concluding that the manufacturecommenced in Assessment Year 2002-03 and not in the Assessment Year2003-04 as claimed by the Appellant. For all these reasons, Ms. Razaqsubmits that this appeal may be dismissed. 14. The rival contentions now fall for our determination. 15.In order that the first substantial question of law as framed isanswered in favour of the Appellant and against the Revenue, it is necessaryto examine whether the material on record supports the Appellant'scontention that the process undertaken by its industrial undertakingsduring the Assessment Year 2002-03 was not manufacturing process butonly a process of testing optical fiber cable or trial production as contendedby Mr. Rivankar, learned counsel for the Appellant. If it is established thatthe process was mere testing of optical fiber cable or process involved merely a trial production, then, following the decisions in HindustanAntibiotics Ltd.,( supra ) as also Himalayan Magnestite Ltd., ( supra ), thissubstantial question of law might have to be answered in favour of theAppellant and against the Revenue. However, both the Assessing Officer aswell as the ITAT have recorded categorical findings of fact that the processundertaken by the Appellant was industrial undertakings during theAssessment Year 2002-03 was not testing of optical fiber cable orcommencing of only trial production but the process was in factmanufacture of finished products which was in fact sold for a profit to thepurchasers on the basis of purchase orders already received. This meansthat the finished products were made to product on the basis of thepurchase orders already received and not merely the products for testing ofoptical fiber cable or trial production as urged by and on behalf of theAppellant. The question which therefore arises is whether this categoricalfindings of fact are vitiated by perversity in the sense that such findings arenot borne out from the evidence on record or that inferences drawn by thetwo authorities from the evidence on record are so absurd that the same canbe stigmatized as perverse. 16.The material on record indicates that the Appellant themselvesfiled returns and made declarations before the various authorities includingthe Directorate of Industries, Sales Tax Authority and even the CentralExcise Authority, in which they categorically stated that they had 10 commenced manufacture in the Assessment Year 2002-03. Mr. Rivankarhimself pointed out that in the Assessment Year 2007-08, there was nodefinition “manufacture” in the IT Act. Since the Appellant itself declaredthat it had commenced the manufacture during the Assessment Year 2002-03, it was for the Appellant to explain as to how such manufacture was notrequired to be treated as manufacture for the purpose of provisions inSection 80IB of the IT Act. Merely stating that the position under thevarious enactments is different and is too vague and the explanation totrickle out from the admissions made by the Appellant themselves beforevarious statutory authorities. It is pertinent to note that on the basis of suchdeclarations and returns the Appellant derived advantages under therespective statutes. 10 commenced manufacture in the Assessment Year 2002-03. Mr. Rivankarhimself pointed out that in the Assessment Year 2007-08, there was nodefinition “manufacture” in the IT Act. Since the Appellant itself declaredthat it had commenced the manufacture during the Assessment Year 2002-03, it was for the Appellant to explain as to how such manufacture was notrequired to be treated as manufacture for the purpose of provisions inSection 80IB of the IT Act. Merely stating that the position under thevarious enactments is different and is too vague and the explanation totrickle out from the admissions made by the Appellant themselves beforevarious statutory authorities. It is pertinent to note that on the basis of suchdeclarations and returns the Appellant derived advantages under therespective statutes. 17.The ITAT has noted that the Appellant has went to the extentof contending that the declarations made in the Assessment Year 2002-03were result of inadvertent mistake. The ITAT however noted that nomaterial was produced on record to indicate that any admission was madeto correct the so called inadvertent mistake and further this position wasrepeated in yet another declaration in which there was no explanationwhatsoever. 18.The ITAT, upon appreciation of entire material on record hasnoted that the finished products manufactured and sold by the Appellant 11 during the Assessment Year 2002-03 were in fact manufactured on the basisof purchase orders already received. Admittedly, the price at which theAppellant procured the material and the price at which the Appellant soldthe material after value additions to the purchasers on the basis of purchaseorders is almost double. 19.The ITAT has also noted that absolutely there is no evidencewas produced on record that the processes undertaken in Assessment Year2002-03 were in the nature of testing or trial production. Nocontemporaneous report of such trial production or testing were producedby the Appellant. No reports of production staff for testing were everproduced. According to us, all this material is more than sufficient tosustain the findings of fact recorded by the Assessing Officer and ITAT. 20.Further, it is not possible for us to say that the finding of factrecorded by the two authorities is vitiated by perversity or that theinferences drawn by the two authorities are not legal inferences that couldhave been drawn in the matter of this nature. In fact, the material on recordsuggests that prior to the amendment by Finance Act, 2002 in Section80IB(4), the Appellant had declared the date that the Appellant's industrialundertakings began manufacture was 26th March, 2002. However, after theamendment of extended date for beginning of manufacture upto 31[st]March, 2004, the Appellant sought to contend that the manufacture began 12 for the first time at its industrial undertakings only on 1[st] February, 2003.The ITAT has rightly observed that the Appellant has been shifting thestances. Such shifting of stances clearly amounts to approbation andreprobation. 21.In any case, even if the returns filed by the Appellant ordeclarations made by the Appellant are to be excluded from consideration,rest of the material on record also does not support the Appellant'scontention that the processes undertaken during the Assessment Year 2002-03 were in the nature of testing or trial run is only involvement, there is noelement of manufacture. Accordingly, the first substantial question of lawis required to be answered against the Appellant and in favour of theRevenue. 12 for the first time at its industrial undertakings only on 1[st] February, 2003.The ITAT has rightly observed that the Appellant has been shifting thestances. Such shifting of stances clearly amounts to approbation andreprobation. 21.In any case, even if the returns filed by the Appellant ordeclarations made by the Appellant are to be excluded from consideration,rest of the material on record also does not support the Appellant'scontention that the processes undertaken during the Assessment Year 2002-03 were in the nature of testing or trial run is only involvement, there is noelement of manufacture. Accordingly, the first substantial question of lawis required to be answered against the Appellant and in favour of theRevenue. 22.In Hindustan Antibiotics Ltd., ( supra ), the factual positionwas very clear inasmuch as crude penicillin which was produced as aprecursor to sterile penicillin which was final saleable product, was not evenultimately sold by the Assessee. In the said case, there was no material thatthe products were actually sold to any purchasers and it is in this context, itwas held that mere trial production or production for the purpose of testingdoes not amount to any manufacture. Taking into consideration theestablished factual position in the present case, the decision in the case ofHindustan Antibiotics Ltd. ( supra ) can be of no assistance to the 13 Appellant. 23.In Himalayan Magnesite Ltd.,( supra), it was held that thereshould be manufacturing, the production must be with a view to sell themanufactured goods or articles in the market. In the present case, thematerial on record establishes that the Appellant on the basis of purchaseorders received, processed the material by making value additions. The finalproduct sold which was quite different from the inputs procured was thensold for a profit. Again, therefore, the ruling in Himalayan Magnesite Ltd.,( supra) can be of no assistance to the Appellant in the present case. 24.In Emptee Poly-Yarn P. Ltd., ( supra ) the issue involved waswhether the twisting and texturising partially oriented yarn amounts tomanufacture in terms of Section 80IA of the IT Act. On facts and byreference the material produced on record by the parties, the Hon'ble ApexCourt ruled that there was no element of manufacture in such process.However, the Hon'ble Apex Court made it abundantly clear that “.. thejudgment in the present case is to be confined to the facts of the presentcase”. Accordingly, even the ruling in Emptee Poly-Yarn P. Ltd., ( supra ) isof no assistance to the Appellant. 25.The second substantial question of law is really not differentfrom the first substantial question of law. In any case, taking into 14 consideration the findings of fact recorded by the Assessing Officer and theITAT that the manufacturing in the present case actually commenced inthe Assessment Year 2002-03 and not in the Assessment Year 2003-04.Even this substantial question of law will have to be decided against theAppellant and in favour of the Revenue. It is pertinent to note that thefindings of fact is not at all vitiated by any perversity and therefore, itcannot be said that the ITAT was not justified in holding that theAssessment Year 2002-03 is the final Assessment Year as contemplatedunder clause (c) of sub-section 14 of Section 80IB of IT Act. 25.The second substantial question of law is really not differentfrom the first substantial question of law. In any case, taking into 14 consideration the findings of fact recorded by the Assessing Officer and theITAT that the manufacturing in the present case actually commenced inthe Assessment Year 2002-03 and not in the Assessment Year 2003-04.Even this substantial question of law will have to be decided against theAppellant and in favour of the Revenue. It is pertinent to note that thefindings of fact is not at all vitiated by any perversity and therefore, itcannot be said that the ITAT was not justified in holding that theAssessment Year 2002-03 is the final Assessment Year as contemplatedunder clause (c) of sub-section 14 of Section 80IB of IT Act. 26.The third substantial question of law is again required to beanswered against the Appellant and in favour of the Revenue because thesubstantial question of law seems to proceed on the basis that there was nodispute that the process of purchasing the material by the Appellant fromopen market was only for the purpose of testing optical fiber cable. Thematerial on record as noted earlier establishes that there was manufactureinvolved and the process undertaken by the Appellant during theAssessment Year 2002-03 was not restricted to mere testing or trial run.The findings of fact in this regard are amply borne out from the material onrecord and consequently are not vitiated by any perversity or absurdity.This substantial question of law is also therefore required to be answeredagainst the Appellant and in favour of the Revenue. 15 27.The appeals under Section 260A of the IT Act are entertainedand are required to be decided on the basis of substantial questions of lawthat may be involved in such matters. In the present case, we find that theAppellant basically wished us to reappreciate the evidence on record as if wewere exercising some First Appellate jurisdiction. No doubt, even thefindings of fact can, be assailed in an appeal under Section 260A of the ITAct but for that the Appellant has to establish that such findings of fact arevitiated by perversity. In the present case, the Appellant has failed toestablish that the findings of fact recorded by the Assessing Officer and theITAT are vitiated by perversity or that they are not backed by any materialon record. In fact, the findings are duly supported by the material on recordand even the inferences drawn by the two authorities suffer from noperversity or absurdity as was suggested on behalf of the Appellant. 28.For the all aforesaid reasons, this appeal fails and is herebydismissed. There shall however be no order as to costs. C. V. BHADANG, J. M. S. SONAK, J. at*