The Commissioner Of Income Tax Pondicherry v. M/S.leo Fasteners A-27A, Industrial Estate, Thattanchavady, Pondicherry - 9

IN THE HIGH COURT OF JUDICATURE AT MADRAS RESERVED ON : 11.04.2017 DELIVERED ON : 10.07.2017 Coram The Honourable Mr.Justice RAJIV SHAKDHERandThe Honourable Mr.Justice R.SURESH KUMAR Tax Case (Appeal) Nos.533 to 538 of 2010, 1217 to 1220 of 2010and 787 and 788 of 2014 1. The Commissioner of Income tax Pondicherry .... Appellant in T.C.(A)Nos.533 to 538 of 2010, 787 and 788 of 2014 Vs 1. M/s.Leo Fasteners A-27A, Industrial Estate, Thattanchavady, Pondicherry - 9. .... Respondent in T.C.(A)Nos.533 to 538 of 2010, 787 and 788 of 2014and Appellant in T.C.(A)Nos.1217 to 1220 of 2010 2. The Assistant Commissioner of Income Tax Circle I, Pondichery..Respondent in TCA 1217 to 1220/10 Prayer : Appeals filed under Section 260A of the Income Tax Act,1961 against the orders dated 28.08.2009 and 12.11.2010 on thefile of the Income Tax Appellate Tribunal, Chennai "B" BenchpassedinI.T.A.Nos.2057to2062/MDS/2008andI.T.A.Nos.171,172,749,750,1083,1084/MDS/2010 respectively andappeal against the order of the Commissioner of Income Tax(appeals)inI.T.A.Nos.174,173,616,615,172,617/07-08andI.T.A.Nos.172/07-08 & 400/09-10 dated 31.07.2008 andI.T.A.Nos.347,397,400/09-10 dated 29.04.2010 respectively andappeal against the order of the Additional Commissioner ofIncome Tax, Puducherry Range, Pondichery (Circle I) made inP.N.No/G.I No AABFL06523/303-L/Assesment year 2000-2001 dated29.12.2006, Assessment year 2001-2002 dated 29.12.2006,Assessment year 2002-2003 dated 31.12.2007 , Assessment year2003-2004 dated 31.12.2007, Assessment year 2004-2005 dated29.12.2006, Assessment year 2005-2006 dated 31.12.2007Assessment year 2004-2005 dated 29.12.2006, Assessment year2005-2006 dated 31.12.2007, Assessment year 2006-2007 dated 29.12.2008, Assessment year 2007-2008 dated 18.12.2009 ,Assessment year 2006-2007 dated 29.12.2008 and Assessment year2007-2008 dated 18.12.2009 respectively. For Appellant/Revenue : Mr.J.Narayanasamy For Respondents/Assessee : Mr.K.Ravi for M/s.Rugan & Arya C O M M O N J U D G M E N T (Judgment of the Court was delivered by RAJIV SHAKDHER,J.) 1. The captioned matters concern twelve (12) appeals. Outof which, eight (8) appeals have been filed by the Revenue,i.e., T.C.(A)Nos.533 to 538 of 2010 and 787 and 788 of 2014,while the remaining four (4) appeals have been filed by theAssessee, i.e., T.C.(A)Nos.1217 to 1220 of 2010. Out of theeight (8) appeals filed by the Revenue, six (6) appeals assailthe order of the Income Tax Appellate Tribunal (in short 'theTribunal') dated 28.08.2009, while the remaining two (2) assailthe order of the Tribunal dated 12.11.2010. Likewise, four (4)appeals, filed by the Assessee, assail the order of the Tribunaldated 12.11.2010. 2. The record shows that six (6) appeals have been disposedof by the one bench of the Tribunal, by a common order, whilethe other six (6) appeals have been disposed of by another benchof the Tribunal via another common order. As a matter of fact,one member of the Tribunal is common to both orders. 2.1. Counsel for parties are agreed that there is a commonthread and rationale running through the impugned orders of theTribunal, which has left both sides aggrieved. 2.2. In order to give a synoptic view of the variousassessment orders and orders-in-appeal passed, albeit, quadifferent periods by the authorities below, we have set forththe details pertaining to the same, in the form of a table setout hereafter: 2. The record shows that six (6) appeals have been disposedof by the one bench of the Tribunal, by a common order, whilethe other six (6) appeals have been disposed of by another benchof the Tribunal via another common order. As a matter of fact,one member of the Tribunal is common to both orders. 2.1. Counsel for parties are agreed that there is a commonthread and rationale running through the impugned orders of theTribunal, which has left both sides aggrieved. 2.2. In order to give a synoptic view of the variousassessment orders and orders-in-appeal passed, albeit, quadifferent periods by the authorities below, we have set forththe details pertaining to the same, in the form of a table setout hereafter: 3. Given the aforesaid state of affairs, while, narratingthe facts and discussing the issues, we would be describing theparties as Assessee and Revenue, as against Appellant andRespondent.4. The appeals, mainly veer around two (2) aspects, thoughcumulatively, several questions of law have been framed. Thefirst aspect concerns the claim of deduction made by theAssessee under Section 80IB of the Income Tax Act, 1961 (inshort, 'the 1961 Act'). The Assessee, evidently, has two units,which were set up at two different points in time and, areubiquitously referred to by the Authorities below as Unit-I andUnit-II. The Assessee claims separate deduction under Section80IB of the 1961 Act at the prescribed rates qua both Unit-I andUnit-II, on the ground that each unit, by itself, is separateindustrial undertaking. The Revenue's contention that the twounits have emerged by a process of splitting and/orreconstruction of the existing undertaking, is vigorouslycontested by the Assessee. 4.1. Via the aforementioned assessment orders, the Assesseehas declined the relief qua both Unit-I and Unit-II, broadly, onthe ground that both Units were formed by splitting andreconstruction of existing undertakings. 4.2. The Commissioner of Income Tax (Appeals)s [in shortCIT(A)s] have partly allowed the appeals. The order dated31.07.2008, passed by, one CIT(A) has been followed in substanceby the other CIT(A), which passed the order dated 29.04.2010. Indoing so, the CIT(A)s have allowed the Assessee to claimdeduction, as was sought for, at the rate of 25%, vis-a-visprofits generated qua Unit-I and, in so far as Unit-II isconcerned, deduction claimed has been scaled down from 100% to25%, based on the broad reasoning that it is not an independent unit, which can exist on its own. 4.3. The Tribunal via the aforementioned impugned orders,has sustained the views taken by the CIT(A)s. 4.4. It is, on account of this, both the Assessee and theRevenue are aggrieved and, thus, have preferred the captionedappeals. 5. The second aspect, which arises for consideration, isembedded in T.C.(A)Nos.1219 and 1220 of 2010. As regards thisaspect, the Assessee is aggrieved by the fact that the Tribunalhas upheld the computation of deduction under Section 80IA, byallowing for squaring off loss incurred by, one, Unit, albeit,for earlier years. This, according to the Assessee, is contraryto the judgment of the Tribunal rendered in : Rangamma Steelsand Malleables V. Assistant Commissioner of Income Tax. 6. Before we proceed further, it may be relevant to cullout the questions of law, which have been framed qua thecaptioned appeals: T.C.(A)Nos. 533 to 538 of 2010: (i). Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal was rightin law in holding that the Assessing Officer cannotreconsider the issue of granting the deduction underSection 80IB after the lapse of time, even if thereis a survey in the premises of the assessee andfindings of the survey shows that the assessee hasmanipulated his profits so as to get maximumdeduction under Section 80IB of the Act ? 6. Before we proceed further, it may be relevant to cullout the questions of law, which have been framed qua thecaptioned appeals: T.C.(A)Nos. 533 to 538 of 2010: (i). Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal was rightin law in holding that the Assessing Officer cannotreconsider the issue of granting the deduction underSection 80IB after the lapse of time, even if thereis a survey in the premises of the assessee andfindings of the survey shows that the assessee hasmanipulated his profits so as to get maximumdeduction under Section 80IB of the Act ? (ii). Whether on the facts and in the circumstancesof the case, the Income Tax Appellate Tribunal wasright in ignoring the provisions of Section 80IA(10)read with 80IA(13) and give suitable direction to theAssessing Officer to reconsider the issue on thebasis of the materials available on record ? T.C.(A)Nos.1217 and 1218/2010: (i). Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal was right inupholding the denial of the benefit under Section 80IB to Unit 2, when under identical circumstancesdeduction has been allowed to Unit 1, as well asother entities similarly placed ? and (ii). Whether on the facts and circumstances of thecase, the Tribunal was right in upholding denial ofdeduction under Section 80 IB when all the conditionslaid down in the section have been met by theassessee, on the ground that there are transactionsbetween inter connected undertakings and diversion ofprofits to the eligible undertaking, without firstdirecting the assessing officer to exercise his powers under Section 80IB(8) and 80 IA(10) andascertain the quantum of inflated profits if any? T.C.(A)Nos. 1219 and 1220/2010:(i). Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal was right inupholding the denial of the benefit under Section80IB to Unit 2, when under identical circumstancesdeduction has been allowed to Unit 1, as well asother entities similarly placed? and (ii). Whether on the facts and circumstances of thecase, the Tribunal was right in upholding denial ofdeduction under Section 80 IB when all the conditionslaid down in the section have been met by theassessee, on the ground that there are transactionsbetween inter connected undertakings and diversion ofprofits to the eligible undertaking, without firstdirecting the assessing officer to exercise hispowers under Section 80IB(8) and 80 IA(10) andascertain the quantum of inflated profits if any?” (iii). Whether the Tribunal was right in upholdingthe computation of deduction under Section 80IA byreducing the losses of one unit for earlier years,contrary to the decisions of a co-ordinate bench inwhich the judicial member was common?TCA 787 and 788 of 2014: (i) Whether on the facts and in the circumstances ofthe case, the Tribunal was right in law in holdingthat deduction under Section 80IB is not proper? 7. Having regard to the above, and in order to adjudicateupon the captioned appeals, the following broad facts arerequired to be noticed. The facts, which we have been able toglean from the records placed before us, are as follows: 8. The Assessee, it appears, at the relevant point in time,was in the business of manufacturing High Tensile PrecisionFasteners (in short Fasteners), which are also referred to as"nuts" in the market. These nuts are extensively used in theautomobile industry. 8.1. It appears that the Assessee, which is a partnershipfirm, comprised of one Mr.L.M.Shah and his son Mr.A.L.Shah. TheAssessee firm was constituted in March, 1998. 7. Having regard to the above, and in order to adjudicateupon the captioned appeals, the following broad facts arerequired to be noticed. The facts, which we have been able toglean from the records placed before us, are as follows: 8. The Assessee, it appears, at the relevant point in time,was in the business of manufacturing High Tensile PrecisionFasteners (in short Fasteners), which are also referred to as"nuts" in the market. These nuts are extensively used in theautomobile industry. 8.1. It appears that the Assessee, which is a partnershipfirm, comprised of one Mr.L.M.Shah and his son Mr.A.L.Shah. TheAssessee firm was constituted in March, 1998. 8.2. During the period relevant for Assessment year (A.Y.)1998-99, the Assessee purchased two Nut former machines. Thiswas followed by the Assessee purchasing in May, 2002, one moreNut Former machine, though, via the import route. For the nextfive (5) years, relevant for A.Ys.1998-99 and 2002-03, theAssessee claimed deduction at the rate of 100% of the profitsderived by it for conducting the business of manufacturingfasteners/nuts. https://hcservices.ecourts.gov.in/hcservices/ 8.3. The Assessee claims that it set up a second Unit and,started commercial production qua the said Unit on 23.10.2003.Since, the second unit was set up, the Assessee claimeddeduction vis-a-vis this unit, which is referred to as Unit -II,by the Authorities below, at the rate of 100% of the profitsderived in respect of the said unit, with effect from A.Y.2004-05. 8.4. The Assessing Officers, appear to have an objection tothe Assessee claiming Section 80IB deduction vis-a-vis bothunits. According to the Assessing Officers, Unit -I and Unit-II were not, by themselves, "integrated units". By which, itappears, the Revenue meant independent industrial undertakings. 8.5. In other words, their view was that the units wereformed by splitting and/or reconstructing existing business. Incoming to this conclusion, the Assessing Officers traced thebusiness carried out by the father and son, i.e., Mr.L.M.Shahand Mr.A.L.Shah (collectively referred to as Messrs Shah & Shah)to 1984, when, an entity in the form of private limited company,by the name, Fastenex Private Limited (in short 'FX'), wasincorporated and set up by them. 8.6. The Assessing Officers noticed that, in the firstinstance, FX had imported a Nut Former Machine, in 1984, from aTaiwanese source, which was followed by two other machines,being imported, albeit, in 1994 and 1996. 8.7. The incorporation and setting up of FX was followed by,Mr.A.L.Shah, floating a proprietary concern, under the name andstyle of Formex (in short FOX). Resultantly, in the name ofproprietary concern, between 1994 and 1996, four (4) Nut Formermachines were purchased. FX, evidently, claimed deduction underSection 80IA of the 1961 Act between 1994-95 and 1999-2000, atthe rate of 100%. 8.8. As alluded to above, in between the Assessee's firstUnit, i.e., Unit-I was set up in March, 1998, whereby, deductionwas claimed under Section 80IB of the 1961 Act, at the full rateof 100% for first five (5) years, i.e., periods relevant toA.Ys.1998-99 and 2002-2003. 9. Apart from the aforesaid entities, the AssessingOfficers also noticed the incorporation and setting up of thefollowing entities by Messrs.Shah & Shah. (i) Brightenex Pvt. Ltd. (in short BPL) (ii) Toolex Pvt. Ltd. (in short TPL) (iii) Auro Engineering. 10. The Assessing Officers, in order to show connectionbetween aforementioned entities and, to demonstrate theuntenability of Assessee's stand that Units I and II wereindependent undertakings, which would be eligible for deductionunder Section 80IB, adverted, broadly, to stages/process https://hcservices.ecourts.gov.in/hcservices/ 9. Apart from the aforesaid entities, the AssessingOfficers also noticed the incorporation and setting up of thefollowing entities by Messrs.Shah & Shah. (i) Brightenex Pvt. Ltd. (in short BPL) (ii) Toolex Pvt. Ltd. (in short TPL) (iii) Auro Engineering. 10. The Assessing Officers, in order to show connectionbetween aforementioned entities and, to demonstrate theuntenability of Assessee's stand that Units I and II wereindependent undertakings, which would be eligible for deductionunder Section 80IB, adverted, broadly, to stages/process https://hcservices.ecourts.gov.in/hcservices/ involved in the manufacture of fasteners/nuts. While alludingto the manufacturing process, an attempt was made to link eachprocess to an entity or entities, as the case may be. In thisbehalf, the record discloses the following: (i) Process of "wire rod pickling" and "phosphating" iscarried on by BPL(ii) The next stage, which involves, "forging" is carriedout by FX, FOX and the Assessee, by using Nut Former Machines.(iii) The third stage, which involves, "Nut Tapping" is alsocarried out by FX, FOX and the Assessee.(iv) The last stage, which involves plating of the goods, iscarried out by BPL. 10.1. Besides the above, certain secondary operations, suchas, "cap cutting", "curling" and "drilling" is carried out byFX, FOX and the Assessee. 10.2. The tools and dyes required in the carrying out ofoperations, such as, nut forging and nut tapping were,apparently, supplied by TPL, apart from other services, whichwere rendered by it. 10.3. This information, it appears, was culled out by theRevenue from documents including loose sheets seized in a surveycarried out under Section 133A of the 1961 Act, in respect ofthe aforementioned entities, which included the Assessee. 11. The record shows that the survey was carried out on18.11.2004 and 19.11.2004. The survey, inter alia, revealedthat the Assessee had understated scrap sales and investmentsmade in a certain immovable properties. 11.1. The record also shows that in respect of the A.Y.2004-05, the Assessee filed a revised return on 14.05.2003, wherein,it admitted additional income of Rs.12,91,000/- qua sale ofscrap. Furthermore, they also recomputed this deduction underSection 80IB of the 1961 Act. 12. Thus, based on the documents impounded, and theiranalysis, the Assessing Officers came to the conclusion that theAssessee manipulated inter-group transactions only for thepurpose of claiming tax benefits. The Assessing Officersspecifically concluded that TPL had been used as a conduit totransfer machinery and that the manipulation was done in amanner that the value of the transferred machines alwaysremained below 20% of the total value of the plant and machineryinstalled in the recipient concern, i.e., in the instant case,the Assessee. In this behalf, the role of FX and FOX was alsodiscussed by the Assessing Officer. 13. Based on these broad findings, the Assessing Officerrejected the claim of the Assessee for deduction under Section80IB of the 1961 Act, both for Unit - I and Unit-I. 13.1. Thus, in effect, the entire claim made by theAssessee under Section 80IB of the 1961 Act was disallowed. 14. As regards the other aspect, that is, deduction claimedby the Assessee under Section 80IA of the 1961 Act was https://hcservices.ecourts.gov.in/hcservices/ concerned, which arises for consideration in T.C.(A)Nos.1219 and1220 of 2010, the concerned Assessing Officer, in effect,adjusted the losses incurred by its one wind mill division,albeit, for earlier years, against profits of the A.Ys. inissue, while calculating the total taxable income. 14.1. The observations made in this regard by the concernedAssessing Officer via two separate orders, pertaining toA.Y.s.2006-07 and 2007-08 are extracted hereunder:T.C.(A)No.1219 of 2010: (A.Y.2006-07) https://hcservices.ecourts.gov.in/hcservices/ concerned, which arises for consideration in T.C.(A)Nos.1219 and1220 of 2010, the concerned Assessing Officer, in effect,adjusted the losses incurred by its one wind mill division,albeit, for earlier years, against profits of the A.Ys. inissue, while calculating the total taxable income. 14.1. The observations made in this regard by the concernedAssessing Officer via two separate orders, pertaining toA.Y.s.2006-07 and 2007-08 are extracted hereunder:T.C.(A)No.1219 of 2010: (A.Y.2006-07) “The provision of Sec.80IA (4)(iv) of theIncome Tax Act clearly states that the “undertakingwhich is engaged in generation of Power” and hence,the profits have to be arrived for windmill divisiontogether as an undertaking and not as a individualdivision. Further, the assessee had also got a loss ofRs.2,59,37,516/- on account of depreciation in thewindmill business in the Asst. Year 2005-06. As perthe provision of 80AB, the deduction shall beallowable only on the gross total income (i.e.,)after setting-off of the earlier losses.Accordingly, if the loss of the current Asst. Year(i.e.,) Asst. Year 2006-07 is adjusted (i.e.,Rs.1,31,20,482 - Rs.33,85,137 = Rs.97,35,345/-),the balance of Rs.9,73,53,450/- is adjusted againstthe earlier years loss of Rs.2,59,37,516/-, therewill be no profit left for deduction u/s 80IA of theIncome Tax Act.” T.C.(A)No.1220 of 2010 (A.Y.2007-08):“On the other hand, on perusal of recordsrevealed that the assessee-firm has computed theamount eligible u/s 80-IA at Rs.1,44,07,087/- toWind Power Division-I and Rs.86,93,342/- in PowerDivision-II. The provision of 80IA(4)(iv) of the Income TaxAct clearly states that the “undertaking which isengaged in generation of Power” and hence, theprofits have to be arrived for windmill divisiontogether as an undertaking and not as a individualdivision. Accordingly, the allowable deduction 80IAis restricted to Rs.68,98,260/- as againstRs.2,31,00,429/- claimed. .....” 15. Being aggrieved, the Assessee preferred appeals beforethe CIT(A)s. As indicated, at the outset, the CIT(A)s partlyallowed the appeal. The lead order is the order dated31.07.2008. The other order dated 29.04.2010, passed by anotherCIT(A), substantially follows the order dated 31.07.2008, bothin its reasoning and conclusion.15.1. The conclusion reached by CIT(A)s, is that, while theAssessee would be entitled to deduction under Section 80IB qua https://hcservices.ecourts.gov.in/hcservices/ Unit-I, it would not be entitled deduction vis-a-vis Unit -II. 16. The Tribunal, in both the orders, which are dated28.08.2009 and 12.11.2010, has accepted the view taken by CIT(A)in the orders referred to above in paragraph 2.2.Substantially, the Tribunal has approved the findings and thereasoning given by CIT(A), in the order dated 31.07.2008. Thisis reflected in the Tribunal's order dated 12.11.2010. 17. Therefore, for the purpose of disposal of the appeals,we propose to discuss and highlight the reasoning given by theAuthorities below qua the Assessee, vis-a-vis, A.Y. 2004-05,which is also the course adopted by the Tribunal. 18. The relevant orders of the Authorities below, withrespect to the said A.Y. will thus had taken into account by us.The Assessing Officer's order, which relates to A.Y.2004-05 isdated 29.12.2006. The order of the CIT(A), for the very sameA.Y. is dated 31.07.2008, while, the related order of theTribunal is dated 12.11.2010. 17. Therefore, for the purpose of disposal of the appeals,we propose to discuss and highlight the reasoning given by theAuthorities below qua the Assessee, vis-a-vis, A.Y. 2004-05,which is also the course adopted by the Tribunal. 18. The relevant orders of the Authorities below, withrespect to the said A.Y. will thus had taken into account by us.The Assessing Officer's order, which relates to A.Y.2004-05 isdated 29.12.2006. The order of the CIT(A), for the very sameA.Y. is dated 31.07.2008, while, the related order of theTribunal is dated 12.11.2010. 19. In order to appreciate the issues raised in the presentappeals, both by the Assessee and the Revenue, one would,therefore, have to set down, as to what is the scope of Section80IB of the 1961 Act, when, deduction is claimed by any Assesseeand not just the Assessee in the instant matter. It must benoted that but for some minor changes, none of which arematerial over a period of time, the provisions of Section 80IB,have more or less remained the same. 20. Therefore, what is it that an Assessee is required todemonstrate to claim deduction under Section 80IB of the 1961Act, to the extent it is relevant for the instant appeals, is,broadly, as follows. 20.1. The Assessee in order to claim deduction at theprescribed percentage qua profits and gains derived from anindustrial undertaking, which is required to demonstrate that itfulfils the following negative and positive attributes as setout in sub-section (2) of Section 80IB. (i) It is not formed by splitting up, or the reconstructionof a business already in existence; (ii) It is not formed by the transfer to a new business ofmachinery or plant previously used for any purpose; (iii) It manufactures or produces any article or thing, notbeing any article or thing specified in the list in the EleventhSchedule or operates one or more cold storage plant or plants,in any part of India. (iv) Where the industrial undertaking uses power, to aid inthe manufacture or production of articles or things, it isrequired to employ 10 or more workers. In cases, where,manufacturing process is carried out without the aid of power,the number of workers employed should not be less than 20. 20.2. As would be evident, the first two attributes havenegative connotations, while 3rd and 4th attributes are positivein nature. 20.3. Interestingly, in so far as the prohibition of forming an industrial undertaking by a transfer of machinery and plant,previously used, for any purpose to a new business is concerned,Explanation 2 contained in Section 80IB(2) provides somelatitude. The Explanation indicates that the negative conditionwill not get kicked-in, if, the value of machinery, or plant, ora part thereof, so transferred, does not exceed 20% of the totalvalue of the machinery, or plant, used in the recipientbusiness. 20.4. Thus, as long as the transfer of plant and machineryin the undertaking qua which deduction is sought, is less thanthe total value of plant and machinery installed in theindustrial undertaking, that by, itself, will not disentitle theAssessee from claiming deduction under Section 80IB. 21. The objection, which has been, principally, propoundedby the Revenue in its appeals is that, the Assessee, who is theowner of both Unit I and Unit II, had violated the firsteligibility condition, which is that, both units had been formedby splitting and/or re-constructing the business. 21.1. The entire thrust of the Assessing Officers' findinghas been that the business of manufacture of fasteners/nuts hasbeen spread over various entities, only to derive a tax benefitunder Section 80IB of the 1961 Act. 21. The objection, which has been, principally, propoundedby the Revenue in its appeals is that, the Assessee, who is theowner of both Unit I and Unit II, had violated the firsteligibility condition, which is that, both units had been formedby splitting and/or re-constructing the business. 21.1. The entire thrust of the Assessing Officers' findinghas been that the business of manufacture of fasteners/nuts hasbeen spread over various entities, only to derive a tax benefitunder Section 80IB of the 1961 Act. 21.2. The CIT(A)s and the Tribunal, however, have not whollysubscribed to this view of the Assessing Officers. They havegranted the relief to the Assessee, vis-a-vis Unit I. In doingso, they have come to the conclusion that unless, it could beshown that formation of the undertaking is predicated on thetransfer of plant and machinery from an existing business, theAssessee cannot be declined the relief qua Unit I. In coming tothe conclusion, both CIT(A)s and the Tribunal fortified theirreasoning by adverting to the fact that between A.Ys.1998-99 and2002-03, the Assessee had claimed, and was, granted the benefitof the provisions of Section 80IB. 21.3. The reasoning of the CIT(A), which has been approvedby the Tribunal, in its orders, is reflected in the followingobservations, in the order dated 31.07.2008, passed quaA.Y.2004-05 (T.C.(A)No.1217 of 2010) “4.11.4.3. As held by the Supreme Court unless theundertaking, Unit-I in the present appellant's case, isestablished to have been formed as a result of transfer ofbuildings, plant and machinery, etc., the benefit ofdeduction u/s80-IB cannot be denied. The mere fact thatcertain items of plant and machinery which were previouslyused in the business of the sister concerns weretransferred, that too in the second year of its commencingthe business will not disentitled the appellant firm to thebenefits granted by law and to do so would amount to givinga very narrow interpretation which will go against thespirit behind the provision granting the relief.undertaking, Unit-I in the present appellant's case, isestablished to have been formed as a result of transfer ofbuildings, plant and machinery, etc., the benefit ofdeduction u/s80-IB cannot be denied. The mere fact thatcertain items of plant and machinery which were previouslyused in the business of the sister concerns weretransferred, that too in the second year of its commencingthe business will not disentitled the appellant firm to thebenefits granted by law and to do so would amount to givinga very narrow interpretation which will go against thespirit behind the provision granting the relief. 4.11.5. In order to see whether the appellant firm had beenformed as a result of transfer of assets in a substantialmanner from the other two concerns, M/s.Fastenex Pvt. Ltd.or Formex, it is necessary to analyse the assets position aswell as the manner of functioning and the net profit resultsof these concerns, year-wise. As already indicated, thecapital of these concerns remained intact when the appellantfirm was formed. It is only that certain second-handmachinery items – Tapping machines that were transferred tothe firm through M/s.Toolex Pvt. Ltd. a quick glance of theprofits of these two concerns for the accounting periodsrelevant for the assessment years 1999-2000 to 2005-06 willshow that these concerns had been functioning in their ownright independently. 4.11.5.1.On a study of the details furnished by theappellant's representative, it is seen that Fromex, theproprietory concern of Shri. A.L.Shah, is the only one thathad been carrying on the activities of manufacturing nutsand it had been claiming deduction u/s 80-IB in respect ofits profits. The year-wise break up details of sales/grossreceipts/income and the net profits thereon, of this concernare furnished as under : 4.11.5.2.Two pints are clear from the above data. 4.11.5.1.On a study of the details furnished by theappellant's representative, it is seen that Fromex, theproprietory concern of Shri. A.L.Shah, is the only one thathad been carrying on the activities of manufacturing nutsand it had been claiming deduction u/s 80-IB in respect ofits profits. The year-wise break up details of sales/grossreceipts/income and the net profits thereon, of this concernare furnished as under : 4.11.5.2.Two pints are clear from the above data. (i) For the initial three accounting periods ending with31.1.99, 31.3.2000 and 31.3.2001 Formex had been showinghuge sales turnover in respect of which it had been claimingdeduction u/s 80-IB also. The assessment year 2000-01 wasthe seventh year of claim. (ii) But, however, for the subsequent accountingperiods, that is, from the financial year 2001-02 to 2004-05, there had been no sale of nuts, but, this concern hadbeen showing income by way of service charges only. 4.11.5.3.Which means that over a period of time, theappellant firm had taken over the entire manufacturingactivities of nuts. But, that does not mean that the firmM/s.Leo Fasteners itself was formed by splitting up orreconstruction of the concern, Formex. And the mere factthat the appellant firm ultimately took over the entireactivity of manufacturing nuts from Formex will notdisentitle it to the benefit of deduction u/s 80-IB. 4.11.6.As far as the affairs of M/s.Fastenex Pvt. Ltd.are concerned, this is a limited company and it had beenshowing only service charges as income against which it hadclaimed huge expenditure by way of job work right throughfrom the financial year 1999-2000 upto 2004-05. On a perusalof the profit and loss account statements of this company,it is seen that it had been showing income from the activityof generating power from wind mills also. And it had beenclaiming deduction u/s 80-IA/80-IB. The break-up details ofservice charges, expenditure and net profit for this concernare furnished in the table given below: 4.11.7.Thus, even on an analysis of the affairs of theother concerns and in particular, the proprietory concern,Formex, nothing could be brought out in concrete terms toshow that the formation of the appellant firm was bysplitting up or by reconstruction of any of these connectedconcerns. The totality of the facts do indicate that therehad been transactions between the connected concerned andthe appellant firm in the sense that they had carried outcertain processes involved in the manufacture of nuts and itis only the appellant firm which had taken credit for theentire sale of nuts ultimately over a period of years. But,still, going by the principles laid down by the SupremeCourt in the cases of Textile Machinery Corporation Ltd. Vs.CIT and Bajaj Tempo Ltd. Vs. CIT, there is nothing in theaffairs of the firm M/s.Leo Fasteners to indicate that ithad been formed by splitting up or reconstruction of analready existing business, either in the first accountingperiod or later on. It was highlighted in the case ofTextile Machinery Corporation Ltd. Vs. CIT, that the newundertaking must be an integrated unit by itself whereinarticles are produced and at least a minimum number ofpersons had been employed as prescribed by law and this isprecisely the situation in the present appellant's case. Thefacts brought out by the appellant's representative and asdiscussed in the above paragraphs will reveal that thetotality of the facts prevailing in the formation andfunctioning of Unit-I of the appellant firm certainlyconforms to the views expressed by the Apex Court andtherefore, the Assessing Officer's views are not to beaccepted as correct. 4.12.In view of the foregoing discussions, it is heldthat the Unit-I of the appellant firm cannot be said to havebeen formed by splitting up or reconstruction of anindustrial undertaking that already existed and there hadbeen no violation of any of the conditions as laid down insec.8-IB in its formative years. In so far as the profits ofUnit-I are concerned, it has to be that they will qualifyfor the deduction u/w 80-IB." 21.4. Since, the Assessing Officers had also denied therelief to the Assessee, inter alia, on the ground that most ofthe work involved in the manufacture of fasteners/nuts iscarried out by its sister concerns, i.e., FX, FOX and BPL, andtherefore, the Assessee could not be allowed deduction underSection 80IB of the 1961 Act, as it was not carrying outmanufacturing activity; it was an aspect, which was alsoexamined by the CIT(A) in the very same order. The CIT(A),after a detailed analysis, came to the conclusion that theAssessee was performing the most vital function, which was nut tapping. 21.5. In this regard, the following observations andfindings of fact returned by the CIT(A), need to be noticed."5. Now coming to the question as to whether theappellant firm had carried on any manufacturingactivity at all in the light of the fact that certainprocesses were got done by the firm on job-work basisonly, the salient features of the impugned order onthis aspect of the issue had been narrated inparagraphs Nos.4.1(i) to 4.1(f) and 4.1(viii) above.It is because the appellant firm had got done certainprocesses through its connected concerns, viz.,Fastenex, Formex and Brigtenex, and the percentage ofsales turnover were quite high when compared to theconsumption of the raw materials for a number ofaccounting periods including the impugned year, theAssessing Officer was of the view that the appellantfirm by itself had not carried on any manufacturingactivities. He had observed as under in the impugnedorder :“In addition, payments are also made to Toolex andBrightenex for Tools/Dies and pickling/phosphating &planting respectively. It is to be noted thatM/.s.Toolex and M/s.Brightenex are also exclusivelyoperating for the business of the group and do not haveany transactions with outsiders. Thus, in the wholeprocess what the assessee would claim is that tappingof the nuts is done by them and also work relating tocap cutting etc. if any. But, as we have already seen,machinery belonging to other concerns has beentransferred using the conduit of Toolex to createtapping capacity in this concern. This kind ofmanipulation is the reason for such high profit marginswhereas all other sister concerns who have actuallydone most of the processes involved, hardly discloseany taxable incomes. Sri L.M.Shah and Sri A.L.Shah whoare the persons behind the whole arrangement have thusshifted the profits from other concerns to LFA and thento LFA, Unit-II primarily to avail deduction u/s 80-IB.”“All the concerns are involved in the same businessand are inter-related in the manufacturing process ofnuts. As mentioned previously, M/s.Fastenex, M/s.FOXhave been manufacturers of nuts and had already availedof the tax benefits u/s 80-IA. They are now beingshown as job workers for production of nut blanks fromthe wire rod. As regards Brightenex and Toolex, theyare also part of the manufacturing process of nuts.M/s.Brightenex providespickling/phosphatingandplanting services. M/s.Toolex provides service towardstools and dies. Therefore, the Shah Group has been shifting profits from one concern to another on thebasis of mere book entries. Therefore, it is clearthat LFA is not an independent production unit”. shifting profits from one concern to another on thebasis of mere book entries. Therefore, it is clearthat LFA is not an independent production unit”. 5.1.As against the above views, during the course ofhearing of the appeal, the appellant's representativehas made efforts to explain the different processesinvolved in the manufacture of nuts and he has alsoexplained in clear terms as to what are the processescarried on by the appellant firm after getting the rawmaterials processed by its connected concerns upto acertain stage. It is necessary to understand thedifferent processes involved in the manufacturing ofnuts to begin with. The different processes involvedare Forging, Pickling, Phosphating, Wire drawing,Plating and Nut Tapping. Certain secondary operationslike assembly, welding, Curl cutting etc. are alsocarried out. The two main stages are producing Blanksand Tapping. Blanks are stated to be only semi-finished components which do not have a markettablevalue and 'forging' is the process of producing'blanks' with the help of machinery called 'NutFormers'. The various stages of processing asexplained by the representative are briefly stated asunder : “Leo Fasteners procures raw materials/ componentsand processes them for manufacture of nuts. The rawmaterials (wore rods) procured are pickled, phosphatedand then wire drawn using the services of sisterconcerns. Then such wire drawn rods are converted intoblanks either by themselves or through outsourcing.Later, the main and vital process (nut tapping) whichadds utility value for the nuts and makes the productsusable is being performed by M/s.Leo Fasteners. In case of certain special nuts, secondaryoperation like assembly, welding etc. is done whichenhances the performance of the nuts and also createsgreater value addition. These processes are alsoperformed by the unit which effects the sale of nuts”. “Blanks” are only semi-finished components and arenot readily marketable. Also, the blanks do not haveany utility value. They can only be used as a componentfrom which nuts can be manufactured. “Forging” is theprocess involving nut formers to produce blank nutsfrom the rods. This process is being carried out byLeo Fasteners (Both units), Fastenex P. Ltd. andFormex. This process can be considered crucial onlyfrom the investment/capacity angle.Thus only when the blanks are processed (tapped)properly, duly meeting the requisite precision level do they result in “NUTS” which are readily marketable.“Nut tapping” is the process involving tapping machinesto produce “nuts” from the blanks. This clearly bringsout the vitality of the tapping process vis-a-vis allother activities involved. This process had beencarried on by Leo Fasteners wherever Leo fasteners hadsold the nuts. For some of the nuts, further processing throughwelding / assembly is carried out, based on the designrequirement. These steps, by adding certain componentto the basic nut, enhances their performance as well asadds to the reaslisable value. To explain the insignificant nature of the otherprocesses involved, such processes have been explainedin detail hereunder also explaining the concernsinvolved in such non-core activities : “Pickling” is the treatment of metallic surfaces inorder to remove stains, rust or scale with a solutioncontaining strong mineral acids, before subsequentprocessing. This process can by no stretch ofimagination be termed as core as there is notransformation in the materials as such and this isbeing performed by M/s.Brightenex P. Ltd. “Phosphating” is the method of protecting a steelsurface from corrosion through the application ofchemical phosphate conversion coating. This processalso can never be termed as core as there is notransformation in the materials as such. This processis also being carried out by M/s.Brightenex P. Ltd. “Pickling” is the treatment of metallic surfaces inorder to remove stains, rust or scale with a solutioncontaining strong mineral acids, before subsequentprocessing. This process can by no stretch ofimagination be termed as core as there is notransformation in the materials as such and this isbeing performed by M/s.Brightenex P. Ltd. “Phosphating” is the method of protecting a steelsurface from corrosion through the application ofchemical phosphate conversion coating. This processalso can never be termed as core as there is notransformation in the materials as such. This processis also being carried out by M/s.Brightenex P. Ltd. “Wire drawing” is the process used to reduce orchange the diameter of a wire or rod through a singleor series of drawing die(s). This process also cannever be termed as core as the diameter of the rodsalone undergo a change during this process and rods(input) continue to be rods (output) even after theprocess. This process is also being carried out byM/s.Brightenex P. Ltd.” 5.2. The explanation given as above will give ageneral idea of the various processes involved inbringing out the final product “nut” from the rawmaterials, wire rods. It is seen from a careful studyof the submissions made that there are tow importantstages in the various processes involved in themanufacture of nut – Nut Forging, which produces blanksand Tapping/Threading. It has been explained abovethat it is only the process called 'Nut Tapping' whichbring about the vital change in the raw material tomake the final product commercially and qualitativelydifferent from the raw material. 'Nut Tapping' is nothing but the act of threading the nuts. It wassubmitted that although upto the stage of producing nutblanks, the processes of pickling, phosphating andforging are done by the appellant firm with the help ofthe sister concerns on job work basis, the mainactivity of nut tapping/threading which is crucial toproduce a nut, is being done only by the appellantfirm. It was also highlighted that after the stage of“Nut tapping”, the materials are subjected to furtherprocesses viz., crimping and welding which are carriedout only by the appellant firm and further the processof plating the nuts are done by the connected concern,M/s.Brightenex Pvt. Ltd. But, however, all the nuts somanufactured are passed through quality control by theappellant firm only before they are brought out in themarket." (emphasis is ours) 21.6. Clearly, on both counts, CIT(A) held in favour of theAssessee, which is that, it not only was not formed by splittingor reconstruction of an existing business, and that, it didcarry out manufacturing activity, contrary to what the AssessingOfficers have held. 22. In so far as Unit II is concerned, the CIT(A), in thevery same order, while noticing that certain secondaryoperations were carried out in Unit II, and that, the Assesseehad endeavoured to set up Unit II, with the object of enhancingthe quality of the final product, i.e., fasteners and nuts and,in that behalf, had imported five (5) brand new nut formermachines, declined to grant the relief to the Assessee vis-a-visUnit II. 22.1. This was, after the Assessee had given details ofinvestments in fixed assets, which,