ITO, New Delhi V. M/s. Mark & Space Telesystems Pvt. Ltd., New Delhi

ITA 1355/DEL/2012

• Counselvise Citation: 135520114 RSA 2012
• Duration Of Justice: 1 year(s) 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2013
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 22-07-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 20-03-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SUKHVEER CHAUDHARY
• Assessee Lawyers: V K AGGARWAL
• Section: 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH E NEW DELHI) BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. NO.1355/DEL/2012 ASSESSMENT YEAR : 2005-06 ITO, MARK & SPACE TELESYSTEMS P LTD. WASRD-6 (2), 1002, 10 TH FLOOR, PADAM TOWER, NEW DELHI. V. RAJENDRA PLACE, NEW DELHI. (APPELLANT) (RESPONDENT) PAN /GIR/NO. PAN /GIR/NO. PAN /GIR/NO. PAN /GIR/NO.AACCM AACCM AACCM AACCM- -- -6843 6843 6843 6843- -- -L LL L APPELLANT BY : SHRI SUKHVEER CHAUDHARY, SR. DR. RESPONDENT BY : SHRI V.K. AGGARWAL, AR. ORDER PER TS KAPOOR, AM: THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORD ER OF LD CIT(A) DATED 3.12.2011. THE GROUNDS RAISED BY THE R EVENUE ARE AS UNDER:- 1. THE ORDER OF LD CIT(A) IS ERRONEOUS AND CONTRARY TO F ACTS AND LAW. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD CIT(A) HAS ERRED IN DELETING THE ADDITION OF ` .78,56,533/- ON ACCOUNT OF DISALLOWANCE OF DEDUCTION U/S 80IC OF THE INCOME TAX ACT, 1961 . 3. THE APPELLANT CRAVES LEAVE TO ADD TO ALTER, AMEND AN Y GROUNDS OF THE APPEAL RAISED ABOVE AT THE TIME OF HEARING. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMP ANY FILED ITS RETURN OF INCOME DECLARING AN INCOME OF ` .2,61,898/- AFTER CLAIMING ITA NO1355/DEL/2012 2 DEDUCTION OF ` .78,56,553.51 ON ACCOUNT OF DEDUCTION U/S 80IC OF T HE INCOME TAX ACT, 1961 . THE CASE OF THE ASSESSEE WAS SELECT ED FOR SCRUTINY. DURING ASSESSMENT PROCEEDINGS, THE ASSESSING OFFIC ER OBSERVED THAT ASSESSEE HAD AN OFFICE IN DELHI WHEREIN IT WAS ENGAGED IN THE AREAS OF TELECOM ACCESS NETWORK, TELECOM POWER SOLUTIONS AND LONG DISTANCE TELEPHONY APPLICATIONS. THE ASSESSING OFFIC ER FURTHER OBSERVED THAT THE ASSESSEE HAD CLAIMED TO HAVE SET UP A MANUFACTURING UNIT IN PARWANOO IN HIMACHAL PRADESH T HE INCOME OF WHICH HAS BEEN CLAIMED TO BE EXEMPT U/S 80IC OF THE ACT. FROM THE DOCUMENTS AND RECORDS PROVIDED BY THE ASSESSEE, THE ASSESSING OFFICER MADE THE FOLLOWING OBSERVATIONS:- I) THAT THERE WAS ONLY FIVE EMPLOYEES IN THE PARWANOO UN IT WHICH INCLUDED ONE SWEEPER AND IT WAS NOT POSSIBLE FOR SUCH A SMALL TEAM OF FOUR PERSONS WHO COULD GENERATE PRODUCTI ON EQUIVALENT TO ` .1,34,39,000/-. II) THAT IN DELHI UNIT THERE WERE 23 EMPLOYEES WHO GENER ATED REVENUE OF ` .36,68,846/- WHEREAS IN THE PARWANOO UNIT IN A PERIOD OF FOUR MONTHS IT GENERATED TURNOVER OF ` .1,34,39,000/-. III) THAT ASSESSEE FAILED TO FURNISH LIST OF EMPLOYEES WITH ADDRESSES AND DUTIES ASSIGNED TO EACH OF THEM. IV) THAT ASSESSEE FAILED TO SUBMIT A COPY OF QUARTERLY RETUR N OF HIMACHALI AND NON HIMACHALI EMPLOYEES EMPLOYED AT PARTWANOO UNIT WHICH WAS REQUIRED TO BE FILED WITH G ENERAL MANAGER DISTT. INDUSTRIES CENTRE, DISTT. SOLAN, HIMACHA L PRADESH. V) THAT ASSESSEE FAILED TO SPECIFY THE DISTINCTIVE NATURE O F ACTIVITIES CLAIMED TO BE CARRIED OUT AT DELHI UNIT A ND AT PARWANOO UNIT. ITA NO1355/DEL/2012 3 VI) THAT OUT OF TOTAL PURCHASES CLAIMED TO HAVE BEEN MADE AT ` .64,62,829.41, A SUM OF ` .34,19,520/- WAS SHOWN TO BE REPRESENTING THE PURCHASE OF FINISHED GOODS. THEREFORE, IT WAS IN-CONTRAVENTION TO THE CLAIM THAT ASSESSEE COMPANY WAS CARRYING OUT OF ITS OWN DESIGN PRODUCT. VII) THAT NO MANUFACTURING ACCOUNT WAS FURNISHED IN SPITE OF REPEATED REQUESTS. THEREFORE, ON THE BASIS OF ABOVE FACTS AND CIRCUMSTANC ES, THE ASSESSING OFFICER HELD THAT THE UNIT AT PARWANOO DOES NO T APPEAR TO HAVE BEEN ESTABLISHED PHYSICALLY. THEREFORE, THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY DEDUCTION CLAIMED U/S 80IC OF T HE ACT SHOULD NOT BE DISALLOWED. IN RESPONSE TO THE SHOW CAUSE NOTICE , THE ASSESSEE SUBMITTED AS UNDER:- IN RESPONSE TO THE SHOW CAUSE NOTICE ON THE CLAIM OF D EDUCTION U/S 80IC OF THE ACT THE ASSESSEE FURNISHED A DETAILED SUB MISSION WHICH IS REPRODUCED HEREUNDER FOR THE SAKE OF CONVENI ENCE AND DISCUSSION. IT MAY BE NOTED THAT THE PARWANOO UNIT IS ALTOGETHER A MANUFACTURING UNIT AND NO OTHER ACTIVITY EXISTS AT PA RWANOO. THE PROFIT AND LOSS FOR THE PARWANOO UNIT IS THE MANUFACT URING ACCOUNT FOR THE COMPANY. COPY OF MANUFACTURING ACCO UNT IS ENCLOSED AS PER ANNEXURE II. THE COMPANY WAS PROVIDING CONSULTANCY SERVICES LIKE DESI GN & DEVELOPMENT SERVICES TO TELECOM MANUFACTURING COMPANI ES WITHIN INDIA AND HAVE HIGH END EMPLOYEES TO DEVELOP DESIGN FOR TELECOM COMPANIES IN INDIA. SALARY TO THE EMPLOYEES I S THE MAIN ITA NO1355/DEL/2012 4 EXPENSES IN ORDER TO GENERATE THIS CONSULTANCY INCOME A T DELHI UNIT. THE SALARY OF ` .25,98,946/- IS PAID IN THE YEAR UNDER REFERENCE TO GENERATE CONSULTANCY FEES INCOME OF ` . 36,68,846/- WE ALSO LIKE TO INVITE YOUR ATTENTION TO THE FACT TH AT THE COMPANY IN THE PRECEDENT ASSESSMENT YEAR 2004-05 HAS GENERATED F EES OF ` .19, 81, 478/- AND PAID SALARY TO THE TUNE OF ` .16,65,415/-. THE COMPANY IN CONSULTANCY BUSINESS IS GENERATING A MARGIN O F 28% TO SALARY FOR THE YEAR UNDER REFERENCE AN INCREASE OF MORE THAN 12% TO THE DETERMINED RATIO OF 16% IN PRECEDING PRE VIOUS YEAR 2004-05. DETAILS OF EMPLOYEES ALONG WITH THEIR ADDRESSE S, NATURE OF DUTY, DATE OF EMPLOYMENT AND QUALIFICATION FOR D ELHI AND PARWANOO ARE ONCE AGAIN ENCLOSED IN ANNEXURE III. IT MAY BE NOTED THAT ALL THE EMPLOYEES ARE REGISTERED WITH EMPL OYEES PROVIDENT FUND AND PAYMENT OF SALARY TO EVERY EMPLO YEE IS PAID VIDE CHEQUE. CLAIM OF DEDUCTION UNDER SEE 801C OF THE INCOME TAX ACT 1961: THE COMPANY WITH EFFECT FROM SEPTEMBER 2004 HAS START ED MANUFACTURING FACILITY IN PARWANOO TO PRODUCE TELEC OM PRODUCTS AND EQUIPMENTS AFTER REGISTRATION WITH DEPARTMENT OF INDUSTRIES (NODAL AGENCY). THE COMPANY HAS DECIDED TO ENTER IN TO MANUFACTURING IN PARWANOO IN ADDITION TO CONSULTANC Y SERVICES OF DESIGN & DEVELOPMENT SERVICES TO TELECOM MANUFACTURING COMPANIES AT DELHI (NO MANUFACTURING OR TRADING AT D ELHI FOR THE YEAR UNDER REFERENCE OR IN THE PREVIOUS YEAR AND ONL Y CONSULTANCY ACTIVITY AT DELHI, KINDLY REFER ANNUAL R EPORTS ON RECORDS). BEING HIGH TECHNOLOGY EQUIPMENTS ITS ALWAYS F ORESEEN HIGH PROFITABILITY IN MANUFACTURING ACTIVITY. AT NO POINT OF TIME THE UNIT CAN BE SAID TO BE FORMED BY SPLITTING OR SHIF TING OF THE ACTIVITY FROM DELHI SO THE CONDITIONS OF 801C IS FULLY COMPLIED IN ITA NO1355/DEL/2012 5 ITS ENTIRETY. IT MAY BE NOTED THAT THE DEPARTMENT OF INDUSTRIES HAS GIVEN THE SINGLE WINDOW CLEARANCE AND THAT TO AFT ER VERIFICATION AND INSPECTION WHILE GIVING PERMANENT REGISTRATION SUBSEQUENT TO TEMPORARY REGISTRATION IN AUG 2004, THE DEPARTMENT OF INDUSTRIES, GOVERNMENT OF HIMACHAL PRAD ESH BEING THE NODAL AGENCY FOR CERTIFYING THE ESTABLISHME NT OF THE NEW UNIT FOR CLEARING. THE UNIT FOR ELIGIBILITY OF UNIT FOR CLAIMING BENEFITS UNDER VARIOUS ACTS AND LAWS. ALSO THE DEPARTMEN T OF INDUSTRIES HAS CERTIFIED ABOUT THE NUMBER OF EMPLOYEES (HIMACHAL AND NON HIMACHAL), THE INSTALLATION AND DE SCRIPTION OF NEW PLANT AND MACHINERY, PRODUCTS TO BE MANUFACTURED ETC. IN THE MANUFACTURING THE LNPUT RAW MATERIAL (COMPONENT S & SUB ASSEMBLIES) IS PURCHASED. THIS IS SUBJECTED TO IGI (IN SECT ION) THEN KITTING IS DONE & SENT FOR ASSEMBLY BY LOCAL PARTN ERS. THE KEY MANUFACTURING ACTIVITY INVOLVED IN THESE SYSTEMS IS OF TESTING & CALIBRATION WHICH IS CARRIED OUT USING AUTOMATIC TE ST EQUIPMENT UNDER SUPERVISION OF EMPLOYEES. THE OTHER KEY OPERATIO N INVOLVES PROGRAMMING OF EMBEDDED PARTS. BOTH THESE OPE RATIONS USE COMPUTERIZED MACHINERY AND ARE NOT LABOUR INTENSI VE HENCE WE CAN PRODUCE A VERY LARGE QUANTITY WITH LIMITED P RODUCTION STAFF. THE SERVICES OF THIRD PARTY ASSEMBLY COMPANIES WHI CH ARE IN TURN EMPLOYING A LARGE NUMBER OF PEOPLE IN HIMAC HAL PRADESH. IT MAY BE NOTED THAT THE DIRECTOR OF THE COMPANY MR . SANKALP SRIVASTAVA IS IIT (BE ELECTRONICS AND COMMUNICATION) I S THE MAJOR TECHNICAL PERSON IN SETTING AND GIVING TECHNICAL ASSISTA NCE ON THE MANUFACTURING UNIT AT PARWANOO WHOSE VALUE ADDITION ON THE MANUFACTURING ACTIVITY CANNOT BE ASCERTAINED AND ESTI MATED. THE GROSS MARGIN ON THE SALE IN PARWANOO IS 58% APPROX. PLEASE NOTE FURTHER THAT THE PRODUCTION AT PARWANOO UNIT C ONSISTS MAINLY ITA NO1355/DEL/2012 6 MANUFACTURING & TESTING CARD SETS/SYSTEMS USING ELECTRONI C COMPONENTS & SUB ASSEMBLIES AS STATED ABOVE. THESE OPERATIO NS HAVE BEEN VERIFIED BY THE DEPARTMENT OF INDUSTRIES BE FORE GRANTING THE PERMANENT REGISTRATION (COPY OF THE REG ISTRATION IS ALREADY ON RECORD AND OTHER CERTIFIED DOCUMENTS OF D EPARTMENT OF INDUSTRIES, GOVERNMENT OF HIMACHAL PRADESH IS ATTACH ED HEREWITH. THE DEDUCTION U/S 80IC IS FULLY ALLOWABLE AS MENTIONED ABOVE AND ON FOLLOWING GROUNDS: IT IS TO MENTION THAT :- NO EMPLOYEE OF THE DELHI UNIT HAS BEEN TRANSFERRED TO THE PARWANOO UNIT. THERE HAS BEEN NO SPLITTING OF THE DEL HI UNIT. REFER THE EXPLANATION GIVEN IN POINT NO. 4 ABOVE AN D THE LIST OF EMPLOYEES PRODUCED (MOST OF THE EMPLOYEES IS IN CONTINU ED SERVICES FROM THE PREVIOUS YEAR). THE UNIT HAS NOT BEEN FORMED BY TRANSFERRING BUSINESS OF MACHINERY & PLANT PREVIOUSLY USED FOR ANY OTHER PURPO SE AS CERTIFIED BY DEPARTMENT OF INDUSTRIES AND ADDITION TO FIXED ASSETS GIVEN IN THE PREVIOUS HEARINGS. AS MENTIONED ABOVE THE COMPANY WAS NOT MANUFACTURING ANY TELECOM IN THE PREVIOUS YEARS AND GIVING CONSULTANCY SERVICES ONLY FROM DELHI UNIT (PROVIDING DESIGN AND TELECOM SE RVICES) TILL SETTING UP OF MANUFACTURING FACILITY (TELECOM PRODUC TS) IN OCT 2004 AT PARWANOO UNIT. HENCE NO QUESTION OF TRANSFER OF PLANT AND MACHINERY OR FIXED ASSETS ARISE. THERE CANNOT BE A REVENUE CORRELATION BETWEEN DESIGN SERVICE BUSINESS (CONSULTANCY) BEING RUN AT DELHI & MANUFACTURING BUSINESS BEING RUN AT PA RWANOO. THE REVENUE AND EXPENSES OF THE DELHI UNIT CAN BE ONL Y CORRELATED WITH DELHI UNIT AND IS VERY MUCH JUSTIFIED REFER POINT ITA NO1355/DEL/2012 7 NO. 4 ABOVE AND EARLIER SUBMISSIONS REFER CERTIFIED RE PORT OF AUDITORS ALSO REGARDING THE SAME. THE ACTIVITIES AT DEL HI AND PARWANOO ARE CATEGORICALLY DISTINCT I.E. DELHI RENDE RING DESIGN & DEVELOPMENT CONSULTANCY SERVICES AND PARWANOO MANUFACT URING TELECOM PRODUCTS. THE COMPANY IS COMPLYING WITH ALL STATUTORY REGULATIO N AND COMPLIANCE AFTER SETTING UP MANUFACTURING FACILITY. WE ARE SUBMITTING THE FOLLOWING DOCUMENTS REGARDING PHYSICAL EXISTENCE OF A UNIT IN ADDITION TO CERTIFIED FROM 001, GOVT. OF H.P:- RENT AGREEMENT SALES TAX REGISTRATION TELEPHONE CONNECTION ESI APPLICATION & SUBSEQUENT CORRESPONDENCE THE UNIT HAS INTIMATED EXCISE DEPARTMENT ABOUT OPERAT IONS AND MANUFACTURING EVERY YEAR. EXCISE & TAXATION DEPARTMENT RECORD OF MOVEMENT OF R AW MATERIAL & FINISHED GOODS. THE PARWANOO UNIT IS LNDEPENDANT ENTITY AND HAVING A LL EMPLOYEES EXCEPT, ONE FROM HIMACHAL PRADESH IN THE PA RWANOO UNIT. REFER FORM 1 ISSUED BY DEPARTMENT OF INDUSTRIES, GOVT. OF H.P. COPY ATTACHED. ALSO REFER CERTIFIED REPORTS OF A UDITORS. THE PRODUCTION AT PARWANOO UNIT CONSISTS MAINLY MANUFACTU RING & TESTING CARD SETS/SYSTEMS USING ELECTRONIC COMPONENTS & SU B ASSEMBLIES. THESE OPERATIONS HAVE BEEN VERIFIED BY THE DEPARTMENT OF INDUSTRIES BEFORE GRANTING THE PERMANEN T REGISTRATION, WE ARE CATEGORICALLY STATING THAT THE P ERCENTAGE OF HIMACHAL STAFF EMPLOYED AT PARWANOO UNIT WAS 75% IN F Y 04-05 ITA NO1355/DEL/2012 8 & THIS IS AN ESSENTIAL CONDITION FOR GETTING THE PERMAN ENT REGISTRATION - A COPY OF WHICH HAS BEEN SUBMITTED TO Y OU. THE PURCHASE OF RS.34,19,250 ATTRIBUTED FOR PURCHASE O F SUB ASSEMBLY THE GOODS MANUFACTURED BY SUB VENDORS USED FOR FINAL PRODUCTS, A RAW MATERIAL COMPONENT FORMING PART OF F INAL PRODUCT ON WHICH LOT OF VALUE ADDITION HAS BEEN DONE AS EXPLA INED ABOVE. 3. THE ASSESSING OFFICER AFTER GOING THROUGH THE REPLY OF THE ASSESSEE DID NOT CONSIDER THE ASSESSEE TO BE ELIGIBLE FOR DE DUCTION U/S 80IC OF THE ACT AND DISALLOWED THE SAME BY HOLDING AS UNDER:- AFTER CAREFUL CONSIDERATION OF THE ABOVE EXPLANATIO N AND SUBMISSIONS MADE BY THE ASSESSEE DEFENDING THE DEDUCTION CLAIMED U/S 80LC OF THE ACT IT IS CONCLUDED THAT ITS EMPHASIS HAS BEEN ON SUBSTANTIATING THE EXISTENCE OF THE INDUSTRIAL UNIT AT PARWANOO. BUT THAT IS NOT THE SOLE POINT OF SHOW CAUSE NOTICE. THE EXISTENCE OF THE UNIT AT PARWANOO IS NOT DENIED. THE ASSESSEE WAS ASKED TO EXPLAIN THE OBSERVATION AS EMANATING FROM THE FACTS OF THE CASE AND DOCUMENTS SUBMITTED BY I TSELF THAT THE UNIT WAS NOT AN EXCLUSIVE INDEPENDENT UNIT. IT WAS AN EXTENSION OF THE DELHI UNIT AND THE ASSESSEE HAS DIVERTED THE PROFIT OF THE DELHI UNIT TO THIS NEW BRANCH ALONG WI TH SOME PART OF ITS ACTIVITIES. IT IS CLEAR FROM THE FACT THAT EVEN IN THE PERIOD OF FOUR MONTHS AND WITH FOUR EMPLOYEES ONLY IT HAD ACHIE VED THE ALLEGED HUGE PRODUCTION AND REVENUE WHICH SURPASSED I TS REVENUES OF ITS MAIN AND BIGGER UNIT AT DELHI. THE OB SERVATION ALSO GETS STRENGTH FROM THE ADMISSION OF THE ASSESSEE ITSELF THAT ITS DIRECTOR MR. SANKALP SRIVASTAVA WAS THE MAJOR TECH NICAL PERSON IN SETTING AND GIVING TECHNICAL ASSISTANCE ON THE ITA NO1355/DEL/2012 9 MANUFACTURING UNIT AT PARWANOO WHOSE VALUE ADDITION ON THE. MANUFACTURING ACTIVITY IS SAID TO BE OUT OF ESTIMATION . IF IT WAS SO EVEN THEN WHY NO EXPENSES RELATING TO THE REMUNERATIO N OR ANY OTHER NATURE FOR MR. SRIVASTAVA WERE FOUND DEBITED TO THE ACCOUNT OF THE PARWANOO UNIT. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES IT IS FOU ND THAT THE EXPLANATION AND REPLY OF THE ASSESSEE IS NOT COMPLETE AN D SPECIFIC TO THE ISSUE AND QUERIES RAISED. HENCE, IT IS H ELD THAT CONDITIONS STIPULATED IN THE STATUTE FOR ALLOWING DED UCTION U/S80IC OF THE ACT ARE NOT FULFILLED IN THIS CASE SO RE SULTANTLY THE DEDUCTION CLAIMED FOR RS.7856553/- IS DISALLOWED. 4. AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE LD CIT( A) AND SUBMITTED VARIOUS SUBMISSIONS AS SUBMITTED BEFORE LD ASSESSIN G OFFICER. THE LD CIT(A) AFTER GOING THROUGH THE SUBMI SSIONS OF THE ASSESSEE AND REMAND REPORT OBTAINED FROM ASSESSEE ALLOWED THE DEDUCTION BY HOLDING AS UNDER:- I HAVE CAREFULLY GONE THROUGH THE REASONS FOR MAKING THE DISALLOWANCE IN THE ASSESSMENT ORDER AND HAVE CONSIDERED THE WRITTEN SUBMISSIONS AS WELL AS ORAL ARGUMENTS OF THE LD. AR. THE BASIC ISSUE INVOLVED IN THE APPEAL IS DISALLOWANCE OF DE DUCTION U/S 801C. AS MENTIONED EARLIER, THE ID. AD DISALLOWED THE SAID DEDUCTION HOLDING THAT THE PARWANOO UNIT WAS AN EXTE NSION OF DELHI UNIT, THE APPELLANT HAD DIVERTED THE PROFITS O F DELHI UNIT TO PARWANOO UNIT, IN A PERIOD OF 4 MONTHS WITH 4 EMPLOY EES ONLY, THE PARWANOO UNIT CANNOT ATTAIN THE PRODUCTION AND REVENUE DECLARED AND THAT NO REMUNERATION WAS PAID TO MR. SA NKALP SRIVASTAVA, DIRECTOR. IT IS SEEN THAT WHILE STATING THE AFORESAID ITA NO1355/DEL/2012 10 FINDINGS IN THE ASSESSMENT ORDER, THE ID. AO HAS NEITHER GIVEN ANY BASIS THEREIN FOR ARRIVING AT SUCH CONCLUSIONS NO R HAS BROUGHT INCRIMINATING MATERIAL ON RECORD TO SUPPORT HIS STAND. THE ID. AR HAS FURNISHED SATISFACTORY EXPLANATION TO ALL THE DOUBT S RAISED BY THE ID. AD AND HAS VEHEMENTLY ARGUED THAT THE DISALLO WANCE WAS MADE ON SURMISES AND CONJECTURES WITHOUT ANY BASIS. THE I D. AR HAS EXPLAINED THAT THE ACCOUNTS OF THE TWO UNITS ARE D ULY AUDITED AND THE SAME SHOW THAT BOTH THE UNITS HAVE ENTIRELY INDEPENDENT SEPARATE ACTIVITIES. IT WAS AVERRED BY THE ID. AR THAT THE ID. AO HIMSELF HAS ACCEPTED THE FIGURE OF REVENUE AND HENCE, HIS SUBSEQUENT DISALLOWANCE OF DEDUCTIONS U/S 80LC IS ARBI TRARY. EVEN THE DISCREPANCIES POINTED OUT BY THE ID. AO AS PE R THE REMAND REPORT, WERE SATISFACTORILY EXPLAINED BY THE A PPELLANT. DURING THE COURSE OF THE APPELLATE PROCEEDINGS, THE I D. AR FILED COPIES OF VARIOUS DOCUMENTS, E.G. RENT AGREEMENT FOR THE PREMISES TAKEN ON LEASE IN SEPTEMBER, 2004 FOR THE FIR ST TIME, NEW SALES TAX REGISTRATION NUMBER OBTAINED SEPARATELY F OR THE PARWANOO UNIT ESI & EPF REGISTRATION GOT DONE FOR TH E EMPLOYEES OF PARWANOO UNIT FOR THE FIRST TIME INVOICES OF THE F IXED ASSETS PURCHASED FOR PARWANOO UNIT AND THOSE OF INVOICES CHA LLANS AND GATE PASSES FOR THE SALE. QUOTING THE PROVISIONS OF SECTI ON 80IC, THE LD AR EXAMINED THAT ALL THE CONDITIONS PRESCRIB ED UNDER THE SAID SECTION HAVE BEEN FULFILLED BY THE APPELLANT. IT IS FURTHER SEEN THAT THE RATIOS OF THE DECISIONS IN THE CASES OF CIT VS. CONTINENTAL ENGINES LTD., (2011) 60 DTR (DEL) 40, AND ACIT VS. SO BHAGIA CLOTHING CO., (2009) 125 TT J (DEL) 980, RELIED UPO N BY THE APPELLANT ARE CLEARLY APPLICABLE IN ITS CASE. ITA NO1355/DEL/2012 11 IN THE AFORESAID FACTS AND CIRCUMSTANCES OF THE CASE AND IN THE LIGHT OF THE APPELLANT'S SUBMISSION AND THE CASE LAWS REL IED UPON BY IT, I AM OF THE CONSIDERED OPINION THAT THE DISALL OWANCE OF DEDUCTION U/S 80LC OF THE ACT HAS BEEN WRONGLY MADE B Y THE LD. AD. ACCORDINGLY, THE GROUND NOS. 1 TO 5 ARE ALLOWED TO THE APPELLANT WITH THE DIRECTION TO THE AD TO GRANT DED UCTION U/S 80LC TO IT. 5. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 6. AT THE OUTSET, THE LD DR SUBMITTED THAT ASSESSEE WAS EN GAGED IN THE MANUFACTURING OF HIGHLY TECHNICAL PRODUCTS AND I T HAD ONLY FOUR EMPLOYEES WHO WERE NOT TECHNICALLY QUALIFIED. IN THI S RESPECT, RELEVANT PORTION OF ASSESSMENT ORDER WAS READ. THE LD DR SUBMIT TED THAT IN A PERIOD OF FOUR MONTHS, WITHOUT THE HELP OF TECHNICAL PERSONNEL AND WITHOUT THE HELP OF MUCH PLANT & MACHINERY THE ASSESSEE HAD GENERATED TURNOVER OF MORE THAN ` .1 CRORE WHICH DOES NOT SEEM TO BE POSSIBLE. HE FURTHER ARGUED THAT DURING REMAND PROCEE DINGS, THE ASSESSEE HAD SERVED NOTICES U/S 133(6) TO THE BUYERS OF ASSESSE ES PRODUCTS AND IN RESPONSE ONLY TWO PARTIES HAD FILED THE IR CONFIRMATION BEFORE THE ASSESSING OFFICER AND REST OF THE THREE PARTI ES FILED CONFIRMATION BEFORE LD CIT(A) ONLY AND LD CIT(A) WI THOUT CONFRONTING IT TO THE ASSESSING OFFICER ALLOWED THE CLAIM OF ASSESSEE, IN VIEW OF THE ABOVE, IT WAS ARGUED THAT ORDER OF LD CIT(A) BE SET A SIDE AND THAT OF ASSESSING OFFICER BE UPHELD. 7. LD AR, ON THE OTHER HAND, INVITED OUR ATTENTION TO PAPER BOOK PAGES 139 TO 144 WHERE A COPY OF SUBMISSIONS TO LD CIT(A ) DATED 8.11.2011 WAS PLACED. HE SUBMITTED THAT ALL THE OBJEC TIONS OF THE ASSESSING OFFICER WERE DEALT WITH IN THIS LETTER AND THE REFORE THE LD CIT(A) AFTER GOING THROUGH THE SUBMISSION HAS ALLOWED THE DEDUCTION. ITA NO1355/DEL/2012 12 OUR ATTENTION WAS ALSO INVITED TO PAPER BOOK PAGE 77 WHEREIN A COPY OF FORM NO.12 ISSUED BY THE DEPARTMENT OF INDUSTRIES CE RTIFYING THAT THE ASSESSEE WAS HAVING A REGISTERED UNIT FOR ASSEMBLY OF EMBEDDED SYSTEM OF SOFTWARE WAS PLACED. OUR ATTENTION WAS ALSO IN VITED TO PAPER BOOK PAGE 78 WHERE A COPY OF PERMANENT REGISTRATION CERTIFICATE ISSUED BY THE MEMBER SECRETARY, S.W.S.A. PARWANOO WAS PLACED WHEREIN THE DATE OF PRODUCTION WAS MENTIONED AS 27.11 .2004. OUR ATTENTION WAS ALSO INVITED TO PAPER BOOK PAGES 29 TO 86 WHEREIN COPY OF FORM FILED BY THE ASSESSEE FOR OBTAINING REGISTRATION CERTIFICATE WAS PLACED. PAPER BOOK PAGE 100 WAS ALSO REFERRED IN SUPP ORT OF THE FACT THAT ASSESSEE HAD FILED ITS SALES TAX RETURN UNDER THE ACT AND HAD DECLARED THE ENTIRE TURNOVER WITH THE SALES TAX AUTH ORITIES. WE WERE ALSO TAKEN TO PAPER BOOK PAGE 9 WHERE A CONSOLIDATED P&L ACCOUNT CONSISTING OF DELHI & PARWANOO UNIT WAS PLACED. OUR AT TENTION WAS ALSO INVITED TO THE FACT THAT IN THE PRESENT YEAR THE PRO FIT OF DELHI UNIT HAS INCREASED AS COMPARED TO EARLIER YEAR AND THEREFORE T HE ALLEGATION OF THE ASSESSING OFFICER THAT ASSESSEE HAD DIVERTED PROFITS OF DELHI UNIT TO PARWANOO UNIT WAS NOT CORRECT. SIMILARLY OTHER DOCUM ENTS IN SUPPORT OF THE FACT THAT ASSESSEE HAD ESTABLISHED MANUFACTURING UNI T AT PARWANOO WERE REFERRED TO E.G. LEASE AGREEMENT AT PAGE 37, DE TAIL OF PLANT & MACHINERY AT PAPER BOOK PAGES 40 TO 59, DETAIL OF RA W MATERIAL PURCHASED AT PAPER BOOK PAGES 69 TO 76 AND DETAIL OF SALE IN PARWANOO UNIT FROM PAPER BOOK PAGES 50 TO 68. OUR ATTENTION W AS ALSO INVITED TO PAPER BOOK PAGES 94 TO 99 WHERE DETAIL OF OUT SOURCIN G EXPENSES INCURRED BY THE ASSESSEE WERE PLACED. IN VIEW OF THE A BOVE FACTS IT WAS ARGUED THAT ASSESSEE HAD SET UP THE PROJECT AND HAD INST ALLED NECESSARY PLANT & MACHINERY FOR ITS OPERATION AND IT HAD STARTED MANUFACTURING FROM 27.11.2004 AND IT HAD FILED SALES TAX RETURN WITH THE PRESCRIBED AUTHORITY. THEREFORE, THE LD CIT(A) H AD RIGHTLY DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. ITA NO1355/DEL/2012 13 8. LD AR FURTHER ARGUED THAT THE OBJECTION OF ASSESSIN G OFFICER REGARDING NON WITHDRAWAL OF ANY SALARY FROM PARWANOO UNIT IS NOT RELEVANT AS THE MANAGING DIRECTOR OF COMPANY HAD NOT DERIVED ANY SALARY FROM DELHI UNIT ALSO. 9. IN HIS REJOINDER, THE LD DR TOOK US TO PAGE 2 OF A SSESSMENT ORDER AND THE PROFILE OF ASSESSEE COMPANY AS SUBMITTED BY IT TO ASSESSING OFFICER AND INVITED OUR ATTENTION TO PAPER BOOK PAG E 140 WHEREIN A COPY OF LETTER WRITTEN BY THE ASSESSEE TO LD CIT(A) WAS PLACED AND IN VIEW OF THE CONTENTS OF LETTER THE LD DR ARGUED THAT AS PER STEP-4 EVEN ASSEMBLY OF PRODUCT WAS BEING DONE BY LOCAL PARTIES OUT OF THEIR PREMISES AND THEREFORE WHAT TO TALK ABOUT THE PRODUCT ION THE ASSESSEE WAS NOT EVEN DOING ASSEMBLY WORK. HE INVITED OUR ATTE NTION TO PAPER BOOK PAGE 12 AND ARGUED THAT THE TOTAL SALARY EXPEND ITURE INCURRED FOR PARWANOO UNIT WAS ONLY ` .1,41,064/- AND ELECTRICITY EXPENSES ONLY ` .233,27.50 AND IN CONTRAST THE ASSESSEE HAS CLAIMED TO AC HIEVE HUGE TURNOVER. INVITING OUR ATTENTION TO PAPER BOOK PAGE 81, THE LD DR TOOK US TO POINT 18 WHEREIN THE ASSESSEE HAD MENTIONED THAT I T WAS NOT REGISTERED UNDER THE FACTORIES ACT., REGARDING RELIA NCE OF THE LD AR ON SALES TAX ORDER, THE LD DR SUBMITTED THAT SALES TAX O RDER DOES NOT MENTION AS TO WHETHER ANY MANUFACTURING ACTIVITY WAS CARRIED OUT OR NOT. FURTHER HE ARGUED FROM THE DETAIL OF SALARY AT PAPER BOOK PAGE 104 THAT THE AMOUNT OF SALARY PAID TO EACH PERSON WAS TO SMALL TO BELIEVE THAT THE PERSONS WERE REALLY TECHNICALLY QUAL IFIED AS THE MONTHLY REMUNERATION RANGED FROM ` .3000/- TO ` .8000/-. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PA RTIES AND HAVE GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. WE OBSERVE FROM THE DOCUMENTS FILED BEFORE ASSESSING OFFICER AND LD CIT (A) WHICH ITA NO1355/DEL/2012 14 RANGES FROM LEASE DEED, TELEPHONE CONNECTION, REGISTRA TION WITH THE PRESCRIBED AUTHORITY, DETAIL OF PLANT & MACHINERY ET C. THAT THE ASSESSEE HAD ALL DOCUMENTS IN SUPPORT OF ITS CLAIM OF HAVING SET UP A MANUFACTURING UNIT AT PARWANOO. THE COPY OF SALES TA X ORDER FILED BY THE ASSESSEE ALSO ESTABLISHES THAT ASSESSEE HAD ACHIEVED A TUR NOVER OF ` .1,39,43,000/-. THE MAIN POINT TO BE CONSIDERED BY U S IS AS TO WHETHER THE PROFITS EARNED BY PARWANOO UNIT REALLY REPRESENTE D PROFITS FROM MANUFACTURING ACTIVITY AT PARWANOO UNIT OR NOT. FRO M PAPER BOOK PAGE 60 WE FIND THAT ASSESSEE HAD MADE ITS ENTIRE SALES TO ON LY FIVE PARTIES. THE RELEVANT NAME OF PARTIES AND TURNOVER MADE TO TH EM IS AS UNDER:- 1. PRAGATI ELECTROCOM CO. PVT. LTD. GURGAON. ` .4,65,000/- 2. KUDAL TELECOM PVT. LTD. ` .1,60,000/- 3. ACME TELEPOWER PVT. LTD. GURGAON. ` .76,62,000/- 4. ACME TELE POWER LTD. PARWANOO. ` .50,15,000/- 5. VALIANT COMMUNICATION LTD. ` .1,37,000/- TOTAL ` .1,34,39,000/- FROM THE ABOVE BREAK UP OF TURNOVER MADE BY THE ASSES SEE, WE FIND THAT MAJOR TURNOVER WAS MADE TO ACME TELE POWER PVT. LTD. TO ITS GURGAON UNIT AND PARWANOO UNIT. THE TURNOVER TO THE SE PARTIES CONSTITUTED 97.79% OF TOTAL TURNOVER. DURING REMAND PROCEEDINGS, THE ASSESSING OFFICER ISSUED NOTICE U/S 133(6) TO FOUR OUT OF THESE FIVE PARTIES, OUT OF WHICH ONLY ONE PARTY NAMELY M/S VALIA NT COMMUNICATION LTD. FILED CONFIRMATION TO WHOM TURNOVER OF ONLY ` .1,37,000/- WAS MADE WHICH CONSTITUTED 1.02% OF TOTAL TURNOVER. FURTHER O NE MR. RAJESH CHADHA LANDLORD OF ASSESSEE FILED CONFIRMATION. ONE PAR TY M/S KUDAL TELECOM WAS NOT ISSUED NOTICE U/S 133(6) THE REST OF THR EE PARTIES WHICH CONSTITUTED THE MAJOR TURNOVER OF ASSESSEE COMPAN Y DID NOT FILE ANY REPLY WITH ASSESSING OFFICER. EVEN THE REPLY FILED BY M/S VALIANT TELECOM PVT. LTD. AS PLACED IN PAPER BOOK PAGE 121 EXPLAINS THE TRA NSACTIONS OF ASSESSEE ITA NO1355/DEL/2012 15 COMPANY OF THEIR DELHI UNIT AS IS APPARENT FROM PAPER BOOK PAGE 128 WHERE A COPY OF ACCOUNT OF ASSESSEE COMPANY IN THE BOOK S OF ACCOUNTS -++++++OF M/S VALIANT COMMUNICATION LTD. IS PLACED. T HE ABOVE SAID LEDGER ACCOUNT CLEARLY SHOWS THAT M/S VALIANT COMMUNIC ATION LTD. HAD CREDITED THE ACCOUNT OF THE ASSESSEE COMPANY ON ACCOUNT OF TECHNICAL KNOW HOW FEE AND PROVISION FOR ROYALTY. THE TURNOVER CLAIMED TO HAVE BEEN MADE FROM PARWANOO UNIT VIDE BILL NO.503 DATED 9.3.2005 HAS BEEN CREDITED BY VALIANT COMMUNICATION LTD. ON 31.3 .2005. MOREOVER THERE WAS A DIFFERENCE BETWEEN THE LEDGER ACCOUNT BA LANCES AS SHOWN BY THE ASSESSEE AND AS SHOWN BY M/S VALIANT COMMUNICATION LTD. WHICH WAS EXPLAINED BY THE ASSESSEE AT PAPER BOOK PAGE 2 61. THE RECONCILIATION STATEMENT FILED BY THE ASSESSEE ITSELF SHOW S THAT FROM 1.4.2002 ONWARDS THERE WERE CERTAIN GLARING DISCREPA NCIES BETWEEN THE TWO ACCOUNTS WHICH WERE NOT RECTIFIED TILL THE A SSESSING OFFICER BROUGHT TO THE NOTICE OF ASSESSEE. THOUGH THE MAJOR ENT RIES IN THE ACCOUNT STATEMENT OF THIS COMPANY RELATED TO DELHI UN IT AND THE DIFFERENCES IN THE ACCOUNT STATEMENTS MAY NOT HAVE A BEARING ON THE ISSUE UNDER CONSIDERATION, YET IT HIGHLIGHTS ONE POINT THAT ACCOUNTS OF THE ASSESSEE AT DELHI UNIT WERE ALSO MAINTAINED IN A CASU AL MANNER. THE LD CIT(A) IN HIS ORDER HAS WRITTEN THAT THE REMA INING PARTIES HAD FILED THEIR CONFIRMED COPIES OF ACCOUNTS WITH HIM AND THEREFORE ON THE BASIS OF CONFIRMED COPIES OF ACCOUNTS HE ALLOWED THE CL AIM OF THE ASSESSEE. THE LD CIT(A) DID NOT CONFRONT THE SAME TO THE ASSESSING OFFICER AND INSTEAD ALLOWED THE CLAIM. 11. THE MAJOR OBJECTION OF THE ASSESSING OFFICER WAS THA T IN SUCH A SHORT PERIOD OF FOUR MONTHS WITHOUT THE HELP OF TECHN ICAL PEOPLE, IT WAS NOT POSSIBLE TO ACHIEVE THE SAID TURNOVER. THE LD AR B EFORE LD CIT(A) HAD SUBMITTED THAT OPERATIONS OF THE ASSESSEE WERE NOT LA BOUR INTENSIVE AND WITH THE HELP OF COMPUTERIZED MACHINER Y THE ASSESSEE ITA NO1355/DEL/2012 16 WAS ABLE TO PRODUCE LARGE QUANTITIES WITH LIMITED PRO DUCTION STAFF. FROM THE SCHEDULE OF FIXED ASSETS OF PARWANOO UNIT PLACED AT PAPER BOOK PAGE 40 WE FIND THAT ASSESSEE HAD TOTAL FIXED ASSETS TO TH E TUNE OF ` .1,60,542/- WHICH INCLUDED FURNITURE & FIXTURE TO T HE EXTENT OF ` .36,894/- MEASURING INSTRUMENTS ` .13,600/-, POWER SUPPLY ` .34,116/-, SOLDERING STATION ` .4620/- AND TELEPHONES ` .5499/- THUS LEAVING AN AMOUNT OF ` .65,813/- TOWARDS PLANT & MACHINERY WHICH INCLUDED COMPUTERS AND PROGRAMMES. WE DO NOT UNDERSTAND AS TO H OW THIS MACHINERY OF WORTH ` .65,813/- CAN BE CONSIDERED TO BE SUFFICIENT ENOUGH TO ACHIEVE A TURNOVER OF ` .1,34,39,000/-. THE OTHER CONTENTION OF LD AR WAS THAT IT HAD GOT THE WORK DONE FROM OUTSI DE TO ACHIEVE THE PRODUCTION. DETAILS OF ASSEMBLY CHARGES PAID BY THE ASSESSE E ARE AT PAPER BOOK PAGE 94 WHICH SHOWS THAT AN AMOUNT OF ` .46,280/- WAS PAID AS ASSEMBLY CHARGES. 12. THE LD CIT(A) WHILE DECIDING THE APPEAL OF THE ASSESSEE HAS IGNORED THESE IMPORTANT FACTS AND HAS JUST DECIDED THE ISSUE IN FAVOUR OF ASSESSEE ON THE BASIS OF ENTRIES OF SALES MADE BY THE ASSE SSEE. THE ASSESSING OFFICER HAD RAISED A POINT THAT IN SUCH A SHORT PERIOD WITHOUT THE HELP OF SUFFICIENT PLANT & MACHINERY, PRODUCTION OF SUCH AN AMOUNT WAS NOT POSSIBLE WHICH THE LD CIT(A) SIMPLY IGNORED AN D ON THE BASIS OF BOOKS OF ACCOUNTS OF THE ASSESSEE ALLOWED THE CLAIM. 13. THE CONTENTIONS OF LD AR BEFORE US INCLUDED THAT THERE WAS SUFFICIENT EVIDENCE TO SUPPORT THAT UNIT WAS ESTABLISHED AND FURTHER HE ARGUED THAT TURNOVER WAS REPORTED TO SALES TAX AUTHORI TIES. WE DO AGREE WITH THE LD AR THAT ASSESSEE HAD EVERY DOCUMENT T O SUPPORT THAT UNIT WAS ESTABLISHED AND WE ALSO AGREE WITH LD A R THAT TURNOVER WAS INTIMATED TO SALES TAX AUTHORITIES BUT THE IMPORTA NT QUESTION REMAINS WHETHER THE ENTRIES OF SALES AND PURCHASES WERE ANY BOOK ITA NO1355/DEL/2012 17 ENTRIES OR ACTUAL ENTRIES. THE DOUBT OF BOOK ENTRIES I S FURTHER CORROBORATED BY THE FACT THAT OUT OF TURNOVER OF ` .1,34,39,000/- DURING THE YEAR AN AMOUNT OF ` .1,06,53,550/- REMAINED INVESTED IN SUNDRY DEBTORS AND OUT OF PURCHASES OF ` .51,19,374/- AN AMOUNT OF ` .33,48,468/- REMAINED UNPAID UPTO 31.3.2005. THOUGH LD CIT(A) HAS MENTIONED THAT MONEY WAS RECEIVED FROM DEBTORS BUT TH E FACT REMAINS THAT TURNOVER WAS MADE HURRIEDLY IN A PERIOD OF FOUR MONTHS THAT TO WITHOUT REALIZING THE DEBTORS. THE PROFILES OF BUYERS OF ASSESSEE NEEDS TO BE INVESTIGAT567YED TO ASCERTAIN AS TO WHETHER THESE PERSONS ACTUALLY DEALT IN THE GOODS PURCHASED FROM THE ASSESSEE AND FURTHER SELLERS PROFILES ALSO NEEDS TO BE INVESTIGATED TO ASCERTAI N AS TO WHETHER THEY REALLY DEALT INTO THE ITEMS SOLD BY THEM TO ASSESSEE . THEREFORE, IN VIEW OF ALL FACTS AND CIRCUMSTANCES AS EX PLAINED ABOVE, WE ARE OF THE OPINION THAT CASE OF THE ASSESSEE BE RE-AD JUDICATED BY ASSESSING OFFICER WHO WILL CONDUCT PROPER ENQUIRIES FROM BUYERS AND SELLERS OF THE ASSESSEE OF ITS PARWANOO UNIT TO ASCERTAIN THE CORRECT AMOUNT OF TURNOVER PROFITS. NEEDLESS TO SAY THAT PROPER OPPORTUNITY WILL BE GIVEN TO ASSESSEE OF BEING HEARD. 14. IN VIEW OF THE ABOVE, THE APPEAL FILED BY THE R EVENUE IS ALLOWED FOR STATISTICAL PURPOSES. 15. ORDER PRONOUNCED IN THE OPEN COURT ON 23RD DAY OF AUGUST, 2013. SD/- SD/- (RAJPAL YADAV ) (T.S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER DT.23.8.2013. HMS ITA NO1355/DEL/2012 18 COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DEL HI. TRUE COPY. BY ORDER (ITAT, NEW DELHI). DATE OF HEARING 22.7.2013 DATE OF DICTATION 8.8.2013 DATE OF TYPING 8.8.2013 DATE OF ORDER SIGNED BY 23.8.2013 BOTH THE MEMBERS & PRONOUNCEMENT. DATE OF ORDER UPLOADED ON NET & SENT TO THE BENCH CONCERNED.