DCIT, Panchkula V. M/s Surya Telecom Pvt. Ltd., Panchkula

ITA 182/CHANDI/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 8514 (ITAT-CHANDIGARH)
• Duration Of Justice: 6 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 11-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAI SHREE SHARMA
• Keywords: Rejection of books of accounts; Depreciation; Rule of consistency
• Section: 143(3); 145; 12; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES A CHANDIGARH BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND MS SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO. 182/CHD/2010 ASSESSMENT YEAR: 2006-07 THE DCIT, V M/S SURYA TELECOM PVT. LTD, PANCHKULA CIRCLE, PANCHKULA PANCHKULA PAN: AAHCS 3041 F (APPELLANT) (RESPONDENT) APPELLANT BY : SMT. JAI SHREE SHARMA RESPONDENT BY: SHRI AJAY JAGGA ORDER PER SUSHMA CHOWLA, JM THE APPEAL BY THE REVENUE IS AGAINST THE ORDER OF CIT(A), PANCHKULA DATED 30.11.2009 RELATING TO ASSESSMENT YEAR 2006-0 7 AGAINST THE ORDER PASSED UNDER SECTION 143(3) OF THE I.T. ACT. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- (I) WHETHER ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) WAS JUSTIFIED IN HOLDING THAT THE ASSESSEE IS ENTITLED TO DEDUCTION U/S 80IC OF THE INCOME TAX ACT, 1961 DESPITE THE FACT THAT THE ASSESSING OFFICER IN THE ASSESSMENT ORDER HAS CLEAR LY HELD THAT THE ASSESSEE IS NOT ENGAGED IN THE PROCES S OF MANUFACTURING AND IS MERELY ENGAGED IN THE SUPPLY O F FURNISHED GOODS OF GOVERNMENT AGENCIES. (II) WHETHER ON THE FACT AND IN THE CIRCUMSTANCES O F THE CASE, THE LD. CIT(A) IS JUSTIFIED IN DELETING THE A DDITION OF RS. 9,32,258/- ON ACCOUNT OF DEPRECIATION DISALL OWED DESPITE THE FACT THAT THE ASSESSEE HAS FAILED TO PR OVE WITH EVIDENCES THE EXISTENCE OF MACHINERY AND SUCH 2 MACHINERY WAS USED FOR MANUFACTURING OR PRODUCTION DURING THE YEAR UNDER CONSIDERATION. 3 THE FIRST ISSUE RAISED IN THE PRESENT APPEAL IS A GAINST THE ALLOWABILITY OF CLAIM OF DEDUCTION U/S 80 IC OF IT ACT. 4 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF SUPPLYING COMMUNICATION EQUIPMENT MAINL Y TO GOVT AGENCIES. THE ASSESSEE WAS OPERATING FROM TWO UNITS ONE AT PANCHKULA AND SECOND AT PARWANOO. THE ASSESSEE WAS CLAIMING DEDUCTION U /S 80 IC OF IT ACT AGAINST PROFITS OF THE PARWANOO UNIT SINCE ASSESSME NT YEAR 2004-05. THE ASSESSEE WAS ALLOWED DEDUCTION U/S 80 IC OF IT ACT RELATING TO ASSESSMENT YEARS 2004-05 AND 2005-06. HOWEVER, THE SAID DEDUCTION WAS DENIED BY ASSESSING OFFICER IN ASSESSMENT YEAR 2006-07. THE REASONS FOR DENIAL OF THE SAID DEDUCTION IN THE YEA R UNDER APPEAL WERE THE OBSERVATIONS OF THE ASSESSING OFFICER PURSUANT TO T HE VISIT TO THE PARWANOO UNIT, DURING THE CONDUCT OF ASSESSMENT PRO CEEDINGS. THE ASSESSING OFFICER HAS MENTIONED THAT THE BUSINESS O F THE ASSESSEE WAS OF MANUFACTURING OF COMMUNICATION EQUIPMENTS WHICH INC LUDES MANUFACTURING OF TRANSCEIVERS, POWER SUPPLY AND OTH ER ACCESSORIES. THE ASSESSING OFFICER HAD OBSERVED THE TRANSCEIVER WHIC H THE ASSESSEE MANUFACTURES WAS A DEVICE THAT TRANSMITS AND RECEIV ES ANALOG OR DIGITAL SIGNALS. IT COMPRISES OF THREE MAIN PARTS - A TRANS MITTER, A RECEIVER AND A OSCILLATOR GENERATOR. THE COMPONENTS AS PER ASSESSI NG OFFICER WERE HIGHLY INTEGRATED CIRCUIT BOARDS MADE BY HIGHLY PRO FESSIONAL AND SKILLED TECHNICIANS. THESE CIRCUIT BOARDS ARE THEN ARRANGE D IN A FIXED MANNER AND ARE FIXED IN THE OUTER BODY COVER. ONCE THE TRANSC EIVER IS MANUFACTURED THEN IT IS TO BE CUSTOMIZED FOR USE OF THE CUSTOMER S BECAUSE EACH CUSTOMER HAS A PRE-SET FREQUENCY ALLOTTED BY THE GO VERNMENT. THE 3 ASSESSING OFFICER NOTED THAT ALL THESE STEPS ARE IN TEGRAL PART OF THE MANUFACTURING PROCESS OF TRANSCEIVER SETS. THE ASS ESSING OFFICER FURTHER OBSERVED THAT THE OTHER COMPONENT CLAIMED TO HAVE B EEN MANUFACTURED BY THE ASSESSEE IS THE POWER SUPPLY WHICH REGULATES TH E SUPPLY OF POWER TO THE EQUIPMENTS. THE ESSENTIAL COMPONENTS ARE THE E LECTRONIC CIRCUITS OF WHICH THE COMMON CIRCUIT IS THE PCB. AS PER ASSESS ING OFFICER TO MANUFACTURE A POWER SUPPLY, A UNIT HAS TO FIRST WRI TE A PCB WHICH IS THE WORK OF HIGHLY SKILLED AND PROFESSIONAL TECHNICIANS AND THEN ON THESE PCBS TRANSFORMERS, RESISTORS, CAPACITORS, VOLTAGE R EGULATORS ETC. HAVE TO BE LAID. LASTLY THE ENTIRE CIRCUIT IS PUT INTO TH E REQUIRED COVERING OR EQUIPMENT AND THEN THE PRODUCT IS TESTED FOR USE. T HE ASSESSING OFFICER ON HER VISIT TO FACTORY PREMISES ON 8.12.2008 OBSER VED THAT THE FACTORY UNIT WAS LOCATED IN ONE LARGE ROOM ON THE FIRST FLO OR OF THE PREMISES AND NOT MORE THAN 7 TO 8 WORKERS WERE ENGAGED AT THE UN IT. FURTHER, THE ASSESSING OFFICER NOTED THAT NO MACHINE WAS BEING U SED AND ONLY TWO DRILLING MACHINES ALONG WITH STABILIZERS AND TESTER S WERE PRESENT THERE AND NO MANUFACTURING WAS BEING CARRIED. STATEMENT OF TW O OF THE WORKERS AT FACTORY UNIT WERE RECORDED IN WHICH THEY STATED THA T NO MANUFACTURING WAS TAKING PLACE. THEY ADMITTED THAT MATERIAL WAS BEIN G PURCHASED IN RAW CONDITION AND THEN LOADING THE PC PROGRAMMES AND SO FTWARE TO ADJUST VARIOUS PARAMETER WAS CARRIED ON. AS REGARDS POWER SUPPLY EQUIPMENT, THEY STATED THAT ASSESSEE PURCHASES READYMADE PCBS AND FINAL SETTING OF VOLTAGE AND FINAL TESTING OF POWER SUPPLY IS DONE. THE ASSESSING OFFICER FOUND THE CONSUMPTION OF ELECTRICITY AT RS. 24,429/ = FOR A TOTAL TURNOVER OF RS. 5.92 CRORE TOO LOW TO JUSTIFY PRODUCTION IN COMPARISON WITH CONSUMPTION OF ELECTRICITY AT PANCHKULA UNIT. THE ASSESSING OFFICER ALSO TOOK PHOTOGRAPHS OF THE ACTIVITY AT THE UNIT AND OB SERVED THAT TRANSCEIVER, POWER SUPPLY AND OTHER ACCESSORIES ARE PURCHASED IN A FINISHED STAGE AND 4 ONLY PROGRAMMING AND TESTING OF TRANSCEIVER IS DONE AS PER REQUIREMENTS OF CUSTOMERS. THE RAW MATERIAL NEEDED FOR MANUFACT URING THE HIGHLY SOPHISTICATED PRODUCTS WERE NOT FOUND AVAILABLE AT THE FACTORY PREMISES AND ONLY FINISHED GOODS PURCHASED FROM OUTSIDE WERE FOUND LYING AT THE PREMISES. THE ASSESSING OFFICER THUS HELD THAT ASS ESSEE WAS NOT CARRYING ON MANUFACTURING ACTIVITIES AT PARWANOO UNIT BUT WA S DOING BASIC ACTIVITY AND CARRYING OUT TRADING ACTIVITY. THE ASSESSING O FFICER COMPARED THE ACTIVITIES CARRIED ON BY THE ASSESSEE AT ITS TWO UN ITS AND ON BASIS OF VARIOUS PARAMETERS AT PAGE 22 OF ASSESSMENT ORDER O BSERVED THAT EXPENSES BOOKED AT PARWANOO UNIT ARE MUCH LESS THAN THOSE BO OKED AT PANCHKULA UNIT. AS PER THE ASSESSING OFFICER THE ASSESSEE HA D REDUCED EXPENSES AT PARWANOO UNIT TO CLAIM HIGHER DEDUCTION U/S 80 IC O F IT ACT. THE ASSESSING OFFICER ALSO NOTED THE TRANSFER OF RAW MA TERIAL STOCK OF RS. 2.25 CRORE FROM PANCHKULA UNIT TO PARWANOO UNIT, WHICH I N TURN WAS UTILIZED AT PARWANOO UNIT. THE ASSESSEE WAS THUS HELD TO BE NOT ELIGIBLE FOR CLAIM OF DEDUCTION U/S 80 IC OF IT ACT. THE CONTENTIONS OF THE ASSESSEE THAT IT WAS ON THE VERGE OF CLOSURE OF BUSINESS AND ITS TUR NOVER HAD DECREASED FROM RS. 601.03 LACS IN FINANCIAL YEAR 2005-06 TO R S. 65.46 LACS IN FINANCIAL YEAR 2007-08 AND CONSEQUENT THEREOF SHIFT ING OF MACHINERY FROM PARWANOO UNIT TO PANCHKULA UNIT AND LESS LABOU R FORCE AT THE UNIT WERE NOT ACCEPTED. THE ASSESSEE ALSO CONTENDED THA T BECAUSE OF LACK OF ORDERS, THERE WAS NO MANUFACTURING ACTIVITY ON THE DATE OF VISIT OF ASSESSING OFFICER ON 8.12.2008. THE ASSESSING OFFI CER REJECTING THE CONTENTIONS OF THE ASSESSEE HELD THAT ASSESSEE WAS NOT ENGAGED IN MANUFACTURING ACTIVITIES. THE ASSESSING OFFICER AL SO HELD THAT THE REGISTRATION WITH VARIOUS DEPARTMENTS DOES NOT ENTI TLE THE ASSESSEE TO CLAIM OF DEDUCTION U/S 80 IC OF IT ACT. THE ASSESS ING OFFICER HELD THAT THE ASSESSEE HAD TRIED TO COVER ITS CLAIM AS PER SE RIAL NO. 13 OF PART-C OF 5 14 TH SCHEDULE UNDER SECTION 80 IC(2) OF THE ACT. THE A SSESSING OFFICER REJECTED THE BOOKS OF ACCOUNTS U/S 145 OF IT ACT AN D ALSO DISALLOWED THE CLAIM OF DEDUCTION U/S 80 IC OF THE ACT. THE ASSES SING OFFICER FURTHER OBSERVED THAT THE ASSESSEE HAD SHOWN VALUE OF PLANT & MACHINERY IN THE PARWANOO UNIT AT RS. 29,98,881/- AND HAD CLAIMED DE PRECIATION AT RS. 9,32,258/-. IN THE ABSENCE OF ANY MACHINERY FOUND AT THE FACTORY PREMISES ON THE DATES OF INSPECTION, THE CLAIM OF D EPRECIATION OF RS. 932,258/- WAS DISALLOWED BY THE ASSESSING OFFICER. 5 THE LD. A.R. FOR THE ASSESSEE MADE ELABORATE WRI TTEN SUBMISSION S BEFORE THE LD. CIT(A), WHICH ARE REPRODUCED IN PARA 3 AT PAGE 6 TO 17 OF THE APPELLATE ORDER. THE LD. CIT(A) IN PARA 5.1 AT PG: 18 OF THE APPELLATE ORDER HAS SUMMARIZED THE CONTENTIONS OF LD. A.R. FO R THE ASSESSEE AS UNDER: THE COUNSEL FOR THE APPELLANT ON THE OTHER HAND HA S ARGUED THAT THE APPELLANTS ACTIVITY CLEARLY FALLS IN SR N O. 13 OF PART- C OF 14 TH SCHEDULE AS PER SECTION 80IC(2)(II) OF IT ACT. TH E LD. COUNSEL ARGUED THAT THE APPELLANT IS REGISTERED WITH INDUSTRIES DEPARTMENT PARWANOO, CENTRAL EXCISE DEPA RTMENT, SHIMLA. SALES TAX DEPARTMENT OF HP AND DIRECTORATE OF QUALITY INSURANCE OF DGS&D DEPARTMENT OF GOVT OF IN DIA. THE APPELLANT IS ALSO REGISTERED WITH MINISTRY OF COMMUNICATION, GOVT. OF INDIA. AS REGARDS, THE TRA NSCEIVER SETS, THE COUNSEL ARGUED THAT THE APPELLANT HAS C ARRIED OUT THE THIRD ACTIVITY OF FREQUENCY SYNTHESIZATION WHIC H THE MOST RELEVANT ACTIVITY WITHOUT WHICH THE EQUIPMENT CAN N OT BE SOLD AND WHICH AMOUNTS TO MANUFACTURE. THE LD. COUNSEL ARGUED THAT THE ASSESSING OFFICER HERSELF ADMITTED THAT TH E THIRD ACTIVITY HAS BEEN CARRIED OUT BY THE APPELLANT AND THIS ACTIVITY IS AN INTEGRAL PART OF MANUFACTURING PROCE SS OF THE TRANSCEIVERS BUT HAS HELD THAT THE APPELLANT IS NOT CARRYING OUT MANUFACTURING ACTIVITY. THE COUNSEL ARGUED THA T AS REGARDS MANUFACTURING OF TRANSMITTERS AND MANUFACTU RING OF RECEIVERS, THESE COMPONENTS WERE IMPORTED AND CANNO T BE MANUFACTURED BY THE APPELLANT SINCE THEY ARE HIGHLY TECHNICAL AND SOPHISTICATED ITEMS. SIMILARLY, FOR THE POWER SUPPLY EQUIPMENT THE APPELLANT HAS CARRIED OUT THE ACTIVIT Y OF LAYING OF TRANSFORMERS, REGISTERS ETC., WHICH IS AN INTEGR AL PART OF MANUFACTURING PROCESS AS ADMITTED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER. THE COUNSEL FURTHER ARGUE D THAT THE NUMBER OF WORKERS WORKING DURING INSPECTION HAS BEE N MENTIONED AS 7 TO 8 BY THE ASSESSING OFFICER BUT TH E 6 INSPECTION WAS CARRIED OUT IN FINANCIAL YEAR 2008-0 9. THE COUNSEL ARGUED THAT SECTION 80 IC DOES NOT IMPOSE ANY RESTRICTION ON THE MINIMUM NUMBER OF WORKERS AND MO REOVER, THE ASSESSING OFFICER HAS BASED HER OPINION ON THE BASIS OF WAGES REGISTER FOR FINANCIAL YEAR 2008-09 WHEN THE WORK WAS SUBSTANTIALLY REDUCED AND THE ASSESSING OFFICER HAS IGNORED THE SALARY AND WAGES REGISTER FOR THE FINANCIAL YEA R 2005-06 WHICH WAS PRODUCED BEFORE HER. REGARDING ADEQUACY OF THE MACHINERY, THE COUNSEL ARGUED THAT THE MACHINERY FO UND DURING INSPECTION IS HI-TECH AND IS SUFFICIENT FOR CARRYING OUT THE JOB OF THE APPELLANT AND MOREOVER, THE MACHINER Y WAS SUBSTANTIALLY REDUCED IN FINANCIAL YEAR 2008-09 SIN CE THE APPELLANT WAS HAVING FEW ORDERS. THE. COUNSEL STRO NGLY ARGUED THAT THE WORD MANUFACTURE INCLUDES ASSEMBLY ALSO AND PLACED RELIANCE ON THE DECISIONS IN THE CASE OF CIT BOMBAY V TELCO, 68 ITR 325 AND ASPINWALL V. CIT, 251 ITR 32 3 (S.C) AND SOME OTHER CASE LAWS. FINALLY THE LD. COUNSEL ARGUED THAT FOR THE ASSESSMENT YEAR 2004-05 AND 2005-06 TH E CLAIM OF DEDUCTION HAS BEEN ALLOWED BY THE DEPARTMENT U/S `143(3) OF THE IT ACT AND AS PER RULE OF CONSISTENCY THE DE DUCTION SHOULD BE ALLOWED THIS YEAR ALSO. 6. THE CIT(A) THUS HELD AS UNDER:- ON CAREFUL CONSIDERATION OF THE ABOVE FACTS AND SUBMISSIONS, I FIND THAT THE DISALLOWANCE OF THE DE DUCTION U/S 80IC HAS BEEN MADE BY THE ASSESSING OFFICER ON THE GROUND THAT COMPLETE MANUFACTURING ACTIVITY WITH REGARD TO TRANSCEIVER SETS AND POWER SUPPLY HAS NOT BEEN CARR IED OUT BY THE APPELLANT. IN THE CASE OF TRANSCEIVER SETS ONL Y ONE ACTIVITY OUT OF THREE ACTIVITIES HAS BEEN CARRIED O UT AND IN THE CASE OF POWER SUPPLY ONE ACTIVITY OUT OF TWO HAS BE EN CARRIED OUT. THE ASSESSING OFFICER FURTHER MENTIONED THAT THE NUMBER OF WORKERS EMPLOYED BY THE APPELLANT AT THE TIME OF INSPECTION WAS 7 TO 8 AND BARE MINIMUM MACHINERY WA S LYING IN THE FACTORY PREMISES AT PARWANOO. THE UNDERSTAND ING OF THE ASSESSING OFFICER WITH REGARD TO MANUFACTURING OF TRANSCEIVER SETS IS THAT ALL THE THREE ACTIVITIES S HOULD HAVE BEEN CARRIED OUT FOR MANUFACTURE TO TAKE PLACE AND FOR POWER SUPPLY BOTH THE ACTIVITIES SHOULD HAVE BEEN CARRIED OUT. THE LD. COUNSEL FOR THE APPELLANT HAS ARGUED THAT THE T RANSMITTERS AND THE RECEIVER ARE HI-TECH PARTS WHICH ARE IMPORT ED AND CANNOT BE MANUFACTURED BY THE APPELLANT AND THE ACT IVITY OF FREQUENCY SYNTHESIZATION AND ASSEMBLY ITSELF AMOUNT S TO MANUFACTURE OR PRODUCTION. THE LD. LD. COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION IN THE CASE OF CIT BOMBAY V TELCO, 68 ITR 325 AND ASPINWALL V CIT, 251 ITR 323 (S.C). SIMILAR IS THE POSITION WITH REGARD TO THE POWER SUPPLY IN WHICH THE LD. COUNSEL ARGUED THAT T HE WRITING OF THE PCBS IS AGAIN A VERY HI-TECH JOB AND THE APPELLANT CANNOT MANUFACTURE THE SAME AND THE ACTIV ITY OF LAYING THE TRANSFORMERS, RESISTORS IS ITSELF MANUFA CTURING ACTIVITY. I FIND FORCE IN THE ARGUMENTS OF THE LD. COUNSEL THAT THE ACTIVITIES CARRIED OUT BY THE APPELLANT AMOUNT TO 7 MANUFACTURE/PRODUCTION AS REQUIRED FOR THE PURPOSES OF SECTION 80IC. IT IS NOT NECESSARY THAT FOR MANUFAC TURE TO BE COMPLETE TRANSMITTERS, RECEIVERS AND PCBS SHOULD AL SO BE MANUFACTURED BY THE APPELLANT. THE ASSESSING OFFIC ER HAS HELD THAT THE APPELLANT IS NOT CARRYING OUT MANUFAC TURING ACTIVITY ON THE WRONG PRESUMPTION THAT FOR THE ACTI VITY TO BE COMPLETE ALL THE STEPS SHOULD BE PERFORMED BY THE A PPELLANT. IT IS THEREFORE, HELD THAT THE ACTIVITY OF THE APPE LLANT OF FREQUENCY SYNTHESIZATION FOR TRANSCEIVER SETS AND T HE ACTIVITY OF LYING OF TRANSFORMERS, RESISTORS ETC. FOR POWER SUPPLY EQUIPMENT AMOUNTS TO MANUFACTURING ACTIVITY AND THE APPELLANT IS ENTITLED TO DEDUCTION U/S 80 IC OF THE IT ACT. THE DECISION IN THE CASE OF CIT BOMBAY V TELCO, 68 ITR 325 AND ASPINWALL V CIT, 251 ITR 323 (S.C) RELIED UPON BY T HE COUNSEL ARE APPLICABLE. 7. THE LD. CIT(A) WITH REGARD TO OTHER POINTS RAISE D BY ASSESSING OFFICER OBSERVED AS UNDER:- WITH REGARD TO THE OTHER GROUNDS TAKEN BY THE ASSE SSING OFFICER FOR DISALLOWING THE DEDUCTION BEING THE NUM BER OF WORKERS BEING ONLY 7 TO 8 AND BARE MINIMUM MACHINER Y LYING AT THE PREMISES OF THE APPELLANT WHICH SHOW THAT MANUFACTURING ACTIVITY IS NOT BEING CARRIED OUT, I FIND FORCE IN THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT THIS FACTUAL SITUATION WAS ON THE DATE OF INSPECTION WHI CH WAS CARRIED OUT IN FINANCIAL YEAR 2008-09 AND IT CANNO T BE APPLIED TO THE FINANCIAL YEAR 2005-06 IN VIEW OF TH E FACT THAT THE BUSINESS ACTIVITY OF THE APPELLANT WAS REDUCED CONSIDERABLY DUE TO LACK OF ORDERS. THE RECORDS WI TH REGARD TO THE NUMBER OF WORKERS DURING FINANCIAL YEAR 2005 -06 AND THE MACHINERY USED DURING THAT PERIOD WAS PRODUCED BEFORE THE ASSESSING OFFICER WHO HAS IGNORED THE SAME. TH E COUNSEL FURTHER ARGUED THAT THERE IS NO STIPULATED OF MINIM UM NUMBER OF WORKERS U/S 80IC OF THE IT ACT. I FURTHER FIND FORCE IN THE ARGUMENT OF THE COUNSEL THAT THOUGH THE PRINCIPLE O F RESJUDICATA DOES NOT APPLY IN INCOME PROCEEDINGS, Y ET RULE OF CONSISTENCY DOES NOT APPLY. THE COUNSEL HAS RIGHTL Y PLACED RELIANCE IN THE CASE OF RADHASOAMI SATSUNG V CIT (1 992) 193 ITR 321 (S.C) AND H.A. SHAH V CIT (1956) 30 ITR 618 (BOM). IN VIEW OF THE ARGUMENTS OF THE COUNSEL THE ASSESSI NG OFFICER IS NOT JUSTIFIED IN REJECTING THE CLAIM OF THE APPE LLANT U/S 80IC OF THE IT ACT. THE ADDITION MADE BY THE ASSES SING OFFICER IS ORDERED TO BE DELETED. 8. THE CIT(A) IN VIEW OF TRANSFER OF STOCK FROM PA NCHKULA UNIT TO PARWANOO UNIT GAVE THE FOLLOWING DIRECTION:- 8 HOWEVER, I FIND THAT THE ASSESSING OFFICER HAS MEN TIONED IN THE ASSESSMENT ORDER THAT THE APPELLANT HAS TRANSFE RRED STOCK FROM ITS PANCHKULA UNIT TO PARWANOO UNIT AND HAS SH OWN VERY LITTLE AMOUNT OF EXPENSES IN THE PARWANOO UNIT. TH E TRANSFER OF STOCK IS OF THE VALUE OF RS. 2,25,45,879/-. THE ASSESSING OFFICER DID NOT EXAMINE THE STOCK TRANSFER FROM THE VIEW OF SUB-SECTION 9 OF SECTION 80IA WHICH IS APPLICABLE T O SECTION 80IC WHICH RELATES TO TRANSFER OF GOODS FROM ONE UN IT TO OTHER OF AN ASSESSEE OTHER THAN AT MARKET RATE BECAUSE TH E ASSESSING OFFICER HAS TOTALLY DISALLOWED THE DEDUCT ION U/S 80IC OF THE IT ACT. SINCE, THE DEDUCTION HAS NOW B EEN ALLOWED, THE ASSESSING OFFICER IS DIRECTED TO EXAMI NE THE APPLICABILITY OF SUB-SECTION 9 OF THE SECTION 80IA IN THIS CASE AND TAKE NECESSARY ACTION. THIS GROUND OF APPEAL I S ALLOWED. 9. THE LD. CIT(A) ALSO ALLOWED THE CLAIM OF DEPRECI ATION ON PLANT AND MACHINERY ACCEPTING THE PLEA OF ASSESSEE OF TRANSFE R OF ASSETS TO PANCHKULA UNIT AND LIST OF FIXED ASSETS AND INVESTMENT BEING ACCEPTED IN EARLIER YEARS. THE ASSESSEE HAD CLAIMED DEPRECIATION ON PL ANT & MACHINERY AT PARWANOO UNIT AT RS. 3,10,275/- AND NOT RS. 9,32,25 8/- AS DISALLOWED BY THE ASSESSING OFFICER. 10 THE LD. D.R. FOR THE REVENUE PLACING RELIANCE ON THE ORDER OF THE ASSESSING OFFICER POINTED THAT THE ASSESSEE HAD IMP ORTED THE PARTS AND ASSEMBLED THEM AND SUCH ACTIVITY IS NOT MANUFACTURE . THE LOW CONSUMPTION OF ELECTRICITY AT FACTORY PREMISES PROV ES NO MANUFACTURING ACTIVITY BEING CARRIED ON. THE LD. D.R. FOR THE RE VENUE RELIED ON THE CASE OF V.M. SALGAOCAR BROS (P) LTD V. CIT (1996) 217 IT R 849 (KAR) FOR THE PROPOSITION THAT IMPROVING OF MARKETABILITY WAS NOT HELD TO BE MANUFACTURE. THE LD. A.R. FOR THE ASSESSEE PLACED RELIANCE ON THE ORDER OF CIT(A) AND THE WRITTEN SUBMISSIONS FURNISHED BE FORE THE LD. CIT(A) AND POINTED OUT SIMILAR CLAIM OF DEDUCTION U/S 80IC OF THE ACT WAS ALLOWED IN EARLIER YEARS AND THE SAME IS TO BE ALLO WED DURING THE YEARS. RELIANCE WAS PLACED ON:- 9 1 ITO V. ARIHANT TILES & MARBLES (P) LTD (2010) 186 TAXMAN 439 (S.C) 2. CIT-V, NEW DELHI V. ORACLE SOFTWARE INDIA LTD (2010) 187 TAXMAN 275 (S.C) 3 M/S GIRNAR INDUSTRIES, 39/4, CSEZ V. CIT, ITA NO. 100 OF 2009 OF HON'BLE HIGH COURT OF KERALA AT ERNAKULAM 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE WAS CARRYING ON THE BUSINESS OF SUPPLY OF COMMUNICATION EQUIPMENT TO GOVT. AGENCIES. THE CLAIM OF THE ASSES SEE WAS THAT IT WAS CARRYING ON MANUFACTURING ACTIVITIES. THE ASSESSEE HAD TWO UNITS AND IN RESPECT OF INCOME FROM PANCHKULA UNIT, NO DEDUCTION WAS CLAIMED BUT IN RESPECT OF INCOME FROM PARWANOO UNIT, DEDUCTION U/S 80 IC OF THE ACT WAS CLAIMED. THE PARWANOO UNIT WAS ESTABLISHED IN THE EARLIER YEARS. THE UNIT WAS ESTABLISHED IN THE STATES OF HIMACHAL PRADESH B ECAUSE OF THE INCENTIVES NOTIFIED FOR THE STATES OF UTTRANANCHAL AND HIMACHAL PRADESH. THE COPY OF NOTIFICATION NO. 1(1) 2001-NER DATED 7. 1.2003 NOTIFYING THE PACKAGE OF INCENTIVES FOR THE STATES OF UTTARANCHAL AND HIMACHAL PRADESH ARE PLACED AT PAGE NO. 20 OF THE PAPER BOOK (ANNEXU RE B). THE CLAIM OF ASSESSEE IS THAT THE MANUFACTURING ACTIVITY BEING C ARRIED OUT BY IT IS COVERED AS PER ITEM NO. 13 UNDER PART C OF 14 TH SCHEDULE REFERRED UNDER SECTION 80IC(2) OF IT ACT WHICH TALKS OF INFORMATION AND COMMUNICATION TECHNOLOGY INDUSTRY, COMPUTER HARDWARE, CALL CENTRE S . 12. THE ASSESSEE HAD FURNISHED ON RECORD COPY OF RE GISTRATION OF THE ASSESSEE WITH INDUSTRIES DEPARTMENT FOR MAN UFACTURING / ASSEMBLY 10 ACTIVITIES AS AT PAGES 21 TO 29 OF THE PAPER BOOK ( ANNEXURE C). FURTHER, THE ASSESSEE HAS SUBMITTED COPY OF REGISTRATION OF THE ASSESSEE WITH THE CENTRAL EXCISE DEPARTMENT AS MANUFACTURER AT PAGE 30 OF THE PAPER BOOK (ANNEXURE D), COPY OF REGISTRATION OF THE ASS ESSEE WITH SALES TAX DEPARTMENT FOR MANUFACTURING / ASSEMBLY OF PRODUCT AT PAGES 31-32 (ANNEXURE E). IN ADDITION, THE ASSESSEE ALSO FURN ISHED ON RECORD THE COPY OF THE REGISTRATION OF THE ASSESSEE WITH THE D IRECTORATE OF QUALITY INSURANCE DGS&D DEPARTMENT OF GOVT. OF INDIA AS A M ANUFACTURER AT PAGES 33 TO 38 (ANNEXURE F) AND COPY OF TECHNICAL Q UALIFICATION CERTIFICATE OF STAFF (SKILLED STAFF) AT PAGE 39 OF THE PAPER BOOK (ANNEXURE-G). THE ASSESSEE HAD ESTABLISHED THE U NIT IN STATE OF HIMACHAL PRADESH AND PRODUCTS MANUFACTURED BEING CO VERED BY 14 TH SCHEDULE, THE ELIGIBILITY OF THE UNIT FOR DEDUCTION U/S 80IC OF THE ACT WAS CLAIMED BY THE ASSESSEE. 13. THE PLEA OF THE ASSESSEE THAT AFTER THE REQUISI TE REGISTRATIONS BEING ALLOWED BY THE DIFFERENT DEPARTMENTS, THE MANUFACTU RING ACTIVITY BEING CARRIED ON BY THE INDUSTRIAL UNDERSTANDING STANDS P ROVED. WE ARE OF THE VIEW THAT IN ORDER TO START IS MANUFACTURING ACTIVI TY, THE ASSESSEE NEEDS REGISTRATION / APPROVAL FROM DIFFERENT DEPARTMENTS TO ESTABLISH ITS UNIT FOR CARRYING ON THE MANUFACTURING ACTIVITIES. THE UNIT BEING REGISTERED WITH VARIOUS AUTHORITIES ONLY ESTABLISHES THE INTENTION OF THE ASSESSEE TO START ITS MANUFACTURING ACTIVITY. WHETHER THE ACTIVITY C ARRIED ON BY THE ASSESSEE IS MANUFACTURING, ENTITLING IT TO THE BENE FIT OF DEDUCTION U/S 80IC OF THE ACT, IS ALTOGETHER A DIFFERENT ASPECT TO BE DECIDED INDEPENDENT OF REGISTRATION. 14. NOW, COMING TO THE MANUFACTURING PROCESS UNDERT AKEN BY THE ASSESSEE, WE FIND THAT THE ASSESSEE CLA IMS TO HAVE MANUFACTURED 11 TRANSCEIVER SETS, POWER SUPPLY EQUIPMENTS AND OTHER EQUIPMENTS DURING THE YEAR. TO MANUFACTURE TRANSCEIVER SETS, THREE BASIC COMPONENTS / ACTIVITIES ARE REQUIRED I.E A) TRANSMITTER B) A REC EIVER AND C) FREQUENCY SYNTHESIZATION. ADMITTEDLY, THE ASSESSEE IS NOT CA RRYING OUT THE FIRST TWO ACTIVITIES I.E. THE MANUFACTURING OF TRANSMITTER AN D RECEIVER. THE ASSESSEE IS PURCHASING THE SAID COMPONENTS FROM DIFFERENT PL ACES INCLUDING FROM ITS PANCHKULA UNIT, BUT THE THIRD ACTIVITY IS BEING PERFORMED AT THE PARWANOO UNIT. UNDER THE THIRD ACTIVITY, THE ASSES SEE SETS THE PRE-SET FREQUENCY ALLOTTED TO A PARTICULAR GOVERNMENT AGENC Y BY THE GOVT. OF INDIA IN ORDER TO FACILITATE THE USE OF THE SAID EQ UIPMENT FOR SECURITY / DEFENCE PURPOSES BY VARIOUS GOVERNMENT AGENCIES, TO WHOM THE ASSESSEE IS MAKING THE SUPPLIES. THE ASSESSING OFFICER ON A VISIT TO THE PARWANOO UNIT ADMITS THAT THE FACT OF THE CARRYING ON OF THE THIRD ACTIVITY AT THE PREMISES OF THE ASSESSEE. THE ACTIVITY CARRIED ON BY THE ASSESSEE IS THE INTEGRAL PART OF ACTIVITY MAKING THE COMPONENTS SAL EBLE AS A TRANSCEIVER SETS. IN THE ABSENCE OF THE SAME, THE TWO COMPONE NTS I.E. TRANSMITTER AND RECEIVER CANNOT BE USED AS TRANSCEIVER SET. THE A SSESSEE BY THE SAID ACTIVITY OF FREQUENCY SYNTHESIZATION MODULATES CHAN GES IN THE BASIC COMPONENTS I.E. TRANSMITTERS AND RECEIVER, FOR ITS ULTIMATE USE AS A TRANSCEIVER SETS BY THE VARIOUS GOVT. AGENCIES, WHO ARE THE END USERS OF THE SAME. TO AVAIL THE BENEFIT OF CLAIM OF DEDUCTI ON U/S 80IC OF THE ACT, IT IS NOT THE REQUIREMENT OF LAW THAT EACH STEP OF MANUFACTURING IS TO BE CARRIED ON THE ASSESSEE ITSELF. THE CLAIM OF ASSES SEE IN THE PRESENT FACTS AND CIRCUMSTANCES IS ONLY IN RESPECT OF THE 3 RD STEP OF FREQUENCY SYNTHESIZATION, AND NOT THE MANUFACTURE OF THE TWO ITEMS WHICH ARE SUBJECTED TO FREQUENCY SYNTHESIZATION. THE ACTIVIT Y CARRIED ON BY THE ASSESSEE IS THE INTEGRAL PART OF MANUFACTURING TRAN SCEIVER SETS AND IS MANUFACTURE ENTITLING THE ASSESSEE TO BENEFIT OF DEDUCTION U/S 80IC OF 12 THE ACT. IN RESPECT OF THE SECOND ITEM MANUFACTUR E BY THE ASSESSEE I.E. POWER SUPPLY EQUIPMENT, TWO BASIC ACTIVITIES ARE RE QUIRED I.E. A) WRITING A PRINTED CIRCUIT BOARD (PCB), AND (B) LAYING OF TR ANSFORMERS, RESISTORS, CAPACITORS, HEAT SINK ASSEMBLY, VOLTAGE REGULATOR, SWITCHES ETC. ON FIXED PRINCIPLES OF ELECTRONIC ENGINEERING. THE ASSESS ING OFFICER ADMITS IN PARA 1 ON PAGE 9 OF THE ASSESSMENT THAT THE ABOVE S AID ACTIVITIES ARE INTEGRAL PART OF THE MANUFACTURING PROCESS OF POWER SUPPLY EQUIPMENT AND THE TWO HAVE TO BE CARRIED OUT BEFORE THE PRODUCT I S IN A CONDITION FOR USE. THE ASSESSING OFFICER FURTHER MENTIONED THAT WRITIN G OF PCB HAS NOT BEEN CARRIED OUT BY THE ASSESSEE AND ONLY THE LAYING OF TRANSFORMERS, REGISTERS ETC. HAS BEEN CARRIED OUT. THE SECOND ACTIVITY, UN DERTAKEN BY THE ASSESSEE TRANSFORMS THE PCBS INTO POWER SUPPLY EQUIPMENTS AN D IS MARKETABLE TO END USER. THE SAID ACTIVITY IS CONSIDERED BY THE ASSESSING OFFICER TO BE THE INTEGRAL PART OF MANUFACTURING PROCESS AND ADMI TTEDLY THE ASSESSEE IS CARRYING ON THE SECOND ACTIVITY. ONCE, IT HAS BEEN FOUND THAT THE ASSESSEE IS CARRYING OUT THE INTEGRAL PART OF MANUFACTURING PROCESS, THE CONTENTION OF THE ASSESSEE THAT IT IS INVOLVED IN MANUFACTURIN G ACTIVITIES STANDS PROVED. 15. FOR CLAIMING DEDUCTION U/S 80IC OF THE AC T, THE BASIC CONDITION IS THAT THE GROSS TOTAL INCOME SHOULD INC LUDE PROFITS AND GAINS FROM ANY BUSINESS UNDERTAKEN BY THE UNDERTAKING OR ENTERPRISE, WHICH IS ENGAGED IN THE MANUFACTURE OR PRODUCTION OF ANY ART ICLE OR THING, NOT BEING ANY ARTICLE OR THING SPECIFIED IN THE 13 TH SCHEDULE. IN THE FACTS OF THE PRESENT CASE BEFORE US, WHERE THE ASSESSEE WA S CARRYING ON ONE OF THE ACTIVITIES OF MANUFACTURING PROCESS, WHICH ITS ELF IS MANUFACTURING AND MERELY BECAUSE THE ASSESSEE WAS NOT CARRYING ON THE OTHER ACTIVITIES ENVISAGED BY THE ASSESSING OFFICER, DOES NOT DISENTITLE 13 THE ASSESSEE FROM THE CLAIM OF DEDUCTION U/S 80IC O F THE ACT. THE ACTIVITIES BEING CARRIED OUT BY THE ASSESSEE FOR TH E MANUFACTURING OF TRANSCEIVER SET AND POWER SUPPLY EQUIPMENT MAKES THE PRODUCT MA RKETABLE FOR ITS ULTIMATE USE BY THE GOVERNMENT AGENCIES TO WHOM SUPPLIES ARE BEING MADE BY THE ASSESSEE, ENTITLES THE ASSESSEE TO THE CLAIM OF THE DEDUCTION U/S 80IC OF THE ACT. WE CONFIRM THE ORD ER OF THE CIT(A) IN THIS REGARD. 16. THE SECOND ASPECT OF THE ISSUE FOR DENIAL OF DE DUCTION TO THE ASSESSEE WAS THE PRESENCE OF 7 TO 8 WORKERS DURING INSPECTION OF THE PARWANOO UNIT. THE SAID INSPECTION WAS CARRIED OU T DURING THE COURSE OF ASSESSMENT PROCEEDINGS DURING THE FINANCIAL YEAR 20 08-09 AND THE EXPLANATION OF THE ASSESSEE WAS THAT BECAUSE OF LAC K OF ORDERS, THERE WAS NO MANUFACTURING ACTIVITIES AND HENCE LESSER NUMBER OF WORKERS ON THE DATE OF INSPECTION. THE ASSESSEE HAD PRODUCED FOR VERIFICATION DURING THE ASSESSMENT PROCEEDINGS, THE SALARY AND WAGES REGIST ER RELATING TO THE FINANCIAL YEAR 2005-06 UNDER WHICH SALARY WAS PAID TO SKILLED PERSONS AND OTHER WAGERS. THE QUALIFICATION CERTIFICATES OF T HE PERSONS IN THE SALARY REGISTER WERE ALSO PRODUCED BEFORE THE ASSESSING OF FICER. THE COPIES OF THE SAME HAVE BEEN PRODUCED BEFORE THE CIT(A) AND T HE CIT(A) HAS RECORDED A FINDING THAT THE RECORD WITH REGARD TO T HE NUMBER OF WORKERS DURING FINANCIAL YEAR 2005-06 AND MACHINERY USED DU RING THAT PERIOD WAS PRODUCED BEFORE THE ASSESSING OFFICER, WHO HAS IGNO RED THE SAME. ADMITTEDLY, BUSINESS ACTIVITY OF THE ASSESSEE HAD R EDUCED CONSIDERABLY DUE TO LACK TO ORDER IN FINANCIAL YEAR 2008-09 AND THE FACTUAL SITUATION ON THE DATE OF INSPECTION CANNOT BE APPLIED FOR LOOKIN G AT THE RESULTS SHOWN IN THE YEAR UNDER APPEAL. THE ASSESSEE HAS ALSO PO INTED OUT THAT NO DEDUCTION U/S 80IC OF THE ACT HAS BEEN CLAIMED FROM ASSESSMENT YEAR 14 2007-08. FURTHER, THERE IS NO STIPULATION OF MINIM UM NUMBERS OF WORKERS U/S 80IC OF THE ACT. THE DR FOR THE REVENUE HAS FA ILED TO POINT OUT ANYTHING CONTRARY TO THE FINDINGS OF THE CIT(A). T HE ASSESSEE HAD CLAIMED DEDUCTION U/S 80IC OF THE ACT IN ASSESSMENT YEAR 2004-05 AND 2005-06 AND THE SAME WERE ALLOWED TO THE ASSESSEE V IDE ORDERS PASSED U/S 143 (3) OF THE INCOME TAX ACT. THOUGH THE PRINCIPL E OF RES JUDICATA DOES NOT APPLY TO THE INCOME TAX PROCEEDINGS, YET THE RU LE OF CONSISTENCY DEMANDS THAT UNDER SIMILAR SITUATIONS, THE CLAIM O F THE ASSESSEE BE NOT DISTURBED. IN THE ENTIRETY OF THE FACTS AND CIRCUM STANCES REFERRED BY US IN THE PARAS HEREIN ABOVE, WE UPHOLD THE ORDER OF C IT(A) IN ALLOWING THE CLAIM OF DEDUCTION U/S 80IC OF THE ACT IN RESPECT O F THE PROFITS OF PARWANOO UNIT. WE ALSO CONFIRM THE ORDER OF CIT(A ) IN DIRECTING THE ASSESSING OFFICER TO EXAMINING THE APPLICABILITY OF SECTION 80 IA(9) OF THE ACT IN RESPECT OF TRANSFER OF STOCK OF RS. 2,25 ,45,879/- FROM THE PANCHKULA UNIT TO PARWANOO UNIT. ACCORDINGLY, TH E GROUND NO.1 RAISED BY THE REVENUE IS DISMISSED. 17. THE LEARNED DR FOR THE REVENUE HAD PLACED RELI ANCE ON THE RATIO LAID DOWN BY THE V.M. SALGAOCAR BROS (P) LTD V. CIT (1996) (SUPRA) FOR THE PROPOSITION THAT IMPROVING MARKETABILITY OF ART ICLE DOES NOT CONSTITUTE MANUFACTURE OR PRODUCTION. THE TEST OF MARKETABIL ITY STANDS APPROVED BY THE RATIO LAID DOWN BY THE HON'BLE APEX COURT IN IN DIA CINE AGENCIES VS. CIT [(2009) 308 ITR 98 (SC) ] AND COMPUTER GRAPHICS LTD VS. CIT [308 ITR 98 (SC)]. THE HON'BLE SUPREME COURT HAD REVERS ED THE RATIO LAID DOWN BY THE MADRAS HIGH COURT IN COMPUTER GRAPHICS LTD VS. ACIT [308 ITR 96 (MAD)], WHEREIN IT WAS HELD THAT THE AC TIVITY OF CONVERTING JUMBO ROLLS INTO MARKETABLE SMALL SIZES COULD NOT B E REGARDED AS A MANUFACTURING ACTIVITY AND THE ASSESSEE WAS NOT ENT ITLED TO THE BENEFIT OF 15 SECTION 80-IB OF THE ACT AS HAD BEEN ALREADY DECIDE D IN THE ASSESSEES OWN CASE IN THE EARLIER YEAR. THE RELIANCE BY THE LEARNED DR THUS STANDS REVERSED. 18. THE SECOND ISSUE RAISED BY THE REVENUE IS AGAI NST THE ALLOWANCE OF DEPRECIATION. THE ASSESSING OFFICER WHILE COMPU TING THE INCOME OF THE ASSESSEE HAD DISALLOWED DEPRECIATION OF RS. 9,32,25 8/- AS ON THE DATE OF INSPECTION, NO MACHINERY WAS FOUND AT THE PARWANOO UNIT EXCEPT THE DRILL MACHINES AND TESTERS. THE EXPLANATION OF THE ASSE SSEE THAT IT HAD SHIFTED ITS MACHINERY FROM PARWANOO UNIT TO PANCHKULA UNIT IN VIEW OF LACK OF ORDERS AND LESSER PRODUCTION, WAS REJECTED IN A SUM MARY MANNER. BEFORE THE CIT(A), THE ASSESSEE HAD FILED THE COPY OF DEPR ECIATION CHART, COPY OF WHICH IS ALSO FURNISHED BEFORE US. THE CONTENTION OF THE ASSESSEE WAS THAT THE DEPRECIATION AT PARWANOO UNIT WAS CLAIMED AT RS. 3,10,275/- ONLY. FURTHER, THE INVESTMENT MADE IN THE PLANT AN D MACHINERY WAS ACCEPTED IN THE PRECEDING YEAR AND DEPRECIATION WAS ALLOWED TO THE ASSESSEE. THE SAID MACHINERIES IN LATER YEARS WER E TRANSFERRED TO THE PANCHKULA UNIT DUE TO LACK OF MANUFACTURING ACTIVIT IES AT PARWANOO UNIT ESTABLISHES THE EXISTENCE OF THE PLANT AND MACHINER Y AND CONSEQUENTLY THE CLAIM OF DEPRECIATION IS TO BE ALLOWED. WE UPHOLD THE ORDER OF CIT(A) IN ALLOWING THE CLAIM OF THE ASSESSEE AND DELETING THE ADDITION OF RS. 9,32,258/-. THE GROUND NO.2 RAISED BY THE REVENUE IS THUS DISMISSED. 19. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF AUGUST,2010. SD/- SD/- (G.S.PANNU) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 30 TH AUGUST, 2010 16 RKK COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR