ACIT, V. M/s. Phonix Lamps India Ltd,

ITA 390/DEL/2009

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 1338 (ITAT-DELHI)
• Duration Of Justice: 8 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-10-2009
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 09-10-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 02-02-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: NANDITA KANCHAN
• Keywords: Depreciation; Set aside
• Section: 80HHC; 80IA; 80IC

Judgement Text

1 ITA NO.390 &C.O21/DEL/09 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: F NEW DELHI BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER AND SMT SUCHITRA KAMBLE , JUDICIAL MEMBER I.T.A .NO.- 390/DEL/2009 (ASSESSMENT YEA R-2004-05) ACIT NOIDA RANGE NOIDA (APPELLANT) VS PHONIX LAMPS INDIA LTD. 59A, NSEZ, PHASE II NOIDA GAUTAM BUDH NAGAR (RESPONDENT) C.O .NO.-21 /DEL/2009 (ASSESSMENT YEA R-2004-05) PHONIX LAMPS INDIA LTD. 59A, NSEZ, PHASE II NOIDA GAUTAM BUDH NAGAR (APPELLANT) VS ACIT NOIDA RANGE NOIDA (RESPONDENT) APPELLANT BY SMT. NANDITA KANCHAN CIT (DR) RESPONDENT BY SH. SHASHWAT BAJPAI, ADV ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED BY THE REVENUE AGAINST ORDER D ATED 20/10/2008 PASSED BY LD. CIT(A), GHAZIABAD. DATE OF HEARING 09.10.2015 DATE OF PRONOUNCEMENT 23 .10.2015 2 ITA NO.390 &C.O21/DEL/09 2. THE GROUNDS OF APPEAL ARE AS FOLLOWS:- 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS BY HOLDING THAT THE UTTRANCHAL UNIT OF THE ASSESSEE COMPANY IS ENTITLED TO DEDUCTION U/S 80 IC OF THE INCOME TAX ACT 1961 W.E. F A. Y 2005-06, BEING THE INITIAL ASSESSMENT YEAR OF THE P URPOSE OF 80 IC I.T. ACT AND NOT FROM THE A.Y 2004-05, AS HELD BY THE A.O, WITHOUT APPRECIATING THE FACTS PROPERLY AS BROUGHT OUT BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOLDING THAT THE UTTRANCHAL UNIT OF THE ASSESSEE COMPANY IS ENTITLED TO DEDUCTION U/S 80 HHC OF THE I.T ACT, 1961 W.E.F A. Y 2005-06, BEING THE INITIAL ASSESSMENT YEAR FOR THE PURPOSE O F 80 HHC AND NOT FROM THE ASSESSMENT YEAR 2004-05, AS HELD B Y THE A.O., WITHOUT APPRECIATING THE FACTS PROPERLY AS BROUGHT OUT BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER. 3. THE ORDER OF THE LD. CIT(A) MAY BE SET-ASIDE AND THE ORDER OF THE A.O BE RESTORED. 3. THE ASSESSEE COMPANY MANUFACTURES COMPACT FLORES CENT LAMP (CF LAMPS), HALOGEN LAMP, METAL HALIDE LAMPS F OR WHICH PURPOSE IT HAS THREE UNITS. UNIT-I WAS IN NEPZ ARE A AND WAS CLAIMING DEDUCTION U/S 10A OF THE INCOME TAX ACT TI LL FINANCIAL YEAR 2001-02. THE SECOND UNIT WAS OUTSIDE THE NEPZ AREA . THE THIRD UNIT WAS STARTED DURING THE ASSESSMENT YEAR 2003-04 AT DEHRADUN. THE ASSESSEE HAS CLAIMED DEDUCTION U/S 80HHC ON THE BASIS THAT IT IS EXPORTING CF LAMPS TO OTHER COUNTRIES. THE GROS S PROFIT RATIO SHOWN BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2004- 05 IS 29.39 % AS AGAINST 32.67% IN THE IMMEDIATELY PRECEDING YEAR . THE DECREASE IN THE GROSS PROFIT RATION HAS BEEN EXPLAINED BY TH E ASSESSEE, TO BE 3 ITA NO.390 &C.O21/DEL/09 ON ACCOUNT OF FALL IN THE VALUE OF DOLLAR AND THE A SSESSEE EXPLANATION WAS ACCEPTED BY THE ASSESSING OFFICER. AFTER EXAMINATION AND DISCUSSION WITH THE ASSESSEE THE FO LLOWING ADDITIONS DISALLOWANCES WERE MADE TO THE ASSESSEES TOTAL INCOME BY THE AO. DURING THE YEAR UNDER CONSIDERATION THE AS SESSEE HAS STARTED A NEW UNIT AT DEHRADUN. THIS UNIT IS LOCAT ED IN THE EXPORT PROCEEDING ZONE IN THE STATE OF UTTRAKHAND. THUS T HE SPECIAL PROVISION IN RESPECT OF CERTAIN UNDERTAKINGS IN CER TAIN SPECIAL CATEGORY STATES AS LAID DOWN IN SECTION 80IC OF THE INCOME TAX ACT, 1961 WERE APPLICABLE TO THIS AREA AS PER THE ASSESS ING OFFICER. HOWEVER, THE ASSESSEE COMPANY HAS NOT CLAIMED THAT THE UNIT IS COVERED UNDER SECTION 80IC OF THE INCOME TAX ACT, 1 961 FOR THE YEAR UNDER CONSIDERATION ON THE BASIS THAT IN ITS A CCOUNTS THE ASSESSEE HAS SHOWN THAT THIS UNIT IS UNDER TRAIL RU N. FOR THE PURPOSE OF CONVENIENCE THE RELEVANT PROVISIONS OF S ECTION 80IC OF THE INCOME TAX ACT, 1961 ARE REPRODUCED AS UNDER:- SECTION 80IC OF THE INCOME TAX ACT (8) (V) INITIAL ASSESSMENT YEAR MEANS THE ASSESSMENT YEAR RELEVANT TO THE PRE VIOUS YEAR IN WHICH THE UNDERTAKING OF THE ENTERPRISE BEGINS T O MANUFACTURE OR PRODUCE ARTICLES OR THINGS, OR COMME NCES OPERATION OR COMPLETES SUBSTANTIAL EXPANSION. 4. THE ASSESSEE COMPANY HAS SHOWN THAT THE PRE-OPER ATIVE EXPENDITURE IN RESPECT OF ITS DEHRADUN UNIT REOPENI NG FOR CAPITALIZATION AS THE UNIT HAS BEEN CLAIMED TO BE U NDER TRIAL RUN. THE DETAILS OF SUCH EXPENDITURE WERE SHOWN IN SCHED ULE 19 OF THE ACCOUNTS OF THE COMPANY. THE SAME ARE AS FOLLOWS: 4 ITA NO.390 &C.O21/DEL/09 NATURE OF EXPENSES/INCOME AMOUNT COST OF MATERIAL CONSUMED 3,98,74,811 REPAIR & MAINTENANCE 8,17,879 POWER & FUEL 18,36,446 DEPRECIATION 6,66,805 INSURANCE CHARGES 71,313 SECURITY SERVICES 2,62,994 SALARY & WAGES 88,79,797 CONTRIBUTION TO PROVIDENT & OTHER FUNDS. 4,60,868 WELFARE EXPENSES 10,54,962 PRINTING AND STATIONERY 2,05,193 POSTAGE, TELEPHONE & TELEGRAM 2,66,606 RENT 1,46,446 CONVEYANCE & TRAVELLING 12,10,613 LEGAL & PROFESSIONAL CHARGES 80,585 MISC. EXPENSES 3,91,229 BANK CHARGES 1,64,299 INTEREST ON TERM LOAN 22,87,242 INTEREST OTHERS 1,64,709 FREIGHT & INSURANCE 4,37,159 SUB TOTAL 5,92,79,956 LESS: SALES 3,13,26,073 STOCK OF FINISHED GOODS 1,46,38,996 EXCHANGE VARIATION 38,15,901 SUB TOTAL 4,97,80,970 TOTAL 94,98,966 5 ITA NO.390 &C.O21/DEL/09 5. THIS SCHEDULE SHOWS THAT THE ASSESSEE COMPANY HA S PURCHASED AND CONSUMES MATERIAL CONSUMED OF RS. 3,9 8,74,811/-. DURING THE YEAR, EXPENDITURE INCURRED ON SALARY, WA GES, WELFARE AND EVEN ON REPAIR MAINTENANCE. THE COMPANY FROM THIS UNIT HAS INCURRED SALES AMOUNTING TO RS. 3,13,26,073/- AND T HERE IS A STOCK OF FINISHED GOODS WITH THE ASSESSEE COMPANY VALUED AT RS.1,46,38,996/-. THUS, EVEN AFTER SHOWING A SALE OF RS.3,13,26,073/- FROM THE SAID COMPANY, THE ASSESSE E COMPANY HAS CLAIMED THAT THE UNIT IS UNDER TRIAL RUN. VIDE NOTICE DATED 11/10/2006, THE ASSESSEE COMPANY WAS ASKED WHY THE YEAR UNDER CONSIDERATION SHOULD NOT BE TAKEN AS THE INITIAL AS SESSMENT YEAR FOR THE PURPOSE OF SECTION 80IC OF THE INCOME TAX ACT, 1961 IN RESPECT OF UNIT LOCATED IN UTTRAKHAND. SECONDLY, THE COMPAN Y WAS ASKED WHY FOR THE PURPOSE OF SECTION 80HHC OF THE INCOME TAX ACT, 1961, THE SALES MADE BY THE ASSESSEE COMPANY FROM ITS UTT RAKHAND UNIT NOT BE INCLUDED IN THE TOTAL TURNOVER. 6. THE ASSESSEE REPLIED THAT THE UNIT WAS ONLY TRIA L RUN AND NOT HAD COMMERCIAL PRODUCTION DURING THE YEAR, AND THER EFORE, THE YEAR UNDER CONSIDERATION SHOULD NOT BE TREATED AS FIRST YEAR OF DEDUCTION SECTION 80IC (3) (II) OF THE INCOME TAX ACT, 1961. THE ASSESSEE FURTHER SUBMITTED BEFORE THE AO THAT THE ASSESSEE W AS ENTITLED TO CLAIM DEDUCTION FOR 100 PERCENT OF PROFIT AND GAINS FOR 5 6 ITA NO.390 &C.O21/DEL/09 ASSESSMENT YEARS COMMENCING THAT THE INITIAL ASSESS MENT YEAR AND THEREAFTER 30%. THE ASSESSEE COMPANY FURTHER SUBMI TTED THAT COMMERCIAL PRODUCTION OF CF LAMPS WERE NOT TAKEN P LACE IN THE YEAR UNDER CONSIDERATION, BUT ONLY TRIAL PRODUCTION TOOK PLACE. THE ASSESSEE FURTHER SUBMITTED THAT THERE WAS A HUGE WA STAGE WHICH CAUSED A LOSS OF RS.90,98,986/- IN THE YEAR OF TRIA L PRODUCTION I.E. A.Y 2004-05. THE ASSESSEE SUBMITTED BEFORE THE ASS ESSING OFFICER THAT THE TRIAL PRODUCTION WAS MADE IN THE PREVIOUS YEAR RELEVANT TO A.Y 2004-05 WAS ALSO EVIDENT FROM THE EXTENT OF TUR NOVER WHICH WAS ONLY RS.3,13.26 LACS IN THE TRIAL RUN, WHICH INCREA SED TO RS.5159.50 LACS AND RS.8988.40 LACS IN SUBSEQUENTLY NEXT TWO F INANCIAL YEARS WHEN COMMERCIAL PRODUCTION COMMENCED. TO SUPPORT T HIS, THE ASSESSEE COMPANY SUBMITTED A CERTIFICATE FOR STARTI NG UP COMMERCIAL PRODUCTION FROM CHARTERED ENGINEER DATED 4/4/2004 WHEREIN IN IT WAS SUBMITTED THAT ALL PLANTS AND MAC HINERIES FINALLY COVERED BY MARCH 2004 AND ACCORDINGLY COMMERCIAL PR ODUCTION STARTED W.E.F. 1 ST APRIL 2004. IN THIS CERTIFICATE, THERE IS NO SPEC IFIC MENTION ABOUT HOW MUCH QUANTITY HAS BEEN PRODUCED/MANUFACTURED FROM THE DEHRADUN UNIT AND HO W MUCH EXACT WASTAGE TOOK PLACE. THERE WAS NO RECORD TO S HOW FROM THE GIVEN DOCUMENTS THAT THE FIRST INVOICE WAS SUBMITTE D PRIOR TO COMMERCIAL PRODUCTION. THE ASSESSING OFFICER WHILE TAKING INTO CONSIDERATION ALL THESE FACTORS HELD THAT THE INITI AL ASSESSMENT YEAR FOR THE PURPOSE OF SECTION 80IC OF THE INCOME TAX A CT, 1961. THE ASSESSING OFFICER HAS GIVEN DETAILED REASONS WHICH ARE REPRODUCED HEREINBELOW: 7 ITA NO.390 &C.O21/DEL/09 THE ASSESSEEES CONTENTION IN THIS REGARD IS NOT A CCEPTED BECAUSE I) THE INITIAL ASSESSMENT YEAR FOR THE PURPOSE OF SECT ION 80IC HAS BEEN DEFINED IN THE SECTION ITSELF IN SUB-SECTI ON 8(5) AS THE INITIAL ASSESSMENT YEAR MEANS THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAK ING OF THE ENTERPRISE BEGINS TO MANUFACTURE OR PRODUCE ART ICLES OR THINGS, OR COMMENCES OPERATION OR COMPLETES SUBSTAN TIAL EXPANSION. II) THE ASSESSEE COMPANY FROM ITS UTTRANCHAL UNIT HAS S HOWN SUBSTANTIAL MATERIAL CONSUMPTION AMOUNTING TO RS.3. 98 CRORES AND ALSO SUBSTANTIAL EXPENSE ON POWER AND FU EL AND ALSO ON WAGES. ALL THESE EXPENSES ARE DIRECT EXPENSES WHICH CLEARLY SHOW THAT MANUFACTURING ACTI VITY HAS BEEN UNDERTAKEN AT THIS UNIT. III) DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY FROM ITS UTTRANCHAL UNIT UNDERTAKEN SALES O F 3.13 CRORES AND ALSO HAS STOCK OF FINISHED GOODS VA LUED AT 1`.46 CRORES. THIS FURTHER STRENGTHENS THE FACT TH AT NOT ONLY MANUFACTURING ACTIVITY HAS BEEN UNDERTAKEN AT THE UNIT BUT SUBSTANTIAL SALES HAVE ALSO BEEN MADE FROM THE UNIT. IT IS IMPORTANT TO NOTE THAT THE TOTAL TURNO VER OF THE ASSESSEE COMPANY WHICH WAS ESTABLISHED ABOUT 12 YEA RS BACK IS 165 CRORES APPROXIMATELY, THUS THE SALES FR OM THIS SMALL UNIT OVER A VERY SHORT PERIOD OF TIME I.E OVE R ONE TO ONE AND A HALF MONTH IS NEARLY 2% OF THE TOTAL TURN OVER. IV) FOR THE PURPOSE OF UNDERTAKING THESE SALES THE ASSE SSEE COMPANY HAS NOT ONLY ISSUED PROPER BILLS BUT ALSO P AID THE VARIOUS APPLICABLE TAXES BEFORE MAKING THESE SA LES. V) THE FACT THAT THE COST OF MATERIAL CONSUMED I.E 3.9 8 CRORES IS LESS THAN THE TOTAL VALUE OF SALES AND THE TOTAL STOCK OF FINISHED GOODS (3.13 CRORES + 1.46 CRORES= 4.49 CRO RES) FURTHER STRENGTHENS THE CASE THAT IT CANNOT BE THE CASE OF 8 ITA NO.390 &C.O21/DEL/09 THE ASSESSEE THAT THE UNIT IS SHOWING SUBSTANTIAL WASTAGE. THE MERE FACT THAT THE UNIT HAS SOME INIT IAL LOSSES DOES NOT MAKE THE PERIOD AS PRIOR TO COMMENC EMENT OF PRODUCTION. MOREOVER THE TERM USED IN THE SECTI ON IS BEGINS TO MANUFACTURE AND NOT COMMENCEMENT OF COMMERCIAL PRODUCTION. THE TWO TERMS ARE CLEARLY DISTINGUISHABLE AND NO SALE CAN EVER TAKE PLACE IF A UNIT DOES NOT BEGIN TO MANUFACTURE. THE STAGE AT WHICH A UNIT STARTS COMMERCIAL PRODUCTION IS LATER THAN THE STAG E AT WHICH IT BEGINS TO MANUFACTURE. THOUGH IN THIS CAS E THE QUANTUM OF SALE AND THAT TOO OVER A LIMITED PERIOD OF ONE TO ONE AND A HALF MONTH SHOWS THAT THE UNIT HAS EVER COMMENCED COMMERCIAL PRODUCTION. VI) POINTS (II) TO (V) CLEARLY REVEAL THAT THE UNIT HAS BEGIN TO MANUFACTURE AND PRODUCE ARTICLE OR THINGS. THEREFO RE, THERE IS NO QUESTION THAT THIS YEAR IS NOT THE INIT IAL ASSESSMENT YEAR FOR THE UTTRANCHAL UNIT FOR THE PUR POSE OF SECTION 80 IC. VII) THUS IT IS HELD THAT ASSESSMENT YEAR 2004-05 IS THE INITIAL ASSESSMENT YEAR FOR THE UTTRANCHAL UNIT FOR THE PURPOSE OF SECTION 80IC. DEDUCTION UNDER THIS SECTION CAN NOW BE CLAIMED BY THE ASSESSEE COMPANY FOR THE REMAINING YEARS AS PER PROVISIONS OF THE SECTIO N. SINCE ASSESSMENT YEAR 2004-05 IS THE INITIAL ASSESSMENT Y EAR FOR THE UNIT, THEREFORE, THE DEPRECIATION ON THE FIXED ASSETS WOULD DEEMS TO HAVE BEEN ALLOWED HOWEVER THE SAME WOULD NOT BE ALLOWED TO BE ADJUSTED AGAINST PR OFIT OF THE OTHER UNITS IN LIEU OF SUB-SECTION 80IC (7) AS PER WHICH SUB-SECTION 5 OF SECTION 80IA WOULD APPLY TO THE ELIGIBLE UNDERTAKING. SUB-SECTION 80IA(5) CLEARLY LAYS DOWN THAT THE PROFITS AND GAINS OF THE ELIGIBLE UNI T WOULD BE COMPUTED AS IF SUCH ELIGIBLE BUSINESS WERE THE O NLY SOURCE OF INCOME OF THE ASSESSEE DURING THE PREVIOU S YEAR RELEVANT TO THE INITIAL ASSESSMENT YEAR. THUS HOLDING OF THE UNIT AS COV ERED U/S 80IC WOULD HAVE NO IMPACT ON THE TAXABLE INCOME FOR THE YEAR 9 ITA NO.390 &C.O21/DEL/09 UNDER CONSIDERATION BUT WOULD EFFECT THE NUMBER OF REMAINING YEARS FOR WHICH THE UNIT WOULD BE ELIGIBL E TO CLAIM DEDUCTION U/S 80 IC. 7. THE ASSESSING OFFICER HELD THAT THE UNIT IS COVE RED UNDER SECTION 80IC OF THE INCOME TAX ACT, 1961 AND WOULD HAVE NO IMPACT ON THE TAXABLE INCOME IN THE YEAR UNDER CONS IDERATION BUT WOULD HAVE EFFECT ON THE REMAINING YEAR FOR WHICH T HE UNIT WOULD BE ELIGIBLE TO CLAIM DEDUCTION UNDER SECTION 80IC OF T HE INCOME TAX ACT. 8. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE FILED APPEAL BEFORE THE LD. CIT(A). THE LD. CIT(A) WHILE DECIDING IN FAVOUR OF THE ASSESSEE HOLD THAT IN THE PROVISIONS UNDER SECTION 80IC OF THE INCOME TAX ACT,1961, THE TERM USED IS ANY UNDERTAKING OR ENTERPRISE WHICH HAS BEGUN OR BEGINS TO MANUFACT URE OR PRODUCE ANY ARTICLE. THE TERM BEGINS TO MANUFACTURE IS R EQUIRED TO BE UNDERSTOOD IN THE RELEVANT CONTEXT. ANY PRODUCTION CHANGED CAN BE SAID TO HAVE COMMENCED MANUFACTURING ONLY THEN, THE PRODUCTION CHANGED AND OPTIMIZE AND ESTABLISH AND THE PRODUCTI ON CHANGED IS ABLE TO SUSTAIN MANUFACTURING IN COMMERCIAL SINCE I N THE CONTEXT OF THE PROVISION MANUFACTURING MEANS PRODUCTION IN A C OMMERCIALLY SUSTAINABLE PRODUCTION CHANGED. WHILE ANALYZING TH ESE PREMISES THE LD. CIT(A) CONSIDERED THE RELEVANT CASE LAW DEC IDED BY HONBLE MADRAS HIGH COURT (110 ITR 168) WHEREIN IT HAS BEEN LAID DOWN THAT WITHOUT APPLYING THIS TEST BY MANUFACTURING T HE PROTO TYPE, THE ASSESSEE COULD NOT BE SAID TO HAVE MANUFACTURE D AND ARTICLE WHICH WAS CAPABLE OF BEING SOLD BY THE ASSESSEE IN THE CONTEXT OF 10 ITA NO.390 &C.O21/DEL/09 TAX INCENTIVE, AND ARTICLE CAN BE SAID TO HAVE MANU FACTURED ONLY WHEN IT COMES FROM COMMERCIALLY SUSTAINABLE PRODUCT ION CHANGED AND ONLY AT THIS STAGE ARTICLE IS CAPABLE OF BEING SOLD. THE LD. CIT(A) FURTHER HELD THAT, IN VIEW OF HIGH PERCENTAG E OF WASTAGE, THE MANUFACTURING IN THE PERIOD UNDER CONSIDERATION CAN NOT BE SAID TO BE ABLE TO SUSTAINED MANUFACTURING IN COMMERCIAL SE NSE. THEREFORE, THE LD. CIT(A) HELD THAT (I) THE AO WAS NOT JUSTIFIED IN HOLDING THAT ASSESSMENT YEAR 2004-05 I.E. THE YEAR UNDER CONSIDERATION IS, THE INITIAL ASSESSMENT YEAR FOR T HE UTTRAKHAND UNIT FOR THE PURPOSE OF SECTION 80IC OF THE INCOME TAX ACT AND (II) THE AO WAS ALSO NOT JUSTIFIED IN INCLUDING THE SAL E FROM THIS UNIT IN ITS TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION O F DEDUCTION U/S 80HHC OF THE INCOME TAX ACT, 1961. THE AO WAS ACCO RDINGLY DIRECTED TO GIVE CONSEQUENTIAL RELIEF. 9. THE REVENUE FILED THE PRESENT APPEAL. 10. THE DR SUBMITTED THAT THERE WERE ONLY 9.41 LACS MANUFACTURING UNITS AND THE COST OF MANUFACTURING O F PER PIECE WAS RS.30. THE DR FURTHER SUBMITTED THAT THE PERCENTAG E OF WASTAGE DURING THE TRIAL PRODUCTION WAS AS FOLLOWS:- ASSESSMENT YEAR WASTAGE (PERCENTAGE) 2005-06 21.35 2006-07 16.05 2007-08 13.64 11 ITA NO.390 &C.O21/DEL/09 11. THE DR MADE A SUBMISSION THAT THE ASSESSEE COM PANYS ACTIVITY WAS NOT AT ALL A TRIAL, BUT THE SALE PROCE EDS SHOWS THAT THERE WAS SIMULTANEOUS MANUFACTURING/COMMERCIAL ACTIVITIE S WHICH YIELDED 3.7 CRORES FOR THE PRESENT ASSESSMENT YEAR. THE PAPER BOOK WHICH WAS SUBMITTED BY THE ASSESSEE, WHEREIN THE AU DIT ANNUAL REPORT THOUGH MENTIONED THAT COMPETITION OF NET PRO FIT INCLUDES TRIAL RUN PRODUCTION OF 91.41 LACS, BUT THERE WAS NO BIFU RCATION GIVEN AS TO HOW MUCH WASTAGE WAS INCURRED DURING TRIAL PRODU CTION. AS PER THE ASSESSEE, THE TRIAL RUN WAS STARTED ON DECEMBER 2003. THE DR SUBMITTED THAT THE ASSESSEES SUBMISSIONS THAT THE WASTAGE IS OF FAR MORE THEN THE ACTUAL PRODUCTION SHOULD NOT BE TAKEN INTO CONSIDERATION. AS THE SAME WILL NOT BE A CRITERIA FOR DECIDING WHETHER THE COMMENCEMENT OF COMMERCIAL ACTIVITY TOO K PLACE IN ANY FINANCIAL YEAR/ASSESSMENT YEAR. ONCE THE SALES TOOK PLACE THEN, IT AMOUNTS TO MANUFACTURING/COMMERCIAL ACTIVI TIES AND IT CANNOT BE TERMED AS TRIAL PRODUCTION. THEREFORE, S ECTION 80IC OF THE INCOME TAX ACT HAS BEARING IN THE PRESENT CASE. THE DR SUBMITTED THAT THE TURNOVER CHART GIVEN BY THE ASSE SSEE COMPANY WAS MISLEADING AS THE PRODUCTION WAS ONLY FOR 3 MON THS PERIOD. THE PRODUCTION CONTINUOUSLY INCREASED, SO THE ASSES SEES CONTENTION THAT THERE WAS A TECHNICAL DEFECT AND BE CAUSE OF WHICH THERE WAS LOT OF WASTAGE DOES NOT SUSTAIN. THE DR F URTHER SUBMITTED THAT THE INVOICE SUBMITTED BEFORE THE AUT HORITIES AND BEFORE THIS TRIBUNAL HAS NOT MENTIONED THAT THESE A RE THE TRIAL PRODUCTIONS. SUBMISSIONS OF DETAILS IN RESPECT OF EXCISE AND CUSTOMS AUTHORITIES DOES NOT AMOUNT TO ANY FINDING THAT THERE WAS 12 ITA NO.390 &C.O21/DEL/09 NO SALE PRIOR TO COMMERCIAL PRODUCTIONS. THE SALE TOTALLY REFLECTED IN THE BOOKS OF ACCOUNTS AND SECTION 80IC OF THE IN COME TAX ACT, THUS IS ATTRACTED IN THE PRESENT CASE. 12. THE AR SUBMITTED THAT FOR THE 3 MONTHS THERE WA S MANUFACTURING BUT IT CANNOT BE TERMED AS COMMERCIAL PRODUCTION BECAUSE IT AMOUNTS TO TRIAL PRODUCTION. THE AR SUB MITTED THAT THE LD. CIT(A) HAS PROPERLY GIVEN THE FINDING. THE AR POINTED OUT IN PAPER BOOK WHICH WAS SUBMITTED BY HIM THE RELEVANT PAGES (PG NOS. 156,157,159 & 160) WHEREIN THE DEFECTS IN RESPECT O F CFL LAMPS WAS POINTED OUT AND SUBMITTED THAT THE MACHINERY AN D THE TRIAL RUN PRODUCTION TOOK PLACE DURING THE PERIOD DECEMBER 20 03 UP TILL JANUARY 2004. THE ASSESSEE ALSO SUBMITTED THAT BEC AUSE OF THESE DEFECTS, THERE WAS MORE THAN 30% WASTAGE AND THE LO SS WAS INCURRED DUE TO THE SAME. TO TAKE BENEFIT OF HIS S UBMISSIONS AS RELATES TO THE NON-APPLICATION OF SECTION 80IC OF T HE INCOME TAX ACT, THE AR SUBMITTED THAT THE WASTAGE VALUE DURING THE PRESENT ASSESSMENT YEAR WAS TOO HIGH AND THIS AMOUNTS TO TR IAL PRODUCTION. IN FACT, AS PER ASSSESSEE, THE COMMERCIAL PRODUCTIO N STARTED AFTER JANUARY 2004 AND THUS THE SAME COULD NOT BE TREATED AS COMMERCIAL PRODUCTION FOR THE PERIOD 2004-05 IN RES PECT OF DECEMBER 2003 TILL JANUARY 2004. TO SUPPORT THIS, THE AR HAS SUBMITTED VARIOUS CHARTS ALONG WITH INVOICES. THE ASSESSEE ALSO SUBMITTED VARIOUS CASE LAWS ON THE ISSUE THAT THE T RIAL PRODUCTION 13 ITA NO.390 &C.O21/DEL/09 CANNOT BE TREATED AS COMMERCIAL PRODUCTION. THE CA SE LAWS SUBMITTED BY THE AR AS FOLLOWS: 1. ORIENT COSMETICS LTD. VS. DCIT [2000] 74 ITD 135 (MAD) 2. METROPOLITAN SPRINGS PVT. LTD.VS. CIT[1981]132 I TR 893 (BOM) 3. MADRAS MACHINE TOOLS MANUFACTURERS LTD VS. CIT[1 975]98 ITR119 (MAD) 4. ADDL. CIT VS. SOUTHERN STRUCTURAL LTD. [1977]110 ITR 164 (MAD) 5. CIT VS. HINDUSTAN ANTIBIOTICS LTD.[1974]93 ITR 5 48 (BOM) 6. HERO HONDA MOTORS LTD. VS. JT. CIT [2006] 103 IT D 157 (DEL) 7. WESTERN INDIA VEGETABLE PRODUCTS LTD. VS. CIT [1 954] 26 ITR 151 (BOM) 8. CIT VS. ENNORE FOUNDRIES LTD. [1985] 21 TAXMAN 349 (MAD) 9. CIT VS. WEBBING & BELTING FACTORY LTD [1968] 68 ITR 186 13. ALL THE PRESENT CASE LAWS WHICH WERE SUBMITTED BY THE ASSESSEE ARE ON THE BASIC PREMISE THAT THE TRIAL PR ODUCTION CANNOT BE TAKEN INTO ACCOUNT AS COMMERCIAL PRODUCTION. 14. THE DR SUBMITTED THAT THE CASE OF CIT VS. HINDUSTAN ANTIBIOTICS LTD. [1974] 93 ITR 548 (BOM) WAS ON INT ERMEDIATE 14 ITA NO.390 &C.O21/DEL/09 PRODUCT AND NOT SIMILAR TO THE ASSESSEES CASE. CAS E OF ORIENT COSMETICS LTD. VS. DCIT [2000] 74 ITD 135 (MAD), TH E DR SUBMITTED THAT THERE WAS NO MANUFACTURING OR SALE O R PURCHASE IN THAT PARTICULAR CASE AND THAT VIEW CANNOT BE TAKEN IN THIS CASE AS IT IS TOTALLY ON THE DIFFERENT FOOTINGS. THE CASE OF METROPOLITAN SPRINGS PVT. LTD VS. CIT[1981]132 ITR 893 (BOM) IS RELATED TO THE TRIAL PRODUCTION, FIRST WHEREIN TRIAL PRODUCTION HAS BEEN DEALT WITH TESTING AND SAMPLING. BUT IN PRESENT CASE THERE WAS NO TESTING OR SAMPLING ON RECORD TO SHOW THAT THIS AMOUNTS TO TRI AL PRODUCTION. IN THE CASE OF MADRAS MACHINE TOOLS MANUFACTURERS L TD. VS. CIT [1975] 98 ITR 119 (MAD), THE DR SUBMITTED THAT THE WASTAGE WAS TOO SMALL AND THAT CANNOT BE THE CRITERIA IN THE PR ESENT CASE. IN THE CASE OF ADDL. CIT VS. SOUTHERN STRUCTURALS LTD. [1 977] 110 ITR 164 (MAD), THERE WAS A PROTO TYPE PRODUCTION AND, THERE FORE, THIS WILL ALSO NOT BE APPLICABLE. IN THE CASE OF HERO HONDA MOTORS LTD. VS. JT. CIT [2006] 103 ITD 157 (DEL), THE ASSESSEE COMP ANY WHICH TOOK BENEFIT OF SECTION 80 HHC AS RELATES TO DEDUCTION W AS TAKEN INTO CONSIDERATION IN RESPECT OF THE FIRST SALE AND ITS RELEVANT YEAR. THE DR SUBMITTED THE CASE LAW OF CIT VS. NESTOR PHARMAC EUTICALS LTD. (2010) 322 ITR 631 WHEREIN, IT WAS HELD THAT TRIAL PRODUCTION IS DIFFERENT FROM COMMERCIAL PRODUCTION. IN THIS CASE , THE HONBLE DELHI HIGH COURT HELD THAT THE ASSESSEE HAD SOLD O NE WATER COOLER AND ONE AIR CONDITION BEFORE APRIL 1998. THUS, THE STAGE OF TRIAL PRODUCTION HAD BEEN CROSSED OVER AND THE ASSESSEE H AD COME OUT WITH THE FINAL SALEABLE PRODUCT WHICH WAS IN FACT S OLD AS WELL. THE QUANTUM OF COMMERCIAL SALE WOULD BE IMMATERIAL. WIT H SALE OF 15 ITA NO.390 &C.O21/DEL/09 THOSE ARTICLES MARKETABLE QUALITY WAS ESTABLISHED, MORE PARTICULARLY WHEN ASSESSEE FAILED TO SHOW THAT THE DEALER RETUR NED THOSE GOODS ON THE GROUND THAT THERE WAS ANY DEFECT IN THE WATE R COOLER OR AIR- CONDITION PRODUCED AND SOLD BY THE ASSESSEE TO THE DEALER. THINGS WOULD HAVE BEEN DIFFERENT, IF THAT HAD HAPPENED. THE DR FURTHER SUBMITTED THAT THIS CASE LAW CLEARLY STATES THAT TH E WASTAGE IS NOT A WHOLE AND SOLE CRITERIA FOR A TRIAL PRODUCTION. TH E IMPROVEMENTS MADE BY THE ASSESSEE DURING THE YEAR THAT WOULD HAV E COME UNDER THE PURVIEW OF TRIAL PRODUCTION BUT IT FAILS FURTHE R TEST OF TRIAL, WHEN IT HAS BECOME AN ELIGIBLE PRODUCT AND ACTUAL SALE T OOK PLACE. THE PURCHASERS HAD NOT RETURNED THE ARTICLES WHICH ARE DEFECTIVE AND THE SAME CANNOT BE TERMED AS TRIAL PRODUCTION. 15. WE HAVE PERUSED ALL THE RECORDS AND HEARD SUBMI SSIONS MADE BY BOTH THE PARTIES. SECTION 80IC (8)(V) OF THE IN COME TAX ACT READS AS UNDER:- SECTION 80IC (8)(V) INITIAL ASSESSMENT YEAR MEA NS THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WH ICH THE UNDERTAKING OR THE ENTERPRISE BEGINS TO MANUFACTURE OR PRODUCE ART ICLES OR THINGS, OR COMMENCES OPERATION OR COMPLETES SUBSTANTIAL EXPANS ION; FROM THE MEANING OF INITIAL ASSESSMENT YEAR IT CA N BE SEEN THAT WHENEVER ANY UNDERTAKING OR THE ENTERPRISE BEGINS I TS COMMERCIAL MANUFACTURING AND PRODUCTION OF ARTICLES IT COMES U NDER THE PURVIEW OF SECTION 80IC OF THE INCOME TAX ACT, 1961 . THOUGH, THE ASSESSEE COMPANY HAS SHOWN THE PRE-OPERATIVE EXPEND ITURE IN RESPECTED OF ITS DEHRADUN UNIT & CLAIMED THAT IT WA S UNDER TRIAL 16 ITA NO.390 &C.O21/DEL/09 RUN AND THERE WAS NO COMMERCIAL PRODUCTION TOOK PLA CE DURING THE YEAR, BUT THE FACTS ARE DIFFERENT ALTOGETHER. IN F ACT, THE ASSESSEE SINCE THE BEGINNING OF THE SAID UNIT/PLANT WAS TAKI NG PURCHASE ORDERS FROM VARIOUS PARTIES AND COMPLYING WITH THE SAID PURCHASE ORDERS IN THE USUAL MANNER AND THERE WAS NO DEFECT OR COMPLAINT MADE BY THE PURCHASERS AT ANY POINT OF TIME. THE P ARTIES WHOM THE ASSESSEE SUPPLIED CONTINUOUSLY WERE, BAJAJ ELECTRIC ALS (34 INVOICES DURING THE PERIOD BETWEEN 22.12.2003 TO 29.03.2004) , SURAJ MOTOR COMPANY (11 INVOICES DURING THE PERIOD BETWEEN 03.0 1.2004 TO 22.03.2014), INTEGRATED RESOURCES (10 INVOICES DURI NG THE PERIOD BETWEEN 03.01.2004 TO 17.03.2014) SURAJ MOTOR COMPA NY (8 INVOICES DURING THE PERIOD BETWEEN 03.01.2004 TO 30 .03.2004), SURYA SALES AND VARIOUS OTHER PARTIES. THESE DETAIL S WERE SUBMITTED BEFORE THE TRIBUNAL DURING THE COURSE OF THE ARGUME NT BY THE AR. THE ASSESSEE WAS HAVING REGULAR TRANSACTIONS SINCE DECEMBER, 2003 TO MARCH 2004 AND IN FACT IT SHOWS FROM THE RE CORDS THAT THEY WERE HAVING LARGE QUANTITY OF ORDERS FROM THESE PUR CHASERS. STAGE OF TRIAL PRODUCTION IS ONLY PREPARATORY IN NATURE A ND A PRODUCT HAS TO GO THROUGH MANY PROCESS AS WELL AS TRIAL AND ERR OR BEFORE IT IS GIVEN A FINAL SHEET. SUCH PRODUCT IS ALSO OFFERED TO THE MARKET WITH A VIEW TO DECIDING THEIR ACCEPTABILITY IN THE MARKE T AND ON THE BASIS OF FEED BACK FROM THE MARKET. IN THE PRESENT CASE, THOUGH THE ASSESSEE HAS CLAIMED THAT IT COMMENCED COMMERCIAL P RODUCTION IN MARCH, 2004, BUT IN REALITY THE COMMERCIAL PRODUCTI ON STARTED SINCE THE INITIAL SET UP OF THE UNIT. THE INVOICES SUBMIT TED BY THE ASSESSEE WERE ALSO NOT GIVEN THE CLEAR PICTURE AS TO WHEN TH E FIRST INVOICE WAS 17 ITA NO.390 &C.O21/DEL/09 RETURN BACK ON THE REASON OF NOT AS PER THE REQUIRE MENT OF THE CUSTOMERS. IN FACT, LEDGER WHICH WERE GIVEN BY THE ASSESSEE FOR THE PERIOD 1 ST APRIL 2003 TO 31 MARCH, 2004 CLEARLY SHOWS THAT TH ERE WAS A CONTINUOUS TRANSACTION/SALE TO VARIOUS COMPAN IES AND THOSE COMPANIES WERE REPEATEDLY GIVING ORDERS TO THE ASSE SSEE COMPANY. SO THIS CANNOT BE TERMED AS A TRIAL PRODUCTION WHEN THERE IS A CONTINUOUS SALE TO A PARTICULAR COMPANY FOR EXAMPLE IN THE ASSESSEES CASE THERE WAS 34 TRANSACTIONS/INVOICES MENTIONED IN THE LEDGER TO BAJAJ ELECTRICALS LTD. FOR THE PERIOD 22 ND DECEMBER 2003 TILL 24 TH FEBRUARY 2004 AND THERE WAS NO SPECIFIC MENTION TH AT THE PRODUCT/CF LAMPS WHICH WERE SOLD TO BAJAJ ELECT RICALS WERE OF DEFECTIVE OR OF ANY SORT OF WASTAGE TO THE ASSESSEE COMPANY. THUS, THE BENEFIT OF TRIAL PRODUCTION CANNOT BE CLAIMED B Y THE ASSESSEE COMPANY AND SECTION 80IC IS CLEARLY ATTRACTED IN CA SE OF ASSESSEE COMPANY. SECONDLY, THE HUGE WASTAGE WILL ALSO BE NO T A CRITERIA FOR DETERMINING FOR NON-APPLICABILITY OF 80IC OF THE IN COME TAX ACT IN ASSESSEES CASE. THE WASTAGE WAS NOT PARTICULARLY H IGHER THAN THE ACTUAL SALEABLE PRODUCTION OF THE ASSESSEE COMPANY. THE HON'BLE DELHI HIGH COURT HELD THAT THE PROVISIONS OF I.T AC T USE THE WORD MANUFACTURE TRIAL PRODUCTION IS NOT REGARDED AS B EGINNING TO MANUFACTURE OR TO PRODUCE ARTICLES BECAUSE OF THE R EASON THAT THE ASSESSEE HAS TO PRODUCE TRIAL PRODUCTION TO VERIFY WHETHER IT CAN BE USE ULTIMATELY IN THE MANUFACTURE OF THE FINAL ARTI CLE. THESE ARE, THEREFORE, TRIAL RUNS THE ARTICLE IS TESTED TO FIND OUT AS TO WHETHER IT CAN BE LAUNCHED AS A FINAL PRODUCT IN THE MARKET OR NOT. THEREFORE, WITH MERE TRIAL PRODUCTION THE MANUFACTURE FOR THE PURPOSE OF 18 ITA NO.390 &C.O21/DEL/09 MARKETING THE GOODS HAS NOT STARTED WITH STARTS ONL Y WITH COMMERCIAL PRODUCTION NAMELY TO THE SATISFACTION OF MANUFACTURER HAS BEEN BROUGHT INTO EXISTENCE AND IS NOW FIT FOR MARKETING. THUS, THE DELHI HIGH COURT IN CASE OF CIT VS. NESTOR PHAR MACEUTICALS (2010) 322 ITR 631 CLEARLY MENTIONED THE DIFFERENCE BETWEEN TRIAL PRODUCTION AND COMMERCIAL PRODUCTION. THE INSTANCE OF THE SALE ALONG WITH THE DOCUMENTARY EVIDENCE CLEARLY SHOWS I N THE PRESENT CASE THAT, THOUGH THE ASSESSEE IS CLAIMING THE ACTI VITY OF DEHRADUN UNIT AS A TRIAL PRODUCTION, THE SAME IS NOT AT ALL A TRIAL PRODUCTION BUT THE COMMERCIAL PRODUCTION FROM DECEMBER 2003 ON WARDS. SELLING THE PRODUCT TO PARTICULAR PARTIES CONTINUOU SLY ALSO SHOWS THAT IT IS A COMMERCIAL PRODUCTION AND NOT OF A TRI AL PRODUCTION. THE CASE LAWS SUBMITTED BY THE ASSESSEE ARE ON DIFF ERENT FOOTINGS AND WAS RIGHTLY DISTINGUISHED BY THE DR. THUS, THE FIRST GROUND OF THE REVENUE IS SUSTAINED AND THE LD. CIT(A)S ORDER IS SET ASIDE TO THAT EFFECT. AS RELATES TO THE SECOND GROUND, THE S AME IS CONSEQUENTIAL AND THE AO IS DIRECTED TO DETERMINE T HE DEDUCTION U/S 80HHC OF THE INCOME TAX ACT, 1961 FOR THE A.Y 2 004-05. 16. IN RESULT, APPEAL OF THE REVENUE IS ALLOWED. 17. C.O IS NOT PRESSED BY THE ASSESSEE, HENCE DISMI SSED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 23RD OF OCTOBER, 2015. SD/- SD/- (R.S. SYAL) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 23/10/2015 19 ITA NO.390 &C.O21/DEL/09 R. NAHEED* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT R EGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 12.10.2015 PS 2. DRAFT PLACED BEFORE AUTHOR 13.10.2015 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 15.10.2015 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 23.10.2015 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 23.10.2015 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.