Appeal Details
Counselvise Citation
[2013] 120 COUNSELVISE.COM (IT) 1949 (ITAT-PANAJI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
5 month(s) 14 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
08-03-2013
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
DB
Assessment Year
2009-2010
Appeal Filed On
24-09-2012
Judgement Text
ITA NO S . 72 & 85/PNJ/2012 SESA GOA LTD., PANAJI, GOA IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH , PANAJI BEFORE: SHRI P.K. BANSAL, ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, JUDICIAL MEMBER ITA NO. 72 / PNJ / 20 12 ASSESSMENT YEAR : 2009 - 10 SESA GOA LTD. PANAJI GO A VS. JCIT RANGE - 1 PANAJI (APPELLANT) (RESPONDENT) PAN NO. AACCS 7101B ITA NO.85/PNJ/2012 ASSESSMENT YEAR : 2009 - 10 ACIT CIRCLE - 1(1) PANAJI VS. SESA GOA LTD. PANAJI - GOA (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI VINOD KUMAR , CA SHRI SANJEEV BINDAL CA & SHRI VIJAY GU PTA, CA RESPONDENT BY: SHRI M.V. SHESHACHALA (DR) SHRI B.L. GURUPRASAD DATE OF HEARING : 19.02.2013 DATE OF PRONOUNCEMENT : 08.03.2013 O R D E R P ER SHRI P. K. BANSAL, AM THESE CROSS APPEALS ARE FILED AGAINST THE ORDER OF THE CIT(A) DATED 3 1.08.2012. THE ASSESSEE IN HIS APPEALS TAKEN DETAILED GROUNDS OF APPEALS WHEN THE BENCH ASK ED TO FILE THE GROUNDS OF APPEAL IN BRIEF. THE ASSESSEE ACCORDINGLY FILED THE GROUNDS OF APPEAL IN BRIEF AS UNDER: - 1.1 THE LEARNED CIT(A) ERRED IN UPHOLDING THE A DDITION OF RS. 12,29,25,0497 - MADE BY A.O., U/S 14A OF THE ACT READ WITH RULE 8D OF THE RULES, AS EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. 1.2. THE LEARNED CIT (A) OUGHT TO HAVE APPRECIATED THAT THE SAID ADDITION HAS BEEN MADE BY THE A.O. WITHOU T CONSIDERING THE UNDERLYING ITA NO. 72&85/PNJ/2012 2 FACTS PERTAINING TO THE PATTERN OF INVESTMENTS AND INCOME ARISING OUT OF THE SAME WHICH DOES NOT WARRANT APPLICATION OF SECTION 14A. 2. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE BY THE A.O. OF THE' EXPENDITURE OF RS. 9,88,29,729/ - TOWARDS PAYMENT OF SALES COMMISSION TO THE NON RESIDENT AGENTS. 3. THE LEARNED CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE A.O., U/S. 40(A)(I) OF THE ACT, OF THE EXPENDITURE OF RS. 36,05,767/ - INCURRED BY THE APPELLANT BY WAY OF PAYMENT OF DEMURRAGE TO THE NON - RESIDENT BUYERS OF IRON ORE. 4. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE BY THE A.O. THE EXPENDITURE OF RS. 1,19,70,782/ - TOWARDS DEMURRAGE ON SHIPS PAYABLE TO THE NON RESIDENT SHIP - OWNERS, HAVIN G FAILED TO APPRECIATE THAT NEITHER THE PROVISIONS OF SECTION 195 NOR SECTION 40(A)(I) WERE APPLICABLE TO SUCH TAX PAYMENTS. 5. THE LEARNED CIT (A) ERRED IN HOLDING THAT THE APPELLANT'S CLAIM FOR DEDUCTION OF EXPENDITURE TOWARDS PAYMENT OF THE EDUCATION CESS AND THE SECONDARY AND HIGH SECONDARY CESS OF RS. 19, 72, 00,814 / - , WAS NOT MAINTAINABLE. 6. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE APPELLANT IS NOT ELIGIBLE FOR DEDUCTION U/S. 10B OF THE ACT, TOTALING RS.257,23,14,771 IN RESPECT OF ITS 100% EXPORT ORIENTED UNIT AT AMONA IN GOA. THE CIT(A) OUGHT TO HAVE APPRECIATED THE UNIT SET UP IN THE YEAR 2002 - 03 SATISFIES THE CONDITION OF NEW UNDERTAKING AS REQUIRED UNDER SECTION 10 - B OF THE ACT. 7. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE APPELLANT IS NOT ELIGIBLE FOR DEDUCTION U/. 10B OF THE ACT, TOTALING RS. 185,34,16,650 IN RESPECT OF ITS 100% EXPORT ORIENTED UNIT AT CHITRADURGA HI KARNATAKA. 8. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ACTIVITY CARRIED ON BY THE APPELLANT AT ITS EO U AT AMONA AND CHITRADURGA CANNOT ALSO BE ITA NO. 72&85/PNJ/2012 3 CONSIDERED AS 'PRODUCTION' TO MAKE THE APPELLANT ELIGIBLE FOR DEDUCTION U/S. 10 - B OF THE ACT IN RESPECT OF THE SAID EQUS. 9.1 .THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ACTIVITIES CARRIED ON THE EOU AT CO DLI CANNOT BE CONSIDERED AS 'MANUFACTURE' AND HENCE THE APPELLANT IS NOT ELIGIBLE FOR DEDUCTION OF RS. 8,70,52,701/ - U/S. 10 - B OF THE ACT. 9.2.THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ACTIVITY CARRIED ON BY THE APPELLANT IN ITS EOU AT CODLI CANNOT ALSO BE CONSIDERED AS 'PRODUCTION' TO MAKE THE APPELLANT ELIGIBLE FOR DEDUCTION U/S. 10 - B OF THE ACT IN RESPECT OF THE SAID EOU AT CODLI. 10. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE APPELLANT IS NOT ELIGIBLE FOR DEDUCTION OF RS. 90,57,484/ - AS A DDITIONAL DEPRECIATION CLAIMED U/S. 32(L)(IIA) OF THE ACT, IN RESPECT OF PLANT AND MACHINERY ACQUIRED AND INSTALLED IN ITS MET - COKE DIVISION. 11. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCES BY THE A.O. OF ADDITIONAL DEPRECIATION U/S. 32(1) (IIA) OF THE ACT OF RS. 10,01,21,951/ - , IN RESPECT OF PLANT AND MACHINERY ACQUIRED AND INSTALLED BY THE APPELLANT IN ITS BUSINESS OF MINING OPERATION. 2. DURING THE COURSE OF HEARING VIDE LETTER DT. 19/12/2012 , LD.AR REQUESTED THAT THE GROUND NO. 6.11 I N DETAILED GROUNDS OF APPEAL FILED ON 24/09/2012 SHOULD ALSO BE ADDED AS GROUND NO. 7 A IN THE GROUNDS OF APPEAL FILED IN BRIEF. 3. THE LD. DR ALSO AGREED THAT THIS GROUND IS ALREADY THERE IN DETAILED AS GROUND NO. 6.11. WE ACCORDINGLY ADMIT GROUND NO. 7 A ALSO FOR ADJUDICATION AFTER GROUND NO. 7 IN GROUNDS FILED BY THE ASSESSEE IN BRIEF. REVENUE HAS TAKEN THE FOLLOWING GROUNDS IN THEIR APPEALS: - 1. THE ORDER NO. IN ITA NO.561/PNJ/2011 - 12/JCIT, DATED: 31.08.2012 IN THE ABOVE CASE IS OPPOSED TO LAW AND F ACTS OF THE CASE. ITA NO. 72&85/PNJ/2012 4 2. THE LEARNED CIT (A) HAS ERRED IN APPRECIATING THE ISSUE OF 'DISALLOWANCE OF EXPENDITURE ON RESEARCH & DEVELOPMENT' TO THE TUNE OF RS. 1,94,55,376 FOR ASSE S SMENT YEAR 2009 - 10, AS SECTION 43(4)(I) OF THE I.T. ACT, 1961 DEFINES SCIENTIFIC RESEARCH AS ANY ACTIVITIES FOR THE EXTENSION OF KNOWLEDGE IN THE FIELDS OF NATURAL OR APPLIED SCIENCE INCLUDING AGRICULTURE, ANIMAL HUSBANDRY OR FISHERIES. THE CASE OF THE ASSESSEE IS CLEARLY NOT COVERED UNDER THIS DEFINITION. MOREOVER, THE ASSESSEE HAS A LSO NOT TAKEN APPROVAL OF THE DESIGNATED AUTHORITY THAT THIS ACTIVITY TANTAMOUNT TO SCIENTIFIC RESEARCH. FOR THE A.Y 2006 - 07 ALSO SAME ISSUE WAS CONFIRMED BY CIT (APPEAL). 3. THE LEARNED CIT (A) HAS FAILED TO APPRECIATE THE 'DISALLOWANCE OF FOREIGN EXCHAN GE NOTIONAL LOSS/LOSS ON FORWARD CONTRACTS' TO THE TUNE OF RS.1,59,00,000/ - . BOARD'S CIRCULAR NO. 23 (XXXIV - 4) D OF 1960 DATED: 12/09/1960 AND INSTRUCTION NO.3 - 2010 DATED: 23/03/2010 CLEARLY SAYS THAT THE LOSSES INCURRED BY THE ASSESSEE ON FORWARD CONTRA CTS IS TO BE TREATED AS SPECULATIVE LOSS AND NOT HEDGING LOSS. 4. THE LEARNED CIT (A) HAS FAILED TO APPRECIATE THE ADDITION WITH RESPECT TO 'EXPENDITURE INCURRED IN RESPECT OF ISSUE OF BONUS SHARES' TO THE TUNE OF RS.61,35,482/ - , WHICH IS MAINLY RELATED T O EXPANSION OF CAPITAL BASE AND THEREFORE IT IS IN THE NATURE OF CAPITAL EXPENDITURE BUT NOT REVENUE EXPENDITURE. 5. FOR THIS AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF LEARNED CIT (A) BE CANCELLED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FILED RETURN DECLARING AN INCOME OF RS. 28 , 84 , 80 , 920/ - . ASSESSMENT U/S 143(3) WAS MADE VIDE ORDER DT. 30/12/2011 U/S 143(3) AFTER MAKING VARIOUS DISALLOWANCES AND T HE ADDITION AT AN INCOME OF RS. 4 , 90 , 07 , 85 , 742/ - . THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A) WHO PARTLY ALLOWED THE APPEAL OF THE ASSESSEE. ITA NO. 72&85/PNJ/2012 5 5. GROUND NO S . 1.1 & 1.2 IN THE APPEAL OF THE ASSESSEE RELATE TO THE DISALLOWANCE U/S 14A OF THE I. T. ACT. THE BRIEF FACTS RELATING TO THIS GROUND ARE THAT AO HAS NOTED THAT THE ASSESSEE HAS RECEIVED DIVIDEND INCOME OF RS. 1 , 42 , 72 , 73 , 668/ - EXEMPT FROM TAX. THE AO ASKED THE ASSESSEE TO EXPLAIN WHY THE DISALLOWANCE U/S 14 A READ WITH RULE 8D SHOULD NOT BE MADE FOR THE EXPENSES INCURRED. THE ASSESSEE SUBMITTED THE EXPLANATION THAT HE HAS NOT BORROWED ANY MONEY FOR PURCHASE / INVESTMENT ON WHICH DIVIDEND IS RECEIVED. NO INTEREST HAS BEEN DEBITED TO PROFIT AND LOSS ACCOUNT. INTEREST AND OTHER CHARGES APPEARING IN THE PROF IT AND LOSS ACCOUNT RELATE TO BANK CHARGE S IN CONNECTION WITH COLLECTION OF OUTSTATION CHEQUES. NO ADMINISTRATION EXPENDITURE WAS INCURRED ON EARNING DIVIDEND INCOME AS INVESTMENT IN MUTUAL FUNDS WAS MADE JUST TO PARK TH E SURPLUS FUNDS. THE ASSESSEE HAS AL READY DISALLOWED A SUM OF RS. 25 , 78 , 156/ - IN THE COMPUTATION OF INCOME. THE AO DID NOT AGREE AND HE WAS OF THE VIEW THAT THE COMPANY HAS MADE SUBSTANTIAL INVESTMENT IN MUTUAL FUNDS. INVESTMENT OF SUCH MAGNITUDE REQUIRES PROPER ANALYSIS OF THE MARKET CONDIT ION TO THE STOCK MOVEMENT ETC. AND THEREFORE, THE ASSESSEE MUST HAVE INCURRED SUBSTANTIAL EXPENDITURE FOR EARNING THE DIVIDEND. THE ASSESSING OFFICER BY INVOKING THE PROVISION OF SECTION 14A RE A D WITH RULE 8D WORKED OUT THE DISALLOWANCE AS UNDER: I. AMOU NT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME - NIL II. IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR I NCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY: - [AXB]/C = A. AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR NIL B. THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME APPEARING IN THE BALANCE SHEET OF THE ASSESSEE ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR RS.20 , 00,44,93,634 + RS.30 , 19,67,88,502 = RS.50 , 20,12,82, 136/ - ITA NO. 72&85/PNJ/2012 6 AVERAGE OF THE ABOVE = RS.25 , 10,06,41,068/ - C. THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY OF THE LAST DAY OF THE PREVIOUS YEAR - NIL (I) AN AMOUNT EQUAL TO ONE - HALF PER CENT OF THE AVERAGE OF T HE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. = RS.25 , 10,06,41,068 X .005 = RS.12,55,03,205 LESS : ADMINISTRATIVE EXPENDITURE ALREADY DISALLOWED RS. 25,78,156 BY THE ASSESSEE RS.12,29,25,049 ACCORDINGLY, A SUM OF RS.12,29,25,049/ - IS DISALLOWED U/S 14A READ WITH RULE 8D AS EXPENDITURE INCURRED FOR EARNING THE EXEMPTED INCOME AND S AME IS ADDED TO THE TOTAL INCOME. 6. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). THE CIT(A) CONFIRMED THE DISALLOWANCE BY HOLDING AS UNDER: 4.1 DURING THE APPELLATE PROCEEDINGS, THE AUTHORISED REPRESENTATIVE OF THE ASSESSEE VEHEMENTLY ARGUED ON BEHAL F OF THE APPELLANT AND PLEADED FOR DELETION OF THE DISALLOWANCES MADE BY THE ASSESSING OFFICER. IT WAS SPECIFICALLY STATED THAT RULE 8D PROVIDES FOR COMPUTATION OF DISALLOWANCE ONLY IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE PREVIOUS YE AR IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF EXPENDITURE COMPUTED BY THE ASSESSEE. IT WAS CLAIMED THAT A CAREFUL READING OF BOTH SECTION 14A(2) AS WELL AS RULE 8D(1)(B) BRINGS OUT CLEARLY THAT RESORT TO MAKING DISALLOWANCE BY APPLYING THRESHOLD OF 0.5% TO THE TOTAL VALUE OF INVESTMENT IS TO BE MADE ONLY AFTER THE AO WAS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE REGARDING THE COMPUTATION OF SUCH EXPENSES. FOLLOWING THE DECISION IN THE CASE OF JINDAL PHOTO LTD. ITA NO I.T.A. NO. 4539/DEL./2010, IT WAS CLAIMED THAT IT WAS MANDATORY FOR THE ASSE SSING OFFICER TO RECORD HIS DIS SATISFACTION ABOUT THE CLAIM OF THE ASSESSEE REGARDING COMPUTATION OF EXPENSES INCURRED FOR EARNING THE EXEMPT INCOME AND THE ONUS IS ON ASSESSING OFFICER TO BRING OUT THE FAC TUAL INCURRENCE OF EXPENSES. THE ASSESSEE ALSO RELIED ON VARIOUS OTHER AUTHORITIES INCLUDING THAT IN THE CASE OF CIT VS. HERO CYCLES LTD (323 ITR 518), CIT VS WALFORT SHARE AND STOCK BROKERS (P) LTD (310 ITR 421), ETC, TO SUBSTANTIATE ITS CLAIM. IN THIS RE GARD IT WAS ALSO STATED THAT THAT THE REASONING OF THE ASSESSING OFFICER THAT THE INVESTMENT OF SUCH HIGH MAGNITUDE WOULD REQUIRE A REGULAR ANALYSIS AND MONITORING OF THE INVESTMENTS WOULD HAVE BEEN RELEVANT IN THE CONTEXT OF INVESTMENT IN EQUITY SHARES OR EQUITY ORIENTED MUTUAL FUNDS. WHEREAS, THE ENTIRE INVESTMENT IN THE CASE OF THE ASSESSEE IS ITA NO. 72&85/PNJ/2012 7 INTO DEBT ORIENTED MUTUAL FUNDS WHICH DO NOT REQUIRE ANY SIGNIFICANT EFFORTS EITHER IN MAKING SUCH INVESTMENT OR IN TRACKING THE SAME. IT WAS THEREFORE CLAIMED THA T THE ESTIMATED DISALLOWANCE OF RS.25,78,156/ - MADE BY THE APPELLANT WAS REASONABLE AND THEREFORE, THE SAME SHOULD HAVE BEEN ACCEPTED BY THE ASSESSING OFFICER. 4.2 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AS WELL AS THE OBSERVATIONS OF THE ASSESSING OFFICER. THE PRIMARY CONTENTION OF THE ASSESSEE IS THAT BEFORE INVOKING THE PROVISIONS OF SECTION 14A FOR MAKING DISALLOWANCE OF EXPENDITURE BY APPLYING RULE 8D OF THE INCOME TAX RULES, THE ASSESSING OFFICER OUGHT TO HAVE RECORDED HIS DISSATI SFACTION FOR REJECTING THE QUANTIFICATION OF THE EXPENDITURE RELATING TO THE TAX EXEMPTED INCOME MADE BY THE ASSESSEE. BEFORE PROCEEDING FURTHER IT WILL BE RELEVANT TO EXAMINE THE PROVISIONS OF SECTION 14A PROVIDING FOR DISALLOWANCE OF EXPENDITURE RELATING TO EXEMPT INCOME. SECTION 14A : FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER T HIS ACT. PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR RED UCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR ANY ASSESSMENT YE AR BEGINNING ON OR BEFORE THE 1 ST DAY OF APRIL, 2001. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED , IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE C LAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB - SECTION (2) SHALL ALSO APPLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME UNDER THIS SECTION. FROM THE PLAIN READING OF THE PROVISIONS OF SECTION 14A OF INCOME TAX ACT, IT IS CLEAR THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPEN DITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. RULE 8D OF THE INCOME TAX RULES EXPRESSLY PROVIDES THE METHOD FOR DETERMINING THE AMOUNT OF EXPENDITURE IN RELATION TO THE EXEMPT INCOME. THE REFORE, THE POSITION WITH RESPECT TO ASSESSMENT YEAR 2008 - 09 ONWARDS IS THAT IN ALL CASES WHERE THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED ON EARNINGS THAT DO NOT FORM PAR T OF THE TOTAL INCOME, EXPENDITURE ON THIS ACCOUNT HAS TO BE COMPUTED AS PROVIDED UNDER RULE 8D OF INCOME TAX RULES. THERE CAN BE NO OTHER BASIS OF ESTIMATING SUCH EXPENDITURE TO BE DISALLOWED. ITA NO. 72&85/PNJ/2012 8 4.3. FROM THE ASSESSMENT ORDER IT IS OBSERVED THAT THE ASSES SING OFFICER HAS TAKEN NOT ACCEPTED THE CLAIM OF THE ASSESSEE THAT SINCE MOST OF THE INVESTMENTS WERE MADE IN MUTUAL FUNDS PRIMARILY TO INVEST THE SURPLUS FUNDS OF THE COMPANY, NO ADMINISTRATIVE EXPENDITURE WAS INCURRED IN THIS REGARD.THE ASSESSING OFFICER HAD SPECIFICALLY TAKEN NOTE OF THE FACT THAT THERE WAS SUBSTANTIAL INVESTMENT MADE BY THE COMPANY RESULTING IN RECEIPT OF SUBSTANTIAL AMOUNT OF DIVIDEND INCOME AND CONSIDERING THE MAGNITUDE OF BOTH THE INVESTMENT HELD AND THE DIVIDEND RECEIVED BY THE COMP ANY, IT WAS NOT PLAUSIBLE TO ACCEPT THAT NO ADMINISTRATIVE EXPENDITURE WAS INCURRED IN THE HANDS OF THE COMPANY IN THIS REGARD. IT IS ALSO IMPORTANT TO NOTE THAT THE ASSESSING OFFICER HAD SPECIFICALLY RECORDED HIS DISSATISFACTION ABOUT THE CORRECTNESS OF D ISALLOWANCE OF RS.25,78,156/ - MADE BY THE ASSESSEE. THE FACT THAT THE ASSESSING OFFICER HAD PROPERLY EXAMINE THE MATTER AND HAD APPLIED HIS MIND TO THE ISSUE OF DISALLOWANCE OF EXPENDITURE IS ALSO EVIDENT FROM THE FACT THAT THE ASSESSING OFFICER HAD CONSID ERED AND ACCEPTED THE EXPLANATION OF THE ASSESSEE REGARDING THE CLAIM THAT NO BORROWED FUNDS WERE USED BY THE COMPANY FOR SUCH INVESTMENTS AND HENCE NO DISALLOWANCE OF INTEREST U/S14A WAS CALLED FOR. 4.4 ON CAREFUL CONSIDERATION OF THE FACTS OF THE CASE, IT IS OBSERVED THAT THERE IS AN INHERENT CONTRADICTION IN THE SUBMISSIONS MADE BY THE ASSESSEE. WHILE ON ONE HAND THE ASSESSEE VEHEMENTLY CLAIMS THAT NO DIRECT EXPENDITURE WAS INCURRED TO EARN THE DIVIDEND INCOME, ON THE OTHER HAND IT HAD QUANTIFIED CERTA IN EXPENSE ON A NOTIONAL BASIS WHICH COULD RELATE TO EARNING OF DIVIDEND INCOME FROM SUCH INVESTMENTS. THE FACT, THAT THE ASSESSEE HAD MADE AN NOTIONAL DISALLOWANCE OF RS.25,78,156/ - AS THE ESTIMATED ADMINISTRATIVE EXPENDITURE RELATABLE TO THE EARNING OF D IVIDEND INCOME, SHOWS THAT IT WAS ONLY AN ADHOC QUANTIFICATION OF THE EXPENDITURE WITHOUT HAVING ANY DIRECT CO - RELATION WITH THE ACTUAL EXPENDITURES INCURRED. IN THIS REGARD IT IS RELEVANT TO REFER TO THE ANNEXURE SU B MITTED BY THE ASSESSEE DURING THE SCRU TINY PROCEEDINGS, FURNISHING DETAILS OF THE COMPUTATION OF THE AMOUNT RS.25,78,156/ - . FROM THE INFORMATION FURNISHED IN THE ANNEXURE, IT IS CLEARLY NOTICED THAT FOR THE PURPOSE OF ALLOCATION OF EXPENDITURE RELATING TO THE EXEMPT INCOME, THE ASSESS E E HAS CO NSIDERED EXPENSES ONLY UNDER THREE HEADS INCLUDING MAINTENANCE OF OFFICE EQUIPMENTS, PRINTING AND STATIONERY AND POSTAGE AND TELEPHONE. THE OTHER ADMINISTRATIVE EXPENSES SUCH AS PROFESSIONAL AND LEGAL CHARGES (RS.23.56 CRORES), AUDITORS FEES (RS. 0.5 3 CRORES), TRAVELING AND REPRESENTATION EXPENSES OF DIRECTORS (RS.4.22 CRORES) AND MISCELLANEOUS EXPENSES (RS.3.60 CRORES) WERE NOT CONSIDERED BY THE ASSESSE E FOR ALLOCATION. NO SPECIFIC REASONS HAVE BEEN FURNISHED IN THIS REGARD TO JUSTIFY WHY THESE HEADS ARE NOT RELEVANT IN THIS REGARD. IT IS RELEVANT TO NOTE THAT THE EXPENDITURE REFERRED TO IN SECTION 14A SHOULD COMPRISE OF EXPENDITURES SUCH AS SALARY, RENT, TAXES, INTEREST, ETC. IN FACT, IN THE DECISION IN THE CASE OF GODREJ & BOYCE MFG.CO. LTD., THE HO N'BLE BOMBAY HIGH COURT HAS HELD THAT, THE EXPRESSION EXPENDITURE INCURRED IN SECTION 14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC., IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR. [PARA 43]. THEREFORE, IT WAS NECESSARY FOR THE ASSE SSEE TO ALLOCATE ALL THE EXPENDITURES RELEVANT FOR INCURRING THE TAX EXEMPT INCOME INSTEAD OF LIMITING THE ALLOCATION ONLY TO THREE HEADS OF EXPENDITURE, AS DISCUSSED ABOVE. ITA NO. 72&85/PNJ/2012 9 FURTHER, IT IS ALSO SEEN THAT FOR THE PURPOSE OF ALLOCATION OF THE EXPENSES, THE ASSESS E E HAS ALLOCATED THE EXPENSES ON A PRO RATA BASIS BY TAKING INTO CONSIDERATION THE TURNOVER OF DIFFERENT TYPES OF RECEIPTS SUCH AS, SALES, HIRE CHARGES OF TRANSHIPPER, SALE OF GAS, SALE OF CARBON CREDITS ETC. HOWEVER, IN RESPECT OF DIVIDEND INCOME, T HE ASSESS E E HAS TAKEN INCOME AS THE BASIS FOR THE PURPOSE OF ALLOCATION INSTEAD OF CONSIDERING THE TOTAL INVESTMENT, WHICH SHOULD CORRESPOND TO TURNOVER AS IN THE CASE OF OTHER RECEIPTS. THIS IS PATENTLY WRONG BECAUSE THE BASIS OF ALLOCATION SHOULD BE SIMILAR FOR ALL ITEMS AND WHEN THE ASSESS E E HAS CONSIDERED TURNOVER AS THE BASIS FOR ALL OTHER KIND OF RECEIPTS, IT OUGHT TO HAVE ALSO CONSIDERED THE TOTAL TURNOVER OF THE INVESTMENT FOR ALLOCATING THE EXPENSES IN RESPECT OF THE DIVIDEND INCOME. THEREFORE, ALLOCATING THE EXPENDITURE TAKING INCOME AS THE BASIS IN THE CASE OF DIVIDEND INCOME AND TURNOVER AS THE BASIS IN THE CASE OF OTHER RECEIPTS, GIVES RISE TO MAJOR DISTORTION IN THE ALLOCATION OF EXPENDITURE. FURTHER, IT IS ALSO SEEN THAT THE ALLOCATION OF THE EXPENDITURE INCURRED TOWARDS SALARY, GRATUITY, PF ETC, WHICH ALONE ACCOUNTED FOR 38% OF THE TOTAL ADMINISTRATIVE EXPENDITURE, HAS NOT BEEN MADE ON A PROPORTIONATE BASIS. NO JUSTIFICATION HAS BEEN ADDUCED IN THIS REGARD. IF THE TOTAL SALARY EXPENDITURE OF RS.21.85 CRORES IS ALLOCATED ON A PRO RATA BASIS, THE PROPORTIONATE AMOUNT RELATABLE TO DIVIDEND INCOME WILL BE RS.62.10 LACS INSTEAD OF RS.17.03 LACS, AS COMPUTED BY THE ASSESS E E IN THE ANNEXURE. THIS CLEARLY SHOWS THAT THE BASIS ADOPTED BY THE ASSESS E E FOR QUANTIFICATION OF THE EXPENDITURE INCURRED IN RELATION TO THE EXEMPTED INCOME IS GROSSLY FLAWED AND ERRONEOUS. FURTHER, IT IS ALSO SEEN THAT THE SALES AND OTHER RECEIPTS OF THE ASSESS E E, EXCLUDING DIVIDEND INCOME IS AROUND RS.4853 CRORES. THE AVERAG E VALUE OF THE INVESTMENTS AS PER THE BALANCE SHEET IS FOUND TO BE RS.2510 CRORES. PUT TOGETHER, THE TOTAL TURNOVER INCLUDING INVESTMENT IN MUTUAL FUNDS COMES TO RS.7363 CRORES APPROXIMATELY. THEREFORE, IF THE TOTAL ADMINISTRATIVE EXPENDITURE OF RS.56.59 C RORES IS ALLOCATED ON A PROPORTIONATE BASIS, THE EXPENDITURE INCURRED IN RELATION TO THE DIVIDEND INCOME SHALL AMOUNT TO RS.19.29 CRORES. AS AGAINST THIS, THE ASSESSE E HAD COMPUTED AN AMOUNT OF RS.25.78 LACS AS THE PROPORTIONATE EXPENDITURE. SIMILARLY, O N A DIFFERENT ANALOGY, IT MAY BE SEEN THAT IN THE EXPLANATION BAA UNDER SECTION 80HHC OF THE INCOME TAX ACT, THE STATUTE PROVIDES FOR DEDUCTION OF 90% OF VARIOUS RECEIPTS SUCH AS SALE OF LICENSE, DUTY DRAWBACK, COMMISSION, INTEREST, ETC, FOR COMPUTING THE BUSINESS PROFITS. THIS IMPLIES THAT IN SUCH CASES 10% OF SUCH RECEIPTS COULD BE REASONABLY HELD TO BE THE EXPENDITURE IN RELATION TO THE RECEIPTS. TAKING THIS INTO CONSIDERATION, THE EXPENDITURE INCURRED IN RELATION TO MAKING INVESTMENT IN SHARES AND MUTUA L FUNDS COULD BE REASONABLY ESTIMATED BY TAKING A SIMILAR FIGURE OF 10% OF THE TOTAL TRANSACTIONS IN SUCH SHARES AND MUTUAL FUNDS. BY ADOPTING THIS METHOD OF COMPUTATION, THE EXPENDITURE INCURRED IN RELATION TO THE MUTUAL FUND INVESTMENTS IN THE CASE OF TH E ASSESS E E COMES TO RS.25.10 CRORES BEING 10% OF THE AVERAGE INVESTMENT OF RS.2510 CRORES, WHICH IS VERY CLOSE TO THE ESTIMATION MADE BY THE ASSESSING OFFICER. 4.5 THE ABOVE DISCUSSIONS AND COMPARISONS CLEARLY SHOW THAT THE QUANTIFICATION OF THE EXPENDITU RE AT RS.25.78 LACS MADE BY THE ASSESSEE IS GROSSLY UNDERSTATED AND WITHOUT ANY BASIS. AS DISCUSSED ABOVE THE ASSESSEE ITA NO. 72&85/PNJ/2012 10 HAS NOT ALLOCATED THE TOTAL SALARY EXPENDITURE OF RS. 21.85 CRORES PROPORTIONATELY. INSTEAD, IT HAS TAKEN ADHOC FIGURE OF RS. 17.03 LACS AS THE SALARY EXPENDITURE INCURRED IN RELATION TO EARNING OF DIVIDEND INCOME, WHICH IS WITHOUT ANY BASIS. IT HAS BEEN ALSO SHOWN ABOVE THAT IF THE SALARY EXPENDITURE WAS ALLOCATED PROPORTIONATELY, THE EXPENDITURE INCURRED FOR EARNING THE DIVIDEND INCOME WO ULD HAVE BEEN RS.62.10 LACS INSTEAD OF RS.17.03 LACS, AS COMPUTED BY THE ASSESS E E. CONSIDERING THE ABOVE DEVIATIONS AND DISCREPANCIES, IT IS CLEARLY ESTABLISHED THAT THE METHOD ADOPTED BY THE ASSESSEE FOR THE ALLOCATION OF EXPENDITURE IN RELATION TO THE EX EMPTED INCOME IS GROSSLY FLAWED AND ERRONEOUS AND THEREFORE, THE ASSESSING OFFICER WAS FULLY JUSTIFIED IN NOT BEING SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESS E E AND FOR INVOKING THE PROVISIONS OF SECTION 14A(2) OF THE I. T. ACT. 4.6 THE AS SESSEE HAS RELIED ON VARIOUS JUDICIAL DECISIONS SUCH AS IN THE CASE OF CIT VS. HERO CYCLES LTD , 323 ITR 518(P&H) AND CIT VS WALFORT SHARE AND STOCK BROKERS (P) LTD, 326 ITR (SC), TO SUBSTANTIATE THIS GROUND OF APPEAL. HOWEVER, ON EXAMINATION OF THESE CASE S IT IS OBSERVED THAT THESE DECISIONS RELATE TO THE ASSESSMENT YEAR 2004 - 05 AND 2000 - 01 RESPECTIVELY, WHICH WAS PRIOR TO THE INSERTION OF RULE 8D. CAREFUL READING OF BOTH SECTION 14A(2) AS WELL AS RULE 8D(1) CLEARLY BRINGS OUT THAT THE ASSESSING OFFICER C AN DERIVE JURISDICTION TO INVOKE THE PROVISIONS OF THIS SECTION ONLY IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE, WHICH THE ASSESSEE CLAIMS TO HAVE INCURRED IN RELATION TO THE EXEMPT INCOME. SECTIO N 14A CLEARLY MANDATES THAT ONCE THE ASSESSING OFFICER IS SATISFIED THAT THE CLAIM OF THE ASSESS E E IS NOT CORRECT, HE HAS NO OTHER OPTION BUT TO INVOKE THE METHODS PRESCRIBED IN RULE 8D FOR QUANTIFYING THE EXPENDITURE INCURRED IN RELATION TO THE EXEMPT INC OME . IN THE PRESENT CASE, THERE ARE MORE THAN SUFFICIENT REASONS, AS DISCUSSED ABOVE, FOR THE ASSESSING OFFICER TO REJECT THE CLAIM OF THE ASSESS E E. IN VIEW OF THE GLARING ERRORS AS DISCUSSED ABOVE, THE ASSESSING OFFICER IS FULLY JUSTIFIED IN INVOKING THE PROVISIONS OF I.T. RULE 8D FOR QUANTIFYING THE EXPENDITURE INCURRED IN RELATION TO THE EXEMPT INCOME. ADMITTEDLY, THE ASSESS E E HAS NOT RAISED ANY OBJECTION AS FAR AS THE COMPUTATION OF THE EXPENDITURE UNDER RULE 8D IS CONCERNED. THEREFORE, IN MY CONSIDERED VIEW, THE ASSESSING OFFICER WAS CORRECT FOR NOT BEING SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE INCURRED IN RELATION TO THE EXEMPT INCOME. HAVING CLEARLY RECORDED HIS DISSATISFACTION ABOUT THE CORRECTNESS O F THE CLAIM MADE BY THE ASSESSEE, H E WAS FULLY WITHIN HIS JURISDICTION TO INVOKE THE PROVISIONS OF SECTION 14A(2) AND QUANTIFY THE AMOUNT TO BE DISALLOWED AS PRESCRIBED UNDER RULE 8D(1)(B). THEREFORE, CONSIDERING THE FACTS OF THE CASE AND FOR THE REASONS A S DISCUSSED ABOVE, I CONFIRMED THE DISALLOWANCE OF EXPENDITURE OF RS.12,29,25,049/ - MADE BY THE ASSESSING OFFICER UNDER SECTION 14A OF THE I.T. ACT. THE FIRST GROUND OF APPEAL IS ACCORDINGLY DISMISSED. 7. BEFORE US THE LD. AR SUBMITTED THAT THE ASSESSEE HAS NOT BORROWED ANY FUNDS FOR THE INVESTMENT IN MUTUAL FUNDS. THEREFORE, NO INTEREST HAS BEEN DEBITED. THE ASSESSEE HAS MERELY PARKED HIS SURPLUS FUNDS IN DEBT MUTUAL FUNDS. THE ASSESSEE HAS NOT INVESTED ANY EQUITY ITA NO. 72&85/PNJ/2012 11 SHARES . THEREFORE, THE ASSESSEE HAS NOT CARR IED OUT ANY ANALYSIS OF THE MARKET CONDITION, STOCK INVESTMENT, ETC. THE ASSESSEE HIMSELF WORKED OUT THE DISALLOWANCE AT RS.25,7 8,156/ - IN THE FOLLOWING MANNER: SESA GOA LIMITED ALLOCATION OF MAINT. O F OFFICE EQUIPMENT, PRINTING & STATIONERY, POST AGE AND TELEPHONE EXPENSES ON THE BASIS OF INCOME AND PART SALARY OF THE FINANCE TEAM FOR THE FINANCIAL YEAR 2008 - 09 FOR THE PURPOSE OF SUBSECTION (2) OF SECTION 14A PARTICULARS INCOME MAINT. O F OFF. EQUIP. PRINT. & STAT. POST & TEL. SALARY TOTAL SALES 47471212678 13090545 5806553 14129124 2696889 HIRE OF TRANSHIPPER 77622414 21405 9495 23103 SALE OF MATERIALS 37827915 10431 4627 11259 SALE OF CARBON CREDITS 27606793 7613 3377 8217 SALE OF GASES 36427301 10045 4456 10842 HIRE CHARG ES OF BARGES 25362117 6994 3102 7549 ITA NO. 72&85/PNJ/2012 12 PROCEEDS FROM VARIOUS SERVICES 114783174 31652 14040 34164 INTEREST 428301292 118107 52389 127478 DIVIDENDS 1427251668 393575 174578 424801 1703935 PROFIT ON SALE OF ASSETS 629444 174 77 187 OTHER RECEI PTS 14278125 3937 1746 4250 PROFIT ON SALE OF INVESTMENTS 301014801 83007 36819 89593 PROVISION FOR DOUBTFUL DEBTS WRITTEN BACK 49962317722 13777486 6111258 14870566 1703935 ALLOCATION OF EXPENDITURE ON EXEMPT INCOME (ON DIVIDENDS ) DIVIDENDS EXPENDITURE SGL DIVIDENDS 1 , 42 , 72 , 51 , 668 25 , 78 , 156 SIL DIVIDENDS 6 , 57 , 29 , 601 1 , 18 , 733 TOTAL DIVIDENDS 1 , 49 , 29 , 81 , 269 26 , 96 , 889 DESIGNATIO N OF EMPLOYEE TREASURY OFFICER CHIEF FINANCIAL OFFICER MANAGING DIRECTOR TOTAL SALARY CTC BASIS 4 , 02 , 475 25 , 48 , 920 1 , 32 , 84 , 603 1 , 62 , 35 , 998 PERCENTAGE OF SALARY 100% 25% 5% AMOUNT 4 , 02 , 475 6 , 37 , 230 6 , 64 , 230 17 , 03 , 935 8. THE ASSESSING OFFICER M AINLY OBSERVED THAT HE IS NOT SATISFIED WITH THE DISALLOWANCE MADE WITH THE ASSESSEE AND APPLIED RULE 8D. THE ITA NO. 72&85/PNJ/2012 13 ASSESSEE COMPANY DID NOT BORROW ANY FUNDS FOR MAKING SUCH INVESTMENTS AND THE SAME WAS MADE OUT OF ITS OWN FUNDS. NO DIRECT ADMINISTRATIVE EXPENSE S WERE INCURRED IN RESPECT OF SUCH INVESTMENTS. EVEN ASSUMING THAT THE EXPENDITURE INCURRED AS REFERRED TO IN SECTION 14A COVERS ALSO INDIRECT EXPENDITURE, A PROPORTION OF ADMINISTRATIVE EXPENDITURE OF R S .25 , 78 , 156/ - (WHICH COULD BE RELATABLE TO SUCH INVES TMENTS) HAD ALREADY BEEN OFFERED FOR DISALLOWANCE U/S 14A . THE SAID DISALLOWANCE OFFERED BY THE ASSESSEE INCLUDED PART OF SALARIES OF ITS RESPECTIVE OFFICIALS ENGAGED IN SUCH INVESTMENT WORK AND RELATED INCIDENTAL ADMINISTRATIVE EXPENSES. THE AO ACCEPTED THE FACT THAT NO BORROWINGS WERE MADE FOR SUCH INVESTMENTS, HENCE NO DISALLOWANCE WAS MADE IN RELATION TO INTEREST EXPENSES OR ANY DIRECT EXPENSES BUT THE AO APPLIED RULE 8D AND MADE DISALLOWANCE @ 0.5% OF THE AVERAGE AMOUNT OF INVESTMENTS AT THE BEGINNIN G AND CLOSING OF THE YEAR AND A DISALLOWANCE OF RS 12,29,25,049/ - WAS MADE. IT WAS POINTED OUT THAT THE AO MADE FOLLOWING AVER MENTS: - A) NO ADMINISTRATIVE EXPENDITURE WAS INCURRED ON EARNING OF DIVIDEND INCOME. B) THE DISALLOWANCE MADE BY THE ASSESSEE T OWARDS ADMINISTRATIVE EXPENDITURE IS VERY LOW CONSIDERING THE MAGNITUDE OF THE INVESTMENTS AND DIVIDEND INCOME RECEIVED. C) AN INVESTMENT OF THIS MAGNITUDE CANNOT BE MADE WITHOUT A PROPER ANALYSIS OF THE MARKET CONDITION/STOCK MOVEMENT. THE LD. AR DREW OUR ATTENTION TOWARDS THE FINDINGS OF THE CIT (A) AND STATED THAT CIT (A) IN BRIEF GAVE THE FOLLOWING FINDINGS: - A ) THERE IS AN INHERENT CONTRADICTION IN THE SUBMISSIONS OF THE ASSESSEE. ON ONE HAND IT ARGUES THAT NO DIRECT EXPENDITURE WAS INCURRED TO EARN D IVIDEND INCOME AND ON THE OTHER HAND IT QUANTIFIED CERTAIN EXPENSES ON A NOTIONAL BASIS. B ) THE ASSESSEE HAS CONSIDERED EXPENSES ONLY UNDER THREE HEADS, I.E., (A) MAINTENANCE OF OFFICE EQUIPMENTS, (B) PRINTING AND STATIONERY, AND (C) POSTAGE AND TELEPHONE. OT HER ADMINISTRATIVE EXPENSES WERE NOT CONSIDERED BY THE ASSESSEE FOR ALLOCATION AND NO SPECIFIC REASONS HAVE BEEN FURNISHED FOR THE SAME. ITA NO. 72&85/PNJ/2012 14 C ) THE ASSESSEE HAS ALLOCATED THE EXPENSES ON PRO - RATA BASIS BY TAKING INTO CONSIDERATION THE TURNOVER OF DIFFERENT TYPES OF RECEIPTS SUCH AS SALES, HIRE CHARGES, SALE OF GAS AND CARBON CREDITS. HOWEVER, IN RESPECT OF DIVIDENDS, THE ASSESSEE HAS CONSIDERED THE DIVIDEND INCOME INSTEAD OF TOTAL INVESTMENT IN MUTUAL FUNDS WHICH IS WRONG BECAUSE THE BASIS OF ALLOCATION SHOULD BE SIMILAR FOR ALL ITEMS. D ) FURTHER, SALARY HAS NOT BEEN ALLOCATED CORRECTLY ON PROPORTIONATE BASIS. IF THE ENTIRE SALARY EXPENDITURE OF RS. 21.85 CRORES IS ALLOCATED THEN PROPORTIONATE AMOUNT RELATABLE TO DIVIDEND INCOME WOULD BE RS. 62.10 LACS INSTEAD OF RS. 17.03 LACS AS COMPUTED BY THE ASSESSEE. E ) IF THE TOTAL ADMINISTRATIVE EXPENSES OF RS. 56.59 CRORES ARE ALLOCATED AMONG THE SALE AND OTHER RECEIPTS OF BUSINESS (RS. 4 , 853 CRORES) AND VALUE OF INVESTMENTS IN MUTUAL FUNDS (RS. 2,510 CRORES), THEN IT SHALL AMOUN T TO RS. 19.29 CRORES IN RESPECT OF DIVIDENDS. F ) AS PER SECTION 80HHC EX P LANATION BAA, 10% OF RECEIPTS COULD REASONABLY BE HELD AS THE EXPENDITURE IN RELATION TO OTHER RECEIPTS. THEN THE EXPENDITURE COMES TO RS. 25.10 CRORES BEING 10% OF THE INVESTMENT OF RS . 2,510 CRORES WHICH IS VERY CLOSE TO THE ESTIMATION OF THE AO. G ) ON THE BASIS OF ABOVE DEVIATIONS AND DISCREPANCIES, IT IS CLEARLY ESTABLISHED THAT THE METHOD ADOPTED BY THE ASSESSEE IS ERRONEOUS AND FLAWED AND THE AO IS FULLY JUSTIFIED IN INVOKING RULE 8D AND THEREFORE CONFIRMED THE DISALLOWANCE. 9. IT WAS SUBMITTED BY THE LD. COUNSEL THAT T HE ASSESSEE INVESTED FUNDS ON THE ADVICE OF MUTUAL FUND MANAGERS. MUTUAL FUND OFFICIALS CAME TO THE DOORSTEP OF THE ASSESSEE TO COLLECT THE FORMS AND CHEQUES AND RENDER ED ALL SERVICES AND IN SOME CASES DIVIDENDS ARE REINVESTED IN THE MUTUAL FUNDS ITSELF AND THUS PRACTICALLY NO COST WAS INCURRED BY THE ASSESSEE IN MAKING INVESTMENTS AND RECEIVING DIVIDENDS. THE ASSESSEE INVESTED IN DEBT MUTUAL FUNDS. PAGE NOS. 457 - 458 OF (INITIAL) PB VOL. II CONTAINING DETAILS OF INVESTMENTS EXHIBIT THAT THE ASSESSEE INVESTED IN A LIMITED NUMBER OF MUTUAL ITA NO. 72&85/PNJ/2012 15 FUNDS ONLY. FURTHER, PAGE NO. 20 OF (INITIAL) PB VOL. I EXHIBIT THE DETAILS OF PROFIT ON SALE OF INVESTMENTS WHICH HAS BEEN OFFERED FOR TAXATION BY THE ASSESSEE AS CAPITAL GAIN AND DUE TAXES HAVE BEEN PAID THEREON. THEREFORE, UNDISPUTEDLY TAXABLE INCOME WAS EARNED FROM THESE INVESTMENTS. ACCORDINGLY, SECTION 14A CANNOT BE APPLIED WHEN INVESTMENTS ARE YIELDING TAXABLE INCOME AS WELL. F URTHE R ONLY FEW TRANSACTIONS OF PURCHASE AND SALE HAVE BEEN UNDERTAKEN BY THE ASSESSEE. THE ASSESSEE NEED NOT SPEND DAY TO DAY TIME TO DECIDE ABOUT THE INVESTMENTS AS THE ASSESSEE HAS NOT CHURNED OUT / SHIFTED THE INVESTMENTS ON DAILY / REGULAR BASIS. IT CAN BE SEEN THAT ONCE AN INVESTMENT IS MADE, IT LIES THERE; JUST A FEW OF THEM WERE SOLD TO ENCASH PROFIT ON THEM AND WHICH WAS SUBJECTED TO CAPITAL GAINS TAX. ONLY ONE PERSON WAS FULL - TIME ENGAGED FOR THE INVESTMENT ACTIVITY AND WHO USED TO ANALYSE VARIOUS OPT IONS AND THEN THE DECISION TO INVEST WAS TAKEN BY THE C F O AND APPROVED BY THE MANAGING DIRECTOR. THEREFORE, THE ASSESSEE ITSELF DISALLOWED U/S 14A THE SALARY OF THE SAID PERSONS TO THE EXTENT OF THEIR INVOLVEMENT IN THE ACTIVITY OF INVESTMENTS AS MENTIONED ON PAGE NO. 109 OF (INITIAL) PB VOL. I. HOWEVER, CIT (A) PRESUMED THAT EACH STAFF A ND PERSONNEL WAS PARTICIPATING IN THE INVESTMENT ACTIVITY AND PROBABLY THEREFORE FELT THE NEED TO ALLOCATE THE ENTIRE SALARY IN SOME PROPORTION. BUT THIS PROPOSITION IS PRI MA FACIE FALLACIOUS SINCE ALL EMPLOYEES ARE NOT SUPPOSED TO UNDERTAKE OR BE ENGAGED IN EACH AND EVERY BUSINESS ACTIVITY. THEIR STRENGTH IS PRE - DETERMINED ACCORDINGLY TO THE MANPOWER REQUIREMENT AND THEIR DUTIES ARE ALSO PRE - ASSIGNED ACCORDINGLY. IT MUST BE APPRECIATED THAT THE PRIMARY BUSINESS OF THE APPELLANT IS MINING WHICH DEFINITELY ENTAILS A HUGE MANPOWER NEED AND IN COMPARISON TO WHICH THE MANPOWER REQUIRED TO ASSIST IN INVESTING SURPLUS FUNDS WITH MUTUAL FUNDS IS ABSOLUTELY INSIGNIFICANT. THUS, THE ENTIRE SALARY EXPENSES OF THE ENTIRE STAFF CANNOT BE ALLOCATED PROPORTIONATELY BETWEEN TAXABLE AND EXEMPT INCOMES AS AVERRED BY THE CIT (A), ESPECIALLY WHEN A PROPER PERSON - WISE ALLOCATION TO THE INVESTMENT ACTIVITY IS PRACTICALLY POSSIBLE. 10. THE ASSES SEE HAS ALSO MADE THE PROPORTIONATE DISALLOWANCE OUT OF CERTAIN EXPENSES RELATABLE TO EARNING OF EXEMPT INCOME AS MENTIONED ON PAGE NO. 108 OF (INITIAL) PB VOL. I , WHICH WAS CONSIDERED RELATABLE TO EARNING EXEMPT INCOME. NO EXPENSES SUCH AS RENT, LEGAL AND PROFESSIONAL ITA NO. 72&85/PNJ/2012 16 FEES, TRAVELLING EXPENSES OF DIRECTOR, ETC., WERE PARTICULARLY INCURRED FOR THIS INVESTMENT ACTIVITY AND THEREFORE NO DISALLOWANCE WAS MADE. HONBLE SUPREME COURT IN CIT VS WALFORT SHARE & STOCK BROKERS (P) LTD. (2010) 326 ITR 1 (SC) HELD THA T THE AO IS REQUIRED TO PROVE THAT THE DISALLOWANCE IS NECESSARY DUE TO PROXIMATE CAUSE AND NEXUS OF EXPENDITURE TO EARN THE EXEMPT INCOME. LIKEWISE, IN MAXOPP INVESTMENT LTD VS. CIT (2011) 15 TAXMANN. COM 390 (DELHI) , IT HAS BEEN HELD THAT THE ASSESSING O FFICER IS REQUIRED TO SATISFY AS REGARDS THE IN CORRECTNESS OF THE CLAIM OF EXPENDITURE.IT WAS FOR THE AO TO POINT OUT THE EXPENSES ACTUALLY INCURRED FOR EARNING THE EXEMPT INCOME AND POINT OUT DISCREPANCY IN THE COMPUTATION OF DISALLOWANCE MADE BY THE ASSE SSEE. BUT NO SUCH EFFORT HAS BEEN MADE BY THE AO AND NO SUCH DISCREPANCY HAS BEEN POINTED OUT AS CAN BE SEEN FROM THE ASSESSMENT ORDER. NO EVIDENCE HAS BEEN BROUGHT ON RECORD BY THE AO THAT THE EXPLANATIONS OF THE APPELLANT WERE NOT CORRECT. A REASONABLE A MOUNT OF EXPENDITURE OF MORE THAN RS. 25.78 LACS INCLUDING SALARIES WAS DISALLOWED BY THE APPELLANT HIMSELF. THE AO DID NOT RECORD HIS SATISFACTION AS TO WHY THE DISALLOWANCE MADE BY THE ASSESSEE - COMPANY WAS INCORRECT. HE MERELY ALLEGED THAT THE SAID DISAL LOWANCE IS LOW AS COMPARED TO THE MAGNITUDE OF INVESTMENT AND DISALLOWANCE WHICH CANNOT BE A REASON FOR APPLYING RULE 8D. REFERRING TO SECTION 1 4A( 2 ), IT WAS POINTED OUT THAT THE SATISFACTION OF THE ASSESSING OFFICER ABOUT THE IN CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE RELATING TO THE DIVIDEND INCOME SHOULD BE WITH REGARD TO THE ACCOUNTS OF THE ASSESSEE. NO SUCH SATISFACTION HAS BEEN ARRIVED AT BY THE ASSESSING OFFICER. HE HAS NOT REJECTED THE ACCOUNTS OF THE ASSESSEE. HE HA S NOT POINTED OUT ANY MISTAKE IN THE ACCOUNTS OF THE ASSESSEE. THE LD. A.R. IN THIS REGARD RELIED ON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING COMPANY LTD. VS. DCIT 328 ITR 81 (MUM.) . 11 . RULE 8D PROVIDES F OR THE COMPUTATION OF THE DISALLOWANCE IN THIS CONNECTION , ONLY IF THE ASSESSING OFFICER , HAVING REGARD TO THE ACCOUNTS OF THE PREVIOUS YEAR IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE EXPENDITURE COMPUTED/WORKED OUT BY THE ASSESSEE. THE ASS ESSING OFFICER MUST , IN THE FIRST INSTANCE DETERMINED WHETHER THE CLAIM OF THE ASSESSEE IN THAT REGARD IS CORRECT AND THE DETERMINATION MUST BE MADE HAVING REGARD ITA NO. 72&85/PNJ/2012 17 TO THE ACCOUNTS OF THE ASSESSEE. THE SATISFACTION OF THE ASSESSING OFFICER MUST BE ARRIVED A T ON AN EXACT BASIS. THE CIT (A) CONCLUDED THAT THE ASSESSEE MADE A CONTRARY CLAIM THAT NO ADMINISTRATIVE EXPENDITURE WAS INCURRED BUT WORKED OUT THE DISALLOWANCE ON NOTIONAL BASIS. THERE IS NO CONTRADICTION IN THE STATEMENT OF ASSESSEE. THE ASSESSEE STATE D THAT THERE WAS NO DIRECTLY RELATABLE EXPENDITURE WHICH WAS INCURRED TO EARN DIVIDENDS AND THE DISALLOWANCE WAS MADE FOR OTHER EXPENSES. THIS WAS, IN FACT, ACCEPTED BY THE AO WHO ALSO DID NOT MAKE ANY DISALLOWANCE U/R 8D(1)(I). THE CIT (A) TRIED TO JUSTIF Y THE APPLICATION OF RULE 8D BY THE ASSESSING OFFICER ON SURMISES AND PRESUMPTIONS WHICH IS NOT PERMISSIBLE AT ALL. ONE ASSERTION MADE BY THE CIT ( A) WAS THAT THE AMOUNT OF INVESTMENT CORRESPONDS TO THE AMOUNT OF TURNOVER/SALES IN CASE OF DIVIDENDS AND THE REFORE THE SAME SHOULD BE CONSIDERED FOR THE PURPOSE OF ALLOCATION OF INDIRECT EXPENSES, BUT IT IS SUBMITTED THAT IT IS NOT CORRECT PROPOSITION. THE CORRESPONDING BASE FIGURE TO THE VALUE OF INVESTMENT MADE IN MUTUAL FUNDS CAN AT BEST BE THE STOCK OF IRON - ORE/FINISHED GOODS, BUT IT CAN NEVER BE SAID TO CORRESPOND TO THE TURNOVER OF IRON - ORE, ETC. IN ANY MANNER BECAUSE THE BASIC NATURE OF RECEIPTS AND INCOME IS SUCH THAT THEY CAN NEVER CORRESPOND TO STOCK OR VALUE OF INVESTMENT AT ALL. FURTHER, THE TURNOVER OF MUTUAL FUNDS, I.E., THE VALUE OF REDEMPTION OF MUTUAL FUNDS IS SUBJECT TO TAX AS CAPITAL GAINS [SINCE EXEMPTION/S 10(38) IS NOT AVAILABLE ON LIQUIDATION OF A DEBT - ORIENTED MUTUAL FUND] AND THEREFORE THE SAID BASIS CANNOT BE CONSIDERED FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE U/S 14A. THUS, TO ALLOCATE THE INDIRECT EXPENSES, ONLY DIVIDEND RECEIPTS / INCOME COULD HAVE BEEN CONSIDERED AS HAS BEEN DONE BY THE ASSESSEE. THUS, THE PRESUMPTION OF THE CIT ( A) TO CONSIDER THE VALUE OF INVESTMENT FOR ALLOCAT ION OF EXPENSES IS BASELESS. ANOTHER PREPOSTEROUS PROPOSITION OF THE CIT (A) IS TO APPLY SECTION 80HHC WHICH IS ENTIRELY A DIFFERENT CODE FOR AN ENTIRELY DIFFERENT PURPOSE. THE BASIS OF 10% ADOPTED THEREIN CANNOT BE CONSIDERED WHILE COMPUTING DISALLOWANCE U/S 14A. IF THAT BASIS WAS TO BE ADOPTED THEN THERE WAS NO NEED TO INTRODUCE RULE 8D. THE INTENTION BEHIN D ENACTING THE PROVISIONS OF SECTION 14A AND RULE 8D IS TO BRING EQUITY IN LEVY AND COLLECTION OF TAXES BY PROVIDING THAT IF AN INCOME STREAM IS NOT TA XABLE THEN EXPENSES INCURRED IN RELATION THERETO SHOULD NOT/CANNOT BE ALLOWED (WHICH IF NOT DONE, THEN MAY ALLOW A SORT OF DOUBLE ITA NO. 72&85/PNJ/2012 18 ADVANTAGE TO AN ASSESSEE). HOWEVER IN THE SAME COROLLARY OF ARGUMENT, IT SHOULD BE APPRECIATED THAT THE INTENTION BEHIND PRO VISIONS LAID DOWN IN RULE 8D IS NOT TO EMBARK UPON AN UNWARRANTED HIGH LEVEL OF DISALLOWANCE OF EXPENSE WHEN THE AVAILABLE FACTS AND CIRCUMSTANCES DO SUGGEST OTHERWISE . 12. RELIANCE WAS PLACED IN THIS REGARD ON THE DECISION IN THE CASE OF CIT VS. JINDAL P HOTO LTD. IN ITA NO.4539/DLI/010 DATED 7 / 1 / 11 FOR THE PROPOSITION OF THE LAW THAT THE ASSESSING OFFICER MUST RECORD HIS DIS SATISFACTION ABOUT THE CLAIM OF THE ASSESSEE REGARDING COMPUTATION OF EXPENSES INCURRED FOR EARNING EXEMPT INCOME WITH REGARD TO THE ACCOUNTS OF THE ASSESSEE. NO AD - HOC DISALLOWANCE CAN BE MADE. AGAIN DELHI BENCH OF THIS TRIBUNAL FOR THE ASSESSMENT YEAR 2008 - 09 IN THE CASE OF THE SAME ASSESSEE I.E. DCIT VS. JINDAL PHOTO LTD. VIDE ORDER DATED 23 / 9 / 2011, THE TRIBUNAL FOLLOWED THE SAME P RINCIPLE AND TOOK THE VIEW THAT A MECHANICAL APPLICATION OF RULE 8D IS NOT PERMISSIBLE. THE ONUS IS ON THE ASSESSING OFFICER TO RECORD HIS SATISFACTION AS TO THE INCORRECTNESS OF THE CLAIM OF THE ASSESSEE ABOUT THE EXPENSES INCURRED IN RELATION TO THE EXE MPT INCOME AND ASSESSING OFFICER HAS TO ESTABLISH A CLEAR FINDING OF THE EXPENSES INCURRED IN RELATION TO THE EXEMPT INCOME. RELIANCE WAS ALSO PLACED ON THE DECISION OF JUSTICE S.P. BARUCHA VS. ADDL. INCOME TAX OFFICER IN ITA NO.3889/MUM/2011. BUT THIS D ECISION , IN OUR OPINION , IS NOT APPLICABLE TO THE FACTS OF THE CASE AS IN THIS CASE, THE ASSESSEE HAS NOT CLAIMED ANY EXPENDITURE BEING INCURRED FOR EARNING THE EXEMPT INCOME. RELIANCE WAS ALSO PLACED ON THE DECISION OF THE `F BENCH, MUMBAI IN ITA NO. 577 9/2006 AND ITA NO. 208/2009 IN THE CASE OF AVSHESH MERCANTIL E PVT. LTD. AND OTHERS VS. DCIT F OR THE PROPOSITION OF THE INCOME WHEN THE ASSESSEE HAS BOTH TAXABLE AS WELL AS EXEMPT INCOME, THE PROVISIONS OF SECTION 14A WILL NOT APPLY. RELIANCE WAS ALSO PLAC ED ON THE DECISION OF APEX COURT IN T HE CASE OF CIT VS. WALFORT SHARE AND STOCK BROKERS LTD. , 326 ITR 1, I T WAS STRESSED THAT THE INTENTION BEYOND PROVISION LAID DOWN IN RULE 8D IS NOT EMBARK ED UPON AN UNWARRANTED HIGH LEVEL OF DISALLOWANCE OF EXPENDITURE WHEN THE AVAILABLE FACTORS AND CIRCUMSTANCES DO SUGGEST THAT AN AD - HOC APPLICATION WOULD PROVIDE SUCH RESULT AS HAS HAPPENED IN ASSESSEES CASE. IT WAS POINTED OUT THAT , AS A RESULT OF COMPUTATION OF ITA NO. 72&85/PNJ/2012 19 DISALLOWANCE BY THE ASSESSING OFFICER U/S 14A, THE DISA LLOWANCE IN RELATION TO EXEMPT INCOME COMES AT RS.12 , 55 , 03 , 205/ - I.E. ABOUT 8.8% OF TOTAL EXEMPT DIVIDEND INCOME. WHEREAS, AS PER THE AUDITED ACCOUNTS, THE TOTAL ADMINISTRATIVE EXPENSES INCURRED FOR THE WHOLE YEAR ARE ONLY RS.56.59 CRORES W ITH REGARD TO T HE TOTAL TURNOVER OF RS.4 , 996.23 CRORES, INCLUDING THE EXEMPT DIVIDEND INCOME. THIS WORKS OUT ONLY AT 1.7%. IT IS IMPOSSIBLE FOR A COMPANY TO INCUR ALMOST 1/5 TH OF RS. 56 CRORE S IN EARNING AN INCOME WHICH IS FROM INVESTMENT AND NOT FROM THE MAIN STREAM. 13 . THE LEARNED D.R. ON THE OTHER HAND SUBMITTED THAT THE ASSESSEE S INVEST MENT IN SHARES, ETC. ARE RS.2 , 510 CRORES. DIVIDEND INCOME EARNED FROM THIS INVESTMENT IS RS.142 , 72 , 73 , 668/ - . THE ASSESSEE HAS WORKED OUT THE DISALLOWANCE AT RS.25 , 78 , 156/ - U/S 1 4A ON AD - HOC BASIS BY TAKING INTO ACCOUNT EXPENDITURE INCURRED TOWARDS MAINTENANCE OF OFFICE EQUIPMENT, PRINTING & STATIONERY AND POSTAGE & TELEPHONE. THE ASSESSING OFFICER , HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE , IS NOT SATISFIED WITH THE CORRECTN ESS OF THE CLAIM OF THE ASSESSEE AS THE EXPLANATION OF THE ASSESSEE THAT NO ADMINISTRATIVE EXPENDITURE INCURRED ON EARNING DIVIDEND INCOME NOT ACCEPTABLE , CONSIDERING THE MAGNITUDE OF INVESTMENT AND DIVIDEND INCOME RECEIVED . THE DISALLOWANCE MADE BY ASSES SEE U/S. 14A OF THE ACT TOWARDS ADMINISTRATIVE EXPENDITURE IS LOW ON COMPARING THE MAGNITUDE OF PURCHASE AND SALE MADE BY THE ASSESSEE AND INVESTMENT OF LARGE MAGNITUDE CANNOT BE MADE BY PROPER ANALYSIS OF THE MARKET CONDITION STOCK MOVEMENT ETC. APPELLAT E COMMISSIONER CONFIRMED FINDING OF THE ASSESSING OFFICER THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM. SUBMISSION OF THE ASSESSEE ON THE ONE HAND THAT THERE WAS NO ADMINISTRATIVE EXPENDITURE AND ON THE OTHER HAND THERE WAS ADMINISTRATIVE EXPENDITURE WHICH WAS WORKED OUT ON NOTIONAL BASIS IS SELF CONTRADICTORY. AD - HOC ADMINISTRATIVE EXPENDITURE WORKED OUT BY THE ASSESSEE ON MAINTENANCE OF OFFICE EQUIPMENT, PRINTING AND STATIONERY AND POSTAGE AN D TELEPHONE. OTHER ADMINISTRATIVE EXPENSES SUCH AS: - PROFESSIONAL LEGAL CHARGES RS.23.56 CROR ES AUDITORS FEE RS. 0.53 CRORES ITA NO. 72&85/PNJ/2012 20 TRAVELLING AND REPRESENTATION EXPENSES OF DIRECT ORS RS. 4.22 CRORES MISCELLANEOUS EXPENSES RS. 3.60 CRORES NOT TAKEN INTO CONSIDERATION. ADMINISTRATIVE EXPENDITURE SUCH AS SALARY RENT, TAXES, INTEREST NOT TAKEN INTO CON SIDERATION IN WORKING OUT AD - HOC BASIS AS HELD IN GODREJ & BOYCE MFG. CO . LTD. EXPENSES ON PRORATE BASIS WAS WORKED OUT BY TA KING INTO CONSIDERATION THE TURNOVER OF DIFFERENT TYPES OF RECEIPTS SUCH AS SALES, HIGHER CHARGES OF TRANS CHIPPER, SALE OF GAS, S ALE OF CARBON CREDITS ETC., HOWEVER, IN RESPECT OF DIVIDEND INCOME ASSESSEE HAS TAKEN INTO CONSIDERATION INCOME AS THE BASIS. A CCURACY OF ASSESSEES AD - HOC QUANTIFICATION NOT CORRE CT. SALES AND OTHER RECEIPTS (EXCLUDING DIVIDEND). RS.4,853 CRORES A VERAGE VALUE OF INVESTMENT AS PER BALANCE SHEET RS.2,510 CRORES TOTAL TURNOVER IS RS.7,363 CRORES TOTAL ADMINISTRATIVE EXPENDITURE DECLARED IS RS.56.59 CRORES PROPORTIONATE EXPENDITURE OF DIVIDEND INCOME RS.19.29 CRORES WHEREAS, ASSESSEE HAD DECLARED RS.25.78 LAKHS AS EXPENSE S . SATISFACTION OF THE ASSESSING OFFICER HAS BEEN CLEARLY RECORDED IN ORDER TO INVOKE SECTION 14A OF THE ACT. SATISFACTION OF THE ASSESSING OFFICER MUST IN THE FIRST IN STANCE MAKE THE DETERMINATION, IT DOES NOT PROHIBIT THE APPELLATE COMMISSIONER TO REVISE THE DETERMINATION OR EXERCISE THE POWER WHICH THE ITO COULD EXERCISE. ADMITTEDLY, ASSESSEE WORKS OUT THE ADMINISTRATIVE EXPENSE WHICH IS FOUND TO BE INCORRECT. ADMITT EDLY, ASSESSEE CANNOT WORKOUT THE EXPENSE AS PER SECTION 14A OF THE ACT ON AD - HOC BASIS AND SAID SECTION 14A OF THE ACT IS NOT APPLICABLE OR NO ADMINISTRATIVE EXPENSE INCURRED. CONTENTION THAT NO EXPENDITURE INCURRED FOR EARNING SUBSTANTIAL DIVIDEND INCOM E CANNOT BE ACCEPTED. NO DISPUTE REGARDING COMPUTATION OF RS.12,29,25,049/ - IN ACCORDANCE WITH RULE 8D OF THE I T RULES. HE RELIED ON THE FOLLOWING CASES: - 1 . (2007) 111 TTJ (MUMBAI) 82 ACIT VS. CITICORP FINANCE (INDIA) LTD., 2 . (2005) 93 TTJ (CHENNAI) 161 SOUTHERN PETRO CHEMICAL INDUSTRIES VS. DCIT ITA NO. 72&85/PNJ/2012 21 3 . (2004) 83 TTJ (MUMBAI) 843 ACIT VS. PREMIER CONSOLIDATED CAPITAL TRUST (I) LTD., 4 . (2010) 328 ITR 81 (BOM) GODREJ & BOYCE MFT. CO. LTD. VS. DCIT & ANR., 5 . (1962) 44 ITR 739 (SC) CIT & ANR. VS S.V. ANGIDI CHETTIAR 6 . (1958) 33 ITR 182 (SC) CIT VS. MCMILLAN & CO. 7 . (2005) 278 ITR 3 (GUJ) CIT VS. PARMANAND M. PATEL 14. WE HAVE CAREFULLY CONSIDERED THE R I VAL SUBMISSIONS ALONG WITH THE OR D ER OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH VARIOUS CASE LAWS AND THE P ROVISIONS OF THE IT ACT IN THIS REGARD. THE ISSUE INVOLVED BEFORE US RELATE TO THE DISALLOWANCE MADE BY THE AO BY APPLYING THE PROVISIONS OF SEC.14A OF THE IT A C T R EAD WITH RULE 8D OF THE IT RULES . SEC.14A WAS INSERTED BY THE FINANCE ACT, 2001 W.E.F. 1.4 .1962. ORIGINALLY THIS SEC. PROVIDES THAT IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T. SUBSEQUENTLY, BY FINANCE ACT, 2002 WITH RETROSPECTIVE EFFECT FROM 11 / 5 / 2001 PROVISO WAS ADDED WHICH STATES THAT THIS SEC. SHALL NOT EMPOWER THE AO EITHER TO RE - ASSESS OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING THE REFUND ALREADY MADE OR OT HERWISE INCREASING THE LIABILITY OF THE ASSESSEE FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE 1/4/2001. WITH EFFECT FROM 1/4/2007 BY FINANCE ACT , 2006 S UB - SEC. (2) EMPOWERS THE AO TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCO ME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH THE METHOD AS MAY BE PRESCRIBED. SUCH POWER IS TO BE EXERCISED IF THE AO HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDI TURE MENTIONED IN SUB - SEC.(1). BEFORE APPLYING RULE 8D, IT IS APPARENT THAT THE AO MUST BE SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. SUCH SATISFAC TION IS A N OBJECTIVE SATISFACTION THAT IT HAS TO BE JUDICIOUS AND BASED ON THE MATERIAL ON RECORD. IT CANNOT BE AN IMPRESSION THAT ITA NO. 72&85/PNJ/2012 22 IT IS MUCH MORE THAN THE GOSSIP OR HEARSAY, IT MEANS JUDGMENT OR BELIEF THAT IT IS A BELIEF OR A CONNECTION RESULTING FROM WHAT ONE THINKS ON A P ARTICULAR QUESTION. IT MUST BE BASED ON THE REASONS AND GROUND AS SEEMS GOOD TO HIM AND WHILE MAKING SUCH SATISFACTION, THE AO MUST GIVE REGARD TO THE ACCOUNTS OF THE ASSESSEE. HE MUST RECORD DEFICIENCY IN THE ACCOUNTS WITH REGARDS TO THE CLAIM OF THE ASS ESSEE. SUB - SEC.(3) PROVIDES THAT PROVISIONS OF SUB - SEC.(2) SHALL ALSO APPLY WHERE ASSESSEE CLAIMS THAT NO EXPENDITURE HAD BEEN INCURRED IN RELATION TO INCOME NOT FORMING PART OF THE TOTAL INCOME . THIS IS NOT THE CASE OF THE ASSESSEE AS IN THE CASE OF THE ASSESSEE, ASSESSEE HIMSELF ESTIMATED THE EXPENSES RELATING TO THE EXEMPT INCOME AND DISALLOWED THE SAME. RULE 8D WAS INSERTED BY GAZETTE NOTIFICATION DATED 24 / 3 / 2008 IN VIEW OF THE POWER CONFERRED UNDER SUB - SEC (2) . THIS RULE PRESCRIBES THE METHOD FOR CO MPUTING THE EXPENDITURE INCURRE D IN RELATION TO THE INCOME NOT FORM ING PART OF THE TOTAL INCOME. THIS IS AN UNDISPUTED FACT THAT IN THIS CASE, THE ASSESSEE HAS INVESTED IN DEBTS MUTUAL FUNDS. THE ASSESSEE COMPUTED DISALLOWANCE U/S 14A(2) AT RS.25,78,156/ - AND DISALLOWED THE SAME, WHILE COMPUTING ITS TOTAL INCOME. THE WORKING O F THE SAID DISALLOWANCE CLAIMED BY THE ASSESSEE IS GIVEN HEREIN ABOVE I N THE SUBMISSIONS MADE BY THE ASSESSEE. THE AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASS ESSEE ESPECIALLY THE EXPLANATION OF THE ASSESSEE THAT NO ADMINISTRATIVE EXPENDITURE INCURRED ON EARNING THE DIVIDEND INCOME. CONSIDERING THE MAGNITUDE OF THE INVESTMENTS AND THE DIVIDEND INCOME RECEIVED, THE AO WAS OF THE VIEW THAT THE DISALLOWANCE MADE BY THE ASSESSEE U/S 14A OF THE IT ACT TOWARDS THE ADMINISTRATIVE EXPENDITURE IS LOW ON COMPARING THE MAGNITUDE OF PURCHASE AND SALES MADE BY THE ASSESSEE AND THE INVESTMENTS OF LARGE MAGNITUDE CANNOT BE MADE WITHOUT PROPER ANALYSIS OF THE MARKET CONDITION/ STOCK MOVEMENT ETC. THE REVENUE WAS OF THE OPINION, THAT THE ASSESSEE HAS WORKED OUT THE ADMINISTRATIVE EXPENDITURE AND HAD NOT CONSIDERED ALL THE ADMINISTRATIVE EXPENDITURE. B O TH THE PARTIES BEFORE US VEHEMENTLY RELIED ON THE DECISION OF GODREJ BOYCE MF G CO. LTD. VS DCIT 328 ITR 81 (MUM) . 15. WE HAVE GONE THROUGH THIS DECISION AND WE NOTED THAT IN THIS CASE, THE ASSESSEE CLAIMED EXEMPTION IN RESPECT OF DIVIDEND INCOME OF 34.34 CRORES U/S 10(33). THE AO ISSUED NOTICES FOR DISALLOWANCE OF INTEREST U/S 1 4A OF THE IT ACT. THE EXPLA NATION OF THE ASSESSEE WAS THAT (I) 95% OF THE SHARES WERE ITA NO. 72&85/PNJ/2012 23 BONUS SHARES FOR WHICH NO COST WAS INCURRED ; ( II) NO INVESTMENT IN SHARES WAS MADE IN THE CURRENT YEAR AND NO DISALLOWANCE WAS MADE IN EARLIER YEARS AND ( III) THERE WER E SUFFICIENT INTEREST FREE FUNDS AVAILABLE IN THE FORM OF SHARE CAPITAL, RESERVES ETC. WHICH WERE MORE THAN INVESTMENT IN SHARES. THE AO WAS NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE AND HE MADE DISALLOWANCE U/S 14A ON PRORAT A BASIS. THE CIT(A) FOLLOWING HIS ORDERS FOR EARLIER YEARS, ACCEPTED THE APPEAL OF THE ASSESSEE. THE TRIBUNAL FOLLOWING THE DECISION OF THE SPECIAL BENCH IN THE CASE OF ITO VS DAGA CAPITAL MANAGEMENT (P) LTD 117 ITD 169 (SB) RESTORED THE MATT ER TO THE FILE OF THE AO FOR T HE CONSIDERATION IN THE LIGHT OF THE PROVISIONS OF SUB - SEC.(2) & (3) OF SEC.14A OF THE IT ACT. THE ASSESSEE , BEING AGGRIEVED, FILED APPEAL AS WELL AS WRIT PETITION CHALLENGING THE CONSTITUTIONAL VALIDITY OF SUB - SEC. (2) & (3) AND RULE D. THE HONBLE HI GH COURT GAVE THE FOLLOWING FINDING S ; 1. THE PROVISIONS OF SEC. 14 A AND RULE 8D ARE CONSTITUTIONALLY VALID. 2. THE PROVISIONS OF SUB - SEC. (2) & ( 3) OF SEC.14A AND RULE 8 D ARE PROSPECTIVE AND NOT RETROSPECTIVE, IN NATURE AND THEREFORE, WO ULD APPLY FROM A SSESSMENT YEAR 2007 - 08 . 3. THE BASIC OBJECT OF SEC.14A IS TO DISALLOW THE DIRECT AND INDIRECT EXPENDITURE INCURRED IN R E LATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME (PAGE 21) . 4. THE INSERTION OF SEC.14A WAS CURATIVE AND DECLARATORY OF THE INTENT OF THE PARLIAMENT. THE BASIC PRINCIPLE OF TAXATION IS THAT ONLY NET INCOME, NAMELY, GROSS INCOME MINUS EXPENDITURE THAT IS TAXABLE. EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THAT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME (PAGES 22 - 23). THE TEST WHICH HAS BEEN ENUNCIATED IN WALLFORT FOR ATTRACTING THE PROVISIONS OF SEC.14A IS THAT THERE HAS TO BE A PR O XIMATE CAUSE FOR DISALLOWANCE WHICH HA S ITS RELATIONSHIP WITH THE TAX EXEMPT INCOME. ONCE THE TEST OF PROXIMATE CAU S E, BASED ON TH E RELATIONSHIP OF THE EXPENDITURE WITH TAX EXEMPT INCOME IS ESTABLISHED, A DISALLOWANCE WOULD HAVE TO BE EFFECTED UNDER SECTION 14A (PAGE 28) 5. WHAT MERITS EMPHASIS IS THAT THE JURISDICTION OF THE AO TO DETERMINE THE EXPE NDITURE INCURRED IN RELATION TO S UCH INCOME WHICH DOES NOT FORM PART OF TH E TOTAL INCOME, IN ACCORDANCE WITH THE PRESCRIBED METHOD, ARISES IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE ITA NO. 72&85/PNJ/2012 24 CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE WHICH THE ASSESSEE CLAIMS T O HAVE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. MOREOVER, THE SATISFACTION OF THE AO HAS TO BE ARRIVED AT, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. HENCE, SUB - SEC (2) DO E S NOT IPSO FACTO ENABLE THE AO TO APPLY THE METHOD PRESCR IBED BY THE RULES STRAIGHTAWAY WITHOUT CONSIDERING WHETHER THE CLAIM MADE BY TH E ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME W HICH DOE S NOT FORM PART OF THE TOTAL INCOME IS CORRECT. THE AO MUST, IN THE FIRST INSTANCE, DETERMINE W HETHER THE CLAIM OF THE ASSESSEE IN THAT REGARD IS CORRECT AND THE DETERMINATION MUST BE MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE SATISFACTION OF THE AO MUST BE ARRIVED AT ON AN OBJECTIVE BASIS. IT IS ONLY WHEN THE AO IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, THAT THE LEGISLATURE DIRECTS HIM TO FOLLOW THE METHOD THAT MAY BE PRESCRIBED. IN A SITUATION WHERE THE ACCOUNTS OF THE ASSESSEE FURNISH AN OBJECTIVE BASIS FOR THE AO TO ARRIVE AT A SATISFACTION IN REGARD TO THE CORRECTNESS OF TH E CLAIM OF THE ASSESSEE OF THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THERE WOULD BE NO WARRANT FOR TAKING RECOURSE TO THE METHOD PRESCRIBED BY THE RULES. FOR, IT IS ONLY IN THE EVENT OF TH E AO NOT BEING SO SATISFIED THAT RECOURSE TO THE PRESCRIBED METHOD IS MANDATED BY LAW (PAGES 31 - 32) . 6. I N THE EVENT THAT THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE , HE MUST RECORD REASONS FOR HIS CONCLUSION (PAGE - 79) . 7 . THE EFFECT OF SEC.14A IS TO WIDEN THE THEORY OF THE APPORTIONMENT OF EXPENDITURE (PAGE 49) . 8. THE EXPRESSION EXPENDITURE INCURRED; IN SEC.14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST , ETC., IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FO R (PAGE - 50) . 9. SUB - SECTIONS (2) & (3) OF SEC.14A ARE INTENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS OF SUB - SEC (1) (PAGES 50) . 10. EVEN IN THE ABSENCE OF SUB - SECTION (2) OF SEC.14A THE AO WOULD HAVE TO APPORTION THE EXPENDITURE AND TO DISALLOW THE EXPEN DITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM ITA NO. 72&85/PNJ/2012 25 PART OF THE TOTAL INCOME UNDER THE ACT. THE AO WOULD HAVE TO FOLLOW A REASONABLE METHOD OF APPORTIONING THE EXPENDITURE CONSISTENT WITH WHAT THE CIRCUMSTANCES OF THE CASE WOULD WAR RANT AND HAVING REGARD TO ALL R ELEVANT FACTS AND CIRCUMSTANCES. THE SAID DECISION OF THE JURISDICTIONAL HIGH COURT IS BINDING ON US . WHILE DECIDING THIS CASE, THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS WALLFORT SHARES & STOCK BROKERS LTD., 23 3 CTR (SC) 42 WAS REFERRED TO . IN THIS DECISION, W E NOTED THAT THE HONBLE SUPREME COURT IN THAT CASE UPHELD THE VIEW OF THE HONBLE MUMBAI HIGH COURT IN THE CASE OF WALLFORT SHARES & STOCK BROKERS LT D. VS ITO 310 ITR 421. THE HONBLE SUP REME COURT IN THIS DECISION, AT PAGE - 31 OF THE ORDER HELD AS UNDER; TO ATTRACT SEC.14A THERE HAS TO BE PROXIMATE CAUSE FOR DISALLOWANCE WHICH HA S ITS RE LATIONSHIP WITH THE TAX EXEMPT. PAY BACK OR RETURN OF INVESTMENT IS NOT SUCH PROXIMATE CAU S E. HENCE, SE C.14A IS NOT APPLICABLE IN THE PRESENT CASE. THUS, IN THE ABSENCE OF SUCH PR OXIMATE CAUSE FOR DISALLOWANCE, SEC.14A CANNOT BE INVOKED. 16. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS DCIT (SUPRA) THEREFORE AT PAGE - 28 H AS CLEARLY LAID DOWN THAT THERE MUST BE PROXIMATE CAUSE BASED ON THE RELATIONSHIP OF THE EXPENDITURE THAT TAX EXEMPT INCOME IS ESTABLISHED, ONLY THEN A DISALLOWANCE WOULD HAVE TO BE EFFECTED U/S 14A OF THE I T ACT. THEREFORE, IN VIEW OF THE DECISION OF TH E JURISDICTIONAL HIGH COURT AND THE DECISION OF THE HONBLE SUPREME COURT , WE ARE OF THE VIEW THAT SEC.14A CANNOT BE APPLIED UNLESS THERE IS A PRO XIMATE CAUSE FOR DISALLOWANCE. THE ONUS TO ESTABLISH THAT THERE IS PROXIMATE CAUSE BASED ON THE RELATIONSHIP OF THE EXPENDITURE WITH THE EXEMPT INCOME IN OUR OPINION IS ON THE REVENUE. THUS, THE APPLICATION OF THE PROVISIONS OF SEC. (2) & (3) OF SEC.14A AND RULE 8D IS NOT AUTOMATIC IN EACH AND EVERY CASE, WHERE THERE IS INCOME NOT FORMING PART OF THE TOTAL INCOM E. SUB - SEC. (2) & (3) ARE INTENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS OF SUB - SEC. (1). THEREFORE, IT IS NECESSARY FOR THE AO FIRST TO ASCERTAIN WHETHER THERE IS PROXIMATE CONNECTION BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF THE TOTAL INCOME. IF SUCH PROXIMATE CONNECTION IS ESTABLISHED WITH THE EXEMPT INCOME , THE AO WOULD BE JUSTIFIED IN APPLYING THE PROVISIONS ITA NO. 72&85/PNJ/2012 26 OF SUB - SEC (2) & (3) OF SEC.14A AND RULE 8D OF THE IT ACT, 1961. THE EXPENDITURE INCURRED U/S 14A WOULD INCLUDE DIRECT AND INDIRECT EXPENDITURE, BUT RELATIONSHIP WITH EXEMPTED INCOME MUST BE PROXIMATE. IF THERE IS MATERIAL TO ESTABLISH THAT THERE IS DIRECT NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF TOTAL INCOME THEN DISALLOWANCE WOULD BE JUSTIFIED EVEN WHERE THERE IS NO RECEIPT OF EXEMPTED INCOME U/S 10 IN THE YEAR UNDER CONSIDERATION IN VIEW OF THE DECISION OF SPECIAL BENCH IN THE CASE OF CHEMINVEST LTD. 124 TTJ 577 (DEL) (SB). 17. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INC OME. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO TO BE ALLOWED ON NET BASIS I.E. GROSS RECEIPTS MINUS RELATED EXPENSES. THEREFORE, IF ANY EXPENDITURE IS DIRECTLY RELATED TO EXEMPTED INCOME, IT CANNOT BE ALLOWED TO BE SET OFF AGAINST TAXABLE PROFIT. ON TH E SAME ANALOGY, IN OUR OPINION, IF ANY EXPENDITURE IS DIRECTLY RELATED TO TAXABLE INCOME, IT CANNOT BE ALLOWED TO BE SET OFF AGAINST THE EXEMPTED INCOME MERELY BECAUSE SOME INCIDENTAL BENEFIT HAS ARISEN TOWARDS EXEMPTED INCOME. BEFORE MAKING ANY DISALLOWAN CE U/S 14A, THE AO IS REQUIRED TO RECORD A SATISFACTION, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, THAT CLAIM OF ASSESSEE THAT EXPENDITURE INCURRED IS NOT RELATED TO THE INCOME FORMING PART OF THE TOTAL INCOME IS INCORRECT. SUCH SATISFACTION MUST BE ARRIVED AT ON THE OBJECTIVE BASIS. HE IS ALSO REQUIRED TO RECORD THE REASONS FOR ARRIVING AT SUCH SATISFACTION. THE ASSESSING OFFICER IN THIS CASE , WE NOTED IS NOT SATISFIED WITH THE CORRECTNESS OF THE DISALLOWANCE MADE BY THE ASSESSEE EVEN THOUGH HE HA S ACCEPTED THE EXPLANATION OF THE ASSESSEE THAT NO INTEREST IS INCURRED WITH REGARD TO EXEMPT INCOME. HE REJECTED THE EXPLANATION OF THE ASSESSEE THAT NO ADMINISTRATIVE EXPENDITURE INCURRED ON EARNING DIVIDEND INCOME CONSIDERING THE MAGNITUDE OF THE INVEST MENTS AND DIVIDEND INCOME RECEIVED AND THE DISALLOWANCE ACCORDING TO HIM MADE BY THE ASSESSEE U/S 14A TOWARDS ADMINISTRATIVE EXPENDITURE IS VERY LESS. THE ASSESSING OFFICER NOWHERE POINTED OUT THE PROXIMATE CONNECTION OF OTHER EXPENSES NOT APPORTIONED BY THE ASSESSEE FOR THE EARNING OF THE DIVIDEND INCOME. HE MERELY OBSERVED THAT THE ADMINISTRATIVE EXPENSES DISALLOWED BY THE ASSESSEE IS VERY LESS BUT HOW THEY ARE LESS AND HOW THE OTHER EXPENSES INCURRED BY THE ASSESSEE RELATED TO THE DIVIDEND INCOME HAS N OT BEEN BRO UGHT ON RECORD. EVEN THE AO HAS NOT POINTED OUT THE EXPENSES EXCLUDED BY THE ASSESSEE FOR ITA NO. 72&85/PNJ/2012 27 DISALLOWANCE HAS PROXIMATE CONNECTION WITH DIVIDEND INCOME. IN OUR OPINION , THE ASSESSING OFFICER BEFORE REJECTING THE DISALLOWANCE COMPUTED BY THE ASSESS EE MUST GIVE A CLEAR CUT FINDING HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE HOW THE OTHER EXPENDITURE CLAIMED BY THE ASSESSEE OUT OF NON EXEMPT INCOME IS RELATED WITH THE EXEMPT INCOME. NO DISCREPANCY IN THE CLAIM OF THE ASSESSEE WAS POINTED OUT. THE A SSESSING OFFICER IN OUR OPINION IN VIEW OF THE JURISDICTION AL H IGH C OURT DECISION IS BOUND TO RECORD SATISFACTION AS TO HOW THE EXPENSES CLAIMED BY THE ASSESS EE HAVE BEEN INCURRED ON EARNING DIVIDEND INCOME WERE NOT SUFFICIENT AND CORRECT. WE HAVE ALREADY HELD THAT THE ONUS TO PROVE IN THIS REGARD LIES ON THE ASSESSING OFFICER. ALTHOUGH THE L D. DR HAD VEHEMENTLY CONTENDED AND TRIED TO BUILD UP HIS CASE BY SUBSTITUTING THE REASONS GIVEN BY THE CIT(APPEAL) IN PLACE OF THE AO, BUT FAILED TO BRING ANY COGENT MATERIAL OR EVIDENCE IN THIS REGARD WHICH MAY PROVE THAT THE OTHER EXPENSES CLAIMED BY THE REVENUE FOR APPORTIONMENT HAD PROXIMATE CONNECTION WITH THE EARNING OF THE DIVIDEND INCOME. IN OUR OPINION UNTIL AND UNLESS THIS IS PROVED OR ESTABLISHED BY THE REVE NUE, THE ASSESSING OFFICER DOES NOT HAVE ANY POWER TO REJECT THE ACCOUNTS OF THE ASSESSEE AND TAKE THE SHELTER OF RULE 8D FOR COMPUTING THE DISALLOWANCE OUT OF THE EXEMPT INCOME. WE ARE NOT AT ALL CONVINCED WITH THE SUBMISSION OF THE L D. DR RELYING ON THE DECISION OF CIT(APPEAL) IN RESPECT OF EXPLANATION BB TO SEC. 80HHC THAT 10% OF THE RECEIPTS UNDER THE SOURCES MENTIONED THEREIN ARE DEEMED TO BE THE EXPENDITURE. THIS IN OUR OPINION WILL STRENGTHEN THE CASE OF THE ASSESSEE AS EXPLANATION BB TO SEC. 80HHC DOES NOT RECOGNIZE AMOUNT OF THE INVESTMENT MADE IN OTHER RECEIPT TO BE THE BASIS OF COMPUTING THE EXPENDITURE BEING INCURRED FOR THE EARNING OF THAT INCOME. SIMILAR VIEWS HAVE BEEN TAKEN BY HONBLE TRIBUNAL IN THE FOLLOWING DECISIONS ALSO. IN THE CASE OF DCIT VS. JINDAL PHOTO LTD. HELD IN I.T.A.T. DELHI BENCH DATED 7.1.2011 IT WAS HELD AS FOLLOWS: NOW AS PER SECTION 14A(2) OF THE ACT, IF THE AO, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASS ESSEE IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE ASSESSEES TOTAL INCOME UNDER THE ACT, THE AO SHALL DETERMINE THE AMOUNT INCURRED IN RELATION TO SUCH INCOME, IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED , I.E., ITA NO. 72&85/PNJ/2012 28 UNDER RULE 8D OF THE I.T. RULES. HOWEVER, IN THE PRESENT CASE, THE ASSESSMENT ORDER DOES NOT EVINCE ANY SUCH SATISFACTION OF THE AO REGARDING THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. AS SUCH, RULE 8D OF THE RULES WAS NOT APPROPRIATELY APPLIE D BY THE AO AS CORRECTLY HELD BY THE CIT(A). IT HAS NOT BEEN DONE BY THE AO THAT ANY EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE FOR EARNING ITS DIVIDEND INCOME. MERELY, AN ADHOC DISALLOWANCE WAS MADE. THE ONUS WAS ON THE AO TO ESTABLISH ANY SUCH EXPE NDITURE. THIS ONUS HAS NOT BEEN DISCHARGED. IN CIT VS. HERO CYCLES (P&H) 323 ITR 518, UNDER SIMILAR CIRCUMSTANCES, IT WAS HELD THAT THE DISALLOWANCE U/S 14A OF THE ACT REQUIRES A CLEAR FINDING OF INCURRING OF EXPENDITURE AND THAT NO DISALLOWANCE CAN BE MADE ON THE BASIS OF PRESUMPTIONS. IN ACIT VS. EICHER LTD., 101 TTJ (DEL.) 369, THAT IT WAS HELD THAT THE BURDEN IS ON THE AO TO ESTABLISH NEXUS OF EXPENSES INCURRED WITH THE EARNING OF EXEMPT INCOME, BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT. IN MARUTI UDYOG VS. DCIT, 92 ITD 119 (DEL.), IT HAS BEEN HELD THAT BEFORE MAKING ANY DISALLOWANCE U/S 14A OF THE ACT, THE ONUS TO ESTABLISH THE NEXUS OF THE SAME WITH THE EXEMPT INCOME, IS ON THE REVENUE. IN WIMCO SEEDLINGS LIMITED VS. DCIT, 107 ITD 2 67 (DEL.) (TM), IT HAS BEEN HELD THAT THERE CAN BE NO PRESUMPTION THAT THE ASSESSEE MUST HAVE INCURRED EXPENDITURE TO EARN TAX FREE INCOME. SIMILAR ARE THE DECISIONS IN: 1. PUNJAB NATIONAL BANK VS. DCIT, 103 TTJ 908 (DEL.); 2. VIDYUT INVESTMENT LTD., 1 0 SOT 284 (DEL.); AND 3. D.J. MEHTA VS. INCOME TAX OFFICER, 290 ITR 238 (MUM.) (AT) IN VIEW OF THE ABOVE, FINDING NO ERROR WITH THE ORDER OF THE CIT(A) ON THE POINT AT ISSUE, THE SAME IS HEREBY CONFIRMED. GROUND NO.3 IS THUS REJECTED. IN THE CASE OF JINDAL PHOTO LTD. VS. DCIT HELD IN I.T.A.T. DELHI BENCH DATED 23.9.2011 IT WAS HELD AS FOLLOWS: IN THE YEAR UNDER CONSIDERATION, IT IS SEEN THAT IT IS NOT INCORRECT WHEN THE ASSESSEE CONTENDS THAT NO SATISFACTION HAS BEEN RECORDED BY THE ITA NO. 72&85/PNJ/2012 29 AO REGARDING THE ASSESSEES CALCULATION BEING INCORRECT. EVEN SO, RULE 8D OF THE RULES HAS BEEN APPLIED. THIS, IN OUR OPINION, IS NOT CORRECT. SUCH SATISFACTION OF THE ASSESSING OFFICER IS A PRE - REQUISITE TO INVOKE THE PROVISIONS OF RULE 8D OF THE RULES. THE LEARNED CI T(A), THEREFORE, ERRED IN PARTIALLY APPROVING THE ACTION OF THE ASSESSING OFFICER. IN THE CASE OF AVSHESH MERCANTILE P. LTD. VS. DCIT IN I.T.A.T. MUMBAI BENCH (I.T. ACT NO.5779/MUM/2006 & 208/MUM/2009) IT WAS HELD AS FOLLOWS: AT THE TIME OF HEARING, THE CONTENTION RAISED BY THE LEARNED DR IN THIS REGARD IS THAT THE APPEAL OF THE REVENUE ON THE ISSUE HAVING BEEN DISMISSED BY THE HON'BLE BOMBAY HIGH COURT MERELY OBSERVING THAT NO QUESTION ARISES, IT CANNOT BE TREATED AS A DECISION RENDERED BY THE HON'BLE H IGH COURT ON THE MERIT OF THE ISSUE WHICH IS BINDING ON THIS TRIBUNAL. WE ARE UNABLE TO ACCEPT THIS CONTENTION OF THE LEARNED DR. IT IS WELL SETTLED PROPOSITION OF JUDICIAL PRECEDENTS THAT IS APPEAL THE HON'BLE HIGH COURT CONSIDERS FACTS PERTAINING TO TH E ISSUE AND GIVES APPROVAL TO THE DECISION OF THE LOWER FORUM, THE DECISION OF LOWER FORUM GETS MERGED WITH THE JUDGMENT AND ORDER OF THE HIGH COURT AND IT BECOMES BINDING PRECEDENT EVEN THOUGH APPROVAL TO DECISION OF LOWER FORUM/COURT IS SUMMARILY RECORDE D. SIMILAR SITUATION HAD ARISEN FOR CONSIDERATION BEFORE THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF NIRMA INDUSTRIES LTD. 283 ITR 402 WHEREIN THE EFFECTS OF SUMMARY DISPOSAL OF APPEAL BY THE HIGH COURT WERE ANALYSED AND EXPLAINED BY THEIR LORDSHIPS. I T WAS CLARIFIED THAT WHILE HEARING AN APPEAL EVEN FOR DECIDING WHETHER SUBSTANTIAL QUESTION OF LAW ARISES OR NOT FROM THE ORDER OF THE TRIBUNAL, THE HIGH COURT DOES NOT EXERCISE EITHER THE ORIGINAL JURISDICTION OR THE JURISDICTION TO ISSUE WRITS AND THE ON LY JURISDICTION EXERCISED BY THE HIGH COURT IN THE FIRST INSTANCE DECIDES WHETHER OR NOT SUBSTANTIAL QUESTION OF LAW ARISES FROM THE ORDER OF THE TRIBUNAL, IT CANNOT BE SAID THAT THE HIGH COURT DOES NOT EXERCISE THE APPELLATE POWERS OR THAT THERE IS NO DEC ISION ON MERIT WHEN THE HIGH COURT DISMISSES AN APPEAL HOLDING THAT NO SUBSTANTIAL QUESTION OF LAW ARISES FROM THE ORDER OF THE TRIBUNAL. IT WAS HELD THAT WHENEVER AN ORDER OF THE SUBORDINATE FORUM IS CARRIED IN APPEAL BEFORE THE HIGHER ITA NO. 72&85/PNJ/2012 30 APPELLATE FORUM/CO URT, OPERATIVE PART THEREOF MERGES INTO THE JUDGMENT, DECISION OR ORDER OF THE HIGHER COURT AFTER THE CONFIRMATION, MODIFICATION OR REVERSAL, AS THE CASE MAY BE, AND THE DECISION OF THE LOWER COURT OR FORUM HAS NO INDEPENDENT EXISTENCE THEREAFTER IN RELATI ON TO THE ISSUE WHICH WAS CARRIED BEFORE THE APPELLATE COURT OR FORUM. IT WAS HELD THAT WHERE THE HIGH COURT COMES TO THE CONCLUSION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES ON A PARTICULAR ISSUE, IT CANNOT BE STATED THAT THE SUBJECT MATTER OF CONTROVER SY BETWEEN THE PARTIES HAS NOT BEEN DEALT WITH BY THE HIGH COURT. IT WAS HELD THAT WHEN THE DECISION OF THE TRIBUNAL IS AFFIRMED ON THE ISSUE BROUGHT BEFORE THE HIGH COURT, IT IS THE DECISION OF THE HIGH COURT WHICH BECOMES OPERATIVE AND WHICH IS CAPABLE OF BEING GIVEN EFFECT TO FOR ALL INTENTS AND PURPOSES. KEEPING IN VIEW THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF NIRMA INDUSTRIES LTD. (SUPRA), WE HAVE NO HESITATION TO HOLD THAT THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF DELITE ENTERPRISE LTD. (SUPRA) IS A DECISION ON MERIT WHICH IS BINDING PRECEDENT ON US. AS THE ISSUE INVOLVED IN THE PRESENT CASES AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERETO ARE SIMILAR TO THAT OF THE CASE OF DELITE ENTERPRISE (SUPRA), WE RESPECT FULLY FOLLOW THE SAID DECISION OF THE JURISDICTIONAL HIGH COURT AND DELETE THE DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(A) ON ACCOUNT OF PREMIUM PAID BY THE ASSESSEES ON REDEMPTION OF PREMIUM NOTES (OCPN) BY INVOKING THE PROVISIONS OF S ECTION 14A OF THE ACT. AS REGARDS THE CASE LAWS CITED BY THE LEARNED DR, IT IS OBSERVED THAT IN NONE OF THESE CASES, THE FACTS INVOLVED WERE SIMILAR TO THE CASE OF THE PRESENT ASSESSEES IN AS MUCH AS THE INVESTMENT MADE THEREIN WAS NOT FOUND TO BE CAPABLE OF EARNING TAXABLE AS WELL AS EXEMPT INCOME WHICH WAS ACTUALLY NOT EARNED BY THE ASSESSEE IN THE RELEVANT PERIOD AS ARE THE FACTS OF THE PRESENT CASE OR THAT OF THE CASE OF DELITE ENTERPRISE (SUPRA) DECIDED BY THE HON'BLE BOMBAY HIGH COURT. ACCORDINGLY, WE DECIDE THE COMMON ISSUE INVOLVED IN ALL THESE APPEALS IN FAVOUR OF THE ASSESSEES FOLLOWING THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF DELITE ENTERPRISES (SUPRA) AND ALLOW THE APPEALS OF ALL THE ASSESSEES. ITA NO. 72&85/PNJ/2012 31 18. WE HAVE ALSO GONE THROUGH TH E DECISION RELIED UP ON BY TH E LEARNED DR ALSO . THE DECISION OF ACIT VS CITICORP FINANCE (IND.) LTD., 108 ITD 457 (BOM.) IS NO MORE RELEVANT, IN VIE W OF THE DECISION OF THE HONBLE MUMBAI HIGH COURT IN THE CASE OF GODREJ BOYCE MFG CO. LTD. (SUPRA). THE DECI SION OF SPIC VS DCIT 93 TTJ (CHENNAI) 161 IS NOT APP LICABLE TO THE FACTS OF THE CASE. AS IN THAT CASE, THE ASSESSEE WAS REGULARLY INVESTING IN THE SHARES . THE ASSESSEE HAS NOT DISALLOWED ANY EXPENDITURE WITH REGARD TO THE EARNING OF THE DIVIDEND INCOME. UNDER THESE FACTS, THE HONBLE TRIBUNAL HELD THAT WHETHER TO INVEST OR NOT TO INVEST IS A VERY STRATEGIC DECISION AND TOP MANAGEMENT I NVOLVE IN TAKING THE DECISIONS. THIS DECISION RELATE TO ASSESSMENT YEAR 2000 - 01 MUCH PRIOR TO THE INSERTION OF PROVISION O F SEC. 14A(2) OF THE IT ACT, 1961. THE DECISION OF ACIT VS PREMIUM CONSOLIDATED CAPITAL TRUST 83 TTJ (BOM.) RELATE S TO ASSESSMENT YE A R 1991 - 92 PRIOR TO INSERTION OF 14A(2) HENCE WILL NOT ASSIST THE REVENUE. THE OTHER DECISION RELIED ON ARE ALSO NOT APPLICA BLE TO THE FACTS OF THE C A SE , EXCEPT THE DECISION OF JURISDICTIONAL HIGH COURT IN THE C A SE OF GODREJ & BOYCE MFG. CO. LTD. VS DC IT & ANOTHER 328 ITR 81(BOM .). IN VIEW OF OUR AFORESAID DISCUSSION AND RESPECTIVELY FOLLOWING THE DECISION OF THE JURISDICTIO NAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT & ANOTHER 328 ITR 81 (BOM) , WE DELETE THE DISALLOWANCE MADE U/S 14A R.W. RULE 8D AND ACCORDINGLY, THE GROUND TAKEN BY THE ASSESS E E IN THIS REGARD IS ALLOWED. 19 . GROUND NO. 2 RELATES TO SUSTENANCE OF THE DISALLOWANCE OF RS. 9,88,29,729/ - TOWARDS THE PAYMENT OF THE SALES COMMISSION TO THE NON - RESIDENT AGENTS. THE ASSESSING OFFICER DISALLOWED THE COMMISSION PAID TO THE SALES AGENTS U/S 40(A)(I) OF THE INCOME - TAX ACT FOR THE REASON THAT THE ASSESSEE HAD NOT DEDUCTED TAX U/S 195 OF THE I.T. ACT ON SUCH PAYMENT. WHEN THE MATTER WENT BEFORE THE CIT(A), CIT(A) CONFIRMED THE DISALLOWANCE U/S 37 OF THE INCOME - TAX ACT IN THE FOLLOWING MANNER: - 6.3 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE BY THE ASSESSEE AND THE OBSERVATIONS OF THE ASSESSING OFFICER. I HAVE ALSO PERUSED THE ORDER OF THE HON'BLE ITAT IN ITA. NO. 113/PNJ/2010, DATED 10.3.2011 IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR ITA NO. 72&85/PNJ/2012 32 2005 - 06, IN WHICH TH E SIMILAR ISSUE WAS CONSIDERED. WITH REGARD TO THE CONTROVERSY WHETHER THE ASSESSEE IS REQUIRED TO DEDUCT TAX AT SOURCE FOR THE COMMISSION PAID TO THE NON - RESIDENT AGENTS, THE HON'BLE TRIBUNAL HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN THE ABOVE RE FERRED APPEAL. IN THIS REGARD IT IS HELD THAT CIRCULAR NO. 7 OF 2009 WITHDRAWING THE CIRCULAR NO. 23 OF 1969, 163 OF 1975 AND 786 OF 2000, WILL BE OPERATIVE ONLY FROM 22/10/2009 AND NOT PRIOR TO THAT DATE. IT WAS ACCORDINGLY HELD THAT THE CIRCULAR IS NOT A PPLICABLE FOR THE YEAR UNDER CONSIDERATION, I.E., 2005 - 06 AND ACCORDINGLY THE APPEAL OF THE ASSESSEE WAS ALLOWED. FOLLOWING THE RATIO OF THIS DECISION, CIRCULAR NO. 7 OF 2009, WHICH WAS HELD TO BE OPERATIVE ONLY FROM 22/10/2009, SHOULD HAVE NO APPLICATION TO THE PRESENT CASE WHICH RELATES TO THE FINANCIAL YEAR 2008 - 09 RELEVANT TO THE ASSESSMENT YEAR 2009 - 10. ACCORDINGLY, FOLLOWING THE DECISION OF THE HON'BLE ITAT, THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX IN RESPECT OF THE COMMISSION PAYMENTS MADE TO THE NO N - RESIDENT AGENTS. THEREFORE, AS FAR AS THE ISSUE OF NON DEDUCTION OF TAX IS CONCERNED, THE ASSESSING OFFICER IS NOT JUSTIFIED IN DISALLOWING THE COMMISSION PAYMENT BY INVOKING PROVISIONS OF SECTION 40(A)(I) OF THE INCOMES TAX ACT. 6.4 THE ASSESSING OFFIC ER, WHILE MAKING THE DISALLOWANCE OF COMMISSION PAYMENT, HAS ALSO REFERRED TO THE OBSERVATIONS OF THE CIT(A) ON THE SIMILAR ISSUE FOR THE ASSESSMENT YEAR 2006 - 07 AND STATED AS UNDER. FOR THE REASONS ELABORATELY DISCUSSED BY THE CIT (A) IN THE APPELLATE O RDER ITA NO.136/PNJ/2009 - 10 DT. 30.08.2011 FOR THE A.Y. 2006 - 07 IN THE ASSESSEES OWN CASE, THE COMMISSION PAYMENTS MADE BY THE ASSESSEE ALSO NEEDS TO BE DISALLOWED AS THE ISSUES DURING THE YEAR UNDER CONSIDERATION ARE ALSO SIMILAR TO THE ISSUES FOR THE A.Y. 2006 - 07, APART FROM THE GROUND OF NON - DEDUCTION OF TDS U/S 40A(IA). IN VIEW OF THE AFORESAID DISCUSSION, THE AMOUNT OF ITA NO. 72&85/PNJ/2012 33 RS.9,88,29,729/ - IS ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. IT IS THEREFORE, NECESSARY TO REFER TO THE ORDER OF THE CI T(APPEAL) FOR THE ASSESSMENT YEAR 2006 - 07 IN CONNECTION WITH THE ALLOWABILITY OF COMMISSION PAYMENT. DURING THE YEAR 2005 - 06 (RELEVANT FOR ASSESSMENT YEAR 2006 - 07) COMMISSION WAS PAID TO THREE CONCERNS INCLUDING, RS.15,21,98,212/ - TO MITSUI & CO., JAPAN, RS.2,71,86,975/ - TO AHMED JAFFAR & CO. LTD., KARACHI AND RS.66,86,324/ - TO ARIMPEKS DIS TICARET VE MUM LTD. IN THIS REGARD, IN THE ORDER OF THE CIT (APPEAL), IT WAS HELD THAT SINCE THE ASSESSEE COMPANY IS DEALING WITH THE PURCHASERS OF IRON ORE YEAR AFTER YEAR, EXPORTS ARE MADE DIRECTLY; PAYMENTS ARE RECEIVED DIRECTLY WITHOUT BEING ROUTED THROUGH THE COMMISSION AGENTS. THERE IS APPARENTLY NO JUSTIFIED REASON FOR PAYMENT OF COMMISSION WITHOUT SUBSTANTIATING THE AUTHENTICITY OF THE COMMISSION AGENTS AND WITHO UT HAVING FURNISHED REASONABLE PROOF OF CORRESPONDENCE AND ADEQUACY OF SERVICES RENDERED BY THE COMMISSION AGENTS. THEREFORE, FOR THE ASSESSMENT YEAR 2006 - 07 THE CIT (APPEAL) HAD HELD THAT THERE WAS NO NECESSITY FOR ENGAGING THE COMMISSION AGENTS AND ACCOR DINGLY, THE COMMISSION PAYMENT WAS NOT HELD TO BE ALLOWABLE AS BUSINESS EXPENDITURE U/S 37 OF THE I.T. ACT. 6.5 IN THE PRESENT CASE, IT IS OBSERVED THAT THE FACTS ARE VERY MUCH SIMILAR TO THAT OF THE CASE FOR ASSESSMENT YEAR 2006 - 07. FOR THE YEAR UNDER CONSIDERATION, ASSESSEE HAS PAID COMMISSION OF RS.8,26,79,634/ - TO M/S MITSUI & CO. LTD., JAPAN AND RS.54,90,159/ - TO M/S OMEGA PVT. LTD., KARACHI, PAKISTAN. THE BALANCE AMOUNT OF THE CLAIM REPRESENTS SERVICE TAX. DURING THE COURSE OF APPEAL PROCEEDINGS, T HE ASSESSEE HAD FURNISHED COPY OF AGREEMENT DATED 26.07.2007 BETWEEN SESA GOA LTD. AND OMEGA PVT. LTD. AND A COPY OF AN ADDENDUM AGREEMENT BETWEEN SESA GOA LTD. AND MITSUI JAPAN. THE ASSESSEE HAS ALSO RELIED ON EXTRACTS OF E - MAILS EXCHANGE BETWEEN THE APPE LLANT AND THE SALES AGENTS TO ITA NO. 72&85/PNJ/2012 34 SUBSTANTIATE THE NATURE OF SERVICES RENDERED BY THE SALES AGENTS. HOWEVER, IT IS IMPORTANT TO NOTE THAT THE CLAIM OF PAYMENT OF COMMISSION TO THE EXTENT OF RS.9.88 CRORES CANNOT BE JUSTIFIED MERELY BY RELYING ON COPIES OF AGRE EMENTS OR E - MAIL EXTRACTS. IT IS NOT DISPUTED THAT M/S MITSUI & CO. OR M/S OMEGA PVT. LTD. ARE KNOWN ENTITIES AS FAR AS THE ASSESSE E IS CONCERNED. IT IS POSSIBLE THAT THE ASSESSEE MAY HAVE SOME KIND OF BUSINESS RELATIONSHIP WITH THE ABOVE TWO COMPANIES. IT IS ALSO POSSIBLE THAT THERE MAY BE SOME CORRESPONDENCE WITH THE TWO COMPANIES WITH REGARD TO SALES OF IRON ORE ABROAD. BUT THIS SHALL NOT BE SUFFICIENT JUSTIFICATION TO PROVE THAT THE COMPANIES ABROAD HAVE RENDERED NECESSARY SERVICES FOR EFFECTING SALES S O AS TO JUSTIFY THE CLAIM OF COMMISSION. I T IS IMPORTANT TO OBSERVE THAT ALTHOUGH THE AGREEMENT BETWEEN THE ASSESSEE AND OMEGA PVT. LTD. IS DATED 26.7.2007, NO COMMISSION WAS PAID TO OMEGA LTD. DURING THE F.Y. 2007 - 08 WHICH IMPLIES THAT NO SERVICES WERE RE NDERED DURING THAT YEAR, NOTWITHSTANDING THE AGREEMENT. THIS DEMONSTRATES THAT ENTERING AN AGREEMENT DOES NOT NECESSARILY IMPLY THAT SERVICES ARE RENDERED. SIMILARLY, THE ASSESSEE HAS NOT BEEN ABLE TO COUNTER THE OBSERVATIONS MADE BY THE CIT(APPEAL) IN RES PECT OF COMMISSION PAYMENT TO M/S MITSUI & CO. FOR THE ASSESSMENT YEAR 2006 - 07. IT IS ESTABLISHED IN LAW THAT MERE EXISTENCE OF AN AGREEMENT FOR PAYMENT OF COMMISSION SHALL NOT JUSTIFY THE CLAIM OF DEDUCTION U/S 37 OF THE I.T. ACT. IN THIS REGARD, IT IS RE LEVANT TO NOTE THE FOLLOWING OBSERVATIONS OF THE SUPREME COURT IN THE CASE OF LAXMINARAYAN MADANLAL VS CIT (1972) 86 ITR 439 (SC). THE QUESTION WHETHER AN AMOUNT CLAIMED AS AN EXPENDITURE WAS LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS HAS TO BE DECIDED ON THE FACTS AND IN THE LIGHT OF THE CIRCUMSTANCES IN EACH CASE. THE MERE EXISTENCE OF AN AGREEMENT BETWEEN THE ASSESSEE AND ITS SELLING AGENTS OR PAYMENT OF CERTAIN AMOUNTS AS COMMISSION, ASSUMING THERE WAS SUCH PAYMENT, DO ES NOT BIND THE ITO TO HOLD THAT PAYMENT WAS MADE EXCLUSIVELY AND WHOLLY FOR THE PURPOSE OF THE ASSESSEES BUSINESS. ALTHOUGH THERE ITA NO. 72&85/PNJ/2012 35 MIGHT BE SUCH AN AGREEMENT IN EXISTENCE AND THE PAYMENTS MIGHT HAVE BEEN MADE, IT IS STILL OPEN TO THE ITO TO CONSIDER THE R ELEVANT FACTORS AND DETERMINE FOR HIMSELF WHETHER COMMISSION SAID TO HAVE BEEN PAID TO THE SELLING AGENTS OR ANY PART THEREOF IS PROPERLY DEDUCTIBLE U/S 37 OF THE IT ACT. 6.6 IN THE PRESENT CASE, IT IS SIGNIFICANT TO NOTE THAT ASSESSEE IS AN ESTABLISHE D IRON ORE EXPORTER AND HAS BEEN EXPORTING IRON ORE TO THE SAME COUNTRIES YEAR AFTER YEAR FOR SUBSTANTIALLY LONG TIME. IT IS ALSO OBSERVED THAT THE ASSESSEE HAS BEEN TRANSACTING WITH KNOWN BUSINESS CONCERNS AND THEREFORE, THERE WAS NO REAL NECESSITY FOR AN AGENT TO RENDER ANY SERVICE FOR PROMOTING SALES WITH SUCH CONCERNS WITH WHOM THE ASSESSEE HAS BEEN TRANSACTING FOR LONG. AS FAR AS MITUSI & CO., JAPAN, IS CONCERNED, IT IS PERTINENT TO NOTE THAT ASSESSEE HAS BEEN EXPORTING IRON TO THIS CONCERN FOR SUBSTAN TIALLY LONG TIME, WHICH SHOULD NORMALLY NOT REQUIRE ANY SALES PROMOTION. CONSIDERING THE FACTS OF THE CASE AS DISCUSSED ABOVE, THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE THE CLAIM FOR PAYMENT OF COMMISSION TO NON - RESIDENT AGENTS BY ADDUCING SPECIFIC AN D TANGIBLE EVIDENCE TO DEMONSTRATE THAT SERVICES WERE RENDERED BY THE SALES AGENTS TO JUSTIFY COMMISSION PAYMENT AS CLAIMED BY THE ASSESSEE. THEREFORE, IN VIEW OF THE ABOVE, IT IS HELD THAT THE COMMISSION PAYMENT OF RS.9,88,29,729/ - WHICH IS CLAIMED TO HAV E BEEN PAID TO NON - RESIDENT AGENTS CANNOT BE ALLOWED AS BUSINESS EXPENDITURE U/S 37 OF THE I.T. ACT, AND THEREFORE, THE DISALLOWANCE OF RS.9,88,29,729/ - MADE BY THE ASSESSING OFFICER IS ACCORDINGLY CONFIRMED. THE GROUND OF APPEAL IS ACCORDINGLY, DISMISSED . 2 0 . THE LEARNED. A.R. VEHEMENTLY CONTENDED THAT THE COMMISSIONS TO THE NON - RESIDENTS ARE BEING PAID FROM YEAR TO YEAR. IN THIS REGARD, HE HAS DRAWN OUR ATTENTION TOWARDS PAGE 413 OF THE PAPER BOOK, WHICH CONTAINS THE DETAILS OF THE COMMISSION PAID TO VARIOUS PARTIES DURING THE YEAR AS WELL AS IN THE EARLIER YEARS AS FOLLOWS: - ITA NO. 72&85/PNJ/2012 36 DETAILS OF COMMISSION PAID TO NON - RESIDENT SALES AGENTS ABROAD NAME & ADDRESS OF AGENT AY 2004 - 05 AMOUNT (RS.) AY 2005 - 06 AY 2006 - 07 AY 2007 - 08 AY 2008 - 09 AY 2009 - 10 MIT SUI & CO. LTD. HEAD OFFICE, CPO BOX 822, 100 - 91 APAN 63920828 99823321 15219821 2 182307027 12792282 6 8267953 4 ARIMPEKS DIS TICARET VE MUM LTD., GIZ PLAZA, HARMAN SOKAK, NO.5 KAT: 10, DAIRE : 19 34394 LEVENT ISTANBUL TURKEY 2178584 6686324 6125101 38867 60 NISSHO IWAI CORPORATION 19 TH FLOOR, TRADEPIA ODAIBA, 3 - 1, DAIBA 2 CHOME, MINATO KU, TOKYO, JAPAN 25374360 5268486 AHMED JAFFER & CO. 113A, SINDHI MUSLIM CO - OP HOUSING SOCIETY, PO BOX 7482, MAIN SHAHRAH E - FAISAL, KARACHI 7400, PAKISTAN 21431717 28898391 27186975 32209631 27999688 OMEGA PRIVATE LIMITED, 68B, SINDHI MUSLIM CO - OPERATIVE HOUSING 5490159 ITA NO. 72&85/PNJ/2012 37 SOCIETY, KARACHI, 74000, PAKISTAN OTHERS DIFFERENCE IN RATE OF EXCHANGE ADD (LESS) PREVIOUS YEARS ADJUSTMENTS SERVICE TAX 1107269 0 5 2639868 136168783 18607151 1 220641759 0 15980927 4 0 - 1764641 19160584 8816969 3 0 - 257580 1091761 6 TOTAL 11336677 3 136168783 18607151 1 220641759 17720521 7 9882972 9 2 1. IT WAS POINTED OUT THAT DURING THE YEAR; COMMISSION HAS BEEN PAID ONLY T O TWO PARTIES AS IS CLEAR FROM THE SAID CHART I.E. MITSUI & CO. LTD., JAPAN AND OMEGA PRIVATE LIMITED, KARACHI. IN THE EARLIER YEAR, COMMISSION WAS PAID TO AHMED JAFFER & CO. IN KARACHI. THIS PARTY WAS RECONSTITUTED AND BECAME PRIVATE LIMITED COMPANY AT THE SAME PLACE AND THE SAME SERVICES ARE BEING RENDERED BY OMEGA PRIVATE LTD. NONE OF THE PARTIES IS RELATED TO THE ASSESSEE. THE ASSESSEE HAS ENTERED INTO AN AGREEMENT WITH BOTH THE PARTIES FOR WHICH ATTENTION WAS DRAWN TO PAGE 414 AND 421 OF THE PAPER BOOK. 21.1 THE AO DISALLOWED THE SAID COMMISSION U/S 40(A)(I) FOR THE FIRST TIME IN A.Y. 2005 - 06, ON THE PRETEXT THAT NO TAX HAS BEEN DEDUCTED AT SOURCE ON SUCH COMMISSION PAID. THOUGH CIT (A) CONFIRMED THE DISALLOWANCE, BUT THE ISSUE WAS DECIDED IN FAV OR OF THE ASSESSEE BY THE HONBLE I.T.A.T., PANAJI IN ITA NO. 113/PNJ/2010 VIDE ORDER DT. 10/03/2011. IT IS UNDERSTOOD THAT DEPARTMENT HAS NOT FILED APPEAL AGAINST THE SAID ORDER IN THE HIGH COURT OF BOMBAY AT GOA. THE CIT (A) IN HIS ORDER FOR A.Y. 2005 - 06 , HAD ALSO RAISED A POINT REGARDING NECESSITY OF THE PAYMENT OF SUCH COMMISSION. THE I.T.A.T. DID REFUTE TO MAKE ANY COMMENT ON THIS ISSUE SINCE IT WAS NOT A GROUND RAISED BY AO FOR DISALLOWANCE. THE SAME DISALLOWANCE IS GETTING REPEATED IN THE AYS ITA NO. 72&85/PNJ/2012 38 2006 - 07 , 2007 - 08, 2008 - 09 & 2009 - 10. HOWEVER, THE QUESTION OF GENUINENESS OF COMMISSION HAS BEEN RAISED IN ALL THESE YEARS. IN AY 2006 - 07, THE SAID DISALLOWANCE WAS CONFIRMED BY CIT (A) AND THE MATTER IS LYING UNDER APPEAL BEFORE THE HONBLE I.T.A.T. WHICH HAS AL READY BEEN HEARD. FOR A.Y. 2007 - 08, THE FIRST APPELLATE ORDER IS STILL PENDING FOR ADJUDICATION TILL DATE. FOR A.Y. 2008 - 09, IN VIEW OF CERTAIN TP ADDITIONS, THE DRAFT ORDER WAS REFERRED TO DRP WHICH REFUSED TO INTERFERE WITH THE AOS ORDER AND HENCE THIS MATTER IS ALSO BEFORE THE TRIBUNAL BUT ADJOURNED ON THE REQUEST OF DEPARTMENT. 21.2 THE LEARNED A.R SUBMITTED THAT SO FAR THE ISSUE REGARDING DISALLOWANCE OF COMMISSION U/S 40(A)(I) DUE TO NON - DEDUCTION OF TAX AT SOURCE IS CONCERNED, THE SAME HAS BEEN DECIDED IN FAVOR OF THE ASSESSEE AND THUS THERE REMAINS NO DISPUTE REGARDING THE SAME. IT WAS FURTHER ARGUED THAT IT MUST BE APPRECIATED THAT THE SOMETIMES COMMISSION IS PAID TO THE AGENT ONLY IN THE FIRST YEAR FOR FINDING A BUYER. HOWEVER, MOSTLY IT IS PA ID REGULARLY YEAR AFTER YEAR FOR SMOOTH EXECUTION OF THE CONTRACTS WITH THE SAID BUYERS. IT ALWAYS DEPENDS UPON THE TERMS AND CONDITIONS OF THE CONTRACT WITH AGENT WHICH MENTION ABOUT THE SERVICE TO BE RENDERED BY THE AGENTS. THE AGENT MAY/MAY NOT ASSIST I N SETTLING THE TERMS OF THE TRANSACTIONS BECAUSE THAT IS THE SUBJECT MATTER BETWEEN THE SELLER AND THE BUYER. BUT THE AGENTS ARE ENTITLED FOR COMMISSION FOR SERVICES RENDERED BY THEM FOR SMOOTH AND PERFECT EXECUTION OF CONTRACTS WITHOUT HINDRANCES. THE SER VICES OF THE SALE AGENTS ARE UTILIZED, BESIDES GETTING THE SALES CONTRACTS, ALSO IN SETTLING THE PROBLEMS ARISING TO THE BUYERS. THESE AGENTS ARRANGE MEETINGS, PREPARE PRESENTATIONS, COMMUNICATE SHIPPING DOCUMENTS, NOMINATION OF VESSEL FOR EXPORT BY THE BU YERS, DEALING WITH THE DIFFICULTIES ARISING ON SUCH NOMINATIONS, ASSIST IN FIXING SHIPMENT SCHEDULES, OPENING LETTER OF CREDIT BY THE BUYERS AND ANY AMENDMENTS WHEREON, VARIOUS ISSUES CROPPING IN CONNECTION WITH LETTER OF CREDIT, FOLLOW - UP WITH BUYERS FOR PAYMENTS AND SETTLEMENT OF INVOICES, PROMPT SETTLEMENT OF DEMURRAGE AND DISPATCH MATTERS. OUR ATTENTION WAS DRAWN TO PAGE NO.131 OF (INITIAL) PB VOL. I, WHEREIN VIDE PARA NOS. 2.3 & 2.4 SERVICES RENDERED BY THE COMMISSION AGENTS ARE MENTIONED. THE AGENTS E NSURE THAT THE GOODS WOULD BE SUPPLIED BY THE BUYERS ON SETTLED TERMS FOR WHICH PAYMENT WOULD BE RELEASED BY THE BUYER AS SETTLED BETWEEN THE TWO. THE AGENTS CANNOT BE LEFT OUT OF THE TRANSACTIONS. SALE OF GOODS IS NOT THE ONLY IMPORTANT ASPECT IN ITA NO. 72&85/PNJ/2012 39 INTERNAT IONAL BUSINESS, THAT TOO OF IRON ORE BUSINESS, VARIOUS BUSINESS AUXILIARY SERVICES LIKE SHIPPING DISPATCHING, DOCUMENTATION, LETTER OF CREDIT ARE OTHER IMPORTANT ASPECTS TO BE TAKEN CARE OF FOR PROPER DISPATCH OF GOODS AND RECEIPT OF MONEY. IF THE GOODS AR E NOT SHIPPED IN TIME, THE ASSESSEE MAY HAVE TO BEAR EXTRA COST IN FORM OF DEMURRAGE, COMPENSATION, ETC. IF THE LETTER OF CREDIT IS NOT OPENED IN TIME IT WILL DELAY THE DISPATCH AND THE ENTIRE PROCESS. EITHER THE ASSESSEE HAS TO EMPLOY STAFF OVERSEAS WHICH CAN TAKE CARE OF SUCH THINGS BUT IT WILL INCREASE FIXED COST TO THE ASSESSEE, OR THE ASSESSEE CAN GET SERVICES OF THESE AGENTS WHO HAVE BEEN RENDERING SERVICES TO IT FOR YEARS AND KNOW THE INTRICACIES OF BUSINESS. IT IS THE PREROGATIVE OF THE BUSINESSMAN TO DECIDE AS TO WHETHER COMMISSION HAS TO BE PAID OR NOT AS PER HIS BUSINESS REQUIREMENTS. THE COMMERCIAL EXPEDIENCY SHOULD BE ADJUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN. THE AO CANNOT STEP INTO THE SHOES OF THE BUSINESSMAN TO DECIDE COMMERCIAL EXP EDIENCY. THE CIT (A) HAS ACCEPTED THAT THERE IS SOME BUSINESS RELATIONSHIP AND CORRESPONDENCE BETWEEN THE ASSESSEE AND THE AGENTS BUT HELD THAT IS NOT SUFFICIENT JUSTIFICATION TO HOLD SERVICES WERE RENDERED BY AGENTS FOR COMMISSION TO THE EXTENT OF RS. 9.8 8 CRORES. THIS SHOWS THAT THE CIT (A) AGREED THAT EVIDENCES PRODUCED SHOW THE EXISTENCE OF BUSINESS RELATIONSHIP WHICH COULD BE NONE OTHER THAN AGENT AS IS CLEAR FROM THE AGREEMENT WHEREIN SERVICES RENDERED ARE MENTIONED. EMAILS SHOW THAT THE SAID SERVICES WERE ACTUALLY RENDERED. WHAT MORE JUSTIFICATION WAS REQUIRED HAS NOT BEEN BROUGHT ON RECORD BY THE AUTHORITIES. THE INTERNATIONAL BUSINESS IS BEING DONE THROUGH TELEPHONES, INTERNET AND EMAILS AND THEREFORE ONLY SUCH TYPE OF EVIDENCES CAN BE PRODUCED TO P ROVE THE PHYSICAL RENDERING OF SERVICES BY THE AGENTS. THE CIT (A) HELD THAT MERE EXISTENCE OF AN AGREEMENT FOR PAYMENT OF COMMISSION DOES NOT JUSTIFY THE EXPENDITURE. THE ASSESSEE AGREES TO IT BUT THE AGREEMENTS ARE SUPPORTING EVIDENCES TO SHOW THE NATURE OF SERVICES RENDERED BY THE AGENT. THESE AGREEMENTS READ WITH OTHER SUPPORTING EVIDENCES LIKE EMAILS, ETC. PROVE THE RENDERING OF SERVICES BY THE AGENTS AND ARE THEREFORE AN IMPORTANT PIECE OF EVIDENCE. RELIANCE WAS PLACE D BY THE LD. AR ON THE JUDG E MENT O F CIT VS SHRIRAM PISTONS & RINGS LTD. [2012 - TIOL - 187 - HC - DEL - IT] WHEREIN IT HAS BEEN HELD THAT WHEN THE ASSESSEE PAYS UP COMMISSION BASED ON AGREEMENTS, ANY DISALLOWANCE CANNOT BE MADE OF THE SAME BY DISPUTING THAT THE AGENTS DID NOT RENDER ANY SERVICE. THE ASSESSEE - COMPANY HAS BEEN ITA NO. 72&85/PNJ/2012 40 PAYING COMMISSION TO MITSUI & CO. IN THE PRECEDING YEARS WHICH HAS BEEN ALLOWED TO IT EVEN PRIOR TO AY 2006 - 07. THE COMMISSION PAID TO MITSUI & CO. LTD. WAS CONSIDERED BY THE TRANSFER PRICING OFFICER IN AY 2004 - 05 AND 2005 - 06 AND IT WAS HELD BY HIM THAT THE TRANSACTIONS WERE AT ARMS LENGTH PRICES. PHOTOCOPIES OF THE TPO ORDERS ARE ENCLOSED AT PAGE NOS. 424 - 427 OF (INITIAL) PB VOL. II. THE SAID MITSUI & CO. LTD. WAS AN AE (ASSOCIATED ENTERPRISE) OF THE ASSESSEE TILL AY 2008 - 09 AND TILL THEN, THE TRANSACTIONS WITH THE AE INCLUDING PAYMENT OF COMMISSION WERE SUBJECTED TO TPOS AUDIT AND NO ADVERSE INFERENCE WAS DRAWN BY TPO IN VIEW OF ARMS LENGTH PRINCIPLE FOLLOWED FOR MAKING SUCH PAYMENT. A PHOTOCOPY OF THE ADDENDUM AGREEMENT ENTE RED WITH MITSUI & CO. IS PLACED AT PAGE NOS. 421 - 423 OF (INITIAL) PB VOL. II. FURTHER, MITSUI & CO. LTD RENDERED SERVICES TO THE ASSESSEE DURING THE YEAR AS CAN BE SEEN FROM THE PHOTOCOPIES OF EMAILS EXCHANGED BETWEEN BUYER AND MITSUI AND SELLER AND MITSU I PLACED AT PAGE NOS. 135 - 156 OF (INITIAL) PB VOL. I. THESE EVIDENCES CLEARLY SHOW THAT THE SAID AGENT HAS RENDERED SERVICES TO THE ASSESSEE AND THEREFORE COMMISSION PAID TO IT SHOULD BE ALLOWED. A COPY OF AGENCY CONTRACT ENTERED INTO WITH M/S OMEGA PRIVAT E LTD IS PLACED ON RECORD AT PAGE NOS. 414 - 420 OF (INITIAL) PB VOL. II. THOUGH THE AGREEMENT WAS ENTERED INTO ON 26/07/2007, BUT SINCE NO SERVICES WERE RENDERED BY THE SAID PARTY AS PER CONTRACT, NO COMMISSION WAS PAID TO IT IN THE PRECEDING YEAR. HOWEVER, IN THE YEAR UNDER CONSIDERATION, SERVICES WERE RENDERED BY IT, AND THEREFORE THE COMMISSION WAS PAID. THE SAID AMOUNT WAS PAID TO THE AGENT FOR SMOOTH EXECUTION OF CONTRACT WITH PAK ISTAN STEEL. THE SAID PARTY IS NOT RELATED TO THE ASSESSEE IN ANY MANNER. NONE OF THE RECIPIENTS OF COMMISSION WAS A RELATED PARTY BUT INTERNATIONALLY KNOW N INDEPENDENT AND REPUTED COMPANIES. ALL PAYMENTS WERE MADE THROUGH PROPER BANKING CHANNELS NOTIFIED TO RBI AS WELL. THE ASSESSEE COMPANY HAD A TURNOVER (IRON ORE ONLY) OF RS . 4,586 CRORES DURING THE FINANCIAL YEAR 2008 - 09 (RELEVANT TO AY 2009 - 10). THE CLAIM OF COMMISSION WAS RS. 9.88 CRORE, WHICH WORKS OUT TO 0.215% OF THE TURNOVER WHICH IS REASONABLE. THE ASSESSEE HAD DECLARED AN INCOME OF RS. 2,007 CRORES AND PAID TAX OF RS . 682 CRORES AT THE TIME OF FILING THE RETURN. IN THE FACTS AND CIRCUMSTANCES, THE LOWER AUTHORITIES ARE NOT JUSTIFIED IN CONCLUDING THAT THE COMMISSION OF RS. 9.88 CR (WHICH WOULD HAVE A TAX IMPACT OF RS. 3.35 CR (APPROX.) OR 0.5% OF THE TAX PAID BY THE A SSESSEE IS NOT GENUINE. ITA NO. 72&85/PNJ/2012 41 22. IT WAS ARGUED THAT THE FACTS INVOLVED IN THIS YEAR ARE DIFFERENT FROM THE ASSESSMENT YEAR 2006 - 07. THE ASSESSEE HAS NOT SUBMITTED THE VARIOUS EVIDENCES WHILE DURING THIS YEAR THE ASSESSEE HAS SUBMITTED BRIEF EVIDENCES WHI CH ARE AVAILABLE AT PAGE 135 TO 156 OF THE PAPER BOOK. THE VARIOUS E - MAILS CONFIRMED THE SERVICES BEING RENDERED BY THE AGENT DATE - WISE, SUMMARY OF THE E - MAILS WITH THE AGENTS ARE GIVEN IN THE FOLLOWING TABLE AVAILABLE AT PAGE 135 OF THE PAPER BOOK. PAGE NO. EMAIL NO. DATE CONTENTS 1 1 23.12.08 THE AGENT CONFIRMING VESSEL NOMINATION FROM THE BUYER 1 2 23.12.08 OUR ACCEPTANCE TO THE ABOVE NOMINATION 1 3 24.12.08 OUR REQUEST TO THE AGENT FOR OPENING OF LC 2 - 6 4 - 11 09.12.08 - 24.12.08 REQUEST FOR LC AMEN DMENTS AND LC ACCEPTANCES 7 12 12.11.08 THE AGENT CONFIRMING VESSEL NOMINATION FROM THE BUYER 7 13 12.11.08 THE AGENT ADVISING CHANGES IN THE SALE CONTRACT WITH THE BUYER 8 14 11.11.08 OUR ACCEPTANCE TO THE ABOVE. 8 15 11.11.08 THE AGENT CONFIRMING CH ANGES IN THE CONTRACT TO BE CONVEYED TO THE BUYER 10 16 20.11.08 WE ARE SUGGESTING AMENDMENTS TO THE DRAFT LC 12 17 21.11.08 THE AGENT CONFIRMING/SUGGESTING AMENDMENTS TO THE LC 13 18 17.11.08 THE AGENT CONFIRMS VESSEL NOMINATION FROM THE BUYER 13 - 14 1 9 17.11.08 OUR ACCEPTANCE TO THE ABOVE. 15 21 17.11.08 THE AGENT FORWARDING DRAFT LC 15 - 16 20 19.11.08 OUR SUGGESTION TOWARDS THE AMENDMENTS TO THE DRAFT LC 17 22 24.02.09 THE AGENT FORWARDING DRAFT REVISED FINAL ADJUSTMENT SHEET ITA NO. 72&85/PNJ/2012 42 18 23 24.01.09 WE ARE SUGGESTING CORRECTIONS TO FINAL ADJUSTMENT SHEETS AND REQUESTING THE AGENT TO FORWARD THE SAME TO THE BUYER 18 24 27.01.09 OUR REQUEST TO THE AGENT TO CORRESPOND WITH THE BUYER 18 25 03.02.09 WE ARE ASKING THE AGENT TO CONVEY OUR MESSAGE TO THE BUYER 20 - 21 26 13.03.09 THE AGENT CONVEYING MESSAGE FROM THE BUYER TO US 23 . IT WAS CONTENDED THAT IT IS ON THE PRINCIPAL AS TO HOW MANY OR HOW MUCH SERVICES HE MAY REQUIRE FROM AN AGENT, THE PURPOSE OF APPOINTING AN AGENT IS TO BE INTRODUCED TO A PARTY. ONCE THE AGENT HAS INTRODUCED A PARTY, HE MAY CONTINUE TO GET THE COMMISSION AS PER THE TERMS AND CONDITIONS AGREED BETWEEN THE AGENT AND THE PRINCIPAL. IN THE INSTANT CASE, ALL PAYMENTS WERE DULY APPROVED BY THE RBI AND WERE SENT THROUGH BANKING CHANNEL. SUR VEY HAS TAKEN PLACE IN THE CASE OF THE ASSESSEE, BUT NO CONTRARY EVIDENCE WAS FOUND WHICH MAY PROVE THAT THESE PARTIES WERE NOT THE AGENTS OF THE ASSESSEE. THE DISALLOWANCE WAS MADE MERELY ON SURMISES AND CONJECTURES. IT WAS POINTED OUT THAT THE MAIN CON DITION FOR DEDUCTION OF THE EXPENDITURE U/S 37 OF THE ACT IS THAT THE EXPENDITURE SHOULD BE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AND THAT THERE IS NO CONDITION TO THE FACT THAT IT NEED TO HAVE ALSO BEEN INCURRED NECESSARILY. IT IS THE ASSESSEE TO DECIDE WHETHER ANY EXPENDITURE SHOULD BE INCURRED OR NOT. THE ASSESSING OFFICER CANNOT ENTER INTO THE SHOES OF THE ASSESSEE AND DIRECT THE ASSESSEE AS TO WHAT EXPENDITURE THE ASSESSEE SHOULD INCUR. THUS, IT WAS CONTENDED THAT THE ASS ESSEE HAS DULY PROVED THE GENUINENESS OF THE EXPENDITURE INCURRED AND THE DEDUCTION MUST BE ALLOWED. THE LEARNED D.R. ON THE OTHER HAND CONTENDED THAT MITSUI & COMPANY LTD. IS ORIGINALLY A PURCHASER FROM ASSESSEE. THE CLAIM OF THE ASSESSEE THAT DURING TH E CURRENT ASSESSMENT YEAR, MITSUI & COMPANY LTD. DID NOT PURCHASE ANY STOCK FROM THE ASSESSEE BUT ACTED AS AN AGENT IS NOT SUPPORTED BY ANY EVIDENCE. THE ASSESSEE HAS NOT PROVED ANY NEXUS BETWEEN THE AGENTS AND THE ASSESSEE WITH REFERENCE TO THE ACTUAL SA LE OR EXPORT. THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE TO SUBSTANTIATE THE PAYMENT OF THE COMMISSION THAT THE ITA NO. 72&85/PNJ/2012 43 SERVICES WERE RENDERED BY THE SALES AGENT. MERE AGREEMENT BETWEEN THE ASSESSEE AND THE FOREIGN COMPANY IS NOT SUFFICIENT TO JUSTIFY THE PAYM ENT OF THE COMMISSION. RELIANCE WAS PLACED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF LAXMINARAYAN MADANLAL VS. CIT 86 ITR 439 (SUPREME COURT). 24. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS ALONG WITH THE ORDER OF THE TAX AUTHORITI ES BELOW AND ALSO THE MATERIAL RELIED UPON BY BOTH THE PARTIES. THE ONLY ISSUE BEFORE US IS WHETHER THE COMMISSION PAID BY THE ASSESSEE HAS BEEN INCURRED BY THE ASSESSEE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. NOW, COMING TO THE RELEVANT PROVISION IN WHICH THE ASSESSEE CLAIMED DEDUCTION IS SECTION 37(1) OF THE INCOME TAX ACT, 1961. SECTION 37(1) READS AS UNDER: - ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE O F CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROF ESSION . EXPLANATION: FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR P ROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE FROM THE AFORESAID SECTION, IT IS APPARENTLY CLEAR THAT EXPENDITURE TO BE ELIGIBLE FOR DEDUCTION U/S 37(1) MUST FULFILL THE FOLLOWING CONDITIONS: - A ) THE EXPENDITUR E SHOULD NOT BE COVERED BY THE PROVISION OF SECTION 30 TO 36 AS THESE SECTIONS PROVIDE ITS SPECIFIC TREATMENT TO EXPENDITURE LAID DOWN IN THOSE SECTIONS. ITA NO. 72&85/PNJ/2012 44 B ) EXPENDITURE SHOULD NOT BE CAPITAL IN NATURE. C ) IT IS NOT TO BE PERSONAL EXPENDITURE OF THE ASSESSEE. D ) IT SHOULD BE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION. E ) IT SHOULD BE INCURRED DURING THE PREVIOUS YEAR. F ) IT SHOULD NOT BE INCURRED FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. 24.1 IN THE CASE OF T HE ASSESSEE, THERE IS NO DOUBT THAT THE COMMISSION PAID BY THE ASSESSEE IS NOT COVERED BY THE PROVISION OF SECTION 30 TO 36. THERE IS ALSO NO DISPUTE THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IS OF REVENUE NATURE AND NOT OF CAPITAL IN NATURE. THERE IS ALSO NO DISPUTE ABOUT THE FACT THAT THE EXPENDITURE HAS BEEN INCURRED DURING THE RESPECTIVE PREVIOUS YEARS. THERE IS ALSO NO DISPUTE THAT THIS EXPENDITURE HAS NOT BEEN INCURRED FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. THE EXPENDI TURE SO INCURRED BY THE ASSESSEE COMPANY CANNOT BE REGARDED TO BE THE PERSONAL EXPENDITURE OF THE ASSESSEE. THERE IS NO EVIDENCE ON RECORD THAT THESE EXPENSES WERE INCURRED TO MEET OUT THE PERSONAL NEEDS OF THE ASSESSEE COMPANY. THE COMPANY IS ALWAYS INCO RPORATED FOR THE PURPOSE OF CARRYING ON THE BUSINESS AS STIPULATED UNDER ITS OBJECT CLAUSE LAID DOWN IN THE MEMORANDUM OF ASSOCIATION. THE COMPANY SO INCORPORATED IS NOT HUMAN BEING, WHICH MAY HAVE PERSONAL NEEDS. THE COMPANY IS AN ARTIFICIAL PERSON INCOR PORATED UNDER THE LEGISLATURE BY HAVING A SEPARATE ENTITY. ALTHOUGH BY HAVING A SEPARATE ENTITY; IT MAY WORK AS A HUMAN BEING IN ITS OWN NAME BUT IT DOES NOT REQUIRE ANY EXPENDITURE TO BE INCURRED, AS A HUMAN BEING REQUIRES FOR MEETING OUT ITS PERSONAL NEE DS. THEREFORE THE EXPENDITURE INCURRED BY THE ASSESSEE COMPANY CANNOT BE REGARDED TO BE THE PERSONAL EXPENDITURE OF THE ASSESSEE. THE PERSONAL EXPENDITURE OF THE MANAGEMENT OR THE HUMAN BEINGS WHO ARE CONTROLLING THE COMPANY CANNOT BE REGARDED TO BE THE PE RSONAL EXPENSES OF THE ASSESSEE COMPANY. IT MAY BE REMUNERATION OR PERQUISITE IN THE HANDS OF THE MANAGEMENT OR THE HUMAN BEINGS BUT IT CANNOT REGARD TO BE THE PERSONAL EXPENSES OF AN INCORPORATED BODY. 25. THE ONLY DISPUTE IN THIS CASE RELATES TO T HE FACT WHETHER THE COMMISSION PAID CAN BE REGARDED TO HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE ITA NO. 72&85/PNJ/2012 45 PURPOSES OF THE BUSINESS OR PROFESSION OF THE ASSESSEE COMPANY. BEFORE 1939, THE PHRASE USED WAS EXPENDITURE INCURRED SOLELY FOR THE PURPOSE OF EARNIN G PROFIT. THE OMNIBUS PROVISION OF SECTION 37 AS AMENDED BY 1939 ACT ALLOWS OF EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH BUSINESS/PROFESSION AS LONG AS NO PERSONAL/CAPITAL ELEMENT IS INVOLVED. THE SCOPE OF THE TERM FOR THE PU RPOSE OF BUSINESS IS SURELY WIDER THAN THE TERM FOR THE PURPOSE OF EARNING PROFIT. IN OUR OPINION THE INCOME TAX DEPARTMENT CANNOT PRESCRIBE WHAT EXPENDITURE AN ASSESSEE SHOULD INCUR AND UNDER WHAT CIRCUMSTANCES. EVERY BUSINESSMAN KNOWS HIS INTEREST BES T. THE ASSESSEE MAY NOT BE A PRUDENT MAN AND YET AN EXPENDITURE INCURRED VOLUNTARILY FOR THE PURPOSE OF THE BUSINESS WOULD BE ALLOWABLE U/S 37(1). THE HONBLE APEX COURT IN THE CASE OF EASTERN INVESTMENT LTD. VS. CIT, 20 ITR 14 (SC), LAID DOWN THE FOLLO WING PRINCIPLES FOR EVALUATION OF WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS: - (I) EVEN IF THE QUESTION MUST BE DECIDED ON THE FACTS OF EACH CASE, THE CONCLUDING DECISION WILL BE ONE OF LAW. (II) IT IS NOT NECESSARY THAT THE EXPENDITURE BE INCUR RED FOR EARNING PROFIT. (III) IT IS ENOUGH THAT THE MONEY WAS EXPENDED NOT OF NECESSITY AND WITH A VIEW TO DIRECTING AND IMMEDIATE BENEFIT TO THE TRADE, BUT VOLUNTARILY ON THE GROUND OF COMMERCIAL EXPEDIENCY, AND IN ORDER, INDIRECTLY, TO FACILITATE THE CA RRYING ON OF THE BUSINESS. (IV) NO HARD AND FAST RULE CAN BE LAID DOWN TO EXPLAIN WHAT THE WORD SOLELY IS MEANT FOR. THE EXPRESSION WHOLLY AND EXCLUSIVELY USED IN SECTION 37(1) DOES NOT MEAN NECESSARILY. ORDINARILY, IT IS FOR THE ASSESSEE TO DECID E WHETHER ANY EXPENDITURE SHOULD BE INCURRED IN THE COURSE OF ITS OR HIS BUSINESS. SUCH EXPENDITURE MAY BE INCURRED VOLUNTARILY AND WITHOUT ANY NECESSITY, AND IF IS INCURRED FOR PROMOTING THE BUSINESS AND TO EARN PROFITS, THE ASSESSEE CAN CLAIM DEDUCTION T HEREFORE UNDER SECTION 37(1) EVEN THOUGH THERE WAS NO COMPELLING NECESSITY TO INCUR SUCH EXPENDITURE. THE SUPREME COURT, IN THE CASE OF CIT VS MALAYALAM PLANTATION (1964) 53 ITR 140 (SC), HELD THAT IT IS ITA NO. 72&85/PNJ/2012 46 NOT ONLY EXPENDITURE WHICH DIRECTLY RESULTS IN BENEF IT OR ADVANTAGE TO THE ASSESSEES BUSINESS THAT IS ENTITLED TO DEDUCTION, BUT ALSO ANY EXPENDITURE WHICH IS INCURRED WITH A VIEW TO FACILITATING THE CARRYING ON OF THE BUSINESS. 26. WE DO AGREE WITH THE SUBMISSIONS OF THE LD. AR THAT IT IS NOT OPEN TO TH E DEPARTMENT TO PRESCRIBE WHAT EXPENDITURE THE ASSESSEE SHOULD INCUR AND IN WHAT CIRCUMSTANCES HE SHOULD INCUR THAT EXPENDITURE. EVERY BUSINESSMAN KNOWS HIS INTEREST BEST AS THIS HAS BEEN CLEARLY LAID DOWN BY THE HONBLE APEX COURT IN 91 ITR 544 IN THE CA SE OF CIT VS DHANRAJGIRI RAJA NARSINGHGIRI. NO DOUBT EVERY BUSINESSMAN IS THE BEST JUDGE OF HIS BUSINESS EXPEDIENCY BUT THE ASSESSING OFFICER IN OUR OPINION HAS THE RIGHT TO KNOW WHETHER THE EXPENDITURE HAS BEEN INCURRED FOR BUSINESS PURPOSES OR NOT OR WH ETHER IT HAS BEEN INCURRED FOR OTHER EXTRANEOUS CONSIDERATION. SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF JAIPUR ELECTRO PVT. LTD. VS CIT, 134 CTR 237 (RAJ). THE HONBLE BOMBAY HIGH COURT HAS ALSO TAKEN THE SIMILAR VIEW IN THE CASE OF RAMANAND SAGAR VS DCIT, 255 ITR 134 (BOM) IN WHICH IT WAS HELD THAT THE MERE FACT THAT THE PAYMENT HAS BEEN MADE UNDER A CONTRACT IS NOT CONCLUSIVE OF EXPENDITURE BEING LAID DOWN WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. ONCE DOUBT ARISE ABOUT THE BONAFIDE NATURE OF THE PAYMENT, IT IS NECESSARY TO LOOK INTO THE NECESSARY CIRCUMSTANCES SUCH AS RELATIONSHIP OF THE PAYEE TO THE ASSESSEE, THE GENERAL STANDARD OF SIMILAR EXPENDITURE IN COMPARABLE BUSINESS, THE TRUE WORTH OF THE SER VICES OR GOODS IN QUESTION AND SO FORTH. IT IS ALSO OPEN TO THE A.O. TO QUESTION THE REALITY OF THE EXPENDITURE I.E., THE TRUE NATURE OF THE PAYMENT, THE TRUE CONSIDERATION FOR IT AND SO FORTH. ONCE THE A.O. CONSIDERS THE PAYMENT AND THE PURPOSE TO BE BONA FIDE, IT IS NOT OPEN FOR HIM TO SUBSTITUTE HIS OWN JUDGMENT WHAT IS THE REASONABLE QUANTUM OF EXPENDITURE FOR THE ASSESSEE. THE A.O. CAN ONLY DECIDE WHETHER THE EXPENDITURE IS REAL, WHETHER IT RELATES TO THE BUSINESS AND IS WHOLLY SPENT FOR THAT PURPOSE. I N APPLYING THE TEST OF COMMERCIAL EXPEDIENCY, FOR DETERMINING WHETHER THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF THE BUSINESS THE REASONABLENESS OF THE EXPENDITURE HAS TO BE JUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND N OT THE REVENUE, AS HELD IN CIT VS WALCHAND AND CO. (P) LTD. (1967) 65 ITR 381 (SC). THE SIMILAR VIEW HAS BEEN TAKEN IN THE CASES OF J K WOOLLEN MANUFACTURERS VS CIT (1969) 72 ITR ITA NO. 72&85/PNJ/2012 47 612 (SC); ALUMINUM CORPORATION OF INDIA LTD. VS CIT (1972) 86 ITR 11 (SC) AND CIT VS PANIPAT WOOLLEN AND GENERAL MILLS CO. LTD. (1976) 103 ITR 66 (SC). CONSIDERING THE TRUE IMPORT OF THE EXPRESSION WHOLLY AND EXCLUSIVELY IT WAS OBSERVED BY THE APEX COURT IN SASSOON J DAVIT AND CO. PVT. LTD. VS CIT (1979) 118 ITR 261, THAT THE SAME DOES NOT MEAN NECESSARILY. ORDINARILY, IT IS FOR THE ASSESSEE TO DECIDE WHETHER ANY EXPENDITURE SHOULD BE INCURRED IN THE COURSE OF ITS BUSINESS. SUCH EXPENDITURE MAY BE INCURRED VOLUNTARILY AND WITHOUT ANY NECESSITY AND IF IT IS INCURRED FOR PROMOTING THE BUSINESS AND TO EARN PROFITS, THE ASSESSEE CAN CLAIM DEDUCTION UNDER THE RELEVANT PROVISION EVEN THOUGH THERE WAS NO COMPELLING NECESSITY TO INCUR SUCH EXPENDITURE. THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITED BY THE EXPENDITURE SHO ULD NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF DEDUCTION U/S 37 OF THE ACT IF IT OTHERWISE SATISFIES THE TESTS LAID DOWN BY LAW. THE BILL READ ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY, NECESSARILY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED. IN VIEW OF THE PROTESTS RAISED BY THE TAXPAYERS THE WORD NECESSARILY CAME TO BE DROPPED. IT WILL BE ALSO NOTICED THAT IN CIT VS CHANDULAL KESHAVLAL AND CO. (1960) 38 ITR 601, 610, IT WAS OBSERVED AS FOLLOWS : - ANOTHER FACT THAT EMERGES FROM THESE CASES IS THAT IF THE EXPENSE IS INCURRED FOR FOSTERING THE BUSINESS OF ANOTHER ONLY OR WAS MADE BY WAY OF DISTRIBUTION OF PROFITS OR WAS WHOLLY GRATUITOUS OR FOR SOME IMPROPER OR OBLIQUE PURPOSE OUTSIDE THE COURSE OF BUSINESS THEN THE EXPENSE IS NOT DEDUCTIBLE. IN DECIDING WHETHER A PAYMENT OF MONEY IS A DEDUCTIBLE EXPENDITURE ONE HAS TO TAKE INTO CONSIDERATION QUESTIONS OF COMMERCIAL EXPEDIENCY AND THE PRINCIPLES OF ORDINARY COMMERCIAL TRADING. IF THE PAYMENT OR E XPENDITURE IS INCURRED FOR THE PURPOSE OF THE TRADE OF THE ASSESSEE IT DOES NOT MATTER THAT THE PAYMENT MAY INCUR TO THE BENEFIT OF A THIRD PARTY (USHERS WILTSHIRE BREWERY LIMITED V BRUCE (1914) 6 TAX CASES 399 (HL). ANOTHER TEST IS WHETHER THE TRANSACTI ON IS PROPERLY ENTERED INTO AS A PART OF THE ASSESSEES LEGITIMATE COMMERCIAL UNDERTAKING IN ORDER TO FACILITATE THE CARRYING ON OF ITS BUSINESS; AND IT IS IMMATERIAL THAT A THIRD PARTY ITA NO. 72&85/PNJ/2012 48 ALSO BENEFITS THEREBY. BUT IN EVERY CASE IT IS A QUESTION OF FACT WHET HER THE EXPENDITURE WAS EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF TRADE OR BUSINESS OF THE ASSESSEE. 27. IF WE APPLY THE PRINCIPLES OF THE LAW AS ENUNCIATED IN THE VARIOUS JUDGMENTS, WE ARE OF THE OPINION THAT ONCE THE A.O. FINDS THAT THE ASSES SEE HAS BONAFIDELY INCURRED THE EXPENDITURE FOR THE BUSINESS, THE A.O. CANNOT DECIDE THE QUANTUM OF THE EXPENDITURE TO BE INCURRED BY THE ASSESSEE. IN THIS CASE BEFORE US THE ASSESSING OFFICER HAS DISPUTED THE FACT THAT COMMISSION HAS BEEN PAID FOR THE PU RPOSE OF THE BUSINESS AND ALSO DISALLOWED THE SAID EXPENDITURE BY APPLYING THE PROVISIONS OF SEC. 40(A)(I) AS WELL AS ON THE BASIS OF THE GENUINENESS OF THE EXPENDITURE INCURRED. THE CIT (A) WHILE HOLDING THAT THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX IN R ESPECT OF THE COMMISSION PAYMENT MADE TO THE NON - RESIDENT AGENTS TOOK THE VIEW THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN DISALLOWING THE COMMISSION PAYMENT BY INVOKING THE PROVISION OF SEC. 40(A)(I). THE CIT(A), HOWEVER, DISALLOWED THE COMMISSION PAI D BY THE ASSESSEE TO THE FOREIGN NON - RESIDENT AGENTS BY APPLYING THE PROVISIONS OF SEC. 37 AS ACCORDING TO HIM THE ASSESSEE HAD NOT ABLE TO SUBSTANTIATE THE CLAIM FOR PAYMENT OF COMMISSION TO NON - RESIDENT AGENTS BY ADDUCING SPECIFIC AND TANGIBLE EVIDENCE T O DEMONSTRATE THAT THE SERVICES WERE RENDERED BY THE SALES AGENTS TO JUSTIFY THE COMMISSION PAYMENT AS CLAIMED BY THE ASSESSEE. HE, THUS, CONFIRMED THE ORDER OF THE ASSESSING OFFICER FOR THE SAID DISALLOWANCE. NOW THE ONLY ISSUE BEFORE US IS WHETHER THE A SSESSEE HAD DISCHARGED ITS ONUS OF PROVING THE GENUINENESS OF THE EXPENDITURE INCURRED BY THE ASSESSEE OR NOT. 27.1 THE DOCUMENTARY EVIDENCES BY WAY OF AGREEMENTS WITH THE NON - RESIDENT AGENTS AND EMAILS EXCHANGED WITH THEM IN THIS REGARD, WHICH WERE PL ACED ON RECORD OF THE AUTHORITIES BELOW AND ALSO FURNISHED AT PAGE NOS. 135 TO 156 OF THE PAPER BOOK BEFORE US, CLEARLY EXHIBIT THE NATURE AND EXTENT OF SERVICES RENDERED BY THOSE NON - RESIDENT AGENTS; AND THE GENUINENESS OF THE SAME CANNOT BE DOUBTED MEREL Y ON SURMISES WITHOUT BRINGING ANYTHING CONTRARY ON RECORD. CIT (A) WHILE REJECTING THIS VITAL PIECE OF EVIDENCE HAS MERELY STATED VIDE PARA 6.5 OF HIS APPELLATE ORDER THAT IT IS POSSIBLE THAT THE ASSESSEE MAY HAVE SOME KIND OF BUSINESS RELATIONSHIP WITH THE ABOVE TWO ITA NO. 72&85/PNJ/2012 49 COMPANIES. IT IS ALSO POSSIBLE THAT THERE MAY BE SOME CORRESPONDENCE WITH THE TWO COMPANIES WITH REGARD TO SALES OF IRON ORE ABROAD. BUT THIS SHALL NOT BE SUFFICIENT JUSTIFICATION TO PROVE THAT THE COMPANIES ABROAD HAVE RENDERED NECESSARY SERVICES FOR EFFECTING SALES SO AS TO JUSTIFY THE CLAIM OF COMMISSION. WHEREAS IN OUR CONSIDERED VIEW, THE CONTENTS OF THE EMAILS FURNISHED BY THE ASSESSEE, WHICH HAVE BEEN SUMMARIZED HEREIN ABOVE, CLEARLY SHOW THAT THOSE WERE BEING EXCHANGED WITH THE SA ID TWO NON - RESIDENT AGENTS IN ACTUAL PERFORMANCE OF THEIR SERVICES FOR WHICH THEY HAD BEEN ENGAGED BY THE ASSESSEE AS PER THE RESPECTIVE AGREEMENTS ENTERED INTO WITH THEM AND FOR WHICH COMMISSION HAD BEEN PAID TO THEM. IT IS NOT THE CASE OF THE REVENUE TH AT THE IMPUGNED EMAILS WERE FABRICATED OR FORGED ONE. IN FACT, THE CIT (A) HAS ADMITTED IN HIS APPELLATE ORDER THAT IT IS POSSIBLE THAT THERE MAY SOME CORRESPONDENCE WITH THE TWO COMPANIES WITH REGARD TO SALE OF IRON ORE ABROAD, BUT WITHOUT GOING INTO T HE MERITS OF THE EMAILS EXCHANGED AND WITHOUT CONTROVERTING HOW THE SAME DID NOT EXHIBIT THAT ACTUAL SERVICES HAD NOT BEEN RENDERED BY THOSE AGENTS, HE MERELY REJECTED THE CLAIM OF THE ASSESSEE AS IF THE ASSESSEE HAS NOT INCURRED THESE EXPENSES GENUINELY F OR THE PURPOSE OF THE BUSINESS. IT IS CARDINAL PRINCIPLE OF LAW THAT A DISALLOWANCE CANNOT BE MADE ON MERE SURMISES AND CONJECTURES. WHERE THE EXPLANATION OF THE ASSESSEE IS BONAFIDE AND EVIDENCES PRODUCED BY IT FURTHER CORROBORATE ITS EXPLANATION, THERE I S NO REASON FOR REVENUE TO DISREGARD THE SAME ON WHIMS WITHOUT BRINGING FORTH ANY TANGIBLE AND COGENT MATERIAL TO THE CONTRARY. 27.2 THE SAID TWO NON - RESIDENT AGENTS HAD BEEN ENGAGED BY THE ASSESEEE IN THE PAST AND THEY HAVE BEEN PAID COMMISSION ON S ALES ABROAD SINCE LAST SO MANY YEARS. THERE IS NO LAW WHICH MANDATES THAT A MIDDLEMAN IS ENTITLED TO HIS COMMISSION ONLY FOR THE FIRST TIME WHEN HE INTRODUCES BOTH THE PARTIES TO EACH OTHER. WE AGREE WITH THE LD. AR THAT IN FACT, IT IS A NORMAL BUSINESS PRACTICE ALL OVER THE WORLD THAT AFTER THE PARTIES ARE INTRODUCED THE ACTUAL WORK OF A COMMISSION AGENT STARTS. HERE IN THE INSTANT CASE OF THE ASSESSEE, THE BUYERS HAD BEEN INTRODUCED BY THE SAID AGENTS IN THE PAST. THE EMAILS EXHIBIT THAT THE AGENTS W ERE DEEPLY INVOLVED WITH THE BUYERS VIS - - VIS THE ASSESSEE IN ACTUAL TRANSPORTATION OF GOODS AND SECURING PAYMENTS TO THE ASSESSEE. EMAILS SHOW THAT THE AGENT WAS CONFIRMING VESSEL NOMINATION FROM THE BUYER, WHICH WAS LATER ACCEPTED BY THE ASSESSEE. OTHE R EMAILS ITA NO. 72&85/PNJ/2012 50 SHOW THE ASSESSEES REQUEST TO THE AGENT FOR OPENING OF LC AND SUBSEQUENTLY REQUESTING THE AGENT FOR LC AMENDMENTS AND LC ACCEPTANCES. IN OTHER SUCH SET OF EMAILS, THE ASSESSEE IS FOUND SUGGESTING AMENDMENTS TO THE DRAFT LC AND THE AGENT CONFIRMI NG / SUGGESTING AMENDMENTS TO THE LC. SIMILARLY, ANOTHER SET OF EMAILS SHOW THE AGENT ADVISING CHANGES IN THE SALE CONTRACT WITH THE BUYER AND THE ASSESSEE ACCEPTING THE SAME. YET ANOTHER EXCHANGE OF EMAILS SHOWS THE AGENT IS FORWARDING DRAFT REVISED FIN AL ADJUSTMENT SHEET AND THE ASSESSEE IS SUGGESTING CORRECTIONS TO FINAL ADJUSTMENT SHEETS AND REQUESTING THE AGENT TO FORWARD THE SAME TO THE BUYER. MORE SO, IN ONE SUCH SET OF EMAILS, THE ASSESSEE IS SEEN ASKING THE AGENT TO CONVEY ITS MESSAGE TO THE BU YER AND THE AGENT CAN BE SEEN CONVEYING MESSAGE FROM THE BUYER TO THE ASSESSEE. THUS, THERE REMAINS NO DOUBT IN OUR MIND THAT THE NON - RESIDENT AGENTS WERE ACTUALLY RENDERING THE SERVICES AS MIDDLEMEN IN TERMS OF THEIR RESPECTIVE AGREEMENTS WITH THE ASSESS EE AND, ACCORDINGLY, COMMISSION WAS GENUINELY PAID BY THE ASSESSEE FOR THOSE SERVICES ONLY, I.E., WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. THE DECISION IN LAXMINARAYAN MADANLAL VS CIT (1972) 86 ITR 439 (SC), RELIED UPON BY T HE REVENUE IS TOTALLY DISTINGUISHABLE ON FACTS. IN THAT CASE THE ASSESSEE HAD ONLY PRODUCED THE AGREEMENTS AND THE HONBLE APEX COURT DECIDED THAT THE MERE EXISTENCE OF AN AGREEMENT BETWEEN THE ASSESSEE AND ITS SELLING AGENTS OR PAYMENT OF CERTAIN AMOUNTS AS COMMISSION, ASSUMING THERE WERE SUCH PAYMENTS, DOES NOT BIND THE ITO TO HOLD THAT PAYMENT WAS MADE EXCLUSIVELY AND WHOLLY FOR THE PURP OSE OF THE ASSESSEES BUSINESS. WHEREAS IN THE INSTANT CASE, THE ASSESSEE HAS PLACED OTHER DOCUMENTARY EVIDENCES ON RE CORD BESIDES THE AGREEMENTS, WHICH CLEARLY DEMONSTRATE THAT THE REQUISITE SERVICES UNDER THOSE AGREEMENTS FOR WHICH COMMISSION WAS PAID TO THEM, HAD ACTUALLY BEEN RENDERED BY THEM. THUS, IN THE CASE OF THE ASSESSEE COMMERCIAL EXPEDIENCY HAS CLEARLY BEEN PR OVED. THEREFORE, THE DISALLOWANCE OF RS. 9,88,29,729/ - FOR COMMISSION PAID TO NON - RESIDENT AGENTS IS DELETED BY ALLOWING THIS GROUND OF APPEAL OF THE ASSESSEE. 28. THE GROUND NOS. 3 & 4 RELATE TO THE COMMON ISSUE ABOUT THE DISALLOWANCE OF THE DEMURRAGE CHARGES PAID AMOUNTING TO RS.36 , 05 , 767/ - TO THE BUYERS AS REIMBURSEMENT AND RS.1 , 19 , 70 , 782/ - PAID TO THE SHIPPING ITA NO. 72&85/PNJ/2012 51 COMPANIES/SHIP OWNERS U/S 40(A)(I) OF THE INCOME - TAX ACT. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAS NOTED THAT THE ASSESSEE HAS P AID AN AMOUNT OF RS. 36 , 05 , 767/ - TO ITS BUYER IN PAKISTAN WITHOUT DEDUCTION OF TAX AT SOURCE AND THEREFORE HE DISALLOWED THE SAME U/S 40(A)(I). IN RESPECT OF SUM OF RS. 119,70 , 782/ - , THE AO NOTED THAT THE ASSESSEE DEPOSITED THE TAXES DEDUCTED ON BEHALF OF THE SHIPPI NG COMPANIES OF THE COUNTRIES W ITH WHOM INDIA HAS NO DTAA . THE TAXES WERE PAID ON ITS PAN ON BEHALF OF THOSE SHIPPING COMPANIES BUT WERE NOT PAID WITHIN THE DUE DATES AND THEREFORE SAID AMOUNT WAS DISALLOWED U/S 40(A)(I). WHEN THE MATTER WENT BEF ORE THE CIT(A), CIT(A) CONFIRMED BOTH THE DISALLOWANCES BY MERGING BOTH THE GROUNDS OBSERVING AS UNDER: 7.2 I HAVE CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS MADE BY THE ASSESSEE. THE CLAIM OF THE ASSESSEE THAT THE DEMURRAGE AMOUNT REMITTED TO T HE NONRESIDENT BUYERS OF IRON ORE WAS ACTUALLY PAYABLE BY THE SAID BUYERS TO THE SHIP OWNERS AND THEREFORE LIABLE TO TAX U/S. 172 OF THE ACT, IS WITHOUT ANY MERIT. IT HAS BEEN CLEARLY ESTABLISHED THAT THE PAYMENTS WERE MADE BY THE ASSESSEE TO THE BUYERS OF IRON ORE ABROAD AND NO TAX WAS EITHER DEDUCTED OR DEDUCTED BELATEDLY IN RESPECT OF SUCH PAYMENTS. THE CLAIM THAT SUCH PAYMENTS WERE ULTIMATELY PAYABLE TO THE SHIP OWNERS WILL NOT CHANGE THE NATURE OF PAYMENTS IN THE HANDS OF THE ASSESSEE. AS FAR AS THE AS SESSEE IS CONCERNED, IT HAS PAID THE AMOUNTS AS DEMURRAGE AND THE SAME HAS BEEN CLAIMED AS EXPENDITURE. THE PAYMENTS MADE BY THE ASSESSEE ARE CLEARLY COVERED BY THE RESIDUAL LIMB OF SECTION 40 (I) OF THE INCOME TAX ACT, WHICH REFERS TO OTHER SUM CHARGEABL E UNDER THIS ACT. THE PAYMENTS MADE BY THE ASSESSEE ARE CLEARLY IN THE NATURE OF PAYMENTS CHARGEABLE TO TAX. THE ASSESSEE HAS NOT SUBSTANTIATED ITS CLAIM THAT THESE PAYMENTS WOULD HAVE BEEN SUBSEQUENTLY PAID TO THE SHIP OWNERS BY THE BUYERS OF IRON ORE OR WHY SUCH PAYMENTS ARE NOT CHARGEABLE TO TAX. IT IS ESTABLISHED LAW THAT THE ONUS OF SUBSTANTIATING THE CLAIM LIES ON THE ASSESSEE WHO MAKES THE CLAIM. THEREFORE, CONSIDERING THE FACTS OF THE CASE AND THE OBSERVATIONS MADE BY THE ASSESSING OFFICER AND CONS IDERING THE FACT THAT THE ASSESSEE HAS COMPLETELY FAILED TO SUBSTANTIATE ITS CLAIM AS MENTIONED ABOVE, I FIND NO MERIT IN THE CLAIM OF THE ASSESSEE. ACCORDINGLY, I CONFIRM THE DISALLOWANCE OF RS.36,05,767/ - AND RS. 1,19,70,782/ - MADE BY THE ASSESSING OFFIC ER. THIS GROUND OF APPEAL IS ACCORDINGLY, DISMISSED. ITA NO. 72&85/PNJ/2012 52 29. BEFORE US , THE LEARNED. A.R. CONTENDED THAT THE DEMURRAGE AMOUNT REMITTED TO THE BUYERS OF IRON ORE IN PAKISTAN AMOUNTING TO RS.36 , 05 , 767/ - WAS IN RESPECT OF AMOUNT PAYABLE BY THE SAID BUYERS TO THE S HIP OWNERS OF THE VESSELS BY WHICH RELEVANT IRON ORE WAS EXPORTED . THE ASSESSEE HAS EXPORTED TO PAKISTANI BUYER ON FOB BASIS. THE FOREIGN BUYER ENGAGES A SHIP FOR TAKING DELIVERY OF THE GOODS FROM INDIA. SHIP COMES TO INDIAN PORT FOR A LIMITED PERIOD AND WHEN THE ASSESSEE ENABLES TO LOAD THE GOODS ON TO THE SHIP WITHIN THE LIMITED PERIOD. IN SUCH SITUATIONS THE FOREIGN BUYER HAS TO PAY DEMURRAGE TO THE SHIP OWNER. THE ASSESSEE HAS TO COMPENSATE THE BUYER FOR THE SAME. THE ASSESSEE HAS REMITTED THE SAID SU M TO PAKISTAN BUYERS WHICH THEY SAID BUYER HAD PAID TO SHIP OWNERS IN ADDITION TO THE FREIGHT CHARGES DUE TO DELAY IN LOADING OF THE SHIPS AT THE INDIA PORT. THE SAID SUM WAS PAID AS PER THE EXPORT CONTRACT. TAX IS TO BE DEDUCTED AT SOURCE ONLY WHEN INCOME IS CHARGEABLE TO TAX UNDER THIS ACT. SO IT IS NECESSARY TO DETERMINE WHETHER THIS INCOME IS TAXABLE OR NOT. SUCH PAYMENT IS NOT IN THE NATURE OF ANY INCOME SINCE THIS IS MERELY OFFSETTING THE ADDITIONAL COST INCURRED BY THE SAID BUYER DUE TO THE LACK OF O PERATIONAL EFFICIENCY AND NON - ADHERENCE TO THE STIPULATED TIMELINES (TERMS OF PERFORMANCE) BY THE SELLER. IN FACT THIS AMOUNT MUST BE CONSIDERED AS AN ADDITIONAL DISCOUNT BY THE ASSESSEE TO THE BUYER. IT WAS AKIN TO PRICE REDUCTION DUE TO FAULT IN PRODUCT/ SERVICE AND IS EQUIVALENT TO DISCOUNT/REBATE WHICH CAN BE ADJUSTED AGAINST THE SALE PRICE. IT GOES TO REDUCE THE SALE PRICE RATHER THAN TO BE CONSIDERED AS AN EXPENSE IN THE HANDS OF THE ASSESSEE. FURTHER, EVEN IF FOR THE SAKE OF ARGUMENT, IT IS ASSUMED TH AT THERE IS AN INCIDENCE OF INCOME IN THE HANDS OF NON - RESIDENT BUYERS, THE SAME WOULD NOT ATTRACT ANY TAX IN INDIA IN VIEW OF EXPLANATION 1(B) TO SECTION 9(1)(I) OF IT ACT, 1961 WHI CH PROVIDES THAT IN CASE OF NON - RESIDENT, NO INCOME SHALL BE DEEMED TO ACC RUE OR ARISE IN INDIA TO HIM THROUGH OR FROM OPERATIONS WHICH ARE CONFINED TO THE PURCHASE OF GOODS IN I NDIA FOR THE PURPOSE OF EXPORT. IT IS AN ADMITTED FACT THAT THE NON - RESIDENT BUYER GOT THE DEMURRAGE THROUGH THE OPERATION WHICH ARE CONFINED TO PURCHAS E OF GOODS, I.E., IN RELATION TO THE SHIP WHICH IT HAD ARRANGED FOR TAKING THE DELIVERY OF THE GOODS FROM THE ASSESSEE/SELLER FROM INDIA. THUS, THE SAID INCOME WILL NOT BE DEEMED TO ACCRUE OR ARISE IN INDIA AND THEREFORE THE SAID AMOUNT IS NOT TAXABLE IN I NDIA AND IS NOT LIABLE TO THE TAX DEDUCTION AT SOURCE. PRESUMING ITA NO. 72&85/PNJ/2012 53 WITHOUT ADMITTING, IF THE SAID AMOUNT IS CONSIDERED AS DEMURRAGE PAYMENT INSTEAD OF COMPENSATION, IN THAT CASE DEMURRAGE CHARGES ARE LIABLE TO TAX U/S 172(8) OF THE ACT IN THE HANDS OF SHIP O WNERS. IN THIS REGARD, IT IS STATED THAT SECTION 172(8) STATES THAT THE AMOUNT MENTIONED IN 172(2) INCLUDES DEMURRAGE CHARGES. SECTION 172(2) PROVIDES THAT WHERE A SHIP CARRIES PASSENGERS, GOODS, ETC., THEN 7.5% OF THE AMOUNT PAID OR PAYABLE ON ACCOUNT OF SUCH CARRIAGE TO THE OWNER OR CHARACTER ON THIS BEHALF SHALL BE DEEMED TO BE INCOME ACCRUING IN INDIA TO THE OWNER OR CHARTERER. THUS, AS PER SECTION 172(8), THE AMOUNT OF DEMURRAGE WILL ALSO BE CONSIDERED FOR THIS PURPOSE, I.E., FOR COMPUTING ITS TAXABLE INCOME. THUS, THE DEMURRAGE STANDS CONSIDERED AS PART OF FREIGHT, I.E., THE PAYMENT MADE U/S 172(2) OF THE ACT. RELIANCE IS PLACED ON CBDT CIRCULAR NO. 723 OF 1995 WHICH EXPLAINS THAT SECTION 194C AND 195 TO TAX DEDUCTION AT SOURCE ARE NOT APPLICABLE TO TH E SECTION 172. CLAUSES 5 OF THE CIRCULAR STATES THAT EVEN THE PAYMENT TO THE AGENT OF THE NON - RESIDENT SHIP OWNERS WILL ALSO NOT ATTRACT TDS. THE DEMURRAGE PAID BY THE ASSESSEE TO THE NON - RESIDENT BUYER WOULD IN TURN HAVE BEEN PAID BY THE BUYER TO THE SHIP - OWNERS. THE FREIGHT INCLUDING DEMURRAGE WAS TAXABLE IN THE HANDS OF SHIP OWNER U/S 172 OF THE ACT. THUS, THE AMOUNT CAN BE TREATED AS PAID TO THE AGENT OF THE SHIP OWNER. EVEN IN THAT CASE THE ASSESSEE WAS NOT LIABLE TO DEDUCT TDS AS MENTIONED IN CLAUSE 5 OF CIRCULAR NO. 723 (SUPRA). THUS, WHEN THE AMOUNT COVERED UNDER SECTION 172 IS NOT LIABLE TO TDS U/S 195, THEN NO DISALLOWANCE U/S 40(A)(IA) CAN BE MADE. 29.1 FOR THE SUM OF RS. 1 , 19 , 70 , 782/ - , IT WAS CONTENDED THAT THE ASSESSEE HAS EXPORT SALES CONTRAC T WITH THE BUYER ON CIF BASIS. THE ASSESSEE ENGAGES A SHIP ON ITS OWN AND PAID THE FREIGHT DIRECTLY TO SHIP OWNER S WHICH ARE ALSO NON - RESIDENT S . SOMETIMES THERE IS DELAY IN LOADING THE SHIP WITHIN THE PRE AGREED TIME LINE WHICH RESULTS INTO PAYMENT OF DEMU RRAGE BY THE ASSESSEE TO SUCH SHIP O WNERS. THE CIT (A) DID NOT DEAL WITH THIS AMOUNT SEPARATELY BUT GOT IT MERGED WITH PAYMENT MADE TO PAKISTANI BUYER WITHOUT APPRECIATING THE DEFECT OF THESE PAYMENTS WERE ENTIRELY DIFFERENT FROM DEMURRAGE REIMBURSED TO PA KISTANI BUYER. THE SAID AMOUNT WAS PAID TO FOREIGN SHIPPING COMPANIES. U/S 172 DEMURRAGE IS TO RECEIVE THE SAME TREATMENT AS FREIGHT PAYMENT THE ASSESSEE HAS NOT DEDUCTED ANY TAX ON THESE PAYMENTS BUT IN SOME CASES THE ASSESSEE ASSISTED SHIP OWNERS IN DISC HARGING THEIR LEGAL OBLIGATION BY MAKING ITA NO. 72&85/PNJ/2012 54 PAYMENT TO THE DEPARTMENT FOR AND ON BEHALF OF SUCH SHIP OWNERS AND NOT A S TDS. ASSESSING AUTHORITY MISUNDERSTOOD THAT THE ASSESSEE HAS DEDUCTED THE TAX AND DEPOSITED IT. IN THE EARLIER YEAR ALSO SIMILAR PAYMENTS WE RE MADE WITHOUT TDS AND WERE ALLOWED AS DEDUCTION. CIRCULAR NO. 723 OF 1995 IS VERY CLEAR THAT SECTION 194C AND 195 ARE NOT APPLICABLE TO SECTION 172 WHICH IS A SELF CONT AINED CODE. THUS IT WAS CONTENDED THAT SINCE THE PROVISION OF 195 IS NOT APPLICABLE AN D THE PAYMENTS ARE NOT COVERED UNDER SECTION 40(A)(I) AND THEREFORE THE DISALLOWANCE BE DELETED. 30 . THE LD. DR ON THE OTHER HAND CONTENDED THAT DEMURRAGE CHARGES ARE LIABLE TO TAX IN INDIA U/S 172( 8 ) OF THE ACT. THE ASSESSEE WHEN MAKING THE PAYMENT TO THE NON - RESIDENT IS BOUND TO DEDUCT TAX AT SOURCE U/S 195 OF THE INCOME - TAX ACT. HAVING FAILED SO, THE DISALLOWANCE HAS RIGHTLY BEEN SUSTAINED BY THE CIT(A) U/S 40(A)(I) OF THE INCOME - TAX ACT. 31 . WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THIS IS A FACT THAT THE ASSESSEE HAS PAID THE DEMURRAGE CHARGES TO THE NON - RESIDENT IN RESPECT OF DELAY IN LOADING THE SHIP. WE FIND THAT THE SUM OF RS. 36 , 05 , 767/ - WAS REIMBURSED BY THE ASSESSEE TO THE FOREIGN BUYER TO COM PENSATE THE FOREIGN BUYER FOR PAYING DEMURRAGE TO THE SHIP OWNER WHEN SHIP CAME TO INDIAN PORT AND THE ASSESSEE COULD NOT LOAD THE GOODS ON TO THE SHIP WITHIN THE LIMITED TIME PERIOD. THE EXPORT SALES WERE MADE TO THE FOREIGN PAKISTANI BUYER ON FOB BASIS. IN VIEW OF THE CONTRACT WITH THE PAKISTANI BUYER SPECIFICALLY CLAUSE 11(D) , IN OUR OPINION , THE ASSESSEE IS BOUND TO COMPENSATE THE PAKISTANI BUYER IN RESPECT OF DEMURRAGE PAID BY THE PAKISTANI BUYER TO THE SHIP OWNER. THIS PAYMENT IN OUR OPINION CAN BE RE GARDED TO BE THE EXPENDITURE INCURRED BY THE ASSESSEE FOR THE SALES OF THE GOODS. WE DO NOT AGREE WITH THE LD. AR THAT THIS PAYMENT WAS AKIN TO PRICE DEDUCTION DUE TO FAULT IN PRODUCT/SERVICE AND IS EQUIVALENT TO DISCOUNT/REBATE WHICH CAN BE ADJUSTED AGAIN ST THE SALE PRICE. 32. WE HAVE GONE THROUGH EXPLANATION 1(B) TO SECTION 9(1)(I) OF THE INCOME - T AX ACT , 1961 . WE NOTED THAT THIS SECTION PROVIDES THAT IN THE CASE OF A NON - RESIDENT, NO INCOME SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA TO HIM THROUGH OR FROM OPERATIONS WHICH ARE CONFINED TO THE PURCHASE OF THE GOODS IN ITA NO. 72&85/PNJ/2012 55 INDIA FOR THE PURPOSE OF EXPORT. THE NON - RESIDENT BUYER GOT THE COMPENSATION TOWARDS THE DEMURRAGE INCURRED THROUGH THE OPERATION WHICH ARE CONFINED TO THE PURCHASE OF THE GOODS, I.E. IN RE LATION TO THE SHIP WHICH IT HAD ARRANGE FOR TAKING THE DELIVERY OF THE GOODS FROM THE ASSESSEE/SELLER FROM INDIA. IN OUR OPINION THIS INCOME CANNOT BE DEEMED TO ACCRUE OR ARISE IN INDIA IN THE HANDS OF THE FOREIGN BUYER AND THEREFORE IT CANNOT BE TAXABLE I N INDIA AND IS NOT LIABLE TO TAX DEDUCTION AT SOURCE. ON THIS BASIS, NO DISALLOWANCE CAN BE MADE U/S 40(A)(IA) AND ACCORDINGLY WE DELETE THE DISALLOWANCE OF RS. 36 , 05 , 767/ - . 32.1 NOW COMING TO THE SUBMISSION OF THE LD. DR THAT THESE CHARGES ARE THE DEMUR RAGE LIABLE TO TAX IN INDIA U/S 172(8) OF THE I.T. ACT AND HAVE BEEN INCURRED BY THE ASSESSEE FOR MAKING PAYMENT TO THE SHIPPING COMPANY THROUGH FOREIGN BUYER. WE HAVE GONE THROUGH THE CIRCULAR NO.723 DATED 19 / 9 / 1995 WHICH DEALS WITH THE PROVISIONS OF SECT ION 172, 194C & 195 OF THE INCOME - TAX ACT. IT READS AS UNDER: SECTION 172 DEALS WITH SHIPPING BUSINESS OF NON - RESIDENTS. SECTION 172(1) PROVIDES THE MODE OF THE LEVY AND RECOVERY OF TAX IN THE CASE OF ANY SHIP, BELONGING TO OR CHARTERED BY A NON - RESIDE NT, WHICH CARRIES PASSENGERS, LIVE - STOCK, MAIL OR GOODS SHIPPED AT A PORT IN INDIA. AN ANALYSIS OF THE PROVISIONS OF SECTION 172 WOULD SHOW THAT THESE PROVISIONS HAVE TO BE APPLIED TO EVERY JOURNEY A SHIP, BELONGING TO OR CHARTERED BY A NON - RESIDENT, UNDE RTAKES FROM ANY PORT IN INDIA. SECTION 172 IS A SELF - CONTAINED CODE FOR THE LEVY AND RECOVERY OF THE TAX, SHIP WISE AND JOURNEY WISE, AND REQUIRES THE FILING OF THE RETURN WITHIN A MAXIMUM TIME OF THIRTY DAYS FROM THE DATE OF DEPARTURE OF THE SHIP. THE P ROVISIONS OF SECTION 172 ARE TO APPLY, NOTWITHSTANDING ANYTHING CONTAINED IN OTHER PROVISIONS OF THE ACT. THEREFORE, IN SUCH CASES, THE PROVISIONS OF SECTION 194C AND 195 RELATING TO TAX DEDUCTION AT SOURCE ARE NOT APPLICABLE. THE RECOVERY OF TAX IS TO B E REGULATED, FOR A VOYAGE UNDERTAKEN FROM ANY PORT IN INDIA BY A SHIP UNDER THE PROVISIONS OF SECTION 172. ITA NO. 72&85/PNJ/2012 56 SECTION 194C DEALS WITH WORK CONTRACT INCLUDING CARRIAGE OF GOODS AND PASSENGERS BY ANY MODE OF TRANSPORT OTHER THAN RAILWAYS. THIS SECTION APPLIES TO PAYMENTS MADE BY A PERSON REFERRED TO IN CLAUSES (A) TO (J) OF SUB - SECTION (1) TO ANY RESIDENT (TERMED AS CONTRACTOR). IT IS CLEAR FROM THE SECTION THAT THE AREA OF OPERATION OF TDS IS CONFINED TO PAYMENTS MADE TO ANY RESIDENT. ON THE OTHER HAND, SECTION 172 OPERATES IN THE AREA OF COMPUTATION OF PROFITS FROM SHIPPING BUSINESS OF NON - RESIDENTS. THUS, THERE IS NO OVERLAPPING IN THE AREAS OF OPERATION OF THESE SECTIONS. THERE WOULD, HOWEVER, BE CASES WHERE PAYMENTS ARE MADE TO SHIPPING AGENTS OF N ON - RESIDENT SHIP OWNERS OR CHARTERERS FOR CARRIAGE OF PASSENGERS, ETC., SHIPPED AT A PORT IN INDIA. SINCE, THE AGENT ACTS ON BEHALF OF THE NON - RESIDENT SHIP - OWNER OR CHARTERER, HE STEPS INTO THE SHOES OF THE PRINCIPAL. ACCORDINGLY, PROVISIONS OF SECTION 172 SHALL APPLY AND THOSE OF SECTIONS 194C AND 195 WILL NOT APPLY. 33 . FROM THE PERUSAL OF THIS CIRCULAR, IT IS APPARENTLY CLEAR THAT THE PROVISIONS OF SECTION 194C AND 195 RELATING TO TAX DEDUCTION AT SOURCE ARE NOT APPLICABLE WHERE THE PROVISIONS OF SE CTION 172 ARE APPLICABLE. THE CIRCULAR ISSUED BY THE CBDT IS BINDING ON THE DEPARTMENT. IN VIEW OF THE CIRCULAR IN OUR OPINION THE ASSESSEE IS NOT OBLIGED TO DEDUCT TDS ON THE PAYMENT MADE AS DEMURRAGE CHARGES A ND THE DEMURRAGE CHARGES ARE ALSO LIABLE TO BE TAXED U/S 172 OF THE INCOME - TAX ACT. THE ASSESSEE, SINCE IS NOT LIABLE TO DEDUCT TAX AT SOURCE, NO QUESTION ARISE FOR MAKING ANY DISALLOWANCE U/S 40 (A) (I). 33.1 COMING TO THE DISALLOWANCE OF RS. 1 , 19,70 , 782/ - , WE NOTED THAT THIS IS NOT A CASE WHERE THE ASSESSEE HAD DEDUCTED TAX AT SOURCE BUT THE ASSESSEE HAD ASSISTED THE SHIPPING OWNER IN DISCHARGING THEIR LEGAL OBLIGATION BY MAKING PAYMENT OF THEIR INCOME TAX TO THE REVENUE FOR WHICH THEY WERE LIABLE U/S 172 OF THE I.T. ACT. THIS IS NOT A CASE WHER E ASSESSEE HAS DEDUCTED TDS AS THE ASSESSEE WAS NOT LIABLE TO DEDUCT ANY TDS IN RESPECT OF PAYMENT MADE TO THE SHIP OWNER FOR THE DEMURRAGE . THERE IS NO DISPUTE THAT THE INCOME OF THE FOREIGN SHIPPING COMPANIES WERE CHARGEABLE TO TAX U/S 172 OF THE I.T. AC T. THE DEMURRAGE PAID TO THESE SHIPPING COMPAN IES WERE ALSO TO BE ITA NO. 72&85/PNJ/2012 57 TREATED AS FREIGHT IN VIEW OF SPECIFIC PROVISION OF SECTION 172(8). WE HAVE ALREADY HELD IN THE PRECEDING PARAGRAPH THAT IN VIEW OF CIRCULAR NUMBER 723 DT. 19/09/1995, THE PROVISION OF SECTI ON 194C AND 195 RELATING TO TAX DEDUCTION AT SOURCE ARE NOT APPLICABLE TO THE INCOME WHICH IS CHARGEABLE TO TAX U/S 172. IN VIEW OF THIS CIRCULAR THE ASSESSEE WAS NOT OBLIGED TO DEDUCT TAX AT SOURCE ON THE DEMURRAGE PAID TO THE SHIPPING OWNERS DURING THE Y EAR. SINCE THE PROVISION OF TDS WERE NOT APPLICABLE, THEREFORE NO DISALLOWANCE CAN BE SUSTAINED U/S 40(A)(IA). WE THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) ON TH ESE ISSUE S AND DELETE THE DISALLOWANCE OF RS.36,05,767/ - AND RS. 1,19,70,782/ - . THUS THE GR OUND NOS. 3 & 4 ARE ALLOWED. 33.2 . THE GROUND NO. 5 RELATE S TO THE DISALLOWANCE OF EDUCATION AND HIGHER EDUCATION CESS AMOUNTING TO RS.19 , 72 , 00 , 814/ - . THE ASSESSEE CLAIMED THIS CESS PAID BY HIM AS DEDUCTION AS BUSINESS EXPENDITURE. THE ASSESSING OFFICER HOLD THAT THIS CESS IS COLLECTED BY THE REVENUE AS PART OF INCOME - TAX AND IN VIEW OF SECTION 40(IC)&(I), THIS AMOUNT CANNOT BE ALLOWED AS AN EXPENDITURE. WHEN THE MATTER WENT BEFORE THE CIT(A), CIT(A) CONFIRMED THE DISALLOWANCE BY HOLDING AS UNDER: 8.1 I HAVE CONSIDERED THE OBSERVATIONS OF THE ASSESSING OFFICER AND THE EXPLANATION FURNISHED BY THE ASSESSEE IN THIS REGARD. THE CLAIM OF THE ASSESSEE THAT EDUCATION CESS AND SECONDARY & HIGHER SECONDARY EDUCATION CESS IS PAID UNDER THE LAW FOR PROVIDING FIN ANCE FOR BASIC, SECONDARY, AND HIGHER SECONDARY EDUCATION AND THEREFORE, SUCH PAYMENT WAS FOR THE PURPOSE OF THE BUSINESS IS WITHOUT ANY SUBSTANCE. THE FACT REMAINS THAT THE EDUCATION CESS AND SECONDARY & HIGHER SECONDARY EDUCATION CESS ARE COLLECTED AS PA RT OF INCOME TAX AND FRINGE BENEFIT TAX. THE FACT THAT THE CESS IS APPLIED FOR THE PURPOSE OF PROMOTING BASIC EDUCATION AND HIGHER SECONDARY EDUCATION WILL NOT CHANGE THE NATURE OF THE LEVY IN THE HANDS OF THE ASSESSEE. THE AMOUNTS COLLECTED BY WAY OF EDUC ATION CESS AND SECONDARY & HIGHER SECONDARY EDUCATION CESS FORMS AN INTEGRAL PART OF THE DIRECT TAX COLLECTION AND THEREFORE SUCH PAYMENTS ARE CLEARLY COVERED UNDER THE PROVISIONS OF SECTION 40(A)(IC) AND (II) OF THE INCOME TAX ACT. ITA NO. 72&85/PNJ/2012 58 8.2 FURTHER IT IS ALS O ADMITTED THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF RS.19,88,55,081/ - TOWARDS THE EDUCATION CESS AND SECONDARY & HIGHER SECONDARY EDUCATION CESS, BY A SEPARATE LETTER DATED 5.10.2011, AFTER FILING THE RETURN. THIS IS A CLEAR CASE WHERE THE ASSESSEE HAD C LAIMED DEDUCTION AFTER THE RETURN WAS FILED. THE CLAIM WAS NEITHER MADE IN THE ORIGINAL RETURN OF INCOME NOR IN ANY REVISED RETURN OF INCOME WAS FILED IN THIS REGARD . THEREFORE, EVEN WITHOUT GOING INTO THE MERITS OF THE CLAIM, THE SAME CANNOT BE ALLOWED AS A DEDUCTION FOLLOWING THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF GOETZE (INDIA) LTD. VS. CIT, 284 ITR 323 . IN THIS CASE THE COURT HAS HELD THAT WHERE AN ASSESSEE HAS CLAIMED DEDUCTION AFTER THE RETURN HAS BEEN FILED, THE ASSESSING AUTHORITY HAS NO POWERS TO ENTERTAIN SUCH CLAIM MADE OTHERWISE THAN BY A WAY OF A REVISED RETURN. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE SUPREME COURT, THE CLAIM OF THE ASSESSEE IS ALSO LIABLE TO BE REJECTED. 8.3 IN VIEW OF THE ABOVE DISCUSS ION, I AM OF THE CONSIDERED OPINION THAT THE ASSESSEES CLAIM FOR DEDUCTION OF EDUCATION CESS AND SECONDARY & HIGHER SECONDARY EDUCATION CESS IS NOT MAINTAINABLE AND THEREFORE THE SAME HAS BEEN RIGHTLY REJECTED BY THE ASSESSING OFFICER. ACCORDINGLY, I CONF IRM THE ACTION OF THE ASSESSING OFFICER IN REJECTING THE CLAIM OF THE ASSESSEE. THIS GROUND OF APPEAL IS ACCORDINGLY, DISMISSED. 34 . THE LEARNED. A.R. CONTENDED THAT THE EDUCATION CESS AND SECONDARY AND HIGHER EDUCATION CESS ARE PAID FOR PROVIDING FINANC E FOR QUALITY EDUCATION AND THEREFORE IT HAS BEEN INCURRED FOR THE PURPOSE OF THE BUSINESS. THE PAYMENT OF SAID CESS IS NOT SPECIFICALLY COVERED WITHIN THE PROVISIONS OF DISALLOWANCE U/S 40(A)(IA) & 40(A)(II) OR ANY OTHER PROVISIONS OF THE ACT. THE LEARN ED D.R. ON THE OTHER HAND CONTENDED THAT NO DEDUCTION TOWARDS THE PAYMENT OF THE EDUCATION CESS AND HIGHER SECONDARY EDUCATION CESS WAS CLAIMED IN THE ORIGINAL RETURN. EVEN NO REVISED RETURN WAS FILED MAKING THIS CLAIM. THE EDUCATION CESS AND SECONDARY A ND HIGHER SECONDARY EDUCATION ITA NO. 72&85/PNJ/2012 59 CESS FORMS AN INTEGRAL PART OF DIRECT TAX COLLECTION AND THEREFORE SUCH PAYMENTS ARE CLEARLY COVERED UNDER THE PROVISIONS OF SECTION 40(A)(IA) AND (II) OF THE ACT. 35 . WE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. IN OUR OPINION, EDUCATION CESS AND SECONDARY HIGHER EDUCATION CESS LEVIED BY THE ASSESSEE HAS BEEN COLLECTED AS PART OF THE INCOME - TAX AND THE PROVISIONS OF SECTION 40(A)(IC) & (II) ARE CLEARLY APPLICABLE AND THE ASSESSEE IS NOT ENTITLED FOR TH E DEDUCTION. THE SAID PAYMENT IS NOT A FE E BUT IS A TAX. IN CASE OF FEES, PAYMENT IS MADE AGAINST GETTING CERTAIN BENEFIT OR SERVICES WHILE TAX IS IMPOSED BY THE GOVERNMENT AND IS LEVIED FOR WHICH THE PERSON WHO PAY THE TAX IS NOT PROMISED IN RETURN TO G ET ANY BENEFIT OR SERVICE. THE ASSESSEE IS NOT GETTING ANY BENEFIT OR SERVICES IN RETURN BY MAKING THE PAYMENT TOWARDS THE EDUCATION CESS AND SECONDARY HIGHER EDUCATION CESS. THEREFORE, IT CANNOT BE SAID THAT IT IS AN EXPENDITURE INCURRED WHOLLY AND EXCLU SIVELY FOR THE PURPOSE OF THE BUSINESS AND IS NOT PART OF TAX . WE DO NOT FIND ANY INFIRMITY OR ILLEGALITY IN THE ORDER OF THE CIT(A) WHILE CONFIRMING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IN THIS REGARD. THUS, DISALLOWANCE OF RS.19,72,00,814/ - I S HEREBY CONFIRMED. THUS, THIS GROUND STAND DISMISSED. 36 . THE GROUND NOS. 6, 7, 8 & 9 RELATE TO THE CLAIM OF THE DEDUCTION BY THE ASSESSEE U/S 10B OF THE ACT IN RESPECT OF ITS 100% EXPORT ORIENTED UNIT S AT AMONA IN GOA, AT CHITRADURGA IN KARNATAKA AND A T CODLI IN GOA . DURING THE YEAR, THE ASSESSEE CLAIMED DEDUCTION IN RESPECT OF 3 UNITS LOCATED AT AMONA , CHI TRADURGA & CODLI RESPECTIVELY. OF THESE 3 UNITS, THE CODLI UNIT IS REGISTERED AS A N EOU FROM THE INITIAL STAGES OF SETTING UP WHILE THE OTHER TWO U NITS AT AMONA AND CHITRADURGA WERE ORIGINALLY SET UP IN DOMESTIC TARIFF AREA S, WHICH WERE SUBSEQUENTLY CONVERTED AS EOU S . THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MINING AND EXPORT OF IRON ORE AND MANUFACTURE AND SALE OF METALLURGICAL COKE. THE ASSESSI NG OFFICER DISALLOWED THE SAID CLAIM S MADE U/S 10B OF THE ACT IN RESPECT OF ALL THE UNITS . THE MAIN REASON GIVEN BY THE AO WAS THAT THERE IS NO PRODUCTION OR MANUFACTURE INVOLVED IN THE ACTIVITIES CARRIED OUT IN THE UNITS. THE ASSESSING OFFICER TOOK THE VI EW IN RESPECT OF AMONA AND CHITRADURGA UNIT THAT TH E S E UNIT S STARTED COMMENCEMENT OF THE MANUFACTURE IN THE YEAR 1985 AND 1994 RESPECTIVELY AND THEREFORE, CANNOT BE ITA NO. 72&85/PNJ/2012 60 TREATED AS NEW UNITS ELIGIBLE FOR THE BENEFIT U/S 10B MERELY ON THE GROUND THAT THERE WAS E XPANSION OF THESE UNITS BY WAY OF PURCHASE OF NEW PLANT AND MACHINERY IN THE YEARS 2002 - 03 & 200 5 - 06 RESPECTIVELY. IN RESPECT OF ULTRA FINES RECOVERY PLANT AT CODLI, THE ASSESSING OFFICER GAVE THE REASONS MAINLY THAT (A) THE SAID UNIT DOES NOT FULFILL THE CONDITIONS OF MANUFACTURE OR PRODUCTION AS REQUIRED U/S 10B (B) NO SATISFACTORY EVIDENCE HAS BEEN PRODUCED REGARDING THE DATE OF COMMENCEMENT OF MANUFACTURE OR PRODUCTION (C) THE FRESH APPROVAL OF THE BOARD IS NOT AVAILABLE TO THE UNIT AND (D) THE UNIT IS NOT DEBITING ANY PURCHASE COST IN RESPECT OF THE PURCHASE OF WASTAGE FROM OTHER UNITS. IN RESPECT OF THREE UNITS IN GENERAL, THE ASSESSING OFFICER HELD (A) THE IRON ORE PROCESSING CANNOT BE TREATED AS MANUFACTURE OR PRODUCTION IN VIEW OF THE INSERTION O F NEW SECTION 2(29BA ) DEFINING THE MEANING OF MANUFACTURE/PRODUCTION (B) THE ASSESSEE HAD NOT MAINTAINED SEPARATE BOOKS OF ACCOUNTS FOR THE EOU UNITS AND FOR NON - EOU UNITS AND SETTING UP OF A UNIT IN THE OLD MINES WHICH ARE ALREADY BEING OPERATED BY THE A SSESSEE CANNOT BE TREATED AS NEW UNIT. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). THE CIT(A) DEALT WITH THE DEDUCTION IN RESPECT OF EACH OF THE UNIT S SEPARATELY. THE CIT(A) CONFIRMED THE ORDER OF THE ASSESSING OFFICER BY SUSTAINING THE DISALLOWANCE OF THE DEDUCTION CLAIMED U/S 10B IN RESPECT OF AMONA UNIT , CODLI UNIT AND CHITRADURGA U NIT. THE CIT(A) AS PER THE DISCUSSION HELD UNDER PARA 10.4 TO 11.7 TOOK THE VIEW THAT NO NEW UNIT HAS COME INTO EXISTENCE AT THE AMONA PLANT DURING THE YEAR 2002 - 03. SIMILARLY, NO NEW UNIT CAME INTO EXISTENCE AT CHITRADURGA PLANT DURING THE YEAR 2005 - 06 OR IN THE SUBSEQUENT YEAR BY SUMMARIZING AS UNDER, UNDER PARA 12 OF ITS ORDER. THE ASSESSEE HAS ONLY INSTALLED OF FEW DISCRETE STANDALONE EQUIPMENTS WHICH CANNOT BE HE LD TO CONSTITUTE A SEPARATE UNDERTAKING HAVING ITS OWN IDENTITY AND CAPABLE OF FUNCTIONING AS AN INDEPENDENT UNIT. THE IDENTITY OF THE OLD UNIT COMPRISING OF THE OLD AND EXISTING MACHINES & EQUIPMENTS, WAS NOT LOST. THE INCREASE IN THE PRODUCTION OF IRON O RE CANNOT BE ATTRIBUTED TO THE INSTALLATION OF NEW PLANT AND MACHINERY . . THEREFORE, IN VIEW OF THE ABOVE, IT IS CLEARLY ESTABLISHED THAT NO NEW UNIT HAS COME INTO EXISTENCE AT THE AMONA PLANT DURING THE YEAR 2002 - 03. IT IS ONLY A CASE OF RECONSTRUCTION OF THE EXISTING UNIT IN WHICH THE OLD STRUCTURES IN THE PLANT INCLUDING SOME OF THE MACHINES AND EQUIPMENTS WERE REPAIRED HAND RENOVATED AND SOME ADDITIONAL MACHINES AND EQUIPMENTS WERE NEWLY INSTALLED. SIMILARLY, NO NEW UNIT ALSO CAME INTO EXISTENCE AT T HE CHITRADURGA PLANT OF THE ASSESSEE ITA NO. 72&85/PNJ/2012 61 DURING THE YEAR 2005 - 06 OR IN THE SUBSEQUENT YEARS. IT IS ALSO A CASE OF RECONSTRUCTION OF THE EXISTING UNIT INVOLVING REPAIR AND RENOVATION OF THE OLD STRUCTURE AND OTHER PLANT AND MACHINERY. THEREFORE THE ASSESSEE I S NOT ELIGIBLE TO CLAIM DEDUCTION UNDER SECTION 10B IN RESPECT OF BOTH ITS UNITS AT AMONA AND CHITRADURGA FOR THE ASSESSMENT YEAR 2009 - 10, WHICH IS MUCH BEYOND THE PERIOD OF 10 CONSERVATIVE YEARS, AS PRESCRIBED IN THIS SECTION. 37 . THE CIT(A) HAS ALSO DIS CUSSED VARIOUS CASE LAWS AS RELIED BY THE ASSESSEE UNDER PARA 30 OF ITS ORDER. THE CIT(A) HAS ALSO HELD THAT THE UNIT AT CHITRADURGA WAS EARLIER IN THE DOMESTIC TRAFFIC AREA . D URING THE FINANCIAL YEAR 2008 - 09 , T HE ASSESSEE WANTED TO CONVERT THE UNIT AS A N EOU AND SUBMITTED ITS APPLICATION IN THE CONCERNED AUTHORITIES DATED 15.2.2008 AND AS PER INSTRUCTION NO.2 DATED 9.3.2009 OF THE CBDT, THE APPROVAL GRANTED BY THE DEVELOPMENT COMMISSIONER IN SUCH CASES WILL BE CONSIDERED AS VALID. ONE SUCH APPROVAL IS RA TIFIED BY THE BOARD OF APPROVAL FOR EOU SCHEME. THE APPROVAL WAS RATIFIED BY THE BOARD ON 14.1.11. THEREFORE, FOR THE ASSESSMENT YEAR 2009 - 10, THERE WAS NO APPROVAL OF THE BOARD. CIT(A) ULTIMATELY TOOK THE VIEW THAT THE ASSESSEE WAS NOT ENGAGED IN MANUF ACTURING OR PRODUCTION. THE IRON ORE AT AMONA AND CHITRADURGA PLANTS OF THE ASSESSEE ARE NOT ENTIRELY FROM THE IRON ORE EXTRACTED BY THE ASSESSEE FROM ITS MINES . P ART OF THE IRON ORE S FED TO THE BENEFIC I ATION UNIT AT AMONA IS PURCHASED BY THE COMPANY. MI NES OF THE ASSESSEE FROM WHICH IRON ORE S ARE FED TO THE AMONA AND CHITRADURGA PLANTS ARE VERY OLD WHICH ARE BEING EXPLOITED BY THE COMPANY SINCE LONG. THE CIT(A) TOOK THE VIEW THAT SINCE THE MINES OF THE ASSESSEE ARE NOT NEW, IT CANNOT BE SAID THAT THEY F ORM ED PART OF THE UNDERTAKING AT AMONA AND CHITRADURGA, EVEN IF THESE TWO UNITS ARE CONSIDERED TO BE NEW. IT WAS FURTHER HELD THAT THE AMONA AND CHITRADURGA UNITS CANNOT BE SAID TO HAVE BEEN ENGAGED IN EXTRACTION ACTIVITIES, THEREFORE, THE ACTIVITIES OF A MONA AND CHITRADURGA PLANTS CANNOT BE HELD AS MANUFACTURING OR PRODUCTION KEEPING IN VIEW THE DECISION OF THE SUPREME COURT IN THE CASE OF THE ASSESSEE WHICH HAS BEEN FOLLOWED BY THE I.T.A.T. BENCH IN THE CASE OF M/S. CHOWGULE AND COMPANY LTD (I.T.A NO. 16 2 & 184/PNJ/2006 AND MISC. APPLICATION NO. 23/PNJ/2007) AND IN THE CASE OF V.S. DEMPO AND C OMPANY PVT. LTD. (ITA NO. 44/PNJ/2009). IT WAS HELD THAT ALTERNATIVELY IF THE MINES FROM WHICH IRON ORE IS SUPPLIED TO THE PROCESSING PLANTS ARE CONSIDERED TO FORM PART OF THE UNDERTAKING S AT AMONA AND CHITRADURGA, SUCH UNDERTAKINGS CANNOT BE THUS HELD TO BE NEW UNDERTAKING S IN VIEW OF THE OLD MINES FORMING PART OF SUCH ITA NO. 72&85/PNJ/2012 62 UNDERTAKING S . CIT(A) ULTIMATELY UNDER PARA 15.3 HELD THAT THE ACTIVITIES OF THE ASSESSEE IN TWO UNITS AT AMONA AND CHITRADURGA WOULD NOT AMOUNT TO MANUFACTURE BY OBSERVING AS UNDER: THEREFORE, IN THE PRESENT CASE OF THE ASSESSEE, THE QUESTION WHETHER THE ACTIVITIES OF THE TWO EOUS AT AMONA AND CHITRADURGA WOULD AMOUNT TO `MANUFACTURE OR NOT HAS TO BE NECESSARILY ANSWERED BY REFERRING TO THE DEFINITION OF `MANUFACTURE PROVIDED UNDER SECTION 2(29BA) OF THE INCOME TAX ACT, WHICH IS APPLICABLE FOR THE ASSESSMENT YEAR UNDER REFERENCE. CONSIDERING THIS DEFINITION, IT IS SUFFICIENTLY CLEAR THAT THE IRON ORE PROCESSING ACTIVITIES OF THE ASSESSEE AT THE EOUS AT AMONA AND CHITRADURGA DO NOT AMOUNT TO `MANUFACTURE. THEREFORE, THE CLAIM OF THE ASSESSEE TO ADOPT A LIBERAL VIEW FOR INTERPRETING THE DEFINITION OF `MANUFACTURE CANNOT BE ACCEPTED. 37.1 . THE CI T(A) IS OF THE VIEW THAT THE PERCENTAGE OF THE OLD MACHINERY IN THE CASE OF BOTH THE UNITS WILL CERTAINLY EXCEED 20% OF THE TOTAL VALUE OF THE PLANT AND MACHINERY. REFERRING TO THE APPLICATION OF THE ASSESSEE MADE BEFORE THE DEVELOPMENT COMMISSIONER , IT W AS NOTED BY THE CIT(A) THAT THE APPLICATIONS WERE FOR CONVERSION OF EXISTING DTA UNITS TO EOU UNITS AND NOT FOR ESTABLISHMENT OF THE NEW UNDERTAKING AND ULTIMATELY ON THIS BASIS, THE CIT(A) HELD THAT THE ASSESSEE IS NOT ELIGIBLE TO CLAIM DEDUCTION U/S 10B OF THE INCOME - TAX ACT IN RESPECT OF AMONA AND CHITRADURGA UNITS. IN RESPECT OF C ODLI UNIT THE CIT (A) CONFIRMED THE FINDING OF THE AO THAT THERE IS NO MANUFACTURING OR PRODUCTION OR ARTICLE OR THING. WHAT IS FED AS RAW MATERIAL TO THE C ODLI UNIT IS IRON OR E AND WHAT COMES OUT AFTER PROCESSING IT ALSO IRON ORE, THE ONLY MINOR DIFFERENCE BEING IN T HE IRON CONTENT OF THE MATERIAL. THE CIT (A) RELIED ON THE DECISION OF THE SUPREME COURT IN ASSESSEES OWN CASE 271 ITR 331 FOR THE PROPOSITION THAT EXTRACTION AND PROCESSING OF IRON ORE TOGETHER CONSTITUTES PRODUCTION . CIT (A) ALSO HELD THAT THE ASSESSEE COMPANY HAS NOT PRODUCED ANY SATISFACTORY EVIDENCE WITH REGARD TO DATE/YEAR OF COMMENCEMENT OF BU SINESS OF THE UNIT. ULTIMATELY THE DISALLOWANCE OF THE CLAIM OF THE ASSESSEE U/S 10B IN RESPECT OF ALL THE THREE UNITS WAS SUSTAINED. 38. THE LEARNED. A.R. CONTENDED THAT THE ASSESSEE HAS 9 UNITS, OUT OF WHICH IT CLAIMED EXEMPTION U/S 10B OF THE ACT IN RESPECT OF PROFIT DERIVED FROM 3 UNITS. THE PROFITS FROM THE 3 UNIT S I.E. THE EOUS ARE IN THE SAME PROPORTION AS TO THE OTHER UNITS. PROFITS FROM EOU WERE 48% ON SALES OF RS.931/ - CRORES WHILE PROFIT FROM OTHER UNITS WERE RS.1,706/ - CRORES ON SALE OF RS.3,352/ - CRORES. THUS THE PROFITS FROM THE EOU WERE 48% WHILE FROM T HE OTHER UNITS ITA NO. 72&85/PNJ/2012 63 WERE 51%. FOR THE SAKE OF CONVENIENCE AND AS ARGUED BY BOTH THE SIDES , WE WOULD LIKE TO DEAL WITH GROUND RELATING TO EXEMPTION U/S 10B IN RESPECT OF EACH OF THE THREE UNITS OWNED BY THE ASSESSEE SEPARATELY. 38.1 IN RESPECT OF THE AMONA P LANT THE ASSESSEE CLAIMED EXEMPTION U/S 10B FOR A SUM OF RS. 2 , 57 , 23 , 14 , 771/ - , T HE LEARNED AR CONTENDED THAT THE PLANT A T AMONA WAS SET UP IN 1985 IN BICHOLIM TALUK . O VER THE YEARS THE PLANT WAS ERODED AND OUTDATED. DURING THE FINANCIAL YEAR 2002 - 03 AFTER COMPLETE RE - VAMPING OF THE EARLIER PLANT, A NEW PLANT WAS SET UP BY INSTALLING NEW MACHI NES ALONGSIDE USING SOME PARTS OF THE OLD MACHINES. THE COST OF THE NEW PLANT AND MACHINERIES FOR ALL MAJOR/CRITICAL PROCESSES AND THE CIVIL STRUCTURES AMOUNTED TO RS .3,96,10,020/ - THE WDV OF THE OLD PLANT AND MACHINERY USED IN THE NEW UNDERTAKING WAS RS.26,17,714/ - WHICH WAS AROUND 6.7% OF THE NEW PLANT & MACHINERY. ATTENTION WAS DRAWN TO PAPER BOOK VOL - I (45 - 48) . HE SUBMITTED THAT T HE DETAILS REPRESENT THE PART OF T HE DEPRECIATION SCHEDULE FILED ALONG WITH THE RETURN AND THE BOOKS OF THE ASSESSEE WERE NOT REJECTED DURING THE FINANCIAL YEAR: 2003 - 04. DURING THE FINANCIAL YEAR 2008 - 09 , THE DTA UNIT SET UP IN FINANCIAL YEAR 2002 - 03 WAS CONVERTED INTO 100% EOU IN TERMS OF APPROVAL FROM THE O/O DEVELOPMENT COMMISSIONER, MINISTRY OF COMMERCE & INDUSTRY, MUMBAI, VIDE APPROVAL NO. PER:44(2007)IAII/39 - 07 - 08 DATED 28 - 03 - 2008 AND THE SAME WAS RATIFIED BY THE BOARD OF A PPROVAL IN ITS MEETING HELD ON 03 - 06 - 2008 ( PAGE 41 - 44 OF THE FIRST PAPER BOOK ). THE PREMISES OF THE UNDERTAKING WERE BONDED AND LICENCE NO.4/2008 DATED 23 - 07 - 2008 WAS ISSUED U/S 58 OF THE CUSTOMS ACT AT PAGE 280 OF THE PAPER BOOK. THE CONVERSION OF THE DTA UNIT INTO EOU UNIT BECAME FINAL ON THE RECEIPT OF CUSTOMS LICENCE NO.4/2008 DATED 23 - 03 - 2008 DULY BONDING THE PREMISES. THE UNIT STARTED FUNCTIONING AS EOU. THE INFORMATION FOR THE SAME WAS GIVEN TO THE DEVELOPMENT COMMISSIONER VIDE LETTER DATED 24 - 07 - 2008. FOR THIS ATTENTION WAS DRAWN TO PAGE 64 OF PAPER BOO K VOL.I. I T WAS SUBMITTED THAT THE ASSESSEE ACCORDINGLY MADE THE CLAIM U/S 10B OF THE IT ACT DURING THE YEAR. THIS WAS THE 7 TH YEAR OF EXISTENCE OF THE UNIT AND THE DEDUCTION U/S 10B WAS CLAIMED FOR THE FIRST TIME . I N THE MONTHS OF NOVEMBER AND DECEMBER , 2011, T HE ASSESSING OFFICER MADE CERTAIN ENQUIRIES WHICH WERE REPLIED. ATTENTION WAS DRAWN TO PAGES 58 TO 113 OF PAPER BOOK VOL.I. ON 23 - 12 - 2011 A SURVEY U/S 133A WAS CONDUCTED IN THE PREMISES OF ALL THE ITA NO. 72&85/PNJ/2012 64 UNITS. THE SURVEY ONLY RE - CONFIRMED THAT INI TIALLY A UNIT WAS SET UP DURING THE YEAR 1985 AND MAJOR RENOVATION AND MODERNI Z ATION TOOK PLACE DURING THE FINANCIAL YEAR 2002 - 03. DURING RENOVATION AND MODERNI Z ATION, IT WAS SUBMITTED THAT NOT ONLY THE NEW/LATEST TECHNOLOGY ON THE MAIN PROCESS OF THE MACH INES I.E ., SCREENING / S CHENCK (AUSTRALIA) BANANA SCREENING MACHINE WAS INTRODUCED BUT THE CAPACITY OF THE PLANT WAS ALSO ENHANCED FROM 1 MTPA (MILLION T ONS P ER ANNUM) TO APROX. 2 MTPA WITH FURTHER FLEXIBILI TY TO INCREASE THE SAME FURTHER. OUR ATTENTION W AS DRAWN TOWARDS THE PRODUCTION DATA FROM THE YEAR 1999 - 2000 TO 2000 - 01 SUBMITTING THAT PRODUCTION HAS INCREASED DRASTICALLY WHICH WAS 9.17 LACS MT IN 1999 - 2000 AND WAS 10.38 LAC S MT IN 2000 - 01. IT WAS POINTED OUT THAT DURING THE YEAR 2002 - 03 THE PRODUCTI ON WAS 11.29 LAC MT AND THIS YEAR WAS A TRANSITION YEAR. ATTENTION WAS ALSO DRAWN TO PAGE - 239 OF THE PAPER BOOK , WHICH GIVES THE DETAILS OF PRODUCTION DATA OF FEW YEARS AFTER SET - UP. THESE ARE REPRODUCED AS UNDER: FY MT (LACS) 2002 - 03 11.29 2003 - 04 15.5 0 2004 - 05 15.14 2005 - 06 16.78 2006 - 07 17.62 2007 - 08 21.46 2008 - 09 29.87 2009 - 10 30.70 2010 - 11 22.86 THUS IT WAS CONTENDED THAT THE PRODUCTION HAD INCREASED IN A PHASED MANNER FROM 9.17 LAC MT IN FINANCIAL YEAR 1999 - 2000 TO 30.7 LAC MT IN FINANCIAL YEAR 20 09 - 10. 38.2 I T WAS STATED THAT THE ASSESSEE SUBMITTED THE FOLLOWING DOCUMENTS TO THE ASSESSING OFFICER AND THE SAME ARE PRODUCED BEFORE THIS TRIBUNAL ; - A . LOP NO.PER:44(2007) IA - II/39/07 - 08/2606 DATED 28/3/2008 (PAGE NOS. 41 - 43 PAPER BOOK VOL.I ITA NO. 72&85/PNJ/2012 65 B . BOARD OF A PPROVAL NO.SEEPZ/IA - II/44/2007 - 08 /6053 DT.6/7/2009 PAGE NO.44 OF PAPER BOOK VOL.I . C . CUSTOMS LICENCE NO.4/2008 DT.23/7/2008 FOR PRIVATE BONDED WAREHOUSE - PAGE NO.280, PAPER BOOK VOL.I. D . GREEN CARD NO.02029 PAGE NOS.281 - 282 OF PAPER BOOK VOL.II . E . FACTORY LICEC E NO.GOA/1132 DT.4/11/2003 PAGE NO.283 OF PAPER BOOK VOL.II . F . LETTER DT.24/7/2008 INTIMATING THE DEVELOPMENT COMMISSIONER ABOUT THE COMMENCEMENT OF COMMERCIAL PRODUCTION PAGE NO.64 OF PAPER BOOK VOL.I . G . LUT PAGE NO.76 OF PAPER BOOK VOL.I . H . REPORT OF CA ON FOR M NO.56G PAGE NOS.10 - 12 OF PAPER BOOK VOL.I . I . DETAILS OF COMPUTATION OF DEDUCTION U/S10B PAGE NO.6 OF PAPER BOOK VOL.I . J . PLANT & MACHINERY - DEPRECIATION CHART/FIXED ASSET SCHEDULE FOR ASSESSMENT YEAR 2003 - 04 TO 2009 - 2010 PAGE NOS.45 - 48 OF PAPER BOOK VOL.I . K . NOTE ON THE PRODUCTION PROCESS OF THE UNDERTAKING PAGE NOS.21 - 30 OF PAPER BOOK VOL.I . L . A NOTE ON SETTING UP EOUS PAGE NOS.31 - 32 OF PAPER BOOK VOL.I . M . A NOTE FOR COMPARISON BETWEEN EOU AND NON EOU PROFITABILITY % PAGE NO.91 OF PAPER BOOK VOL.I. 38.3 DURING THE SURVEY A STATEMENT OF SHRI H.K.MOORTHY AND SHRI ULHAS KERKAR BOTH TECHNOCRATS BY PROFESSION WERE RECORDED. THIS STATEMENT IS AVAILABLE AT PAGE 728 - 731 AND 714 TO 716 OF ADDITIONAL PAPER BOOK VOL.I. THE ASSESSING OFFICER TOOK A VIEW THAT THE AMONA UN IT WAS SET UP IN THE YEAR 1985 AND ALLEGED THAT IT WAS NOT A NEW UNIT BUT MERELY A RE - CONSTRUCTION AND DISALLOWED THE CLAIM OF THE ASSESSEE U/S 10B OF THE IT ACT. SEVERAL PAPERS WERE IMPOUNDED DURING THE SURVEY, BUT COP IES OF THESE PAPERS WERE MADE AVAIL ABLE TO THE ASSESSEE IN MARCH 2012, WHEN THE PROCEEDING S WERE PENDING BEFORE THE CIT(A). THE ASSESSING OFFICER DISALLOWED THE CLAIM MADE U/S 10B OF THE IT ACT, AS THE MAIN REASON WAS THAT THERE WAS NO PRODUCTION OR MANUFACTURE INVOLVED IN THE ACTIVITIES CARRIED OUT IN THE UNIT AND THE UNIT IS OLD ONE. IN RESPECT OF THE AVERMENT OF THE ASSESSING OFFICER THAT THE SAID UNIT IS ITA NO. 72&85/PNJ/2012 66 NOT ENGAGED IN ANY MANUFAC TURE OR PRODUCTION OF ARTICLE OR THING. IT WAS SUBMITTED THAT THE ASSESSING OFFICER WOULD NOT HAVE UNDE RSTOOD THE FACTS PROPERLY AND THEREFORE, A WRONG INTERPRETATION OF THE DECISION OF THE SUPREME COURT IN THE CASE OF SESA GOA LTD., 271 ITR 331 WAS TAKEN. AS PER THE ASSESSING OFFICER THE RATIO OF THE AFORESAID CASE THAT BOTH EXTRACTION AND PROCESSING OF CRUDE ORE ARE NECESSARY TO MAKE A CASE OF PRODUCTION WHEREAS IN HIGH COURT DECISION WHICH WAS CONFIRMED BY THE SUPREME COURT ON APPEAL BY THE DEPARTMENT NO SUCH REASONING WAS RECORDED ANY WHERE. IN FACT THE REFERENCE S WERE MADE TO THREE HIGH COURTS DECIS ION IN WHICH IT WAS HELD THAT THE EXTRACT ION ITSELF WAS PRODUCTION. THE FAMOUS CASE OF CHOW G ULE (SUPREME COURT) IN SALES TAX MATTER WAS ALSO DISTINGUISHED IN THIS CASE. IN FACT BASED UPON SESA GOA (SUPREME COURT) SEVERAL CASES HAVE BEEN DELIVERED BY THE S UPREME COURT INCLUDING ORACLE WHERE ONE SIMPLE PROCESS OF COPYING SOFTWARE ONTO A BLANK CD WAS ALSO HELD TO BE PRODUCTION. RELIANCE WAS PLACED ON THE FOLLOWING OTHER CASES; A ) ARIHANT TILE & MARBLES LTD VS INCOME TAX OFFICER (2007) 295 ITR 1348 (RAJ.) B ) CIT VS FATEH GRANITE (P) LTD.,(2009 ) 314 ITR 32 (BOM.) C ) CIT VS ORACLE SOFT W ARE INDI LTD.,(2010) 320 ITR 546(SUPREME COURT) D ) TATA TEA LTD VS ACIT (2011) 338 ITR 285(KER.) E ) MADHU JAYANTI INTL.LTD., VS DCIT (2012) 137 ITD 377(KOL.)(SB) F ) CHOWGULE & CO., LTD, VS ACI T PANAJI, BENCH IN I.T. A. N O . 162/PNJ/2006 DT. 12 - 07 - 2007 TO BE READ WITH THE MISC. APPLICATION IN I TA NO. 184/PNJ/2006 DT.19 - 0 7 - 07 . ON THE ISSUE THAT THE ASSESSEE HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNTS FOR THE EOU UNITS AND NON - EOU UNITS , I T WAS P OINTED OUT THAT THERE IS NO SUCH REQUIREMENT U/S10B OF THE IT ACT IN THIS REGARD RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS; - A ) DCIT VS ARABIAN EXPORTS LTD., 109 TTJ.(MUM.).440 B ) INTERNATIONAL INSTRUMENTS (P) LTD., VS CIT 123 ITR 11(KAR.) C ) CIT V S MAZAGAON DOCK LTD., 191 ITR 460(BOM.) ITA NO. 72&85/PNJ/2012 67 D ) CIT VS ABHIRAMI COTTON MILLS 220 ITR 84 E ) CIT VS BONGAIGAON REFINERY & PETROCHEMICALS LTD., 38.4 IN RESPECT OF THE FINDING OF THE ASSESSING OFFICER THAT NO SUCH EVIDENCE HAS BEEN PRODUCED BY THE ASSESSEE FOR T HE DATE OF COMMENCEMENT OF MANUFACTURE OR PRODUCTION. IT WAS SUBMITTED THAT THE ASSESSEE DULY INFORMED THE DEVELOPMENT COMMISSIONER, SEZ, MUMBAI VIDE LETTER DATED 9/3/2008 THAT IT S COMMERCIAL PRODUCTION STARTED ON 8/3/2000. COPY OF THIS LETTER WAS ALSO S ENT TO THE CUSTOMS DEPARTMENT. 38.5 IN RESPECT OF THE OBSERVATIONS OF THE ASSESSING OFFICER THAT THE UNIT IS NOT A NE W UNIT AS THE ASSESSEE HAS ALREADY A N EXISTING UNIT SET UP IN1985 AND IT IS A CASE OF RECONSTRUCTION. IT WAS SUBMITTED THAT THE GUIDIN G PRINCIPLES ON VARIOUS RULINGS BOTH INITIAL AS WELL AS RECENT ONES WHEN TESTED TO THE FACTS OF THE CASE CONFIRM THAT DURING THE FINANCIAL YEAR 2002 - 03 THE ENTIRE UNIT WAS SET UP WHEREIN COMMUNICATION WITH THE PANCHAYAT ETC., PARTICULARLY PANCHNAMA AND NEW SPAPER CLIPPING BRINGS OUT CLEARLY THAT A COMPLETE DESTRUCTION OF OLD UNIT WAS DONE AND ALTOGETHER NEW PLANT WAS SET UP ALBEIT WITH THE AID OF SOME OLD MACHINES AND SOME PART S THEREOF . MERE USAGE OF WORD RENOVAT I ON I N SOME COMMUNICATION WITH FEW AUTHOR ITIES CANNOT BE ACCORDED UNDUE WEIGHTAGE DISREGARDING ALL OTHER CORROBORATIVE EVIDENCES. IN THIS REGARD RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS; A) TEXTILE MACHINERY CORPN .LTD.,VS CIT 107 ITR 195 B) CIT VS INDIAN ALUMINIUM CO.,LTD., 108 ITR 367 (S UPREME COURT) C) CIT VS ORIENT PAPER MILLS LTD., 176 ITR 110 (SUPREME COURT) D) METTUR CHEMICAL & IND. CORPN. LTD VS CIT 217 ITR 768 (SUPREME COURT) E) CIT VS MAHAAN FOODS LTD. (2008) 216 CTR (DEL) 148 F ) GUJARAT ALKALIES AND CHEMICAL LTD., VS CIT 249 CT R (GUJ.) 82 G ) TAURUS MERCHANDISE (P) LTD., VS INCOME TA X OFFICER (2012) 143 TTJ (DEL.). 3 8.6 IT WAS SUBMITTED THAT AS THE FIRST UNIT WAS SET UP DURING THE YEAR 1985 HAD BECOME OUTDATED, OBSOLETE AND UNECONOMICAL AND IT BECAME DANGEROUS ITA NO. 72&85/PNJ/2012 68 TO RUN THE OLD U NIT. THE ASSESSEE HAS TO TAKE UP IMMEDIATE ACTION FOR SETTING UP THE NEW PLANT DURING 2002 - 03. SUBSTANTIAL CAPITAL OF RS.6.5 CRORES WAS INDUCTED WHILE THE OLD MACHINERY WORTH RS.26.00 LAKHS WAS USED AND NO IDENTITY OF THE OLD UNIT WAS RETAINED AND THE C APACITY OF THE PLANT WAS SUBSTANTIALLY INCREASED FROM 1 MTPA TO 2 MTPA AND FURTHER IN - BUILT FLEXIBILITY TO EXPAND THEREAFTER WHICH TOOK PLACE DURING THE FINANCIAL YEAR 2008 - 09. IF THE NEW UNIT WAS NOT SET UP , THE EXISTING BUSINESS OF THE ASSESSEE WOULD HAVE COME TO AN END. ALL MAJOR MACHINERIES WERE INSTALLED AFRESH WITH CAPACITIES MORE THAN DOUBLE D AND WITH SCOPE TO MAKE FURTHER EXPANSION. THE EARLIER PHYSICAL LAYOUT/FOUNDATIONS W ERE TOTALLY DISMANTLED AND IN PLACE OF T HE SAME, NEW FOUNDATION WERE ERE CTED. THE ASSESSING OFFICER MERELY REFERRED TO THE USAGE OF THE WORD RENOVAT I ON IN VARIOUS COMMUNICATIONS EXCHANGED BETWEEN THE ASSESSEE AND THE VILLAGE PANCHAYAT OF AMONA WHEREAS HE COMPLETELY IGNORED THE NEWSPAPER CLIPPING WHICH APPEARED IN THE LOCAL MARATHI NEWSPAPER PUDARI DATED 31/7/2002 WHICH CARRIED A FULL NEWS ITEM IN RELATION TO ON - GOING CONSTRUCTION ACTIVITIES AT THE AMONA PLANT OF THE ASSESSEE AND REFERRED THE SAME AS ILLEGAL CONSTRUCTION OF A NEW PLANT AS ALSO THE PANCHANAMA CONDUCTED BY THE AMONA GRAM PANCHAYAT (PAGE 299) . THE PANCHANAMA WAS CARRIED ON 7/9/2002 STATING THAT IT WAS A NEW CONSTRUCTION HAVING STEEL FABRICATION WITH RCC FOUNDATION. 38.7 THE PRODUCTION PROCESS EMPLOYED AT AMONA UNIT BEFORE SETTING UP OF THE NEW PLANT DUR ING FINANCIAL YEAR 2002 - 03 AND FINANCIAL Y E AR 2005 - 06 RESPECTIVELY CLEARLY SHOWS THAT THE PROCESS UNDERWENT A SWEEPING CHANGE AND LATEST SCREENING TECHNOLOGY WAS INTRODUCED (PAGE - 393) . THE DETAILS OF MAJOR MACHINERY AND EQUIPMENTS EMPLOYED USED IN THE SAI D UNIT IN THE OLD AND NEW PLANT SHOWS THAT THE LATEST TECHNOLOGY WAS USED IN THE NEW PLANT.(PAGE 394) 38.8. IT WAS SUBMITTED THAT ORE WAS PROCESSED/PRODUCED IN AMONA UNIT OUT OF THE ORE EXTRACTED FROM OWN MINES AT GOA & KARNATAKA AND ALSO THE SAME PURCHA SED FROM THIRD PARTIES AS PER DETAILS GIVEN BELOW; BREAK UP OF PURCHASE OF (CRUDE ORE) FROM OWN MINES AT GOA RS. 45,25,03,692 FROM OWN MINES AT KARNATAKA RS. 43,11,06,896 ITA NO. 72&85/PNJ/2012 69 FROM THIRD PARTIES RS. 3,16,15,091 TO TAL RS. 91,52,25,679 38.9 IN THE COMPUTATION OF DEDUCTION CLAIMED U /S 10B IN RESPECT OF AMONA UNIT, THE ASSESSEE DECLARED COST OF CRUDE ORE OF RS.45.25 CRORES AS PART OF COST PRODUCTION OF RS.55.71 CRORES, WHILE ORE PURCHASED WAS D ECLARED AT RS.43.11 CRORES TRANSFERRED FROM ITS KARNATAKA MINES + RS.3.16 CRORES TRANSFERRED FROM THIRD PARTY LEASED MINES. THE BENEFICIATION PLANT MAINLY CONSISTS OF VARIOUS TYPES OF CONVEYORS AND SCREENS WHICH ARE FITTED ON HUGE STEEL S TRUCTURES, WHEREAS THE SPECIALIZ ED ITEMS OF PLANT & MACHINERY ARE COMPARATIVELY FEW IN TERMS OF PHYSICAL QUANTITY AND SIZE. THE USABLE STEEL FROM THE DISMANTLED PLANT WAS ALSO RE - USED ALONG WITH FRESH STEEL PURCHASES AND FABRICATION CHARGES WERE INCURRED ON THE SAME IN SET TING UP OF THE NEW UNIT. IN RESPECT OF CAPITAL EXPENDITURE OF RS.3.96 CRORES IT WAS SUBMITTED THAT THE B ILLS WERE FILED AS UNDER; P & M BILLS AMOUNT PB REFERENCE SUBMITTED BEFORE THE AO NIL SUBMITTED BEFORE CIT(A) 2,21,69,787 PAGE NOS.1378 - 1435 OF ADDL. PB VOL.III SUBMITTED BEFORE THE ITAT 1,35,23,639 PAGE NOS.794 - 1146 OF ADDL. PB VOL.II BALANCE 39,16,594 (9.88%) TOTAL CAPITAL EXPENDITURE 3,96,10,020 38.10 . DURING THE COURSE OF HEARING LEARNED AR SHOWE D SAMPLES OF THE INPUT CALLED ROM (RUN OF MINES) WHICH APPEARED TO BE PIECES OF ROCKS; AND OUT PUT IN THE FORM OF IRON FINES AND IRON ORE LUMPS , WHICH WERE MUCH LESS IN SIZE AS COMPARED TO ROM . IT WAS POINTED OUT THAT PRACTICALLY CRUDE ORE IS OF NO USE , BU T THE USAGE OF LUMPS AND FINES IS ABSOLUTELY ESSENTIAL FOR STEEL MAKING INDUSTRY , WHICH ARE PRODUCED AFTER PROCESSING IN THE BENEFICIATION PLANT . THE ACTIVITY INVOLVED IN CONVERTING INPUT INTO OUTPUT CONSISTS OF CRUSHING, ITA NO. 72&85/PNJ/2012 70 SCREENING, WASHING, STACKING, LOAD ING IN BARGES; RIVER TRANSPORTATION TO THE PORT, AND EXPORT IN SHIPS. EVEN THE LEARNED AR BY SHOWING THE SAMPLE REQUESTED THE BENCH TO HAVE A SITE VISIT BY EXERCISING THE POWER U/S 25 5(6) OF THE IT ACT. THE LEARNED DR OBJECTED TO THIS. THE BENCH TO MAKE I T VERY CLEAR ABOUT THE PROCESS INVOLVED DECIDED TO HAVE SPOT INSPECTION AT 3.00 PM ON 19 / 12 / 2012. DURING THE COURSE OF HEARING ALONG WITH BOTH THE PARTIES I.E. THE ASSESSEES COUNSEL, STANDING COUNSEL FOR TH E DEPARTMENT, THE ACIT AND THE INSPECTOR AND ALS O THE BENCH CLERK , T HE PHYSICAL INSPECTION OF THE AMONA UNIT WAS CARRIED ON 19 - 12 - 2012 IN THE AFTERNOON. 3 8.11 THE LEARNED AR CARRIED US THROUGH THE ORDER OF THE CIT(A) AND MADE NUMBER OF COMMENTS ON THE OBSERVATION/FINDING OF THE CIT(A). ON THE DIRECTI ON OF THE BENCH, THE AR SUBMITTED THE FOLLOWING SYNOPSIS IN RESPECT OF THE DISALLOWB ILITY OF EXEMPTION TO THE ASSESSEE U/S 10B OF THE IT ACT. THESE ARE REPRODUCED A UNDER; 2. POINT - WISE RESPONSE TO THE OBSERVATIONS OF CIT(A) IN HIS ORDER: 2.1 IN ADDITIO N TO ALL THE DOCUMENTS WHICH WERE MAD E AVAILABLE TO THE AO THE FOLLOWING ADDITIONAL DOCUMENTS AND INFORMATION WERE PROVIDED AND PLEADINGS WERE MADE BEFORE THE CIT(A) AS BELOW; - COPIES OF BILLS OF EQUIPMENT MATERIAL SERVICES AMOUNTING TO RS.2.21 CRORES OUT OF 3.96 CRORES SINCE THE RECORD WAS VERY OLD. - VARIOUS DOCUMENTS IMPOUNDED DURING SURVEY WERE AGAIN SUBMITTED WITH CIT(A) DULY DRAWING HIS ATTENTION T HAT MAJOR DISMANTLING AND DEMOLISHING WERE UNDERTAKEN. THE CIT(A) SOUGHT REMAND REPORT FROM THE AO AND CONSIDERED THE CONTENTS WHILE ADJUDICATING THE APPEAL. 2.2 AT PAGE 42, A S PER CIT(A) VI DE PARA - 10.5 : T HE ASSESSEE DID NOT FURNISH EVIDENCE OF NEW MACHINES. ASSESSEES EXPLANATION THE CIT(A) WAS EXPLAINED THAT ALL CAPITALISATION MAD E IN THE EARLIER YEARS STOOD ACCEPTED BY THE DEPARTMENT UNDER SCRUTINY ASSESSMENTS AND IT WAS DIFFICULT FOR THE ASSESSEE TO NOW QUICKLY RETRIEVE ALL THE BILLS IN SHORT TIME AT THIS STAGE. ITA NO. 72&85/PNJ/2012 71 2.3 AT PAGE 43 , A S PER CIT(A) VIDE PARA - 10.5 : A LL OLD MACHINES WERE NOT REPLACED. THE NUMB ER OF SUCH NEW MACHINES AND EQUIPMENTS IS FOUND TO BE VERY SMALL AS COMPARED TO THE TOTAL NUMBER OF PLA N T AND MACHINERY DEPLOYED IN THEIR PROCESSING PLANT. THEREFORE, THE CLAIM OF ASSESSEE THAT THE OLD AND OUTDATED EXISTING UNIT WAS COMPLETELY REPLACED BY A NEW SET OF MACHINES. IS FACTUALLY INCORRECT. AT PAGE - 47 , A S PER CIT(A) VIDE PARA 10.6 : B Y CARRYING OUT REPAIRS A NEW UNIT IS NOT SET UP. BY REPAIRING OR RENOVATING THE RUSTED AND CORRODED STEEL STRUCTURES OF THE OLD PLANT OR BY CHANGING THE LOCATION/F OUNDATION OF THE OLD EQUIPMENTS OR INSTALLING A FEW NEW MACHINES IN THE ENTIRE PLANT COMPRISING OF SEVERAL SUCH EQUIPMENTS, THE ASSESSEE CANNOT CLAIM THAT IT HAS SET UP A NEW UNIT. APPELLANTS EXPLANATION (COMMON TO BOTH THE OF THE ABOVE OBSERVATIONS ) THE CIT(A) IGNORED TO CONSIDER THE EXPLANATION OF THE ASSESSEE THAT THE BASIC COST OF PLANT & MACHINERY IN CASE OF AN IRON ORE BENEFICIATION PLANT IS INCURRED ON RAISING STEEL AND CONCRETE STRUCTURES ON WHICH THE CONVEYOR BELTS, CRUSHERS, SCREENS AND OTHER SUC H EQUIPMENTS ARE INSTALLED. THE CIT(A) OVERLOOKED THE BASIC COMPOSITION OF PRODUCTION APPARATUS REQUIRED IN AN IRON ORE BENEFICIATION PLANT AND MADE THE ABOVE NAIVE ASSERTION IN A CASUAL MANNER WITHOUT ANY REAL UNDERSTANDING OF THE ACTUAL PRODUCTION MECHA NISM INVOLVED. IT IS ERRONEOUS TO COMPARE THE NUMBER OF MACHINES AND EQUIPMENTS TO CONCLUDE WHETHER SUBSTANTIAL EXPANSION TOOK PLACE, WHEN THE ACT ITSELF PROVIDES THE THRESHOLD LIMIT OF 20% FOR THE SAID PURPOSE IN EXPLANATION 2 TO SECTION 80 - I(2) READ W ITH EXPLANATION TO SEC.10B(2). 2.4 AT PAGE 48 - 49 , A S PER CIT(A) VIDE PARA 10.7 : T HERE WAS NO DELETION IN THE BLOCK VALUE OF MACHINERY AND EQUIPMENTS PREVIOUSLY USED IN AMONA PLANT. THUS, OLD MACHINERY WAS NOT DISCARDED OR OLD PLANT WAS DISMANTLED. ITA NO. 72&85/PNJ/2012 72 AP PELLANTS EXPLANATION IT IS AN ADMITTED FACT BY THE ASSESSEE THAT IN VIEW OF DIFFICULTY FACED BY IT IN IDENTIFYING SCRAP OF DIFFERENT MACHINERY ITEMS, IT OPTED NOT TO MAKE ANY DELETION FROM THE ASSETS. INSTEAD, THE VALUE REALISED FROM SALE OF SCRAP WAS OFF ERED TO FULL TAX BY DECLARING IT SEPARATELY AS OTHER INCOME IN THE PROFIT & LOSS ACCOUNTS DURI NG THE RECONSTRUCTION PERIOD. THIS PRACTICE WAS ADOPTED SINCE SOME MACHINES WERE EITHER RE - USED TO MAKE OUT NEW OR MODIFIED MACHINES AND THEIR STEEL FRAMES AND STRUCTURES WERE ALSO RE - USED (WHEREVER TECHNICALLY) POSSIBLE CONSIDERING ITS STRENGTH). MOREOVER, IT NEEDS TO BE APPRECIATED THAT BY ADOPTING TO THIS TREATMENT, THE ASSESSEE SUBJECTED ITSELF TO A DISADVANTAGEOUS POSITION SINCE HAD IT MADE THE DELETION O F SCRAP VALUE FROM THE BLOCK OF ASSETS, IT WOULD HAVE ACHIEVED LESSER DEPR ECIATION BUT WOULD HAVE ESCAPED FULL TAX THAT IT PA ID ON THE SCRAP VALUE RECEIVED. BUT IN ANY CASE, THE WRITTEN DOWN VALUE OF OLD MACHINES WAS SUBSTANTIALLY LOWER THAN THE THRESHOLD LIMIT OF 20% PRESCRIBED IN EXPLANATION 2 TO SEC.80 - I(2) READ WITH EXPLANATION TO SEC.10B(2). 2.5 AT PAGE 50 - 53 , A S PER CIT(A) VIDE PARA 10.8 : C ORRESPONDENCE WITH VILLAGE PANCHAYAT SHOWS THAT THE CONSTRUCTION ACTIVITIES WERE ACTUALLY IN THE NATURE OF REPAI RS AND RENOVATION. APPELLANTS EXPLANATION THE CIT(A) REFERRED TO FEW COMMUNICATION WITH THE PANCHAYAT TO MAKE A CASE THAT IT WAS ONLY A NORMAL REPAIRS OR RENOVATION WORK UNDERTAKEN. HE DID NOT REFER TO SEVERAL OTHER COMMUNICATIONS AND DOCUMENTS WHICH CLARIFIED THAT THE ASSESSEE CARRIED OUT MAJOR DISMANTLING AND DEMOLITION AS WELL AS NEW PLANT WAS SET UP. CIT(A) REFERRED TO VARIOUS COMMUNICATION WHEREIN PHRASES LIKE URGEN T REPAIRS AND RENOVATION ETC., THE CIT(A) MISLED AND MISCONCEIVED IN HIS THOUGHT PROCESS, OPTED TO DISREGAR D THE CONTEXT COMPLETELY. NEITHER HE GAVE ATTENTION TO CERTAIN CRITICAL DOCUMENTS NOR TO THE FACT THAT IT WAS NOT A GREEN FIELD PROJECT (I.E. THE ASSESSEE WAS NOT SETTING UP A FACTORY FOR THE FIRST TIME ON A PIECE OF LAND WHICH WAS HITHERTO USED FOR NON - COMMERCIAL OR NON - INDUSTRIAL PURPOSE). ITA NO. 72&85/PNJ/2012 73 2.6 AT PAGE - 79 , A S PER THE CIT(A) VIDE PARA - 14 : N O MATERIAL CHANGE IN THE INPUT AND THE OUTPUT OF THE UNIT, WHICH ES SE NTIALLY REMAINS AS IRON ORE. APPELLANTS EXPLANATION THIS OBSERVATION I S PATENTLY WRONG. THE INPUT IS CRUDE ORE WHEREAS THE OUTPUT IS LUMPS AND FINES. NOT ONLY THE PHYSICAL APPEARANCE IS ABSOLUTELY DIFFERENT BUT EVEN THE COMMERCIAL NAME AND USAGE ARE BOTH FAR DIFFERENT. THERE IS PRACTICALLY NO USE OF CRUDE ORE BUT THE USAGE OF LUMPS AND FINS IS ABSOLUTELY ESSEN TIAL FOR STEEL MAKING INDUSTRY. IT SEEMS THAT THE CIT(A) GOT MISLED BY THE LOOSE USAGE OF THE TERM IRON ORE WITHOUT VERIFYING THE ACTUAL FACTS. MOREOVER DURING THE COURSE OF HEARING BEFORE THE HONBLE ITAT, THE ASSES SEE COMPANY SHOWED SAMPLES OF THE INPUT IN THE FORM OF CRUDE ORE AND THE OUTPUT IN THE FORM OF IRON ORE AND LUMPS. THE ACTIVITY WAS EXPLAINED IN DETAIL WHICH ENCOMPASS TRANSPORTATION OF CRUDE ORE, CRUSHING, SCREENING AND WASHING, STACKING, LOADING IN BAR GES, RIVER TRANSPORTATION TO THE PORT AND EXPORT IN SHIPS. THE ASSESSEE HAS ALSO MENTIONED THAT IT WOULD BE WILLING TO SHOW THE NATURE OF ACTIVITY INVITING THE HONBLE MEMBERS FOR A SITE VISIT IN ORDER TO HAVE ON THE SPOT UNDERSTANDING OF FACTUAL MATTERS. IT WAS REQUESTED THAT THOUGH THE CLAIM WAS MADE U/S 10B IN RESPECT ITS THREE UNITS AMONA, CHITRADURG AND GADIA SADO (CODLI) BUT CONSIDERING THE NON - FEASIBLE TO INSPECT ALL THE THREE UNITS, THE NEAREST UNIT, AMONA 100% EOU MAY BE TAKEN UP FOR THE SITE VIS IT. THE HONBLE MEMBERS ASKED THE DEPARTMENTAL REPRESENTATIVE ALSO TO ACCOMPANY THE SITE VISIT. ACCORDINGLY, A SITE VISIT TO AMONA UNIT WAS ARRANGED FOR THE HONBLE MEMBERS ON 19 - 12 - 2012 IN THE AFTERNOON. FROM THE TAX DEPARTMENT THE STANDING COUNSEL. JCI T, ACIT AND INSPECTORS TOGETHER WITH ITAT BENCH CLERK ACCOMPANIED THE HONBLE MEMBERS FOR SITE VISIT. THE ACTIVITY W AS EXPLAINED ON SIGHT TO THE INVITE IN A DETAILS MANNER. 2.7 AT PAGE 79, AS PER CIT(A) VIDE PARA 14.1 : IN CIT VS SESA GOA LTD. (2004) 271 ITR 331 (SC), IT WAS HELD THAT EXTRACTION AND PROCESSING OF IRON ORE UNDERTAKEN TOGETHER AMOUNT TO PRODUCTION. APPELLANTS EXPLANATION ITA NO. 72&85/PNJ/2012 74 THE JUDGMENT IN CIT VS SESA GOA LTD., (2004) 271 ITR 331 WAS DELIVERED BY THE HONBLE SUPREME COURT IN ASSESSEES O WN CASE. THE FA C TS WERE THAT THE ASSESSEE OWNED TRANSPORT VEHICLES LIKE DUMPERS, ETC. WHICH WERE EMPLOYED IN CONVEYING CRUDE ORE FROM ITS MINES TO THE BENEFICIATION PLANT FOR PROCESSING AND THUS, DECL ARED AS PLANT AND MACHINERY. IT WAS EXPLAINED THAT INS TEAD OF INSTALLING THE CONVENTIONAL CONVEYOR BELT SYSTEM FROM THE MINES TO THE BENEFICIATION PLANT FOR CONVEYING CRUDE ORE, THE ASSESSEE HAD CHOSEN THE COST EFFECTIVE WAY OF CONVEYING IT THROUGH AN ON - WHEEL CONVEYING SYSTEM I.E. THROUGH DUMPERS ETC., AND W HICH MACHINES DID NOT HAVE ANY OTHER USE. THEREFORE, FOR ALL PRACTICAL PURPOSES THESE WERE NOT VEHICLES AS UNDERSTOOD IN THE ORDINARY SENSE, BUT PLANT AND MACHINERY IN THE CASE OF THE ASSESSEE. ACCORDINGLY, THE ASSESSEE CLAIMED INVESTMENT ALLOWANCE U/S 32A ON THE SAID ASSETS, BUT IT WAS DISALLOWED BY THE ASSESSING AUTHORITY UNDER THE AVERMENT THAT THOSE ASSETS HAD NOT BEEN USED IN THE MANUFACTURING PROCESS. AFTER PASSING THROUGH THE COURSE OF APPELLATE PROCEEDINGS BEFORE THE CIT(A) AND THE ITAT THE MATT ER TRAVELLED TO THE HIGH COURT. THE HONBLE PANAJI BENCH OF THE HIGH COURT OF BOMBAY, WHILE ANSWERING THE QUESTION WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ITAT WAS JUSTIFIED IN HOLDING THAT THE ASSESSEE IS ENTITLED TO DEDUCTION OF INVES TMENT ALLOWANCE U/S 32A OF THE IT ACT, 1961 IN RESPECT OF MACHINERY USED IN MINING ACTIVITY , I GNORING THE FACT THAT THE ASSESSEE IS ENGAGED IN EXTRACTION AND PROCESSING OF IRON ORE NOT AMOUNTING TO MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING ?, HELD AS UNDER (266 ITR 126) : AT THE END OF LAST BUT ONE PARA OF THE ORDER.... THE ACT ALSO CONTAINS INTERNAL EVIDENCE TO SHOW THAT THE LEGISLATURE HAS TREATED RAW ORE DIFFERENTLY FROM PROCESSED ORE . A DIVISION BENCH OF THIS COURT IN CIT VS EMIRATES C OMMERCIAL BANK LTD., (2003) 262 ITR 55 HAS GIVEN THE BENEFIT EVEN IN RESPECT OF DATA PROCESSING DONE ON COMPUTERS. IN OTHER WORDS, THE LEGISLATION BEING A BENEFICIAL PIECE OF LEGISLATION, AN EXPANDED MEANING SHOULD BE SO GIVEN AND HAS TO BE GIVEN. ITA NO. 72&85/PNJ/2012 75 THUS, THE HONB LE BOMBAY HIGH COURT RATIFIED THE POSITION THAT RAW ORE WAS DIFFERENT FROM PROCESSED ORE. FURTHER, WHILE AGREEING WITH THE DECISION REACHED ON 262 ITR 55 (SUPRA) IN RESPECT OF THE DATA PROCESSING THAT THE SAME AMOUNTED TO PRODUCTION, IT HAS BASICALLY DECI DED THAT THE PROCESSING OF IRON ORE ALSO AMOUNTS TO PRODUCTION FOLLOWING THE SAME ANALOGY. IT CAN BE SO CONCLUDED SINCE THE DATA PROCESSING ON COMPUTERS DOES NOT INVOLVE EXTRACTION OF AN ARTICLE OR THING FROM EARTH, AND, THEREFORE, THE RELIANCE OF THE SA ID JUDGMENT HERE CAN ONLY BE IN RESPECT OF PROCESSING OF THE ORE AND NOT EXTRACTION OF THE ORE. FURTHER, IN THE LAST PA RA OF THEIR ORDER, THE HONBLE BOMBAY HIGH COURT HELD..... THE ORE HAS TO BE EXTRACTED OR RAISED FROM THE EARTH IN WHICH IT IS EMBEDDED A N D HAS TO BE BROUGHT TO THE SURFACE. WHAT IS BROUGHT TO THE SURFACE IS SOMETHING NEW WHICH COMES INTO EXISTENCE AS AN ARTICLE OR THING. IF THAT BE THE CASE , WINNING OR EXTRACTING OF ORE WOULD FALL WITHIN THE EXPRESSION PRODUCTION. THUS, ON THE QU ESTION PUT BEFORE THE HONBLE HIGH COURT WHETHER EXTRACTION AND PROCESSING OF IRON ORE AMOUNTED TO MANUFACTURE OR PRODUCTION, IT DECIDED THAT PROCESSING OF ORE WAS PRODUCTION AND ALSO THAT EXTRACTION OF ORE WAS ALSO PRODUCTION . HOWEVER, THE DEPARTMENT PRE FERRED FURTHER APPEAL BEFORE THE HONBLE SUPREME COURT, WHERE THE SAME QUESTIO N AS PUT BEFORE THE HIGH COURT WAS RE - EXAMINED BY THE APEX COURT. THE APEX COURT HELD AS UNDER (271 ITR 331).... THE REASONING GIVEN BY THE HIGH COURT, IN THE DECISIONS NOTED BY US EARLIER, IS I N OUR OPINION, UNIMPEACHABLE. THIS COURT HAD, AS EARLY AS IN 1961 IN CHRESTIAN MICA INDUSTRIES LTD. VS STATE OF BIHAR (1961) 12 STC 150 DEFINED THE WORD PRODUCTION ALBEIT IN CONNECTION WITH THE BIHAR SALES TAX ACT, 1947. THE DEFINITIO N WAS ADOPTED FROM THE MEANING ASCRIBED TO THE WORD IN THE OXFORD ENGLISH DICTIONARY AS MEANING AMONGST OTHER T H INGS THAT WHICH IS PRODUCED, A THING THAT RESULTS FROM ANY ACTION, PROCESS OR EFFORT, A PRODUCT, PRODUCT OF HUMAN ACTIVITY OR EFFORT. FROM TH E WIDE DEFINITION OF THE WORD PRODUCTION, IT HAS TO FOLLOW THAT MINING ACTIVITY FOR THE PURPOSE OF PRODUCTION OF MINERAL ORES WOULD ITA NO. 72&85/PNJ/2012 76 COME WITHIN THE AMBIT OF THE WORD PRODUCTION, SINCE ORE IS A THING WHICH IS THE RESULT OF HUMAN ACTIVITY OR EFFORT. IT HAS ALSO BEEN HELD BY THIS COURT IN CIT VS N.C. BUDHARAJA & CO., (1993) 204 ITR 412 THAT THE WORD PRODUCTION IS MUCH WIDER THAN THE WORD MANUFACTURE . WE ARE THEREFORE, OF THE OPINION THAT EXTRACTION AND PROCESSING OF IRON ORE AMOUNTS TO PRODUCTION WITHIN THE MEANING OF THE WORD IN SECTION 32A(2)(B)(III) OF THE ACT AND CONSEQUENTLY, THE ASSESSEE IS ENTITLED TO THE BENEFIT OF SEC.32A(1) OF THE ACT. . IT MUST BE APPRECIATED THAT T HE APEX COURT CATEGORICALLY EXPRESSED THAT THE REASONING GIVEN BY THE HIGH COUR T ON THE MEANING OF WORD PRODUCTION AS UNIMPEACHABLE IN ITS OPINION, AND SINCE A COMMON PHASE EXTRACTION AND PROCESSING OF IRON ORE HAD BEEN EMPLOYED IN THE QUESTION. IT WAS ALSO ANSWERED IN THE SINGULAR MANNER ONLY BY THE APEX COURT. HOWEVER , WHAT M UST BE UNDERSTOOD IS THAT THE HONBLE HIGH COURT IN 266 ITR 126 NOWHERE HELD THAT BOTH EXTRACTION AND PROCESSING OF ORE SHALL HAVE TO BE UNDERTAKEN TOGETHER TO CONSTITUTE PRODUCTION. THEREFORE, IT CANNOT BE UNDERSTOOD THAT THE APEX COURT DECIDED THE ISSUE IN ANY DIFFERENT MANNER AND IT MUST BE SAFELY CONCLUDED THAT EXTRACTION OF IRON ORE AND PROCESSING OF IRON ORE WERE INDEPENDENTLY HELD AS PRODUCTION. ACCORDINGLY, THE ASSERTION OF THE DEPARTMENT THAT EXTRACTION AND PROCESSING SHOULD BOTH BE UNDERTAKEN TOG ETHER IN ORDER TO PASS THE TEST OF PRODUCTION IS JUST MISGIVING AND AGAINST THE SPIRIT OF THE ABOVE DECISIONS OF THE HONBLE BOMBAY HIGH COURT AND THE SUPREME COURT. FURTHERMORE, EVEN IN THE CASE OF CHOWGULE & CO., LTD., RELIED UPON BY THE DEPARTMENT, IT M UST BE APPRECIATED THE ORDER DATED 12/07/2007 OF THE HONBLE PANAJI BENCH OF ITAT IN ITA NO.162/PNJ/2006 WAS IMMEDIATELY RECTIFIED BY THE SAME BENCH IN MIS C . APPN. MOVED BY THE ASSESSEE INMA.NO.23/PNJ/2007 ORDER DATED 19/7/2007 WHERE IT WAS FINALLY HELD; WE HOLD THAT THE ASSESSEE - COMPANY ITSELF IS EXTRACTING THE ENTIRE IRON ORES AND THEREAFTER PROCESSING THE SAME, AND THEREFORE, ENTITLED FOR THE DEDUCTION U/S 10B AS HELD BY THE SUPREME COURT IN THE CASE OF SESA GOA. ITA NO. 72&85/PNJ/2012 77 THE NEED FOR RECTIFICATION AROSE SINCE IN THE ORIGINAL ORDER THE HONBLE ITAT HAD HELD THAT THE AS SE SSEE WAS ONLY PROCESSING IRON ORE BUT WAS NOT EXTRACTING THE ORE (PL. SEE PARA - 5 ORDER DATED 19/7/ 2007 IN MA) BUT THE HONBLE ITA T FOUND DURING THE MA PROCEEDINGS (IN THE LIGHT OF SUB - PARA 8 IN PARA - 4 OF ORDER DATED 19/07/2007) THAT THE ASSESSEE - COMPANY WAS EXTRACTING AS WELL AS PROCESSING THE ORE, AND THEREFORE, 10B DEDUCTION WAS ALLOWED TO THE ASSESSEE COMPANY. IT MUST BE UNDERSTOOD THAT EOU AND ASSESSEE HAVE DIFFERENT MEANING. IT IS NOT NECES SARY THAT BOTH THE EXTRACTION OF IRON ORE AND PROCESSING OF IRON ORE MUST BE CARRIED OUT B Y THE EOU ITSEL F TO CLAIM EXEMPTION U/S 10B. IT MUST BE UNDERSTOOD THAT THE MINES AND PROCESSING UNITS ARE ALWAYS AT A SAFE DISTANCE WITH EACH OTHER BECAUSE MINE BLA STING WOULD OTHERWISE DISTURB THE FUNCTIONING OF THE PROCESSING UNITS. EOU UNIT HAS TO BE A CUSTOM BONDED AREA BUT THE MINES ARE SPREAD OVER KILOMETERS IN AREA WHICH CANNOT BE MADE CUSTOM BONDED. THUS, THE MINES CANNOT BE MAD E PART OF THE EOU UNIT IN A NY MANNER. HOWEVER, EVEN IF THE EXTRACTION OF IRON ORE IS CARRIED OUT BY THE ASSESSEE AT MINES OWNED BY HIM OR BY THIRD PARTY (WHIC H CANNOT BE COVERED UNDER EOU) UNIT AS EXPLAINED ABOVE) AND ONLY THE PROCESSING IS CARRIED OUT BY EOU UNIT , EVEN THEN THE ASS ESSEE WILL BE ELIGIBLE FOR 10B DEDUCTION FOR THE SAID EOU AS THE ASSESSEE IS EXTRACTING AS WELL AS PROCESSING THE ORE. THIS IS THE DECISION OF THE CHOWGULE BECAUSE IN THAT CASE THE EOU WAS USING THE IRON ORE EXTRACTED BY THE SAID COMPANY FROM ITS OWN MIN ES AND FROM THE MINES OF ANTAO B R OTHERS WHICH COULD NOT BE PART OF THE EOU UNIT OF THAT ASSESSEE IS ANY MANNER AS EXPLAINED ABOVE. THUS, THE BASIC CONDITION FOR ALLOWING EXEMPTION U/S 10B BY HOLDING THE EXTRACTION AND PROCESSING OF IRON ORE AS PRODUCTION IS THAT THE ASSESSEE SHOULD CARRY ON BOTH THESE ACTIVITIES BY ITSELF AND IT CANNOT BE UNDERSTOOD TO MEAN THAT BOTH THESE ACTIVITIES SHOULD BE CARRIED ON BY THE EOU ITSELF. IN OTHER WORDS THE HONBLE ITAT DID NOT HOLD THAT A EOU QUALIFYING FOR DEDUCTION U/ S 10B MUST UNDERTAKE BOTH THESE ACTIVITIES TOGETHER, RATHER ITA NO. 72&85/PNJ/2012 78 IT WAS HELD THAT IF THE ASSESSEE EXTRACTED THE ORE BY ITSELF AND ALSO UNDERTOOK PROCESSING OF THE ORE AS ITS EOU, IT WOULD QUALIFY FOR DEDUCTION U/S 10B FOR ITS ORE PROCESSING EOU. IN THE PRESENT CASE OF THE ASSESSEE ALSO, THERE IS NO DISPUTE THAT THE ASSESSEE - COMPANY NAMELY M/S SESA GOA LTD., ALSO UNDERTOOK BOTH THE ACTIVITIES OF EXTRACTION AND PROCESSING AND HAS CORRECTLY CLAIMED THE DEDUCTION U/S 10B IN RESPECT OF PROFITS ARISING FROM PROCESSING OF ORE AT ITS EOUS. THUS, THE PARAMETERS LAID DOWN IN THE ABOVE CASE OF CHOWGULE & CO., BY THE HONBLE ITAT ARE SQUARELY MET BY THE ASSESSEE. 2.8 AT PAGE 89 , A S PER CIT(A) VIDE PARA - 16 : F OR DETERMINING THE PERCENTAGE OF OLD EQUIPMENTS USED IN THE NEW UNITS EVEN THE ASSETS HELD AT THE EXTRACTING UNIT MUST BE TAKEN INTO CONSIDERATION. THE CIT(A) HAS ASSERTED THAT TO DETERMINE THE PERCENTAGE OF THE OLD MACHINE REUSED IN THE NEW SET UP IT IS NECESSARY TO TAKE IN TO CONSIDERATION ALL THE OLD AND EXISTING MA CHINES OF THE RESPECTIVE UNITS ALONG WITH THE PLANT AND MACHINERY DEPLOYED IN THE MINES OF THE ASSESSEE. HE HAS FURTHER AVERTED THAT IF THE VALUE OF PLANT AND MACHINERY EMPLOYED IN THE MINES OF THE COMPANY ARE TAKEN INTO CONSIDERATION, THEN THE PERCENTA GE OF OLD MACHINE WILL CERTAINLY BE EXCEEDING THE THRESHOLD LIMIT OF 20% AS PRESCRIBED. CIT(A) HAS JUSTIFIED HIS AVERMENTS BY RELYING ON HIS INTERPRETATION OF THE JUDGMENT OF THE HONBLE SUPREME COURT IN CIT VS SESA GOA LTD., (004) 271 ITR 331 THAT THE ACTIVITIES TO BE ELIGIBLE TO BE HELD AS PRODUCTION SHOULD COMPRISE OF THE EXTRACTION A WELL AS THE PROCESSING OF IRON ORE. APPELLANTS EXPLANATION THE ASSESSEE HAS CLAIMED DEDUCTION U/S 10B IN RESPECT OF ITS BENEFICIATION UNITS ONLY AND NOT THE MINES. T HEREFORE, THERE IS NO RATIONALE IN CLUBBING THE MACHINES EMPLOYED AT THE MINES WITH THOSE OWNED BY THE UNITS FOR THE PURPOSE OF CALCULATING THE PERCENTAGE OF OLD EQUIPMENTS USED IN THE NEW UNIT. FURTHER, THE CIT(A)S ASSERTION THAT IF THE VALUE OF PLANT AND MACHINERY EMPLOYED IN THE MINES OF THE COMPANY ARE TAKEN INTO CONSIDERATION, THEN THE PERCENTAGE OF OLD ITA NO. 72&85/PNJ/2012 79 MACHINE WILL CERTAINLY BE EXCEEDING THE THRESHOLD LIMIT OF 20% AS PRESCRIBED, IS NOTHING BUT PRESUMPTUOUS. MOREOVER, IT HAS ALREADY BEEN EXPLAINED THAT IN HONBLE SUPREME COURT S JUDGMENT IN271 ITR 331 READ WITH BOMBAY HIGH COURTS RULING IN 266 ITR 126 IN THE CASE OF SESA GOA LTD., IT HAS ACTUALLY DECIDED THAT EXTRACTION OR ORE AND PROCESSING OF ORE ARE INDEPENDENTLY HELD AS PRODUCTION. ALTERNAT IVELY, BY REFERENCE TO THE DECISION OF THE TATA TEA LTD. VS ACIT (2011) 338 ITR 285 (KER.) AND MADHU JAYANTI INTL. LTD., VS DCIT (2012) 137 ITD 377 (KOL.)(SB), IT WAS CONTENDED THAT IN CASE OF AN EOU REGARD HAS TO BE GIVEN TO THE DEFINITION OF MANUFACTURE AS CONTAINED IN EXIM POLICY. EVEN IF THE WORD MANUFACTURE HAD BEEN INSERTED IN THE IT ACT, IT IS SUBMITTED THAT IT WOULD NOT DETER TO DRAW THE DEFINITION OF PRODUCTION FROM EXIM POLICY. AS IT IS SETTLED LAW, THAT PRODUCTION IS WIDER THAN THE WORD MANUFA CTURE AND EVERY CASE OF MANUFACTURE CAN BE INCLUDED IN PRODUCTION. THE DEFINITION GIVEN IN EXIM POLICY FOR MANUFACTURE WOULD STAND GOOD FOR THE WORD PRODUCTION . REFERENCE WAS INVITED TO PAGE 174 TO 179 OF PAPER BOOK VOL.I. THE LEARNED AR FURTHER SUB MITTED THAT THE FOLLOWING GUIDING PRINCIPLE EMERGE FOR THE RECKONING OF A NEW UNIT BASED UPON VARIOUS LAND MARK RULINGS; - WHERE THERE IS INFUSION OF NEW CAPITAL - WHERE THERE IS SUBSTANTIAL MODIFICATI ON IN THE OLD UNIT SO AS TO DISTURB THE IDENTITY OF TH E OLD UNIT. - THERE SHOULD BE LEST POSSIBLE OR INSIGNIFICANT USAGE OF THE PLANT AND MACHINERY OF THE OLD UNIT. - THERE SHOULD BE A NEGATIVE ACT TO DISTURB THE IDENTITY OF THE OLD UNIT. - THERE IS NO BAR ON THE EXISTING AS SESSEE TO SET UP NEW UNITS ESSENTIA LLY PRODUCING THE SAME COMMODITY AS IN THE EXISTING UNITS. THUS, IT WAS VEHEMENTLY CONTENDED THAT THE AO AS WELL AS THE CIT(A) WERE NOT CORRECT IN TAKING THE VIEW THAT THE ASSESSEE IS NOT ENTITLED FOR EXEMPTION U/S 10B IN RESPECT OF AMONA PLANT. IT WAS ALSO SPECIFICALLY POINTED ITA NO. 72&85/PNJ/2012 80 OUT BY REFERRING TO THE DECISION OF THE CIT(A) AT PAGE - 48 THAT THE CIT(A) HAS WRONGLY OBSERVED THAT THE ASSESSEE HAS NOT MADE ANY ADDI TION IN THE PLANT AND MACHINERY . THE ASSESSEE HAS INVESTED T HE AMOUNT IN THE PLANT AND MACHINER Y IN AMONA PLANT FOR THIS ATTENTION WAS DRAWN TO PAGE - 45 TO 48 OF THE PAPER BOOK . ATTENTION WAS ALSO DRAWN TOWARDS THE BOARDS RESOLUT ION, ANNUAL ACCOUNTS AS WELL AS SCHEDULE OF THE DEPRECIATION FOR THE DIFFERENT YEARS. THE LEARNED AR VEHEMENTLY STATED T HAT THE CHART GIVEN AT PAGE - 48 HAS BEEN COMPILED BY THE CIT(A) WITHOUT CONSIDERING THE AUDITED ACCOUNTS SO AS TO GIVE AN IMPRESSION THE ASSESSEE HAS NOT MADE ANY INVESTMENT FOR SETTING UP NEW PLANT AND MACHINERY IN AMONA UNIT. CHITRADURGA UNIT 39. THE LEARNED AR SUBMITTED THAT THE ASSESSEE CLAIMED EXEMPTION U/S 10B IN RESPECT OF CHIRADURGA PLANT AT RS.1,85,34,16,649/ - AS PER THE AUDIT REPORT. THIS PLANT WAS INITIALLY SET UP BY M/S A . NARRAIN MINES LIMITED., WHICH WAS ACQUIRED BY M/S SESA GOA LTD., DURI NG THE FY 1998 - 99. THE POSITION OF ASSETS AS PER BOOKS AS ON 31 - 03 - 1999 WAS UNDER; ASSETS GROSS BLOCK WDV (RS. IN LACS) PLANT & MACHINERY 34.77 20.78 TOTAL ASSETS 51.71 31.40 39.1 THIS COMPANY MERGED WITH M/S SESA GOA LTD ., W.E.F. 01 - 04 - 2002 IN TERMS OF THE ORDER DATED 06 - 06 - 2003 OF BOMBAY HIGH COURT . THE E XISTING PLANT IN THE SAID UNIT WAS QUITE OLD AND HAD BECOME INEFFICIENT DUE TO THE COMPLETION OF ITS ECONOMIC LIFE. THE ASSESSEE UNDERTOOK A PROJECT TO SET UP A NEW UND ERTAKING DURING THE FY: 2005 - 06 IN A PHASED MANNER TO INCREASE THE CAPACITY BY EMPLOYING LATEST TECHNOLOGY/FACILITY IN PLACE OF EXISTING PRODUCTION FACILITY. THE ASSESSEE APPLIED TO THE KARNATAKA STATE POLLUTION CONTROL BOARD VIDE ITS APPLICATION DATED 0 9 - 09 - 2005 FOR ITS CONSENT FOR ESTABLISHMENT UNDER WATER ACT AND AIR ACT FOR EXPANSION OF IRON ORE MINING CAPACITY FROM 1`.6 MTPA TO 2.5 MTPA. SUBSEQUENTLY, THE MANAGEMENT OF THE COMPANY ALSO UNDERWENT A CHANGE FROM MITSUI GROUP WITH M/S VEDANTA GROUP. DUE TO THIS EXPANSION/ESTABLISHMENT PROJECT COULD BE COMPLETED DURING THE FY 2008 - 09. ITA NO. 72&85/PNJ/2012 81 THE FOLLOWING INVESTMENTS WERE MADE WHICH RESULTED IN CREATION OF NEW UNIT IN PLACE OF THE EXISTING UNIT. SL.NO. FY: PLANT & MACHINERY (RS.IN CRORES) 1 2005 - 06 0 .94 2. 2006 - 07 0.36 3. 2008 - 09 7.04 TOTAL 9.18 39. 2 THE VALUE OF OLD PLANT & MACHINERY USED IN THE NEW PLANT WAS AT RS.6,93,596/ - I.E ., WDV WAS ON 01 - 04 - 2005 AND THE VALUE OF PLANT & MACHINERY AS ON 31 - 03 - 2006 WAS AT RS.1,00,78,229/ - . THE OLD MACHINERY THEREFORE, VALUED AT A MEAGRE 6.88% AS ON 31 - 03 - 2006, BEING THE CLOSING DAY OF THE PREVIOUS YEAR RELEVANT TO THE AY:2006 - 07 WHICH HAS BEEN DECLARED AS THE FIRST YEAR OF SETTING UP THE NEW UNIT BY THE ASSESSEE. DURING THE FY 2008 - 09 THE AS SESSEE SUBMITTED HIS APPLICATION WITH THE CONCERNED AUTHORITIES FOR CONVERSION OF NEWLY SET UP UNIT INTO AN EOU. APPROVAL IN THIS REGARD WAS RECEIVED VIDE APPROVAL NO.1/64/2007:PER:EOU:KR:COMMISSIONER, MINISTRY OF COMMERCE & INDUSTRY, BANGALORE, WHICH WA S RATIFIED BY THE BOARD OF APPROVAL IN ITS MEETING HELD ON 14 - 01 - 2011. THE PREMISES OF THE UNDERTAKING WAS BONDED AND LICENCE NO.1/2008 DATED 05 - 06 - 2008 WAS ISSUE U/S 58 OF THE CUSTOMS ACT AND THE COMMERCIAL PRODUCTION FOR THE CONVERTED EOU BEGAN ON 06 - 06 - 2008 AND THE SAME WAS INTIMATED TO THE DEVELOPMENT COMMISSIONER VIDE LETTER DATED 14 - 07 - 2008. 39.3 THE ASSESSEE SUBMITTED THE COPIES OF THE DOCUMENTS TO THE AO AND THE SAME HAS BEEN FURNISHED BEFORE THIS TRIBUNAL IN THE PAPER BOOK DETAILED AS UNDER; ( A ) LOP NO.1/64/2007 PER:EOU:KR:CSZ/243 DATED 15/02/20 08 (PAGE NOS.49 - 52 OF PB VOL.I). ( B ) BOARD OF APPROVAL NO.1/64/2007/EOU/CSEZ/225 DATED 21/02/2011(PAGE NO.53 OF PB VOL.I) ( C ) LETTER DATE D 14/07/2008 INTIMATING THE DC, ABOUT THE COMMENCEMENT OF COMMERCIAL PRODUCTION O N 06/06/2008(PAGE NO.63 OF PB VOL.I) ( D ) GREEN CARD N O .1052(PAGE NOS.319 - 320 PB VOL.II) ITA NO. 72&85/PNJ/2012 82 ( E ) CHARTERED ACCOUNTANTS REPORT ON FORM NO.56G(PAGE NOS.13 - 15 OF PB VOL.I) ( F ) DETAILS OF COMPUTATION OF DEDUCTION U/S 10B (PAGE NO.7 OF PB VOL.I) ( G ) PLANT & MACHINERY - DEPRECIATI ON CHART/FIXED ASSET SCHEDULE FOR AYS 2006 - 07 TO 2009 - 2010(PAGE NOS.54 - 55 OF PB VOL.I) ( H ) NOTE OF THE PRODUCTION PROCESS OF UNDERTAKING SUBMITTED VIDE LETTER DATED 11/05/2012 BEFORE CIT(A) (PAGE NOS.21 - 30 OF PB VOL.I) ( I ) THE CONSENT TO ESTABLISH RECEIVED FROM THE POLLUTION CONTROL BOARD (PAGE NOS.327 332 OF PB VOL.II) 39.4 THE ASSESSEE DECLARED FY:2005 - 06 SINCE IT STARTED THE PROJECT OF SETTING UP OF THE NEW UNIT DURING FY: 2005 - 06, AS THE PROJECT STARTED IM PLEMENTATION DURING THAT YEAR. IN THIS REGARD RELI ANCE WAS PLACED IN THE CASE OF METTUR CHEMICAL & INDUSTRIAL CORPN. LTD. VS CIT (1996) 217 ITR 768 (SC) . IN THIS REGARD, THE ASSESSEE HAS GIVEN THE PRODUCTION DATA OF FEW YEARS IMMEDIATELY PRECEDING THE SET UP OF THE NEW UNIT FOR WHICH THE ATTENTION WAS DR AWN TO PAGE - 272 OF THE PAPER BOOK VOL.II WHICH ARE LAID DOWN AS UNDER; FY MT(LACS) FY MT( LACS) 1999 - 00 5.04 2003 - 04 10.86 2000 - 01 5.84 2004 - 05 11.49 2001 - 02 7.13 2005 - 06 @ 15.98 2002 - 03 8.21 @ YEAR OF TRANSITION FY MT(LAC S FY MT(LACS) 2005 - 06@ 15.98 2008 - 09 31.78 2006 - 07 10.71 2009 - 10 38.49 2007 - 08 21.26 2010 - 11 32.92 @ YEAR OF TRANSITION ITA NO. 72&85/PNJ/2012 83 39.5 IT WAS SUBMITTED THAT SUBSTANTIAL CAPITAL WAS IN DUCTED AND THE PRODUCTION CAPACITY WENT UP FROM AS LOW AS 1.6 MTPA TO 6.00 MTPA IN A PHASED MANNER DURING FY: 205 - 06 ITSELF. THE PRODUCTION CAPACITY WENT UP TO 2.5 MTPA THE MAJOR REASON FOR ENHANCEMENT IN FY 2005 - 06 WAS THE INSTALLATION OF DUST SUPPRESSI ON SYSTEM WHICH CONTAINED DUSTING OF IRON ORE IN THE ENTIRE PLANT, THUS, PAVING THE WAY FOR FULL UTILISATION OF THE PRODUCTION CAPACITY (LUMPY ORE) AND BY 2008 - 09 THE CAPACITY INCREASED TO 6 MTPA. SINCE THE PROCESS OF SETTING UP A NEW UNIT WAS STARTED IN 2005 - 06 AND THEREFORE, THIS YEAR HAS TAKEN TO BE THE INITIAL YEAR. IN WHICH THE BENEFIT U/S 10B WAS THE IMMEDIATE ONE AND THIS YEAR WAS DECLARED IN THE APPLICATION FILED BEFORE THE AUTHORITIES FOR THE EOU. THERE WAS NO INTENTION TO AVAIL OF MAXIMUM BENEF IT. IT WAS ALSO STATED THAT PRODUCTION BEFORE SETTING UP OF THE PLANT DURING 2002 - 03 WAS DIFFERENT AND PRODUCTION PROCESS IS GIVEN AT PAGE 393 OF THE PAPER BOOK. THE DETAILS OF THE MAJOR MACHINERY AND EQUIPMENT EMPLOYED/USED IN THE SAID UNIT IN THE OLD AS WELL AS IN THE NEW PLANT DURING 2002 - 03 ARE GIVEN AT PAGE - 385 OF THE PAPER BOOK, VOL.I. NO CRUDE OR PROCESSED ORE WAS PURCHASED FROM ANYONE IN THIS UNIT AND FOR THIS ATTENTION WAS DRAWN TO PAGE - 392 OF THE PAPER BOOK. ORE COSTING RS.20,27,01,4548/ - WAS PR OCESSED/PRODUCED IN CHITRADURGA UNIT ONLY OUT OF THE ORE EXTRACTED BY THE ASSESSEE FROM OWN MINES WHICH ARE DECLARED IN THE HEAD COST OF PRODUCTION. IN THE CO MPUTATION OF EXEMPTION CLAIMED U/S 10B FOR THIS UNIT. 39.6 THE BENEFICIATION PLANT MAINLY CONS ISTS OF VARIOUS TYPES OF CONVEYORS AND SCREENS WHICH ARE FITTED ON HUGE STEEL STRUCTURES, WHEREAS THE SPECIALISED ITEMS OF PLANT & MACHINERY ARE COMPARATIVELY FEW IN TERMS OF PHYSICAL QUANTITY AND SIZE. THUS, USABLE STEEL FROM THE DISMANTLED PLANT WAS ALS O RE - USED ALONG WITH FRESH STEEL PURCHASES AND THE FABRICATION CHARGES WERE INCURRED ON THE SAME IN SETTING UP OF THE NEW UNIT. A SUMMARY YEAR WISE AMOUNTS AND RELATED BILLS SUBMITTED BEFORE THE AUTHORITIES WAS GIVEN AS UNDER; FY TOTAL BEFORE BEFORE BEFORE BALANCE AMOUNT AO CIT(A) ITAT 2005 - 06 93,84,634 NIL 54,65,761 29,70,530 948,342 2006 - 07 35 ,67,255 NIL 713,988 27,87,493 65,775 20 07 - 08 7,03,82,157 NIL 3,47.26,031 3,51,87, 107 469,019 ITA NO. 72&85/PNJ/2012 84 2008 - 09 8,33,34,046 NIL 4,09,05,780 4,09,45,130 14,83,136 IN THIS REGARD, ATTENTION WAS DRAWN TO ADDITIONAL PAPER BOOK PAGE NOS. 1436 TO 1472 AND 1147 TO 1355. 39.7 THE LEARNED AR CARRIED US TO THE ORDER OF THE C IT(A) AND DISCUSSED IN DETAIL THE VARIOUS OBSERVATION OF THE CIT(A) WHICH WERE FILED AS SYNOPSIS ON THE DIRECTION OF THE BENCH, AS UNDER; AT PAGE - 54 A S PER CIT(A) : INITIAL YEAR OF NEW UNIT IS FY: 2005 - 06 THERE IS CATEGORICAL NOTING BY THE CIT(A) THAT TH E ASSESSEE HAD STARTED IMPLEMENTING THE PROJECT IN A PHASED MANNER AND FY: 2005 - 06 BEING THE FIRST YEAR OF IMPLEMENTATION, HENCE THAT YEAR WAS ADOPTED AS THE INITIAL YEAR OR BASE YEAR OF SET UP OF THE NEW UNIT. APPELLANTS EXPLANATION THIS CONSOLIDATES T HE DECLARATION OF FY: 25005 - 06 BEING THE FIRST YEAR OF THE NEW UNIT MADE BY THE ASSESSEE AND THERE IS NO DISPUTE ABOUT IT. AT PAGE - 55 A S PER CIT(A) : ONLY FEW MACHINES WERE REPLACED. THE CIT(A) HAS OPTED TO DISREGARD THAT THE MAIN OR MOST CRITICAL MACHINE , I.E. SCREENING MACHINES WERE IMPORTED AND ALSO BROUGHT IN NEW TECHNOLOGY. THE DUST SUPPRESSION SYSTEM WAS BOUGHT AND INSTALLED IN FY 2005 - 06 WHICH MADE IT POSSIBLE TO TAP THE FULL CAPACITY. APPELLANTS EXPLANATION BANANA SCREEN (M/S SCHENCK PROCESS IND IA LTD, ) NEW VIBRATING SCREENS AND HYDROCONE CRUSHER, (M/S SANDVIK SRP AB), WHICH ARE THE BACKBONE OF ANY IRON ORE PROCESSING PLANT WERE ALL NEW AND HAVING THE LATEST TECHNOLOGY. - DUST SUPPRESSION SYSTEM WAS INSTALLED IN FY: 2005 - 06 ITSELF (M/S SATHU EN GG.) ITA NO. 72&85/PNJ/2012 85 - BESIDES PEDESTRAL BREAKER SYSTEM WAS ALSO INTRODUCED IN FY: 2008 - 09 (M/S TOLLERS BENTONO) - NEW CONVEYOR BELTS WERE ALSO BROUGHT IN - ONLY FEES HOPPER, PRIMARY JAW CRUSHERS AND SOME CONVEYORS BELTS WERE USED OUT OF OLD PLANT WITH CERTAIN MODIFICA TIONS. AT PAGE 58 A S PER CIT(A) VIDE PARA 11.3 : T HE ASSESSEE CLAIMED THAT THE ENTIRE PLANT WAS DEMOLISHED IN THE FY 2005 - 06 ITSELF. THE CIT(A) HAS AVERRED THAT AS PER THE ASSESSEE THE ENTIRE PLANT WAS DEMOLISHED IN THE FY 2005 - 06 ITSELF. BUT EXCEPT FOR A BILL OF M/S BHELLA CONSTRUCTIONS CONTAINING AN EXPENDITURE OF RS.3.522 TOWARDS DEMOLITION OR DISMANTLING OF THE OLD PLANT NO OTHER EVIDENCE HAS BEEN FURNISHED IN THIS REGARD. APPELLANTS EXPLANATION; HOWEVER, IT IS CATEGORICALLY SUBMITTED THAT NOWHERE SU CH POINT WAS MADE BY THE ASSESSEE. ADMITTEDLY, IT WAS A RENOVATION PROJECT CARVING OUT NEW UNIT DONE IN A PHASED MANNER SPREAD OVER 4 LONG YEARS. THUS, THERE WAS NO QUESTION OF DEMOLISHING THE ENTIRE PLANT IN ONE GO. IT MUST BE APPRECIATED THAT DUE TO A DVANCEMENTS IN SCIENCE AND TECHNOLOGY ALL ACROSS, NOWADAYS, METRO CAN BE LAID OUT WITHOUT DISRUPTING THE TRAFFIC IN THE CONCERNED AREA EVEN FOR A DAY. AS FAR AS THE BILL OF M/S BHELLA CONSTRUCTIONS IS CONCERNED (PAGE NOS. 1443 - 1445 OF ADDITIONAL PB VOL.I II) IT IS EXPLAINED THAT THE CIT(A) PICKED UP JUST ONE ITEM SL.NO.7 OF RS.3,522/ - IN THE SAID BILL WHICH HE FOUND AS DIRECTLY ATTRIBUTABLE TO THE DISMANTLING WORK. WHEREAS THE SAID BILL CLEARLY SHOWS TWO OTHER ITEMS ALSO FOR CHARGES TOWARDS THE DISMANTLI NG WORK OF RS.65.3346/ - AND RS.79,060/ - AT SL.NOS,.13 & 14 RESPECTIVELY, WHICH HAD BEEN MADE TOWARDS DISMANTLING OF STRUCTURAL STEEL AND CRUSHER HOPPER RESPECTIVELY. THUS, NOT ONLY DOES THE CHARGE OF CIT(A) GET DEMOLISHED ON FACTS, BUT EVEN THE EXPLANATI ON OF THE ASSESSEE GETS PROVED FROM THE SAID BILL ITSELF THAT THE OLD CRUSHER HOPPER HAD BEEN COMPLETELY DISMANTLED. MOREOVER, MAJOR PORTION OF THE EXPENDITURE INCURRED IN EXPANSION CONSTITUTED OF ERECTION AND ITA NO. 72&85/PNJ/2012 86 INSTALLATION OF THE STEEL STRUCTURES ON WHIC H EQUIPMENTS LIKE CONVEYORS, CRUSHERS AND SCREEN WERE FITTED AND THEREFORE, WHEREVER STEEL FROM THE OLD STRUCTURE WAS FOUND NOT IN RE - CYCLABLE CONDITION, IT WAS GIVEN AWAY TO THOSE FABRICATORS ONLY AFTER ADJUSTING ITS SCRAP PRICE FROM THEIR FABRICATION CHA RGES. FURTHERMORE, SUCH SCRAP WAS ALSO SOLD TO SCRAP DEALERS AND THE RELEVANT INCOME WAS DISCLOSED SEPARATELY IN THE PROFIT & LOSS ACCOUNT FOR THE YEARS ENDED ON 31/03/2006, 31/3/2007 AND 31/3/2008 (PAGE NOS.1365 1377 OF ADDL. PB VOL.II) THUS, PROVING THAT THE OLD PLANT WAS INDEED DISMANTLED IN THOSE YEARS. AS PER CIT(A) VIDE PARA - 11.3 : E XPENSES CLAIMED AS CAPITAL WERE FOUND TO BE REVENUE IN NATURE. BILLS OF SATHU ENGG. AND BHELLA CONSTRUCTION WERE FOUND TO BE FOR UNDERTAKING FABRICATION, ERECTION AND OTHER WORKS. THEREFORE, THESE EXPENSES WERE NOT CAPITAL IN NATURE AND APPEARED TO BE IN THE NATURE OF REPAIRS TO THE EXISTING STEEL STRUCTURE. APPELLANTS EXPLANATION IT MUST BE APPRECIATED THAT THE BENEFICIATION PLANT MAINLY CONSISTS OF VARIOUS TYPES OF CONVEYORS AND SCREENS WHICH ARE FITTED ON HUGE STEEL STRUCTURES. THUS, ADMITTEDLY, THE USABLE STEEL BY ONLY SALVAGED FROM THE DISMANTLED PLANT WAS ALSO RE - USED IN SETTING UP OF THE NEW AND FOR WHICH THE FABRICATION CHARGES ETC., WERE PAID O THE SAID PARTI ES. MOREOVER, IF THE IMPUGNED BILLS DID PERTAIN TO ORDINARY REPAIRS, AS AVERTED BY THE CIT(A) THEN THE SAME COULD HAVE BEEN EASILY BOOKED IN REPAIRS ACCOUNTS BY THE ASSESSEE AND WOULD HAVE BEEN FULLY ALLOWED TO IT. MOST IMPORTANTLY, THE ASSESSMENTS FOR THE AY: 2006 - 07 AND 2007 - 08 HAD ALSO BEEN FRAMED U/S 143(3) OF THE ACT WHERE THE DEPRECIATION VIS - A - VIS CAPITAL EXPENDITURE (FIXED ASSETS) HAD BEEN EXAMINED THE RESPECTIVE AOS AND EVEN DISALLOWANCES WERE MADE OUT OF THE SAME IN SOME CASES. (REFERENCE IS D RAWN THE RELEVANT PAGES OF THE SAID ASSESSMENT ORDERS GIVEN AT PAGE NOS. 16 & 41 OF ADDL. PB - I) . BUT IN NO CASE, ADDITION TO PLANT & MACHINERY WAS EVER DISTURBED AND NO ITA NO. 72&85/PNJ/2012 87 ADVERSE COMMENT WAS EVER MADE IN RESPECT THERETO BY THE AO. THUS, THE SAME STANDS A CCEPTED IN SCRUTINY OF THE DEPARTMENT. ACCORDINGLY, IT IS SUBMITTED THAT THE CIT(A) HAD NO AUTHORITY TO TRAVEL BACK TO THOSE EARLIER YEARS TO HOLD OTHERWISE THAT THE IMPUGNED BILLS SHOWED THAT THE RELATED EXPENDITURE WAS IN THE NATURE OF REPAIRS. THIS W AS BEYOND THE JURISDICTION OF THE CIT(A) AND THEREFORE, THE SAID FINDING IS PERVERSE AND HAS NO LEGAL FOOTING. AT PAGE 67 A S PER CIT(A) VIDE PARA 1 1.7 : PRODUCTION DATA SHOWS THAT IT INCREASED WITHOUT INVESTMENT IN PLANT & MACHINERY. PRODUCTION INCREASED F ROM 5.4 METRIC TONS IN THE YEAR 1999 - 2000 TO 11.49 METRIC TONS IN THE YEAR 2004 - 05 WITHOUT ANY INVESTMENT IN PLANT & MACHINERY. SIMILARLY, THE PRODUCTION INCREASED FROM 10.71 METRIC TONS IN THE YEAR 2006 - 07 TO 2 1 . 2 6 METRIC TONS IN THE YEAR 2007 - 08 WITHOU T ANY INVESTMENT IN PLANT & MACHINERY DURING THE YEAR 2007 - 08. APPELLANTS EXPLANATION THE CONCLUSION DRAWN BY THE CIT(A) THAT WITHOUT ANY ADDITION OF PLANT & MACHINERY, PRODUCTION HAD SIZABLY INCREASED IN THE YEAR 2004 - 05 FROM THAT IN THE YEAR 1999 - 2 00 0 AND ASSERTING THAT THEREFORE, IN THE LATER YEARS INCREASE IN PRODUCTION COULD NOT BE ATTRIBUTED TO INSTALLATION OF NEW PLANT & MACHINERY IS TOTALLY MISPLACED. CIT(A) HAS IGNORED THE BASIC FACT THAT THE CHITRADURGA PLANT HAD THE EXISTING PRODUCTION CAPAC ITY OF 1.6 MILLION TONS PER ANNUM (OR 16 LAKH MTPA) BEFORE EXPANSION STARTED IN THE FY 2005 - 06 AND THE SAID INCREASE IN PRODUCTION FROM 5.4 LAKH MT IN 1999 - 2000 TO 11.49 LAKH MT WAS VERY MUCH WITHIN THE EXISTING PRODUCTION CAPACITY OF 16 LAKH MTPA IN THOSE YEARS. IT IS REITERATED THAT AFTER EXPANSION (WHICH STARTED IN THE FY 2005 - 06) THE SAID PRODUCTION CAPACITY WAS INCREASED FROM 1.6 MTPA (OR 16 LAKH MTPA) IN TERMS OF LUMPS TO 2.5 MTPA (OR 25 LAKH MTPA) EXPRESSED IN TERMS OF LUMPS. LUMPS AND FINES ARE TWO DIFFERENT VARIETIES OF IRON ORE. WHEREAS LUMP IRON ORE IS DEFINED AS BETWEEN 6MM AND 30MM IN SIZE, ANYTHING BELOW ITA NO. 72&85/PNJ/2012 88 6MM IS CONSIDERED FINS. LUMPS F ETCH A HIGHER PRICE THAN FINES. THE REASON LUMP IS PREFERRED IS THAT WHEN IT IS FED INTO A BLAST FUR NACE FOR STEEL MAKING, ITS PARTICLE SIZE ALLOWS OXYGEN OR AIR TO CIRCULATE AROUND THE RAW MATERIALS AND MELT THEM EFFICIENTLY. THE FINE IRON ORE PRODUCTS HAVE FIRST TO BE PROCESSED INTO WHAT IS CALLED SINTER, OTHERWISE IT WILL EFFECTIVELY, SMOTHER THE AIR FLOW IN THE BLAST FURNACE. IN FACT, IT WAS ONLY AFTER THE ASSESSEE INSTALLED A DUST SUPPRESSION SYSTEM IN FY 2005 - 06 THAT IS MANAGED TO INCREASE THE PRODUCTION OF FINES IN A SUBSTANTIAL MANNER WHICH WAS GETTING PRACTICALLY WASTED TO THAT, AS A RESULT THE OVERALL PRODUCTION OF LUMPS AND FINES INCREASED UP TO 38 TO 49 LAKH METRIC TONS I.E ., EVEN BEYOND THE INSTALLED CAPACITY OF 25 LAKH METRIC TONS EXPRESSED IN TERMS OF LUMPS. IT IS UNDISPUTED THAT THE SUBSTANTIAL EXPANSION FOR THIS UNIT STARTED IN THE FY 2005 - 06 IN A PHASED MANNER SPREAD OVER THE YEARS. THERE WAS SOME INCREASE IN PRODUCTION ACHIEVED DUE TO PARTIAL EXPANSION IN THE FY 2005 - 06 ITSELF, BUT THE REAL OUTCOME OF THE SAID EXPANSION IN TERMS OF PRODUCTION SURFACED IN THE YEAR IN WHICH IT WAS COMPL ETED I.E ., IN THE FY 2008 - 09 (AY 2009 - 10) WHEN PRODUCTION INCREASED TO 31.78 LAKH MT. AS FAR AS THE SECOND AVERMENT OF THE CIT(A) IS CONCERNED THAT EVEN WHEN NO INVESTMENT HAD BEEN MADE IN PLANT & MACHINERY IN THE YEAR 2007 - 08, PRODUCTION IN THAT YEAR INCR EASED TO 21.26 MT FROM 10.71 MT IN THE PR ECEDING YEAR, IT MUST BE APPRECIATED THAT THE PLANT WAS PARTIALLY CLOSED IN THE YEAR 2006 - 07 DUE TO THE FACT THAT SUBSTANTIAL EXPANSION WAS UNDERWAY IN THAT YEAR AND THEREFORE, PRODUCTION IN THAT YEAR AS JUST 10.71 LAKH MT WHICH, AS A CONSEQUENCE OF THE SAID EXPANSION , GREW UP TO 21.26 LAKH MT IN THE FOLLOWING YEAR I.E. , 2007 - 08. THERE IS NOTHING UNUSUAL ABOUT IT. MOREOVER, IT IS NOT UNDERSTOOD HOW PRODUCTION CAN INCREASE IS ON A LARGE SCALE. THEREFORE, NO PARITY CAN BE DRAWN BETWEEN INVESTMENT IN PLANT & MACHINERY IN THE YEAR 2007 - 08 AND THE PRODUCTION LEVEL ACHIEVED IN THAT VERY YEAR AS HAS BEEN ATTEMPTED BY THE CIT(A). AT PAGE 68 A S PER CIT(A) : NO MAJOR PLANT & MACHINERY INSTALLED . ITA NO. 72&85/PNJ/2012 89 THE CIT(A) HAS ASSERTED THAT EXCEPT FOR A FEW ITEMS LIKE VIBRATING SCREEN AND HYDROCONE CRUSHER, NO OTHER MAJOR EQUIPMENT OR MACHINE WAS INSTALLED DURING THE PERIOD WHICH COULD HAVE HELPED IN INCREASING THE PRODUCTION CAPACITY. APPELLANTS EXPLANATION IT HAS ALREADY BEEN EXPLAINED AT LENGTH THAT THE BASIC COST OF PLANT AND MACHINERY IN CASE OF AN IRON ORE BENEFICIATION PLANT IS INCURRED ON RAISING STEEL AND CONCRETE STRUCTURES ON WHICH THE CONVEYOR BELTS, CRUSHERS, SCREENS AND OTHER SUCH EQUIPMENTS ARE INSTALLED. THE CIT(A) HAS OV ERLOOKED THE BASIC COMPOSITION OF PRODUCTION APPARATUS REQUIRED IN AN IRON ORE BENEFICIATION PLANT AND MADE THE ABOVE NAIVE ASSERTION IN A CASUAL MANNER WITHOUT ANY REAL UNDERSTANDING OF THE ACTUAL PRODUCTION MECHANISM INVOLVED. IN FACT, IN KARNATAKA, THE RE ARE MANY PLANTS WHICH ARE KNOWN AS MOBILE SCREENING PLANT (MSP). THE MAJOR MACHINERY IN SUCH IRON ORE PLANT IS SCREENING ONLY. THUS, NO ADVERSE COGNIZANCE OF THE SAID ASSERTION OF CIT(A) WHICH AT BEST JUST A CASUAL REMARK, CAN BE TAKEN IN ANY MANNER. AT PAGE 79 A S PER CIT(A) VIDE PARA 14 : N O MATERIAL CHANGE IN THE INPUT AND THE OUTPUT OF THE UNIT, WHICH ESSENTIALLY REMAINS AS IRON ORE. APPELLANTS EXPLANATION THIS OBSERVATION IS PATENTLY WRONG. THE INPUT IS CRUDE ORE WHEREAS THE OUTPUT IS LUMPS AND FINES. NOT ONLY THE PHYSICAL APPEARANCE IS ABSOLUTELY DIFFERENT BUT EVEN THE COMMERCIAL NAME AND USAGE ARE BOTH FAR - FAR DIFFERENT. THERE IS PRACTICALLY NO USE OF CRUDE ORE, BUT THE USAGE OF LUMPS AND FINES IS ABSOLUTELY ESSENTIAL FOR STEEL MAKING INDUSTR Y. IT SEEMS THAT THE CIT(A) GOT MISLED BY THE LOOSE USAGE OF THE TERM IRON ORE WITHOUT VERIFYING THE ACTUAL FACTS. MOREOVER, DURING THE COURSE OF HEARING, BEFORE THE HONBLE ITAT, THE ASSESSEE - COMPANY SHOWED SAMPLES OF THE INPUT IN THE FORM OF CRUDE ORE AND THE OUTPUT IN THE FORM OF IRON ORE FINES AND LUMPS. THE ACTIVITY WAS EXPLAINED IN DETAIL WHICH ENCOMPASS TRANSPORTATION OF CRUDE ORE, ITA NO. 72&85/PNJ/2012 90 CRUSHING, SCREENING AND WASHING, STACKING, LOADING IN BARGES, RIVER TRANSPORTATION TO THE PORT AND EXPORT IN SHIPS . THE ASSESSEE HAS ALSO MENTIONED THAT IT WOULD BE WILLING TO SHOW THE NATURE OF ACTIVITY INVITING THE HONBLE MEMBERS FOR A SITE VISIT IN ORDER TO HAVE ON THE SPOT UNDERSTANDING OF FACTUAL MATTERS. IT WAS REQUESTED THAT THOUGH THE CLAIM WAS MADE U/S 10B IN RESPECT ITS THREE UNITS AMONA, CHITRADURG AND GADIA SADO (CODLI) BUT CONSIDERING THE NON - FEASIBLE TO INSPECT ALL THE THREE UNITS, THE NEAREST UNIT, AMONA 100% EOU MAY BE TAKEN UP FOR THE SITE VISIT. THE HONBLE MEMBERS ASKED THE DEPARTMENTAL REPRESENTA TIVE ALSO TO ACCOMPANY THE SITE VISIT. ACCORDINGLY, A SITE VISIT TO AMONA UNIT WAS ARRANGED FOR THE HONBLE MEMBERS ON 19 - 12 - 2012 IN THE AFTERNOON. FROM THE TAX DEPARTMENT THE STANDING COUNSEL. JCIT, ACIT AND INSPECTORS TOGETHER WITH ITAT BENCH CLERK ACC OMPANIED THE HONBLE MEMBERS FOR SITE VISIT. THE ACTIVITY WAS EXPLAINED ON SIGHT TO THE INVITE IN A DETAILS MANNER. APPELLANTS EXPLANATION THE JUDGMENT IN CIT VS SESA GOA LTD., (2004) 271 ITR 331 WAS DELIVERED BY THE HONBLE SUPREME COURT IN ASSESSEE S OWN CASE. THE FA C TS WERE THAT THE ASSESSEE OWNED TRANSPORT VEHICLES LIKE DUMPERS, ETC. WHICH WERE EMPLOYED IN CONVEYING CRUDE ORE FROM ITS MINES TO THE BENEFICIATION PLANT FOR PROCESSING AND THUS, DECLARED AS PLANT AND MACHINERY. IT WAS EXPLAINED THA T INSTEAD OF INSTALLING THE CONVENTIONAL CONVEYOR BELT SYSTEM FROM THE MINES TO THE BENEFICIATION PLANT FOR CONVEYING CRUDE ORE, THE ASSESSEE HAD CHOSEN THE COST EFFECTIVE WAY OF CONVEYING IT THROUGH AN ON - WHEEL CONVEYING SYSTEM I.E. THROUGH DUMPERS ETC., AND WHICH MACHINES DID NOT HAVE ANY OTHER USE. THEREFORE, FOR ALL PRACTICAL PURPOSES THESE WERE NOT VEHICLES AS UNDERSTOOD IN THE ORDINARY SENSE, BUT PLANT AND MACHINERY IN THE CASE OF THE ASSESSEE. ACCORDINGLY, THE ASSESSEE CLAIMED INVESTMENT ALLOWANCE U/S 32A ON THE SAID ASSETS, BUT IT WAS DISALLOWED BY THE ASSESSING AUTHORITY UNDER THE AVERMENT THAT THOSE ASSETS HAD NOT BEEN USED IN THE MANUFACTURING PROCESS. AFTER PASSING THROUGH THE COURSE OF APPELLATE PROCEEDINGS BEFORE THE CIT(A) AND THE ITAT THE MATTER TRAVELLED TO THE HIGH COURT. THE HONBLE PANAJI BENCH OF THE HIGH ITA NO. 72&85/PNJ/2012 91 COURT OF BOMBAY, WHILE ANSWERING THE QUESTION WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ITAT WAS JUSTIFIED IN HOLDING THAT THE ASSESSEE IS ENTITLED TO DEDUCTION OF INV ESTMENT ALLOWANCE U/S 32A OF THE IT ACT, 1961 IN RESPECT OF MACHINERY USED IN MINING ACTIVITY. IGNORING THE FACT THAT THE ASSESSEE IS ENGAGED IN EXTRACTION AND PROCESSING OF IRON ORE NOT AMOUNTING TO MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING HELD AS UNDER (266 ITR 126)..... AT THE END OF LAST BUT ONE PARA OF THE ORDER.... THE ACT ALSO CONTAINS INTERNAL EVIDENCE TO SHOW THAT THE LEGISLATURE HAS TREATED RAW ORE DIFFERENTLY FROM PROCESSED ORE. A DIVISION BENCH OF THIS COURT IN CIT VS EMIRATES COMME RCIAL BANK LTD., (2003) 262 ITR 55 HAS GIVEN THE BENEFIT EVEN IN RESPECT OF DATA PROCESSING DONE ON COMPUTERS. IN OTHER WORDS, THE LEGISLATION BEING A BENEFICIAL PIECE OF LEGISLATION, AN EXPANDED MEANING SHOULD BE SO GIVEN AND HAS TO BE GIVEN... THUS, TH E HONBLE BOMBAY HIGH COURT RATIFIED THE POSITION THAT RAW ORE WAS DIFFERENT FROM PROCESSED ORE. FURTHER, WHILE AGREEING WITH THE DECISION REACHED ON 262 ITR 55 (SUPRA) IN RESPECT OF THE DATA PROCESSING THAT THE SAME AMOUNTED TO PRODUCTION, IT HAS BASICAL LY DECIDED THAT THE PROCESSING OF IRON ORE ALSO AMOUNTS TO PRODUCTION FOLLOWING THE SAME ANALOGY. IT CAN BE SO CONCLUDED SINCE THE DATA PROCESSING ON COMPUTERS DOES NOT INVOLVE EXTRACTION OF AN ARTICLE OR THING FROM EARTH, AND, THEREFORE, THE RELIANCE OF THE SAID JUDGMENT HERE CAN ONLY BE IN RESPECT OF PROCESSING OF THE ORE AND NOT EXTRACTION OF THE ORE. FURTHER, IN THE LAST PARA OF THEIR ORDER, THE HONBLE BOMBAY HIGH COURT HELD..... THE ORE HAS TO BE EXTRACTED OR RAISED FROM THE EARTH IN WHICH IT IS EMBEDDED AD HAS TO BE BROUGHT TO THE SURFACE. WHAT IS BROUGHT TO THE SURFACE IS SOMETHING NEW WHICH COMES INTO EXISTENCE AS AN ARTICLE OR THING. IF THAT BE THE CASE , WINNING OR EXTRACTING OF ORE WOULD FALL WITHIN THE EXPRESSION PRODUCTION. . THUS, ON THE QUESTION PUT BEFORE THE HONBLE HIGH COURT WHETHER EXTRACTION AND PROCESSING OF IRON ORE AMOUNTED TO MANUFACTURE OR PRODUCTION, IT DECIDED THAT PROCESSING OF ORE WAS PRODUCTION AND ALSO THAT EXTRACTIO N OF ORE WAS ALSO PRODUCTION. HOWEVER, THE DEPA RTMENT PREFERRED FURTHER APPEAL BEFORE THE HONBLE SUPREME COURT, WHERE THE SAME QUESTION AS PUT BEFORE THE HIGH COURT WAS RE - EXAMINED BY THE APEX COURT. THE APEX COURT HELD AS UNDER (271 ITR 331).... ITA NO. 72&85/PNJ/2012 92 THE REASONING GIVEN BY THE HIGH COURT, IN THE DECISI ONS NOTED BY US EARLIER, IS IN OUR OPINION, UNIMPEACHABLE. THIS COURT HAD, AS EARLY AS IN 1961 IN CHRESTIAN MICA INDUSTRIES LTD. VS STATE OF BIHAR (1961) 12 STC 150 DEFINED THE WORD PRODUCTION ALBEIT IN CONNECTION WITH THE BIHAR SALES TAX ACT, 1947. TH E DEFINITION WAS ADOPTED FROM THE MEANING ASCRIBED TO THE WORD IN THE OXFORD ENGLISH DICTIONARY AS MEANING AMONGST OTHER T H INGS THAT WHICH IS PRODUCED, A THING THAT RESULTS FROM ANY ACTION, PROCESS OR EFFORT, A PRODUCT, PRODUCT OF HUMAN ACTIVITY OR EFFORT . FROM THE WIDE DEFINITION OF THE WORD PRODUCTION, IT HAS TO FOLLOW THAT MINING ACTIVITY FOR THE PURPOSE OF PRODUCTION OF MINERAL ORES WOULD COME WITHIN THE AMBIT OF THE WORD PRODUCTION, SINCE ORE IS A THING WHICH IS THE RESULT OF HUMAN ACTIVITY OR EFFOR T. IT HAS ALSO BEEN HELD BY THIS COURT IN CIT VS N.C. BUDHARAJA & CO., (1993) 204 ITR 412 THAT THE WORD PRODUCTION IS MUCH WIDER THAN THE WORD MANUFACTURE. WE ARE THEREFORE, OF THE OPINION THAT EXTRACTION AND PROCESSING OF IRON ORE AMOUNTS TO PRODUCT ION WITHIN THE MEANING OF THE WORD IN SECTION 32A(2)(B)(III) OF THE ACT AND CONSEQUENTLY, THE ASSESSEE IS ENTITLED TO THE BENEFIT OF SEC.32A(1) OF THE ACT . IT MUST BE APPRECIATED THAT HE APEX COURT CATEGORICALLY EXPRESSED THAT THE REASONING GIVEN BY THE HIGH COURT ON THE MEANING OF WORD PRODUCTION AS UNIMPEACHABLE IN ITS OPINION, AND SINCE A COMMON PHASE EXTRACTION AND PROCESSING OF IRON ORE HAD BEEN EMPLOYED IN THE QUESTION. IT WAS ALSO ANSWERED IN THE SINGULAR MANNER ONLY BY THE APEX COURT. HOWEVE R, WHAT MUST BE UNDERSTOOD IS THAT THE HONBLE HIGH COURT IN 266 ITR 126 NOWHERE HELD THAT BOTH EXTRACTION AND PROCESSING OF ORE SHALL HAVE TO BE UNDERTAKEN TOGETHER TO CONSTITUTE PRODUCTION. THEREFORE, IT CANNOT BE UNDERSTOOD THAT THE APEX COURT DECIDED THE ISSUE IN ANY DIFFERENT MANNER AND IT MUST BE SAFELY CONCLUDED THAT EXTRACTION OF IRON ORE AND PROCESSING OF IRON ORE WERE INDEPENDENTLY HELD AS PRODUCTION. ACCORDINGLY, THE ASSERTION OF THE DEPARTMENT THAT EXTRACTION AND PROCESSING SHOULD BOTH BE UNDER TAKEN TOGETHER IN ORDER TO PASS THE TEST OF PRODUCTION IS JUST MISGIVING AND AGAINST THE SPIRIT OF THE ABOVE DECISIONS OF THE HONBLE BOMBAY HIGH COURT AND THE SUPREME COURT. FURTHERMORE, EVEN IN THE CASE OF CHOWGULE & CO., LTD., RELIED UPON BY THE DEPART MENT, IT MUST BE APPRECIATED THE ORDER DATED 12/07/2007 OF THE HONBLE PANAJI BENCH OF ITAT IN ITA NO.162/P NJ /2006 WAS IMMEDIATELY RECTIFIED BY THE SAME BENCH IN MIS C . APPN. MOVED BY THE ASSESSEE IN MA.NO.23/PNJ/2007 ORDER DATED 19/7/2007 WHERE IT WAS ITA NO. 72&85/PNJ/2012 93 FINA LLY HELD; WE HOLD THAT THE ASSESSEE - COMPANY ITSELF IS EXTRACTING THE ENTIRE IRON ORES AND THEREAFTER PROCESSING THE SAME, AND THEREFORE, ENTITLED FOR THE DEDUCTION U/S 10B AS HELD BY THE SUPREME COURT IN THE CASE OF SESA GOA. THE NEED FOR RECTIFICATION A ROSE SINCE IN THE ORIGINAL ORDER THE HONBLE ITAT HAD HELD THAT THE ASESSSEE WAS ONLY PROCESSING IRON ORE BUT WAS NOT EXTRACTING THE ORE (PL. SEE PARA - 5 ORDER DATED 19/7/2007 IN MA) , B UT THE HONBLE ITA T FOUND DURING THE MA PROCEEDINGS (IN THE LIGHT OF SUB - PARA 8 IN PARA - 4 OF ORDER DATED 19/07/2007) THAT THE ASSESSEE - COMPANY WAS EXTRACTING AS WELL AS PROCESSING THE ORE, AND THEREFORE, 10B DEDUCTION WAS ALLOWED TO THE ASSESSEE COMPANY. IT MUST BE UNDERSTOOD THAT EOU AND ASSESSEE HAVE DIFFERENT MEANING. IT I S NOT NECESSARY THAT BOTH THE EXTRACTION OF IRON ORE AND PROCESSING OF IRON ORE MUST BE CARRIED OUT B Y THE EOU ITSELF TO CLAIM EXEMPTION U/S 10B. IT MUST BE UNDERSTOOD THAT THE MINES AND PROCESSING UNITS ARE ALWAYS AT A SAFE DISTANCE WITH EACH OTHER BECA USE MINE BLASTING WOULD OTHERWISE DISTURB THE FUNCTIONING OF THE PROCESSING UNITS. EOU UNIT HAS TO BE A CUSTOM BONDED AREA BUT THE MINES ARE SPREAD OVER KILOMETERS IN AREA WHICH CANNOT BE MADE CUSTOM BONDED. THUS, THE MINES CANNOT BE MAD PART OF THE EOU UNIT IN ANY MANNER. HOWEVER, EVEN IF THE EXTRACTION OF IRON ORE IS CARRIED OUT BY THE ASSESSEE AT MINES OWNED BY HIM OR BY THIRD PARTY (WHIC H CANNOT BE COVERED UNDER EOU UNIT AS EXPLAINED ABOVE) AND ONLY THE PROCESSING IS CARRIED OUT BY EOU UNIT, EVEN THE N THE ASSESSEE WILL BE ELIGIBLE FOR 10B DEDUCTION FOR THE SAID EOU AS THE ASSESSEE IS EXTRACTING AS WELL AS PROCESSING THE ORE. THIS IS THE DECISION OF THE CHOWGULE BECAUSE IN THAT CASE THE EOU WAS USING THE IRON ORE EXTRACTED BY THE SAID COMPANY FROM IT S OWN M INES AND FROM THE MINES OF ANTAO B R OTHERS WHICH COULD NOT BE PART OF THE EOU UNIT OF THAT ASSESSEE IS ANY MANNER AS EXPLAINED ABOVE. THUS, THE BASIC CONDITION FOR ALLOWING EXEMPTION U/S 10B BY HOLDING H EXTRACTION AND PROCESSING OF IRON ORE AS PROD UCTION IS THAT THE ASSESSEE SHOULD CARRY ON BOTH THESE ACTIVITIES BY ITSELF. AND IT CANNOT ITA NO. 72&85/PNJ/2012 94 BE UNDERSTOOD TO MEAN THAT BOTH THESE ACTIVITIES SHOULD BE CARRIED ON BY THE EOU ITSELF. IN OTHER WORDS THE HONBLE ITAT DID NOT HOLD THAT A EOU QUALIFYING FOR DEDU CTION U/S 10B MUST UNDERTAKE BOTH THESE ACTIVITIES TOGETHER, RATHER IT WAS HELD THAT IF THE ASSESSEE EXTRACTED THE ORE BY ITSELF AND ALSO UNDERTOOK PROCESSING OF THE ORE AS ITS EOU, IT WOULD QUALIFY FOR DEDUCTION U/S 10B FOR ITS ORE PROCESSING EOU. IN THE PRESENT CASE OF THE ASSESSEE ALSO, THERE IS NO DISPUTE THAT THE ASSESSEE - COMPANY NAMELY M/S SESA GOA LTD., ALSO UNDERTOOK BOTH THE ACTIVITIES OF EXTRACTION AND PROCESSING AND HAS CORRECTLY CLAIMED THE DEDUCTION U/S 10B IN RESPECT OF PROFITS ARISING FROM PR OCESSING OF ORE AT ITS EOUS. THUS, THE PARAMETERS LAID DOWN IN THE ABOVE CASE OF CHOWGULE & CO., BY THE HONBLE ITAT ARE SQUARELY MET BY THE ASSESSEE. AT PAGE - 89 A S PER CIT(A) VIDE PARA 16 : FOR DETERMINING THE PERCENTAGE OF OLD EQUIPMENTS USED IN THE N EW UNIT, EVEN THE ASSETS HELD AT THE EXTRACTING UNIT MUS T BE TAKEN INTO CONSIDERATION. THE CIT(A) HAS ASSERTED THAT TO DETERMINE THE PERCENTAGE OF THE OLD MACHINE REUSED IN THE NEW SET UP IT IS NECESSARY TO TAKE INTO CONSIDERATION ALL THE OLD AND EXISTING MACHINES OF THE RESPECTIVE UNITS ALONG WITH THE PLANT AND MACHINERY DEPLOYED IN THE MINES OF THE ASSESSEE. HE HAS FURTHER AVERTED THAT IF THE VALUE OF PLANT AND MACHINERY EMPLOYED IN THE MINES OF THE COMPANY ARE TAKEN INTO CONSIDERATION, THEN THE PERCENT AGE OF OLD MACHINE WILL CERTAINLY BE EXCEEDING THE THRESHOLD LIMIT OF 20% AS PRESCRIBED. THE CIT(A) HAS JUSTIFIED HIS AVERMENTS BY RELYING ON HIS INTERPRETATION OF THE JUDGMENT OF THE HONBLE SUPREME COURT IN CIT VS SESA GOA LTD., (2004) 271 ITR 331 THAT THE ACTIVITIES TO BE ELIGIBLE TO BE HELD AS PRODUCTION SHOULD COMPRISE OF THE EXTRACTION AS WELL AS THE PROCESSING OF IRON ORE. APPELLANTS EXPLANATION THE ASSESSEE HAS CLAIMED DEDUCTION U/S 10B IN RESPECT OF ITS BENEFICIATION UNITS ONLY AND NOT THE M INES. THEREFORE, THERE IS NO RATIONALE IN CLUBBING THE MACHINES EMPLOYED AT THE MINES WITH THOSE ITA NO. 72&85/PNJ/2012 95 OWNED BY THE UNITS FOR THE PURPOSE OF CALCULATING THE PERCENTAGE OF OLD EQUIPMENTS USED IN THE NEW UNIT. FURTHER, THE CIT(A)S ASSERTION THAT IF THE VALUE OF P L ANT AND MACHINERY EMPLOY ED IN THE MINES OF THE COMPANY ARE TAKEN INTO CONSIDERATION, THEN THE PERCENTAGE OF OLD MACHINE WILL CERTAINLY BE EXCEEDING THE THRESHOLD LIMIT OF 20% AS PRESCRIBED, IS NOTHING BUT PRESUMPTUOUS. MOREOVER, IT HAS ALREADY BEEN E XPLAINED THAT IN HONBLE SUPREME COURT JUDGMENT IN 271 ITR 331 READ WITH BOMBAY HIGH COURTS RULING IN 266 ITR 126 IN THE CASE OF SESA GOA IT HAS ACTUALLY DECIDED THAT EXTRACTION OF ORE AND PROCESSING OF ORE ARE INDEPENDENTLY HELD AS PRODUCTION. CODLI U NIT 40. THE ASSESSEE CLAIMED EXEMPTION U/S 10B IN RESPECT OF CODLI PLANT AT RS.87052701/ - . THE ASSESSEE FOR MAKING USE OF DUMPS (WASTE / TAILINGS LEFT OUT OF NORMAL IRON ORE FOR PROCESS) ESTABLISHED THIS PLANT . T HE COMMERCIAL PRODUCTION STARTED ON 8.3.200 0 . A N APPLICATION TO SIA D I PP, MINISTRY OF INDUSTRY WAS MOVED IN 1997 TO ACCORD EOU STATUS FOR SUCH PLANT VIDE LETTER DATED 15.8.1997. IN THE APPLICATION ASSESSEE STATED THE RAW MATERIAL COST AS RAW MATERIAL USED IN THE WASTAGE OF OTHER PLANTS (PG 376) PB . THIS PLANT PRODUCES ULTRA FINE RECOVERY. THIS PL ANT WAS APPROVED VIDE APPROVAL NO. PER303(1997)EOB/318/97 DATED 27.10.1997 AS EOU PLANT (PGS.32 - 37 PB). THE MINISTRY OF INDUSTRY VIDE LETTER DATED 9.2.2000 WAS INFORMED ABOUT THE START OF COMMERCIAL PROD UCTION ON 8.3.2000, AFTER THE EXPIRY OF 5 YEARS, THE EARLIER APPROVAL VIDE LETTER DATED 3.4.2005 TO CONTINUE EOU FOR A FURTHER PERIOD OF 5 YEARS (PG.60 - 61 PB) . T HE ASSESSEE COMPANY AVAILED OF BENEFIT U/S 80HHC UP TO ASSESSMENT YEAR 2004 - 05 . N O CLAIM WAS M ADE U /S 10B IN ASSESSMENT YEAR 2005 - 06 IN THE RETURN OF INCOME, THE CLAIM WAS MADE BY WAY OF LETTER DURING ASSESSMENT PROCEEDINGS U/S 143(3) WHICH WAS ALLOWED BY AO AND THE MATTER IS PENDING ON LEGALITY BEFORE THE HONBLE HIGH COURT. FOR THE ASSESSMENT Y EAR 2006 - 07 & 2007 - 08 THE AO ALLOWED THE CLAIM U/S 10B AFTER EXAMINING THE CLAIM FOR THESE ASSESSMENTS AND THE ASSESSMENTS WERE RE - OPENED U/S 263 OF THE IT ACT, AFTER THE CLAIM FOR THE IMPUGNED ASSESSMENT YEAR IS REJECTED BY THE AO. HOLDING THAT THE CLAI M ALLOWED U/S 10B BY THE AO WAS ERRONEOUS IN SO FAR AS PREJUDICIAL TO THE INTEREST OF REVENUE. DURING THE ITA NO. 72&85/PNJ/2012 96 IMPUGNED ASSESSMENT YEAR, THE AO DISALLOWED THE CLAIM. HERE ALSO A SURVEY WAS CONDUCTED AT SITE ON 26.12.2011. DURING THE SURVEY, THE STATEMENT OF G M MR. JOSEPH COHELLO (PG.NOS.722 TO 727) WAS RECORDED, BUT NO NEW FACTS WERE BROUGHT. EVEN THE AO DID NOT MENTION ABOUT THE SURVEY OF THE STATEMENT RECORDED DURING THE SURVEY. OUR ATTENTION WAS DRAWN TOWARDS THE STATEMENT TO KNOW ABOUT THE PROCESS EMPLOYE D BY THE ASSESSEE. 40.1 ON THE OBJECTION OF THE AO THAT THE SAID UNIT IS NOT ENGAGED IN ANY MANUFACTURE OR PRODUCTION OR ANY ARTICLE OR THING. IT WAS CONTENDED THAT THE AO AND THE CIT(A) COULD NOT UNDERSTAND THE PROCESS INVOLVED IN THE UNIT. THIS EOU EMP LOYS THE PROCESS AND MACHINERY WHICH ARE DIFFERENT FROM OTHER PROCESSING PLANT. WHAT IS FED AS INPUT IN THE PLANT IS TAILINGS , WHICH IS THE WASTE MATERIAL OBTAINED FROM OTHER NORMAL PROCESSING AND FROM THIS IRON ORE IS EXTRACTED AS OUTPUT . THE INPUT IS MERELY IS A WASTE AND HAS COST PRACTICALLY ALL THE CHARACTERISTIC OF IRON ORE AND CANNOT BE CONSIDERED AS IRON ORE EXTRACTED FROM THE MINES. FROM THIS WASTE MATERIAL WHAT IS EXTRACTED IS CALLED THE IRON ORE WHICH HAS THE UTILITY AND MARKETABILITY. THE WASTE, AS SUCH DOES NOT HAVE ANY COMMERCIAL MARKETABILITY. IT WAS CONTENDED THAT THE DECISION OF M/S SESA GOA LTD., (271 ITR 331) HAS WRONGLY BEEN INTERPRETED BY THE REVENUE. RELIANCE WAS PLACED FOR THE PREPOSITION OF THE LAW THAT THE SAID UNIT IS ENGA GED MANUFACTURING OR PRODUCTION OF A N ARTICLE OR THING ON THE SAME DECISION WHICH HAS BEEN RELIED ON IN RESPECT OF SIMILAR ISSUE ARISING IN OTHER TWO UNITS. 40.2 ON THE OBJECTION OF THE AO THAT THE ASSESSEE HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNTS F OR EOU UNITS AND NON - EOU UNITS SUBMISSIONS MADE IN RESPECT OF OTHER UNITS WERE REITERATED. 40.3 ON THE OBJECTION OF THE AO THAT NO SATISFACTORY EVIDENCE WAS PRODUCED BY THE ASSESSEE ABOUT THE DATE OF MANUFACTURING OR PRODUCTION. IT WAS SUBMITTED THAT TH E ASSESSEE SUBMITTED THAT THE APPROVAL DATED 27.10.1997 (PG.33 - 37 PB) . IN THE APPROVAL ONE OF THE CONDITIONS WAS THAT THE ASSESSEE HAS TO IMPLEMENT THE PROJECT AND COMMENCE COMMERCIAL PRODUCTION WITHIN 3 YEARS AND HAD TO INTIMATE THIS TO MINISTRY. THE ASSE SSEE ACCORDINGLY, ITA NO. 72&85/PNJ/2012 97 INTIMATED THE MINISTRY VIDE ITS LETTER DATED 9.3.2000 I.E. , COMMERCIAL PRODUCTION STARTED ON 8.3.2000. 40.4 ON THE OBJECTION OF THE AO THAT SETTING UP OF A UNIT ON THE OLD MINES WHICH ARE ALREADY OPERATED BY THE ASSESSEE CANNOT BE TREAT ED AS NEW UNIT. IT WAS CONTENDED THAT SEC.10B NOWHERE PROHIBITS THE ASSESSE E TO SET UP THE UNIT BY ITSELF WAS NEW AND IS ENGAGED IN THE MANUFACTURE OR PRODUCTION ACTIVITY. THE ACTIVITIES CARRIED IN THE OLD MINES ARE TOTALLY DIFFERENT FROM THE ACTIVITY C ONTEMPLATED IN THE UNIT. 40.5 ON THE CONTENTION OF THE AO THAT THE FRESH APPROVAL OF THE BOARD IS NOT AVAILABLE TO THE UNIT, IT WAS SUBMITTED THAT THE ASSESSEE HAS OBTAINED THE RENEWAL OF EARLIER APPROVAL DULY RATIFIED BY THE BOARD OF APPROVAL. FOR THIS, ATTENTION WAS DRAWN TO PAGES (436 TO 439 PB) WHICH CONTAINS COPY OF THE LETTER DATED 13.7.2012 RECEIVED FROM THE DEVELOPMENT COMMISSIONER AND ALSO COPY OF THE LETTER DATED 1.8.2012 WAS ALSO SUBMITTED THAT DURING THE COURSE OF HEARING CONFIRMING THE APPROV AL OF BOARD OF APPROVALS WAS NOT REQUIRED FOR RENEWAL GRANTED FOR CONTINUATION AS AN EOU FOR FURTHER PERIOD OF 5 YEARS IN TERMS OF PARA 6.6 OF FOREIGN TRADE POLICY. THIS LETTER WAS DULY VERIFIED BY US AND COPY OF THE SAME WAS ALSO GIVEN TO THE DR. O N THE CONTENTION THAT THE UNIT HAS NOT DEBITED ANY COST OF THE WASTE MATERIAL USED, IT WAS SUBMITTED THAT THE WASTE WAS USED FROM TAILINGS/PONDS WHICH HAD NEITHER ANY COST NO R ANY COMMERCIAL MARKETABILITY. ATTENTION WAS ALSO DRAWN TO PAGE - 376 OF PAPER BOOK TO STRESS THAT THESE FACTS WERE DULY MENTIONED IN THE EOU APPLICATION SUBMITTED WITH THE SIA/DIPP AND WAS DULY SHARED WITH THE AO. SOME PIECE OF TAILING WAS PHYSICALLY PRODUCED AT THE TIME OF HEARING BEFORE THE HONBLE BENCH . 40.6 THE LEARNED AR CARRIED US TO THE ORDER OF THE CIT(A) AND THE VARIOUS OBSERVATIONS MADE BY HIM AND CONTENDED AND STATED HOW THESE OBSERVATIONS ARE NOT CORRECT. ON OUR PERMISSION, HE SUBMITTED THE SYNOPSIS IN THE FOLLOWING MANNER; POINT - WISE RESPONSE TO THE OBSERVATIONS OF CIT(A) IN HIS ORDER; ITA NO. 72&85/PNJ/2012 98 2.1 AT PAGE - 103 A S PER CIT ( A) VIDE PARA 20 : WHAT IS FED AS RAW MATERIAL TO THE CODLI UNIT IS IRON ORE AND WHAT COMES OUT AFTER PROCESSING IS ALSO IRON ORE, THE ONLY MINOR DIFFERENCE BEING IN THE IRON CONTENT OF THE MATERIAL. APPELLANT'S EX PLANATION: CIT(A) HAS NOT UNDERSTOOD IS THAT THE INPUT FOR THIS PLANT IS 'TAILINGS', WHICH IS THE WASTE MATERIAL OBTAINED FROM OTHER NORMAL PROCESSING AND FROM THIS 'IRON ORE' IS EXTRACTED AS OUTPUT. SO, WHAT GOES IN AS INPUT IS 'TAILINGS' AND WHAT COMES O UT IS THE 'IRON ORE'. IN FACT, CIT(A) HAS MADE A CONTRADICTORY STATEMENT TO HIS ABOVE AVERMENT AT PAGE NO. 107 OF HIS ORDER, WHERE HE HAS ASSERTED THAT 'HAVING LOST ALL THE CHARACTERISTICS OF IRON ORE THE TAILINGS CAN NEVER BE CONSIDERED AS IRON ORE EXTRAC TED FROM THE MINES AND THEREFORE, RECYCLING OF SUCH WASTE MATERIALS CANNOT BE CONSIDERED TO BE THE SAME AS PROCESSING OF EXTRACTED IRON ORE.' THIS ASSERTION RATHER PROVES THE STAND OF THE APPELLANT THAT THE OUTPUT OF CODLI UNIT IS A 'NEW' PRODUCT HAVING DI FFERENT CHARACTERISTICS AND USE. 2.2 AT PAGE 105 A S PER CIT(A) VIDE PARA 21: THE UNIT IS NOT ENGAGED IN ANY MANUFACTURING OR PRODUCTION OF ARTICLE OR THING SINCE THE UNIT IS NOT ENGAGED IN 'EXTRACTION AND PROCESSING OF IRON ORE', WHICH TOGETHER CONSTI TUTES 'PRODUCTION', AS INTERPRETED BY THE SUPREME COURT IN SESA GOA 271 ITR 331. APPELLANT'S EXPLANATION: THE JUDGMENT IN CIT VS. SESA GOA LTD. (2004) 271 ITR 331 WAS DELIVERED BY THE HON'BLE SUPREME COURT IN ASSESSEE'S OWN CASE. THE FACTS WERE THAT THE AS SESSEE OWNED TRANSPORT VEHICLES LIKE DUMPERS, ETC. WHICH WERE EMPLOYED IN CONVEYING CRUDE ORE FROM ITS MINES TO THE BENEFICIATION PLANT FOR PROCESSING AND, THUS, DECLARED AS 'PLANT AND MACHINERY'. IT WAS EXPLAINED THAT INSTEAD OF INSTALLING THE CONVENTIONA L CONVEYOR BELT SYSTEM FROM THE MINES TO THE BENEFICIATION PLANT FOR CONVEYING CRUDE ORE, THE ASSESSEE HAD CHOSEN THE COST EFFECTIVE WAY OF CONVEYING IT THROUGH AN ON - WHEEL CONVEYING SYSTEM, I.E., THROUGH DUMPERS, ETC. AND WHICH MACHINES DID NOT HAVE ANY O THER USE. THEREFORE, ITA NO. 72&85/PNJ/2012 99 FOR ALL PRACTICAL PURPOSES THESE WERE NOT 'VEHICLES' AS UNDERSTOOD IN THE ORDINARY SENSE, BUT 'PLANT AND MACHINERY' IN THE CASE OF THE ASSESSEE. ACCORDINGLY, THE ASSESSEE CLAIMED INVESTMENT ALLOWANCE U/S 32A ON THE SAID ASSETS, BUT IT WAS DISALLOWED BY THE ASSESSING AUTHORITY UNDER THE AVERMENT THAT THOSE ASSETS HAD NOT BEEN USED IN THE MANUFACTURING PROCESS. AFTER PASSING THROUGH THE COURSE OF APPELLATE PROCEEDINGS BEFORE THE CIT (APPEALS) AND IT AT, THE MATTER TRAVELED TO THE HIGH CO URT. THE HON'BLE PANAJI BENCH OF THE HIGH COURT OF BOMBAY, WHILE ANSWERING THE QUESTION 'WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE INCOME - TAX APPELLATE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE ASSESSEE IS ENTITLED TO DEDUCTION OF IN VESTMENT ALLOWANCE UNDER SECTION 32A OF THE INCOME - TAX ACT, 1961, IN RESPECT OF MACHINERY USED IN MINING ACTIVITY, IGNORING THE FACT THAT THE ASSESSEE IS ENGAGED IN EXTRACTION AND PROCESSING OF IRON ORE, NOT AMOUNTING TO MANUFACTURE OR PRODUCTION OF ANY AR TICLE OR THING?', HELD AS UNDER [266 ITR 126]: AT THE END OF LAST BUT ONE PARA OF THE ORDER: '... THE ACT ALSO CONTAINS INTERNAL EVIDENCE TO SHOW THAT THE LEGISLATURE HAS TREATED RAW ORE DIFFERENTLY FROM PROCESSED ORE. A DIVISION BENCH OF THIS COURT IN CIT VS. EMIRATES COMMERCIAL BANK LTD. (2003) 262 ITR 55, HAS GIVEN THE BENEFIT EVEN IN RESPECT OF DATA PROCESSING DONE ON COMPUTERS. IN OTHER WORDS, THE LEGISLATION BEING A BENEFICIAL PIECE OF LEGISLATION, AN EXPANDED MEANING SHOULD BE SO GIVEN AND HAS TO BE GIVEN. ' THUS, THE HON'BLE BOMBAY HIGH COURT RATIFIED THE POSITION THAT RAW ORE WAS DIFFERENT FROM PROCESSED ORE. FURTHER, WHILE AGREEING WITH THE DECISION REACHED IN 262 ITR 55 (SUPRA) IN RESPECT OF DATA PROCESSING THAT THE SAME AMOUNTED TO 'PRODUCTION', IT HAS BASICALLY DECIDED THAT THE 'PROCESSING' OF IRON ORE ALSO AMOUNTS TO 'PRODUCTION' FOLLOWING THE SAME ANALOGY. IT CAN BE SO CONCLUDED SINCE THE DATA PROCESSING ON COMPUTERS DOES NOT INVOLVE 'EXTRACTION' OF ANY ARTICLE OR THING FROM EARTH, AND, THEREFO RE, THE RELIANCE OF THE SAID JUDGMENT HERE CAN ONLY BE IN RESPECT OF 'PROCESSING' OF THE ORE AND NOT 'EXTRACTION' OF THE ORE. FURTHER, IN THE LAST PARA OF THEIR ORDER, THE HON'BLE BOMBAY HIGH COURT HELD: 'THE ORE HAS TO BE EXTRACTED OR RAISED FROM THE EART H IN WHICH IT IS ITA NO. 72&85/PNJ/2012 100 EMBEDDED AND HAS TO BE BROUGHT TO THE SURFACE. WHAT IS BROUGHT TO THE SURFACE IS SOMETHING NEW WHICH COMES INTO EXISTENCE, AS AN ARTICLE OR THING. IF THAT BE THE CASE, WINNING OR EXTRACTING OF ORE WOULD FALL WITHIN THE EXPRESSION 'PRODUCTI ON '. THUS, ON THE QUESTION PUT BEFORE THE HON'BLE HIGH COURT 'WHETHER 'EXTRACTION AND PROCESSING' OF IRON ORE AMOUNTED TO 'MANUFACTURE OR PRODUCTION'', IT DECIDED THAT 'PROCESSING OF ORE' WAS 'PRODUCTION' AND ALSO THAT 'EXTRACTION OF ORE' WAS ALSO 'PRODUC TION'. HOWEVER, THE DEPARTMENT PREFERRED FURTHER APPEAL BEFORE THE HON'BLE SUPREME COURT, WHERE THE SAME QUESTION AS PUT BEFORE THE HIGH COURT WAS RE - EXAMINED BY THE APEX COURT. THE APEX COURT HELD AS UNDER [271 ITR 331]: 'THE REASONING GIVEN BY THE HIG H COURT, IN THE DECISIONS NOTED BY US EARLIER, IS, IN OUR OPINION, UNIMPEACHABLE. THIS COURT HAD, AS EARLY AS IN 1961, IN CHRESTIAN MICA INDUSTRIES LTD. VS. STATE OF BIHAR [1961] 12 STC 150, DEFINED THE WORD 'PRODUCTION', ALBEIT IN CONNECTION WITH THE BIHA R SALES TAX ACT, 1947. THE DEFINITION WAS ADOPTED FROM THE MEANING ASCRIBED TO THE WORD IN THE OXFORD ENGLISH DICTIONARY AS MEANING 'AMONGST OTHER THINGS THAT WHICH IS PRODUCED; A THING THAT RESULTS FROM ANY ACTION, PROCESS OR EFFORT, A PRODUCT; A PRODUCT OF HUMAN ACTIVITY OR EFFORT'. FROM THE WIDE DEFINITION OF THE WORD 'PRODUCTION', IT HAS TO FOLLOW THAT MINING ACTIVITY FOR THE PURPOSE OF PRODUCTION OF MINERAL ORES WOULD COME WITHIN THE AMBIT OF THE WORD 'PRODUCTION' SINCE ORE IS 'A THING' WHICH IS THE RE SULT OF HUMAN ACTIVITY OR EFFORT. IT HAS ALSO BEEN HELD BY THIS COURT IN CIT VS. N.C. BUDHARAJA AND CO. [1993] 204ITR 412 THAT THE WORD 'PRODUCTION' IS MUCH WIDER THAN THE WORD 'MANUFACTURE'. 'WE ARE, THEREFORE, OF THE OPINION THAT EXTRACTION AND PROCESSIN G OF IRON ORE AMOUNTS TO 'PRODUCTION' WITHIN THE MEANING OF THE WORD IN SECTION 32A(2)(B)(III) OF THE ACT AND, CONSEQUENTLY, THE ASSESSEE IS ENTITLED TO THE BENEFIT OF SECTION 32A(L) OF THE ACT.' IT MUST BE APPRECIATED THAT THE APEX COURT CATEGORICALLY EXP RESSED THAT THE REASONING GIVEN BY THE HIGH COURT ON THE MEANING OF WORD R ITA NO. 72&85/PNJ/2012 101 'PRODUCTION' WAS UNIMPEACHABLE IN ITS OPINION; AND SINCE A COMMON PHRASE - 'EXTRACTION AND PROCESSING OF IRON ORE' HAD BEEN EMPLOYED IN THE QUESTION, IT WAS ALSO ANSWERED IN THE SINGU LAR MANNER ONLY BY THE APEX COURT. HOWEVER, WHAT MUST BE UNDERSTOOD IS THAT THE HON'BLE HIGH COURT IN 266 ITR 126 NOWHERE HELD THAT BOTH 'EXTRACTION AND PROCESSING' OF ORE SHALL HAVE TO BE UNDERTAKEN TOGETHER TO CONSTITUTE 'PRODUCTION'. THEREFORE, IT CANNO T BE UNDERSTOOD THAT THE APEX COURT DECIDED THE ISSUE IN ANY DIFFERENT MANNER, AND IT MUST BE SAFELY CONCLUDED THAT 'EXTRACTION OF IRON ORE' AND 'PROCESSING OF IRON ORE' WERE INDEPENDENTLY HELD AS 'PRODUCTION'. ACCORDINGLY, THE ASSERTION OF THE DEPARTMENT THAT 'EXTRACTION AND PROCESSING' SHOULD BOTH BE UNDERTAKEN TOGETHER IN ORDER TO PASS THE TEST OF 'PRODUCTION' IS JUST A MISGIVING AND AGAINST THE SPIRIT OF THE ABOVE DECISIONS OF THE HON'BLE BOMBAY HIGH COURT AND THE SUPREME COURT. FURTHERMORE, EVEN IN TH E CASE OF CHOWGULE & CO. LTD., RELIED UPON BY THE DEPARTMENT, IT MUST BE APPRECIATED THE ORDER DATED 12/07/07 OF THE HON'BLE PANAJI BENCH OF ITAT IN ITA NO. 162/PNJ/2006 WAS IMMEDIATELY RECTIFIED BY THE SAME BENCH IN MISCELLANEOUS APPLICATION MOVED BY THE ASSESSEE IN M.A. NO. 23/PNJ/2007 ORDER DATED 19/07/07 WHERE IT WAS FINALLY HELD: 'WE HOLD THAT THE ASSESSEE - COMPANV ITSELF IS EXTRACTING THE ENTIRE IRON ORES AND THEREAFTER PROCESSING THE SAME, AND, THEREFORE, ENTITLED FOR THE DEDUCTION U/S 10B AS HELD BY THE SUPREME COURT IN THE CASE OF SESA GOA.' THE NEED FOR RECTIFICATION AROSE SINCE IN THE ORIGINAL ORDER THE HON'BLE ITAT HAD HELD THAT THE ASSESSEE WAS ONLY 'PROCESSING' IRON ORE BUT WAS NOT 'EXTRACTING' THE ORE (PLEASE SEE PARA 5 OF ORDER DATED 19/07/07 IN MA). BUT THE HON'BLE ITAT FOUND DURING THE MA PROCEEDINGS (IN THE LIGHT OF SUB - PARA 8 IN PARA 4 OF ORDER DATED 19/07/07) THAT THE ASSESSEE - COMPANY WAS EXTRACTING AS WELL AS PROCESSING THE ORE, AND, THEREFORE, 10B DEDUCTION WAS ALLOWED TO THE ASSESSEE - CO MPANY. IT MUST BE UNDERSTOOD THAT 'EOU' AND 'ASSESSEE' HAVE DIFFERENT MEANING. IT IS NOT NECESSARY THAT BOTH THE EXTRACTION OF IRON ORE AND PROCESSING OF IRO N ORE MUST BE CARRIED OUT BY TH E EOU ITSELF TO CLAIM EXEMPTION U/S 10B. IT MUST BE UNDERSTOOD THAT THE MINES AND PROCESSING UNITS ARE ITA NO. 72&85/PNJ/2012 102 ALWAYS AT A SAFE DISTANCE WITH EACH OTHER BECAUSE MINE BLASTING WOULD OTHERWISE DISTURB THE FUNCTIONING OF THE PROCESSING UNITS. EOU UNIT HAS TO BE A CUSTOM BONDED AREA BUT THE MINES ARE SPREAD OVER KILOMETRES IN AREA WHI CH CANNOT BE MADE CUSTOM BONDED. THUS, THE MINES CANNOT BE MADE PART OF THE EOU UNIT IN ANY MANNER. HOWEVER, EVEN IF THE EXTRACTION OF IRON ORE IS CARRIED OUT BY THE ASSESSEE AT MINES OWNED BY HIM OR BY THIRD PARTY (WHICH CANNOT BE COVERED UNDER EOU UNIT A S EXPLAINED ABOVE) AND ONLY THE PROCESSING IS CARRIED OUT BY EOU UNIT, EVEN THEN THE ASSESSEE WILL BE ELIGIBLE FOR 10 B DEDUCTION FOR THE SAID EOU AS THE ASSESSEE IS EXTRACTING AS WELL AS PROCESSING THE ORE. THIS IS THE DECISION OF THE CHOWGULE BECAUSE IN THAT CASE THE EOU WAS USING THE IRON ORE EXTRACTED BY THE SAID COMPANY FROM ITS OWN MINES AND FROM THE MINES OF ANTAO BROTHERS, WHICH COULD NOT BE A PART OF THE EOU UNIT OF THAT ASSESSEE IN ANY MANNER AS EXPLAINED ABOVE. THUS, THE BASIC CONDITION FOR ALLOW ING EXEMPTION U/S I 0 B BY HOLDING THE 'EXTRACTION' AND PROCESSING OF IRON ORE' AS 'PRODUCTION' IS THAT THE ASSESSEE SHOULD CARRY ON BOTH THESE ACTIVITIES BY ITSELF; AND IT CANNOT BE UNDERSTOOD TO MEAN THAT BOTH THESE ACTIVITIES SHOULD BE CARRIED ON BY THE E OU ITSELF. IN OTHER WORDS THE HON'BLE IT AT DID NOT HOLD THAT A 'EOU' QUALIFYING FOR DEDUCTION U/S 10B MUST UNDERTAKE BOTH THESE ACTIVITIES TOGETHER, RATHER IT WAS HELD THAT IF THE ASSESSEE EXTRACTED THE ORE BY ITSELF AND ALSO UNDERTOOK PROCESSING OF THE ORE AT ITS EOU, IT WOULD QUALIFY FOR DEDUCTION U/S 10B FOR ITS 'ORE PROCESSING' EOU. IN THE PRESENT CASE OF THE APPELLANT ALSO, THERE IS NO DISPUTE THAT THE ASSESSEE - COMPANY, NAMELY M/S SESA GOA LTD., ALSO UNDERTOOK BOTH THE ACTIVITIES OF EXTRACTION AND PR OCESSING AND HAS CORRECTLY CLAIMED THE DEDUCTION U/S 10B IN RESPECT OF PROFITS ARISING FROM 'PROCESSING' OF ORE AT ITS EOUS. THUS, THE PARAMETERS LAID DOWN IN THE ABOVE CASE OF CHOWGULE & CO. BY THE HON'BLE ITAT ARE SQUARELY MET BY THE APPELLANT. 2.3 AT PAGE 109 - 110 A S PER CIT(A) VIDE PARA 21.4: THERE IS A LIMITED DISCUSSION ON 'TATA TEA' CASE FOR ALTERNATE ARGUMENT OF APPELLANT THAT IN CASE OF EOU, REGARD TO BE GIVEN TO THE EXIM POLICY. ITA NO. 72&85/PNJ/2012 103 APPELLANT'S EXPLANATION: REFERENCE IS INVITED TO THE JUDGMENTS I N TATA TEA LTD. VS. ACIT (2011) 338 ITR 285 (KER.) AND MADHU JAYANTI INTERNATIONAL LTD. VS. DCIT (KOL. ITAT)(SB). IN CASE OF AN EOU, REGARD HAS TO BE GIVEN TO THE DEFINITION OF MANUFACTURE CONTAINED IN THE RELEVANT EXIM POLICY. EVEN IF DEFINITION OF 'MANUF ACTURE' HAS BEEN INSERTED IN THE INCOME - TAX ACT, IT IS SUBMITTED THAT IT WOULD NOT DETER TO DRAW THE DEFINITION OF PRODUCTION FROM EXIM POLICY. SINCE IT IS SETTLED LAW THAT PRODUCTION IS WIDER THAN MANUFACTURE AND EVERY CASE OF MANUFACTURE CAN BE INCLUDED IN PRODUCTION, HENCE THE DEFINITION GIVEN IN EXIM POLICY FOR 'MANUFACTURE' WOULD STAND GOOD FOR THE WORD 'PRODUCTION' [PLEASE REFER TO PAGE NOS. 174 - 1 79 OF (INITIAL) PB VOL. ( I ) 2.4 AT PAGE 112 A S PER CIT( A) VIDE PARA 22: THE ASSESSEE - COMPANY HAS NOT PRODUCED ANY SATISFACTORY EVIDENCE WITH REGARD TO DATE / YEAR OF COMMENCEMENT OF BUSINESS OF THE UNIT. APPELLANT'S EXPLANATION: THE ABOVE AVERMENT HAS BEEN MADE WITHOUT CHECKING FROM THE RECORD THAT A COPY OF LETTER FURNISHED TO SIA, DIPP (AS WELL AS CUST OM DEPARTMENT) HAD BEEN FURNISHED BY THE APPELLANT. THESE LETTERS WERE DULY ACKNOWLEDGED BY RESPECTIVE AUTHORITIES. THERE IS NO MENTION OR DISCUSSION WHAT OTHER EVIDENCE COULD BE PRODUCED OR AS TO HOW THE EVIDENCE PRODUCED WAS LACKING MERIT OF CONSIDERATIO N OR RELIANCE. 2.5 AT PAGE 113 A S PER CIT(A) VIDE PARA 23 : THE ASSESSEE - COMPANY HAS NOT BEEN ABLE TO FURNISH ANY EVIDENCE TO SHOW THAT THE APPROVAL ISSUED BY THE DEVELOPMENT COMMISSIONER WAS SUBSEQUENTLY RATIFIED BY THE BOARD. APPELLANT'S EXPLANATION: A COPY OF THE LETTER DT. 13/07/12 RECEIVED FROM THE DEVELOPMENT COMMISSIONER, SEEPZ, MUMBAI CONFIRMING THE BOARD'S APPROVAL [PAGE NOS. 436 - 439 OF (INITIAL) PB VOL. II] WAS FURNISHED. ANOTHER COPY OF THE LETTER DT. 01/08/2012 RECEIVED FROM THE DEVELOPMENT COMMISSIONER, SEEPZ, MUMBAI CONFIRMING THAT THE APPROVAL OF THE BOARD OF APPROVALS WAS NOT REQUIRED FOR THE RENEWAL GRANTED FOR CONTINUATION AS AN EOU FOR FURTHER ITA NO. 72&85/PNJ/2012 104 PERIOD OF 5 YEARS IN TERMS OF PARA 6.6(A) OF FOREIGN TRADE POLICY. (THIS DO CUMENT WAS SUBMITT ED DURING ITAT HEARING). 2.6 AT AGE 114 A S PER CUT A) VIDE PARA 23: IT IS SETTLED PRINCIPLE OF TAX JURISPRUDENCE THAT TH E PROVISIONS REGARDING EXEMPTIONS AND CONCESSIONS NEED TO BE CONSTRUED STRICTLY IN ACCORDANCE WITH THE WRITTEN LANGUAGE OF THE STA TUTE. APPELLANT'S EXPLANATION: THERE IS NO DOUBT IN THE ABOVE OBSERVATION OF THE CIT(A), BUT IT SHOULD BE APPLIED IN ALL CASES. NO REFERENCE HAS BEEN MADE BY THE CIT(A) TO BAJAJ TEMPO (SC) AND SEVERAL SUCH OTHER RULINGS WHERE IT IS HELD THAT ONCE A CLAIM IS FOUND BASICALLY BONAFIDE, THE PROCEDURAL ASPECTS BE LOOKED AT LIBERALLY IN THE MATTER RELATING TO INCENTIVE / EXEMPTION PROVISIONS OF THE ACT. 3. REPLY TO PERTINENT AVERMENTS RAISED IN PR'S REJOINDER (OTHER THAN THOSE ALREADY EXPLAINED HEREIN ABOVE ) 3 . 1 VIDE PARA 3B (PAGE 7) OF D R'S PB VOL - II IT IS AVERRED THAT THE ASSESSEE DID NOT INCLUDE ANY AMOUNT TOWARDS COST OF IRON ORE INPUT TO ITS CODLI, AMONA AND CHITRADURGA UNITS. IF THE SAID COST IS TAKEN INTO ACCOUNT, THEN THERE WOULD BE LOSS IN ALL THESE UNITS AND DEDUCTION U/S 1 OB WOULD BE NIL. APPELLANT'S EXPLANATION: THIS AVERMENT DOES NOT BEAR OUT FROM THE FACTS. THE ASSESSEE HAD DECLARED 'COST OF PRODUCTION' IN THE COMPUTATION SHEETS OF DEDUCTION CLAIMED U/S 10B IN RESPECT OF EACH EOU SUBMITTED DURING THE ASSESSMENT PROCEEDINGS ALONG WITH DETAILS OF EOU - WISE BREAK - UP OF THE 'COST OF PRODUCTION'. A COPY OF THE SAME WAS ALSO FURNISHED BEFORE THE HON'BLE BENCH ON 20/12/12. IT IS ALSO REPRODUCED HEREIN BELOW: AMONA UNIT A MOUNT (RS.) ITA NO. 72&85/PNJ/2012 105 ORE MINING COST (ORE INPUT COST FROM OWN MINES IN GOA) 45,25,03,6 92 ORE DRESSING COST 10,46 , 39 , 225 TOTAL (AS PER 10B COMPUTATION SHEET): 55,71,42 , 9 17 CHITRADURGA UNIT ORE MINING COST (ORE INPUT COST FROM OWN MINES IN KARNATAKA ) 20,27,01,458 ORE DRESSING COST 6,9 0,45.428 TOTAL (AS PER 10B COMPUTATION SHEET): 27,17,46.886 CODLI UNIT ORE MINING COST @ NIL NIL ORE DRESSING COST 2,49.57.787 TOTAL (AS PER 1 0 B COMPUTATION SHEET): 2, 49, 57,787 @ RAW - MATERIAL FOR CODLI IS 'TAILINGS' WHICH IS A TOTAL WASTE AND HAS NO VALUE. THUS, ORE INPUT COST HAS BEEN DULY AND CORRECTLY DECLARED IN THE COMPUTAT IO NS FOR DEDUCTION CLAIMED U/S 10 B IN RESPECT OF ALL THREE EOUS BY THE ASSESSEE. 3 . 2 VIDE PARA 3C (PAGE 8) OF D R'S PB VOL - II IT IS AVERRED THAT LETTER SIGNED BY THE EXECUTIVE ASSISTANT TO DEVELOPMENT COMMISSIONER, SEEPZ SEZ STATING THAT 'RENEWAL GRANT ED FOR COMMUNICATION AS AN EOU FOR FURTHER PERIOD OF 5 YEARS FROM 2006 - 07 TO 2010 - 11, DID NOT REQUIRE THE APPROVAL OF THE BOARD OF APPROVALS IN RESPECT OF CODLI UNIT. BUT THIS LETTER IS NOT SIGNED BY THE AUTHORIZED PERSON IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. APPELLANT'S EXPLANATION: A COPY OF THE IMPUGNED LETTER DT. 01/08/2012 (...SUBMITTED DURING THE HEARING IN NOVEMBER, 2012 BEFORE THE HON'BLE IT AT) WAS INDEED SIGNED BY THE EXECUTIVE ASSISTANT TO THE DEVELOPMENT COMMISSION, WHICH IS A STANDARD P RACTICE THAT SUCH CLARIFICATORY LETTERS ARE RELEASED BY THE EA ONLY UNDER DUE AUTHORITY OF THE DEVELOPMENT COMMISSIONER. IT MUST BE APPRECIATED THAT IT IS NOT THE CASE WHERE THE APPROVAL OF THE BOARD OF APPROVALS WAS NOT SIGNED BY THE DEVELOPMENT COMMISSIO NER AND, THEREFORE, THE SAME WAS NOT TO BE ADMITTED; IT WAS A CASE OF MERELY ITA NO. 72&85/PNJ/2012 106 INTIMATING / CONFIRMING TO THE APPELLANT - COMPANY THAT THE APPROVAL OF THE BOARD OF APPROVALS WAS NOT REQUIRED FOR THE RENEWAL GRANTED FOR CONTINUATION AS AN EOU FOR FURTHER PERIOD OF 5 YEARS IN TERMS OF PARA 6.6(A) OF FOREIGN TRADE POLICY. 40.7 THUS, IT WAS CONTENDED THAT THERE IS A CHANGE OF UTILITY WASTE IN OTHER PLANT FOR WHICH THERE WAS NO CUSTOMER AND IT IS BEING DUMPED WAS UTILIZED BY MAKING THE ULTRA - FINE ORE. THE LEARNE D. A.R. BROUGHT OUT THE RAW MATERIAL I.E. , THE TAILING WHICH WAS IN LIQUID FORM AND ALSO THE ULTRA - FINE ORE WHICH WAS IN POWDER FORM AND SHOWN IT BEFORE THE BENCH DURING THE COURSE OF HEARING. THUS, HE CONTENDED THAT BOTH THE THINGS, RAW MATERIAL AS WELL AS THE ULTRA - FINE ORES PRODUCED ARE DIFFERENT AND HAVING DIFFERENT UTILITY. 41. THE LEARNED DR SUBMITTED THE FOLLOWING FACTS IN TABULAR FORM IN RESPECT OF ALL THE THREE UNITS I.E ., AMONA PLANT, CHI T RADURGA PLANT AND CODLI PLANT : - CODLI UNIT AMONA PLAN T CHITRADURGA UNIT COMMENCEMENT OF PROCESSING IRON ORE 1973 1958 1952 PLACE PANAJI, GOA PANAJI, GOA CHITRADURGA, KARNATAKA ACQUIRED BY ASSESSEE 1978 1985 F.Y. 1998 - 99 RENOVATION PROCESS NO EVIDENCE 2002 - 03 F.Y. 2005 - 06 TO 2008 - 09 INVESTMENT ON PLANT & MACHINERY & RENOVATION NO EVIDENCE `3,96,10,020/ - ` 93,93,596/ - ` 35,67,257/ - ` 7,03,82,158/ - APPROVAL EOU NO APPROVAL 28.03.2008 15.02.2008 ITA NO. 72&85/PNJ/2012 107 RATIFIED BY BOARD NO RATIFICATION 03.06.2008 14.01.2011 S. 10B CLAIM A.Y.2005 - 06 A.Y. 2009 - 10 A.Y. 2009 - 10 CLAIM U/S. 10B `8,70,52,701 `257,23,14,771/ - `185,34,16,650/ - SECTION 80IB OF THE ACT CLAIMED IN RESPECT OF ALL THE THREE UNITS OF CODLI, AMONA AND CHITRADURGA DIVISION OF RS.451,27,84,122/ - . 41.1 IT WAS STATED THAT A LL THE THREE UNITS COMMENCED PR OCESSING OF IRON ORE IN THE YEARS 1973, 1958 & 1952. SECTION 10B OF THE ACT, CAME UNDER THE STATUTE BOOK BY FINANCE ACT, 1988 W.E.F. 01.04.1989. IN THE ASSESSMENT YEAR 2005 - 06 (CODLI UNIT), ASSESSMENT YEAR 2009 - 10 BOTH AMONA UNIT AND CHITRADURGA UNIT MAD E A CLAIM OF DEDUCTION U/S.10B OF THE ACT. ALL THE THREE UNITS AS STATED ABOVE HAD COMMENCED PROCESSING NEARLY 25 YEARS EARLIER TO THE ASSESSMENT YEAR IN WHICH THE CLAIM U/S. 10B OF THE ACT WAS MADE. ADMITTEDLY, THE THREE UNITS UNDER WHICH SECTION 10B OF T HE ACT CLAIM HAS BEEN MADE ARE NOT NEW UNITS AS CONTEMPLATED UNDER SECTION 10B OF THE ACT. RELAXATION OF THE NEW UNIT HAS BEEN SUBSEQUENTLY PROVIDED IN THE SECTION BY WAY OF AMENDMENT ONLY UNDER CERTAIN CONDITIONS STIPULATED IN THE SECTION, WHICH WERE STA TED AS UNDER: A . FOR A PERIOD OF TEN CONSECUTIVE ASSESSMENT YEARS BEGINNING WITH THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE ARTICLE OR THING. [10B(1)] PREVIOUS YEAR IN WHICH UNDERTAKING BEG AN TO PRODUCE UNIT NAME TEN CONSECUTIVE ASSESSMENT YEARS 1972 - 1973 CODLI 1973 - 74 TO 1982 - 83 1957 - 1958 AMONA 1958 - 59 TO 1967 - 68 1951 - 1952 CHITRADURGA 1952 - 53 TO 1961 - 62 ITA NO. 72&85/PNJ/2012 108 I . THE PROVISION CLEARLY MANDATES THAT THE ASSESSEE WOULD BE ENTITLED TO CLAIM DEDUCTI ON U/S. 10B OF THE ACT FROM THE PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE ARTICLE OR THING. SECONDLY, THIS CLAIM IS PROVIDING FOR A PERIOD OF TEN CONSECUTIVE ASSESSMENT YEARS, AGAIN, FROM THE DATE WHEN THE UNDERTAKING BEGINS TO PRODUCE OR MANUFACTURE ARTICLE OR THING. ADMITTEDLY, IN THE FACTS OF THE PRESENT CASE THE CODLI, AMONA AND CHITRADURGA UNITS OF THE ASSESSEE HAVE NOT MADE A CLA I M FROM THE DATE OF COMMENCEMENT OF PROCESSING IRO N ORE. FURTHER ALL THE THREE UN I T S HAVE NOT MET THE CONSECUTIVE ASSESSMENT YEARS CONTEMPLATED IN THE SECTION FROM THE DATE OF COMMENCEMENT OF PROCESSING IRON ORE. II . THE ASSESSEE IN ORDER TO OVERCOME THIS MANDATORY PROVISION HAS PROJECTED A NEW CONTENTION THAT ALL THE THREE UNITS AT CODLI, AMONA AND CHITRADURGA ARE NEW UNITS WHICH HAVE COMMENCED PROCESSING OF IRON ORE W.E.F. F.Y. 2004 - 05, 2002 - 03 & 2005 - 06 RESPECTIVELY. IN ORDER TO SUBSTANTIATE THEIR CLAIM, ASSESSEE STATES THAT THERE IS ADDITION TO THE OLD MACHINERY IN THESE THREE UNITS WHICH WOULD C ONSTITUTE NEW UNITS HAVING COMMENCED PROCESSING FROM THE RESPECTIVE FINANCIAL YEARS. III . ASSESSEES CLAIM: VALUE ADDITION TO PLANT AND MACHINERY . NEW UNIT NAME OF THE UNIT DATE OF VALUE ADDITION AMOUNT OF VALUE ADDITION CLAIM OF NEW UNIT COMMENCED CO DLI NO EVIDENCE NO EVIDENCE F.Y.2004 - 05 AMONA F.Y. 2002 - 03 `3,96,10,020/ - F.Y. 2002 - 03 CHITRADURGA F.Y.2005 - 06 F.Y.2006 - 07 F.Y. 2008 - 09 ` 93,93,596/ - `35,67,257/ - `7,03,82,158/ - F.Y. 2005 - 06 ITA NO. 72&85/PNJ/2012 109 IV . THE OLD UNIT CONTINUOUS TO FUNCTION WITHOUT STOPPING OF PROCESSING IRON ORE EVEN FOR ONE YEAR. THE ONLY ADDITION MADE IS BY VIRTUE OF ADDING A FEW MACHINERIES. THIS HAS RESULTED IN INCREASED QUANTUM OF PROCESSING IRON ORE IN AMONA AND CHITRADURGA UNITS. HOWEVER THERE IS NO EVIDENCE IN THIS REGARD IN RESPECT OF THE CODLI UNIT. THE ADDITION MADE TO THE OLD MACHINERY CANNOT BE TERMED AS A NEW UNDERTAKING. V . THE JUDGMENTS RELIED ON BY THE ASSESSEE OF THE APEX COURT INTERPRETING OF SECTION 15C OF THE INCOME TAX ACT 1922, WILL NOT BE APPLICABLE TO THE FACTS OF T HE PRESENT CASE AS THE WORDINGS OF SECTION 10B OF THE ACT AND 15C OF THE ACT ARE NOT IDENTICAL. THE WORDS BEGINNING WITH THE ASSESSMENT YEARS RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE ARTICLE OR THING , WH ICH IS PROMINENT AND THE GENESIS OF SECTION 10B OF THE ACT IS TOTALLY ABSENT IN SECTION 15COF THE ACT. HENCE, THE PRINCIPLE ENUNCIATED BY THE APEX COURT IN THOSE JUDGMENTS CANNOT BE MADE APPLICABLE TO THE FACTS OF THE PRESENT CASE. VI . IN FACT, WHEN THE LEGI SLATURE HAS DEEMED IT FIT TO EXTENT SUCH ADDITION TO MACHINERY AS A NEW MACHINERY. IT HAS SPECIFICALLY STATED SO AS IN EXPLANATION TO SECTION 80IA OF THE ACT. RELIANCE WAS PLACED ON THE FOLLOWING CASES; - 1 . (2011) 334 ITR 157 (KAR) SAMI LABS LTD., VS. ACIT 2 . SLP(C).NO.14937/2011 M/S. SAMI LABS LTD., VS. ACIT 3 . BOARD CIRCULAR NO.1 OF 2005 DATED 06.01.2005 4 . (1990) 181 ITR 518 (KAR) CIT VS. NIPPON ELECTRONICS (INDIA) (P) LTD., 5 . (1990) STC 270 FALMER JEANS VS. RODIN B . PROVIDED THAT WHERE IN COMPUTING THE T OTAL INCOME OF THE UNDERTAKING FOR ANY ASSESSMENT YEAR, ITS PROFITS AND GAINS HAD NOT BEEN INCLUDED BY APPLICATION OF THE PROVISIONS OF THIS SECTION AS IT STOOD ITA NO. 72&85/PNJ/2012 110 IMMEDIATELY BEFORE ITS SUBSTITUTION BY THE FINANCE ACT, 2000, THE UNDERTAKING SHALL BE ENTITLED TO THE DEDUCTION REFERRED TO IN THIS SUB - SECTION ONLY FOR THE UNEXPIRED PERIOD OF AFORESAID TEN CONSECUTIVE ASSESSMENT YEARS; [1 ST PROVISO TO SECTION 10B(1)]. PREVIOUS YEAR IN WHICH UNDERTAKING BEGAN TO PRODUCE UNIT NAME TEN CONSECUTIVE ASSESSMENT YEARS U NEXPIRED PERIOD AFTER 2000 1972 - 1973 CODLI 1973 - 74 TO 1982 - 83 NOT APPLICABLE 1957 - 1958 AMONA 1958 - 59 TO 1967 - 68 NOT APPLICABLE 1951 - 1952 CHITRADURGA 1952 - 53 TO 1961 - 62 NOT APPLICABLE I . ADMITTEDLY, ASSESSEE HAD NOT APPLIED FOR DEDUCTION U/S.10B OF THE A CT BEFORE THE FINANCE ACT, 2000. IN ORDER TO AVAIL OF THE BENEFIT AFTER SUBSTITUTION OF THE FINANCE ACT, 2000, ASSESSEE SHOULD HAVE AVAILED OF THE BENEFIT U/S.10B OF THE ACT OR SHOULD BE SOUGHT FOR EXEMPTION FROM THE ASSESSING OFFICER SUB - SECTION (8) OF S ECTION 10B OF THE ACT. II . ON FACTS, ASSESSEE HAS NEITHER CLAIMED SECTION 10B OF THE ACT, EXEMPTION OR SOUGHT THE PERMISSION OF THE ASSESSING OFFICER FOR EXEMPTION FROM THE APPLICABILITY OF SECTION 10B OF THE ACT, PRIOR TO FINANCE ACT, 2000. C. NOTWITHSTANDING ANYTHING CONTAINED IN THE FOREGOING PROVISIONS OF THIS SECTION, WHERE THE ASSESSEE, BEFORE THE DUE DATE FOR FURNISHING THE RETURN OF INCOME UNDER SUB - SECTION (1) OF SECTION 139, FURNISHES TO THE ASSESSING OFFICER A DECLARATION IN WRITING THAT THE PROVISIO NS OF THIS SECTION MAY NOT BE MADE APPLICABLE TO HIM, THE PROVISIONS OF THIS SECTION SHALL NOT APPLY TO HIM FOR ANY OF THE RELEVANT ASSESSMENT YEAR. (SUB - SECTION (8) OF SECTION 10B) NAME OF THE UNIT COMMENCEMENT OF THE UNIT APPLICATION UNDER SUB - SECTION 8 OF SECTION 10B CODLI 1973 NOT FILED ITA NO. 72&85/PNJ/2012 111 AMONA 1958 NOT FILED CHITRADURGA 1952 NOT FILED I . EXEMPTION CLAIMED BY THE ASSESSEE CAN BE EXEMPTED EARLIER TO FINANCE ACT, 2000 OR SUBSEQUENTLY ONLY IF THE ASSESSEE FILES SUCH AN APPLICATION UNDER SUB - SECTION (8) O F SECTION 10B OF THE ACT. 1 . ADMITTEDLY, ASSESSEE HAS NOT FILED ANY SUCH APPLICATION UNDER SUB - SECTION (8) OF SECTION 10B OF THE ACT. THEREFORE THE ASSESSEE WILL NOT BE ENTITLED TO CLAIM EXEMPTION U/S.10B OF THE ACT. THE DR RELIED IN THE CASE OF HEMALATH A GARGYA VS. CIT, A.P. (2003) 9 SCC 510 D. RELEVANT ASSESSMENT YEARS MEANS ANY ASSESSMENT YEARS FALLING WITHIN A PERIOD OF TEN CONSECUTIVE ASSESSMENT YEARS REFERRED TO IN THIS SECTION. [SECTION 10B EXPLANATION 2(V)]. THE CLAIM U/S.10B OF THE ACT CAN BE MADE: A . IN RESPECT OF A NEW UNIT. B . IN THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE ARTICLE OR THING. C . PERIOD OF TEN CONSECUTIVE ASSESSMENT YEARS. D . EXEMPTED ONLY IF ASSESSEE APPLIES AND IS EXEMPTED BY THE ASSESSING OFFICER. ADMITTEDLY, THE ASSESSEE HAS NOT SATISFIED ANY OF THESE MANDATORY CONDITIONS. HENCE ASSESSEE IS NOT ENTITLED TO THE CLAIM U/S.10B OF THE ACT. E . DEDUCTION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY A HUNDRED PERCENT EX PORT ORIENTED UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS.[10B(1)] THE DEDUCTION OF SUCH PROFITS AND GAINS ARE SUBSTANTIATED AND HAS TO BE WORKED OUT IN ACCORDANCE WITH SUB - SECTION (4) OF SECTION 10B OF THE ACT, WHICH IS AS UNDER: ITA NO. 72&85/PNJ/2012 112 F . FOR THE PURPOS E OF SUB - SECTION (1), THE PROFITS DERIVED FROM EXPORT OF ARTICLES OR THINGS SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS OF THE UNDERTAKING, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUCH ARTICLES OR THINGS BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING (SUB SECTION (4) OF SECTION 10B OF THE ACT). I.E., PROFITS DERIVED FROM EXPORT OF ARTICLE OR THINGS = PROFITS OF THE BUSINESS OF THE UNDERTAKING X EXPORT TURNOVER IN RESPECT OF SUCH ARTICLES OR THINGS TOTAL TURNOVER OF THE BUSINESS CARRIED BY THE UNDERTAKING ADMITTEDLY, ASSESSEE HAS NOT INCLUDED ANY AMOUNT TOWARDS COST OF IRON ORE INPUT TO THE CODLI UNIT, AMONA PLANT AND CHITRADURGA UNIT. THE WORKING OF THE CLAIM MADE U/S.10B OF THE ACT PRESENTED BY THE ASSESSEE WOULD DISCLOSE THIS FACT. ASSESSEE HAS NOT INCLUDED THIS AMOUNT ONLY TO BOOSTER THE PROFIT AND CLAIM DEDUCTION U/S.10B OF THE ACT. IF THE COST OF THE INPUT I.E., IRON ORE, IS TAKEN INTO ACCOUNT THEN THE ASSESSEE WOULD NOT BE EA RNING ANY PROFITS BUT WOULD BE EARNING ONLY LOSS. THERE WILL BE NO CLAIM AT ALL U/S.10B OF THE ACT. G . HUNDRED PERCENT EXPORT ORIENTED UNDERTAKING MEANS AN UNDERTAKING WHICH HAS BEEN APPROVED AS A HUNDRED PERCENT EXPORT ORIENTED UNDERTAKING BY THE BOARD APPOINTED IN THIS BEHALF BY THE CENTRAL GOVERNMENT IN EXERCISE OF THE POWERS CONFERRED BY SECTION 14 OF THE INDUSTRIES (DEVELOPMENT AND REGULATION) ACT, 1951 (65 OF 1951) AND THE RULES MADE UNDER THAT ACT. (EXPLANATION 2(IV) OF SECTION 10B) NAME OF THE UNIT APPROVAL AS EOU APPROVAL BY BOARD APPOINTED BY CENTRAL GOVERNMENT WHETHER PERMITTED FOR CURRENT ASSESSMENT YEAR 2009 - 10 CODLI ---- NO APPROVAL NO APPROVAL ITA NO. 72&85/PNJ/2012 113 AMONA 28.03.2008 03.06.2008 APPROVAL CHITRADURGA 15.02.2008 14.01.2011 NO APPROVAL I . THE AS SESSEE IS BOUND TO OBTAIN THE REQUISITE APPROVAL IN ACCORDANCE WITH THE EXPLANATION READ WITH SECTION AS ENVISAGED ABOVE. II . ASSESSEE HAS PRODUCED A LETTER SIGNED BY EXECUTIVE ASSISTANT TO DEVELOPMENT COMMISSIONER, SEEPZ SEZ STATING THAT RENEWAL GRANTED F OR COMMUNICATION AS AN EOU FOR FURTHER PERIOD OF 5 YEARS FROM 2006 - 07 TO 2010 - 11, WAS NOT REQUIRED THE APPROVAL OF BOARD OF APPROVALS IN RESPECT OF CODLI UNIT. THIS LETTER IS NOT SIGNED BY THE AUTHORIZED PERSON IN ACCORDANCE WITH THE PROVISIONS OF THE AC T. III . IN RESPECT OF CHITRADURGA UNIT NO APPROVAL FOR THE CURRENT ASSESSMENT YEAR 2009 - 10 HAS BEEN OBTAINED. IV . HENCE, THE ASSESSEE DOES NOT HAVE THE REQUISITE PERMISSION TO CLAIM BENEFIT U/S.10B OF THE ACT IN RESPECT OF CODLI UNIT AS WELL AS CHITRADURGA UNIT . 41.2 THE LEARNED DR MADE FOLLOWING WRITTEN SUBMISSIONS ; - CONDITIONS STIPULATED BY SECTION (SUB - SECTION 2 OF SECTION 10B) H . IT MANUFACTURES OR PRODUCES ANY ARTICLES OR THINGS OR COMPUTER SOFTWARE. [SECTION 10B(2)(I)] A . FACTS: - IN THE CODLI UNIT, A MONA UNIT AS WELL AS CHITRADURGA UNIT, ASSESSEE IS CARRYING ON THE PROCESS OF FEEDING IRON ORE WHICH IS GRINDED, WASHED OF IMPURITY AS WELL AS DRY BLOWN AND THE OUTPUT AGAIN IS IRON ORE. BOTH ASSESSING OFFICER AS WELL AS APPELLATE COMMISSIONER EXAMINING TH E FACTS, FIND THAT ALL THE THREE UNITS ARE INVOLVED IN PROCESSING OF IRON ORE. THE PLANT AND MACHINERY WHICH IS SITUATED ITA NO. 72&85/PNJ/2012 114 IN THE PREMISES OF THESE THREE UNITS ARE BENEFICATION PLANTS. IT IS MAINLY INVOLVED IN SCREENING OF THE IRON ORE WHICH HAS BEEN FED I NTO THE PLANTS BY A PROCESS INVOLVING EITHER DRY OR WET. A . ASSESSEES CONTENTION CODLI UNIT, AMONA UNIT AND CHITRADURGA UNIT ARE INDEPENDENT UNIT CARRYING ON MANUFACTURE AND PRODUCTION ACTIVITIES OF ARTICLE AND THING. THEREFORE IT SATISFIES THE CONDITI ONS CONTAINED IN SECTION 10B(2)(I) OF THE ACT. B . REVENUES SUBMISSION: ASSESSEE HAS NUMBER OF UNITS WHICH CARRY ON INDEPENDENT ACTIVITIES. A SERIES OF ACTIVITY FROM THE EXTRACTION OF IRON ORE TO ITS ULTIMATE EXPORT IS CARRIED ON BY THESE VARIOUS UNITS. THE JURISDICTIONAL BOMBAY HIGH COURT, (2004) 266 ITR 126 CIT VS. SESA GOA LTD., HELD THE PROCESSES INVOLVED IN MINING ORE COMMENCING FROM EXTRACTION OF IRON ORE TO SELLING IT FOR EXPORT ARE IDENTIFIED AS UNDER: ( I ) EXTRACTION OF ORE FROM THE MINE; ( II ) CONV EYING THE ORE TO THE DRESSING PLANT; ( III ) WASHING, SCREENING AND DRESSING THE ORE; ( IV ) CONVEYING OF THE ORE FROM THE MINE SITE TO THE RIVERSIDE; ( V ) TRANSPORT OF THE ORE FROM THE RIVER SIDE TO THE HARBOR BY MEANS OF BARGES; ( VI ) STACKING OF THE ORE AT THE HARBOR IN DIFFERE NT STOCK PILES ACCORDING TO ITS PHYSICAL AND CHEMICAL COMPOSITION; AND ( VII ) BLENDING OF THE ORE FROM DIFFERENT STOCK PILES WITH A VIEW TO PRODUCING ORE OF THE REQUIRED SPECIFICATIONS AND LOADING IT INTO THE SHIP BY MEANS OF THE MECHANIZED ORE HANDLING PLANT. ITA NO. 72&85/PNJ/2012 115 WHETHER THESE PROCESSES INVOLVE MANUFACTURE OR PRODUCTION WAS CONCLUDED BY THE JURISDICTIONAL HIGH COURT AS UNDER: C . MANUFACTURE: IT WOULD, THEREFORE, NOT BE POSSIBLE FOR US TO ACCEPT THE CONTENTION THAT EXTRACTIONS OF ORE AND THE VARIOUS P ROCESSES WHICH IT UNDERGOES UNTIL IT IS SOLD AMOUNTS TO MANUFACTURE. IN OUR OPINION, THE VARIOUS PROCESSES APPLIED DO NOT AMOUNT TO MANUFACTURE AND CONSEQUENTLY, IT WOULD BE DIFFICULT TO HOLD THAT THE EXTRACTION OF ORE AMOUNTS TO MANUFACTURE. D . PROD UCTION: I . THE ORE HAS TO BE EXTRACTED OR RAISED FROM THE EARTH IN WHICH IT IS EMBEDDED AND HAS TO BE BROUGHT TO THE SURFACE. WHAT IS BROUGHT TO THE SURFACE IS SOMETHING NEW WHICH COMES INTO EXISTENCE, AS AN ARTICLE OR THING. IF THAT BE THE CASE, WINNING OR EXTRACTING OF ORE WOULD FALL WITHIN THE EXPRESSION PRODUCTION. II . THE MATTER WAS CARRIED TO THE APEX COURT. THE APEX COURT IN CIT VS. SESA GOA LTD., (2004) 271 ITR 331 (SC) HAS HELD AS UNDER: III . WE ARE, THEREFORE, OF THE OPINION THAT EXTRACTION AND P ROCESSING OF IRON ORE AMOUNTS TO PRODUCTION WITHIN THE MEANING OF THE WORD IN S.32A(2)(B)(III) OF THE ACT AND, CONSEQUENTLY, THE ASSESSEE IS ENTITLED TO THE BENEFIT OF S.32A(1) OF THE ACT. THE QUESTION WHETHER THE HIGH COURT WAS CORRECT IN HOLDING THAT THE ACTIVITY DID NOT AMOUNT TO MANUFACTURE IS LEFT OPEN. IV . IT SHOULD BE NOTED THAT OUT OF THE NUMBER OF PROCESSES CARRIED ON BY THE ASSESSEE AS NOTICED IN THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT, THE CODLI UNIT, AMONA UNIT AND CHITRADURGA UNIT CARR IES ON (III) WASHING, SCREENING AND DRESSING ITA NO. 72&85/PNJ/2012 116 THE ORE. IT IS THE CONTENTION OF THE REVENUE THAT THIS WASHING, SCREENING AND DRESSING OF THE ORE OR SUCH OTHER PROCESS CARRIED ON IN THE BENEFICATION PLANTS OF THE THREE UNITS DOES NOT AMOUNT TO MANUFACTURE OR PRODUCTION. IT IS FURTHER SUBMITTED THAT THIS CONTROVERSY IS NOW FAIRLY CONCLUDED BY THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF THE ASSESSEE ITSELF. V . FIRSTLY, EXAMINING THE TERM MANUFACTURE , THE JURISDICTIONAL HIGH COURT HAS CONCLUDED THAT NOT ONLY THE LIMITED ACTIVITY CARRIED ON BY THE CODLI UNIT, BUT THE ENTIRE ACTIVITY CARRIED ON BY THE ASSESSEE I.E. THE EXTRACTION OF IRON ORE AND THE ULTIMATE SALE OF THE SAME WOULD NOT AMOUNT TO MANUFACTURE STANDS SETTLED AND CONCLUDED IN THE ASSES SEES CASE. HOWEVER AS FAR AS THE SUPREME COURT LEVEL IS CONCERNED THIS ISSUE HAS BEEN KEPT OPEN. IN THE FACTS OF THE CASE OF CODLI UNIT IT IS ONLY ONE SMALL ACTIVITY AMONG THE LARGE NUMBER OF PROCESSES INVOLVED BY THE ASSESSEE IS CARRIED ON. WHEN THE LARGE ACTIVITY ITSELF IS HELD AS NOT TO BE MANUFACTURE THE QUESTION OF THE CODLI, AMONA & CHITRADURGA UNITS INDEPENDENTLY CARRYING ON MANUFACTURING ACTIVITY WOULD NOT ARISE. VI . FURTHER, A BARE READING OF THE JUDGMENTS OF THE APEX COURT IN 1981 AIR (SC) 101 4 CHOWGULE & CO., P. LTD., VS. UNION OF INDIA & ORS., 1980 SCC (TAX) 319 DY. COMMISSIONER OF SALES TAX (LAW) VS. M/S. PIO FOOD PACKERS AND 1991 AIR (SC) 2222 COLLECTOR OF CENTRAL EXCISE VS. S.N. SUNDERSON (MINERALS) LTD., WOULD ALSO CLEARLY SHOW THAT THE ACTIVITY CARRIED ON BY THE CODLI, AMONA & CHITRADURGA UNITS ARE NOT A MANUFACTURING ACTIVITY, BUT ONLY AN ACTIVITY OF PROCESSING . EARLIER EVEN THE PROCESSING ACTIVITY WAS TREATED AS MANUFACTURE U/S. 10B OF THE ACT. HOWEVER THIS HAS BEEN SPECIFICALLY EX CLUDED. THEREFORE THE ASSESSEE WILL NOT BE ENTITLED TO TREAT ITS ACTIVITY AS MANUFACTURING ACTIVITY. ITA NO. 72&85/PNJ/2012 117 VII . SECTION 2(29BA) OF THE ACT DEFINES MANUFACTURE. ASSESSEE ALSO DOES NOT FALL WITHIN THIS DEFINITION. HENCE, ASSESSEE DOES NOT CARRY ON THE ACTIVITY O F MANUFACTURE. VIII . SECONDLY, THE CLAIM OF THE ASSESSEE THAT THE PROCESSING OF IRON ORE AMOUNTS TO PRODUCTION IS ALSO NOT CORRECT. THE ACTIVITY OF THE ASSESSEE ADMITTEDLY IS THAT OF A BENEFICIATION PLANT WHERE IMPURITIES ARE REMOVED FROM THE IRON ORE CO LLECTED. LARGE BOULDERS ARE SIZED INTO POWDER. IT IS ONLY A SCREENING PROCESS. THE JURISDICTIONAL HIGH COURT AS WELL AS THE APEX COURT IN THE CASE OF THE VERY SAME ASSESSEE AS HELD THAT EXTRACTION OF IRON ORE AND ULTIMATE SALE OF THE SAME AMOUNTS TO PRODUCTION . PRODUCTION IS CONCLUDED AS EXTRACTION & PROCESSING OF IRON ORE. IF THIS TEST IS APPLIED TO THE CODLI UNIT THE UNIT DOES NOT CARRY ON ANY EXTRACTION OF IRON ORE. THEREFORE AS HELD IN THE ASSESSEES OWN CASE BY BOTH THE JURISDICTIONAL HIG H COURT AND THE APEX COURT CODLI UNITS ACTIVITIES CANNOT BE TERMED AS PRODUCTION AS ONLY A PROCESS IS CARRIED ON. IX . HENCE, THE CODLI UNIT OF THE ASSESSEE DOES NOT CARRY ON ANY MANUFACTURE OF PRODUCTION ACTIVITY. IT IS HIT BY THE RESTRICTION IMPOSED U/S .10B(2)(I) OF THE ACT. X . ASSESSEES ARGUMENTS WAS BEING ADDRESSED REGARDING THE ACTUAL ACTIVITY BEING CARRIED ON IN RESPECT OF CODLI, AMONA & CHITRADURGA UNITS. THIS IS REFLECTED IN THE ASSESSEES WEBSITE, WHICH IS ENCLOSED ALONG WITH THIS SUBMISSION. E . IMP ORTANT NOTE: ASSESSEES ACTIVITY HAS NOT CHANGED FROM THE INCEPTION. THE PLANTS UNDER WHICH SECTION 10B DEDUCTION IS CLAIMED CONTINUES TO BE THE SAME. THE SAME PRODUCTS ARE FED. THIS CHAIN OF PRODUCTION TO ULTIMATE SALE CANNOT BE CUT INTO NUMBER OF INDE PENDENT ACTIVITY. THEREFORE THE CONTENTION OF THE ASSESSEE IS INCORRECT TO SAY THAT THIS IS AN INDEPENDENT UNIT. THE INPUT WHICH WAS MADE EARLIER AND NOW IS THE SAME. THE CONTENTION THAT IT IS THE END PRODUCT, TAILINGS, BY - ITA NO. 72&85/PNJ/2012 118 PRODUCTS ETC., ARE ALL CONTENT IONS MADE TO DIVERT THE ATTENTION FROM THE ACTUAL CONTROVERSY. F . CASE LAWS: 1 . 1981 AIR (SC) 1014 CHOWGULE & CO., P. LTD., VS. UNION OF INDIA & ORS., 2 . 1980 SCC (TAX) 319 DY. COMMISSIONER OF SALES TAX (LAW) VS. M/S. PIO FOOD PACKERS. 3 . 1991 AIR (SC) 2222 COL LECTOR OF CENTRAL EXCISE VS. S.N. SUNDERSON (MINERALS) LTD., 4 . (2004) 266 ITR 126 CIT VS. SESA GOA LTD., 5 . CIT VS. SESA GOA LTD., (2004) 271 ITR 331 (SC) G . COVERED ISSUE: - SIMILAR KIND OF ACTIVITY OF PROCESSING IRON ORE BY WASHING, DRYING, POWDERING ETC., I S TERMED AS PROCESS NOT AS MANUFACTURE OR PRODUCTION IN TWO JUDGMENTS VIZ., 1 . HONBLE ITAT, PANAJI BENCH IN ITA NO.162 & 184/ PNJ/2006 IN THE CASE OF CHOWGULE & CO. LTD., ASSESSMENT YEAR 2002 - 03. 2 . (1996) 217 ITR 849 (KAR) V.M. SALAGOACAR BROS. (P) LTD ., VS CIT. 5. IT IS NOT FORMED BY THE SPLITTING UP OR THE RECONSTRUCTION OF A BUSINESS ALREADY IN EXISTENCE. [SECTION 10B(2)(II)] A. THE CODLI UNIT, AMONA UNIT & CHITRADURGA UNIT COMMENCED THEIR ACTIVITY IN THE YEAR 1973, 1958 & 1952 RESPECTIVELY. AS HELD BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF THE ASSESSEE ITSELF, THE ASSESSEE CARRIES ON NUMBER OF ACTIVITIES, EXTRACTION OF IRON ORE AND THE ULTIMATE EXPORT OF THE SAME. THE ASSESSEE AFTER HAVING TAKEN OVER ALL THE THREE UNITS IN THE YEARS 1978, 198 5 & 1998 - 99 RESPECTIVELY HAS BEEN CARRYING ON A COMPOSITE ACTIVITY OF EXTRACTION OF IRON ORE AND THEREAFTER EXPORTING THE SAME. IN THIS PROCESS ASSESSEE HAS CLAIMED DEDUCTION U/S.80HHC OF THE ACT. OUT OF THE COMPOSITE ACTIVITY OF THE ASSESSEE THE CODLI UNIT, AMONA UNIT AND CHITRADURGA UNIT CARRY ON ONLY ONE EXCLUSIVE ACTIVITY I.E., WASHING, SCREENING AND DRESSING THE IRON ORE. ITA NO. 72&85/PNJ/2012 119 B. IN THIS COMPOSITE ACTIVITY THE ASSESSEE WAS CLAIMING DEDUCTION U/S. 80HHC OF THE ACT IN RESPECT OF THE PROFITS EARNED IN T HE COURSE OF EXPORT, UP TO THE ASSESSMENT YEAR 2004 - 05. WHEN THE DEDUCTION U/S. 80HHC OF THE ACT WAS DISCONTINUED FROM THE YEAR 2005 - 06 ONWARDS ASSESSEE HAS TRIED TO BREAK UP ITS BUSINESS ACTIVITY OF EXTRACTION OF IRON ORE AND THE ULTIMATE EXPORT OF THE S AME. ONE SUCH ACTIVITY CARRIED ON BY THE CODLI UNIT, AMONA UNIT & CHITRADURGA UNIT OF WASHING, SCREENING AND DRESSING THE IRON ORE IS BEING SPLIT UP FROM THE COMPOSITE ACTIVITY OF THE ASSESSEE WHICH IS PROHIBITED UNDER LAW. C. SPLITTING UP: A BUSINESS A LREADY IN EXISTENCE IS BROKEN UP IN TO DIFFERENT SECTIONS AND THE ORIGINAL INTEGRITY IS BROKEN VIDE OPEN. D. ADMITTEDLY, THE ASSESSEE AS IDENTIFIED BY THE JURISDICTIONAL HIGH COURT WAS CARRYING ON SEVEN DIFFERENT ACTIVITIES. THE CODLI UNIT, AMONA UNIT & CHITRADURGA UNIT WAS CARRYING ON ONE SUCH ACTIVITY. THE ASSESSEE BY CLAIMING THIS ACTIVITY AS A SEPARATE ACTIVITY WOULD AMOUNT TO SPLITTING UP OF BIFURCATION OF THE ORIGINAL INTEGRATED ACTIVITY OF EXTRACTION OF IRON ORE AND EXPORT OF THE SAME. HENCE, TH E ASSESSEE HAS SPLIT UP ITS ORIGINAL ACTIVITY OF BUSINESS ALREADY IN EXISTENCE WHICH IS CONTRARY TO SECTION 10B(2)(II) OF THE ACT. E . RECONSTRUCTION OF BUSINESS : TO REBUILD OR TO RECONSTITUTE MUST NECESSARILY INVOLVE THE CONCEPT THAT THE ORIGINAL BUSI NESS OR UNDERTAKING IS NOT TO CEASE FUNCTIONING AND ITS IDENTITY IS NOT TO BE LOST OR ABANDONED. THE UNDERLYING IDEA OF RECONSTRUCTION EVIDENTLY MUST BE AND THIS IS BROUGHT OUT BY THE SECTION ITSELF OF A BUSINESS ALREADY IN EXISTENCE. THERE MUST BE A CONTINUATION OF THE ACTIVITIES AND THE BUSINESS OF THE SAME INDUSTRIAL UNDERTAKING. THE UNDERTAKING MUST CONTINUE TO CARRY ON THE SAME BUSINESS THOUGH IN SOME ALTERED OR VARIED FORM. IF THE ALTERATIONS AND CHANGES ARE SUBSTANTIAL, THERE WOULD BE LITTLE SCOPE FOR DESCRIBING WHAT EMERGES AS A RECONSTRUCTION OF THE BUSINESS. (1959) 35 ITR 662 (BOM) CIT VS. GAEKWAR FOAM & RUBBER CO. LTD., F. ADMITTEDLY, ASSESSEE WAS ORIGINALLY CARRYING ON AN INTEGRATED ACTIVITY. UNDER THE GUISE OF CLAIMING DEDUCTION U/S . 10B OF THE ACT THE ASSESSEE HAD IDENTIFIED ONE OF ITS UNITS AND PROCEEDED TO MAKE ITA NO. 72&85/PNJ/2012 120 SOME VALUE ADDITION BY WAY OF MACHINERY. THE ORIGINAL BUSINESS ACTIVITY CONTINUES. THE ORIGINAL OWNERSHIP ALSO CONTINUES. G. HENCE, SECTION 10B(2)(II) OF THE ACT, IS A PPLICABLE AND THE ASSESSEE IS NOT ENTITLED TO CLAIM DEDUCTION. 6 . IT IS NOT FORMED BY THE TRANSFER TO A NEW BUSINESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. [SECTION 10B(2)(III)] A . ASSESSEES CONTENTION: THE CODLI UNIT, AMONA UNIT & CHITRADUR GA UNIT HAVE NO DOUBT BEEN PROCESSING IRON ORE FROM THE YEARS 1973, 1958, & 1952. THE ASSESSEE TO THESE THREE UNITS HAS ALLEGEDLY CLAIMED THAT IT HAS MADE CERTAIN VALUE ADDITION TO THE PLANT AND MACHINERY WITH EFFECT FROM THE FINANCIAL YEARS 2004 - 05, 2002 - 03 & 2005 - 06 RESPECTIVELY IN RESPECT OF EACH UNIT. THEREFORE, EACH OF THESE UNITS SHOULD BE CALLED AS NEW UNIT ENTITLED FOR DEDUCTION U/S.10B OF THE ACT. B . REVENUES SUBMISSION: IT IS FOUND BY THE ASSESSING OFFICER AS WELL AS THE APPELLATE COMMISSIONER ON FACTS THAT THESE THREE UNITS HAVE BEEN FUNCTIONING FROM THE YEARS 1973, 1958 & 1952. THE PROCESSING OF IRON ORE HAS CONTINUED CONTINUOUSLY YEAR AFTER YEAR, MONTH AFTER MONTH AND DAY AFTER DAY FROM ITS INCEPTION. THE PLACE OF BUSINESS OF THE THREE UNIT S HAS NOT CHANGED. THE INFRASTRUCTURE PROVIDED ORIGINALLY HAS NOT CHANGED. ONLY ALTERATIONS HAVE BEEN MADE. THE CAPACITY HAS BEEN INCREASED. THE MANAGEMENT CONTINUES. THE ADDITION MADE OR ALTERATIONS MADE DO NOT IN ANY MANNER CREATE A NEW UNIT. IT CA N BE SAFELY CONCLUDED THAT THE SAME INFRASTRUCTURE CONSISTING OF PLANT AND MACHINERY PREVIOUSLY USED FOR OTHER PURPOSE IS BEING UTILIZED IN THIS NEW INDUSTRY ALLEGEDLY CLAIMED TO HAVE BEEN STARTED BY THE ASSESSEE CONSTITUTING A TRANSFER AND IS HIT BY SECTI ON 10B(2)(III) OF THE ACT. 7 . ASSESSEE NOT MAINTAINING SEPARATE BOOKS OF ACCOUNTS FOR EACH OF THE UNITS AT CODLI , AMONA & CHITRADURGA. MAINTENANCE OF SEPARATE BOOKS OF ACCOUNTS WOULD INDICATE THAT EACH OF THE UNITS IS CARRYING ON BUSINESS INDEPENDENTLY WHICH CAN BE BROUGHT TO TAX. IN THE FACTS OF THE PRESENT CASE NO INDEPENDENT ACCOUNTS ARE ITA NO. 72&85/PNJ/2012 121 MAINTAINED. HENCE THE ASSESSEE IS NOT ENTITLED TO CLAIM DEDUCTION U/S.10B OF THE ACT. CASE LAW: 1 . CIVIL APPEAL NO.2978/2008 & CIVIL APPEAL NO.1070/2009 M/S. ARISUDANA SPIN NING MILLS LTD., VS. CIT, LUDHIANA 2 . CIVIL APPEAL NO.1679/2004 CIT, GUWAHATI VS BONGAIGAON REFINERY & PETROCHEMICALS LTD. 8 . ASSESSEE IN RESPECT OF CODLI UNIT HAD CLAIMED DEDUCTION FROM THE ASSESSMENT YEAR 2005 - 06 FROM THE ASSESSMENT YEAR 2005 - 06 TO THE ASSESSM ENT YEAR 2008 - 09, THE ORIGINAL ORDERS PASSED BY THE TRIBUNAL IS NOT ON MERITS. IT HAS PROCEEDED TO GRANT RELIEF ON OTHER ISSUES. HENCE THE ORDERS PASSED IN THE EARLIER ASSESSMENT YEARS CANNOT BE TREATED AS A BINDING PRECEDENT. CASE LAW: 1 . BHARAT SANCHAR NIGAM LTD., & ANR. VS UNION OF INDIA & ORS. (2006) 282 ITR 273 (SC) . 42. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS ALONG WITH THE ORDERS OF THE TAX AUTHORITIES BELOW AS WELL AS THE MATERIAL REFERRED BEFORE US FROM THE PAPER BOOKS. WE HAVE ALSO GONE THROUGH THE VARIOUS CASE LAWS AS RELIED UPON FROM BOTH THE SIDES. IN RESPECT OF ALL THE THREE UNITS ESTABLISHED BY THE ASSESSEE WHICH ARE APPROVED AS EOU BY THE COMPETENT AUTHORITY, THE ASSESSEE HAS CLAIMED EXEMPTION U/S 10B OF THE INCOME - TAX ACT, 1 961, WHICH WAS DENIED BY THE REVENUE. THE MAIN REASON IN ALL THE THREE UNITS FOR DISALLOWING EXEMPTION U/S 10B IN ADDITION TO THE OTHER REASONS IS THAT THE ASSESSEE IS NOT ENGAGED IN ANY MANUFACTURE OR PRODUCTION OF ARTICLE OR THING. THEREFORE, THE FI RST ISSUE TO BE DECIDED IN THIS CASE IS WHETHER THE ASSESSEE IS ENGAGED IN ANY MANUFACTURING OR PRODUCTION OF ANY ARTICLE OR THING IN ALL THE THREE UNITS, NAMELY, EOU UNITS AT AMONA, CHITRADURGA AND CODLI. THE PROCESSES UNDERTAKEN AT EACH OF THESE UNITS AR E AS UNDER: PROCESSES UNDERTAKEN AT AMONA BENEFICIATION PLANT I . THE CRUDE IRON ORE (RUN OF MINES - ROM) EXTRACTED FROM THE MINES IS RECEIVED AT THE PLANT. II . CRUDE IRON ORE IS FED TO THE HOPPER. ITA NO. 72&85/PNJ/2012 122 III . SCREENING OF CRUDE IRON ORE IS DONE ON A VIBRATING SCREEN OR THE VIBRATING GRIZZLY FEEDER HAVING OPENING OF THE PARTICULAR DESIRED SIZE. THUS, OVERSIZED PRODUCTS GET SEPARATED. IV . THE OVERFLOW FROM THE VIBRATING GRIZZLY, I.E., OVERSIZED PRODUCT GOES TO PRIMARY JAW CRUSHER THROUGH CONVEYOR BELTS. V . THE OVERSIZED CRUDE IRON ORE IS CRUSHED IN THE PRIMARY JAW CRUSHER TO REDUCE THE SIZE OF LUMPS. VI . CRUSHED CRUDE ORE LUMPS ARE CONVEYED TO ANOTHER VIBRATING SCREEN, CALLED BANANA SCREEN, WHICH IS A DOUBLE DECK SCREEN ( THE VIBRATING SCREEN IS A DOUBLE DECK SYSTEM. THE TOP DEC K OF THE SAME IS CALIBRATED AT 30MM SIZE AND BOTTOM DECK IS CALIBRATED AT 10MM SIZE. THE OUTPUT IS SEGREGATED INTO THE MATERIAL SIZE OF +30MM (<30MM >10MM) AND <10MM.). VII . THE +30MM PRODUCT FROM BANANA SCREEN IS MOVED TO THE SECONDARY CRUSHER, AND IS MOVED B ACK AGAIN TO THE BANANA SCREEN FOR RE - SEGREGATION. THESE PROCESSES ARE REPEATED TILL THE DESIRED SIZES OF CRUDE ORE LUMPS ARE OBTAINED. VIII . THE <30MM > 10MM FRACTIONS ARE TAKEN TO THE LOG WASHER, WHICH IS A WET PROCESS, AND BY WHICH UNSTABLE LUMPY PARTI CLES AND COATED FINES ARE REMOVED FROM THE SURFACE OF LUMPS. IX . THE OUTPUT IS WET SCREENED FOR SEPARATION OF < 30MM > 10MM LUMPS. THE BALANCE MATERIAL, WHICH IS < 10MM FRACTION IS PASSED INTO A SPIRAL CLASSIFIER. X . HERE SEGREGATION OF MATERIAL (< 100MM) IS M ECHANICALLY DONE ACCORDING TO GRAVITY. THE HEAVIER MATERIAL, WHICH IS COLLECTED AS UNDERFLOW, IS STACKED AS CLASSIFIER FINES. THE OVERFLOW FROM THE CLASSIFIER, WHICH CONSTITUTES LIGHTER MATERIAL, IS PUMPED TO TWO STAGE CYCLONES PRIMARY AND SECONDARY. XI . PRIMARY CYCLONE SEGREGATES HIGH GRADE FINES WHICH ARE REMOVED AS AN UNDERFLOW, AND THE OVERFLOW IS FED TO SECONDARY CYCLONES TO RECOVER FURTHER IRON ORE FINES. PRIMARY AND SECONDARY CYCLONE UNDERFLOW IS DEWATERED BY SLOW SPEED SPIRAL CLASSIFIERS, AND COLLE CTED AS FINES. XII . THE SECONDARY CYCLONES OVERFLOW IS A WASTE, CALLED TAILINGS AND IT IS DISCHARGED INTO THE TAILING POND. XIII . IRON ORE LUMPS AND FINES ARE THEN MOVED THROUGH CONVEYOR BELTS TO THE BARGES, WHICH ARE STATIONED ON THE RIVER BANK BESIDES THE PLAN T. HERE, DIFFERENT SIZES OF LUMPS HAVING DIFFERENT CHEMICAL AND PHYSICAL COMPOSITIONS ARE MIXED MECHANICALLY AS PER THE PRODUCT COMPOSITION ORDERED BY THE OVERSEAS BUYERS . ITA NO. 72&85/PNJ/2012 123 PROCESSES UNDERTAKEN AT CHITRADURGA BENEFICIATION PLANT I . THE CRUDE IRON ORE (RUN O F MINES - ROM) EXTRACTED FROM THE MINES IS RECEIVED AT THE PLANT. II . CRUDE IRON ORE IS FED TO THE HOPPER. III . SCREENING OF CRUDE IRON ORE IS DONE ON A VIBRATING SCREEN OR THE VIBRATING GRIZZLY FEEDER HAVING OPENING OF THE PARTICULAR DESIRED SIZE. THUS, OVERSI ZED PRODUCTS GET SEPARATED. IV . THE OVERFLOW FROM THE VIBRATING GRIZZLY, I.E., OVERSIZED PRODUCT GOES TO PRIMARY JAW CRUSHER THROUGH CONVEYOR BELTS. V . THE OVERSIZED CRUDE IRON ORE IS CRUSHED IN THE PRIMARY JAW CRUSHER TO REDUCE THE SIZE OF LUMPS. VI . CRUSHED CRUD E ORE LUMPS ARE CONVEYED TO ANOTHER VIBRATING SCREEN, CALLED BANANA SCREEN, WHICH IS A DOUBLE DECK SCREEN ( THE VIBRATING SCREEN IS A DOUBLE DECK SYSTEM. THE TOP DECK OF THE SAME IS CALIBRATED AT 30MM SIZE AND BOTTOM DECK IS CALIBRATED AT 10MM SIZE. THE O UTPUT IS SEGREGATED INTO THE MATERIAL SIZE OF +30MM (<30MM >10MM) AND <10MM.). VII . THE >30MM PRODUCT FROM THE SCREENS IS MOVED TO THE SECONDARY CRUSHER, WHICH IS MOVED AGAIN TO THE SECONDARY AND TERTIARY SCREENS FOR FINAL SCREENING OF CALIBRATED ORE. VIII . THE SEC ONDARY AND TERTIARY SCREENS BOTH HAVE A TOP DECK OF 30MM CALIBRATION AND THE BOTTOM DECK OF 10MM CALIBRATION. THE 10MM TO 30MM CALIBRATED PRODUCT FROM THE SCREEN IS SEGREGATED AND STACKED SEPARATELY TO BE SOLD AS LUMPS. IX . THE < 10MM PRODUCT IS COLLECTED AS FINES IN ANOTHER PRODUCT BUNKER FROM WHERE IT IS SENT FOR STACKING OR DISPATCH. THE < 10MM PRODUCT FROM PRIMARY SCREEN SOMETIMES GOES TO ANOTHER FINES SCREEN FOR FURTHER SCREENING AT 5MM, IF REQUIRED. X . IRON ORE LUMPS AND FINES ARE THEN MOVED THROUGH CONV EYOR BELTS TO THE BARGES, WHICH ARE STATIONED ON THE RIVER BANK BESIDES THE PLANT. HERE, DIFFERENT SIZES OF LUMPS HAVING DIFFERENT CHEMICAL AND PHYSICAL COMPOSITIONS ARE MIXED MECHANICALLY AS PER THE PRODUCT COMPOSITION ORDERED BY THE OVERSEAS BUYERS. PRO CESSES UNDERTAKEN AT CODLI ULTRA FINE RECOVERY (UFR) PLANT I . SCAVENGER (SECONDARY) CYCLONES OVERFLOW IS A WASTE PRODUCT CALLED TAILINGS, BUT AT THIS 100% EOU THIS WASTE GENERATED BY ITA NO. 72&85/PNJ/2012 124 THE IRON ORE BENEFICIATION PLANTS IS FURTHER PROCESSED AND LOW GRADE IRON ORE IS PRODUCED. THE TAILINGS ARE FIRST DE - SLIMED BY 5 DE - SLIMING CYCLONE EQUIPMENT. IN ORDER TO INCREASE THE PRESSURE (30 PSI) AS REQUIRED FOR THE DE - SLIMING OPERATION, HIGH CAPACITY SLURRY PUMPS ARE USED. THE SAID PROCESS RESULT IS A FINER SIZE CUT - OFF WHICH IS REQUIRED TO FACILITATE MAGNETIC SEPARATION. II . THE DE - SLIMED OVERFLOW FROM THE ABOVE PROCESS IS FED TO A 3 MM VIBRATORY SCREEN FOR SEPARATION OF FOREIGN MATTER, IF ANY, AND IS CLASSIFIED AS SCREENED SLURRY. THE DE - SLIMED OVERFLOW CONSISTING OF GAN G MATERIAL IS CHANNELED OUT TO THE TAILING THICKER. III . SCREENED SLURRY IS THEN FED TO THE MEDIUM INTENSITY MAGNETIC SEPARATOR, WHICH OPERATES AT AROUND 7 TESLA OF MAGNETIC INTENSITY. THIS INSTRUMENT RECOVERS THE MAGNETITE AND MARTITE MATERIAL PRESENT IN THE SLURRY FEED. THIS PRODUCT IS CALLED AS MAGS. IV . THE OVERFLOW FROM MIMS, I.E., NON - MAGS, IS AGAIN TREATED IN A VERY HIGH INTENSITY MAGNETIC ENVIRONMENT, WHICH FACILITATES FURTHER RECOVERY. TO ACHIEVE THIS, FERROUS WHEEL SEPARATOR, WHICH GENERATES MAGNETIC INTENSITY OF AROUND 14 TESLA IS USED. WITH THIS EQUIPMENT VERY FINE HEMATITE PARTICLES ARE RECOVERED FROM MAGS. V . MAGS FROM BOTH MIMS AND FERROUS WHEEL ARE THE AGITATED FOR HOMOGENEOUS MIXING WITH THE HELP OF AGITATOR, AND THEN DE - WATERED WITH THE HELP OF C ERAMIC FILTER. THE DE - WATERED ULTRA FINES, WHICH IS THE FINAL PRODUCT, IS STACKED AT A SHED ERECTED FOR THE PURPOSE. VI . NON - MAGS FROM MIMS / FERROUS WHEEL AND DE - SLIMING CYCLONE OVERFLOW IS TREATED AT THE TAILING THICKER FOR WATER RECOVERY BEFORE THE SAME IS SENT TO THE TAILING POND AS WASTE MATERIAL. 42.1 EACH OF THESE UNITS WAS APPROVED AS EOU UNIT BY THE DEVELOPMENT COMMISSIONER ON THE FOLLOWING DATES, WHICH WERE RATIFIED BY THE BOARD OF APPROVAL ON THE DATES DETAILED AS UNDER RESPECTIVELY: AMONA CHI TRADURGA CODLI BOARD OF APPROVAL (LOP NO. FOR 100% EOU) PER:44(2007)IA - II/39/07 - 08 1/64/2007:PER: EOU:KR:CSZ/243 PER:303(1997) EOB/318/97 BOARD OF APPROVAL (LOP 28/03/2008 15/02/2008 27/10/1997 ITA NO. 72&85/PNJ/2012 125 DATE) RATIFICATION BY THE BOARD OF APPROVAL (LETTER NO.) SE EPZ/IA - II/44/2007 - 08/6053 1/64/2007/EOU: CSEZ/225 IA - II/28/(57) /05 - 06/2406 RATIFICATION BY THE BOARD OF APPROVAL (LETTER DATE) 06/07/2009 21/02/2011 03/04/2005 42. 2 ON ACCEPTING THE APPLICATION MOVED BY THE ASSESSEE REQUESTING PERSONAL VISIT OF BENCH M EMBERS TO ITS AMONA PLANT BOTH MEMBERS IN PRESENCE OF MR. SESHACHALA (DR) MR. SANJEEV KUMAR BINDAL (AR) AND THE OFFICIALS OF THE IT DEPARTMENT AND THE ASSESSEE COMPANY MADE AN ON SIGHT INSPECTION OF THE SAID PLANT OF M/S SESA GOA LTD., LOCATED AT AMONA VI LLAGE, NORTH GOA BETWEEN 0 3.00 PM TO 04.30PM 0N 19.12 12. THE PURPOSE OF INSPECTION WAS TO UNDERSTAND THE TYPE OF PLANT & MACHINERY INSTALLED AT THE IRON ORE BENEFICIATION PLANT AND ALSO THE PROCESSES UNDERTAKEN FOR PRODUCTION OF IRON ORE IRON ORE BENEFICI ATION PLANT. THIS IRON ORE BENEFICIATION PLANT, IN OPEN, WE FOUND SPREAD OVER AN AREA OF ABOUT 100 SQUARE METERS BUT NO PRODUCTION ACTIVITY WAS GOING ON. IT WAS INFORMED THAT THE PLANT WAS NOT RUNNING BECAUSE OF THE BAN ON MINING AND PROCESSING ACTIVITIE S SINCE SEPTEMBER, 2012. HEAPS OF MUD MIXED WITH BOULDERS OF VARIOUS SIZES, WERE FOUND STACKED IN FRONT OF THE PLANT. IT WAS TOLD THAT THE HEAPS OF MUD AND BOULDERS WERE IN FACT CRUDE OR ALSO CALLED RUN - OF MILE (ROM IS BROUGHT FROM THE MINES SITUATED ABOUT 10 - 15 KILOMETERS FROM THE PLANT AND FED TO THE PLANT. 42.3 THE BOUNDARIES OF THE PLANT CONSISTED OF RETAININ G WALLS HAVING A STEEP FACE OF ABOUT 10 METERS ON TWO SIDES, FACING OF BARBED WIRES ON ONE SIDE AND OPEN SPACE IN FRONT WHERE THE FINAL PROD UCT IS STORED. THE STARTING POINT OF THE PLANT AS SHOWN TO US IS A HOPPER WHICH IS MADE UP OF MILD STEEL (MS) PLATES WHEREIN ROM IS FED TO THE PLANT. THE HOPPER WAS FOUND FITTED AT THE EDGE OF THE RETAINING WALL OF ABOUT 10 METERS HEIGHT. IT WAS EXPLA INED THAT THE ROM IS POURED BY TRUCKS DIRECTLY INTO THE HOPPER AND IS TAKEN FOR CRUSHING THROUGH A CONVEYOR SYSTEM, AFTER WHICH IT IS CARRIED TO THE SCREENS OF VARIOUS SIZES, YET ITA NO. 72&85/PNJ/2012 126 AGAIN THROUGH AN ORGANIZED MECHANISM OF CONVEYOR BELTS. THE WHOLE PLANT WE N OTED CONSISTS OF HUGE STEEL STRUCTURES OF ABOUT 6 - 10 METERS HEIGHT ON WHICH THE BANANA SCREEN AND THE CONVEYORS WERE FOUND INSTALLED. THE PROCESS OF CRUSHING AND SCREENING WERE TOLD TO BE REPEATED TILL THE DESIRED SIZES WERE OBTAINED. IT WAS EXPLAINED TH AT THE PRODUCTS THEN PASS THROUGH LOG WASHERS WHERE THE IMPURITIES ARE FURTHER REMOVED. SOME OF THE CONVEYORS WERE FOUND OPEN TO SKY WHEREAS SOME WERE FOUND COVERED WITH GALVANIZED IRON (GI) SHEETS. IT WAS SEEN THAT THE CONVEYORS WERE MADE TO CARRY ORE OF VARIOUS SIZES FROM THE SCREENS TO THE LOG WASHERS WHERE THE OUTPUT IS WASHED. LOG WASHER WAS FOUND TO BE A RECTANGULAR DRUM FITTED WITH A SPIRAL PINION MADE OF MS PLATES. THE FINAL PRODUCT, LUMPS AND FINES W ERE NOTED TO BE TOTALLY PHYSICALLY DIFFERE NT IN APPEARANCE AND USE FROM THE INITIAL INPUT PRODUCT. WE WERE ALSO SHOWN METALLURGICAL COKE PLANT BUT THAT IS NOT RELEVANT FOR EXEMPTION U/S 10B. 42.4 THE HEARING WAS EARLIER CONCLUDED ON 20/12/2012 AFTER HEARING COUNSELS FROM BOTH THE SIDES CONTINUOUS LY ON DIFFERENT DATES, I.E., FROM 21 / 11 / 12 TO 20/12/2012. BOTH SIDES HAVE EXHAUSTIVELY ARGUED AND PUT UP THEIR SUBMISSIONS AND EVEN REQUESTED TO FILE THE SYNOPSIS, WHICH BENCH PERMITTED. ACCORDINGLY, SYNOPS E S WERE FILED FROM BOTH THE SIDES. AFTER THE C ONCLUDING OF THE HEARING W HILE THE CASE WAS UNDER DICTATION, THE REVENUE MOVED AN APPLICATION DATED 18/01/2013 ON 21/01/2013 FOR REFERRING THE ISSUE WHETHER THE ASSESSEE IS ENGAGED IN PRODUCTION OR NOT IN ALL THE THREE UNITS TO SPECIAL BENCH AS IN THEIR OP INION THIS ISSUE IS DULY COVERED IN THEIR FAVOUR BY THE ITAT PANAJI BENCH IN THE CASE OF CHOWGULE & CO. FOR THE AY 2002 - 03 IN ITA NO. 162/PNJ/2006 IN CASE THIS TRIBUNAL WANTED TO TAKE A DIFFERENT VIEW. THE CASE IMMEDIATELY ON 21/01/2013 WAS DE - HEARD AND W AS RE - FIXED FOR HEARING THE APPLICATION OF REVENUE DATED 18/01/2013 FOR 19/02/2013 SO THAT BOTH THE PARTIES MAY BE GIVEN SUFFICIENT OPPORTUNITIES. ON THAT DATE LD. CCIT PERSONALLY APPEARED AND ARGUED IN DETAIL HOW THE CASE WAS DULY COVERED BY THE DECISION OF THIS BENCH IN THE CASE OF CHOWGULE & CO. (P) LTD. FOR THE AY 2002 - 03 IN ITA NO. 162/PNJ/2006 READ WITH MISC. APPLICATION NO. 23/PNJ/2007 DATED 19/07/2007. HE CARRIED US THROUGH THE ORDER OF THIS ITA NO. 72&85/PNJ/2012 127 TRIBUNAL IN THE CASE OF CHOWGULE & CO. AS WE LL AS MA NO. 23 EVEN THE WRITTEN SUBMISSIONS ALONG WITH PAPER BOOK WAS ALSO FILED. 42.5 THE WRITTEN SUBMISSION S READ AS UNDER: - 1. FACTS OF THE CASE : (I) M/S SESA GOA LTD., IS CLAIMING OLD BUT RENOVATED BENEFICATION PLANTS AS NEWLY ESTABLISHED 100% EOU MANUFACTURING OR PRODUCING ANY ARTICLE OR THING. (II) THESE UNITS DO NOT EXTRACT IRON ORE THEMSELVES. (III) ENTIRE PROFIT FROM EXPORT FROM THESE UNITS IS TAKEN AS EXEMPT U/S 10B. NO PROFIT HAS BEEN ALLOCATED TO OTHER ACTIVITIES, E.G. EXTRACTION ETC. SE CTION 10B(7) HAS TOTALLY BEEN DISREGARDED BY NOT TAKING THE INPUT COST OF IRON ORE AT A MARKET RATE. 2. ITAT PANAII BENCH'S VIEW : ITAT, PANAJI BENCH INTERPRETED CIT VS. SESA GOA LTD.,(266 ITR 126 (BOM) IN THE CASE OF ACIT CIRCLE - 2 VS. M/S CHOWGULE & CO. L TD., IN ITA NO. 162/PNJ/ 2006 AND ITA NO. 184/PNJ/2006. PRODUCTION IN RELATION TO EXTRACTION AND PROCESSING OF IRON ORE HAS BEEN HELD AS UNDER. 'THE SUPREME COURT IN FACT HAS HELD IN THE CASE OF SESA GOA LTD., THAT 'EXTRACTION AND PROCESSING OF MINING ORE AMOUNTS TO PRODUCTION'. ONE SHOULD READ THE EXPRESSION 'EXTRACTION' AND 'PROCESSING' TOGETHER. THE RULING OF THE SUPREME COURT IS NOT THAT EXTRACTION AS WELL AS PROCESSING, INDEPENDENTLY AMOUNTS TO PRODUCTION, (EMPHASISE SUPPLIED) . IF AN ASSESSEE CARRIES ON THE BUSINESS OF EXTRACTING MINERAL ORE, IT AMOUNTS TO MANUFACTURE OR PRODUCTION AS PER THE ABOVE JUDGEMENT. IF THE SAME ASSESSEE IN ADDITION TO EXTRACTION, ALSO PROCESS THE MINERAL ORE, THE COMBINED ACTIVITY OBVIOUSLY AMOUNTS TO PRODUCTION/MANUFACTURE. BUT PROCESSING THE MINERAL ORE WITHOUT EXTRACTION OF THE ORE HAS NOT BEEN HELD TO BE PRODUCTION / MANUFACTURE BY THE SUPREME COURT IN THE SAID DECISION OF SESA GOA. ' 'IN THE PRESENT CASE ALSO, THE PROCESS CARRIED ON BY THE ASSESSEE IS PROVIDING VALUE ADDIT ION TO IRON ORE BY ENHANCING ITS QUALITY. IT IS IN FACT UPGRADING THE QUALITY FOR APT INDUSTRIAL USE. EVEN THOUGH THE PROCESS EMPLOYED BY THE ASSESSEE MIGHT REQUIRE DEPLOYMENT OF HUGE CAPITAL AND LARGE PLANT AND MACHINERY, SUCH THINGS DO NOT CHANGE THE BAS IC CHARACTER OF THE ACTIVITIES CARRIED ON BY THE ASSESSEE - COMPANY. WHAT IS RECEIVED BY THE ASSESSEE - COMPANY IS IRON ORE; WHAT IS PROCESSED BY THE ASSESSEE - COMPANY IS IRON - ORE AND AGAIN WHAT IS SENT OUTSIDE THE ASSESSEE - COMPANY IS STILL THE IRON ORE. NO NEW PRODUCT COMES INTO EXISTENCE. IN THIS LINE OF TRADE, DIFFERENT GRADES OF IRON ORE WILL HAVE DIFFERENT NOMENCLATURES AND NAMES. BUT THOSE EXPRESSIONS OF CONVENIENCE DO NOT MEAN THAT THE ASSESSEE HAS PRODUCED OR MANUFACTURED A NEW ARTICLE OR THING.' THE DE CISION OF HON'BLE ITAT IN MA NO.23/PNJ/2007 HAS NOT CHANGED THE ABOVE POSITION REGARDING 'PRODUCTION' IN THE CASE OF IRON ORE. 3 WHY SPECIAL BENCH : I. OBSERVATION OF THE BENCH DURING THE COURSE OF HEARING OF THE PRESENT CASE WERE THAT THE DECISION IN ITA NO.162/PNJ/2006 AND ITA NO.1841/PNJ/2006 HAVE BEEN REVERSED AND THE SAME CANNOT BE APPLIED TO THE CASE OF THE ASSESSEE - COMPANY. ITA NO. 72&85/PNJ/2012 128 II) H OWEVER, THERE IS NO REVERSAL OF THE JUDGEMENT. IN FACT, NO ITAT CAN REVERSE OR REVIEW ITS OWN DECISION. ONLY MISTAKES APPAR EN T FROM RECORD CAN BE RECTIFIED, III) IF THIS VIEW IS TAKEN THEN IT WOULD BE CONTRARY TO THE EARLIER FINDINGS OF ITAT IN CHOWGULE'S CASE. IV) THE DECISION OF GUJARAT HIGH COURT IN THE CASE OF AFFECTION INVESTMENT LTD., VS. ACIT.REPORTED IN 222 CTR 2009, SAYAJI IRON & ENGG. CO. VS. CIT (2002) 172 CTR (GUJ). 339 (2002) 253 ITR 749 (GUJ) AND DECISION OF MADRAS HIGH COURT IN THE CASE OF CIT VS. L.G. RAMAMURTHI REPORTED IN 110 ITR 453, CLEARLY MANDATES THAT THE ITAT HAS TO REFER TO THE LARGER BENCH ON THE ISS UE IF IT IS TO TAKE A CONTRARY VIEW ON A DECISION RENDERED BY THE BENCH OF THE SAME ITAT IN THE EARLIER DECIDED CASES. FURTHER, SUPREME COURT IN THE CASE OF ITAT VS. DCIT REPORTED IN 218 ITR 275 HELD THAT PRESIDENT, ITAT CAN SUO - MOTO OR ON REQUEST FROM ANY PARTY CAN CONSTITUTE SPL. BENCH. IT IS REQUESTED THAT AN OPPORTUNITY OF BEING HEARD IS GIVEN TO US, SO THAT OUR CASE IS PROPERLY EXPLAINED BEFORE YOUR HONOURS. 42.6 DURING THE COURSE OF THE HEARING , THE BENCH POINTED OUT THAT LD. DEPARTMENTAL S P E CIAL COUNSEL HAS ALREADY TAKEN THE ARGUMENT THAT THE CASE OF THE REVENUE ON THIS ISSUE IS DULY COVERED BY THE DECISION OF THIS BENCH IN THE CASE OF CHOWGULE & CO. ITA NO. 162 AND IN CASE THIS TRIBUNAL WANTED TO DIFFER THE MATTER BE REFERRED ON THIS ISSUE FOR CO NSTITUTING A SPECIAL B ENCH. THE BENCH NEVER OBSERVED THAT THE CASE IS COVERED OR NOT COVERED BY THE DECISION IN THE CASE OF CHOWGULE & CO. THE LD. AR ON THE CONTRARY OBJECTED TO THE ADMISSION OF THIS APPLICATION AS IT WILL T A NTAMOUNT TO RE - HEARING OF THE CASE FOR WHICH HEARING HAD ALREADY BEEN CONCLUDED. IN THIS REGARD HE RELIED UPON CERTAIN DECISIONS SUCH AS M/S ROGER ENTERPRISES PVT LTD. VS. DCIT SPL. RANGE 5, NEW DELHI ITA NO. 1515,1516,1517/DEL/97 DT. 8.5.2003, DENSO INDIA LTD. VS. JCIT, TDS RANGE 22, NEW DELHI ITA NOS. 3233 TO 3242/DEL/2003 DT. 2.9.2004 AND THAT OF MADRAS HIGH COURT IN THE CASE OF S GOVINDARAJA MUDALIAR VS. INCOME TAX APPELLATE TRIBUNAL 206 ITR 62 BUT ON THE BASIS OF NATURAL JUSTICE AS THE ORDER WAS NOT FINALIZED AND E SPECIALLY WHEN C CIT HAD PERSONALLY APPEARED , WE PERMITTED CCIT TO ARGUE ON THIS APPLICATION. THE CCIT CARRIED US T O THE ORDER OF THE ITAT IN I TA NO. 162 AND 184 IN CHOWGULE AND COMPANY AND ALSO THE MA NO.23 ORDER TO PRESS THAT THE COORDINATE BENCH OF THIS TRIBUNAL HAS TAK EN THE VIEW THAT EXTRACTION AND PROCESSING OF IRON ORE IS NECESSARY FOR HOLDING THAT ASSESSEE HAS MANUFACTURED OR PRODUCED AN ARTICLE OR THING. MERE PROCESSING OF IRON ORE WILL ITA NO. 72&85/PNJ/2012 129 NOT TANTAMOUNT TO BE MANUFACTURE / PRODUCTION. THE DECISION OF CO - ORDINATE BENC H DATE D 12.7.2007 IS BINDING ON US. THIS FINDING OF COORDINATE BENCH HAS NOT BEEN REVERSED BY THE ORDER PASSED IN M.A NO.23 DATED 19.7.2007. IT WAS V E HE MENTLY CONTENDED, THAT IN CASE THIS BENCH WANT TO TAKE A DIFFERENT VIEW THAN THAT HAS BEEN TAKEN BY TH E CO - ORDINAT E BENCH IN THEIR ORDER DATED 12.7.2007, THIS ISSUE BE REFERRED TO THE SPECIAL BENCH. HE RELIED IN THIS REGARD ON THE WRITTEN SUBMISSION S . LD. AR ON MERIT RELIED UPON THE EARLIER DECISION S REFERRED TO BY HI M DURING THE COURSE OF HEARING. HE REI TERATED AND RELIED ON THE DECISION OF SPECIAL BENCH IN THE CASE OF MADHU JAYANTI INTERNATIONAL LTD. AND OTHERS VS. DCIT (SB)(KOL) (SUPRA) AND THAT OF KERALA H IGH C OURT IN THE CASE OF TATA TEA AS WELL AS DECISION OF THE SUPREME COURT EARLIER REFERRED TO . H IS MAIN CONTENTION WAS EARLIER TAKEN WAS THAT SUBSEQUENT TO THE DECISION OF CHOWGULE & CO. PANAJI BENCH, A NUMBER OF DECISIONS HAVE BEEN DECIDED BY THE SPECIAL BENCH, HIGH COURT AND SUPREME COURT, WHICH ARE SUPERIOR FORUM THAN THE DIVISION BENCH OF THE TRI BUNAL ON THE ISSUE WHETHER THE PROCESSING OF INPUT AMOUNT S TO MANUFACTURE OR PRODUCTION. WE WILL DECIDE THIS ISSUE SUBSEQUENTLY AS AT THIS STAGE WITHOUT DISCUSSING THE RELEVANT PROVISIONS OF THE ACT , WE CANNOT FORM AN OPINION WHETHER THE PROCESSING OF IRO N ORE TO MAKE IT FIT FOR EXPORT AMOUNT S TO MANUFACTURE OR PRODUCTION. 42.7 IN OUR OPINION , THE COMMON ISSUE INVOLVED ON THE FACTS OF THE CASE IN THE CASE OF THE ASSESSEE IS WHETHER ALL THE THREE UNITS IN RESPECT OF WHICH THE ASSESSEE CLAIMED THE EXEMP TION U/S 10B ARE ENGAGED IN ANY MANUFACTURE OR PRODUCTION OF ARTICLE OR THING FOR THE PURPOSE AVAILING OF EXEMPTION U/S 10B . IF ENGAGED IN PROCESSING, WHETHER ASSESSEE IS ENTITLE D FOR EXEMPTION U/S 10B IN RESPECT OF ALL THESE THREE UNITS. THE NATURE OF ACT IVITIES IN THE CASE OF AMONA PLANT AS WELL AS CHITRADURGA IS SIMILAR AS EXPLAINED IN THE EARLIER PARAS. BOTH THESE UNITS AS WELL AS CODLI PLANT ARE APPROVED AS 100% EOU UNITS. THE NECESSARY BOARD APPROVALS ARE PLACED IN RESPECT OF EACH UNIT BY THE ASSESS EE ON RECORD. FOR CODLI UNIT, APPROVAL WAS GIVEN INITIALLY FOR FIVE YEARS, WHICH WAS SUBSEQUENTLY EXTENDED TO WHICH WE ARE SATISFIED AS THE REVENUE DID NOT PROVE THAT THE LETTER ISSUED IS BOGUS OR FORGED ONE. TO DECIDE THE ISSUE WHETHER ALL THESE UNITS ARE ENGAGED IN ANY MANUFACTURING OR PRODUCTION OF ARTICLE OR THING, IT IS NECESSARY TO REFER TO THE RELEVANT PROVISIONS OF THE INCOME - TAX ACT, 1961. ITA NO. 72&85/PNJ/2012 130 43. PROVISION OF SEC. 10A OF THE ACT WHICH DEALS WITH THE SPECIAL PROVISIONS IN RESPECT OF THE NEWLY ESTABL ISHED UNDERTAKINGS IN FREE - TRADE ZONE, ETC., AND SEC. 10AA OF THE ACT WHICH DEALS WITH THE SPECIAL PROVISIONS IN RESPECT OF THE NEWLY ESTABLISHED UNITS IN SPECIAL ECONOMIC ZONES; AND ALSO SEC. 10B OF THE ACT WHICH DEALS WITH THE SPECIAL PROVISIONS IN RESPE CT OF THE NEWLY ESTABLISHED 100% EXPORT ORIENTED UNDERTAKINGS WERE INSERTED BY THE FINANCE ACT, 1988 W.E.F. 01/04/1989. SEC. 10B PROVIDES THAT ANY PROFITS AND GAINS DERIVED BY AN ASSESSEE FROM A 100% EOU SHALL NOT BE INCLUDED IN THE TOTAL INCOME OF THE ASS ESSEE. THIS PROVISION APPLIES TO ANY UNDERTAKING WHICH MANUFACTURES OR PRODUCES ANY ARTICLE OR THING. EXPLANATION (I) TO SEC. 10B PROVIDES THAT THE EXPRESSION 100% EXPORT ORIENTED UNIT MEANS AN UNDERTAKING WHICH HAS BEEN APPROVED BY THE BOARD APPOINTED I N THIS BEHALF BY THE CENTRAL GOVERNMENT IN EXERCISE OF THE POWERS CONFIRMED BY SEC. 14 OF THE INDUSTRIES (DEVELOPMENT ®ULATION) ACT, 1951 AND THE RILES MADE THERE UNDER . EXPLANATION (III) WHICH WAS THERE AT THE TIME OF THE SAID SEC. 10B DEFINED THE WOR D MANUFACTURE FOR THE PURPOSE OF THE SAID SECTION TO INCLUDE ANY (A) PROCESS OR (B) ASSEMBLING OR (C) RECORDING OF PROGRAMME ON DISC, TAPE, PERFORATED MEDIA OR OTHER INFORMATION STORAGE DEVICE. THUS, PROCESS WAS INCLUDED WITHIN THE WORD MANUFACTURE F OR THE PURPOSE OF SEC. 10B. EXPLANATION (IV) OF THE SAID SEC. 10B FURTHER PROVIDED THAT THE WORD PRODUCE FOR THE PURPOSE OF SAID SECTION, IN RELATION TO ANY ARTICLE OR THING SHALL INCLUDE PRODUCTION OF COMPUTER PROGRAMME. CBDT VIDE ITS CIRCULAR NO. 528 DATED 16/12/1988 176 ITR ST. 154 EXPLAINED THE [PROVISIONS ENACTED BY THE FINANCE ACT, 1988 UNDER PARA 8.2 OF THE CIRCULAR. IN THIS CIRCULAR, CBDT HAD CLEARLY EXPLAINED THAT THE SAID NEW SEC. 10B HAD BEEN INSERTED IN THE STATUTE BOOK WITH A VIEW TO PROVIDE FURTHER INCENTIVE FOR EARNING FOREIGN EXCHANGE SO AS TO SECURE THAT THE INCOME OF A 100% EOU SHALL BE EXEMPT FROM TAX FOR A PERIOD OF FIVE CONSECUTIVE ASSESSMENT YEARS FALLING WITHIN THE BLOCK OF EIGHT ASSESSMENT YEARS. THE EXEMPTION PROVIDED UNDER THIS N EW SECTION WAS SIMILAR TO THE ONE PROVIDED UNDER SEC. 10A OF THE ACT TO INDUSTRIAL UNDERTAKING OPERATING UNDER THE FREE - TRADE ZONE. IT WAS ALSO CLARIFIED THEREIN THAT THE EXPRESSION MANUFACTURE FOR THE PURPOSE OF BOTH SECTIONS 10A AND 10B OF THE SAID ACT WOULD INCLUDE ANY PROCESSING OR ASSEMBLING OR RECORDING OF ITA NO. 72&85/PNJ/2012 131 PROGRAMME ON DISC, TAPE, PERFORATED MEDIA OR OTHER INFORMATION STORAGE DEVICE. 43.1 THIS DEFINITION OF MANUFACTURE WAS REMOVED WHEN SEC. 10A AND 10B OF THE ACT WERE AMENDED BY THE FINANCE ACT , 2001 W.E.F. 01/04/2001. SECTIONS 10A AND 10B OF THE ACT WERE FURTHER AMENDED BY THE FINANCE ACT, 2003 W.E.F. 01/04/2004 AND THE DEFINITION OF MANUFACTURE WAS INSERTED AS UNDER: - EXPLANATION (IV) FOR THE PURPOSE OF THIS SECTION, MANUFACTURE OR PRODU CE SHALL INCLUDE THE CUTTING AND POLISHING OF PRECIOUS AND SEMI - PRECIOUS STONES. 43. 2 THE EOUS WERE ALLOWED TO SELL 25% PRODUCTION WITHIN THE COUNTRY. WITH A VIEW TO RATIONALIZE THE CONCESSION AND TO PHASE THESE OUT BY THE END OF THE ASSESSMENT YEAR 2 009 - 10, THE PROVISIONS OF SEC. 10A AND 10B WERE SUBSTITUTED BY THE NEW PROVISIONS BY THE FINANCE ACT, 2000. CBDT VIDE CIRCULAR NO. 794 DATED 09/08/2000 245 ITR ST. 21, 34 - 35 UNDER PARA 15.3 EXPLAIN ED THAT THE DEDUCTION U/S 10B WOULD BE GRANTED IN RESPECT O F PROFITS AND GAINS DERIVED BY AN UNDERTAKING WHICH MANUFACTURES OR PRODUCES ARTICLE OR THINGS OR COMPUTER SOFTWARE AND DERIVED PROFITS AND GAINS FROM THE EXPORTS THEREOF. THE SAID EXEMPTION WAS AVAILABLE FOR A PERIOD OF 10 CONSECUTIVE YEARS IN A GRADED MA NNER. THE NEW PROVISIONS CONTAINED THE FOLLOWING ADDITIONAL CONDITIONS: I . THE SALE PROCEEDS OF ARTICLES OR THINGS OR COMPUTER SOFTWARE EXPORTED OUT OF INDIA, SHOULD BE RECEIVED IN OR BROUGHT INTO INDIA WITHIN A PERIOD OF 6 MONTHS FROM THE END OF THE PREVIOU S YEAR OR WITHIN SUCH FURTHER PERIOD AS THE COMPETENT AUTHORITY MAY ALLOW SUB - SECTION (3); II . THE PROFITS DERIVED FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS, THE SAME PROPORTION , AS THE EXPORT TURNOVER IN RESPECT OF SUCH ARTICLE OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF BUSINESS SUB - SECTION (4); III . THE ASSESSEE MUST FURNISH IN THE PRESCRIBED FORM NO. 56G, ALONG WITH HIS RETURN OF INCOME, THE REPORT OF A CHARTE RED ACCOUNTANT CERTIFYING THAT THE DEDUCTION HAS BEEN CORRECTLY ITA NO. 72&85/PNJ/2012 132 CLAIMED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 10B SUB - SECTION (5); IV . WHERE THE ASSESSEE AVAILS OF THE BENEFITS OF SECTION 10A OR SECTION 10B, IT WILL NOT BE ELIGIBLE FOR OTHER TAX EXEM PTIONS AVAILABLE UNDER OTHER PROVISIONS OF THE ACT DURING THE PERIOD OF 10 YEARS SUB - SECTION (6); V . MANUFACTURE SHALL HAVE THE SAME MEANING AS ASSIGNED TO IT IN CLAUSE (R) OF SECTION 2 OF THE SPECIAL ECONOMIC ZONES ACT, 2005. 43.3 SUBSEQUENTLY, SPECI AL ECONOMIC ZONE ACT, 2005 WAS PASSED BY THE PARLIAMENT IN MAY, 2005, WHICH WAS BROUGHT INTO EFFECT W.E.F. 23/06/2005. SECTION 2(R) OF SPECIAL ECONOMIC ZONE ACT DEFINES THE EXPRESSION MANUFACTURE AS UNDER: - MANUFACTURE MEANS TO MAKE, PRODUCE, FABRICAT E, ASSEMBLE, PROCESS OR BRING INTO EXISTENCE, BY HAND OR BY MACHINE, A NEW PRODUCT HAVING A DISTINCT NAME, CHARACTER OR USE AND SHALL INCLUDE PROCESSES SUCH AS REFRIGERATION, CUTTING, POLISHING, BLENDING, REPAIR, REMAKING, RE - ENGINEERING AND INCLUDES AGRIC ULTURE, AQUACULTURE, ANIMAL HUSBANDRY, FL ORICULTURE, HORTICULTURE, PISCI CULTURE, POULTRY, SERICULTURE, AVICULTURE AND MINING. 43.4 THIS DEFINITION WAS ADOPTED BY THE LEGISLATURE IN SECTION 10AA W.E.F. 10/02/2006 AS ADOPTED BY THE SPECIAL ECONOMIC ZONES ACT, 2005 BY INSERTING EXPLANATION 1(III) TO SECTION 10AA OF THE ACT WHICH READS AS UNDER: - (III) MANUFACTURE SHALL HAVE THE SAME MEANING AS ASSIGNED TO IT IN CLAUSE (R) OF SECTION 2 OF THE SPECIAL ECONOMIC ZONE ACT, 2005. AS PER THE SAID DEFINITION PROCESS IS INCLUDED IN MANUFACTURE. SUBSEQUENTLY, BY THE FINANCE ACT, 2009 W.E.F 1.4.2009, CLAUSE (29BA) WAS INSERTED IN SECTION 2 OF THE INCOME TAX ACT, 1961 DEFINING THE EXPRESSION MANUFACTURE AS UNDER: MANUFACTURE, WITH ITS GRAMMATICAL VARIATIONS, MEANS A CHANGE IN A NON - LIVING PHYSICAL OBJECT OR ARTICLE OR THING, - ( A ) RESULTING IN TRANSFORMATION OF THE OBJECT OR ARTICLE OR THING INTO A NEW AND DIS T INCT OBJECT OR ARTICLE OR THING HAVING A DIFFERENT NAME, CHARACTER AND USE OR ITA NO. 72&85/PNJ/2012 133 ( B ) BRINGING INTO EXISTENCE OF A NEW AND DISTINCT OBJECT OR ARTICLE OR THING WITH A DIFFERENT CHEMICAL COMPOSITION OR INTEGRAL STRUCTURE. 43.5 IN CHOWGULE & CO. PVT. LTD. VS. UNION OF INDIA (1981) 1 SCC 653 HONBLE SUPREME COURT, AFTER CONSIDERING THE JUDGMENT OF HONBLE BOMBAY HIGH CO URT IN NILGIRI CEYLON TEA SUPPLYING CO. VS. STATE OF BOMBAY (1959) 10 STC 500 (BOM.), CLEARLY OBSERVED ON THE QUESTION WHETHER THE BLENDING OF ORE, WHILST LOADING IT IN THE SHIP BY MEANS OF THE MECHANICAL ORE HANDLING PLANT, CONSTITUTED MANUFACTURE OR PRO CESSING OR ORE FOR SALE WITHIN THE M E ANING OF SECTION 8(3)(B) AND RULE 13 OF THE CENTRAL SALES TAX ACT, 1956. DEALING WITH THIS QUESTION, THEIR LORDSHIPS HELD AND OBSERVED AT PAGES 659 AND 660 OF THE REPORTS AS UNDER: - IT STILL REMAINS TO CONSIDER WHETH ER THE ORE BLENDED IN THE COURSE OF LOADING THROUGH THE MECHANICAL ORE HANDLING PLANT CAN BE SAID TO UNDERGO PROCESSING WHEN IT IS BLENDED. THE ANSWER TO THIS QUESTION DEPENDS UPON WHAT IS THE TRUE MEANING AND CONNOTATION OF THE WORD PROCESSING IN SECTIO N 8(3)(B) AND RULE 13. THIS WORD HAS NOT BEEN DEFINED IN THE ACT AND IT MUST THEREFORE BE INTERPRETED ACCORDING TO ITS PLAIN NATURAL MEANING. WEBSTERS DICTIONARY GIVES THE FOLLOWING MEANING OF THE WORD PROCESS: TO SUBJECT TO SOME SPECIAL PROCESS OR TRE ATMENT, TO SUBJECT (ESPECIALLY RAW MATERIAL) TO A PROCESS OF MANUFACTURE, DEVELOPMENT OF PREPARATION FOR THE MARKET ETC.; TO CONVERT INTO MARKETABLE FORM AS LIVESTOCK BY SLAUGHTERING, GRAIN BY MILLING, COTTON BY SPINNING, MILK BY PASTEURIZING, FRUITS AND V EGETABLES BY SORTING AND REPACKING. WHERE THEREFORE ANY COMMODITY IS SUBJECTED TO A PROCESS OR TREATMENT WITH A VIEW TO ITS DEVELOPMENT OR PREPARATION FOR THE MARKET, AS, FOR EXAMPLE, BY SORTING AND REPACKING FRUITS AND VEGETABLES, IT WOULD AMOUNT TO P ROCESSING OF THE COMMODITY WITHIN THE MEANING OF SECTION 8(3)(B) AND RULE 13. THE NATURE AND EXTENT OF PROCESSING MAY VARY FROM CASE TO CASE; IN ONE CASE THE PROCESSING MAY BE SLIGHT AND IN ANOTHER IT MAY BE EXTENSIVE; BUT WITH EACH PROCESS SUFFERED, THE C OMMODITY WOULD EXPERIENCE A CHANGE. WHEREVER A COMMODITY UNDERGOES A CHANGE AS A RESULT OF SOME OPERATION PERFORMED ON IT OR IN REGARD TO IT, SUCH OPERATION WOULD AMOUNT TO PROCESSING OF THE COMMODITY. THE NATURE AND EXTENT OF CHANGE IS NOT MATERIAL. IT M AY BE THAT CAMPHOR POWDER MAY JUST BE COMPRESSED INTO CAMPHOR CUBES BY APPLICATION OF MECHANICAL FORCE OR PRESSURE WITHOUT ADDITION OR ADMIXTURE OF ANY OTHER MATERIAL AND YET THE OPERATION WOULD AMOUNT TO PROCESSING OF CAMPHOR POWDER AS HELD BY THE ITA NO. 72&85/PNJ/2012 134 CALCUTT A HIGH COURT IN OM PRAKASH GUPTA VS COMMISSIONER OF COMMERCIAL TAXES [16 STC 935 (CAL)]. WHAT IS NECESSARY IN ORDER TO CHARACTERIZE AN OPERATION AS PROCESSING IS THAT THE COMMODITY MUST AS A RESULT OF THE OPERATION, EXPERIENCE SOME CHANGE. HERE, IN THE P RESENT CASE, DIVERSE QUANTITIES OF ORE PROCESSING DIFFERENT CHEMICAL AND PHYSICAL COMPOSITIONS ARE BLENDED TOGETHER TO PRODUCE ORE OF THE REQUISITE CHEMICAL AND PHYSICAL COMPOSITION DEMANDED BY THE FOREIGN PURCHASER AND OBVIOUSLY AS A RESULT OF THIS BLENDI NG, THE QUANTITIES OF ORE MIXED TOGETHER IN THE COURSE OF LOADING THROUGH THE MECHANICAL ORE HANDLING PLANT EXPERIENCE CHANGE IN THEIR RESPECTIVE CHEMICAL AND PHYSICAL COMPOSITION, BECAUSE WHAT IS PRODUCED BY SUCH BLENDING IS ORE OF A DIFFERENT CHEMICAL AN D PHYSICAL COMPOSITIONS. WHEN THE CHEMICAL AND PHYSICAL COMPOSITION OF EACH KIND OF ORE WHICH GOES INTO THE BLENDING IS CHANGED, THERE CAN BE NO DOUBT THAT THE OPERATION OF BLENDING WOULD AMOUNT TO PROCESSING OF ORE WITHIN THE MEANING OF SECTION 8(3)(B) AND RULE 13. IT IS NO DOUBT TRUE THAT THE BLENDING OF ORE OF DIVERSE PHYSICAL AND CHEMICAL COMPOSITIONS IS CARRIED OUT BY THE SIMPLE ACT OF PHYSICALLY MIXING DIFFERENT QUANTITIES FOR SUCH ORE ON THE CONVEYOR BELT OF THE MECHANICAL ORE HANDLING PLANT, BUT TO OUR MIND IT IS IMMATERIAL AS TO HOW THE BLENDING IS DONE AND WHAT PROCESS IS UTILIZED FOR THE PURPOSE OF BLENDING. WHAT IS MATERIAL TO CONSIDER IS WHETHER THE DIFFERENT QUANTITIES OF ORE WHICH ARE BLENDED TOGETHER IN THE COURSE OF LOADING THROUGH THE MECHANICAL ORE HANDLING PLANT UNDERGO ANY CHANGE IN THEIR PHYSICAL AND CHEMICAL COMPOSITION IS A RESULT OF BLENDING AND SO FAR AS THIS ASPECT OF THE QUESTION IS CONCERNED, IT IS IMPOSSIBLE TO ARGUE THAT THEY DO NOT SUFFER ANY CHANGE IN THEIR RESPECTIVE CHE MICAL AND PHYSICAL COMPOSITIONS. THUS THE HONBLE SUPREME COURT ACCEPTED THAT THERE IS CHANGE IN CHEMICAL COMPOSITIONS AFTER PROCESSING OF THE IRON ORE IN THIS CASE. FROM THE SAID DECISION OF THE APEX COURT, IT IS APPARENT THAT HONBLE APEX COURT HELD EVE N BLENDING OF IRON ORE FOR THE PURPOSE OF EXPORT INVOLVES CHANGE IN THE CHEMICAL AND PHYSICAL COMPOSITION OF IRON ORE. BUT IF WE LOOK TO THE FACTS IN THE IMPUGNED CASE OF THE ASSESSEE, THE ASSESSEE IS NOT ONLY BLENDING IRON ORE BUT CARRYING OUT VARIOUS PRO CESSES AS TO MAKE IRON ORE CALLED CRUDE ORE USEABLE TO ISPAT INDUSTRIES. THE ACTIVITY OF THE UNITS OF THE ASSESSEE FOR AMONA AND CHITRADURGA INVOLVED CONVERTING INPUT INTO OUTPUT CONSIST OF CRUSHING (CRUDE ORE CALLED ROM WHICH APPEARED TO BE PIECES OF ROCK S AS WE NOTED DURING THE COURSE OF HEARING ON THE BASIS OF SAMPLE SHOWN TO US ) ITA NO. 72&85/PNJ/2012 135 SCREENING, WASHING, STACKING, LOADING IN BARGES, RIVER TRANSPORTATION TO THE BOAT AND EXPORT IN SHIPS. THE FINISHED PRODUCT WHICH COMES OUT ARE CALLED LUMPS AND FINES WHICH ARE USED FOR ISPAT INDUSTRIES AND BROUGHT BY THE FOREIGN BUYERS. THE FINISHED PRODUCT TECHNICALLY AFTER PROCESSING HAD DIFFERENT NAME. AS SHOWN TO US DURING THE COURSE OF HEARING WE NOTED THAT THE LUMPS AND FINES ARE ENTIRELY DIFFERENT FROM CRUDE ORE. DURING C ONVERSION OF CRUDE ORE INTO LUMPS AND FINES, WASTE IS GENERATED WHICH IS CALLED TAILING AND DISCHARGE D INTO TAILING POND. IN CODLI UNIT THESE TAILINGS WHICH ARE IN LIQUID FORM ARE CONVERTED INTO ULTRA FINE. IN OUR OPINION AS WE NOTED FROM THIS PHYSICAL SAM PLE ALSO CRUDE ORE IS ENTIRELY DIFFERENT FROM THE LUMPS AND FINE IN PHYSICAL APPEARANCE USED AND CHEMICAL COMPOSITIONS EVEN TECHNICALLY NAMES ARE ALSO DIFFERENT, SIMILARLY WHAT COMES AS OUTPUT FROM THE INPUT IN CODLI UNIT THAT IS ALSO DIFFERENT IN PHYSICA L APPEARANCE AND CHEMICAL COMPOSITION. WE DO NOT AGREE WITH THE LEARNED D.R THAT THERE IS NOT ANY CHANGE IN PHYSICAL AND CHEMICAL COMPOSITION OF THE OUTPUT THAN THE INPUT AS IS BEING PROCESSED IN ALL THE THREE UNITS. IF WE GO TO SECTION 2(29BA) INSERTED W .E.F . 1.4.2009, WE FIND CLAUSE (B) OF THIS SECTION CLEARLY STATES THAT BRINGING INTO EXISTENCE OF NEW AND DISTINCT OBJECT OR ARTICLE OR THING WITH A DIFFERENT CHEMICAL COMPOSITION OR INTEGRAL STRUCTURE TANTAMOUNT TO MANUFACTURE. THE CRUDE ORE ONCE PROCES SED IS MADE MARKETABLE AND HAD A DIFFERENT CHEMICAL AND PHYSICAL COMPOSITION THAN THE ROM (CRUDE ORE) EVEN THOUGH IN COMMON PARALANCE BOTH MAY BE CALLED IRON ORE. IT IS NO MORE REMAINS AS CRUDE ORES. TAILING NO MORE REMAINS TAILING BUT CONVERTED INTO A POW DER. IN VIEW OF THIS CLAUSE AND THE DECISION OF SUPREME COURT IN THE CASE OF CHOWGULE & CO. (SUPRA), IT CAN BE HELD THAT THE ASSESSEE IS ENGAGED IN THESE UNITS IN MANUFACTURING. FURTHER, IN CIT VS N.C. BUDHARAJA & CO. (1993) 204 ITR 412 (SC), HONBLE SU PREME COURT FURTHER OBSERVED THAT THE WORD PRODUCTION IS MUCH WIDER THAN THE WORD MANUFACTURE. IT WAS SAID (PAGE 423): THE WORD PRODUCTION HAS A WIDE CONNOTATION THAN THE WORD MANUFACTURE. WHILE EVERY MANUFACTURE CAN BE CHARACTERIZED AS PRODUCTIO N, EVERY PRODUCTION NEED NOT AMOUNT TO MANUFACTURE THE WORD PRODUCTION OR PRODUCE WHEN USED IN JUXTAPOSITION WITH THE WORD MANUFACTURE TAKES IN BRINGING INTO EXISTENCE NEW GOODS BY A PROCESS WHICH MAY OR MAY NOT AMOUNT TO MANUFACTURE. IT ALSO TAKES IN ITA NO. 72&85/PNJ/2012 136 ALL THE BY - PRODUCTS, INTERMEDIATE PRODUCTS AND RESIDUAL PRODUCTS WHICH EMERGE IN THE COURSE OF MANUFACTURE OF GOODS. 43.6 IN CHRISTIAN MICA INDUSTRIES LTD. VS. STATE OF BIHAR (1961) 12 STC 150 (SC), HONBLE SUPREME COURT DEFINED THE WORD PRODUCTION , ALBEIT, IN CONNECTION WITH THE BIHAR SALES TAX ACT, 1947. THE DEFINITION WAS ADOPTED FROM THE MEANING ASCRIBED TO THE WORD PRODUCTION IN THE OXFORD ENGLISH DICTIONARY, AS MEANING AMONGST OTHER THINGS THAT WHICH IS PRODUCED; A THING THAT RESULTS FROM A NY ACTION, PROCESS OR EFFORT, A PRODUCT; A PRODUCT OF HUMAN ACTIVITY OR EFFORT. FOR THE WIDE DEFINITION OF THE WORD PRODUCTION, IT HAS TO FOLLOW THAT MINING ACTIVITY FOR THE PURPOSE OF PRODUCTION OF MINERAL ORES WOULD COME WITHIN THE AMBIT OF THE WORD PRODUCTION SINCE ORE IS A THING, WHICH IS THE RESULT OF HUMAN ACTIVITY OR EFFORT. 43. 7 ACCORDING TO WEBSTER INTERNATIONAL ENGLISH DICTIONARY, THE VERB PRODUCE MEANS TO BRING FORWARD, BEGET, ETC. THE JUXTAPOSITION OF THE WORD MANUFACTURE WITH AGRI CULTURE AND HORTICULTURE IS SIGNIFICANT AND CANNOT BE LOST SIGHT OF. THE INTENTION IN EMPLOYING THE WORD PRODUCED OBVIOUSLY WAS TO INTRODUCE AN ELEMENT OF VOLITION AND EFFORT INVOLVING THE EMPLOYMENT OF SOME PROCESS FOR BRINGING INTO EXISTENCE SOME GO ODS. 43.8 IN PARAGRAPH 7 OF ITS IN THE CASE OF CHOWGULE & C0 (P) LTD. VS. UOI (SUPRA) , HONBLE APEX COURT ALSO CONSIDERED THE QUESTION WHETHER THE DIFFERENT BRANDS OF TEA PURCHASED AND BLENDED BY THE ASSESSES FOR THE PURPOSE PRODUCING THE TEA MIXTURE COU LD BE SAID TO HAVE BEEN PROCESSED, AFTER THE PURCHASE, WITHIN THE MEANING OF THE PROVISO TO SECTION 8(A), SO AS TO PRECLUDE THE ASSESSES FROM BEING ENTITLED TO DEDUCT THEIR TURNOVER UNDER SECTION 8(A), SO AS TO PRECLUDE THE VALUE OF THE TEA PURCHASED BY THEM. THE RELEVANT OBSERVATIONS MADE BY THE HONBLE SUPREME COURT IN THIS RESPECTIVE ARE QUOTED AND SET OUT HEREIN BELOW FOR READY REFERENCE: 7. THE REVENUE HOWEVER RELIED ON THE DECISION OF THE BOMBAY HIGH COURT IN NILGIRI CEYLON TEA SUPPLYING CO. VS. S TATE OF BOMBAY [10 STC 500 (BOM HC)]. THE ASSESSEES IN THIS CASE WERE REGISTERED DEALERS IN TEA UNDER THE BOMBAY SALES TAX ACT, 1953 AND THEY PURCHASED IN BULK DIVERSE BRANDS OF TEA AND WITHOUT THE APPLICATION OF ANY MECHANICAL OR CHEMICAL PROCESS BLENDED THESE BRANDS OF DIFFERENT QUALITIES ACCORDING TO A CERTAIN FORMULA EVOLVED BY THEM AND SOLD THE ITA NO. 72&85/PNJ/2012 137 TEA MIXTURE IN THE MARKET. THE QUESTION AROSE BEFORE THE SALES TAX AUTHORITIES WHETHER THE DIFFERENT BRANDS OF TEA PURCHASED AND BLENDED BY THE ASSESSEE FOR THE PURPOSE OF PRODUCING THE TEA MIXTURE COULD BE SAID TO HAVE BEEN PROCESSED AFTER THE PURCHASE WITHIN THE MEANING OF THE PROVISO TO SECTION 8(A), SO AS TO PRECLUDE THE ASSESSES FROM BEING ENTITLED TO DEDUCT FROM THEIR TURNOVER UNDER SECTION 8(A), THE VALU E OF THE TEA PURCHASED BY THEM. THE HIGH COURT OF BOMBAY HELD THAT DIFFERENT BRANDS OF TEA PURCHASED BY THE ASSESSES COULD NOT BE REGARDED AS PROCESSED WITHIN THE MEANING OF THE PROVISO TO CLAUSE (A) OF SECTION 8, BECAUSE THERE WAS NOT EVEN APPLICATION OF MECHANICAL FORCE SO AS TO SUBJECT THE COMMODITY TO A PROCESS, MANUFACTURE, DEVELOPMENT OR PREPARATION AND THE COMMODITY REMAINED IN THE SAME CONDITION. THE ARGUMENT OF THE REVENUE BEFORE US WAS THAT THIS DECISION OF THE BOMBAY HIGH COURT WAS ON ALL FOU RS WITH THE PRESENT CASE AND IF THE BLENDING OF DIFFERENT BRANDS OF TEA FOR THE PURPOSE OF PRODUCING A TEA MIXTURE IN ACCORDANCE WITH A FORMULA EVOLVED BY THE ASSESSES COULD NOT BE REGARDED AS PROCESSING OF TEA, EQUALLY ON A PARITY OF REASONING, BLENDING OF ORE OF DIFFERENT CHEMICAL AND PHYSICAL COMPOSITIONS COULD NOT BE HELD TO CONSTITUTE PROCESSING OF THE ORE. NOW UNDOUBTEDLY THERE IS A CLOSE ANALOGY BETWEEN THE FACTS OF NILGIRI TEA COMPANY CASE [10 STC 500 (BOM HC)] AND THE FACTS OF THE PRESENT CASE , BUT WE DO NOT THINK WE CAN ACCEPT THE DECISION OF THE BOMBAY HIGH COURT IN THE NILGIRI TEA COMPANY CASE [10 STC 500 (BOM HC)] AS LAYING DOWN THE CORRECT LAW. WHEN DIFFERENT BRANDS OF TEA WERE MIXED BY THE ASSESSEE IN NILGIRI TEA COMPANY CASE [10 STC 500 (BOM HC)] FOR THE PURPOSE OF PRODUCING A TEA MIXTURE OF A DIFFERENT KIND AND QUALITY ACCORDING TO A FORMULA EVOLVED BY THEM, THERE WAS PLAINLY AND INDUBITABLY PROCESSING OF THE DIFFERENT BRANDS OF TEA, BECAUSE THESE BRANDS OF TEA EXPERIENCED, AS A RESULT O F MIXING, QUALITATIVE CHANGE, IN THAT THE TEA MIXTURE WHICH CAME INTO EXISTENCE WAS OF DIFFERENT QUALITY AND FLAVOR THAN THE DIFFERENT BRANDS OF TEA WHICH WENT INTO THE MIXTURE. THERE ARE, IT IS TRUE, SOME OBSERVATIONS IN THE JUDGMENT OF THE BOMBAY HIGH CO URT WHICH SEEM TO SUGGEST THAT IF INSTEAD OF MANUAL APPLICATION OF ENERGY IN MIXING THE DIFFERENT BRANDS OF TEA, THERE HAD BEEN APPLICATION OF MECHANICAL FORCE IN PRODUCING THE TEA MIXTURE, THE COURT MIGHT HAVE COME TO A DIFFERENT CONCLUSION AND THESE OBSE RVATIONS WERE RELIED UPON BY THE ASSESSEE, SINCE IN THE PRESENT CASE THE BLENDING WAS DONE BY APPLICATION OF MECHANICAL FORCE, BUT WE DO NOT THINK THAT IS THE CORRECT TEST TO BE APPLIED FOR THE PURPOSE OF DETERMINING WHETHER THERE IS PROCESSING. THE QUES TION IS NOT WHETHER THERE IS MANUAL APPLICATION OF ENERGY OR THERE IS APPLICATION OF MECHANICAL FORCE. WHATEVER BE THE MEANS EMPLOYED FOR THE PURPOSE OF CARRYING OUT THE OPERATION, IT IS THE EFFECT OF THE OPERATION ON THE COMMODITY THAT IS MATERIAL FOR THE PURPOSE OF DETERMINING WHETHER THE OPERATION CONSTITUTES PROCESSING WE ARE CLEARLY OF VIEW THAT THE BLENDING OF ORE IN THE COURSE OF LOADING THROUGH THE MECHANICAL ORE HANDLING PLANT AMOUNTED TO PROCESSING OF ORE WITHIN THE MEANING OF SECTION 8(3)(B) AND RULE 13 AND THE MECHANICAL ORE HANDLING PLANT FELL WITHIN THE DESCRIPTION OF MACHINERY, PLANT, EQUIPMENT USED IN THE PROCESSING OF ORE FOR SALE ITA NO. 72&85/PNJ/2012 138 43.9 IN DECIDING THE SAID QUESTION, THE HONBLE SUPREME COURT AFTER CONSIDERING THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN NILGIRI CEYLON TEA SUPPLYING CO. VS. STATE OF BOMBAY [1959] 10 STC 500 (BOM), INTER ALIA, OBSERVED AS FOLLOWS: ( I ) WHEN DIFFERENT BRANDS OF TEA WERE MIXED BY THE ASSESSEE AS IN NILGIRI CEYLON TEA SUPPLYING CO.S CASE (1959) 10 STC 500 (BOM) FOR THE PURPOSE OF PURCHASING A TEA MIXTURE OF A DIFFERENT KIND AND QUALITY ACCORDING TO A FORMULA EVOLVED BY THEM, THERE WAS PLAINLY AND INDUBITABLY PROCESSING FOR THE DIFFERENT BRANDS OF TEA, BECAUSE THESE BRANDS OF TEA EXPERIENCED, AS A RESUL T OF MIXING, A QUALITATIVE CHANGE, IN THAT THE TEA MIXTURE WHICH CAME INTO EXISTENCE WAS OF A DIFFERENT QUALITY AND FLAVOR THAN THE DIFFERENT BRANDS OF THE TEA WHICH WENT INTO THE MIXTURE; ( II ) THERE ARE, IT IS TRUE, SOME OBSERVATIONS IN THE JUDGMENT OF THE BOM BAY HIGH COURT WHICH SEEM TO SUGGEST THAT IF INSTEAD OF MANUAL APPLICATION OF ENERGY IN MIXING THE DIFFERENT BRANDS OF TEA, THERE HAD BEEN APPLICATION OF MECHANICAL FORCE IN PRODUCING THE TEA MIXTURE, THE COURT MIGHT HAVE COME TO A DIFFERENT CONCLUSION AND THESE OBSERVATIONS WERE RELIED UPON BY THE ASSESSEE, SINCE, IN THE PRESENT CASE, THE BLENDING WAS DONE BY APPLICATION OF MECHANICAL FORCE, BUT THAT IS NOT THE CORRECT TEST TO BE APPLIED FOR THE PURPOSE OF DETERMINING WHETHER THE OPERATION CONSTITUTES IS PROCESSING. ( III ) THE QUESTION IS NOT WHETHER THERE IS ANY MANUAL APPLICATION OF ENERGY OR THERE IS APPLICATION OF MECHANICAL FORCE. WHATEVER BE THE MEANS EMPLOYED FOR THE PURPOSE OF CARRYING OUT THE OPERATION, IT IS THE EFFECT OF THE OPERATION ON THE COMMODITY THAT IS MATERIAL FOR THE PURPOSE OF DETERMINING WHETHER THE OPERATION CONSTITUTES PROCESSING. 43.10 THEREFORE, HONBLE SUPREME COURT, IN CONSTRUING THE EXPRESSION PROCESSING ALLOWED THE APPEAL OF THE ASSESSEE, IN CHOWGULE & CO. PVT. LTD. (SUPRA), HOL DING, INTER ALIA, THAT WHERE ANY COMMODITY IS SUBJECTED TO A PROCESS OR TREATMENT WITH A VIEW TO ITS DEVELOPMENT OR PREPARATION FOR THE MARKET IT WOULD AMOUNT TO PROCESSING OF THE COMMODITY WITHIN THE MEANING OF CENTRAL SALES TAX ACT, 1956. HONBLE SUPRE ME COURT, IN THE SAID JUDGMENT, DID NOT CONSIDER THE EXPRESSION MANUFACTURE SINCE THE QUESTION WAS DECIDED ONLY ON THE EXPRESSION PROCESSING. HOWEVER, CONSIDERING THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF NILGIRI TEA CO. [1959] 10 STC 500, H ONBLE SUPREME COURT OBSERVED THAT, FOR THE PURPOSE OF PRODUCING A TEA MIXTURE OF A DIFFERENT KIND AND QUALITY ACCORDING TO A FORMULA EVOLVED BY THEM, THERE WAS PLAINLY AND INDUBITABLY PROCESSING OF THE DIFFERENT BRANDS OF TEA, BECAUSE THESE BRANDS OF TEA EXPERIENCED, AS A RESULT OF A QUALITATIVE ITA NO. 72&85/PNJ/2012 139 CHANGE, IN THAT THE TEA MIXTURE WHICH CAME INTO EXISTENCE WAS OF A QUALITY AND FLAVOR FROM THE DIFFERENT BRANDS OF TEA WHICH WENT INTO THE MIXTURE. 43.11 HONBLE KERALA HIGH COURT HAD THE OCCASION TO CONSIDER WHET HER ASSESSEE IS ENGAGED IN THE MANUFACTURE OR PRODUCTION OF AN ARTICLE OR THING WHEN ASSESSEE WAS EXCLUSIVELY ENGAGED IN BLENDING, PACKAGING AND EXPORT OF TEA BAGS, TEA PACKETS AND BULK TEA PACKS IN THE CASE OF TATA TEA LTD. VS. ACIT 338 ITR 285. THE ASSES SEES UNIT WAS RECOGNIZED AS 100% EOU. THE ASSESSEE CLAIMED EXEMPTION U/S 10B OF THE ACT FOR THE ASSESSMENT YEAR 1996 - 97 ONWARDS WHICH WAS GRANTED UP TO THE ASSESSMENT YEAR 2000 - 2001, BUT FOR THE ASSESSMENT YEARS 2001 - 02 AND 2002 - 03 THE EXEMPTION WAS DENIE D FOR THE REASON THAT BY THE FINANCE ACT, 2000, THE DEFINITION OF MANUFACTURE WHICH INCLUDED PROCESSING CONTAINED IN SEC. 10B OF THE AC T WAS DELETED W.E.F. 01/04/2001. (THE SAME REASONING AS HAS BEEN GIVEN BY THE COORDINATE BENCH IN THE CASE OF CHOWGULE & CO. ITA 162 & 184 HEAVILY RELIED BY THE DEPARTMENT UNDER PARA 14 OF THEIR ORDER DT. 12.7.2007.) HONBLE H IGH COURT NOTED IN THAT CASE THAT THE REVENUES STAND IS THAT MANUFACTURE OR PRODUCTION HAD LIBERAL MEANING UNDER THE DEFINITION CLAUSE CONTAINED IN SECTION 10B OF THE ACT UNTIL ITS DELETION WHICH COVERS EVEN PROCESSING AND, THEREFORE, BLENDING AND PACKAGING OF TEA FOR EXPORT WAS TREATED AS MANUFACTURE OR PRODUCTION OF AN ARTICLE QUALIFYING FOR EXEMPTION. HONBLE KERALA HIGH COURT CONSIDERED THE CO NTENTION OF THE ASSESSEE THAT THE SCHEME OF INCOME TAX EXEMPTION AVAILABLE TO UNITS IN THE SEZ U/S 10A OF THE ACT AND UNITS IN THE FREE TRADE ZONE PROVIDED U/S 10AA OF THE ACT AND THE EXEMPTION AVAILABLE TO 100% EOU U/S 10B OF THE ACT ARE VERY SIMILAR IN N ATURE AND THE WORDINGS OF THE STATUTORY PROVISIONS ARE SIMILAR IN NATURE. HONBLE KERALA HIGH COURT ALSO CONSIDERED THE JUDGMENT IN THE DECISION OF SUPREME COURT IN TARA AGENCIES ( 292 ITR 444 (SC ) RELIED UPON BY THE SR. STANDING COUNSEL FOR THE REVENUE, WH EREIN HONBLE SUPREME COURT CLEARLY HELD THAT BLENDING OF TEA DOES NOT AMOUNT TO MANUFACTURE OR PRODUCTION OF AN ARTICLE OR THING, BUT IS ONLY PROCESSING. HONBLE HIGH COURT ALLOWING THE APPEAL OF THE ASSESSEE HELD THAT THE ASSESSEE WAS EXCLUSIVELY ENG AGED IN BLENDING AND PACKING OF TEA FOR EXPORT AND WAS NOT MANUFACTURING OR PRODUCING ANY OTHER ARTICLE OR THING. IT WAS RECOGNIZED AS A 100% EOU DIVISION AND THE DEPARTMENT HAD NO CASE THAT THE ASSESSEES UNIT ENGAGED IN EXPORT OF TEA BAGS AND TEA PACKETS WAS NOT A 100% EOU. IF EXEMPTION WAS DENIED ON THE GROUND THAT PRODUCTS ITA NO. 72&85/PNJ/2012 140 EXPORTED WERE NOT PRODUCED OR MANUFACTURED IN THE INDUSTRIAL UNITS OF THE ASSESSEES 100% EOU, IT WOULD DEFEAT THE VERY OBJECT OF SECTION 10B OF THE ACT. (SIMILAR TO ASSESSEES CASE). FURTHER, INDUSTRIAL UNITS ENGAGED IN THE VERY SAME ACTIVITY, I.E., BLENDING, PACKING AND EXPORT OF TEA IN THE SPECIAL ECONOMIC ZONES AND FREE TRADE ZONES, WOULD CONTINUE TO ENJOY TAX EXEMPTION UNDER SECTION 10A OF THE ACT AND SECTION 10AA OF THE ACT RESPE CTIVELY. THE ASSESSEE WAS ALLOWED EXEMPTION ON THE PROFIT DERIVED BY ITS 100% EOU ENGAGED IN BLENDING, PACKING AND EXPORT OF TEA BAGS AND TEA PACKETS. HONBLE HIGH COURT HELD AS UNDER: THE FINDING OF THIS COURT IS THAT THE PURPOSE OF INCORPORATION OF SECT ION 2(R) OF THE SPECIAL ECONOMIC ZONES ACT, 2005, INTO SECTION 10AA OF THE INCOME - TAX ACT IS TO PROVIDE A LIBERAL MEANING TO THE WORD MANUFACTURE WHICH TAKES IN EVEN BLENDING, REFRIGERATION, ETC. IT WAS NOTICED BY THIS COURT THAT THE DEFINITIONS OF MANU FACTURE CONTAINED IN THE ABOVE DEFINITION CLAUSES ARE VERY LIBERAL WHICH TAKES IN EVEN PROCESSING LIKE BLENDING. THE CONTENTION OF THE COUNSEL FOR THE ASSESSEE IS THAT THE PURPOSE OF REMOVAL OF THE DEFINITION OF MANUFACTURE FROM SECTION 10B WAS NOT TO P ROVIDE A RESTRICTED MEANING FOR THAT TERM CONTAINED IN THE MAIN SECTION BECAUSE IF THAT WAS SO, THEN THE LEGISLATURE WOULD HAVE ONLY MODIFIED THE DEFINITION CLAUSE. FURTHER, THE DEFINITION OF 100 PER CENT EXPORT ORIENTED UNIT EVEN AFTER THE AMENDMENT IS RE TAINED IN THE SAID SECTION, WHICH DEFINES IT AS AN UNDERTAKING WHICH HAS BEEN APPROVED AS A 100 PER CENT EXPORT ORIENTED UNDERTAKING BY THE BOARD APPOINTED IN THIS BEHALF BY THE CENTRAL GOVERNMENT IN EXERCISE OF POWERS CONFERRED BY SECTION 40 OF THE INDUST RIES (DEVELOPMENT & REGULATION) ACT, 1951, AND THE RULES MADE UNDER THAT ACT. IT IS PERTINENT TO NOTE THE PRODUCTS FOR WHICH THE ASSESSEES UNIT IS RECOGNIZED AS A 100 PER CENT EXPORT ORIENTED UNIT ARE TEA BAGS, TEA IN PACKETS AND TEA IN BULK PACKS. IN FAC T, THE ASSESSEE IS EXCLUSIVELY ENGAGED IN BLENDING AND PACKING OF TEA FOR EXPORT AND IS NOT MANUFACTURING OR PRODUCING ANY OTHER ARTICLE OR THING. STILL IT IS RECOGNIZED AS A 100 PER CENT EXPORT ORIENTED UNIT BY THE CONCERNED AUTHORITY WITHIN THE MEANING O F THAT TERM CONTAINED IN THE DEFINITION CLAUSE OF SECTION 10B OF THE INCOME - TAX ACT AND THE DEPARTMENT HAS NO CASE THAT THE ASSESSEES UNIT ENGAGED IN EXPORT OF TEA BAGS AND TEA PACKETS IS NOT A 100 PER CENT EXPORT ORIENTED UNIT. SO MUCH SO, IN OUR VIEW, I F EXEMPTION IS DENIED ON THE GROUND THAT PRODUCTS EXPORTED ARE NOT PRODUCED OR MANUFACTURED IN THE INDUSTRIAL UNIT OF THE ASSESSEES 100 PER CENT EXPORT ORIENTED UNIT, THE SAME WOULD DEFEAT THE VERY OBJECT OF SECTION 10B. FURTHER, INDUSTRIAL UNITS ENGAGED IN THE VERY SAME ACTIVITY, I.E., BLENDING, PACKING AND EXPORT OF TEA IN THE SPECIAL ECONOMIC ZONES AND FREE TRADE ZONES, WILL CONTINUE TO ENJOY TAX EXEMPTION UNDER SECTION 10A AND SECTION 10AA RESPECTIVELY. THE STILL WORSE POSITION IS THAT THE APPELLANT WO ULD BE DENIED OF EXPORT EXEMPTION AVAILABLE UNDER SECTION 80HHC EVEN TO A MERCHANT EXPORTER. IN OUR VIEW, THE DECISION OF THE SUPREME COURT IN TARA AGENCIES CASE [2007] 292 ITR 444 (SC) IS NOT APPLICABLE FOR THE PURPOSE OF CONSIDERING EXEMPTION FOR INDUST RIES IN THE EXPORT ITA NO. 72&85/PNJ/2012 141 PROCESSING ZONES, FREE TRADE ZONES AND TO 100 PER CENT EXPORT ORIENTED UNITS COVERED BY SECTIONS 10A, 10AA AND 10B OF THE INCOME - TAX ACT. THEREFORE, FOLLOWING THE JUDGMENT OF THIS COURT ABOVE REFERRED TO WE HOLD THAT THE ASSESSEE IS ENTI TLED TO EXEMPTION ON THE PROFIT DERIVED BY ITS 100 PER CENT EXPORT ORIENTED UNIT ENGAGED IN BLENDING, PACKING AND EXPORT OF TEA BAGS AND TEA PACKETS. CONSEQUENTLY, WE ALLOW THE APPEALS BY REVERSING THE ORDERS OF THE TRIBUNAL AND BY RESTORING THE ORDERS OF THE FIRST APPELLATE AUTHORITY DECLARING THE APPELLANTS ENTITLEMENT FOR EXEMPTION. 43.12 HONBLE HIGH COURT IN THIS CASE, IN OUR OPINION, HAS CLEARLY LAID DOWN THAT ONCE THE ASSESSEE IS RECOGNIZED AS A 100% EOU FOR ENGAGING IN AN ACTIVITY AND ASSESSEE IS ENGAGED IN THE SAME VERY ACTIVITY, IF THE EXEMPTION IS DENIED TO THE ASSESSEE ON THE GROUND THAT THERE IS NO PRODUCTION OR MANUFACTURING BUT ONLY PROCESSING OF THE PRODUCTS EXPORTED IN THE 100% EXPORT ORIENTED UNIT, THE SAME WOULD DEFEAT THE VERY OBJECT OF SECTION 10B. THE HONBLE HIGH COURT TOOK THE VIEW THAT THE DECISION OF THE HONBLE SUPREME COURT IN TARA AGENCYS CASE 292 ITR 444 WILL NOT APPLY EVEN THOUGH HONBLE SUPREME COURT IN THAT CASE HAS HELD THAT BLENDING OF TEA DOES NOT AMOUNT TO MANUFACTURE O R PRODUCTION OF AN ARTICLE BUT IS ONLY PROCESSING. THUS, THE HONBLE KERALA HIGH COURT IN THE CASE OF TATA TEA LTD. (SUPRA) GAVE THE CLEAR CUT FINDING IMPLIEDLY THAT EVEN IF THE ASSESSEE IS ENGAGED IN PROCESSING AND IS RECOGNIZED AS 100% EOU, IT WILL BE EN TITLED FOR EXEMPTION CLAIMED U/S 10B OF THE ACT. 43.13 THE CRUX OF THE SUBMISSIONS OF THE LD. SP E CIAL COUNSEL FOR THE DEPARTMENT IS THAT THE ASSESSEE IS ENGAGED IN THESE 100% EXPORT ORIENTED UNITS ONLY IN PROCESSING OF IRON ORE AND BY PROCESSING IT GET IT UPGRADED FOR EXPORT, THEREFORE IT IS NOT ENTITLED FOR EXEMPTION U/S 10B DOES NOT HAVE ANY LEG TO STAND IN VIEW OF THE DECISION OF KERALA HIGH COURT (SUPRA), SUPREME COURT IN THE CASE OF CHOWGULE & CO(SUPRA). EVEN ON THIS ISSUE WE HAVE GONE THROUGH THE D ECISION OF HONBLE SPECIAL BENCH IN THE CASE OF MADHU JAYANTI INTERNATIONAL LTD. AND OTHERS VS. DCIT. THE QUESTION FOR CONSIDERATION AND DECISION OF THE SPECIAL BENCH WAS: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ASSESSEES, WHO ARE I N THE BUSINESS OF BLENDING & PROCESSING OF TEA AND EXPORT THEREOF, CAN BE SAID TO BE MANUFACTURE/PRODUCER OF THE TEA FOR THE PURPOSE OF SECTION 10A/10B OF THE I.T. ACT, 1961? ITA NO. 72&85/PNJ/2012 142 44. THE BRIEF FACTS IN THE CASE OF MADHU JAYANTI INTERNATIONAL LTD. IN ITA N O. 1463/KOL/2007 WERE THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING, PROCESSING, EXPORTING AND DEALING IN VARIOUS COMMODITIES, MORE PARTICULARLY TEA, COFFEE, JUTE, PEPPER, CHILLIES, CARDAMOM, TURMERIC AND SIMILAR OTHER SPICES, ETC. THE AS SESSEE, AS PER THE CLAIM IS A 100% EOU WITHIN THE MEANING OF SECTION 10B OF THE I.T. ACT, 1961 AND CLAIMED EXEMPTION UNDER THAT SECTION. THE ASSESSEE BUYS TEA FROM AUCTIONS HELD IN TEA BOARD RECOGNIZED AUCTION CENTRES AT KOLKATA, GUWAHATI, SILIGURI, COCHIN , COIMBATORE AND COONOOR. THE ASSESSEE CONCEDED THE FACTUAL POSITION THAT IT IMPORTS SMALL QUANTITY OF TEA OF THE TYPE AND QUALITY NOT PRODUCED IN INDIA. IT FURTHER CONCEDED THE FACTUAL POSITION THAT IT DOES NOT GROW OR MANUFACTURE ANY TEA. ACCORDING TO TH E ASSESSEE, TEA SO BOUGHT IN DIFFERENT AUCTIONS IS PROCESSED WITH A VIEW TO REMOVE ALL DUST AND FOREIGN SUBSTANCES AND THEREAFTER IT BLENDS DIFFERENT VARIETIES OF TEA TO MAKE IT OF UNIFORM AND CONSISTENT QUALITY THROUGHOUT THE YEAR. THEREAFTER, IT IS PAC KED IN CONSUMER PACKETS OF 50, 100, 250, 500 OR 1000 GMS. ETC. OR PACKED IN THE FORM OF TEA BAGS OF 1.94 GMS. OR 2 GMS. ETC., AS THE CASE MAY BE. THE ASSESSEE CLAIMED EXEMPTION U/S 10B OF THE ACT IN RESPECT OF ITS 100% EOU FOR EXPORT OF MANUFACTURED JUTE B AGS, PACKET TEA, TEA BAGS, BULK TEA, ETC. THE AO REJECTED THE CLAIM OF ASSESSEE OF EXEMPTION U/S 10B IN RESPECT OF EXPORT OF BLENDING OF TEA. THE REJECTION OF EXEMPTION U/S 10B WAS CONFIRMED BY THE CIT(A). WHEN THE MATTER WENT BEFORE THE SPECIAL BENCH, SP ECIAL BENCH AFTER DISCUSSION THE RELEVANT PROVISIONS AS WELL AS THE VARIOUS DECISIONS OF HIGH COURT AND THE SUPREME COURT HELD AS UNDER: - 32. THE PROVISIONS OF SECTION 10AA OF THE ACT WAS INSERTED ON THE STATUTE BOOK BY THE SPECIAL ECONOMIC ZONES ACT, 20 05 W.E.F. 10.02.2006. EVEN PRIOR TO THE ENACTMENT OF THE SAID SEZ ACT, SPECIAL ECONOMIC ZONES (INCLUDING UNITS THEREIN) WERE ALL ALONG TREATED LIKE EQU / FTZ / EPZ FOR ALL PURPOSES WHATSOEVER AND WERE DEALT WITHIN THE EXIM POLICY ACCORDINGLY. SECTION 2(K) OF THE SPECIAL ECONOMIC ZONE ACT, 2005 DEFINES THE EXPRESSION 'EXISTING SPECIAL ECONOMIC ZONE' TO MEAN EVERY SPECIAL ECONOMIC ZONE WHICH IS IN EXISTENCE ON OR BEFORE THE COMMENCEMENT OF THE SAID ACT. SECTION 2(E) DEFINES THE EXPRESSION 'EXISTING UNIT' TO M EAN EVERY UNIT WHICH HAS BEEN SET UP ON OR BEFORE THE COMMENCEMENT OF THE SAID ACT IN AN EXISTING SPECIAL ECONOMIC ZONE. IN OTHER WORDS, ADMITTEDLY ALL SPECIAL ECONOMIC ZONES WERE ALSO BEING GOVERNED BY THE EXIM POLICY PRIOR TO THE ENACTMENT OF SEZ ACT, 20 05. CLAUSE (III) OF EXPLANATION 1 TO SECTION 1OAA LAYS DOWN THAT THE EXPRESSION 'MANUFACTURE' SHALL HAVE THE SAME MEANING AS ASSIGNED TO IT IN SECTION 2(R) OF THE SPECIAL ECONOMIC ZONES ACT, 2005, WHICH DEFINITION IS AS UNDER: ITA NO. 72&85/PNJ/2012 143 'MANUFACTURE' MEANS TO MAKE, PRODUCE, FABRICATE, ASSEMBLE, PROCESS OR BRING INTO EXISTENCE, BY HAND OR BY MACHINE, A NEW PRODUCT HAVING A DISTINCTIVE NAME, CHARACTER OR USE AND SHALL INCLUDE PROCESSES SUCH AS REFRIGERATION, CUTTING, POLISHING, BLENDING, REPAIR, REMAKING, RE - ENGINEERIN G AND INCLUDES AGRICULTURE, AQUACULTURE, ANIMAL HUSBANDLY, FLORICULTURE, HORTICULTURE, PISCICULTURE, POULTRY, SERICULTURE, VITICULTURE AND MINING'. IN EXIM POLICY, THE EXPRESSION 'MANUFACTURE' IS DEFINED, IN PARAGRAPH 9.30 & 9.31 THEREOF ALMOST IN THE SAME MANNER AS IN THE SPECIAL ECONOMIC ZONE ACT, 2005, WHICH IS AS UNDER: 'MANUFACTURE' MEANS TO MAKE, PRODUCE, FABRICATE, ASSEMBLE, PROCESS OR BRING INTO EXISTENCE, BY HAND OR BY MACHINE, A NEW PRODUCT HAVING A DISTINCTIVE NAME, CHARACTER OR USE AND SHALL INC LUDE PROCESSES SUCH AS REFRIGERATION, REPACKING, POLISHING AND LABELING. MANUFACTURE, FOR THE PURPOSE OF THIS POLICY, SHALL ALSO INCLUDE AGRICULTURE, AQUACULTURE, ANIMAL HUSBANDRY, FLORICULTURE, HORTICULTURE, PISCICULTURE, POULTRY, SERICULTURE, VITICULTURE AND MINING.' BUT THE ONLY DIFFERENCE BETWEEN THE EXIM POLICY OF 2002 - 07 AND OF 2000 IS THAT WORDS 'AND SEGREGATION' WHICH WERE APPEARING IN THE DEFINITION OF THE EXPRESSION 'MANUFACTURE' IN THE EXIM POLICY OF 2000 WAS DELETED IN THE EXIM POLICY OF 2002 - 07 . FURTHER, EVEN IN PREVENTION OF FOOD ALTERNATION RULES, 1955, IT HAS BEEN INTER ALIA STATED THAT TEA USED IN THE MANUFACTURE OF FLAVOURED TEA SHALL CONFORM TO THE STANDARDS OF TEA. THE FLAVOURED TEA : MANUFACTURERS SHALL REGISTER THEMSELVES WITH THE TEA B OARD BEFORE MAKING FLAVOUR TEA IN THE TEA (DISTRIBUTION & EXPORT) CONTROL ORDER, 1957 ISSUED BY THE GOVERNMENT OF INDIA, MINISTRY OF COMMERCE & INDUSTRY (DEPARTMENT OF COMMERCE) THE EXPRESSIONS 'FLAVOUR TEA', 'GREEN TEA ' 'INSTANT TEA', 'PACKET TEA' 'QUICK BREWING BLACK TEA', 'TEA' AND 'TEST BAG' HAVE BEEN S EPARATELY DEFINED AS DISTINCT PRODUCT. IN TEA (MARKETING) CONTROL ORDER, 2003 ISSUED BY THE ' CENTRAL GOVERNMENT, IN EXERCISE OF THE POWERS CONFERRED BY SECTION 30(5)(3) OF THE TEA ACT, 1953, THE EXPRESS IONS 'MANUFACTURER', 'BUYER', 'PACKET TEA', 'TEA BAG', - 'GREEN TEA', 'QUICK BREWING BLACK TEA', 'INSTANT TEA' AND 'MADE TEA' HAVE ALSO BEEN DISTINCTLY AND SEPARATELY DEFINED. CLAUSE (29BA) WAS INSERTED IN SECTION 2 OF THE INCOME TAX ACT, 1961 BY THE FINANCE (NO.2) ACT, 2009 W.E.F. 01.04.2009 TO DEFINE THE EXPRESSION 'MANUFACTURE' AS UNDER: 'MANUFACTURE', WITH ITS GRAMMATICAL VARIATIONS, MEANS A CHANGE IN A NON - LIVING PHYSICAL OBJECT OR ARTICLE OR THING, - (A) RESULTING IN TRANSFORMATION OF THE OBJECT OR ART ICLE OR THING INTO A NEW AND DISTINCT OBJECT OR ARTICLE OR THING HAVING A DIFFERENT NAME, CHARACTER AND USE; OR (B) BRINGING INTO EXISTENCE OF A NEW AND DISTINCT OBJECT OR ARTICLE OR THING WITH A DIFFERENT CHEMICAL COMPOSITION OR INTEGRAL STRUCTURE; THE AF ORESAID DEFINITION OF THE EXPRESSION 'MANUFACTURE', ALTHOUGH BROUGHT INTO THE STATUTE BOOK W.E.F. 01.04.2009, WAS APPLIED BY THE HON'BLE SUPREME COURT EVEN FOR THE ASSESSMENT YEAR 2001 - 02 IN ITO V. ARIHANT TILES AND MARBLES PVT. LTD. (2010) 320 ITR 79, 82 (SC) ON THE ITA NO. 72&85/PNJ/2012 144 GROUND THAT PARLIAMENT HAD TAKEN NOTE OF GROUND REALITY IN INSERTING SECTION 2(29BA) IN THE INCOME TAX LAW. THE SAID DEFINITION WAS AGAIN APPLIED BY THE HON'BLE SUPREME COURT IN CIT V. EMPTEE POLY - YARN PVT. LTD. (2010) 'GREEN TEA' MEANS THE VAR IETY OF MANUFACTURED TEA COMMERCIALLY KNOWN AS GREEN TEA; 320 ITR 665,667 (SC). 33. THE ASSESSEE COMPANY CARRIES OUT ITS OPERATIONS OF BLENDING, PACKAGING AND EXPORT OF TEA BAGS, TEA PACKETS AND BULK TEA PACKS IN ITS MODERN FACTORY, WELL EQUIPPED WITH ALL IMPORTED AND SOPHISTICATED AUTOMATIC PLANT AND MACHINERIES WITH THE HELP OF OVER 100 WORKMEN ENGAGED ON CONTRACT BASIS THROUGH M/S. TROT PVT. LTD. THE MANUFACTURING'. OPERATIONS ARE CARRIED IN ITS SAID FACTORY SITUATED AT 19/4A, MUNSHIGANJ ROAD (UNDER FALT A EXPORT PROCESSING ZONE), KOLKATA. WE FIND FROM FACTS OF THE CASE THAT THE DETAILS OF TURNOVER OF THE ASSESSEE SHOWS BULK TEA (0.94%), PACKET TEA AND TEA BAGS .(99.06%),. AS. PER DIFFERENT DESCRIPTIONS, BRAND NAMES AND VARIETIES, AS LISTED APR. ASSESSEE C OMPANY IS DULY REGISTERED AS A 100% EOU BY THE GOVERNMENT OF INDIA, MINISTRY OF INDUSTRY, DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTION SECRETARIAL FOR INDUSTRIAL APPROVALS, ECU SECTION IN THE STATE OF WEST BENGAL FOR MANUFACTURE OF PACKET TEA, TEA BAGS/B ULK TEA WITH ANNUAL CAPACITY OF 3110 MT. IN TERMS OF REGISTRATION CERTIFICATE DATED 26TH DECEMBER, 1995, INTER ALIA, WITH THE CONDITION THAT ITS 100% PRODUCTION (EXCLUDING REJECTS NOT EXCEEDING 5%) WOULD HAVE TO BE EXPORTED AND THAT ITS REGISTERED EOU UNIT SHALL MAKE VALUE ADDITION TO A MINIMUM EXTENT OF 79%. UNDISPUTEDLY, THE EXPORTED CONSUMER PRODUCTS, BLENDED BY ASSESSEE IN ITS SAID FACTORY PREMISES IS A CASE OF SUBSTANTIAL VALUE ADDITION, AS COMPARED TO THE UNBLENDED BLACK TEA IN GRANULE AND DUST FORM N ORMALLY AVAILABLE FOR SALE IN THE OPEN RETAIL MARKET THROUGHOUT INDIA. 34. THE SUBJECT FOR CONSIDERATION UNDER SECTIONS 10A AND/OR 10B OF THE SAID ACT IS MANUFACTURE / PRODUCTION OF TEA ; THE OBJECT BEING GRANT OF BENEFITS OF TAX EXEMPTION TO EXPORTERS CAR RYING OUT THEIR OPERATIONS IN FTZ, EOU, EPZ & SEZ AREAS IN ACCORDANCE WITH THE EXIM POLICY DECLARED BY THE GOVERNMENT OF INDIA IN PARLIAMENT AND IN THE LIGHT OF ALLIED AND GOVERNING LAWS; IN THE LIGHT OF ALLIED LAWS E.G. THE TEA ACT, 1953, THE PREVENTION O F FOOD ADULTERATION ACT, 1953 READ WITH PREVENTION OF FOOD ADULTERATION RULES, 1955. THE TEA (MARKETING) CONTROL ORDER, 2003, THE TEA (DISTRIBUTION & EXPORT) CONTROL ORDER, 2005 AS WELL AS THE RULES AND REGULATIONS FRAMED BY THE TEA BOARD AND ALSO CALCUTTA TEA TRADERS ASSOCIATION FROM TIME TO TIME AS DISCUSSED ABOVE. 35. WE FIND FROM THE ABOVE FACTS AND CIRCUMSTANCES AND CASE LAWS RELIED ON BY BOTH THE SIDES THAT THE ASSESSEE WAS EXCLUSIVELY ENGAGED IN BLENDING, PACKAGING AND EXPORT OF TEA BAGS, TEA PACKETS AND BULK TEA PACKS. THE ASSESSEE'S DIVISION ENJOYS RECOGNITION AS A 100% EOU, WHICH IS GRANTED BY THE DEVELOPMENT COMMISSIONER, MINISTRY OF COMMERCE & INDUSTRY, GOVT. OF INDIA. THE ASSESSEE CLAIMED EXEMPTION U/S. 10B OF THE ACT FOR AYS 2000 - 01 ONWARDS, WH ICH WAS GRANTED UPTO THE AY 2003 - 04. HOWEVER, FOR THE AY 2004 - 05, EXEMPTION WAS DECLINED FOR THE REASONS THAT BY THE FINANCE ACT, 2000, THE DEFINITION OF `MANUFACTURE WHICH INCLUDED 'PROCESSING' CONTAINED IN SECTION 1OB OF THE ACT WAS DELETED W.E.F. 01.04 .2001. THE ARGUMENT OF THE DEPARTMENT IS THAT MANUFACTURE OR PRODUCTION HAD LIBERAL MEANING UNDER THE DEFINITION CLAUSE CONTAINED ITA NO. 72&85/PNJ/2012 145 IN SECTION 10B OF THE ACT UNTIL ITS DELETION WHICH COVERS EVEN PROCESSING AND, THEREFORE, BLENDING 'AND PACKAGING OF TEA FOR E XPORT WAS TREATED AS 'MANUFACTURE' OR 'PRODUCTION' OF AN ARTICLE QUALIFYING FOR EXEMPTION. WE ARE OF THE CONSIDERED VIEW THAT THE CONTENTION OF THE ASSESSEE THAT THE SCHEME OF INCOME TAX EXEMPTION AVAILABLE TO UNITS IN THE SEZ U/S. TOA OF THE ACT AND UNITS IN THE FREE TRADE ZONE PROVIDED U/S, 10AA OF THE ACT AND THE EXEMPTION AVAILABLE TO 100% EOU U/S. 1OB OF THE ACT ARE VERY SIMILAR IN NATURE AND THE WORDINGS OF THE STATUTORY PROVISIONS ARE SIMILAR IN NATURE IS CORRECT. WE FIND THAT HON'BLE KERALA HIGH COU RT ALSO CONSIDERED THE JUDGMENT IN - THE DECISION OF SUPREME COURT IN TARA AGENCIES, SUPRA RELIED ON BY THE LD. CIT, DR, WHEREIN HON'BLE SUPREME COURT CLEARLY HELD THAT BLENDING OF TEA DOES NOT AMOUNT TO 'MANUFACTURE' OR 'PRODUCTION' OF AN ARTICLE, BUT IS ON LY PROCESSING. WE FIND THAT THE ASSESSEE WAS EXCLUSIVELY ENGAGED IN BLENDING AND PACKING OF TEA FOR EXPORT AND WAS NOT MANUFACTURING OR PRODUCING ANY OTHER ARTICLE OR THING. IT WAS RECOGNISED AS A 100% EOU DIVISION AND THE DEPARTMENT HAD NO CASE THAT THE A SSESSEE'S UNIT ENGAGED IN EXPORT OF TEA BAGS AND TEA PACKETS WAS NOT A 100% EOU. IF EXEMPTION WAS DENIED ON THE GROUND THAT PRODUCTS EXPORTED WERE NOT PRODUCED OR MANUFACTURED IN THE INDUSTRIAL UNIT OF THE ASSESSEE'S 100% EOU, IT WOULD DEFEAT THE VERY OBJE CT OF SECTIONS 10B OF THE ACT. 36. WE, IN VIEW OF THE ABOVE, HOLD THAT WHEN THE PRODUCTS FOR WHICH THE ASSESSEE'S UNIT IS RECOGNIZED AS A 100% EOU ARE TEA BAGS, TEA IN PACKETS AND TEA IN BULK PACKS AND THE ASSESSEE IS EXCLUSIVELY ENGAGED IN BLENDING AND PA CKING OF TEA FOR EXPORT MAY NOT BE MANUFACTURER OR PRODUCER OF ANY OTHER ARTICLE OR THING IN COMMON PARLANCE. HOWEVER, FOR THE PURPOSE OF SECTION 10A, 10AA AND 10B, WE HAVE TO CONSIDER THE DEFINITION OF THE WORD 'MANUFACTURE' AS DEFINED IN SECTION 2(R) OF SEZ ACT, EXIM POLICY, FOOD ADULTERATION RULES, 1955, TEA (MARKETING) CONTROL ORDER, 2003, ETC. WE ALSO FIND THAT THE DEFINITION OF 'MANUFACTURE' AS PER SECTION 2(R) OF THE SEZ ACT, 2005 IS INCORPORATED IN SECTION 10AA OF THE INCOME - TAX ACT WITH EFFECT FROM 10.02.2006. HON'BLE KERALA HIGH COURT IN THE CASE OF GIRNAR INDUSTRIES (SUPRA) HAD HELD SUCH AMENDMENT IN SECTION 10AA TO BE OF CLARIFICATORY IN NATURE. THE DEFINITION OF 'MANUFACTURE' UNDER THE SEZ ACT, EXIM POLICY, FOOD ADULTERATION RULES AND TEA (MARKE TING) CONTROL ORDER IS MUCH WIDER THAN WHAT IS THE MEANING OF THE TERM `MANUFACTURE UNDER THE COMMON PARLANCE, AND IT INCLUDES PROCESSING, BLENDING, PACKAGING ETC. IN VIEW OF THE ABOVE AND RESPECTFULLY FOLLOWING THE DECISION OF HON'BLE KERALA HIGH COURT I N THE CASE OF GIRNAR INDUSTRIES (SUPRA) AND TATA TEA LIMITED (SUPRA), WE 'HOLD THAT THE ASSESSEE IS ENTITLED FOR EXEMPTION UNDER SECTION 10B OF THE ACT ON ACCOUNT OF BLENDING OF TEA. SIMILARLY, IN OUR VIEW, THE INDUSTRIAL UNITS ENGAGED IN THE VERY SAME A CTIVITY I.E. BLENDING, PACKING AND EXPORT OF TEA IN THE FREE TRADE ZONE SHALL ALSO BE ENTITLED TO ENJOY TAX EXEMPTION UNDER SECTION 10A OF THE ACT. 37. ACCORDINGLY, WE ANSWER THE QUESTION REFERRED IN FAVOUR OF THE ASSESSEE BY HOLDING THAT THE ASSESSEES WHO ARE IN THE BUSINESS OF BLENDING AND PROCESSING OF TEA AND EXPORT THEREOF, IN 100% EOUS ARE MANUFACTURER/ PRODUCER OF THE TEA FOR THE PURPOSE OF CLAIMING EXEMPTION U/S.10B OF THE ACT. FURTHER, ASSESSEES WHO ARE IN THE BUSINESS OF BLENDING AND PROCESSING OF TEA HI RESPECT OF UNDERTAKINGS IN FREE TRADE ZONES ARE ITA NO. 72&85/PNJ/2012 146 MANUFACTURER/PRODUCER OF TEA FOR THE PURPOSE OF CLAIMING EXEMPTION U/S. 10A OF THE ACT. WE HAVE EXAMINED AND DISCUSSED THE FACTS IN THE CASE OF MADHU JAYANTI INTERNATIONAL LTD. AND FOUND THAT THERE IS BLENDING OF TEA AND CONSEQUENTLY THE ASSESSEE IS ELIGIBLE FOR EXEMPTION U/S. 10B OF THE ACT AS PRAYED FOR. THEIR APPEAL FOR THE AY 2004 - 05 IS ALLOWED. AS REGARDS OTHER APPEALS AND THAT OF THE INTERVENERS, THE MATTERS ARE RESTORED BACK TO THE DIVISION BENC H, WITH DIRECTIONS TO DECIDE THOSE APPEALS IN THE LIGHT OF PRINCIPLE LAID DOWN HEREIN, SO FAR AS THE CLAIM FOR RELIEF U/S. 10A OR 10B OF THE ACT IN ACCORDANCE WITH LAW. 44.1 FROM THE READING OF PARA 35 OF THE AFORESAID JUDGMENT WE NOTED THAT THE SPECIAL BENCH IN THIS CASE CLEARLY HELD THAT THE ASSESSEE WAS ENGAGED ONLY IN PROCESSING AND WAS NOT ENGAGED IN THE MANUFACTURE OR PRODUCTION BUT HAD ULTIMATELY UNDER PARA 36 IT TOOK THE VIEW IN VIEW OF THE FACT THAT THE DEFINITION OF MANUFACTURE U/S 2(R) OF THE SEZ ACT, 2005 WHICH IS INCORPORATED IN SECTION 10AA W.E.F. 1 0/02/2006 INCLUDES PROCESSING. THEREFORE, FOLLOWING THE DECISION OF KERALA HIGH COURT IN THE CASE OF GIRNAR INDUSTRIES AND TATA TEA LTD. (WHICH WAS DISCUSSED BY US IN THE PRECEDING PARAGRAPHS) HELD T HAT THE ASSESSEE IS ENTITLED FO R EXEMPTION U/S 10B OF THE ACT ON ACCOUNT OF BLENDING OF TEA. 45. WE HAVE ALSO GONE THROUGH THE DECISION OF HONBLE SUPREME COURT IN INDIAN CINE AGENCIES VS CIT 308 ITR 98 . IN THIS CASE THE QUESTION BEFORE THE HONBLE SUPREME COURT WAS: WHEN THE ASSESSEE WAS ENGAGED IN THE ACTIVITY OF CUTTING JUMBO ROLL FILMS INTO FLAT AND SMALL ROLLS IN DESIRED SIZES, WHETHER SUCH ACTIVITY UNDERTAKEN BY THE ASSESSEE WAS MANUFACTURE OR PRODUCTION ? IN THIS CASE, THE HONBLE SUPREME COUR T AFTER DISCUSSING VARIOUS CASES, THE PROVISIONS OF DIFFERENT ACTS AND THE DICTIONARY MEANING TOOK THE VIEW THAT THE ASSESSEE WAS ENGAGED IN MANUFACTURE / PRODUCTION. WHILE HOLDING SO UNDER PARA 12 OF ITS ORDER, HONBLE SUPREME COURT HAS GIVEN THE SAME ANA LOGY FOR THE PURPOSE OF ELIGIBILITY OF DEDUCTION UNDER SECTION 80HH AND 80 - I AS HAS BEEN GIVEN BY THE KERALA HIGH COURT IN THE CASE OF TATA TEA DISCUSSED HEREIN ABOVE FOR THE PURPOSE OF SECTION 10B, THAT IF THERE WAS NO MANUFACTURING ACTIVITY, THEN THE QUE STION OF REFERRING TO ITEM 10 OF ELEVENTH SCHEDULE FOR THE PURPOSE OF EXCLUSION DOES NOT ARISE. FROM THIS JUDGMENT, THUS, IT IS APPARENT THAT THE HONBLE APEX COURT ACCEPTED THAT MANUFACTURE /PRODUCTION INCLUDES PROCESSING ALSO. ITA NO. 72&85/PNJ/2012 147 45.1 WE HAVE ALSO GONE THRO UGH THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ITO VS. ARIHANT TILES AND MARBLES PVT. LTD. 320 ITR 79 (SC) . IN THIS CASE WHEN THE ASSESSEE WAS ENGAGED IN THE ACTIVITY OF CUTTING AND POLISHING OF MARBLE BLOCKS, THE QUESTION BEFORE THE SUPREME COURT WAS WHETHER THE ACTIVITIES UNDERTAKEN BY THE ASSESSEE WOULD FALL WITHIN THE MEANING OF THE WORDS MANUFACTURE OR PRODUCTION IN SECTION 80 - IA OF THE INCOME - TAX ACT, 1961? IN THIS CASE, HONBLE SUPREME COURT, AFTER DISCUSSING THE DEFINITION OF MANUFACTURE GIVEN IN SECTION 2(29BA) OF THE INCOME - TAX ACT, 1961 AND ALSO DISCUSSING THE PROVISIONS OF SECTION 80 - IA(2)(III) AND AFTER GOING THROUGH VARIOUS DECISIONS, HELD AS UNDER: 22. APPLYING THE ABOVE TESTS LAID DOWN BY THIS COURT IN CIT VS. N.C. BUDHARAJA AND CO. 204 ITR 412 (SC) TO THE FACTS OF THE PRESENT CASES, WE ARE OF THE VIEW THAT BLOCKS CONVERTED INTO POLISHED SLABS AND TILES AFTER UNDERGOING THE PROCESS INDICATED ABOVE CERTAINLY RESULTS IN EMERGENCE OF A NEW AND DISTINCT COMMODITY. THE ORIGINAL BL OCK DOES NOT REMAIN THE MARBLE BLOCK, IT BECOMES A SLAB OR TILE. IN THE CIRCUMSTANCES, NOT ONLY THERE IS MANUFACTURE BUT ALSO AN ACTIVITY WHICH IS SOMETHING BEYOND MANUFACTURE AND WHICH BRINGS A NEW PRODUCT INTO EXISTENCE AND, THEREFORE, ON THE FACTS OF T HESE CASES, WE ARE OF THE VIEW THAT THE HIGH COURT WAS RIGHT IN COMING TO THE CONCLUSION THAT THE ACTIVITY UNDERTAKEN BY THE RESPONDENTS - ASSESSEES DID CONSTITUTE MANUFACTURE OR PRODUCTION IN TERMS OF SECTION 80IA OF THE INCOME TAX ACT, 1961. 23. BEFORE CO NCLUDING, WE WOULD LIKE TO MAKE ONE OBSERVATION. IF THE CONTENTION OF THE DEPARTMENT IS TO BE ACCEPTED, NAMELY THAT THE ACTIVITY UNDERTAKEN BY THE RESPONDENTS HEREIN IS NOT A MANUFACTURE, THEN, IT WOULD HAVE SERIOUS REVENUE CONSEQUENCES. AS STATED ABOVE, EACH OF THE RESPONDENTS IS PAYING EXCISE DUTY, SOME OF THE RESPONDENTS ARE JOB WORKERS AND THE ACTIVITY UNDERTAKEN BY THEM HAS BEEN RECOGNIZED BY VARIOUS GOVERNMENT AUTHORITIES AS MANUFACTURE. TO SAY THAT THE ACTIVITY WILL NOT AMOUNT TO MANUFACTURE OR PR ODUCTION UNDER SECTION 80IA WILL HAVE DISASTROUS CONSEQUENCES, PARTICULARLY IN VIEW OF THE FACT THAT THE ASSESSEES IN ALL THE CASES WOULD PLEAD THAT THEY WERE NOT LIABLE TO PAY EXCISE DUTY, SALES TAX ETC. BECAUSE THE ACTIVITY DID NOT CONSTITUTE MANUFACTURE . KEEPING IN MIND THE ABOVE FACTORS, WE ARE OF THE VIEW THAT IN THE PRESENT CASES, THE ACTIVITY UNDERTAKEN BY EACH OF THE RESPONDENTS CONSTITUTES MANUFACTURE OR PRODUCTION AND, THEREFORE, THEY WOULD BE ENTITLED TO THE BENEFIT OF SECTION 80IA OF THE INCOME TAX ACT, 1961. 45.2 IN THIS CASE ALSO, HONBLE SUPREME COURT TOOK THE VIEW THAT CUTTING AND POLISHING OF THE MARBLE BLOCKS IS THE ACTIVITY WHICH CONSTITUTES MANUFACTURE OR PRODUCTION AS AFTER PROCESSING MARBLE BLOCK NO MORE REMAINS AS MARBLE ITA NO. 72&85/PNJ/2012 148 BLOCK. TH IS DECISION HAS ALSO DULY CONSIDERED, IN OUR OPINION, WHETHER THE ACTIVITY OF PROCESSING IS MANUFACTURE / PRODUCTION. 45.3 NOW , WE WOULD LIKE TO DEAL WITH THE SUBMISSIONS OF THE REVENUE WHETHER THIS ISSUE SHOULD BE SENT TO SPECIAL BENCH OR NOT. WE HAVE G ONE THROUGH THE DECISION OF THIS TRIBUNAL IN ITA NO. 162/PNJ/2006 DT. 12 TH JULY, 2007 READ WITH MISC. APPLICATION IN MA NO. 23/PNJ/2007 DT. 19 TH JULY, 2007 IN THE CASE OF CHOWGULE & CO. IN THIS CASE WE NOTED THAT THE COORDINATE BENCH OF THE TRIBUNAL HAS IN TERPRETED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SESA GOA 271 ITR 331 THAT EXTRACTION AND PROCESSING OF MINING ORE AMOUNTS TO PRODUCTION; AND ONE SHOULD READ THE EXPRESSION EXTRACTION AND PROCESSING TOGETHER (THIS DECISION WAS NOT RENDE RED IN RESPECT OF EXEMPTION AVAILABLE U/S 10B) . EVEN THE COORDINATE BENCH OF THIS TRIBUNAL FURTHER HELD THAT IF SECTION 10B PROVIDES EXEMPTION FOR PROCESSING ALSO, THE LAW WOULD HAVE MADE IT VERY CLEAR BY APPARENTLY STATING THAT PROCESSING IS ALSO ENTITLE D FOR EXEMPTION. WHEN THE EXPRESSION PROCESSING IS OMITTED IN SECTION 10B, WE ARE NOT SUPPOSED TO FILL UP THE OMISSION. IF SOMETHING IS NOT THERE WE SHOULD ACCEPT AS IT IS NOT THERE. WE SHOULD NOT PROVIDE FOR THE OMISSION THAT AMOUNTS TO JUDICIAL LEGISLA TION. THERE IS NO CONFUSION IN THE PROVISION OF LAW PROVIDED UNDER SECTION 10B. THE EXEMPTION IS AVAILABLE ONLY TO MANUFACTURE OR PRODUCTION. IT IS NOT AVAILABLE FOR PROCESSING. ALTHOUGH SUBSEQUENTLY THIS TRIBUNAL HAS RECTIFIED THE ORDER UNDER SECTION 254 VIDE ORDER DATED 19 TH JULY, 2007 ON THE APPLICATION OF THE ASSESSEE AND TOOK THE VIEW THAT THE ASSESSEE IS ENTITLED FOR EXEMPTION UNDER SECTION 10B AS THE ASSESSEE - COMPANY ITSELF IS EXTRACTING THE ENTIRE IRON ORE FROM OWN MINES AND MINES TAKEN ON LEASE AN D THEREAFTER PROCESSING THE SAME. WE CANNOT LOOK INTO THE FINDING OF THE COORDINATE BENCH WHETHER THEY HAVE CORRECTLY INTERPRETED THE DECISION OF SUPREME COURT IN 271 ITR 331 OR NOT. THE LD. AR VEHEMENTLY CONTENDED THAT THE DECISION DT. 12 TH JULY, 2007 OF THIS TRIBUNAL IN THAT CASE GOT OVERRULED BY THE DECISION OF THIS TRIBUNAL VIDE ORDER DT. 19 TH JULY, 2007 BUT WE DO NOT AGREE ON THIS WITH THE LD. AR. WE HAVE GONE THROUGH THE ORDER DT. 12 TH JULY, 2007 AS WELL AS ORDER DT. 19 TH JULY, 2007 BUT WE NOTED THAT THE TRIBUNAL RECTIFIED THE ORDER AS THE TRIBUNAL NOTED THE ASSESSEE ITSELF WAS EXTRACTING THE ENTIRE ORES AND PROCESSING THE SAME. THUS, THE ASSESSEE COMPLIED WITH BOTH THE CONDITIONS OF EXTRACTING AND PROCESSING OF IRON ORE. THIS TRIBUNAL DID NOT REVERSE THE FINDING THAT THE PROCESSING IS NOT ENTITLED FOR ITA NO. 72&85/PNJ/2012 149 THE EXEMPTION. THE TRIBUNAL DID NOT REVERSE THE FINDING THAT EXTRACTION AND PROCESSING SHOULD GO TOGETHER. EVEN THAT BENCH / TRIBUNAL DID NOT VISUALIZE THAT 100 % EOU IS APPROVED FOR A PARTICULAR LOCATI ON AND ITS BOUNDRY CANNOT EXTEND BEYOND THAT LOCATION. IT IS ONLY THE PROFIT DERIVED BY THE 100% EOU UNIT SITUATED WITHIN THAT LOCATION, CAN BE REGARDED TO BE THE PROFIT DERIVED BY THE 100% EOU. THE ASSESSEE IN THAT CASE HAS TAKEN THE MINES ON LEASE WHICH WER E NOT APPROVED AS PART OF 100% EOU BUT STILL THE ASSESSEE WAS ALLOWED EXEMPTION U/S 10B EVEN THOUGH THE IRON ORE EXTRACTED FROM THOSE MINES WHICH WERE TAKEN ON LEASE WERE NOT PART OF THE 100% EOU 45.4 NO DOUBT THE DECISION OF THE COORDINATE BENCH IS BINDING ON US IN VIEW OF THE SETTLED JUDICIAL PRINCIPLES IN THE VARIOUS DECISIONS EVEN RELIED ON BY THE LD. CCIT B UT THERE ARE CERTAIN EXCEPTIONS TO THIS CARDINAL PRINCIPLE OF JUDICIAL DISCIPLINE. ONCE THE DECISION OF SPECIAL BENCH OR THIRD MEMBER HAS COME ON SIMILAR ISSUE SUBSEQUENTLY, THE DECISION OF THE SPECIAL BENCH WILL BE BINDING ON US. IF THE DECISION OF JURISDICTIONAL HIGH COURT / SUPREME COURT HAS COME SUBSEQUENTLY ON THE SIMILAR ISSUE, IN VIEW OF THE ARTICLE 141 OF THE CONSTITUTION OF INDIA THAT D ECISION WILL BE BINDING ON US. EVEN THIS WILL BE REGARDED A MISTAKE OF LAW IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS SAURASHTRA KUTCH STOCK EXCHANGE 305 ITR 227 (SC). IF THERE IS NO JURISDICTIONAL HIGH COURT DECISION AND SUBSEQ UENTLY ANY OTHER HIGH COURT HAS DECIDED THE SIMILAR ISSUE, THIS IS THE SETTLED PRINCIPLE OF LAW THAT THE DECISION OF THAT HIGH COURT HAS TO BE FOLLOWED AS THE HIGH COURT IS ALWAYS SUPERIOR TO THE TRIBUNAL IN PREFERENCE TO THE DECISION OF COORDINATE BENCH . THE DECISION SO PRONOUNCED SUBSEQUENTLY IF AFFECTS THE ISSUE RELATING TO THE ASSESSEE, IN OUR OPINION, THESE SUBSEQUENT DECISIONS ARE BIN D ING ON US AS JUDICIAL DISCIPLINE REQUIRE THAT. T HIS TRIBUNAL IS BOUND TO CONSIDER THOSE DECISIONS AND THE TRIBUNAL IS NOT BOUND WITH THE DECISION OF THE COORDINATE BENCH. THE JURISDICTIONAL BOMBAY HIGH COURT IN THE CASE OF H.A. SHAH & CO. VS. CIT (1956) 30 ITR 618, 625 (BOM.) EVEN TOOK THE VIEW THAT IN CASE FRESH MATERIAL FACTS CAME TO THE KNOWLEDGE OF SUBSEQUENT BENCH, THE DECISION OF COORDINATE BENCH IS NOT BINDING. I N THIS REGARD , HONBLE HIGH COURT OBSERVED AS UNDER : - NOR ARE WE SATISFIED THAT IN ORDER TO ENABLE THE SECOND TRIBUNAL TO DEPART FROM THE FINDING OF THE FIRST TRIBUNAL IT IS ESSENTIAL THAT THERE MUST BE SOME FRESH FACTS WHICH MUST BE PLACED BEFORE THE SECOND ITA NO. 72&85/PNJ/2012 150 TRIBUNAL WHICH WERE NOT PLACED BEFORE THE FIRST TRIBUNAL. IF THE FIRST TRIBUNAL FAILED TO TAKE INTO CONSIDERATION MATERIAL FACTS, FACTS WHICH HAD A CONSIDERABLE BEARING UPON THE ULTIMATE DECISION, AND IF THE SECOND TRIBUNAL WAS SATISFIED THAT THE DECISION WAS ARRIVED AT BECAUSE OF THE FAILURE TO TAKE INTO CONSIDERATION THOSE MATERIAL FACTS AND THAT IF THESE MATERIAL FACTS HAD BEEN TAKEN INTO CONSIDERATION THE DECISION WOULD HAVE BEEN DIFFERENT, THEN THE SECOND TRIBUNAL WOULD BE IN THE SAME POSITION TO REVISE THE EARLIER DECISION AS IF FRESH FACTS HAD BEEN PLACED BEFORE IT. ON PRINCIPLE THERE IS NOT MUCH DIFFERENCE BETWEEN FRESH FACTS BEING PLACED BEFORE THE SECOND TRIBUNAL AND THE SECOND TRIBUNAL TAK ING INTO CONSIDERATION CERTAIN MATERIAL FACTS WHICH THE FIRST TRIBUNAL FAILED TO TAKE INTO CONSIDERATION. 45.5 THE OTHER EXCEPTION IS FOR NON - BINDING OF THE COORDINATE BENCH DECISION IS WHEN THERE HAD BEEN AMENDMENT IN LAW SUBSEQUENT TO THE DECISION ON THE BASIS OF WHICH THE COORDINATE BENCH RENDERED THE DECISION AND THE CO - ORDINATE BENCH COULD NOT BE ABLE TO CONSIDER THE SAID AMENDMENTS, THE DECISION OF THE CO - ORDINATE BENCH IS NOT BINDING. FROM PARA 14 OF THE ORDER OF THE CO - ORDINATE BENCH IT IS APPA RENTLY CLEAR WHILE DECIDING THE AP PEAL IN THE CASE OF CHOWGULE & C O. (ITA 162 & 184), IT HAD GOT IMPRESSED THAT THE EXPRESSION PRO C ESSING IS OMITTED IN SECTION 10B. THE APPEAL RELATES TO A.Y.2002 - 03 NOT RELATING TO IMPUGNED A.Y. CLAUSE (III) OF EXPLANAT ION 1 TO SECTION 1OAA , WHICH LAYS DOWN THAT THE EXPRESSION 'MANUFACTURE' SHALL HAVE THE SAME MEANING AS ASSIGNED TO IT IN SECTION 2(R) OF THE SPECIAL ECONOMIC ZONES ACT, 2005, AND SECTION 2(29BA) WERE SUBSEQUENTLY BROUGHT INTO THE STATUTE AFTER THE RENDER ING OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SESA GOA 271 ITR ON THE BASIS OF CO - ORDINATE BENCH DECIDED THE CASE OF CHOWGULE & C O . EVEN THESE PROVISIONS WERE NOT IN THE STATUTE DURING THE ASSESSMENT YEAR 2002 - 03 TO WHICH YEAR THE CO - ORDINAT E BENCH WAS ENTRUSTED WITH THE ISSUE OF CLAIM OF EXEMPTION U/S 10B. THE CO - ORDINATE BENCH COULD NOT HAVE ANY OCCASION TO CONSIDER THE SAME EVEN THOUGH THE CLAUSE (III) OF EXPLANATION 1 TO SECTION 10AA HAS ALREADY COME INTO FORCE AFTER THE DECISION OF HONB LE APEX COURT IN THE CASE OF SESA GOA LTD 271 ITR 331 WHEN THE DECISIONS WAS RENDERED BUT WAS NOT INSERTED WITH RETROSPECTIVE EFFECT . EVEN THE PROVISION OF SECTION 2(29BA) WAS ALSO INSERTED AFTER THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SESA GO A LTD(SUPRA). BOTH THESE AMENDMENTS ARE IN THE STATUTE AS ON TODAY AND ARE TO BE CONSIDERED FOR THE IMPUGNED ASSESSMENT YEAR. THE DECISION OF SUPREME CO URT IN THE CASE OF CHOWGULE & CO AS CITED BY US EARLIER WAS ALSO NOT CONSIDERED BY THE ITA NO. 72&85/PNJ/2012 151 COORDINATE BENC H AS THE WORD PROCESSING WAS OMITTED IN SECTION 10B DURING THAT YEAR FOR WHICH CASE WAS DECIDED. BOTH THESE AMENDMENTS HAVE DULY BEEN CONSIDERED BY THE SUBSEQUENT DECISION OF SPECIAL BENCH, HIGH COURT AND THE SUPREME COURT CITED BY US IN DISCUSSION HELD HERE IN ABOVE. WE NOTED THAT SUBSEQUENT TO THE DECISION OF THIS TRIBUNAL IN ITA NO. 162/PNJ/2006 DT. 12 TH JULY, 2007, THE SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF MADHU JAYANTI INTERNATIONAL LTD. [2012 - TIOL - 424 - ITAT - KOL - SB] HAS DEALT WITH THE ISSUE E XHAUSTIBLY WHETHER THE ASSESSEES WHO ARE IN THE BUSINESS OF BLENDING OF TEA I.E PROCESSING OF TEA AND EXPORT THEREOF IN 100% EOU CAN BE SAID TO BE MANUFACTURER / PRODUCER OF TEA FOR THE PURPOSE OF SECTION 10A/10B. WHEN THE SUPREME COURT HAS ALREADY HELD IN THE CASE OF TARA AGENCIES 292 ITR 444 THAT BLENDING OF TEA IS PROCESSING. THUS, THE SPECIAL BENCH HAS DECIDED THE ISSUE IN RESPECT OF 100% EOU FOR THE PURPOSE OF EXEMPTION UNDER SECTION 10B WHETHER AN ASSESSEE WHO IS ENGAGED IN PROCESSING CAN BE SAID TO B E ENGAGED IN MANUFACTURE / PROCESSING. WE ALSO NOTED THAT KERALA HIGH COURT IN THE CASE OF TATA TEA LTD. VS. ACIT 338 ITR 285 DEALT WITH THE ISSUE IN RESPECT OF 100% EOU FOR THE PURPOSE OF EXEMPTION UNDER SECTION 10B WHETHER THE PROCESSING OF TEA IS TREATE D AS MANUFACTURE OR PRODUCTION OF AN ARTICLE QUALIFYING FOR EXEMPTION. NOT ONLY THESE DECISIONS SUBSEQUENT TO THE DECISION OF THE COORDINATE BENCH, SUPREME COURT HAS ALSO DECIDED FOLLOWING CASES IN WHICH ALSO, IN OUR OPINION, SIMILAR ISSUE WHETHER PROCESSI NG IS MANUFACTURE OR PRODUCTION HAS BEEN DECIDED. THESE DECISIONS ARE GIVEN AS UNDER: - I ) INDIA CINE AGENCIES 308 ITR 98 (SC) II ) ORACLE SOFTWARE INDIA LTD. 320 ITR 546 (SC) III ) ARIHANT TILES AND MARBLES (P) LTD. 320 ITR 79 (SC). 45.6 WE NOTED THAT IN ALL THESE DE CISIONS EXCEPT IN THE CASE OF ORACLE SOFTWARE THE DECISION OF THE SU PREME COURT IN THE CASE OF CIT V S. SESA GOA LTD. 271 ITR 331 WAS REFERRED TO BY THE COURT. HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1 (P& H) HAS OBSERVED AS UNDER ON THE RESPONSIBILITY OF THE TRIBUNAL WHILE DECIDING THE CASE: ITA NO. 72&85/PNJ/2012 152 THE TRIBUNAL BEING THE LAST FACT - FINDING AUTHORITY, A HIGHER RESPONSIBILITY IS CAST BY THE LEGISLATURE ON IT TO DECIDE THE CASES BY RECORDING COMPLETE FACTS AND ASSIG NING COGENT REASONS. IT IS THE DUTY OF THE TRIBUNAL TO DECIDE THE CASES ON THE BASIS OF THE LAW LAID DOWN BY THE SUPREME COURT/HIGH COURT AND NOT WHAT THE TRIBUNAL DECIDES ON THE PARTICULAR ISSUE. EVERY EFFORT MUST BE MADE BY THE TRIBUNAL TO DECIDE THE I SSUE BY TAKING HELP FROM THE DECISIONS OF THE SUPREME COURT AND IF THERE IS NO DIRECT AUTHORITY OF THE SUPREME COURT ON THE POINT THEN OF THE JURISDICTIONAL HIGH COURT AND LASTLY OF ANY OTHER HIGH COURT. 45.7 WE NOTED THAT THE COORDINATE BENCH IN THE C ASE OF CHOWGULE & CO. LTD. ITA NO. 162/PNJ/2006 DECIDED THE ISSUE ONLY ON THE BASIS OF THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS. GEM INDIA MANUFACTURING CO. 249 ITR 307, WHILE THE SAID DECISION HAS NOT BEEN FOLLOWED BY THE SUPREME COURT IN T HEIR SUBSEQUENT DECISION S . EVEN THE CASE RELATE TO A.Y.2002 - 03. NO CONTRARY DECISION SUBSEQUENT TO THE DECISION OF THE SPECIAL BENCH, KERALA HIGH COURT AND THAT OF THE SUPREME COURT RENDERED IN THE CASE OF INDIA CINE AGENCY (SUPRA) AS WELL AS ARIHANT TILES & MARBLES (SUPRA) WAS BROUGHT TO OUR KNOWLEDGE WHICH MAY HAVE TAKEN A DIFFERENT VIEW THAT 100% EOU APPROVED BY THE COMPETENT AUTHORITY IF ENGAGED IN PROCESSING ACTIVITY FOR UPGRADING A COMMODITY FOR THE PURPOSE OF MARKETABILITY FOR EXPORT WOULD NOT BE ALL OWED EXEMPTION U/S 10B. THE LD. SPECIAL COUNSEL EVEN COULD NOT BRING TO OUR KNOWLEDGE ANY DECISION SUBSEQUENT TO THE DECISION OF THE SPECIAL BENCH AND ARIHANT TILES & MARBLES (SC) AS WELL AS KERALA HIGH COURT IN THE CASE OF TATA TEA (SUPRA) WHICH WOULD HAV E DISALLOWED THE CLAIM OF THE ASSESSEE U/S 10B ON THIS BASIS AFTER CONSIDERING THE EXPLANATION (III) OF SECTION 10AA AS WELL AS DEFINITION GIVEN U/S 2(29BA). THUS, DUE TO THE DECISION RENDERED BY THE SPECIAL BENCH, HIGH COURTS AND SUPREME COURT SUBSEQUENT TO THE DATE OF ORDER IN THE CASE OF CHOWGULE & CO. LTD. VS. ACIT IN ITA NO. 162/PNJ/2006 IN OUR OPINION, THE ISSUE RAISED BY THE REVENUE IS NOT FIT TO BE REFERRED TO SPECIAL BENCH AS THE DECISIONS OF SPECIAL BENCH / HIGH COURT / SUPREME COURT ARE BINDING O N US IN PREFERENCE TO THE DECISION OF THE COORDINATE BENCH. THUS, WE HAVE IN OUR OPINION GERMANE REASON NOT TO REFER THIS ISSUE FOR CONSTITUTION OF A SPECIAL BENCH AS IN OUR OPINION EVEN IF THE SPECIAL BENCH IS CONSTITUTED THE EARLIER DECISION OF THE SPECI AL BENCH IN THE CASE OF MADHU JAYANTI WILL BE BINDING UNTIL AND UNLESS THERE ARE SPECIAL AND GERMANE REASONS FOR CONSTITUTING A LARGE SPECIAL ITA NO. 72&85/PNJ/2012 153 BENCH . WE, THEREFORE, DISMISS THE APPLICATION DT. 18/01/2013 MOVED BY THE REVENUE FOR CONSTITUTING THE SPECIAL BEN CH. 45.8 NOW COMING BACK TO THE ISSUE WHETHER AN ASSESSEE WHO IS ENGAGED IN PROCESSING FOR UPGRADING AND MAKING THE COMMODITY FIT FOR EXPORT AND WHICH IS A 100% EOU APPROVED BY THE COMPETENT AUTHORITY CAN BE SAID TO HAVE BEEN ENGAGED IN MANUFACTURE OR P RODUCTION OF AN ARTICLE OR THING. WE HAVE NOTED THAT THIS ISSUE IS DULY COVERED BY THE DECISION OF THE SPECIAL BENCH IN THE CASE OF MADHU JAYANTI INTERNATIONAL LTD. (SUPRA) . THE RELEVANT PARAGRAPH OF THIS JUDGEMENT HAS BEEN REPRODUCED BY US IN THE PRECEDING PARAS . 45.9 IN THIS DECISION, SPECIAL BENCH HAS EXHAUSTIVELY DEALT WITH THE PROVISIONS OF SECTION 10B, SECTION 2(29BA) OF THE INCOME - TAX ACT, 1961 AND SECTION 2(R) OF THE SPECIAL ECONOMIC ZONES ACT, 2005; AND THE VARIOUS DECISIONS OF THE SUPREME COURT AS WELL AS THE HIGH COURT WHICH DEALT WITH THE SIMILAR ISSUE AND EVEN THE DECISION OF CHOWGULE & CO (SC) AS WAS REFERRED TO BY US IN THE PRECEDING PARAS HEREIN ABOVE . THE SPECIAL BENCH CLEARLY NOTED IN THIS DECISION, THE DECISION OF THE SUPREME COURT IN TARA AGENCIES CASE 292 ITR 444 IN WHICH IT WAS HELD BLENDING AND PACKING OF TEA AMOUNTS TO PROCESSING AND IS NOT MANUFACTURING OR PRODUCING OF AN ARTICLE OR THING. IN THIS DECISION THE SPECIAL BENCH ALSO NOTED THAT KERALA HIGH COURT IN THE CASE OF TATA TEA LT D. VS. ACIT 338 ITR 285 (KER.) WHICH TOOK THE VIEW THAT 100% EOU ENGAGED IN PROCESSING CANNOT BE DENIED EXEMPTION ON THE BASIS THAT THE UNITS ARE NOT ENGAGED IN MANUFACTURE OR PRODUCTION. MOREOVER, ON FACTS EXACTLY SIMILAR TO THE FACTS OF THE ASSESSEE, IN THE CASE OF CHOWGULE & CO. PVT. LTD. VS UNION OF INDIA (1981) 1 SCC 653 AIR 1981 SC 014, HONBLE SUPREME COURT WERE CONCERNED WITH THE QUESTION WHETHER THE BLENDING OF ORE, WHILST LOADING IT IN THE SHIP BY MEANS OF THE MECHANICAL ORE HANDLING PLANT, CONST ITUTED MANUFACTURE OR PROCESSING OF ORE FOR SALE WITHIN THE MEANING OF SECTION 8(3)(B) AND RULE 13 OF CENTRAL SALES TAX ACT, 1956. THE HONBLE SUPREME COURT, IN CONSTRUING THE EXPRESSION PROCESSING ALLOWED THE APPEAL OF THE ASSESSEE, IN CHOWGULE & CO . PVT. LTD. (SUPRA), HOLDING, INTER ALIA, THAT WHERE ANY COMMODITY IS SUBJECTED TO A PROCESS OR TREATMENT WITH A VIEW TO ITS DEVELOPMENT OR PREPARATION FOR THE MARKET IT WOULD AMOUNT TO PROCESSING OF THE COMMODITY WITHIN THE MEANING OF CENTRAL SALES TAX ACT, ITA NO. 72&85/PNJ/2012 154 1956. THE SPECIAL BENCH ULTIMATELY ALLOWED EXEMPTION TO THE ASSESSEE ON THE SIMILAR ISSUE WHERE THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF BLENDING THE TEA FOR UPGRADING FOR MARKETING. THUS, IN VIEW OF THE DECISION OF THE SPECIAL BENCH AND OTHER DECI SIONS DISCUSSED IN THE PRECEDING PARAGRAPHS AND THAT OF HONBLE SUPREME COURT IN THE CASE OF CHOWGULE & CO (SUPRA) AS WELL AS DEFINITION OF MANUFACTURE AS INSERTED W.E.F 1.4.2009 BY WAY OF SECTION 2 (29AB) OF THE INCOME TAX ACT AS REFERRED TO BY BOTH THE PARTIES , WE HOLD THAT ALL THE THREE 100% EOU ENGAGED IN PROCESSING SO AS TO MAKE CRUDE ORE AND WASTE I.E TAILINGS USABLE OR MARKETABLE ARE ENTITLED FOR EXEMPTION U/S 10B SUBJECT TO THE OTHER CONDITIONS FOR EXEMPTION UNDER SECTION 10B ARE BEING FULFILLED . 45.10 NOW, WE WILL DEAL WITH THE CONTENTION WHETHER THE ASSESSEE HAS SET NEW UNITS OR HAS MERELY RECONSTRUCTED THE BUSINESS WHICH WAS ALREADY IN EXISTENCE. WE NOTED THAT THE ASSESSEE HAD MADE THE FOLLOWING INVESTMENTS IN INSTALLING THE PLANT & MACHINER Y IN THESE EOUS: - FIN.YEAR AMONA CHITRADURGA CODLI 1999 - 2000 9,00,78,574 2002 - 03 3,96,10,020 2005 - 06 93,84,633 (PHASE - I) 2006 - 07 35,67,257 (PHASE - II) 2008 - 09 7,03,82,158 (PHASE - III) TOTAL: 3,96,10,020 8,33,34,046 (ALL PHS) 9,00,78,574 TH E CONTENTION OF THE ASSESSEE IS THAT IT HAD SET UP ALL THESE UNITS AS NEW UNITS AND HAD ALSO GOT THE APPROVAL FOR THEM FROM THE COMPETENT AUTHORITY AS 100% EOU UNITS. THE OLD MACHINERY AND PART OF OLD MACHINERIES WHEREVER USED, THE VALUE OF THESE MACHINERI ES WERE LESS THAN 20% IN EACH UNITS. THE OLD UNITS SITUATED IN AMONA, CHTRADURGA AND CODLI WERE ERODED, NON - PRODUCTIVE AND NON - ECONOMICAL. THE REVENUE HAS STRONGLY CONTENDED THAT NONE OF THESE UNITS EVEN THOUGH 100% EOU BUT WERE SETUP LONG AGO. THE ASSESS EE HAD MERELY RENOVATED THESE UNITS DURING THE PERIOD AS CLAIMED BY ITA NO. 72&85/PNJ/2012 155 THE ASSESSEE. THE REVENUE ON THE OTHER HAND ACCEPTED THAT THE ASSESSEE HAD INVESTED IN AMONA PLANT RS.3,96,10,020/ - DURING THE YEAR 2002 - 03 AND IN CHITRADURGA UNIT DURING F.Y. 2005 - 06 TO 2008 - 09 RS.8,33,34,046/ - BUT THE ASSESSEE HAD NOT SUBMITTED ANY EVIDENCE IN RESPECT OF THE INVESTMENTS MADE IN THE CODLI UNIT AND IN WHICH YEAR. WE NOTED THAT CIT(A) IN HIS APPELLATE ORDER AT PAGE NOS. 48 - 50 HAS GIVEN DEPRECIATION CHARTS I N RESPECT OF PL ANT & MACHINERY P REVIOUS LY USED AT AMONA PLANT. LIKEWISE, AT PAGE NOS. 65 - 66 SIMILAR CHARTS IN RESPECT OF CHITRADURGA UNIT HAVE BEEN GIVEN. COLUMN ADDITIONS HAS BEEN LEFT BLANK. THESE CHARTS HAVE BEEN COMPILED BY THE CIT(A) OR BY THE DEPARTMENT. THIS GIV ES AN IMPRESSION AS IF NO ADDITION TO PLANT & MACHINERY HAD BEEN MADE DURING THE FINANCIAL YEARS CONCERNED IN THESE PLANTS BY THE ASSESSEE WHILE WE VERIFIED FROM PAGE 45 TO 58 OF FIRST PB THAT THERE ARE ADDITIONS IN THE PLANT AND MACHINERY OF THE UNITS. TH IS FACT IS ALSO VERIFIABLE FROM THE MINUTES OF THE BOARD MEETING AND SCHEDULE OF FIXED ASSETS FORMING PART OF THE BALANCE SHEET FOR THE RESPECTIVE FINANCIAL YEARS, WHICH WERE DULY AUDITED. THE ASSESSEE PRODUCED THE FOLLOWING DOCUMENTS IN SUPPORT OF THE FRE SH CAPITAL INVESTMENT MADE BY IT IN ACQUISITION OF PLANT & MACHINERY FOR ITS EOUS IN EACH RELEVANT FINANCIAL YEAR: I . MINUTES OF THE MEETINGS OF BOARD OF DIRECTORS OF THE APPELLANT - COMPANY APPROVING CAPITAL EXPENDITURE AT AMONA AND CHITRADURGA PLANTS AT PAGE NOS. 696, 699 - 700 & 702 OF THE PAPER BOOK. II . PHOTOGRAPHS OF PANTS AT AMONA & CHITRADURGA EOUS AT PAGE NOS. 704 - 713 OF THE PAPER BOOK. III . YEAR - WISE TABLES OF PLANT & MACHINERY CAPITALIZED FOR (A) AMONA EOU FOR THE FYS 2002 - 03 TO 2008 - 09 (AT PAGE NOS. 45 - 48 OF THE PAPER BOOK), (B) CHITRADURGA EOU FOR THE FYS 2005 - 06 TO 2008 - 09 (AT PAGE NOS. 54 - 55 OF THE PAPER BOOK), AND (C) CODLI EOU FOR THE FYS 1999 - 2000 TO 2008 - 09 (AT PAGE NOS. 38 - 40 OF THE PAPER BOOK). IV . AUDITED ANNUAL ACCOUNTS OF THE APPELLANT - COMPAN Y FOR THE FINANCIAL YEARS ENDED ON 31/03/2003, 31/03/2006, 31/03/2007 AND 31/03/2009 AT PAGE NOS. 91 - 632 OF THE ADDITIONAL PAPER BOOK. ITA NO. 72&85/PNJ/2012 156 V . COPIES OF BILLS OF PLANT & MACHINERY ITEMS WERE SUBMITTED IN RESPECT OF THE EOUS AS UNDER: ( A ) AMONA EOU FOR RS. 3,57,03,426 / - OUT OF TOTAL INVESTMENT OF RS. 3,96,10,020/ - AT PAGE NOS. 794 - 1146 AND 1378 - 1435 OF THE ADDITIONAL PAPER BOOKS. ( B ) CHITRADURA EOU FOR RS. 8,18,50,910/ - OUT OF TOTAL INVESTMENT OF RS. 8,33,34,046/ - AT PAGE NOS. 1147 - 1355 AND 1436 - 1472 OF THE ADDITIONAL PAPE R BOOKS. 45.11 THESE EVIDENCES CLEARLY PROVE , IN OUR OPINION , THAT THE ASSESSEE MADE HUGE INVESTMENTS IN THESE UNITS. EVEN THE ASSESSEE SUBMITTED THE EVIDENCES FOR SELLING THE OLD AND OBSOLETE DISMANTLED MACHINES AS SCRAP SALES. WE DO AGREE THAT THE AS SESSEE HAD NOT REDUCED THE BLOCK OF ASSETS WITH THESE AMOUNTS BUT THIS IN OUR OPINION WILL NOT CHANGE THE TRUE CHARACTER OF THE TRANSACTION. WE FIND FORCE IN THE SUBMISSION OF THE ASSESSEE THAT IN THE CASE OF AMONA EOU , OLD UNIT SET - UP IN 1985 HAD BECOME OUTDATED, OBSOLETE, EVEN DANGEROUS AND UNECONOMICAL TO RUN AFTER A SPAN OF 17 YEARS. THEREFORE, THE ASSESSEE HAD TO TAKE AN IMMEDIATE ACTION TO EITHER ABANDON IT OR REVAMP IT ENTIRELY. THIS FACT IS ALSO PROVED WITH THE FACT THAT THE PRODUCTION CAPACITY OF THIS PLANT WHICH WAS 1 MTPA EARLIER GOT DOUBLED AT 2 MTPA COUPLED WITH FURTHER FLEXIBILITY CREATED TO INCREASE IT MORE IN FUTURE AFTER SETTING UP NEW UNIT. THE NEWLY INCREASED PRODUCTION CAPACITY HAD NOT BEEN DENIED BY THE REVENUE. THE COST OF NEW PLANT AND MACHINERY FOR ALL MAJOR / CRITICAL PROCESSES AND CIVIL STRUCTURES FOR THOSE PLANTS AMOUNTED TO RS. 3,96,10,020/ - DURING THE FY 2002 - 03, WHEREAS THE WDV OF THE OLD PLANT USED IN THE NEW UNDERTAKING WAS JUST RS. 26,17,714/ - , WHICH IS A MERE 6.7% OF THE C OST OF NEW PLANT & MACHINERY, I.E., WITHIN THE PERMISSIBLE LIMIT OF 20%. THE CIT(A), IN OUR OPINION, WAS NOT CORRECT IN COMPARING THE NUMBER OF MACHINES AND EQUIPMENTS INSTALLED IN MINING DIVISION TO BE PART OF OLD PLANT AND MACHINERY INSTALLED IN 100% E OU UNITS WHEN IN FACT MINING DIVISION IS NOT PART OF 100% EOU AS PER THE APPLICATION MADE BY THE ASSESSEE AND THE APPROVAL ALLOWED BY THE COMPETENT AUTHORITIES TO ASCERTAIN WHETHER SUBSTANTIAL EXPANSION HAD TAKEN PLACE IN THE FY 2002 - 03 AT AMONA PLANT OR NOT. SIMILARLY, WE FIND FORCE IN THE SUBMISSIONS OF THE LD. AR IN THE ABSENCE OF ANY CONTRARY EVIDENCE THAT THE PRESENT UNIT IN CHITRADURGA, KARNATAKA WAS INITIALLY SET - UP AND RUN BY A COMPANY CALLED M/S A. NARRAIN MINES LTD. THE SAID COMPANY WAS ACQUIRED BY THE ASSESSEE - COMPANY IN THE FY 1998 - 99 AND IT WAS LATER MERGED INTO THE ITA NO. 72&85/PNJ/2012 157 ASSESSEE - COMPANY. THE EXISTING PLANT IN THE SAID UNIT WAS QUITE OLD AND HAD BECOME INEFFICIENT DUE TO THE COMPLETION OF ITS ECONOMIC LIFE. THE ASSESSEE UNDERTOOK A PROJECT TO SET U P A NEW UNDERTAKING DURING THE F Y 2005 - 06 IN A PHASED MANNER TO INCREASE THE CAPACITY BY EMPLOYING LATEST TECHNOLOGY/FACILITY IN PLACE OF EXISTING PRODUCTION FACILITY. THE ASSESSEE APPLIED TO THE KARNATAKA STATE POLLUTION CONTROL BOARD VIDE ITS APPLICATION DATED 09 / 09 / 2005 FOR ITS C ONSENT FOR E STABLISHMENT UNDER THE WATER AND AIR ACT S FOR EXPANSION OF IRON ORE MINING CAPACITY FROM 1 . 6 MTPA TO 2.5 MTPA. SUBSEQUENTLY, THE MANAGEMENT OF THE COMPANY ALSO UNDERWENT A CHANGE FROM MITSUI GROUP WITH M/S VEDANTA GRO UP. DUE TO THIS EXPANSION/ESTABLISHMENT PROJECT COULD BE COMPLETED DURING THE FY 2008 - 09 IN THREE PHASES HAVING A TOTAL PRODUCTION CAPACITY OF 6 MTPA . T HE INVESTMENTS WERE MADE IN A PHASED MANNER WHICH RESULTED IN CREATION OF NEW UNIT IN PLACE OF THE EXIST ING UNIT. IN THE FY 2005 - 06, I.E., THE INITIAL YEAR FOR THE PURPOSE OF SECTION 10B, TOTAL INVESTMENT OF RS. 93,84,633/ - WAS MADE IN ACQUISITION OF NEW PLANT & MACHINERY INCLUDING DISMANTLING OF THE OLD PLANT & STRUCTURES. THE PHASE - II OF PROJECT ESTABLISHM ENT WAS COMPLETED NE XT YEAR, I.E., FY 2006 - 07 IN WHICH FRESH CAPITAL INVESTMENT OF RS. 35,67,257/ - WAS MADE IN PLANT & MACHINERY. FINALLY THE THIRD PHASE OF NEW PLANT WAS COMPLETED IN THE FY 2008 - 09 WITH AN ADDITION OF RS.7,03,82,158/ - TO PLANT & MACHINERY . THE WDV AS ON 01/04/2005 OF THE PLANT & MACHINERY AT CHITRADURGA WAS JUST RS.6,93,596/ - WHICH WAS EITHER DISMANTLED COMPLETELY OR WHEREVER STRUCTURAL STEEL WAS USABLE IT WAS UTILIZED IN THE ERECTION OF NEW MACHINERY. THE COST OF NEW MACHINERY ACQUIRED I N FY 2005 - 06 WAS RS. 93,84,633/ - . THUS, THE VALUE OF PLANT & MACHINERY EXISTING AS ON 01/04/2005 WAS MERELY 7.4% OF THE COST OF NEW PLANT & MACHINERY; WHICH IS ALSO WITHIN THE PERMISSIBLE LIMIT. THE ACCOUNTS BOOKS IN THAT YEAR WERE DULY AUDITED AND WERE N OT REJECTED BY THE ASSESSING OFFICER IN THOSE ASSESSMENT YEARS. NOW COMING TO CODLI UFR UNIT, WE NOTED THAT NEITHER THE ASSESSING OFFICER NOR THE CIT (APPEALS) HAS DISPUTED THE CAPITAL INVESTMENT MADE IN NEW PLANT & MACHINERY IN THE FY 1999 - 2000 , THEY HAVE MERELY EXPRESSED THEIR DISSATISFACTION ON THE EVIDENCES FURNISHED BY THE ASSESSEE IN RESPECT OF THE DATE OF COMMENCEMENT OF MANUFACTURING OR PRODUCTION, WHICH WAS STATED AS 08/03/2000 BY THE ASSESSEE ON THE STRENGTH OF DOCUMENTARY EVIDENCES SUCH AS THE AP PROVAL FROM THE BOARD OF APPROVALS, INTIMATION OF COMMENCEMENT OF ITA NO. 72&85/PNJ/2012 158 COMMERCIAL PRODUCTION ON 08/03/2000 TO THE MINISTRY OF INDUSTRIES, ETC . , WHICH HAVE DISCUSSED SEPARATELY IN THIS ORDER BY US. THE MAIN CONTENTIONS OF THE REVENUE BEFORE US ARE AS UNDER: - ( I ) THAT ALL OLD MACHINES WERE NOT REPLACED SINCE THERE WAS NO DELETION IN THE BOOK VALUE OF THE EXISTING PLANT SHOWN IN THE DEPRECIATION CHARTS FOR THE CONCERNED YEARS. ( II ) THAT BY CARRYING OUT REPAIRS A NEW UNIT IS NOT SET - UP. IN THE CASE OF CHITRADURGA UNIT, S OME BILLS WERE FOUND FOR UNDERTAKING FABRICATION, ERECTION AND OTHER SUCH WORKS WHICH APPEAR TO BE REVENUE IN NATURE AND NOT CAPITAL IN NATURE. ( III ) THAT IN THE CASE OF AMONA PLANT, CORRESPONDENCE WITH VILLAGE PANCHAYAT SHOWS THAT THE CONSTRUCTION ACTIVITIES W ERE ACTUALLY IN THE NATURE OF REPAIRS AND RENOVATION. ( IV ) THAT THE ASSESSEE HAD INCORRECTLY CLAIMED THAT THE ENTIRE EXISTING PLANT AT CHITRADURGA WAS DEMOLISHED IN THE FY 2005 - 06 ITSELF, WHEREAS ONLY ONE BILL OF RS. 3,522/ - CONTAINED DEMOLITION OR DISMANTLING CHARGES. ( V ) THAT FOR DETERMINING THE PERCENTAGE OF OLD EQUIPMENT USED IN THE NEW UNIT, EVEN THE ASSETS HELD AT THE EXTRACTION UNITS MUST BE TAKEN INTO CONSIDERATION. ( VI ) THAT YEAR - WISE PRODUCTION DATA OF CHITRADURGA UNIT SHOWS THAT THE PRODUCTION INCREASED WITH OUT NEW INVESTMENT IN PLANT & MACHINERY. MOREOVER, NO MAJOR PLANT & MACHINERY WAS INSTALLED AT CHITRADURGA AS COULD HELP IN INCREASING THE PRODUCTION CAPACITY. 45.12 ACCORDING TO REVENUE, ALL OLD MACHINES WERE NOT REPLACED SINCE THERE WAS NO DELETION IN T HE BOOK VALUE OF THE EXISTING PLANT SHOWN IN THE DEPRECIATION CHARTS FOR THE CONCERNED YEARS. CIT(A) HAS COMPLIED CHARTS IN RESPECT OF AMONA AND CHITRADURGA UNITS IN HIS APPELLATE ORDER. IN THIS REGARD THE LD. AR EXPLAINED THE BASIC COST OF PLANT & MACHINE RY IN THE CASE OF AN IRON ORE BENEFICIATION PLANT IS INCURRED ON RAISING STEEL AND CONCRETE STRUCTURES ON WHICH THE CONVEYOR BELTS, CRUSHERS, SCREENS, ETC. ARE INSTALLED. THOUGH ALL EXISTING ITEMS OF MACHINE WERE SCRAPPED USABLE STEEL FROM THE SAME WAS UTI LIZED IN THE ERECTION OF NEW MACHINES AND EQUIPMENTS FOR WHICH ONLY SOME ADDITIONAL CHARGES WERE PAID. THUS, THE EXISTING DISMANTLED STRUCTURE GOT MERGED WITHIN THE NEW PLANT TO THAT EXTENT. ACCORDINGLY, INSTEAD OF DELETING ITA NO. 72&85/PNJ/2012 159 THE RELATABLE VALUE OF EXISTING PLANT, THE COST OF ADDITIONAL PLANT ACQUIRED DURING THE YEAR WAS RECORDED AT NET VALUE. ALSO THE SCRAP OF THE REMAINING EXISTING PLANT WAS SOLD AND SHOWN SEPARATELY IN THE RELEVANT AUDITED PROFIT & LOSS ACCOUNT FOR THE CONCERNED FINANCIAL YEAR UNDER THE H EAD SERVICE AND OTHER PROCEEDS FOR WHICH ATTENTION WAS DRAWN TO P & L ACCOUNT AND ACCORDINGLY THESE MEAGER SUM S WERE NOT REDUCED FROM THE SCHEDULE OF FIXED ASSETS. IN THIS REGARD, OUR ATTENTION WAS DRAWN TO SCHEDULE 14 OF THE PROFIT & LOSS ACCOUNT FOR TH E YEARS ENDED ON 31/03/2003 AND 31/03/2006 AND ALSO THE BREAK - UP OF SERVICE AND OTHER PROCEEDS PROVIDED AT PAGE NOS. 1356 AND 1365 OF THE PAPER BOOK FOR THE SAID TWO FINANCIAL YEARS RESPECTIVELY. GROSS RECEIPT FROM SALE OF SCRAP FOR GOA (AMONA UNIT) AMOU NTING TO RS. 71,41,971/ - WAS DECLARED IN THE FY 2002 - 03; AND THAT OF RS. 4,67,163/ - WAS DECLARED FOR THE YEAR ENDED ON 31/03/2006 IN RESPECT OF KARNATAKA (CHITRADURGA UNIT). WE FIND SUBSTANCE IN THE EXPLANATION OF THE LD. AR THAT THE SAID CONTENTION OF THE REVENUE DOES NOT, THEREFORE, HOLD GOOD IN OUR OPINION. OTHERWISE ALSO, WE HAVE NOTED THAT THE VALUE OF THE EXISTING PLANT WAS MUCH BELOW THE THRESHOLD LIMIT OF 20% REQUIRED FOR SUBSTANTIAL INVESTMENT FOR SETTING - UP OF A NEW UNIT FOR THE PURPOSE OF SECTION 10B. 45.13 WITH REGARD TO THE CONTENTION OF THE REVENUE THAT I N THE CASE OF CHITRADURGA UNIT, SOME BILLS WERE FOUND FOR UNDERTAKING FABRICATION, ERECTION AND OTHER SUCH WORKS WHICH APPEAR TO BE REVENUE IN NATURE AND NOT CAPITAL IN NATURE. WE NOTED THE EX PLANATION OF THE LD. AR THAT THE ASSESSMENTS FOR THE AYS 2006 - 07 AND 2007 - 08 HAD BEEN FRAMED U/S 143(3) WHERE DEPRECIATION VIS - - VIS CAPITAL EXPENDITURE (FIXED ASSETS) HAD DULY BEEN EXAMINED BY THE AOS AND EVEN SOME DISALLOWANCES HAD BEEN MADE IN RESPECT O F DEPRECIATION ON ASSETS OTHER THAN PLANT & MACHINERY, WHICH WAS NOT DISTURBED, HENCE, ACCEPTED AS CORRECT BY THE AOS. THE COPIES OF THE SAID ASSESSMENT ORDERS WERE FURNISHED. THUS, WHEN THE FACTUM OF CAPITAL INVESTMENT IN PLANT & MACHINERY IN THOSE YEARS STOOD ACCEPTED BY THE DEPARTMENT, IT IS BEYOND THE JURISDICTION OF THE FIRST APPELLATE AUTHORITY TO TRAVEL BACK TO THE COMPLETED ASSESSMENTS AND HOLD OTHERWISE. MOREOVER, THESE BILLS SUPPORT THE EXPLANATION OF THE ASSESSEE THAT IT HAD PAID FABRICATION AND OTHER SUCH CHARGES FOR REUSING THE EXISTING STEEL AND CONCRETE STRUCTURES WHEREVER POSSIBLE IN THE PROCESS OF ERECTING ITS NEW PLANTS. WE FIND NO FAULT WITH THE ITA NO. 72&85/PNJ/2012 16 0 EXPLANATION OF THE LD. AR AND THEREFORE DO NOT AGREE ON THIS WITH THE AUTHORITIES BELOW. 45.14 WE HAVE EXAMINED THE CONTENTION OF THE REVENUE T HAT IN THE CASE OF AMONA PLANT, CORRESPONDENCE WITH VILLAGE PANCHAYAT SHOWS THAT THE CONSTRUCTION ACTIVITIES WERE ACTUALLY IN THE NATURE OF REPAIRS AND RENOVATION. T HE CIT(A) HAD REFERRED TO ONLY A FEW CORRE SPONDENCE EXCHANGED WITH PANCHAYAT TO MAKE A CASE THAT IT WAS ONLY SOME REPAIRS OR AT BEST A RENOVATION WORK UNDERTAKEN AT AMONA, WHEREAS SEVERAL OTHER PIECES OF CORRESPONDENCE WERE IGNORED BY HIM WHICH PROVE THAT THE APPELLANT HAD FACTUALLY UNDERTAKEN A M AJOR DISMANTLING AND DEMOLITION OF THE EXISTING PLANT AS WELL AS ERECTION AND INSTALLATION OF NEW PLANT IN ITS PLACE THERE. FROM THE CORRESPONDENCE EXCHANGED WITH PANCHAYAT AND NEW S PAPER CLIPPINGS FILED IN PB (PAGES 293,294,299 & 409 - 411), W E NOTED THE CIT (A) IGNORED THE LOCAL NEWSPAPER CLIPPINGS WHICH IN OUR OPINION ARE VITAL PIECE OF EVIDENCE IN THIS REGARD. THESE CLIPPINGS CLEARLY BRING OUT THE FACT THAT A COMPLETE DESTRUCTION OF OLD UNIT WAS DONE AND ALTOGETHER NEW PLANT WAS SET - UP AT AMONA, ALBEIT, WIT H THE AID OF SOME OLD MACHINERY AND PARTS THEREOF. REGARDING THE CONTENTION OF THE REVENUE THAT THERE IS ONLY ONE BILL OF RS.3 , 522/ - WHICH CONTAINS DEMOLITION OR DISMANTLING CHARGES, WE NOTED THAT IN THE SAME BILL RS. 65,346/ - AND RS. 79,060/ - AT SL. NOS. 13 & 14 FOR DISMANTLING OF STRUCTURAL STEEL AND CRUSHER HOPPER RESPECTIVELY WERE ALSO STATED (PAGE NOS. 1443 - 1445 OF THE ADDITIONAL PAPER BOOK VOL.III). IN THE CASE OF THE ASSESSEE WE NOTED AND AS HAS BEEN ACCEPTED BY THE REVENUE ITSELF THAT THE EXTRACTIO N DIVISION AND EOU UNITS ARE ENTIRELY DIFFERENT, AND THE DISPUTE BEFORE US RELATE ONLY TO THE EOU UNITS WHETHER THEY ARE NEW OR NOT, THEREFORE IN OUR VIEW, REVENUE IS NOT CORRECT IN ADDING THE VALUE OF THE EX T RACTION DIVISION FOR DETERMINING 20% THRESHOLD LIMIT OF OLD PLANT AND MACHINERY FOR ESTABLISHING THE NEW UNIT. ON THE ONE SIDE, THE REVENUE IS TAKING THE CONTENTION THAT EXTRACTION DIVISION IS NOT THE PART OF 100% EOU, THEREFORE THE ASSESSEES EOU UNITS CANNOT BE REGARDED TO HAVE BEEN ENGAGED IN EXTRA CTION OF ORE AND IRON ORE PROCESSING, ON THE OTHER HAND, WHILE DETERMINING THE THRESHOLD LIMIT OF 20% OF OLD PLANT AND MACHINERY, THE REVENUE CANNOT BE PERMITTED TO TAKE A CONTRARY CONTENTION. WE ARE OF THE FIRM VIEW THAT WHILE DETERMINING THE ELIGIBILITY OF A PARTICULAR UNIT U/S 10B, ITS ONLY THE VALUE OF OLD PLANT AND MACHINERY INSTALLED IN THAT VERY UNIT WILL BE CONSIDERED FOR DETERMINING THE THRESHOLD LIMIT OF 20%. ITA NO. 72&85/PNJ/2012 161 THUS, THIS CONTENTION OF THE REVENUE STAND DISMISSED. PRODUCTION DATE SUBMITTED BY THE AS SESSEE ON RECORD CLEARLY PROVE THAT THE PRODUCTION IN EACH OF THESE UNITS GOT SUBSTANTIALLY INCREASED AS COMPARED TO THE PRODUCTION IN THE OLD UNITS DISMANTLED OR DISCARDED. THERE IS NO COGENT EVIDENCE OR MATERIAL BEING BROUGHT ON RECORD BY THE REVENUE WHI CH MAY PROVE THAT THE OLD UNIT REMAINS IN EXISTENCE MERELY BY RECONSTITUTING THE SAME. 45.15 WE HAVE GONE THROUGH THE VARIOUS CASES RELIED ON BEFORE US. THESE CASES LAID DOWN AS UNDER: - ( I ) CIT VS. MAHAAN FOODS LTD. (2009) 177 TAXMAN 274 (DEL) : (2008) 216 CTR (DEL) 148: 12. AS PER FINDINGS OF FACT RECORDED BY THE TRIBUNAL, IT HAS BEEN STATED THAT IN THE PRESENT CASE THE OLD UNDERTAKING NO LONGER EXISTED AND REMAINED IDENTIFIABLE. IT WAS COMPLETELY SUBMERGED IN THE NEW INDUSTRIAL UNDERTAKING OF THE ASSES SEE. THE PROVISIONS OF SECTION 80IA OF THE ACT WITH REFERENCE TO EXPLANATION 2 DO NOT REQUIRE THAT NEW INDUSTRIAL UNDERTAKING SHOULD BE RAISED ON SEPARATE PLOT OF LAND LEAVING THE EARLIER UNDERTAKING TOTALLY UNTOUCHED. WE FIND THAT THE PROCESSES FOR WHIC H THE ASSESSEE ENTERED INTO TECHNOLOGICAL COLLABORATIONS WITH M/S ROTACOM INDUSTRIES, B.V., NETHERLANDS AND M/S SEPPO RALLI OY, FINLAND WERE THE KEY PROCESSES OF THE ASSESSEES INDUSTRIAL UNDERTAKING AND OTHER PROCESSES SUCH AS STORAGE OF MILK IN STAINLESS STEEL STORAGE TANKS, PRE - WARMING, PRE - HEATING, PASTEURIZATION WERE ONLY OF PREPARATORY NATURE FOR THE MANUFACTURING OF THE PRODUCT OF THE ASSESSEE. THE ASSESSEE APPEARS TO HAVE INTRODUCED ALMOST ENTIRELY NEW MANUFACTURING TECHNOLOGY AND PROCESSES. 13. T HE RECONSTRUCTION OF A BUSINESS OR AN INDUSTRIAL UNDERTAKING MUST NECESSARILY INVOLVE THE CONCEPT THAT THE ORIGINAL BUSINESS OR UNDERTAKING IS NOT TO CEASE FUNCTIONING, AND ITS IDENTITY IS NOT TO BE SET TO BE LOST OR ABANDONED. THE CONCEPT ESSENTIALLY RES TS ON CHANGES BUT THE CHANGES MUST BE CONSTRUCTIVE AND NOT DESTRUCTIVE. THERE MUST BE SOMETHING POSITIVE ABOUT THE WHOLE MATTER AS OPPOSED TO NEGATIVE. THE UNDERLYING IDEA OF A RECONSTRUCTION EVIDENTLY MUST BE - AND THIS IS BROUGHT OUT BY THE SECTION ITSEL F - OF A 'BUSINESS ALREADY IN EXISTENCE'. THERE MUST BE A CONTINUATION OF THE ACTIVITIES AND BUSINESS OF THE SAME INDUSTRIAL UNDERTAKING. THE UNDERTAKING MUST CONTINUE TO CARRY ON THE SAME BUSINESS THOUGH I N SOME ALTERED OR VARIED FORM. IF THE ALTERATION AND CHANGES ARE SUBSTANTIAL, THERE WOULD BE LITTLE SCOPE FOR DESCRIBING WHAT EMERGES AS A RECONSTRUCTION OF THE BUSINESS. (SEE CIT V. GAEKWAR FOAM AND RUBBER CO. LTD. [1959] 35 ITR 662 [BOM.] 14. FROM THE PERUSAL OF SECTION 80 - IA OF THE ACT IT IS CLEAR T HAT THE STATUTE ITSELF HAS ENVISAGED AND APPROVED OF A SITUATION IN WHICH AN OLD EXISTING SMALLER INDUSTRIAL UNDERTAKING IS ABSORBED BY A NEW MUCH BIGGER INDUSTRIAL UNDERTAKING. ITA NO. 72&85/PNJ/2012 162 15. IN THE PRESENT CASE, ONLY CAPACITY WAS INCREASED AND THERE WAS EXPANSION OF OLD BUSINESS WITH SOME MODIFICATIONS. AS FOR RECONSTRUCTION OF THE BUSINESS, IT IS NOWHERE EVIDENT THAT THE OLD INDUSTRIAL UNIT WAS SPLIT UP OR DAMAGED OR DESTROYED THAT WAS SUPPOSEDLY RECONSTRUCTED AS A NEW UNIT BY THE ASSESSEE. WHAT THE ASSESSEE HAS DONE IS TO SET UP AN INDUSTRIAL UNDERTAKING WITH LATEST TECHNOLOGY AND WITH INCREASED CAPACITY AND OF COURSE, WITH A FAIRLY GOOD AMOUNT OF FRESH INVESTMENT. ( II ) METTUR CHEMICALS & INDUSTRIAL CORPORATION LTD. VS. CIT (1996) 217 ITR 768 (SC) 11. IT IS FOUND AS A FACT THAT THE APPELLANT HAD BEGUN TO MANUFACTURE OR PRODUCE ARTICLES IN THE PREVIOUS YEAR ENDED ON 31 - 3 - 1957 WITH THE HELP OF THIRTY HOOKER CELLS. IT IS TRUE THAT RECTIFIER HAD NOT BEEN INSTALLED IN THE YEAR 1957 - 58 BUT IT IS NOT IN DISPUTE THAT WITH SUITABLE ADJUSTMENT BEING MADE TO THE POWER SYSTEM, THE THIRTY HOOKER CELLS WHICH HAD BEEN INSTALLED WERE UTILISED. THE USE OF THESE NEW HOOKER CELLS HAD RESULTED IN THE CAPACITY OF THE UNIT GRADUALLY INCREASING AND THE PRODUCTION SO MADE WAS NOT EXPERIMEN TAL BUT WAS COMMERCIAL. THIS BEING SO, THE APPELLANT'S UNDERTAKING MUST BE REGARDED AS HAVING BEEN NEWLY ESTABLISHED WHEN IT HAD BEGUN TO MANUFACTURE OR PRODUCE ARTICLES BY 31 - 3 - 1957. AS 1957 - 58 WAS THE FIRST ASSESSMENT YEAR 13. THIS IS A CASE WHERE THE MANUFACTURING CAPACITY OF THE APPELLANT WAS INCREASED ON A LICENCE BEING GRANTED FROM 13.5 TO NS PER DAY TO 20 TONS PER DAY. IN OTHER WORDS, THESE HOOKER CELLS WERE INSTALLED AND THE BILLETER CELLS WERE GRADUALLY REPLACED. THE NEW INDUSTRIAL UNDERTAKING CA ME INTO EXISTENCE WHEN THE INITIAL LOT OF THIRTY HOOKER CELLS WERE INSTALLED IN THE YEAR 1957 - 58 WHICH HAD RESULTED IN ENHANCED COMMERCIAL PRODUCTION. THE TRIBUNAL AND THE HIGH COURT, IN OUR OPINION, RIGHTLY CAME TO THE CONCLUSION THAT THE UNDERTAKING COUL D FUNCTION WITH THIRTY HOOKER CELLS IN THE YEAR 1957 - 58 AND FURTHER NUMBERS WERE ADDED IN THE SUBSEQUENT YEAR. THE UNDERTAKING HAVING THUS STARTED, THE COMMERCIAL MANUFACTURE IN THE YEAR 1957 - 58 COULD NOT CLAIM THE BENEFIT OF PROVISIONS OF SECTION 84 OF TH E ACT BECAUSE THE UNIT AS SUCH HAD COMMENCED IN THE YEAR 1957 - 58 NOTWITHSTANDING THE FACT THAT THERE HAD BEEN AN EXPANSION THERETO IN THE SUBSEQUENT YEAR. ( III ) TAURUS MERCHANDISING (P) LTD. VS. ITO (2012) 143 TTJ (DEL) 1 16. IN JT. CIT VS. ASSOCIATED CAPSU LES (P) LTD. (2008) 117 TTJ (MUMBAI) 399 : (2008) 9 DTR (MUMBAI)(TRIB) 95 : (2008) 304 ITR 85 (MUMBAI)(AT), IT HAS BEEN HELD THAT WHERE THE ASSESSEE HAD ESTABLISHED NEW PLANT AND MACHINERY AT THE SAME PREMISES AND WAS PRODUCING THE SAME PRODUCT AS THAT DON E BY THE EXISTING BUSINESS, THE NEW UNITS WERE HAVING SEPARATE AND DISTINCT IDENTITY OF THEIR OWN, PROFITS AND GAINS WERE DERIVED FROM THEM AND THE ASSESSEE WAS TREATING EACH UNIT AS A SEPARATE AND INDEPENDENT UNIT IN ITS ACCOUNTS, THE NEW UNITS COULD NOT BE HELD TO BE PART OF THE EXISTING BUSINESS; AND THAT THE ASSESSEE WAS ENTITLED TO DEDUCTION UNDER SS. 80 - I AND 80 - IA OF THE ACT. 17. FURTHER, THE EXISTENCE OF BUSINESS IS A PRESUPPOSITION FOR THE FORMATION OF A NEW UNDERTAKING BY THE RECONSTRUCTION OR THE SPLITTING UP ITA NO. 72&85/PNJ/2012 163 THEREOF. IN THE PRESENT CASE, THERE HAD BEEN NO BUSINESS IN THE OLD UNIT OF THE ASSESSEE FOR OVER FIVE YEARS BEFORE THE START OF PRODUCTION BY THE NEW EOU. THAT BEING SO, THE NEW EOU OF THE ASSESSEE CANNOT, IN ANY MANNER, BE SAID TO BE FO RMED BY THE RECONSTRUCTION OR SPLITTING UP OF A BUSINESS ALREADY IN EXISTENCE. THEN, THE AUTHORITIES BELOW HAVE OBSERVED THAT MERE REGISTRATION AS A ONE HUNDRED PER CENT EOU IS NOT THE SOLE CRITERION FOR GRANT OF DEDUCTION UNDER S. 10B OF THE ACT. THIS OB SERVATION ITSELF AMOUNTS TO AN ADMISSION OF THE UNIT BEING REGISTERED AS A ONE HUNDRED PER CENT UNIT WITH THE DEVELOPMENT COMMR., NEPZ. EXPLANATION 2(IV) TO S. 10B OF THE ACT PROVIDES FOR A ONE HUNDRED PER CENT EOU TO MEAN AN UNDERTAKING WHICH HAS BEEN AP PROVED AS A ONE HUNDRED PER CENT EOU BY THE BOARD APPOINTED IN THIS BEHALF BY THE CENTRAL GOVERNMENT IN EXERCISE OF THE POWERS CONFERRED BY S. 14 OF THE INDUSTRIES (DEVELOPMENT AND REGULATION) ACT, 1951 AND THE RULES MADE THEREUNDER. FOR FACILITY, THE SAID EXPLN. 2(IV) TO S. 10B IS BEING REPRODUCED AS FOLLOWS: - 'HUNDRED PER CENT EXPORT - ORIENTED UNDERTAKING' MEANS AN UNDERTAKING WHICH HAS BEEN APPROVED AS A HUNDRED PER CENT EXPORT - ORIENTED UNDERTAKING BY THE BOARD APPOINTED IN THIS BEHALF BY THE CENTRAL GOV ERNMENT IN EXERCISE OF THE POWERS CONFERRED BY S. 14 OF THE INDUSTRIES (DEVELOPMENT AND REGULATION) ACT, 1951 (65 OF 1951), AND THE RULES MADE UNDER THAT ACT.' 18. THEREFORE, REGISTRATION AS A ONE HUNDRED PER CENT EOU IS A SINE QUA NON FOR CLAIMING DEDU CTION UNDER S. 10B OF THE ACT. FURTHER, AS IS AVAILABLE FROM THE COPY OF REGISTRATION OF THE UNIT AS A ONE HUNDRED PER CENT EOU (ASSESSEE'S PAPER BOOK 71 TO 74), THE UNIT WAS DULY APPROVED BY THE BOARD APPOINTED IN THIS BEHALF BY THE CENTRAL GOVERNMENT. IN TUBE INVESTMENTS OF INDIA LTD. VS. ASSTT. CIT (2009) 121 TTJ (CHENNAI)(TM) 577 : (2009) 20 DTR (CHENNAI)(TM)(TRIB) 244 : (2009) 117 ITD 239 (CHENNAI)(TM), IT HAS BEEN HELD THAT A ONE HUNDRED PER CENT EOU, AS PER EXPLN. 2(IV) TO S. 10B MEANS AN UNDERTAKI NG APPROVED AS A ONE HUNDRED PER CENT EOU BY THE BOARD APPOINTED IN THIS BEHALF BY THE CENTRAL GOVERNMENT IN EXERCISE OF THE POWERS CONFERRED BY S. 14 OF THE INDUSTRIES (DEVELOPMENT AND REGULATION) ACT, 1951 AND THE RULES FRAMED UNDER THAT ACT; AND THAT IT WAS NOT THE CASE OF THE DEPARTMENT THAT APPROVAL AS REQUIRED UNDER THE STATUTE HAD NOT BEEN ACCORDED TO THE ASSESSEE ( IV ) GUJARAT ALKALIES AND CHEMICALS LTD. VS. CIT (2012) 249 CTR (GUJ.) 82 IN THE PRESENT CASE ALSO, IT IS NOT THE CASE OF THE REVENUE THAT THE NEW UNIT BY ITSELF IS NOT CAPABLE OF PRODUCTION OF GOODS BUT THE CASE OF THE REVENUE IS THAT IT TAKES HELP OF THE OLD EXISTING UNIT. WE ARE OF THE VIEW THAT, THAT ITSELF SHOULD NOT BE THE REASON TO REJECT THE CLAIM UNDER SECTION 80 - I OF THE ACT. THUS , WHETHER AN UNDERTAKING IS A NEW INDUSTRIAL UNDERTAKING ENTITLED TO THE EXEMPTION UNDER SECTION 80 - I OF THE ACT DEPENDS ON THE FACTS OF EACH CASE. NO HARD AND FAST RULE CAN BE LAID DOWN. USE BY THE ASSESSEE OF THE OLD UNDERTAKING FOR THE PURPOSE OF PR ODUCTION IN ITS NEW UNDERTAKING IS NOT A DECISIVE TEST IN CONSTRUING SECTION 80 - I OF THE ACT. THE NEW UNDERTAKING MUST NOT BE SUBSTANTIALLY THE SAME OLD BUSINESS. SUBSTANTIAL INVESTMENT OF NEW ITA NO. 72&85/PNJ/2012 164 CAPITAL IS IMPERATIVE AND IN THE PRESENT CASE, THERE HAS BEE N A HUGE SUBSTANTIAL INVESTMENT OF AROUND RS.7 CRORE ALMOST THREE DECADES AGO. THE WORDS THE CAPITAL EMPLOYED IN THE PRINCIPAL CLAUSE OF SECTION 80 - I OF THE ACT ARE SIGNIFICANT, FOR FRESH CAPITAL MUST BE EMPLOYED IN THE NEW UNDERTAKING CLAIMING EXEMPTIO N. MANUFACTURE OR PRODUCTION OF ARTICLES YIELDING ADDITIONAL PROFIT ATTRIBUTABLE TO THE NEW OUTLAY OF CAPITAL IN A SEPARATE AND DISTINCT UNIT IS ESSENTIAL TO EARN THE BENEFIT OF SECTION 80 - I. THE FACT THAT AN ASSESSEE BY ESTABLISHMENT OF A NEW INDUSTRIAL UNDERTAKING EXPANDS HIS EXISTING BUSINESS WHICH HE CERTAINLY DOES, WOULD NOT ON THAT SCORE DEPRIVE HIM OF THE BENEFIT UNDER SECTION 80 - I. EVERY NEW CREATION IN BUSINESS IS SOME KIND OF EXPANSION AND ADVANCEMENT. THE TRUE TEST IS NOT WHETHER THE NEW INDU STRIAL UNDERTAKING CONNOTES EXPANSION OF THE EXISTING BUSINESS OF THE ASSESSEE BUT WHETHER IT IS A NEW IDENTIFIABLE ENDE A VOUR WHERE SUBSTANTIAL INVESTMENT OF FRESH CAPITAL IS MADE TO ENABLE EARNING OF PROFIT ATTRIBUTABLE TO THAT NEW CAPITAL. IN THE CIRCUM STANCES, THE QUESTION REFERRED FOR THE OPINION OF THIS COURT IS ANSWERED IN THE NEGATIVE, I.E., AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE ( V ) BAJAJ TEMPO LTD. VS. CIT (1992) 104 CTR (SC) 116 DEDUCTION UNDER S. 15C OF 1922 ACT (S. 80J OF 1961 ACT) ALLOWABILITY INDUSTRIAL UNDERTAKING ESTABLISHED IN A BUILDING TAKEN ON LEASE USED PREVIOUSLY FOR OTHER PURPOSE T OOLS AND IMPLEMENTS WORTH RS. 3,500 OF THE PREVIOUS UNDERTAKING ALSO TRANSFERRED RELIEF UNDER S. 15C IS ALLOWABLE CLAUSE (I) OF SUB - S. ( 2) OF S. 15C DOES NOT APPLY THE PROVISION GRANTING RELIEF WAS ENACTED TO ENCOURAGE INDUSTRIALIZATION AND HAS TO BE CONSTRUED LIBERALLY TOOLS AND IMPLEMENTS TRANSFERRED WERE OF INSIGNIFICANT VALUE AS COMPARED TO THE WHOLE ASSETS AND LITERAL CONSTRUCTION OF CL. (I) OF S. 15C(2) WOULD DEFEAT THE VERY PURPOSE OF ENACTING THE PROVISIONS THE KEY TO INTERPRETATION IS THAT THE NEW UNDERTAKING SHOULD NOT BE FORMED' BY TRANSFER OF BUILDING, PLANT OR MACHINERY EMPHASIS IS ON FORMATION NOT ON USE. 45.16 WE FIND THAT THE FOLLOWING GUIDING PRINCIPLES EMERGE FOR THE RECKONING OF A NEW UNIT BASED UPON VARIOUS LAND MARK RULINGS AND ALSO FIND THAT ( I ) THERE WAS INFUSION OF NEW CAPITAL BY THE ASSESSEE IN THOSE UNITS. ( II ) THERE WAS SUBSTANTIAL MODIFICATION IN THE OLD U NITS SO AS NOT TO DISTURB THE IDENTITY OF THE OLD UNITS, I.E., THE IDENTITY OF THOSE UNITS REMAINED UNCHANGED. ( III ) THERE WAS LEAST POSSIBLE OR INSIGNIFICANT USAGE OF THE PLANT AND MACHINERY OF THE OLD UNITS. ( IV ) THERE WAS A NEGATIVE ACT OF THE ASSESSEE TO DISTURB THE IDENTITY OF THE OLD UNIT AS THE PLANT AND MACHINERY WAS DISMANTLED BY THE ASSESSEE IN ALL THESE UNITS. ( V ) THE ASSESSEE HAD SET UP NEW UNITS ESSENTIALLY PRODUCING THE SAME COMMODITY AS IN THE EXISTING UNITS, THOUGH THERE IS NO SUCH BAR IMPOSED IN LAW. ITA NO. 72&85/PNJ/2012 165 45. 17 ACCORDINGLY, AFTER HEARING BOTH THE PARTIES AND ALSO GOING THROUGH THE MATERIAL PLACED ON RECORD AND AFTER CONSIDERING THE VARIOUS DECISIONS, WE HOLD THAT NEW UNITS HAD ACTUALLY BEEN ESTABLISHED BY THE ASSESSEE IN THE FY 1999 - 2000 AT CODLI; IN THE FY 20 02 - 03 AT AMONA; AND IN THE FY 2005 - 06 AT CHITRADURGA. 45.18 WE NOTED AFTER GOING THROUGH THE PROVISIONS OF SEC.10B THAT THERE IS NO REQUIREMENT THAT THE ASSESSEE SHOULD MAINTAIN SEPARATE BOOKS OF ACCOUNTS IN RESPECT OF 100% EOU UNIT FOR CLAIMING DEDUCTION . THE ONLY REQUIREM ENT IN THIS REGARD U/S 10B(5) IS THAT THE ASSESSEE SHALL NOT BE ALLOWED DEDUCTION UNLESS THE ASSESSEE FURNISHES IN THE PRESCRIBED FORM ALONG WITH THE RETURN OF INCOME THE REPORT OF AN ACCOUNT ANT , AS WE FIND IN THE EXPLANATION BELOW SUB - S EC.2 OF SEC.288, CERTIFYING THAT DEDUCTION HAS BEEN CORRECTLY CLAIMED IN ACCORDANCE WITH PROVISIONS OF THE IT ACT, 1961. WE HAVE GONE THROUGH THE CASE LAWS , AS RELIED BY THE LEARNED AR AND W E FIND THAT THE CASE OF THE ASSESSEE IS DULY COVERED BY THE DECIS ION IN TH E CASE OF DCIT VS ARABIAN EXPORTS LTD., (2007) 109 TTJ (MUM.) 440 ON THIS ISSUE. IT IS NOT DENIED BY THE REVENUE THAT THE ASSESSEE HAS FILED THE REPORT IN ACCORDANCE WITH SEC.10B(5) OF THE IT ACT, 1961. WE THEREFORE, DISMISS THIS CLAIM OF THE RE VENUE. 45.19 WE NOTED THAT IN RESPECT OF THE AMONA PLANT THE ASSESSEE HAS DULY INFORMED THE DC, SEZ BOMBAY VIDE HIS LETTER DATED 9.3.2008 I.E ., COMMERCIAL PRODUCTION STARTED ON 8.3.2000 AND COPY OF THE SAID LETTER WAS DULY SENT TO CUSTOMS DEPARTMENT WHIC H WAS NOT DISPUTED BY THESE COMPETENT AUTHORITIES. 45.20 IN THE CASE OF CHITRADURGA PLANT ALSO WE NOTED THAT THE ASSESS EE VIDE ITS LETTER DATED 14.7.2008 DULY INTIM ATED TO THE DC, SEZ THAT THE CONVERTED 100% EOU IS STARTED COM MERCIAL PRODUCTION ON 6.6. 2008. THE PREMISES OF THE SAID UNIT WAS BONDED AND THE LICENCE NO.1/2008 DATED 5.6.2008 WAS ISSUED U/S 58 OF THE CUSTOMS ACT . SIMILARLY, WE NOTED THAT IN THE CASE OF CODLI UNIT THE ASSESSEE HAS DULY INTIMATED TO THE MINISTRY OF INDUSTRY VIDE LETTER DATED 9.3.2000 THAT THE COMMERCIAL PRODUCTION IS STARTED ON 8.3.2000 . NONE OF THE AFORESAID GOVERNMENT AUTHORITY HAS DISPUTED THAT THE ASSESSEE HAS NOT STARTED COMMERCIAL PRODUCTION ON THAT DATE. ITA NO. 72&85/PNJ/2012 166 45.21 IN VIEW OF THE AFORESAID DISCUSSION , WE ARE OF THE VIEW T HAT THE ASSESSEE IS ENTITLED FOR EXEMPTION U/S 10B IN RESPECT OF ALL THE THREE 100% EXPORT ORIENTED UNITS, BUT DURING THE COURSE OF THE HEARING, WE NOTED THAT THE ASSESSEE WHILE COMPUTING THE EXEMPTION U/S 10B HAS DEBITED ORE EXTRACTED FROM OWN MINES IN AM ONA UNIT AS WELL AS CHITRADURGA UNIT AT COST OF RS. 45,25,23,692/ - AND RS. 20,27,01,458/ - RESPECTIVELY, WHILE IN VIEW OF PROVISIONS OF SECTION 10B (7) READ WITH SECTION 80 - IA(8) THE ASSESSEE IS REQUIRED TO TRANSFER THE CRUDE ORE EXTRACTED FROM ITS OWN MINES AT MARKET VALUE F OR DETERMINING THE TRUE PROFIT DE RIVE D BY THE 100% EOU FOR THE PURPOS E OF COMPUTING THE INCOME ILLEGIBLE FOR EXEMPTION U/S 10B. WE ALSO NOTED THAT THE ASSESSEE HAS ALSO PURCHASED CRUDE ORE I.E ROM FROM OUTSIDE PARTIES I.E FROM MINING BEL ONGING TO THE OTHER PARTIES. THE PRICE PAID BY THE ASSESSEE TO THESE OUTSIDE PARTIES, IN OUR OPINION CAN BE REGARDED TO BE THE BEST EVIDENCE FOR DETERMIN IN G THE MARKET VALUE OF THE CRUDE ORE USED BY THE ASSESSEE EXTRACTING IT FROM ITS OWN MINES. S INCE DETE RMINATION OF MARKET VALUE REQUIRES VERIFICATION ON THE PART OF THE REVENUE, WE, THEREFORE, RESTORE THIS ISSUE ONLY FOR DETERMINING THE MARKET VALUE OF THE CRUDE ORE CONSUMED BY THE ASSESSEE ON THE BASIS OF THE VALUE PAID BY THE ASSESSEE FOR THE CRUDE ORE T O THE OUTSIDE PARTIES DURING THE YEAR AND THEREBY RECOMPUTING THE PROFIT DERIVED BY THE ASSESSEE FROM THE 100% EOU UNITS ELIGIBLE FOR EXEMPTION U/S 10B . ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO RECOMPUTE THE EXEMPTION AVAILABLE U/S 10B TO THE ASSESS EE IN RESPECT OF AMONA AS WELL AS CHITRADURGA UNIT S AFTER ASCERTAINING THE MARKET VALUE OF THE CRUDE ORE S TRANSFERRED BY THE ASSESSEE TO THESE UNITS FROM ITS EXTRACTION DIVISIONS ON THE BASIS OF THE AVERAGE MARKET VALUE AS THE ASSESSEE HAS PAID TO THE OUTS IDE PARTIES FOR THE CRUDE ORES PURCHASED BY THE ASSESSEE FROM THESE PARTIES DURING THE IMPUGNED ASSESSMENT YEAR AND SUBSTITUTING AS COST OF THE RAW MATERIAL IN PLACE OF COST OF THE CRUDE ORE DERIVED BY THE ASSESSEE FROM ITS OWN MINES AFTER GIVING PROPER AN D SUFFICIENT OPPORTUNITY TO THE ASSESSEE TO ADDUCE THE MATERIAL AND EVIDENCE IN THIS REGARD . 45.22 WITH REGARD TO CODLI UNIT, THE ASSESSEE CLAIMED BEFORE US THAT THE INPUT IN THIS CASE IS TAILINGS WHICH IS MERELY A WASTE PRODUCT AND DOES NOT INVOLVE A NY COST AND ALSO HAS NOT FETCHED ANY PRICE IN THE OPEN MARKET, ITA NO. 72&85/PNJ/2012 167 THEREFORE, ITS MARKET VALUE IS NIL FOR THE PURPOSE OF COMPUTATION OF PROFIT ELIGIBLE FOR EXEMPTION U/S 10B FROM THIS UNIT. WE FIND FORCE IN THE SUBMISSION OF THE ASSESSEE BUT IN THE INTEREST O F JUSTICE AND FAIR PLAY TO BOTH THE PARTIES, IN RESPECT OF THIS UNIT ALSO WE DIRECT THE ASSESSING OFFICER TO RECOMPUTE THE PROFIT OF THIS UNIT ELIGIBLE FOR EXEMPTION AFTER SATISFYING HIMSELF ABOUT THE FAIR MARKET VALUE OF TAILINGS AFTER GIVING PROPER AND SUFFICIENT OPPORTUNITY TO THE ASSESSEE TO PROVE THE MARKET VALUE OF THE TAILINGS USED IN THE CODLI UNIT AND ALLOW THE ASSESSEE EXEMPTION TO THE ASSESSEE U/S 10B OF THE INCOME - TAX ACT, 1961 FOR CODLI UNIT ON THE PROFIT SO RECOMPUTED ACCORDINGLY . THE ASSES SEE IS DIRECTED TO ADDUCE THE NECESSARY EVIDENCE ON WHICH IT MAY RELY TO PROVE THE MARKET VALUE OF INPUT S BEFORE THE ASSESSING OFFICER. THUS, THE GROUND NOS. 7, 8 & 9 ARE PARTLY ALLOWED. 46. GROUNDS NOS.10 & 11 IN ASSESSEES APPEAL RELATE TO DISALLOWANCE OF DEPRE CIATION CLAIMED U/S 32(1)(IIA). THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CLAIMED ADDITIONAL DEPRECIATION AMOUNTING TO RS.10 , 91,79,435/ - AND RS.10 , 01,21,951/ - IN RESPECT OF IRON ORE DIVISION AND RS.90,57,484/ - FOR METALLURGICAL COKE DIV ISION. THE AO TOOK THE VIEW THAT THE ASSESSEE WAS NOT ENGAGED IN THE MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING AND THEREFORE, THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF THE ASS ESSEE 271 ITR 331 RELATING TO ADDITIONAL DEPRECIATION IS NOT APPLICABLE. THE SAID DECISION RELATE PRIOR TO 1.4.1999. ACCORDING TO HIM, THERE IS NO CHANGE EITHER IN THE NAME OR IN THE COMPOSITION OF THE IRON ORE BEFORE EXTRACTION AND AFTER EXTRACTION AND PROCESSING AND THE CONDITIONS AS LAID DOWN U/S 2(29BA) AR E NOT FULFILLED. SIMILARLY, IT WAS HELD THAT IN THE CASE OF CONVERSION OF COAL INTO COKE THERE IS NO DIFFERENT CHEMICAL COMPOSITION OR INTEGRA L STRUCTURE IN THE NEW ARTICLE AND IT HAS NO DIFFERENT CHARACTER AND USE. RELIANCE WAS PLACED ON THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS GEM INDIA MANUFACTURING CO., 249 ITR 307(2001) AND LUCKY MINERALS (P) LTD., 116 TAXMAN 1(SC). THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). THE CIT(A) ALSO TOOK THE VIEW THAT THE ASSESSEE PRIMARILY ENGAGED IN THE PROCESS OF CONVERTING COAL TO COKE ESSENTIALLY THERE IS NOT MUCH OF DIFFERENCE IN THE PHYSICAL AND CHEMICAL CHARACTERISTIC OF COAL AND COKE. THE DIVISION IS NOT ASSOCIATED WITH ANY KIND OF EXTRACTION OF COAL OR ANY OTHER ORE AS PART OF ITS BUSINESS ACTIVI TY. IN THE CASE OF CIT VS SESA GOA LTD., 271 ITR 331(SC) ITA NO. 72&85/PNJ/2012 168 THE HONBLE APEX COURT HELD THAT FOR AN ACTIVITY TO BE PRODUCTION, IT SHOULD COMPRISE OF BOTH EXTRACTION OF IRON ORE AND ITS PROCESSING. THE LEARNED AR REITERATED THE SUBMISSIONS MADE BEFORE THE C IT(A). IT WAS CONTENDED THAT THE ASSESSEE ENGAGED IN THE BUSINESS OF EXTRACTION AND PROCESSING OF IRON ORE. THE ASSESSEE IS PROCESSING THE IRON ORE NOT ONLY ONE WHICH IS EXTRACTED OUT OF ITS OWN MINES, BUT ALSO THE ONE WHICH IS EXTRACTED FROM THE MINES W HI CH ARE HIRED. THE HONBLE SUPREME COURT HAS CLEARLY HELD THAT THE EXTRACTION AND PROCESSING OF IRON ORE AMOUNTS TO PRODUCTION. THERE IS NO SUBSEQUENT AMENDMENT IN THIS REGARD OR INTRODUCTION OF THE DEFINITION OF THE WORD PRODUCTION IN THE ACT . SEC.32(1) (IIA) USED BOTH THE WORD MANUFACTURE OR PRODUCTION AND DOES NOT REQUIRE THAT THE ASSESSEE SHOULD BE ENGAGED IN THE MANUFACTURE AND PRODUCTION. SEC.2(29BA) OF THE ACT DEFINES THE WORD MANUFACTURE . THE CIT(A) TOOK THE VIEW THAT THE IRON ORE PROCESSIN G PLANT AT CODLI, AMONA AND CHITRADURGA DO NOT AMOUNT TO EITHER MANUFACTURE OR PRODUCTION . THE REVENUE IS FULLY AWARE OF THAT IN THESE PLANTS , THE ASSESSEE HAS USED THE IRON ORE EXTRACTED FROM ITS MINES AND ALSO FROM OTHER MINES TAKEN ON LEASE FOR PRO CESSING TO MAKE IT MARKETABLE FOR EXPORT. SEC.32(1)(IIA) ONLY REQUIRES THAT THE ASSESSEE MUST BE ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING. THUS, THE ASSESSEE MUST BE ALLOWED INVESTMENT ALLOWANCE SO FAR AS IT RELATES TO PLANT AND MACHINERY USED IN IRON ORE DIVISION. IN RESPECT OF CLAIM OF THE ASSESSEE FOR THE ADDITIONAL DEPRECIATION FOR THE PLANT AND MACHINERY INSTALLED IN METALLURGICAL COKE DIVISION, THE ASSESSEE CONTENDED THAT SEC.32(1)(IIA) NOWHERE REQUIRES THAT THE N EW PLANT AND MACHINERY MUST BE ACQUIRED OR INSTALLED FOR MANUFACTURE OR PRODUCTION. THE ONLY CONDITION SUBJECT TO THE PROVISO THEREIN IS THAT THE ASSESSEE MUST BE ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OR ARTICLE OR THING. THE LEARNED AR ALSO TRIED TO EXPLAIN THE PROCESS OF COKE DIVISION TO PROVE THAT THE COKE DIVISION IS ENGAGED IN THE PRODUCTION OF AN ARTICLE OR THING. THE LEARNED DR ON THE OTHER HAND RELIED ON THE ORDER OF THE CIT(A). 46.1 WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIO NS ALONGWITH THE ORDER OF THE TAX AUTHORITIES. SEC.32(1)(IIA) LAID DOWN AS UNDER; ITA NO. 72&85/PNJ/2012 169 IIA) IN THE CASE OF ANY NEW MACHINERY OR PLANT (OTHER THAN SHIPS AND AIRCRAFT), WHICH HAS BEEN ACQUIRED AND INSTALLED AFTER THE 31 ST DAY OF MARCH, 2005 BY AN ASSESSEE E NGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING (OR IN THE BUSINESS OF GENERATION OR GENERATION AND DISTRIBUTION OF POWER ) A FURTHER SUM EQUAL TO TWENTY PERCENT OF THE ACTUAL COST OF SUCH MACHINERY OR PLANT SHALL BE ALLOWED AS DEDUCTION UNDER CLAUSE(II): PROVIDED THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF - A ) ANY MACHINERY OR PLANT WHICH, BEFORE ITS INSTALLATION BY THE ASSESSEE, WAS USED EITHER WITHIN OR OUTSIDE INDIA BY ANY OTHER PERSON; OR B ) ANY MACHINERY OR PLANT INSTALL ED IN ANY OFFICE PREMISES OR ANY RESIDENTIAL ACCOMMODATION, INCLUDING ACCOMMODATION IN THE NATURE OF A GUEST HOUSE; OR C ) ANY OFFICE APPLIANCES O ROAD TRANSPORT VEHICLES; OR D ) ANY MACHINERY OR PLANT, THE WHOLE OF THE ACTUAL COST OF WHICH IS ALLOWED AS A DEDUC TION(WHETHER BY WAY OF DEPRECIATION OR OTHERWISE) IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OF ANY ONE PREVIOUS YEAR. 46.2 FROM THE PROVISIONS OF THE SECTION, IT IS APPARENT THAT THE ASSESSEE IS ENTITLED IN THE CASE OF ANY NEW MACHINERY OR PLANT WHICH HAS BEEN ACQUIRED OR INSTALLED BY HIM AFTER 31.03.2005 FOR THE ADDITIONAL DEPRECIATION IF THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING. PROVISO TO SEC TION DENIES THE DEDUCTION TO AN ASSESSEE OF THE ADDITIONAL DEPRECIATION IN CERTAIN CASES. FROM THE BALANCE SHEET AND ALL OTHER EVIDENCES FILED BEFORE US IT IS APPARENTLY CLEAR THAT THE ASSESSEE IS ENGAGED PRIMARILY IN THE BUSINESS OF EXTRACTION OF ORE AND ITS PROCESSING. THE AUTHORITIES BELOW INTERPRETED THE PROVISIONS OF SECTION, CORRECTLY TAKING THE VIEW THAT THE PLANT AND MACHINERY SHOULD BE INSTALLED FOR THE PRODUCTION OF AN ARTICLE OR THING. THE ASSESSEE S PLANT S A T CODLI, AMONA AND CHITRADURGA WHETHER ENGAGED FOR THE MANUFACTURE OR PRODUCTION INDEPENDENTLY, IN OUR VIEW, IS NOT RELEVANT. THE RELEVANT CONSIDERATION IS THAT THE ASSESSEE MUST BE ITA NO. 72&85/PNJ/2012 170 ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING AND THE NEW PLANT AND MACHINERY MUS T BE ACQUIRED AND INSTALLED. THE ASSESSEE HAS EXTRACTED THE IRON ORE AND ALSO PROCESSED IT. THE CASE OF THE ASSESSEE IS DULY COVERED BY THE DECISION OF THE HONBLE SUPREME COURT IN ASSESSEES OWN CASE REPORTED IN 271 ITR 331(SC) (SUPRA) . THIS SECTION USED THE WORD BUSINES S OF MANUFACTURE OR PRODUCTION NOT THE WORD MANUFACTURE AND PRODUCTION . WE DO NOT AGREE WITH THE REVENUE THAT THE CASE OF THE ASSESSEE IS NOT COVERED BY THE DECISION OF THE HONBLE SUPREME COURT IN ASSESSEES OWN CASE. RESPECTFULLY FO LLOWING THE DECISION OF THE HONBLE SUPREME COURT IN ASSESSEES OWN CASE, WE DELETE THE DISALLOWANCE AND ALLOW THE ADDITIONAL DEPRECIATION TO THE ASSESSEE AMOUNTING TO RS.10,91,75,435/ - . REVENUES APPEAL: - 47. THE FIRST GROUND IS REVENUES APPEAL IS GENE RAL IN NATURE AND DOES NOT REQUIRE ANY ADJUDICATION. 48. THE SECOND GROUND RELATES TO DELETION OF THE DISALLOWANCE OF EXPENDITURE ON RESEARCH & DEVELOPMENT. THE BRIEF FACTS RELATING TO THE GROUND IS THAT THE AO DISALLOWED A SUM OF RS.1,94,55,376/ CONSIDE RING THE SAME AS SCIENTIFIC RESEARCH EXPENDITURE BY TREATING IT AS EXPENDITURE OF CAPITAL IN NATURE. THE AO HAS DEALT WITH THIS ISSUE UNDER PARA - 2 PAGE - 5 OF THE ORDER. WHEN THE MATTER WENT BEFORE THE CIT(A), THE CIT(A) AFTER GETTING REMAND REPORT ON THE SUBMISSIONS OF THE ASSESSEE NOTED THAT THE ASSESSEE HAS NOT CLAIMED THE SUM OF RS.2,60 , 32,608/ - AS RESEARCH & DEVELOPMENT EXPENDITURE NEITHER IN THE BOOKS OF ACCOUNTS NOR IN THE COMPUTATION OF INCOME. THE AO HAS TREATED THIS EXPENDITURE WHICH WERE INCURRE D IN USUAL COURSE UNDER VARIOUS HEADS TO BE SCIENTIFIC RESEARCH AS IN THE DIRECTORS REPORT SUCH EXPENDITURE WAS CLASSIFIED AS EXPENDIT URE FOR RESEARCH & DEVELOPMENT. IT WAS ALSO NOTED BY HIM THAT OUT OF TOTAL EXPENDITURE OF RS.2 , 60 , 32 , 608/ - AN AMOUNT OF RS.65 , 77 , 232/ - WAS CONSIDERED CAPITAL EXPENDITURE BY THE ASSESSEE AND ONLY THE BALANCE AMOUNTING TO RS.1 , 94 , 55 , 376/ - DEBITED TO THE PROFIT & LOSS ACCOUNT. THE AO HAS NOT BROUGHT OUT ANY SPECIFIC FINDING TO SHOW THAT ANY PART OF THE BALANCE EXPENDITURE UNDE R REFERENCE IS IN THE NATURE OF CAPITAL EXPENDITURE. EVEN NO SUCH ITA NO. 72&85/PNJ/2012 171 EXPENDITURE WAS DEBITED IN THE PROFIT & LOSS ACCOUNT UNDER THE HEAD RESEARCH & DEVELOPMENT. THE CIT(A) HAS GIVEN THE CLEAR CUT FINDING THAT THE CONDITIONS PRESCRIBED U/S 35 OF THE IT ACT WOULD COME TO PLAY ONLY IF THE EXPENDITURE IS CLAIMED AS EXPENDITURE FOR SCIENTIFIC RESEARCH. HOWEVER, IN THE PRESENT CASE, CONSIDERING THE DEFINITION OF SCIENTIFIC RESEARCH PROVIDED U/S 43(4)(I) THE AO OBSERVED THAT THE CASE OF THE ASSESSEE IS NOT COVERE D UNDER THE DEFINITION OF SCIENTIFIC RESEARCH. THE CIT(A) IN VIEW OF THE CONCLUSION OF THE AO TOOK THE VIEW THAT THE AO SHOULD HAVE NOT AGAIN TREATED THIS EXPENDITURE TO BE SCIENTIFIC EXPENDITURE AND THEREFORE, HE DELETED THE ADDITION. 49 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. THE LEARNED DR ALTHOUGH, VEHEMENTLY RELIED ON THE ORDER OF THE AO BUT C OULD NOT DENY THAT THE AO HIMSELF OBSERVED THAT THE CASE OF THE ASSESSEE IS NOT COVERED UNDER THE DEFINITION OF THE SCIENTIFIC RESEARCH. IN VIEW OF THIS FACT, IN OUR OPINION, NO INTERFERENCE IS CALLED FOR IN THE ORDER OF THE CIT(A) AND THE CIT(A)HAS RIGHTLY DELETED THE ADDITION. WE ACCORDINGLY, CONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE. THUS, GROUND NO. 2 STAND S DISMISSED. 50. THE THIRD GROUND RELATE TO THE DELETION OF THE DISALLOWANCE MADE BY THE AO AS EXCHANGE LOSS INCURRED ON THE FOREIGN EXCHANGE FORWARD CONTRACT. THE AO NOTED THAT THE ASSESSEE HAS DEBITED FORWARD CONTRACT LOSS ON THE BASIS OF THE ACTUAL SETTLEMENT OF FORWARD CONTRACTS. IF THE ASSESSEE HAS ENTERED INTO FOREIGN EXCHANGE FORWARD CONTRACTS, ACCORDING TO THE ASSESSEE, TO HEDGE LOSS ON RECEIPT OF THE EXPORT PROCEEDS. THE AO APPLIED PROVISIONS OF SEC. 43(5) AND TREATED IT TO BE THE SPECULATIV E LOSS. WHEN THE MATTER WENT BEFORE THE CIT(A), THE CIT(A) ON THE BASIS OF THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS BADRIDA GAURIDU(P) LTD.,(261 ITR 256) TOOK THE VIEW THAT THE LOSS INCURRED BY THE ASSESSEE ON FORWARD CONTRACTS HAD A DIRECT NEXUS WITH IT EXPORT ACTIVITIES AND THEREFORE, SUCH LOSS IS A LOSS INCIDENTAL TO THE BUSINESS ACTIVITIES OF THE ASSESSEE. THIS LOSS CANNOT BE REGARDED TO BE THE SPECULATION LOSS. THE LEARNED DR EVEN THOUGH, BEFORE RELIED ON THE ORDER OF TH E AO COULD NOT BRING TO OUR KNOWLEDGE ANY OTHER DECISION OF THE JURISDICTIONAL HIGH COURT OR THAT OF THE SUPREME COURT WHICH WOULD HAVE TAKEN ITA NO. 72&85/PNJ/2012 172 A CONTRARY VIEW, WHAT HAS BEEN TAKEN BY THE HONBLE MUMBAI HIGH COURT INTO 261 ITR 256. EVEN THIS WAS NOT THE CASE OF THE REVENUE THAT THE SAID DECISION WAS NOT APPLICABLE IN THIS CASE. UNDER THE SE FACTS OF THE CASE, WE ARE OF THE VIEW, THAT NO ILLEGALITY AND INFIRMITY IS CAUSED IN THE ORDER OF THE CIT(A) WHILE DELETING THE DISALLOWANCE ON ACCOUNT OF FOREIGN EXCHANG E ON FORWARD CONTRACT. THUS, THIS IS NOT A FIT CASE WHICH WARRANTS OUR INTERFERENCE AND WE ACCORDINGLY, DISMISS THE THIRD GROUND TAKEN BY THE REVENUE. 51. THE LAST GROUND IN REVENUES APPEAL RELATES TO DELETION OF DISALLOWANCE OF THE EXPENDITURE INCU RRED FOR THE ISSUE OF BONUS SHARES. THIS ISSUE, IN OUR OPINION, IS NO MORE RES - INTEGRA IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS GENERAL INSURANCE CORPN. 286 ITR 32 (SC) , WHICH HAS BEEN FOLLOWED BY THE CIT(A) . WE THEREFORE DO NOT FIND ANY MERIT IN THE GROUND TAKEN BY THE REVENUE ACCORDINGLY, WE DISMISS THE SAME. 52. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED, WHILE THE APPEAL FILED B Y THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 8.3.2013 SD/ - SD/ - (D.T. GARASIA) (P.K. BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER AM/ * PLACE: PANAJI, GOA DATED 8.3.2013 COPY TO 1 SESA GHOR, 20, EDC COMPLEX, PATTO, PANAJI, GOA - 403001 2 JCIT RANGE - 1, PANAJI, GOA. 3 ACIT, CIRCLE - 1(1), PANAJI, GOA. 4 THE CIT, PANAJI 5 THE CIT(A), PANAJI 6 THE DR, ITAT, PANAJI 7 GUARD FILE.
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