Penalty [Section 271(1)(c)] : Where ITAT, hold assessee's explaination reasonable

Income-tax - Penalty [Section 271(1)(c)] : Where Tribunal, holding assessee's explanations to be reasonable, deleted penalty under section 271(1)(c) - [2011] 9 taxmann.com 268 (Delhi)

__._,_.___

ITR Volume 331 part 2 dated 21.02.2011

INCOME TAX REPORTS (ITR) HIGHLIGHTS  ISSUE DATED 21-2-2011  Volume 331 Part 2

    HIGH COURT JUDGMENTS

  --> Limitation for provisional attachment : Department to show whether time extended as required under law : VLS Finance Ltd. v. Asst. CIT (Delhi) p. 131

  --> Samiti set up by State Government entitled to registration u/s 12A : CIT v. Krishi Upaj Mandi Samiti, Jailsalmer (Raj) p. 135, CIT v. Krishi Utpadan Mandi Samiti (All) 154 and CIT v. Krishi Upaj Mandi Samiti, Shrimadhopur (Raj) p. 174

  --> Market committee constituted statutorily with object of helping agriculturists and consumers entitled to registration u/s 12A : CIT v. Krishi Upaj Mandi Samiti (MP) p. 140

  --> Seizure of jewellery not released on ground it did not belong to assessee alone where no proof that jewellery belonging to a third person : Matter remanded : Madhu Lalwani v. CIT (Delhi) p. 184

  --> Interest on funds transferred from cash credit/packing credit not entitled to deduction : CIT v. Dhanalakshmi Weaving Works (Ker) p. 188

  --> Revision on ground goodwill not an asset entitled to depreciation not valid : CIT v. Hindustan Coco Cola Beverages P. Ltd. (Delhi) p. 192

  --> Assessee transferring residential house and purchasing four flats in the same residential building entitled to exemption u/s 54 : CIT v. Smt. K. G. Rukminiamma (Karn) p. 211

  --> Cost of construction of property : Estimate based on relevant material justified : CIT v. Smt. V. Gajalakshmi (Mad) 216

  --> AO allowing claim for depreciation without examining facts : Revision by Commissioner justified : CIT v. English Indian Clays Ltd. (Ker) 219

  --> Reassessment proceedings on change of opinion on whether assessee engaged in manufacture not permissible : Northern Strips Ltd. v. ITO (Delhi) p. 224

  --> Mercantile system of accounting : Interest accrued on non-performing assets not recognised as income : No accrual of income : CIT v. Coimbatore Lakshmi Inv. and Finance Co. Ltd. (Mad) p. 229

  --> Duty draw back does not form part of net profit : Eastman Exports Global Clothing P. Ltd. v. Asst. CIT (Mad) p. 232

  --> Power of AO to assess such other income only if income referred to in notice of reassessment has been assessed : CIT v. Jet Airways (I) Ltd. (Bom) p. 236

  --> Recovery of tax : Tribunal finding karta had become a partner in his individual capacity : HUF property could not be attached : ITO v. Tippala China Appa Rao (AP) p. 248

  --> High Court can condone delay in filing appeal : CIT v. R. K. B. K. Ltd. (Cal) p. 269

  --> Assessee executing trust deed in 2000 starting activities in 2005 : Application belatedly filed as per advice of chartered accountant : Delay to be condoned : CIT v. Indian Gospel Fellowship Trust (Mad) p. 283

    NEWS-BRIEF

  --> Plan to cure tax assessment limits of I-T officials'

    In a significant organisational revamp, the Central Board of Direct Taxes has raised the monetary limit of tax assessments handled by income-tax officers or ITOs.

    The move is designed to lighten the load on senior officers so that they can concentrate more on investigations, international taxation issues and transfer pricing. It also aims to ease the hardships of taxpayers in small towns and mofussil areas who have to travel to cities to attend to their tax matters.

    Under the revised monetary limits, revenue cadre officials in metros will handle non-corporate taxpayers with an annual income above 20 lakh and corporates with an income above 30 lakh. In case of non-metros, they will deal only with non-corporate taxpayers with an annual income above 15 lakh and corporates with income over 20 lakh.

    This is a big respite for taxpayers in small towns who until now had to travel to big centres where a Commissioner or an Assistant Commissioner usually has his office.

    The Central Board of Direct Taxes has also finalised a strategic plan that includes creation of dedicated directorates for criminal investigation and risk management.

    Resources freed up as part of this restructuring will be diverted to these specialised units. This will help in mounting an effective surveillance on fund flows into the country that have the potential to impact national security.

    The country's direct tax revenues have grown from 13,000 crore in 1991-92 to 3.87 lakh crore in 2009-10. The number of taxpayers has also grown nearly five times over the period to more than 3.2 crore. [Source : www.economictimes.com dated February 5, 2011]

  --> Tax cap ruling against evaders in line with litigation policy

    The IT Department is mulling over development of an increase in limits above which it files appeals against tax evaders in the tribunal or courts.

    "The Department is planning to change the tax limits for appeals. Now, for filing an appeal in Income-tax Appellate Tribunal (ITAT), the tax effect should be Rs. 3 lakh, for High Courts it has been increased to Rs. 10 lakh and for Supreme Court it is Rs. 25 lakh," the official said.

    With the move, the Income-tax Department expects to reduce up to 13 per cent. cases at ITAT level and 25-30 per cent. cases at High Court and Supreme Court level each, the source added.

    "Even if the case is strong enough to be taken to the Tribunal, the Department will not do so. This will cut down the wastage of resources in unnecessary litigation and reduce the burden of overburdened courts while at the same time assessee would also benefit from this policy," the official added.

    According to the National Litigation Policy, the Government should work towards reducing litigation in courts so that valuable court time would be spent in resolving other pending cases. This will help in achieving the goal in the National Legal Mission to reduce average pendency time from 15 years to 3 years.

    The initiative by the Income-tax Department comes in the backdrop of criticism by the Finance Minister that the I-T Department has emerged as the largest litigant in the country.

    Last year, the Comptroller and Auditor General of India (CAG) had stated in its report that the disputed tax amount "can wipe off the revenue deficit of the Government in 2008-09".

    The total amount of direct tax stuck at the Commissioner (Appeals) level is Rs. 2.2 lakh crore for 2008-09, the CAG had pointed out.

    Apart from that, Rs. 12,757.59 crore is stuck at Income-tax Appellate Tribunal, Supreme Court and High Court levels, the Finance Minister had told the Parliament last year.

    The move is to cut down wastage of resources in unnecessary litigation and reduce the burden of overburdened courts. [Source : www.financialexpress.com dated January 31, 2011]

  --> Survey says to raise IT exemption limit to rough ride over inflation fears

    The Government must increase the personal income tax exemption limit to at least Rs. 3 lakh from Rs. 1.6 lakh at present in the upcoming Budget for giving relief to taxpayers from high inflation, majority of CEOs surveyed by industry body ASSOCHAM has said.

    "In view of the unprecedented inflation particularly the food inflation, the Government must increase the personal income-tax exemption limit from the existing Rs. 1.6 lakh to at least Rs. 3 lakh to give adequate relief to the larger sections of the society, added the majority of the CEOs," the pre-Budget survey said.

    The Budget 2011-12 would be unveiled by the Finance Minister on February 28. At present, income up to Rs. 1.6 lakh is exempted from tax for individuals. For women and senior citizens, the limit is Rs. 1.9 lakh and Rs. 2.4 lakh, respectively.

    The survey further said that due to continuous elevated inflation and high commodity prices across globe, there is a strong case for continuation of stimulus package so that the growth momentum is not spiked.

    It was a pre-Budget expectations survey conducted under the Associated Chambers of Commerce and Industry of India (ASSOCHAM) with participation from its 1,000 CEOs. Inflation, particularly food inflation, has been a concern for both the Government and the common man. For the past few months, food prices are at high levels.

    The WPI inflation for December rose to 8.43 per cent., from 7.48 per cent. in the previous month. Food inflation, based on wholesale prices, rose to 17.05 per cent. for the week ended January 22, on account of escalating vegetable prices, particularly, onions. It was at 15.57 per cent. in the previous week.

    Around 84 per cent. of the CEOs belonging to large, micro, small and medium enterprises polled in the survey held that stimulus package for textiles, gems and jewellery, construction and real estate, cement and steel, among others, should continue for the next fiscal. [Source : www.economictimes.com dated February 6, 2011]

  --> ASSOCHAM offers a neat way to enhance deduction on health insurance premiums

    The Associated Chambers of Commerce and Industry of India (ASSOCHAM) in its pre-budget memorandum recommended that the deduction (under section 80D) in respect of medical insurance premium of an individual or his family should be raised to Rs. 25,000 from Rs. 15,000.

    The rationale given by ASSOCHAM is "In the context of the sharply increasing medical expenses, medical insurance premiums are escalating every year. Also, there is need to increase the penetration ratio of insurance by providing encouragement through tax reliefs for opting for medical insurance." [Source : www.economictimes.com dated February 8, 2011]

  --> Amendment in DTC is the best hope for CARE

    Global agency CARE said the Government should amend the provisions of the Direct Taxes Code in the forthcoming Budget so that balances of non-profit organisation (NPOs) are not treated as income.

    ". . . retained balances of specific-purpose grants received by NPOs should not be treated as 'income' so long as it is applied for the specified purpose," CARE said in a statement.

    It asked the Government that NPOs should be allowed to retain 15 per cent. of general contributions or other incomes to provide a buffer for ongoing activities.

    "Considering that taxable income of the NPOs are computed largely on the same lines as commercial organisations, the DTC must also provide carry forward and set-off of deficit in any financial year against the surplus in subsequent years," the agency said. [Source : www.economictimes.com dated February 8, 2011]

  --> Indian Merchants' Chamber offers Pre-Budget proposals

    Indian Merchants' Chamber (IMC) has submitted its Pre-Budget Memorandum for the budget proposals for direct taxes and issues to the Prime Minister, the Finance Minister and the Chairman, C.B.D.T.

    IMC says, in light of the measures proposed in the revised Direct Taxes Code (DTC) Bill, 2010 it is necessary that none of the proposals contained in the DTC should be introduced through the Finance Bill.

    Some of the key recommendations explained in detail in the memorandum are listed below.

    Retrospective Amendment Should Be Avoided

    Definition of "Charitable Purpose" : Section 2(15)

    Year of Deductibility Of Legitimate Business Expenditure-Reduce Avoidable Litigation

    Exemption from T.D.S. for Regular Assessees

    Disallowance of expenses relating to exempt income : Section 14A

    Gifts etc. in kind to be treated as income : Section 56(2)

    Failure to make claim for certain deductions in the return of Income : Section 80A(5)

    Distribution of capital assets on dissolution of firm to partners : Section 45(4)

    Stay of demand until disposal of the appeal, no recovery proceedings

    Extension of the facility of advance ruling to domestic enterprises

    Dispute Resolution Panel (Section 144C of Income-tax Act) [Source : www.economictimes.com dated February 10, 2011]

  --> Constant agriculture sector incentives worrying the market

    Industry chamber CII called for the Government to provide tax incentives on agricultural activities in the forthcoming Budget to encourage private participation and adoption of new technologies in the sector.

    "CII has recommended encouraging private sector participation through various tax measures (in agriculture)," the industry chamber said in a statement. It said that additional tax incentives need to be given on expenses incurred on new technology and inputs.

    CII also said the Government should incentivise best crop raising practices, soil testing, residue analysis and diagnostics. According to the Government's advance estimates, the output of the agriculture and allied sectors is likely to grow by 5.4 per cent. in 2010-11, compared to just 0.4 per cent. in 2009-10.

    Experts said growth of the sector needs to be encouraged through calibrated Budget measures, as agriculture in India is primarily monsoon-dependent and any minor changes in rainfall patterns affect productivity and quality.

    With regard to the infrastructure sector, CII hopes that the Union Budget presented on February 28 will help reverse the declining investment trend by introducing certain innovative fiscal measures.

    "Emerging challenges such as rising input costs and interest rates amid still subdued global demand will have to be dealt with," CII's Director-General said.

    The industry chamber also asked the Government to reduce the tax liabilities of infrastructure companies to motivate them to make larger investments. India needs a whopping USD 1 trillion investment in the infrastructure sector in the 12th Five-Year Plan (2012-17), of which it expects 50 per cent. to come from the private sector. [Source : www.economictimes.com dated February 8, 2011]



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Indo-UK DTAA : Dividend received by a resident Indian from an English Company is

Indo-UK DTAA : Dividend received by a resident Indian from an English Company is to be increased by 1/9th of the same and on increased amount, which is a gross dividend, same is to be considered as dividend received by assessee for the purpose of Income-tax Act

If the resident of the Contracting State is given some benefit under the Treaty but with conditions then those conditions are also binding for availing the benefit


[2010] 6 taxmann.com 126 (Mum.)
ITAT, MUMBAI BENCH `L', MUMBAI
ACIT

v.

Homy N. J. Dady
ITA No. 470/Mum/2008
July 30, 2010

__._,_.___

Foreign Travel Tax - Penalty for delay in payment

Foreign Travel Tax - Penalty for delay in payment – Provisions of Act to take precedence over Rules; Delay in payment amounts to failure to pay; Higher Penalty on Remand?: Bombay HC

MUMBAI, AUG 28, 2010: ALL these petitions filed by the petitioners under Article 226 of the Constitution of India are challenging imposition of penalty under section 38(3) of the Finance Act, 1979 for delay in payment of Foreign Travel Tax ('FTT') to the Government. The facts involved in all these petitions are more or less common and issues involved are identical. Hence all these petitions were heard together and disposed of by this common judgment.

The Finance Act, 1979, which received assent of the President on 10 th May, 1979 contains Chapter V which provides for provisions of levy of FTT under section 35 of the Act on all passengers embarking on the international journey and created liability on the carriers to collect and pay it to the Central Government.

Section 35A thereof created liability on the carrier to pay interest for default in payment of FTT, whereas section 38 in general provides for penalty and subsection (3) thereof, in particular, provides for penalty on the carrier or other person who fails to pay FTT to the Central Government under subsection (2) of section 35. In addition to the payment of such tax and the interest leviable thereon, the carrier is also held liable to pay minimum penalty not less than one fifth, which may extend to three times of the amount of tax not so paid to the credit of the Central Government. Subsection (4) of section 38 provides that in case of breach of any rules by the carrier or other person, he shall be liable to pay penalty which shall not be less than five hundred rupees, which may extend to fifty thousand rupees, and where the breach is a continuing one, with further penalty which may extend to five hundred rupees for every day after the first during which such breach continues. Proviso to section 38 provides that no order for imposing a penalty shall be passed by such authority unless the carrier or other person on whom the penalty is proposed to be imposed is given an opportunity of being heard in the matter by such authority.

That being the provisions of the Act, proviso to rule 11 provides that no officer of customs mentioned in Sec.3 of the Customs Act shall be competent to impose a penalty exceeding five thousand rupees in any such case.

All the advocates appearing for the petitioners in one voice urged that under proviso to rule 11 of the FTT Rules, no officer of Customs mentioned in section 3 of the Customs Act is competent to impose penalty under section 38(3) of the Act more than Rs.5,000/. According to them, rule 11 is a part of the statute and it provides for lesser penalty than provided in section 38(3) of the Act. Proviso to rule 11 of the FTT Rules being beneficial to the assessees, it should be given effect to rather than section 38(3) of the Act. In other words, no penalty in excess of Rs. 5,000/could be imposed by the respondents is the unequivocal submission advanced by the advocates appearing for the petitioners. In addition to this, it is further submitted that rule 11 of the FTT Rules existed on the statute right from 11th June, 1979, whereas subsections (3), (4) and (5) of section 38 were substituted for the original subsection (3) by the Finance Act (32 of 1994). At that time it was expected on the part of the legislature to amend rule 11 of the FTT Rules. Since there is omission to amend rule 11, a legislative casus omissus cannot be supplied by process of judicial interpretation. It is, thus, urged that subsection (3) of section 38 cannot be used against the petitioners to impose penalty for late payment of FTT.

The High Court after referring to several cases, noted, "it is clear that a delegated legislation would have to be read in the context of the primary statute under which it is made and, in case of any conflict, it is primary legislation that will prevail."

Keeping in mind the aforesaid well settled principles of rule of interpretation, if one turns to section 38(3) of the Act, in contrast to rule 11 of the FTT Rules, it is not difficult to notice that the said rule runs contrary to the provision of the Act. There is a clear conflict between the proviso to rule 11 and section 38(3), the substantive provision of the Act. Reconciliation thereof is not possible. Subsection (3) of section 38 of the Act is a leading provision which by no stretch of imagination can be said to be or treated as subordinate provision. The subordinate provision must give way to the leading provision of the Act. Rule being subordinate legislation cannot override the provision of primary legislation. In this view of the matter, the submission advanced on behalf of the petitioners that the penalty must be in consonance with proviso to rule 11 of the FTT Rules and not in line with section 38(3) of the Act is without any substance. The submission advanced by Mr.Sridharan (counsel) that legislative casus omissus cannot be supplied by the Court is misplaced since this court is only giving primacy to primary provision of the primary legislation while upholding minimum penalty imposed.

The High Court further observed,

The provision of Chapter V of the Act in general and section 38(3) in particular provides that every carrier or other person, who fails to pay the FTT to the credit of the Central Government under subsection (2) of section 35, in addition to payment of such tax and the interest leviable thereon, is made liable to pay penalty. The said provision shows the mandatory nature of payment of liability. The use of the word "shall" in the statute, ordinarily speaking, means the statutory provision is mandatory. It is construed as such, unless there is something in the context in which the word is used, which would justify departure from that meaning. There is nothing in the language of the provision of section 38(3) which would justify any departure. On the other hand, section 38(3) makes it abundantly clear that if the carrier or any other person fails to pay the FTT to the credit of the Central Government within fifteen days as specified, the penalty must follow, which shall not be less than one-fifth of the amount of FTT. It is well settled that when the consequences of the failure to comply with the prescribed requirement is provided by the statute itself, there can be no manner of doubt that such statutory requirement must be interpreted as mandatory.

If we turn to the statutory provisions and the scheme of the foreign travel tax and collection thereof, section 35 of the Act creates liability to collect tax and payment thereof to the credit of the Central Government. Section 35A provides for payment of interest for default in payment of FTT, whereas section 38 provides for penalty in case of nonpayment of FTT within a prescribed time frame, subject to compliance of the principles of natural justice. Both sections operate in different contingencies.

Further more, the question as to whether mens rea is essential ingredient or not depends upon the nature of the right of the parties and the purpose of penalty for which penalty is sought to be imposed. Section 38 of the Act nowhere fastens criminal liability. The default or failure to pay is nothing, but failure or default to comply with the statutory civil obligations provided under the Act and the rules made thereunder. The penalty leviable under ChapterV or under section 38 is penalty in case of default or failure of statutory obligation or in other words for breach of civil obligation. In the provisions engrafted under ChapterV of the Act, there is no element of any criminal aspect as is generally contemplated under criminal proceedings. Therefore, there is no need to establish proof of criminal motive or any mens rea on the part of the defaulter. It is not an essential element for imposing penalty under the Act and rules framed thereunder.

As already noticed, each petitioner was served with the show cause notice. They were given opportunity of hearing. The adverse circumstances were brought to their notice. They were heard and thereafter, by reasoned order imposing penalty is passed against on each of the petitioners. The petitioners have availed opportunity of appeal and revision before the competent authorities provided under the Act. All the three different authorities have passed reasoned orders in consonance with the provisions of the Act following principles of natural justice.

The sole question that arises for consideration in the present petitions, is: whether the authorities below were justified in imposing and sustaining penalty in consonance with subsection (3) of section 38 of the Act ignoring proviso to rule 11 of the FTT Rules. The breach of civil obligation against each petitioner has been established, which was sufficient to attract penalty in the nature of fine under the provisions of the Act irrespective of the fact whether or not the contravention made by the defaulter was with any guilty intention.

It is seen that the respondents, in all cases, have admitted violation of the provisions of the Act by making late deposits. Subsection (3) of section 38 of the Act provides that every carrier or other persons who fails to pay FTT to the Central Government under section 35(2) shall be in addition to payment of such tax and interest leviable thereon be liable to pay penalty which shall not be less than one-fifth but which may extend to three times of the amount of the tax not so paid to the credit of the Central Government. The factual matrix in the cases in hand demonstrate several instances of delayed payment, short or nonpayment of the FTT apart from the lapses committed by the carriers in filing returns. It is, thus, clear that the delayed payment or rather nonpayment of the part of the FTT within the prescribed period is an admitted fact in all these petitions.

One more submission advanced by the advocates appearing for the petitioners is that power to impose penalty under section 38(3) of the Act is exercisable only in case of "failure to pay the tax" and not where there is only a delay in the payment of tax. According to them, "failure to pay" arises only where no payment has at all been made prior to the issuance of the demand notice and does not arise where a payment has been made, albeit belatedly. In other words, mere delay in payment cannot be within the sweep of "failure to pay". Hence delayed payment does not attract penalty.

The High Court held that the said submission is devoid of any substance.

" Failure to pay" means nonpayment. The meaning of nonpayment, as given in the Black's Law Dictionary, is:

" Failure to deliver money or other valuables, esp. when due in discharge of an obligation.

The concept of failure to pay can be quoted with nonpayment. Nonpayment is nothing but failure to pay when due. As per the provisions of the Act, amount of FTT collected becomes due within fifteen days from the date of collection thereof. Failure to pay within this prescribed time frame would mean nonpayment or failure to pay. If any person fails to pay within the statutory period of fifteen days, then such person is well within the sweep of the words "failure to pay". Once the period of fifteen days is over and breach in payment of tax is committed, then it is immaterial when the defaulter in future is making the payment. Had there been no minimum penalty prescribed under subsection (3) of section 38 of the Act, it would have been open for the adjudicating authority to consider the conduct of the defaulter and the extent of delay taking into account the extenuating circumstances while imposing penalty. But once the statute prescribes the minimum penalty without giving any discretion in favour of the adjudicating authority, then one has to go by the provisions of the Act.

The High Court further held, "This Court while exercising writ jurisdiction has only to consider whether or not power to impose penalty has been exercised in accordance with the provisions of the Act and that the decision making process is in accordance with law. Once the Court comes to the conclusion that there is no fault on the part of the adjudicating authority either in complying with the provisions of the Act or in the decision making process, then this Court would be justified in refusing to interfere with the impugned orders. "

Higher Penalty on Remand? The petitioner has urged that it was not open for the adjudicating authority to enhance the quantum of penalty while considering the show cause notice after its remand by the appellate authority to the adjudicating authority. The High Court found the submission without any merit. If one goes through the order of remand, one would find that it was not a limited remand. The remand was to enable the adjudicating authority to consider all the issues after affording opportunity of personal hearing to the petitioner. The first orderinoriginal dated 14th June, 1999 was in breach of principles of natural justice. Consequently, it was set aside, that too, at the request of the petitioner. The show cause notices were restored to the file of the adjudicating authority for consideration afresh. It was not a limited remand. In that view of the matter, it was open for the adjudicating authority to enhance the amount of penalty in consonance with the provision of subsection (3) of section 38 of the Act. Thus, submission made in this behalf holds no water.

All the petitions are dismissed.

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Income tax - Sec 147 - Revenue cannot reopen assessment for second time merely o

 

Income tax - Sec 147 - Revenue cannot reopen assessment for second time merely on ground that subsequent judgement of Apex Court has gone in favour of Revenue: Madras HC

CHENNAI, AUG 27, 2010: REASSESSMENT is a very common action which is resorted by most AOs. But the interesting issue in this case is that whether an assessment can be reopened for the second time u/s 147. Can Revenue reopen an assessment which was already reassessed u/s 147, based on subsequent judgement of the Apex Court. Does it amount to change of opinion. And the answers to these questions go against the Revenue.

Facts of the case

The assessee was engaged in manufacturing, trading and exporting of leather goods. For the assessment year 1999-2000, the assessee filed return showing 'nil' income by claiming deduction under Section 80HHC of the Income-tax Act, 1961. The assessee's return was initially processed under Section 143(1) of the Act. The Assessing Officer reopened the assessment by invoking the provisions under Section 147 of the Act. The reopened assessment was completed on 18.03.2003. Accordingly, the deduction claimed by the assessee under Section 80HHC of the Act, was scaled down to Rs.73,42,876/-. In the said reassessment order, the loss from the export business was adjusted in accordance with the provisos to Section 80HHC(3)(c) of the Act. However, the Assessing Officer reopened the assessment, which was already reopened, by once again invoking the provisions of Section 147 of the Act. Accordingly, a notice under Section 148 of the Act, was issued to the assessee on 04.08.2005. The said proceedings have been initiated by the Assessing Officer on the ground that the assessee was wrongly allowed deduction under Section 80HHC of the Act, after netting the negative business profits with the export incentive. Thereafter, the Assessing Officer has passed an order rejecting the case of the assessee by disallowing the deduction under Section 80HHC.

CIT(A) disagreed with the assessee but Tribunal allowed the appeal.

Before the HC, the Revenue argued that the proceedings have been initiated for the second time under Section 147 of the Act, only based upon the judgment of the Apex Court, wherein the Hon'ble Supreme Court was pleased to hold that the deduction under Section 80HHC could be allowed only if there was positive profits from export operations.

The HC held that,

++ in the present case, the assessee at the time of filing return for the assessment year 1999-2000 has disclosed all the materials before the Assessing Officer and claimed deduction under Section 80HHC. Even before the earlier proceedings initiated under Section 147, it is not the case of the Revenue that the assessee has not disclosed the materials. Therefore, on a consideration of the materials available on record, the Assessing Officer passed an order on the earlier two occasions. Thereafter, the Assessing Officer has sought to reopen the assessment once again invoking the power under Section 147 of the Act, which, in is not permissible in law on the facts of the case;

++ the judgment rendered by the Supreme Court is an expression of opinion on the interpretation of statute. The power under Section 147 will have to be invoked by the Assessing Officer in accordance with the said provision. In other words, merely because a judgment has been rendered, the same cannot be a ground for reopening the assessment under Section 147 of the Act;

++ it is not in dispute that the first reassessment was done by the Assessing Officer under Section 147 of the Act on 18.03.2003. Thereafter, notice for reopening the assessment for the second time was issued to the assessee on 04.08.2005. The assessment in the present case on hand is for the assessment year 1999-2000. The four years period of limitation for invoking the power under Section 147 expired on 31.12.2004. As observed earlier, in the present case on hand, the assessee has disclosed all the material facts and he has also filed the return within the time. Therefore, the proceedings initiated by the Assessing Officer for the second time under Section 147 is barred by limitation. Therefore, even the proviso to Section 147 does not come into play on the facts of the case;

++ Explanation-1 to proviso to Section 147 also does not apply to the present case on hand. A perusal of the said explanation would show that a mere production of accounts books and other evidence could have been discovered by the Assessing Officer would not amount to disclosure within the meaning of the provision. Therefore, the said Explanation-1 should be considered in the context of the provision, inasmuch as the same is applicable only for the production of the records and other evidence. Hence, the same will not be applicable to the case of filing of a return with adequate particulars fully disclosing all the materials for the purpose of assessment.

Revenue's appeal dismissed.

__._,_.___

__,_._,___

S. 147 reopening for rectifying s. 154 mistakes is invalid

 

Hindustan Unilever vs. DCIT (Bombay High Court)

S. 147 reopening for rectifying s. 154 mistakes is invalid

The AO issued a notice u/s 148 to reopen the assessment within 4 years from the end of the assessment year. There were four recorded reasons and one of them was that the AO had committed a computational error in the assessment order by deducting the wrong figure instead of the right figure. The assessee filed a Writ Petition to challenge the reopening inter alia on the ground that as the mistake could be rectified u/s 154, the reopening was bad. HELD upholding the challenge:

(i) While Explanation 2 to s. 147 deems income to have escaped assessment if excessive deduction is allowed, the reopening of an assessment u/s 147 has serious ramifications because the AO is empowered to reassess income even in respect of issues not set out in the notice. Therefore, if the power to rectify an order u/s 154(1) is adequate to meet a mistake or error in the order of assessment, the AO must take recourse to that power as opposed to the wider power to reopen the assessment. If the error can be rectified u/s 154, it would be arbitrary for the AO to reopen the entire assessment u/s 147. Further, the error in the order was not attributable to a fault or omission on the part of the assessee and the assessee cannot be penalized for a fault of the AO;

(ii) When one or more modes of assessment or remedies are available to the taxing Authority, the Authority must adopt that remedy which causes least prejudice to the assessee.

__._,_.___

Sec 80 I , coating of wire NOT manufacturing

Income-tax : Process of coating with oxides of Noble Metals on Titanium Metal Electrode / Anode bringing about a change in its character and user for making it fit for use in production of chlorine and caustic soda in an electrolytic process is "manufacture" or "production" of "article" or "thing" within meaning of section 80-IA.

    l  The conclusion drawn by the Tribunal that by coating electrode or titanium anodes the assessee was not "manufacturing" or "producing" an "article" or "thing" within the meaning of section 80-IA(2) was erroneous, being contrary to mandatory provision of section 80-IA and contrary to and inconsistent with the evidence on record.

 

[2011] 9 taxmann.com 234 (Delhi)

HIGH COURT OF DELHI

Titanor Components Ltd.

v.

CIT

SANJAY KISHAN KAUL & RAJIV SHAKDHER, JJ.

ITA NO. 24/1999

FEBRUARY 4, 2011

 

JUDGMENT

 

Rajiv Shakdher, J

1. This is an appeal preferred under section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'IT Act') by the assessee against the judgment of the Income Tax Appellate Tribunal (hereinafter referred to as the 'Tribunal') dated 24.04.1999 passed in ITA No. 2079/D/98 pertaining to assessment year 1994-95.

1.1 The appellant is aggrieved by the impugned judgment inasmuch as it has resulted in denial of deduction claimed by the assessee under the provisions of section 80IA of the IT. Act. The captioned appeal against the impugned judgment was admitted on 18.08.2000. By this order, the following questions of law were framed :-

"(i). Whether coating with oxides of Noble Metals on Titanium Metal Electrode / Anode bringing about a change in its character and user for making it fit for use in the production of chlorine and caustic soda in an electrolytic process is "manufacture" or "production" of "article" or "thing" within the meaning of section 80-IA of the Income Tax Act, 1961?

(ii). Whether the conclusion, drawn by the Income Tax Appellate Tribunal that by coating electrode or titanium anodes the appellant was not "manufacturing" or "producing" an "article" or "thing" within the meaning of section 80IA(2) of the Income Tax Act, 1961, is erroneous being -

  (a)  Contrary to mandatory provision of section 80IA;

  (b)  Contrary to and inconsistent with the evidence on record?"

2. The brief facts which have led to the present appeal are as follows:

2.1 The assessee applied to the Government of India through Ministry of Industry, Department of Industrial Development for a licence to set up a plant to manufacture coated metal electrodes at Kundaim Industrial Area in north Goa. The assessee was issued a licence on 16.10.1990. The assessee also applied for and was issued a registration certificate by the Excise Department vide letter dated 26.06.1993. In the interregnum, i.e., on 26.02.1993 the assessee had entered into an agreement (in short 'agreement') with a company by the name of M/s UHDE India Limited (hereinafter referred to as 'UHDE') for coating titanium substrates. This contract was evidently executed between the assessee and UHDE with the knowledge of another company by the name of Indian Petro Chemicals Corporation Ltd. (hereinafter referred to as 'IPCL').

2.2 It appears that UHDE had undertaken an obligation to supply coated titanium substrates to IPCL for the use in their chlorine-caustic soda plant. By virtue of this agreement IPCL was to supply the titanium substrates through UHDE to the assessee free of cost, to enable the assessee to execute the job work, which entailed coating of, the titanium substrates, in terms of the specifications provided for in the aforementioned agreement.

2.3 Under the said agreement the assessee was required to coat the titanium substrates numbering 1212 at a total cost of Rs 6,42,84,480/-. The per square metre cost of coating titanium substrates was pegged at Rs 19,500/-. Importantly, the cost agreed to did not include excise duty which was required to be reimbursed by UHDE. Furthermore, the assessee was also obliged to dispatch the coated titanium substrates to another company, i.e., one Alpha Label India Ltd (hereinafter referred to as 'Alpha') alongwith necessary documentation, which included, the excise gate pass; so as to enable the said entity from claiming MOD VAT credit in respect of the excise duty. Evidently, Alpha was required to undertake further fabrication work to manufacture "membrane cell elements". It is not disputed that the assessee executed the contract arrived at between itself and UHDE.

3. With this background the assessee filed its return for the relevant assessment year, i.e., 1994-95. The assessee's return was a loss return which, pegged the loss at Rs 1,28,71,873/-. During the course of assessment, the assessing officer noted that the assessee had claimed a deduction under the provisions of section 80IA of the IT. Act amounting to Rs 2,62,20,996/- against a gross total income of Rs 1,33,49,093/-.

3.1 It is pertinent to note that the assessee avers in the appeal that the claim for deduction under section 80IA of the IT Act was evidently reduced to a sum of Rs 1,46,24,648/- and furthermore, the overall deduction under section 80IA of the IT. Act would be limited to the gross total income under section 80A(2) of the IT. Act.

4. The assessing officer was evidently of the view that the deduction under section 80IA of the IT. Act was not available to the assessee as the "process" whereby, the titanium substrates were coated by the assessee did not constitute "manufacture" within the meaning of the said provision. The assessee, however, on its part attempted to furnish an explanation vide letters dated 28.02.1997 and 07.03.1997.

4.1 Briefly, the assessee attempted to explain that titanium substrates were received by it through UHDE as free issue material which, the assessee was required to coat with chemicals (Noble Metal Oxide), as per the specifications contained in its agreement with the UHDE. For its efforts the assessee had received consideration, as stipulated in the aforementioned agreement against an expenditure of Rs 1,67,80,525/- incurred by it towards raw material consisting of Noble Metals, such as, ruthenium and iridium. In addition the assessee claimed it had paid excise duty to the tune of Rs 1,60,45,945/-.

4.2 The sum and substance of the explanation furnished by the assessee was that a commercially distinct product had come into existence after it was processed by the assessee.

4.3 Before the assessing officer reliance was placed on the provisions of section 80IA and, in particular, sub-section 2(iii) read with sub-section 12(b) and, the explanation to section 33B to contend that the word "manufacture" in section 80IA necessarily would include processing of goods.

5. The assessing officer, however, rejected the contention of the assessee and proceeded to hold that the processing of goods could not be equated with manufacture and production of articles. In his view, chemical coating of titanium substrates did not result in it being transformed into an entirely new commercial commodity. Thus, the assessing officer concluded that processing in the instant case, did not partake the attributes of manufacture or production of an article or thing as envisaged in section 80IA of the I.T. Act.

6. Aggrieved by the order the assessee preferred an appeal to the Commissioner of Income Tax (Appeal) [hereinafter referred to as 'CIT(A)']. The CIT(A) sustained the order of the assessing officer. In arriving at his conclusion, the CIT(A) placed reliance on the judgment of the Bombay High Court in the case of CIT v. Sterling Foods (Goa) 213 ITR 851, even though the said decision pertained to the provisions of section 80HH of the IT. Act, since it used the same expression 'manufacture' or 'production' of articles.

6.1 On facts, the CIT(A) more or less replicated the view of the assessing officer by holding that coating of titanium substrates by the assessee did not result in its conversion into an entirely new commodity. The underlying theme of CIT(A)'s order is that titanium substrates and titanium anodes are one and the same thing; therefore, all that the assessee did was to coat the said articles with noble metal oxides which, according to the CIT(A), did not result in emergence of an entirely new commodity.

7. The assessee being aggrieved preferred an appeal to the Tribunal. The Tribunal sustained the view of the authorities below.

7.1 The thrust of the Tribunal's view appears to be that the expression used by the assessee in its agreement with UHDE to describe the articles received, i.e., titanium substrates (which, as noticed above, were free issue material supplied for the purposes of coating them with noble metal oxides) was a "misnomer". For this purpose, the Tribunal relied upon the observations set out in the encyclopedia of chemical technology authored evidently by Kirk and Other (volume 15 at pages 172-183).

7.2 In other words, the Tribunal was of the view that what the assessee was receiving under its agreement with UDHE as free issue material was nothing but uncoated titanium metal anodes which on receipt were subjected to a process of coating by the assessee. In the opinion of the Tribunal the process of coating carried out by the assessee only enhanced the "longevity" and the "utility" of the original article by making it resistant to corrosion and, increasing its "conductivity" and "dimensional stability". In sum and substance the Tribunal concluded that a distinct commercial commodity did not emerge by virtue of the process employed by the assessee on the original article. According to the Tribunal, what the assessee received were titanium electrodes. These were, as per the Tribunal, nothing but titanium metal anodes; which remained unaltered in its character even after the conclusion of the process of coating. The discussion in this regard is found in paragraphs 22 and 24 of the impugned judgment of the Tribunal.

7.3 The Tribunal went on to support the aforementioned analysis by adverting to the fact that the assessee's agreement with UHDE disclosed that the coated titanium metal anodes had to be dispatched by it, for further fabrication, to one Alpha for the purposes of manufacturing membrane cell element. In the Tribunal's wisdom, this demonstrated that in order to convert a coated titanium metal anode into a "useful commercial commodity" it would require further processing. Consequently, the Tribunal repelled the contention of the assessee in regard to its claim for deduction under section 80IA of the IT. Act.

8. The instant appeal impugns this very reasoning of the Tribunal.

8.1 In support of the appeal, arguments on behalf of the assessee were addressed by Mr. Jain, while in opposition Ms Bansal appeared on behalf of the department.

8.2 Mr Jain briefly reiterated the grounds taken before the authorities below and, in particular, stressed on the opinions rendered by two experts, i.e., Dr. (Mrs.) K. Gadgil and Mr M.K. Sarkar, professors with the Indian Institute of Technology, Delhi (in short, I.I.T. Delhi) to demonstrate that the process undertaken by the assessee actually resulted in production of an anode and hence, a new article emerged contrary to what had been held by the authorities below. Mr Jain submitted that the test for ascertaining as to whether a new article was produced was: as had been settled by courts in several decisions rendered in the past; the coming into existence of a new marketable commodity. It was contended, the fact that this article had been subjected to a process which resulted in manufacture, and that the manufactured article was marketable was apparent on perusal of the material placed on record, i.e., invoices, excise gate passes and the agreement entered into by it with UHDE as also the opinion of the experts. In support of his submissions the learned counsel relied upon the following : CIT v. Oracle Software India ltd. (2010) 2 SCC 677; Vijay Ship Breaking Corpn. & Ors. v. CIT (2008) 14 DTR (SC) 74; CIT v. Tamil Nadu Heat Treatment and Fetting Services (P.) Ltd. (1999) 238 ITR 529; CIT v. Laxmi Art Studio (2001) 249 ITR 710; and CIT v. Emptee Poly-Yarn Private Limited (2010) 2 SCC 720.

9. As against this, Ms Bansal largely relied upon the judgment of the Tribunal and the authorities below. In particular, Ms Bansal stressed upon the fact that what the assessee had undertaken was job work and, in lieu thereof, the consideration received was nothing but job work charges. The learned counsel contended that the findings of fact returned by the Tribunal and the authorities below, clearly demonstrated that no new commodity had came into existence as contended by the assessee. In support of this submission she laid great stress on the observations made by the Tribunal in paragraph 25 of its judgment (which have already been noticed by us hereinabove) to the effect that the coated titanium substrates required further fabrication and, for this purpose they had to be dispatched under the agreement with UHDE by the assessee to one Alpha. The learned counsel in support of her contentions relied upon the judgment in the case of Bhagat Construction Co. Pvt Ltd. v. CIT (1998) 232 ITR 722.

10. We have heard the learned counsel for the parties and perused the judgment and orders of the authorities below, including the material placed before us.

10.1 On consideration of the material, in our view the following facts have emerged :

   (i)  the assessee had applied for a licence to set up an industry to manufacture coated titanium metal anodes. This licence was issued to the assessee on 16.10.1990;

  (ii)  On 26.02.1993 the assessee had entered into an agreement with UHDE for coating titanium substrates. It is pertinent to note at this stage (as noticed above) that while the department all along has contended that the titanium substrates are nothing but uncoated titanium metal anodes, the assessee on the other hand has taken the stand that titanium substrates are nothing but supports, which after coating are transformed into anodes;

(iii)  the assessee was issued a registration certificate by the Excise Department on 26.06.1993 in respect of the process of coating it undertook qua the article it received from UDHE. We are consciously not using, at this juncture, either the expression titanium substrate or titanium metal anode as there is contest between the parties on this very aspect;

(iv)  the assessee has in its invoices issued to UHDE sought recovery of both, the charges towards coating of the article received as well as in respect of excise duty leviable on it. Towards excise duty the assessee has paid a sum of Rs 1,60,45,945/-. There is no dispute raised before us with regard to production of invoices and the relevant gate passes before the assessing officer for scrutiny;

  (v)  In terms of the agreement arrived at between the assessee and UHDE the coated articles were sent to an entity by the name of Alpha for further fabrication to manufacture membrane cell elements;

(vi)  the assessee had placed before the authorities below, a flow chart with respect to the process employed in converting the article received from UDHE into a finished product. For the sake of convenience the same is extracted hereinbelow:

(vii)  the assessee had supported its contention made to the effect that, the process undertaken by it involved a transformation of the original material into a distinctly new marketable product, by relying upon the following material: extracts from the encyclopedia of chemical technology authored by Kirk and Othmer (volume 15 page 172-183); the opinion of professors Dr. (Mrs) K. Gadgil and Mr Sarkar of I.I.T., Delhi, who, in their opinion had placed reliance on relevant contents of the aforementioned encyclopedia of chemical technology; and lastly on invoices and excise gate passes; to which reference is already made hereinabove by us.

11. With aforesaid material on record let us examine what it briefly reveals :-

11.1 A reading of the extracts from the encyclopedia of chemical technology seems to suggest that in a chlor-alkali industry electrolytic process is inevitably used. An electrolytic process broadly involves de-composition of a liquid, which contains ions, by electrolysis. Electrolysis is nothing but de-composition of the substance by application of electric current. Therefore, what was crucial for IPCL, who happens to be manufacturer of Chlorine-Caustic Soda that they had, for their purposes in place anodes, which allowed passage of electricity without building up non-corrodible oxide coating on the surface.

11.2 As is therefore evident that an anode is really one of the terminals through which electrons pass in an electrolytic process; the other terminal is commonly referred to as a cathode.

11.3 The Tribunal upon reading the following passage came to the conclusion that what was supplied to the assessee was nothing but an uncoated anode. For the sake of convenience the passages are extracted hereinbelow:

"In response to the needs of the aerospace industry, an important technological breakthrough in the development of metal anodes took place in the 1950s when titanium became commercially available in large quantities. The excellent corrosion resistance of titanium in a variety of solutions and its self-oxidizing, valve-metal characteristic quickly were recognized to be of value for electrochemical systems. Titanium as an anode does not pass current satisfactorily because of the build up of noncorrodible oxide coatings on the surface, but with the addition of a noncorrodible metal coating, a useful anode can be produced. Extensive research work culminated in the filing of patents in 1957 in the Netherlands the U.K. (5-6) in 1958, which led to a group of patents (7-9) where oxides of noble metals are used in the coating of titanium, in particular, ruthenium oxide in combination with other metals and oxides. These precious metal oxide coatings have received worldwide acceptance in the chlor-alkali industry and have resulted in considerable power savings in the production of chlorine. By optimizing the characteristics of these anodes, new cell designs and technology for the production of chlorine have been developed."

11.4 A perusal of a further extract from the very same encyclopedia of chemical technology would show that a commercially distinct product, which is ubiquitously described as precious metal anode or noble metal coated titanium or dimensionally stable anodes etc., come into existence. The relevant extract from the said encyclopedia succeeding the extract set out hereinabove reads as follows :-

"A Second group of patents (10-12) covers platinum and mixtures of platinum-iridium deposited thermally or electrolytically on the titanium substrate. Such anodes have their main application in cathodic protection and the production of sodium chlorate.

These composite anodes, with titanium as the base metal, have been described variously as precious metal anodes (PMA), noble-metal coated titanium (NMT), dimensionally stable anodes (DSA), and platinized titanium anodes (PTA)."

11.5 The fact that there is a distinct different product produced is borne out from the following extracts under the heading "ruthenium titanium oxides".

"Scanning electron micrographs of ruthenium titanium oxide coatings show a characteristic microcracked surface (23). This cracking occurs early in the coating preparation, as solvent evaporates from the surface to form a gel of unreacted ruthenium and titanium compounds. As the coating is baked at higher temperatures, the cracks increase in size because of volume contraction of the gel. A fully baked anode coating has the appearance shown in Figure I and a surface area factor of 180-230 times the geometrical area, as measured by BET (Brunauer-Emmett-Teller) nitrogen adsorption. This large surface area contributes to the low chlorine discharge potential of these types of coatings, providing a large number of catalytic sites for gas evolution while minimizing concentration polarization…….

Chlorine-Caustic. The widest application and most rapid acceptance of metal anodes has been in the chlorine-caustic industry, where ruthenium-titanium oxide DSA coatings are used. In the mid 1960s, chlorine producers were shifting worldwide to mercury cells to take advantage of the high current densities attainable. For this reason, and because of more favourable economics, the DSA initially was first operated commercially in mercury cells. Anode structures were designed to replace graphite anodes and conversion could be completed without modification of the cells (see Alkali and chlorine products)." (emphasis is ours)

11.6 Prof. Dr. (Mrs.) K. Gadgil and Mr Sarkar of the IIT, Delhi while relying upon the said encyclopedia opined as follows:

"In manufacture of caustic soda-chlorine by electrolytic process, the positive terminal Anode should have the property that it should facilitate liberation of chlorine and suppress production of Oxygen from the aquous electrolyte (sodium chloride solution). This requires operations at a very low current density with high resistance to oxidation corrosion).

Pure titanium metal cannot be used because of quick coverage of surface by non-conducting Titanium dioxide which increases the resistance and voltage quickly to a level where high amount of oxygen is produced, besides reducing conducting surface area in a very short time. Bare Titanium is not a Anode. Consequently industrial chlorine cannot be produced. Best solution to this problem was found by coating the surface of Titanium with Noble metal oxides (which are conducting) in particular, Ruthenium oxide with or without other noble metals, such as Iridium.

Coated Titanium Metal Anodes are manufactured by coating of Titanium substrate with solution of mixed metal oxides, followed by drying and controlled baking, with strict process control. The formulae of coating solutions and process of their manufacture are closely guarded secrets of Technology suppliers.

It has been found that such coated metal titanium anodes have micro-cracked surfaces having internal surface area around 200 times that of geometrical surface, with high amount of conductivity even in presence of Titanium oxides. Through these micro-cracks high rate of chlorine release is facilitated. IN ABSENCE OF THE NOBLE METAL OXIDE COATING, THE CURRENT WILL FACE ENORMOUS RESISTANCE TO PASS THROUGH THE BASE TITANIUM SURFACE DUE TO THE FORMATION OF TITANIUM OXIDE FILM AND ELECTROLYSIS DOES NOT TAKE PLACE TO PRODUCE INDUSTRIAL CHLORINE....

TITANIUM ONLY ACTS AS A SUBSTRATE (SUPPORT) FOR SUPPORTING THE REAL ANODE WHICH IS NOBLE, METAL OXIDES

In summary, it can be stated that bare titanium metal is not an Anode and therefore, cannot be used as a Metal Anode for caustic soda — chlorine manufacture by electrolytic process. Whereas, mixed metal oxide coated titanium metal Anode provides excellent conductivity, resistance to corrosion and dimential stability necessary for manufacture of caustic soda and chlorine by electrolytic process all over the world. Technology of coating composition and methods of manufacture of anodes, however, tend to get upgraded continuously through R&D efforts of Technology suppliers." (emphasis is ours)

11.7 A reading of the aforesaid opinion alongwith the extracts from the encyclopedia quite clearly indicates that, according to the experts, titanium substrates is only used for the purpose of supporting production of a real anode, that is, a noble metal oxide. A bare titanium is not an anode.

11.8 It is important to bear in mind that the department did not produce any material by way of affidavit of any chemical analyst or an expert in chemical technology to counter the view of professor Mr. Sarkar and Dr. (Mrs.) K. Gadgil. The authorities below had donned upon themselves the role of an expert by reading an extract in a manner which perhaps suited their conclusion.

11.9 In our view such an approach is flawed; while sitting as an adjudicator, courts have to base at times, their decision; on material produced before it on an issue which requires expert input - therefore its decision not to accept material placed before it should ordinarily also be based on a similarly persuasive evidence, unless the material placed before it is completely unreliable. As noted above, the department did not adduce any evidence in support of its contention, which was contrary to that raised by the assessee.

12. What lends credence to the submissions made on behalf of the assessee which is that, coating of titanium substrates leads to emergence of a distinct product, is the fact that the process undertaken by the assessee has been subjected to excise duty by another statutory authority of the State. This crucial aspect of the matter we find has not been adverted to by any of the authorities below including the Tribunal even though the material as well as submission with regard to this aspect was squarely putforth by the assessee.

12.1 It is trite law that only that process is recognized as constituting manufacture which results in emergence of a distinct article on being subjected to either treatment, or labour or even manipulation, [see UOI v. Delhi Cloth & General Mills (1963) Supp (1) SCR 586]. The Supreme Court in the aforementioned case while, quoting from the Permanent Edition Of Words And Phrases Vol. 26 cited with approval the following passage:

"Manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use."

12.2 But for the purposes of imposition of excise duty it is not enough that manufacture takes place, it should result in production of an article which is marketable though not necessarily marketed. This aspect of the matter has been dealt with by the Supreme Court in several decisions. We do not wish to burden the judgment with all those cases; however only to highlight the contours of this principle we intend to refer to the following two judgments.

12.3 First being: South Bihar Sugar Mills Ltd. v. UOI & Ors. (1968) 3 SCR 21. In South Bihar Sugar Mills (supra) case [in which Delhi Cloth Mills (Supra) was cited with approval] the Supreme Court after analyzing the scientific evidence put forth both by the assessee and the department came to the conclusion that, in manufacture of sugar, kiln gas was produced by the assessee, which was not carbon die oxide as known to the market and hence, could not be made amenable to imposition of excise duty. The relevant observations is extracted hereinbelow:

"16. The Act charges duty on manufacture of goods. The word 'manufacture' implies a change but every change in the raw material is not manufacture. There must be such a transformation that a new and different article must emerge having a distinctive name, character or use. They duty is levied on goods. As the act does not define goods, the legislature must be taken to have used that word in its ordinary, dictionary meaning. The dictionary meaning is that to become goods it must be something which can ordinarily come to the market to be bought and sold and is known to the market. That it would be such an article which would attract the Act was brought out in Union of India v. Delhi Cloth & General Mills Ltd. [1963] Suppl. 1 SCR 586...."

12.4 The second being: A.P. State Electricity Board v. Collector of Central Excise (1994) 2 SCC 428. In this case once again the Supreme Court was called upon to adjudicate as to whether pre-stressed cement concrete poles manufactured by Andhra Pradesh State Electricity Board (APSEB) were goods within the meaning of section 3 of the Central Excise Act Sale Act, 1994. The Supreme Court after examining a number of judgments including the judgments in the case of Delhi Cloth Mills (supra) and South Bihar Sugar Mills (supra) came to the conclusion that what was necessary for imposition of excise duty was for the emergence of marketable goods. It was argued on behalf of the assessee that pre-stressed cement concrete poles manufactured by them were not goods inasmuch as they were not marketable since they were manufactured for a captive purchaser. The court after analyzing its own precedents opined that: whether or not the goods were in fact marketed was of no relevance; what was essential was that goods were marketable. Marketability being essentially a question of fact it would have to be decided as an issue of fact in each case. Even if goods were available only from one source or from a specified market it made no difference so long as they were available to the purchaser. Marketability was not dependent upon whether or not a number of purchasers available for the goods in issue; a single purchaser would suffice. Relevant observations in this regard are contained in paragraph 10 of the judgment which are extracted hereinbelow for the sake of convenience:

"10. It would be evident from the facts and ratio of the above decisions that the goods in each case were found to be not marketable. Whether it is refined oil (non-deodorised) concerned in Delhi Cloth and General Mills or kiln gas in South Bihar Sugar Mills or aluminium cans with rough uneven surface in Union Carbide or PVC films in Bhor Industries or hydrolysate in Ambalal Sarabhai the finding in each case on the basis of the material before the Court was that the articles in question were not marketable and were not known to the market as such. The 'marketability' is thus essentially a question of fact to be decided on the facts of each case. There can be no generalization. The fact that the goods are not in fact marketed is of no relevance. So long as the goods are marketable, they are goods for the purposes of section 3. IT is also not necessary that the goods in question should be generally available in the market. Even if the goods are available from only one source or from a specified market, it makes no difference so long as they are available for purchasers. Now, in the appeals before us, the fact that in Kerala these poles are manufactured by independent contractors who sell them to Kerala State Electricity Board itself shows that such poles do have a market. Even if there is only one purchaser of these articles, it must still be said that there is a market for these articles. The marketability of articles does not depend upon the number of purchasers nor is the market confined to the territorial limits of this country. The appellant's own case before the excise authorities and the CEGAT was that these poles are manufactured by independent contractors from whom it purchased them. This plea itself- though not pressed before us - is adequate to demolish the case of the appellant." (emphasis is ours)

13. As in the Central Excise and Salt Act, 1944, in the IT. Act there is no definition of the word manufacture. The expression industrial undertaking, however, has been defined inter alia in the explanation to section 33B of the IT. Act as any undertaking which is mainly engaged in the manufacture or processing of goods. The Tribunal in this case has, returned a finding to the effect that the assessee has been treated as an industrial undertaking by the relevant authorities. However, after accepting that the assessee is an industrial undertaking; (and there being no dispute that the only activity in which the assessee is engaged in is: coating titanium substrates with noble metal oxides) - the Tribunal, curiously, went on to say that what was produced was not a distinct article ignoring the evidence on record.

13.1 This apart, the Tribunal while rejecting the contention of the assessee in paragraph 26 of the impugned judgment observed that the assessee had not placed on record material to show that after coating the article in issue it became a "saleable" article and hence, a different commodity.

13.2 In our view the Tribunal lost sight of the fact that a distinct new product had come into existence after it was processed by the assessee. The fact that it had a single purchaser, (i.e., UHDE/IPCL) for its coated titanium substrates ought not to have come in the way of Tribunal allowing the deduction to the assessee. As noticed above the test is that the transformed article should be marketable. In this case there could not have been a better evidence of marketability than the assessee's agreement with UHDE.

14. The Supreme Court, as a matter of fact has, in a recent judgment entitled CIT v. Oracle Software India Limited (2010) 2 SCC 677 further refined the test as to what constitute a manufacturing process. In this case the Court was called upon to decide as to whether a process by which blank compact discs are transformed into loaded software would constitute manufacture in context of section 801 of the IT. Act. The Court employed the test of fitness. In other words, to come to the conclusion whether the process employed constitutes manufacture one would have to ascertain the efficacy of the process in rendering the commodity or an article fit for use. The relevant observations of the court in this regard are given in paragraphs 16 to 18 of the judgment. This judgment of the Supreme Court was followed in CIT v. Emptee Poly-Yarn Private Limited (2010) 2 SCC 720.

14.1 In our view the Tribunal had to employ the test of fitness in ascertaining whether the process employed by the assessee rendered the free issue material supplied to it (whether referred to as titanium substrates or a titanium metal anode), fit for use in the industry.

14.2 The Tribunal's conclusion; that the coated titanium substrates did not result in production of a distinct new article, based on provisions of the agreement arrived at by the assessee with the UHDE which, required it to dispatch the processed titanium substrates to Alpha for further fabrication to manufacture membrane cell element is, in our view, flawed. The reason for this is: the Tribunal had to address the issue as to whether the process employed by the assessee resulted in manufacture of a distinct new article. If it did, it mattered little that the said product could be further worked upon to manufacture membrane cell element. This line of inquiry and the resultant conclusion, without relevant material to support it: was, according to us, misdirected. In our opinion the Tribunal employed the wrong test. Once the Tribunal found as a fact that the process undertaken by the assessee resulted in production of a "useful commercial commodity" the enquiry had to end there, and the assessee's claim allowed.

15. The judgment cited by Ms Bansal, i.e., Bhagat Construction (supra) has no applicability. In the said case the assessee before the court impugned the order of the Tribunal before it whereby, its claim of investment allowance in respect of equipment used for quarrying and stabilizing electricity was denied. The court sustained the contention of the department on the ground that the assessee was not an industrial undertaking. The reason for coming to this conclusion was that it had been found as a matter of fact that the assessee's main business was civil engineering works and not to manufacture any intermediary products. In the course of carrying out civil engineering works it had quarried certain material which were mainly stones and the said material had been used for the said purpose. The court was of the view that, since in the course of its main activity, which was, as indicated above, civil work certain by-product had been produced, which was consumed, it would not enable the assessee to claim investment allowance on the ground that it was engaged in carrying out an industrial activity. The court held that the assessee was not a manufacturer of any article or thing but, as a matter of fact was a consumer of by-product, produced, and therefore, the machinery in issue was not amenable to investment allowance. In our view, the case is completely distinguishable on facts and hence, not applicable.

16. For the reasons given above, both questions of law are answered in favour of the assessee and against the department. Consequently, the impugned judgment is set aside. However, in the circumstances parties shall bear their own cost.

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ITR (Trib) : Valume 7 Part 8 dt 21.02.2011

ITR'S TRIBUNAL TAX REPORTS (ITR (Trib)) HIGHLIGHTS
Volume 7 Part 8 ISSUE DATED 21-02-2011

APPELLATE TRIBUNAL ORDERS
->> Assessee disclosing full details o->> income pertaining to claim for deduction o->> expenses on payments to workers, penalty u/s. 271(1)(c) to be deleted : Asst. CIT v. Megji Mathradas (Mumbai) p. 749 ->> License fee paid to parent company under technical assistance agreement allowable as business expenditure : Dy. CIT v. Nestle India Ltd. (Delhi) p. 758 ->> Mere non receipt o->> interest by creditor does not make assessee not liable to TDS u/s.194A : ITO v. Executive Officer cum Secretary Marketing Committee (Delhi) p. 769 ->> Where assessee not deemed owner, income from subletting assessable as income from other sources : Tushar Pravinchandra Shah v. Dy. CIT (Ahmedabad) p. 776 ->> Where no objection before AO regarding service o->> notice o->> reassessment, reassessment valid : ITO v. M. V. Balaji (Chennai) p. 795 ->> Where no expenditure incurred by educational institution towards achieving main object, denial o->> renewal o->> approval justified u/s. 80G : Pearls Educational Institute v. CIT (Delhi) p. 804 ->> Industrial undertaking : 90 per cent. o->> income from wind energy not to be reduced u/s. 80HHC, Expln. (baa) : Elgitread (India) Ltd. v. Asst. CIT (Chennai) p. 813
NEWS-BRIEFS
->> Plan to cure tax assessment limits o->> income-tax officials In a significant organisational revamp, the Central Board o->> Direct Taxes has raised the monetary limit o->> tax assessments handled by Income-tax Officers. The move is designed to lighten the load on senior officers so that they can concentrate more on investigations, international taxation issues and transfer pricing. It also aims to ease the hardships o->> taxpayers in small towns and mofussil areas who have to travel to cities to attend to their tax matters. Under the revised monetary limits, revenue cadre officials in metros will handle non-corporate taxpayers with an annual income above Rs. 20 lakh and corporates with an income above Rs. 30 lakh. In case o->> non-metros, they will deal only with non-corporate taxpayers with an annual income above Rs. 15 lakh and corporates with income over Rs. 20 lakh. This is a big respite for taxpayers in small towns who until now had to travel to big centres where a Commissioner or an Assistant Commissioner usually has his office. The Central Board o->> Direct Taxes has also finalised a strategic plan that includes creation o->> dedicated directorates for criminal investigation and risk management. Resources freed up as part o->> this restructuring will be diverted to these specialised units. This will help in mounting an effective surveillance on fund flows into the country that have the potential to impact national security. The country's direct tax revenues have grown from Rs. 13,000 crore in 1991-92 to Rs. 3.87 lakh crore in 2009-10. The number o->> taxpayers has also grown nearly five times over the period to more than Rs. 3.2 crore. [Source : www.economictimes.com dated February 5, 2011] ->> Tax cap ruling against evaders in line with litigation policy The Income-tax Department is mulling over development o->> an increase in limits above which it files appeals against tax evaders in the Tribunal or courts. "The Department is planning to change the tax limits for appeals. Now, for filing an appeal in the Income-tax Appellate Tribunal (ITAT), the tax effect should be Rs. 3 lakh, for High Courts it has been increased to Rs. 10 lakh and for the Supreme Court it is Rs. 25 lakh", the official said. With the move, the Income-tax Department expects to reduce up to 13 per cent. cases at ITAT level and 25-30 per cent. cases at the High Court and the Supreme Court level each, the source added. "Even i->> the case is strong enough to be taken to the Tribunal, the Department will not do so. This will cut down the wastage o->> resources in unnecessary litigation and reduce the burden o->> overburdened courts while at the same time assessee would also benefit from this policy", the official added. According to the National Litigation Policy, the Government should work towards reducing litigation in courts so that valuable court time would be spent in resolving other pending cases. This will help in achieving the goal in the National Legal Mission to reduce average pendency time from 15 years to 3 years. The initiative by the Income-tax Department comes in the backdrop o->> criticism by the Finance Minister that the Income-tax Department has emerged as the largest litigant in the country. Last year, the Comptroller and Auditor General o->> India (CAG) had stated in its report that the disputed tax amount "can wipe of->> the revenue deficit o->> the Government in 2008-09". The total amount o->> direct tax stuck at the Commissioner (Appeals) level is Rs. 2.2 lakh crore for 2008-09, the CAG had pointed out. Apart from that, Rs. 12,757.59 crore is stuck at Income-tax Appellate Tribunal, Supreme Court and High Court levels, the Finance Minister had told the Parliament last year. The move is to cut down wastage o->> resources in unnecessary litigation and reduce the burden o->> overburdened courts. [Source : www.financialexpress.com dated January 31, 2011] ->> ASSOCHAM offers a neat way to enhance deduction on health insurance premiums The Associated Chambers o->> Commerce and Industry o->> India (ASSOCHAM) in its pre-budget memorandum recommended that the deduction (under section 80D) in respect o->> medical insurance premium o->> an individual or his family should be raised to Rs. 25,000 from Rs. 15,000. The rationale given by ASSOCHAM is "In the context o->> the sharply increasing medical expenses, medical insurance premiums are escalating every year. Also, there is need to increase the penetration ratio o->> insurance by providing encouragement through tax reliefs for opting for medical insurance." [Source : www.economictimes. com dated February 8, 2011]