Commissioner of Income Tax-VIII v. Khanna Brothers

5. These are three appeals by the Revenue under Section 260A of the Income Act, 1961 ('Act'). ITA Nos. 972 and 967 of 2015 are directed against the common order,dated 14^^ June 2013 passed by the Income Tax Appellate Tribunal('ITAT')in ITA Nos. 397/Del/2010 and 2210/Del/2012 for the Assessment Years('AYs')2006-07 and 2008-09 respectively. ITA Nos.490of2015 is directed againstthe impugned order dated 13"^February 2015 passed by theITAT inITA No.227/Del/2013 forthe AY2010-11. ITA Nos.972,967&490/2015 Page2of11

6. The common question that is soughtto be urged in three appeals concerns the correctness of the order of the ITAT, upholding the order of the Commissioner of Income Tax (Appeals) ['CIT (A)'] holding that the Assessee was eligible to the deduction under Section 80IC ofthe Act and deleting the disallowance ordered by the Assessing Officer(AO)for the AYsin question.

7. The facts leading to the filing of these appeals are that the Assessee, Khanna Brothers,is a partnership firm.The Assessee filed its return for the AY 2006-07on 31®^ October2006 declaring atotalincome ofRs.24,17,034. The Assessee claimed deduction ofRs.22,58,647.72 in the computation of income on account ofnet profit from the Agartala Branch(Tripura)ofthe Assessee. The Assessee submitted the profit and loss(P&L)account for the Agartala Branch for the period 1®^ April 2005 to 31®^ March 2006, the balance sheet as on 31®^ March 2006 and the auditor's report in form Nos. 3CD and lOCCB.The auditor's report certified thatthe Assessee's units did not manufacture any article or thing specified in the 13^ Schedule.The date ofcommencement ofoperation ofthe unit was 12'*^ July 2005.In the Tax Auditreport in form No.3CD the business ofthe Assessee was described as 'manufacturing and fabrication ofsteel structure'. The case was picked up for scrutiny and notices under Sections 143(2)and 143(1)ofthe Act were issued.

8. The Assessing Officer ('AO') in the assessment order dated 30^*" December 2008 noted thatthe AY 2006-07 wasthe first year in which claim for deduction under Section 80IC ofthe Acthad been made by the Assessee. ITA Nos.972,967&490/2015 Page3of11 In response to a query as to how it could claim to be a manufacturing unit, the Assessee submitted the purchase order dated 30^^ December 2004 issued to it by M/s. Dharmpal Prem Chand Limited ('DPCL). The subject ofthe purchase order was"fabrication,supply,shot blasting,painting and erection ofsteel structures for picking line and HR coil storage building(G-H&H-1 Boys) ofour steel project at Agartala." It wasfurther stated in the purchase order as under: "With reference to your offer and subsequentdiscussions with you on the above subject, we are pleased to place the order on you for fabrication, supply, shot blasting, painting and erection of660 Ml +/- 2% ofSteel structures including roofing and wall cladding for Pickling Line and HR Coil Storage buildings ofour steel project at Agartala.The details ofthe building covered under yourscope shall be as follows: Total tonnage of 660 MT +/- 2% of fabricated steel structures shall be sand/shot blasted and given two coats of epoxy primer and one coat offmish plant prior to erection. The steel structures shall be painted with one coat offinish paint after erection. The entire work shall be executed strictly in conformity with the Technical details as given at enclosed detail fabrication drawings to be made available with you. Thetotalfixed pricefor the scope ofwork mentioned above shall be Rs.

6.50 crores(Rupees Six Grores and Fifty lakhs only). ITA Nos.972,967&490/2015 Page4ofll The above mentioned price are onFOR site basis excluding Excise duty. Education Cess and Sales Tax(Inclusive ofFreightand Transit insurance)."

9. Before the AO,the Assessee contended that it had paid the requisite excise duty and that it was registered with the Central Excise Authorities for manufacturing ofexcisable goods.It was stated that the land/shed had been taken from Tripura Industrial Development Corporation Limited in a notified industrial area. For the purpose of sales tax registration, the 'business' was indicated as 'manufacturing'. The unit was also registered under the Factories Act as a steel manufacturer. It was claimed that the fabrication work was in fact done in the premises of the Assessee at Agartala.

10. The AO observed thatthatthe tax auditor had not given any description offinished goods as"no such article or thing manufactured or produced by the Assessee could be ascertained." The AO referred to the decision ofthe Supreme Court in Commissioner ofIncome Tax v. N.C. Budhraja & Co. (1993)204ITR 412(SC)and held that the fabrication work done by the Assessee and erected at the factory site ofthe contractee cannot be called manufacture.A reference was made to the decision ofthe Supreme Courtin M/s. Builders Association ofIndia v. Union ofIndia(1994)209ITR 877 (SC)where it was held that construction ofa dam,building, bridge or road and the like cannot be brought within the purview ofthe word 'article' or 'thing'and therefore,investment allowance was not allowable under Section 32A ofthe Act. ITA Nos.972,967&490/2015 Page5of11 V. r'

11. Accordingly the AO added back to the income ofthe Assessee,for AY 2006-07,the sum ofRs.22,58,648 claimed as deduction under Section 80IC ofthe Act.

12. The Assessee then appealed before the CIT(A).By an order dated 27'^ November 2009 while allowing the appeal of the Assessee, the CIT(A) disagreed' with the AO and held that the Assessee was engaged in 'manufacture' of articles and was, therefore, eligible for deduction under Section 80IC ofthe Act.

13. The Assessee's return for AY 2008-09 was picked up for scrutiny and notice under Section 143(2) was issued on 6^^ August 2009. A reference was made in the AO's order dated 31'^ December 2010to the factthat on 9^^ March 2010 a survey operation under Section 133 ofthe Act was conducted atthe Faridabad,Chandigarh and Agartala branches ofthe Assessee.By this time, the Chandigarh and Faridabad branches had been closed. During the course ofthe survey,the Assessee voluntarily offered undisclosed stock of the value ofRs. 1,01,17,491 for taxation.

14. In the order dated 31®' December 2010 for AY 2008-09, the AO concluded that"during the course ofsurvey operation, additional evidences have been gathered which prove thatthe Assessee was not a manufacturer of certain goods or articles which saleable independently in the open market, but it was mere a contractor for M/s.Dharampal Prem Chand Limited who was establishing a Tobacco factory unit in Agartala." The AO accordingly reached the same conclusion regarding ineligibility ofthe Assessee to claim deduction under Section 80IC ofthe Act. ITA Nos.972,967&490/2015 Page6of11

15. Aggrieved by the above order ofthe AO,the Assessee filed an appeal before the CIT (A). By an order dated 30^^ January 2012 the CIT (A) allowed the Assessee's appeal by referring to the fact that survey operation had been carried out on 9**^ March 2010 therein it was found that the Appellanthad only two orthree employees during the Financial Year('FY') 2006-07 and 2007-08 and there were only limited number of machines found at the factory which were no longer existed. On the issue of the Appellant being a manufacturer,the CIT(A)followed the order passed for the earlier AY.The CIT(A)noted thatthe Assessee after procuring the raw material had subjected it to various mechanical processes and transformed into a 'something else'. Accordingly, it was held that the Assessee was entitled to deduction under Section 80IC ofthe Act.

16. Againstthe above orders ofthe CIT(A)for the AYs 2006-07 and 2008- 09,the Revenue filed appeals before theITAT.Bythe impugned order dated 14^*^ June 2013,theITAT confirmed the order,ofthe CIT(A)and dismissed the Revenue's appeals.

17. For AY 2010-11,a separate set oforders were passed by the AO and the CIT(A). The Revenue preferred another appeal before the ITAT,i.e., ITA No. 227/Del/2013. By the impugned order dated 13^^^ February 2015 the ITAT followed its,earlier order and thereafter affirmed the order ofthe CIT (A).

18. The first issue that is required to be addressed is whether the Assessee undertook any ma:nufacturing activities in the units at Agartala during the ITA Nos.972,967&490/2015 Page 7of11 la AYs in question. As noticed hereinbefore,the Assessee undertook the work offabrication ofsteel for use by DPCL. Apart from fabrication, the work involved shot/sand blasting,painting and erection ofthe steel structures.The detailed fabrication drawings were provided byDPCL.