Deduction under s 10B

Assessee EOU, involved in manufacturing of an article or thing cannot be denied deduction under s 10B merely because it was getting some works done on job basis from its sister concern — as held by DelHC in CIT v Continental Engines Ltd — In favour of: The Assessee ; ITA No. 1324/2010

CIT v Continental Engines Ltd
High Court of Delhi
ITA No. 1324/2010
A K Sikri and M L Mehta, JJ

Decided on: 3 June 2011

Counsel appeared:
Ms. Prem Lata Bansal, Sr. Adv with Mr.Ruchir Bhatia, Adv. for the appellant
Mr. Rajat Navet, Adv. for the respondent.
Judgment
Per : M L Mehta, J:
1. The Revenue has preferred this appeal against the judgment dated 21st July, 2009 of
the Income Tax Appellate Tribunal (hereinafter referred to as the “Tribunal”). Vide the
impugned judgment, the Tribunal disallowed the appeal of the Revenue preferred against
the order of the CIT(A) in respect of the assessment year 2003-04, 2004-05 and 2005-06.
The present appeal is filed by the Revenue in respect of the impugned order relating to
assessment year 2003-04 only.

2. The assessee filed return of income of Rs. 1,67,04,890/-. The case was processed and
taken up for scrutiny. Notice under section 143(2) of the Income Tax Act, 1961
(hereinafter referred to as “the Act”) was issued.




3. The assessee company is an export oriented unit and is engaged in the manufacturing
of machined aluminium cylinder heads which includes cylinder heads, cylinder blocks,
dies and moulds, manifolds, etc. During the assessment year 2003-04, the assessee made
purchases of Rs. 4.93 crores from its sister concerns, M/s. Continental Brakes Ltd. and
Rs. 5.58 crores from M/s.L.P. Casting Pvt. Ltd. Since the bulk of purchases were made
from the sister concerns, the transactions of the assessee were extensively investigated by
the Assessing Officer (AO). Notice under section 133(6) was also sent to ascertain the
genuineness and veracity of the purchases made. The assessee is running its business at
two places having an old unit at Gurgaon termed as 'CEL-I' and the second unit at
Bhiwadi termed as 'CEL-II'. The assessee claimed deduction under section 80HHC of the
Act for CEL-I and exemption under section 10B for unit at Bhiwadi, CEL-II. The
assessee had shown net profit of Rs. 8,56,49,780/- on a turnover of Rs. 26,49,90,680/-

4. The AO disallowed the claim of the assessee under section 10B holding that the
assessee failed to establish the fulfilling the conditions under section 10B of the Act. For
arriving at this conclusion, the AO gives reason as under:
“To conclude it is held that the assessee does not fulfill the conditions for
claiming exemptions u/s 10B since no new article or things as claimed by the
assessee no article or things has been produced by the assessee during the year
under consideration the assessee is getting the job work done from its sister
concern i.e. CBL which is charging 50 Rs. Per peace. As no expenses has been
claimed on account of labour wages and the expenses claimed on account of
power and fuel are 212845/- which appears to be imaginary and which are not in
consonance with the export turnover shown by assessee. The assessee was
exporting the cylinder manifold in earlier year also there is no new article thing
produced by the assessee this year. In fact the newly claimed to be established
unit does not have its own staff management workers employees independent
machinery etc. it is totally dependent upon the parent unit-I and it is only an
arrangement made by the assessee to claim the benefit of section 10B in the guise
of newly established unit at Bhiwadi when it found that its earlier claim of s 10B
for Gurgaon unit was expiring at the end of A.Y. 2002-03. The submission of the
assessee vide letter dated 28.03.2005 where by an offer of the additional income
for taxation on account of allocation of admn. finance and salary expense is
nothing but an admission of the manipulation of the accounts and making
unlawful claim u/s 10B of the act. I am satisfied that the assessee has furnished
inaccurate particulars to that extent and penalty proceedings u/s 271(1)(c) of the
act are being initiated on this point.
The claim made by the assessee under section 10B is disallowed considering the
non fulfillment of the requisite conditions stipulated under this section. However,
the fact that the assessee is making export is not disputed and the claim of s
80HHC is allowable for this unit also.”

5. In appeal filed by the Revenue, the CIT(A) allowed the exemption under section 10B
of the Act to the assessee. For arriving at this conclusion, the CIT(A) recorded as under:-
“7. I have gone through the order of Assessing officer and the submissions made
by the assessee. It is worthwhile to note that the assessee is an approved EOU
unit by the NEPZ authorities which is not in dispute. Further, the assessing
officer has accepted the exports made by the assessee from the CEL-II Unit as in
the assessment order itself he has admitted and agreed at page – 16 that the
assessee is making exports which is not disputed. Now the question remains
whether the assessee has manufactured or produced any article or thing within
the meaning of section 10B of the Income Tax Act, 1961. From the facts I find
that there are different processes which are carried out in the EOU undertaking
listed out at page 110 of the paper book. As a result of this process a raw casing
becomes finished goods which is a marketable commodity.
Therefore in my considered opinion the assessee has carried out manufacturing
of an article or thing. So far as the assessing officer's observations relating to
certain jobs being done by sister concern does not stand in the way of assessee
for claiming the exemption under Section 10B as change. If a new substance is
brought into existence or if any new or different article having a distinct name,
character or use results from a manufacture. Whether in a particular case
manufacture has resulted by a process or not would depend on the facts and
circumstances of the particular case.
There is nothing in the section preventing him from getting job work done from
outside.
The assessee has also explained that the proper books of accounts of the unit are
been maintained.
The assessee also contended that the other unit namely CEL-I on a stand alone
basis, the profitability is comparable with that of the earlier years and that there
is no case for booking more expenses in CEL-I and less in CEL-II. However, to
buy peace, the assessee during the course of hearing before the Assessing Officer
has also fairly given the alternative working of the total expenditure based on the
total turnover of CEL-I and CEL-II to the Assessing Officer and also reduced the
claim of 10B to an extent of Rs.1 crores approximately by reallocating the
expenses based on turnover.
The assessee has also drawn my attention to the assessment order for assessment
year 2004-2005 in the assessee's own case wherein the AO himself has
categorically mentioned that the conditions for claim of deductions u/s 10B for
CEL-II are fulfilled. Consequently the A.O. has allowed the deduction u/s 10B.
Considering all the above facts and the legal case laws I am of the view that the
assessee is eligible for claiming exemption u/s 10B of the Income Tax Act, 1961
for its unit No.CEL-II at Bhiwadi. As a result the claim of the assessee under
Section 10B of Rs.541,40882/- (as revised by the assessee before the Assessing
Officer) is allowed. Consequently the deduction under Section 80HHC while the
assessing officer has allowed on the export turnover of CEL-II would be
withdrawn.

6. It is also noteworthy that during the course of proceedings before the AO, the assessee
also gave alternate working of the total expenditure based on total turnover of CEL-I and
CEL-II and consequently reduced the claim under section 10B to the extent of Rs. 1.00
crore approximately by relocating the expenses based on turnover.

7. The Tribunal in appeal filed by the Revenue in respect of the relevant assessment year
2003-04 and also other assessment years, namely, 2004-05, 2005-06 maintained the order
of the CIT(A) in the following manner.
“5. We have heard the parties and perused the material placed on record. We
are satisfied that the Commissioner of Income-Tax (Appeals) was right and
proper in allowing the claim of the assessee u/s 10B for both the assessment
years under consideration. We, therefore, uphold the orders of the Commissioner
of Income-Tax (Appeals) and allow the claim of the assessee made u/s 10B of the
Act in both the appeals.”

8. There is no dispute that the assessee is an approved EOU unit approved by the NEPZ
authorities and there is also no dispute that the assessee was having two units described
as CEL-I and CEL-II and that the assessee was making exports. Both the CIT(A) and the
Tribunal have recorded as a matter of fact that the assessee was involved in
manufacturing of an article or thing and that the mere fact that it was getting some works
done on job basis from its sister concern would not deprive the assessee of its entity to be
an EOU manufacturing unit. It is also recorded by both the authorities below and rightly
so that the AO himself has recorded in respect of the assessee's own case for the
assessment year 2004-05 that CEL-II fulfilled the conditions under section 10B and was
allowed deductions thereunder. Even for the assessment year 2005-06, the appeal filed by
the assessee has already been allowed by the CIT(A) holding the assessee to be entitled to
claim deductions under section 10B.

9. In view of the above, we do not see any reason to interfere with the impugned order of
the Tribunal as no substantial question of law arises. The appeal is dismissed accordingly.