Ashok Kumar, Prop. Bhagwati Stone,, ... vs Department Of Income Tax

Appellant by: Sh. Tarsem Lal, DR Respondent by: Sh. P.N. Arora. Adv. Date of hearing: 10.02.2015 Date of pronouncement: .02.2015

ORDER

PER A.D. JAIN, J.M.

1. This is department's appeal for the assessment year 2010-11

against the order dated 24.06.2014, passed by the learned CIT(A),

Jammu.

2. The following grounds have been taken.

i. On the facts and circumstances whether the ld. CIT(A) was right in holding that the unit is a new undertaking and qualifies for deduction u/s 80IB when the new machinery has not been installed in place of and the appellant has made substantial investment in the plant and machinery.

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ii. On the facts and circumstances whether the ld. CIT(A) was right in reducing the quantum of addition on account of carriage expenses by 50% without giving any concrete basis.

iii. On the facts and circumstances whether the ld. CIT(A) was right in reducing the addition made on account of various expenses debited to trading and P&L as the disallowance made by AO is worked @ 12% only. Under such circumstances when assessee failed to maintain the vouchers & bills in respect of expenses debited, the disallowance made by AO was reasonable.

3. The facts are that the assessee had claimed the

deduction u/s 80IB of the I.T. Act, 1961, in respect of the

profits earned from a Stone Crusher. Accordingly, in the

course of the assessment proceedings the assessee was

required to justify the claim and furnish necessary

documentary evidence to substantiate the claim. In response,

the assessee produced copies of the purchase bills of the

P&M, Sales Tax Registration, VAT returns, Electricity bills

and details of the employees/workers. The Assessee was

required to furnish evidence regarding the date of

commencement of the production/manufacturing from the

competent authority/concerned department.

4. The assessee filed a copy of a DIC registration certificate

before the AO. From this certificate, the AO observed: 3

I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

(a) That the Industrial Unit, a stone crusher, had been

granted registration by Industries Department(DIC

Udhampur) vide No.07/10/0004/PMT/SSI dated

22.9.1971.

(b) That the stone crusher had been a proprietorship concern

of one Sh. Jatinder Kumar s/o Late Sh. Amar Nath R/o

Near Bhirwah Bridge, Udhampur till 27.02.2006.

Thereafter, the assessee became a partner in the business

on 8.03.2006 and finally the assessee became sole

proprietor of the unit/stone crusher a few days later on

31.3.2006.

5. In the course of the assessment proceedings, the assessee was required to

justify the claim u/s 80IB of the Act in view of the fact that the industrial

unit/stone crusher did not appear to be a new one and thus not fulfilling

the conditions laid down for qualifying for the deduction u/s 80IB. The

assessee, in response, stated as follows:

"The Unit of the assessee was registered with DIC in the year

1971.....even the power connection got sanction in that year, however,

the first power connection is not available with the assessee at present

as the matter belongs to may years past. The industrial unit, however,

went sick and non functional very soon and remained out of 4 I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

production upto 2006-07. During the period when the unit was not

productional all the machinery of the unit got eroded and nothing was

left usable as machinery. On 07.04.2006, a team of engineers from the

office of the Executive Engineer Mechanical Division Udhampur

conducting the survey of plant and machinery of the unit and declared

that the machinery was worth its scrap value only.........

It was after the Executive Engineer Mechanical Division declaring the machinery as scrap a technical cum project report of the unit was prepared by the project Manager DIC wherein all the machinery that was required to be repurchased and installed. Thereafter joint director of Industries Dev Jammu dated 06.05.2006 its letter to the DIC Udhampur authorized the Industrial Unit to purchase all the machinery afresh. Thereafter, the assessee went head to procure the machinery which was purchased between 19.5.2006 to 19.12.2006. The purchase bills and details of the parties from whom the purchases of Plant and machinery were conducted stands already submitted and verified, it was during the year 07-08 the assessee went into production. The returned filed by the assessee before the Commercial Tax Department showing nil sales during 2006-07 and the sales during 07-08 is the evidenced that the assessee started sales during the year 2007-08....."

6. Again, the A.O., vide query letter dated 15.3.2013, specifically

required the assessee to furnish explanation on the following points: 5

I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

i) Please state/explain how the unit/stone crusher

can be treated as New One as the registration

granted by DIC, Udhampur, has been granted in

1971.

ii) Please explain as to how the Unit/Stone crusher

can be treated as a new Industrial Unit eligible

for 80Ib deduction in view of the registration

granted way back in 1971 and thus the date of

commencement of the business/production being

very old and not what prescribed u/s 80IB.

iii) Please state/explain how the stone crusher is

eligible for deduction u/s 80IB as the same

involves mere splitting of stones, which

otherwise has been done considerably by

engaging labour by you as huge amount has been

claimed in the accounts as Stone Splitting.

iv) As per the DIC registration copy, it is noticed

that the stone crusher was owned by Sh. Jatinder

Kumar Sharma upto Mar, 2006. In March,2006,

you joined the proprietorship firm of Sh. Jatinder

Kumar Sharma as a partner and after a few days 6 I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

became the proprietorship firm owned by you

shunting out Sh. Jatinder Kumar. In this regard

please explain as to why this may not be treated

as Sham transaction in which a running industry

has been purchased by you under the guise of

partnership firm, in vew of the judgment of the

Apex court in the case of ALA firms.

7. In response, the assessee, vide his reply, cited many case laws regarding

the nature of production/manufacturing activity of the stone crusher and

the thing or article produced by it qualifying for deduction u/s 80IB. It

was further stated that the assessee had purchased an old crusher and to

regularize the same, entered into partnership with the seller and

subsequently the seller retired and the assessee became the owner of the

old plant. These transfers and changes had been approved by the

Department of Industries. The previous owned had registered himself

with the Deptt. of Industries in the earlier years. On purchase of the unit,

the assessee being the new owner, got the unit transferred in his name

and all the relevant endorsements which had been made by the Industries

Deptt. had been filed. It is a clear transaction and the same could not be

said to be a sham transaction.

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8. The AO considered the assessee's reply but did not find it convincing for

the following reasons (pages 5 & 6, para 8.1 of the assessment order):

" (a) The stone crusher/industrial unit under consideration has

been set up way back in 1971 as is evident from the registration

granted by Industries Department in the name of one Sh.

Jatinder Kumar Sharma S/o Sh. Amar Nath R/o Birwah Bridge

Dhanari Udhampur. The assessee has in fact purchased this old

stone cursher in 2006 from Sh. Jatinder Kumar. The unit is not

a new one and thus eligible for 80Ib deduction. The assessee

has not produced any satisfactory material on records to prove

the newness of the unit in terms of the provisions of section

80IB.

(b) The undertaking is a reconstructed business unit already in

existence and not a new one. The original business in this case

has not ceased functioning and its identify is not lost.

(c) There has been some P&M installed in the old stone

crusher and the assessee has not been able to give details

of such P&M and continued to argue that the Old P&M

was worth nothing but only a scrap. Sh. Jatinder Kumar

has admitted to have made heavy repairs and renovation to 8 I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

the P&M few years back of the transfer which negates the

claim of the assessee.

(d) The running of stone crusher is a business involving

converting of boulders into smaller stones like bajri, etc

which is not considered manufacturing for the purpose of

80IB. The case is squarely covered by the decision given

by Hon'ble ITAt, Chandigarh in the case of ITO Vs

Jitendra Stone Crushing Co 105 ITD 52 wherein it has

been held that breaking of boulders into small stones or

bajri is not a manufacturing activity. The assessee is not

eligible for the deduction as claimed in view of the

following case laws;

i) ACIT vs. G.T.C Enterprises (ITAT, Chennai) 87 ITD

188

ii) Hindi Nippon Rural Industries P. Ltd. Vs. CIT(Ker) 201

ITR 588

iii) Numpudhiris Pickle Industries (ker) 1993 KLJ (Tax

Cases) 198

(e) That nothing has been brought on records which could

confirm the date of commencement of the

production/manufacture, another important 9 I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

ingredient/condition for allowing deduction u/s 80IB.

Section 80IB prescribes time limits for production and

eligibility or otherwise for deduction u/s 80IB for a

particular assessment year has to be allowed only if there is

authentic date of commencement of the

production/manufacturing which is no ascertainable in this

case. Such date is normally confirmed by the DIC

authorities which is the concerned department to regulate

closely and meaningfully the industrial activities in a

particular area right from the day first. In respect of new

Industrial Unit, once completed and ready for production, a

Certificate of Registration is grated by the district DIC

authorities certifying the date of production etc. The

registration granted by the DIC authorities in this case

dates back to 1971 and the date of commencement of the

production is to be treated some around 1971 in this case.

Same thing has also been confirmed by the General

Manager. DIC Udhampur, vide his letter No.1971 dated

10.01.2013.

(f) The Stone crusher has been in the name of Sh. Jatinder

Kumar Sharma R/o Birwah Bridgem Dhanori Udhampur 10 I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

upto Mar,2006. In March,2006, the assessee became a

partner in the business concern and after a few days

became the sole proprietor by shunting out Sh. Jatiner

Kumar. No satisfactory documentary evidence has been

furnished by the assessee regarding the sale/transfer of this

working unit. No sale deed has been produced nor any

disclosure of the purchase of the unit/stone crusher has

been made, thereby casting a doubt on the genuineness of

the transaction/purchase itself. Thus it is fairly a sham

transaction in which an existing unit has been

acquired/purchased in the guise of partnership. A sham

transaction in no way can be eligible for deduction u/s

80IB."

9. The assessee's claim u/s 80IB of the IT Act was, thus, rejected by the

AO, holding that the assessee did not fulfill all the conditions of section

80IB of the Act and that so, the assessee was not eligible for deduction

thereunder.

10. By virtue of impugned order, the ld. CIT(A) allowed the assessee's

claim u/s 80IB of the Act, holding thus:

"4.2. Ground of Appeal No 2 relates to disallowance of deduction u/s

80IB of the Act amounting to Rs.17,31,437/-. It is noticed that the 11 I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

appellant has purchased an old stone crusher unit which was

registered with DIC Udhampur in 1971. The plant and machinery of

the old unit was not in a workable condition and accordingly the same

was scrapped and permission was sought from the DIC for installation

of new machinery in place of old machinery. The appellant made

substantial investment in the plant and machinery which resulted in

the increase in installed capacity of the unit to 60000MT per annum

from the capacity of 12000MT per annum of old unit. The installation

and expansion is substantial and brought the unit which was is a non

operational state in a good working condition with modern and

enhanced technology. Hon'ble High Court of Bombay in the case of

Gaekwar Foam & rubber Co (1959) 35 ITR 632 observed that if the

alternation and changes are substantial, there would be little scope for

describing what emerges as a reconstruction of the business. Thus for

instance if ownership of a business or an undertaking changes hands

not ostensibly but in reality and effectively, that would not be

reconstruction or if the very nature of the business is changed that

again would not be reconstruction or, if the very nature of the business

is changed that again would not be reconstruction. In the present case,

the appellant has purchased a virtually closed unit in dilapidated

condition and purchased new plant and machinery to make the unit 12 I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

workable. Except for land and building, most of the fixed assets

including plant and machinery were newly installed by the appellant.

However, the DIC certificate, electric connection and other

permissions sought by the older unit were used by the appellant.

Having regard to the facts and circumstances of the case, I am of the

opinion that the substantial expansion made by the appellant cannot be

regarded as reconstruction. The appellant satisfies all other conditions

prescribed u/s 80IB of the Act. Therefore, this ground of appeal of the

appellant is allowed. A relief of Rs.17,31,437/- is allowed."

11. Aggrieved, the department has taken ground No.1 before us.

12. The learned DR has contended that the ld. CIT(A)'s action of deleting

the disallowance is unsustainable in law, as the ld. CIT(A) has neither

considered, nor repelled the AO's detailed reasons for making the

disallowance.

13. The ld. counsel for the assessee, on the other hand, has strongly

supported the impugned order.

14. It has been contended that the ld. CIT(A) has duly taken into

consideration the fact that the assessee had purchased an old stone

crusher unit, which was registered with the DIC Udhampur in 1979; that

the plant and machinery of the old unit was not in a workable condition

and so, the same was scraped and permission was sought from the DIC 13 I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

for installation of new machinery in place of the old machinery; that the

assessee made substantial investment in the plant and machinery, which

resulted in increase in the installed capacity of the Unit from 12,000 MT

per annum of the old unit to 60,000/- MT per annum ; that the installation

and expansion was substantial and brought the non-operational unit to a

good working condition with modern and enhanced technology.

15. We have heard the rival conditions of the parties on this issue. We find

that deduction u/s 80IB is available to the profits and gains of an

Industrial Undertaking if it fulfills the following conditions laid down

thereunder:

(a) It should be a new undertaking

(b) It should not be formed by transfer of old plant & machinery

(c) It should manufacture or produce article other than non priority sector items given in the Eleventh Schedule.

(d) Manufactures or production should be started within a stipulated time limit.

(e) It should employ 10/20 workers.

(f) Return of income should be submitted on or before due date.

16. In the assessment order, the AO observed that none of the above

conditions of Section 80IB of the Act stood fulfilled by the assessee. It

was observed that:

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I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

" (a) The stone crusher/industrial unit under consideration has

been set up way back in 1971 as is evident from the registration

granted by Industries Department in the name of one Sh.

Jatinder Kumar Sharma S/o Sh. Amar Nath R/o Birwah Bridge

Dhanari Udhampur. The assessee has in fact purchased this old

stone cursher in 2006 from Sh. Jatinder Kumar. The unit is not

a new one and thus eligible for 80Ib deduction. The assessee

has not produced any satisfactory material on records to prove

the newness of the unit in terms of the provisions of section

80IB.

(b) The undertaking is a reconstructed business unit already in

existence and not a new one. The original business in this case

has not ceased functioning and its identify is not lost.

(c) There has been some P&M installed in the old stone

crusher and the assessee has not been able to give details of

such P&M and continued to argue that the Old P&M was worth

nothing but only a scrap. Sh. Jatinder Kumar has admitted to

have made heavy repairs and renovation to the P&M few years

back of the transfer which negates the claim of the assessee.

(d) The running of stone crusher is a business involving

converting of boulders into smaller stones like bajri, etc 15 I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

which is not considered manufacturing for the purpose of

80IB. The case is squarely covered by the decision given by

Hon'ble ITAt, Chandigarh in the case of ITO Vs Jitendra

Stone Crushing Co 105 ITD 52 wherein it has been held that

breaking of boulders into small stones or bajri is not a

manufacturing activity. The assessee is not eligible for the

deduction as claimed in view of the following case laws;

i) ACIT vs. G.T.C Enterprises (ITAT, Chennai) 87 ITD 188

ii) Hindi Nippon Rural Industries P. Ltd. Vs. CIT(Ker) 201 ITR 588

iii) Numpudhiris Pickle Industries (ker) 1993 KLJ (Tax Cases) 198

e) That nothing has been brought on record which could

confirm the date of commencement of the

production/manufacture, another important ingredient/condition

for allowing deduction u/s 80IB. Section 80IB prescribes time

limits for production and eligibility or otherwise for deduction

u/s 80IB for a particular assessment year has to be allowed only

if there is authentic date of commencement of the

production/manufacturing which is no ascertainable in this

case. Such date is normally confirmed by the DIC authorities

which is the concerned department to regulate closely and 16 I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

meaningfully the industrial activities in a particular area right

from the day first. In respect of new Industrial Unit, once

completed and ready for production, a Certificate of

Registration is grated by the district DIC authorities certifying

the date of production etc. The registration granted by the DIC

authorities in this case dates back to 1971 and the date of

commencement of the production is to be treated some around

1971 in this case. Same thing has also been confirmed by the

General Manager. DIC Udhampur, vide his letter No.1971

dated 10.01.2013.

f) The stone crusher has been in the name of Sh. Jatinder

Kumar Sharma R/o Birwah Bridgem Dhanori Udhampur upto

Mar,2006. In March, 2006, the assessee became a partner in the

business concern and after a few days became the sole

proprietor by shunting out Sh. Jatiner Kumar. No satisfactory

documentary evidence has been furnished by the assessee

regarding the sale/transfer of this working unit. No sale deed

has been produced nor any disclosure of the purchase of the

unit/stone crusher has been made, thereby casting a doubt on

the genuineness of the transaction/purchase itself. Thus it is

fairly a sham transaction in which an existing unit has been 17 I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

acquired/purchased in the guise of partnership. A sham

transaction in no way can be eligible for deduction u/s 80IB."

17. It was on the basis of the above observations/reasons that the AO held

the assessee ineligible for deduction u/s.80IB of the Act.

18. The ld. CIT(A), as correctly submitted by the ld. DR, has not considered

any of the above said observations of the AO, muchless dealt with then.

Therefore, the order under appeal is a non speaking order qua Ground

No.1. Accordingly, we remit this issue to the file of the ld. CIT(A), to be

decided afresh by considering and dealing with all the aforesaid

observations of the AO, on affording adequate opportunity of hearing to

the assessee.

19. Apropos Ground No.2 , the AO observed that in the Manufacturing,

Trading cum-P&L Account of the assessee as on 31.3.2010, the assessee

had shown receipts of Rs.19,05,705/- under the head "By Carriage" and

that an equivalent amount stood debited under the caption " To carriage".

The AO further observed that this receipt/ expenditure had also registered

a fall as compared to the immediately preceding assessment year. The

AO made a disallowance of Rs.3,00,000/- out of the claim made, since no

bills/vouchers/ evidence were produced by the assessee to substantiate 18 I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

his claim. The AO further observed that the assessee owned a tipper and

that its use for the carriage in question could not be ruled out.

20. The ld. CIT(A) reduced the disallowance to Rs. 15 lac.

21. The ld. DR has contended that ld. CIT(A), despite holding that the AO

had correctly made the disallowance, reduced it by 50%, without

assigning any reason for such reduction.

22. The ld. Counsel for the assessee, per contra, has placed strong reliance

on the impugned order.

23.The ld. CIT(A) has reduced the disallowance from Rs.3,00,000/- to

Rs.1,50,000/- by observing as follows:

"4.4 Ground of appeal No 4 relates to addition of Rs.3,00,000/- on account of disallowance of carriage expenses debited to profit and loss account. The appellant has argued that it is providing carriage services to its customer and all expenses incurred are recovered from customer without charging any profit. However, the appellant has failed to produce the relevant documentary evidences in support of his claim. Bills, vouchers relating to carriage expenses have not been produced. Accordingly, the AO made an adhoc disallowance of expenses of Rs.3,00,000/- out of carriage expenses. Keeping in view the facts of the case, I am of the opinion that the AO has rightly made an adhoc disallowance as the appellant failed to produce bills/vouchers in respect of carriage expenses, however, the amount of disallowance seems to be on a higher side. In my opinion, it would be fair to make disallowance of Rs.1,50,000/- which is around 8% of the 19 I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

receipts and expenses debited on account of carriage business and it would result in a profit of 8% on such receipts which is reasonable in carriage business. Therefore, this ground of appeal is partly allowed and a relief of Rs.1,50,000/- is allowed."

24. Evidently, no reason for reducing, the disallowance has been given by

the ld. CIT(A), rendering the order under appeal an non-speaking order in

this regard.

25. Such an order is unsustainable in law, as it is well settled that all orders

of quasi-judicial Authorities must be speaking and reasoned orders.

Accordingly, this issue is also remanded to the file by the ld. CIT(A), to

be decided afresh by passing an speaking order, on providing due

opportunity of hearing to the assessee.

26. So far as regards Ground No.3, the AO has made disallowance of

Rs.3,00,000/- by observing as under:

"The assessee has also debited major expenses under the head Wages, Machine Running & Maintenance., Tipper expenses, Staff welfare, Establishment, etc in the accounts. Despite giving reasonable time assessee could not produce complete supporting vouchers for these expenses. Keeping in view the relevant facts and circumstances of the case, an adhoc disallowance Rs.3,00,000/- is made out of these expenses to plug leakage of taxable profits on account of possible inadmissible, unverifiable personal and other non business expenses included, therefore, an addition of Rs.3,00,000/- is made to the total income on this account."

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I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

27. The ld. CIT(A) reduced this disallowance to Rs.1,00,000/-, holding as

follows:

"4.7 Ground of Appeal No.7 relates to disallowance of Rs.3,00,000/- out of various expenses debited to profit and loss account as bills/vouchers were not produced before the AO for verification. In the absence of relevant supporting documents, the AO has rightly made adhoc disallowance out of various expenses like wages, running & maintenance expenses, tipper expenses, staff welfare expenses etc. The amounts of adhoc disallowance made however is on higher side and it is restricted to Rs.1,00,000/-''

28. The ld. DR, here again, has submitted that no reason has been given by

the ld. CIT(A) to reduce the disallowance made by the AO.

29. The ld. Counsel for the assessee has, again, relied on the CIT(A)'s order.

30. Here again, the ld. CIT(A) has not assigned any reason for reducing the

disallowance made by the AO. Therefore, this matter is also remitted to

the ld. CIT(A), to be decided afresh by passing a speaking order on

affording adequate opportunity of hearing to the assessee.

31. In the result, the appeal is treated as allowed, for statistical purposes.

Order pronounced in the open court on February, 2015.

(B.P. JAIN) (A.D. JAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: .02. 2015 /PK/ 21 I.T.A. No. 531 (Asr)/2014 Assessment Year: 2010-11

Copy of the order forwarded to: 1. The Assessee: Sh. Ashok Kumar 2. The I.T.O, Ward -2, Udhampur (J&K) 3. The CIT(A), 4. The CIT, 5. The SR DR, I.T.A.T.,

True copy By order

(Assistant Registrar) Income Tax Appellate Tribunal, Amritsar Bench: Amritsar.