Liddle Manufacturing Pvt. Ltd,, Distt. ... vs Assessee

BEFORE SH. A.D. JAIN, HON'BLE JUDICIAL MEMBER, AND SH. B.P. JAIN, HON'BLE ACCOUNTANT MEMBER

I.T.A. No.178/Asr/2013 (Assessment Year: 2009-10)

M/s. Liddle Manufacturing Pvt. Vs. The Income Tax Officer, Ltd., Ward No.1(4), Kathua. C/o Jammu Metallic Oxides Pvt. (Respondent) Ltd., Khasra No.725, Near Railway Crossing Village Logate, Teh. & Distt. Kathua PAN:AABCL4156C(Appellant)

Appellant b y: Sh. P.N.Arora, Adv. Respondent b y: Sh. Tarsem Lal, DR.

Date of hearing: 08.12.2014 Date of pronouncement: 02.01.2015

ORDER

PER: B.P. JAIN (AM):

This appeal of the assessee is arising from the order of Learned

CIT(A), Jammu dated 30.01.2013 for the Assessment Year 2009-10.

2. The assessee has raised the following grounds of appeal.

"1. That the order of the Assessing Officer as well as the order of the Ld. CIT(Appeals) are both against the facts of the case and untenable in law.

2. That the worthy CIT(Appeals) has grossly erred in confirming the order of the AO without applying his mind and without appreciating the facts, arguments and written submissions filed before him from time to time.

3. That the AO has grossly erred thereby disallowing deduction of Rs.1,33,10,413/- claimed under section 80IE of the Income-Tax Act, 1961. That deduction under section 80IE of the I.T.Act,1961, was correctly claimed and the same was in accordance with the law 2 ITA No. 178/Asr/2013

and the CIT(Appeals)has grossly erred in confirming the same without any rhyme & reason and justification.

4. That the worthy CIT(Appeals) did not appreciate that the appellant fulfilled all the conditions laid down under section 80IE of the Income Tax Act,1961.

5. That the authorities below did not appreciate that the Company is manufacturing goods and the AO has grossly erred in coming to the conclusion that less consumable stores have been used, less expenses were incurred during the course of manufacturing process. The AO failed to appreciate that the assessee company was engaged in the manufacturing of Precious Metal Compounds, which were of a very high value item. Thus the presumption of the AO was not justified that component of labour, consumable stores, electricity are not commensurate with the production. Further, the CIT(Appeals) has grossly erred in confirming the order of the AO without any rhyme & reasons.

6. That the AO has grossly erred in coming to the conclusion that the manufacturing Gold Chloride Powder out of gold bullion is not a manufacturing activity. The conclusion of the AO is without any basis and justification. Further, the Ld. CIT(Appeals) has grossly erred in confirming the order of the AO on this issue without appreciating the facts & circumstances of the case.

7. That the authorities below did not appreciate that the Central Excise department considering the same as a manufacturing activity. The authorities below did not appreciate that the several processes are involved before obtaining the final product and it is clearly a case of manufacturing. The Ld. AO has not been able to place any material on the record for rejecting the contention of the assessee and for coming to the conclusion that it is not a manufacturing activity. The AO has miserably failed to appreciate the process of manufacturing. Similarly, the CIT(Appeals) has grossly erred in confirming the order of the AO without any rhyme & reason.

8. That the Ld. CIT(Appeals) has grossly erred in confirming the order of the AO wherein the AO has erred in not allowing the deduction on account of Rs.82,48,402/- received by the appellant as Central Excise Duty Refund on the ground that the same is not derived from the Industrial undertaking. The CIT(Appeals) has miserably failed to appreciate that this amount received by the appellant on account of Excise Duty Refund is a capital receipt and is not subject to tax and it is totally exempt from the Income-Tax.. Thus the deduction on amount of Rs.82,48,402/- u/s 80IE of the Income Tax Act, 1961, should have been allowed.

9. That the worthy CIT(Appeals) has miserably failed to appreciate that this case is clearly covered by the decision of the Territorial Jurisdictional Court in the case of M/s. Bajaj Alloys & 3 ITA No. 178/Asr/2013

Ors. Vs. Commissioner of Income-Tax & Ors. Reported in 333- ITR,335.

10. That the authorities below failed to appreciate that even otherwise, it was an allowable deduction under section 80IE of the Income-Tax Act,1961, and the same should have been allowed as claimed.

11. That the Ld. CIT (Appeals) has grossly erred in confirming the disallowance under section 36(1)(iii) at Rs.2,29,550/- on account of disallowance of interest made by the AO. That the authorities below did not appreciate that the interest was paid on the loan utilized for manufacturing purpose. The authorities below have not been able to place any material on the record to justify the disallowance and has not been able to make any nexus between the loan taken and utilized for non-business purposes. As such, there was no justification for disallowing the interest to the tune of Rs.2,29,550/- and the addition made may be deleted.

Alternatively, without prejudice to the above the disallowance of interest is very high & excessive.

12. Again, the AO has grossly erred in charging interest under section 234B & 234C of the Income-Tax Act, 1961, amounting to Rs.11,98,326/-. The Ld. CIT(Appeals) did not appreciate that no reasonable opportunity of being heard was allowed before charging interest under section 234B & 234C of the Income-tax Act,1961.

13. Alternatively, the interest charged under section 234B & 234C of the Income-Tax Act, 1961, is very high & excessive.

14. Any other ground of appeal that may be urged at the time of hearing of the appeal."

3. The Ground No. 1, 2 and 14 are general in nature and they do not

require an y adjudication.

4. As Ground No.3 to 7, the brief facts of the case are that the assessee

has claimed deduction u/s 80 IE of the Act, amounting to Rs.1,33,10,413/-.

The assessee was having Offices at Delhi and Ahemdabad which were to

purchase the raw material and later on the raw materials were dispatched

to Sikkim manufacturing unit. The assessee is also having unit at Kota

Branch for which separate trading and profit and loss account were

submitted. The AO after considering the explanation of the assessee in 4 ITA No. 178/Asr/2013

response to show cause dated 29.11.2011 made the various observation

which for the sake of convenience are reproduced here in below:

" i) As per assessee's contention, it has manufactured goods worth

Rs.18.35 Crores in its Sikkim Unit. From the P &L A/c of the

assessee, it is seen that the assessee has not paid any electricity

charges in respect of Sikkim Unit. In fact, for all its four units the

assessee has shown electricity expenses of Rs.1100/- only on

turnover of Rs.18.60 Crores, which is unimaginable.

ii) On total turnover of Rs. 18.35 Crores, the assessee has shown

total wages and salary expanses of Rs.3,60,000/- only in respect of

its Sikkim Unit.

iii) As per Form 10CCB, in respect of its Sikkim Unit, the assessee

has shown to have engaged only four workers for a turnover of

Rs.18.35 Crores. It is quite unimaginable as to how four workers

could have manufactured items worth Rs. 18.35 Crores.

iv) The assessee Company in its audited A/cs attachd with the

return had itself shown that sales of 17.78 Crores have been made

from its Ahmedabad Kota and Delhi Units which are not eligible for

deduction u/s. 80IE of the A.T. Act,1961. In fact, registration

certificate dated 20 t h May, 2008 issued by Commercial Tax Officer,

Kota shows that the Assessee Company was registered under TIN

08062957322 for sale and purchase of metals such as copper,

nickel, Zinc etc. 5 ITA No. 178/Asr/2013

v) It has been gather that there is no such industrial undertaking at

Sikkim as on date and, as such, no manufacturing activity is going

on at Sikkim as on date, which has been confirmed by the assessee.

vi) It is seen that the assessee has shown consumable of Rs.716/- on

turnover of Rs.18.35 Crores in respect of Sikkim Unit.

vii) On total turnover of Rs.18.35 Crores the assessee has shown

packing material consumed at Rs.23,000/- only in respect of Sikkim

Unit.

vii) In respect of Sikkim Unit, the assessee has shown Plant &

Machinery of Rs. 13.31 Lakhs and in respect of Kota Unit, the

assessee has shown Plant and Machinery of Rs.18.35 Crores in

respect of Sikkim Unit and turn over of Rs.14.40 Lakh in respect of

Kota Unit.

2.2. In its reply the assessee has stated that only three batches of

gold were processed and due to that expenses were of negligible

value. From the above it is evident that the assessee has in fact

carried out trading activity mainly at Ahmadabad, Delhi and Kota.

In fact, even if any conversion of gold into gold powder has been

done at Sikkim during the year it is of negligible value. It is quite

apparent that the assessee is claiming to have an industrial

undertaking with total turnover of 18.35 Crores at Sikkim only to

claim benefits/incentives available under Income Tax Act and

Central Excise Act. The mere fact that the assessee has received 6 ITA No. 178/Asr/2013

Central Excise Duty refund does not entitle the assessee for claim

of deduction u/s. 80IE of the I.T. Act in view of the above facts.

Accordingly it is held that the assessee company is engaged in

trading activity and no manufacturing has been done by the

assessee company. As such, deduction u/s. 80IE of Rs.1,33,10,413/-

claimed by the assessee is disallowed and added to the income of

the assessee.

The assessee has furnished inaccurate particulars of income

and has claimed wrong deduction u/s 80IE of the I.T. Act, 1961 to

the above extent. Penalty proceedings u/s. 271(1) (c ) of the I.T.

Act, 1961 are, therefore, initiated.

3.1 It is seen that the assessee has claimed deduction u/s. 80IE of

the Income Tax Act 1961 of Rs.1,33,10,413/- showing its activity as

manufacture of gold powder from gold. During the course of

assessment proceedings, the assessee vide order sheet entry dated

29.11.2011 was asked to explain and show cause as to how

deduction u/s 80IE of the Income Tax Act 1961 has been claimed on

conversion of gold into gold powder and why same may not be

disallowed. In response, a written reply was filed in this office

stating that the conversion of gold in to gold powder constitutes

manufacturing activity. In this regard it is submitted that

manufacturing of gold powder from gold the main raw material is

gold bullion, hydrochloric acid, nitric acid and sodium met 7 ITA No. 178/Asr/2013

bisulphate. In the first process gold converts into gold chloride and

finally convert into gold powder. By this process gold powder came

into existence and process is a manufacturing process.

3.2. I have gone through the contentions raised by the assessee what amounts

to manufacture has been defined in paragraph from an American judgment which

has been quoted by approval by various judgments of the Hon'ble Supreme Court

as also in the case of Delhi Cloth & General Mills Co. Ltd. The paragraph quoted

in para 14 on page 795 of the report reads as follows:

"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."

Thus for manufacture mere change from one form of state to another is

not sufficient.

3.3. What constitutes manufacturing has been laid down by Hon'ble Supreme

Court of India in the case of Dy. CIT v. Pio Food Packer [1980]46 STC 63(SC).

In that case the Hon'ble Apex Court has laid down that where there is no

essential difference in the identity or original commodity and processed articles,

it is not possible to say that one commodity has been consumed in the

manufacture of another although it has undergone a degree of processing it must

be regarded as still retaining the original identity."

The assessee has also contended that his activity is purely manufacturing

in which gold converts into gold chloride and finally convert into gold powder., In

this regard, the Hon'ble Supreme Court in the case of State of Orissa v. Titaghur

Paper Mills Co. Ltd. [1985] 60 STC 213(SC) has held that merely because 8 ITA No. 178/Asr/2013

certain articles are known by different names, it does not mean that they are

different commercial commodities if in fact they are merely different forms of the

same commodity.

The Hon'ble Bomaby High Court in the case of CST vs. Dunker Coffee

Mfg. Co.[1975]35 STC 493 has also held that mere change in the name of

commodity will not amount to manufacture.

3.4. Further, in the case of State of Gujrat v. Sakarwala Bros.[1967 19 STC 24

to 31 the question before the Hon'ble Supreme Court of India was whether

patasha harda and elichidana were product of sugar and no sugar as such in any

form. The Hon'ble Supreme Court affirmed the following observations of the

Tribunal:-

" If chemical composition of the article is to be taken as guide in

interpreting he entry 47 there is no doubt that patasha harda and

elichidana are mere different form of sugar as defined by the

Central Excise and Sales Tax Act, 1944. We were informed that

small portion of hydrogen sulphide is passed through the sugar

solution for bleaching purposes after which patashas are prepared

by splaching the solution on piece of wood which converts sugar

into amorphosed sugar, the hardas are allowed to cool and

elichidana prepared by rapidly passing the solution of appropriate

thickness through a sieve so as to convert it into granulate lumps of

sugar. But whatever the process, these articles are only forms of 9 ITA No. 178/Asr/2013

refined sugar with the requisite sucrose content.....after undergoing

all the process the article continues to be sugar."

In the case of the assessee also, the assessee has shown his

activity of converting gold into gold chloride and finally into gold

powder...

Applying the rest laid down by various Hon'ble Courts as

mentioned above, it is observed that converting does not result into

manufacture of a commodity which is different from the original

one. Reliance is also placed upon the decision of e Vasantha & Co.

v. State of Madras[1963] 14 STC 697 to 701 ( Mad.). In that case,

the assessee was dealer in sugar and the question before the

Hon'ble Court was whether sugar candy, is different from sugar

and exempt from payment of sales tax. In that case, after

considering various facts and circumstances of the case and the

opinion of National Sugar Institute of Kanpur, it was held that

sugar candy is purer form of sugar.

In the case of Tungabhadra Industries Ltd. vs. CTO[1960] 11

STC 827, the Hon'ble Supreme Court has decided that

purification/refining of groundnut oil to obtain refined groundnut

oil does not amount to manufacture. Since there is no change in the

nature of the substance which remains groundnut oil even after

purification. The important observations of the Hon'ble Supreme

Court at page 831 are reproduced below:

10 ITA No. 178/Asr/2013

"When raw groundnut oil is converted into refined oil, there is no

doubt processing, but this consists merely in removing from raw

groundnut oil the constitute part of the raw oil which is not really

oil. The elements removed in the refining process consists of free

fatty acids, phosphoticides and unsaponfiable matter. After the

removal of this non-oleic matter thereafter the oil continues to be

groundnut oil and nothing more. The matter remove from the raw

groundnut oil not being oil cannot be used, after separation, as oil

or for any purpose for which oil could be used after separation, as

oil or for any purpose for which oil could be used. In other words,

the processing consist in the non-oil content of the raw oil being

separated and removed, rendering the only content of the oil 100

per cent. For this reason refined oil continues to be groundnut oil

within the meaning of rules 5(1)(k) and 18(2) notwithstanding that

such oil does not possess the characteristic colour, or taste, odour

etc. of the raw groundnut oil."

At page No.833 of this Order the Hon'ble Supreme Court has

held that process of removal of impurities does not render

groundnut oil any the less. The Hon'ble Supreme Court has further

held that even hydrogenation of oil does not amount to

manufacture. At page 835 the Hon'ble Supreme Court has held that

there is no use to which the groundnut oil can be put for which the

hydrogenated oil could not be used, nor is where any use to which 11 ITA No. 178/Asr/2013

the hydrogenated oil could be put for which the raw oil could not be

used.

3.5. Thus, keeping in view the facts of the case and above judicial

pronouncements, it is evident that conversion of gold into gold

powder does not amount to manufacture and, as such, is not entitled

to deduction u/s80IE of the I.T. Act 1961. Accordingly, deduction

u/s 80IE of the I.T. Act 1961 of Rs.1,33,10,413/- claimed by the

assessee is disallowed and an amount of Rs.1,33,10,413/- subjected

to tax. Since the assessee has wrongly claimed deduction u/s 80IE

of the I.T. Act 1961, penalty proceedings u/s. 271(1)(c) of the

Income Tax Act, 1961 for furnishing inaccurate particulars of

income are initiated.

5. As regards Ground No.8 to 10 with respect to the Excise dut y

refund, the assessee has received Excise dut y refund of Rs.82,48,402/-

which was claimed as deduction u/s. 80IE of the Act which is

corresponding to the receipt of the said refund. A show cause notice was

given that said excise dut y refund may not be withdrawn as the same is

not derived from manufacturing activit y. The assessee has submitted the

repl y which is available at page 8 & 9 of the AO's order. The AO after

considering the reply of the assessee mainl y relied upon the decision of

Ponni Sugars and Chemicals Ltd. (306 ITR, 392 (SC) and Sawhney Steel

and Press Works Ltd., 228 ITR 253 (SC) apart from the decision in the

case of C IT vs. Reliance Industries Ltd., Civil Appeal No. 7769 of 2011, 12 ITA No. 178/Asr/2013

dated 09.09.2011, the AO observed that the Income Tax Department has

not accepted the decision of Hon'ble High Court of Jammu & Kashmir in

the case of M/s Bajaj Allo ys & Ors. Vs. CIT and has filed S LP against the

said decision and therefore, excise dut y refund which is received b y the

assessee as consequent to the scheme formulated b y the Govt. of India

cannot be said to be derived from Industrial undertaking and has to be

held as revenue receipt and accordingly, AO added the same to the

income of the assessee.

6. As regards Ground No.11 with regard to the disallowance

u/s.36(1)(iii) the observation of the AO while disallowing Rs.2,29,550/-

are contained at page 13 & 14 of the AO's order which are reproduced for

the sake of convenience herein below.

" 5.1 It is seen that during the year the assessee has shown to have

made interest free transaction with M/s Horizon Projects & Infra

Pvt. Ltd., Kota; M/s Macro Soft Technology Pvt. Ltd, Mumbai and

M/s Nutrilite Foods Pvt. Ltd, Kota totaling Rs.31,10,000/- which

has been shown as an investment. Besides an amount of

Rs,24,00,000/- has been shown as an advance to Smt. Mina Kumari

Pradhan. During the course of assessment proceedings, the assessee

was asked to state its purpose and also state as to whether same is

for business purpose. In response to above, the assessee filed a

written reply stating that M/s Horizon Projects & Infra Pvt. Ltd,

Kota; M/s Macro Soft Technology Pvt. Ltd, Mumbai and M/s 13 ITA No. 178/Asr/2013

Nutrilite Foods Pvt Ltd., Kota totaling Rs. 31,10,000/- are non

interest bearing investments and advance was paid to Smt. Mira

Kumari Pradhan for purchase of additional land at Sikkim which

could not materialize. However the assessee could not furnish any

such agreement with Smt. Mina Kumari Pradhan. The investment

has also been made for no business purposes. It is seen that the

assessee has obtained unsecured loan amounting to

Rs.2,49,75,000/- on which interest of Rs.10,40,471/- was paid by

the assessee. At the same time, the assessee had made an interest

free advances/investments of Rs.55,10,000/- for non business use.

5.2.I have gone through the earlier reply of the assessee and the

judicial pronouncements on this issue. The assessee has not been

able to prove that these interest free advances were made for the

purpose of business. Section 36(1)(iii) provides for deduction of

interest on the loans raised for business purposes. Once th e

assessee claims any such deduction in the books of account, the

onus will be on the assessee to satisfy the Assessing Officer that

whatever loans were raised by the assessee, the same were used for

business purposes. If in the process of examination of genuiness of

such a deduction, it transpires that the assessee had advanced

certain funds to sister concerns or any other person without any

interest, there would be very heavy onus on the assessee to be

discharged before the Assessing Officer to the effect that in spite of 14 ITA No. 178/Asr/2013

pending loans on which the assessee is incurring liability to pay

interest, there was justification to advance loans to sister concerns

for non-business purposes without any interest and, accordingly.

The assessee should be allowed deduction of interest being paid on

the loans raised by it to that extent. The only thing sufficient to

disallow the interest paid on the borrowing to the extent the amount

is lent to sister concern without carrying any interest for non-

business purposes would be that the assessee has some loans or

other interest-bearing debts to be repaid. In case of the assessee

has some surplus amount which, according to it, could not be

repaid prematurely to any financial institution, still the same is

either required to be circulated and utilized for the purpose of

business or to be invested in a manner in which it generates income

and not that it is diverted towards sister concern free of interest.

This would result in not presenting true and correct picture of the

accounts of the assessee as at the cost being incurred by the

assessee, the sister concern would be enjoying the benefits thereof.

It cannot possibly be held that the funds to the extent diverted to

sister concerns or other persons free of interest are required by the

assessee for the purpose of its business and loans to the extent are

required to be raised. There should be nexus of use of borrowed

funds for the purpose of business to claim deduction under section

36(1)(iii). This view has also been upheld by the Hon'ble Punjab & 15 ITA No. 178/Asr/2013

Haryana High Court in the case of CIT v. Abhishek Industries Ltd.

[2006] 156 Taxman 257.

5.3. Accordingly, in view of above, interest paid to bank to the

extent of interest free advances/investments is disallowed. It is seen

that during the year an interest free advance and at the same time

the assessee is paying Intt of Rs.10,40,471/- on unsecured loan of

Rs.2,49,75,000/-. In view of above it would result in disallowance

of interest paid to the extent of Rs.2,29,550/-. Accordingly, an

amount of Rs.2,29,550/- is disallowed and added to the income of

the assessee. Since the disallowance is for violation of provisions of

the Income Tax Act, 1961, no deduction u/s 80IE of the Act will be

admissible on this amount. Penalty proceedings u/s 271(1) (c ) of

the Income admissible on this amount. Penalty proceedings u/s

271(1)(c) of the Income Tax Act,1961 for furnishing inaccurate

particulars of income are initiated.

7. Before the learned CIT(A) the learned Counsel for the assessee

made the submissions which for the sake of convenience are reproduced

herein below:

"1. That During the course of assessment proceedings, it was

pleaded by the assessee Company before the L/d Assessing Officer

that Assessee company due to unavoidable circumstances could do

the manufacturing for 2 months only and three batches were

processed with 127 kg gold. Since raw material of the assessee 16 ITA No. 178/Asr/2013

company was precious metal and heavy cost was involved

manufactured goods were exported outside the India due to this

reason for small period of time turnover of the assessee company

gone to 18.35 crores. But L/d Assessing Officer without

appreciating the evidence produced before him held that assessee

company has claimed expenses which are unimaginable:-

A,Electricity shown for Rs. 1100.00

B,Wages and salary for Rs.36000.00

C,Four workers were engaged as per report 10CCB

D,In the Audit balance sheet 17.78 crores have been shown made

from Ahmadabad, Delhi & Kota. In facts sales Tax Officer Kota has

issued TIN 08062957322 copper and nickel Zinc.etc.

E, At present no business activity is being carried out by the

assessee.

F,packing material of Rs23000.00 was consumed.

G, Plat and machinery at Sikkim unit is Rs.13.31Lakhs and Kota

unit at Rs.10.79 but in the same time turnover at Sikkim is Rs 18.35

crores and at Kota is Rs.14.40 lacs. Each and every query was

explained during the course of Assessment proceedings.

1. Regarding Electricity:- In this regard it is submitted that

during the course of assessment proceedings it was explained that

company has paid Rs. 54112.00 on account of Electirc charges for

the financial year 2008-2009 in the year 2010-11 due to the reason 17 ITA No. 178/Asr/2013

that company has conducted manufacturing activity only for two

months and department of Energy and power Sikkim could not issue

bill during the year under consideration and electric charges could

not be paid without bill issued by the concerned department due to

this reasons no electric charges were booked in the books of

account and claimed in the manufacturing account. Explanation

along with evidence of installation electric connection and proof

payment has not been properly appreciated by the L/d Assessing

Officer Kathua. Delayed payment of Electricity charges for what so

ever reason can by no stretch of imagination be construed that

there has been no consumption of electricity at all. Consumption of

electricity payment of its charges are two different events.

Therefore drawing of conclusion on this basis is snot justified in

any manner. Since electric expenses were wholly and exclusively for

the purpose of manufacturing at Sikkim. Reply along with evidence

is annexed here with and marked as Annexure A for your kind

perusal.

2. Regarding Rs. 36000.00 wages and salary has been paid by

the company during the year under consideration. In this regard it

is submitted that during the course of Assessment proceedings, it

was explained that assessee company could do manufacturing

activity for 2 months only and three batches were processed with

127 kg raw material. Since raw material of the assessee company 18 ITA No. 178/Asr/2013

was precious metal and heavy cost was involved, the quantum of

expenditure does not determine its character.

3. As per report 10CCB only for workers were engaged. In this

regard it is submitted that U/S 80IB of the IT Act,1961 there was no

any condition with respect of number of workers to be engaged

Unless there is a limitation put by the law on this account quantum

of workers does not determined its fate.

4. Audit report Balance sheet shows sales at Ahmedabad and

Delhi, In this regard it is submitted that during the course of

Assessment proceedings assessee has stated before the Ld.

Assessing Officer that raw material which was procured at Delhi

and Ahmadabad was dispatched to Sikkim for manufacturing of

finished products as branch transfer and branch wise trading

account and profit and loss account were enclosed. It was interstate

movement from one state to other state and company retained the

ownership of goods and no sale was involved. It was held that mere

consignment of goods by a manufacture to his own branches out

side the state does not amount to sales or disposal as such. The

Consignment of goods is neither sales or purchases.

Good year India Limited v. State of Haryana(1990)

76STC71(SC) page no 98. Following evidences were

produced. 19 ITA No. 178/Asr/2013

1.Transfer memos from Delhi to Sikkim duly seal and signed

by the Sales Tax Check post Authorities Simmim have already

produced before your good self.

2. Evidence regarding transportation of goods between

Delhi/Ahmedabad to Simmim by the well equipped security

company have also produced before your good self.

3. Copies of the requisite Mandatory declarations forms F

U/S 6A(1) of the Central Sales Tax Act 1956 by the Sikkim

Unit to Delhi and Ahembabad, is annexed here with and

marked as Annexure B for your kind perusal.

But Assessing Officer without any material on record or anything

contrary against the dealer company held that Assessing Company

has carried out trading activity mainly at Delhi and Ahmedabad. It

is held that when making an assessment U/S 143(3) of the IT

Act.1961, the A.O is not entitled to make a pure guess without any

evidence on material at all.(Dhankeshwari cotton Mills Ltd Vs CIT

261ITR 775(SC).

5. It was admitted during the course of Assessment proceedings

that Assessee company has discontinued his manufacturing activity

at Sikim. There was no legal requirement for the Assessee to remain

in the production for further period to claim deduction U/S 80IE of

the Act,1961.

20 ITA No. 178/Asr/2013

6. Regarding consumable of Rs.716.00 has been shown for the

Sikkim unit, in this regard it is submitted that during the course of

Assessment proceedings Assessee company has produced copy of

account of purchases along with evidence. The basic raw material

of the Assessee of the Assessee company is gold bullion and other

consumables items such as nitric acids and hhdrochloric acid were

purchases and duly accounted for in the books of account. Copy of

purchases bill and copy of account is enclosed. Rs.716 was for

purchases of hand gloves and laboratory items bills and copy of

account is enclosed.Rs.716 was for purchases of hand gloves and

laboratory items bills are enclosed. But L/d Assessing Officer held

that Assessee has claimed Rs. 716.00 as consumable on turnover of

Rs.18.35 Crores. Bills & Consumable purchases are annexed here

with and marked as Annexure C &D for your kind perusal.

7. Regarding packing material of Rs. 23000.00 in this regard it

is submitted that assessee company was engaged in manufacturing

gold chlorae which is costly product. Three batches were

manufactured and goods are dispatched in the poly jars. Only 127

kgs were manufactured. Poly jar for Rs. 23000.00 was quite

adequate for packing of 127 Kgs.

8. Regarding plant and machinery for Rs. 13.31 lkahs at Sikkim

and Rs. 10.79 Lakhs at Kota and turnover of Rs. 18.35 cores at

Sikim and Rs. 14.40 lakhs at Kota it is submitted that assessee 21 ITA No. 178/Asr/2013

company has to unit for different activities at Sikkim and Kota. The

assessee company was engaged in manufacturing of gold chlorate

out of gold at Sikim and at Kota copper, nickel and zinc and hence

comparison with these metals are not justifiable.

9. Ld. Assessing Officer in order at para no. 2.2 page 4 has

admitted in fact, even if any conversion of gold in to gold chloride

powder has been done at Sikkim during the year it is of negligible

value but no quantitative has been determined by the L/d Assessing

Officer.

10. That Ld. Assessing Officer is the order at para no.2.2 page 4

held that mere fact that Assessing has received excise duty refund

does not entitled for the assessee for claim, in this regard it is

submitted that Central Excise duty is an indirect tax levied on

goods manufactured in India. The tax is administered by the Central

Government under the Authority of Entry 84 of the union list (list

1). The Central Excise duty is levied in the term of Central Excise

Act 1944 and taxable event under the Central Excise law is

"Manufacture" and liability of central Excise duty arises as soon

as the goods are manufactured. Refund of excise duty paid was in

the term of notification no 56/2002. The excise duty was paid by the

assessee company being a manufacturer of excise able goods. There

is no law regarding payment of duty by the re-seller and get its

refund. Since excise duty was paid by the dealer company it is 22 ITA No. 178/Asr/2013

established beyond any doubt that the dealer has manufactured the

goods during the year under consideration. Copies of Excise

returns and refund cheques and order was produced during the

course of Assessment proceedings but same was not appreciated by

the L/d Assessing Officer Kathua. Cheque for Excise dept., Monthly

returns, RG 1, form 1V are annexed here with and marked as

Annexure E, F, G & H for your kind perusal.

11. Regarding manufacturing of gold chloride out of gold bullion

is not manufacturing activity:- Section 2(29BA) of the income tax

Act 1961 define the term manufacturing. This definition was

incorporated in the Act by finance Act 2009 w.e.f. assessment year

2009-2010. L/d Assessing Officer in the impugned order bye passed

this definition and taken the help of external aids to coined the term

manufacturing. When Act has already defined the term

manufacturing there was no need to create new definition. L/d

Assessing Officer has done this only to deny the Appellant the

benefit of deduction U/S 80IE of the IT Act 1961, Breif

manufacturing process is as under;-

With the held pf sheet rolling machine and cutting machine

Gold bullion or bar have to be rolled and cut in to small pieces.

These small pieces have to put in the glass reactor along with

Hydrochloric Acid and Nitric Acid then certain temperature is given

in the reactor. After a certain duration the reaction of Gold and 23 ITA No. 178/Asr/2013

both acids converts in to gold chloride. Gold Chloride solution

taken in a suitable container with stirrer. Than water-solubl e

reducing agent added like Na 2 S 2 O 5 C6H6O 2 are added. The Gold is

precipitate to fine particlers & is separated from solution and filter

the precipitated. The Precipitated so obtained is washed with hot

water & dried in an oven & packed. The Gold powder being

manufactured by this process is having 90% or more by weight

passes through asleve having a mesh aperture of 0.5 MM. This

product used for Electronic connectors, solder joint compound in

mobiles, super computers and Laptops, Electroplating, anode in an

electric Cell and in Photography, as a print toning agent (Gold

Toning) starting material to form other gold compounds, Cell body

stains for bright and dark filed microscopy and raw material for

printing ink.

Gold and gold chloride are two different commercial

commodities. Gold is a dense, soft, shiny, malleable and ductile (it

can draw in to sheet and wires) on the other hand gold chloride

which prepared out of Gold metal is soft, it is chemical compound

of the Gold and Chlorine. It is hygroscopic (observe moisture from

Air and soluble in the water as well ethanol. It is not malleable and

ductile, it decomposes above 160 C or in light. This clearly shows

that preparation of Gold chloride from Gold involves the process

resulting in to bring out entirely a different commercial commodity 24 ITA No. 178/Asr/2013

which very much covered by the term manufacturing as per the

definition in the Act under section 2(29BA);- "Manufacture" with

its grammatical variation, means a change in non living physical

object or things;-

(a) resulting in transformation of the object of articles of thing

in to a new and distinct object of article or things having a

different name character and use; or

(b) brining in to existence of new and distinct object or article

or thing with a different composition or integral structure"

12. That Regarding receipt of Excise duty of refund

Rs.8248402.00 is not revenue receipts;- Assessee company has

received Excise duty refund of Rs.8248402.00. During the course of

Assessment proceedings L/d Assessing Officer was apprised with the

law laid down by the Hon'ble High Court of J&K in the matter of

M/S Shree Balaji Alloys & Ors Vs Commissioner of Income Tax &

Ors declared on 31.01.2011. Law laid down by the jurisdictional

High Court is binding on all the courts under his jurisdiction but

same has been respectfully followed by the other forums like Worthy

CIT(Appeals) Jammu and ITAT Amritsar bench. But Ld. Assessing

Officer has not appreciated the submission and disallowed the

deduction claimed U/S 80IE of the IT Act on the central excise duty 25 ITA No. 178/Asr/2013

refund. Copy reply annexed here with and marked as Annexure 1 for

your kind perusal.

13. That regarding disallowance of interest debited to P &L A/C

on account of interest free advance made for purchases of land and

investment made for purchases of shares;- Assessee Company has

made advances for additional land at Sikkim Rs.24,00,000.00 to

Smt. Meena Kumari Pardhan same was not materialized and got it

back. Company has also purchased shares of Rs.3100000.00 of

other companies. L/d Assessing Officer has disallowed interest

claimed of the Assessee company in the profits & loss A/c of Rs.

2,29,550.00 on the ground that same was not for the business

purposes and disallowed. In this regard it is submitted that interest

paid on the capital borrowed for purchases of share for the purpose

of business is allowable U/S 36(1)(iii) of the income Tax Act 1961.

Additional Commissioner Vs. Laxmi agent P Itd(1980) 125(Guj). Interest is also allowable even the borrowing is for acquiring stock

in trade;- State of Madras Vs G.J. Geolho (1964) 53ITR 186(SC). In

the instant case both investment was made for business purpose and

Assessee company had earned more than the investment made. More

over this issue in dispute is squarely covered by the decision of

Hon'ble ITAT Amritsar bench in the case of M/S Sun

Pharmaceuticals, in ITAT No.184(Ars)/2009 for the Assessment year 26 ITA No. 178/Asr/2013

2005-2006 dated 11-06-2010, in this case Hon'ble ITAT Amritsar

bench has allowed deduction U/S 80IE on the enhanced income.

14. That L/d Assessing Officer Kathua has not applied his mind

by passing impugned order, he has moved from one opinion to toher

in an effort to disallow deduction U/S 80IE of the Income Tax Act

1961 to the appellant. Firstly he has said that appellant has done

trading activity because alleged less consumption of consumable,

then he has gone to say the activity of conversion of Gold Chloride

from gold bullion carried out by the Assessee company during the

year under consideration is not constitute manufacturing as per law

laid down by the various High Courts. Lastly he has said that

Excise duty refund of Rs.8248402.00 received by the assessee

company from the Central Excise Department to this extent income

is not derived from manufacturing of industrial undertaking. The

impugned order passed by the L/d Assessee Officer is a self

contradictory and liable to quash."

8. Before the leaned CIT(A) the assessee has submitted the

manufacturing process in detail which is available at page 7 to10 of

learned CIT(A)'s order and is reproduced for the sake of convenience as

under:

".1. Cutting of gold bars is small pieces.

With the help of Sheet Rolling Machine and cutting machines Gold

Bullion or Gold Bar have to be rolled and cut in small pieces because, it 27 ITA No. 178/Asr/2013

is difficult to dissolve large size of gold bars in aqua regia solution. It

also helps to shorten the time of process. These small pieces have to be

put in Glass Reactor along with Hydrochloric Acid, called aqua regia

solution.

What is Aqua regia ?

Aqua Regis (lit. "king's water), or nitor hydrochloric acid is a

highly corrosive mixture of acids, a hydrochloric acid, usually in a

volume ratio 1:3 it was named so because it can dissolve he so called

royal or other metals are capable of withstanding its corrosive properties.

Preparation of Aqua Regia

1. Pour 150 ml. concentrate HCL (hydrochloric acid) in a

plypropylene container.

2. Carfully and slowly add 500ml. of concentrated HNOe(nitric acid)

to the HCL

3. Aqua regia is prepared. To dilue it, your con add few milliliters of

it to water.

2. Mixing of gold pieces with Aqua Regia Solution/Digestion of gold in

aqua regia.

In this process one hundred gram of small gold pieces are charged to

aqua regia at room temperature in a reaction equipped with stirrer and a

heater. The aqua regia required from this containes 425 ml of

concentrated hydrochloric acit(HCL) and 150 ml of concentrated nitric

acid (HNO3). The resulting mixture is stirred and heated. The gold 28 ITA No. 178/Asr/2013

completely dissolves in the aqua regia to form a clear, golden-clored

solution. After certain duration the reaction of gold with both acids

converts it into Gold Chloride solution. The solution is cooled to room

temperature.

The solution is then charged to a second reaction vessel equipped with

stirrer, a PH meter, a thermometer and colling jacket and stirring and

cooling are initiated. A concerned sodium hydroxide solution in water is

slowly added to the vessel to raise it to a particular desired PH.

The addition rate of sodium hydroxide is regulated so that the

temperature of he reaction mixture does not exceed a particular

temperature. The resulting reaction mixture is dark orange in color and is

quite clear.

Chemistry Aqua regia dissolves gold, through neither constituent acid

will do so alone, because, in combination, each acid performs a different

task. Nitric acid is a powerful oxidizer, which will actually dissolve a

virtually undetectable amount of gold, forming gold ions (Au3+). The

hydrochloric acid provides a ready supply of chloride ions (Cl.), which

react with the gold ions to produce chloroaurate anions, also in solution.

The reaction with hydrochloric acid is an equilibrium reaction which

favours formation of chloroaurate anions (AuCl 4 ). This results in a removal

of gold ions from sol ution and allows furt her oxidation of gold to take place.

The gold dissolves t o become chloroauric acid. In addition, gold may be

dissolved by the tree c hlorine present in aqua regia.

Appropriate equations are:

29 ITA No. 178/Asr/2013

Au(s ) +3No-3(aq)-Au3+(aq)+3NO 2 (g)+3H 2 O(I )and

AU3+(aq)+4CL- (aq)- AuCL-4(aq).

Au+3HNO 3 +4HCL 4 -HauCL 4 3NO 2 +3H 2 P

The oxidation reaction can also be written showing nitric oxide as the

product rather than nitrogen dioxide:

Au(s)+NO-3(aq)-4H*(aq)-----Au3+(aq)+NO(g)+2H 2 O(1).

3.Filtering Process

The quo-regia now contains various metal chlorides(and perhaps nitrates)

in solution and insoluble chloride as well as a lot of unwanted material in

the sludge, and this mixture (when cooled) must be filtered. The reasons

for cooling is that silver chloride, though quite insoluble in water, is

slightly soluble in strong acids and this solubility is lower in cold acids.

The aqua-regia solution are filtered with a Buchner filtering funnel and a

4 liter vaccum filtering flask and paper discs usually used these filters.

These should be large enough to line the bottom and sides of the filter

funnel, inserted dry, watted thoroughly with water and firmly seated and

pressed into the comers to avoid wrinkles and vacuum leaks. Two ply's of

filter paper are used to help filtration and avoid breakthrough. The

filtered solution is poured into a plastic container for the next step of

elimination of excess nitric acid and precipitating the gold.

4.Nitric Acid Elimination

The excess qua-regia that was added to ensure complete solubility of all

gold is, of course, still in the solution and must be eliminated to allow the

gold to be precipitated.

30 ITA No. 178/Asr/2013

The classic procedure for nitric acid elimination is repeated boiling to

near dryness with the addition of hydrochloric acid with some sulphuric

acid near the end.

5. Precipitating the Gold Chloride Solution

Metallic gold is precipitated, from the solution obtained by the

digesting the gold bars in aqua regia solution, by sodium metabisulphite.

The sodium metabisulphite act as reducing agent in this process and

powered sodium metabisulphiteis placed in another flask and dissolve

with water. This form a solution of sodium bisulphate and then add the

sodium bisulphate solution to the gold chloride solution. Then it is left to

settle for four hours. The brown powder of gold is precipitated at the

bottom of the flask.

1 s t Step-Oxidzation process

Na 2S2 O2 +H2+O-2NaHSO3

(i.e.Sodium metabisulphite+water-bisulphae)

llnd Step-Reducing process

2HAuCl 4 +2NaHSO+3-2Au+4HCL+Na 2 SO 4 +SO 2

(i.e.Chloroauric acid+sodium bisulphate-Gold powder+hydrochloric

acid+Sulphur dioxide gas).

The gold precipitated is filtered and washed with hot distilled water and

an annonium solution, dried in an even & packed. The Gold Powder being

manufactured by this process is having 90% or more by weigh passes

through a sieve having a mesh aperture of 0.5 MM.

Use/Application of Gold Powder 31 ITA No. 178/Asr/2013

In Electronic Connectors & Solder Joint Compound in Mobiles, Super

Computers and Laptops Electroplating and as an anode in an electric cell

In Photography, as a print toning agent (Gold Toning)

Starting material to form other gold compounds

Cell body stains for bright filed and dark filed microscopy

Raw material for Printing Inks.

Flow Chart of Gold powder manufacturing process Gold bars/bullion By rolling Machine gold bars cut in small pieces Mixing with aqua regia solution Clear gold chloride solution Precipitation with reducing agent Gold powder (in wet form) Filter washed and dired Dry Gold powder, (ready for packing) By this process raw material gold bullions get converted in to gold chloride powder

which is entitled a different commercial commodity with different name, character, and

use, same is very much covered by the term manufacturing as per the definition in the IT

Act 1961 U/s 2(29BA)"Manufacture with its grammatical variation, means a change in a

non living physical object or things:-

(a) resulting in transformation of the object or articles or things in to a new and

distinct object or articles or things having a different name, character, and use;

or 32 ITA No. 178/Asr/2013

(b) bringing in to existence of new and distinct object or article or things with a

different composition or integral structure."

All the above submission amply support the facts that manufacturing taken place

in the matter. Hence submitted for kind consideration."

After considering the submission of the assessee and the manufacturing

process, the learned CIT(A) rejected the claim of the assessee b y

observing in vide para 4.3, 4.4 and 4.5 which is reproduced herein below

for the sake of convenience.

"4.3. In view of the above manufacturing process and facts of the case the following emerges:

(i) The gold bar is converted into more pure form of dry gold powder for use in electronic industries. At the outset it is to mention that the appellant every where stated that it has converted gold bar to gold chloride but in fact it has only changed the shape from gold bar to gold powder.

(ii) The appellant has though contested that the electricity charges were Rs.54,112/- instead of Rs.1100/- but could not satisfy as to why the payment of electricity charges for financial year 2008-09 were made in theyear 2010-11 and also why no bills received for the period of manufacturing timely.

(iii) All purchases of gold bullion were stated to be made from either Ahmedabad unit or Delhi unit of the appellant and transported all the way to Sikim. This is illogical that for converting gold bullion to powder the appellant will incure additional transportation charge and risk as well because of being costly item under transportation. 33 ITA No. 178/Asr/2013

(iv) Even if the appellant theory of manufacturing is believed. It is at thebest a laboratory process of purification of gold which does not tantamount ot manufacturing.

(v) The consumption of raw material which as per appellant are hydrochloric, acid, nitric acid and sodium meta bisulphate is abysmal. As per balancd chemical equation the volume and weight of these chemicals required to convert gold bar into pure gold powder are many fold than the weigh of the gold. All these regents are costly chemicals and contradict the theory of the appellant for meager consumption of consumable of Rs.716/- only.

The appellant explanation that consumable are not only for Rs.716 but more and in fact this is cost of gloves. Even if the appellant version of the total consumable i.e., hydrochloric acid and nitric acid worth Rs..3.07 lacks approx is taken into consideration it was not adequate weight wise or volume wise. Further there is no purchase detail shown of Sodium Meta bisulphate which is an important ingredient in his. Thus the amount of consumables used was not enough for carrying out the said transformations.

(vi) Four workers and without any substantial power consumption cannot transform 127kg. Gold into gold powder.

(vii) In the instant case the appellant has not placed on record that the skilled laborers and plant and machinery has been used for achieving the said conversion. It has also not been brought to my notice that these chemical conversion has taken place under the guidance and supervision of qualified and technical persons. What kind of machinery has been deployed was also not brought to my notice.

(viii) As admitted by the appellant that it has processed only three batches of gold bar in short span of time and closed industry thereafter. It the industry was viable and incentives were in place why was the industry 34 ITA No. 178/Asr/2013

closed down? This creates a bonafide doubt about this manufacturing unit.

(ix) Section 80IE was inserted by the Finance Act, 2007 for the undertaking manufacturing eligible article or thing in North East state including Sikkim for those beginning to operate between 01.04.2007 to 31.03.2017. The appellant was trying to take undue benefit of this scheme giving this a colour of manufacturing.

The above observations prove that there is no manufacturing activity which has gone into process at all.

4.4. For argument sake even if it is considered that conversion of gold bars into powder has taken place, it cannot be called manufacturing activity for the following reasons.

(i) This is a purification process. There may be charge in the form but there is no change in the chemical composition of gold. In the definition of manufacturing the statute also desire there should be change in the chemical composition. Manufacturing employees a change but every change is not manufacturing even though every change is the result of treatment, labour and manipulation.

(ii) In the case of state of Orissa V/s Titaghur Paper Mills Company Ltd.

1985 60 STC 213(SC) it has been held that merely because certain articles are known by different names it does not mean that they are different commercial commodity. If in fact they are merely different form of same commodity. It has been held by the Bomaby High Court in the case of CST V/s Duncan Coffee Manufacturing Co.1975 35STC 493 that mere change in the name of commodity will not amount to manufacture.

(iii) The Hon'ble Supre Court in the case of Jung Bahadur Industries Ltd.

V/s CTO 1960 11STC 827 held that purification, refining of ground 35 ITA No. 178/Asr/2013

nut oil does not amount to manufacturing. The Hon'ble apex Court has held that process of removal of impurities does not render ground nut oil any the less.

(iv) In another judgment in the case of B.G.Chitale Vs DCIT 2008 305 ITR (AT) 1 Pune (SV). It was held that the pasteurization and standardization of milk does not amount to manufacturing or production of article or things. A real test was whether there was plant and machinery and skilled labour to achieve the desired product.

In the instant case I find that real manufacturing per se was not in place for the reasons mentioned above and even for sake of arguments if manufacturing unit existed the conversion of gold bar into gold powder was a purification process and not manufacturing. The appellant argues that since it got excise duty refund hence it was manufacturing, will not authenticate its stand because as per notification the excise duty was exempt and whatever has been paid by the appellant was received back from the excise department. Merely because there was a refund the appellant claim of manufacturing is not proved and may be the excise duty erroneous been refunded back.

Moreover the appellant has palced reliance on Shree Balajee Alloys case in respect of excise duty refund but this ratio is not applicable in this case because the same decisions is applicable to units located in Jammu and Kashmir and not in Sikkim. In vie of the above, the claim of the appellant is rejected.

4.5 Regarding the disallowance under section 36(1)(iii) for Rs.2,29,550/- for the reasons extended by the A.O. that there was no nexus between borrowed funds for the purposes of business and the borrowed funds have been used for one other purposes, I am of the view that interest has rightly been disallowed. During the year interest free advances are quite substantial and at the same time the appellant is paying interest of 36 ITA No. 178/Asr/2013

Rs.10.40 lakhs on unsecured loan of Rs.2.49 crores. Thus I upheld the disallowance and reject the appellant's ground on this issue."

9. The leaned counsel for the assessee Mr. P.N. Arora, Advocate submitted a chart

mainly with regard to the allegations made by the AO with reference to the CIT(A)'s

findings and how the same were met out during the assessment or first appellate

proceedings. For the sake of convenience the said chart is reproduced herein below:-

Sl. No. Objections of the A.O. Remarks/Objection met by the Assessee-

Company

(1) Disallowance u/s 80IE in (i) It was explained that company has paid respect of wrong deduction Rs.54112/ on account of electricity charges for claimed the financial year 2008-09 in the year 2010-11 due to the reason that company has conducted

(i) Sikkim Unit manufacturing activity only for two months The assessee has not paid any and Department of Energy & Power, Sikkim electricity charges in respect of could not issue bill during the year under Sikkim Unit. In fact for all its consideration and electric charges could not be four units the assessee has paid without bill issued by the concerned shown electricity expenses only department. Due to this reasons no electric to the tune of Rs.1100/- on charges were booked in the books of accounts turnover of Rs.18.60 Crores. and claimed in the manufacturing account.

(Refer Para (i) Page 3 of [Refer Para 1 Page 3 of the CIT(A)'s order] Assessment Order]

(ii) On total turnover of (ii) It was explained durinhg the course of Rs.18.35 Crore the assessee has assessment proceeding that during the current shown total wages and salary period the assessee-company could do expenses of Rs.360000/-. manufacturing activity for 2 months only and only 3 branches were processed with 127 Kg.

[Refer Para (ii) Page 3 of of Raw Material. Since raw material of the Assessment Order] company was precious metal and heavy cost 37 ITA No. 178/Asr/2013

was involved, the quantum, of expenditure does not determine its character.

[Refer Para 2 Page 3 of CIT(A)'s order]

(iii) As per Form 10CCB, the (iii) It was explained that there was no assessee has shown to have restriction/condition with respect of number of engaged only 4 workers for a workers to be engaged, unless there is a turnover of Rs.18.35 Crore. It is limitation put by the law on this account. quite un-imaginable as to how 4 Moreover, quantum of workers does not workers could have determine its fate.

manufactured items worth [Refer Para 3 Page 3 of CIT(A)'s order] Rs.18.35 Crore.

[Refer Para (iii) Page 3 of Assessment Order]

(iv) In the Adudit account, the (iv) The Audit Report & Balance Sheet shows assessee-company has shown sales at Ahmedabad & Delhi. In this regard it total sales of Rs.17.78 Crore was submitted that raw materials which was made from its Ahmedabad, procured at Delhi & Ahmedabad was Kota & Delhi units which are dispatched to Sikkim for manufacturing of not eligible for deduction u/s finished products as a branch transfer and 80IE of the Act, In fact branch-wise Trading and Profit & Loss a/c registration certification dated were also furnished. It was only an interstate 20/05/2008 issued by movement from one state to other state and the Commercial Tax Officer, Kota company retained the ownership of goods. As shows that the assessee- such, no sales were involved. It was held that company was registered under mere consignment of goods by a manufacturer TIN 08062957322 for sales & to his own branches outside the state does not purchases of metals such as amount to sales or disposal. This view finds copper, nickel, zinc etc. support from the decision in the case of Goodyear India Ltd. vs. State of Haryana, [Refer Para (iv) Page 3 of reported in 76 STC 71. In this regard following Assessment Order] evidences were produced.

38 ITA No. 178/Asr/2013

(i) Transfer memos from Delhi to Sikkim duly seal & signed by the Sales Tax check post authorities of Sikkim.

(ii) Evidence regarding transportation of goods between Delhi/Ahmedabad to Sikkim by the well equipped Security Company.

(iii) Copies of the requisite mandatory declaration Form 'F' u/s 64(1) of the Central Sales Tax Act, 1956, by the Sikkim unit to Delhi & Ahmedabad.

But the AO without any material on record contrary against the dealer company held that the assessee-company has carried out trading activity mainly at Delhi & Ahmedabad.

[Refer Para 4 Page 3 &4 of the CIT(A)'s order]

(v)It has been gathered that ( v)That it was admitted during the course of there was not such industrial assessment proceedings that the assessee- undertaking Sikkim as on date, company has discontinued his manufacturing as such no manufacturing activity at Sikkim. There was no legal activity was going on at requirement for the assessee to remain in the Sikkim as on date. production for further period to claim deduction u/s 80IE of the IT Act, 1961. [Refer Para (v) Page 3 of Assessment Order] [Refer Para (v) Page 3 of Assessment Order]

(vi) That the assessee has (vi) In this regard it was submitted that

shown consumable of Rs.716/- assessee-company has produced copy of on turnover of Rs.18.35 Crore account of purchases along-with evidence. The in respect of Sikkim Unit. basic raw material of the assessee-company was Gold Bullion and other consumable items 39 ITA No. 178/Asr/2013

[Refer Para (vi) Page 3 of such as Nitric Acid and Hydrochloric Acid Assessment Order] were purchased and duly accounted for in the books of accounts. Copies of purchase bills were also furnished. Rs.716/- was for purchase of Hand Gloves and Laboratory items, for which purchases bills were also furnished. But the Ld. AO held that the assessee has claimed Rs.s716/- as consumable on turnover of Rs.18.35 Crore.

[Refer Para 6 Page 4 of CIT(A)'s order]

(vii) That on total turnover of (vii) In this connection, it was submitted that Rs.18.35 Crore, the assessee the assessee-company was engaged in has shown packing material manufacturing Gold, Chlorate which is a costly consumed at Rs.23000/- only in product. Three batches were manufactured and respect of Sikkim Unit. goods were dispatched in the Poly Jars. Only 127 Kg were manufactured. Poly Jar for [Refer Para (vii) Page 3 of Rs.23000 was quite adequate for packing of Assessment Order] 127 Kg.

[Refer Para 7 Page 4 of CIT(A)'s order]

(viii) In respect of Sikkim Unit, (viii) Regarding Plant & Machinery for the assessee has shown plant & Rs.13,31 Lac at Sikkim and Rs.10.79 Lac at machinery of Rs. 13.31 Lac and Kota and turnover of Rs.18.35 Crore at Sikkim in respect of Kota Unit, the and Rs.14.40 Lac at Kota, it was submitted that assessee has shown plant & the assessee-company has two units for machinery of Rs.10.79 Lac. At different activities at Sikkim & Kota. The the same time, the assessee has assessee-company was engaged in the shown turnover of Rs.18.35 manufacturing of Gold Chlorate out of Gold at Crore in respect of Sikkim Unit Sikkim and at Kota Coper, Nickel & Zinc & & turnover of Rs.14.40 Lac in hence, comparison with these metals was not respect of Kota Unit. justifiable.

[Refer Para (viii) Page 4 of 40 ITA No. 178/Asr/2013

Assessment Order] [Refer Para 8 Page 4 of CIT(A)'s order]

(ix) Manufacturing of Gold Kindly refer necessary details mentioned in the Chlorate out of Gold Bullion is order of Ld.CIT(A) in Para 4.1 to 4.4 at Page not manufacturing activity. 6 to 11, which is enclosed herewith for your ready reference.

[Refer Para 3.1 to 3.5 Page 4 to 7 of Assessment Order]

(II) Disallowance u/s 80IE is (II) It was explained before the authorities respect of the Central Excise below that the Central Excise Duty Refund Duty Refund received by the received by the assessee was a capital receipt assessee company held to be and as such the same was not subject to tax. As "Revenue Receipt" not derived held by the J&K High Court in the case of M/s from the Industrial Undertaking Shree Balaji Alloys vs. CIT and Another, and cannot said to be "Profits reported in 333 ITR Page 335.

derived from Industrial [Refer Para 5 Page 5 & 6 of CIT(A)'s order] Undertaking" and hence liable to be added to the Income of the assessee at Rs.82,48,402/-.

[Refer Para 4.1 to 4.7 Page 7 to 12 of Assessment Order]

(III) Disallowance u/s 36(i)(va) in (III) It was explained during the year under respect of interest paid to bank consideration that a sum of Rs.24,00,00/- was to the extent of interest free paid to Smt. Meera Kumari Pradhan for the advances/investment at purpose of purchase of land which was not Rs.229550/-. materialized and she returned back the same to the assessee-company and interest paid for this [Refer Para 4.1 to 4.7 Page 7 purpose was allowable u/s 36(1)(iii) of the IT to 12 of Assessment Order] Act, 1961. Further interest paid on the capital borrowed for acquiring shares was also allowable u/s 36(1)(iii).

[Refer Para 4.5 Page 11&12 of CIT(A)'s 41 ITA No. 178/Asr/2013

order]

(IV) Deduction u/s 80IE has to be This view finds support from the decision of allowed on finally enhanced ITAT, Amritsar Bench, Amritsar in the case of assessed income. Smt. Harbhajan Kaur Prop. M/s Sainico Engineers, Kathua in ITA No.331(ASR)/2013, order dated 6/12/2013 relating to Assessment Year 2009-10 and also in the case M/s Asian Industries, Jammu in ITA No.588(ASR)/2013, order dated 02/09/2014 relating to Assessment Year 2009-10.

[Refer Para 1 to 8 and 9 to 15 of compliance of judgements]

10. On the other hand, learned JCIT, DR Mr. Tarsem Lal argued at the outset that

there is a tendency amongst people to avoid tax as in the present case. He argued that

Gold bar is not available in the open Market but the same is available and can be

purchased from State Bank of India. Therefore he doubted if at all any purchase has been

made. He further argued that there is no reason to purchase the Gold at different offices

i.e. at Delhi and Ahemdabad and transport the same at Sikkim. As regards electrical

expenses paid, the Ld. DR argued that these expenses might have been paid for some

residence of employer or employee of assessee at Sikkim. Since no meaningful expenses

have been incurred by the assessee, therefore, the assessee has not carried out any

manufacturing activity. Therefore the case made out by the assessee does not inspire

confidence. As regards Excise Duty Refund, the learned DR argued that decision of

Hon'ble J & K High Court in the case of Balaji Alloys (supra) is not applicable since the

scheme in the case of Balaji Alloys was different to scheme in the present case. 42 ITA No. 178/Asr/2013

11. In the rejoinder learned counsel for the assessee Mr. P.N. Arora, Advocate argued

that in the case of Shree Balaji Alloys vs. CIT 333 ITR 335 (J&K) there were

concessions for the State of J&K to achieve the acceleration of Industrial Development

in the State of J& K which had been found lagging behind in such development and

generation of employment in the State of J&K which was not only temporary but was of

permanent in nature which in the Public Interest which would have brought additional

permanent source of employment to the unemployed in the State of J&K. Looking to the

purpose of eradication of the social problem of unemployment in the State of J &K, the

Hon'ble J& K High Court had held that such incentive could not be construed as

production or operational incentives for the benefit of assessee alone and accordingly

held that excise duty refund, interest subsidy and insurance subsidy are capital receipts

in the hands of the assessee. As against the decision in the case of Shree Balaji Alloys

(Supra), in the present case also the refund of Excise Duty is in the terms of large scheme

worked out by the Union Government in conjunction with the North Eastern States in

order that the industry is presented with a congenial environment. During the past six

decades since independence the States of North Eastern have lagged behind in

Industrialization. As these states have primarily an agrarian economy, the income level of

the people are lagging behind economically. One of the primary reason has been the lack

of avenue for the work and the woeful inadequacy of skill sets possessed by the people.

To undo this and ensure that the people can develop skill sets to improve their life the

Union Govt. developed the idea for all around exemptions to ensure that development

takes place. Accordingly, the Government extended a whole set of incentives to lower the

cost of production so that industries are interested in coming to in these states and large 43 ITA No. 178/Asr/2013

number of employment is generated apart from acceleration of industrial development.

The learned counsel for the assessee Mr. P.N. Arora, Advocate accordingly argued that

the scheme of the Central Government is akin and similar to the one as pronounced by

the Govt. of India and the Prime Minister for the State of J& K referred to in the case of

Shree Balaji Alloys vs. CIT(Supra), Therefore, facts being identical and accordingly the

excise duty refund in the present case has to be treated as incentives in the form of

capital receipt in the hands of the assessee and not as revenue receipt as held by the

Learned CIT(A).

12. We have heard the rival contentions and perused the facts of the case. The main

allegations by the AO as enumerated in the chart placed on record by the Learned

Counsel for the assessee and also as per our perusal of AO's and CIT(A)'s order, is

mainly with regard to the electricity charges in respect of the Sikkim unit which has been

claimed during the impugned year at Rs. 1100/- only, against turnover of Rs. 18.60

crores. The explanation of the assessee was that there was actual expense of Rs.54,112/-

on account of electricity for the manufacturing activity conducted only for two months

during the impugned year. In fact the bill has been raised by the electricity department

during the year 2010-11 and department of energy and power could not issue the bill

during the impugned year and accordingly said bill was not paid to the concerned

department during the impugned year. Due to this reason no electricity charges were

booked in the books of account of the impugned year. In fact the said electricity charges

of Rs.54,112 were pertaining to the impugned year ending 31st March,2009 relevant to

assessment year 2009-10. Which in fact were raised during the Financial Year 2010-11.

This explanation was submitted before the learned CIT(A) available at page 3 at para 1 of 44 ITA No. 178/Asr/2013

his order. The learned CIT(A) in fact was not satisfied in spite of the fact the reasons and

explanation were placed on record along with copy of the bill of the department of energy

and power, receipt of the amount paid and certificate from the Government of Sikkim,

energy and power department available at PB60,61 and 62. But the learned CIT(A) has

not taken cognizance of the same and merely observed at page 10 in para 4.3(ii) that he

is not satisfied. This approach of the learned CIT(A) is not sustainable in law, as it suffers

from the vice of non-consideration of documentary evidence brought on record by the

assessee.

13. As regards the allegations of the AO that the assessee had paid wages and salary expenses to the tune of Rs.3,60,000/- only against a turn over Rs. 18.35 crores, it was explained by the assessee that the assessee carried out manufacturing activity for two months only during the year and assessee has processed only three batches totaling to 127 Kg of raw material and the raw material was of heavy costs and that the quantum of expenditure does not determine its character. This explanation was submitted before the learned CIT(A) and is available at page 3 in para 2 of learned CIT(A)'s order. Also, with regard to the employment of four workers only, vis-a-vis turnover, it was explained that there is no restriction or condition with respect to the number of workers to be engaged and since there is no such limitation put by the law on this account, it does not lie within the purview of the taxing authorities to impose such a condition unilaterally, i.e., without due sanction of law. The said explanation is available at para 2 at page 3 of learned CIT(A)'s order. But the learned CIT(A), without considering the explanation of the assessee dittoed the order of AO at page 10 (vi), (vii).

14. Next allegation by the AO is that in the audited accounts, the assessee company has

declared total sales of Rs. 17.78 crores at Ahemdabad, Kota and Delhi Units which are

not eligible for deduction u/s.80IE of the Act. The registration certificate issued by the

CTO Quota shows that assessee is registered under TIN for sale and purchase of metals 45 ITA No. 178/Asr/2013

such as copper, nickel and Zinc etc. In this regard it was explained by the assessee, and

said explanation is recorded at para 4 at page 3 & 4 of learned CIT(A)'s order, that with

regard to sales at Ahemdabad and Delhi, the raw material was procured at Delhi and

Ahemdabad and was dispatched to

Sikkim for manufacturing of finished products as a branch transfer and branch wise

trading account and profit and loss account were furnished. Such interstate movement of

goods does not involve any sales to the assessee and assessee retains ownership of goods.

The AR relied upon the decision in the case of Good year India Limited v. State of

Haryana reported 76 STC 71(SC) on the basis of evidence placed on record i.e. i)

transfer memos from Delhi to Sikkim which was duly sealed and signed by the Sales Tax

Check post Authorities of Sikkim, ii) evidence regarding the transportation of goods

between Delhi and Ahemdabad to Sikim by the well equipped security company and iii)

copies of the requisite mandatory declarations forms F u/s 64(i) of the Central Sales Tax

Act 1956 by the Sikkim Unit to Delhi and Ahemdabad. But the learned CIT(A) again

endorsed the order of the AO without considering the explanation of the assessee just on

the basis of human probability which in fact does not have any basis as evident from

pages 10 &11 in para 4.3 in (iii) (v) (vii) of his order. As regards the allegations that the

assessee has declared consumables of Rs.716 /- on the turnover of Rs.18.35 Crores in

respect of Sikkim Unit, it was explained and the said explanation is available in para 6 at

page 4 of the CIT(A)'s order. The assessee has produced copy on account of purchases

along with the evidence and basic raw material of the assessee was gold billion and

consumable items such as Nitric Acid and Hydrochloric Acid were purchased and duly

accounted for in the books of account and bills were produced. Rs. 716/- were for the 46 ITA No. 178/Asr/2013

purchase of hand gloves and laboratory items for which the bills were produced. The

learned CIT(A) merely repeated the order of the AO at page 10 in para 4.3 in (v) and has

not considered the explanation of the assessee in the right prospective.

15. As regards the expenses on account of packing material consumed at Rs.23,000/-

against turnover of Rs.18.35 crores as alleged by the AO, it was submitted by the

assessee that the goods are costly which were dispatched in poly jars and only 127 Kgs

were manufactured and the costs of poly jars was Rs. 23,000/- which is quite adequate for

packing of 127 kgs of raw material.

16. Next allegation by the AO was that the assessee is having plant and machinery of

Rs.13.31 lacs that Sikkim Unit and Rs. 10.79 crores at Kota unit for the turnover of

Rs.18.35 crore at Sikkim unit and Rs.14.40 lac at Kota unit. In this regard the assessee

submitted the explanation which is available at para 8 at page 4 of learned CIT(A)'s order

that assessee company was engaged in manufacturing of gold chlorate out of gold at

Sikkim and at Kota copper, nickel and zinc and hence comparison with these metals was

not justifiable. The learned CIT(A) in para 4.3 has not taken the explanation of the

assessee in the right perspective and has simply repeated the order of the AO.

17. As regards the manufacturing of gold chlorate out of gold bullion not being a

manufacturing activity as alleged by the AO, the learned counsel for the assessee has

submitted a detailed manufacturing process which is available in the order of learned

CIT(A) in para 4.2 and at pages 5 to 10, which is cutting of gold bars in small pieces with

the help of Sheet Rolling Machine and cutting machines. Gold Bullion or Gold Bars

have to be rolled and cut in small pieces, because it is difficult to dissolve large size of 47 ITA No. 178/Asr/2013

gold bars in aqua regia solution. The small pieces have to be put in Glass Reactor along

with Hydrochloric Acid, called aqua regia solution. The said aqua regia was explained

by the assessee at page 7 of learned CIT(A)'s order to be a highly corrosive mixture of

acids, a fuming yellow or red solution. The mixture is formed by freshly mixing

concentrated nitric acid and hydrochloric acid, usually in volume ratio of 1:3. Thereafter,

there is mixing of gold pieces with aqua regia solution, which process is called digestion

of gold in aqua regia. The solution is cooled at room temperature. The aqua regia

required for this contains 425 ml of concentrated hydrochloric acid(HCL)and 150ml of

concentrated nitric acid where gold is completely dissolved in the aqua reiga to form a

clear, golden-colored solution. After a certain duration the same is converted into Gold

Chloride solution. The solution is cooled to room temperature. Thereafter, the solution is

charged to second reaction vessel equipped with stirrer, a pH meter, a thermometer and

cooling jacket a stirring and cooling are initiated. A concentrated sodium hydroxide

solution in water is slowly added to the vessel to raise it to a particular desired pH. The

addition rate of sodium hydroxide is regulated so that the temperature of the reaction

mixture does not exceed a particular temperature and the resulting reaction mixture is

dark orange in color and is quite clear. Thereafter, there is a Filtering Process where

unwanted material is filtered. The reasons for cooling is that silver chloride, though quite

insoluble in water, is slightly soluble in strong acids. Thereafter, the nitric acid is

eliminated by boiling to near dryness with the addition of hydrochloric acid with some

sulphuric acid near the end. Thereafter, the process is of precipitation of the gold chloride

solution, by sodium metabisulhite which act as reducing agent which is left to settle for

four hours. Such gold powder is precipitated at the bottom of the flask. It was explained 48 ITA No. 178/Asr/2013

by the leaned counsel for the assessee while submitting the complete manufacturing

process that there is a different application of the final product which is gold chlorate

powder which is entirely a different product, as reproduced herein above from page 9 of

the learned CIT(A)'s order. Applications of the Gold chlorate powder are quite different

from the application of the gold bar or gold bullion. The gold bar or gold bullion in fact

is used for making of jewellery whereas the gold chlorate powder after passing through

such cumbersome process can be used only in the electrical connectors and Solder Joint

compound in Mobiles, Super computers and Laptops and Electroplating and as an anode

in an electric cell, in Photography, as a print toning agent (Gold Toning), Starting

material to form other gold compounds, Cell bodies stains for bright field and dark field

microscopy and Raw material for Printing Inks. The application is entirely different

commercial commodities with different name and character which is covered under the

definition of manufacturing u/s.2(29BA) of the Income Tax Act which in fact in the

present case has been transferred into a new distinct object having different name and

character and use of different applications which applications are not possible in the gold

bullion or gold bar as raw material. Section 2(29BA) is reproduced for the sake of

convenience as under:

"2(29BA) "Manufacture with its grammatical variation, means a change in a non living physical object or things:

(a) resulting in transformation of the object or articles or things in to a new and distinct object or articles or things having a different name, character, and use; or

(b) bringing in to existence of new and distinct object or article or things with a different composition or integral structure."

18. Accordingly, the findings of the learned CIT(A) in para 4.3 and 4.4 that the

assessee has only changed the shape from the gold bar to gold powder nothing but the 49 ITA No. 178/Asr/2013

repetition of the order of the AO without considering the explanation of the assessee and

in particular without taking into consideration the manufacturing process which in fact is

part of the learned CIT(A)'s order at page 7 to 10 as mentioned herein above, mentioning

of such a cumbersome manufacturing process as purification process and mentioning that

there is no change in the chemical composite of gold by the learned CIT(A) is without

any basis and without considering explanation of assessee.

19. In view of our findings herein above and the explanation submitted by the

assessee discussed herein above, we hold that the conversion of gold bullion or gold bar

to the gold chlorate powder is a manufacturing process, in the circumstances and facts of

the present case since, the final and manufactured product is new and distinct object with

different name character and use which is not possible in the case of raw material. In the

circumstances and facts of the case, the decisions relied upon by the AO at page 5 to 7

and learned CIT at page 11 are not at all applicable. As regards the argument made by

Mr. Tarsem Lal learned DR that there is a tendency amongst people to avoid tax and gold

bullion is not available in the open market but from the SBI and actually there is no

purchase and no meaningful expenses have been incurred and the argument of the

assessee for his case does not inspire confidence these are arguments based on human

probability which are without any basis in the light of our findings herein above. The

learned DR has tried to make out a new case, for which no material was placed on record.

Since, the purchase have not been doubted by the AO or the learned CIT(A) and

arguments of learned DR at this stage that no purchases have been made cannot be help

the revenue. On the other hand the arguments that the gold billion is not available in the

open market but is available from the State Bank of India only was not an issue before 50 ITA No. 178/Asr/2013

the AO or the learned CIT(A), since no purchase have been doubted by either of the

authorities below and raising such an issue at this stage cannot help the revenue. As

regards the allegation that electrical expenses and other expenses are not meaningful, the

assessee has submitted his explanation which has not been taken in the right prospective

by the learned CIT(A) and the explanation of the assessee has been found correct in our

finding herein above. And we are satisfied with the explanation of the assessee and

therefore, the arguments of learned DR that the case does not inspire confidence cannot

help the revenue. The reliance by the learned counsel for the assessee and the decision of

the Steel Authority India Kolkata ITAT, in the fact has not been placed on record and in

view of our findings herein above where assessee's activities have been held to be

manufacturing activity and accordingly assessee is eligible for deduction u/s.80IE of the

Act. Accordingly, arguments made by the learned JCIT, DR cannot help the revenue.

Accordingly, we hold that the assessee has met out all the conditions referred to u/s. 80IE

of the Act and is entitled for the deduction 80IE of the Act and accordingly all the

grounds No. 3,4,5,6 & 7 of the assessee are allowed.

20. As regards Ground No.8, 9 &10 , the assessee has claimed the deduction with

regard to excise duty refund and has relied upon the decision of Hon'ble J&K High Court

in the case of Shree Balaji Alloys (supra) wherein excise duty refund has been held to be

capital receipt. The explanation submitted by the assessee in this regard at page 8 & 9 of

the learned CIT(A)'s order is found to be convincing and in view of the scheme of the

Union Government with regard to North Eastern State which is akin to and similar to the

one in the case of Shree Balaji Alloys(supra) and therefore, in the present circumstances

and facts of the case, we are bound by the decision of Shree Balaji Alloys(supra) and the 51 ITA No. 178/Asr/2013

said receipts are held to be capital receipts. The argument made by the learned DR

mentioned herein above therefore, cannot help to the revenue. Accordingly ground No.

8,9 & 10 of the assessee are allowed.

21. As regards Ground No.11, the assessee has submitted the explanation that a sum of

Rs.24 lac was paid to Smt. Meena Kumari Pradhan for the purposes of land which was

not materialized which has been returned back to the assessee company and was

allowable u/s.36(1)(iii) of the Act and interest was paid on capital borrowed for purchase

of shares was also allowable U/s 36(1)(iii) of the Act and reliance was placed on the

decision of ITAT, Amritsar in the case of Smt. Harbhajan Kaur, Prop. ITA

No.331/Asr/2012 order dated 06/12/2013 and in the case of Asian Industries date

2.9.2014 in ITA No. 588/Asr/2013. The assessee has submitted that both the investments

were made for the business purposes and the assessee company had earned more than

investment made. In the circumstances and facts of the case, learned CIT(A) is not

justified in disallowance of interest. Accordingly, Ground No.11 of the assessee is

allowed.

22. As regards ground No.12 &13 is with respect to the charging of interest u/s. 234B and 234C of the Act which are consequential and mandatory in nature.

23. In the result, the appeal of the assessee is allowed.

Order pronounced in the open Court on 2 n d January, 2015.

Sd/- Sd/- (A.D. JAIN) (B.P. JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 02.01.2015 Pk. Ps 52 ITA No. 178/Asr/2013

Copy of the order forwarded to:

1. The Assessee: M/s. Liddle Manufacturing Pvt. Ltd.,

2. The Income Tax Officer, Ward -1(4), Kathua.

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.