Ranjana Johari , Jaipur vs Department Of Income Tax

Jh vkj-ih-rksykuh] U;kf;d lnL; ,oa Jh Vh-vkj-ehuk] ys[kk lnL; ds le{k BEFORE: SHRI R.P. TOLANI, JM & SHRI T.R. MEENA, AM

vk;dj vihy la-@ITA No. 222/JP/2012 fu/kZkj.k o"kZ@Assessment Year : 2008-09

The I.T.O. cuke Smt. Ranjana Johari, Ward 6(2), Jaipur. Vs. Prop. M/s Global Art Exports, S-249, Mahaveer Nagar, Tonk Road, Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: ACKPM 7029 D vihykFkhZ@Appellant izR;FkhZ@Respondent

izR;k{ksi.k@C.O. No. 29/JP/2012 (Arising out of vk;dj vihy la-@ITA No. 222/JP/2012) fu/kZkj.k o"kZ@Assessment Year : 2008-09 Smt. Ranjana Johari, cuke The I.T.O. Prop. M/s Global Art Exports, Vs. Ward 6(2), Jaipur. S-249, Mahaveer Nagar, Tonk Road, Jaipur.

LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: ACKPM 7029 D izR;k{ksid@Objector izR;FkhZ@Respondent

jktLo dh vksj ls@ Revenue by : Shri Ajay Malik (Addl.CIT) fu/kZkfjrh dh vksj ls@ Assessee by : Shri Vikash Rajvanshi (CA)

lquokbZ dh rkjh[k@ Date of Hearing : 04/12/2014 ?kks"k.kk dh rkjh[k@ Date of Pronouncement : 2702/2015 2 ITA 222/JP/2012 & C.O. 29/JP/2012_ ITO Vs Smt. Ranjana Johari

vkns'k@ ORDER

PER: T.R. MEENA, A.M.

The appeal by revenue and cross objection by assessee arise

from the order dated 19/12/2011 of Learned CIT (A)-II, Jaipur for A.Y.

2008-09. Respective grounds of appeal as well as C.O. are as under:-

Grounds in Revenue Appeal.

"On the facts and in the circumstances of the case, the Learned CIT(A)-II, Jaipur has erred in:- (1) allowing exemption U/s 10BA of the IT Act in spite of the fact that goods exported were not manufactured by the assessee which is the primary condition for exemption u/s 10BA.

(2) not considering the facts found during the course of survey conducted earlier at assessee's business premises, which confirmed that the assessee was not carrying out manufacturing activity.

(3) not considering the fact that for claiming exemption u/s 10BA of the It Act, substantial manufacturing activity is to be carried out and insignificant activity like polishing, fitting etc. to almost finished goods purchased from the market would not suffice for the purpose of Section 10BA.

(4) not considering the fact that the assessee made purchase of raw wood of Rs. 2,02,99,938/- which is only 15.90% of total purchase. Balance 84.1`0% purchases made by the assessee are of polishing material, packing material, semi-finished goods, which proves that no substantial manufacturing activity is done by the assessee which is the primary condition for exemption u/s 10BA.

3 ITA 222/JP/2012 & C.O. 29/JP/2012_ ITO Vs Smt. Ranjana Johari

(5) not considering the finding of the A.O. that the assessee is basically engaged in purchasing readymade furniture of artistic work and after doing some polishing and finishing work exporting the same. Which is proved from the list of Sundry Creditors for goods more than Rs. 5 lacs furnished by the assessee wherein most of the major creditors are Handicraft showroom which supply readymade furniture having artistic work."

Ground in Cross Objection "On the facts and in the circumstances of the case and in law, the Learned CIT(A)-II, Jaipur has erred in fact as well as in law:-

(i) In not allowing depreciation of factory building at Jhotwara of Rs. 84,181/-."

2. All the grounds of the revenue's appeal are revolving around the

deduction U/s 10BA of the Income Tax Act, 1961 (in short the Act) not

carrying out the manufacturing activity as required by the law. The

learned Assessing Officer observed that the assessee is exporter of

wooden furniture. During the year under consideration, the assessee

was drawing income from export of wooden furniture in the name and

style of M/s Global Art Exports at Sitapura Industrial Area, jaipur. In the

profit and loss account, net profit of Rs. 71,52,975/- had been declared

on turnover of Rs. 16,61,00,380/-. This net profit includes rental income

of Rs. 60,000/-. In the computation of income, entire profit of business

i.e. Rs. 71,25,075/- had been claimed exempt U/s 10BA of the Act. The 4 ITA 222/JP/2012 & C.O. 29/JP/2012_ ITO Vs Smt. Ranjana Johari

learned Assessing Officer further observed that the assessee had

declared 100% exemption of profit U/s 10BA of the Act, therefore, he

gave reasonable opportunity of being heard on manufacturing as well

as claim made by the appellant U/s 10BA of the Act. It has been held

that for A.Y. 2004-05, 2005-06 and 2006-07, this deduction has been

disallowed by the then Assessing Officer on the ground that major

activity was undertaken by the assessee were trading only, no artistic

items manufactured as per Sub-section (2) of Section 10BA of the Act,

there must be manufacturing or production of eligible articles of things.

Since most of purchases were of readymade furniture which was

exported as it was or after minor polishing on the same. Therefore, it

has been held that these activities cannot be considered as

manufacturing or production. By considering the various decisions in

paragraphs No. 4 of the assessment order, held that definition laid

down by the Hon'ble Supreme Court and Hon'ble Rajasthan High Court

as cited in the assessment order, it can easily be concluded that

business activity of the assessee of purchasing readymade furniture

against the form 17B for trading purposes and exporting the same only

after polishing and packing the same, cannot be termed as

manufacturing of furniture, not to subject of manufacturing of 5 ITA 222/JP/2012 & C.O. 29/JP/2012_ ITO Vs Smt. Ranjana Johari

handmade artistic furniture. Under these circumstances, it is crystal

clear that the assessee does not fulfill the basic condition of

manufacturing and made artistic wooden articles as laid down U/s 10BA

of the Act and she is not eligible for exemption under this Section.

Accordingly, he treated amounting to Rs. 71,25,075/- as normal taxable

income from business.

3. Being aggrieved by the order of the Assessing Officer, the

assessee carried the matter before the learned CIT(A), who had allowed

the appeal by observing as under:-

"3.1 I have duly considered the submissions of the appellant. I find that the issue of allowability of deduction U/s 10BA has been decided in the favour of the assessee by the order of Hon'ble Jaipur Tribunal (ITA No. 1111, 1112 & 1113/JP/2010)dated 14/07/2011 for A.Y. 21004-05, A.Y. 2005-06 and A.Y. 2006-07. The observations of the Hon'ble Tribunal in para 12 are reproduced as under:

"We have heard rival submissions and considered them carefully. We have also perused various evidences filed before ld. CIT (A) in support of the case of the assessee and also the detailed written submissions placed on record alongwith the submission of ld. ClT DR. After considering the submission and perusing all other materials, we find that ld. CIT(A) was justified in 6 ITA 222/JP/2012 & C.O. 29/JP/2012_ ITO Vs Smt. Ranjana Johari

holding that assessee is eligible for deduction claimed under section 10BA of the Act for all the three years. Facts and submissions have been discussed by ld. CIT(A) in detail. The objection of the AO raised in his assessment order as well as in his remand report were also taken into consideration by ld. CIT(A) and thereafter ld. CIT(A) has arrived at the conclusion that assessee is not merely a processor but has done substantial activity of manufacturing the handicraft goods and, therefore, the assessee is entitled for deduction under section 10BA of the Act. The main plank of argument of ld. CIT DR is that assessee is simply a processor as he has incurred only 1% of the total turnover as labour expenses. This is not correct. 1% labour expenses are incurred on private labourer engaged by the assessee on job work got done by the assessee, otherwise the assessee has its own manufacturing premises where permanent employees are employed and if this expenditure is taken into consideration then it is not 1% but it is substantial expenditure. This aspect has also been examined by ld. CIT (A) and found that the assessee has incurred substantial expenditure on its manufacturing activity. Statements of 12 persons were recorded by AO during remand proceedings and those persons have categorically stated that they sold unfinished goods to 7 ITA 222/JP/2012 & C.O. 29/JP/2012_ ITO Vs Smt. Ranjana Johari

the assessee and major portion of work on those goods have been done by the assessee itself in their premises. Neither the facts narrated by the supplier were found incorrect nor there was any other evidence to hold that the assessee is only doing manufacturing process. On similar facts, the Tribunal in case of Mangalam Arts in ITA No. 815/JP/2007 dated 20/06/2008 has held that the assessee is entitled for deduction under section 10BA .The ld. CIT (A) has also taken this case into consideration and found that facts are similar. Therefore, in our considered view and in view of rule of consistency, the ld. CIT (A) was justified in holding that the assessee is entitled for deduction under section 10BA of the Act. Neither any fresh material was brought on record by ld. CIT DR nor the findings of ld. CIT(A) could be controverted by placing positive material therefore for this reason also, we are of the view that order of ld. CIT (A) is liable to be confirmed for all the three years. Accordingly, we confirmed the finding of ld. CIT (A) in this regard for all the three years."

3.2 As per section 10BA (2), the following conditions were necessary for claiming the deduction:

a) It manufactures or produces the eligible articles or things without the use of imported raw material;

8 ITA 222/JP/2012 & C.O. 29/JP/2012_ ITO Vs Smt. Ranjana Johari

"Eligible article means" all handmade articles or things, which are of artistic value and which requires the use of wood as the main raw material-."

Since the business of the assessee is export of wooden handicraft items having artistic value with an antique look, raw materials such as wooden items, polish, stones, brass, iron, etc. are used for making it an artistic item. Since grooving, brass work, inlay work, metal work, carving, studding work, stone work and other related process cannot be carried out with the help of machines (since being a meticulous work) it involves thought, personal skills and constructive power to manufacture the product of artistic nature. The semi finished wooden items and article and things purchased against Form 17B are further subjected to manufacturing process and converted into eligible handmade crafted artistic wooden articles and things. For example for manufacturing a table, only a top was purchased which too had a skeleton shape. Thereafter legs of the table were made by the assessee on which table top was fitted. All the carving work as desired by the customer was done by the assessee. Thereafter finishing of the table was done by the assessee. Similarly, in case of all items, the assessee had done major activity of manufacturing to bring the article in a new and finished shape. Therefore, it could not be said that assessee was merely a processor and no 9 ITA 222/JP/2012 & C.O. 29/JP/2012_ ITO Vs Smt. Ranjana Johari

substantial work had been done by the assessee. Hence the assessee qualified the first condition. No imported raw material was used by the assessee and she had carried out the manufacturing activity as by the ITAT.

b) It is not formed by the splitting up or the reconstruction, of a business already in the existence.

The assessee started first time new undertaking and manufacturing w.e.f. 05.11.2003 as per copy of S.S.I. Permanent Registration Certificate by District Industrial Center, Udyog Bhawan, Jaipur issued on 09.11.2005. Therefore, the contention of the AO was wrong that the unit was formed by the splitting up or the reconstruction, of a business already in the existence.

c) It is not formed by the transfer to a new business of Machinery or Plant previously used for any purpose. Since assessee has started a new undertaking as described above and the assessee had purchased all new Plant & Machinery for manufacturing process & during the Assessment year 2008-09 also, the assessee purchased all new Plant & Machinery of Rs. 1,02,23,345/-. Therefore this condition is also fulfilled. The main machinery was hand tool, grinder, sanding machine & drill machine required for wooden handicraft artistic work.

d) Ninety percent or more of its sale during the previous year relevant to the assessment year are by way of 10 ITA 222/JP/2012 & C.O. 29/JP/2012_ ITO Vs Smt. Ranjana Johari

exports of the eligible articles or thing. During the year also, the assessee has exported 99.92% of eligible articles or things. Hence the above said condition of section 10BA is fulfilled by the assessee.

e) It employs twenty or more workers during the previous year in the process of manufacture or production.

Section 10BA of The Income Tax Act specifies that the assessee employs twenty or more workers during the previous year in the process of manufacture or production. As per the wages register so produced before the AO, total workers employed by the assessee during the relevant year were around 44. However total workers employed through contractor to whom job charges paid were around 150 during the year. Thus, it is amply clear on facts and in law both that the appellant is a manufacturing exporter and had satisfied all the conditions laid down U/s 10BA (2) (e) and hence the entire deduction was to be allowed.

3.3 lt was also held by the Hon'ble Jodhpur Tribunal in the case of Kwal Pro Exports Vs ITO (ITA No. 543,544,545/Jd/2007 and 415/Jd/2008) that the AO had inferred that the assessee simply carried out trading of manufactured items purchased locally and this finding was found to be perverse on facts. The Tribunal observed that various steps undertaken by the assessee on the semi-finished goods 11 ITA 222/JP/2012 & C.O. 29/JP/2012_ ITO Vs Smt. Ranjana Johari

and other articles gave them a commercial look making the article completely distinct in character and making them marketable commodity. The tribunal further observed that even though the original identity of the material did not lose its identity completely yet a different commercial commodity had been brought into existence by the assessee and that the end product so produced was different and distinct both in character and use as well. The Tribunal held that if change made in the article resulted in a new and different article then it would amount to manufacturing activity which would imply a change and transformation. It was held that in a case wherein assessee had undertaken a chain of activities to convert the locally purchased semi finished goods and other articles into marketable commodity altogether different both in character and use than what was purchased originally then the assessee would be entitled to deduction U/s 10B of the Income Tax Act. Further it was held that even though the original material did not loose its identity completely, yet a different commercial commodity had been brought into existence by the assessee which tantamount to manufacturing activity.

3.4 The appellant had claimed total purchases and direct expenses of Rs. 1`5,35,05,538/-. The purchases of semi- finished goods as per form VAT 15 (not against form 17B) were of Rs. 8,03,51,262/-. Hence value addition was made 12 ITA 222/JP/2012 & C.O. 29/JP/2012_ ITO Vs Smt. Ranjana Johari

on 91.04% of the total purchases of semi finished goods. The manufacturing & other direct expenses were at Rs. 7,31,54,276/- which constituted 47.65% of total direct expenses. Therefore the value addition was made after production activities and goods were not exported as such. Only on the basis of purchases being made against Form 17B, it could not be said that the assessee had not done any manufacturing activity because as per Rule 23(1)(b) of RST Act, there was no prohibition on the buyer exporter from making changes in the products to be exported and there was nothing which could warrant adverse inference on the ground that purchases were made against Sale Tax 17B Form. In view of above facts, I direct the AO to allow deduction of Rs 71,25,075/- U/s 10BA to the appellant. This ground of appeal is allowed."

4. Now the Revenue is in appeal before us. The learned D.R.

vehemently supported the order of the Assessing Officer.

5. At the outset, the learned AR for the assessee argued that this

issue has already been considered by the Hon'ble ITAT, Jaipur in

assessee's own case vide order dated 14/07/2011 passed in ITA Nos.

1111, 1112 and 1113/JP/2010 for A.Y. 2004-05, 2005-06 and 2006-07

and held that the assessee was manufacturing the goods for export

purposes. The Hon'ble ITAT, Jaipur has given detailed findings on this 13 ITA 222/JP/2012 & C.O. 29/JP/2012_ ITO Vs Smt. Ranjana Johari

issue. There was a survey U/s 133A of the Act at the factory premises

and no adverse findings was found by the survey team. No physical

inventory was prepared at the factory and no advance tax was

demanded by the department from the assessee during the survey

proceedings. Only statement of Smt. Ranjana Johri was recorded. Copy

of the statement had not been provided by the department. The survey

team was satisfied with the claiming of exemption U/s 10BA of the Act.

He drawn our attention on the finding given by the Hon'ble ITAT Jaipur

in assessee's own case at paragraph No. 12 of its order on this issue.

Therefore, he prayed to dismiss the revenue's appeal and confirm the

order of the learned CIT(A).

6. We have heard the rival contentions of both the parties and

perused the material available on the record. The Coordinate Bench in

assessee's own case in ITA Nos. 1111, 1112 and 1113/JP/2010 for A.Y.

2004-05, 2005-06 and 2006-07 on identical facts and circumstances has

held that the assessee's activities is manufacturing or production as

defined by the Act in Section 10BA of the Act. The operative portion of

the order is reproduced as under:-

"12. We have heard rival submissions and considered them carefully. We have also perused various evidences filed 14 ITA 222/JP/2012 & C.O. 29/JP/2012_ ITO Vs Smt. Ranjana Johari

before ld. CIT (A) in support of the case of the assessee and also the detailed written submissions placed on record along with the submissions of ld. CIT D/R. After considering the submissions and perusing all other materials, we find that ld. CIT (A) was justified in holding that assessee is eligible for deduction claimed under section 10BA of the Act for all the three years. Facts and submissions have been discussed by ld. CIT (A) in detail. The objection of the AO raised in his assessment order as well as in his remand report were also taken into consideration by ld. CIT (A) and thereafter ld. CIT (A) has arrived at the conclusion that assessee is not merely a processor but has done substantial activity of manufacturing the handicraft goods and, therefore, the assessee is entitled for deduction under section 10BA of the Act. The main plank of argument of ld. CIT D/R is that assessee is simply a processor as he has incurred only 1% of the total turnover as labour expenses. This is not correct. 1% labour expenses are incurred on private labourer engaged by the assessee on job work got done by the assessee, otherwise the assessee has its own manufacturing premises where permanent employees are employed and if this expenditure is taken into consideration then it is not 1% but it is substantial expenditure. This aspect has also been examined by the ld. CIT (A) and found that the assessee has incurred substantial 15 ITA 222/JP/2012 & C.O. 29/JP/2012_ ITO Vs Smt. Ranjana Johari

expenditure on its manufacturing activity. Statements of12 persons were recorded by AO during remand proceedings and those persons have categorically stated that they sold unfinished goods to the assessee and major portion of work on those goods have been done by the assessee itself in their premises. Neither the facts narrated by the supplier were found incorrect nor there was any other evidence to hold that the assessee is only doing manufacturing process. On similar facts, the Tribunal in case of Mangalam Arts in ITA No. 815/JP/2007 dated 20.6.2008 has held that the assessee is entitled for deduction under section 10BA. The ld. CIT (A) has also taken this case into consideration and found that facts are similar. Therefore, in our considered view and in view of rule of consistency, the ld. CIT (A) was justified in holding that assessee is entitled for deduction under section 10BA of the Act. Neither any fresh material was brought on record by ld. CIT D/R nor the findings of ld. CIT (A) could be controverted by placing positive material, therefore, for this reason also, we are of the view that order of ld. CIT (A) is liable to be confirmed for all the three years. Accordingly, we confirm the finding of ld. CIT (A) in this regard for all the three years."

By respectfully following the order of the Coordinate Bench in

assessee's own case on same issue, we are of the considered view that

the assessee was in manufacturing of goods and eligible for deduction 16 ITA 222/JP/2012 & C.O. 29/JP/2012_ ITO Vs Smt. Ranjana Johari

U/s 10BA of the Act. Accordingly, we confirm the order of the learned

CIT(A).

7. The ground of the C.O. is not pressed by the learned A.R.,

therefore, we dismiss the C.O. filed by the assessee as not pressed.

8. In the result, the revenue's appeal and C.O. of the assessee are

dismissed.

Order pronounced in the open court on 27/02/2015.

Sd/- Sd/- ¼vkj-ih-rksykuh½ ¼Vh-vkj-ehuk½ (R.P.Tolani) (T.R. Meena) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Tk;iqj@Jaipur fnukad@Dated:- 27th February, 2015 *Ranjan

vkns'k dh izfrfyfi vxzsf'kr@Copy of the order forwarded to:

1. vihykFkhZ@The Appellant- The ITO, Ward 6(2), Jaipur.

2. izR;FkhZ@ The Respondent- Smt. Ranjana Johari, Jaipur.

3. vk;dj vk;qDr@ CIT

4. vk;dj vk;qDr¼vihy½@The CIT(A)

5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur

6. xkMZ QkbZy@ Guard File (ITA No. 222/JP/2012 & C.O. 29/JP/2012)

vkns'kkuqlkj@ By order,

lgk;d iathdkj@Asst. Registrar