The ITO, Ward-1(1),, Baroda v. Abbey Chemicals Pvt. Ltd.,, Baroda

ITA 2875/AHD/2004 | 2001-2002
Pronouncement Date: 29-01-2010 | Result: Dismissed

Appeal Details

RSA Number 287520514 RSA 2004
Bench Ahmedabad
Appeal Number ITA 2875/AHD/2004
Duration Of Justice 5 year(s) 4 month(s) 5 day(s)
Appellant The ITO, Ward-1(1),, Baroda
Respondent Abbey Chemicals Pvt. Ltd.,, Baroda
Appeal Type Income Tax Appeal
Pronouncement Date 29-01-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted C
Tribunal Order Date 29-01-2010
Date Of Final Hearing 11-01-2010
Next Hearing Date 11-01-2010
Assessment Year 2001-2002
Appeal Filed On 23-09-2004
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE SHRI MAHAVIR SINGH JM & SHRI A.N. PAHUJA A M I.T.A. NO.2875/AHD/2004 (ASSESSMENT YEAR 2001-02) ITO WARD-1(1) VS ABBEY CHEMICALS PVT LTD BARODA 510 GAYATRI CHAMBERS R.C. DUTT ROAD ALKAPURI BARODA [PAN : AACA4923F] (APPELLANT) (RESPONDENT) REVENUE BY : SHRI SHELLEY JINDAL DR ASSESSEE BY : SHRI SH TALATI AR O R D E R AN PAHUJA : THIS APPEAL BY THE REVENUE AGAINST AN ORDER DATED 07-07-2004 OF THE LD. CIT(A)-I BARODA RAISES THE FOLLOWING GROU NDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A) HAS ERRED IN (I) ALLOWING DEDUCTION U/S 10B OF THE ACT WHICH OUG HT TO HAVE BEEN DISALLOWED TO THE ASSESSEE AS THE ASSESSEE COMPANY WAS NOT A NEW INDUSTRIAL UNDERTAKING. (II) DELETING THE ADDITION MADE ON ACCOUNT OF LOWER G.P. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORD ER PASSED BY THE AO. 3. IT IS THEREFORE PRAYED THAT THE ORDER OF THE CIT(A) MAY BE SET ASIDE AND THAT OF THE AO BE RESTORED. 2. ADVERTING FIRST TO GROUND NO.1(I) IN THE APPEAL FACTS IN BRIEF AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING INCOME OF RS.6 933/-FILED ON 29-10-2001 BY THE ASSESSEE ENGAGED IN THE MANUFACTURE OF 2.2D ITHIO-DI BENZOIC ACID WAS TAKEN UP FOR SCRUTINY WITH THE ISSUE OF NOTICE U/S 143(2) OF THE INCOME-TAX ACT 1961[HEREINAFTER REFERRED TO AS THE ACT].DURI NG THE COURSE OF ASSESSMENT I.T.A. NO.2875/AHD/2004 2 PROCEEDINGS THE ASSESSING OFFICER[AO IN SHORT] NOT ICED THAT THE ASSESSEE CLAIMED DEDUCTION U/S 10B OF THE ACT IN RESPECT OF PROFITS OF ITS EXPORT ORIENT UNIT EVEN WHEN IN THE PRECEDING ASSESSMENT YEARS 1998-99 TO AY 2000-01 IT CLAIMED DEDUCTION U/S 80HHC OF THE ACT. THE AO WAS OF THE OPINION THAT THE PROVISIONS OF SECTION 10B(2) OF THE ACT WERE AVAILABLE TO THE NEW UNDERTAKINGS ONLY AND RECONSTRUCTION OR CONVERSION OF BUSINESS ALREADY IN EXISTENCE DOES NOT ENTITLE THE ASSESSEE FOR THE BENEFIT U/S 10B OF THE ACT . THE A O FURTHER OBSERVED THAT IT WAS INCUMBENT UPON THE ASSESSEE TO PROVE THAT ITS PLANT AND MACHINERY WAS NOT USED EARLIER FOR ANY PURPOSE SUBJECT TO EXPLANATION BELO W SECTION 10B(2) OF THE ACT. ACCORDING TO THE AO IT WILL BE SELF DEFEATING EXE RCISE IF THE LEGISLATION HAVING INTRODUCED A SUNSET CLAUSE IN SECTION 80HHC(4) OF T HE ACT CONTEMPLATES DEDUCTION U/S 10B TO THE SAME INDUSTRIAL UNDERTAKIN G. IN RESPONSE TO A SHOW CAUSE NOTICE THE ASSESSEE EXPLAINED THAT ALL THE M ACHINES/EQUIPMENTS AND PLANTS ARE NEWLY PURCHASED AND ARE INSTALLED FOR TH E MANUFACTURING PURPOSES. HOWEVER THE AO OBSERVED THAT THE EQUIPMENT AND PLA NTS WERE NOT NEWLY PURCHASED AS WAS EVIDENT FROM THE FOLLOWING DETAILS : A.Y. W.D.V. OF MACHINERY ADDITIONS DURING THE FY 1997-98 76 53 224 2 31 693 1998-99 78 84 917 8 01 607 1999-2000 86 86 524 25 75 659 2000-01 1 12 62 184 39 32 858 2001-02 1 51 95 042 51 48 070 AND THUS THE ASSESSEE CANNOT CLAIM THE STATUS OF NEW INDUSTRIAL UNDERTAKING FOR THE PURPOSE OF DEDUCTION U/S 10B OF THE ACT. THE ASSESSEE WHILE EXPLAINING THAT EOU IS APPROVED BY THE GOVERNMENT IS A TOTALLY NEW UNDERTAKING AND HAS NOT USED MACHINERY OR PLANT USED EARLIER USED IN ANY OTHER PLANT IN INDIA. HOWEVER THE AO REJECTED THESE SUBMISSIONS OF THE ASSESSEE A ND DENIED THE CLAIM FOR DEDUCTION U/S 10B OF THE ACT ON THE GROUND THAT THE PROVISIONS OF SECTION 10B SUBSTITUTED BY FINANCE ACT 2000 W.E.F. 1.4.2001 ST ART WITH THE HEADING SPECIAL I.T.A. NO.2875/AHD/2004 3 PROVISION IN RESPECT OF NEWLY ESTABLISHED HUNDRED P ERCENT EXPORT ORIENTED UNDERTAKINGS AND THE ASSESSEE DID NOT FULFILL TH E CONDITIONS STIPULATED U/S 10B(2) OF THE ACT SINCE I) THE LETTER OF PERMISSION FOR CONVERSION OF EXIST ING DOMESTIC TARIFF AREA UNIT IN TO 100% EOU ISSUED BY THE GOVERNMENT OF INDIA O N 6 TH JANUARY 2001 IS NOT AN APPROVAL IN EXERCISE OF POWERS CONFERRED BY SECTION 14 OF THE INDUSTRIAL DEVELOPMENT & REGULATION) ACT 1951 BUT IS A LETTER EXTENDING FACILITIES & PRIVILEGES ADMISSIBLE AS ENVISAGED IN EXPORT IMPORT POLICY 1997-2002; II) AS PER CHAPTER 9 (PARAGRAPH 9.3) OF THE EXIM P OLICY 1997-2002 CONVERSION OF DOMESTIC TARIFF AREA (DTA) UNIT TO EO U WAS PERMITTED SUBJECT TO THAT NO CONCESSION WAS PERMISSIBLE TO PL ANT MACHINERY AND EQUIPMENTS ALREADY INSTALLED IN SO FAR AS CONCESSIO N ON DUTIES AND TAXES WAS CONCERNED WHILE PARA 9.4 OF THE SAID POLICY MA NDATED THE APPLICANT TO MAINTAIN DISTINCT IDENTITY AND REQUIRED TO MAINT AIN SEPARATE ACCOUNTS ALSO.; III) THE NEW NOTIFICATION CHANGED THE CONVERTIBILI TY CLAUSE AS UNDER : (A) EXISTING DTA UNITS MAY ALSO APPLY FOR CONVERSI ON INTO AN EOU/EHTP/STP UNIT BUT NO CONCESSION IN DUTIES AND TAXES WOULD BE AVAILABLE UNDER THE SCHEME FOR PLANT MACHINERY AND EQUIPMENT ALREADY INSTALLED. 2.1 THE AO FURTHER POINTED OUT THAT THE AFORESAI D FACTS WERE CLEARLY BORNE OUT FROM THE ASSESSEES APPLICATION DATED 25-10-2000 TO DGFT AND THE RELEVANT PARA OF THE SAID APPLICATION READS AS UNDER : WE ARE A PRIVATE LIMITED COMPANY MANUFACTURING AND EXPORTING ABOVE MENTIONED PRODUCT SINCE LAST FIVE YEARS. AS WE HAVE SIZEABLE EXPORT WE PROPOSE TO FULLY CONVERT OUR EX ISTING UNIT INTO EOU. FOR THIS PURPOSE WE HAVE ALREADY SENT APPLICA TION DATED 3-7- 2000 HOWEVER BY OVERSIGHT WE HAVE MENTIONED IT AS FOR SETTING UP OF A NEW UNIT. I.T.A. NO.2875/AHD/2004 4 2.2 ACCORDING TO THE AO EXPLANATION 2 TO SECTION 8 0I(2) OF THE ACT DEFINES NEWLY ESTABLISHED INDUSTRIAL UNDERTAKING AND SUCH UNDERTAKING HAS TO SATISFY THE REQUIREMENT OF RESTRICTION OF 20% OF THE MACHINERY USED IN PREVIOUS UNDERTAKING. SINCE THE ASSESSEE ADMITTED THAT ALL PLANT AND MAC HINERY WERE ALREADY INSTALLED PRIOR TO THE DATE ON WHICH THE LETTER OF PERMISSION DATED 06-01-2001 WAS RECEIVED AND EVEN THE PLANT AND MACHINERY ADDED DURING THE Y EAR WERE ALSO INSTALLED PRIOR TO THE CONVERSION OF THE ASSESSEES EXISTING UNIT INTO AN EOU THE AO RECORDED THE STATEMENTS OF ASSESSEES REPRESENTATIVE SHRI S S PATEL NRI MANAGING DIRECTOR SHRI DG PATEL ALTERNATE DIRECTOR TO THE SAID SS PATEL AND SHRI RC PATEL CHIEF CHEMIST IN CHARGE OF INSTALLATION PR ODUCTION QUALITY CONTROL AND WHILE REFERRING TO CIRCULAR NO.794 DATED 09-08-2000 THEREAFTER SHOW CAUSED THE ASSESSEE VIDE LETTERS DATED 01-03-2004 AND 08-03-20 04 AS REPRODUCED IN THE ASSESSMENT ORDER. IN RESPONSE THE ASSESSEE VIDE L ETTER DATED 16-03-2004 REPLIED THAT THE LETTER OF PERMISSION (LOP) ISSUED BY THE MINISTRY OF COMMERCE & INDUSTRY DATED 16/1/2001 IS SUFFICIENT COMPLIANCE FOR CLAIMING DEDUCTION U/S 10B OF THE ACT AND THAT THE ASSESSEE COMPLIED WITH THE PROVISIONS OF SECTION 10B(2)(II) OF THE ACT. THE ASSESSEE ALSO CONTENDED THAT IN THEIR CASE THERE HAS NOT BEEN ANY TRANSFER OF THE ASSETS . HOWEVER TH E AO DID NOT AGREE WITH THE SUBMISSIONS OF THE ASSESSEE AND OBSERVED THAT THE CONVERSION OF UNIT ALLOWED BY THE MINISTRY OF COMMERCE IS DEFACTO RECONSTRUCTI ON FOR THE PURPOSES OF SECTION 10B(2)(II) AND THAT THE ASSESSEES ARGUMENT THAT IT IS AMPLY THEREFORE CLEAR THAT THE BUSINESS ALREADY IN EXISTENCE CAN CL AIM EXEMPTION U/S 10B IF THE TWO SITUATION (SPLIT-UP AND RECONSTRUCTION) ARE NOT THERE. HAS NO MEANING AND IS SUPERFLUOUS. 2.3 IN THE LIGHT OF AFORESAID FACTS AND CIRCUMSTAN CES THE AO CONCLUDED THAT SINCE THE ASSESSEE IS AN OLD UNDERTAKING AND EVEN I F IT HAS REGISTERED ITSELF AS ON E.O.U. THE PROVISIONS OF SECTION 10B OF THE ACT ARE NOT APPLICABLE AND THE ASSESSEE IS INELIGIBLE TO CLAIM ITS INCOME EXEMPT U NDER SECTION 10B OF THE ACT. THE ESTABLISHMENT OF A NEW INDUSTRIAL UNDERTAKING INSTALLATION OF BRAND NEW MACHINERY (AT LEAST 80%) AND APPROVAL U/S 14 OF THE INDUSTRIES (DEVELOPMENT AND REGULATION) ACT 1951 ARE SINE QUA NON FOR ANY CLAI M OF EXEMPTION U/S 10B OF THE I.T.A. NO.2875/AHD/2004 5 INCOME TAX ACT 1961 W.E.F. 1.4.2001 I.E. AY 2001- 2002 THE AO HELD. THE AO FURTHER OBSERVED THAT THE VERY ADMISSION OF THE ASS ESSEE THAT THE ASSESSEE IS USING THE MACHINERY OR PLANT PREVIOUSLY USED PRECLU DES IT FROM THE AMBIT OF BENEVOLENT PROVISIONS OF NEWLY INTRODUCED SEC.10B O F THE I.T. ACT.THE ASSESSEE HAS FAILED TO PROVE ALL THE CONDITIONS AND THEREFO RE ITS CLAIM FOR EXEMPTION U/S 10B IS TREATED AS BOGUS / SHAM AND REJECTED. CONSEQ UENTLY THE CERTIFICATE ISSUED BY THE ACCOUNTANT IN FORM 56 G WAS ALSO TREA TED AS UNTRUE AND THE REPORT OF THE SAID ACCOUNTANT WAS REJECTED. 3. ON APPEAL THE ASSESSEE WHILE REITERATING T HEIR SUBMISSIONS BEFORE THE AO CONTENDED THAT THE LETTER OF PERMISSION ISSUED BY THE DEPARTMENT OF I NDUSTRIAL POLICY AND PROMOTION SECRETARIAT FOR INDUSTRIAL AS SISTANCE WAS ONLY AFTER CLEARANCE OF THE PROPOSAL BY THE BOARD OF APPROVAL. THEREFORE THE LETTER OF PERMISSION NO.PER:1(2001) EOB/98/2000 DATED 16-01-2 001 ISSUED TO M/S.ABBEY CHEMICAL PVT.LTD. IS WITH THE APPROVAL OF THE BOARD OF APPROVAL CONSTITUTED UNDER SECTION 14 OF INDUSTRIES (DEVELOP MENT AND REGULATION) ACT 1951. THE LD. CIT(A) CONFRONTED THIS EVIDENCE TO THE DEPARTMENTAL OFFICERS AND IN VIEW OF THE CLEAR CUT LANGUAGE OF THE ABOVE LETTER IT WAS ACCEPTED THAT THE PERMISSION WAS SUFFICIENT U/S.14 OF THE INDUSTR IES (DEVELOPMENT & REGULATION) ACT 1951 AND FOR THE PURPOSES OF PROV ISIONS OF SECTION 10B EXPLANATION 2(IV). ACCORDINGLY THE LD. CIT(A) OBSE RVED THAT AS PER THE EVIDENCE AVAILABLE IT IS CLEAR THAT THE EXISTING D TA UNIT OF THE ASSESSEE CLEARLY FALLS UNDER THE CATEGORY OF EOU WITH EFFECT FROM 16-1-2001. 3.1 THE ASSESSEE FURTHER SUBMITTED THAT THE UN IT WAS FORMED NEITHER BY SPLITTING UP NOR BY RECONSTRUCTION OF A BUSINESS AL READY IN EXISTENCE. THERE WAS NO 'TRANSFER' OF ANY ' PLANT & MACHINERY PREVIO USLY USED FOR ANY PURPOSE. THEREFORE AS NONE OF THESE CONDITIONS EXISTED IT HAS TO BE TREATED AS A NEWLY ESTABLISHED UNDERTAKING. IT WAS POINTED OUT THAT THE WORD 'NEW' IS USED ONLY IN THE HEADING OF SECTION 10B AND WAS MORE RELEVANT A T THE TIME OF INTRODUCTION OF SECTION IN 1988. THE WORD 'NEW' IS NO WHERE DEFINED IN THE SECTION. THE EXISTING I.T.A. NO.2875/AHD/2004 6 UNITS LIKE THE ASSESSEE'S HAVE BEEN KEPT IN MIND IN THE SUBSTITUTED SECTION 10B AS A PROVISO FOR EXISTING UNITS HAS BEEN PUT IN SUB -SECTION (1) ITSELF WHICH STATES THAT 'WHERE IN COMPUTING THE TOTAL INCOME OF THE UN DERTAKING FOR ANY ASSESSMENT YEAR THE PROFITS AND GAINS HAD NOT BEEN INCLUDED BY APPLICATION OF THE PROVISIONS OF THIS SECTION AS IT STOOD IMMEDIATELY BEFORE ITS SUBSTITUTION BY THE FINANCE ACT 2000 THE UNDERTAKING SHALL BE ENTITLED TO THE DEDU CTION REFERRED TO IN THE SUB- SECTION ONLY FOR THE UNEXPIRED PERIOD OF AFORESAID 10 CONSECUTIVE ASSESSMENT YEARS.' THE FACT THAT IT WAS A NEW INDUSTRIAL UNDER TAKING AND THAT APPROVAL FOR EOU WAS SOUGHT SUBSEQUENTLY DOES NOT DISENTITLE THE ASSESSEE FROM CLAIMING THE BENEFIT OF SECTION 10B THE ASSESSEE ADDED. IT WAS FURTHER POINTED OUT THAT CIRCULAR NO.528 DATED 16-12-1988 CLEARLY MENTIONS IN CLAUSE 5 THAT THE OPTION IS GIVEN TO UNITS WHICH WERE MANUFACTURING EARLIER TO STATE THE FIVE CONSECUTIVE YEARS IN WHICH THEY WOULD AVAIL OF THE BENEFIT OF S ECTION 10B . 4. IN THE LIGHT OF AFORESAID SUBMISSIONS THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE IN THE FOLLOWING TERMS: 2.15 AFTER GOING THROUGH THE FACTS OF THE CASE AND SUBMISSIONS FROM BOTH THE SIDES I FIND THAT THE ASSESSING OFFI CER'S BASIC OBJECTION IS TO THE FACT THAT THE UNIT WAS ALREADY EXISTING AND GETTING DEDUCTION U/S.80HHC PRIOR TO BECOMING AN EOU. IN TH IS SITUATION HE HAS TERMED IT AS A 'CONVERSION' WHICH IS EQUIVAL ENT TO RECONSTRUCTION AND ALSO THAT OLD MACHINERY HAS BEEN USED IN THE EOU AND THEREFORE THE CONDITIONS OF SECTION 10B(2) ARE NOT SATISFIED. THE APPELLANT ON THE OTHER HAND STATED THAT MERELY GETTING STATUS AS EOU SUBSEQUENTLY DOES NOT CHANGE THE POSITION IN ANY WAY WHATSOEVER AND IT SATISFIED THE CONDITI ONS OF ELIGIBILITY AS IT HAS NEITHER USED OLD MACHINERY IN ITS UNIT NO R IS IT FORMED BY SPLITTING OR RECONSTRUCTION OF AN EXISTING BUSINESS BUT IS THE SAME BUSINESS WHICH WAS ALREADY IN EXISTENCE. 2.16 CIRCULAR NO.528 DT.16-12-1988 STATES THAT VIDE SECTION 10A A FIVE YEAR TAX HOLIDAY WAS ALLOWED TO INDUSTRIAL UND ERTAKINGS IN A FREE TRADE ZONE FOR FIVE CONSECUTIVE YEARS FALLING WITHIN A BLOCK OF 8 YEARS. IT IS FURTHER STATED AS FOLLOWS: ' THE ABOVE TAX HOLIDAY WAS NOT AVAILABLE TO A HUND RED PER CENT EXPORT ORIENTED UNDERTAKING. SUCH UNDERTAKINGS WERE ELIGIBLE ONLY FOR DEDUCTION OUT OF THEIR EXPORT PRO FITS UNDER I.T.A. NO.2875/AHD/2004 7 SECTION 80HHC OF THE INCOME TAX ACT. WITH A VIEW TO PROVIDING FURTHER INCENTIVE FOR EARNING FOREIGN EXCHANGE A N EW SECTION 10B HAS BEEN INSERTED BY THE ACT SO AS TO SECURE TH AT THE INCOME OF A HUNDRED PER CENT EXPORT-ORIENTED UNDERT AKING SHALL BE EXEMPT FROM TAX FOR A PERIOD OF FIVE CONSE CUTIVE ASSESSMENT YEARS FALLING WITHIN THE BLOCK OF EIGHT ASSESSMENT YEARS'. 2.17 FROM THE ABOVE IT WOULD APPEAR THAT UNDERTAKINGS WHICH WERE GETTING BENEFITS U/S 80HHC COULD NOW AVAIL OF BENEFIT OF SECTION 10B SO AS TO PROVIDE FURTHER INCENTIVE FOR EARNING FOREIGN EXCHANGE. SUBSEQUENTLY W/HEN THE SECTION WAS AMENDED CIRCULAR/NO 794 DATED 8-9-2000 WAS ISSUED IN WHICH IT WAS STATED THAT SECTION 10B ALLOWED A TEN YEAR TAX HOLIDAY TO EXPORT ORIENTED UNDERTAKINGS AND WITH A VIEW TO RATIONALISING THE PROVISIONS OF SEC.L0A & 10B THEY HAYE BEEN SUBSTITUTED BY NEW PROVISIONS. THE NEW PROVISIONS STATE THAT THE DEDUCTION WOULD BE GRANTED WITH REFERENCE T O THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE AR TICLES OR THINGS AND IT ALSO STIPULATED THAT THE EXISTING UNITS WOULD GET A DEDUCTION FOR THE EXPIRED PERIOD OF TEN YEAS ONLY. HERE AGAIN THERE IS REFERENCE TO OLD UNITS SO LONG AS THEY ARE EOU. 2.18 FROM A HARMONIOUS CONSTRUCTION OF THE PROVIS IONS OF THE SECTION THE CONCEPTS OF 'SPLITTING UP' AND 'RECONS TRUCTION' 'TRANSFER' OF MACHINERY AND NEW' UNIT IT WOULD A PPEAR THAT THE SECTION 10A ORIGINALLY INTENDED TO GIVE BENEFIT TO NEW UNITS IN FREE TRADE ZONES SET UP AFTER A SPECIFIC DATE. I N SUCH A SITUATION A SPECIFIC DATE WAS MENTIONED. THEREAFTER THE SAME BENEFIT WAS EXTENDED TO EOUS U/S.L0B. HOWEVER IN S ECTION 10B NO SPECIFIC DATE WAS MENTIONED AND THE CIRCULA R NO.528 IN FACT CLARIFIES THAT EXISTING UNITS WHICH WERE C LAIMING DEDUCTION U/S.80HHC COULD NOW OBTAIN THE BENEFIT PR OVIDED THEY FALL IN THE EIGHT YEAR PERIOD. IN BRIEF THE I NTENTION WAS TO GIVE BENEFIT WITHIN 8/10 YEARS STARTING FROM THE DA TE OF MANUFACTURE. THEREFORE IN NO CASE CAN ANY UNIT EX CEED 10 YEARS FROM THE DATE OF MANUFACTURE AND IS LIMITED T O FIVE YEARS WITHIN THAT PERIOD. 2.19 COMING TO THE SPECIFIC ELIGIBILITY CLAUSES I WOULD HOLD THAT 'SPLITTING UP' AND 'RECONSTRUCTION' REFERRED TO SIT UATIONS WHERE AN EXISTING UNIT HAVING BOTH EXPORT ' AND INTERNAL TRADE AND I.T.A. NO.2875/AHD/2004 8 MANUFACTURING SPLITS ITSELF INTO AN EXPORT UNIT AN D A LOCAL UNIT SO AS TO ENSURE THAT THE EXPORT UNIT GETS THE FULL BEN EFIT OF SECTION 10B. SIMILARLY A 'RECONSTRUCTION' WOULD MEAN BREAK ING DOWN OF PART OF THE ORIGINAL TO FORM A NEW ONE. HERE THE I NTENTION WOULD CLEARLY BE THAT PART OF A TOTAL ACTIVITY BEING CARR IED ON WAS INTENDED TO BE SEPARATED SO AS TO AVAIL OF THE FULL BENEFIT OF THIS SECTION. SOMETIMES THIS WORK OF SPLITTING UP AND RECONSTRUC TION COULD BE DONE ON PAPER ONLY MERELY TO CLAIM THIS BENEFIT. IT WAS TO LIMIT SUCH CASES THAT THIS ELIGIBILITY CRITERIA WAS DRAWN UP. SIMILAR WOULD BE THE POSITION IN RESPECT OF THE CLAUSE REGARDING NEW MAC HINERY AND MACHINERY WHICH HAS BEEN EARLIER UTILIZED. 2.20 IN THE CASE OF THE APPELLANT THE POSITION H OWEVER WOULD BE VERY DIFFERENT AS IT WAS 'FORMED' AS A 'NEW' UNIT IN 1991 AND HAS PURCHASED ONLY 'NEW' MACHINES. IT CAN NOT THEREFORE BE STATED TO HAVE BEEN FORMED BY 'SPLITTING UP' OR 'RECONSTRUCTI ON' OF ANY OTHER UNIT OR THAT IT HAS UTILIZED MACHINERY WHICH WAS E ARLIER UTILIZED BY ANOTHER UNIT. THIS NARROWS DOWN THE DEBATE TO THE I SSUE WHETHER IT WOULD BE CONSIDERED AS A 'NEW UNDERTAKING' FOR CLAI MING THE BENEFIT OF SECTION 10B. THE SECTION ITSELF IS NOT A T ALL EXPLICIT ON THIS POINT. THE WORD 'NEW' WAS IN THE TITLE WHEN THE SEC TION WAS FIRST INTRODUCED. IT IS HOWEVER NOT DEFINED. HOWEVER TH E INTENTION OF LEGISLATURE WAS TO GIVE BENEFITS TO EOUS IN A WAY S IMILAR TO THOSE IN THE FREE TRADE ZONES. EXISTING UNITS I.E. OLD UNIT S AVAILING BENEFITS OF SECTION 80HHC COULD AVAIL OF THIS BENEFIT PROV IDED THEY WERE NOT FORMED BY SPLITTING RECONSTRUCTION AND UTILIZA TION OF OLD MACHINERY. THIS IS TANTAMOUNT TO SAYING THAT THE OLD UNITS REFERRED TO IN THE BOARDS CIRCULAR ALSO HAVE THE SAME CHARA CTERISTICS AS THE SO CALLED NEW UNITS. THIS DRAWS US TO THE CONCLU SION THAT THE UNIT ITSELF SHOULD BE NEW AT THE TIME IT WAS FORMED REGA RDLESS OF WHETHER IT WAS FORMED AS AN EOU OR NOT. IT IS THE POINT AT WHICH IT WAS FORMED THAT A DECISION HAS TO BE TAKEN AS TO WHETHE R IT' WAS FORMED BY RECONSTRUCTION/SPLITTING OR UTILIZATION OF OLD M ACHINERY. IF IT HAS NOT BEEN SO FORMED THEN IT IS A 'NEW' UNIT WHICH SATI SFIES THE ELIGIBILITY CRITERIA LAID DOWN IN THE SECTION. IT WOULD HOWEVER NOT BE ELIGIBLE FOR DEDUCTION U/S.L0B UNTIL IT OBTAINS AN EOU CERT IFICATE. 2.21 APPLYING THE ABOVE REASONING IN THE CASE OF TH E ASSESSEE THE RECORDS CLEARLY SPEAK OF THE FACT THA T WHEN IT WAS FORMED IT WAS ABSOLUTELY 'NEW' AND UTILIZED ON LY NEW MACHINES WHICH HAD NOT BEEN USED ELSEWHERE AND THE REFORE IT HAS TO BE TERMED AS A 'NEW' UNIT. ONCE IT WAS SO FORMED AND WAS DOING EXPORT BUSINESS IT WAS CLAIMING DEDU CTION U/S.80HHC EVEN THOUGH IT WAS REGISTERED AS DTA UNIT AND IT APPLIED FOR THE EOU STATUS ONLY SUBSEQUENTLY. ONCE IT HAS I.T.A. NO.2875/AHD/2004 9 OBTAINED A VALID EOU CERTIFICATE IT CONTINUES FOR THE RELEVANT PERIOD OF TEN YEARS TO BE A NEW UNIT NOT FORMED BY SPLITTING UP RECONSTRUCTION OR UTILIZATION OF OLD MACHINERY BUT CAN AVAIL OF THE BENEFIT OF SECTION 10B ONLY DURING THE UNEXPIRE D PERIOD OUT OF THE TEN YEARS AVAILABLE. THE CONCEPT OF CONVERSION' AS STATED BY THE ASSESSING OFFICER CAN NOT APPLY TO TH E DETRIMENT OF THE APPELLANT MERELY BECAUSE IT WAS CONVERTED- F ROM A DTA TO AN EOU UNIT. MERE REGISTRATION AS EOU DOES NOT M EAN THAT THE SAME UNIT WHICH IS NOT FORMED BY SPLITTING REC ONSTRUCTION ETC. WOULD SUDDENLY BECOME AN OLD UNIT FOR THIS PU RPOSE OR STATED TO BE FORMED BY SPLITTING OR RECONSTRUCTION. CHANGE IN THE NATURE OF REGISTRATION HAS BEEN DONE AS PER SUI TABLE RULES LAID DOWN UNDER-THE EXIM POLICY AND AFTER APPROVAL OF THE RELEVANT BOARD. THEREFORE IT HAS TO BE TERMED TO B E A 'NEW' UNIT WHICH OBTAINED EOU STATUS IN THE YEAR UNDER CONSIDERATION AND WOULD THEREFORE BE ELIGIBLE FOR EXEMPTION U/S.LOB ONLY TO THE EXTENT OF THE UNEXPIRED PERIOD OF 10 YEARS FROM THE DATE IT STARTED MANUFACTURE. 2.22 AS REGARDS THE ASSESSING OFFICER'S OBSERVATION THAT WHEN THE LEGISLATURE IS INTRODUCING A SUNSET CLAUSE FOR SECTION 80HHC NO PURPOSE WOULD BE SERVED IN ALLOWING THE S AME UNIT THE BENEFIT OF SECTION 10B I WOULD ' ON THE CONTR ARY STATE THAT THE PURPOSE OF SECTION 10B AND ITS FINAL CLOSURE IN THE YEAR 2009-2010 WAS TO PROTECT 100% EOUS AND OTHER FREE T RADE ZONE UNITS FROM LOSING THE BENEFITS AVAILABLE AND THEREBY HARMING THE INFLOW OF FOREIGN EXCHANGE INTO THE COU NTRY. THE BENEFIT WAS NOT SIMILARLY EXTENDED TO THOSE UNITS W HICH HAD BOTH EXPORTS AND LOCAL SALES AND THUS CONTINUED TO AVAIL OF DEDUCTION U/S.80HHC. 2.23 IN THE APPELLANT'S CASE IT IS CLEAR FROM THE RECORD AND ALSO FROM THE FIGURES AVAILABLE IN THE ASSESSING OF FICER'S ORDER THAT EVEN PRIOR TO THE YEARS WHEN IT HAS BECOME AN EOU THE APPELLANT WAS IN ANY CASE DOING ONLY EXPORT BUSINES S AND THE ENTIRE PRODUCTION FORMED THE EXPORT TURNOVER. THERE FORE THIS IS NOT A CASE OF MIXED PRODUCTION WHERE ANY BIFURCATI ON RESTRUCTURING OR CONVERSION FROM ONE KIND TO ANOTHE R KIND OF UNIT HAS BEEN DONE. THIS IS A CLEAR CUT CASE OF A C OMPANY DOING EXPORT BUT CLAIMING EOU STATUS AT A LATER DA TE AND THIS IS NOT SUFFICIENT TO DEBAR THE UNIT FROM THE BENEFI TS OF SECTION 10B. IF THE INTENTION OF THE LEGISLATURE HAD BEEN T O LIMIT THE BENEFITS OF THE SECTION TO ONLY ABSOLUTELY NEWLY SE T UP- UNITS I.T.A. NO.2875/AHD/2004 10 WHICH SHOULD START MANUFACTURE ONLY WHEN THEY WERE MADE INTO EOUS THEN LIKE SECTIONS 801 & 10A SPECIFIC C LAUSES WOULD HAVE BEEN INCLUDED REGARDING THE SAME. THE AB SENCE OF THESE CLAUSES IN SECTION 10B IS VERY MATERIAL. E VEN OTHERWISE THE APPELLANT IS FREE TO OBTAIN WHICHEVE R CLAIM IS MORE BENEFICIAL TO HIM SO LONG AS IT IS OTHERWISE E LIGIBLE. AS EXAMINED ABOVE I WOULD HOLD THAT THE APPELLANT DOE S SATISFY THE ELIGIBILITY CRITERIA BY NOT BEING FORMED THROUG H SPLITTING UP/RECONSTRUCTION OR UTILIZATION OF OLD MACHINERY. AT THE TIME IT WAS FORMED IT WAS A NEW UNIT UTILIZING NEW MACHINE RY AND IS THEREFORE ELIGIBLE TO .CLAIM THE BENEFIT TO THE LI MITED PERIOD AVAILABLE WITHIN THE 10 YEAR ZONE FROM THE DATE OF MANUFACTURE. AS PER THE INCOME TAX RECORDS THE DAT E OF MANUFACTURE IN THE APPELLANT'S CASE APPEARS TO BE ASSESSMENT YEAR 1995-96. THEREFORE THE ASSESSING O FFICER IS DIRECTED TO CALCULATE THE TEN YEARS FROM THIS POINT OF TIME AND GRANT THE BENEFIT OF SECTION 10B FOR THE REMAINING PERIOD ONLY STARTING WITH ASSESSMENT YEAR 2001-02 WHEN IT HAS OBTAINED THE EOU STATUS. 5. THE REVENUE IS NOW IN APPEAL BEFORE US AGAI NST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. DR WHILE CARRYIN G US THROUGH THE IMPUGNED ORDER SUPPORTED THE FINDINGS OF THE AO WH ILE THE LD. AR ON BEHALF OF THE ASSESSEE RELIED UPON THE ORDER OF TH E LD. CIT(A). 6. WE HAVE HEARD BOTH THE PARTIES AND GONE THR OUGH THE FACTS OF THE CASE. A PERUSAL OF RELEVANT PROVISIONS REVEALS THA T T HE BENEFIT OF DEDUCTION U/S 10B OF THE ACT IS AVAILABLE TO ANY UNDERTAKING WHICH FULFILS ALL THE FOLLOWING CONDITIONS NAMELY:-- (I) IT MANUFACTURES OR PRODUCES ANY ARTICLES OR THI NGS OR COMPUTER SOFTWARE; (II) IT IS NOT FORMED BY THE SPLITTING UP OR THE R ECONSTRUCTION OF A BUSINESS ALREADY IN EXISTENCE: PROVIDED THAT THIS CONDITION SHALL NOT APPLY IN RES PECT OF ANY UNDER TAKING WHICH IS FORMED AS A RESULT OF THE RE- ESTABLISHMENT RECONSTRUCTION OR REVIVAL BY THE ASS ESSEE OF THE BUSINESS OF ANY SUCH UNDERTAKING AS IS REFERRED TO IN I.T.A. NO.2875/AHD/2004 11 SECTION 33B IN THE CIRCUMSTANCES AND WITHIN THE PE RIOD SPECIFIED IN THAT SECTION; (III) IT IS NOT FORMED BY THE TRANSFER TO A NEW BUS INESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. UNDISPUTEDLY AND AS OBSERVED BY THE LD. CIT(A) IN HER ELABORATE ORDER SINCE THE UNDERTAKING OF THE ASSESSEE WAS 'FORMED' AS A 'NEW' UNIT IN 1991 AND PURCHASED ONLY 'NEW' MACHINES IT COULD NOT HAVE BEEN FORMED BY 'SPLITTING UP' OR 'RECONSTRUCTION' OF ANY OTHER UNI T OR THAT IT HAS UTILIZED MACHINERY WHICH WAS HITHERTO UTILIZED BY ANOTHER UNIT. AS IS EVIDENT FROM AFORESAID CIRCULAR NO. 528 REFERRED TO BY THE LD. CIT(A) THE INTENTI ON OF LEGISLATURE WAS TO GIVE BENEFITS TO EOUS IN A WAY SIMILAR TO THOSE IN THE F REE TRADE ZONES. THE EXISTING UNITS AVAILING BENEFITS U/S 80HHC OF THE ACT COULD AVAIL OF BENEFIT OF DEDUCTION U/S.L0B OF THE ACT PROVIDED THESE WERE NOT FORMED BY SPLITTING RECONSTRUCTION AND UTILIZATION OF OLD MACHINERY AND HAD OBTAINED AN EO U CERTIFICATE. AS FOUND OUT BY THE LD. CIT(A) IN THE INSTANT CASE THE UNDERTAKI NG OF THE ASSESSEE WAS ABSOLUTELY 'NEW' AND UTILIZED ONLY NEW MACHINES WHI CH HAD NOT BEEN USED ELSEWHERE AND WAS DOING EXPORT BUSINESS. IT HAD BE EN CLAIMING DEDUCTION U/S.80HHC HITHERTO WHILE BEING REGISTERED AS DTA UN IT AND IT APPLIED FOR THE EOU STATUS ONLY SUBSEQUENTLY. WITH THE AMENDMENT OF SECTION 10B BY THE TAXATION LAWS (SECOND AMENDMENT) ACT OF 1998 OPERA TIVE FROM ASSESSMENT YEAR 1999-00 THE ASSESSEE WAS ALREADY ENTITLED TO A LARGER PERIOD OF TAX HOLIDAY; WHEN THE NEW SECTION WAS SUBSTITUTED THERE WAS ALR EADY AN UNEXPIRED PORTION OF TAX HOLIDAY TO BE AVAILED BY IT. SECTION 10B WAS SU BSTITUTED BY THE FINANCE ACT 2000 W.E.F 01.04.2001. THE FIRST PROVISO TO THE SUB STITUTED SECTION 10B PROVIDES THAT THE UNIT SHALL BE ELIGIBLE TO THE TAX HOLIDAY UNDER THE NEW SECTION FOR THE UNEXPIRED PERIOD OF 10 YEARS BEGINNING WITH THE ASS ESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE SAID UNDERTAKING BEGINS TO MANUFACTURE. THE REFERENCE IN THE PROVISO IS TO THE UNEXPIRED PERIOD OF 10 YEARS WITHOUT ANY QUALIFICATION. IT DOES NOT REFER TO THE EXPIRED PER IOD OF THE TAX HOLIDAY DURATION. THE SUBSTITUTED SECTION BEING WITHOUT ANY QUALIFIC ATION IS THEREFORE TO BE HELD AS APPLICABLE TO THE RESPONDENT. CIRCULAR NO. 794 D ATED 09.08.2000 EXPLAINING I.T.A. NO.2875/AHD/2004 12 THE PROVISIONS OF THE FINANCE ACT 2000 IS TO THE SA ME EFFECT AS ALSO THE CIRCULAR NO. 1 OF 2005. IN THE LIGHT OF THESE AMENDED PROVIS IONS WE ARE OF THE OPINION THAT O NCE THE ASSESSEE OBTAINED AN EOU CERTIFICATE IT CONTINUES FOR THE R ELEVANT PERIOD OF TEN YEARS TO BE A NEW UNIT NOT FORMED BY SPLITTING UP RECONSTRUCTION OR UTILIZATION OF OLD MACHINERY AND THUS CAN AVAIL OF THE BENEFIT OF SECTION 10B ONLY DURING THE UNEXPIRED PERIOD OUT OF THE TEN YEARS AV AILABLE FROM THE DATE IT STARTED MANUFACTURE. ONCE THE CONDITIONS STIPULATED IN SECT ION 10B OF THE ACT WERE FULFILLED PROVIDING DEDUCTION FOR 10 CONSECUTIVE A SSESSMENT YEARS THE ASSESSEE CAN NOT BE DENIED THE CLAIM FOR DEDUCTION EVEN WHE N IN THE INITIAL YEARS IT HAD CLAIMED DEDUCTION U/S 80HHC OF THE ACT. 6.1 WE FIND THAT WHILE ADJUDICATING A SIMILAR ISS UE IN THE CASE OF CIT V. MAHAVIR SPINNING MILLS LTD. (2008) 217 CTR (P&H) 12 5 HONBLE HIGH COURT NOTICED THAT IN THE ASSESSMENT YEAR 1998-99 THE T AXPAYER CLAIMED DEDUCTION UNDER SECTION10B OF THE ACT FOR THE FIRST TIME VIDE LETTER DATED 19.01.2001.THE TAXPAYER UNDERTAKING CAME INTO OPERATION DURING THE ASSESSMENT YEAR 1991-92 AND WAS AVAILING DEDUCTION UNDER SECTION 80I OF THE ACT AND LATER WAS CONVERTED INTO 100% EOU DURING THE AY 1995-96.THOUGH THE LD. CIT(A) UPHELD THE ORDER OF THE AO DENYING DEDUCTION U/S 10B OF THE ACT THE IT AT DECIDED THE ISSUE IN FAVOUR OF THE TAXPAYER. ON APPEAL BY THE REVENUE T HE HONBLE HIGH COURT WHILE RELYING UPON THE CBDT CIRCULAR NO. 1 OF 2005 HELD AS UNDER: 7. THE CONTENTION RAISED BY THE REVENUE IS WITHOUT ANY MERIT. THE ASSESSEE HAS CLAIMED EXEMPTION UNDER S. 10B FOR THE FIRST TIME VIDE LETTER DATED 19 TH JAN. 2001. ADMITTEDLY THE IMPUGNED EXEMPTION WAS NOT CLAIMED BY THE ASSESSEE IN THE OR IGINAL AS WELL AS REVISED RETURN. THIS UNIT CAME INTO OPERATION IN TH E ASST. YR. 1991-92 BUT DURING THE FINANCIAL YEAR 1994-95 GOT CONVERTED INTO 100 PER CENT EXPORT ORIENTED UNIT (EOU) WITH THE PERMISSION OF T HE DEPARTMENT OF INDUSTRIAL DEVELOPMENT MINISTRY OF INDUSTRY GOVER NMENT OF INDIA NEW DELHI VIDE LETTER DATED 28 TH OCT. 1994. ADMITTEDLY ARIHANT SPINNING MILLS UNIT-II (ASM-II) CAME INTO OPERATION AS DTA UNIT FOR THE FIRST TIME AT MALERKOTLA DISTT. SANGRUR (PUNJA B) DURING THE ASST. YR. 1991-92 AND WAS ELIGIBLE FOR DEDUCTION UNDER S. 80-I OF THE ACT AND DURING THE FINANCIAL YEAR RELEVANT FOR THE ASST . YR. 1995-96 THE SAID UNIT WAS GOT REGISTERED AS 100 PER CENT EOU. T HE WHOLE CONTROVERSY IS THAT THE ASSESSEE CLAIMED DEDUCTION UNDER S. 80-I I.T.A. NO.2875/AHD/2004 13 DURING THE ASSESSMENT PROCEEDINGS AND CLAIMED EXEMP TION UNDER S. 10B OF THE ACT AFTER ITS CONVERSION AS 100 PER CENT EOU. IN SUCH A SITUATION IT HAS TO BE ANALYSED IN THE LIGHT OF BO TH THE SECTIONS I.E. SS. 10B AND 80-I AND THEIR REQUIREMENT. 8. AFTER GOING THROUGH THE RECORD OF THE CASE THE TRIBUNAL HAS GIVEN A FINDING OF FACT THAT THE UNIT OF THE ASSESS EE WAS ENTITLED TO THE BENEFIT UNDER S. 10B OF THE ACT. ADMITTEDLY TH E CIRCULAR NO. 1 OF 2005 IS CLARIFICATORY IN NATURE AND THE SAME IS ALS O BINDING UPON THE DEPARTMENT. 6.2 IN VIEW OF THE FOREGOING AND THE VIEW TAKEN B Y THE HONBLE PUNJAB & HARYANA HIGH COURT IN THEIR AFORESAID DECISION ESP ECIALLY WHEN THE REVENUE HAVE NOT PLACED BEFORE US ANY MATERIAL CONTROVERTI NG THE AFORESAID FINDINGS OF THE LD. CIT(A) WE HAVE NO HESITATION IN UPHOLDING HIS FINDINGS. THEREFORE GROUND NO.1(I) IN THE APPEAL IS DISMISSE D. . 7. GROUND NO.1 (II) RELATES TO ADDITION ON ACCOUNT OF LOW GROSS PROFIT[GP]. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTICED THAT THE ASSESSEE REFLECTED NET PROFIT @ 3.42% AS AGAINS T 11.94% IN THE AY 2000-01 & 28% IN THE AY 1999-2000. NET PROFIT IN THE SUCCEE DING ASSESSMENT YEARS 2002-03 WAS 7.36% & AY 2003-04 -13.62%. THE AO FU RTHER NOTICED THAT THE ASSESSEE DISCLOSED CLOSING STOCK VALUED AT RS.24 63 300 (QUANTITY 12 075) WHEREAS THE AVERAGE COST OF PRODUCTION WORKED OUT T O RS.260 PER KG AND THE AVERAGE SALE PRICE WORKED OUT AT RS.272.60 PER KG. THE AUDITORS REPORTED THAT THE INVENTORIES WERE VALUED AT THE LOWER OF COST OR NET REALIZABLE VALUE USING FIRST OUT METHOD. THE AO WAS OF THE VIEW THAT THERE WAS CLEAR CUT VIOLATION OF METHOD OF VALUATION OF CLOSING STOCK AND THEREFORE ASKED THE ASSESSEE AS TO WHY THE AVERAGE DIFFERENCE IN COST OF PRODUCTION VIS--VIS CLOSING STOCK QUANTITY SHOULD NOT BE WORKED OUT. FURTHER IT WAS NOTICED BY THE A O THAT THE ASSESSEE DISCLOSED EXPORT SALES AT RS.10 22 26 940/- IN THE AUDITED AC COUNTS WHEREAS THE SAME FACTUALLY WORKED OUT AT RS.10 30 66 250/- AS PER TH E DETAILS OF EXPORTS FURNISHED BY THE ASSESSEE IN RESPECT OF 2.2 DI THIO BENZOIC A CID. THIS MEANT THAT AS PER WORKING GIVEN BY THE DIRECTOR OF THE COMPANY THERE WERE TOTAL EXPORT OF 3 80 685 I.T.A. NO.2875/AHD/2004 14 KGS WHEREAS EXPORT OF ONLY 3 75 000 KGS WAS DISCL OSED IN THE AUDIT REPORT. THE ASSESSEE WAS THEREFORE ASKED TO EXPLAIN THE DIFFE RENCE OF 5 685 KGS WHICH ACCORDING TO THE AO HAD BEEN DEDUCTED BY THE ACCOUN TANT TWICE WHILE PREPARING THE FINAL ACCOUNTS. ACCORDINGLY THE ASSESSEE WAS SHOW CAUSED TO EXPLAIN WHY A SUM OF RS.8 39 310 REPRESENTING THE DIFFERENCE IN T HE EXPORT SALES SHOULD NOT BE TREATED UNDISCLOSED INCOME OF THE YEAR. SINCE THE NET PROFIT DISCLOSED BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION WAS ONLY A T 3.42% TO A QUERY BY THE AO AS TO WHY NET PROFIT BE NOT ADOPTED @ 15% THE A SSESSEE REPLIED THAT THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDE R CONSIDERATION WAS A BAD YEAR AS FAR AS PROFITABILITY WAS CONCERNED. THE AV ERAGE EXCHANGE RATE PER POUND STERLING IN 1999-2000 WAS 69.46 AND IN 2000-0 1 IT BECAME 67.49 I.E. LESS BY 2 POUND STERLING. IF MULTIPLIED BY THE SALES THERE IS STRAIGHTAWAY A DIFFERENCE OF RS.30 LAKHS. SECONDLY THE COST IN COMPARISON T O SALES WAS HIGHER BY 11% AS COMPARED TO THE PREVIOUS YEAR MAINLY DUE TO COST OF TRANSPORTATION FROM SOUTH INDIA. THE AO HOWEVER AFTER CONSIDERING THE SUBM ISSIONS OF THE ASSESSEE FOUND THE EXCHANGE RATE DIFFERENCE OF ONLY RS.5 10 611. THE ASSESSEES ARGUMENT THEREFORE WAS HELD TO BE LEADING TO A PA RADOXICAL SITUATION PRESUPPOSING THAT GOODS WOULD BE SUPPLIED AT A PRE- DETERMINED RATE OVER THE YEARS. HE OBSERVED THAT THERE WAS ONLY ONE BUYER VIZ. SUPER PATCO HAVING AN ADDRESS IN LONDON AND THE RESIDENTIAL ADDRESS OF T HE NRI SHAREHOLDER OF THE COMPANY WAS THE SAME. IN ALL PROBABILITY IT WAS A N ASSOCIATED ENTERPRISE AND THEREFORE THERE WAS A STRONG POSSIBILITY OF PRICE RIGGING AND SIPHONING OFF PROFITS. THEREFORE A CASUAL EXPLANATION GENERALIZING EXCHAN GE RATE VARIATION CANNOT BE ACCEPTED AND THE ARGUMENTS REGARDING SUPPLIES FROM SOUTH INDIA REMAINS UNSUBSTANTIATED AS THE ASSESSEE IS PAYING TRANSPORT CHARGES TO THE CONCERNS OF ALTERNATIVE DIRECTORS. ACCORDING TO THE AO THE RE DUCTION IN THE PROFIT IS DUE TO THE ASSESSEES APPREHENSION THAT ITS CLAIM U/S 10B MAY BE REJECTED HENCE THE PROFIT SHOULD BE SHOWN LOW. THE AO THEREFORE APPLIED A R ATE OF 9% ON SALES AND MADE AN ADDITION OF RS.93 29 573. HE ALSO DID NOT ALLOW THE ALTERNATIVE CLAIM FOR DEDUCTION U/S 80HHC OF THE ACT FOR WANT OF THE REQ UISITE REPORT U/S 80HHC(4) OF THE ACT. I.T.A. NO.2875/AHD/2004 15 8. ON APPEAL THE ASSESSEE WHILE REITERATING THE IR CONTENTIONS BEFORE THE AO SUBMITTED THAT THE AOS ALLEGATION OF POSSIBILITY O F PRICE RIGGING IS NOT CORRECT; HE HAS ONLY ASSUMED THAT THE ADDRESS OF THE FOREIGN BU YER AND THE NRI DIRECTOR IS SIMILAR. THE SIMILARITY IN THE ADDRESS IS A MERE C OINCIDENCE AND THE PRODUCT EXPORTED WAS TO UK ONLY. IN THE SAME YEAR THE CHE MICAL WEEKLY SHOWED IMPORT IN INDIA FROM CHINA AT COMPARABLE PRICES. THEREFOR E THE AOS SUSPICION IS BASELESS AND UNFOUNDED. THE ESTIMATION @ 9% IS ALS O WITHOUT ANY BASIS AND TOTALLY UNCALLED FOR. IN THE SUBSEQUENT YEARS THE ASSESSEE HAD EARNED HIGHER PROFITS AS IN PREVIOUS YEARS AND NO SPECIFIC PURPOS E WAS TO BE SERVED IN LOWERING THE PROFITS FOR THIS YEAR ONLY. INTER ALIA THE AS SESSEE RELIED ON THE DECISIONS IN THE CASE OF PANDIT BROS VS CIT 26 ITR 159 (PUN) S V EERAIAH REDDIAR VS CIT (1960) 38 ITR 152)(KER) INTERNATIONAL FOREST CO VS CIT 101 ITR 721 (J&K) DHAKESHWARI COTTON MILLS LTD 26 ITR 775 (SC) C VASANTLAL & CO 45 ITR 206 (SC) AND CIT VS DAULATRAM RAWATMALL 87 ITR 349 (SC). IN THE LIGHT OF THESE SUBMISSIONS THE LD. CIT(A) DELETED THE ADDITION HO LDING AS UNDER: 3.6 THE ASSESSING OFFICER WHILE HAVING QUESTIONED THE CLOSING STOCK AND SALES IN THE SHOW CAUSE NOTICE H AS NOT GIVEN ANY FINDINGS ON THE SAME AND ON GOING THROUGH THE RECORD I FIND THAT THE DISCREPANCIES MENTIONED HAV E BEEN CLARIFIED BY THE APPELLANT. COPY OF THE SAME IS PL ACED ON RECORD BEFORE ME ALSO. THE ASSESSING OFFICER HAS N OT STATED ANYTHING ABOUT THE EXPLANATION HENCE IT CAN BE PR ESUMED THAT HE HAS ACCEPTED THE SAME. IN ANY CASE THEY H AVE NOT BEEN MADE THE BASIS FOR THE ESTIMATION OF PROFIT. 3.7 ON FURTHER DISCUSSION REGARDING THE EXCHANGE FLUCTUATION AND THE APPELLANTS CLAIM THAT IT EARNE D LESS G.P FURTHER DETAILS WERE CALLED FOR AND THE APPELLANT H AS SUBMITTED A COMPARATIVE CHART SHOWING THE FIGURES FOR THE F.Y . 1999- 2000 AND 2000-01. FROM THE CHART IT IS SEEN THAT THE STG POUND VALUE EXPORT VALUE REALIZED VALUE AND THE A VERAGE REALIZED PRICE PER POUND IS AS FOLLOWS: FINANCIAL STG POUND EXPORT VALUE REALIZED AVERAGE I.T.A. NO.2875/AHD/2004 16 YEAR VALUE (RS.) VALUE (RS.) REALIZED PRICE PER POUND STERLING 1999-2000 1638750 112715600 114181278 69.67584 2000-2001 1520550 102710350 102226940 67.23024 3.8 THE APPELLANT HAS FURTHER SUBMITTED AS UNDER: PPELLANT EXPORTED MATERIALS WORTH $ 15.20 LACS AN D THE AVERAGE EXCHANGE RATE IN TERMS OF POUND STERLING TO RUPEE FELL BY RS.2/- APPROXIMATERLY AS COMPARED TO THE PREVIOUS YEAR WHICH STRAIGHTWAY AFFECTED THE COMPAN Y BY RS.30/- LACS APPROXIMATELY. THIS IS THE REALITY. NOW THE LAO MIXES UP THIS REALITY WITH EXCHANGE RATE DIFFER ENCE OF RS.5.10 LACS WHICH HAS BEEN INCLUDED IN SALES. WHE N EXPORTS ARE MADE THEY ARE CREDITED IN BOOKS AT A R ATE PREVAILING ON THE DAY OF EXPORT BUT WHEN THE SAME I S PAID BY THE CUSTOMER THE ACTUAL PRICE RECEIVED BECOMES THE REAL PRICE. AND AT THIS TIME AN ADJUSTING ENTRY I S PASSED EITHER DEBITING OR CREDITING THE EXPORT SALES WHICH IS CALLED AS EXCHANGE RATE DIFFERENCE. THE LAO REFERS TO THIS BUT IT HAS NOTHING TO DO WITH THE AVERAGE RATE OF P OUND STERLING REALIZED DURING THE YEAR. HENCE THE FACT REMAINS THAT THE COMPANY REALIZED AROUND RS.30/- LACS LESS DUE TO FLUCTUATION IN THE RATE OF THE POUND STERLING WHICH ADVERSELY AFFECTED THE COMPANYS PROFIT. 3.9 AFTER GOING THROUGH THE ENTIRE DETAILS I FIND THAT IN THE ANNUAL REPORT THE COMPANY HAS ITSELF MENTIONED REG ARDING OPERATIONS AND FINANCIAL RESULTS THAT SALES RECORD ED DURING THE YEAR WERE 10.37 CRORES AS AGAINST 11.34 CRORE IN T HE PREVIOUS YEAR. THE PROFIT AFTER TAXATION STOOD AT RS.35.46 LAKHS AS AGAINST RS.136 LAKHS IN THE PREVIOUS YEAR. THE DECREASE IN THE PROFIT IS MAINLY DUE TO FALL IN VAL UE OF RUPEE IN TERMS OF POUND STERLING LOW PRICES OF THE FINISHED PRODUCTS INCREASED INPUT COST AND INCREASE IN EXPENSES. GI VEN THIS BACKGROUND IT WAS FOR THE ASSESSING OFFICER TO OBT AIN AND GATHER EVIDENCE THAT THE EXPENSES HAD NOT GONE UP OR THAT THE VALUE OF THE RUPEE VIS--VIS THE POUND HAD NOT GONE DOWN OR THAT THE EXPENSES CLAIMED WERE BOGUS OR INFLATED . MERE STATEMENT THAT THE FOREIGN PARTY HAD THE SAME ADDRE SS AS THAT OF THE NRI DIRECTORS AND THAT THE TRANSPORT COMPAN IES WERE I.T.A. NO.2875/AHD/2004 17 CONCERNS OF THE ALTERNATIVE DIRECTORS IS NOT SUFFIC IENT TO PROVE EITHER PRICE RIGGING OR INFLATION OF EXPENSES OR EV EN BOGUS BILLING. A FURTHER EXERCISE SHOULD HAVE BEEN DONE TO COME TO SUCH A CONCLUSION TO PROVE THAT THE ACCOUNTS SUBMIT TED WERE INCORRECT IN ANY WAY. 3.10 THE APPELLANT HAS PRODUCED BEFORE ME COPY OF T HE CHEMICAL WEEKLY DATED 216 TH SEPTEMBER 2000 IN WHICH AN INDIAN COMPANY M/S TARAK CHEMICALS HAVE IMPORTED TH E SAME PRODUCT FROM CHINA @ RS.226.75 PER KG. WHEN T HE APPELLANT HAS SOLD THE PRODUCT TO UK @ 272.61 PER K G. IN FACT IN THE PREVIOUS YEAR IT WAS SOLD @ RS.290.70 PER KG. HENCE THERE IS LOWER REALIZATION THIS YEAR AS COMP ARED TO PREVIOUS YEAR BUT IT IS BETTER THAN COMPARABLE INS TANCES OF PURCHASE OF THE SAME PRODUCT FROM CHINA. IT IS TH EREFORE CLEAR THAT THE PRICES ARE COMPARABLE. THE DETAILS SUBMITTED REGARDING THE LOWER REALIZATION PER POUND ALSO STAN DS SUBSTANTIATED AND IS NOT TO BE MIXED UP WITH THE EX CHANGE RATE DIFFERENCE ALLUDED TO BY THE ASSESSING OFFICER . UNDER THE CIRCUMSTANCES I DO NOT FIND ANY EVIDENCE TO UPHOLD THE ASSESSING OFFICERS CLAIM THAT THE PROFITS HAVE NOT BEEN CORRECTLY SHOWN. THE ASSESSING OFFICER HAS IN NO W AY PROVED THAT THE FIGURES GIVEN WERE NOT CORRECT OR THAT THE AUDITORS REPORT IS FAULTY IN ANY RESPECT. THERE IS ALSO NO JUSTIFICATION FOR THE FIGURE OF 9% OF SALES TAKEN AS G.P. EXCEPT THAT IT WAS AN AVERAGE OF PRECEDING AND SUCCEEDING ASSESSMENT YEAR S. THE APPELLANT ON THE OTHER HAND HAS PRODUCED SUFFICIE NT EVIDENCE TO SHOW PRIMA FACIE THAT THE EXPENDITURE DEBITED IS CORRECT THAT THE SALES REALIZATION IS CORRECT AND THEREFORE ANY ALLEGATION THAT THE SITUATION MAY BE CONDUCIVE TO P RICE RIGGING OR INFLATION OF EXPENSES IS NOT PROVED. 3.11 THE ASSESSING OFFICER HAS ALSO NOT MADE ANY OBSERVATION REGARDING REJECTION OF BOOKS BUT HAS M ERELY ESTIMATED A HIGHER PROFIT. THIS CAN NOT BE DONE WI THOUT POINTING OUT SPECIFIC DEFECTS SHORTFALLS OR EARNI NG OF EXCESS INCOME. THE APPARENT STATE OF AFFAIRS SHOULD BE TA KEN AS REAL UNLESS THERE ARE COMPELLING REASONS TO SHOW THAT TH E APPARENT IS NOT TRUE. CASE LAW IS AVAILABLE FROM 2 ITR ONWA RDS TO STATE THAT ADDITIONS CAN NOT BE MADE ON SUSPICION SURMIS ES AND CONJECTURES. EXACT CIRCUMSTANCES FOR REJECTION OF ACCOUNTS HAVE TO BE AVAILABLE AND NOT MERE GUESS WORK. THE G UJARTAT HIGH COURT IN THE CASE OF CIT VS. AMITBHAI GUNVANTBHAI I.T.A. NO.2875/AHD/2004 18 (129 ITR 573) ) HELD THAT IF THERE WAS NO CHALLENGE TO THE TRANSACTION REPRESENTED IN THE BOOKS THEN IT IS NO T OPEN TO REVENUE TO CONTEND THAT WHAT IS SHOWN BY THE ENT RIES IS NOT THE REAL STATE OF AFFAIRS. FURTHER EVEN IF FOR SOME REASONS THE BOOKS ARE REJECTED IT IS NOT OPEN TO THE ASSESSING OFFICER TO MAKE ANY ADDITION ON ESTIMATE BASIS OR ON PURE GUESS WORK. THE LAW ON THIS POINT HAS BEEN LAID OUT BY THE SUPREME COURT AS EARLY AS 26 ITR 775 IN THE CASE OF DHAKESHWARI COTTON MILLS LTD. VS CIT AND NUMEROUS C ASES HAVE FOLLOWED ON THE SAME LINE. THE AHMEDABAD BENC H IN THE CASE OF PUSHPANJALI DYEING & PRINTING MILLS HEL D THAT IF THE REVENUE FAILED TO POINT OUT ANY SPECIFIC DEFECTS IN THE BOOKS OF ACCOUNT AND CONSIDERING THAT THE ACCOUNTS WERE SUBJ ECT TO AUDIT THEN FAILING TO PUT ANY MATERIAL AGAINST THE OBSERVATIONS OF THE AUDITOR ANY ADDITION MERELY ON THE GROUND O F LOW YIELD CAN NOT BE SUSTAINED. RELYING ON THE ABOVE CASE LA W AND IN THE ABSENCE OF ANY EVIDENCE TO SHOW PRICE RIGGING O R INFLATION OF EXPENSES OR BOGUS CLAIMS AND EARNING OF INCOME OUTSIDE THE BOOKS THE ADDITION ON ACCOUNT OF HIGHER GP CAN NOT BE SUSTAINED AND IS THEREFORE DELETED. 9. THE REVENUE IS NOW IN APPEAL BEFORE US AGAI NST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. DR WHILE CARRYIN G US THROUGH THE IMPUGNED ORDER SUPPORTED THE FINDINGS OF THE AO WH ILE THE LD. AR ON BEHALF OF THE ASSESSEE RELIED UPON THE ORDER OF TH E LD. CIT(A). 10. WE HAVE HEARD BOTH THE PARTIES AND GONE TH ROUGH THE FACTS OF THE CASE. AS POINTED OUT BY THE LD. CIT(A) THOUGH THE AO QUES TIONED THE CLOSING STOCK AND SALES IN THE SHOW CAUSE NOTICE HE DID NOT RECORD ANY FINDINGS ON THESE ISSUES. THE LD. CIT(A) ON GOING THROUGH THE RECORDS FOUND THAT THESE DISCREPANCIES HAVE BEEN CLARIFIED BY THE ASSESSEE AND ACCORDINGLY IT WAS CONCLUDED THESE HAVE NOT BEEN MADE THE BASIS FOR THE ESTIMATION OF PROFITS . THE LD. CIT(A) FURTHER NOTICED THAT THE DECLINE IN THE PROFITS IS MAINLY DUE TO FA LL IN VALUE OF RUPEE IN TERMS OF POUND STERLING LOW PRICES OF THE FINISHED PRODUCTS INCREASED INPUT COST AND INCREASE IN EXPENSES. AFTER PERUSING A COPY OF THE CHEMICAL WEEKLY DATED 26 TH SEPTEMBER 2000 WHEREIN AN INDIAN COMPANY M/S TAR AK CHEMICALS IS REPORTED TO HAVE IMPORTED THE SAME PRODUCT FROM CHINA @ RS.2 26.75 PER KG. WHILE THE I.T.A. NO.2875/AHD/2004 19 ASSESSEE SOLD THE PRODUCT TO UK PARTY @ 272.61 PER KG IN THE YEAR CONSIDERATION AND @ RS.290.70 PER KG IN THE PRECEDING YEAR THE L D. CIT(A) CONCLUDED THAT THE LOWER REALIZATION THIS YEAR AS COMPARED TO PREVIOUS YEAR IS BETTER THAN COMPARABLE INSTANCES OF PURCHASE OF THE SAME PRODUC T FROM CHINA AND THEREFORE THERE WAS NO JUSTIFICATION FOR THE FIGUR E OF 9% OF SALES TAKEN AS G.P. EXCEPT THAT IT WAS AN AVERAGE OF PRECEDING AND SUCC EEDING ASSESSMENT YEARS . THE REVENUE HAVE NOT PLACED BEFORE US ANY MATERIAL CONTROVERTING THESE FINDINGS OF THE LD. CIT(A) .UNDISPUTEDLY AND AS OB SERVED BY THE LD. CIT(A) IN THE IMPUGNED ORDER THE AO DID NOT POINT OUT ANY DEFEC TS IN THE BOOKS OF ACCOUNT WHILE IGNORING THE BOOK RESULTS. HONBLE GAUHATI HIGH COURT IN ALUMINIUM INDUSTRIES (P) LTD. V. CIT (I.T.R. NO. 12 OF 1990) OBSERVED THAT A LOWER RATE OF PROFIT DECLARED BY THE ASSESSEE AS COMPARED TO THE PREVIOUS YEAR WOULD NOT IN ITSELF BE SUFFICIENT TO JUSTIFY ANY ADDITION. THE M ERE FACT THAT THE PERCENTAGE OF LOSS OR GROSS PROFIT IS HIGH OR LOW IN A PARTICULAR YEAR DOES NOT NECESSARILY LEAD TO INFERENCE THAT THERE HAS BEEN SUPPRESSION. LOW PROF IT IS NEITHER A CIRCUMSTANCE NOR MATERIAL TO JUSTIFY ADDITION OF PROFITS. THE R ATIO OF THE JUDGMENTS IN DHAKESWARI COTTON MILLS LTD. V. CIT [1954] 26 ITR 775 (SC); RAGHUBIR MANDAL HARIHAR MANDAL V. STATE OF BIHAR [1957] 8 STC 770 ( SC); STATE OF KERALA V. C. VELUKUTTY [1966] 60 ITR 239 (SC); STATE OF ORISSA V. MAHARAJA SHRI B.P. SINGH DEO [1970] 76 ITR 690 (SC); BRIJ BHUSAN LAL PARDUMAN KUMAR V. CIT [1978] 115 ITR 524 (SC); CHOUTHMAL AGARWALLA V. CIT [1962] 46 ITR 262 (ASSAM); R.V.S. AND SONS DAIRY FARM V. CIT [2002] 257 ITR 764 (MAD); INTERNATIONAL FOREST CO. V. CIT [1975] 101 ITR 721 (J & K) ; M. DURAI RAJ V. CIT [1972] 83 ITR 484 (KER); RAMCHANDRA RAMNIVAS V. STATE OF ORISSA [1970] 25 ST C 501 (ORISSA); ACTION ELECTRICALS V. DEPUTY CIT [2002] 258 ITR 188 (DELHI) AND KAMAL KUMAR SAHARIA V. CIT [1995] 216 ITR 217 (GAUHATI) INDICATE THAT THE AO IS NOT FETTERED BY ANY TECHNICAL RULES OF EVIDENCE AND PLEADINGS AND HE I S ENTITLED TO ACT ON MATERIAL WHICH ARE NOT ACCEPTABLE IN EVIDENCE IN A COURT OF LAW BUT WHILE MAKING THE ASSESSMENT UNDER THE PRINCIPLES OF BEST JUDGMENT T HE INCOME-TAX OFFICER IS NOT ENTITLED TO MAKE A PURE GUESS WITHOUT REFERENCE TO ANY EVIDENCE OR MATERIAL. THERE MUST BE SOMETHING MORE THAN A MERE SUSPICION TO SUPPORT THE I.T.A. NO.2875/AHD/2004 20 ASSESSMENT. LOW PROFIT IN A PARTICULAR YEAR IN ITSE LF CANNOT BE A GROUND FOR INVOKING THE POWERS OF BEST JUDGMENT ASSESSMENT WIT HOUT SUPPORT OF ANY MATERIAL ON RECORD. THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT V S. AMITBHAI GUNWANTBHAI 129 ITR 573 HELD THAT IF THER E WAS NO CHALLENGE TO THE TRANSACTIONS REPRESENTED IN THE BOOKS THEN IT IS NO T OPEN TO REVENUE TO CONTEND THAT WHAT IS SHOWN BY THE ENTRIES IS NOT THE REAL S TATE OF AFFAIRS. SECONDLY EVEN IF FOR SOME REASON THE BOOKS ARE REJECTED IT IS NOT O PEN TO THE AO TO MAKE ANY ADDITION ON ESTIMATE BASIS OR ON PURE GUESS WORK. T HE AO WITHOUT RECORDING ANY FINDING THAT THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE WERE INCORRECT RENDERING IT IMPOSSIBLE TO DEDUCE THE PROFITS PROC EEDED TO REJECT THE BOOK RESULTS WHILE ADMITTING THE DISCLOSED TURNOVER. NO SPECIFI C DISCREPANCIES OR DEFECTS IN THE BOOKS OF ACCOUNT OF THE ASSESSEE HAVE BEEN POIN TED OUT BEFORE US NOR WAS ANY MATERIAL BROUGHT TO OUR NOTICE TO ESTABLISH THA T PURCHASES WERE INFLATED OR RECEIPTS SUPPRESSED. IN THESE CIRCUMSTANCES THERE WAS NO JUSTIFICATION FOR ESTIMATING THE PROFITS @9% ON THE DISCLOSED TURNOVE R. [ VIKRAM PLASTICS 239 ITR 161(GUJ). SINCE THE AO HAS NOT RECORDED ANY FINDINGS FOR IG NORING THE BOOK RESULTS AND APPLYING THE AVERAGE PROFIT RATE OF THE PRECEDING AND SUCCEEDING YEARS WE ARE OF THE OPINION THAT THE LD. CIT(A) WA S JUSTIFIED IN DELETING THE ADDITION. IF THERE WAS NO CHALLENGE TO THE TRANSA CTIONS REPRESENTED IN THE BOOKS THEN IT IS NOT OPEN TO REVENUE TO CONTEND THAT WHAT IS SHOWN BY THE ENTRIES IS NOT THE REAL STATE OF AFFAIRS. IN THE LIGHT OF THESE OB SERVATIONS OF THE HONBLE JURISDICTIONAL HIGH COURT ESPECIALLY WHEN THERE IS NO MATERIAL BEFORE US FOR TAKING A DIFFERENT VIEW IN THE MATTER WE HAVE NO OPTION B UT TO UPHOLD THE FINDINGS OF THE LD. CIT(A). CONSEQUENTLY GROUND NO.1(II) IS DISMI SSED. 11. GROUND NOS.2 & 3 BEING GENERAL IN NATURE DO N OT REQUIRE ANY SEPARATE ADJUDICATION AND ARE THEREFORE DISMISSED I.T.A. NO.2875/AHD/2004 21 12 . IN THE RESULT APPEAL IS DISMISSED. ORDER PRONOUNCED ON THIS DAY OF 29T H JANUARY 2010. SD/- SD/- (MAHAVIR SINGH) (A.N. PAHUJA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD DATED : 29TH JANUARY 2010 PK/- COPY TO: 1. THE ASSESSEE 2. ITO WARD-1(1) BARODA 3. THE CIT(A)-IV BARODA 4. THE CIT-II BARODA 5. THE DR C BENCH BY ORDER DEPUTY REGISTRAR ITAT AHMEDABAD