In the ITAT Mumbai Bench ‘F’

Shree Par Fragrance (P.) Ltd.

v.

Income-tax Officer, 4(3)(4), Mumbai

R.K. Gupta, Judicial Member

and V.K. Gupta, Accountant Member

IT Appeal No. 5549 (Mum.) of 2007

[Assessment year 2004-05]

November 29, 2007

I. Section 80-IB of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infra­structure development undertakings - Assessment year 2004-05 - Whether manufacturing process should be construed as comprising of procurement of raw materials, processing thereof and genera­tion of finished products and persons involved in all these three processes have to be treated as employed in manufacturing process - Held, yes - Whether, therefore, a factory manager and his assistant looking after various activities of a unit and being ultimately responsi­ble for production results would be considered as workers em­ployed in manufacturing process for purpose of section 80-IB - Held, yes - Whether, however, persons employed in accounting and administrative functions cannot be considered as part of manufac­turing process - Held, yes - Assessee-company engaged in manufac­turing of perfumery components claimed deduction under section 80-IB - Assessing Officer disallowed deduction under section 80-IB on grounds that (i) assessee did not employ 10 or more workers during year, and list of workers also included factory manag­er and his assistant which could not be categorised as worker, (ii) assessee could not be said to be engaged in manufacturing as no new product came out of activities carried on by assessee, (iii) there was no electricity consumption in factory because electricity bill was of a very small amount - Whether since finished products, i.e., perfumery components were chemically and commercially different from raw materials, i.e., chemicals used in making of such finished products, assessee could be said to be engaged in manufacturing of perfumery components qualifying for deduction under section 80-IB - Held, yes - Whether since assessee had submitted bill of meter installed in connection with machinery used for manufacturing and if consumption of electrici­ty was low due to involvement of machinery in processing activity, same could not be a valid ground for denying deduction under section 80-IB and for holding that assessee was carrying manufac­turing activity without aid of power - Held, yes - Whether moreover, since factory manager and his assistant were ultimately responsible for production result, they should be considered as workers employed in manufacturing process, and, accordingly, assessee would be entitled to deduction under section 80-IB - Held, yes

II. Section 69C of the Income-tax Act, 1961 - Unexplained expendi­ture - Assessment year 2004-05 - Assessing Officer verified cash/factory book of assessee for period April, 2003 to March, 2004 and found a negative cash balance - Assessee, submitted that there was cash in head office which had been transferred and paid to workers - However, Assess­ing Officer held that there should be a transfer entry in account books of both head office and factory to show such flow of cash from head office - Assessing Officer further held that cash withdrawal shown by assessee on 29-11-2003 was actually withdrawn from bank on 1-12-2003, hence, this sum was not available on 29-11-2003, accordingly, he disallowed this sum under section 69C - On appeal, assessee explained that bearer cheque was sent on 29-11-2003 from head office and after encashment thereof on 30-11-2003, wages were paid, hence, there could be no shortage or negative balance - He further explained that wages for month of December were actually paid on 3-1-2004, which was inadvertantly recorded by accountant on 31-12-2003 resulting into generation of negative cash balance - Commissioner (Appeals) rejected said explanation - Whether on facts it appeared to be a case of accounting mistake only, hence, no addition was warranted - Held, yes

Facts-I

The assessee-company was engaged in the manufacturing of perfum­ery components. It claimed deduction under section 80-IB. The As­sessing Officer disallowed deduction under section 80-IB on the grounds that (i) the assessee did not employ 10 or more workers during the year, and the list of workers also included factory manager and his assistant which could not be categorised as worker, (ii) the assessee could not be said to be engaged in the manufacturing as no new product came out of activities car­ried on by the assessee, (iii) there was no electricity consump­tion in the factory because the electricity bill was of a very small amount. The Assessing Officer also held that since elec­tricity consumption by the assessee was very low, it would be held a concern which carried on its activity without aid of power so it was required to have 20 workers during the year. Before the Commissioner (Appeals), the assessee contended that factory manag­er as well as assistant assisting him were also workers as com­monly understood because the term ‘worker’ has not been defined under section 80-IB. The Commissioner (Appeals) held that the assessee had not fulfilled the condition of minimum 10 workers in the manufacturing activity and on this basis alone, the claim of the assessee for deduction under section 80-IB failed. The Com­missioner (Appeals) also held that the processing done by the assessee did not constitute manufacturing. Even on the basis of electricity consumption after taking into consideration the additional electricity bill, the Commissioner (Appeals) held that negligible amount of Rs. 18,148 was hardly sufficient to take care of normal electricity charges on light and fan ,etc., hence, the assessee’s processing was done without aid of power and requirement of employing 20 workers in such case was not satis­fied obviously. Finally, he confirmed the order of the Assessing Officer.

On second appeal :

Held-I

As far as the aspect as to whether the assessee was engaged in manufacturing or production was concerned, it was found that the finished products i.e., perfumery components were chemically and commercially different from the raw materials, i.e., chemicals used in the making of such finished products, hence, as settled by various judicial decisions, the assessee could be said to be engaged in the manufacturing of perfumery components and, thus, it qualified on this account. Even otherwise, section 80-IB has also used the term ‘production’ and the term ‘production’ is certainly wider than the term ‘manufacture’. Thus, the assessee’s claim for deduction under section 80-IB could not be rejected as there was a production of a thing and human efforts along with mechanical process were also involved. As far as the aspect of consumption of electricity was concerned, the assessee had sub­mitted the bill of the meter installed in connection with the machinery used for manufacturing, hence, if the consumption was low due to the involvement of machinery in the processing activi­ty, the same could not be a valid ground for denying the deduc­tion under section 80-IB and for holding that the assessee was carrying manufacturing activities without aid of power, hence, required to employ 20 or more workers, particularly when the Legislature has not prescribed any minimum criteria for consump­tion of electricity in the manufacturing process. [Para 8]

As regards aspect of employment of workers in the manufacturing process, both the terms ‘workers’ and ‘manufacturing process’, as used in section 80-IB(2)(iv), have not been defined in the Act. It is one of the four conditions which are required to be complied with by the assessee for claiming deduction under section 80-IB. The principal object of this section is to encourage the setting up of industrial undertaking by offering tax incentives so as to attain the objective of economic development which, as such, comprises of investment, economic size and employment generation and if all the conditions are read together, then these all the above three parameters would be found implied, as a result of the conditions in section 80-IB(2). It is also true that it is an incentive provision, hence, it should be interpreted in a manner so as to advance the objective of the provision and not to frustrate it. Manufacturing process has got two words ‘manufac­turing’ and ‘process’. The term ‘manufacture’ has been defined as to make something on a large scale using machinery and the term ‘process’ has been defined as a series of actions taken towards achieving a particular end. Thus, both these terms taken together lead to a conclusion that the Legislature has not used these words only with reference to the employment of workers in that part of manufacturing process, which is confined to change of raw materials into finished goods. Both the revenue authorities had ignored both input and output process and had focused only on the processing part of the whole manufacturing process while inter­preting this provision of law, which was not correct having regard to the nature of the provision. Thus, the manufacturing process should be construed as comprising of procurement of raw materials, processing thereof and generation of finished products and the persons involved in all these three processes have to be treated as employed in the manufacturing process. Accordingly, the factory manager and assistant looking after various factory operations should be treated as part of workers for the purposes of this section, however, persons employed in accounting and administrative functions cannot be considered as part of manufac­turing process, hence, the contentions of the assessee in regard to inclusion of persons employed in such functions were not correct. [Para 8]

Having stated so, it was necessary to analyse the scope of term ‘workers’. This term has been stated as a person who works or achieves specified thing and the term ‘work’ has been defined as activity involving mental or physical effort done in order to achieve a result. The term ‘works’ has also been stated as a place where industrial or manufacturing process are carried out, hence, the factory manager and his assistant, being ultimately re­sponsible for the production results are also a worker within the meaning of provision of section 80-IB(2)(iv). The term ‘worker’ has not been defined and the term ‘workers’ is akin to the term workmen. The Legislature has not defined it in this section, whereas the term workmen has been defined in the provisions of section 80JJAA which has got a reference to the provisions of section 2-S of the Industrial Disputes Act, 1947 and wherein the persons engaged in managerial and administrative activities are not to be treated as workmen but by not providing the same definition in the present provisions, the Legislature has certainly chosen to give a wider meaning to this term in the context of provision of section 80-IB. The number of workers specified in section 80-IB is indicative of economic size of unit so as to achieve the objectives of economic development in a more meaningful manner. [Para 9]

In this view of the matter, factory manager and his assistant looking after various activities of a unit should be considered as work­ers employed in the manufacturing process. Thus, the assessee also fulfilled the condition regarding employment of minimum number of workers. Accordingly, it was held that the assessee was entitled to deduction under section 80-IB and the Assessing Officer directed to accept the claim of the assessee in this regard. [Para 10]

Facts-II

During the course of assessment proceedings, the Assessing Offi­cer verified the cash book pertaining to the factory of the assessee for the period April, 2003 to March, 2004, which showed a negative cash balance. The assessee, on enquiry by the Assessing Officer, replied that there was cash in head office which had been transferred and paid to workers. However, the Assessing Officer held that there should be a transfer entry in the account books of both head office and factory to show such flow of cash from head office. The Assess­ing Officer further held that the cash withdrawal shown by the assessee on 29-11-2003 was actually withdrawn from the bank on 1-12-2003, hence, this sum was not available on 29-11-2003. Accord­ingly, he disallowed this sum under section 69C. Before the Commissioner (Appeals), the assessee explained that bearer cheque was sent on 29-11-2003 from head office and after encashment thereof on 30-11-2003, the wages were paid, hence, there could be no shortage or negative balance. The assessee further explained that the wages for the month of Decem­ber were actually paid on 3-1-2004, which was in-advertantly recorded by the accountant on 31-12-2003, resulting into genera­tion of negative cash balance. The Commissioner (Appeals) reject­ed this explanation in the absence of no documentary support.

On second appeal :

Held-II

From the perusal of the cash/factory book for the period of April, 2003 to March, 2004, it was found that it contained en­tries relating only to cash inflow by way of transfer from head office or withdrawal from the bank. It was also noted that em­ployees’ wages had been paid mostly at the end of the each month except in the case of the month of June, 2003 and there was a corresponding withdrawal of cash from bank on that date. It was also noted that the assessee was a private limited company and man­aged by independent persons other than owners, hence, normally, there could not be a situation where the wages being a regular payment, which had been duly recorded in the books of account would be disbursed through unaccounted cash. There was no dispute regarding the quantum of wages nor any statements had been ob­tained from the workers in this regard. Thus, taking into account the entire facts, it appeared to be a case of accounting mistake only, hence, no addition was warranted. [Para 15]

Cases referred to

CIT v. Mahesh Chand Gupta [2005] 279 ITR 396/149 Taxman 169 (All.) (para 5), CIT v. Sultan & Sons Rice Mill [2005] 272 ITR 181/145 Taxman 506 (All.) (para 6), CIT v. Hanuman Rice Mills [2005] 275 ITR 79 (All.) (para 6), CIT v. Ajmani Industries [2006] 153 Taxman 43 (All.) (para 6), ITO v. Punchline Forms [2005] 96 ITD 393 (Mum.) (para 6), CIT v. Darshak Ltd. [2001] 247 ITR 489/118 Taxman 863 (Kar.) (para 6), CIT v. Premier Tobacco Packers (P.) Ltd. [2006] 284 ITR 222 (Mad.) (para 6), Torrent Drugs & Chemicals (P.) Ltd. v. Dy. CIT [1999] 64 TTJ (Ahd.) 52 (para 6), M.B. Chemicals v. Dy. CIT [2001] 76 ITD 1 (Pune) (TM) (para 6) and CIT v. Sesa Goa Ltd. [2004] 271 ITR 331/142 Taxman 16 (SC) (para 8).

Yogesh A. Thar for the Appellant. B.K. Singh for the Respondent.