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 and this sum was
not available on 29-11-2003; accordingly, he disallowed this sum under section
69C - On appeal, assessee explained that as bearer cheque
was sent on 29-11-2003 from head office and after encashment thereof on
30-11-2003, wages were paid, 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 and, 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. [
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. [
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. [
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. [
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. [
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
(
Yogesh A. Thar for the Appellant. B.K. Singh for
the Respondent.
nn