$ * IN HIGH COURT OF DELHI AT NEW DELHI 18. + ITA 972/2015 COMMISSIONER OF INCOME TAX-VIII ..... Appellant Through: Mr. Kamal Sawhney, Senior Standing counsel with Mr. Raghvendra K. Singh, Mr. Shikhar Garg and Mr. Sharad Agarwal, Advocates. versus KHANNA BROTHERS ..... Respondent Through: Dr. Rakesh Gupta with Ms. Poonam Ahuja and Mr. Rohit Kumar Gupta, Advocates. WITH 20. + ITA 967/2015 COMMISSIONER OF INCOME TAX-VIII ..... Appellant Through: Mr. Kamal Sawhney, Senior Standing counsel with Mr. Raghvendra K. Singh, Mr. Shikhar Garg and Mr. Sharad Agarwal, Advocates. versus KHANNA BROTHERS ..... Respondent Through: Dr. Rakesh Gupta with Ms. Poonam Ahuja and Mr. Rohit Kumar Gupta, Advocates. AND 4. + ITA 490/2015 PR. COMMISSIONER OF INCOME TAX-11 ..... Appellant Through: Mr. Rohit Madan, Senior Standing counsel. ITA Nos.972, 967 & 490/2015 Page 1 of 11 versus KHANNA BROTHERS ..... Respondent Through: Dr. Rakesh Gupta with Ms. Poonam Ahuja and Mr. Rohit Kumar Gupta, Advocates. CORAM: JUSTICE S. MURALIDHAR JUSTICE RAJIV SHAKDHER ORDER % 17.12.2015 CM No. 31181/2015 (for exemption) in ITA No. 972/2015 1. Exemption allowed subject to all just exceptions. 2. application is disposed of. CM No. 31182/2015 (for condonation of delay in re-filing appeal) in ITA No. 972/2015 3. For reasons stated in application, delay in re-filing appeal is condoned. 4. application is disposed of. ITA Nos. 972/2015, 967/2015 & 490/2015 5. These are three appeals by Revenue under Section 260A of Income Act, 1961 ( Act ). ITA Nos. 972 and 967 of 2015 are directed against common order dated 14th June 2013 passed by Income Tax Appellate Tribunal ( ITAT ) in ITA Nos. 397/Del/2010 and 2210/Del/2012 for Assessment Years ( AYs ) 2006-07 and 2008-09 respectively. ITA Nos. 490 of 2015 is directed against impugned order dated 13 th February 2015 passed by ITAT in ITA No. 227/Del/2013 for AY 2010-11. ITA Nos.972, 967 & 490/2015 Page 2 of 11 6. common question that is sought to be urged in three appeals concerns correctness of order of ITAT, upholding order of Commissioner of Income Tax (Appeals) [ CIT (A) ] holding that Assessee was eligible to deduction under Section 80IC of Act and deleting disallowance ordered by Assessing Officer (AO) for AYs in question. 7. facts leading to filing of these appeals are that Assessee, Khanna Brothers, is partnership firm. Assessee filed its return for AY 2006-07 on 31st October 2006 declaring total income of Rs. 24,17,034. Assessee claimed deduction of Rs. 22,58,647.72 in computation of income on account of net profit from Agartala Branch (Tripura) of Assessee. Assessee submitted profit and loss (P&L) account for Agartala Branch for period 1st April 2005 to 31st March 2006, balance sheet as on 31st March 2006 and auditor s report in form Nos. 3CD and 10CCB. auditor s report certified that Assessee s units did not manufacture any article or thing specified in 13th Schedule. date of commencement of operation of unit was 12th July 2005. In Tax Audit report in form No. 3CD business of Assessee was described as manufacturing and fabrication of steel structure . case was picked up for scrutiny and notices under Sections 143 (2) and 143 (1) of Act were issued. 8. Assessing Officer ( AO ) in assessment order dated 30th December 2008 noted that AY 2006-07 was first year in which claim for deduction under Section 80IC of Act had been made by Assessee. ITA Nos.972, 967 & 490/2015 Page 3 of 11 In response to query as to how it could claim to be manufacturing unit, Assessee submitted purchase order dated 30th December 2004 issued to it by M/s. Dharmpal Prem Chand Limited ('DPCL). subject of purchase order was fabrication, supply, shot blasting, painting and erection of steel structures for picking line and HR coil storage building (G-H & H-1 Boys) of our steel project at Agartala. It was further stated in purchase order as under: With reference to your offer and subsequent discussions with you on above subject, we are pleased to place order on you for fabrication, supply, shot blasting, painting and erection of 660 MT +/- 2% of Steel structures including roofing and wall cladding for Pickling Line and HR Coil Storage buildings of our steel project at Agartala. details of building covered under your scope shall be as follows : Total tonnage of 660 MT +/- 2% of fabricated steel structures shall be sand/shot blasted and given two coats of epoxy primer and one coat of finish plant prior to erection. steel structures shall be painted with one coat of finish paint after erection. entire work shall be executed strictly in conformity with Technical details as given at enclosed detail fabrication drawings to be made available with you. total fixed price for scope of work mentioned above shall be Rs. 6.50 crores (Rupees Six Crores and Fifty lakhs only). ITA Nos.972, 967 & 490/2015 Page 4 of 11 above mentioned price are on FOR site basis excluding Excise duty, Education Cess and Sales Tax (Inclusive of Freight and Transit insurance). " 9. Before AO, Assessee contended that it had paid requisite excise duty and that it was registered with Central Excise Authorities for manufacturing of excisable goods. It was stated that land/shed had been taken from Tripura Industrial Development Corporation Limited in notified industrial area. For purpose of sales tax registration, 'business' was indicated as 'manufacturing'. unit was also registered under Factories Act as steel manufacturer. It was claimed that fabrication work was in fact done in premises of Assessee at Agartala. 10. AO observed that that tax auditor had not given any description of finished goods as no such article or thing manufactured or produced by Assessee could be ascertained. AO referred to decision of Supreme Court in Commissioner of Income Tax v. N.C. Budhraja & Co. (1993) 204 ITR 412 (SC) and held that fabrication work done by Assessee and erected at factory site of contractee cannot be called manufacture. reference was made to decision of Supreme Court in M/s. Builders Association of India v. Union of India (1994) 209 ITR 877 (SC) where it was held that construction of dam, building, bridge or road and like cannot be brought within purview of word article or thing and therefore, investment allowance was not allowable under Section 32A of Act. ITA Nos.972, 967 & 490/2015 Page 5 of 11 11. Accordingly AO added back to income of Assessee, for AY 2006-07, sum of Rs. 22,58,648 claimed as deduction under Section 80IC of Act. 12. Assessee then appealed before CIT (A). By order dated 27th November 2009 while allowing appeal of Assessee, CIT (A) disagreed with AO and held that Assessee was engaged in manufacture of articles and was, therefore, eligible for deduction under Section 80IC of Act. 13. Assessee s return for AY 2008-09 was picked up for scrutiny and notice under Section 143 (2) was issued on 6th August 2009. reference was made in AO s order dated 31st December 2010 to fact that on 9th March 2010 survey operation under Section 133 of Act was conducted at Faridabad, Chandigarh and Agartala branches of Assessee. By this time, Chandigarh and Faridabad branches had been closed. During course of survey, Assessee voluntarily offered undisclosed stock of value of Rs. 1,01,17,491 for taxation. 14. In order dated 31st December 2010 for AY 2008-09, AO concluded that during course of survey operation, additional evidences have been gathered which prove that Assessee was not manufacturer of certain goods or articles which saleable independently in open market, but it was mere contractor for M/s. Dharampal Prem Chand Limited who was establishing Tobacco factory unit in Agartala. AO accordingly reached same conclusion regarding ineligibility of Assessee to claim deduction under Section 80IC of Act. ITA Nos.972, 967 & 490/2015 Page 6 of 11 15. Aggrieved by above order of AO, Assessee filed appeal before CIT (A). By order dated 30th January 2012 CIT (A) allowed Assessee s appeal by referring to fact that survey operation had been carried out on 9th March 2010 therein it was found that Appellant had only two or three employees during Financial Year ( FY ) 2006-07 and 2007-08 and there were only limited number of machines found at factory which were no longer existed. On issue of Appellant being manufacturer, CIT (A) followed order passed for earlier AY. CIT (A) noted that Assessee after procuring raw material had subjected it to various mechanical processes and transformed into something else . Accordingly, it was held that Assessee was entitled to deduction under Section 80IC of Act. 16. Against above orders of CIT (A) for AYs 2006-07 and 2008- 09, Revenue filed appeals before ITAT. By impugned order dated 14th June 2013, ITAT confirmed order of CIT (A) and dismissed Revenue s appeals. 17. For AY 2010-11, separate set of orders were passed by AO and CIT (A). Revenue preferred another appeal before ITAT, i.e., ITA No. 227/Del/2013. By impugned order dated 13 th February 2015 ITAT followed its earlier order and thereafter affirmed order of CIT (A). 18. first issue that is required to be addressed is whether Assessee undertook any manufacturing activities in units at Agartala during ITA Nos.972, 967 & 490/2015 Page 7 of 11 AYs in question. As noticed hereinbefore, Assessee undertook work of fabrication of steel for use by DPCL. Apart from fabrication, work involved shot/sand blasting, painting and erection of steel structures. detailed fabrication drawings were provided by DPCL. 19. In Commissioner of Income Tax v. Beehive Engineering Co. & Allied Industries (P) Ltd. (1996) 221 ITR 561 (AP), Assessee was engaged in purchasing MS angles, joints, channels, etc., cutting them into required sizes, thereafter welding, drilling pieces with holes and fitting them with nuts, bolts etc., for manufacturing trusses. question whether Assessee was industrial company within meaning of Section 2 (7) (c) of Finance Act, 1978 was answered in affirmative by Andhra Pradesh High Court. It was held that two things are clear, viz., (i) that for company to be industrial company within meaning of above said provision it is enough if company is carrying on manufacturing of goods, and (ii) that application of Explanation would arise only in case where company is not mainly industrial company; in such case, if income of that company from manufacture of goods exceeds 51 per cent, it would be treated as industrial company. decision in N.C. Budharaja (supra) was distinguished since in that case question was whether construction of dam in Orissa would be taken to be manufacturing of article or thing. view taken by Orissa High Court that activity of constructing dam was industrial activity was, in those circumstances, reversed by Supreme Court. said decision is, therefore, distinguishable in its application to situation where there is finding of fact that manufacturing activity is being carried out by ITA Nos.972, 967 & 490/2015 Page 8 of 11 Assessee. 20. As far as present case is concerned, fabrication of steel as undertaken by Assessee, which involves several of processes does fall within definition of manufacture for purposes of Section 80 IC of Act. decision in CIT v. Beehieve Engineering Co. (supra) fully supports case of Assessee in this regard. 21. question that next arises is whether during AYs in question, it could be said that Assessee was in fact carrying out any manufacturing activity in its units at Agartala? case of Revenue is that CIT (A) and ITAT failed to take note of fact that survey was undertaken on 9th March 2010 in which it transpired that number of employees in Financial Years (FYs) 2006-07 and 2007-08 was three and in FYs 2008- 09 and 2009-10 it came down to two. survey team found that one unit was lying vacant covered with grass and shrubs with deserted look and had old rusted shed. In other unit some scrap materials like, angles, bars etc. were lying around in scattered manner on ground. survey team had noted that unused corroded winch machines were lying in one corner of compound. question raised was whether it was possible to produce/manufacture goods worth Rs. 8 crore in FY with only three regular employees and few machines. 22. CIT (A) has, in his order for AY 2008-09, taken note of explanation offered by Assessee that in one unit no work was being carried out for several years. As far as second unit was concerned, ITA Nos.972, 967 & 490/2015 Page 9 of 11 last order was completed sometime in July 2009 and thereafter no work was done. It was pointed out by Assessee that this explained why survey team in March 2010 did not find any manufacturing activity underway in said unit. Further under Section 80IC of Act, there was no requirement that Assessee had to directly employ certain number of workers. In fact manufacturing and fabrication work was done with help of contract labour and documents had been furnished to show that labour work charges aggregating Rs. 1,66,17,876 was paid. CIT (A), therefore, concluded in order dated 30th January 2012 that Assessee had furnished adequate evidence of fabrication and assembly of steel structure for steel project of DPCL at Agartala. 23. ITAT has agreed with factual findings of CIT (A) for AY 2008-09 in which there is extensive discussion of survey report. This was followed for AY 2010-11. Therefore, it cannot be said that ITAT and CIT (A) failed to take note of survey report. 24. Court finds that Assessee furnished requisite documents to demonstrate that it carried on aforementioned manufacturing activity at its Agartala unit. Assessee produced during assessment proceedings as well appellate proceedings copies of excise returns filed by it before Central Excise authority at Agartala, bills of machinery and of raw material purchased, details of freight and cartage for purchase of raw material, and details of job work paid. Documents to show that Assessee paid Rs. 1.66 crores for fabrication work carried out with help of contract labour were produced. Further, documents of registration with ITA Nos.972, 967 & 490/2015 Page 10 of 11 VAT, CST, Service Tax, and Central Excise Authorities were furnished. Assessee also produced details of rent paid to Tripura Industrial Development Corporation Ltd., bills of construction of factory sheds and details of payment of electricity charged to Tripura State Electricity Corporation Ltd. appellant has produced bills purchase of machinery installed at premises, comprising drilling machines, welding machines, motors, gas cutting machines.: air compressor, etc. It produced details and bills of purchase of raw material comprising nuts, bolts, rods M.S. angles, channels, HR sheets metal etc. As rightly pointed out by Assessee there was no requirement under Section 80 IC that Assessee had to employ 10 or more workers directly. In circumstances there appears to have been no justification for AO to disallow deduction under Section 80IC of Act for AYs in question. 25. No substantial question of law arises for determination. 26. appeals are dismissed but, in facts and circumstances, with no order as to costs. S. MURALIDHAR, J RAJIV SHAKDHER, J DECEMBER 17, 2015 Rk ITA Nos.972, 967 & 490/2015 Page 11 of 11 Commissioner of Income Tax-VIII v. Khanna Brother