1987-VIL-60-ITAT-HYD

Equivalent Citation: ITD 023, 364,

Income Tax Appellate Tribunal HYDERABAD

Date: 18.06.1987

HEMSONS INDUSTRIES.

Vs

INCOME-TAX OFFICER.

BENCH

Member(s)  : G. SANTHANAM., T. VENKATAPPA.

JUDGMENT

Per Shri T. Venkatappa, Judicial Member --- These appeals relate to the assessment years 1979-80, 1981-82 and 1984-85. Since common points are involved they are disposed of together.

2. The assessee carries on the business of purchase and sale of groundnuts, decortication of groundnuts into kernel and selling the same. It has taken a factory on lease at Anantapur and has its own factory at Kadiri. The assessee claimed relief under section 80HH. The Income-tax Officer declined to grant the relief. He held that the activity carried on by the assessee is only " decortication " which cannot be said to be " manufacturing activity " at all. " Decortication " is only a " processing activity " but not a " manufacturing activity ". Thus the assessee has failed to satisfy the conditions laid down in sub-section (2) of section 80HH. He also held that the assessee failed to fulfill the conditions laid down in sub-section (5) of section 80HH by not filing the audited accounts and auditor's report along with the original return for 1979-80. He also held that the assessee's main factory is situated at Anantapur which is taken on lease where also its activity was decortication of groundnuts. The factory set up at Kadiri is not independent by itself as the entire capital has flown from the main factory at Anantapur and there is absolutely no separate capital employer for Kadiri factory. Further the balance-sheet of the Kadiri factory is not filed. Thus he held that the Kadiri factory is formed by splitting up or reconstruction of the business already in existence in a backward area. Thus he disallowed the claim for relief under section 80HH for all these years. For the assessment year 1984-85 one other additional ground was in respect of capital gain. The factory at Kadiri was acquired by the Government of A.P. The compensation received by the assessee was invested again in a factory established at Gooty. The assessee claimed relief under section 54D. The Income-tax Officer held that the assessee is not entitled for exemption under section 54D and thus he made an addition of Rs. 2,25,530. On appeal the Commissioner of Income-tax (Appeals) upheld the disallowance under section 80HH. He treated the sum of Rs. 2,21,553 as capital gain instead of Rs. 2,25,530 added by the Income-tax Officer.

3. The learned counsel for the assessee strongly urged that decortication of groundnuts into kernel constitutes a manufacturing activity as kernel which has come out from groundnut is a separate commodity and so the assessee is entitled to relief under section 80HH. The delay in filing the audit report for 1979-80 is a curable defect. Sub-section (5) of section 80HH is only directory and so strict construction should not be given. The factory at Kadiri is a separate factory and it is not formed by reconstruction. Rs. 2 lakhs worth of machinery was purchased which was fixed in the factory. Capital has flown from the Anantapur factory. Separate books of account are maintained for Kadiri factory. He submitted that for assessment year 1984-85 deduction claimed under section 54D should have been allowed in full and no addition is warranted as capital gain as the entire amount has been invested in the new industrial undertaking set up at Gooty. The learned departmental representative submitted that decortication of groundnuts into kernel will not constitute manufacturing activity and it is only a processing activity. The Kadiri factory is formed by reconstruction. The capital to that factory was flown from Anantapur factory. Thus the assessee does not satisfy the conditions laid down in section 80HH. He also urged that the assessee does not satisfy the conditions laid down under sub-section (5) of section 80HH as the audit report was not filed along with the return. He also justified the disallowance of the claim made under section 54D.

4. We have considered the rival submissions. The common question in all these appeals is whether the decortication of groundnuts into kernel constitutes a manufacturing activity. In our view it constitutes a manufacturing activity. In Omkarmal Agarwal v. CIT [1968] 67 ITR 329 the Andhra Pradesh High Court held that buying kapas, ginning it and converting it into lint in a factory with the aid of machinery and then selling it is a manufacturing process. In CIT v. M.R. Gopal [1965] 58 ITR 598, the Madras High Court held that the process employed by converting boulders into small stones with the aid of machinery is a manufacturing process and the undertaking is an industrial undertaking and as such entitled to exemption under section 15C. In Ganesh Trading Co. v. State of Haryana [1973] 32 STC 623 the Supreme Court held that the dehusking and conversion of paddy into rice amounted to manufacturing activity. The ratio laid down in the above decisions would squarely apply to the instant case. In Omkarmal Agarwal's case kapas was ginned and lint and cotton seed were separated. It was held to be a manufacturing activity. Just like that in the instant case groundnut is decorticated and the kernel got has been sold. Both cases are almost identical. Hence the above decision of the A.P. High Court equally applies to the case of decortication of groundnuts into kernel which would constitute a manufacturing activity. Similarly in Ganesh Trading Co.'s case paddy was converted into rice which was held to be a manufacturing activity. Thus in our view the assessee carries on manufacturing activity. It is an industrial undertaking in a backward area and a small scale undertaking and it is entitled to relief under section 80HH. In the assessment year 1979-80 though the audit certificate was not filed along with the original return it was furnished along with the return filed in pursuance of the notice issued under section 148. Sub-section (5) of section 80HH states that the assessee furnishes the audit report along with the return. Since it has been furnished along with the return filed in pursuance of the notice under section 148 there is sufficient compliance. In Addl. CIT v. Murlidhar Mathura Prasad [1979] 118 ITR 392 the Allahabad High Court held that the procedural requirements are to be treated as directory. In that case the declaration in Form No. 12 was not filed along with the return. It was held that the requirement that the declaration should be filed along with return is directory. The above ratio squarely applies to the instant case. In our view the requirement under sub-section (5) to section 80HH that the audit report should be filed along with the return is only declaratory. Since the audit report has been submitted along with the return filed in pursuance of notice under section 148 the assesses has complied with the provisions.

5. In our view the factory at Kadiri has not been formed by reconstruction or by splitting up of the business already in existence. The factory at Kadiri is a separate and independent unit which was constructed on a site taken on lease, machinery worth Rs. 2 lakhs has been fixed in the factory. Capital required has been transferred from the Anantapur factory and separate books of account have been maintained. No machinery or plant from Anantapur factory has been transferred to the Kadiri factory. Thus in our view the Kadiri factory is not set up by splitting up or reconstruction of the business already in existence. In Textile Machinery Corpn. v. CIT [1977] 107 ITR 195 the Supreme Court held that for the reconstruction of an existing business there must be transfer of the assets of the existing business to the new industrial undertaking. For the purpose of section 15C the industrial unit set up must be new in the sense that new plants and machinery are erected for producing either the same commodities or some distinct commodities. If an undertaking is not formed by the reconstruction of the old business that undertaking will not be denied the benefit of section 15C merely because it goes to expand the general business of the assessee in some directions. The ratio laid down therein would squarely apply to the instant case. We have already pointed out that no machinery of Anantapur factory has been transferred to Kadiri factory. The Kadiri factory has been newly set up and new machinery has been erected therein. Thus the Kadiri factory is an independent factory and it is not formed by splitting up or reconstruction of the existing unit. Thus in our view the assessee has satisfied all the conditions for allowing the relief under section 80HH. Thus we direct the Income-tax Officer to allow relief u/s. 80HH.

6. In the assessment year 1984-85 there is one other ground i.e. relief claimed under section 54D. The factory at Kadiri along with building was acquired by the Government. The assessee received compensation of Rs. 6,24,823. The value of the factory and the site was Rs. 3,99,293. After deducting that the profit amounted to Rs. 2,25,530. The assessee claimed the same as exempt under section 54D on the ground that it had spent Rs. 1,88,530 for construction of the factory at Gooty during the assessment years 1985-86 and 1986-87. The balance was Rs. 37,000 from which the basic exemption of Rs. 5,000 and the relief under section 80TT were deducted and the balance amount of Rs. 23,040 was offered for taxation as capital gain. The assessee's case has been that acquisition had taken place on 10-9-1983 and within three years the assessee has established an industrial undertaking at Gooty and as such it is entitled to relief under section 54D. In our view the assessee is entitled to the relief claimed. Out of the profit of Rs. 2,25,530 the assessee has reinvested Rs. 1,88,530 in the new industrial undertaking set up at Gooty. This amount has to be allowed as deduction under section 54D. Only the difference between the amount of capital gain and the cost of new assets shall be charged under section 45. Such difference would come to Rs. 37,000 out of which the basic exemption of Rs. 5,000 has to be allowed and the relief under section 80TT has to be allowed. After allowing that the balance would be Rs. 23,040 which is offered for taxation. Thus in our view only Rs. 23,040 is liable to be taxed. This amount has been offered by the assessee in its return and that amount has to be taxed. No other ground is urged.

7. In the result, the appeals are allowed.

 

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