Direct Taxes ‘Manufacture’ – Reassessment – Stamp Valuation

1. Definitions – Manufacture – Clause 3 – S 2 (29BA):- Clause 3 of the Finance Bill 2009 has sought to introduce sub section 29BA in section 2 of the Income Tax Act wherein the manufacture is defined for the first time The amendment is to take effect retrospectively from 1st April, 2009 and would apply in relation to Assessment Year 2009-2010 and subsequent years. . The amendment read as follows:

S.2 (29BA) “manufacture” with its grammatical variation, means a change in a non-living physical object or article or thing –

(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use or ,

(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.

As there was no definition under income tax Act, there was lot of litigation to decide the issue whether manufacture or not. The above definition of the term “manufacture” would be applicable to various provisions of the Act and especially the provisions under Chapter VI-A where income based deduction is claimed by industrial undertaking in accordance with the provisions of the Act. The insertion of this definition is quite essential for defining the term “manufacture” under the following provisions S.32AB, S.80HH, 80HHA, 80HHB, 80HHHBA, 80HHC, 80HHF, 80-I, 80-IA, 80-IAB, 80-IB and 80JJAA.

For the purposes of section 10AA, explanation 1 (iii) “manufacture” shall have the same meaning as assigned to it in clause (r) od section 2 of the Special Economic Zones Act, 2005. Similarly for the purpose of section 10B, Explanation 4 explains this section as “manufacture or produce” shall include the cutting and polishing of precious and semi –precious stones.

Whether the proposed definition is broad enough to cover the manufacture of items produced in non physical form such as computer software ,or up gradation of software etc. which may not result into new thing anddistinct object or article nor does its existence result in different chemical composition or integrals structure si a debatable issue.

Special Economic Zone Act 2005, defines ‘manufacture’ as under:-

S. 2(r) “manufacture” means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, re-engineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining;

It is suggested that, in the proposed definition under the Income-tax Act, after the word, ‘or thing in to a new, or distinct object, would have been more appropriate, rather than the word, and’

In Aspinwall & Co. Ltd vs. CIT (2001) 251 ITR 323 (SC)

The court held that the word ‘manufacture ‘ has to be given a meaning as in understood in common parlance. It is to be understand as meaning the production of articles for use from raw materials by giving such materials new forms, qualities or combination whether by hand labour or machines. If change is made inarticle result in new and different article then it would amount to manufacture activity.

As going through various judicial precedent it brings to our notice that various definition such has “production” and “article” has not be defined under various Acts and Rules. More importance with regard to “production” as meaning of “production” would have wider meaning than “manufacture”. In case an amendment would have been introduce with regard to insertion of definition “production” and “manufacture” both then there would have been a clear air with regard to interpretation of this words under various section of the Act. Now , with insertion of definition term “manufacture” has been defined but the term “production “ is still required to be taken as per the dictionary meaning or so interpreted by various judicial decisions.

In India Cine Agencies vs. CIT (2008) 220 CTR 223 (SC) / (2009) 308 ITR 98 (SC)

The court held that conversion of jumbo rolls of photographic films in to small flats and rolls in desired size amounts to manufacture or production eligible for deduction under section 32AB.

In Vijay Ship Breaking Corpo vs. CIT (2008) 175 Taxman 77 (SC),

The court held that Ship breaking activity results in production of distinct and different article and therefore, assessee doing said activity would be entitled to Deduction under section 80 HHA and 80 I.

The principle laid down by the apex court may be relevant for deciding the whether manufacture or not. As there is specific definition under the income tax Act , the same may be relied on for deciding all pending matters in different stages, it can be argued as clarificatory in nature.

2. Reassessment – Income escaping assessment-Clause . 57. S. 147, 148 (2)

As per the provisions of the Indian Income Tax Act, 1961 of Sec. 147 income escaping assessment before the insertion of new Explanation stands as below :

if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) :

Provided that where an assessment under sub-section (3) of section 143 or this section ………………… or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:

[Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject-matter of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.]

Explanation 1. Production before ………………

Explanation 2. For the purposes ……………….

Clause 57 of the Finance Bill 2009 proposes to insert Explanation 3 to s.147 relating to income escaping assessment which reads as follows:

Provided that for the purpose of assessment or reassessment under this section, Assessing Officer may assess or reassess income in respect of any issue which has escaped assessment and such issues comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reason recorded under sub-section (2) of Sec 148. “
This amendment to take effect retrospectively from 1st April, 1989 and will apply accordingly in relation to the assessment year 1989-90 and subsequent years.

With the amended brought by this clause, the AO has been given powers to reassess the income in respect of any income which comes to his notice and has escapedassessment in the course of reassessment inspite of the fact that the reasons for such issue have not been included in the reason recorded while initiating the proceedings.

The Explanation 3 can be effective in wider sense when read with the Proviso mention under the s.147 where it read as follows “may assess or reassess such income, other than the income involving matters which are the subject-matter of any appeal”. As explanation 3 also mentions as follows “Assessing Officer may assess or reassess income in respect of any issue which has escapedassessment and such issues comes to his notice subsequently in the course of the proceedings” which seems to draws it supports from the proviso mention under thesection 147 which was brought inserted by the Finance Act, 2008 and was effective from 1-4-2008. This effective get retrospectively from the year 1-4-1989 with the insertion of Explanation 3 inserted as per the Finance Bill. Thus, the proposedamendment will widen the powers of the Assessing Officer given by the amendment in 2008 and now, the assessee is devoid from taking the ground that the addition proposed was not mentioned in the reasons for reassessment and therefore his case is not covered by the second proviso.

In CIT vs. Shri Ram Singh (2008) 306 ITR 343 (Raj.).

If in the course of proceedings under s. 147, the AO were to come to conclusion, that any income chargeable to tax, which, according to his “reason to believe”, had escaped assessment for any assessment year, did not escape assessment, then, the mere fact, that the AO entertained a reason to believe, albeit even a genuine reason to believe, would not continue to vest him with the jurisdiction, to subject to tax, any other income, chargeable to tax, which the AO may find to have escaped assessment, and which may come to his notice subsequently, in the course of proceedings under s. 147. It is a different story that for such other income, the AO may have recourse to such other remedies, as may be available to him under law, but then, once it is found, that the income, regarding which hehad “reason to believe” to have escaped assessment, is not found to have escaped assessment, the AO is required to withhold his hands, at that only. Once the AO came to the conclusion, that the income, with respect to which he had entertained “reason to believe” to have escaped assessment, was found to have been explained, his jurisdiction came to a stop at that, and he did not continue to possess jurisdiction, to put to tax, any other income, which subsequently came to his notice, in the course of reassessment proceedings, which were found by him, to have escaped assessment.

Vipin Khanna vs. CIT (2002) 255 ITR 220 ( P & H) held that AO cannot launch enquiry on the grounds not covered in reassessment notice.

The proposed retrospective amendment further clarifies that assessing officer while making assessment under section 147 can make any other addition which comes to his notice during the course of assessment which does not form part of the reasons recorded at the time of issuance of notice.

This amendment will lead to lot of litigation , the assessing officer may try to reassesee all the issues which has became final. When assessment is reopened the assessee can not make a claim which he has not claimed in the original assessment in view of judgment of supreme court in CIT vs. Sun Engineering Works P . Ltd ( 1992) 198 ITR 297 (SC) there fore giving unrestricted power to A.O may lead to unintended litigation. It is suggested that making amendment retrospectively to over come the decision of High court may not be considered as good tax policy.

It may be noted that similar provision is not introduced for the reopening of assessment under wealth tax Act.

The amendment Explanation may be challenged before the Court as the amendment has it violates the right of those Assessee whose matter is pending with regard to the assessment for the year 1989-90 onwards. While those whose assessments are completed before the introduction of the amendment escape this amendment.

3. Special provision for full value of consideration, On the basis of “stamp valuation authority”. Clause – 25 – S. 50C

Section 50C of the Income Tax Act relating to special provision for full value of consideration in certain cases inserted by Clause 25 of the Finance Bill, 2009.

As per the present provision, section includes transactions which are not registered with the stamp duty valuation authority and are executed by an agreement to sell or by power of attorney.

The amendment to this section has taken place to provide that where the consideration received or accruing as a result of transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by an authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration received or accruing as a result of such transfer for computing capital gain.

Further, it is also proposed to insert a new explanation so as to clarify the meaning of the term ‘assessable’.

The term ‘assessable’ means “the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed, it were to referred to such authority for the purpose of the payment of the stamp duty”.

This amendment will take effect from 1st October, 2009 and shall accordingly the apply in relation to transactions undertaken on or after such date.

The amendment extends to the transfer of stamp duty on assets which is not registered with the Stamp Duty Valuation Officer. Further, the value of the capital assets of the assessee shall be determined by the authority of a State Government who would compute the value and the value which would be arrived by such authority would be the value as regard to full consideration. But no mechanism has been setup or suggested to find out the value of the Transfer capital Assets and this amendment would only apply to transaction taken place after 1st October, 2009.

In Carlton Hotel (P) Ltd. vs. ACIT (2009) 122 TTJ 515 (Luck.) the tribunal held that where immoveable property is transferred by a partner to the firm a capital contribution and registration does not take place by payment of stamp duty ,the case would be covered under section 45 (3 ) and provisions of section 50 C can not be invoked .

The word “assessable” may lead to lot of unintended litigation. The taxing the capital gain on notional basis may not be up held by the court in an appropriate case. All most all transaction of immovable property the A.O may try to adopt the readyrecnor of state Government of determining the assessable value.

The constitutional validity with regard to 50C has been upheld by upon by High Court of Madras in K.R.Palanisamy & Ors. vs. Union of India [(2008) 306 ITR 61] it is stated in s. 50C as a real value cannot be regarded as a notional or artificial value and such real value is determinable only after hearing the assessee as per the statutory provisions stated supra. There is no indication either in the provisions of s. 50C of IT Act or s. 47A of the Stamp Act or rules made thereunder about the adoption of the guideline value. Hence, the contention that s. 50C is arbitrary and violative of Art. 14 cannot be accepted.

4. Service of Notice, etc. Clause 766 –S.282

Clause 76 of the Bill seeks to substitute section 282 of the Income-tax Act which relates to service of notice generally. Under the existing provisions contained in the said section a notice or requisition under the Act may be served on the person therein named either by post or as if it were a summons issued by a court. It is proposed to provide that the service of notice or summon or requisition or order or any other communication may be made by delivering or transmitting a copy thereof by post or courier service or in such manner as provided in the Code of Civil Procedure, 1908 (5 of 1908) for the purposes of service of summons; or in the form of any electronic record as provided in Chapter IV of the Information Technology Act, 2000; or by any other means of transmissions as may be provided by rules made by the Board in this behalf It is also proposed that the Board may make rules providing for the addresses (including the address for electronic mail or electronic mail message) to which such communication may be delivered. This amendment to take effect from 1st October, 2009.

This is welcome provision. The Government can save the time and money for by sending the notice by electronic media.

5. Allotment of Document Identification Number – Clause 77 – S. 282B

Clause 77 of the Bill seeks to insert a new section 282B of the Income-tax Act relating to allotment of Document Identification Number. It is proposed to insert a new section 282B in the Income-tax Act so as to provide that every income tax authority shall allot a computer generated Document Identification Number in respect of every notice, order, letter or any correspondence issued by him to any other income-tax authority or assessee or any other person and such number shall be quoted thereon. It is further proposed that where the notice, order, letter or any correspondence issued by any income-tax authority does not bear a Document Identification Number, such notice, order, letter or any correspondence shall be treated as invalid and shall be deemed never to have been issued. It is also proposed to provide that every document, letter or any correspondence, received by an income-tax authority or on behalf of such authority, shall be accepted only after allotting and quoting of a computer generated Document Identification Number. It is also proposed to provide where the document, letter or any correspondence received by any income-tax authority or on behalf of such authority does not bear Document Identification Number, such document, letter or any correspondence shall be treated as invalid and shall be deemed never to have been received.

This amendment will take effect from 1st October, 2010.

It is proposed with this insertion that notice, order, letter or any correspondence does not bear a IT-DIN then all such would be treated has an invalid and would be deemed to have been never been issued.

Further, it also clarifies that all documents, correspondence received by the income tax authority or on behalf of an authority will be accepted only after allotting and quoting computer generated IT-DIN. This to take effect from 1st October,2010.

Incase the assessee is able to show the reasonable cause the documents cannot be treated as invalid.

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