Blending and bottling of IMFL qualifies as 'manufacture' for tax deduction

The High Court affirmed the Tribunal's decision that blending and bottling of IMFL constitutes 'manufacture' for claiming deduction under Section 80-IB. It held that the process resulted in a distinct commodity fit for human consumption, qualifying as manufacturing. The second unit was deemed to create a new marketable product, not a mere expansion, entitling the assessee to the deduction. The Court supported this interpretation with Supreme Court precedents, emphasizing that any process leading to a commercially different commodity amounts to manufacturing.

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Issues Involved:

1. Whether blending and bottling of IMFL amounts to 'manufacture' for the purpose of claiming deduction under Section 80-IB.
2. Whether the second unit set up by the assessee constitutes an expansion or reconstruction of the existing unit.

Detailed Analysis:

1. Whether blending and bottling of IMFL amounts to 'manufacture' for the purpose of claiming deduction under Section 80-IB:

The assessee, a small-scale industry recognized by the Director of Industries, Pondicherry, set up a second unit to manufacture and bottle Indian Manufactured Foreign Liquor (IMFL). For the assessment years 2003-04 and 2004-05, the assessee claimed deduction under Section 80-IB of the Act for the profits and gains derived from this second unit. The assessing officer rejected this claim, arguing that the process did not constitute 'manufacture' within the meaning of Section 80-IB and that the second unit was merely an expansion or reconstruction of the existing unit.

Upon appeal, the Commissioner of Income Tax (Appeals) held that the process of blending and bottling did not result in the manufacture or production of a new article or thing, as the alcohol remained alcohol. The Tribunal, however, disagreed, applying the decision of the Allahabad High Court in CIT v. Rampur Distilleries and Chemicals Company Ltd., and concluded that the rectified spirit is not mentioned in the 1st Item of the 11th Schedule "beer, wine and other alcoholic spirits." Consequently, the Tribunal held that the assessee, as a Small Scale Industrial Unit, was entitled to deduction under Section 80-IB.

The High Court analyzed Section 80-IB, noting that a deduction is available only where the assessee engages in the manufacture or production of an article or thing, not specified in the 11th Schedule. The Court observed that the industry run by the assessee is a small-scale industry, thus the reference to the 11th Schedule does not apply.

The Court further detailed the process undertaken by the assessee, which involved adding several ingredients to the rectified spirit to create a marketable product fit for human consumption. This process, involving blending, filtration, and bottling, was recognized as a manufacturing activity under different statutes and required various licenses and permissions. The Tribunal's decision was supported by the Supreme Court's definition of 'manufacture,' which includes any process that results in a commercially different and distinct commodity.

2. Whether the second unit set up by the assessee constitutes an expansion or reconstruction of the existing unit:

The assessing officer's contention that the second unit was merely an expansion or reconstruction of the existing unit was rejected by the Tribunal. The Tribunal held that the process undertaken by the assessee resulted in a new and distinct marketable commodity, thus qualifying as a manufacturing activity. The High Court agreed with this view, noting that the end-product, IMFL, is commercially different from the rectified spirit, which is not fit for human consumption.

The High Court referenced several Supreme Court decisions, including Aspinwall & Co. Ltd. v. CIT and Ujagar Prints v. Union of India, which established that a process resulting in a commercially different commodity constitutes manufacturing. The Court concluded that the blending and bottling of IMFL by the assessee did indeed amount to manufacture under Section 80-IB, and the assessee was entitled to the claimed deduction.

Conclusion:

The High Court dismissed the appeals, affirming the Tribunal's decision that blending and bottling of IMFL amounts to 'manufacture' for the purpose of claiming deduction under Section 80-IB, and that the second unit set up by the assessee did not merely constitute an expansion or reconstruction of the existing unit. The Court upheld the Tribunal's interpretation of the concept of 'manufacture' in accordance with the law laid down by the Supreme Court.

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