2011 (4) TMI 968 - HC - Income Tax

High Court affirms Tribunal decision on industrial undertaking eligibility under section 80-IA

The High Court upheld the Tribunal's decision, ruling in favor of the assessee. It concluded that the assessee's activities qualified as 'manufacture' or ... Whether Tribunal was right in holding that the activity of the assessee of manufacturing of identity cards amounts to 'manufacture' and the undertaking of the assessee is an 'industrial undertaking' for the purpose of section 80-IA of the Act and the assessee is eligible for the benefit under section 80-IA of the Act - Held that:- Schedule XI prescribes negative list which in terms of clause (iii) of sub-section (2) of section 80-IA denies the benefit to an assessee in respect of manufacture or production of items which falls thereunder. Entry 10 of Schedule XI reads 'photography apparatus and goods'. The manufacture of identity cards cannot be described as photography apparatus and goods. In fact, the assessee is taking the aid of photographic apparatus and goods for manufacturing or producing identity cards. The Tribunal, while adjudicating the aforesaid issue in favour of the assessee, no substance in the objections raised by the Revenue, the question of law is answered against the Revenue and in favour of the assessee, appeals are dismissed Issues Involved:1. Allowability of deduction under section 80-IA of the Income-tax Act, 1961.2. Classification of the assessee's activity as 'manufacture' or 'production.'3. Determination of whether the assessee qualifies as an 'industrial undertaking.'4. Applicability of the Eleventh Schedule to the Act concerning 'photography apparatus and goods.'Issue-wise Detailed Analysis:1. Allowability of Deduction under Section 80-IA:The primary issue concerns the eligibility of the assessee for deduction under section 80-IA of the Income-tax Act, 1961. The Tribunal had allowed the deduction, which the Revenue contested. Section 80-IA provides deductions to an assessee whose gross total income includes profits and gains derived from any business of an industrial undertaking, provided certain conditions are met. The Revenue's objections were based on the nature of the assessee's activities and the classification of the product.2. Classification of the Assessee's Activity as 'Manufacture' or 'Production':The Revenue argued that the assessee's activities did not constitute 'manufacture' or 'production' as they did not result in a new article or thing. The Tribunal, however, considered the detailed process undertaken by the assessee, which included data entry, photography, data processing, application of holograms, printing, and lamination of identity cards. The Tribunal concluded that these activities transformed the original data into a new and distinct product, thus qualifying as 'manufacture' or 'production.' The Tribunal's decision was supported by the Supreme Court judgment in ITO v. Arihant Tiles and Marbles (P.) Ltd., which held that transforming marble blocks into slabs and tiles constituted manufacture or production.3. Determination of Whether the Assessee Qualifies as an 'Industrial Undertaking':The Tribunal determined that since the assessee's activities amounted to manufacturing or producing a new article or thing, the assessee qualified as an 'industrial undertaking' under section 80-IA. The Tribunal referenced the legislative intent and the definition of 'manufacture' inserted by the Finance (No. 2) Act, 2009, which supports the transformation of an object into a new and distinct entity.4. Applicability of the Eleventh Schedule to the Act:The Revenue contended that the assessee's product fell under the Eleventh Schedule, specifically under 'photography apparatus and goods,' which would disqualify it from section 80-IA benefits. The Tribunal rejected this argument, clarifying that the assessee was not manufacturing photographic products but was using photographic apparatus in its manufacturing process. The Tribunal noted that the identity cards produced by the assessee could not be classified as photography apparatus and goods.Conclusion:The High Court upheld the Tribunal's findings, concluding that the assessee's activities constituted 'manufacture' or 'production,' thus qualifying it as an 'industrial undertaking' eligible for deduction under section 80-IA. The Court also agreed that the identity cards did not fall under the Eleventh Schedule's negative list. Consequently, the objections raised by the Revenue were dismissed, and the question of law was answered in favor of the assessee. The appeals were dismissed accordingly.