1991 (4) TMI 33 - HC - Income Tax

Contract manufacturing with supervision qualifies as manufacture, assessee allowed deduction under s. 80-I for outsourced production

HC upheld the Tribunal's finding that the assessee was engaged in 'manufacture' for purposes of deduction under s. 80-I of the Income-tax Act, despite not ... Deduction For Priority Industry u/s 80I - manufacturing activity - Depreciation On Scientific Research Assets - actual cost of the assets without applying Explanation 1 to section 43(1) - HELD THAT:- In the absence of a factory or manufacturing facilities of its own, the assessee-company utilises the manufacturing facilities of Turner Hoare on payment, held that this fact by itself did not make any difference and the assessee was engaged in the manufacturing activity, that is, of manufacturing sugar and tea machinery. Accordingly, the Tribunal held that the assessee was entitled to relief as contemplated under section 80-1 of the Income-tax Act, 1961. The Madras High Court, in its decision in Addl. CIT v. Chillies Export House Ltd. [1977 (12) TMI 12 - MADRAS HIGH COURT] referred to the Allahabad High Court decision in the case of Bulbu Prasad Amarnath v. CST [1963 (10) TMI 19 - ALLAHABAD HIGH COURT], wherein it was held that it is not merely the person who manufactures but even the person who had the goods manufactured who would be entitled to the benefit of the definition. Therefore, we have to proceed on the basis of the decisions cited that an assessee would be said to be engaged in manufacturing activity if he is doing a part of the manufacturing activity by himself and, for the rest of it, engages the services of somebody else on a contract other than a contract of purchase. We find from the facts found by the Tribunal that the assessee's manufacturing activity consisted of (i) canvassing of orders, (ii) preparing of designs and drawings on the basis of orders, (iii) placing orders for the manufacture of machinery with Turner Hoare, (iv) to see that the manufacturing process is carried on by Turner Hoare under the direct supervision of the assessee-company, (v) to have a check over the quality control and last but not the least, to be responsible for the proper functioning of the machinery and guarantee after sale service for a stipulated period. Out of so many activities, except for one activity, namely, getting the machinery manufactured through Turner Hoare, all other activities are, admittedly, undertaken by the assessee-company. In the circumstances, we find no difficulty in agreeing with the Tribunal that the assessee is engaged in the business of manufacture of sugar and tea machinery and is, accordingly, qualified for relief under section 80-1. In the above view of the matter, we answer questions also in the affirmative and in favour of the assessee. Issues involved:1. Entitlement to depreciation allowance u/s 32 for assets previously deducted u/s 35(1)(iv)/35(2)(ia).2. Computation of depreciation allowance without applying Explanation 1 to section 43(1).3. Determination of whether the assessee carried on the business of manufacturing sugar and tea machinery.4. Entitlement to relief u/s 80-1 of the Income-tax Act, 1961.Entitlement to Depreciation Allowance:The High Court considered the questions referred by the Income-tax Appellate Tribunal regarding the assessee's entitlement to depreciation allowance u/s 32 for assets whose cost was fully deducted in earlier years u/s 35(1)(iv)/35(2)(ia). Referring to a previous judgment, the court affirmed the entitlement of the assessee to the depreciation allowance for the relevant assessment years.Computation of Depreciation Allowance:The court also addressed whether the depreciation allowance should be computed based on the actual cost of the assets without applying Explanation 1 to section 43(1). Following the previous judgment, the court answered this question in the affirmative and in favor of the assessee.Business of Manufacturing Sugar and Tea Machinery:Regarding the determination of whether the assessee was engaged in the business of manufacturing sugar and tea machinery, the Tribunal found that the assessee engaged in activities such as canvassing orders, preparing designs, and supervising manufacturing under Turner Hoare. Despite utilizing Turner Hoare's facilities, the Tribunal held that the assessee was engaged in manufacturing activity and qualified for relief u/s 80-1.Legal Interpretation and Decision:The court examined the arguments presented by both parties, emphasizing the requirement for the assessee to be directly involved in the manufacturing process to be considered engaged in manufacturing activity. Based on the activities undertaken by the assessee, except for manufacturing through Turner Hoare, the court agreed with the Tribunal's finding that the assessee was indeed engaged in the business of manufacturing sugar and tea machinery. Consequently, the court answered the third and fourth questions in the affirmative and in favor of the assessee. No costs were awarded in this matter.