1983 (12) TMI 9 - HC - Income Tax

Assessee Denied Higher Rebate for Textile Activities

The High Court held that the assessee was not entitled to a higher rate of development rebate under section 33(1)(b)(B)(i) of the Income-tax Act for ... Manufacture - manufacture of textiles - development rebate under s. 33(1)(b)(B)(i) - item 32 of the Fifth Schedule (Textiles, including cotton yarn) - transformation test for manufacture - intermediary processing not amounting to manufactureDevelopment rebate under s. 33(1)(b)(B)(i) - item 32 of the Fifth Schedule (Textiles, including cotton yarn) - Assessee's entitlement to the higher rate of development rebate under s. 33(1)(b)(B)(i) in respect of machinery used in its business - HELD THAT: - The Court held that entitlement to the higher development rebate under s. 33(1)(b)(B)(i) requires that the machinery claimed must have been used in the manufacture of an article specified in item 32 of the Fifth Schedule (textiles made wholly or mainly of cotton, cotton yarn, hosiery and rope). The Tribunal's conclusion that the assessee was entitled to the enhanced rebate rested on the proposition that the assessee's machinery was used in manufacture of textiles by reason of its warping, sizing and bleaching operations. The Court rejected that conclusion because the machinery was not shown to have been used in manufacturing a specified item but only in treating yarn purchased from others; accordingly the statutory requirement for the higher rebate was not satisfied. The Tribunal's order failed to apply the requisite test of manufacture to the material facts and gave no adequate reasoning for treating the processes as manufacture within item 32.Assessee not entitled to the higher rate of development rebate under s. 33(1)(b)(B)(i) in respect of the machinery used for the processes described.Manufacture - transformation test for manufacture - intermediary processing not amounting to manufacture - Whether the assessee's operations of warping, sizing and bleaching of purchased cotton yarn amount to manufacture of cotton yarn or textiles within item 32 - HELD THAT: - Applying the transformation test, the Court held that not every change effected by processing amounts to manufacture: there must be a transformation producing a new and distinct commercial article with a different name, character or use. The assessee purchased cotton yarn and merely subjected it to warping, sizing and bleaching; these operations improve performance but do not change the basic structure or identity of the yarn nor produce a new commercial commodity. Authorities were considered which support the proposition that dyeing, colouring, bleaching or similar treatments of yarn do not convert it into a different commercial article. The Court therefore concluded that the activities in question are intermediary processes and do not constitute manufacture of cotton yarn or textiles for the purposes of item 32.Operations of warping, sizing and bleaching of purchased cotton yarn do not amount to manufacture of cotton yarn or textiles within item 32.Final Conclusion: Both questions referred were answered against the assessee: the operations carried on (warping, sizing and bleaching of purchased cotton yarn) do not amount to manufacture of textiles under item 32, and consequently the assessee is not entitled to the higher development rebate under s. 33(1)(b)(B)(i); costs awarded to the Revenue. Issues Involved:1. Entitlement to higher rate of development rebate u/s 33(1)(b)(B)(i) for machinery used by the assessee.2. Whether the operations carried on by the assessee amount to the manufacture of textiles as specified in item 32 of the Fifth Schedule.Summary:Issue 1: Entitlement to Higher Rate of Development Rebate u/s 33(1)(b)(B)(i)The Tribunal held that the assessee, engaged in warping, sizing, and bleaching of cotton yarn, was entitled to a higher rate of development rebate u/s 33(1)(b)(B)(i) of the Income-tax Act. The Tribunal's decision was based on the interpretation that these operations fall under item 32 of the Fifth Schedule, which includes 'textiles (including those dyed, printed or otherwise processed) made wholly or mainly of cotton, including cotton yarn, hosiery and rope.' The Tribunal rejected the Revenue's contention that the term 'textiles' should be limited to the manufacture of cloth from raw material and not intermediary processes.Issue 2: Whether Operations Amount to Manufacture of TextilesThe High Court examined whether the activities carried on by the assessee, such as warping, sizing, and bleaching of cotton yarn, could be considered as manufacturing textiles. The court referred to several precedents, including the Supreme Court's decision in South Bihar Sugar Mills v. Union of India, which defined 'manufacture' as a process that results in a new and different article with a distinctive name, character, or use. The court concluded that the assessee's operations did not transform the cotton yarn into a new commercial product; it remained cotton yarn even after the processes. Therefore, the activities did not amount to the manufacture of textiles.Conclusion:The High Court held that the Tribunal's view was incorrect. The processes of warping, sizing, and bleaching did not constitute manufacturing of textiles as specified in item 32 of the Fifth Schedule. Consequently, the assessee was not entitled to the higher rate of development rebate u/s 33(1)(b)(B)(i). Both questions were answered in the negative and against the assessee, with costs awarded to the Revenue.