1984 (1) TMI 13 - HC - Income Tax

Private Limited Company Denied Higher Development Rebate for Textile Activities

The court ruled against the assessee, a private limited company, in a case concerning entitlement to a higher rate of development rebate under section ... Manufacture or production - development rebate under section 33(1)(b)(B)(i) - Item 32 of the Fifth Schedule - textiles (including those dyed, printed or otherwise processed) - processing versus transformation test - identity retention testDevelopment rebate under section 33(1)(b)(B)(i) - Item 32 of the Fifth Schedule - textiles (including those dyed, printed or otherwise processed) - Assessee's entitlement to the higher development rebate at 35% for the machinery used in its business for assessment year 1970-71. - HELD THAT: - The Tribunal's allowance of the higher rate was examined in the light of whether the assessee's operations amounted to the 'construction, manufacture or production' of textiles within the meaning of s.33(1)(b)(B)(i) read with item 32 of Schedule V. The court applied the principle that mere processing (such as embroidering and dyeing) of cloth purchased from others does not amount to manufacture where the feed-in material retains its basic character and identity and is not transformed into a commercially different or distinct article. Earlier decisions including CIT v. S. S. M. Sizing Centre were noted for the proposition that operations which do not change the basic structure or identity of the purchased material are not manufacture; authorities such as CWT v. Radhey Mohan Narain , Chowgule & Co. Pvt. Ltd. v. Union of India , CST v. Harbilas Rai and Sons , and Cheriyan v. Barfi Devi were considered and applied to hold that embroidery and dyeing here merely added designs and colour without creating a different commercial article. Decisions which turned on wider statutory definitions of 'manufacture' were distinguished (for example, CST v. Hastimal Ratanlal and Hiralal Jitmal v. CST ) as reliant on definitions not operative under the Act in issue. Applying the 'processing versus transformation' and 'identity retention' tests, the court concluded that the assessee had not brought textiles into being by its operations and therefore the machinery was not installed for purposes of manufacture or production of textiles within the meaning of the provision.The assessee was not entitled to the higher development rebate at 35% for the machinery used, for assessment year 1970-71.Manufacture or production - processing versus transformation test - identity retention test - Whether the assessee was engaged in the construction, manufacture or production of textiles (otherwise processed) so as to qualify for the higher rate. - HELD THAT: - The court held that the assessee commenced with cloth already manufactured by others and that subsequent embroidering and occasional dyeing did not transform the cloth into a different or distinct commercial article. The words in brackets in item 32 ('including those dyed, printed or otherwise processed') were interpreted as descriptive of processes by which textiles may be manufactured or produced, not as conferring entitlement where the material's identity remains unchanged. Reliance was placed on precedents applying the test that manufacture requires a change that produces a commercially different commodity; where the end-product retains the basic character of the feed-in material, the operations do not amount to 'manufacture or production.' Applying that reasoning to the facts, the court concluded that the assessee's activities did not constitute manufacture or production of textiles.The assessee was not engaged in the construction, manufacture or production of textiles and therefore was not entitled to the higher rate.Final Conclusion: Questions referred are answered in the negative and in favour of the Revenue: the assessee did not manufacture or produce textiles by embroidering and dyeing cloth purchased from others and therefore was not entitled to the higher rate of development rebate; no order as to costs. Issues Involved:1. Entitlement to higher rate of development rebate u/s 33(1)(b)(B)(i) of the I.T. Act, 1961.2. Determination of whether the assessee's activities constitute 'manufacture or production' of textiles.Summary:Issue 1: Entitlement to Higher Rate of Development Rebate u/s 33(1)(b)(B)(i)The assessee, a private limited company, claimed a development rebate at a special rate of 35% for the assessment year 1970-71, arguing that its activities constituted the manufacture or production of textiles within the meaning of item 32 of the V Schedule to the I.T. Act, 1961. The ITO allowed a development rebate at 20%, contending that the assessee's activities were limited to embroidering designs on cloth purchased from other mills and did not amount to manufacturing or producing textiles. The AAC upheld this view, dismissing the assessee's appeal. However, the Tribunal, relying on the dictionary meaning of 'process,' ruled in favor of the assessee, granting the higher rate of development rebate at 35%.Issue 2: Determination of 'Manufacture or Production' of TextilesThe court examined whether the assessee's operations, which involved embroidering and dyeing cloth purchased from others, constituted 'manufacture or production' of textiles. Referring to the case CIT v. S. S. M. Sizing Centre [1985] 155 ITR 782 (Mad), the court noted that similar operations like warping, sizing, and bleaching of yarn did not amount to manufacturing or production, as the basic structure or identity of the yarn remained unchanged. Applying this interpretation, the court concluded that the assessee's activities did not transform the cloth into a different or distinct commercial product. The cloth retained its identity as cloth manufactured by another, even after embroidery and dyeing. Therefore, the assessee's operations did not qualify as 'manufacture or production' of textiles.Conclusion:The court held that the assessee was not entitled to the higher development rebate as it was not engaged in the 'manufacture or production' of textiles within the meaning of s. 33(1)(b)(B)(i) read with item 32 of Schedule V to the Act. Both questions were answered in the negative and in favor of the Revenue, with no order as to costs.