2012 (2) TMI 692 - AT - Income Tax

Tribunal affirms SSI Unit's manufacturing activity qualifies for tax deduction under Income Tax Act

The Tribunal dismissed the Revenue's appeal, affirming that the process of making dal from chana, toor, and masur constitutes a manufacturing activity. ... Deduction under section 80IB(3)(ii) of the Income-tax Act - manufacturing versus processing - commercially distinct end product test - industry - functional test emphasising systematic organised activity - liberal construction of tax incentive provisionsManufacturing versus processing - commercially distinct end product test - deduction under section 80IB(3)(ii) of the Income-tax Act - Making of dal from chana, toor and masur is a manufacturing activity and the assessee is entitled to deduction under section 80IB(3)(ii). - HELD THAT: - The Tribunal examined the totality of the industrial processes adopted by the assessee - mixing and weighing, grading and sorting (de-stoning), watering and oiling, drying, de-husking, repeated milling, splitting, machine drying, SORTEX sorting, polishing (value addition), storage and packing - all carried out with power operated plant and specialised machinery. Applying the decisive functional test, the Tribunal held that the end product (dal) is commercially different and identified by buyers and sellers as distinct from the raw whole pulses; therefore production of dal qualifies as manufacture. The Court applied a liberal approach to statutory incentives and reviewed precedent authorities both for and against manufacturing character; in juxtaposition with the facts and processes before it, the weight of authority and the nature of processing led to the conclusion that a new and distinct commercial end product comes into existence. The Revenue neither controverted the factual parity with the earlier favourable order nor produced binding judicial authority to distinguish the present facts; consequently the Commissioner (Appeals) order deleting the addition was affirmed. [Paras 6, 9]The assessee's activity of making dal from whole pulses is manufacturing; the deduction under section 80IB(3)(ii) is allowable and the Revenue's appeal is dismissed.Final Conclusion: The Tribunal affirmed the CIT(A)'s deletion of the disallowance and dismissed the Revenue's appeal for AY 2006-07, holding that conversion of whole pulses into dal by the processes described amounts to manufacture and entitles the assessee to deduction under section 80IB(3)(ii). Issues Involved:1. Whether making of dal from chana, toor, and masur is a manufacturing activity.2. Entitlement to deduction u/s 80IB(3)(ii) of the I.T. Act.Summary:Issue 1: Manufacturing ActivityThe primary issue was whether the process of making dal from chana, toor, and masur constitutes a manufacturing activity. The Revenue argued that no new item, article, or thing comes into existence, thus no manufacturing is involved. Conversely, the assessee claimed that the process involves a specialized procedure with the aid of machinery, resulting in a commercially new and distinct product. The Tribunal, referencing its earlier order dated 2.3.2011, detailed the manufacturing process, including mixing, grading, watering, drying, de-husking, splitting, sorting, polishing, and packaging. The Tribunal concluded that the end product, dal, is commercially different from the raw material, thus constituting a manufacturing activity.Issue 2: Deduction u/s 80IB(3)(ii)The Tribunal examined whether the assessee is entitled to deduction u/s 80IB(3)(ii) of the I.T. Act. The assessee, a registered SSI Unit, claimed this deduction as a small-scale undertaking. The Assessing Officer had denied the deduction, arguing that no manufacturing was involved. However, the Commissioner of Income Tax (Appeals) decided in favor of the assessee. The Tribunal upheld this decision, citing various judicial pronouncements, including the Hon'ble Apex Court's decisions in cases like India Cine Agencies vs. CIT and CIT vs. Oracle Software India Limited, which supported the view that the process undertaken by the assessee qualifies as manufacturing. Consequently, the Tribunal affirmed that the assessee is entitled to the deduction u/s 80IB(3)(ii) of the Act.Conclusion:The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision that the assessee is entitled to the deduction u/s 80IB(3)(ii) of the I.T. Act, as the process of making dal from chana, toor, and masur constitutes a manufacturing activity.