2021 (1) TMI 167 - HC - Income Tax

High Court rules blending of oils as manufacturing, rejects SEZ Act override, admits deductions appeal.

The High Court dismissed the Revenue's appeal on the eligibility of manufacturing and trading activities for exemption under Section 10AA, citing the ... Eligibility for exemption under section 10AA - Whether assessee is engaged in manufacturing activity? - Whether the Appellate Tribunal has erred in holding that the SEZ Act, 2005 override the Income Tax Act ignoring that the taxation of such SEZs is decided wholly and solely by Income-tax Act and that SEZ Act does not have any bearing on the same? - HELD THAT:- The essence of manufacture is the change of one object to another for the purpose of making it marketable. As held by the Supreme Court in India Cine Agencies (2008 (11) TMI 15 - SUPREME COURT) that the essential point is that, in manufacture, something is brought into existence which is different from that which originally existed, in the sense that the thing produced is, by itself, a commercially different commodity, whereas in the case of processing, it is not necessary to produce a commercially different article. It is the cumulative effect of the various processes, to which, the raw material is subjected to that the manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. We are not inclined to admit this tax appeal on the first two proposed questions of law. This appeal stands dismissed so far as the question Nos.2(A) and (B) are concerned. However, we clarify that Question No.2(A) also raises the issue with regard to the trading activities of the assessee. Although both the authorities below have held in favour of the assessee on this ground, yet we do not propose to go into the question of “trading activities” and keep this question open for being considered in any other appropriate case. Disallowance u/s 14A - sufficiency of own funds - HELD THAT:- Substantial question of law in view of the decision of this High Court in the case of Commissioner of Income Tax-I vs. UTI Bank Ltd. [2013 (8) TMI 238 - GUJARAT HIGH COURT]. The ratio of this decision is that if there are sufficient interest free funds to meet the tax free investments, they are presumed to be made from the interest free funds and not the loaned fund and no disallowance can be made under Section 14A. Tax appeal is admitted on the following two substantial questions of law; “(C) Whether the Appellate Tribunal has erred in law in holding that the assessee is eligible for deduction with respect to income on account of currency fluctuation, interest income and that it is entitled to deduction under Section 10AA? (D) Whether the Appellate Tribunal has erred in law and in holding that the assessee's claim of loss shall increase the deduction under Section 10AA by ignoring that the documentary evidences have not been furnished and that assessee's eligibility under Section 10AA has been challenged?” Issues Involved:1. Eligibility of the assessee's manufacturing and trading activities for exemption under Section 10AA of the Income Tax Act.2. Whether the SEZ Act, 2005 overrides the Income Tax Act concerning taxation of SEZs.3. Eligibility for deduction on account of currency fluctuation and interest income under Section 10AA.4. Increase in deduction under Section 10AA due to the assessee's claim of loss.5. Deletion of disallowance made under Section 36(1)(ii) based on the utilization of own funds.Detailed Analysis:Issue 1: Eligibility of Manufacturing and Trading Activities for Exemption under Section 10AAThe Revenue questioned whether the Appellate Tribunal erred in holding that the assessee is engaged in manufacturing activity and that its trading activities are eligible for exemption under Section 10AA. The assessee, a Private Limited Company dealing in petroleum products, claimed deductions under Section 10AA for activities conducted in the SEZ. The CIT (A) and the Tribunal upheld the assessee's claim, recognizing the blending of oils as a manufacturing activity. The Tribunal noted that blending different grades of oil resulted in a new product with distinct specifications, thus qualifying as manufacturing under the SEZ Act. The High Court referred to the Supreme Court's decision in India Cine Agencies, emphasizing that manufacturing involves transforming an article into a commercially different commodity. Consequently, the High Court dismissed the Revenue's appeal on this issue, affirming the concurrent findings of the lower authorities.Issue 2: SEZ Act vs. Income Tax ActThe Revenue contended that the SEZ Act does not override the Income Tax Act regarding the taxation of SEZs. However, the High Court did not find this argument substantial enough to constitute a question of law. The Court reiterated that the definition of manufacturing under the SEZ Act is applicable for claiming benefits under Section 10AA, thus dismissing the Revenue's appeal on this ground.Issue 3: Deduction on Account of Currency Fluctuation and Interest IncomeThe Revenue challenged the Tribunal's decision to allow the assessee deductions related to currency fluctuation and interest income under Section 10AA. The High Court admitted this issue as a substantial question of law, indicating the need for further examination.Issue 4: Increase in Deduction Due to Assessee's Claim of LossThe Revenue argued that the Tribunal erred in increasing the deduction under Section 10AA based on the assessee's claim of loss, citing insufficient documentary evidence. The High Court admitted this issue as a substantial question of law, acknowledging the need for detailed scrutiny.Issue 5: Deletion of Disallowance under Section 36(1)(ii)The Revenue questioned the deletion of a disallowance made under Section 36(1)(ii), arguing that it was based on an inference rather than facts. The High Court referred to its previous decision in Commissioner of Income Tax-I vs. UTI Bank Ltd., which established that if there are sufficient interest-free funds to cover tax-free investments, they are presumed to be made from those funds. Consequently, the High Court dismissed the Revenue's appeal on this issue.Conclusion:The High Court dismissed the Revenue's appeal concerning the first two questions related to Section 10AA and the SEZ Act, as well as the fifth question regarding disallowance under Section 36(1)(ii). However, it admitted the appeal on the third and fourth questions concerning deductions related to currency fluctuation, interest income, and the assessee's claim of loss, recognizing these as substantial questions of law requiring further consideration.