High Court sets aside ITAT's findings on 'manufacture' without considering minimal work. Appeals partially allowed.

The High Court partially allowed the appeals, setting aside the ITAT's findings that the assessee was involved in 'manufacture' or 'production' without considering the minimal work done at Parwanoo. The cases were remanded back to the ITAT for a fresh decision in light of the observations made by the High Court.

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Issues Involved:
1. Whether the process of threading and painting of anchor rods carried out by the assessee at Parwanoo amounted to manufacture or production, and consequently whether the assessee was eligible for deduction u/s 80IC of the Income Tax Act.
2. Whether the making of anchor rods by third parties on a job work basis could be considered as part of the manufacturing operations of the assessee, especially when such job work was not carried out under the direct control and supervision of the assessee.
3. Whether the ITAT disregarded the mandate of section 80IA (10) read with section 80IC(7) of the I.T. Act and erroneously held that the entire profit declared by the assessee was allowable as deduction u/s 80IC.
4. Whether ITAT has misconstrued and misunderstood the facts on record while setting aside the clear finding that the profit had been inflated by the assessee for the purpose of deduction u/s 801C.

Issue-wise Detailed Analysis:

Questions Nos. 3 and 4:
The Assessing Officer (AO) found that the assessee declared a significant profit margin in the assessment year 2006-07, which led to the conclusion that the profits were inflated. The AO compared the assessee's sales and expenses with another entity, M/s Kay Pee Industries, and determined that the assessee had not fully debited expenses, leading to inflated profits. Consequently, certain deductions were made from the assessee's profits, including amounts for technical know-how and goodwill, leading to an assessed income from undisclosed sources. The AO also found that the threaded rods were produced by a sister concern, indicating a possible split or reconstruction of an existing business, violating Section 80IC(4)(i).

For the assessment year 2007-08, the AO denied deductions on the premise that the process did not qualify as 'manufacture' or 'production'. The CIT(A) upheld the AO's findings, but the ITAT reversed these conclusions, stating that the AO's conclusions were based on estimations without rejecting the books of accounts under Section 145. The ITAT found no legal basis for the AO's deductions and concluded that the AO's findings were based on conjectures and surmises. The High Court agreed with the ITAT, noting that the ITAT's findings were based on records and there was no rejection of the assessee's books of accounts. Questions No. 3 and 4 were thus answered in favor of the assessee.

Questions Nos. 1 and 2:
The AO did not consider the process undertaken by the assessee to be 'manufacture' or 'production' because it involved only threading and assembly, with most of the work done outside Parwanoo. The CIT(A) concurred for AY 2006-07 but reversed for AY 2007-08. The ITAT held that the process was indeed 'manufacture' and 'production'.

The High Court referred to precedents, including Aspinwall and Co. Ltd. v. Commissioner of Income Tax and Commissioner of Income Tax-V, New Delhi vs. Oracle Software India Limited, which defined 'manufacture' as a process that changes the original commodity into a new and distinct commodity. The Court noted that the process undertaken by the assessee involved multiple steps that transformed raw steel rods into foundation anchors for windmills, thus qualifying as 'manufacture'.

However, the AO had found that substantial work was outsourced to Ludhiana, and only minimal work was done at Parwanoo, which did not meet the requirements of Section 80IC. The ITAT concurred with the factual findings but still held the process to be 'manufacture'. The High Court emphasized that the term 'manufacture' or 'produce' in Section 80IC should be construed in the context of the provision's objective, which was to promote long-term investment in industrially backward areas. The Court held that the ITAT failed to consider the small quantum of work done at Parwanoo and its implications.

Conclusion:
The High Court partially allowed the appeals, setting aside the ITAT's findings that the assessee was involved in 'manufacture' or 'production' without considering the minimal work done at Parwanoo. The cases were remanded back to the ITAT for a fresh decision in light of the observations made by the High Court. All pending miscellaneous applications were also disposed of.

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