2005 (4) TMI 249 - AT - Income Tax

Appellant's Bread-Making Deemed Manufacturing, Qualifies for Tax Deduction

The Tribunal held that the appellant's bread-making activity constitutes manufacturing, entitling them to a deduction under section 80-IB of the ... Deduction Issues Involved:1. Entitlement to deduction under section 80-IB of the Income-tax Act.2. Classification of the appellant's activity as manufacturing or processing.3. Applicability of judicial precedents cited by the Assessing Officer and CIT(A).Detailed Analysis:1. Entitlement to Deduction under Section 80-IB of the Income-tax Act:The primary issue is whether the appellant is entitled to a deduction of Rs. 16,06,870 under section 80-IB. The appellant claimed this deduction on the grounds that their activity of making bread qualifies as manufacturing. The Assessing Officer and the CIT(A) rejected this claim, holding that the appellant's activity does not constitute manufacturing but rather food processing, which does not qualify for the deduction under section 80-IB.2. Classification of the Appellant's Activity as Manufacturing or Processing:The appellant argued that their activity involves a mechanized process transforming raw materials (maida, sugar, oil, yeast) into bread, which is a distinct commodity. The appellant detailed nine manufacturing steps, including mixing, dividing, rounding, proving, molding, fermenting, baking, cooling, and slicing, to demonstrate that they are engaged in manufacturing. The CIT(A) and the Assessing Officer, however, relied on the Supreme Court's decision in Indian Hotels Co. Ltd. and the Madras High Court's decision in P. Devasahayam, concluding that the appellant's activity is mere food processing and not manufacturing.3. Applicability of Judicial Precedents Cited by the Assessing Officer and CIT(A):The CIT(A) and the Assessing Officer cited the Supreme Court decision in Indian Hotels Co. Ltd. and the Madras High Court decision in P. Devasahayam to support their conclusion. In Indian Hotels Co. Ltd., the Supreme Court held that foodstuff prepared by cooking or any other process from raw materials cannot be regarded as a commercially distinct commodity and does not amount to manufacturing. Similarly, in P. Devasahayam, the Madras High Court held that preparing biscuits and sweets is incidental to trading and does not constitute manufacturing. The appellant contended that these cases are distinguishable as they pertain to trading activities, whereas the appellant is engaged in a purely manufacturing process.Tribunal's Findings:On Entitlement to Deduction under Section 80-IB:The Tribunal observed that the appellant satisfies the conditions laid down under section 80-IB, including being registered with the Directorate of Industries, holding a power license, and employing more than ten workers in the manufacturing process. The Tribunal noted that the appellant's unit is installed in an industrial area and is not formed by splitting or reconstructing an existing business.On Classification of the Appellant's Activity:The Tribunal considered the detailed manufacturing process provided by the appellant and concluded that the bread produced is a new and distinct commodity with a different name, character, and use from the raw materials. The Tribunal referred to the jurisdictional J & K High Court's decision in CIT v. Abdul Ahad Najar and the Supreme Court's decisions in N.C. Budharaja & Co. and Kores India Ltd., which support the view that transforming raw materials into a commercially distinct product constitutes manufacturing.On Applicability of Judicial Precedents:The Tribunal found the cases cited by the Assessing Officer and CIT(A) distinguishable. In Indian Hotels Co. Ltd., the activity was ancillary to the business of running a hotel, a trading activity, whereas the appellant's primary activity is manufacturing. Similarly, in P. Devasahayam, the activity was incidental to trading, unlike the appellant's case, which involves a dedicated manufacturing process.Conclusion:The Tribunal concluded that the appellant's activity of making bread constitutes manufacturing and not mere food processing. Therefore, the appellant qualifies as an industrial undertaking under section 80-IB and is entitled to the deduction claimed. The orders of the Assessing Officer and CIT(A) were set aside, and the appeal was allowed.