1990 (10) TMI 119 - AT - Income Tax

Assessee's Manufacturing Activities Qualify for Tax Relief; Tribunal Emphasizes Substance Over Technicalities

The Tribunal allowed the appeals by the assessee, determining that the assessee's activities constituted manufacturing, making them eligible for relief ... Backward Area, Carrying On Business, Industrial Company, Industrial Undertaking, Investment Allowance, Plant And Machinery, Profits And Gains Issues Involved:1. Whether the assessee was engaged in the manufacture or production of an article or thing for the purposes of sections 32A, 80HH, and 80-I.2. Whether the assessee should be treated as an industrial company for concessional tax rates under section 2(8)(c) of the Finance Act.3. Whether the assessee is entitled to a deduction of Rs. 30,000 for technical consultancy fees paid to M/s. Srirang Consultancy Services.Issue 1: Manufacture or Production of an Article or ThingThe core issue was whether the assessee's activities constituted the manufacture or production of an article or thing, which is a prerequisite for claiming relief under sections 32A, 80HH, and 80-I. The assessee processed raw tobacco into 'Jarda' or 'Jardi' through a series of mechanical and manual operations. The Tribunal examined whether these operations amounted to manufacturing.The Tribunal referenced multiple judicial precedents to determine the meaning of 'manufacture.' The Supreme Court's definition in Anwarkhan Mehboob Co. v. State of Bombay was pivotal: 'Manufacture implies a change, but every change is not manufacture; a new and different article must emerge having a distinctive name, character, or use.' The Tribunal also cited Idandas v. Anant Ramchandra Phadke, which laid down three tests for manufacturing: production of a commodity, involvement of labour or machinery, and transformation into a commercially different product.Applying these principles, the Tribunal concluded that the assessee's process of converting raw tobacco into 'Jarda' or 'Jardi' resulted in a commercially new product. Therefore, the assessee was engaged in the manufacture or production of an article or thing.Issue 2: Classification as an Industrial CompanyThe Tribunal also addressed whether the assessee qualified as an industrial company under section 2(8)(c) of the Finance Act, which would entitle it to a concessional tax rate. The definition requires the company to be engaged in the manufacture or processing of goods.Given the Tribunal's earlier conclusion that the assessee was involved in manufacturing, it followed that the assessee met the criteria for classification as an industrial company. The Tribunal also noted that even if the activities were considered processing rather than manufacturing, the assessee would still qualify for the concessional rate.Issue 3: Deduction for Technical Consultancy FeesThe third issue was the disallowance of a Rs. 30,000 deduction for technical consultancy fees paid to M/s. Srirang Consultancy Services. The Income-tax Officer disallowed the claim due to lack of evidence, and the Commissioner(A) upheld this decision on technical grounds, refusing to admit new evidence.The Tribunal criticized this approach, emphasizing that claims should not be rejected merely on technicalities. The Tribunal reversed the Commissioner(A)'s decision and remitted the issue back to the Income-tax Officer, directing him to consider the fresh evidence and make a determination on the allowability of the deduction after giving the assessee an opportunity to be heard.Conclusion:The appeals by the assessee were allowed. The Tribunal concluded that the assessee was engaged in manufacturing, thereby qualifying for relief under sections 32A, 80HH, and 80-I, and should be treated as an industrial company for concessional tax rates. The issue of the Rs. 30,000 deduction was remitted back to the Income-tax Officer for reconsideration with new evidence.