1991 (9) TMI 104 - AT - Income Tax

Refining waste oil not manufacturing: ITAT rules against investment allowance

Crystal Oil (Private) Limited. Versus Income-Tax Officer.

Crystal Oil (Private) Limited. Versus Income-Tax Officer. - ITD 040, 015, Issues:1. Whether the refining of waste lubricating oil by the assessee amounts to manufacturing a new marketable product.2. Whether the investment allowance granted to the assessee was erroneous and prejudicial to the interest of the Revenue.3. Whether the assessee's activity qualifies as manufacturing under the Income-tax Act, 1961.Analysis:1. The assessee contended that their refining process transformed waste oil into an efficient lubricant through various stages like dehydration, acid treatment, filtration, and blending, using specific machinery. However, the CIT disagreed, emphasizing that the operation's effect on the commodity, not the manual or mechanical force applied, determines manufacturing. The CIT held that the process did not create a new product with a different chemical composition but merely removed impurities, making it a purifying process rather than manufacturing.2. The CIT initiated action under section 263 of the Income-tax Act, 1961, considering the investment allowance granted to the assessee as prejudicial to the Revenue's interest. The CIT's decision was based on the interpretation that the refining process did not amount to manufacturing, thus questioning the eligibility for investment allowance.3. The ITAT, while considering the appeal, reviewed various legal precedents cited by both parties. The ITAT highlighted the distinction between manufacturing and processing, emphasizing that manufacturing involves creating a new product with a different identity, while processing involves altering the shape or size of raw materials. The ITAT referenced judgments like Jayant Oil Mills (P.) Ltd. and Kalsi Tyre (P.) Ltd., where the Supreme Court clarified that manufacturing must result in a new identifiable product known in the market.4. The ITAT rejected the assessee's argument that their refining process qualified as manufacturing, citing that the process mainly removed impurities from waste oil to make it usable again. The ITAT concluded that the process did not meet the legal requirements for manufacturing, as it did not transform the waste oil into a new identifiable product. Additionally, the ITAT dismissed the relevance of the assessee's registration with the Director of Small Scale Industries in determining manufacturing activity.5. Ultimately, the ITAT upheld the CIT's decision, dismissing the appeal and affirming that the refining process undertaken by the assessee did not amount to manufacturing. The ITAT reasoned that the process did not change the identity, use, or purpose of the waste oil substantially, making it a purifying process rather than manufacturing, thus denying the investment allowance and supporting the Revenue's interest.