2008 (9) TMI 405 - AT - Income Tax

Assessee Granted Manufacturing Deduction, Denied Interest Income; Tribunal Emphasizes Transformative Nature

The Tribunal partially allowed the appeals by granting the deduction under Section 80-IB for manufacturing activities but denying the deduction for ... Manufacture Or Production Issues Involved:1. Eligibility for deduction under Section 80-IB for manufacturing activities.2. Compliance with the conditions stipulated under Section 80-IB.3. Adequacy of machinery and manpower.4. Consumption of power and its adequacy.5. Payment of Central Excise Duty and its impact on the manufacturing status.6. Interest income and its qualification for deduction under Section 80-IB.Detailed Analysis:1. Eligibility for Deduction under Section 80-IB for Manufacturing Activities:The primary issue was whether the assessee's activities qualified as 'manufacturing' for the purpose of claiming deductions under Section 80-IB. The assessee argued that their process of converting raw herbs into herbal heena powder and other products involved significant transformation and resulted in a commercially new product. The Revenue contended that the activities were mere processing, not manufacturing. The Tribunal concluded that the end-product was commercially different from the raw materials, thus qualifying as manufacturing. This conclusion was supported by various judicial precedents, such as CIT vs. Sawyer's Asia Ltd. and CIT vs. Harit Synthetic Fabrics (P) Ltd.2. Compliance with Conditions Stipulated under Section 80-IB:The Revenue argued that the assessee did not comply with the conditions under Section 80-IB, such as the employment of a minimum number of workers and the adequacy of machinery. The Tribunal found that the assessee employed 13 workers, exceeding the minimum requirement of 10 workers. The Tribunal also noted that the assessee's activities involved systematic processes using various machinery, thus fulfilling the conditions of Section 80-IB.3. Adequacy of Machinery and Manpower:The Revenue questioned the adequacy of the machinery and manpower used by the assessee, citing the high profits as suspicious. The Tribunal reviewed the list of machinery and found that the assessee had installed several machines before and after August 2002, which supported substantial manufacturing activities. The Tribunal dismissed the Revenue's suspicion, stating that the assessee's machinery and manpower were sufficient for the claimed production and sales.4. Consumption of Power and Its Adequacy:The Revenue argued that the power consumption was inadequate for the claimed production levels. The Tribunal noted that the area where the assessee operated supplied electricity at a cheaper rate to promote industries. The Tribunal found no evidence of illegal electricity consumption and suggested that the machinery might be energy-efficient. The Tribunal concluded that the power consumption was not a decisive factor in determining the manufacturing status.5. Payment of Central Excise Duty and Its Impact on Manufacturing Status:The Revenue argued that the lack of Central Excise Duty payment indicated that the assessee's activities did not qualify as manufacturing. The Tribunal clarified that certain goods and new units in industrially backward areas were exempt from Central Excise Duty. The Tribunal emphasized that the issue was whether the assessee's activities amounted to manufacturing, regardless of excise duty payment. The Tribunal concluded that the exemption from excise duty did not disqualify the assessee from claiming deductions under Section 80-IB.6. Interest Income and Its Qualification for Deduction under Section 80-IB:The assessee claimed that interest income from security deposits for obtaining VAT numbers should be considered incidental to manufacturing and eligible for deduction under Section 80-IB. The Tribunal disagreed, citing the Supreme Court's decision in CIT vs. Sterling Foods, which held that such income was not 'derived from' the industrial undertaking. Consequently, the Tribunal denied the deduction for interest income.Conclusion:The Tribunal allowed the appeals in part, granting the deduction under Section 80-IB for the manufacturing activities but denying the deduction for interest income. The Tribunal emphasized that the assessee's activities constituted manufacturing, fulfilling the conditions stipulated under Section 80-IB, and dismissed the Revenue's objections regarding machinery adequacy, power consumption, and excise duty payment.