2006 (2) TMI 208 - AT - Income Tax

Tribunal upholds decision on manufacturing process, lease incomes not qualifying for deductions

PA Time Industries. Versus Deputy Commissioner Of Income-tax, Circle - Solan.

PA Time Industries. Versus Deputy Commissioner Of Income-tax, Circle - Solan. - ITD 101, 132, TTJ 103, 684, Issues Involved:1. Disallowance of deduction under section 80-IB on the manufacture of 'case sets'.2. Disallowance of deduction under section 80-IA/IB on lease rental income and miscellaneous income.3. Assessee's right to add/amend or delete any ground of appeal.Issue-wise Detailed Analysis:1. Disallowance of Deduction under Section 80-IB on the Manufacture of 'Case Sets':The primary issue is whether the process of welding glass and case to manufacture 'case sets' qualifies as a manufacturing activity eligible for deduction under section 80-IB. The assessee, engaged in manufacturing watches and components, claimed this deduction, arguing that the ultrasonic welding process resulted in a new product, a 'case set'. The Assessing Officer (AO) and CIT (Appeals) rejected this claim, stating that welding did not create a new product with distinct characteristics. The AO cited precedents from Orient Longman Ltd. v. CIT and Addl CIT v. A. Mukherjee & Co. (P.) Ltd., asserting that job work does not qualify as manufacturing for section 80-IB deductions. The CIT (Appeals) concurred, differentiating between the production of 'stator', which involves significant transformation, and 'case sets', which do not.The Tribunal upheld the CIT (Appeals)'s view, emphasizing that 'manufacture' implies substantial transformation resulting in a new product with a distinct name, character, or use. The Tribunal referenced cases like B.S. Bajaj & Sons v. CIT and Shah Scott Distilleries (P.) Ltd. v. Asstt. CIT to underline that mere assembly or minor changes do not constitute manufacturing. The Tribunal concluded that the ultrasonic welding process did not alter the fundamental nature of the glass and case, thus not qualifying as manufacturing. Consequently, the assessee's appeal on this issue was dismissed.2. Disallowance of Deduction under Section 80-IA/IB on Lease Rental Income and Miscellaneous Income:The second issue concerns the disallowance of deductions under sections 80-IA/IB on lease rental income of Rs. 90,000 and miscellaneous income of Rs. 10,258. The CIT (Appeals) held that these incomes were not derived from the industrial undertaking and thus not eligible for the deductions. The Tribunal's analysis on this issue is not detailed in the provided text, but the CIT (Appeals)'s decision was based on the principle that for income to qualify for section 80-IA/IB deductions, it must be directly derived from the primary industrial activity.3. Assessee's Right to Add/Amend or Delete Any Ground of Appeal:The third issue is a procedural matter where the assessee reserves the right to add, amend, or delete any ground of appeal before or during the hearing. This is a standard clause in appeals and does not involve substantive legal analysis.Conclusion:The Tribunal upheld the CIT (Appeals)'s decision on both primary issues. The process of welding glass and case to create 'case sets' was not considered manufacturing, thus disqualifying the assessee from section 80-IB deductions. Additionally, lease rental and miscellaneous incomes were not deemed to be derived from the industrial undertaking, thereby ineligible for section 80-IA/IB deductions. The procedural right to amend grounds of appeal was noted but not substantively addressed.