Assessee denied deduction under section 80-I for non-manufacturing activity.

The Tribunal upheld the CIT's order under section 263, concluding that the activity carried on by the assessee did not amount to manufacture. Therefore, the assessee was not entitled to deduction under section 80-I of the Income-tax Act, 1961, and the appeal was dismissed.

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Issues Involved:
1. Whether the activity carried on by the assessee amounts to manufacture to entitle it for deduction under section 80-I of the Income-tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Whether the activity carried on by the assessee amounts to manufacture to entitle it for deduction under section 80-I of the Income-tax Act, 1961:

The assessee, a dealer in tendu leaves, claimed deduction under section 80-I in the revised return, which was initially allowed by the Assessing Officer. The CIT, upon examining the case, issued a show cause notice under section 263, questioning the validity of the deduction as the activity did not amount to manufacture or production. The assessee argued that the term 'manufacture' was not defined in the Income-tax Act and relied on various Supreme Court decisions under Sales-tax legislations to support their claim. The process described by the assessee involved several steps, including pruning, plucking, drying, and packing the tendu leaves to make them suitable for bidi manufacturing.

The CIT rejected the assessee's submissions, stating that no new commodity emerged from the process, and thus, it did not qualify as manufacturing. The CIT relied on various judicial precedents, including Mohanlal Vishram v. CST, Delhi Cold Storage (P.) Ltd v. CIT, JB. Advani & Co. (P.) Ltd. v. CIT, and Koshy's (P.) Ltd. v. CIT, to support his conclusion. The CIT held that the order of the Assessing Officer was erroneous and prejudicial to the interest of Revenue, directing the withdrawal of the relief granted under section 80-I.

The assessee appealed to the Tribunal, arguing that the final product was a different commodity as green leaves could not be used for making bidis, whereas the processed leaves could. The assessee cited the Tribunal Nagpur Bench's decision in Jayeshkumar Ambubhai Patel and distinguished contrary High Court decisions on the basis of different sections being interpreted.

The Tribunal considered rival submissions and referred to the Supreme Court's leading judgment in Union of India v. Delhi Cloth and General Mills Co. Ltd., which differentiated between 'process' and 'manufacture.' The Tribunal concluded that the process carried on by the assessee did not amount to manufacture as the final product retained substantial identity as tendu leaves throughout the process. The Tribunal also referred to the Supreme Court's judgment in CST v. D.S. Bist, where similar processing of green tea leaves into dry leaves was held not to amount to manufacture. Further, the Tribunal cited Madhya Pradesh High Court's decision in Natwarlal v. Union of India and Patna High Court's decision in North Koel Kendu Leaves and Mahulam Leaves, which held that similar activities did not amount to processing.

The Tribunal upheld the CIT's order under section 263, concluding that the activity carried on by the assessee did not amount to manufacture, and thus, the assessee was not entitled to deduction under section 80-I. Consequently, the appeal of the assessee was dismissed.

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