TaxTMI 
TaxTMI 
2009 (12) TMI 649
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.... 3. The assessee carries on the business of assembling diesel generating sets at its various units, including the unit under reference located at Daman. For the assessment year under consideration, as in the earlier assessment year, it claimed deduction under section 80-IA of the Income-tax Act (hereinafter referred to as "the Act") in the sum of Rs. 1,80,57,561 in respect of profit derived from the Daman unit. The Assessing Officer dis- allowed the deduction on the ground that the activity of assembling gensets from various components did not amount to manufacture or pro- duction of any articles or thing. For taking this view, the Assessing Officer placed reliance on the detailed discussion as contained in the assessment order for the assessment year 1995-96 passed in the assessee's own case. 4. The assessee went in appeal before the Commissioner of Income-tax (Appeals) and it contended that diesel generating set is an item of plant and machinery required by business for meeting their power requirements. The assessee-company assembles DG sets of different kinds up to 1500 KVA range. Several components go into the making of a diesel generating set some of the major compo....
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....e function of the battery is to provide the initial current required to start the engine. The function of the silencer is to diminish the sound of the DG set when it runs. The function of the radiator is to maintain the temperature of the DG set. The above compo- nents constitute the inputs in the manufacture of a diesel generating set. The DG set is the final product which has a distinctive name, character and function different from each of the components. 6. On the aforesaid, the Commissioner of Income-tax (Appeals) held that the activity of the assessee amounts to manufacture. For this purpose, the Commissioner of Income-tax (Appeals) also relied upon earlier orders passed by the Income-tax Appellate Tribunal (hereinafter referred to as "the Tribunal") in respect of the assessee itself. The Tribunal has affirmed this finding. 7. In so far as operation/activity undertaken by the assessee is concerned, which is described in detail above, it is a finding of fact which has been arrived at and it cannot be disputed. Such an activity would amount to manufacture. When we apply the principles laid down in various judg- ments explaining what amounts to "manufacture activity....
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....ed, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manu- facture can be said to take place." 15. Adverting to facts of the present case, the assessee after plucking or receiving the raw coffee berries makes it undergo nine processes to give it the shape of coffee beans. The net product is absolutely different and separate from the input. The change made in the article results in a new and different article which is recognized in the trade as a new and distinct commodity. The coffee beans have an independent identity distinct from raw material from which it was manufactured. A distinct change comes about in the finished pro- duct.' 7. When we apply the aforesaid principle on the facts of the present case, the irrefutable conclusion would be that the respondent company is indulging in manufacturing activity. We, thus, answer the question formulated in favour of the assessee and uphold the view of the Tribunal on this aspect." 8. This q....
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....enefit received had to be credited against the cost of manufacture of goods/purchases debited to the profit and loss account. That, such credit was not an independent source of profit. In this connection, reliance has been placed on Accounting Standard 2 issued by the ICAI on 'valuation of inventories' which indicates that while determining the cost of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition should be considered and that trade discounts, rebates, duty drawback and such other similar items have to be deducted in determining the cost of purchase. Placing reliance on AS-2, it was submitted that where excise duty paid was subsequently recoverable by way of drawback, the same would not form part of the manufac- turing cost. It was submitted on behalf of the appellant(s) that payment of excise duty/customs duty on inputs consumed in manu- facture of goods by an industrial undertaking eligible for deduction under section 80-IB, was inextricably linked to the manufacturing operations of the eligible undertaking without which manufacturing operations cannot be undertaken, hence the duty, which was paid in the ....
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....of duty drawback/DEPB. In this connection, reliance was placed on the judgment of the Gujarat High Court in the case of CIT v. India Gelatine and Chemicals Ltd. reported in [2005] 275 ITR 284. Lastly, it was submitted on behalf of the appellant(s) that there was no difference between the Advance Licence Scheme and the duty drawback/DEPB. In this connection, it was urged that duty drawback regime required the industrial undertaking to pay in the first instance the duty on inputs and there- after seek reimbursement on profit of goods manufactured using such duty paid inputs, having been exported. The industrial undertaking alternatively could avail of the Advance Licence Scheme whereunder the industrial undertaking could import inputs to be used for manufacture of goods meant for export without payment of duty. In the case where the industrial undertaking enjoyed the benefit of the Advance Licence Scheme, the profit as shown in the profit and loss account was regarded as income derived from the industrial under- taking entitled to deduction under section 80-IB of the 1961 Act with- out any adjustment whereas when the same industrial undertaking when it opts for duty drawback is denie....
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....ived from business. Following are the discussions on the subject from the said judgment (pages 86 and 87) : "Precisely, this very issue came up for consideration before the Gujarat High Court in the case of Nirma Industries Ltd. v. Deputy CIT [2006] 283 ITR 402. That was also a case where interest was received by the assessee from the debtors for late payment of the sale proceeds and the question was as to whether this interest can be treated as the income derived from the business for the purpose of section 80-I of the Act. Answering the question in favour of the asses- see, the Gujarat High Court relied upon the judgment of the apex court in the case of CIT v. Govinda Choudhury and Sons [1993] 203 ITR 881 in which case the Supreme Court had held that interest was of the same nature as other trading receipts in the following manner page 884)) : 'The assessee is a contractor. His business is to enter into con- tracts. In the course of the execution of these contracts, he has also to face disputes with the State Government and he has also to reckon with delays in payment of amounts that are due to him. If the amounts are not paid at the proper time and interest i....
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.... Thus, in prin- ciple, in reality, the transaction remains the same and there is no dis- tinction as to the source. It is incorrect to state that the source for interest is the outstanding sale proceeds. Thus, according to the Gujarat High Court, when interest is paid on delayed payment, it can be treated as higher sale price which is converse situation to offering of cash discount because the transaction remains the same and there is no distinction as to the source. Look- ing from this angle, the interest becomes part of the hire sale price and is clearly derived from the sales made and is not divorced there- from. It is, thus, the direct result of the sale of goods and the income is derived from the business of industrial undertaking. The same view is expressed by various other High Courts in the following judgments : (i) Phatela Cotgin Industries (P) Ltd. v. CIT [2008] 303 ITR 411 (P&H) ; (ii) CIT v. Flender Macneill Gears Ltd. [1984] 150 ITR 83 (Cal) ; (iii) Tata Sponge Iron Ltd. v. CIT [2007] 292 ITR 175 (Orissa) ; and (iv) CIT v. Indo Matsushita Carbon Co. Ltd. [2006] 286 ITR 201 (Mad) ; There is no reason to depart from....
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....he purpose of tax. 19. The Commissioner of Income-tax (Appeals) affirmed this finding of the Assessing Officer in the following words : "4.2 I have considered the matter. As per the facts stated on behalf of the assessee, it is not a case of unclaimed balances remaining out- standing for a long period of time and appropriated for want of claim by the creditors. It is on the contrary as the case where advances have been expressly forfeited by the assessee on account of the alleged breach of contract on the part of the intending purchasers. The intending purchasers have been demanding the refund of their money, and some of them have also filed suits for recovery against the assessee. However, the assessee has taken the stand that the con- cerned parties were themselves in default of contracts for sale, and were, therefore, not entitled to the refunds. The assessee has written off and appropriated their advances with the express intention of not refunding the same. The argument taken by the assessee before the Department - namely, that it had no right under the contracts of sale to effect the forfeiture-is contrary to its own stand visa vis (vis-a-vis sic.) the concerned par....
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....ection 80-IA in respect of the said income. The order of the Commissioner of Income-tax (Appeals) is reversed and the claim of the assessee is allowed." 22. The Tribunal followed the reasoning given in paragraph 3.1.3 of the order. In that paragraph, the Tribunal has held that deduction under section 80-IA of the Act will be allowable in respect of any income inci- dental or attributable to the business of the undertaking, which is clearly erroneous in view of the Liberty. In the process, the Tribunal did not even consider the argument of the Revenue justifying the order of the Com- missioner of Income-tax (Appeals) on the basis of the judgment of the Supreme Court in the case of T. V. Sundaram Iyengar and Sons Ltd. [1996] 222 ITR 344. 23. After having considered the matter, we are of the view that the order of the Assessing Officer as upheld by the Commissioner of Income-tax (Appeals) on this aspect is correct in law. Having regard to the aforesaid judgment of the Supreme Court, the amount was to be treated as trading receipt and, therefore, it has to be added as income of the assessee. The transferring of this amount to the capital reserve account unilaterally....