AI Drafter 
TaxTMI 
TaxTMI 
2014 (12) TMI 132
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd exporting of cut and polished diamonds. The assessee, thus claimed a deduction u/s 80JJAA at Rs. 31,36,181/-. This deduction was denied by the AO and later by the CIT(A), following the decision rendered by the Hon'ble Supreme Court in the case of CIT vs Gem India Manufacturing Co., reported in 249 ITR 307 (SC), wherein it was held that cutting and polishing of diamonds does not amount to manufacture or production of article and that it is only processing. On denial of deduction claimed by the assessee, the AO proceeded to levy the penalty u/s 271(1)(c). 4. In the penalty proceedings as well, the AO placed reliance on the case of Gem India (supra) and held that as per the ratio laid down by the Hon'ble Supreme Court, the assessee was not entitled for the deduction, as the wrong claim of deduction which was not available to the assessee, amounted to furnishing of inaccurate particulars. 5. In the appeal before the CIT(A), the assessee retreated its bona fides, but the CIT(A) sustained the observation of the AO with regard to furnishing of inaccurate particulars of income and, he, therefore sustained the levy of penalty. 6. Aggrieved, the assessee is now before the ITAT. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... diamonds are not the same thing as polished and cut diamonds. The two are different entities in the commercial world. Though the chemical composition remains the same the physical characteristics of shape and class, etc., are substantially different". It would appear that no material had been placed on the record before the Tribunal upon which it could have reached the conclusion that, either in common or commercial parlance, raw diamonds were not the same thing as polished and cut diamonds, and that they were different entities in the commercial world. An ipse dixit of the Tribunal is not best foundation for a decision." On the above facts, it was held by the Apex Court as under: "There can be little difficulty in holding the raw and uncut diamond is subjected to a process of cutting and polish which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. There is no material on record upon which such a conclusion can be reached." Thus, from the above, it is clear that the Hon'ble Supreme Court has held that cutting and polishing of uncut diamonds would not result in manufac....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... blocks into slabs. In the present case, we are also concerned with the activity of polishing and ultimate conversion of blocks into polished slabs and tiles. What we find from the process indicated hereinabove is that there are various stages through which the blocks have to go through before they become polished slabs and tiles. In the circumstances, we are of the view that on the facts of the cases in hand, there is certainly an activity which will come in the category of "manufacture" or "production" under section 80-IA of the Income-tax Act. As stated hereinabove, the judgment of this court in Aman Marble Industries P. Ltd. [2003] 157 ELT 393 (SC) was not required to construe the word "production" in addition to the word "manufacture". One has to examine the scheme of the Act also while deciding the question as to whether the activity constitutes manufacture or production. Therefore, looking to the nature of the activity stepwise, we are of the view that the subject activity certainly constitutes "manufacture or production" in terms of section 80-IA. In this connection, our view is also fortified by the following judgments of this court which have been fairly pointed out to us....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f a dam to store water (reservoir) can be characterized as amounting to manufacturing or producing an article. It was held that the word "manufacture" and the word "production" have received extensive judicial attention both under the Income-tax as well as under the Central excise and the sales tax laws. The test for determining whether "manufacture" can be said to have taken place is whether the commodity, which is subjected to a process can no longer be regarded as the original commodity but is recognized in trade as a new and distinct commodity. The word "production", when used in juxtaposition with the word "manufacture", takes in bringing into existence new goods by a process which may or may not amount to manufacture. The word "production" takes in all the bye-products, intermediate products and residual products which emerge in the course of manufacture of goods. Applying the above tests laid down by this court in N.C. Budharaja's case [1993] 204 ITR 412 (SC) to the facts of the present cases, we are of the view that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emergence of a new and distinct commodity. T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he appeal on quantum additions if were to file. Therefore, the attaining finality on the quantum additions against the assessee is no issue for confirming the penalties. As such there exists dispute on the debatable nature of the said provisions. As per the judgment of the Hon'ble Supreme Court in the case of CIT vs. Reliance Petroproducts Pvt. Ltd. (322 ITR 158), it is a settled law that no penalty should be levied when the issue is a debatable one and when the claim is wrongly made in the return of income. Considering the settled nature of the issue, CIT(A) has rightly deleted the penalty made by the AO u/s 271(1)(c) of the Act and it does not call for any interference. Accordingly, grounds raised by the Revenue in all the remaining four appeals are dismissed". 10. Likewise, the AR has referred to other decisions, which we have taken note of and pleaded that penalty was not leviable, thus needs to be deleted. 11. The DR on the other hand strongly defended the orders of the revenue authorities and submitted that at the time when the assessee filed its return, only Gem India (supra) was available and since the assessee went against the ratio laid down by the Hon'ble Supreme C....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a (supra), held that the assessee was not engaged in any activity of manufacture or production of article and since the business of the assessee was cutting and polishing of diamonds, it could not amount to manufacture or production, as per the decision of the Hon'ble Supreme Court of India in Gem India (supra). The AO, on this analogy, held that the deduction as claimed cannot be allowed, since there was no manufacture or production of any article by the undertaking. On the other hand, when the deduction was claimed, i.e. in assessment year 2005-06, Explanation 4 to section 10A w.e.f. 01.04.2004, was already in the statute book, which read as, "For the purposes of this section, "manufacture or produce" shall include the cutting and polishing of precious and semiprecious stones". 15. The fact that the Finance Act, 2003 inserted Explanation 4 in section 10A of the Act w.e.f. 01.04.2004, the assessee was under bona fide belief that the said definition can be extended for claiming deduction u/s 80JJAA of the Act as well, as the business of the assessee was cutting and polishing of rough diamonds. Accordingly, the AR submitted that the assessee made the impugned claim, having a bona....