2003 (2) TMI 421 - AT - Income Tax

Deductions - Profits and gains from industrial undertaking, etc., engaged in infrastructure development, etc.

Summary

Issues Involved:
1. Validity of proceedings initiated under section 263 of the Income-tax Act.
2. Whether the assessee's activity qualifies as a manufacturing process for deduction under section 80-IA of the Act.

Issue-wise Detailed Analysis:

1. Validity of Proceedings under Section 263:

The primary issue before the Tribunal was whether the proceedings initiated by the Commissioner of Income-tax (CIT) under section 263 of the Income-tax Act were in accordance with the law. The CIT issued a notice under section 263, stating that the assessment order allowing the deduction under section 80-IA was erroneous and prejudicial to the interest of the revenue. The CIT's contention was based on the payment of processing charges to an external party, M/s. Shyam Udyog, which suggested that no manufacturing activity was carried out by the assessee.

The Tribunal noted that the assessee had provided detailed information and supporting documents to the Assessing Officer (AO) during the assessment proceedings. The AO had conducted a thorough inquiry, including verifying the nature of the assessee's business, the registration of the factory, and the processes involved in converting cotton waste into yarn. The AO concluded that the assessee was engaged in manufacturing and allowed the deduction under section 80-IA.

The Tribunal referred to various judicial precedents, including CIT v. Gabriel India Ltd. and Malabar Industrial Co. Ltd. v. CIT, to emphasize that an order cannot be termed erroneous and prejudicial to the interest of the revenue merely because the CIT has a different view. The Tribunal observed that the AO had applied his mind and conducted sufficient inquiries before allowing the deduction. Therefore, the proceedings under section 263 were not justified, and the order of the CIT was quashed.

2. Qualification as a Manufacturing Process for Deduction under Section 80-IA:

The second issue was whether the assessee's activity of converting cotton waste into yarn qualified as a manufacturing process, entitling the assessee to a deduction under section 80-IA. The assessee argued that the entire process, including cleaning and opening the cotton waste and converting it into yarn, constituted manufacturing. The assessee had engaged M/s. Shyam Udyog only for cleaning and opening the cotton waste, while the subsequent processes were carried out in-house.

The Tribunal examined the details of the manufacturing process provided by the assessee, including the use of roving machines, reeling machines, and bundling machines to convert cleaned cotton waste into yarn. The Tribunal noted that the AO had considered these details and concluded that the assessee was engaged in manufacturing.

The Tribunal referred to judicial precedents, including CIT v. Oricon (P.) Ltd. and CIT v. Penwalt India Ltd., which supported the view that an assessee could still be considered a manufacturer even if part of the process was outsourced. The Tribunal concluded that the assessee's activity of converting cleaned cotton waste into yarn constituted manufacturing and that the deduction under section 80-IA was rightly allowed by the AO.

Conclusion:

The Tribunal quashed the order of the CIT, holding that the proceedings under section 263 were not justified as the AO had conducted sufficient inquiries and applied his mind before allowing the deduction under section 80-IA. The Tribunal also affirmed that the assessee's activity qualified as manufacturing, entitling the assessee to the deduction under section 80-IA. The appeal filed by the assessee was allowed.