2005 (7) TMI 543 - AT - Income Tax

Summary

Issues Involved:
1. Grant of deduction under section 80-IA of the Income-tax Act.
2. Treatment of Rs. 6,05,000 as agricultural income.

Issue-wise Detailed Analysis:

1. Grant of Deduction under Section 80-IA:

The primary issue pertains to whether the income of Rs. 43,99,494 from M/s. Time Industries qualifies for deduction under section 80-IA of the Income-tax Act. The Assessing Officer (AO) scrutinized the accounts and observed that the machinery deployed by M/s. Time Industries was minimal and the profits seemed disproportionately high for the first year of operations. The AO noted that the concern was primarily involved in cutting larger sheets of paper into smaller sizes, which did not amount to "manufacturing" as per the conditions laid down in section 80-IA(2)(iii). The AO also found that the concern did not employ the requisite number of workers as mandated by section 80-IA(2)(v).

The assessee contended that the process involved cutting, graining, embossing, and printing, which transformed the paper into a new product. The CIT(A) accepted the assessee's claim, stating that the activities amounted to manufacturing and that the concern employed the requisite number of workers.

Upon appeal, the Tribunal referred to the judgment of the Hon'ble Jurisdictional High Court in CIT v. Sterling Foods, which clarified that for a process to be considered manufacturing, the end product must be a new and distinct commodity. The Tribunal concluded that cutting paper into smaller sizes did not result in a new product and thus did not qualify as manufacturing. Furthermore, the Tribunal found that the assessee did not employ the requisite number of workers, as the inclusion of a sweeper in the count was not justified. Consequently, the Tribunal disallowed the deduction under section 80-IA.

2. Treatment of Rs. 6,05,000 as Agricultural Income:

The second issue revolves around whether the receipts of Rs. 6,05,000 should be treated as agricultural income. The assessee claimed a net agricultural income of Rs. 3 lakhs, supported by Proforma 7/12 from the Gujarat Government, which detailed the ownership and cultivation of land.

The AO directed the assessee to provide detailed evidence of agricultural production and expenses, which the assessee failed to submit. Consequently, the AO treated the income as from other sources.

The CIT(A) accepted the assessee's claim without providing any substantial reasoning. Upon further appeal, the Tribunal reviewed the evidence and found it insufficient to substantiate the claim of Rs. 3 lakhs as net agricultural income. The Tribunal noted that the assessee's small landholding and reliance on laborers made it improbable to generate such income. The Tribunal set aside the CIT(A)'s order and remanded the issue to the AO for fresh adjudication, allowing the assessee to produce additional evidence.

Conclusion:

The Tribunal concluded that the assessee was not entitled to the deduction under section 80-IA due to the failure to demonstrate manufacturing activities and the requisite employment of workers. Additionally, the Tribunal remanded the issue of agricultural income back to the AO for further examination. The appeal of the revenue was partly allowed in alignment with the Tribunal's previous decision in ITA No. 287/Mum./2002.