2002 (10) TMI 40 - HC - Income Tax

1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in not granting deduction under section 32A of the Income-tax Act, 1961, for the assessment year 1986-87 and deduction under section 80-I for the assessment year 1987-88 ? - The assessee is only trading in photographic colour papers as a wholesaler and slit the already manufactured and produced photographic paper into required sizes to suit the requirement of its customers and in easily marketable sizes. Therefore, the slitting of the bigger roll into marketable smaller rolls or sizes is an integral part of the trading activity of the assessee. - In view of the above discussion with particular reference to the activity carried on by the assessee, and in the light of the decisions above referred to, we are of the considered view that on the facts and circumstances of this case, the assessee cannot be regarded as being engaged in the business of manufacture or production of an article or thing. The question is answered in favour of the Revenue and against the assessee.

Issues Involved:

1. Whether the assessee is entitled to deduction under section 32A of the Income-tax Act, 1961, for the assessment year 1986-87.
2. Whether the assessee is entitled to deduction under section 80-I of the Income-tax Act, 1961, for the assessment year 1987-88.

Detailed Analysis:

1. Entitlement to Deduction under Section 32A for Assessment Year 1986-87:

The assessee, a dealer in photographic color papers, imported these in jumbo rolls and subsequently cut them into smaller rolls and sheets using a slitting machine in a controlled environment. The assessee claimed that this activity amounted to manufacturing and processing, thereby qualifying for investment allowance under section 32A of the Income-tax Act. However, the Assessing Officer rejected this claim, stating that cutting or slitting jumbo rolls did not constitute manufacturing or production of an article.

Upon appeal, the Commissioner of Income-tax (Appeals) accepted the assessee's contention and directed the allowance of the investment for the assessment year 1986-87. The Revenue then appealed to the Tribunal, which upheld the Assessing Officer's decision, leading to the present reference.

The court examined whether the activity of cutting jumbo rolls into smaller sizes could be considered manufacturing or production. The court referred to the definitions and judicial interpretations of "manufacture" and "production," noting that these terms imply bringing a new and distinct commodity into existence. Citing precedents, the court emphasized that merely changing the size of an existing product does not constitute manufacturing or production.

In this case, the court concluded that the assessee's activity did not result in a new product but merely resized the existing photographic color paper. Therefore, it did not qualify as manufacturing or production, and the assessee was not entitled to the investment allowance under section 32A.

2. Entitlement to Deduction under Section 80-I for Assessment Year 1987-88:

For the assessment year 1987-88, the assessee claimed a deduction under section 80-I, arguing that the activity of cutting jumbo rolls into smaller sizes amounted to manufacturing or production, thus qualifying for the deduction. The Assessing Officer denied this claim, and the Tribunal upheld the decision, leading to the present reference.

The court reiterated its analysis from the section 32A discussion, emphasizing that the activity of cutting jumbo rolls into smaller sizes did not constitute manufacturing or production. The court referred to relevant case law, including CIT v. Gem India Manufacturing Company, where it was held that cutting and polishing diamonds did not result in a new article or thing. Similarly, in the present case, the court found that the smaller rolls and sheets of photographic color paper were not new products but merely resized versions of the original jumbo rolls.

Therefore, the court concluded that the assessee's activity did not qualify as manufacturing or production, and the assessee was not entitled to the deduction under section 80-I for the assessment year 1987-88.

Conclusion:

The court held that the assessee's activities of cutting jumbo rolls into smaller sizes did not amount to manufacturing or production. Consequently, the assessee was not entitled to the investment allowance under section 32A for the assessment year 1986-87 or the deduction under section 80-I for the assessment year 1987-88. The question was answered in favor of the Revenue and against the assessee.

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