2005 (12) TMI 525 - HC - Income Tax

Industrial undertaking engaged in the manufacture and production of bread was entitled to the benefit of deduction under section 80-IB of the Act - Claim of deduction u/s 1OB allowed.

Summary

Issues Involved:
1. Eligibility for deduction under section 80-IB of the Income-tax Act.
2. Classification of the assessee's activity as manufacturing or processing.
3. Determination of the assessee's unit as an industrial undertaking.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80-IB:
The core issue was whether the respondent-assessee was entitled to deduction under section 80-IB of the Income-tax Act. The assessee, engaged in the preparation of bread, claimed this deduction on the grounds that it was manufacturing a new product by converting raw materials such as maida, sugar, yeast, and oil into bread. The Assessing Officer (AO) disallowed the deduction, referencing the Supreme Court judgment in Indian Hotels Co. Ltd. v. ITO, concluding that the assessee did not qualify for the deduction as it was not manufacturing or producing any article or thing, but merely processing food.

2. Classification of the Assessee's Activity as Manufacturing or Processing:
The AO and the Commissioner of Income-tax (Appeals) [CIT(A)] both held that the assessee's activity was processing, not manufacturing. They relied on the Supreme Court's interpretation in Indian Hotels Co. Ltd.'s case, which distinguished between manufacturing and processing. However, the Income-tax Appellate Tribunal (ITAT) reversed these orders, distinguishing the case from Indian Hotels Co. Ltd. The ITAT concluded that the assessee was manufacturing bread, a new and distinct commodity with a distinct name, character, and use, thus qualifying as an industrial undertaking under section 80-IB.

3. Determination of the Assessee's Unit as an Industrial Undertaking:
The court examined whether the assessee's unit was an industrial undertaking. The unit was registered with the Directorate of Industries, held a power licence, and was situated in an industrial area with more than ten workers. The court noted that the term "industrial undertaking" includes any entity engaged in the manufacture or processing of goods. Given the registration and the nature of the activities, the court concluded that the assessee's unit was indeed an industrial undertaking.

Analysis by the Court:
The court analyzed the definition and interpretation of "manufacture" and "industrial undertaking" as provided in various judgments, including CIT v. N.C. Budharaja & Co. and Kores India Ltd. v. CCE. The court observed that the process of converting raw materials into bread involved several mechanical steps, transforming the raw materials into a new product with different properties. This transformation met the criteria for manufacturing, as established by the Supreme Court.

The court also differentiated the present case from Indian Hotels Co. Ltd., noting that the latter involved a flight kitchen ancillary to a hotel business, which was primarily a trading activity. In contrast, the assessee in the present case was engaged in a manufacturing activity, producing a new commodity (bread) from raw materials.

Conclusion:
The court held that the respondent-assessee was an industrial undertaking engaged in the manufacture and production of bread, thus entitled to the deduction under section 80-IB of the Income-tax Act. The appeal by the revenue was dismissed, and the order passed by the ITAT on 25th April 2005 was affirmed.