2010 (4) TMI 810 - AT - Income Tax

Whether conversion of printed aluminium sheets into pilferage proof caps, is a process which can be called a manufacturing activity - Job worker - Heated Aluminium sheets and toughened through coating of varnish so that the printed matter remained permanent - Assessee further processed on printed aluminium sheets and the end is pilferage proof caps - AO denied exemption under 80-IB as the process didnt amount to manufacture. - Held that -The raw material used which was printed aluminium sheet, were through such processes converted to pilferage proof caps which was an entirely different product, having different commercial use than from the printed aluminium sheet. The aluminium sheet as such cannot serve the purpose of closing a bottle in a pilfer proof manner.The Apex Court in the case of India Cine Agencies v. CIT (2008 -TMI - 31532) has clearly held that even conversion of jumbo rolls of photographic films into small flats and rolls would amount to manufacture or production. - Decided in favor of assessee. Disallowance u/s 40(1)(ia) - shartfall in deduction of tax at source - held that - The disallowance contemplated under section 40(a)(ia) is where tax has not been deducted or where, after deduction, it is not paid. Whether such disallowance can be done even when deduction has been effected but at a rate lower than the prescribed one has not been looked into by the learned Commissioner of Income-tax (Appeals). The view of the learned Commissioner of Income-tax (Appeals) that the exercise is futile is not correct since it will have ramifications in future years, when allowances are claimed by the assessee after remitting the short fall. - matter remanded back to CIT(A)

Summary

Issues:
1. Whether the conversion of printed aluminum sheets into pilferage proof caps constitutes a manufacturing activity for deduction under section 80-IB of the Income-tax Act, 1961.
2. Disallowance under section 40(a)(ia) of the Act regarding the deduction of tax at source.

Analysis:

Issue 1: Conversion of printed aluminum sheets into pilferage proof caps as manufacturing activity
- The appeals by the Revenue involved the common issue of determining whether the conversion of printed aluminum sheets into pilferage proof caps qualifies as a manufacturing activity for claiming deduction under section 80-IB of the Income-tax Act, 1961.
- The Assessing Officer initially contended that the process did not amount to manufacturing but was merely a change in the form of the commodity, relying on previous judgments.
- The assessees argued that the process involved in converting the printed aluminum sheets into pilferage proof caps constituted manufacturing, presenting detailed steps involved in the process.
- The learned Commissioner of Income-tax (Appeals) ruled in favor of the assessees, acknowledging the manufacturing nature of the process.
- Upon further appeal, the Departmental representative challenged the decision, citing previous court rulings to support their argument against considering the process as manufacturing.
- The authorized representative supported the decision of the learned Commissioner of Income-tax (Appeals).
- The Tribunal examined the processes carried out by the assessees and concluded that the conversion of printed aluminum sheets into pilferage proof caps resulted in a distinct and different product, qualifying as manufacturing. The Tribunal disagreed with the Revenue's reliance on previous court judgments and upheld the decision of the learned Commissioner of Income-tax (Appeals).

Issue 2: Disallowance under section 40(a)(ia) of the Act
- The second issue arose in the case of Diplomat Enterprises regarding the disallowance under section 40(a)(ia) of the Act.
- The assessee had made a suo motu disallowance due to a shortfall in tax deduction, which was adjusted by the Assessing Officer proportionately.
- The learned Commissioner of Income-tax (Appeals) reinstated the disallowance made by the assessee, deeming the adjustment by the Assessing Officer unnecessary.
- Upon appeal, the Departmental representative contested the decision, while the authorized representative supported the reinstatement of the disallowance.
- The Tribunal observed that the rationale behind the reinstatement by the learned Commissioner of Income-tax (Appeals) was flawed, as it did not consider the implications of the disallowance in future years when the shortfall in tax deduction was rectified.
- The Tribunal concluded that the matter was not adequately adjudicated and remitted it back to the learned Commissioner of Income-tax (Appeals) for proper consideration and decision in accordance with the law.

In conclusion, the Tribunal dismissed the appeal of the Revenue in one case and partly allowed it in another for statistical purposes, providing detailed analysis and reasoning for each issue involved in the judgment.