2011 (3) TMI 1044 - AT - Income Tax

Deduction u/s 80-IA - Survey - Assessing Officer doubted all the documents filed before him on one pretext or the other and concluded that assessee had not done any manufacturing activity in the Daman factory - copies of SSI certificate, factory license, certificate of sales tax registration and pollution certificate issued by various departments clearly show that manufacturing operations were being carried on by the assessee. Copy of the inspection report of the ESI Corporation also proves the case - Similarly, registration under SSI, registration of Sales tax Department for pollution control, inspection by ESI Corporation, will not take place without any manufacturing Whether cutting and polishing of diamonds would constitute manufacturing activity or not - IOn the case of ncome Tax Officer, Udaipur Versus M/s Arihant Tiles & Marbles (P) Ltd (2009 -TMI - 35072 - SUPREME COURT) wherein it was held that the word manufacture and the word production have received extensive judicial attention both under the Income Tax as well as under the Central Excise and the Sales Tax laws that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emergence of a new and distinct commodity - Held that assessee was engaged in the business of manufacture of cutting and polishing of rough diamonds and, accordingly, eligible for deduction under section 80-IA - Decided in favor of the assessee

Issues Involved:
1. Rejection of claim for deduction under section 80-IA.
2. Determination of whether cutting and polishing of diamonds constitutes manufacturing or production.

Issue-wise Detailed Analysis:

1. Rejection of claim for deduction under section 80-IA:

The primary dispute in the appeals was the rejection of the claim for deduction under section 80-IA. A survey under section 133A conducted on 24-3-1999 led the Assessing Officer (AO) to believe that the claim was bogus. Notices under sections 148 and 143(2) were issued for assessment years 1996-97, 1997-98, and 1998-99, respectively. During the survey, the Managing Director, Shri V.T. Shah, could not provide details about the factory operations, leading the AO to question the legitimacy of the manufacturing activities. Various documents were submitted by the assessee, including photos of workers, factory inspection letters, and bank statements, but the AO doubted their authenticity, stating they did not conclusively prove manufacturing activities.

The AO dismissed the documents on various grounds, such as the absence of workers during the survey, low electricity consumption, and lack of concrete evidence of manufacturing activities. The AO also questioned the nature of the activity, arguing that cutting and polishing of diamonds did not constitute manufacturing, relying on the Tribunal's decision in Pink Star v. Dy. CIT and the Bombay High Court's decision in CIT v. London Star Diamond Co. (I.) Ltd.

The CIT(A) upheld the AO's decision, citing the Supreme Court's ruling in CIT v. Gem India Manufacturing, which held that cutting and polishing diamonds did not constitute manufacturing or production of an article or thing.

Before the Tribunal, the assessee argued that the survey took place after the factory had closed, and the AO improperly dismissed the documents. The Tribunal found merit in the assessee's submissions, noting that the factory closure and the death of Shri Yadav, who managed the factory, explained the lack of immediate information during the survey. The Tribunal held that the documents collectively indicated that manufacturing activities had indeed taken place at the Daman factory.

2. Determination of whether cutting and polishing of diamonds constitutes manufacturing or production:

The Tribunal examined whether cutting and polishing diamonds could be considered manufacturing. The assessee argued that the Supreme Court's decision in CIT v. Gem India Manufacturing was context-specific and that subsequent rulings, such as ITO v. Arihant Tiles & Marbles (P.) Ltd., supported the view that such activities could constitute manufacturing. The Tribunal considered the detailed processes involved in transforming rough diamonds into polished diamonds, noting that the final product was significantly different from the raw material.

The Tribunal referred to various Supreme Court decisions, including Vijay Ship Breaking Corpn. v. CIT and CIT v. Empee-Poly Yarn (P.) Ltd., which expanded the definition of manufacturing to include activities that produced new and distinct commodities. The Tribunal also noted that Explanation 4 to section 10A, which includes cutting and polishing of precious stones as manufacturing, though specific to section 10A, provided a useful reference in the absence of a definition in section 80-IA.

The Tribunal concluded that the assessee's activities constituted manufacturing, drawing parallels with the Supreme Court's decision in Arihant Tiles & Marbles (P.) Ltd., which recognized the transformation of marble blocks into polished slabs as manufacturing. The Tribunal held that cutting and polishing diamonds resulted in a new and distinct product, thus qualifying for deduction under section 80-IA.

Conclusion:

The Tribunal allowed the assessee's appeals, setting aside the CIT(A)'s order and directing the AO to allow the deduction under section 80-IA, recognizing both the legitimacy of the manufacturing activities and the classification of cutting and polishing diamonds as manufacturing.

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