2012 (6) TMI 231 - AT - Income Tax

Revision u/s 263 - Whether CIT erred in holding that the deduction u/s. 80IA/80IB is not allowable to the Appellant Company on the ground that the unit owned by the Appellant Company does not manufacture or produce any article or thing - assessee is engaged in the business of buying different types of tea from the market, blending them in different proportions and thereafter sells the tea in the market - assessee has claimed that it is an industrial undertaking engaged in manufacturing activity and entitled for deduction u/s. 80IA/80IB of the Act Held that - assessee is engaged in the Processing activity only and there is no manufacturing activity of any kind. action of the AO in allowing the assessee s claim is erroneous and also prejudicial to the interest of revenue because income has been subjected to excessive allowance by deduction u/s. 80IA/80IB of the Act. In the absence of any specific enquiries on processing vs manufacturing of the various product of tea by blending various tea. AO failed apply his mind on the issue. order of the CIT does not call for any interference. - appeal of the assessee is dismissed

Summary

Issues Involved:
1. Invocation of provisions of section 263 of the Income Tax Act, 1961.
2. Determination of whether the activity of blending and packaging tea constitutes "manufacturing" or "processing" under section 80IA/80IB.
3. Assessment of whether the order of the Assessing Officer (AO) was erroneous and prejudicial to the interest of the Revenue.

Issue-wise Detailed Analysis:

1. Invocation of Provisions of Section 263:
The primary issue is whether the Commissioner of Income Tax (CIT) correctly invoked section 263 of the Income Tax Act, 1961. The CIT invoked section 263 on the grounds that the AO's order allowing the deduction under section 80IA/80IB was erroneous and prejudicial to the interest of the Revenue. The CIT found that the AO did not adequately investigate whether the assessee's activity of blending and packaging tea constituted "manufacturing" or "processing." The Tribunal upheld the CIT's invocation of section 263, stating that the AO's failure to apply the correct legal interpretation constituted an "incorrect assumption of law," justifying the CIT's intervention.

2. Determination of "Manufacturing" vs. "Processing":
The core of the dispute revolves around whether the assessee's activity of blending and packaging tea qualifies as "manufacturing" or merely "processing." The AO initially allowed the deduction under section 80IA/80IB, considering the activity as "manufacturing." However, the CIT, relying on various judicial precedents, including the Supreme Court's decision in Tara Agencies, concluded that blending and packaging tea is "processing" and not "manufacturing." The Tribunal agreed with the CIT, noting that the prevailing judicial interpretation at the time of the AO's order, including decisions from the Rajasthan High Court and Calcutta High Court, supported the view that blending tea is "processing" and not "manufacturing."

3. Assessment of AO's Order as Erroneous and Prejudicial:
The Tribunal examined whether the AO's order was erroneous and prejudicial to the interest of the Revenue. It was noted that the AO did not conduct a detailed inquiry into whether the assessee's activities constituted "manufacturing" under section 80IA/80IB. The Tribunal highlighted that the AO's order lacked any discussion or analysis on this critical issue. Furthermore, the Tribunal emphasized that judicial discipline requires tax authorities to adhere to the interpretations of higher courts. Since the AO's order contradicted established judicial interpretations, it was deemed erroneous. The Tribunal also affirmed that the erroneous allowance of the deduction resulted in a loss to the Revenue, fulfilling the criteria of being prejudicial to the interest of the Revenue.

Conclusion:
The Tribunal dismissed the appeal of the assessee, upholding the CIT's invocation of section 263. The Tribunal concluded that the AO's order allowing the deduction under section 80IA/80IB was based on an incorrect assumption of law and was prejudicial to the interest of the Revenue. The Tribunal's decision was grounded in the consistent judicial interpretation that blending and packaging tea constitutes "processing" rather than "manufacturing," thereby disqualifying the assessee from the claimed deductions.