2010 (9) TMI 917 - HC - Income Tax

Deduction under section 80I - assessee is carrying on the activity of manufacturing, selling and laying of mosaic tiles and the same was used for flooring for the purpose of construction of building had also entered into contract with its customers for laying the tiles using its own manpower and skills and, thereafter, for even getting it polished. Held that - As AO made distinction and took a view that polishing activity did not qualify for deduction under section 80-I for the simple reason that in the activity of laying and polishing there is no product or article produced from out of this activity and the mere fact that the assessee had a comprehensive contract with its customers by paying lump sum amount for the entire activity of laying and polishing of tiles manufactured by it. As decided in CIT v. Agrawal Brothers 1996 (5) TMI 23 - MADHYA PRADESH HIGH COURT , that section 80-I interpret the provision in favour of the Revenue to hold that an activity under the nature of contract of overhead water tanks is not an activity of manufacturing or even the activity under-taken by the assessee is an industrial undertaking. The condition required under clause (iii) of sub-section (2) of section 80-I of the Act is not definitely made in this case as the assessee has claimed deduction for the assessment year 1996-97 whereas in terms of clause (iii) the benefit of the notification is available for initial period of ten years next following March 31, 1981 - in favour of the Revenue.

Issues Involved:
1. Whether the activity of the assessee involving manufacture, sale, and laying of mosaic tiles qualifies for deduction under section 80-I of the Income-tax Act, 1961.
2. Whether the appellate authorities correctly distinguished the judgment of the Supreme Court in CIT v. N. C. Budharaja and Co. and the judgment of the Bombay High Court in Mittal Builders regarding the material utilized in construction.

Issue-wise Detailed Analysis:

1. Deduction under Section 80-I:
The core issue is whether the assessee's activities of manufacturing, selling, and laying mosaic tiles qualify for deduction under section 80-I of the Income-tax Act, 1961. The assessee, a limited company, engaged in manufacturing and selling mosaic tiles, also undertook contracts for laying and polishing these tiles. The assessee claimed deductions under section 80-I for profits attributable to both manufacturing and service activities.

The Assessing Officer (AO) allowed deductions for profits from manufacturing but denied deductions for profits from laying and polishing activities. The AO reasoned that laying and polishing do not result in a new product or article, thus not qualifying under section 80-I. The AO relied on the Supreme Court judgment in CIT v. N. C. Budharaja and Co., which held that constructing a dam using raw materials does not produce an article or thing eligible for deduction under section 80HH.

The Commissioner of Income-tax (Appeals) reversed the AO's decision, granting deductions for the entire contract value, including laying and polishing activities. The Appellate Tribunal upheld this decision without providing substantial reasoning, leading to the Revenue's appeal to the High Court.

The High Court examined the statutory provisions of section 80-I, emphasizing that the deduction is available for profits derived from manufacturing or producing an article or thing. The court found that while manufacturing tiles qualifies for deduction, the activities of laying and polishing do not result in a new product or article. The court supported the AO's view, stating that the service component of laying and polishing tiles does not meet the criteria for deduction under section 80-I.

2. Distinguishing Judgments:
The second issue involved whether the appellate authorities correctly distinguished the Supreme Court judgment in CIT v. N. C. Budharaja and Co. and the Bombay High Court judgment in Mittal Builders. The AO had relied on these judgments to deny deductions for the service activities. The Supreme Court in Budharaja's case held that constructing a dam does not produce a new article or thing, thus not qualifying for deductions under section 80HH.

The High Court noted that while section 80-I differs from section 80HH, the interpretation of "article" or "thing" in Budharaja's case is relevant. The court also referenced the Madhya Pradesh High Court decision in CIT v. Agrawal Brothers, which held that constructing overhead water tanks does not qualify as manufacturing or producing an article or thing under section 80-I.

The High Court concluded that the appellate authorities erred in distinguishing these judgments. The court affirmed that the service activities of laying and polishing tiles do not qualify for deductions under section 80-I, aligning with the interpretations in Budharaja and Agrawal Brothers.

Conclusion:
The High Court allowed the Revenue's appeal, setting aside the orders of the Tribunal and the Appellate Commissioner. The court affirmed the AO's view that the profits attributable to the service activities of laying and polishing tiles do not qualify for deductions under section 80-I of the Income-tax Act, 1961. The judgment emphasized the distinction between manufacturing activities, which produce a new article or thing, and service activities, which do not meet the criteria for deductions under the specified section.

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