2007 (5) TMI 132 - HC - Income Tax

Deduction AO contended that assessee is not entitle for deduction u/s 80-IB on the ground that as there is no qualitative change in the marble slabs and also not amounting to manufacture Held that AO was not correct and allowed deduction

Issues Involved:
1. Interpretation of the expression 'production' under Section 80IA/80IB of the Income Tax Act, 1961.
2. Determination if cutting and polishing marble blocks into slabs and tiles constitutes 'production' for Section 80IA/80IB purposes.
3. Eligibility of the assessee for deduction under Section 80IA/80IB of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Interpretation of the Expression 'Production' under Section 80IA/80IB:
The court examined whether the terms 'manufacture' and 'production' under Sections 80IA/80IB are synonymous or if 'production' has a broader meaning. It was established that 'production' has a wider connotation than 'manufacture'. The court referenced various judicial pronouncements, including CIT vs. N.C. Budharaja and Co. [1993] 204 ITR 412, which clarified that while all manufacturing activities result in production, not all production activities qualify as manufacturing.

2. Cutting and Polishing Marble Blocks into Slabs and Tiles:
The court considered whether the activity of converting marble blocks into slabs and tiles constitutes 'production'. The court noted that marble blocks in their raw form are not usable and must be processed to become marketable. The court referenced several cases, including CIT vs. Mysore Minerals Ltd. [2001] 250 ITR 725, where the Karnataka High Court held that converting granite blocks into slabs and sizes and polishing them constitutes manufacturing. This decision was affirmed by the Supreme Court in CIT vs. Sesa Goa Ltd. [2004] 271 ITR 331, which held that the extraction and processing of iron ore amounts to 'production'.

The court also noted that under the Income Tax Rules, 1962, marble and granite industries are classified under the manufacturing industry sector, reinforcing the view that such activities constitute manufacturing.

3. Eligibility of the Assessee for Deduction under Section 80IA/80IB:
The court examined the facts of the case, where the assessee was engaged in sawing marble blocks into slabs and tiles and marketing them. The Assessing Officer and Commissioner of Income-Tax (Appeals) had denied the deduction under Section 80IA, stating that the activity did not amount to manufacturing. However, the Tribunal's Vice Chairman, relying on the Supreme Court's decision in Lucky Minmat (P) Ltd. vs. CIT [2000] 245 ITR 830, concluded that the activity did not constitute manufacturing or production.

The court, however, disagreed with the Tribunal's majority view, emphasizing that the interpretation of terms under different statutes should not be automatically imported. The court highlighted that the legislative intent under the Income Tax Act and Rules framed thereunder considers the cutting and polishing of marble blocks as manufacturing activities. The court also referenced the Central Board of Direct Taxes' Circular No. 729, which supports the view that processing granite makes it a marketable commodity.

Conclusion:
The court concluded that the conversion of marble blocks into slabs and tiles amounts to manufacturing or production within the meaning of Section 80IA/80IB of the Income Tax Act. The appeals were allowed, and it was held that the appellant is entitled to claim deductions under these sections. The court's decision was based on the principle that if a process makes a raw material usable and marketable, it constitutes manufacturing or production.

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