1990 (11) TMI 110 - HC - Income Tax

Summary

Issues involved:
1. Interpretation of whether assembly of parts in a component and of various components resulting in the formation of a tractor constitutes manufacturing for the purpose of relief under sections 80-I and 80J of the Income-tax Act, 1961.
2. Determination of whether the payment made towards the cost of raw material and finished goods is a revenue expenditure and a legitimate deduction from the income of the assessment year 1969-70.

Issue 1 - Assembly of Parts and Industrial Undertaking:
The case involved the U. P. State Agro-Industrial Corporation Ltd., which assembled tractors received in knocked down condition from Czechoslovakia. The Tribunal held that the assessee qualified as an "industrial undertaking" due to its engagement in assembling tractors. The Revenue contended that the activity did not amount to manufacturing as the assessee only assembled parts imported from Czechoslovakia. However, the Court, considering precedents and the definition of "manufacture," concluded that the activity of assembling parts into components and then into a tractor constituted manufacturing. The Court highlighted the liberal construction trend of the relevant sections and ruled in favor of the assessee.

Issue 2 - Payment towards Raw Material and Finished Goods:
The U. P. State Agro-Industrial Corporation Ltd. purchased assets from the Department of Agriculture, Government of Uttar Pradesh and subsequently paid an additional amount to the U.P. Government for these assets. The Income-tax Officer initially disallowed this amount as capital expenditure, but the Appellate Assistant Commissioner and the Tribunal deemed it as a revenue expenditure eligible for deduction. The Court agreed with the lower authorities, emphasizing that the payment was made towards the purchase of raw material and finished goods, thus qualifying as a revenue expenditure.

Conclusion:
The Court answered both questions in favor of the assessee, affirming that the assembly of parts into a tractor constituted manufacturing for the purpose of relief under sections 80-I and 80J, and the payment towards raw material and finished goods was a legitimate revenue expenditure deductible from the income of the assessment year 1969-70.