2013 (8) TMI 14 - HC - Income Tax

Deduction u/s 10B(2)(ii)(iii) - designer products - manufacturing activity for export of handicraft items of dried parts of plants - Reconstruction of business - Tribunal referring to case Aspinwall & Co. Ltd. V. CIT 2001 (9) TMI 3 - SUPREME Court - allowed deduction deduction u/s 10B(2)(ii)(iii) - Held that - process which the assessee had undertaken satisfies the test of manufacture to qualify for relief under Section 10B - apart from cleaning and grading, the assessee had taken further processing; that what is purchased as raw material and what is exported as a product for export are totally different items. The process that the assessee had undertaken clearly points out the irreversible nature of the final end product from a raw material purchased - Decided against Revenue.

Summary

Issues Involved:
1. Whether the Tribunal was right in deciding the issue of manufacture contrary to law laid down in 292 ITR 444.
2. Whether the Tribunal was right in finding "splitting up" contrary to Section 10B(2)(ii)(iii) of the Income Tax Act and 137 ITR 851.

Detailed Analysis:

Issue 1: Manufacture
The core issue is whether the activities undertaken by the assessee qualify as "manufacture" under Section 10B of the Income Tax Act. The assessee, a 100% Export Oriented Unit (EOU), claimed deductions for the export of handicraft items, primarily dried flowers and parts of plants. The Assessing Officer (AO) argued that the activities described by the assessee, such as cleaning, grading, bleaching, and packaging, did not amount to "manufacture." The AO cited the decision in 292 ITR 444 (CIT V. Tara Agencies) to support this view, emphasizing that mere processing does not constitute manufacturing.

The Commissioner of Income Tax (Appeals) and the Tribunal disagreed with the AO, referring to the Supreme Court's decision in 251 ITR 323 (Aspinwall & Co. Ltd. V. CIT), which stated that "manufacture" should be understood in common parlance. They concluded that the assessee's activities resulted in a commercially new product, thus qualifying as manufacturing. The Tribunal noted that the final products were distinct from the raw materials, involving irreversible changes, and hence, the assessee was entitled to deductions under Section 10B.

The High Court upheld the Tribunal's view, emphasizing that the process undertaken by the assessee met the criteria for "manufacture" as defined under Explanation 4 to Section 10B, which includes activities resulting in a new and distinct product. The court also distinguished the case from 292 ITR 444, noting that blending tea (as in Tara Agencies) is different from the extensive processing undertaken by the assessee.

Issue 2: Splitting Up
The second issue was whether the assessee firm was formed by splitting up or reconstructing an existing business, which would disqualify it from claiming deductions under Section 10B(2)(ii) of the Income Tax Act. The AO argued that the assessee firm and a closely held private limited company in Kolkata, which had overlapping directors, were essentially the same business split into two entities. The AO pointed out shared employees and the use of company assets by the firm to support this contention.

The Commissioner of Income Tax (Appeals) and the Tribunal found no evidence of splitting up or reconstruction. They noted that the products dealt with by the firm and the company were different, and there was no transfer of assets or business from the company to the firm. The Tribunal emphasized that the firm was constituted with capital contributions from the partners' personal funds, and the mere presence of common directors did not prove splitting up.

The High Court agreed with the lower authorities, stating that the Revenue failed to provide sufficient evidence to substantiate the claim of splitting up. The court highlighted that both entities dealt in different graded products and operated independently, with the firm focusing on high-end products and the company on low-end products. Consequently, the court confirmed the Tribunal's order, allowing the assessee to claim deductions under Section 10B.

Conclusion:
The High Court dismissed the Revenue's appeals, affirming that the assessee's activities constituted "manufacture" and rejecting the claim of splitting up. The assessee was entitled to deductions under Section 10B of the Income Tax Act for the relevant assessment years.