2013 (12) TMI 715 - AT - Income Tax

Cutting and polishing of rough diamonds - Manufature or not - Additional depreciation - Held that - Raw diamonds and cut and polished diamonds were different and distinct marketable commodities having different uses - Therefore, a company engaged in cutting and polishing raw diamonds for the purpose of export was engaged in the processing of goods to convert them into marketable form - The raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but the polished diamond is a new article or thing which is the result of manufacture or production - The cut and polished diamond could not be treated a new article or thing and that cutting and polishing of diamonds cannot be held manufacturing or production - Cutting and polishing of rough diamond in to polished diamond is not manufacturing or producing of a new article or thing - Decided against assessee.

Issues Involved:
1. Whether the assessee-firm is engaged in manufacturing or production of any article or thing.
2. Eligibility for additional depreciation on plant and machinery under Section 32 of the Income Tax Act.
3. Applicability of the Supreme Court's decision in CIT vs. Gem India Manufacturing (2001) 249 ITR 307.
4. Consideration of subsequent decisions and the definition of "manufacture" in Section 2(29BA) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Engagement in Manufacturing or Production:
The primary issue revolves around whether the assessee-firm, engaged in the business of cutting and polishing diamonds, qualifies as a manufacturer or producer of an article or thing. The Assessing Officer (AO) disallowed the additional depreciation claimed by the assessee, holding that cutting and polishing diamonds do not constitute manufacturing or production. This decision relied heavily on the Supreme Court's ruling in CIT vs. Gem India Manufacturing, which stated that cutting and polishing diamonds do not result in a new article or thing.

2. Eligibility for Additional Depreciation:
The assessee claimed additional depreciation of Rs. 1.16 Crores on new plant and machinery under Section 32 of the Income Tax Act. The AO disallowed this claim, asserting that additional depreciation is only allowable for manufacturing activities. The First Appellate Authority (FAA) upheld this disallowance, leading to the assessee's appeal to the ITAT.

3. Applicability of CIT vs. Gem India Manufacturing:
The AO and FAA based their disallowance on the Supreme Court's decision in CIT vs. Gem India Manufacturing, which concluded that cutting and polishing diamonds do not amount to manufacturing or production. The Tribunal noted that this decision directly addressed the issue at hand, making it binding precedent. The Tribunal emphasized that judicial discipline necessitates following a directly applicable judgment.

4. Consideration of Subsequent Decisions and Definition of "Manufacture":
The assessee argued that subsequent Supreme Court decisions in cases like Empee Poly Yarn P. Ltd., Oracle Software India Limited, and Arihant Tiles & Marbles Pvt. Ltd. should be considered. These cases involved broader interpretations of manufacturing and production. However, the Tribunal found these cases distinguishable, as they dealt with different contexts and statutory provisions, such as Section 80-IA of the Income Tax Act, rather than additional depreciation under Section 32.

The Tribunal also considered the broader definition of "manufacture" in Section 2(29BA) but concluded that the specific precedent set by CIT vs. Gem India Manufacturing remained controlling. The Tribunal noted that the activity of cutting and polishing diamonds is not subject to excise laws, unlike the activities in some of the cited cases. Therefore, the Tribunal held that the assessee's activities did not qualify as manufacturing for the purpose of additional depreciation under Section 32.

Conclusion:
The Tribunal dismissed the appeal, affirming the AO's and FAA's decisions. It held that the assessee-firm's activities of cutting and polishing diamonds do not constitute manufacturing or production of a new article or thing, and therefore, the firm is not entitled to additional depreciation under Section 32 of the Income Tax Act. The Tribunal emphasized adherence to the Supreme Court's ruling in CIT vs. Gem India Manufacturing as binding precedent.

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