2014 (3) TMI 858 - HC - Income Tax

Claim of 100% deduction on transformer oil u/s 80IA(2)(iv)(c) of the Act - Process amounts to manufacture or not - Whether the Tribunal is legally correct in its view that the assessee s business is an industrial undertaking within the meaning of Section 80IA of the Act Held that - The assessee company performs work in the nature of business for repairing and manufacturing of transformer assessee contended that the company has been manufacturing aluminium HT/LT Leg Coils, which were used in old burnt transformers and in this regard, it had also submitted in detail before the assessing - the inclusive definition of Manufacture or Produce as enunciated and elaborated in Section 10-A and 10-B of the I.T. Act is applicable to provisions of section 80-I or section 80-IA because these words have been defined with a particular purpose or with reference to the limited/particular context i.e. free trade Zone and 100% Export Oriented Undertakings - prima-facie, there appears to be a discrimination yet this is a reasonable/discrimination because it is well within the competence of the legislature to define a word for specific purposes or object or section and not for general connotation where ever these words occur in the I.T. Act. Relying upon CIT Vs. Venkateswara Hatcheries (P) Ltd. 1999 (3) TMI 12 - SUPREME Court - the word Manufacture and produce has not been defined in section 80-IA and there is no specific mention in it that the definition of these words as given in Section 10-A and 10-B will apply to section 80-IA, the Dictionary Meaning and understanding of common parlance has been taken/construed to be the logical/reasonable meaning/interpretation/definition - by means of continuous and regular action or succession of action taking place or carried on in a definite manner and leading to the accomplishment of some result then only some benefits could be conferred in favour of the assessee. The definition of processing would not be applicable especially in the background that the transformer oil has been purchased by the assessee from market and centrifuging had been done by centrifugal machine in order to make it usable in Transformer, but in substance no new substance or articles or things has been emerged from the said processing, only some special processing or treatment had been given to transformer oil through a particular method thus, it cannot be construed that due to this transformation or activity there was change in the substance and new substance or article had come out - the assessee did not indulge in any manufacturing activities or producing any new articles or things thus, the assessee is not entitled to the benefits of 100% deduction under section 80IA (2)(iv)(c) of the Act Decided in favour of Revenue.

Summary

Issues Involved:
1. Whether the assessee's business qualifies as an industrial undertaking within the meaning of Section 80IA of the Income Tax Act, 1961.
2. Whether the assessee is legally entitled to claim deduction under Section 80IA on transformer oil.

Issue-wise Detailed Analysis:

1. Qualification as an Industrial Undertaking:
The primary issue was whether the assessee's business of repairing and manufacturing transformers qualifies as an "industrial undertaking" under Section 80IA of the Income Tax Act, 1961. The assessee argued that their activities, including the manufacturing of aluminium HT/LT Leg Coils and the processing of transformer oil, should be considered as manufacturing or production, thus qualifying them for deductions under Section 80IA.

The Commissioner of Income Tax (Appeals) supported the assessee's claim, stating that the definition of "Industrial Undertaking" under Section 80IA includes the "processing of goods." This interpretation was upheld by the Tribunal, which allowed deductions for transformer oil but denied them for scrap and labor charges related to the sale of scrap.

However, the High Court, referencing various judgments, including those from the Supreme Court, held that mere processing does not amount to manufacturing or production of new articles or things. The court emphasized that for an activity to qualify as manufacturing, it must result in a commercially new and distinct commodity. The court concluded that the assessee's activities did not meet this criterion, as centrifuging transformer oil did not produce a new substance but merely treated the existing oil.

2. Entitlement to Deduction on Transformer Oil:
The second issue was whether the assessee was entitled to claim deductions under Section 80IA for transformer oil. The Tribunal had allowed the deduction for transformer oil, considering it part of the assembly of transformers. However, it denied deductions for scrap and labor charges.

The High Court analyzed the nature of the assessee's activities and concluded that the processing of transformer oil did not result in the production of a new article or thing. The court referenced the definitions and interpretations of "manufacture" and "processing" from various legal dictionaries and judgments. It was determined that the assessee's activities constituted processing rather than manufacturing, as no new and distinct commodity emerged from the process.

The court also examined the inclusive definitions of "manufacture" and "produce" under Sections 10-A and 10-B of the Income Tax Act, which were argued by the assessee to support their claim. However, the court noted that these definitions were specific to the context of Free Trade Zones and 100% Export Oriented Undertakings and could not be applied to Section 80IA.

Conclusion:
The High Court concluded that the assessee's activities did not qualify as manufacturing or production of new articles or things. Therefore, the assessee was not entitled to the benefits of 100% deduction under Section 80IA (2)(iv)(c) of the Income Tax Act, 1961. The court set aside the Tribunal's order dated 28.05.2005 and ruled in favor of the Revenue, answering both questions of law against the assessee.