2014 (9) TMI 261 - AT - Income Tax

Claim of deduction u/s 80IC disallowed Cutting and polishing amounts to manufacture/production or not Held that - In Aspin Wall & Co. Ltd. v/s CIT 2001 (9) TMI 3 - SUPREME Court it has been held that in the absence of a definition of the word manufacture it has to be given a meaning as it is understood in common parlance - the production of article for use from raw material or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour or machines - If the change made in the article results in a new and different articles, then it would amount to manufacturing activities - going by the new definition of manufacture as envisaged in section 2(29BA), the process of transformation of rough diamond into polished diamond, results into a new and distinct or article having different name and use - the entire process of transformation in this case can be held as manufacturing within the ambit of section 80IC. what is required to be examined is the process undertaken for conversion of raw / rough diamonds into superior or polished diamond - the assessee has duly placed on record the entire process and the stages through which the rough diamond undergoes for becoming the polished diamond, which is a separate and distinct product and has a different usage - Such a process has neither been rebutted by the Revenue nor any other counter opinion have been sought to contradict the assessee s version of the process - once the entire process of cutting and polishing of diamond have not been rebutted and also the fact that the rough and polished diamond are two distinct commodity having different usage, not only in the common parlance but also in real sense, then it has to be understood that the cutting and polishing of diamond amounts to manufacturing or production of article or thing as envisaged for the purpose of claiming deduction u/s 80IC - the order of the CIT(A) is set aside and assessee s claim for deduction u/s 80IC is allowed Decided in favour of assessee.

Issues Involved:
1. Disallowance of the claim of deduction under section 80IC of the Income Tax Act, 1961.
2. Whether the process of cutting and polishing diamonds amounts to manufacturing or production of an article or thing.
3. Applicability of the Supreme Court decision in Gem India Mfg. Co. to the present case.
4. Consistency in allowing deductions in subsequent years based on earlier years.
5. Charging of interest under sections 234B and 234D.

Detailed Analysis:

1. Disallowance of the Claim of Deduction under Section 80IC:
The assessee challenged the disallowance of the deduction claim under section 80IC amounting to Rs. 18,41,14,136 against the claimed amount of Rs. 19,27,51,144. The primary ground for disallowance was that cutting and polishing diamonds do not constitute manufacturing or production of an "article" or "thing."

2. Whether Cutting and Polishing Diamonds Amounts to Manufacturing:
The assessee, engaged in cutting and polishing diamonds and trading in jewelry, claimed that the process involves multiple stages requiring specialized skills, resulting in a distinct product (polished diamonds) from the raw material (rough diamonds). The detailed processes included planning, cleaving or sawing, bruting, and polishing. The assessee argued that the rough and polished diamonds have different uses, purposes, and market values, thus constituting manufacturing. The Tribunal noted that the processes described by the assessee were not rebutted by the Revenue and that the conversion of rough diamonds into polished diamonds results in a new and distinct product.

3. Applicability of the Supreme Court Decision in Gem India Mfg. Co.:
The Assessing Officer and the learned Commissioner (Appeals) relied heavily on the Supreme Court decision in Gem India Mfg. Co., which held that cutting and polishing diamonds do not amount to manufacturing. However, the Tribunal distinguished the present case, noting that the Supreme Court decision in Gem India was based on the absence of material evidence demonstrating the manufacturing process. The Tribunal referred to the Supreme Court's later decision in Heaven Diamonds Pvt. Ltd., which clarified that the process undertaken must be examined to determine if it constitutes manufacturing. The Tribunal found that the detailed processes provided by the assessee demonstrated that cutting and polishing diamonds do amount to manufacturing.

4. Consistency in Allowing Deductions in Subsequent Years:
The assessee argued that the deduction under section 80IC had been allowed in the previous assessment year (2007-08) and should be consistently allowed in subsequent years. The Tribunal, however, decided the case on merits and did not express an opinion on this argument, focusing instead on whether the process constituted manufacturing.

5. Charging of Interest under Sections 234B and 234D:
The issue of charging interest under sections 234B and 234D was admitted by both parties to be consequential. The Tribunal directed the Assessing Officer to give consequential effect while recomputing the assessee's income based on the Tribunal's findings.

Conclusion:
The Tribunal allowed the assessee's appeals for the assessment years 2008-09 and 2009-10, concluding that the process of cutting and polishing diamonds constitutes manufacturing or production of an article or thing under section 80IC. The Tribunal set aside the disallowance of the deduction and directed the Assessing Officer to recompute the income accordingly. The Tribunal also directed that the charging of interest under sections 234B and 234D be consequentially adjusted.

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