2008 (2) TMI 313 - HC - Income Tax

AO passed an order of assessment disallowing claim under Section 80HH and 80-I and 80-IA on the ground that the activity of processing is not an industrial activity tribunal allowed assessee s appeal holding that texturing and twisting of partially oriented yarn (POY) amounts to manufacture order of tribunal is justified because in impugned process original commodity loses its identify assessee is entitled to special deduction u/s 80-IA

Issues Involved:
1. Whether twisting and texturising of POY amounts to manufacturing or production of a distinct article, thereby qualifying for deduction under Section 80IA of the Income Tax Act.
2. Whether the Tribunal was correct in holding that the view taken by the Assessing Officer in earlier years cannot be changed in subsequent years, thereby importing the maxim of res judicata in income-tax proceedings.

Detailed Analysis:

Issue 1: Twisting and Texturising of POY as Manufacturing or Production
The primary question was whether twisting and texturising of Partially Oriented Yarn (POY) amounts to manufacturing or production of a distinct article. The court referred to the case of Commissioner of Income Tax vs. Bipinali Textiles Pvt. Ltd., which relied on a Central Board of Direct Taxes (CBDT) Circular stating that twisting and crimping of yarn are considered manufacturing activities. The court noted that these instructions are binding on the Department.

The appellants argued that there is a distinction between "process" and "manufacture" or "production." They contended that if the processed item retains its substantial identity, it cannot be considered as manufactured. They cited several judgments, including Indian Hotels Co. Ltd. vs. C.I.T., D. D. Shah & Brothers vs. Union of India, and CIT vs. M/s. Tara Agencies, to support their argument.

The court examined the nature of POY and its transformation through twisting and texturising. Expert opinions and various publications were considered to determine the physical and chemical changes in the yarn. The court found that POY, after undergoing twisting and texturising, results in a product with different physical and chemical properties, recognized in the trade as distinct from the original commodity. This transformation was deemed to constitute manufacturing, as the original commodity loses its identity.

The court also referred to the Aspinwall & Co. Ltd. vs. Commissioner of Income Tax case, which stated that manufacturing involves producing articles with new forms, qualities, or combinations. Similarly, in Deputy Commissioner of Sales Tax vs. M/s. Pio Food Packers, the court held that manufacturing occurs when the original commodity is transformed into a new and distinct article.

The court concluded that the process of texturising and twisting POY results in a new and distinct product, thus qualifying as manufacturing under Section 80IA of the Income Tax Act. The view taken by the Tribunal was upheld.

Issue 2: Application of Res Judicata in Income-Tax Proceedings
The second question was whether the Tribunal was correct in holding that the view taken by the Assessing Officer in earlier years cannot be changed in subsequent years, thereby importing the maxim of res judicata in income-tax proceedings. The court noted that the Tribunal did not explicitly address the issue of res judicata. Given the resolution of the first issue, the court found no reason to answer the second question, deeming it academic and unnecessary for the appeal.

Conclusion:
The court concluded that the process of twisting and texturising POY amounts to manufacturing, thereby entitling the assessee to deductions under Section 80IA of the Income Tax Act. The appeal was dismissed, and the Tribunal's view was upheld. The second issue regarding res judicata was not addressed, as it was considered academic in light of the resolution of the first issue.

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