2006 (6) TMI 60 - HC - Income Tax

Assessee satisfies the test of manufacture as he is producing new material (namely cracker) & also satisfies the test of industrial undertaking as he is involved in systematic activity so assessee is entitled to special deductions u/s 80HH & 80I even if he is working on jobwork basis

Issues Involved:
1. Whether the assessee is a manufacturer.
2. Whether the assessee satisfies the ingredients of an industrial undertaking to claim the benefit of Sections 80HH and 80-I.
3. Whether the assessee loses the character of manufacturer merely because it has engaged coolies under a labour contract to produce the end product, viz., crackers, and for having obtained raw materials from Sri Kaleeswari Fire Works, who pays the duty.
4. Whether the payment of duty by Sri Kaleeswari Fire Works will disentitle the assessee to claim the benefit of Sections 80HH and 80-I of the Act.

Detailed Analysis:

1. Whether the assessee is a manufacturer:
The assessee is engaged in the business of fireworks on a job work basis for labour charges, using raw materials supplied by Sri Kaleeswari Fire Works. The assessing officer disallowed the claim for deduction under sections 80HH and 80-I, arguing that the assessee is merely a labour contractor, not an industrial undertaking. However, the Commissioner of Income-tax (Appeals) and the Tribunal held that the assessee qualifies as a manufacturer. The court referred to the Gujarat High Court's decision in CIT v. Prabhudas Kishordas Tobacco Products, which stated that the test is whether the outside agency works directly under the supervision and control of the assessee. The court concluded that the assessee is a manufacturer as it produces a new product, crackers, from the raw materials provided.

2. Whether the assessee satisfies the ingredients of an industrial undertaking to claim the benefit of Sections 80HH and 80-I:
Sections 80HH and 80-I of the Income-tax Act require an industrial undertaking to employ ten or more workers in a manufacturing process carried on with the aid of power, or twenty or more workers without power. The court noted that the assessee engaged 200 labourers to produce crackers, thus meeting the criteria for an industrial undertaking. The court also referred to the decision in Kadarkarai's case, which held that engaging labourers under a labour contract does not disqualify an entity from being considered an industrial undertaking.

3. Whether the assessee loses the character of manufacturer merely because it has engaged coolies under a labour contract to produce the end product, viz., crackers, and for having obtained raw materials from Sri Kaleeswari Fire Works, who pays the duty:
The court held that the assessee does not lose the character of a manufacturer merely because it engages labourers under a labour contract or uses raw materials supplied by another entity. The court emphasized that the end product, crackers, is a distinct product from the raw materials, satisfying the criteria for manufacturing. The decision in Hindustan Poles Corporation v. Commissioner of Central Excise was cited, which states that manufacture involves bringing into existence a new substance known to the market.

4. Whether the payment of duty by Sri Kaleeswari Fire Works will disentitle the assessee to claim the benefit of Sections 80HH and 80-I of the Act:
The court concluded that the payment of duty by Sri Kaleeswari Fire Works does not disentitle the assessee from claiming the benefits under Sections 80HH and 80-I. The court reasoned that the assessee, by producing the new product (crackers) and employing 200 labourers, meets the requirements of being both a manufacturer and an industrial undertaking. The court dismissed the Revenue's contention that the assessee is not entitled to the benefits due to the payment of duty by another entity.

Conclusion:
The court affirmed that the assessee is a manufacturer and an industrial undertaking eligible for the benefits of Sections 80HH and 80-I of the Income-tax Act. The appeals by the Revenue were dismissed, and the question of law was answered in the affirmative, against the Revenue.

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