2017 (11) TMI 580 - HC - Income Tax

Rectification of mistake u/s 154 - order passed by his predecessor u/s 263 requires to be amended - whether the activity done by the petitioner amounts to manufacture? - Held that - With regard to the first issue, the matter has now been settled in various decisions and one of the decisions being that of the High Court of Gujarat in Commissioner of Income Tax -vs- Alfa Lamination 2009 (3) TMI 73 - GUJARAT HIGH COURT as held after completion of all the processes, CRGO/CRNO coils get converted into transformer core which is the end product which can be used in mfg. of transformer - Tribunal while recording majority opinion & giving due credence to the opinion of the technical experts of the field, is right in holding that assessee is engaged in manufacturing article and is entitled to deduction u/s 80IB. First issue framed for consideration has to be answered in favour of the assessee and it has to be held that the proposal to rectify the so called error in the order dated 20.01.2006 is not tenable Whether the power under Section 154 of the Act could be exercised, after the Commissioner has considered the matter by passing an order under Section 263 of the Act? - As pointed out earlier, the petitioner s predecessor in office had done a thorough exercise and passed the order under Section 263 of the Act dated 20.01.2006, after conducting an inspection of the petitioner s factory and being satisfied that the activity done by the petitioner amounts to manufacture. Unfortunately, the successor in Office namely the second respondent while issuing the impugned notice did not even state as to what is the mistake which is apparent from the record. Thus, it can be safely concluded that the present attempt of the second respondent was to undo what his predecessor has done, which has been clearly held to be impermissible in the case of Festo Elgi Private Limited 1998 (9) TMI 13 - MADRAS High Court . Thus, following the said decision the Issue No.2 is also answered favourable of the assessee.

Summary

Issues:
1. Whether the activity done by the petitioner amounts to manufacture.
2. Whether the second respondent was justified in issuing a notice under Section 154 of the Income Tax Act after a detailed order was passed by his predecessor under Section 263 of the Act.

Issue 1: Activity Amounting to Manufacture
The court considered whether the petitioner's activity amounted to manufacture. Referring to various decisions, including one from the High Court of Gujarat, the court emphasized that the determination of whether an activity constitutes manufacture is fact-specific. The court highlighted that the process should result in a new and distinct article with its own identity and market. The court cited the requirement that the raw material must undergo a process that transforms it into a different end-product. It was noted that the nature and extent of the process may vary, but the final product should not retain the identity of the raw material. The court also mentioned that the Division Bench of the High Court of Gujarat decision on this matter was affirmed by the Supreme Court.

Issue 2: Justification for Notice under Section 154
The court examined whether the second respondent was justified in issuing a notice under Section 154 after the predecessor had passed an order under Section 263 of the Act. The court referred to a decision involving Festo Elgi Private Limited, where it was observed that a successor cannot undo what the predecessor had done merely based on considering themselves abler. The court noted that the predecessor had conducted a thorough inspection and concluded that the petitioner's activity amounted to manufacture. The successor, however, did not specify the apparent mistake in the impugned notice. The court held that the successor's attempt to undo the predecessor's decision was impermissible, following the Festo Elgi Private Limited case. Consequently, the court ruled in favor of the assessee, quashing the impugned notice.

In conclusion, the High Court of Madras addressed the issues of whether the petitioner's activity constituted manufacture and the justification for the notice under Section 154. The court ruled in favor of the assessee on both issues, emphasizing the importance of factual analysis in determining manufacturing activities and highlighting the limitations on successors to undo their predecessors' decisions without valid justification.