2019 (3) TMI 223 - HC - Income Tax

Deduction u/s 80HH on dipping plant - manufacturing or production activity - ITAT held that dipping of the fabric was only for the purposes of marketability and would not impact the position that the activity involved only a series of processes and not 'manufacture' or 'production' - HELD THAT - The activity of dipping is, thus, key to stabilising and heat - setting the products. It is only after such dipping and heat stabilisation that the material would be compatible for rubber adhesion in various products requiring dimensional stability. The input used is industrial fabric or yarn and what emerges after the aforesaid activity is a commercially distinct product, different from the input used. The conclusion of the Tribunal to the effect that the activity engaged is a mere process does not appear to be justified as it is seen from the explanation provided before the authorities that a series of processes are carried out resulting in the final products. Such a series of processes in itself, in our view, amounts to the activity of 'manufacture'. Referring to definition of the term 'manufacture' inserted in the Act by Finance (No.2) Act 2009, with effect from 1.4.2009 any activity that would result in the transformation or change in the character of the object or article or thing, such that a new and distinct object is brought into existence would amount to 'manufacture'. The definition statutorily enshrines one of the long settled tests of what would constitute 'manufacture'. Thus, notwithstanding that the definition itself has been inserted only with effect from 01.04.2009, the test has itself has been consistently applied by the Courts even prior thereto in determining whether an activity would amount to manufacture or not. - Decided in favour of the assessee Allowability of payment u/s 37 - Amounts paid to the Labour Welfare Association for Death Relief Fund - Assessing Authority held not sllowble in the view of Section 40A (9) - HELD THAT - Contribution made by the employer to the Death Relief Fund is also an allowable business expenditure in terms Section 37 in so far as the expenditure is incurred wholly and exclusively for the welfare of its employees and is for the purposes of the business. Similar contributions made by the assessee towards labour welfare have been accepted by the revenue and no distinguishing features have been brought out before us to persuade us to take a different view in the case of this contribution. We draw support in this regard from a decision of the jurisdictional Court in the case of Cheran Engineering Corporation (1998 (2) TMI 74 - MADRAS HIGH COURT). - Decided in favour of the assessee

Summary

Issues:
1. Deduction under Section 80HH of the Income Tax Act for a dipping plant.
2. Disallowance of contribution to a Labour Welfare Association.
3. Validity of reassessment under Section 147 of the Income Tax Act.

Issue 1: Deduction under Section 80HH for a dipping plant:
- The appellant, a manufacturing company, claimed a deduction under Section 80HH for its dipping plant.
- The Assessing Officer rejected the claim, stating the activity was 'processing' not 'manufacture'.
- The CIT (A) accepted the claim based on a precedent.
- However, the Tribunal reversed the decision, stating the activity was 'processing' and not 'manufacture'.
- The Tribunal's view was that the output was not distinct from the input.
- The High Court disagreed, citing the series of processes resulting in a commercially distinct product.
- The Court referenced a similar case involving heat treatment, where the process was deemed 'manufacture'.
- The Court concluded that the dipping plant's activity amounted to 'manufacture' and allowed the deduction.

Issue 2: Disallowance of contribution to a Labour Welfare Association:
- The appellant made contributions to various welfare funds, including a Labour Welfare Association.
- The Assessing Authority disallowed the contributions under Section 40A (9) of the Act.
- The CIT (A) allowed the claim based on a previous court decision.
- The Tribunal reversed the decision, citing Section 40A (9) as applicable.
- The High Court held that the contribution to the Death Relief Fund was a valid business expenditure.
- The Court noted that similar contributions were allowed by the revenue previously.
- Relying on a previous court decision, the Court held in favor of the appellant regarding the contribution to the Labour Welfare Association.

Issue 3: Validity of reassessment under Section 147:
- The Tribunal held the reassessment under Section 147 as valid.
- The High Court did not address this issue as it was not pressed by the Appellant.
- The Tax Case Appeals were disposed of accordingly, with no costs awarded.

This judgment from the Madras High Court involved appeals related to deduction under Section 80HH for a dipping plant and the disallowance of contributions to a Labour Welfare Association. The Court ruled in favor of the appellant, stating that the dipping plant's activity amounted to 'manufacture' and allowing the deduction. Additionally, the Court held that the contribution to the Death Relief Fund was a valid business expenditure. The issue of the validity of reassessment under Section 147 was not addressed as it was not pressed by the Appellant.