2019 (9) TMI 657 - AT - Income Tax

Disallowance of deduction u/s 80IB - net profit on the trading goods of Dholpur Unit - whether repacking of trading goods after a cleaning process can be called as manufacturing? - HELD THAT - The word manufacture has been defined u/s 2(29BA) in the present appeal in case of trading goods, the purchased material is Deshee Ghee and Skimmed Milk and the material sold is also Deshee Ghee and Skimmed Milk. The only difference is that before selling, guthaie from Deshee Ghee and moisture from Skimmed Milk has been removed and they are packed in pouches and tins having brand name of company. No other processing done on trading goods before theirs sale has been explained. Therefore, purchased goods as well sold goods remained to be Deshee Ghee and Skimmed Milk in respect of trading goods and no new product has come into existence with a different chemical composition or having different name, character and use Therefore, the Deshea Ghea and Skimmed Milk sold after purchasing from the market and repacking them after removing guthale from Deshee Ghee and moisture from Skimmed milk would not amount to manufacture, if the above definition of manufacture is applied. In the present case also, for the Deshee Ghee and Skimmed Milk sold out of Desnee Ghee and Skimmed Milk purchased from the market, what was Deshee Ghee and Skimmed Milk continued to be Deshee Ghee and Skimmed Milk but with lesser quantity of guthale in Deshee Ghee and lesser quantity of moisture in Skimmed Milk and no new product has emerged from the process employed by the assessee. Since the output product is not different than the input product and the purpose for which input product can be used, arc only the purpose for which the output product can be used, the Deshee Ghee and Skimmed Milk purchased from the marked cannot be said to be sold out of manufactured Dashee Ghee and Skimmed Milk. Therefore, such sales have been shown by the assessee (appellant) to the Trade Tax Department as trading sale and hence, for such sale, the assessee (appellant) would not be entitled for deduction u/s 80IB as held by the AO in the assessment order and accordingly, the CIT(A) was justified in confirming the addition in articulative manner. Heating of the scrap bitumen in order to obtain solid bitumen, by causing moisture and oil in the scrap bitumen to evaporate or separated, cannot amount to a process of manufacturing. Similarly removing of guthale from Deshee Ghee and moisture from Skimmed Milk cannot amount to a process of manufacturing. Therefore, we appreciate the finding of the CIT(A) in holding hold that the AO is correct in his decision not allowing deduction u/s 80IB on such sale made by the assessee (appellant) out of purchased Deshee Ghee and Skimmed Milk. Since there is no dispute in respect of calculation of trading and manufacturing goods, we confirm the decision of the CIT(A)in upholding AO s disallowing net profit on trading goods of Dholpur unit while calculating deduction u/s 80IB and hence deduction u/s 80IB computed by the AO is confirmed and accordingly - Decided against assessee.

Issues Involved:
1. Disallowance of deduction under Section 80IB of the Income Tax Act.
2. Classification of activities as manufacturing or trading for tax purposes.
3. Applicability of legal precedents to the case.

Detailed Analysis:

1. Disallowance of Deduction under Section 80IB:
The primary issue revolves around the disallowance of a deduction amounting to ?62,35,937 claimed by the assessee under Section 80IB of the Income Tax Act. The Assessing Officer (AO) recomputed the deduction by excluding income from insurance, interest, rent, brokerage, and net profit from trading goods of the Dholpur Unit. The AO computed the deduction at ?1,20,99,129 against the revised deduction of ?1,46,51,327 claimed by the assessee during the assessment proceeding.

2. Classification of Activities as Manufacturing or Trading:
The assessee contended that the net profit earned from trading goods of the Dholpur unit should not be disallowed for the purpose of calculating the deduction under Section 80IB. The AO and CIT(A) concluded that the activities performed by the assessee, such as removing moisture and guthle from purchased ghee and skimmed milk powder, did not constitute manufacturing. The AO noted that these activities did not result in the creation of a new commercial product.

The CIT(A) supported this conclusion by referencing the audit report, which detailed the quantity and value of ghee and skimmed milk powder produced and purchased. The CIT(A) found that the purchased goods were merely repacked after a cleaning process and sold under the company's brand name, which did not amount to manufacturing. The assessee's argument that the process involved adding chemicals and essence to convert the products into a new commercial product was not substantiated with evidence.

3. Applicability of Legal Precedents:
The assessee relied on several case laws to support their claim, including CIT Vs. Vinbros & Co., India Cine Agencies Vs. Dy. CIT, and CIT Vs. Beta Cosmetics. However, the CIT(A) and the appellate tribunal found these cases inapplicable. For instance, in CIT Vs. Beta Cosmetics, the output product was significantly different from the input due to the addition of mineral oil and perfume, which was not the case with the assessee's activities. The tribunal also referenced other cases, such as Sterling Foods Vs. State of Karnataka and CIT Vs. Sri Meenakshi Asphalts, where similar activities were not considered manufacturing.

Conclusion:
The tribunal upheld the CIT(A)'s decision, confirming that the activities performed by the assessee did not constitute manufacturing. Consequently, the disallowance of the deduction under Section 80IB was justified. The tribunal agreed that the assessee's activities of removing moisture and guthle from purchased ghee and skimmed milk powder and repacking them did not result in a new commercial product. Therefore, the assessee's claim for deduction under Section 80IB was not allowable, and the AO's computation of the deduction was upheld.

Final Judgment:
The appeal was dismissed, and the order of the CIT(A) was upheld, confirming the disallowance of the deduction under Section 80IB for the net profit on trading goods of the Dholpur unit. The tribunal emphasized that the activities performed by the assessee did not meet the criteria for manufacturing as defined under the Income Tax Act and relevant legal precedents.

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