1993 (6) TMI 113 - AT - Income Tax

Backward Area, Industrial Company, Manufacture Or Production, New Industrial Undertaking, Profits And Gains

Summary

Issues Involved:
1. Entitlement to deduction under section 80J of the Income-tax Act, 1961.
2. Entitlement to deduction under section 80HH of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction under Section 80J of the IT Act:

The assessee, a closely held company engaged in the business of centrifuging rubber latex, claimed deductions under section 80J. The Income-tax Officer (ITO) rejected this claim, stating that the assessee was not an industrial company manufacturing or producing any article or thing. The CIT (Appeals) upheld the ITO's decision, referencing the Tribunal's earlier decision for the assessment years 1977-78 and 1978-79, and added that the assessee did not employ ten persons on average, disqualifying it from deductions under section 80J.

On second appeal, the Tribunal distinguished the earlier decision, emphasizing a notification dated 8-7-1983 (189 of 1983) which classified latex concentrate as manufactured goods. The Tribunal concluded that the centrifuging process converted normal latex into preserved latex, a different commercial product, thus supporting the assessee's claim.

The High Court of Kerala, however, found that the Tribunal over-emphasized the notification's impact and under-rated its earlier decision. The Court highlighted the need for technical and scientific evidence to determine if the centrifuging process constituted manufacturing or production. The Tribunal was directed to gather evidence and make a definitive finding on whether a new commodity was produced through the centrifuging process.

Upon reassessment, the Tribunal reviewed extensive technical details and expert opinions, concluding that centrifuged latex, despite sharing the same chemical composition as normal latex, undergoes significant physical changes making it a distinct, marketable product. The Tribunal cited Supreme Court precedents, emphasizing that the centrifuging process results in the production of a new article, thereby qualifying the assessee for deductions under section 80J.

2. Entitlement to Deduction under Section 80HH of the IT Act:

The assessee also claimed deductions under section 80HH, which were similarly rejected by the ITO and upheld by the CIT (Appeals) on the same grounds as section 80J. The Tribunal's earlier decision and the subsequent High Court's direction applied equally to section 80HH.

The Tribunal's reassessment reaffirmed that the centrifuging process resulted in a new, marketable product. The Tribunal noted that the assessee employed more than ten persons, satisfying the requirements of section 80J(4)(iv), and this finding remained unchallenged by the revenue.

Consequently, the Tribunal concluded that the assessee was engaged in the manufacture or production of an article or thing, thereby qualifying for deductions under section 80HH as well.

Conclusion:

The Tribunal allowed the appeal, holding that the assessee is entitled to deductions under sections 80J and 80HH of the Income-tax Act, 1961, as the centrifuging process constitutes manufacturing or production of a new article or thing.