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Issues Involved:
1. Disallowance of Rs. 30,460 under Section 40A(2) of the Income Tax Act. 2. Denial of Investment Allowance under Section 32-A of the Income Tax Act. Detailed Analysis: 1. Disallowance of Rs. 30,460 under Section 40A(2) of the Income Tax Act: The appellant, a private limited company engaged in dyeing sewing machine thread, contested the order of the CIT(Appeals) confirming the addition of Rs. 30,460, which was 1% of the rebate allowed on sales to M/s Navin Bharat Co. (India) Pvt. Ltd. The appellant argued that the CIT(Appeals) erred in confirming the addition without justification and in observing that M/s Navin Bharat was allowed only a 5% discount in earlier years, ignoring evidence of additional rebates. The Income Tax Officer (ITO) noted that the appellant paid a 5% trade discount and a 2% rebate on sales to M/s Navin Bharat, a sister concern with common directors, whereas other customers received only a 2% rebate. The ITO disallowed Rs. 75,000 under Section 40A(2), citing discrimination and lack of justification for the heavy payments and the absence of an agreement. The CIT(Appeals) reduced the disallowance to Rs. 30,460, considering a 1% rebate adequate. The Tribunal, after reviewing submissions and records, upheld the CIT(Appeals)' decision, confirming the disallowance of Rs. 30,460. The Tribunal emphasized the absence of an agreement and the interrelation between the parties, justifying the application of Section 40A(2). 2. Denial of Investment Allowance under Section 32-A of the Income Tax Act: The appellant claimed an investment allowance of Rs. 5,116 under Section 32-A, arguing that its business of dyeing thread constituted manufacturing or production of goods. The ITO denied the claim, stating that dyeing yarn did not qualify as manufacturing or production. The CIT(Appeals) upheld this view, citing decisions from the Madras High Court that processing activities like dyeing did not amount to manufacturing. The Judicial Member of the Tribunal agreed with the lower authorities, stating that dyeing yarn did not produce a new article. However, the Accountant Member differed, highlighting that the appellant's activities involved multiple processing stages, transforming yarn into sewing machine threads, a commercially distinct product. The Accountant Member concluded that the appellant was engaged in manufacturing, thus eligible for the investment allowance. The matter was referred to a third Member due to the difference in opinion. The third Member, after considering the arguments and relevant case law, sided with the Accountant Member. The third Member noted that the appellant's activities resulted in a new product, distinct from the original yarn, thereby qualifying as manufacturing. The third Member concluded that the appellant was entitled to the investment allowance. Conclusion: The Tribunal upheld the disallowance of Rs. 30,460 under Section 40A(2) but allowed the investment allowance claim under Section 32-A, recognizing the appellant's activities as manufacturing. The appeal was dismissed in part, with the investment allowance granted based on the majority opinion.
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