2015 (2) TMI 292 - HC - Income Tax

Entitlement to deduction u/s. 80I and 80IA - Whether processing of seeds is manufacturing activity ? - activity of testing, gradation, drying, fumigation and coating of seeds - processing of seeds which is not fit for human consumption - Held that - In view of the matter, from the chart, it appears that the same process also been certified by the Gujarat State Seed Certification Agency and from the certificate issued by the said Agency which clearly describes the manufacturing process, and in view of the two decisions of the Hon'ble Supreme Court, the production of the assessee is not fit for human consumption. The production is not fit for human consumption, and therefore, it changes its original form. If we look at the decision of the Hon'ble Supreme Court in the case of Aspinwall and Co. Ltd. v. Commissioner of Income-Tax, it is said that the word manufacture has not been defined in the Act. In the absence of a definition of the word manufacture it has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to a manufacturing activity.In that view of the matter, we are of the opinion that the contention raised by the department that it is not a manufacturing process, is devoid of merit and the same is required to be rejected. When the product is to be disposed of immediately even that the product is not fit for human consumption. If it is required to be preserved, it seems to be a manufacturing process, and therefore, in our view, the finding of the Tribunal is misconceived and required to be reversed and the view taken in the subsequent year is accepted. Also going through the letter, from which, it is clear that more than 10 employees are working there, which fulfills the condition, and therefore, the assessee is entitled for the benefit under sec. 80IA of the IT Act. - Decided in fvaour of assessee.

Issues Involved:
1. Entitlement to deductions under sections 80I and 80IA of the Income-tax Act, 1961.
2. Classification of seed processing as a manufacturing activity.
3. Reopening of assessment.
4. Allowability of processing charges on seeds.

Detailed Analysis:

Entitlement to Deductions under Sections 80I and 80IA:
The appellant challenged the judgment of the Income Tax Appellate Tribunal (ITAT) which denied deductions under sections 80I and 80IA for various assessment years. The Court framed substantial questions of law regarding whether the appellant was entitled to these deductions. The appellant argued that their activities constituted manufacturing, thereby qualifying for deductions. The Court examined whether the processes involved in seed production and processing met the criteria for manufacturing as defined by relevant legal precedents.

Classification of Seed Processing as Manufacturing Activity:
The core issue was whether the processing of seeds constituted a manufacturing activity. The appellant's counsel argued that the processes, including testing, grading, drying, fumigation, and coating, transformed the seeds into a new product unfit for human consumption, thus qualifying as manufacturing. The counsel cited several Supreme Court judgments, including *State of Rajasthan v. Rajasthan Agriculture Input Dealers' Association* and *Aspinwall and Co. Ltd. v. Commissioner of Income-Tax*, which supported the view that substantial transformation of raw materials into new products constitutes manufacturing. The Court agreed, noting that the processed seeds were distinct from food grains and were certified by the Gujarat State Seed Certification Agency as not fit for human consumption, thus meeting the criteria for manufacturing.

Reopening of Assessment:
In some appeals, the reopening of assessments was challenged. The Court considered whether the ITAT was right in holding that the reopening was bad in law. The appellant argued that the reopening was unjustified as the original assessments were based on full disclosure. The Court examined the procedural and substantive aspects of the reopening and found that it was not warranted, thereby ruling in favor of the appellant.

Allowability of Processing Charges on Seeds:
The appellant also contested the disallowance of processing charges on seeds. The ITAT had held that these charges did not qualify for deductions. The appellant argued that these charges were integral to the manufacturing process. The Court reviewed the nature of these expenses and found that they were indeed part of the manufacturing process, thus allowing the deductions.

Conclusion:
The Court concluded that the appellant's activities constituted manufacturing, thereby entitling them to deductions under sections 80I and 80IA. The reopening of assessments was deemed unjustified, and the processing charges on seeds were allowed as deductible expenses. The Court's decision was based on a thorough examination of legal precedents and the specific processes involved in the appellant's operations. All questions raised were answered in favor of the appellant and against the Revenue. The appeals of the appellant were allowed, and those of the Revenue were dismissed.

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