2015 (5) TMI 653 - HC - Income Tax

Eligibility for deduction under Section 80IB(4) - Whether the conversion of gram Dal into Besan powder, by a process of mere roasting and grinding, amounts to manufacture? - Held that - Applying test given in Idandas versus Anant Ram Chandra Phadke (dead) by L.Rs., 1981 (11) TMI 185 - SUPREME COURT it can conveniently be held that converting gram Dal into Besan will amount to manufacturing process because i) gram Dal loses its shape and identification as in the case of wheat which is converted into flour;ii) the end product i.e. Besan can be said to be different from that of gram Dal. It is through process of labour and machinery that Besan is produced;iii) Gram Dal and Besan are treated as different commercial products. Indisputably, gram Dal also undergoes same process for being converted into Besan which is undergone by the wheat for manufacturing wheat flour. In view of the aforesaid, it can safely be concluded that conversion of gram Dal into Besan amounts to manufacture and consequently the assessee is entitled to the deduction under Section 80IB(4) of the Income Tax Act. - Decided in favour of assesse. - Decided in favour of the assessee Eligibility for deduction under Section 80IB (4) - whether necessarily to be computed after allowing depreciation under Section 32? - Held that - Profits eligible for deduction under Section 80IB (4) of the Act though are necessarily to be computed after allowing depreciation under Section 32 of the Act, but the same would apply only from April 1, 2002, when the amendment came into force and will not apply to earlier years. See CIT v. Mahendra Mills 2000 (3) TMI 3 - SUPREME Court - Decided in favour of the assessee Condition of ten or more workers to be employed in the manufacturing process as specified in section 80IB(2)(iv) - whether could be said to be complied with, especially when ten or more workers were actually engaged on only 73 days during the entire year? - Held that - Once, it is established that the assessee had not employed 10 or more workers during the substantial part of the year, we are left with no other option but to answer the question in favour of the revenue - Decided against the assessee.

Summary

Issues Involved:
1. Whether the conversion of gram Dal into Besan powder amounts to manufacture and whether the profits derived from this process are eligible for deduction under Section 80IB(4) of the Income Tax Act.
2. Whether the profits eligible for deduction under Section 80IB(4) of the Income Tax Act are necessarily to be computed after allowing depreciation under Section 32.
3. Whether the condition of ten or more workers to be employed in the manufacturing process, as specified in Section 80IB(2)(iv), is complied with if ten or more workers were actually engaged on only 73 days during the entire year.

Detailed Analysis:

Issue 1: Conversion of Gram Dal into Besan Powder and Deduction under Section 80IB(4)
The court examined whether the process of converting gram Dal into Besan powder constitutes "manufacture" under the Income Tax Act, making the profits eligible for deduction under Section 80IB(4). The assessee argued that the process involves systematic activities with manpower and machinery, transforming the raw material (gram Dal) into a commercially distinct product (Besan). The court noted that the term "manufacture" was not defined in the Act until the insertion of Section 2(29BA) in 2009, which describes "manufacture" as a process resulting in a new and distinct product with a different name, character, and use. The court referred to the Supreme Court's decision in Idandas vs. Anant Ram Chandra Phadke, which established that converting wheat into flour constitutes manufacturing. Applying this precedent, the court concluded that converting gram Dal into Besan amounts to manufacturing, as it involves a transformation resulting in a new product with a different commercial identity. Therefore, the assessee is entitled to the deduction under Section 80IB(4).

Issue 2: Computation of Profits after Allowing Depreciation under Section 32
The court addressed whether profits eligible for deduction under Section 80IB(4) must be computed after allowing depreciation under Section 32. The revenue argued that depreciation must be deducted to compute eligible profits, as mandated by explanation 5 to Section 32(i)(ii) from the assessment year 2002-03 onwards. The court acknowledged that the allowance of depreciation became mandatory only from April 1, 2002, and the amendment does not apply to earlier years. The court relied on the Madras High Court's decision in Commissioner of Income Tax vs. Sree Senha Valli Textiles P. Ltd., which held that the mandatory depreciation allowance applies only from the date of the amendment. Therefore, for assessment years prior to 2002-03, the profits eligible for deduction under Section 80IB(4) need not be computed after allowing depreciation.

Issue 3: Employment of Ten or More Workers under Section 80IB(2)(iv)
The court examined whether the assessee complied with the requirement of employing ten or more workers in the manufacturing process for a substantial part of the year, as specified in Section 80IB(2)(iv). The Assessing Officer found that the assessee employed ten or more workers only on 73 days during the year, and some workers were engaged in non-manufacturing activities (e.g., truck drivers and cleaners). The ITAT set aside these findings, suggesting that substantial compliance with the requirement was sufficient. However, the court referred to its previous decisions in Commissioner of Income Tax vs. M/s Indus Cosmeceuticals and M/s Amrit Rubber Industries vs. Commissioner of Income Tax, which held that employing ten or more workers for a substantial part of the year is mandatory. Employment for a short period (e.g., two or six months) does not fulfill the requirement. Consequently, the court concluded that the assessee did not comply with the condition of employing ten or more workers for a substantial part of the year, thus answering this question in favor of the revenue.

Conclusion:
The court ruled in favor of the assessee on issues 1 and 2, confirming that the conversion of gram Dal into Besan amounts to manufacture and that profits eligible for deduction under Section 80IB(4) need not be computed after allowing depreciation for years prior to 2002-03. However, on issue 3, the court ruled in favor of the revenue, concluding that the assessee did not meet the requirement of employing ten or more workers for a substantial part of the year. All appeals were disposed of accordingly, with each party bearing its own costs.