THE issue before the Bench is - Whether converting gram Dal into Besan amounts to manufacturing process and assesse would be entitled to the deduction under Section 80IB(4). YES is the answer.
Facts of the case
A) The assessee is engaged in manufacturing of various food products like soya nuggests, besan, vermicelli and instant daliya. It commenced commercial production on 19.03.1999 as per the certificate granted by the Department of Industries. For the assessment year 2000-01 to 2004-05, the assessee filed returns of income claiming the entire profits as deduction under Section 80IB. For the assessment year 2003-04, the assessee filed return of income declaring total income at nil after claiming deduction under Section 80IB. Subsequently, the assessment made for the assessment year 2001-02 was set aside by the CIT under Section 263 in which the CIT held that the Assessing Officer had wrongly allowed deduction under Section 80IB. While regular assessment proceedings for assessment year 2001-02 were started, assessment proceedings under Section 147 were initiated for assessment year 2000-01 and 2002-03. Regular assessment was also made for assessment year 2003-04 and 2004-05. Assessment for the assessment year 2003-04 in this case was completed under Section 143(3). In all these five assessments the claim of deduction under Section 80IB was disallowed on various grounds including the ground that the process of making daliya and besan did not amount to manufacture. CIT(A) dismissed assessee’s appeals and held that in all the years the making of daliya and besan did not amount to manufacture and it also held that the assessee should be allowed depreciation even if it had not claimed the same. ITAT allowed assesssee’s appeal by holding that all the necessary conditions for grant of deduction under Section 80IB were satisfied. On the issue of manufacturing, the ITAT relied its own decision in the case of Indus Cosmeceuticals which related to manufacture of herbal heena powder from heena leaves and was held to be a manufacturing activity. This decision in turn has already been upheld by this Court in a bunch of appeals, the lead case being ITA No.28 of 2009, titled as Commissioner of Income Tax, Shimla versus M/s Indus Cosmeceuticals, 2014-TIOL-2077-HC-HP-IT.
B) The Assessing Officer also held in the assessment that though the assessee had not claimed depreciation in assessment year 2000-01 and 2001-02, the same should be allowed while computing the eligible profits and the depreciation allowable alongwith WDV to be carried forward in each of the years was recomputed in the assessments made. CIT(A) held that the assessee should be allowed depreciation even if it had not claimed the same. ITAT allowed assesssee’s appeal by holding that all the necessary conditions for grant of deduction under Section 80IB were satisfied.
C) The Assessing Officer came to the conclusion that the assessee had not employed 10 or more workers in the manufacturing process though at a given time the assessee was having more than 10 workers out of whom four employees had been engaged in the two trucks owned by the assessee i.e. two drivers, two cleaners and in case these four workers were excluded, then the assessee at all given times had employed 6 to 9 workers. Though in the reply, the assessee disputed the fact that the drivers and cleaners were not included in the employees list, but then this reply was not found acceptable by the Assessing Officer because the assessee did not deny having two trucks which were used to transport the goods to the premises of customers. Moreover, no receipts have been shown in P&L Account. It was concluded that obviously the trucks could not run without the drivers/conductors/helpers and in absence of any separate driver/cleaner, only inference that could be drawn was that it was the employees shown to be engaged in the manufacturing process who had infact been employed as drivers/conductors/helpers with the trucks. The Commissioner of Income Tax affirmed these findings, however, when the matter reached in ITAT, the findings recorded by both the learned authorities below were set aside on the ground that for getting relief under Section 80IB, there must be substantial compliance whereby an undertaking must have employed 10 or more workers substantially during the period for which the claim was made and further that there was no hard and fast rule by which one could determine whether there has been substantial compliance because it is for the authority and the Court to decide based on the facts before it.
Having heard the parties, the Court held that,
++ the word 'manufacture' was not defined under the Act and came to be introduced, for the first time, by insertion of Section 2 (29BA) of the Finance (No.2) Act, 2009, introduced with effect from 01.04.2009 which reads as follows:-
A) The assessee is engaged in manufacturing of various food products like soya nuggests, besan, vermicelli and instant daliya. It commenced commercial production on 19.03.1999 as per the certificate granted by the Department of Industries. For the assessment year 2000-01 to 2004-05, the assessee filed returns of income claiming the entire profits as deduction under Section 80IB. For the assessment year 2003-04, the assessee filed return of income declaring total income at nil after claiming deduction under Section 80IB. Subsequently, the assessment made for the assessment year 2001-02 was set aside by the CIT under Section 263 in which the CIT held that the Assessing Officer had wrongly allowed deduction under Section 80IB. While regular assessment proceedings for assessment year 2001-02 were started, assessment proceedings under Section 147 were initiated for assessment year 2000-01 and 2002-03. Regular assessment was also made for assessment year 2003-04 and 2004-05. Assessment for the assessment year 2003-04 in this case was completed under Section 143(3). In all these five assessments the claim of deduction under Section 80IB was disallowed on various grounds including the ground that the process of making daliya and besan did not amount to manufacture. CIT(A) dismissed assessee’s appeals and held that in all the years the making of daliya and besan did not amount to manufacture and it also held that the assessee should be allowed depreciation even if it had not claimed the same. ITAT allowed assesssee’s appeal by holding that all the necessary conditions for grant of deduction under Section 80IB were satisfied. On the issue of manufacturing, the ITAT relied its own decision in the case of Indus Cosmeceuticals which related to manufacture of herbal heena powder from heena leaves and was held to be a manufacturing activity. This decision in turn has already been upheld by this Court in a bunch of appeals, the lead case being ITA No.28 of 2009, titled as Commissioner of Income Tax, Shimla versus M/s Indus Cosmeceuticals, 2014-TIOL-2077-HC-HP-IT.
B) The Assessing Officer also held in the assessment that though the assessee had not claimed depreciation in assessment year 2000-01 and 2001-02, the same should be allowed while computing the eligible profits and the depreciation allowable alongwith WDV to be carried forward in each of the years was recomputed in the assessments made. CIT(A) held that the assessee should be allowed depreciation even if it had not claimed the same. ITAT allowed assesssee’s appeal by holding that all the necessary conditions for grant of deduction under Section 80IB were satisfied.
C) The Assessing Officer came to the conclusion that the assessee had not employed 10 or more workers in the manufacturing process though at a given time the assessee was having more than 10 workers out of whom four employees had been engaged in the two trucks owned by the assessee i.e. two drivers, two cleaners and in case these four workers were excluded, then the assessee at all given times had employed 6 to 9 workers. Though in the reply, the assessee disputed the fact that the drivers and cleaners were not included in the employees list, but then this reply was not found acceptable by the Assessing Officer because the assessee did not deny having two trucks which were used to transport the goods to the premises of customers. Moreover, no receipts have been shown in P&L Account. It was concluded that obviously the trucks could not run without the drivers/conductors/helpers and in absence of any separate driver/cleaner, only inference that could be drawn was that it was the employees shown to be engaged in the manufacturing process who had infact been employed as drivers/conductors/helpers with the trucks. The Commissioner of Income Tax affirmed these findings, however, when the matter reached in ITAT, the findings recorded by both the learned authorities below were set aside on the ground that for getting relief under Section 80IB, there must be substantial compliance whereby an undertaking must have employed 10 or more workers substantially during the period for which the claim was made and further that there was no hard and fast rule by which one could determine whether there has been substantial compliance because it is for the authority and the Court to decide based on the facts before it.
Having heard the parties, the Court held that,
++ the word 'manufacture' was not defined under the Act and came to be introduced, for the first time, by insertion of Section 2 (29BA) of the Finance (No.2) Act, 2009, introduced with effect from 01.04.2009 which reads as follows:-
"29BA - "manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing, -
(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure."Though, this amendment was introduced only with effect from 01.04.2009 while we are dealing with the assessments prior to 01.04.2009, yet the same would be of relevance since the definition itself apart from being based on the dictionary meaning has embodied in itself the meaning as had been assigned to the word by various judicial pronouncements.
++ in the case of Supreme Court in Idandas versus Anant Ram Chandra Phadke (dead) by L.Rs., AIR 1982 SC 127 the precise question was as to whether the lease was for a manufacturing process. The following tests for determining whether a lease for running flour mill had been granted for the purpose of manufacturing process were culled out:-
"1. That it must be proved that a certain commodity was produced;
2. That the process of production must involve either labour or machinery;
3. That the end product which comes into existence after the manufacturing process is complete, should have a different name and should be put to different use. In other words, the commodity should be so transformed so as to lose its original character."
++ it was thereafter held that wheat was transformed into flour by the manufacturing process which involved both labour and machinery. The commodity before manufacture was wheat which could not be consumed by any human being but would be used only for cattle or medicines or similar other purposes. Thereafter, in order to come to the conclusion that the conversion of wheat into wheat flour amounted to manufacturing process, the Supreme Court held that wheat was transformed, by the manufacturing process which involved both labour and machinery, into flour. The commodity before manufacture was wheat which could not be consumed by any human being but would be used only for cattle or medicine or other similar purposes. The end product would be flour which was fit for human consumption and is used by all persons and its complexion has been completely changed. The name of the commodity after the product came into existence is Atta and not Gehun (wheat). Thus in the instant case all the three tests have been fully satisfied.
++ applying the aforesaid tests to the instant case, it can conveniently be held that converting gram Dal into Besan will amount to manufacturing process because:
++ applying the aforesaid tests to the instant case, 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.
++ 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.
B) ++ The allowance of depreciation was made mandatory only with effect from the assessment year 2002-03 and it is the case of the revenue that assessee has not established its business for the other assessment years. The contention on behalf of the assessee is that the assessee had not claimed any deprecation on fixed assets in the books of accounts so as to claim higher deduction under Section 80IB. The revenue never disputed this claim of the assessee and failed to establish that the interest of the revenue has been adversely affected.
++ as per the admitted case of the revenue itself, the assessee was entitled to depreciation allowance only from April 1, 2002 and, therefore, amendment did not apply to the earlier years. Madras High Court in Commissioner of Income Tax versus Sree Senha Valli Textiles P. Ltd., [2003] 259 I.T.R. 77 had referred to the judgment in the case of the Supreme Court in the case of CIT v. Mahendra Mills - 2002-TIOL-597-SC-IT wherein it was held that if the revised return filed by the assessee is a valid return and the assessee has withdrawn the claim for depreciation that it had made in the original return, then the assessment based on the revised return without considering the claim for depreciation would be a proper assessment. The court observed that the privilege of claiming depreciation cannot be converted into a disadvantage, and the option cannot become an obligation. It was held that though after that judgment was rendered by the Apex Court, Explanation 5 was inserted in section 32(1) of the Income Tax Act, 1961, by the Finance Act 2001, with effect from April 1, 2002, declaring that "for the removal of doubts" the provisions of sub-section (1) will apply whether or not the assessee claims deduction in respect of depreciation in computing his total income, that Explanation cannot be regarded as taking away the effect of the judgment of the Supreme Court for the years prior to the date of introduction of the Explanation. The law declared by the Supreme Court cannot be regarded as having merely raised doubts. The interpretation of the relevant provisions of the Act by the Apex Court settles the law, and unless the subsequent amendment to the statute is expressly given retrospective effect, the law laid down by the Apex Court will remain the binding law for the period prior to the amendment. The newly added Explanation takes effect only on and from April 1, 2002, and will not be applicable for prior years.
++ thus, the the 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.
C) ++ In ITA No.28 of 2009 in case titled Commissioner of Income Tax versus M/s Indus Cosmeceuticals, it was held that in order to qualify for relief under section 80J (4) (iv) of the Income Tax Act, 1961, substantial compliance with the requirement that the new industrial undertaking must have employed in the manufacturing process carried on with the aid of power ten or more workers, is all that is required. The undertaking must have employed ten or more workers substantially during the period for which relief is claimed. There can be no hard and fast rule by which one can determine whether there has been substantial compliance. It is for the authority or the court to so decide based upon the facts before it. It may be true that substantial part does not mean the entire year, but employment for 1/6th of the year or half of the year can under no circumstance be termed to be employment for a substantial part of the year.
++ once, it is established that the assessee had not employed 10 or more workers during the substantial part of the year, the question is decided in favour of the revenue and against the assessee.
B) ++ The allowance of depreciation was made mandatory only with effect from the assessment year 2002-03 and it is the case of the revenue that assessee has not established its business for the other assessment years. The contention on behalf of the assessee is that the assessee had not claimed any deprecation on fixed assets in the books of accounts so as to claim higher deduction under Section 80IB. The revenue never disputed this claim of the assessee and failed to establish that the interest of the revenue has been adversely affected.
++ as per the admitted case of the revenue itself, the assessee was entitled to depreciation allowance only from April 1, 2002 and, therefore, amendment did not apply to the earlier years. Madras High Court in Commissioner of Income Tax versus Sree Senha Valli Textiles P. Ltd., [2003] 259 I.T.R. 77 had referred to the judgment in the case of the Supreme Court in the case of CIT v. Mahendra Mills - 2002-TIOL-597-SC-IT wherein it was held that if the revised return filed by the assessee is a valid return and the assessee has withdrawn the claim for depreciation that it had made in the original return, then the assessment based on the revised return without considering the claim for depreciation would be a proper assessment. The court observed that the privilege of claiming depreciation cannot be converted into a disadvantage, and the option cannot become an obligation. It was held that though after that judgment was rendered by the Apex Court, Explanation 5 was inserted in section 32(1) of the Income Tax Act, 1961, by the Finance Act 2001, with effect from April 1, 2002, declaring that "for the removal of doubts" the provisions of sub-section (1) will apply whether or not the assessee claims deduction in respect of depreciation in computing his total income, that Explanation cannot be regarded as taking away the effect of the judgment of the Supreme Court for the years prior to the date of introduction of the Explanation. The law declared by the Supreme Court cannot be regarded as having merely raised doubts. The interpretation of the relevant provisions of the Act by the Apex Court settles the law, and unless the subsequent amendment to the statute is expressly given retrospective effect, the law laid down by the Apex Court will remain the binding law for the period prior to the amendment. The newly added Explanation takes effect only on and from April 1, 2002, and will not be applicable for prior years.
++ thus, the the 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.
C) ++ In ITA No.28 of 2009 in case titled Commissioner of Income Tax versus M/s Indus Cosmeceuticals, it was held that in order to qualify for relief under section 80J (4) (iv) of the Income Tax Act, 1961, substantial compliance with the requirement that the new industrial undertaking must have employed in the manufacturing process carried on with the aid of power ten or more workers, is all that is required. The undertaking must have employed ten or more workers substantially during the period for which relief is claimed. There can be no hard and fast rule by which one can determine whether there has been substantial compliance. It is for the authority or the court to so decide based upon the facts before it. It may be true that substantial part does not mean the entire year, but employment for 1/6th of the year or half of the year can under no circumstance be termed to be employment for a substantial part of the year.
++ once, it is established that the assessee had not employed 10 or more workers during the substantial part of the year, the question is decided in favour of the revenue and against the assessee.
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