Income Tax Appellate Tribunal - Delhi
Mahesh Chandra Sharma vs Ito on 16 March, 2007
ORDER
G.S. Pannu, Accountant Member
1. This is an appeal against the order of learned CIT (Appeals), Faridabad dated 9-11-2004 pertaining to the assessment year 2001-02. The solidarity issue in this appeal relates to the denial of deduction under Section 80-IB of the Income Tax Act, 1961 (in short 'the Act') to the assessee.
2. Briefly stated facts giving rise to the impugned proceedings can be understood as follows. The assessee is an individual who is carrying on business in two units. In Unit-I the assessee derives income from undertaking job work for others. In this unit the assessee undertakes manufacture of motorcycle wheels for M/s. Bajaj Auto Ltd. In Unit-II the assessee undertakes activity of Press shop, sheet metal & welding. The assessee initially filed return of income on 31-10-2001 declaring an income of Rs. 8,81,363. No deduction under Section 80-IB was claimed originally. In the revised return of income filed on 23-7-2002, the assessee claimed deduction under Section 80-IB of Rs. 2,16,977 in relation to profits of Unit-I. In Unit-II the assessee had suffered a loss, whereas in Unit-I it had profits. The assessing officer rejected the claim of the assessee for deduction under Section 80-IB of the Act.
3. The CIT (Appeals) examined the nature of activity carried out in Unit-I. The learned CIT (Appeals), after examining the activity carried out in Unit-I, held that the wheel assembly process does not involve any manufacturing activity since no new product come into existence with the operations carried out. He, therefore, held the assessee ineligible for claim of deduction under Section 80-IB of the Act with respect to Unit-I. The learned CIT (Appeals) also noted that Unit-I was also operational in the past but no deduction under Section 80-IB was claimed with respect of the same. Presently, the assessee is in appeal before us.
4. Before us, the learned counsel Shri Jatinder Jindal appearing on behalf of the appellant had contended that in Unit-I the assessee was engaged in wheel assembly operations which was to be considered as amounting to 'manufacture' or 'production' and thus the unit qualifies for benefit under Section 80-IB of the Act. The counsel pointed out to pages 38-40 of the paper book wherein is placed the details of activities carried out by the assessee in the two units and on that basis it has been contended that although in Unit-I all the components for assembly of a motorcycle wheel is provided by M/s. Bajaj Auto Ltd. But the entire machinery and labour utilized for the purpose is on account of assessee himself. That merely because the manufacture has been carried out for another entity on a job work basis cannot disentitle the assessee from the claim of deduction under Section 80-IB of the Act. The learned counsel relied upon the following decisions in support of his submissions :
(i) CIT v. Jamal Photo Industries (I) (P.) Ltd. (2006) 203 CTR (Mad.) 256.
(ii) Inspecting Assistant Commissioner v. Varistha Udyog Ltd. (1990) 34 ITD (Delhi) 10.
(iii) CIT v. J.B. Kharwar & Sons .
5. Regarding non-claiming of deduction in the past, it was submitted that the same by itself cannot be a justifiable ground to reject the claim of the assessee. According to him, the assessee fulfils all the conditions pre-scribed under Section 80-IB of the Act and, therefore, the claim of the assessee should succeed.
6. On the other hand, learned DR has relied upon the order of the lower authorities in support of the case of the revenue. Learned DR pointed out that the assessee's argument that deduction is to be allowed in respect of both the units is not tenable as the first unit was engaged in the carrying out of wheel assembly operation for Bajaj Auto Ltd. Only which did not amount to manufacturing activity. The wheel assembly unit does not involve any manufacturing process and no deduction under Section 80-IB has been claimed by the assessee in past. The learned DR pointed out to pages 44 and 45 of the paper book wherein is placed a copy of the remand report of the assessing officer submitted to the learned CIT (Appeals) and relied on the same.
6A. We have considered the rival submissions carefully. The crux of the dispute before us is to establish whether or not the assessee is engaged in the manufacture or production of an article or thing so as to qualify for deduction under Section 80-IA of the Act with respect to Unit-I. Before we proceed to dilate on the legal position, it would be appropriate to understand the fact position with regard to the process being carried out in Unit-I by the assessee. The finished product of the assessee is motorcycle wheel. The raw materials/components used are:
1. Rim
2. Tyre
3. Tube
4. Bearing
5. Drum
6. Spoke
7. Nipple
8. Collar The process as outlined by the assessee and that considered by the lower authorities is detailed as below in the paper book on record:
1. Drum Assembly - In this process the Collar & Bearings are Pressed in the Drum with the help of Pneumatic Press.
2. Drum & spoke Assembly - 18 No. each of outer & inner spokes are assembled with the Drum on Assembly stands.
3. Rim & Drum Assembly-In this process the drums assembled as per process No. 2 is assembled with the Rim by tightening Nipples with Spokes and Rim with the help of Pneumatic Gun.
4. Tightening Operation-The Rim & Drum assembled as per operation No. 3 are put on the tightening machine for tightening the Nipples with Spokes with the help of Pneumatic Guns.
5. Balancing Operation - The Rim & Drum assembly after tightening operation as per Process No. 4 is put on Balancing Fixture for Balancing Rims with the help of Dial Gauges.
6. Tyre Mounting Operation - The balanced Rim assembled as per operation No. 6 is mounted with Tyre & Tube with the help of Tyre Mountain Machine. After mounting tyre & tube air is filled to the required pressure. Air pressure is checked with the help of Air Pressure Gauge.
7. Final Inspection - The wheels assembled are finally checked on fixtures with regard to their Balancing and Air pressure with the help of Gauges.
7. The finished product of the assessee is motorcycle wheel which is supplied to the motorcycle manufacturer Bajaj Auto Ltd.
8. Having noted the process which is involved, we have to examine whether the activity carried out by the assessee amounts to manufacture and if yes, then what does it manufacture. From the process noted above, it is seen that the assessee brings together the various raw materials, components and by carrying intermittent processes, assembles them together so that they can work as one equipment which is termed as a motorcycle wheel. The final product which is achieved is a result of an assembling process. The final product is distinct in character and use than each of the components used. This is for the reason that none of the components or the raw material used can partake the character of or be a substitute for the functioning or the commercial value attributable to the final product.
9. The moot question is whether assembling of different components, which gives rise to an article which is totally different from the parts, amounts to 'manufacture' or not ? This proposition has been directly answered by the Hon'ble Bombay High Court in the case of CIT v. Tata Locomotive & Engg. Co. Ltd. . The following extract of the head note of the judgment is worthy of notice :
The word "manufacture" has a wider and also a narrower connotation. In the wider sense it simply means to make, or fabricate or bring into existence an article or a product either by physical labour or by power, and the word "manufacturer"in ordinary parlance would mean a person who makes fabricates or brings into existence a product or an article by physical labour of power. The other shade of meaning, which is the narrower meaning, implies transforming raw materials into a commercial commodity or a finished product which has an entity by itself, but this does not necessarily mean that the materials with which the commodity is so manufactured must lose their identity. Thus, both the words "manufacture"and "produce"apply to the bringing into existence of something which is different from its components. Whether one takes into account the wider or narrower meaning of the word "manufacture", assembling of automotive bus or truck chasis from imported parts in a "knocked down"condition, would give rise to an article which is totally different from the parts and would amount to manufacture. This is so even though the component parts from which the automotive chasis is made, retain their individual identity in the whole article which is thus manufactured or produced.
10. We may also gainfully refer to the decisions of the Apex court in the case of Gramophone Co. (I) Ltd. v. Collector of Customs and UOI v. Delhi Cloth & General Mills (1963) (Supp.) 1 SCR 586 wherein the expression 'manufacture' has been understood to mean transformation of the goods into a new commodity commercially distinct and separate having its own character, use and name whether it be the result of one or several processes.
11. Considered in this light, factually speaking in the instant case the various parts assembled by the assessee using its machinery results in achieving of a final product. The parts or components; utilized by the A assessee in its assembling process undergo a transformation and result into a product namely motorcycle wheel, which is distinct and separate commodity in character, name and use than each of the parts or components. Therefore, on the basis; of the principles referred to above, in the instant case, it is safe to deduce that the process of assembling carried out by the assessee is to be understood as amounting to 'manufacture' or production of an article. Therefore, the profits derived from such activity is eligible for the claim of benefit under Section 80-IA of the Act.
12. The other objection of the revenue is that the assessee does not manufacture on its own account but does it on a job work basis for another concern. This objection deserves to be rejected. The assessee has been supplied the components by the other concern but all other aspects, namely, labour, machinery, equipments and other infrastructure etc. are met by the assessee on its own account. The assessee, in our view, qualifies to be an 'industrial undertaking'. Merely because the product is manufactured under a job contract it does not distract from the fact that it is the assessee who is engaged in an activity of manufacture. The parity of reasoning enunciated by the Madras High Court in the case of CIT v. Taj Fire Works Industries (2006) 154 Taxman 380 is squarely applicable in the instant case. We, therefore, are of the opinion that on this issue the assessee has to succeed.
13. In the result we conclude by holding that the assessee is carrying out manufacturing activity and is therefore, entitled to claim the benefits of Section 80-IA of the Act. We have noted that apart from the aforesaid objections there is no other objection brought out by the revenue for denying the deduction under Section 80-IA of the Act. We, therefore, set aside the order of the Commissioner (Appeals) and direct the assessing officer to allow deduction to the assessee under Section 80-IA of the Act with respect to the profits derived from its Unit-I.
14. In the result, appeal of the assessee is allowed.