Income Tax Appellate Tribunal - Mumbai
Sheetal Diamonds Ltd, Mum vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI 'J' BENCH
BEFORE SHRI T.R.SOOD, ACCOUNTANT MEMBER &
SHRI R.S.PADVEKAR, JUDICIAL MEMBER
I.T.A.NOS.6687, 6688 & 6689/Mum/2003
A.Yrs. 1996-97, 1997-98 & 1998-99
Sheetal Diamonds Limited, Vs. The Income Tax Officer,
C/o. B.S.Vasa, Advocate, Range 8 (3)(2),
213/215, Jolly Bhavan No.1, Mumbai.
10, New Marine Lines,
Mumbai 400 020.
PAN: AANFS 1796 A
(Appellant) (Respondent)
Appellant by : Shri B.V.Jhaveri.
Respondent by : Shri Sumeet Kumar, Sr. DR
ORDER
Per T.R.SOOD, AM:
In all these appeals a common dispute regarding rejection of claim for deduction u/s.80IA has been raised.
2. After hearing both the parties, we find that a survey u/s.133A was carried out on 24-3-1999 wherein according to the AO it was found that the claim of deduction u/s.80IA is bogus and, accordingly, a notice u/s.148 for A.Yrs. 1996-97 & 1997-98 was issued and notice u/s.143(2) for A.Y 1998-99 was issued. During the survey a statement of the Managing Director Shri V.T.Shah was recorded. He was asked to show the power consumption per month, but he did not know the same as he stated that he was not looking after the affairs of Daman factory. He further stated that 10 to 35 workers were working in the factory, but nobody was produced. It was stated that one Mr. Yadav was looking after the affairs of the Daman factory but, unfortunately, 2 he had died in an accident but his native address was not provided. Some other questions were asked and he could not provide the details. In the background of this survey, a letter was issued to the assessee asking why claim for deduction u/s.80IA should not be denied. In response, a detailed reply along with various documents dated 9-3- 2001 and 15-3-2001 were furnished which has been reproduced by the AO in the assessment order. The AO had dealt with the various documents as under:
a) In respect of points No.1 to 7 of letter dated 9-3-2001 through which copy of the certification of incorporation of the company, copy of agreement for purchase of gala at Daman for factory premises, copy of bill for `.1,24,500/- for construction of additional loft at Daman factory, copy of SSI certificate, copy of factory licence, copy of certificate of Sales Tax registration at Daman and copy of letter to Sales Tax regarding Daman factory, copy of pollution control certificate, it has been stated by the AO that department has not questioned the purchase of gala, or incorporation of the company or SSI certificate. The department has questioned the bona fides of assessee's manufacturing activity and these documents do not prove that manufacturing activity was conducted.
b) The assessee had filed further following documents vide letter dated 15-3-2001:
1 Copy of photo of workers working at Daman factory.
2 Copy of factory inspection letter received from M.I.Bhatt, Ins.3
Inspection ESI Corporation (Govt. Dept) dtd. 4,1,96 - 1 page 3 Copy of letter regarding deposit paid for workers quarters at Daman dt. 23-1-95 - 1 page 4 Copy of letter received from Bank of Baroda dated 5-4-95 - 1 page 5 Copy of letter issued Electricity Department towards the meter is not working properly dated 20-04-95 - 1 page 6-7 Copy of letter received from the Directors & Statistics authority dated 21-7-97 - 2 pages 8 Copy of letter received from Government of India, Ministry of Commerce dtd. 30-3-98 - 1 page 9 Copy of letter received from Administration of Daman & Die, Department of Labour & Employment, Daman - 1 page 10 Copy of letter received from Telecom, District Manager, Valsad dtd. 26-7-95 - 1 page 11-12 Copy of Bank statement of Bank of India, Vapi Branch -2 pages 13-14- Copy of Registered A/D (Daman Factory) received from Annual 15 Survey Industries on India Government Service - 3 pages 16 Copy of envelope received from Sales Tax Office - 1 page 17 Copy of Registered A/d send to Daman - 1 page 18 to Copy of Rep licences issued against Exports (received at 23 Daman) - 6 pages 24 to Copy of Angadia bills received from Mangilal K. Purohit dt. 31 28.2.98, 31-3-98, 31-12-97, 30-11-97, 30-9-97, 31-8-97, 31-7- 97, 30-4-97 - 8 pages 32 It contains three Railway Tickets - (a) Shatabdi Express dt. 30- 7-97, Mumbai to Vapi (b) Return Ticket - Vapi to Mumbai dt. 30-7-97 (Gujarat Express_ - Factory Inspection (c) Gujarat Express dt. 10-09-97 - Vapi to Mumbai 33 It contains 2 Railway Tickets (a) Surat to Vapi dt. 8-12-97 -
Mahesh Wadia
(b) Mumbai to Vapid td. 29-11-97 - Bhimsingh Nepani & 3 Hotel Bills
(a) Hotel Mahalaxmi - 2 Nos
(b) Allbodana Restaurant - 1 No. 34 It contains 3 Nos. STD Bill - Daman to Bombay office and Railway Ticket Surat to Vapi 35 It contains 25 Railway Tickets 36 It contains 6 Nos. STD Bills - Daman to Bombay office 37 It contains 6 Nos. STD bills - Daman to Bombay Office 38 It contains 4 Nos STD bills - Daman to Bombay Office 39 Bombay Office telephone bill attached towards re-check the above STD phone no 40 to Few copies Daily production report of Daman factory - 97-98 50 51 to Few copies of rough diamond Stock Register and out and 54 polished diamond stock register 97-98 55 It contains 2 Nos. of maintenance Bill for the Month of November & December 97 (Daman Factory) 56 It contains (a) 1 No. maintenance bill for the month of January 4 98 (b) Railway ticket Surat to Bombay dtd.13-3-98 (c) 1 No. of Stationery bill - Purohit stationery Daman 57-58 Copy of staff welfare voucher attached with 3 bills (a) Hotel Miramar, Daman (b) Samrat Rest. Daman 59 Copy of expenses Voucher `.1122/-
60 Copy of Hotel Bill - Hotel Somnath Inn, Daman dt. 9-9-97 to 10-9-97 61 It contains (a) Hotel Bill - Hotel Miramar - dt. 10-9-97 (b) bill of Mahalaxmi Hindu Hotel dt. 9-9-97 62 It contains (a) 5 Nos. of STD bills - Daman to Bombay office for the month of Sept. 97 (b) Railway Ticket Mumbai to Vapid td 9-9-97 63 It contains 4 Nos. of Electricity Bills for the month of Oct. 97, Nov. '97, Dec.'97, March 98 64 It contains 3 Nos. of Electricity Bills for the of Oct. '07, Aug '97, July '97 (b) bill of Darshana Electric Stores dt. 25-7-97 65 It contains (a) 2 Nos. Electricity bills for the month of Feb '98, Dec '97 (b) Maintenance receipt for the month of Nov '97 (Daman Factory) 66 It contains (a) 2 Nos. Railway Ticket - Surat to Borivli-
V.T.Shah & M.B.Bhamre
(b) electric repairing charges bill dt. 14-4-97 © Stationery bill - Purohit stationery daman dt. 2-7-97 67 It contains (a) bills of Rajesh Hardware Stores - Machinery parts Daman dt. 29-7-97 (b) 2 Bills of Repairing charges of Tube Lighting repairing, machine repairing & Ghar Chakar, Daman 68 It contains @ 3 bills of Purohit stationery & General Stores, Daman dt. 20-11-97, 8-7-97 (b) bill of Xerox, Valsad 69 Copy of Bill - Prince ceramics Daman dt. 22-7-97 (Machinery Part) 70 It contains (a) bill of Darshana Electric Stores dt. 19-6-97 (Tubelight Chawk 35,00,000/- 9 Ps), (b) Electricity bills 2 Nos. for the month of April, 97 `.2800/- and for the month of May '97 `.2455/-
71 Bill of N.J.electricals - Daman (Electrical items - Tube & Chawk purchase dt. 25-7-97 72 Copy of bill of Hotel Somnath Inn, Daman - Room Charges dt.
29-7-97 to 30-7-97 73 Copy of bill of Tarun Diamond Tools - machinery parts purchased from Surat dt. 6-12-97 74-76 Few copies of workers identity Card 77 Few Nos. of workers photo with name - Daman Factory 78 to Few copies of workers Bio-data - Daman Factory 95 96- Few copies of wages register towards wages paid for the month 103 of Oct. '97 & March '98 103A Copy of Telephone Bill, Daman Factory dated 23-2-98 While dealing with the same, AO made observations that as far as photocopy of photographs is concerned, though it shows that 18 5 workers are working and each worker has been given a fixed table and tube light, but why these photographs were not furnished during the survey. He also expressed doubt regarding the electricity bills as well as purchase of wooden tables etc. in respect of inspection done by Labour Officer, he opined that the inspector relied on somebody's statement and no wage register was furnished. Regarding staff quarters, he observed that this does not prove anything. In respect of bank statement he observed that it did not show as to when the account was opened or any transactions were carried through this bank. In respect of letter written to the Electricity Department regarding non functioning of the meter, he observed that no evidence was given as to when such defects were removed. In respect of letter written by Statistics Authority, NSSO (FOD), Government of India, Ministry of Planning, B 101, Vishnu Chambers, Valsad, he observed that there was no evidence to show that assessee ever filed any return. In respect of letter from Development Commissioner, SEEPZ, it was observed that no evidence was there as to how this letter was received. In respect of letter from the Asst. Employment Officer, Daman asking assessee to furnish quarterly return in form ER-1, AO observed that no evidence regarding filing of the return has been furnished. In respect of letter regarding new telephone, AO observed that no evidence regarding allotment of new number has been given. In respect of photocopies of statement from Bank of India, he observed that it did not show the name address of the Branch and even address of the assessee was also not shown.
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3. Similarly, AO doubted all the documents filed before him on one pretext or the other and concluded that assessee had not done any manufacturing activity in the Daman factory. Without prejudice to these observations, AO also issued a show cause notice to the assessee to explain as to how cutting and polishing of diamonds can be said to a manufacturing activity. Again no reply was filed by the assessee and, therefore, following the decision of the Tribunal in the case of Pink Star vs. DCIT 72 ITD 125 (Mum), wherein it was held that cutting and polishing of diamonds is not a manufacturing activity, the claim was rejected. Further reliance was placed on the decision of the Hon'ble Bombay High Court in the case of CIT vs. London Star Diamond Co. (India) Ltd. 213 ITR 517.
4. Before the ld. CIT[A], it was mainly submitted that the survey was conducted on 24-3-1999 by which time the manufacturing operations had already been stopped and, therefore, observations made during the survey could not be applied for the earlier period. It was vehemently argued before him that the assessee was doing business of cutting and polishing of diamonds and reliance was placed on various documents furnished before the AO.
5. The ld. CIT[A] after considering the submissions, decided the issue against the assessee vide para 3.1 which is as under:
"3.1 The above submissions of the AR as well as the contentions of the AO on this issue have been considered by me carefully. The appellant is engaged in the business of cutting & polishing of diamonds. The claim of the appellant u/s.80IA has been disallowed by the AO in view of ITAT's decision in the case of Pinkstar vs. DCIT [Mum] 72 ITD 137 as well as CIT vs. London Star Diamond Co. (I) Ltd. 213 ITR 517 (Bom). The Hon'ble Supreme Court in the case of CIT vs. Gem India Manufacturing reported in 249 ITR Page 307 held 7 that the cutting & polishing of diamonds does not constitute manufacturing or production of article or thing. As this activity of the appellant has not been considered amounting to manufacturing or production of article or thing by the various courts, the AO has rightly denied the deduction u/s.80IA to the appellant. Therefore, no interference is called for in the matter. The disallowance of deduction of `.1,46,77,707/- is therefore upheld."
6. Before us, Ld. Counsel of the assessee emphasised that it has to be noticed that survey took place on 24-3-1999 by which time the factory had already been closed and that is why the whole problem arose. Further, unfortunately, the person Shri Yadav who was looking after the operations of the Daman factory had died in an accident. Hepointed out that it is wrong on the part of the AO to say that the address of Shri Yadav was not provided because copy of his bio-data was submitted before him, copy of which is placed at page 81 of the paper book which clearly shows his address. He pointed out that the statement of Shri V. T. Shah, Managing Director, of the assessee company was recorded but since he was not looking after the operations he could not furnish some details at the time of survey. Since the factory had already been closed, therefore, there was no question of producing the workers. Most of the documents showing the activity of manufacturing have been rejected by the AO by stating that they were either not produced at the time of survey or do not prove anything. He argued that during survey only those documents are generally produced which are demanded by the authorities and, therefore, there was no question of producing such documents unless they were specifically asked for.
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7. He specifically mentioned production of certain documents, e.g. regarding purchase of gala for the Daman factory which clearly showed that premises were there. He produced a copy of the original photograph showing 18 workers in the factory. The only allegation of the AO against this is that the original photograph was not produced but the same was not demanded. AO has further mentioned that nothing in respect of electricity consumption was stated. He submitted that copies of some of the electric bills were produced which are available at pages 64-65 of the paper book. Similarly, copies of SSI certificate, factory license, certificate of sales tax registration and pollution certificate issued by various departments clearly show that manufacturing operations were being carried on by the assessee. Copy of the inspection report of the ESI Corporation also proves the case. He argued that AO has observed that the bank statement does not incorporate address of the assessee but it was only sample of the bank statement and other bank statements were submitted which contained various transactions. A copy of the Annual Survey of industries certificate, copies of letter of Statistics department regarding submission of information etc. clearly shows that assessee was doing the manufacturing business. Further, copies of telephone bills, bank statement, REP licenses of Daman factory, bio-data of various factory workers, workers identity card, railway tickets for travel of the staff, and hotel bills showing that whenever Bombay office people visited Daman were staying in hotels, were also filed. Copies of daily production report of Daman factory, rough diamonds stock register, 9 various purchases of machinery and machine parts, and wage register etc. were also filed and all these documents clearly showed that assessee had carried out manufacturing activity. AO has either not discussed anything about these documents or simply brushed them aside by saying that either they were not produced at the time of survey or they do not prove anything. This is not correct because nobody will buy factory premises or even staff quarters without a manufacturing business. Similarly, registration under SSI, registration of Sales tax Department for pollution control, inspection by ESI Corporation, will not take place without any manufacturing. All the documents considered together would clearly show that assessee had carried out manufacturing operations.
8. Coming to the second aspect whether cutting and polishing of diamonds would constitute manufacturing activity or not, he submitted that the decision of Hon'ble Supreme Court in the case of CIT vs. Gem India Mfg. Ltd. 249 ITR 307 was rendered in peculiar circumstances. He read out from the head note and pointed out that Hon'ble Supreme Court has clearly observed that polishing or cutting of diamonds cannot be called manufacturing activity in the absence of any material. He further read from last para at page 308 wherein it is clearly observed that there was no material on record from which it could be concluded by the Tribunal that such activity would constitute transfer. Thus, it is clear that this decision was rendered in the context where no material was produced before the Tribunal or lower authorities for coming to the conclusion that cutting and polishing of diamonds would constitute 10 manufacturing activity. He vehemently argued that this decision is to be seen in the light of later decision of Hon'ble Supreme Court in the case of ITO vs. Arihant Tiles & Marbles Pvt. Ltd. 320 ITR 79 wherein even the activity of cutting and polishing of marble slabs was held to be of manufacturing nature.
9. He submitted that the AO had relied on the decision of the Tribunal in the case of Pink Star vs. CIT. DCIT [supra] and in that case the Tribunal, in turn relied on the decision of the Hon'ble Bombay High Court in the case of CIT vs. London Star Diamond Co. (India) [supra], which has also been relied on by the AO and the CIT[A], wherein it was held that cutting and polishing of diamonds may not be manufacturing activity. But at the same time in the case of CIT. London Star Diamond Co. (India) [supra], the Hon'ble High Court has clearly observed that the activity of cutting and polishing of diamond would definitely constitute processing. He then referred to the decision of the Hon'ble Supreme Court in the case of Vijay Ship Breaking Corpn. vs. CIT [314 ITR 309]. In this case the question was whether breaking of ship would constitute 'manufacturing' or 'production' for the purpose of deduction u/s.80HH and u/s.80I. The Hon'ble Supreme Court after referring to the decision in the case of CIT v. N.C.Budhhiraja & Co. [214 ITR 412] observed that the word 'production' has a wider connotation than the word 'manufacture'. It was further observed that the word 'production' when used in juxtaposition with the word 'manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. Thus, even if the 11 activity of cutting and polishing of rough diamonds is held to be only processing, even then it would be covered u/s.80IA.
10. He again referred to the decision of the Hon'ble Apex court in the case of ITO vs. Arihant Tiles & Marbles Pvt. Ltd. [supra], wherein after listing out the various activities of the assessee, the process of cutting the marble blocks with saw machines for making slabs and polishing of the same was held that it would constitute production and would be ultimately eligible for deduction u/s.80IA.
11. He then referred to Explanation 4 of sec.10A wherein it is clearly provided that "manufacturing or produce" would include cutting and polishing of precious and semi precious stones. Though this explanation has been inserted w.e.f. 1.4-2004 but it has already been held to be of clarificatory nature and, thus, applicable to earlier years also by the decision of the Tribunal in the case of Bermecha Impex (P) Ltd. vs. DCIT 7 SOT 26. He then produced before us samples of rough diamonds which are loosely speaking are of uneven shape and dark brownish/bluish colour and like normal stones or glass. Then he explained various processes involved in cutting and polishing of diamonds by referring to the commentary on Diamonds from Mines To Markets by Shri Kantilal Chhotala, relevant extracts of which have been filed in Volume III of the paper book at pages 314 to 324. He submitted that the first process involved is cleaving. He explained that cleaving is normally done to divide rough diamonds into two or more parts or to eliminate a defect however cleaving is not done if rough diamond is of regular shape. After this sawing is done and after this 12 process the polishing becomes easy. Thereafter bruiting or girdling is done. Bruiting is a process by which the force and friction is applied so that the diamond is obtained in to required shape. After this last step involved is grinding and polishing which is done through tang or power driven cast iron wheel which is called scaife or lap. He also produced before us polished diamonds and then pointed out that rough diamonds which are about 1 to 3 c.mts. are reduced to 1 to 5 mm or lower or higher dimension, depending upon the quality of rough diamond. This whole process has to be carried out by skilled workers. According to him, rough diamonds or cut diamonds are totally different product. Then he referred to export and import policy issued by the Government of India, relevant copy of which is placed at pages 307 to 311 of the paper book and at page 309 at clause 3.31 the word "manufacture" has been defined and includes bringing of any article into existence by various processes including polishing and, therefore, it would be covered by that definition. He also relied on the decision of the Third Member decision of the Tribunal in the case of ACIT vs. National Lamination Industry 111 TTJ 754, wherein it was clearly held that the expression "manufacture" involves a concept of change effected to a basic raw material resulting in the emergence or a transformation into a new commercial commodity and since cut and polished diamonds are totally different from rough diamonds, therefore, cutting and polishing would constitute manufacturing activity.
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12. On the other hand, ld. DR referred to the copy of statement recorded from Managing Director Shri V.T.Shah, filed at pages 282 to 292 of the paper book and referred to question No.20 wherein a question was asked that even after verification of the office premises not a single delivery challans was found and, therefore, how it can be said that rough diamonds are sent from office to Daman. In reply, it was stated that since staff is less and that is why he is not able to locate the delivery challans or jhangad book. This clearly shows that there was no evidence available that rough diamonds were dispatched to Daman factory. Then he referred to the assessment order and pointed out the various defects noted by the AO during survey and the fact that no material was produced by the assessee for proving that any manufacturing operations were carried out by the assessee in the earlier year. He further referred to page 31 of the assessment order and pointed out that electricity charges of Daman factory were very low, i.e. only at `.15,778/- in A.Y 1996-97, `.17,405/- in A.Y 1997-98 and `.15,423/- in A.Y 1998-99 respectively. He also pointed out that it was stated that the Managing Director Shri V.T.Shah that the factory operations were mainly controlled by one Shri Yadav who had died in an accident but his address was not provided. All these facts clearly show that no manufacturing operations were carried on by the assessee.
13. Coming to the second aspect, i.e., cutting and polishing of diamonds would constitute manufacturing or not, he also referred to Explanation 4 to sec.10A and pointed out that Explanation 4 itself 14 starts with expression "For the purpose of this section .........", which clearly means that this definition was only meant for the purpose of section.10A and could not be incorporated in sec.80IA. He then referred to the decision of the Hon'ble Supreme Court in the case of CIT vs. Gem India Mfg. Co. [supra] and invited our attention to the last para of the judgment at page 308 where the Hon'ble Apex Court has clearly observed that "There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production....". As far as the decision of Hon'ble Supreme Court in the case of in the case of ITO vs. Arihant Tiles and Marbles P. Ltd. [supra] is concerned, that decision is related to marble blocks and could not be applied in the case of cutting and polishing of rough diamonds. Therefore, cutting and polishing of diamonds would not constitute manufacturing and, thus, not entitled for deduction u/s.80IA.
14. In the rejoinder, Ld. Counsel of the assessee submitted that as pointed out earlier, the questions which were asked from the Managing Director Shri V.T.Shah during the survey were much after the factory has already been closed and, therefore, some of the informations may not be available after the closure. In any case, Shri V.T.Shah had suffered a heart problem and had undergone two bypass surgeries and his statement was recorded immediately after the surgery and, therefore, being away for quite sometime, he could not answer many 15 questions readily. He again referred to page 81 and pointed out that the address of Shri Yadav was duly given to the department. He again referred to page 81 of the paper book which is a copy of the bio-data of Shri Yadav which was duly furnished to the AO. In fact, copies of bio-data of many factory workers were supplied to the department and the same are available. Even copies of identity cards issued by the company were given to the AO along with the photo copy which are available at pages 74 to 76 of the paper book and copies of photograph with name of the workers is available at page 77 of the paper book. He pointed out that electricity bills were furnished to the AO. Copies of which are available at pages 63 to 65 of the paper book. Very low amount of power was required because only one large gala was occupied which required tube lights and small machineries. Therefore, all the relevant particulars were supplied to the department. He again referred to the decision of the Hon'ble Supreme Court in the case of CIT vs. Gem India Mfg. Co.[supra] and pointed out last paragraph at page 308 which was emphasised by the ld. DR, but ld. DR had conveniently omitted to read the last line of the paragraph which clearly observe that "there is no material on record upon which such conclusion can be reached". Thus, it is clear that Hon'ble Court came to this conclusion because, according to the Court, the Tribunal did not have material. He also argued that there is no doubt that Explanation 4 to section.10A clearly states that that definition was for the purpose of that section, but at the same time it has to be remembered that there is no definition for manufacture in the Act or in 16 sec.80IA and, therefore, when there was no definition available, this definition could be looked at.
15. We have considered the rival submissions carefully and find force in the submissions of the Ld. Counsel of the assessee. A perusal of the assessment order clearly shows that the statement of the Managing Director Shri V.T.Shah was recorded much after the closure of the factory and, therefore, some of the information may not be available at that point of time, because in response to question No.44 Shri Shah has clearly stated that from April, 1998 onwards Daman factory was not working regularly and the survey was conducted on 24-3-1999. From the details filed, it is clear that assessee has given proof for purchase of gala, registration under SSI, factory license, sales tax registration, and pollution control certificate etc., but AO brushed aside all these evidences by observing that these do not prove anything. We have already extracted details of documents submitted before the AO like electricity bills, letter from electricity department that meter was not functioning, copies of letter received from administration of Daman & Diu Labour Deptt., letter from the Department of Statistics for supply of information and all these only go to show that some factory was running. Then assessee had also furnished copy of the production reports, copies of some stock register, hotel bills, railway tickets, telephone bills, bills for purchases of machineries from various parties and all these documents have not been doubted but they have been simply brushed aside. If no manufacturing was taken place then what for these expenses were 17 incurred for. Further, copies of REP licenses furnished at pages 18 to 23 of the paper book also shows that these have been issued at the assessee's address at Daman for import of rough diamonds. If no manufacturing operations were being conducted how assessee was able to import rough diamonds at Damaon. This only shows that assessee must have done some manufacturing activity at Daman and accordingly we hold that assessee was doing manufacturing operations at Daman factory.
16. As far as the issue whether cutting and polishing of diamonds would constitute manufacturing or not, before us Ld. Counsel of the assessee had produced rough diamonds which are just like ordinary stones or more precisely coloured glass type with uneven surface and were of uneven shape. All the samples were of dark brownish/greenish/bluish colour measuring about 1 c.m. to 2½ c.m. Ld. Counsel of the assessee produced cut and polished diamonds in the size of 10 cents to 1 carat, which were looking sparkling white. It was explained before us with reference to the procedure for cutting and polishing or processing of the diamonds as listed out by one Mr. Kantilal Chhotalal in the book titled as 'Diamonds From Mines To Markets'. In this book after stating that diamond cutting is a labour incentive industry and India was one of the main centers for the cutting. The process has been briefly discussed as under:
" The ultimate value of a diamond depends, among other factors, on its make, that is, the quality of the finished product. A "good make"
refers to a stone that is of fine proportions, symmetrical, and well polished. The purpose of cutting, faceting and polishing is to bring out the best in a diamond in terms of brilliance and purity, which results 18 from the refraction and reflection of light. It is also necessary to preserve as much of the original weight as possible.
Diamond has some special properties which are not common to other transparent minerals. These are a high refractive index, a high degree of clarity, colour dispersion, reflectivity and luster, and an extremely high degree of hardness.
Luster is the characteristic of reflecting light from the surface. In the diamond, this is unique.
Besides reflecting light from its surface, some of the light is partly absorbed before reflection. Most transparent minerals are not very reflective, but diamond is exceptional, its surface reflects 17 per cent of the light falling on it, in comparison to glass which reflects only 5 per cent.
A diamond is cut and polished to give maximum brilliance which in turn depends on the light reflected back to the viewer [life] and the flashes of colour [fire] when light is split into the colours of the spectrum. But maximum fire is not consistent with maximum life, and the diamond cutter's job is to achieve a fine balance between the two. The diamond cutter is known in the trade as a diamond manufacturer, for he manufactures polished goods from rough diamonds. Diamond cutting includes:
Cleaving, splitting the stone along a place of cleavage; Sawing, dividing a crystal by a diamond saw;
Bruting or Girdling, removing a portion of the crystal by rubbing or grinding it with another diamond, as for instance, the girdle of a brilliant;
Grinding and polishing, making a flat surface or facet on a rotating wheel or lap coated with diamond powder;
Polishing, preparing the finely ground or facet, by a method similar to grinding."
17. We also used Inter Net to find out scientific information on the process involved in making out find diamond. We could get Wikepedia encyclopedia on 'Net' in which various stages involved in making of a 'diamond' are described. The process of cutting and polishing of diamonds as described in the Wikepedia encyclopedia is as under:
Diamond cutting is the art, skill and, increasingly, science of changing a diamond from a rough stone into afaceted gem. Cutting diamond requires specialized knowledge, tools, equipment, and techniques because of its extreme hardness.19
The first guild of diamond cutters and polishers (diamantaire) was formed in 1375 in Nuremberg, Germany, and led to the development of various types of 'Cut'. This has two meanings in relation to diamonds. The first is the shape: square, oval, and so on. The second relates to the specific quality of cut within the shape, and the quality and price will vary greatly based on the cut quality. Since diamonds are very hard to cut, special diamond-bladed edges are used to cut them. The first major development in diamond cutting came with the "Point Cut" during the latter half of the 14th century: the Point Cut follows the natural shape of an octahedral raw diamond crystal, eliminating some waste in the cutting process.
Further, various tests have been explained as under:
Planning Diamond manufacturers analyze diamond rough from an economic perspective, with two objectives steering decisions made about how a faceted diamond will be cut. The first objective is that of maximum return on investment for the piece of diamond rough. The second is how quickly the finished diamond can be sold. Scanning devices are used to get 3-dimensional computer model of the rough stone. Also, inclusions are photographed and placed on the 3D model, which is then used to find an optimal way to cut the stone. Maximizing value The process of maximizing the value of finished diamonds, from a rough diamond into a polished gemstone, is both an art and a science. The choice of cut is influenced by many factors. Market factors include the exponential increase in value of diamonds as weight increases, referred to as weight retention, and the popularity of certain shapes amongst consumers. Physical factors include the original shape of the rough stone, and location of the inclusions and flaws to be eliminated. Weight retention The weight retention analysis studies the diamond rough to find the best combination of finished stones as it relates to per carat value. For instance, a 2.20 carat (440 mg) octahedron may produce (i) either two half carat (100 mg) diamonds whose combined value may be higher than that of (ii) a 0.80 carat (160 mg) diamond + 0.30 carat (60 mg) diamond that could be cut from the same rough diamond. The round brilliant cut and square brilliant cuts are preferred when the crystal is an octahedron, as often two stones may be cut from one such crystal. Oddly shaped crystals, such as macles are more likely to be cut in afancy cut--that is, a cut other than the round brilliant--which the particular crystal shape lends itself to.
Even with modern techniques, the cutting and polishing of a diamond crystal always results in a dramatic loss of weight, about 50%.Sometimes the cutters compromise and accept lesser proportions and symmetry in order to avoid inclusions or to preserve the weight. Since the per-carat price of a diamond shifts around key milestones (such as 1.00 carat), many one-carat (200 mg) diamonds are the result 20 of compromising Cut quality for Carat weight. Some jewelry experts advise consumers to buy a 0.99 carat (198 mg) diamond for its better price or buy a 1.10 carat (220 mg) diamond for its better cut, avoiding a 1.00 carat (200 mg) diamond, which is more likely to be a poorly cut stone.
Colour retention In colored diamonds, cutting can influence the color grade of the diamond, thereby raising its value. Certain cut shapes are used to intensify the color of the diamond. The radiant cut is an example of this type of cut.
Natural green color diamonds most often have merely a surface coloration caused by natural irradiation, which does not extend through the stone. For this reason green diamonds are cut with significant portions of the original rough diamond's surface (naturals) left on the finished gem. It is these naturals that provide the color to the diamond. Turnaround minimization The other consideration of diamond planning is how quickly a diamond will sell. This consideration is often unique to the type of manufacturer. While a certain cutting plan may yield a better value, a different plan may yield diamonds that will sell sooner, and thereby returning the investment sooner.
Cleaving or sawing Cleaving is the separation of a piece of diamond rough into separate pieces, to be finished as separate gems.
Sawing is the use of a diamond saw or laser to cut the diamond rough into separate pieces.
Bruting Bruting is the process whereby two diamonds are set onto spinning axles turning in opposite directions, which are then set to grind against each other to shape each diamond into a round shape. This can also be known as girdling.
Polishing Polishing is the name given to process whereby the facets are cut onto the diamond and final polishing is performed. The process takes the steps blocking, faceting, also called "brillianteering", and polishing. Final inspection The final stage involves thoroughly cleaning the diamond in acids, and examining the diamond to see whether it meets the quality standards of the manufacturer.
Cutting process It is possible only because the hardness of diamond varies widely according to the direction in which one is trying to cut or grind.
A simplified round brilliant cut process includes the following stages:21
• Sawing the rough stone.
• Table setting where one facet is created. The table facet is then used to attach the stone into a dop (a lapidary tool holding gemstones for cutting or polishing).
• Bruting the girdle.
• Blocking four main pavilion facets.
• Transferring to another dop in order to rotate the stone. • Blocking four main crown facets.
• Cutting and polishing all pavilion facets.
• Transferring to another dop.
• Cutting and polishing all crown facets.
This is just one, although a fairly common way of creating a round brilliant cut. The actual process also includes many more stages depending on the size and quality of the rough stone. For example, bigger stones are first scanned to get the three-dimensional shape, which is then used to find the optimal usage. The scanning may be repeated after each stage and bruting may be done in several steps, each bringing the girdle closer to the final shape.
The various processes like cleaving and splitting, bruting and girdling of diamond and polishing and cutting have been discussed in further detail in the book, but we feel there is no need to highlight the technical aspects. Sufficient it to say that rough diamonds looks like a stones (or glass) of uneven shape which, as mentioned earlier, were looking highly coloured, particularly like brownish/greenish/bluish colours, whereas the final product of diamond is a much smaller piece and generally sparkling white in colour. It was explained to us that size of the final product i.e. 'polished diamond' depends on many factors and while buying rough diamonds only an expert can evaluate as to which size the final product would be and even such opinion is not final because while cutting, the rough diamond may get cut into smaller pieces and in that case it has to be finished as such. But a plain look at rough diamond and finished diamond would show that they are totally 22 different products. Further, only cut and polished diamonds are studded into various jewellery items. The above makes it clear that definitely a process is involved which converts the rough diamond into a cut and polished diamond. From the physical demonstration of rough diamond and the cut and polished diamond, it appears to us that the final product i.e. the cut and polished diamond is altogether a different product. As pointed out by the Ld. Counsel of the assessee the Third Member in the case of ACIT vs. National Lamination Inds. [supra], has observed as under:
"Manufacture or production - Transformation of cold rolled grain oriented coils/sheets into transformer core - Expression "manufacture" involves the concept of changes effected to a basic raw material resulting in the emergence of or transformation into a new commercial commodity - By the process of manufacture something is produced and brought into existence which is different from the material out of which it is made and the product is by itself a commercial commodity capable of being sold or supplied - Material from which the thing or product is manufactured must necessarily lose its identity and must be transformed into a distinct product - It is only when the change takes a commodity to the point where commercially it can no longer be regarded as the original commodity but is recognised as a new and distinct article, manufacture can be said to have taken place."
Thus, it is clear that when some process is operated on a material and then if a new product emerges, then such process has to be called 'manufacturing'.
18. Further, we find that Explanation 4 to sec.10A reads as under:
Explanation 4.--For the purposes of this section, "manufacture or produce" shall include the cutting and polishing of precious and semi- precious stones.
No doubt, as argued by the ld. DR the Explanation clearly starts with the expression "For the purposes of this section....." but at the same time, as pointed by the learned Counsel, no definition of the word 23 'manufacture' is available in sec.80IA or otherwise in the Act. We also note that though clause (29BA) has been inserted in section 2 by the Finance (No.2) Act 2009 with retrospective effect from 1-4-2009 wherein the word "manufacture" has been defined, but that cannot be taken as an aid for interpretation because the clause is clearly stated to be applicable after 1-4-2009. The definition given in Explanation 4 to sec.10A has been further held to be of retrospective operation being clarificatory nature in the decision of the co-ordinate Bench of the Tribunal in the case of Bramhecha Impex (P) Ltd. vs. DCIT [supra]. In any case, the word manufacture has been defined in import and export policy, copy of which is placed at pages 306 to 311 of the paper book issued by the Ministry of Commerce, Government of India. The word 'manufacture' has been defined at clause 3.31 which reads as under:
"Manufacture" means to make, produce, fabricate, assemble, process r bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes, such as reingeration, repacking, polishing, labeling and segregation. Manufacture, for the purpose of this Policy, shall also include agriculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining.
19. Now coming to the two decisions of the Hon'ble Supreme Court, let us first go to the decision in the case of CIT vs. Gem India Mfg. Co.
[supra]. The Hon'ble Supreme Court observed the facts of the case as under:
"Section 80-I gives a deduction in respect of profits and gains from industrial undertakings which, among other conditions, manufacture or produce any article or thing. The question, therefore, is whether the assessee, in cutting and polishing diamonds manufactures or produces any article or thing.
The Tribunal took the view that it did because in "common parlance and commercial sense raw diamonds are not the same thing as polished and cut diamonds. The two are different entities in the 24 commercial world. Though the chemical composition remains the same the physical characteristics of shape and class, etc., are substantially different". It would appear that no material had been placed on the record before the Tribunal upon which it could have reached the conclusion that, either in common or commercial parlance, raw diamonds were not the same thing as polished and cut diamonds, and that they were different entities in the commercial world. An ipse dixit of the Tribunal is not best foundation for a decision."
On the above facts, it was held by the Apex court as under:
"There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. There is no material on record upon which such a conclusion can be reached."
Thus, from the above, it is clear that the Hon'ble Supreme Court has held that cutting and polishing of uncut diamonds would not result in manufacture or production. But this conclusion seems to have been given on the basis that there was no material to hold otherwise.
20. In the case of ITO vs. Arihant Tiles & Marbles Pvt. Ltd. [supra] again the Hon'ble Supreme Court observed whether manufacture/production of polished slabs and tiles would constitute manufacture for the purpose of sec.80IA. The head-note of the judgment reads as under:
"The assessee, which was basically a factory owner and not a mine owner, was engaged in producing polished slabs and tiles which were partly exported. The stepwise activities undertaken by the assessee were as follows: (i) raw marble blocks in uneven shape were sorted out and marked; (ii) such blocks were processed on single blade/wire saw machines to square them by separating waste material; (iii) squared up blocks were sawn for making slabs; (iv) sawn slabs were reinforced by filling cracks; (v) slabs were polished in polishing machines and cut into required dimensions/tiles; and (vi) polished slabs and tiles were buffed by shiners. The question was whether the assessee was entitled to the benefit of deduction under section 80 - IA of the Income Tax Act, 1961. The High Court accepted the claim of the assessee that it was entitled to the claim of deduction under section 80 - IA since the polished slabs were manufactured / produced from the marble blocks. On appeal to the Supreme Court:25
Held, affirming the decision of the High Court, that this was not a case of merely cutting marble blocks into slabs. There was the further activity of polishing and ultimate conversion of the blocks into polished slabs and tiles. There were various stages through which the blocks had to go through before they became polished slabs and tiles. The original block did not remain marble block; it became a slab or tile. Blocks were converted into polished slabs and tiles resulting in the emergence of a new and distinct commodity. Such an activity was something beyond manufacture and brought a new product into existence. The stepwise activity constituted "manufacture or production" in terms of section 80 - IA."
The Hon'ble Supreme Court has further observed at placitum 17, 18 [pages 86 & 87] of the report as under:
In the present case, we have extracted in detail the process undertaken by each of the respondents before us. In the present case, we are not concerned only with cutting of marble blocks into slabs. In the present case, we are also concerned with the activity of polishing and ultimate conversion of blocks into polished slabs and tiles. What we find from the process indicated hereinabove is that there are various stages through which the blocks have to go through before they become polished slabs and tiles. In the circumstances, we are of the view that on the facts of the cases in hand, there is certainly an activity which will come in the category of "manufacture" or "production" under section 80-IA of the Income-tax Act. As stated hereinabove, the judgment of this court in Aman Marble Industries P. Ltd. [2003] 157 ELT 393 (SC) was not required to construe the word " production" in addition to the word " manufacture" . One has to examine the scheme of the Act also while deciding the question as to whether the activity constitutes manufacture or production. Therefore, looking to the nature of the activity stepwise, we are of the view that the subject activity certainly constitutes "manufacture or production" in terms of section 80-IA. In this connection, our view is also fortified by the following judgments of this court which have been fairly pointed out to us by learned counsel appearing for the Department.
In the case of CIT v. Sesa Goa Ltd. reported in [2004] 271 ITR 331 (SC), the meaning of the word "production" came up for consideration.
The question which came before this court was whether the Income-tax Appellate Tribunal was justified in holding that the assessee was entitled to deduction under section 32A of the Income-tax Act, 1961, in respect of machinery used in mining activity ignoring the fact that the assessee was engaged in extraction and processing of iron ore, not amounting to manufacture or production of any article or thing. The High Court in that case, while dismissing the appeal preferred by the Revenue, held that extraction and processing of iron ore did not amount to "manufacture" . However, it came to the conclusion that extraction of iron ore and the various processes would involve "production" within the meaning of section 32A(2)(b)(iii) of the 26 Income-tax Act, 1961, and consequently, the assessee was entitled to the benefit of investment allowance under section 32A of the Income- tax Act. In that matter, it was argued on behalf of the Revenue that extraction and processing of iron ore did not produce any new product whereas it was argued on behalf of the assessee that it did produce a distinct new product. The view expressed by the High Court that the activity in question constituted "production" has been affirmed by this court in Sesa Goa' s case [2004] 271 ITR 331 saying that the High Court's opinion was unimpeachable. It was held by this court that the word "production" is wider in ambit and it has a wider connotation than the word "manufacture". It was held that while every manufacture can constitute production, every production did not amount to manufacture.
In our view, applying the tests laid down by this court in Sesa Goa' s case [2004] 271 ITR 331 and applying it to the activities undertaken by the respondents herein, reproduced hereinabove, it is clear that the said activities would come within the meaning of the word "
production" .
One more aspect needs to be highlighted. By the said judgment, this court affirmed the decision of the Karnataka High Court in the case of CIT v. Mysore Minerals Ltd. (No. 1) [2001] 250 ITR 725. In the case of CIT v. N. C. Budharaja and Co. reported in [1993] 204 ITR 412 (SC), the question which arose for determination before this court was whether construction of a dam to store water (reservoir) can be characterised as amounting to manufacturing or producing an article. It was held that the word "manufacture" and the word "
production" have received extensive judicial attention both under the income-tax as well as under the Central excise and the sales tax laws. The test for determining whether "manufacture" can be said to have taken place is whether the commodity, which is subjected to a process can no longer be regarded as the original commodity but is recognised in trade as a new and distinct commodity. The word "production" , when used in juxtaposition with the word " manufacture" , takes in bringing into existence new goods by a process which may or may not amount to manufacture. The word "production" takes in all the by- products, intermediate products and residual products which emerge in the course of manufacture of goods.
Applying the above tests laid down by this court in N. C. Budharaja' s case [1993] 204 ITR 412 (SC) to the facts of the present cases, we are of the view that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emergence of a new and distinct commodity. The original block does not remain the marble block; it becomes a slab or tile. In the circumstances, not only is there manufacture but also an activity which is something beyond manufacture and which brings a new product into existence and, therefore, on the facts of these cases, we are of the view that the High Court was right in coming to the conclusion that the activity undertaken by the respondents-assessees did constitute manufacture or production in terms of section 80-IA of the Income-tax Act, 1961. Before concluding, we would like to make one observation. If the contention of the Department is to be accepted, namely, that the activity undertaken by the respondents herein is not a manufacture, 27 then, it would have serious revenue consequences. As stated above, each of the respondents is paying excise duty, some of the respondents are job workers and the activity undertaken by them has been recognised by various Government authorities as manufacture. To say that the activity will not amount to manufacture or production under section 80-IA will have disastrous con- sequences, particularly in view of the fact that the assessees in all the cases would plead that they were not liable to pay excise duty, sales tax, etc. because the activity did not constitute manufacture. Keeping in mind the above factors, we are of the view that in the present cases, the activity undertaken by each of the respondents constitutes manufacture or production and, therefore, they would be entitled to the benefit of section 80-IA of the Income-tax Act, 1961.
21. Similarly, the Apex Court in the vase of Vijay Ship Breaking Corpn. vs. CIT [supra] has observed that ship breaking would definitely constitute production. In this case also reference was made to the decision of the Apex court in the case of N. C. Buddhiraja & Co. [supra] and it was observed at placitum 8 to 10 as under:
" Firstly, in the case of Ship Scrap Traders v. CIT reported in [2001] 251 ITR 806, the Bombay High Court has analysed the entire ship breaking activity, the articles which emerged from that activity, the various steps which are required to be undertaken for ship breaking activity and, consequently, after placing reliance on the judgment of this court in Budharaja' s case [1993] 204 ITR 412, it has held that the ship breaking activity resulted in production of articles which emerged when the ship breaking activity stood undertaken. In our view, the important test which distinguishes the word "
production" from " manufacture" is that the word " production" is wider than the word " manufacture" as held in Budharaja' s case [1993] 204 ITR 412 (SC). Further, it is true that in Budharaja's case [1993] 204 ITR 412 (SC), the Division Bench has used the word "new article". However, what the Division Bench meant was that a distinct article emerges when the process of ship breaking is undertaken. Further, the Legislature has used the words "manufacture" or "production". Therefore, the word "production" cannot derive its colour from the word "manufacture". Further, even according to the dictionary meaning of the word " production" , the word " produce" is defined as something which is brought forth or yielded either naturally or as a result of effort and work (see Webster' s New International Dictionary). It is important to note that the word "new" is not used in the definition of the word "produce".
Secondly, the judgment of the Bombay High Court in the case of Ship Scrap Traders [2001] 251 ITR 806 stands affirmed by the judgment of this court in the case of CIT v. Sesa Goa Ltd. reported in 28 [2004] 271 ITR 331. In that case, the question that arose before a Bench of three judges of this court was as to whether extraction and processing of mineral ore amounts to production within the meaning of the word in section 32A(2)(b)(iii) of the 1961 Act. It was held that the word "production" is wider than the word "manufacture". It was held that the word "production" has a wider connotation than the word "manufacture". It was further held that the mined ore need not be a new product. In fact, the Department had raised an identical argument in that case stating that the mined ore was not a new product and, consequently, there was no production. This argument has been specifically rejected in Sesa Goa's case [2004] 271 ITR 331 (SC).
For the aforestated reasons, therefore, we are of the view that the Tribunal in the present case was right in allowing the deduction under sections 80HH and 80-I to the assessee holding that the ship breaking activity gave rise to the production of a distinct and different article. Accordingly, the said question is answered in favour of the assessee and against the Department."
22. Again, the Hon'ble Supreme Court in the case of in the case of CIT. Empee Poly Yarn P. Ltd. [320 ITR 665] while adjudicating the issue whether deduction was available for manufacturing twisted yarn has observed as under:
Having examined the process in the light of the opinion given by the expert, which has not been controverted, we find that POY is a semifinished yarn not capable of being put in warp or weft, it can only be used for making a texturized yarn, which, in turn, can be used in the manufacture of fabric. In other words, POY cannot be used directly to manufacture fabric. According to the expert, crimps, bulkiness etc. are introduced by a process, called as thermo mechanical process, into POY which converts POY into a texturized yarn. If one examines this thermo mechanical process in detail, it becomes clear that texturising and twisting of yarn constitutes "manufacture" in the context of conversion of POY into texturized yarn. At this stage, we may also reproduce, hereinbelow, para 10 of our judgment in the case of CIT v. Oracle Software India Ltd. reported in [2010] (1) Scale 425.
The term `manufacture' implies a change, but, every change is not a manufacture, despite the fact that every change in an article is the result of a treatment of labour and manipulation. However, this test of manufacture needs to be seen in the context of the above process. If an operation/process renders a commodity or article fit for use for which it is otherwise not fit, the operation/process falls within the meaning of the word `manufacture'."29
Applying the above test to the facts of this case, it is clear that POY simplicitor is not fit for being used in the manufacture of a fabric. It becomes usable only after it undergoes the operation/process which is called thermo mechanical process which converts POY into texturised yarn, which, in turn, is used for the manufacture of fabric. One more point needs to be mentioned. Under the Income-tax Act, as amended in 2009, the test given by this court in Oracle Software's case [2010] (1) Scale 4251 has been recognised when the definition of the word "manufacture" is made explicit by the Finance (No. 2) Act, 2009, which states that "manufacture" shall, inter alia, mean a change in bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. Applying this definition to the facts of the present case, it may be mentioned that the above thermo mechanical process also brings about a structural change in the yarn itself, which is one of the important tests to be seen while judging whether the process is manufacture or not. The structure, the character, the use and the name of the product are indicia to be taken into account while deciding the question whether the process is a manufacture or not.
Thus from the above decisions it is clear that processing or production of articles is also eligible for deduction u/s.80IA.
23. Now, we will deal with the decision in the case of CIT. London Star Diamond Co. (India) [supra]. First of all, we would like to emphasise that in that case the Hon'ble Bombay High Court was concerned with the following question:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was an industrial company within the meaning of section 2(8) of the Finance Act, 1975?"
The case has been decided for A.Y 1975-76. In those years there was a difference in rates of tax for industrial companies and other companies. The Hon'ble High Court noted that definition of industrial company given in section 2(8)© is as under:
30
"..industrial company' means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining."
The issue was whether cutting and polishing of diamond would constitute manufacturing or not. Though the court observed that cutting and polishing of diamond would not constitute manufacturing, but it was observed at page 521 as under:
"Diamond is naturally crystallised, nearly pure carbon. It has various uses. A clear, flawless piece of this stone after being cut and polished gets transformed into an article of jewellery. Raw diamonds and cut and polished diamonds are different and distinct marketable commodities, having different uses. That being so, it is difficult to hold that a company engaged in cutting and polishing raw diamonds for the purpose of exporting the same is into engaged in the "processing" of raw diamonds. Processing is much wider than "manufacture". It includes activities which may not tantamount to "manufacture".
Cutting and polishing of rough diamonds is definitely a process which amounts to "processing of goods" to convert them into marketable form, if not "manufacture" of goods. We are, therefore, of the clear opinion that the assessee is engaged in the business of processing of goods within the meaning of sub-clause (c) of clause (8) of section 2 of the Finance Act, 1975."
The above clearly shows that the court has clearly held that activity of cutting and polishing would definitely constitute processing. As we have already discussed above in other series of cases i.e. Vijay Ship Breaking Corpn. vs. CIT [supra], CIT. Empee Poly Yarn P. Ltd. [supra] and ITO vs. Arihant Tiles & Marbles Pvt. Ltd. [supra], the Hon'ble Apex Court has clearly observed that even production of article would amount to manufacture. We are of the view that assessee's case is almost identical with that of the issue raised before the Hon'ble Supreme Court in the case of ITO vs. Arihant Tiles & Marbles Pvt. Ltd. [supra], where steps involved in cutting and polishing 31 of marble blocks into marble tiles seems to be similar to the steps involved in cutting and polishing of diamonds. There are very large of marble stones which are cut in to smaller pieces through saw machines and those are then polished. We are of the view that in the assessee's case of cutting and polishing of diamonds is on a better footing than the case of cutting and polishing of marbles tiles. In any case, generally when two decisions on similar proposition are available, then the later decision has to be followed. The decision in the case of ITO vs. Arihant Tiles & Marbles Pvt. Ltd. [supra] being later in point of time, therefore we are of the view, that this decision should be followed. In view of this discussion, we are of the view that assessee was engaged in the business of manufacture of cutting and polishing of rough diamonds and, accordingly, eligible for deduction u/s.80IA. Therefore, we set aside the order of the ld. CIT[A] and direct the AO to allow deduction u/s.80IA.
24. In the result, assessee's appeals are allowed. Order pronounced in the open Court on this day of 23/3/2011.
Sd/- Sd/-
(R.S.PADVEKAR) (T.R.SOOD)
Judicial Member Accountant Member
Mumbai: 23/3/2011.
P/-*
32