1990-VIL-94-ITAT-DEL
Equivalent Citation: [1990] 34 ITD 10
Income Tax Appellate Tribunal DELHI
IT Appeal No. 2926 (Delhi) of 1987
Date: 30.04.1990
INSPECTING ASSISTANT COMMISSIONER
Vs
VARNISH UDYOG LTD.
BENCH
Member(s) : K. S. VISHWANATHAN., M. A. BAKSHI.
JUDGMENT
Per Shri M.A. Bakshi, J.M. --- This appeal filed by the revenue is directed against the order of CIT(A)-I,New Delhi on the following ground :
" On the facts and in the circumstances of the case, the learned CIT(A) erred in directing the IAC(A) to allow deduction u/s. 80-I and 80HH."
2. The assessee had installed an industrial unit at Abohar, a notified backward area. During the year in appeal the assessee received a sum of Rs. 9,36,966 on account of job charges for twisting of yarn during the year. The claim of the assessee u/s. 80HH and 80-I was rejected by the assessing officer on the ground that separate balance sheet in respect of the unit had not been filed ; that the assessee had done job work and was not manufacturing goods on his own account and thirdly, the twisting of yarn does not amount to manufacturing of goods for the purposes of sections 80HH and 80-I claims. The CIT(A) considering the decision of the Gujarat High Court in the case of CIT v. J.B. Kharwar & Sons [1987] 30 Taxman 225 to the effect that carrying on the job work of dyeing and printing of cloth was manufacturing activity held that assessee was entitled to a deduction u/s. 80HH and 80-I. The learned CIT(A) in arriving at this decision also relied upon the order of the ITAT in for asst. year 1979-80 in the case of N. (P.) Ltd v. ITO [IT Appeal No. 927 (Ahd.) of 1982] wherein it was held that twisting of yarn by a chemical process amounted to manufacture of a different commodity than the flat yarn. The learned counsel for the assessee Shri K.C. Srivastava contended that the three reasons given by the assessing officer for disallowance were untenable. The first reason was that balance sheet was not filed. The learned counsel pointed out that separate Profit and Loss account which was necessary for determination of claim u/s. 80-I had been filed before the assessing officer and accordingly, there was no justification for the assessing officer to deny the benefit of the claim to the assessee for want of separate balance sheet which was not at all required under the Statute. Even otherwise, the learned counsel contended that if at all it was necessary the same could have been provided as and when asked for. The second ground on which the claim of the assessee has been denied is that the assessee has been carrying on job work and has not been manufacturing goods. The learned counsel relied upon the decision of the Gujarat High Court in the case of J.B. Kharwar & Sons for the proposition that it is not necessary for the assessee to manufacture goods on its own. It is enough the learned counsel contended, that the assessee is engaged in the manufacture of article and things. If the assessee is engaged in the manufacture of article and things, deduction u/s. 80HH and 80-I permissible. The third ground relied upon by the assessing officer for disallowance of the claim is that the twisting of yarn by a chemical process does not amount to manufacture of goods. The learned counsel contended. that the decision of the ITAT, Ahmedabad Bench in the case of N.(P.) Ltd. on identical facts has held that twisting of yarn by a chemical process amounts to manufacture. The learned counsel contended that flat yarn is used for manufacture of twisting yarn. Several threads are put together and twisted and processed chemically to produce a different commodity known as twisted yarn having different properties. In such circumstances, the learned counsel contended that CIT(A) was fully justified in directing to allow the claim u/s. 80HH and 80-I of the I.T. Act, 1961.
3. The learned Departmental Representative, on the other hand contended, that for the reasons given by the assessing officer in his assessment order, the assessee is not entitled to deduction u/s. 80HH and 80-I of the Income-tax Act, 1961.
4. We have given our careful consideration to the rival contentions. The assessing officer has given three reasons for disallowance of the claim of the assessee. The balance sheet had not been filed by the assessee, in our view, is not a valid reason for the disallowance of the claim. The assessee had filed separate Profit & Loss account in respect of the unit in question and that was sufficient for determination of claim of the assessee. The second ground on which claim of the assessee has been rejected is that the assessee was doing job work and was not involved in the manufacture of goods owned by him. This issue is covered by the decision of the Gujarat High Court in the case of J.B. Kharwar & Sons. In this case the question before their Lordships of the Gujarat High Court was as to whether process of dyeing and printing of grey cloth would amount to manufacturing of goods for the purposes of section 80J irrespective of the fact that grey cloth which was subject to process of dyeing and printing belongs to assessee or someone else. Their Lordships decided the issue in favour of the assessee by holding that the activity which the assessee carried on was manufacturing activity irrespective of the fact as to whether the cloth belonged to it or its customers. Thus the second objection raised by the assessing officer is also unsustainable. The third ground relied upon by the assessing officer for disallowance is that the processing of flat yarn into twisted yarn does not amount to manufacture. The issue in this case is as to whether the process of twisting the flat yarn by a chemical process amounts to manufacture of a different commodity than the flat yarn. In the case of Dy. CST v. Pio Food Packers [1980] 46 STC 63, 66, their Lordships of the Supreme Court dealing with the issue to whether processing amounts to manufacture held as under :
" At some point, processing and manufacturing will merge. But where the commodity retains a continuing substantial identity through the processing stage, we cannot say that it has been manufactured."
The Hon'ble Justice Pathak in the abovenoted case further held :
" Manufacture is the end result of one or more processes through which the original commodity is made to pass ... where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing it must be regarded as still retaining its original identity."
In the case of Union of India v. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 791 at 795 the following passage in the permanent edition of words and phrases was referred to by the Hob'ble Supreme Court with approval " manufacture implies a change, but every change is not manufacture and yet every change of article is the result of treatment, labour and manipulation. But something more is necessary and the must be transformation, and new and different article must emerge having distinctive name, character or use ". The Hon'ble Supreme Court in the case of Empire Industries Ltd. v. Union of India [1986] 162 ITR 846 referred to with approval the decision of the Hon'ble Bombay High Court in Kores (India) Ltd. v. Union of India [1982] 10 ELT (J) 253. The Hon'ble Bombay High Court had held as under :
" Fabric itself means woven materials. It was contended that processing the manufactured fabric does not bring into existence any new woven material but the question is new and different goods emerge having a distinctive name, use and character."
The Hon'ble Supreme Court in Empire Industries Ltd.'s case held that the process of bleaching, dyeing and printing etymologically also means manufacturing. It was accordingly held that grey fabric after it undergoes the various processes of bleaching, dyeing, sizing, printing, finishing, etc., emerges as a commercially different commodity with its own particulars, structure, custom and other commercial incident and accordingly there was in that sense manufacture of goods. A larger Bench of the Supreme Court constituted of five judges in the case of Ujagar Prints v. Union of India [1989] 179 ITR 317 has approved its earlier decision in Empire Industries Ltd. 's case. Thus it is evident from the case law cited above that sometimes processing of goods and manufacturing of goods merge with each other and if a different commodity than the original commodity is produced, the processing may amount to manufacture. Whether processing of goods amounts to manufacture of goods will depend on the facts and circumstances of each case. The issue as to Whether processing of flat yarn by a chemical process amounts to manufacture of twisted yarn had come up before the ITAT Ahmedabad Bench in the case of N. (P.) Ltd. The Hon'ble Bench after quoting expert opinion in the order came to conclusion that when the flat yarn is physically twisted under mechanical process in chemicals, a different commercial commodity than the flat yarn is produced and as such the processing of the flat yarn amounts to manufacturing of goods. Since no contrary decision has been brought to our notice, we respectfully following the decision of the Ahmedabad Bench of the ITAT hold that the processing of flat yarn by a mechanical process and by twisting several threads together, a different commercial commodity is produced. Thus the third objection raised by the assessing officer for denying the benefit of deductions u/s. 80HH and 80-I to the assessee that the assessee is not engaged in the manufacture of goods does not stand the test of law. For the aforementioned reasons we hold that the order passed by the CIT(A) does not call for any interference and that the assessee is entitled to deduction in respect of secs. 80HH and 80-I of the Income-tax Act, 1961.
5. In the result, the appeal of the revenue is dismissed
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