TMI Blog2006 (9) TMI 369X X X X Extracts X X X X X X X X Extracts X X X X ..... t was stated that the profit was gone down on account of increase in the liability of P.F. payment made by the contractor to their workers and 10 per cent had been increased on account of inflation in the market. The Assessing Officer was not convinced with this explanation and he was of the view that most of the labourers are paid in cash which is supported by self-made vouchers only through labour contractors and these expenses cannot be verified. Moreover, there is a substantial drop in the gross profit to 18.23 per cent from 23.03 per cent shown in earlier years was also not particularly substantiated. The Assessing Officer accordingly came to the conclusion that the assessee has paid the labour charges excessive without any legitimate business considerations so as to bring gross profit for the year comparable with the earlier years and he disallowed Rs. 7,25,563 after invoking the provisions of section 37 of the I.T. Act. 3. The assessee preferred an appeal before the CIT(A) with the submissions that service charges paid to the contractors amounted to 20 per cent of the labour charges which was increased from 5 per cent to 10 per cent due to inflation etc., Subsequently, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee could not explain the reasons for the increase in the labourer payments and reimbursement of P.F. expenses to the contractors. Whereas, it was the liability of the contractors, the revenue authorities has rightly disallowed the part of the claim of the assessee. The CIT(A) has already granted sufficient relief to the assessee, as such, no further relief is called for. 6. Having heard the rival submissions and from careful perusal of the record, we find that no doubt assessee has claimed more expenses, but, he has also filed the documentary evidence in support of the claim. The assessee has furnished the vouchers and the details of the payments to the contractors, copies of agreement entered with the contractor were also filed before the Assessing Officer. The contention of the assessee that he has engaged the contractors for getting the job work done and rest of the responsibility is of the contractor to engage the labourers cannot be disregarded in the absence of any material evidence that assessee has made the excess payment in order to reduce the gross profit. We have also examined the judgment of the jurisdictional High Court in the case of Godavari Sugar Mills Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng. Assessee preferred an appeal before the CIT(A) with the submissions that the rough diamonds are subjected to various process such as kerfing, sawing, drilling, boiling, etc., and as a result commercial different diamonds which can yield gem value has been produced, as finished goods. These, cut and polished diamonds are changed in their shape and value. As such, assessee is engaged in the manufacturing activity. Assessee has also placed various judgments to distinguish the facts of the impugned case with the case of the CIT v. London Star Diamond Co. (I) Ltd. [1995] 213 ITR 517 (Bom.) in which the jurisdictional High Court has decided the issue against the assessee. The CIT(A) re-examined the issue in the light of the judgment of the Apex Court in the case of CIT v. Zem India Mfg. Co. [2001] 249 ITR 307 and has held that the rough diamonds into polished diamonds is not a manufacturing process and the same is not covered by the provisions of section 80-IA of the I.T. Act. The relevant observations of the CIT(A) are extracted hereunder : "The appellant is engaged in the business of cutting and polishing of rough diamonds on commission basis. The appellant had claimed d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not find any substantial support in the contention of the appellant. Various decisions quoted by the appellant are not directly applicable to the facts of the appellant. Furthermore, Hon ble Supreme Court in the case of Zem India Mfg. Co. 249 ITR 307 has recently held that conversion of rough diamonds into polished diamonds is not a manufacturing process and hence, the same is not covered by the provisions of section 80-IA of the I.T. Act. Considering the decision of Hon ble Supreme Court in the case of Zem India Mfg. Co. the controversy in respect of treating the activity of conversion of rough diamonds into polished diamond as a manufacturing activity has been settled down and the ratio of this decision has become a law. In view of these facts, I hold that the appellant is not entitled to get any deduction under section 80-IA as making polished diamonds out of rough diamonds cannot be considered as manufacturing as envisaged under section 80-IA of the I.T. Act. Therefore, appellant s appeal is rejected on this ground." 8. Now the assessee is preferred an appeal before the Tribunal and invited our attention to the provisions of sub-section (12)( b ) of section 80-IA with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al undertaking. But, for claiming the deduction under section. 80-IA, the industrial undertaking must be involved in manufacture or producing of any article or thing, as has been mandated in sub-section (2) of section 80-IA of the I.T. Act. According to sub-clause ( iii ) of sub-section (2) of section 80-IA any industrial undertaking must be involved in manufacturing or producing of any article or thing not being an article or thing is specified in the list in 11th Schedule or operates one or more cold storage plant or plants in any part of India for claiming deduction under section 80-IA of the Act. Meaning thereby, for claiming deduction under section 80-IA, the unit should be an industrial undertaking and it should also be engaged in manufacturing or producing any article or thing. If it is not engaged any of these activities, it would not be entitled for deduction under section 80-IA of the I.T. Act. So far as the insertion of Explanation 4 to section 10A is concerned, the learned DR has invited our attention that this Explanation was inserted to explain the activities of cutting and polishing of precious and semi-precious stones only with respect to section 10A of the I.T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, it will not be eligible for deduction under section 80-IA of the Act. In these circumstances, the general definition of industrial undertaking given in section 33B would not make any industrial undertaking eligible for deductions under section 80-IA of the I.T. Act. We, therefore, find no force in the argument of the assessee that even if the assessee is involved in processing of goods, it is, eligible for deduction under section 80-IA of the Act. 11. Now we come to the next argument of the assessee that has been raised with regard to the definition of manufacture or produce given in Explanation 4 to section 10A of the I.T. Act. In this Explanation, it has been made clear that this definition of manufacture or produce is only for the purpose of this section i.e., section 10A of the I.T. Act, according to which, manufacture or produce shall include the cutting and polishing of precious and semi-precious stones. This Explanation was inserted by Finance Act, 2003 with effect from 1-4-2004. First of all, this Explanations were not on the statute during the relevant impugned assessment year and secondly the cutting and polishing of precious and semi-previous stones is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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