1996 (2) TMI 71 - HC - Income Tax

Backward Area Finding Of Fact High Court New Industrial Undertaking Question Of Law Special Deduction

Summary

Issues Involved:
1. Entitlement to deduction under section 80J of the Income-tax Act, 1961.
2. Entitlement to deduction under section 80HH of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Entitlement to deduction under section 80J of the Income-tax Act, 1961

The court examined whether the assessee, a closely held company deriving income from the business of centrifuging rubber latex, was entitled to deductions under section 80J of the Income-tax Act, 1961. The Assessing Officer rejected the claim, which was confirmed by the Commissioner of Income-tax (Appeals). The Income-tax Appellate Tribunal (ITAT) later accepted the claim based on a notification dated July 8, 1983, which classified latex concentrate as manufactured goods. The court observed that the essential question was whether the conversion of normal latex into preserved latex through the centrifuging process constituted manufacturing. The Tribunal, upon detailed consideration, concluded that centrifuged latex is a commercially different product from normal latex, involving significant qualitative changes. This transformation was deemed sufficient to classify the process as manufacturing, thereby entitling the assessee to the deduction under section 80J.

Issue 2: Entitlement to deduction under section 80HH of the Income-tax Act, 1961

Similar to the first issue, the court needed to determine if the assessee was entitled to deductions under section 80HH of the Income-tax Act, 1961. The ITAT's detailed analysis of the centrifuging process highlighted that the process involved significant physical and chemical changes, resulting in a product (centrifuged latex) that was distinct from the original field latex. The Tribunal referenced the Handbook of Natural Rubber Production in India and considered various factors such as the method of preservation, the efficiency of the centrifuging process, and the commercial uses of centrifuged latex. The Tribunal concluded that the process of centrifuging resulted in a new commodity with distinct commercial uses, thus qualifying as manufacturing or production. Consequently, the assessee was entitled to the deduction under section 80HH.

Legal Precedents and Conclusion:

The court referred to several Supreme Court decisions, including Empire Industries Ltd. v. Union of India, Ujagar Prints v. Union of India, and CIT v. N. C. Budharaja and Co., to establish the principles of manufacturing and production. The court emphasized that the emergence of a commercially different product through a series of processes qualifies as manufacturing. The Constitution Bench in Ujagar Prints' case clarified that a product's commercial distinctiveness is the crucial test for determining manufacturing. Applying these principles, the court upheld the Tribunal's decision, affirming that the centrifuging process resulted in a new, commercially distinct product, thereby entitling the assessee to deductions under sections 80J and 80HH.

The court dismissed the Department's petitions, affirming the Tribunal's findings and denying the need for further reference. The detailed factual and legal analysis confirmed that the assessee's process of centrifuging latex constituted manufacturing, qualifying for the claimed deductions.