TMI Blog2014 (12) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... inition can be extended for claiming deduction u/s 80JJAA of the Act as well, as the business of the assessee was cutting and polishing of rough diamonds - as canvassed by the assessee is well supported by Explanation 4, inserted in section 10A with effect from 01.04.2004 and also certain decisions, which are relied upon by the AR, has to be held to be bona fide - This is case where the claim made by the assessee u/s 80JJAA has only been rejected - the explanation given by the assessee with regard to its belief for the claim of the impugned deduction cannot be said to be mala fide – in COMMISSIONER OF INCOME-TAX Versus RELIANCE PETROPRODUCTS PVT. LTD. [2010 (3) TMI 80 - SUPREME COURT] it has been held that the claim made by the assessee, which cannot be sustained in law, will not give rise to penalty to section 271(1)(c) of the Income Tax Act - penalty u/s 271(1)(c) is not exigible in respect of disallowance of claim of deduction, made by the assessee – thus, the order of the CIT(A) is set aside – Decided in favour of assessee. - ITA No. 3034/Mum/2012 - - - Dated:- 22-8-2014 - B. R. Baskaran, AM And Vivek Varma, JM,JJ. For the Petitioner : Mr. B. V. Jhaveri For the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een referred and dealt with, i.e. Gem India (supra) and Arihant Tiles Marbles (P) Ltd. reported in 320 ITR 79 (SC). In the case of Sheetal Diamonds Ltd., the coordinate Bench, dealing with the issue, (as extracted) 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. Co. [2001] 249 ITR 307/117 Taxman 368 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 manufacturing activity. He vehemently argued that this dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the purpose of section 80-IA. 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; (vi) 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: Held, affirming the decision of the High Court, that this was not a case of merely cutting marble blocks into slabs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 or 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 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 not 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court was right in coming to the conclusion that the activity undertaken by the respondents-assessee 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, 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 recognized 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 consequences, particularly in view of the fact that the assessee 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 bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the arguments of the AR that there could be two views, cannot stand. 12. The DR relied on the decisions of CIT vs Zoom Communications (P) Ltd. reported in 327 ITR 510 (Del), CIT vs Escort Finance Ltd., reported in 188 Taxman 87 (Del) to support his argument. 13. The AR in the rejoinder submitted that the time when Gem India (supra) was delivered, definition of the word manufacture was not there. But the legislature, brought out an amendment and inserted Explanation 4 to section 10A w.e.f. 01.04.2004, giving the definition of the word manufacture, which included cutting and polishing of rough diamonds within its fold. The AR in all fairness accepted the fact that no such definition was inserted in the impugned section, i.e. section 80JJAA, but he submitted that the insertion of Explanation clearly talks about cutting and polishing of rough diamonds would amount to manufacture and since the assessee was in the business of cutting and polishing of rough diamonds, the modus of the assessee amounted to manufacture and its facility would be an undertaking. The AR, finally submitted that the case of the assessee in any case is fortified by the decision of Hon ble Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r deduction u/s 80IA of the Act. 16. In these circumstances, the view as canvassed by the AR/assessee is well supported by Explanation 4, inserted in section 10A with effect from 01.04.2004 and also certain decisions, which are relied upon by the AR, has to be held to be bona fide. This is case where the claim made by the assessee u/s 80JJAA has only been rejected. It is not the case of the AO that the assessee has concealed the particulars of income, nor in the wake of Explanation 4 to section 10A, it can be held that the assessee had furnished inaccurate particulars of income. In our opinion, therefore, the explanation given by the assessee with regard to its belief for the claim of the impugned deduction cannot be said to be mala fide. The Hon ble Supreme Court in the case of Reliance Petoproducts Pvt. Ltd. (supra) has succinctly held that the claim made by the assessee, which cannot be sustained in law, will not give rise to penalty to section 271(1)(c) of the Income Tax Act. 17. Under these circumstances, we are of the view that penalty u/s 271(1)(c) is not exigible in respect of disallowance of claim of deduction, made by the assessee. Accordingly, we set aside the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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