L. Narasimha Reddy, J.@mdashThe respondent is an Industrial Undertaking, established in an area notified as ''Backward'', under the Income Tax
Act, 1961 (for short ''the Act''). It undertakes the activity of converting cotton pieces, known as ''cops'' into yarn. Depending upon the customer
requirement, sometimes single yarn is made into double or multiple yarn threads. In its returns submitted for the assessment year 1992-1993, the
respondent claimed certain deductions, referable to Sections 80HH and 80I of the Act. The Assessing Officer took the view that no process of
manufacture whatever is undertaken by the respondent, and thereby, it is not entitled to claim deductions under Sections 80HH and 80I of the Act.
Aggrieved by the order of the Assessing Officer, the respondent carried the matter in appeal to the Commissioner of Income Tax (Appeals). The
Commissioner allowed the appeal, through order, dated 27.03.1996. Challenging the same, the department filed I.T.A. No. 1309/Hyd/1996,
before the Hyderabad Bench ''A'' of the Income Tax Appellate Tribunal (for short ''the Tribunal''). The appeal was dismissed, through order, dated
30.08.2002. Hence, this further appeal under Section 260A of the Act.
2. Sri S.R. Ashok, learned Senior Counsel for the appellant, submits that, it is only when an activity of manufacture is undertaken that an assessee
would qualify for deductions under Sections 80HH and 80I of the Act, and that in the instant case, the assessee did not undertake any activity,
except the one of making a single thread into double or multiple thread products. He contends that an activity of that nature cannot be treated as
manufacture and the Assessing Officer has correctly denied the deductions. He has placed reliance upon the judgments of the Supreme Court in
Collector of Central Excise, Jaipur Vs. Banswara Syntex Ltd., and J.K. Cotton Spinning and Weaving Mills Ltd. and Anr Vs. Union of India
(UOI) and Ors, .
3. Sri B.S. Shivaji, learned counsel for the respondent, on the other hand, submits that the process undertaken by his client is a compendious one,
involving the manufacture of yarn from cops and that there was no basis for the Assessing Officer to deny the deductions. He contends that any
industrial undertaking not only manufacturing, but also producing articles, is entitled for deduction under Section 80HH of the Act, and the
appellant is making an effort to place a restricted interpretation on such a provision, which he intended to encourage the establishment of industries
in backward areas.
4. The Parliament provided certain incentives to encourage the establishment of industries and hotels in backward areas. Section 80HH of the Act
is one such provision. Bereft of the other details, sub-section (1) thereof reads as under:
Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to
which this section applies, thee shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of
the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof.
5. In addition to that, an industrial undertaking or a hotel, is extended the benefit of deduction under Section 80I of the Act, independently,
irrespective of the place of its location. The nature of activity undertaken by the respondent herein is mentioned in its written statement as under:
A brief process of manufacturing is that the yarn is obtained in the form of cops weighing about to 50 gms, each. These cops are fed to the
winding machine and about 250 such cops forms, a cone after winding. These cones are then fed to cheese winding machine and then to doubling
machine for twisting and brings a molecular change in the fibre content of the yarn. Consequently, it brings about total change in parameters of
quality such as single yarn strength count, inch, and end use, thereby bring in a totally different and a new product.
6. The respondent was claiming the benefit of deduction under Section 80HH of the Act, year after year. For the assessment years, 1989-90 and
1990-91, the Assessing Officer allowed deductions. However, for the assessment year 1992-1993, the deduction was denied, on the ground that
no process of manufacturing is involved. The Commissioner of appeals reversed the finding of the Assessing Officer and granted the relief. The
same was upheld by the Tribunal.
7. Basically, the concept of manufacture is specific to the regime under the Central Excise Act. Any product notified under the relevant provisions
is leviable excise duty. It is not uncommon that a particular product passes through various stages, in semi-finished form or in a totally different form
altogether. More often the question arises as to whether a particular activity can be treated as an independent activity of manufacture, so that the
product coming out of it, becomes liable for excise duty.
8. Before undertaking any further discussion on this aspect, a semblance of caveat needs to be added to the effect that the parameters for
manufacture that become applicable under the Central Excise Act, are totally different from those under the Income Tax Act, wherever the
occasion arises. While the Central Excise Act is primarily concerned with the activity of manufacture, as it has to depend upon only that activity for
levy of excise duty, the occurrence of the word ''manufacture'', is rare and incidental under the Income Tax Act. Further, the verification of the
actual activity of the Act may not be the primary concern. It is in the context of identifying an assessee and the taxability of the income that, a
verification, in this regard, is made.
9. The purport of the manufacture was explained by the Supreme Court in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes),
Ernakulam Vs. Pio Food Packers, as under:
There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether
the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved, in its manufacture.
Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent
of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing
at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes take
the commodity to the point where commercially it can no longer be regarded as the original commodity, but instead is recognised as a new and
distinct article, that a manufacture can be said to take place. 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 recognised as still retaining its original identity.
10. In fact, this was taken note of by the Commissioner himself.
11. In the context of Section 80HH of the Act, the Parliament guardedly used the expression ""manufacturing process"", or ""manufacture"", or
produce articles"" in sub-section (4) and other parts thereof.
12. What becomes entitled to claim exemption under Section 80HH of the Act, is an industrial undertaking, as is evident from the very heading of
the Section, than the nature of activity taken up by it. Once the assessee answers the description of an industrial undertaking, it is immaterial
whether it is manufacturing, or producing or processing. The amount that qualifies for deductions is the profits and gains of such an undertaking to
the extent of 20%. Things would have been different altogether, had the deduction been restricted only to the activity of manufacturing.
13. In Banswara Syntex Limited''s case (supra), the Supreme Court has dealt with a matter that arose under the Central Excise Act. The question
involved there was whether the activity of multiplying a single yarn, which was already produced, can be treated as an independent activity of
manufacture. It was held that once the single yarn was treated as an activity of manufacture, and excise duty was levied thereon, the one of twisting
the single yarn into 2 or 3 stands, cannot be treated as an independent activity of manufacture. It is difficult to derive any support from that
judgment, while dealing with a case pertaining to deduction under Section 80HH of the Act. Even otherwise, the activity of the respondent was not
restricted to the one of multiplying the yarns that were already produced by someone else. It has already been mentioned that the respondent has
been manufacturing yarn, from cops, and then, multiplying the yarns, depending upon the customer demand.
14. Similarly, in M/s. J.K. Cotton Spinning and Weaving Mills Limited''s case (supra), the subject-matter was leviability of the excise duty on a
product under the Central Excise Act. Their Lordships held that if a manufactured product has been subjected to further process, and an
independent product has emerged half way through, even that can be levied, the excise duty, subject, of course to the benefit of MODVAT credit.
That is not the situation in the instant case.
15. The Bombay High Court in The Commissioner of Income Tax Vs. Emptee Poly-Yarn Pvt. Ltd., examined the matter from the purview of the
Act and held that the product involved therein was independent of its raw material, and thereby, the questions were answered in favour of the
assessee. The same was affirmed by the Supreme Court in Commissioner of Income Tax, Mumbai Vs. Emptee Poly-Yarn Pvt. Ltd., .
16. We do not find any ground to interfere with the order passed by the Tribunal.
17. The appeal is accordingly dismissed. There shall be no order as to costs. The miscellaneous petitions filed in this appeal shall also stand
disposed of.
