PR. COMMISSIONER OF INCOME TAX-I LUDHIANA vs. M/S VARDHMAN YARNS & THREADS LTD CHANDIGARH ROAD LDH

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ITA/5/2018HC Punjab & HaryanaPHHC01119375201813 December 2019Author: MR. JUSTICE AJAY TEWARI,MR. JUSTICE VIVEK PURI5 pages
AI SummaryDismissed

What did the High Court hold?

The High Court decided both issues in favour of the Assessee. Regarding the first issue, the Court held that it was against the Revenue and in favour of the Assessee, noting that the Revenue could not cite any judgment to counter the proposition laid down by the Bench in the Phatela Cotgin Industries Pvt. Ltd. case. For the second issue, the Court relied on the Supreme Court's judgment in Commissioner of Income Tac, Mumbai vs. Emptee Poly-Yarn Pvt. Ltd., particularly para 7, which stated that texturizing and twisting of yarn constitutes 'manufacture' in the context of converting POY into texturized yarn. The Court found that the yarn used by the Assessee could not be utilized for threading purposes, thus falling within the definition of manufacturing. Consequently, Question No. 2 was answered against the Revenue and in favour of the Assessee. The appeals filed by the Revenue were dismissed. The Assessee's appeal (ITA No. 27 of 2018) was rendered infructuous and disposed of accordingly.

What were the facts?

This judgment concerns four appeals: three by the Revenue and one by the Assessee, filed under Section 260A of the Income Tax Act, 1961. The appeals challenge orders of the Income Tax Appellate Tribunal (ITAT) for Assessment Years (AY) 2008-09, 2009-10, and 2006-07. The primary dispute in ITA No. 5 of 2018 relates to interest income earned by the assessee on a security deposit with the Electricity Board. The Assessing Officer (AO) treated this as 'income from other sources' and disallowed its set-off against business interest expenditure. The AO also denied its inclusion for deduction under Section 80IC. The assessee's appeals to the CIT(A) were unsuccessful.

What were the issues?

The Tribunal had to decide two main questions in ITA No. 5 of 2018: 1. Whether the ITAT erred in law and facts by directing the AO to consider interest income received by the assessee on delayed payments from customers and suppliers as 'Business Income' instead of 'Income from Other Sources' as considered by the AO, turning on the nature of such income. 2. Whether the ITAT erred in law and facts in allowing deduction under Section 80IC by holding that the process undertaken by the assessee, converting yarn into thread, constitutes manufacturing, ignoring that it does not bring into existence a new or distinct product and potentially contradicting the Supreme Court's decision in CIT Vs. Emptee Ply Yarn (P) Ltd., which held that twisting and texturizing of yarn may not constitute 'manufacturing' in every case. Assessee's Contention: For issue 1, the assessee relied on the High Court's judgment in Phatela Cotgin Industries Pvt. Ltd. vs. Commissioner of Income Tax, stating that interest on delayed payments under contract constitutes business income. Revenue's Contention: For issue 1, the Revenue acknowledged the High Court's decision but could not cite any judgment to counter its proposition. For issue 2, the Revenue argued that the conversion of yarn into thread is a process, not manufacturing.

Which sections of the Income-tax Act were involved?

Section 260A,Section 80IC

AI-generated summary — verify with the full judgment below

-1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Date of Decision: 13.12.2019 ITA-5-2018 (O&M)

Pr. Commissioner of Income Tax-I Ludhiana ... Appellant vs. M/s Vardhman Yarns & Threads Ltd Chandigarh Road,Ludhiana .. Respondent ITA-27-2018 (O&M) ITA-6-2018 (O&M)

Pr. Commissioner of Income Tax-I Ludhiana ... Appellant vs. M/s Vardhman Yarns & Threads Ltd Chandigarh Road,Ludhiana .. Respondent ITA-321-2019 (O&M)

Pr. Commissioner of Income Tax-I, Ludhiana ... Appellant vs. M/s VTL Investment Ltd. (Formerly Known as Vardhman Threads Ltd.) Vardhman Complex, Chandigarh Road, Ludhiana. .. Respondent CORAM: HON'BLE MR. JUSTICE AJAY TEWARI HON'BLE MR. JUSTICE VIVEK PURI Present : Mr. Rajesh Katoch, Advocate with Ms. Pridhi Jaswinder Sandhu, Advocate for the appellant(s) in ITA Nos. 5, 6 of 2018 and ITA-321-2019 and for the respondent in ITA-27-2018. Ms. Radhika Suri, Senior Advocate with Mr. M.S.Kanda, Advocate for the appellant in ITA-27-2018 and for the respondent(s) in ITA Nos. 5, 6 of 2018 and ITA-321-2019. SMRITI 2019.12.20 10:10 integrity of this document -2- AJAY TEWARI, J. (ORAL)

1.

This is group of four appeals, three has been preferred by the Revenue and one by the Assessee.

2.

ITA No.5 of 2018 has been filed under Section 260A of the Income Tax Act, 1961 against the order dated 13.07.2017 passed by the Income Tax Appellate Tribunal, Division Bench, Chandigarh, in ITA No. 569/Chd/2012 for the A.Y.2008-09. 3. ITA No.27 of 2018 has been filed under Section 260A of the Income Tax Act, 1961 against the order dated 13.07.2017 passed by the Income Tax Appellate Tribunal, Chandigarh Bench, in ITA No. 1159/Chd/2013 for the A.Y.2009-10. 4. ITA No.6 of 2018 has been filed under Section 260A of the Income Tax Act, 1961 against the order dated 13.07.2017 passed by the Income Tax Appellate Tribunal, Division Bench, Chandigarh, in ITA No. 02/Chd/2014 for the A.Y.2009-10. 5. ITA No.321 of 2019 has been filed under Section 260A of the Income Tax Act, 1961 against the order dated 11.12.2018 passed by the Income Tax Appellate Tribunal, Division Bench, Chandigarh, in ITA No. 762/Chd/2009 for the A.Y.2006-07. 6. For the sake of convenience, facts are being extracted from ITA No.5 of 2018. 7. The brief facts relating to the issues are that the assessee had earned interest income from the security deposit made with the Electricity Board (HPSEB). The Assessing Officer treated the said interest income as 'income from other sources' and did not allow the set off of the same against the interest expenditure incurred by the assessee on the loan amount SMRITI 2019.12.20 10:10 integrity of this document -3- obtained from the banks for business purposes. The Assessing Officer disallowed the claim of the assessee for treating the said income as 'business income' and further to include the said income into the eligible claim for deduction under Section 80IC of the Income Tax Act, 1961. Assessee assailed the order of the Assessing Officer on this issued before CIT (A), but remained unsuccessful.

8.

The following questions have been raised in ITA No. 5 of 2018:- “1. That the Hon'ble ITAT has erred in law and facts in directing the AO to consider interest income received by the assessee on the delayed payments from customers and suppliers as 'Business Income' instead of 'Income from Other Sources' as considered by the AO.

2.

That Hon'ble ITAT has erred in law and facts in allowing deduction u/s 80IC by holding, that process undertaken by the assessee is a manufacturing activity ignoring the facts that conversion of yarn into thread does not amount to manufacturing as it does not bring into existence as new or distinct product and further ignoring the decision of Hon'ble Supreme Court in the constitute 'manufacturing' in every case.” 9. 2019.12.20 10:10 integrity of this document -4-

10.

Learned counsel for the Revenue has argued that actually in that case, an appeal could not be carried to the Supreme Court because of lower tax effect. However, he has not been able to cite any judgment to show or give any reason why the proposition laid down by the Bench in that case could not be followed.

11.

In the circumstances, we hold question No.1 against the Revenue and in favour of the Assessee.

12.

As regards the question No.2, the contention of learned counsel for the Revenue is that metamorphosis of yarn into thread is not manufacturing but process.

13.

In this connection, learned Senior counsel appearing on behalf of the Assessee has relied upon the judgment dated 20.01.2010 rendered by the Supreme Court in Civil Appeal No. 786 of 2010 titled as Commissioner of Income Tac, Mumbai vs. Emptee Poly-Yarn Pvt. Ltd. and particularly para 7 thereof which is reproduced hereinbelow:- “Having examined the process in the light of the opinion given by the expert, which has not been controverted, we find that POY is a semi-finished yarn not capable of being put in warp or weft, it can only be used for making a texturized yarn, which, in turn, can be used in the manufacture of fabric. In other words, POY cannot be used directly to manufacture fabric. According to the expert, crimps, bulkiness etc. are introduced by a process, called as thermo mechanical process, into POY which converts POY into a texturized yarn. If one examines this thermo mechanical process in detail, it becomes clear that texturising and twisting of yarn constitutes 'manufacture' in the context of conversion of POY into texturized yarn. At this stage, we may also reproduce, hereinbelow, para 10 of our judgment in the case of C.I.T. v. Oracle Software India Ltd., reported in MANU/SC/0040/2010: 2010 (1) SCALE

425.

"The term "manufacture" implies a change, but, every change is not a manufacture, despite the fact that every change in an article is the result of a treatment of labour and SMRITI 2019.12.20 10:10 integrity of this document -5- manipulation. However, this test of manufacture needs to be seen in the context of the above process. If an operation/process renders a commodity or article fit for use for which it is otherwise not fit, the operation/process fall's within the meaning of the word "manufacture".”

14.

It is not disputed that the yarn which has been used by the Assessee cannot be utilized, for instance for threading purpose. Resultantly, it falls within the definition of manufacturing. Question No.2 is answered against the Revenue and in favour of the Assessee.

15.

Consequently, the appeals filed by the Revenue are dismissed.

16.

Since the appeals filed by the Revenue are dismissed, learned senior counsel appearing for the Assessee states that the appeal bearing ITA No. 27 of 2018 has been rendered infructuous and the same may be disposed of as such.

17.

Consequently, ITA No.27 of 2018 is disposed of as having been rendered infructuous.

18.

Since the main case(s) is decided, pending application(s), if any, also stands disposed of. (AJAY TEWARI ) JUDGE (VIVEK PURI) JUDGE 13.12.2019 smriti Whether speaking/reasoned : Yes/No Whether Reportable : Yes/No SMRITI 2019.12.20 10:10 integrity of this document

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