M/S RAJ STATE MINES and MINERALS vs. C I T

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 45 / 2006 M/S Raj State Mines & Minerals ----Appellant Versus C I T ----Respondent _____________________________________________________ For Appellant(s) : Mr. Sanajay Jhanwar For Respondent(s) : Mr. Anuroop Singhi _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 26/04/2017 1. By way of this appeal, the appellant has assailed the judgment and order of the Tribunal whereby the Tribunal has dismissed the appeal and confirmed the order passed under Section 263 of the Income Tax Act, 1961. 2. This Court while admitting the matter has framed the following questions of law:- “(i) Whether on the facts and in the circumstances of the case the order passed by the ld. ITAT is not perverse, unjust, improper, and contrary to the material on record and without application of mind? (ii) Whether before insertion of proviso to section 36(i) (iii) by the Finance Act 2003 w.e.f. 1/4/2004 any interest paid in respect of capital borrowed for the purpose of business or profession could be disallowed on the ground that the same was capital in nature?

(2 of 7) [ITA-45/2006] (iii) If there is no dispute that the interest expenditure is in respect of capital borrowed for the purpose of the business/profession of the assessee, is it not irrelevant for the allowability u/s 36(i)(iii) of the Act as to whether the expenditure is of capital or revenue nature or whether the same is pre-operative? iv) Whether the order of ld. AO passed u/s 143(3) can be said to be erroneous within the meaning of Section 263 of the Act when the interest expenditure has been allowed by him on the basis of the facts on record that the same was in respect of the Term Loan availed for the expansion of the existing mining and beneficiation activities to carry on the same business.” 3. Counsel for the appellant contended that in view of the decision of this court in the case of CIT vs. M/s. Mangalam Arts D.B. Income Tax Appeal No.25/2009 decided on 14.2.20107 wherein it has been held as under:- 4. He has contended that the word which has been used in the section ‘manufacturing or process’ is to be construed very strictly and since it is an exemption, it should be equated with the provisions of Section 80I which has been interpreted by the Supreme Court in the case of Commissioner of Income-Tax Vs. Gem India Manufacturing Co.- (2001) 249 ITR 307, wherein it has been held as under: 4. The Tribunal took the view that it did because in "common parlance and commercial sense raw diamonds are not the same thing as polished and cut diamonds. The two are different entities in the commercial world. Though the chemical composition remains the same the physical characteristics of shape and class, etc., are substantially different". It would appear that no material had been placed on the record before the Tribunal upon which it could have reached the conclusions that, either in common or in commercial parlance, raw diamonds were not the same thing as polished and cut diamonds, and that they were different entities in the commercial

(3 of 7) [ITA-45/2006] world. An ipse dixit of the Tribunal is not the best foundation for a decision. “5. The High Court, as aforestated, concluded that the case was covered by its decision in the case of CIT v. London Star Diamond Co. (I.) Ltd.: [1995]213ITR517(Bom) . It was not pointed out to the High Court that the question in that case was whether the assessee was an industrial company within the meaning of Section 2(8) of the Finance Act, 1975, and that, in answering that question, the High Court had held that raw diamonds and cut and polished diamonds were different and distinct marketable commodities having different uses ; Therefore, a company engaged in cutting and polishing raw diamonds for the purpose of export was engaged in the "processing of goods" to convert them into marketable form. The question that the High Court and we are here concerned with is whether, in cutting and polishing diamonds, the assessee manufactures or produces articles or things. 6. There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. There is no material on the record upon which such a conclusion can be reached. 7. The appeal is, therefore, allowed. The order under challenge is sot aside. The question quoted above is answered in the negative and in favour of the Revenue. The assessee shall pay to the Revenue the costs of the appeal.” 5. He has contended that the view taken by the Tribunal is required to be reversed in view of the observations made by the Supreme Court. 6. Mr. Jhanwar, counsel for the respondent has taken us to the judgment of the Tribunal and contended that while considering the process which has been undertaken by the assessee, the Tribunal has observed as under: “The various activities carried out by the appellant, are as under:- (i) Firstly, the appellant purchases wood, semi finished material which requires further wood and other work of beautification and of artistic value. There

(4 of 7) [ITA-45/2006] apart, the other raw material, the wooden out of which is the main, and others i.e. grass, nails etc. are purchased. (ii) Thereafter various other items are added depending upon the designs, size, quality of the subjected item to be exported, (iii) After purchasing the semi finished goods and raw material, as stated above, the very first step is to assemble the same, if so required. Some time the semi finished furniture is required to be given further shape as per the desired exportable designs. (iv) Thereafter, punching is done by hammering nails by hand. It is pure labour work which can be done by experts only. It may be noted that the nails are of special type having artistic and antique look. (v) Fitting of brass and iron items again with a view to give artistic and antique look. (vi) Filling and filing with a view to smoothen the surface. (vii) Sanding (viii) Carving with a view to bring the artistic value and to show that these are antique items. (ix) And lastly polishing (x) Thereafter, various wooden items are fitted according to the need and design of the exportable wooden article, i.e. wooden moulding is fitted Inlay is done.” 7. He contended that taking into consideration the observations made by the Supreme Court in the case of Income Tax Officer, Udaipur Vs. Arihant Tiles and Marbles (P) Ltd.- (2010) 320 ITR 79 (SC), the Supreme Court has observed as under: “16. In the case of Aman Marble Industries Pvt. Ltd. v. Collector of Central Excise reported in 157 ELT 393(SC), the question that arose for consideration was whether cutting of marble blocks into marble slabs amounted to manufacture for the purposes of Central Excise Act. At the outset, we may point out that in the present case, we are not only concerned with the word "manufacture", but we are also concerned with the connotation of the word "production" in Section 80IA of the Income Tax Act, 1961, which, as stated herein- above, has a wider meaning as compared to the word "manufacture". Further, when one refers to the word "production", it means manufacture plus something in addition thereto. The word "production" was not under consideration before this Court in the case of Aman Marble Industries Pvt. Ltd. (supra). Be that as it may, in that case, it was held that "cutting" of marble blocks into slabs per se did not amount to "manufacture". This

(5 of 7) [ITA-45/2006] conclusion was based on the observations made by this Court in the case of Rajasthan State Electricity Board (supra). In our view, the judgment of this Court in Aman Marble Industries Pvt. Ltd. (supra) also has no application to the facts of the present case. One of the most important reasons for saying so is that in all such cases, particularly under the Excise law, the Court has to go by the facts of each case. In each case one has to examine the nature of the activity undertaken by an assessee. Mere extraction of stones may not constitute manufacture. Similarly, after extraction, if marble blocks are cut into slabs per se will not amount to the activity of manufacture. 17. In the present case, we have extracted in detail the process undertaken by each of the respondents before us. In the present case, we are not concerned only with cutting of marble blocks into slabs. In the present case we are also concerned with the activity of polishing and ultimate conversion of blocks into polished slabs and tiles. What we find from the process indicated herein- above is that there are various stages through which the blocks have to go through before they become polished slabs and tiles. In the circumstances, we are of the view that on the facts of the cases in hand, there is certainly an activity which will come in the category of "manufacture" or "production" under Section 80IA of the Income Tax Act. As stated herein- above, the judgment of this Court in Aman Marble Industries Pvt. Ltd. was not required to construe the word "production" in addition to the word "manufacture". One has to examine the scheme of the Act also while deciding the question as to whether the activity constitutes manufacture or production. Therefore, looking to the nature of the activity stepwise, we are of the view that the subject activity certainly constitutes "manufacture or production" in terms of Section 80IA. In this connection, our view is also fortified by the following judgments of this Court which have been fairly pointed out to us by learned Counsel appearing for the Department. 18. In the case of Commissioner of Income Tax v. Sesa Goa Ltd. reported in 271 ITR 331 (SC), the meaning of the word "production" came up for consideration. The question which came before this Court was whether the ITAT was justified in holding that the assessee was 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 ore did not amount to

(6 of 7) [ITA-45/2006] "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 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 saying that the High Court's opinion was unimpeachable. It was held by this Court that the word "production" is wider in ambit and it has a wider connotation than the word "manufacture". It was held that while every manufacture can constitute production, every production did not amount to manufacture.” 8. He has contended that the word ‘production’ is to be construed as a wider meaning than ‘manufacture’ and in view of the observations made by the Supreme Court, the view taken by the Tribunal is just and proper. 4. Another decisions of the Supreme Court in the case of Deputy Commissioner of Income Tax vs. Core Health Care Ltd. reported in (2008) 298 ITR 194 (SC) and Veecumsees vs. Commissioner of Income Tax reported in (1996) 220 ITR 185 (SC). 5. Counsel for the respondent has supported the order of the Tribunal and contended the view taken by the Authority is just and proper. No interference is called for. 6. We have heard counsel for both the sides. 7. Taking into account the decision of this Court and the Supreme Court, we are of the opinion that the issues are now no more res integra and covered by the aforesaid decisions.

(7 of 7) [ITA-45/2006] 8. In that view of the matter, the issues are answered in favour of the assessee and against the department. 9. The appeal stands allowed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. A.Sharma/100