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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI R. C. SHARMA & SHRI PAWAN SINGH
O R D E R Per R. C. Sharma, A. M.: These are the appeals filed by the assessee against the order by the ld. CIT(A) for the assessment years (A.Ys.) 2006-07 and 2007-08, in the matter of order passed u/s.143(3) and 143 r/w s. 147 of the Income Tax Act, 1961.
Common grievance in both the years pertain to decline of claim of additional depreciation. In the A.Y. 2006-07, scrutiny assessment was framed u/s.143(3), wherein after calling details of plant and machinery so installed during the year, the Assessing Officer has allowed the assessee’s claim of additional deprecation. Thereafter the 2 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT assessment was reopended on the plea that as per the decision of Hon’ble Supreme Court in the case of Gem India Mfg. Co. [2001] 249 ITR 307 (SC), cutting and polishing of diamonds did not amount to manufacture/production. Accordingly, additional deprecation was disallowed and the order of AO was confirmed by the CIT(A).
It was argued by the ld. AR that the diamond cutting and polishing involve a very lengthy process and requires special skills to convert rough diamond into polished diamond and both are different products recognized in the market. Reliance was placed on the order of Hon’ble Supreme Court in the case of Heaven Diamonds P. Ltd (in Civil Appeal No. 9936 of 2011 dated 18.11.2011), remitted the matter back to the Tribunal to categorically consider whether the process undertaken by the assessee constitutes manufacture or not. Thus, he submitted that the Hon'ble Supreme Court has itself clarified that the decision of Gem India Mfg. Co. (supra) cannot be applied in all the cases. The process of conversion of raw diamond into a polished diamond has to be examined in a given case and here the assessee has submitted a detailed process as to how a rough diamond has been converted into polished diamond which involves various stages through which cutting and polishing of diamond is undertaken for making altogether different product. The case of the assessee is thus, purely distinguishable from the decision of Gem India Mfg. Co. (supra) inasmuch as the assessee has fully demonstrated the entire process of manufacturing. He placed on record the order of the Tribunal in the case of M/s. Flawless Diamond (India) Ltd. in & 5617/Mum./2012 vide order dated 14.02.2014, wherein similar activity of cutting and polishing of diamond was considered and it was held that it amounts to manufacturing, therefore the assessee is eligible for claim of deduction us/80IC of the Act. Reliance was also placed by the ld. AR on the decision of Co-ordinate Bench in the case of Shital Diamond (in ITA Nos.6687, 6688 & 6689/Mum/2003 dated 25.01.2012), wherein similar activity of cutting and polishing of diamond was considered to be manufacturing, therefore eligible for claim of deduction
3 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT u/s. 80-IB of the Act. As per the ld. AR once the activity of cutting and polishing of diamond is held to be manufacturing activity, the assessee is eligible for claim of additional depreciation.
On the other hand, the ld. DR relied on the order of the lower authorities and contended that in view of the decision of Hon’ble Supreme Court in the case of Gem India Mfg. Co. (supra), cutting and polishing of diamond does not amount to manufacture, therefore, the A.O. was justified in declining claim of additional depreciation thereon.
We have considered the rival contentions and carefully gone through the orders of the authorities below and found from the record that the assessee is engaged in cutting and polishing of diamond and its export. During the financial year relevant to the assessment year under consideration, the assessee firm had installed plant and machinery in order to carry out modernization of the entire polishing and manufacturing process. These plant and machinery were instrumental in increasing the quality of finished product and production capacity of the assessee firm. The manufacturing activity of the assessee involved the following processes: Rough diamond is imported from various suppliers. Rough diamond sample is sent for testing before manufacturing. Grading: Rough is distributed to different assorters for grading of rough diamonds, as per quality, size, shape, colour etc. Planning - determining size and shape, marking a rough diamond Cutting: Cutting of Rough diamond in different shapes depending upon its size, shape and cleavage planes with the target of minimal process loss. Cleaving a diamond position for cutting and final cutting. Cleaving and sawing: Once the cut is decided and planned, diamond is manually cleaved or sawed with diamond coated rotating saws. Diamond cutting is done through laser machines to achieve the optimum specification & precision.
4 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT Bruiting: Bruiting involves the face up outline of a round diamond for facing. In bruiting process, diamond being bruited is spun on lathe while another diamond is forced against it, forming rounded outline i.e. one diamond is used to shape another. Polishing: It involves blocking which establishes diamond's basic symmetry thereafter facets are created to get polished diamonds. Boiling and other Chemical Processing of Polished diamonds to weed out any impurities, stains etc, before the same is considered for its sale Thus the manufacturing of polished diamond involves various process as mentioned above. In manufacturing process, rough diamonds are the basic raw material, which, after passing through above processes, become the polished diamond. We found that these processes of the assessee firm was accepted as manufacturing process from the' beginning & the same was verified and affirmed by the Hon'ble ITAT, in the course of block proceedings after detailed verification. This fact is accepted again and again in every year’s scrutiny assessment.
In the case of Heaven Diamonds P. Ltd., the Hon’ble Supreme Court had set aside the order of the Hon’ble High Court holding that cutting and polishing of diamond does not amount to manufacture. The Hon’ble Supreme Court remitted the matter back to the file of the Tribunal to categorically consider whether the process of cutting and polishing undertaken by the assessee constitute manufacture or not. In this case, the Hon’ble Supreme Court has observed that the decision of Gem India Mfg. Co. (supra) cannot be applied in all the cases and held that the process of conversion of rough diamond into polished diamond has to be examined in a given case. The Hon’ble Supreme Court in the case of ITO v/s Arihant Tiles and Marbles, [2007] 320 ITR 79 (SC) has cited case law on this subject and observed that the detailed process was undertaken for the purpose of production and manufacturing of article or thing has to be examined for coming to any 5 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT conclusion. It was held that conversion of marble blocks into polished slabs and tiles constitutes “manufacture or production” as it results in emergence of raw and distinct commodity and, therefore, assessee undertaking such activity is entitled for benefit of sec. 80-IA.
We had carefully gone through the decision of the Co-ordinate Bench in the case of Flawless Diamond (India) Ltd. (supra), wherein the tribunal have considered the decision of Hon’ble Supreme Court in the case Gem India Mfg. Co. (supra) as well as Heaven Diamonds P. Ltd. (supra) and many other judicial pronouncement of Hon’ble High Court and Hon’ble Supreme Court as well as the tribunal, and observed as under: ‘10. We have carefully considered the rival contentions perused the relevant findings of the authorities below and also the material placed on record. The main issue before us is, firstly, whether the cutting and polishing of diamond amounts to manufacturing or production of article or thing as envisaged in section 80IC and secondly, whether the decision of the Hon'ble Supreme Court in Gem India Mfg. Co. (supra) has set at rest the said issue and is no longer res integra. The activities which can be considered to be manufacturing or production of article or thing or not, has been the subject matter of the judicial scrutiny and analysis in several cases. In majority of the judicial pronouncements, the emphasis on the term “manufacture” has been understood as the end result of one or more process through which the original commodity changes or converts into a distinct article having different name, characteristic, use, etc. The Hon'ble Supreme Court has always opined to examine the process involved for manufacturing of a product in question. In case of Aspin Wall & Co. Ltd. v/s CIT, [2001] 251 ITR 323 (SC), the Apex Court held that in the absence of a definition of the word “manufacture” it has to be given a meaning as it is understood in common parlance. It is to be understood as meaning, the production of article for use from raw material or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour M/s. Flawless Diamond (India) Ltd. 13 or machines. If the change made in the article results in a new and different articles, then it would amount to manufacturing activities. The Supreme Court also quoted the observations made in Dy. CST v/s PIO Foood Packers, [1989] Supp. SCC 174 are as under:–
6 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT “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 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 manufacturer can be said to take place.”
Further, the Hon'ble Supreme Court in Arihant Tiles and Marbles (supra) has cited catena of case laws on this subject and observed that the detail process undertaken for the purpose of production or manufacturing or article or thing has to be examined for coming or reaching to any conclusion. The Supreme Court also referred to the new definition brought in statute in section 2(29BA). Similarly, the Hon'ble Supreme Court in CIT v/s Emptee Poly Yarn Pvt. Ltd., [2010] 320 ITR 665 (SC), came very heavily in stressing the fact that the Revenue must examine the process applicable to the product in question and not to go only by dictionary meaning for deciding this issue.
Thus, to determine whether the cutting and polishing of diamond amounts to manufacturing or production of any article or thing, various process through which the rough diamond undergoes to become a polished diamond, has to be examined. Here in this case before the Assessing Officer, the assessee has demonstrated the various process of diamond cutting and polishing along with the various stages and M/s. Flawless Diamond (India) Ltd. 14 machinery involved. These processes have already been discussed in the forgoing paragraphs. Further, before the learned Commissioner (Appeals) also, the assessee has furnished various additional evidences including the list of machineries and the photographs of various machineries involved in the process of cutting and polishing which have also been examined by the Assessing Officer. In fact, there is no counter opinion or rebuttal on this score by the Department. It has not been the Revenue’s case that various processes and the staging of cutting and polishing of diamond does not result into a separate and distinct entity, which is polished diamond. The conversion of a rough raw diamond as explained by the assessee, involves different processing and several stages to become into a polished diamond, which is entirely a different product, and is mainly used in manufacturing of jewellery and also as an independent
7 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT item of sale, whereas the raw diamond has only industrial usage. The market value of a rough diamond and polished diamond is also at great variance, as polished diamond is far more expensive than, the rough diamond. Looking from the angle of usage, shape, size and colour, the rough diamond converts into entirely a different and distinct product all together which has a different character and usage. The Tribunal in Sheetal Diamonds Ltd. (supra) has discussed the various stages and process involved for cutting and polishing of diamond in detail which for the sake of understanding the entire process and the different attributes of the rough and polished diamond is reproduced herein below:– “16. As far as the issue whether cutting and polishing of diamonds would constitute manufacturing or not, before us Ld. Counsel of the assessee had produced rough diamonds which are just like ordinary stones or more precisely coloured glass type with uneven surface and were of uneven shape. All the samples were of dark brownish / greenish/bluish colour measuring about 1 c.m. to 2½ c.m. Ld. Counsel M/s. Flawless Diamond (India) Ltd. 15 of the assessee produced cut and polished diamonds in the size of 10 cents to 1 carat, which were looking sparkling white. It was explained before us with reference to the procedure for cutting and polishing or processing of the diamonds as listed out by one Mr. Kantilal Chhotalal in the book titled as „Diamonds From Mines To Markets‟. In this book after stating that diamond cutting is a labour incentive industry and India was one of the main centers for the cutting. The process has been briefly discussed as under: “The ultimate value of a diamond depends, among other factors, on its make, that is, the quality of the finished product. A “good make” refers to a stone that is of fine proportions, symmetrical, and well polished. The purpose of cutting, faceting and polishing is to bring out the best in a diamond in terms of brilliance and purity, which results from the refraction and reflection of light. It is also necessary to preserve as much of the original weight as possible. Diamond has some special properties which are not common to other transparent minerals. These are a high refractive index, a high degree of clarity, colour dispersion, reflectivity and luster, and an extremely high degree of hardness. Luster is the characteristic of reflecting light from the surface. In the diamond, this is unique. Besides reflecting light from its surface, some of the light is partly absorbed before reflection. Most transparent minerals are not very reflective, but diamond is exceptional, its surface reflects 17 per cent of the light falling on it, in comparison to glass which reflects only 5 per cent. A diamond is 8 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT cut and polished to give maximum brilliance which in turn depends on the light reflected back to the viewer [life] and the flashes of colour [fire] when light is split into the colours of the spectrum. But maximum fire is not consistent with maximum life, and the diamond cutter‟s job is to achieve a fine balance between the two. The diamond cutter is known in the trade as a diamond manufacturer, for he manufactures polished goods from rough diamonds. Diamond cutting includes: Cleaving, splitting the stone along a place of cleavage; Sawing, dividing a crystal by a diamond saw; Bruting or Girdling, removing a portion of the crystal by rubbing or grinding it with another diamond, as for instance, the girdle of a brilliant; Grinding and polishing, making a flat surface or facet on a rotating wheel or lap coated with diamond powder; Polishing, preparing the finely ground or facet, by a method similar to grinding.”
We also used Inter Net to find out scientific information on the process involved in making out find diamond. We could get Wikepedia encyclopedia on „Net‟ in which various stages involved in making of a „diamond‟ are described. The process of cutting and polishing of diamonds as described in the Wikepedia encyclopedia is as under: M/s. Flawless Diamond (India) Ltd. 16 Diamond cutting is the art, skill and, increasingly, science of changing a diamond from a rough stone into afaceted gem. Cutting diamond requires specialized knowledge, tools, equipment, and techniques because of its extreme hardness. The first guild of diamond cutters and polishers (diamantaire) was formed in 1375 in Nuremberg, Germany, and led to the development of various types of 'Cut'. This has two meanings in relation to diamonds. The first is the shape: square, oval, and so on. The second relates to the specific quality of cut within the shape, and the quality and price will vary greatly based on the cut quality. Since diamonds are very hard to cut, special diamond- bladed edges are used to cut them. The first major development in diamond cutting came with the "Point Cut" during the latter half of the 14th century: the Point Cut follows the natural shape of an octahedral raw diamond crystal, eliminating some waste in the cutting process.
Further, various tests have been explained as under:
Planning Diamond manufacturers analyze diamond rough from an economic perspective, with two objectives steering decisions made about how a faceted diamond will be cut. The first objective is that of maximum
9 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT return on investment for the piece of diamond rough. The second is how quickly the finished diamond can be sold. Scanning devices are used to get 3-dimensional computer model of the rough stone. Also, inclusions are photographed and placed on the 3D model, which is then used to find an optimal way to cut the stone.
Maximizing value The process of maximizing the value of finished diamonds, from a rough diamond into a polished gemstone, is both an art and a science. The choice of cut is influenced by many factors. Market factors include the exponential increase in value of diamonds as weight increases, referred to as weight retention, and the popularity of certain shapes amongst consumers. Physical factors include the original shape of the rough stone, and location of the inclusions and flaws to be eliminated.
Weight retention The weight retention analysis studies the diamond rough to find the best combination of finished stones as it relates to per carat value. For instance, a 2.20 carat (440 mg) octahedron may prod uce (i) either two half carat (100 mg) diamonds whose combined value may be higher than that of (ii) a 0.80 carat (160 mg) diamond + 0.30 carat (60 mg) diamond that could be cut from the same rough diamond.
The round brilliant cut and square brilliant cuts are preferred when the crystal is an octahedron, as often two stones may be cut from one such crystal. Oddly shaped crystals, such as macles are more likely to M/s. Flawless Diamond (India) Ltd. Weight retention The weight retention analysis studies the diamond rough to find the best combination of finished stones as it relates to per carate value. For instance, a 2.20 carat (440 mg) octahedron may produce (i) either two half carat (100 mg) diamonds whose combined value may be higher than that of (ii) a 0.80 carat (160 mg) diamond + 0.30 carat (60 mg) diamond that could be cut from the same rough diamond.
10 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT The round brilliant cut and square brilliant cuts are preferred when the crystal is an octahedron, as often two stones may be cut from one such crystal. Oddly shaped crystals, such as macles are more likely to be cut in a fancy cut—that is, a cut other than the round brilliant— which the particular crystal shape lends itself to. Even with modern techniques, the cutting and polishing of a diamond crystal always results in a dramatic loss of weight, about 50%. Sometimes the cutters compromise and accept lesser proportions and symmetry in order to avoid inclusions or to preserve the weight. Since the per-carat price of a diamond shifts around key milestones (such as 1.00 carat), many one-carat (200 mg) diamonds are the result of compromising Cut quality for Carat weight. Some jewelry experts advise consumers to buy a 0.99 carat (198 mg) diamond for its better price or buy a 1.10 carat (220 mg) diamond for its better cut, avoiding a 1.00 carat (200 mg) diamond, which is more likely to be a poorly cut stone.
Colour retention In colored diamonds, cutting can influence the color grade of the diamond, thereby raising its value. Certain cut shapes are used to intensify the color of the diamond. The radiant cut is an example of this type of cut. Natural green color diamonds most often have merely a surface coloration caused by natural irradiation, which does not extend through the stone. For this reason green diamonds are cut with significant portions of the original rough diamond's surface (naturals) left on the finished gem. It is these naturals that provide the color to the diamond.
Turnaround minimization The other consideration of diamond planning is how quickly a diamond will sell. This consideration is often unique to the type of manufacturer. While a certain cutting plan may yield a better value, a different plan may yield diamonds that will sell sooner, and thereby returning the investment sooner. Cleaving or sawing Cleaving is the separation of a piece of diamond rough into separate pieces, to be finished as separate gems. Sawing is the use of a diamond saw or laser to cut the diamond rough into separate pieces.
Bruting
11 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT Bruting is the process whereby two diamonds are set onto spinning axles turning in opposite directions, which are then set to grind against each other to shape each diamond into a round shape. This can also be known as girdling.
Polishing Polishing is the name given to process whereby the facets are cut onto the diamond and final polishing is performed. The process takes the steps blocking, faceting, also called "brillianteering", and Polishing.
Final inspection The final stage involves thoroughly cleaning the diamond in acids, and examining the diamond to see whether it meets the quality standards of the manufacturer.
Cutting process It is possible only because the hardness of diamond varies widely according to the direction in which one is trying to cut or grind. A simplified round brilliant cut process includes the following stages: • Sawing the rough stone. •Table setting where one facet is created. The table facet is then used to attach the stone into a dop (a lapidary tool holding gemstones for cutting or polishing). • Bruting the girdle. • Blocking four main pavilion facets. • Transferring to another dop in order to rotate the stone. • Blocking four main crown facets. • Cutting and polishing all pavilion facets. • Transferring to another dop. • Cutting and polishing all crown facets This is just one, although a fairly common way of creating a round brilliant cut. The actual process also includes many more stages depending on the size and quality of the rough stone. For example, bigger stones are first scanned to get the three-dimensional shape, which is then used to find the optimal usage. The scanning may be repeated after each stage and bruting may be done in several steps, each bringing the girdle closer to the final shape.
12 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT The various processes like cleaving and splitting, bruting and girdling of diamond and polishing and cutting have been discussed in further detail in the book, but we feel there is no need to highlight the technical aspects. Sufficient it to say that rough diamonds looks like a stones (or glass) of uneven shape which, as mentioned earlier, were looking highly coloured, particularly like brownish/greenish/bluish colours, whereas the final product of diamond is a much smaller piece and generally sparkling white in colour. It was explained to us that size of the final product i.e. „polished diamond‟ depends on many factors and while buying rough diamonds only an expert can evaluate as to which size the final product would be and even such opinion is not final because while cutting, the rough diamond may get cut into smaller pieces and in that case it has to be finished as such. But a plain look at rough diamond and finished diamond would show that they are totally different products.
The aforesaid judgment has been quoted solely for the purpose of explaining the entire process through which rough diamond undergoes to become a separate and distinct product of being a polished diamond and we need not reiterate again. The same process and explanation has been given by the assessee before the Assessing Officer as well as before the learned Commissioner (Appeals), which has not been rebutted at all. Even going by the new definition of “manufacture” as envisaged in section 2(29BA), the process of transformation of rough diamond into polished diamond, results into a new and distinct or article having different name and use. Thus, the entire process of transformation in this case can be held as manufacturing within the ambit of section 80IC.
Now coming to the decision of the Hon'ble Supreme Court in Gem India Mfg. Co. (supra), it is seen that the Hon Supreme Court has categorically held that in the said case, there was no material on record before the Tribunal to come to the conclusion that the raw diamonds are not the same thing as polished and cut diamonds. The relevant observations and the conclusion of the Hon'ble Supreme Court based on such facts are as under:– “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 M/s. Flawless Diamond (India) Ltd. 20 different". It would appear that no material had 13 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT 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 world. An ipse dixit of the Tribunal is not the best foundation for a decision.
The High Court, as aforestated, concluded that the case was covered by its decision in the case of CIT vs. London Star Diamond Co. (I) Ltd. (supra). 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 s. 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. 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 raw 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.”
Later on, the Supreme Court in the judgment and order dated 18th November 2011, passed by the Division Bench of Three Judges in Heaven Diamonds Pvt. Ltd. (supra), have categorically held that the reliance on the decision of Gem India Mfg. Co. (supra) may not be correct as in that case the assessee could not demonstrate the process undertaken by it to convert raw diamond into a superior commodity. The entire judgment of the Hon'ble Supreme Court for the sake of ready reference is reproduced herein below:– “We find from the impugned order of the Tribunal that there is no discussion on the process undertaken by the assessee, who claims benefit of section 80IB of the Act. The assessee imprts raw diamonds and applies thereon the process of sawing, turning, profiling, cutting, drilling, polishing, etc., by the use of sophisticated machineries resulting in production of a superior M/s. Flawless Diamond (India) Ltd. 21 marketable commodity. Detailed procedure has been set out in the paper
14 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT book. The Tribunal ought to have examined the process as to whether such process would constitute “manufacture” under section 80IB. That exercise has not been undertaken. The reliance on the judgment of this Court in the case of CIT v/s Gem India Mfg. Co. Reported in [2001], 249 ITR 307 may not be correct for the simple reason that in that case, the Revenue succeeded as Gem India Mfg. Co. Was not able to demonstrate the process undertaken by it to convert raw diamonds into a superior commodity. Moreover, the High Court has also not gone into that aspect. The High Court should have remitted the case to the Tribunal to consider whether the process undertaken by the assessee constituted “manufacture”. Under the above circumstances, the impugned order of the High Court and the Tribunal are set aside and the matter is remitted to the Tribunal for de novo consideration in the light of what we have stated hereinabove.” [emphasis added]
Thus, from the aforesaid decision, it can be safely inferred that, what is required to be examined is the process undertaken for conversion of raw / rough diamonds into superior or polished diamond. In this case, as stated above, the assessee has duly placed on record the entire process and the stages through which the rough diamond undergoes for becoming the polished diamond, which is a separate and distinct product and has a different usage. Such a process has neither been rebutted by the Revenue nor any other counter opinion have been sought to contradict the assessee’s version of the process. Thus, in our opinion, once the entire process of cutting and polishing of diamond have not been rebutted and also the fact that the rough and polished diamond are two distinct commodity having different usage, not only in the common parlance but also in real sense, then it has to be understood that the cutting and polishing of diamond amounts to manufacturing or production of article or thing as envisaged for the purpose of claiming deduction under section 80IC. Thus, the contention raised by the learned counsel before us is accepted that simply relying on the decision of Gem India Mfg. Co. (supra) by the Revenue to deny the claim of deduction is uncalled for in the present case, especially in the wake of later decision of the Hon'ble Supreme Court in Heavens Diamond (supra) which has clarified this point. Accordingly, the decision and the conclusion drawn by the learned Commissioner (Appeals) for the year under appeal i.e., assessment year 2008–09 are set aside and assessee’s claim for deduction under section 80IC is allowed.
15 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT 17. Since we have allowed the assessee’s claim on merits, therefore, we are not expressing any opinion raised by the learned counsel that if the claim for deduction has been allowed in the earlier year, the same should be allowed in this year also. Thus, the ground no.1 to 5 raised by the assessee are treated as allowed.
In the appeal for the assessment year 2009–10, exactly same issue has been raised which are arising out of similar facts and findings of the learned Commissioner (Appeals). Therefore, the findings given above will apply mutatis mutandis in this appeal also and consequently, the assessee’s claim for deduction under section 80IC is allowed.
The next common issue raised by the assessee in both the years under appeal relates to charging of interest under sections 234B and 234D.
Both the parties admitted before us that this ground is consequential in nature. Accordingly, we direct the Assessing Officer to give consequential effect while re–computing the income of the assessee keeping in view our findings given above and in accordance with the provisions of law.
In the result, assessee’s appeals for the assessment year 2008– 09 and 2009–10 are allowed.’
We had applied the preposition of law laid down in various judicial pronouncement as discussed above to the facts of instant case and found that the assessee has installed heavy machinery for the purpose of polishing and cutting of diamonds. The assessee had undergone through various process through which the rough diamond undergo to become a polished diamond. The conversion of rough diamonds involve different processing and several stages to become a polished diamond which is entirely a different product and mainly used in manufacturing of jewellery and also has an independent item of sale, whereas the rough diamond has only industrial uses. The market value of a rough diamond and polished diamond is also at great variances insofar as the polished diamond is far more expensive than, the rough diamond. Even looking from angle of usage, shape, size and colour, the rough
16 & 6437/Mum/2011 (A.Ys. 2006-07 & 2007-08) M/s. Bhavani Gems vs. Dy. CIT diamond converts into entirely a different and distinct product all together which has a different character and usage.
In view of the above discussion, we do not find any merit for disallowance of assessee’s claim of additional deprecation in respect of its activity of cutting and polishing of diamond which amounts to manufacturing. Accordingly, we direct the A.O. to allow the assessee’s claim of additional depreciation in both the years under consideration.
Insofar as the reopening of assessment for the A.Y. 2006-07 is concerned, we find that as per the reasons recorded, the A.O. has correctly reopened the completed assessment. Accordingly, the ground taken by the assessee in this regard is dismissed.
11. In the A.Y. 2007-08, the assessee is also aggrieved for disallowance of telephone and mobile expenses, motor car expenses and staff welfare expenses. We have considered the rival contentions and found that the assessee’s claim of telephone and mobile expenses, motor car expenses was disallowed by the A.O. on ad hoc basis @ 10% of expenditure so claimed. We found that the assessee has filed full details of this expenditure, keeping in view the nature of the assessee’s business we restrict the disallowance to the extent of 5%. We direct accordingly.
12. The A.O. has also disallowed 10% of the staff welfare expenses on the plea that no details were filed by the assessee. Nothing was brought on record by the ld. AR during the course of hearing before us so as to persuade us to deviate from the findings recorded by the lower authorities. Accordingly, we confirm the disallowance so made on account of staff welfare expenses.