Facts of the Case

  • Assessee's Business: The Assessee is engaged in running a 100% Export Oriented Unit (EOU) at Dhoka, Gurgaon, dealing in the business of processing stone, marble, granite, etc., and exporting them globally.
  • Return of Income: The Assessee filed its return of income on 01.11.2004, declaring 'Nil' income for the Assessment Year in question. The assessment was framed under Section 143(3) of the Income-Tax Act, 1961.
  • Deduction Claimed: The Assessee claimed a deduction under Section 10B of the Act.
  • Assessing Officer's View: The Assessing Officer (A.O.) disallowed the deduction via an order dated 01.12.2006, holding that the Assessee was neither engaged in exporting "computer software" nor engaged in the "manufacture or produce of article or thing," which are necessary ingredients to qualify for Section 10B.
  • ITAT Appeal: The Income Tax Appellate Tribunal (ITAT) set aside the A.O.'s order, holding that the Assessee’s activities amounted to the manufacture or production of an article or thing, thereby satisfying Section 10B. The Revenue preferred an appeal before the High Court under Section 260A.

Issues Involved

  • Whether the processing, cutting, and polishing of raw blocks of stone, marble, and granite to convert them into finished marketable products amounts to "manufacture or production of an article or thing" under Section 10B of the Income-Tax Act, 1961.
  • Whether Explanation 4 to Section 10B (introduced by the Finance Act, 2003) restricts the definition of "manufacture or produce" exclusively to the cutting and polishing of precious and semi-precious stones, thereby excluding other materials like stone, marble, and granite.

Petitioner’s (Revenue's) Arguments

  • The Revenue argued that the Assessee's activities did not amount to the "manufacture or produce of article or thing" under Section 10B.
  • The Revenue's counsel heavily relied on Explanation 4 to Section 10B (inserted via Finance Act, 2003 w.e.f. 01.04.2004), which states: "For the purpose of this section, 'manufacture or produce' shall include the cutting and polishing of precious and semi-precious stones."
  • Backed by the Memorandum Explaining Provisions in the Finance Bill, 2003, the Revenue contended that fiscal support was specifically intended for precious and semi-precious stones. Therefore, the benefit under Section 10B was limited to those specific items and could not be extended to ordinary stone, marble, or granite.

Respondent’s (Assessee's) Arguments

  • The Assessee contended that raw stone blocks undergo extensive chemical, mechanical, and manual treatments, changing their original identity completely before becoming marketable slabs, molded pieces, and tiles.
  • The Assessee relied on the consistent view taken by various High Courts and the Supreme Court, highlighting that the term "production" has a wider connotation than "manufacture."
  • They placed reliance on the coordinate bench ruling of the Delhi High Court in Commissioner of Income Tax v. Sophisticated Marbles & Granite Industries (ITA No. 519/2009), which dealt with identical business activities.

Court Order / Findings

  • Nature of the Activity: The High Court observed that raw stone blocks undergo multiple precise processing stages: cutting via machines, applying full-size fiber on one side for structural support, filling cracks/holes with chemical formulations, machine polishing with oxide agents, and final sizing/shaping into tiles or molded pieces. This alters the initial raw form into a distinct marketable commodity, fully satisfying the legal definition of a "manufacturing process."
  • Precedents Honored: The Court followed its previous ruling in CIT v. Sophisticated Marbles & Granite Industries and noted with approval the Rajasthan High Court decision in Arihant Tiles and Marbles Pvt. Ltd. Vs. Income Tax Officer (295 ITR 148) and the Bombay High Court ruling in CIT Vs. Fateh Granite (P) Ltd. (314 ITR 32).
  • Scope of "Production": Citing the Supreme Court judgment in CIT Vs. Sesa Goa Ltd. (MANU/SC/1123/2004), the Court reaffirmed that the term "production" possesses a wider meaning than "manufacture." Since the expressions are utilized similarly in Section 80-IB and Section 10B, the wider interpretation applies to Section 10B for 100% EOUs.
  • Dismissal of Revenue's Appeal: The Court concluded that no substantial question of law arose and dismissed the Revenue's appeal.

Important Clarification

  • Interpretation of Explanation 4: The Court categorically rejected the Revenue's restrictive reading of Explanation 4 to Section 10B. It clarified that Explanation 4 explicitly uses the term "shall include", meaning it is an inclusive explanation, not an exhaustive or exclusive one.
  • It was added merely to explicitly extend fiscal support to the precious and semi-precious stone export sector, but by no stretch of imagination does it limit or restrict general manufacturing activities from claiming deduction under Section 10B based on settled general legal principles.

Section Involved

  • Section 10B of the Income-Tax Act, 1961 (Deduction for 100% Export Oriented Undertakings).
  • Section 143(3) of the Income-Tax Act, 1961 (Scrutiny Assessment).
  • Section 260A of the Income-Tax Act, 1961 (Appeal to the High Court).

Link to download the order –

 https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:13334-DB/AKS03092009ITA6042009_112849.pdf

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