Case Law Details
CIT Vs Mahavir Crimpers (Gujarat High Court)
The Gujarat High Court considered an appeal filed by the Revenue against the order of the Income Tax Appellate Tribunal, Ahmedabad dated 18 May 2017. The Revenue challenged the Tribunal’s decision on two principal issues: the deletion of an addition of ₹1 crore made under Section 68 of the Income-tax Act, 1961, and the deletion of disallowance relating to additional depreciation of ₹38,15,241 claimed on crimping of yarn.
On the first issue, the Revenue contended that the identity and creditworthiness of the lender company remained unverified and that the lender had received substantial funds and cash deposits before advancing the loan. The Tribunal had observed that there was no dispute regarding the identity of the creditor company and that the loan was not received in cash. The assessee had furnished relevant details, including assessment records of the lender, source of funds, balance sheet reflecting sufficient reserves, surplus and share premium, and evidence of repayment in the succeeding assessment year. The Tribunal also noted that the assessee had regular loan transactions with the lender and relied on the decisions in DCIT v. Rohini Builders and CIT v. Ayachi Chandrashekhar Narsangji while confirming the deletion of the addition.
The High Court held that the issue relating to Section 68 was entirely factual in nature. Upon examining the record and the Tribunal’s findings, it concluded that no question of law arose for consideration.
The second issue concerned whether crimping/texturizing of yarn constituted a manufacturing activity, thereby entitling the assessee to additional depreciation. The Court referred to the judgment of the Bombay High Court in Commissioner of Income-tax v. Emptee Poly Yarn (P) Ltd., where it was held that the processes of texturizing and twisting yarn result in a product with different physical and chemical properties and create a distinct commodity recognized in trade. Such processing was held to amount to manufacture because the original commodity loses its identity and a new and distinct product emerges.
Agreeing with the Bombay High Court’s reasoning, the Gujarat High Court held that the activity amounts to manufacturing. Consequently, the Tribunal’s view was upheld.
Finding no merit in the Revenue’s contentions on either issue, the Gujarat High Court dismissed the tax appeal.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal, Ahmedabad dated 18th May 2017, raising following questions for our consideration :
{A} “Whether on the facts and circumstances of the case and in law, the Appellate Tribunal is right in upholding the decision of CIT [A] in deletion of addition made by the Assessing Officer of Rs. 1,00,00,000/= under Section 68 of the Income Tax Act without appreciating the facts that identity and credit worthiness of subscribers to lender company remained unverified ?”
B. “Whether on the facts and circumstances of the case and in law, the Appellate Tribunal is right in upholding the decision of the CIT [A] without appreciating the facts that just before giving loan to assessee, the lender company M/s. Raj Capital & Finance Private Limited received lot of amount from family members of Bhutra Family of Surat and there is substantial amount of cash deposits in the bank accounts of subscribers of lender Company 7”
C. “Whether on the facts and circumstances of the case and in law, the Appellate Tribunal is right in upholding the decision of CIT [A] in deletion of addition of Rs. 38,15,241/= without appreciating the facts that crimping of yarn is intermediate process of treating yarn and does not come under manufacturing activity therefore the assessee is not entitled for additional depreciation 7”
Two main issues are raised by the Department. First is with respect to addition of Rs. 1 Crore made by the Assessing Officer under Section 68 of the Income-tax Act, 1961 {“the Act” for short}. The second issue pertains to a question whether the activity of crimping of yarn can be said to be the manufacturing activity.
With respect to the additions made under Section 68 of the Act, the Tribunal while confirming the deletion made by the CIT [A] observed as under :-
“5. We have heard both the parties. There is no dispute so far as identity of the creditor party M/s. Raj Capital & Finance Pvt. Ltd. is concerned. There is further no quarrel that the Assessing Officer does not dispute the fact that the assessee has not availed any cash loan from the said entity. His only case is that the assessee has not been able to prove source along with genuineness and creditworthiness of the above stated entity. It emanates from above extracted portion that the assessee has filed all relevant details along with assessment records of the said entity explaining source of the loans to the above entity’s balance sheet indicating sufficient reserves, surplus and share premium as followed by repayment in succeeding assessment year. Learned Departmental Representative fails to rebut CIT (A)’s conclusion that the assessee has been having regular loan transactions with the said entity. We notice in this backdrop that Hon’ble jurisdictional high court’s decision in DCIT v. Rohini Builders, (2002) 256 ITR 360 (Guj) upholding tribunal’s conclusion deleting Section 68 addition in view of identitical details; squarely applies here. So in their lordships’ latter decision in CIT v. Ayachi Chandrashekhar Narsangji (2014) 42 taxman.com 251(Guj) confirming this tribunal’s another decision reversing Section 68 addition wherein the department head accepted repayment of loan in subsequent year to be correct. We take into account all these facts and judicial precedents to affirm CIT (A)’s findings under challenge deleting the impugned addition. This first substantive ground is accordingly declined.”
Upon perusal of the documents on record and in particular the above noted portion of the Tribunal’s order, it clearly emerges that the entire issue is factual in nature. No question of law arises.
With respect to the second issue, we notice that the Bombay High Court in the case of Commissioner of Income-tax v. Emptee Poly Yarn [P] Limited, reported in 305 ITR 309 [Bombay] in the context of assessee’s claim for deduction under Section 80IA of the Act, examined this very question and came to the conclusion that the activity of texturizing and twisting of yarn amounts to manufacturing or article or thing distinct from the original. Resultantly, such activity is held to be manufacturing activity. The Court held as under :
“13. From the material considered it would be clear that POY has different physical and chemical properties and when POY chips undergoes the process of texturising and/or twisting, the yarn i.e. twisted and/or texturised or both results in a product having different physical and chemical properties. In other words the process applied to POY either for the purpose of texturising or twisting constituted manufacture as the article produced is recognized in the trade as distinct commodity pursuant to the process it undergoes and which amounts to manufacture. Under the Central Excise Act, the Union of India itself treat the POY as distinct from POY, drawn twisted or textured or both. From all the material we have no hesitation in arriving at a conclusion that the process which POY undergoes in the process of texturising and twisting results into a new and distinct product and regarded in the Trade as distinct from the commodity involved in the manufacture. The process amounts to manufacture as the original commodity looses its identity. In view of our findings the view taken by the Tribunal will have to be upheld.”
We are in respectful agreement with the view taken by the Bombay High Court.
Tax Appeal is, therefore, dismissed.
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