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 CIT ----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, appellant has assailed judgment and order of Tribunal whereby Tribunal has dismissed appeal and confirmed order passed under Section 263 of Income Tax Act, 1961. 2. This Court while admitting matter has framed following questions of law:- (i) Whether on facts and in circumstances of case order passed by ld. ITAT is not perverse, unjust, improper, and contrary to material on record and without application of mind? (ii) Whether before insertion of proviso to section 36(i) (iii) by Finance Act 2003 w.e.f. 1/4/2004 any interest paid in respect of capital borrowed for purpose of business or profession could be disallowed on ground that same was capital in nature? (2 of 7) [ITA-45/2006] (iii) If there is no dispute that interest expenditure is in respect of capital borrowed for purpose of business/profession of assessee, is it not irrelevant for allowability u/s 36(i)(iii) of Act as to whether expenditure is of capital or revenue nature or whether same is pre-operative? iv) Whether order of ld. AO passed u/s 143(3) can be said to be erroneous within meaning of Section 263 of Act when interest expenditure has been allowed by him on basis of facts on record that same was in respect of Term Loan availed for expansion of existing mining and beneficiation activities to carry on same business. 3. Counsel for appellant contended that in view of decision of this court in 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 word which has been used in section manufacturing or process is to be construed very strictly and since it is exemption, it should be equated with provisions of Section 80I which has been interpreted by Supreme Court in case of Commissioner of Income-Tax Vs. Gem India Manufacturing Co.- (2001) 249 ITR 307, wherein it has been held as under: 4. Tribunal took view that it did because in "common parlance and commercial sense raw diamonds are not same thing as polished and cut diamonds. two are different entities in commercial world. Though chemical composition remains same physical characteristics of shape and class, etc., are substantially different". It would appear that no material had been placed on record before Tribunal upon which it could have reached conclusions that, either in common or in commercial parlance, raw diamonds were not same thing as polished and cut diamonds, and that they were different entities in commercial (3 of 7) [ITA-45/2006] world. ipse dixit of Tribunal is not best foundation for decision. 5. High Court, as aforestated, concluded that case was covered by its decision in case of CIT v. London Star Diamond Co. (I.) Ltd.: [1995]213ITR517(Bom) . It was not pointed out to High Court that question in that case was whether assessee was industrial company within meaning of Section 2(8) of Finance Act, 1975, and that, in answering that question, High Court had held that raw diamonds and cut and polished diamonds were different and distinct marketable commodities having different uses ; Therefore, company engaged in cutting and polishing raw diamonds for purpose of export was engaged in "processing of goods" to convert them into marketable form. question that High Court and we are here concerned with is whether, in cutting and polishing diamonds, assessee manufactures or produces articles or things. 6. There can be little difficulty in holding that raw and uncut diamond is subjected to process of cutting and polishing which yields polished diamond, but that is not to say that polished diamond is new article or thing which is result of manufacture or production. There is no material on record upon which such conclusion can be reached. 7. appeal is, therefore, allowed. order under challenge is sot aside. question quoted above is answered in negative and in favour of Revenue. assessee shall pay to Revenue costs of appeal. 5. He has contended that view taken by Tribunal is required to be reversed in view of observations made by Supreme Court. 6. Mr. Jhanwar, counsel for respondent has taken us to judgment of Tribunal and contended that while considering process which has been undertaken by assessee, Tribunal has observed as under: various activities carried out by appellant, are as under:- (i) Firstly, 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, other raw material, wooden out of which is main, and others i.e. grass, nails etc. are purchased. (ii) Thereafter various other items are added depending upon designs, size, quality of subjected item to be exported, (iii) After purchasing semi finished goods and raw material, as stated above, very first step is to assemble same, if so required. Some time semi finished furniture is required to be given further shape as per 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 nails are of special type having artistic and antique look. (v) Fitting of brass and iron items again with view to give artistic and antique look. (vi) Filling and filing with view to smoothen surface. (vii) Sanding (viii) Carving with view to bring artistic value and to show that these are antique items. (ix) And lastly polishing (x) Thereafter, various wooden items are fitted according to need and design of exportable wooden article, i.e. wooden moulding is fitted Inlay is done. 7. He contended that taking into consideration observations made by Supreme Court in case of Income Tax Officer, Udaipur Vs. Arihant Tiles and Marbles (P) Ltd.- (2010) 320 ITR 79 (SC), Supreme Court has observed as under: 16. In case of Aman Marble Industries Pvt. Ltd. v. Collector of Central Excise reported in 157 ELT 393(SC), question that arose for consideration was whether cutting of marble blocks into marble slabs amounted to manufacture for purposes of Central Excise Act. At outset, we may point out that in present case, we are not only concerned with word "manufacture", but we are also concerned with connotation of word "production" in Section 80IA of Income Tax Act, 1961, which, as stated herein- above, has wider meaning as compared to word "manufacture". Further, when one refers to word "production", it means manufacture plus something in addition thereto. word "production" was not under consideration before this Court in 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 observations made by this Court in case of Rajasthan State Electricity Board (supra). In our view, judgment of this Court in Aman Marble Industries Pvt. Ltd. (supra) also has no application to facts of present case. One of most important reasons for saying so is that in all such cases, particularly under Excise law, Court has to go by facts of each case. In each case one has to examine nature of activity undertaken by 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 activity of manufacture. 17. In present case, we have extracted in detail process undertaken by each of respondents before us. In present case, we are not concerned only with cutting of marble blocks into slabs. In present case we are also concerned with activity of polishing and ultimate conversion of blocks into polished slabs and tiles. What we find from process indicated herein- above is that there are various stages through which blocks have to go through before they become polished slabs and tiles. In circumstances, we are of view that on facts of cases in hand, there is certainly activity which will come in category of "manufacture" or "production" under Section 80IA of Income Tax Act. As stated herein- above, judgment of this Court in Aman Marble Industries Pvt. Ltd. was not required to construe word "production" in addition to word "manufacture". One has to examine scheme of Act also while deciding question as to whether activity constitutes manufacture or production. Therefore, looking to nature of activity stepwise, we are of view that subject activity certainly constitutes "manufacture or production" in terms of Section 80IA. In this connection, our view is also fortified by following judgments of this Court which have been fairly pointed out to us by learned Counsel appearing for Department. 18. In case of Commissioner of Income Tax v. Sesa Goa Ltd. reported in 271 ITR 331 (SC), meaning of word "production" came up for consideration. question which came before this Court was whether ITAT was justified in holding that assessee was entitled to deduction under Section 32A of Income Tax Act, 1961, in respect of machinery used in mining activity ignoring fact that assessee was engaged in extraction and processing of iron ore, not amounting to manufacture or production of any article or thing. High Court in that case, while dismissing appeal preferred by Revenue, held that extraction and processing of iron ore did not amount to (6 of 7) [ITA-45/2006] "manufacture". However, it came to conclusion that extraction of iron ore and various processes would involve "production" within meaning of Section 32A(2)(b)(iii) of Income Tax Act, 1961 and consequently, assessee was entitled to benefit of investment allowance under Section 32A of Income Tax Act. In that matter, it was argued on behalf of Revenue that extraction and processing of iron ore did not produce any new product whereas it was argued on behalf of assessee that it did produce distinct new product. view expressed by High Court that activity in question constituted "production" has been affirmed by this Court in Sesa Goa's case saying that High Court's opinion was unimpeachable. It was held by this Court that word "production" is wider in ambit and it has wider connotation than word "manufacture". It was held that while every manufacture can constitute production, every production did not amount to manufacture. 8. He has contended that word production is to be construed as wider meaning than manufacture and in view of observations made by Supreme Court, view taken by Tribunal is just and proper. 4. Another decisions of Supreme Court in 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 respondent has supported order of Tribunal and contended view taken by Authority is just and proper. No interference is called for. 6. We have heard counsel for both sides. 7. Taking into account decision of this Court and Supreme Court, we are of opinion that issues are now no more res integra and covered by aforesaid decisions. (7 of 7) [ITA-45/2006] 8. In that view of matter, issues are answered in favour of assessee and against department. 9. appeal stands allowed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. A.Sharma/100 Raj State Mines & Minerals v. CIT