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Commissioner Of Income Tax, Bombay City Iii v. Gem India Manufacturing Co. .
Factual and Procedural Background
The assessee, engaged in cutting and polishing diamonds, claimed deductions under Section 80-I of the Income-tax Act, 1961 for Assessment Years 1983-84 and 1984-85. The Commissioner of Income-tax (Appeals) allowed the claim and the Income-tax Appellate Tribunal (ITAT) affirmed the decision. In a reference, the Bombay High Court answered the question in the assessee’s favour, relying on its earlier judgment in Commissioner of Income-Tax v. London Star Diamond Co. (I) Ltd. (1995) 213 ITR 517 (Bom). The Revenue appealed, leading to the present decision.
Legal Issues Presented
- Whether the activity of cutting and polishing rough diamonds amounts to “manufacture or production of an article or thing” under Section 80-I of the Income-tax Act, 1961, entitling the assessee to deduction.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-Tax v. London Star Diamond Co. (I) Ltd. (1995) 213 ITR 517 (Bom) | Held that raw diamonds and cut & polished diamonds are distinct marketable commodities; activity constituted “processing of goods” for determining status as an “industrial company” under Section 2(8) of the Finance Act, 1975. | The High Court had treated this case as controlling; the present court distinguished it, noting that the earlier decision addressed “processing” for a different statutory provision, not “manufacture or production” under Section 80-I. |
Court's Reasoning and Analysis
1. The court scrutinised the ITAT’s finding that, “in common parlance and commercial sense,” rough diamonds were different from cut and polished diamonds. It observed that no evidentiary material had been placed on record to substantiate this assertion; it was merely an ipse dixit of the Tribunal.
2. Regarding the Bombay High Court’s reliance on London Star Diamond, the court held that the earlier case dealt with whether the assessee was an “industrial company” under the Finance Act, 1975, focusing on “processing,” whereas the present issue concerned “manufacture or production” under Section 80-I. The statutory contexts and the tests to be applied were therefore different.
3. While acknowledging that cutting and polishing involve a process applied to raw diamonds, the court found no material basis to conclude that the end product constituted a new “article or thing” resulting from manufacture or production.
Holding and Implications
Appeal Allowed; Question Answered in the Negative, in Favour of the Revenue.
The order of the Bombay High Court was set aside, and the assessee’s claim for deduction under Section 80-I was rejected. The assessee was ordered to pay the costs of the appeal. The decision narrows the scope of “manufacture or production” under Section 80-I by holding that cutting and polishing diamonds, absent supporting material, does not create a new article or thing. No broader precedent was expressly established beyond this clarification.
Order
1. We are concerned with Assessment Years 1983-84 and 1984-85 in this appeal against the order of a Division Bench of the High Court at Bombay. By that order the following question was answered in the affirmative and in favour of the assessee:
“Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in confirming the order of the Commissioner of Income Tax (Appeals) holding that the assessee, engaged in cutting and polishing of diamonds, amounts to manufacturing or production of goods and is entitled to deduction under Section 80-I of the Income Tax Act, 1961?”
The High Court gave this answer because counsel for the parties were agreed that the issue stood covered by the High Court's decision in CIT v. London Star Diamond Co. (I) Ltd. (1995) 213 ITR 517 (Bom)
2. Section 80-I gives a deduction in respect of profits and gains from industrial undertakings which, among other conditions, manufacture or produce any article or thing. The question therefore, is whether the assessee, in cutting and polishing diamonds, manufactures or produces any article or thing.
3. 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 world. An ipse dixit of the Tribunal is not the best foundation for a decision.
4. The High Court, as aforestated, concluded that the case was covered by its decision in the case of London Star Diamond Co. (I) Ltd. (1995) 213 ITR 517 (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.
5. 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.
6. The appeal is, therefore, allowed. The order under challenge is set 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.
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