M.M.KUMAR,J. - (1.) THIS order shall dispose of ITA Nos. 28 of 2004 and 56 of 2005, filed by the revenue under Section 260A of the Income-tax Act, 1961 (for brevity, 'the Act') against the orders dated 4.3.2003 and 2.4.2004, passed by the Chandigarh Bench 'A' of the Income Tax Appellate Tribunal (for brevity, 'the Tribunal') in respect of Assessment Years 1994-95 and 1995-96 respectively, in the case of the assessee-respondent. It is pertinent to notice that against the order passed by the CIT(A) in respect of Assessment Year 1994- 95, the assessee-respondent and revenue-appellant filed ITA No. 980/Chandi/97 and ITA No. 1079/Chandi/97 respectively, which were dismissed by the Tribunal vide common order dated 4.3.2003. Similarly, against the order passed by the CIT (A) in respect of Assessment Year 1995-96, ITA No. 936/Chandi/1998 and ITA No. 897/Chandi/1998 were filed by the assessee-respondent and revenue- appellant respectively. Both the appeals were decided by the Tribunal vide common order dated 2.4.2004. The Tribunal has rejected the appeal of the revenue and partly allowed the assessee's appeal for statistical purposes.
(2.) FEW facts may first be set out, which are taken from ITA No. 28 of 2004, pertaining to Assessment Year 1994-95. The assessee-respondent is a Limited Company, which had filed its return of income for the Assessment Year 1994-95, declaring income at Rs.1,47,810.00. The assessee- respondent derived its income from the manufacturing and trading of hosiery garments such as pullovers, mufflers and blankets etc.. The assessment was completed by the Assessing Officer under Section 143(3) of the Act on 28.2.1997 and addition of Rs.26,63,090.00 was made by disallowing deduction under Section 80-HHC and 80-I of the Act besides other minor additions (A-1). According to the Assessing Officer, the assessee- respondent did not manufacture Flats (knitted sides of pullovers) used in the making of pullovers and had affected purchase of that item from its sister concern. The assessee- respondent had then subjected the raw material like Flats to labeling, tailoring, packing, pakki checking, buttons and button holes, linking etc. Holding that the assessee-respondent did not furnish details of the expenses incurred on the aforesaid processes, the Assessing Officer opined that these processes did not amount to manufacturing activities or production of articles. Accordingly, the Assessing Officer reached the conclusion that the assessee- respondent did not fulfill the basic statutory condition that it must be engaged in the business of manufacture and production of articles. Consequently, the assessee-respondent was not held entitled to deductions in respect of profits from manufacturing of mufflers and pullovers. The Assessing Officer restricted the deductions under Section 80-I of the Act to Rs.80,17,391.00 as against the claim of Rs.1,04,02,080.00. Aggrieved by the order of the Assessing Officer, the assessee-respondent preferred an appeal before the CIT(A) who, vide order dated 19.8.1997, partly upheld the disallowances made by the Assessing Officer under Section 80-I of the Act (A-2). It would be profitable to notice the arguments advanced before the CIT(A). The assessee-respondent submitted before the CIT(A) a letter, dated 30.1.1997, which disclosed the detailed explanation with the help of a chart showing various processes which are undertaken before bringing in existence a final product known as 'pullover' after purchase of Flat (pallas). It was pointed out that the assessee-respondent purchased Flat (Pallas) and thereafter such Flat (Pallas) are subjected to various processes involving Mending, Chain lock, Kachhi lock, Up-down, Milling, Up-down, Pallas steam press, Flatmaster check, Cutting, Kachi Removing, Tailoring, O'clock pakki, Linking, Neck Saphai, Cup sewing, Tarpai, Kaj button, Kachi checking, pakka press, pakki checking, Label Tailoring, Paking and in-store.
(3.) IT was also shown before the CIT(A) that the cost incurred by the supplier on the process of one piece for pullover was about Rs.20.00 approximately which did not include the cost of the raw material and the cost incurred by the assessee-respondent to make the Flat (Palla) a pullover was amounting to t45.00 per pullover. The aforesaid aspect was highlighted to show that substantial processing is done by the assessee-respondent before a Flat (Palla) is converted into finished pullover. It was on the basis of the aforesaid arguments that the CIT(A) in paragraphs 5.2 and 5.3 held as under: "5.2 I have carefully considered the facts of the case and find some substance in the explanation furnished by the Ld. AR. It is seen that in the case of pullovers, substantial processing is done by the appellant. The processing so done is costing Rs.45.00 per piece. The A.O. has not disputed this claim of the appellant. During the course of discussion, the Ld. AR had referred to the judgments of Hon'ble Supreme Court in the case of Delhi Cold Storage Pvt. Ltd. Vs. C.I.T. 191 ITR 656 and Chillies Exports House Ltd. Vs. C.I.T. 225 ITR 814. In the first case, it was held by the Hon'ble Judges of the Supreme Court that no processing is done in a cold storage as such the cold storage is not an industrial company. However, it was observed that "in common parlance, the processing is understood as an action which brings forth some change or alteration of goods or material subjected to the act of processing." 5.3 In the second case of Chillies Export House Ltd., the case was remanded to the Hon'ble Court with certain observations. Thus, it would be seen that none of these judgments directly help the appellant. However, these judgments make one thing very clear i.e. the processing of the material should bring forth some change or alteration of the goods. This change or alteration has to be substantial or significant. In this context, the processing of Flats or pallas into required sizes of pullover through various actions, does amount to processing of goods. The Flats or pallas are a plain woolen cloth which is cut into the required sizes of the pullovers. Thereafter, it involves milling, tailoring, tarpai, cup-sewing and other process mentioned above. These processes cost the appellant a substantial amount on these facts, I hold the pullover involved processing and profits on the sale of pullovers is entitled to the deduction u/s 80-I." ;