1. This is an appeal against the order of the Commissioner passed under Section 263 of the Income-tax Act, 1961 ('the Act').
2. The assessee is a company and as the name suggests is engaged in textile industries. The assessment year is 1979-80 and the relevant accounting year ended on 30-4-1978.
3. The reasons for initiating proceedings under Section 263 could be gathered from the following extract of the order of the Commissioner under appeal : On a perusal of the assessment records of the assessee-company, it is seen that it was allowed investment allowance under Section 32A of the Income-tax Act, 1961, to the extent of Rs. 3,02,798 for the assessment year 1979-80. The ITO has also allowed relief under Section 80J to the extent of Rs. 24,910 for the same year. The investment allowance was allowed to the extent of income assessed and the balance along with relief of Rs. 24,910 under Section 80J has been allowed to be carried forward. According to the provisions of Section 32A(2)(b)(iii) of the Income-tax Act, 1961, investment allowance is admissible only in, respect of machinery and plant which are installed for the purposes of business of construction, manufacture or production of articles or things. Similarly, the provisions of Section 80J of the Income-tax Act require that the deduction under the section shall be allowed to an industrial undertaking which begins to manufacture or produce articles. It is, however, seen from the records that the assessee-company derives income from twisting of yarn. It undertakes this work for the local textile mills and receives twisting charges. The assessee-company is not producing or manufacturing any articles or things. Neither any investment allowance under Section 32A or any relief under Section 80J is, therefore, admissible to it. The ITO's order allowing these two reliefs is under the circumstances, erroneous and prejudicial to the interests of the revenue.
The Commissioner, therefore, issued a notice under Section 263 and called upon the assessee to show cause why the ITO should not be directed to withdraw the deductions allowed to it under Sections 32 A and 80J of the Act.
4. In its letter dated 3-3-1982, the assessee stated before the Commissioner that since it was engaged in the manufacture or production of textile articles, the ITO had rightly allowed the deductions as claimed by it under Sections 32A and 80J. In this connection, it stated before the Commissioner that the flat yarn is not proper for fine weaving. Therefore, textile mills supply flat yarn to the assessee for twisting and by giving special effects and chemical process, the assessee manufactures twisted yarn out of flat yarn so supplied to it.
It was, therefore, submitted that since the twisted yarn was entirely a different commercial commodity from the flat yarn supplied to it by textile mills, it was engaged in the manufacturing activity and, therefore, it was entitled to claim deductions both under Sections 32A and 80J. In support of its stand the assessee relied on the decisions in the cases of East India Cotton  48 STC 239 (sic), CIT v. M.R.Gopal  58 ITR 598 (Mad.), Burmah Shell Refineries Ltd. v. G.B.Chand, ITO  61 ITR 493 (Bom.), CIT v. Ajay Printery (P.) Ltd.  58 ITR 811 (Guj.), CIT v. Pressure Piling Co. India (P.) Ltd.  126 ITR 333 (Bom.) and CIT v. Perfect Liners  142 ITR 654 (Mad.). The assessee also sent along with its letter the opinions of internationally known authorities on twisted yarn with a view to impress upon the Commissioner that twisting of yarn is a manufacturing activity.
5. The Commissioner, however, did not accept the submissions made on behalf of the assessee and directed the ITO to withdraw the deductions allowed under Sections 32A and 80J, in the following manner : 2. I have carefully gone through the quotations taken from the book as also the Judgments relied upon by the assessee. As pointed out already, the assessee does the business of twisting of yarn. The assessee gets yarn from local textile mills for twisting and receives twisting charges. It is not producing or manufacturing any articles on its own. In fact the assessee cannot be said to be manufacturing or producing any articles. It is merely processing the yarn supplied by the textile mills. The product resulting from the process of twisting cannot be categorised as an article. Both Sections 32A and 80J refer to manufacture and production. They contemplate that the articles which are produced or manufactured are something new and different from raw material which are used for the production of these materials. The product or articles must be different from the material used in its preparation. The process of twisting only makes the fibre stronger. It is not a manufacturing process. It does not involve the conversion of yarn into something else. It only tones up the raw material. Twisted yarn is itself raw material. No new production is brought into existence. There is no transaction of raw material into a different commodity. Components of the yarn remain the same and nothing different emerges. Twisting may or may not involve processing. It certainly does not involve manufacturing. In this view of the matter, the ITO's order allowing relief under Section 32A and Section 80J is wrong. He is directed to modify the order by withdrawing deduction allowed by way of investment allowance under Section 32A and relief granted under Section 80J.6. Being aggrieved by the order of the Commissioner, the assessee has come up in appeal before the Tribunal. The learned counsel for the assessee reiterated the submissions which were made before the Commissioner and contended that on the material placed before him, the Commissioner ought not to have passed order under Section 263, directing the ITO to withdraw deductions allowed under Sections 32A and 80J. In this connection, he invited our attention to the expert's opinion on twisted yarn which was filed before the Commissioner. He also invited our attention to the orders of the Commissioner (Appeals) in the assessee's own case for the assessment years 1980-81 and 1982-83 and pointed out that in spite of the order of the Commissioner under appeal, the Commissioner (Appeals) accepted the assessee's submissions that it was engaged in the manufacture of twisted yarn. He, therefore, urged that we should set aside the order of the Commissioner under appeal. The learned representative for the department, on the other hand, placed strong reliance on the order of the Commissioner and justified his action. He also stated that in IT Appeal No. 1908 (Ahd.) of 1982, the Tribunal, Ahmedabad Bench 'A' had held in that case that the assessee was not engaged in the manufacture of articles or things.
7. We have carefully considered the rival submissions of the parties and we find considerable force in the stand taken on behalf of the assessee. Since the point involved in the present appeal is of a technical nature, it would be worthwhile to reproduce below the expert's opinion on the twisting of the yarn : The subject of yarn structure is discussed in chapter 3 of this book. It is pointed out that twist plays an important role in affecting the arrangement of fibres or filaments in the yarn cross section. The study of twist and how it effects some of the important properties of textile yarns is the subject of this chapter.
In staple yarns, twist is essential to hold the fibres together and to impart some degree of cohesiveness to the structure. On the other hand, the filaments in a multifilament yarn would fray away if there were no cohesive forces holding them together. Furthermore, the formation of plied or cabled yarns is also achieved by twisting or piled yarns together to produce a coherent linear structure. In other words, twist is a means by which a bundle of fibres, filaments, or yarns in a piled yarn is held together so that the ultimate structure is made capable of withstanding the stresses and strains and the chafing action of the many processes involved in the manufacture and use of textile fibres.
The role of twist is very profound in determining properties of finished yarns vis-a-vis fabrics. The link between fibre properties and the end-use behaviour of textile fabric can be best explained by the following diagram (Figure 5.1).
When a number of components (fibres or filaments) in a continuous strand are twisted, radial forces develop which in turn affect the relative position of the components in the yarn structure, leading to a close packing of all components in a given cross section. Thus, the insertion of twist in fibre assemblies (yarns) affects, in addition of the tensile properties (strength-extension), the diameter and the specific volume (in other words, softness or hardness) of yarns. The change in the fibre packing in turn determines the cover of a fabric and such other properties as warmth, crease recovery, permeability and various other related characteristics. Twist also affects the hairiness of yarns, which is a very important property in determining the pilling behaviour and the economics of the singeing process.Fibre properties Yarn structure |___________________________________________|Yarn properties Fibric structure |__________________________________________| Figure 5.1. Relationships among fibre, yarn and fabric structure and properties [From Hearle (1)] In his Mather lecture, titled 'Twisted Structures,' Treloar (2) adequately recognises the role of twist in yarns and the part it plays in the design of textile structures. He discusses the obvious necessity of twist in the natural and staple fibres and points out : Twist is essential to provide a certain minimum coherence between fibres, without a yarn having a significant tensile strength cannot be made. This coherence is dependent on the frictional forces brought into play by the lateral pressures between fibres arising from the application of tensile stress along the yarn axis. With the introduction of continuous filament yarns, however, the role of twist must be reconsidered. In continuous filament yarns, twist is not necessary for the achievement of satisfactory resistance to abrasion, fatigue, or other types of damage associated with stresses other than a simple tensile stress and typified by the breakage of individual filaments, leading ultimately to total breakdown of the structure. High twist produces a 'hard' yarn, which is highly resistant to damage of this kind. The role of twist in continuous filament yarn is, thus, to produce a coherent structure that cannot readily be disintegrated by lateral stresses.
From the engineering standpoint, the interesting thing about this structural function of twist is that, in contract to most structure-building techniques, it produces its effect without significantly increasing the fiexural rigidity or residence to bending of the system.
8. It would appear from the above that it cannot be denied that the assessee is engaged in manufacturing activity. In order to get deductions under Sections 32A and 8J, it is not necessary that the assessee should manufacture 'articles' on its own. Again, the assessee cannot be denied deductions under Sections 32A and 80J even if it manufactures 'raw material' which is used by the textile industries.
The assessee is supplied with the flat yarn by the textile mills and after giving physical twisting under mechanical process and chemicals, it manufactures twisted yarn which is entirely a different commercial commodity than the flat yarn supplied to it. Under these circumstances, it is difficult to hold that the assessee was not engaged in manufacturing activity. It is pertinent to note that the assessee was given deduction under Section 35D of the Act, on the ground that it was an industrial undertaking. Further, Schedule XI to the Act contains list of items of articles and things for the manufacture of which the assessee is not entitled to deduction under Sections 32A and 80J. In the said Schedule 'textiles' does not appear as an item. On the contrary, 'textiles' appear in Schedules V and IX to the Act. This clearly shows that a person engaged in the manufacture of articles used in textile industries would be entitled to claim deduction under Sections 32A and 80J. For all these reasons, we have no hesitation in holding that the assessee was engaged in the manufacturing activity and, therefore, was entitled to deduction as contemplated under Sections 32A and 80J. In this view of the matter, we would set aside the order of the Commissioner under appeal.