The main legal point established in the judgment is that if a commercially different article or commodity results after processing, it would amount to a manufacturing activity.

Chitra Venkataraman, J.

This appeal is filed by the revenue seeking admission by framing the following question of law :

"Whether on the facts and circumstances of the case, the Tribunal was right in holding that blending and bottling of IMFL would amount to manufacture for the purpose of claiming deduction under Section 80-IB?

2. The assessee herein is small scale industry recognised as so by the Director of Industries, Pondicherry. It set up a second unit to manufacture and bottle Indian manufactured foreign liquor (IMFL) at Pondicherry. In its return for the assessment year 2003-04 and 2004-05, it claimed deduction under Section 80-IB of the Act in respect of the profits and gains derived from the second unit. The assessing officer however rejected the plea on the issue that the process carried on by the assessee for its product does not constitute manufacture within the meaning of Section 80-IB of the Act. He further held that setting up of the second unit is only an expansion or reconstruction of the existing unit. Aggrieved by the same, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).

.3. In the proceedings before the Commissioner of Income Tax (Appeals), the assessee explained the process of blending as follows:

.The assessee purchased rectified spirit or extra neutral alcohol (ENA) made of grain or grapes or malt to which it added demineralised water in required proportion to reduce the strength of the ENA to make various products like whiskey, brandy, rum, etc. Apart from that, other ingredients like caramel, sugar etc., were also added as per blending formulations. This blend was subject to filtration for required time, blend inspection and then bottling in empty bottles. The finished products were packed and sold.

.4. The Commissioner of Income Tax (Appeals) considered the fact that the alcoholic strength of ENA which was around 95% v/v was reduced to a maximum of 42.8% v/v. Consequently, the Commissioner of Income Tax (Appeals) held that there was no manufacture or production of any new article or thing as the alcohol which was the input remained as alcohol. In the circumstances, he rejected the plea for deduction under Section 80-IB of the Act.

5. On further appeal before the Tribunal, the assessee reiterated the contentions as regards the process undertaken to result in a totally different marketable commodity. Considering the entirety of the issue and applying the decision of Allahabad High Court in the case of CIT v. Rampur Distilleries and Chemicals Company Ltd., reported in 277 ITR 416, the Tribunal held that the rectified spirit is not mentioned in the 1st Item of 11th Schedule "beer, wine and other alcoholic spirits" and consequently, the assessee as a Small Scale Industrial Unit was entitled to deduction under Section 80-IB of the Act. Aggrieved by that order, these appeals are filed.

6. Learned counsel for the Revenue submitted that considering the fact that what was purchased was a concentrated form of rectified spirit and what has been sold is only a diluted form, there is no manufacturing process to result in a different commodity for the purpose of claiming deduction under Section 80-IB of the Act. Learned counsel referred to the 11th Schedule to the Act under which aerated water with further additions were made in the form of essence, was not taken as an item of manufacture to grant the relief under Section 80-IB of the Act. In the circumstances, referring to the said Section, learned counsel submitted that the assessee has not manufactured an item to have the benefit of deduction under Section 80-IB of the Act. He also pointed out that the assessee cannot claim deduction under Section 80-IB of the Act in respect of the items manufactured as referred to in the list in the 11th Schedule. He referred to the decision of the Karnataka High Court in the case of State of Karnataka Vs. Shaw Wallace & Co. Ltd. reported in 110 STC 507 in support of his conte