Income Tax Appellate Tribunal - Delhi
Assistant Commissioner Of Income-Tax vs Soni Photo Films (P) Ltd. on 26 May, 1998
Equivalent citations: [1998]67ITD81(DELHI), [2000]245ITR11(DELHI)
ORDER
T.V. Rajagopala Rao, President
1. The Delhi Bench 'B' had referred the following question for the decision of the Special Bench :
"Whether, on the facts and in the circumstances of the case, assessee-company which is engaged in the business of developing and printing of photographs, is entitled to investment allowances ?"
Both the learned members constituting the Division Bench considered that it is a worthy question to be decided by a Special Bench in view of the fact that there are decisions of different Benches of the Tribunal in favour of the assessee on the point with which decision the learned Members constituting the Division Bench do not want to agree or concur. Before embarking upon giving our considered decision on the question framed and referred to the Special Bench, let us set out the facts of the case.
2. The name of the assessee is Soni Photo Films (P) Ltd. carrying on its activity at A-16, Krishna Nagar, Delhi. It is a private limited company which is incorporated under Certificate of Incorporation No. 16898 dt. 5th September, 1983. The assessee-company closed its accounts for the first time on 31st December, 1984 and the return filed on 25th June, 1985 disclosing a loss of Rs. 2,94,810 along with copies of audited balance sheet and P&L a/c was the first return of the company. Along with its retum-copy of memorandum & articles of association was also filed. The main object of the company as set out in the memorandum & articles of association is to deal in photographic equipment and paper. The ITO, Corn. Cir. XIII, New Delhi (hereinafter referred to as "AO"), called upon the assessee-company to give details of its directors and shareholders, to file confirmations of secured and unsecured loans and details of various expenses claimed, etc. The assessee is said to have defaulted. The assessee-claimed to have purchased photographic equipments worth Rs. 7,76,000, for which no details were filed. The AO felt that it is highly difficult for him to verify the genuineness of the claim. Therefore, he denied the loss claimed and assessed the assessee-company at 'nil' income as per the assessment order passed under s. 144.
3. The assessee filed an appeal before the CIT (A)-V, New Delhi. One of the grounds taken up before him was that it should have been allowed investment allowance on the ground that the activity of the assessee-company in developing and printing of photographs secured for its investment allowance claimed. The AO, who must have been present before the CIT (A), contended that the activity of developing and printing of photographs does not involve manufacture or production of an article or thing and on that ground the assessee-company was not entitled to claim investment allowance. He also appeared to have further contended that the assessee-company failed to create statutory reserve which is a sine qua non for claiming investment allowance and relied upon the Supreme Court decision in the case of Subhalaxmi Mills Ltd. vs. Addl. CIT (1989) 177 ITR 193 (SC). As against the contentions of the AO, the learned counsel for the assessee contended before the CIT (A) that the assessee-company was engaged in processing of films for the purpose of making photographs. He further contended that law does not lay down the type of process that a taxpayer is required to engage in for the purpose of being entitled to investment allowance. Regarding creation of statutory reserve, it was submitted on behalf of the assessee that the assessee-company failed to create the statutory reserve since there was no profit. The learned CIT (A) found that the Hon'ble Supreme Court rendered the decision in the case of Subhalaxmi Mills Ltd. (supra) with reference to grant of development rebate. The learned CIT (A) found that the law laid down by the Hon'ble Supreme Court that creation of reserve is an essential condition for the grant of development rebate equally applies, even while considering and granting of the prayer for investment allowance also. Since the assessee did not create any statutory reserve, the learned CIT (A) held that the assessee could not be allowed investment allowance during the relevant year. He, however, held as follows :
"However, in a subsequent year, if the appellant-company is able to create a statutory reserve, it shall be entitled to grant of investment allowance."
Thus, the learned CIT (A), by his impugned order dt. 26th February, 1990, partly allowed the appeal.
4. Against the decision of the CIT (A), the Revenue came up in second appeal and the only ground taken in the second appeal was the following :
"On the facts and circumstances of the case, the learned CIT(A) has erred in allowing the claim of investment allowance to the assessee-company which is engaged in the business of developing and printing of photographs and as such is not an industrial undertaking."
In the referring order dt. 31st January, 1996, the Division Bench found that the precise activity carried on by the assessee-company was developing and processing of films and for that purpose the assessee-company was running a colour lab. The learned Departmental Representative appeared to have submitted the following in support of the appeal :
(1) Developing of a film does not amount to manufacture or production of an article or thing.
(2) In order to determine whether the assessee's activity is manufacturing or not will depend upon the common parlance meaning of the word manufacture'.
(3) Whenever negatives of photographs are given to the colour lab, in common parlance, it is said that photographs are to be washed and developed and it is never said that photographs are to be manufactured.
(4) That manufacturing of photographs would amount to super-imposing of two photographs to make a new one, i.e., to make a fake photograph.
(5) In view of the Hon'ble Supreme Court's decision in CIT vs. N. C. Budharala & Co. (1993) 204 ITR 412 (SC) and several other decisions of the Hon'ble Supreme Court and other High Courts, which were listed out in para 3 of the referring order, it was contended that the activity carried on by the assessee is not manufacturing or production of an article or thing and, therefore, the assessee is not entitled to investment allowance. As against the arguments of the learned Departmental Representative, the assessee submitted his arguments as follows.
(1) The activity carried on by the assessee does amount to production of an article or thing.
(2) After the activity carried on by the assessee there was transformation in the raw material used and the end-product obtained was different from the raw material used in the manufacturing process and, therefore, the activity carried on by the assessee-company does amount to manufacture.
(3) The raw film used by the assessee loses its identity and becomes an entirely new article in the shape of finished photographs.
(4) The decision of the Hon'ble Supreme Court in the case of N. C. Budharala (supra) relied on by the learned Departmental Representative is distinguishable on facts since the decision in that case was given in respect of construction of a dam.
The learned counsel for the assessee relied on the decisions noted in para 4 of the referring order.
5. After hearing the rival contentions and after going through the decisions cited before them, the referring Bench found that it is true that the Tribunal, Delhi Benches, in the case of Q.S.S. Colour Processors vs. IAC (1989) 35 77J (Del) 486, on identical facts, held that the activity of the assessee is that of manufacturing of photographic films and has directed to allow investment allowance. Similarly, they found that in Daks Copy SeMces (P) Ltd. vs. ITO (1989) 34 7TJ (Bom)(SB) 604 : (1989) 30 ITD 223 (Bom)(SB), on similar set of facts as in the case of the assessee-company, the Special Bench directed to allow investment allowance. Further, the referring Bench also found that the Calcutta Bench of Tribunal in Amiya Kumar Tarafdar vs. ITO (1985) 14 ITD 172 (Cal) had directed to allow investment allowance in the case of an assessee engaged in printing and developing of photographs. Those decisions were all given prior to the decision rendered by the Hon'ble Supreme Court in N. C. Budharaja's case (supra). Their Lordships of the Supreme Court held that the meaning of the word 'construction' as well as the word 'thing' must be determined having regard to the context in which the said words occur. The Hon'ble Supreme Court directed to apply the common parlance meaning of the various terms which were not defined in the IT Act.
6. Having thus surveyed the legal position as emerging from the decisions so far rendered, the referring Bench took up the facts of the case before them.and the real issue which arose for consideration. They have chosen to accept the arguments advanced by the learned Departmental Representative before them and they understood the activity of the assessee-company as washing or developing of photographs. In normal connotation, according to the Division Bench, it is never termed as manufacturing of photographs. However, in view of the fact that several Benches of the Tribunal had already passed their orders in favour of assessee on the point, they felt it proper to refer the question already extracted to the decision of the Full Bench. In this fulcrum of facts, the question referred to the Full Bench stands for our consideration.
7. At the threshold of his argument, the learned Departmental Representative raised an objection stating that the assessee had raised a new ground of appeal before the Tribunal stating that the assessee-company is a small-scale industrial company and, therefore, even though it manufactures or produces articles or things listed out in the Eleventh Schedule, the assessee is entitled to investment allowance under s. 32A. He invited our attention to s. 32A(2)(ii) & (iia) which is as follows :
"32A(2) An industrial undertaking shall be deemed to be a small scale industrial undertaking, if the aggregate value of the machinery and plant (other than tools, jigs, dies and moulds) installed, as on the last day of the previous year, for the purposes of the business of the undertaking does not exceed, -
(i) xxx xxx xxx
(ii) In a case where the previous year after, 31st July, 1980, but before 18th day of March, 1985, 20 lakh rupees; and
(iii) In a case where the previous year ends after 17th day of March, 1985, 35 lakh rupees, and for this purpose, the value of any machinery or plant shall be, -
(a) In the case of any machinery or plant owned by the assessee, the actual cost thereof to the assessee; and
(b) In the case of any machinery or plant hired by the assessee, the actual cost thereof, as in the case of the owner of such machinery or plant."
8. The learned Departmental Representative argued that the assessee did not raise any ground before the CIT (A) saying that the assessee is a small scale industrial undertaking and, therefore, even the manufacture or production of an article or thing in the prohibited categories of items mentioned in the Eleventh Schedule would not bar him from claiming investment allowance under s. 32A. He also invited our attention to item Nos. 9 & 10 of the Eleventh Schedule to the IT Act which are as follows:-
"9. Projectors
10. Photographic Apparatus and goods."
He invited our attention to the famous case of the Hon'ble Supreme Court in Parimisetti Seetharamamma, vs. CIT (1965) 57 ITR 532 (SC) wherein the Court held that though ss. 3 & 4 of the Indian IT Act, 1922, imposes a general law to tax upon all income, the Act does not provide that whatever is received by a person must be regarded as income liable to tax. In all cases in which a receipt, is sought to be taxed as income, the burden lies upon the Department to prove that it is within the taxing provision. Where, however, the receipt is of the nature of income, the burden of proving that it is taxable, because it falls within an exemption provided by the Act, lies upon the assessee. Therefore, on the basis of the ratio of this decision, the learned Departmental Representative argued that the burden to prove that the assessee is a small scale industrial undertaking and for that reason even though it manufactures or produces articles or things mentioned in Eleventh Schedule is entitled to investment allowance under s. 32A which is a deduction available to him under law is on the assessee. The learned Departmental Representative further argued that for the first time this issue cannot be raised before the Tribunal and it cannot be enquired into and decided upon by the Tribunal also at this stage.
9. Countering this argument, the learned advocate for the assessee, Shri K. H. Sampat submitted that along with the income-tax return itself the assessee inter alia filed balance sheet as well as P&L a/c. Further he submitted that on 5th May, 1997 he filed a petition for admission of additional documents before the Special Benches and the said petition is received in the office on 6th May, 1997. Along with the petition, documents running into 10 pages were filed and in the petition it is clearly stated that cls. 9 & 10 of the Eleventh Schedule did not apply to the case of the assessee since entry No. 9 was inserted w.e.f. 1st April, 1989 and the case before the Special Bench relates to asst. yr. 1985-86. In the said petition it is further stated that cl. 10 of Eleventh Schedule talks about photographic apparatus and goods. Apparatus includes tools and equipment whereas the assessee is engaged in manufacture/production of exposed films and taking photograph from the exposed films and is not engaged in production of photographic apparatus and goods and hence items 9 & 10 of Eleventh Schedule cannot be pressed into services against the assessee before the Special Bench. Furthermore, the learned, counsel mentioned in the petition that the assessee-company is a small scale industrial undertaking and the fact that it was registered as a small scale industrial undertaking is evidenced by a certificate furnished at p. 2 of another paper book filed on the same date, i.e. on 5th May, 1997.
10. We have gone through the said certificate and we find that the certificate was granted on 19th May, 1995 and the activity of the assessee-company was stated to be "colour photofilm processing (printing & developing)". The date of commencement of production was mentioned as 12th December, 1984. The said certificate was issued by the Asstt. Director of Industries (SHB). The company is said to have been located at GF.A/16, Krishna Nagar, Delhi-110051. For the first time, the books of account of the assessee-company were closed on 31st December, 1984. Production was started on 12th December, 1984. The investment in plant & machinery as per balance sheet dt. 31st December, 1984 submitted along with the IT return amounted to Rs. 7,71,226 which is well within the limits of 20 lakh rupees as per the definition given to small scale industrial undertaking defined under cl. (ii) of s. 32A of the IT Act. Therefore, even though, the formal plea that the assessee is a small scale industrial undertaking was not taken before the CIT (A), mistakenly since there is sufficient material and clinching evidence to prove that the assessee is a small scale industrial undertaking, this plea can be entertained even at the second appellate stage. In support of this contention, the learned advocate for the assessee invited our attention to the decision CIT vs. Gangappa Cables Ltd. (1979) 116 ITR 778 (AP). The ratio of the decision is clearly spelt out from the headnote of the decision which is as follows :
"The Tribunal disposing of an appeal under the IT Act has got the power to allow the assessee to put forward a new claim, notwithstanding the fact that such a claim was not raised by him before the ITO or the AAC, provided there is sufficient material on record to allow such a claim, The assessee, for the first time, raised a plea in second appeal before the Tribunal that the expenditure incurred by the assessee before it went into commercial production was an admissible deduction for the purpose of s. 80J(1) of the IT Act. The Revenue resisted the claim on the ground that the said claim having not been put forward by the assessee before the ITO or the AAC, it could not be raised in second appeal. The Tribunal held that the director's report accompanied by balance sheet and P&L a/c and other statements were filed by the assessee before the ITO and practically all the details for allowing a claim under s. 80J(1) of the Act were on record and hence it was open to the Tribunal to allow such a claim. On a reference :
Held, that the Tribunal was correct in allowing the claim of the assessee as there was material on record for allowing the same."
In that case also an objection was raised that 80J relief cannot be claimed by the assessee for the first time in the second appeal. The Tribunal while admitting the additional plea or claim held that the director's report, accompanied by balance sheet and P&L a/c and other statements were filed by the assessee before the ITO and practically all the details for allowing the claim under s. 80J(1) of the Act were on record and hence it was open to the Tribunal to allow such a claim. In this connection, the assessee need to prove Only that the value of its plant and machinery is less than Rs. 20 lakhs. The whole value of its plant and machinery is clearly and completely revealed in its balance sheet prepared as on 31st December, 1984. Its value is only Rs. 7,71,226 which is less than Rs. 20 lakhs. Another decision cited by the learned counsel for the assessee was in CIT vs. C. Sekharan (1995) 211 ITR 730 (Ker) in which it has held that the appellate authorities is entitled to admit new grounds or evidence either suo motu or at the invitation of the parties. If the appellate authority is acting on the invitation by the assessee, there must be some ground for admitting new evidence in the sense that there must be some explanation to show that the failure to adduce evidence earlier was not wilful and not unreasonable. In this case, the material was already there. There was only failure on the part of the assessee to raise necessary legal plea based on the material which is already on record. Therefore, following the above Andhra Pradesh High Court decision, we hold that the additional ground is clearly admissible.
11. Now, let us see the relevant provisions of s. 32A for the purposes of examining whether investment allowance is allowable to the assessee and the various contentions raised by both sides in this matter.
"32A. Investment allowance. - (1) In respect of a ship or an aircraft or machinery or plant specified in sub-s. (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty-five per cent of the actual cost of the ship, aircraft, machinery or plant to the assessee :
Provided that no deduction shall be allowed under this section in respect of -
"(a) any machinery or plant installed in any office premises or any residential accommodation, including any accommodation in the nature of a guest house;
(b) any office appliances or road transport vehicles;
(c) any ship, machinery or plant in respect of which the deduction by way of development rebate is allowable under s. 33; and
(d) any machinery or plant, the whole or the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head 'Profits and gains of business or profession' of any one previous year."
12. If you analyse the section quoted above, it can be seen that only the machinery or plant specified in sub-s. (2) are only entitled for investment allowance. Further, the said machinery or plant should be owned by the assessee and should be wholly used for the purposes of the business carried on by him. In such a case, the assessee is entitled to 25 per cent of the actual cost of the plant or machinery in the year in which it is put to use or they are purchased. The proviso to the section lists out the types of plant or machinery or ship which are not entitled for investment allowance. Therefore, to examine the issue relevant provisions of sub-s. (2) of s. 32A are essential and the relevant provisions pertaining to the assessment year in question are as follows :
"(2) The ship or aircraft or machinery or plant referred to in sub-s. (1) shall be the following, namely. -
(a) ** ** ** (b) any new machinery or plant installed after 31st March, 1976 - (i) ** ** **
(ii) in a small scale industrial undertaking for the purposes of business of manufacture or production of any article or thing; or
(iii) in any other industrial undertaking for the purposes of business or construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule.
(c) ** ** ** Explanation. - For the purposes of this sub-ss. (2B), (2C) and (4), - (1) ** ** **
(2) an industrial undertaking shall be deemed to be a small-scale industrial undertaking, if the aggregate value of the machinery and plant (other than tools, jigs, dies and moulds) installed, as on the last day of the previous year, for the purposes of the business of the undertaking does not exceed,
(i) ** ** **
(ii) in a case where the previous year ends after 31st July, 1980, but before 18th day of March, 1985, twenty lakh rupees; and
(iii) ** ** **
(ii) in a case where the previous year ends after 31st July, 1980,
(iii) and for this purpose the value of any machinery or plant shall be, -
(a) in the case of an machinery or plant hired by the assessee, the actual cost thereof to the assessee; and
(b) in the case of any machinery or plant hired by the assessee, the actual cost thereof as in the case of the owner of such machinery or plant."
The sub-s. (4) to s. 32A reads as under :
"(4) The deduction under sub-s. (1) shall be allowed only if the following conditions are fulfilled, namely:
(i) an amount equal to seventy-five per cent;
(ii) the-particulars prescribed in this behalf have been furnished by the assessee in respect of the ship or aircraft or machinery or plant;
(iii) an amount equal to seventy-five per cent of the investment allowance to be actually allowed is debited to the P&L a/c of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the 'Investment Allowance Reserve Account') to be utilised. -
(a) for the purposes of acquiring before the expiry of a period of ten years next following the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, a new ship or a new aircraft or new machinery or plant (other than machinery or plant of the nature referred to in cls. (a), (b) and (d) of the proviso to sub-s. (1)) for the purposes of the business of the undertaking; and
(b) until the acquisition of a new ship or a new aircraft or new machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India :
Provided that this clause shall have effect in respect of a ship as if for the word 1seventy-five', the word 'fifty' had been substituted.
Explanation. - Where the amount debited to the P&L a/c and credited to the Investment Allowance Reserve Account under this sub-section is not less than the amount required to be so credited on the basis of the amount of deduction in respect of investment allowance claimed in the return made by the assessee under s. 189, but a higher deduction in respect of the investment allowance is admissible on the basis of the total income as proposed to be computed by the ITO.under s. 143, the ITO shall, by notice in writing in this behalf, allow the assessee an opportunity to credit within the time specified in the notice or within such further time as the ITO may allow, a further amount to the Investment Allowance Reserve Account out of the profits and gains of the previous year in which such notice is served on the assessee or of the immediately preceding previous year, if the accounts for that year have not been made up; and, if the assessee credits any further amount to such account within the time aforesaid, the amount so credited shall be deemed to have been credited to the Investment Allowance Reserve Account of the previous year in which the deduction is admissible and such amount shall not be taken into account in determining the adequacy of the reserve required to be credited by the assessee in respect of the previous year in which such further credit is made :
Provided that such opportunity shall not be allowed by the ITO in a case where the difference in the total income as proposed to be computed by him and the total income as returned by the assessee arises out of the application of the proviso to sub-s. (1) of s. 145 or sub-s. (2) of that section or the omission by the assessee to disclose his income fully and truly."
Having regard to the wordings of the above extracted provisions of s. 32A, in a case where the previous year ends after 31st July, 1980, but before 18th March, 1985, if the aggregate value of machinery or plant installed before the close of the previous year does not exceed 20 lakh of rupees it should be treated as a small scale industrial undertaking provided the plant or machinery is used for the purposes of business of the assessee. In this case, we are concerned with asst. yr. 1985-86 for which the previous year ended by 31st December, 1984. The assessee had also furnished the balance sheet as on 31st March, 1991 which is duly certified by its Director as well as by its Chartered Accountants, J. S. Lodha & Co. CAs. The fixed assets held by the assessee-company were separately shown as Schedule 'A' and the total value of the fixed assets as on 31st March, 1991 were shown at Rs. 6,32,943. In the same Schedule, the total value of the plant and machinery as on 31st March, 1990, 31st March, 1991 were also provided. It can be seen from the said Schedule 'A' that the actual cost of plant and machinery as on 31st March, 1990 were shown at Rs. 7,82,770 and the addition made during that year was only Rs. 12,975 and, therefore, the written down value of the plant and machinery as on 31st March, 1991 came to Rs. 7,95,751 out of which up to 31st March, 1991 a sum of Rs. 5,50,626 was already granted as depreciation. The remaining value of the plant and machinery as on 31st March, 1991 deducting depreciation was only Rs. 3,24,000. Therefore, having regard to the value of the plant and machinery held by the assessee as on the relevant date which is the end of the previous year 31st March, 1984, we have no hesitation to come to the conclusion that the assessee should be considered to be a small-scale industrial undertaking. As can be seen from s. 32A(2)(b)(ii) if the assessee is engaged in the business of either manufacture or production of any article or thing even though it is a prohibited article or thing mentioned in Eleventh Schedule, it is entitled to claim investment allowance under s. 32A at 25 per cent of the actual cost of the plant or machinery purchased. In a case where it is not a small-scale industrial undertaking, but another type of industrial undertaking in order to claim eligibility for investment allowance, it should be engaged either in construction or manufacture or production of any article or thing, but it should not be an article or thing specified in the list in the Eleventh Schedule. 13. According to the learned Departmental Representative, running a film processing and photo printing laboratory comes under prohibited category of article or thing and they are covered by items 9 and 10 of Eleventh Schedule. The fulcrum of arguments advanced by the either side on this aspect of the matter has already been dealt with in para 9 of this order above. AS can be seen, entry No. 9 in the Eleventh Schedule was inserted from 1st April, 1989 and, therefore, that entry cannot be applied to asst. yr. 1985-86 with which we are concerned in this appeal. As far as item No. 9 in the Eleventh Schedule is concerned, as already extracted above, it concerns itself with photographic apparatus and goods. Therefore, it is clear that if the assessee is a manufacturer or producer of photographic apparatus and good which come under the category of photographic apparatus or akin to photographic apparatus, then only it can be said that the assessee's business activity is hit by item No. 10 of the Eleventh Schedule. The learned counsel for the assessee, Shri K. Sampat argued that the assessee was only engaged in manufacture/production of exposed films and taking positive photographs from the negative films and not at all engaged in production of photographic apparatus or goods and, therefore, item No. 10 of the Eleventh Schedule does not apply or come under item No. 10 of the Eleventh Schedule. After deliberating upon this aspect of the matter, we fully agree with the argument of Shri K. Sampat and hold that business carried on by the assessee was only taking photographs and getting the positive films from the negatives and does not at all engage in the production of photographic apparatus and goods. By photographic apparatus or goods, we understand is the machinery with which photographs can be taken. The assessee is not at all engaged in such production of any apparatus which is capable of taking photographs. There is ocean of difference between manufacture or production of photographic apparatus or goods on the one hand, and taking photographs on the negatives using photographic apparatus itself on the other hand. According to us, what we have to decide in this case is whether taking photographs through the photographic apparatus "camera" and bringing out a positive from the negative film and touching the photograph while delivering it to the customer, whether any manufacturing process is involved or whether the activity carried on by the assessee involves production of an article or thing.
14. Now, let us consider what is the true meaning of the word "manufacture". At page Nos. 9 and 10, the assessee explained the way in which he is adopting manufacturing process while doing his business. Since we feel that it is better to put it in his own words, we are extracting the whole of Annexure 'B', here below :-
"Manufacturing process Color Photo Lab/machinery are consisting of three parts. (As per specification filed on pp. 6, 7 and 8 of paper book filed on 5th May, 1997).
1. Film processing machine :
The function of the above machine is to developing of raw exposed films. The film can be exposed in our studio, out door functions, religious photo and by the amateur customer.
The developing of the films gone through the four chemicals:
(a) Developer
(b) Bleach fix
(c) Fixer
(d) Stabilizer In the last running water wash and dry the film at the last developing of the films (takes times 45 minutes) called negative.
2. Printing machines After developing the film the next process starts negative to prints.
From return to print as per the different sizes of paper used for different size of photos our machine makes passport size photo to enlarged 10" x 12" size print, the printing process adjusted in the printing computer for color correction feeding. To produce the quality color print.
3. Manufacturing final print for paper developed machines After printing the color negative in the printer, the next manufacturing process is color paper developing. The exposed negative prints exposed in the printer on color paper, the exposed color paper roll for developing is fitted in their machines for final print. The following chemicals are used in this process. Then the paper roll comes in next process in the drawer for wetting the paper, on the which process 1, hour time is taken to have photograph for customer."
Shri K. Sampat contended that since the assessee is not a manufacturer of "cameras" or negative film itself or roll of negative films, the assessee cannot be said to have been engaged in a prohibited category of articles enumerated under item No. 10 of Eleventh Schedule. We agree with this contention. The learned Departmental Representative wants to rely upon the Kerala High Court decision in CIT vs. Polyclinic (P) Ltd. (1994) 207 1TR 185 (Ker) in support of his proposition that even in a case of a small scale industrial undertaking, if the article or thing produced or manufactured falls under any item of Schedule Eleven, then also, the assessee is not entitled to investment allowance, taking into consideration, the spirit of the legislature and the scheme under the IT Act. We minutely went through the Kerala High Court decision. Their Lordships while commenting upon the Special Bench decision in ITO vs. Dr. P. Vittal Bhat (1984) 20 ITJ (Bang)(SB) 507 : (1984) 16 Taxman 8 (Bang) held at p. 188 of the reported judgment specifically as follows: "Though in the decision of the Special Bench of the Tribunal s. 32A(1) and (2) have been quoted in full, the Bench considered the matter only from the perspective of s. 32A(2)(b)(ii) of the Act, as is evident from para 14 of the order. The Tribunal posed the question as to whether there was a manufacture or production of an article or thing as the expression is used in s. 32A(2)(b)(ii) of the Act. There is a substantial difference between s. 32A(2)(b)(ii) and (iii). The question referred to this Court is whether the assessee is entitled to investment allowance under s. 32A(2)(b)(iii) of the IT Act. There is no case nor is it discernible from the papers that the assessee is a small-scale industrial undertaking. So, obviously, s. 32A(2)(b)(ii) is inapplicable."
Therefore, having regard to the abovesaid clear observation of the Honourable Kerala High Court, we hold that the proposition for which it is sought to be used by the learned Departmental Representative is not substantiated by that decision. The learned Departmental Representative next contended that in view of the matter, the business carried on by the assessee cannot be said to be involving manufacture. At the most, he argues that it may amount to processing. To support his contention he referred us to pp. 1-3 at which he had provided a photocopy of the Supreme Court judgment in Dunlop India Ltd. vs. Union of India (1994) 4 SCC 686. The facts which arose before the Supreme Court in that case and the judgment thereon are fairly reflected in the headnote of the decision which is as follows :
"The Central Government had held that the process known as 'soap treatment' whereunder grey cotton duck/canvas was treated with soap, colour and water in a soaping machine and the processed fabric was used in different shops of the tyre factory of the appellant for wrapping rubberised cloth layer by layer so that the same do not get pasted or glued together, amounted to a manufacturing process."
Allowing the instant appeal against the said order, the Supreme Court held as under :
"The said process cannot be said to be one which results in changing the identity of the cloth which is subjected to the said treatment and the said process does not give rise to a new product which is marketable. The said process cannot, therefore, be regarded as a manufacturing process."
15. The next decision to which our attention is invited by the learned Departmental Representative is provided at pp. 3-5 of the paper book filed by the Department in the case of Union of India vs. Parle Products (P) Ltd. AIR 1994 SC 106. The question which arose in the said case was whether process involved in converting aluminum foil into "paper-backed aluminium foil" amounts to manufacture. This question is examined for purposes of applying the provisions of s. 2(1) of the Central Excises & Salt Act, 1944. The Honourable Supreme Cour, decided that "the position really turns upon whether as a result of the application of the process a new and commercially distinct article, known to the market as such emerges at the end. This, in turn, depends upon evidence as to the requisite transformation of the goods included a new and different article having distinct identity and character or use. Unless this occurs the process, however, elaborate, it might otherwise be would not graduate itself into 'manufacture'. The article that results from applying the process must be commercially known as another and different article."
"Such a position can be decided on evidence as to how the article is known and recognised by those in the trade, industry or commerce dealing with the article. The finding of the Court must be based on such evidence and not on its own perceptions of the matter."
16. The third decision to which our attention was specifically invited was another Supreme Court judgment in Moti Laminates (P) Ltd. vs. CCE JT 1995 (2) SC 324. A photocopy of the said decision is provided at pp. 18-27 of the paper book filed on behalf of the Department. The question which arose in that case before the Honourable Supreme Court was whether resin or resole produced by the appellants can be considered to be "goods" for purposes of levy under the tariff schedule item No. 68 of the Central Excises & Salt Act. The words 11 produced" or "manufactured" were interpreted and the real meaning discussed for purposes of examining the justification for levy of central excise duty in that case. In that case the following appears as part of the headnote of the decision :
"The duty of excise being on production and manufacture which means bringing out a new commodity it is implicit that such goods must be usable, movable, saleable and marketable. The duty is on manufacture or production but the production or manufacture is carried on for taking such goods to the market for sale. The obvious rationale for levying excise duty linking it with production or manufacture is that the goods so produced must be a distinct commodity known as such in common parlance or to the commercial community for purposes of buying and selling."
"Although the duty of excise is on manufacture or production of the goods, but the entire concept of bringing out new commodity, etc., is linked with marketability. An article does not become goods in the common parlance unless by production or manufacture something new and different is brought out which can be bought and sold."
17. Another decision cited was again a Supreme Court decision in Chowgule & Co. (P) Ltd. vs. Union of India AIR 1981 SC 1014. In this case, the word processing for purposes of Central ST Rules (1957) r. 13 framed under Central ST Act [74 of 1956, s. 8(3)(b)] was considered. The question considered was whether blending of ore of different qualities for obtaining ore of requisite specification amounts to processing within the contemplation of s. 8(3)(b). In that case the blending was done through mechanical ore handling plant. The Supreme Court in that case held that :-
"Where the blending was done through the Mechanical Ore Handling Plant, the plant fell within the description of 'machinery, plant, equipment' used in the processing of ore for sale and it follows as a necessary corollary that if any items of goods were purchased by the assessee as being intended for use as 1machinery, plant, equipment, tools, spare parts, stores, accessories, fuel or lubricants' for the Mechanical Ore Handling Plant, they would be eligible for inclusion in the Certificate of Registration of the assessee."
18. Our attention is also invited to the CEGAT Delhi 'D' Special Bench decision in M. Basheer Ahammed vs. CCE (1990) 38 TTJ (Del)(SB) 266. In that case, meaning of word "manufacture" was discussed for purposes of levy of central excise. In that case, the question the learned CEGAT was considering was what the assessee was doing was recording sound on duty paid cassette tapes either purchased from market or supplied by customers. In such a case whether it can be called manufacture of excisable goods. The CEGAT held the following which is provided in pp. 7 and 8 of the paper book :
"The intention and object of the Central Excises and Salt Act is clear that only a manufacture of the 'excisable goods' in the Schedule that the levy, in terms of s. 3 of the Act, is attracted. The articles classified under item 59 of the Schedule are that 'articles of a kind used for sound and image recording' and amongst them, sound recorded magnetic or cassette tapes. Admittedly, in the present case, the appellant was, not manufacturing either sound recorded magnetic tapes [item 59(2) of Schedule] or sound recorded cassette tapes [item 59(4) of the Schedule] as such. What he was doing was recording sound on duty paid cassette tapes either purchased by him from the market or supplied to him by the customers. The term 'manufacture' is understood in the sense that a new product should come into existence having a distinct name, character and use in the market. Mere application of a process does not bring about transformation of an original product into a new product and such a process cannot be equated to manufacture. In the present case the products, viz., cassette tapes used for sound recording will not loose its identity and in fact the same cassette tapes can be used number of times for recording and re-recording and it is not the intention of the legislature in levying duty each time when single tape is re-recorded. In view of the matter, assessee is not liable to pay any duty or fine for not having manufactured the excisable goods in item 59 of the Schedule and recording sound on duty paid magnetic cassette tapes is not manufacture."
19. The learned Departmental Representative contended that it is the effect of processing on the thing, which is requisite; more than a mere change there must be transformation; if it is merely incidental or ancillary of manufacture is not entitled to investment allowance under s. 32A. A photo is produced when light is made to pass through the negative. The negative as such is not transforming itself to something else. The learned Departmental Representative cited before us Kanti Bros. vs. ITO (1995) 53 7TJ (Hyd) 246 : (1994) 50 ITD 106 (Hyd) in which the Hyderabad Tribunal held that conversion of ground nut oil into refined oil does not amount to manufacturing of a new article or thing. For the same purpose he also cited Bombay Tribunal decision in Jatfa Poly Yarn (P) Ltd. vs. 1TO (1994) 50 ITD 368 (Bom). The learned Departmental Representative also wanted to distinguish the following citations relied upon by the assessee: (1) CIT vs. London Star Diamond Co. (I) Ltd. (1995) 213 ITR 517 (Bom).
The meaning of the words "manufacture" or "processing" in that case was done with reference to the definition of those words under s. 2(8)(c) of the Finance Act, 1975. The question which cropped up before the Bombay High Court was whether the company which was engaged in cutting and polishing raw diamonds for purposes of export is engaged in 'processing of goods' or not. The Honourable Bombay High Court held that the expression 'manufacture' and the word 'processing' are not inter-changeable. They have clearly stated that the word 'processing' is much wider than 'manufacture'. It includes activities which would tantamount to 'manufacture'. The learned Departmental Representative sought to distinguish Bombay Tribunal decision in Daks Copy Services (P) Ltd.'s case (supra). In that case, the assessee was engaged in the business of photocopy and was deriving income from such copying. According to the learned Departmental Representative it is only a service centre. The contents of the paper used for copying did not change and, therefore, the said decision which was rendered in a case where the assessee was engaged in copying the document should not be applied to the facts of the case while deciding the present issue. He also wanted to distinguish the decision of the Delhi Bench of Tribunal in Q.S.S. Colour Processors case (supra). The learned Departmental Representative submitted that though the question in that case was similar to the issue on hand, it is submitted that the Revenue filed rectification application under s. 254(2) of the IT Act. The learned Departmental Representative further submitted that every process cannot be treated as a manufacturing process and he wanted to distinguish rendered by Calcutta 'B' Bench in the case of Amiya Kumar Tarafdar (supra). Lastly, he contended that the Supreme Court decision in N. C. Budharaja's case (supra) is squarely applicable. It should be duly kept in mind while deciding the main point at issue in this appeal. In that case, the meaning of the words 'manufacture' and 1production' as well as the word 'article' were elaborated and discussed and the meaning was clearly laid down. Ultimately, their Lordships held that the dam constructed by the assessee cannot be constituted to be an 'article'. In p. 415, their Lordships held the following :
"The test of determining whether 'manufacture' can be said to have taken place is whether the commodity which is subjected to the processing of manufacture can no longer be regarded as the original commodity but is recognized in the trade as a new and distinct commodity. The word production' has a wider connotation than the word 'manufacture'. While every manufacture can be characterised as production every production need not amount to manufacture. The word 'production' or 'produced', when used in juxtaposition with the word 'manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermitted products and residual products which emerge in the course of manufacture of goods."
"The expression 'manufactured' and 'produced' are not only associated with movables, articles and goods, big and small-but they are never employed to denote construction activity of the nature involved in construction of a dam or a building.
20. While arguing this case, the learned Departmental Representative have submitted the following Supreme Court decisions in support of his contention that taking photos, touching them, getting positives out of the negatives, colouring them in the colour lab would not amount to either manufacture or processing.
21. He had filed copy of decision in Everest Copiers vs. State of Tamil Nadu (1996) 103 STC 360 (SC). In that case, the case was examined to find out whether the activity carried on by the assessee was a sale or a works contract under the provisions of Tamil Nadu General ST Act. The assessee, in that case was an operator of photo copier or xerox machine supplying duplicate copies of documents of customers. The ST Department wanted to bring that transaction as amounting to a sale of the photocopies or xeroxed documents to the customer. After examining several earlier cases on the subject, the Supreme Court held that it is only a works contract and not a sale. They held the following :
"The main object of the work undertaken by the operator of the photocopier or xerox machine is not the transfer of the paper upon which the copies produced; it is to duplicate or make a xerox copy of the document which the payer of price wants duplicated. The paper upon which the duplication takes place is incidental to this transaction. The object of the payment of the price is to get the documents duplicated, not to receive the paper. The payer of the price has no interest in the bare paper upon which his document is duplicated. He has interest in it only if it bears such duplication."
22. Another decision on which much reliance is sought to be placed is another Supreme Court case in the of Asstt. STO vs. B. C. Kame (1977) 39 STC 237 (SC). There also, the matter was examined to know whether the work done by the assessee amounts to a sale or works contract. In that case, the work done by a photographer doing photographic work and supplying prints to the customers was involved. In that case it was held that when a photographer undertakes to take a photograph, develop the photograph, or do other photographic work and thereafter supplying the prints to his clients, he cannot be said to enter into a contract or sale of goods. A contract on the contrary is for use of skill and labour by the photographer to bring out a desired result. The occupation of a photographer, except insofar as he sells the goods purchased by him is essentially one of skill and labour. Therefore, sales-tax is not payable by a photographer under the Madhya Pradesh General ST Act, 1958.
23. Therefore, the learned Departmental Representative summed up his argument by contending that simply because the assessee is engaged in the production of taking films, developing the films into positive films and running a colour photo lab by itself does not earn him the investment allowance within the meaning of s. 32A since his business activity does not amount to either manufacture or production of an article or a thing.
24. Seriously contesting the soundness of the arguments advanced by the learned Departmental Representative, Shri K. Sampat, the learned advocate for the assessee contended that firstly, the activity carried on by the assessee is already fully extracted in the above paras of this order and it may be duly born in mind while determining the eligibility or otherwise for investment allowance to the assessee. What is the nature of the work a photographer does while taking a photograph and whether it involves manufacturing or processing may better be appreciated by fully knowing the work of a photographer, picturesquely described at p. 241 of 39 STC in B. C. Kame's case (supra) by the Honourable Supreme Court. It is said "when a photographer like the respondent undertakes to take photograph, develop the negative or do other photographic work and thereafter supply the prints to his client, he cannot be said to be entered into a contract for sale of goods. The contract on the contrary is for use of skill and labour by the photographer to bring about a desired result. The occupation, of the photographer, except insofar as he sells the goods purchased by him, in our opinion, is essential one of skill and labour. A good photograph reveals not only the aesthetic sense and artistic faculty of a photographer but it also reflects his skill and labour. A good photograph in most cases is indeed a thing of beauty. It not only seeks to mirror and portray a scene from actual life, but it also catches and preserves for the future what belongs to and is a part of the fleeting moment. The ravage brought about by the passage of time, the decay and ageing process which inevitably set in as the years roll by leave what is preserved in the photograph unaffected. It is no wonder that an old photograph revives nostalgic memories of days no more, but to which we look back through the mist of time with fondness even though such fondness has a tinge of sadness."
25. Firstly, the learned advocate wanted to argue that the assessee is a small-scale industrial undertaking since the value of its plant and machinery is less than 20 lakhs rupees, and therefore, assuming without admitting that the assessee has been producing or manufacturing any prohibited category of article or thing mentioned in Eleventh Schedule even then the assessee is entitled to investment allowance under s. 32A. However, we have already came to the conclusion that the assessee is a small-scale industrial undertaking and its activity of business does not produce an article or thing which come under the prohibited categories enumerated in the Eleventh Schedule of the IT Act. The photographer uses his camera either in his studio or outside fits the camera with a roll of negative films and takes the photograph of his clients or make the light pass through the said negative fitted into the camera. From the negative a positive would come out by washing it in a dark room process. Further, the colour lab also is used in order to picturise the film with required colours. If necessary, the photographer even touches the photograph here and there in order to beautify the photograph. Therefore, firstly, the photo produced is only movable property, secondly what is fitted is negative film and what comes out from the camera and later developed is a film in which photograph is printed. Therefore, a negative photograph is not the same thing as an empty film roll and it is quite a distinct and different thing than what is fitted into the camera. We are not on the point whether the photo thus supplied to the customer is a, sale of an article or thing. The question whether it is a sale or whether it is a service contract is not at all relevant for our purposes or for examining whether the assessee is entitled to investment allowance under s. 32A or not. What is relevant is whether there is any manufacture or processing involved in the activity carried on by the assessee or in taking photo developing into a positive film, colouring it and handing it over to the customer. This makes all the difference and the Supreme Court cases cited by the learned Departmental Representative whether any sale is involved by the photocopier by photographer himself are not at all relevant for the purposes of examining the main issue involved in this appeal. The learned advocate for the assessee stated that the question is decided in favour of the assessee not only by the several Tribunal decisions but also by the High Court decisions. He cited the decision CIT vs. D. K. Kondke (1991) 192 ITR 128 (Bom). The Bombay High Court in that case was considering the meaning of the words 11 manufacture" or "processing of goods" for purposes of the relief to be granted under s. 80J. There also, the question was whether the cinematographic film amounted to manufacture or an article or goods. The case came up under s. 104(4)(a) of the IT Act. In that it was held that the production of a cinematographic film amounted to manufacture of an article or goods within the meaning of s. 104(4)(a) (as it then stood) and the activity of the assessee was an industrial undertaking within the meaning of s. 80J. Further, even from a common sense point of view, film production has to be considered as a "manufacturing activity" and the undertaking had to be considered as an industrial undertaking. Therefore, the assessee was an industrial undertaking entitled to the benefit of deduction under s. 80J. He also relied upon the decision of the Advanced Ruling Authority in Arthur E. Newell vs. CIT (1997) 223 ITR 776 (AAR). The expression "manufacture" was elaborately discussed and its true meaning was held to be as follows :
"The expression 'manufacture' involves the concept of changes effected to a basic raw material resulting in the emergence of, or transformation into, a new commercial commodity. Whether an article is converted into a different article depends on several criteria and one of the essential tests is whether in a commercial sense, the original article has ceased to exit and a new article or material should have lost its identity completely : all that is important is whether, what has emerged as a result of the operations is a different commercial commodity, having its own name, identity, character or end use. This determination is essentially one of fact and has to be arrived at on a consideration of all relevant factors such as the quality and nature of the original article, the extent and magnitude of the operations carried out on, or in relation to it and the commercial identity, character and use of the article produced."
26. Therefore, it is not necessary that the original article or material should have lost its identity completely. All that is important is whether what is emerged as a result of operations is a different commercial commodity having its own name, identity, character or end use. Here, in this case, applying the test the negative vacant film roll fitted or kept in or fitted into the camera is a quite different and distinct article than the photograph which can be taken on the negative film. Nobody calls the photo as equal to a negative film. The negative film looses its identity completely and the photo is quite a different commercial commodity having its own identity, character and end use. Therefore, what is involved while taking a photograph by a photographer is manufacture. Way back in 1985 in the Calcutta 'B' Bench in Amiya Kumar Tarafdar (supra) considered the exact question which is now before the Tribunal. The Tribunal held as follows :
"Investment allowance is available to a small-scale industrial undertaking established for manufacture or production of an article or thing. The assessee, being (registered) as a small-scale industry with the State Government was printing and developing of various articles from the negatives inserted in the imported machine. The final product was something different from the negative or the white paper which was inserted in the machine, and it was coming in different sizes. Therefore, if the operation of the machine was taken into consideration along with the final product, it would be clear that the assessee was manufacturing an article with the machine. Hence, investment allowance had been rightly allowed and the ITO's order could not be taken as erroneous and prejudicial to the interest of the Revenue."
27. Another decision heavily relied upon by the learned counsel for the assessee was in the case of Q.S.S. Colour Processors (supra) a photocopy of the judgment was provided at pp. 14 to 24 of the paper book filed by the assessee on 5th May, 1997. The question is dealt with at paras 5 & 5.1. At the end of para 5.1, it is held as follows :
"In instant case, the exposed films are processed by using of various chemicals and all the foreign matters are removed and the negative of the film are obtained. With the use of the regular films by use of certain developing chemicals, the positive prints are obtained and by the use of another chemical called 'fixer' the character of permanency is given to the prints. Therefore, under no circumstances it could be said that the initial raw material viz. the exposed films retain their character even after the processing is complete but rather it could only be said that after 'carrying out of the several processing operations, the product obtained has totally a different character, identity, etc. from its raw material, the exposed films. Therefore, it has to be concluded that the activity of the assessee is that of manufacture of photographic prints and developing of exposed films which is an article or thing within the terms specified in s. 32A of the IT Act, 1961."
27A. Another decision relied upon heavily by Shri Sampat is Rajasthan High Court decision in CIT vs. Trinity Hospital (1997) 225 ITR 178 (Raj). The assessee was running a hospital/nursing home in Jodhpur which had set up X-ray machines, Ultrasound Scanner and Foetal Monitor in its hospital. Those machines produced photographs of internal parts of the body. The question was whether investment allowance is allowable. The Hon'ble High Court after examining the facts of the case held the following as can be seen from the headnote of the decision and ultimately, the investment allowance was allowed :
"(i) that the photographs of various parts of the body obtained by these machines are the resultant product of work or activity. They are the result of efforts and activities and give a result in black and white regarding the internal position of the parts of the body and are helpful for proper and efficient diagnosis. The photographs or the graphs obtained from these machines, which are the result of efforts or activity, therefore, can be said to be 'things' under s. 32A of the Act. The installation of these machines in the hospital by the assessee was for the purpose of the business of production of things. The Tribunal was, therefore, right in allowing investment allowance to the assessee."
28. The latest in the series which was cited before us was Andhra Pradesh High Court decision in CIT vs. Prasad Film Laboratories (P) Ltd. (1997) 225 ITR 348 (AP). The question was whether production of a film is entitled for investment allowance under s. 32A. Allowing the claim of the assessee ultimately, the Honourable High Court held the following :
"Held, (i) that the production of a negative by exposing the raw film and recording the pictures and sound track thereon would amount to production of a cinematograph film. That process should also include developing the exposed film to have the negative or the master film. But when positive prints are made from the master negative, the cinematograph film which was already produced is the raw material, and, therefore, it cannot be said that there is a production of cinematograph film in as much as such cinematograph film was already produced with reference to the negative, and making positive prints from the negative so made is an independent activity which cannot be called production of a cinematograph film, but rather falls in the category of a duplication process. Therefore, since the main business of the assessee was to make the positive prints from negative prints, the fact that occasionally exposed films were also developed would not disqualify the assessee from claiming the allowance.
(ii) That by the process carried out by the assessee, the raw film without images and sound were converted into films with images and sounds, which was a new and distinct commodity well known in the trade as positive prints quite different from raw film. Therefore, the process of obtaining positive prints would be manufacture."
29. Having regard to all the above, we are of the view that the decisions relied upon and the arguments advanced by the learned Departmental Representative do not apply at all or do not appeal to us and, therefore, they are to be rejected. On the other hand, the various documents relied upon by the assessee, the citations relied upon by him and the several arguments advanced by him, in our considered opinion fully support the case of the assessee and having regard to all the above, we hold that the assessee is entitled to investment allowance and ultimately, the Departmental appeal against the order of the CIT (A) dt. 26th February, 1990 should be held to be without merits and hence it is liable to be dismissed.
30. In the result, the Departmental appeal is dismissed.