Income Tax Appellate Tribunal - Amritsar
Raj Manohar And Bros. vs Income-Tax Officer on 8 April, 1996
Equivalent citations: [1982]1ITD90(ASR)
ORDER
--Matters not examined in appeal.
Ratio:
Though technically the entire assessment might be open before the appellate authority but as every point need not to be considered for disposing the appeal hence Commissioner had right to revise those matters which were not considered and examined by the appellate authority.
Held:
Unless there is an overt allusion in the appellate order to a particular issue either raised in the grounds of appeal or taken up by the appellate authority, e.g., Appellate Assistant Commissioner, Commissioner(Appeals) suo motu, an adjudication on such an issue or issues cannot be presumed although technically, the entire assessment may be open before the appellate authority. As a matter of fact, an appellate authority is not expected to and does not, in normal circumstances, travel beyond the aspects of a case, which are necessary for the disposal of the appeal before it. Therefore, the proceedings under section 263 were validly initiated by the Commissioner.
Application:
Also to current assessment years.
Income Tax Act 1961 s.263 ORDER Shri K. C. Srivastava (Accountant Member)
1. This appeal by the assessee is against the order of the Commissioner, passed under section 263 of the Income-tax Act, 1961 ("the Act") for the assessment year 1977-78. The commissioner found that in computing the total income of the assessee, the ITO had allowed deduction under sections 80J and 80HH of the Act by treating the undertaking of the Assessee to extract timber and other forest products from the forests taken on lease to be an industrial undertaking within the meaning and for the purpose of sections 80J and 80HH. According to Commissioner, this order of the ITO was erroneous insofar as it was prejudicial to the interest of revenue as according to him the assessee wa not entitled to the above deduction under sections 80J and 80HH. He took this view in view of the decisions of the Punjab and Haryana High Court in the case of Sidhu Ram Atam Parkash [1974] 34 STC 344 and the case of Pyare Lal Khushwant Rai v. State of Punjab [1974] 34 STC 341. In these decisions, it has been held that a forest contractor making logs and converting them into rafter, plank and fire wood either by manual labour or mechanical process foes not bring into existence any new substance and it could not be considered as manufacturer. The Commissioner, therefore, issued notice to the assessee. On behalf of the assessee, the following objection were raised :
2. It was submitted that the order of the ITO sought to be revised under section 263 had been the subject matter of appeal before the Commissioner (Appeals). It was contended that the order of the ITO ceased to exist and has merged into the order of the Commissioner (Appeals) totally though the question raised now had not been the subject-matter of appeal before the Commissioner (Appeals). The Commissioner (Appeals) however, did not accept this plea of the assessee as, according to him, the scope of the appeal before the Commissioner (Appeals) was very limited and he had reduced the income Rs. 4,624 on some other grounds. He observed that the relief under sections 80J and 80HH had not been raised before the Commissioner (Appeals) and he, therefore, held that the order of the Commissioner (Appeals) had modified in them some of the specific items which had been raised before the Commissioner. He referred to the decision of the Supreme Court in the case of Gojer Bros. (P.) Ltd. v. Ratan Lal Singh [1975] 1 SCR 394 wherein it was held that where the subject matter of appellate order was not the same as that of the order of the lower court or tribunal application of the principle of merger may not apply. In this case, the Supreme Court had referred to the case of State of Madras v. Madurai Mills. Co. Ltd. AIR 1967 SC 685. In this case, it was held that the doctrine of merger was not a doctrine of rigid and universal application and it could not be said that wherever there were two orders, one of the inferior tribunal and the other by the superior tribunal passed in an appeal or revision, there would be a fusion or merger of the two order irrespective of the subject-matter of the appellate order and the scope of appeal or revision contemplated by the particular statute. The Commissioner further observed that the decision of the Allahabad High Court in the case of J. K. Synthetics Ltd. v. Addl. CIT [1976] 105 ITR 344 (All.) had not considered the decision of the Supreme Court and hence it could not be followed. He further referred to the decision of the Gujarat High Court in the case of Kishan Dass Bhagwan Dass Patel v. G. V. Shah [1973] 2 ITJ 249 wherein it was held that if no grievance was made by the assessee in respect of a particular item and the appellate authority did not choose to consider that particular item suo moto, there would be no order of the appellate authority on that particular item.
3. The Commissioner then considered the merits of the case. He found that for satisfying the provisions of either of the two sections, the industrial undertaking should either manufacture or produce articles before qualifying or the deductions provided in those sections. It was contended before the commissioner that though the activity carried on by the assessee could not be considered as a manufacturing activity in view of the decision of the Punjab & Haryana High Court referred to above, the activity would fall under the head "Producing goods or articles" as given in those sections. The Commissioner, however, found that under the provisions of the above sections the deduction could be allowed only if all the conditions laid down in the sections are fulfilled. He found that the conditions prescribed were that the industrial undertaking should be engaged production of articles by employing a given number of workers in a manufacturing process carried on by it. He, therefore, found th at a manufacturing process was necessary for entitling an industrial undertaking to claim deduction under those sections. The Commissioner was of the view that producing articles would have to be given the same meaning as manufacture and in his opinion while manufacture may be with the help of machinery, producing goods may be with or without the help of machinery.
4. The Commissioner found that the Punjab and Haryana High Court had based its conclusion on the decision of the Supreme Court in the case of Union of India v. Delhi Cloth & General Mills AIR 1963 SC 791. In that case the Supreme Court held that processing could not be equated to manufacture and manufacture could mean bringing into existence a new substance and does not mean merely to produce some change in a substance, however, minor in consequence the change may be. The Commissioner referred to the decision of the Punjab and Haryana High Court an being bound by those decisions, he held that the undertaking of the assessee is not one which manufactures or produces articles an therefore, not entitled to any deduction under sections was, 80J and 80HH in respect of the profits and gains therefrom.
5. The Commissioner further held that a minimum number of workers should be employed in the undertaking's manufacturing process. He held that as there was no manufacturing process, there was no question of workers being employed for that purpose. He further referred to the fact that the forest operations were carried on through contractors, who were engaging workers. From this, he came to the conclusion that the industrial undertaking was not engaging those workers but the contractors were employing them. The Commissioner further rejected the plea of the assessee that the deduction under sections 80J and 80HH could not be withdrawn as they had been allowed to the assessee in earlier years. On the above reasons, the commissioner withdrew the deduction allowed by the ITO under sections 80J and 80HH and enhanced the income accordingly.
6. Before us, the learned counsel for the assessee has advanced three main arguments against the order of the Commissioner. It is submitted that the order of the ITO was the subject-matter of appeal before the Commissioner (Appeals) in appeal No. 5/PKT of 1978-79. It was also submitted that the Commissioner (Appeals) had disposed of the above matter on 20-3-1980. It was, therefore, contended that the Commissioner could not exercise his powers of revision under section 263 as, on the date when he passed the order, the assessment order of the ITO had merged with the order of the Commissioner (Appeals). The learned counsel further submitted that it was true that the question regarding the deduction under sections 80J and 80HH had not been the subject-matter of appeal before the Commissioner (Appeals) and the Commissioner (Appeals) had also not considered those questions while disposing of the assessee's appeal. However, it was contended that the learned Commissioner (Appeals) had plenary powers and in view of this legal position the whole assessment should be held as open before him when once the assessee files appeal on any point. It was, therefore, contended that the order with which the Commissioner has interfered was actually the order of the Commissioner (Appeals) and not the order of the ITO. For this submission reliance was placed on the decision of the Allahabad High Court in the case of J. K. Synthetics Ltd. (supra) wherein it was held that where any such appeal was filed before the AAC and the AAC disposed of the appeal the entire assessment order merged in the appellate order irrespective of the points urged by the parties or decided by the appellate authority. Further reliance was placed on the decision of the Madras High Court in the case of CIT v. City Palayacot Co. [1980] 122 ITR 430. However, we find that as far as this decision was concerned, the judgment was against the theory of whole merger in the case of any appeal. It was held in this case by the Madras High Court that the doctrine of merge will have to be taken into account in the light of what was in controversy before the appellate authority or what could have considered by the appellate authority. The Madras High Court had followed certain earlier decisions of the Madras High Court, Karnataka High Court and the Kerala High Court. However, they dissented from the judgment of the Allahabad High Court in the case of Addl. CIT v. Saraya Distillery [1978] 115 ITR 34 where the earlier decision of the same High Court had been followed.
7. Before we proceed to consider the contentions on the merits, we proceed to dispose of this legal objection raised by the learned counsel for the assessee. We had pursued the order of the learned Commissioner in paras 5, 6 and 7 of his order and we find that he has referred to the decision of the Supreme Court in the case of Gojer Bros. (P.) Ltd. v. Rattan Lal Singh (supra) and also the decision of the Supreme Court in the case of State of Madras v. Madurai Mills Co. Ltd. (supra) where it was held that the doctrine of merger was not a doctrine of rigid and universal application and it could not be said that wherever there were two order one of the inferior tribunal and the other by the superior Tribunal the two orders merged irrespective of the subject-matter of the appellate order and the scope of the appeal or revision contemplated by the particular statue. From the order of the learned Commissioner, it appears that there is difference of opinion between the various High Courts on the question of the merger of the order of the ITO with the order of the first appllate authority. We will have, therefore, to proceed from the principle laid doen by the Supreme Court and then to find the circumstances in which it can be held the order of the ITO has merged with the order of the first appellate authority. As already referred to above in the case of Madurai Mills Co. Ltd. (supra), the Supreme Court has held that the doctrine of merger was dependent on the nature of the appellate order or revisional order in each case and the scope of the statutory provisions conferring the appellate or revisional jurisdiction. The matter was considered in detail by the Gujarat High Court in the case of Kishan Dass Bhagwan Dass Patel v. G. V. Shah (supra). In that decision, Chief Justice Bhagwati, as he then was, held that whether there is merger of the order of assessment of the ITO in the appellate order or not and, if there is, to what extent dependent on the subject-matter of the appellate order, the order of the assessment made by the ITO merges in the order of the AAC [or the Commissioner (Appeals)] only insofar as it relates to items considered and decided by the AAC. It was further held that the part of the order of assessment, which relates to items not forming the subject-matter of the appellate order is left untouched and does not merge in the order of the AAC. In coming to the above conclusion, the High Court had relied upon the decision of the Supreme Court referred to above. After review of all the decisions, the Madras High Court has also come to a similar conclusion in the case in City Palaycot (supra). In our opinion, the decisions of the Gujarat High Court and the Madras High Court which is mainly based on the decisions of the Supreme Court has to be held to represent the correct view on the matter. As in this case, the admitted position is that the question regarding the allowance of relief under sections 80J and 80HH had not been considered or decided by the Commissioner (Appeals), it has to be held that there was no merger of the assessment order with the appellate order and the Commissioner could exercise his jurisdiction under section 263 in respect of the order passed by the ITO. This plea of the assessee has, therefore, to be rejected.
8. On the merits of the case, as already stated above, the Commissioner had held that relief under sections 80J and 80HH could not be allowed to the assessee as the assessee was not manufacturing or producing goods and the workers engaged in the industrial undertaking were not engaged in a manufacturing operation. Sub-section (2) of section 80J provides that the deduction under sub-section (1) has to be allowed where the industrial undertaking begin to manufacture or product articles and such deductions available for five years. The condition laid down in sub-section (4) are several and conditions laid down in clauses (iii) and (iv) of that sub section refer to the industrial undertaking manufacturing or producing articles and where the industrial undertaking manufactures or produces articles, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power or employees twenty or more workers in a manufacturing process carried on without the aid of power. The learned Commissioner relying on the decision of the Punjab and Haryana High Court in the case of Sidhu Ram Atam Parkash (supra) as well as in the case of Pyare Lal Khuswant Rai (supra) held that the assessee being a forest contractor, felling trees, making logs and converting them into plank, rafter and fire wood could not be considered as a manufacture. The Commissioner further held that the term producing articles could also refer to production of articles which are new and separate from the articles from which the new articles is produced. The Commissioner further held that the workers could not be held to be engaged in a manufacturing process as no such manufacturing process was carried on by the assessee.
9. The learned counsel for the assessee submitted before us that the decision of the Punjab and Haryana High Court, which have been relied upon by the Commissioner has held that the forest contractors were not engaged in manufacturing operations. However, it was contended that such contractors were certainly producing articles when they were making such logs after felling trees and converting them into plank, rafter, etc. It was submitted that when the section uses two separate words like "manufacture" and "producing articles" separate meaning has to be given to the words and they could not have the same meaning. It was submitted that in producing scant, plank, rafter, etc., the assessee was producing articles which were different from the trees, which was being cut. It was also submitted that the tree itself was not a saleable commodity but when cut into pieces in the form of plank itself, scants or rafters, nature and utility changes. It was, therefore, contended that the assessee should be held to be producing articles even if it is held that they were not manufacturing as such. In this connection, it was pointed out that "industrial undertaking" has not been defined in section 80J and one will have to go to other provisions for ascertaining its meaning. He referred to the definition in the Wealth-tax Act as given in Explanation to section 5(2) (xxxi). According to this Explanation, industrial undertaking means an undertaking engaged in among many other things in the manufacturing or processing of goods. It was contended that the same meaning should be given for the purpose of sections 80J and 80HH and wherever there were processing of goods such activity could be eligible for benefit under the Wealth-tax Act and which should also be eligible for benefit under sections 80J and 80HH under the Income-tax Act. In this connection, a reference was also made to the definition of "industrial company" as given in the Finance Act for the purpose of special rate of Companies Taxation.
10. Regarding the argument of the Commissioner that the assessee was not engaging its own labour but was having labour under contract it was submitted that the labour engaged by the contractors were engaged in the industrial undertaking itself and could not be considered separately. It was argued that there was no difference why the assessee engaged his own labour or engaged contractors but in their turn put labour on specifical job. In this connection, reference was made to the decision of the Calcutta High Court in the case of Addl. CIT v. A. Mukherjee & Co. (P.) Ltd. [1978] 113 ITR 718. In this case, it was held that a publisher may get the books printed by any printer but the printer is not a manufacturer but a mere contractor. Similar view was taken in the case of Griffon Laboratories (P.) Ltd. v. CIT [1979] 119 ITR 145, where it was held that a manufacture may hire a plant and employ hired labour and manufacture the goods. What was necessary that the contractor should be under the supervisory control or direction of the assessee's industrial undertaking.
11. The departmental representative submitted that the scope of deduction under sections 80J and 80HH has to be determined with reference to the provisions of those sections and the interpretation of certain relevant terms by the Punjab and Haryana High Court. He submitted that He submitted that the assessee could not be considered as a manufacturer and he was not producing goods as the articles were not new as held by the Punjab and Haryana High Court in the cases referred to by the learned Commissioner. He submitted that in the cases relied upon by the assessee the requirement was fulfilled as a result of mere processing of goods but that could not be applied to sections 80J and 80HH where the Legislature in its wisdom has not used these terms. What has to be found was whether the forest contractor felling trees, making logs and converting them into planks, rafters or scants was engaged in the manufacturing operation or was producing articles within the meaning of those sections. He submitted that "producing articles" could only have one meaning and that would be very much akin too manufacture. In this connection, a reference was made to section 80J (4) (iv) where the requirement is that the workers are employed in a manufacturing process. It was further contended that the definition given in the Wealth-tax Act or in other statute for any other purpose could not apply and the question of allowance of deduction under sections 80J and 80HH have to be decided on the basis of the requirement in those sections themselves. It was contended that cutting the trees into logs and then into planks, rafter was not producing articles as the things produced are not new in its nature. For this, he strongly relied on the decisions of the Punjab and Haryana High Court.
12. The learned departmental representative further submitted that the provisions must be construed strictly and the assessee must show that the fulfillment of the conditions before the deduction claimed by him can be allowed. It was further submitted that the workers were not engaged by the industrial undertaking and all the workers were being engaged by the contractors who were to do different parts of the job, i.e., cutting of the trees and its transportation. It was submitted that the undertaking itself should employ the workers and then alone conditions laid down in that section can be fulfilled. He had submitted that the assessee was not the employer of the labour but the contractors were and the workers could not be considered as the worker engaged by the industrial undertaking. It was further submitted that the workers must be engaged in a manufacturing process before they could be considered as workers of the industrial undertaking eligible for deduction under those sections. As an argument, it was submitted that if the ultimate owner was to be held as the industrial undertaking the government would get the benefit as the forest belonged to the Government and it was merely leased to the assessee for certain exploitation.
13. The learned counsel for the assessee, in reply, submitted that the workers engaged by the contractors continued to be under the supervision of the assessee and they used to get subsidised rate to all of them. It was submitted that the contractors were obliged to engage certain number of workers and the goods worked out by the workers were kept in the godown of the assessee and under his control. It was also submitted that by actual nature the contract was for seasonal workers and in different seasons different activities were carried on. It was contended that the contractors were engaged in various processes which went into the conversion of logs into planks, rafters and scants.
14. We have very carefully considered the facts of the case and we have perused the reasons given by the learned Commissioner and the arguments advanced by the rival parties. In the beginning of the consideration of this item, we may give the gist of the decision of the Punjab and Haryana High Court on this question. In the case of Pyarelal Khushwant Rai (supra) the forest contractors used to cut the various trees, removing them to his business premises and after chopping he used to sell them as firewood. A question arises whether such forest contractors could be called as having manufacturing business and the assessee could be called a manufacturer. The Court relied upon the decision of the Supreme Court in the case of Delhi Cloth & General Mills Co. Ltd. (supra), where it was held as under :
"The word 'manufacture' used as a verb is generally understood to mean as 'bringing into existence a new substance', and does not mean merely 'to produce some change in a substance', however minor in consequence the change may be. This distinction is well brought about in a passage thus quoted in permanent edition of Words and Phrases, Vol. 26, from an American judgment. The passage runs thus :
'Manufacture' implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. Put something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use."
Applying the above principles, the High Court held that by chopping of the branches or by cutting into small pieces the nature was not changed and there was no transformation in different articles having distinctive names and characters. The High Court dissented from the judgment of the Calcutta High Court in the case of Shaw Bros. & Co. v. State of West Bengal and held that such activity was not a manufacturing activity.
15. In the case of Sidhu Ram Atam Parkash (supra), the assessee was a forest contractor cutting the standing trees and converting the logs into planks, rafters or firewood. Here again the High Court relied upon the decision of the Supreme Court in the case of Delhi Cloth & General Mills Co. Ltd. (supra) and held that when a log, either by manual labour or mechanical process, is converted into a plank or a rafter, a new substance does not come into being and this process is not covered by the definition of the word "manufacture". In this case also the High Court dissented from the decision of the Calcutta High Court in the case of Shaw Brothers (supra).
16. In view of the above judgment of the Punjab and Haryana High Court, the learned counsel for the assessee did not contend that the assessee was engaged in manufacturing operation. He, however, contended that in cutting the trees into logs and the logs into planks and rafters, the assessee was producing articles and according to him these articles were new and different from the trees. We, however, find that the Punjab and Haryana High Court had given answer to this question when they held that in cutting the trees into the logs and the logs into further pieces no new article was being produced and the nature of the goods remained the same. The main argument relied upon by the assessee is that there was processing of goods and to this extent the articles were being produced and the articles produced were different from the trees and the wood of trees. However, there is difference between the manufacture and processing of goods. Manufacture means making of articles or material commercially different from the basic components by physical labour or mechanical process. If the goods to which some labour is applied remained essentially the same commercial articles it cannot be said that final product is the result of manufacture. Processing of goods has in one sense a wider connotation than the term manufacture. At some point processing and manufacturing merge. Where the commodity retains a specific identity through the processing stage it will be said to have been processed and not manufactured. Ginning cotton is certainly processing of goods but cannot be considered as manufacture. However, where something different is produced as compared to the raw materials, one can use the word manufacture or produce articles.
17. Now the words "processing of goods" have not been used in sections 80J and 80HH. We will, therefore, have to confine ourselves to the term "manufacture or produce" of articles. As already stated, there is a difference of opinion on this question so far as it relates to the operation of a forest contractor. However, the decision of the Punjab and Haryana High Court is binding on us in this regard. No materials have been placed before us or before the Commissioner to show that the articles produced were nothing different from the logs, which were the raw materials for the assessee. For the purpose of convenience of transport, the logs are cut into various small sizes and there is no further working on them for converting them for any particular use. For example, some person may manufacture furniture out of it and some other person may make some other articles for the purpose of buildings. Insofar as no such further operation has taken place, the activity of the assessee remains processing of goods and not manufacture as interpreted by the Honourable Punjab and Haryana High Court. We, therefore, agree with the learned Commissioner that the Assessee being a forest contractor, cutting trees into logs and converting them into planks and rafters could not be held to be manufacturing or producing articles. As already stated above, this view has to be taken having regard to the decision of the Punjab and Haryana High Court.
18. The other point which is consequential is whether the assessee engages workers in a manufacturing process. As already stated by us, the activity of the assessee was not a manufacturing activity and, hence, the workers could not be held to be engaged in a manufacturing activity. Thus, the conditions laid down in section 80J (4) (iv) are not satisfied. However, we are not in agreement with the Commissioner or the departments representative that in case there is a manufacturing operation, the workers engaged through the contractors have to be ignored. What has to be seen is whether workers are engaged by the undertaking (and not by the assessee). An undertaking may do a thing directly or get it done by engaging a sub-contractor. That, in our opinion, could not come in the way of allowance of benefit under these sections. However, as the basic conditions required under sections 80J and 80HH are not satisfied, the order of the Commissioner has to be upheld.
19. Before us, there were arguments advanced by the assessee on the basis of certain letters and clarification given by the CBDT (Board) or even by the Minister of State for Finance. The letter from the Board is addressed to the Jammu Forest Lessees Association and clarifies that the provisions of clauses (xxxi) and (xxxii) of sub-section (1) of section 5 of the Wealth-tax Act would be applicable to various contractors. The other letter written by the Minister of State for Finance to a Member of Parliament states as under :
"2. I have had the matter looked into. The Ministry of Law which was consulted has advised that if the process involved in the business of the members of the Jammu Forest Lessees Association is not merely conversion of standing trees into firewood but also manufacture of new commodity saleable as such, the benefit of section 80J/80HH of the Income-tax Act, 1961 will be available. The CIT, Amritsar is being advised accordingly."
As far as the Board's letter is concerned, it relates to the wealth-tax matters and as already stated above there is difference between the language of the provisions of the two Acts. As far as the letter from the Minister of State for Finance is concerned, it does relate to the benefit under sections 80J and 80HH. This letter also puts a condition that the benefit would be available if the process involved was manufacture of new commodity saleable as such. It is no doubt true that it is open to the Government to extend the benefit of a provision to a particular class even if it is not strictly in accordance with the language of the law. However, the letter of the Honourable Minister of State for Finance also put the condition of manufacture of new commodity and in view of the decision of the Punjab and Haryana High Court, it cannot be held that the assessee is manufacturing any new commodity saleable as such. We called upon the departmental representatives to state whether there was any further instruction in this regard so that, if any beneficial instruction was available, we would direct the Commissioner to extend it to the assessee as well. It was, however, stated that there were no such instructions. We, therefore, hold that the reliance of the assessee on these letters does not help him and cannot on the basis of these letters direct the Commissioner to extend any benefit to the assessee in accordance with the Board's directions. In view of this, the appeal of the assessee is dismissed.