Bombay High Court
Commissioner Of Income-Tax vs Yavatmal Co-Operative Ginning And ... on 25 September, 1992
Equivalent citations: [1993]203ITR874(BOM)
JUDGMENT Dr. B.P. Saraf, J.
1. This is a reference under section 256(1) of the Income-tax Act, 1961, made by the Income-tax Appellate Tribunal at the instance of the Commissioner of Income-tax. The relevant assessment years are 1980-81 and 1982-83. The following questions of law have been referred to this court :
"1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellant Tribunal is correct in holding that the ginning of cotton amounts to manufacture ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in granting deduction under section 80HHA to the assessee ?
3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in granting deduction in respect of investment allowance to the assessee for the assessment years 1980-81 and 1982-83 ?"
2. The reference to reference to section 80HHA in question No. 2 appears to be wrong. It should be section 80HH. This question, therefore, is modified accordingly.
3. The assessee is a co-operative society. It runs a ginning factory. In the assessment year 1980-81, it claimed investment allowance under section 32A of the Income-tax Act, 1961, amounting to Rs. 29,340 in respect of certain new machinery installed by it during the relevant previous year for the purpose of its ginning factory. It also claimed deduction under section 80HH of the Act. The claim on this account amounted to Rs. 42,906. In the assessment year 1982-83 also, the assessee claimed deduction under section 80HH for its new ginning unit. The claims for deduction, both under sections 32A and 80HH, were rejected by the Income-tax Officer. The rejection of the claim under section 32A was confirmed on appeal by the machinery in question was installed for the purpose of ginning cotton which did not involve manufacture or production of any article. The rejection of the claim under section 80HH was also upheld. The assessee appealed to the Income-tax Appellate Tribunal. The Tribunal considered the claim of the assessee both under section 32A and section 80HH of the Act. It came to the conclusion that ginning and pressing of raw cotton by the assessee amounted to manufacture and, as such, the assessee was entitled to deduction from the taxable income, both under section 32A as well as section 80HH. At the instance of the Commissioner, the Tribunal has made this reference to this court for opinion.
4. The real controversy for determination in this case is whether the assessee who runs a ginning factory is entitled to the benefit of investment allowance under section 32A and deduction under section 80HH of the Act in respect of the machinery installed by it for the purpose of use in its factory.
5. Section 32A of the Act deals with investment allowance. This section, as it stood at the relevant time, provides, inter alia, as follows :
"32A. Investment allowance. - (1) In respect of... machinery or plant specified in sub-section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on the him, there shall, in accordance with and subject to the provisions of this section, be 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 machinery or plant was installed..., 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 ....
(2) The.... machinery or plant referred to in sub-section (1) shall be the following, namely :- ...
(b) any new machinery or plant installed after the 31st day of March, 1976, - ....
(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 of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule..."
6. Section 80HH provides for deduction in respect of profits and gains from newly established industrial undertaking or hotel business in backward areas. This section, as it stood at the relevant time, inter alia, provides :
"80HH(1) Where the gross total income of an assessee includes any profit and grains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall in accordance with and subject to the provisions of this sections, be allowed, in Computing the total income assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof.
(2) This section applies to any industrialise undertaking fulfills all the following condition, namely :-
(i) it has begun or begins to manufacture or produce articles after the 31st day of December, 1970, in any backward area;...
(4) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of each of the ten assessment years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles..."
7. From a careful reading of the aforesaid two sections, it is clear that the benefit of allowance or deduction under this sections is available only to industries which are engaged in the manufacture of any article or thing.
8. Under section 32A investment allowance is available in respect of machinery or plants "installed in an industries undertaking for purpose of manufacture or productions of any article or things". Hence, to get the benefits of investments allowance under the section 32A, it is not enough that certain new machinery or plants is installed in an industrial undertaking what is further required is that such installation is for the purpose of manufacture or production of any article or thing. The nature of the industrial undertaking is relevant for determining its eligibility for allowance. If the industrial under taking is not engaged in any business of manufacturing of any article or thing but simply needs the machinery or plant for the purposes of processing certain goods dealt with by it, the requirements of the section would not be fulfilled and the industrial undertaking would not be entitled to investment allowance in respect of such machinery or plant installed by it.
9. Similarly, from a reading of the various sub-sections of section 80HH, it is clear that the industrial undertaking must be engaged in the manufacture or production of some articles. Such a condition is evident from sub-section (2) as well as sub-section (4). Sub-section (2) provides that this section shall apply to any industrial undertaking which, inter alia, fulfills the condition that "it has begun or begin to manufacture or produce articles after December 31, 1970". Sub-section (4) further substantiates this interpretation when it provides that the deduction under sub-section (1) shall be allowed in computing the total income in respect of the ten assessment years beginning with the assessment year relevant to "the previous year in which the industrial undertaking begins to manufacturer or produce articles". Manufacture or production of articles by industrial undertaking is thus a condition precedent for grant of deduction under section 80HH as well as the starting point for computing the period of ten assessment years for which the benefit of deduction shall be available.
10. In view of the legal position set out above, there cannot be any doubt in regard to the proposition that the benefit of investment allowance under section 32A and deduction under section 80HH are available to such industrial undertakings only which are engaged in the business of manufacturing or producing articles.
11. The question that arises in this case, therefore, is whether the assessee which is running a ginning factory fulfils this requirement of these two sections. In other words, whether the business of ginning cotton can be said to be a business of manufacturing or producing any article. Ginning is the process of separating cotton seeds from the fiber. The process of ginning has been described in the Encyclopedia Britannica, 15th edition (?), Volume 7, at page 274 as follows :
"In modern ginning plants the gin stand is one unit in a series of machines. The modern roller gin, incorporating the basic principles of earlier versions, consists of a series of toothed circular saws projecting between the slits in a series of metal ribs. The revolving saws catch the fibers in their teeth, and the limited clearance between the saw blade and the rib plate allows only the plucked fibers to pass through the slits, leaving the seeds behind. The lint is then removed from the gin by air blast or by a large cylinder brush. Some gins are equipped with lint cleaners that further clean the cotton after it has been removed from the seed.
Because mechanical harvesting may pick up considerable leaf, twigs, bolls, burrs, and plant trash, improved machines have been developed to perform extensive drying and cleaning before ginning, and to clean the lint after the seed is separated from the fibers. The separated lint is conveyed to pressing boxes, where it is pressed into bales of approximately 500 pounds (225 kilograms) each. The seeds are shipped to crushing mills where they are processed to obtain various by-products."
12. From the aforesaid description of the process of ginning, it is evident that "ginning" is a manufacturing process. The products that emerge out of this process are "ginned cotton" and "cotton seeds."
13. In State of Punjab v. Chandu Lal Kishori Lal [1970] 25 STC 52, the Supreme Court had occasion to consider whether ginning of cotton is a manufacturing process. Referring to the process of ginning, the Supreme Court observed (at page 56) :
"In our opinion, the appellants are right in their contention that the ginning process is a manufacturing process."
14. The Supreme Court in this case was also required to consider whether the ginned cotton, unginned cotton and cotton seeds were distinct commercial commodities or they were one and the same commodity, namely, "cotton". This consideration, however, was in the context and setting of sections 14 and 15 of the Central Sales Tax Act, 1956. Under section 14 of the Central Sales Tax Act, "cotton ginned or unginned" is treated as a single commodity, under one item of declared goods. In such context, the Supreme Court held that the Legislature, for the purposes of that Act, having treated "cotton ginned or unginned" as a single commodity or as a single species of declared goods; they cannot be held to be two distinct commodities for that purpose by a process of interpretation. However, so far as cotton seeds are concerned, the Supreme Court categorically said that it is a distinct commercial commodity. It was observed (at page 56) :
"It is true that cotton in its unginned state contains cotton seeds. But it is by a manufacturing process that the cotton and the seeds are separated and it is not correct to say that the seeds so separated are cotton itself or part of the cotton. They are two distinct commercial goods though before the manufacturing process, the seeds might have been a part of the cotton itself. There is hence no warrant for the contention that cotton seed is not different from cotton."
15. This decision of the Supreme Court makes it abundantly clear that "cotton" and "cotton seeds" are two distinct commercial commodities. In fact, even "ginned" and "unginned" cotton have been held to be a single commodity in view of the same being treated as such by the Legislature under section 14 of the Central Sales Tax Act. This decision, in this case, did not lay down as a general proposition of law that ginned and unginned cotton are for all purposes one and the same commodity. This decision was referred with approval by the Supreme Court in a later decision in the case of State of Punjab v. Seth Ganpat Ram Cotton Ginning and Pressing Factory [1989] 74 STC 1 and it was reiterated that cotton seeds emerge upon a manufacturing process applied to the unginned cotton whereby the cotton and the seeds are separated and that the seeds so separated could not be identified as part of the cotton itself.
16. In view of the aforesaid pronouncements of the Supreme Court, it is clear that the process of ginning cotton results in the manufacture or production of articles like "ginned cotton" and "cotton seeds". It is also settled that "cotton seed" is a commodity separate and distinct from cotton. That being so, it has to be held that the ginning of cotton amounts to manufacture of an article and the Tribunal was correct in granting investment allowance under section 32A and deduction under section 80HH in respect of plant and machinery installed for that purpose.
17. In the light of the foregoing discussion, all the three questions referred to us are answered in the affirmative and in favour of the assessee. Under the facts and circumstances of the case, we make no order as to costs.