Madras High Court
Commissioner Of Wealth Tax vs P. Devasahayam on 10 December, 1997
Equivalent citations: [1999]236ITR885(MAD)
JUDGMENT Janarthanam, J.
1. This is a reference to this Court under s. 27(3) of the WT Act, 1957 (Act No. XXVII of 1957 - for short 'WTA'), and the questions referred to us are :
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee was entitled to the exemption under s. 5(1)(xxxii) of WT Act;
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sweetmeats and biscuits do not retain the original properties of flours, water or sugar and that they go to compose the sweetmeats or biscuits ?
2. The assessee, Mr. P. Devasahayam, of Madurai is an individual carrying on business of sweetmeats and biscuits stall. In his wealth-tax assessment, a claim under s. 5(1)(xxxii) of WT Act was made on the ground that the investment in the business constitutes an 'industrial undertaking' and therefore, the investment in the said business is to be exempted from wealth-tax for the asst. yr. 1976-77.
3. The 7th WTO, Madurai-2, rejected the claim of the assessee so made.
4. On appeal, the AAC, Madurai, upheld the said decision.
5. The assessee agitated the matter by filing WT Appeal No. 4 (Mad) /78-79 before the Tribunal, 'C' Bench, Madras.
6. The Tribunal, in turn, while disposing of the appeal, recorded a finding that the assessee was engaged in 'manufacture or processing of' sweetmeats and biscuits and so holding, the Tribunal ultimately held that the assessee was entitled to the exemption under s. 5(1)(xxxii) of WT Act. It is on the basis of the finding, as stated above, the Tribunal allowed the appeal, by its order dt. 23rd February, 1979.
7. This Reference has arisen out of the said Order of the Tribunal.
8. Sec. 5 of WT Act deals with exemptions in respect of certain assets. Secs. 5(1)(xxxi) and (xxxii), relevant for our present purpose, read as under :
"5. Exemptions in respect of certain assets - (1) Subject to the provisions of sub-s. (1A), wealth-tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee -
(xxxi) the value, as determined in the prescribed manner, of assets (not being any land or building or any rights in any land or building or any asset referred to in any other clause of this sub-section) forming part of an industrial undertaking belonging to the assessee;
Explanation - For the purposes of cl. (xxxa), this clause, cl. (xxxii), and cl. (xxxiv), the term 'industrial undertaking' means an undertaking engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining;
(xxxii) the value, as determined in the prescribed manner, of the interest of the assessee in the assets (not being any land or building or any rights in any land or building or any asset referred to in any other clause of this sub-section) forming part of an industrial undertaking belonging to a firm or an AOP of which the assessee is a partner or, as the case may be, a member);
9. Under s. 5(1)(xxxii), the value of the interest of the assessee in the assets forming part of an 'industrial undertaking' belonging to a firm or an AOP of which the assessee is a partner or, as the case may be, a member, shall not be included in the net wealth of the assessee.
10. 'Industrial undertaking' had been defined, by way of a definition in the Explanation appended to s. 5(1)(xxxi) thereof. The term 'industrial undertaking', according to the said Explanation, means an undertaking engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining.
11. The first part of the said definition is relatable to generation or distribution of electricity or any other form of power or in the construction of ships. The second part of the definition is relatable to the manufacture or processing of goods or in mining.
12. We are concerned only with the second part of the definition relatable to the manufacture or processing of goods. The expression 'manufacture or processing of goods', however, is not defined in WT Act. Therefore, it is implicitly necessary for us to understand the concept or meaning of the expression, 'manufacture or processing of goods', before ever, we could adjudicate upon the question as to whether the] activity of the assessee in the preparation of sweetmeats and biscuits and sale of the items so prepared can ever be construed, as an 'industrial undertaking' falling within the definition, appended to s. 5(1)(xxxi). If the assessee's activity falls within the definition of 'industrial undertaking', then definitely, the assessee is entitled to the exemption under s. 5(1)(xxxii) or otherwise, he may not be entitled to any exemption therefor.
13. The expression 'manufacture or processing of goods' had been the subject of construction and interpretation in many a decision of superior Courts of jurisdiction-apex and High Courts.
14. Precedents on the subject relied upon by Mrs. Chitra Venkataraman, learned counsel representing the Revenue and Mr. R. Janakiraman, learned counsel appearing for the assessee may, we feel, be referred to here, in rather a bid to draw inspiration from them and solve the tangle posed in the case, with ease and grace and without any difficulty whatever.
15. (i)(a). In CIT vs. Casino (P) Ltd. , the assessee is a private limited company running a hotel business. In connection with the assessment of the company for the year 1968-69, the assessee claimed to be an 'industrial company', as the term is defined in the Finance Act, 1968. The claim to be assessed at the rate of tax applicable to an 'industrial company', namely, at 55 per cent of the net income, was not accepted by the ITO.
(b) Before the AAC, it was contended by the assessee that the activity of the assessee is one of converting the raw materials into finished products, namely, food-stuffs, and, therefore, the assessee was carrying on the activity of manufacturing. A company engaged in the process of manufacturing being included in the definition of an 'industrial company' by the definition in s. 2(6)(d) of Finance Act, 1968, the assessee claimed that it should be taxed at the rate applicable to an 'industrial company'.
(c) The AAC found that though manufacturing operations were carried on by the assessee in the conduct of its business, a hotel could not be deemed to be a manufacturing unit, in the sense in which the term is ordinarily understood. He dismissed the appeal.
(d) The assessee filed a further appeal before the Tribunal.
(e) The Tribunal considered the meaning to be given to the term 'manufacture' and also considered the judicial interpretation of the term in certain decisions of Courts and found that the activity carried on by the assessee in manufacturing articles of food from raw materials such as grains, pluses, meat, vegetables, etc., constituted 'manufacture or processing of goods' within the meaning of s. 2(6)(d) of the Finance Act, 1968, and, therefore, the assessee was an 'industrial company'.
(f) A Reference has arisen out of the said order of the Tribunal.
(g) The question referred to therein was :
"Whether, on the facts and in the circumstances of the case, the Tribunal is legally correct in holding that the activity carried on by the assessee in preparing articles of food from raw materials, constitutes 'manufacture or processing of goods' within the meaning of s. 2(6)(d) of the Finance Act, 1968, and that the assessee is an 'industrial company' within the meaning of the definition contained in that section ?"
(h) Their Lordships of a Division Bench of the Kerala High Court took into consideration various precedents emerging from superior Courts of jurisdiction in understanding the expression, 'manufacture or processing', and ultimately summed up the position (at pages 298-299), which reads as under :
"The result of our discussion can be summed up in these terms : Manufacture is a process which results in an alteration or change in the goods which are subjected to such manufacture. A commercially new different article is produced. May be that is produced by manual labour or mechanical force or even by nature's own process such as drying by heat of the sun as in a salt pan [Ardeshir H. Bhiwandiwala vs. State of Bombay (1961) II LLJ 77 : 20 FJR 113 (SC)] or fermentation of toddy [Thomas vs. District Judge, Alleppey (1965) KLJ 487 (Ker)]. The essential question is whether a commodity which, in a commercial sense, is different from the raw materials has resulted.
Notwithstanding what we have said above every case where the Court is called upon to consider the meaning of the term 'manufacture' has to be considered with reference to the context of the enactment. The mere fact that the definition is satisfied does not necessarily mean that there is manufacture. That should ultimately depend upon the meaning of the term in the sense in which the legislature has apparently used it in the concerned statute. Processing has in one sense a wider meaning than the term 'manufacture' as even manufacture may be a process. But, in the context of the Act with which we are now dealing, namely, the Finance Act, 1968, that does not appear to be the position. The definition of industrial company in s. 2(6)(d) of that Act refers to various categories of companies and one of them is that mainly engaged in the manufacture or processing of goods. It is evident from the context in which the word 'processing' is used that it is complementary to the term 'manufacture' and, therefore, would not be such as to cover manufacture also. In other words, activities of a nature in regard to goods which may not amount to manufacture but which would result in the doing of something to the goods to change or alter their form may be taken in by the term 'processing'. We need not go into the scope of the term 'processing' in the circumstances of the case, as the contention of the assessee is that there has been a material change or alteration in the goods resulting in the production of a commercially different article, and if we find that notwithstanding this to be the case, it does not amount to manufacture, naturally the question as to the scope of the term 'processing' need not be gone into further".
(i) The Bench, after having summed up the position relatable to 'manufacture or processing', considered the assessee's contention, as repelled by the Revenue and answered the question under Reference. The discussions relatable to that aspect of the matter, (as referable to pages 299 to 301), run as under :
"The assessee's contention that the foodstuffs produced in its hotel using raw materials such as pluses, meat, wheat and the like, are commercially different from such raw materials is a matter on which there cannot be any scope for controversy. It is for this reason that the assessee urges that it is an 'industrial company' as, according to it, the accepted test stands satisfied. But, we have to remember that the term must be understood in the context of the enactment. We will have to see whether persons concerned, the customers of the hotel and the employees, would employ the term in the sense in which it is sought to be construed. The particular provision of the Finance Act with which we are concerned here prescribes specific rates of tax and the assessee seeks to be included within the definition of the term 'industrial company', so as to get the benefit of the lesser rate of taxation. This benefit is given only to industrial companies which satisfy certain requirements. The four categories of companies which are included in the scope of the term are those mainly engaged in the business of generation or distribution of electricity or any other form of power or mainly engaged in the construction of ships or similarly engaged in mining or in the manufacture or processing of the goods. The context is apparent from this definition. The question ultimately would be whether in common parlance the activity of the assessee could be said to be one of manufacture or processing of the goods, whatever may be the technical meaning of the term. The assessee is dealing every day with his customers. Could it be said that the customers visiting the assessee's hotel would ask for the items in the menu list to be manufactured and supplied to them ? We do not think that it would be appropriate to refer, in the ordinary sense in which we understand in the English language, to the production of food materials in the assessee's hotel as manufacture. Any customer visiting a hotel would ask to be supplied with the food and beverages that is for sale in the hotel and if the waiter is to tell the customer that his order is being 'manufactured', it is likely that the customer would feel something strange about it. It would not pass off, normally, unnoticed. Equally so the customer may not also appreciate if he is told that the wheat or the meat which are used as raw materials are being 'processed' as we understand the term ordinarily.'Processing', in such context, would mean something less than the complete loss of identity of the goods which is the case when the food materials are prepared in the hotel. Hence, if construction of the term in the popular sense is the test to be applied, we do not think that it is possible to say that the assessee manufactures or processes goods in its hotel.
We have already referred to the definition of 'industrial company'. It is possible to read in the context of the definition that the reference is to the manufacturing activity. We can easily draw a distinction between manufacturing concerns and trading concerns. It is true that any manufacturing concern must also normally engage in trading activity in the sense it must also sell. But, for the reason alone, it does not become a trading concern, as the main object of the concern is manufacture and the sale of the goods manufactured is incidental. There may be trading concerns which may sometimes engage in production which is incidental to trading. It nevertheless will continue to be a trading concern. A hotel, according to us, is one such as it is mainly intended for trading and not for production or manufacture.
The various items of foodstuffs and beverages produced in a hotel are intended for the trading and conversion of the raw materials into foodstuffs is only a process in trading. Notwithstanding this, the concern would essentially be a trading concern. We are referring to this distinction, because it appears to us that the definition of the term 'industrial company' indicates that the reference in regard to companies manufacturing or processing of goods is to manufacturing concerns and not to trading concerns. That is the more reason why in the popular sense we cannot consider the assessee as manufacturing goods. Counsel for the Revenue points out to us that in the scheme of the IT Act, the business of a hotel and that of an industrial undertaking are treated differently as could be seen from a reference to these terms in s. 80-J of the Act. We do not think that reference to this is necessary.
The result is that we are unable to agree with the view taken by the Tribunal that the assessee is an 'industrial company' within the meaning of the definition contained in s. 2(6)(d) of the Finance Act, 1968. We do not think that the activity carried on by the assessee in preparing articles of food from raw materials constitutes 'manufacture or processing of goods'. Therefore, we answer the question referred to us in the negative, that is, in favour of the Revenue and against the assessee."
(ii)(a). In CIT vs. Buhari Sons (P) Ltd. (1983) 144 ITR 12 (Mad) : TC 24R.265, the question that came up before a Division Bench of this Court was as to whether preparation of eatables in a hotel does amount to 'manufacture of goods' as per the salient provisions adumbrated in s. 2(7)(d) of the Finance Act, 1966.
(b) The Bench answered the question as below :
"It is well-established that in the absence of any definition in the statute, words occurring in a statute will have to be understood with reference to the objects of the Act and in the context in which they occur. Consequently, the definitions given for the words in one statute cannot automatically be imported for interpreting the same words in another statute. The interpretation of the expression 'manufacturing process' for purposes of the Factories Act, 1948, will not be relevant in construing the same expression for purposes of Finance Act, 1966. The preparation of eatables cannot be taken to be manufacture of goods. The words 'goods' used in s. 2(7)(d) of the Finance Act, 1966, has been used in the sense of merchandise, i.e., articles for sale, and so understood in a commercial sense, the expression 'goods' will not include eatables prepared in a hotel. Further, the expression 'manufacture' does not connote a trading activity and an activity carried on in a hotel can only be taken to be a trading activity and not a manufacturing activity".
(c) The Bench, while expressing such an opinion, placed reliance upon the two decisions of the Supreme Court, namely, D. N. Banerji vs. P. R. Mukherjee and S. Mohan Lal vs. R. Kondiah .
(iii)(a). In CIT vs. Berry's Hotels (P) Ltd. (1994) 207 ITR 615 (Bom), the assessee-company incorporated for carrying on hotel business took over the running business of a partnership firm. The activity of the assessee consisted of cooking food and preparing dishes for service to customers. The assessee claimed that the activity amounted to manufacturing or processing goods as contemplated by the definition of the term 'industrial company' in s. 2(7)(c) of the Finance Act, 1973, and hence the assessee was an industrial company entitled to the concessional rate of tax.
(b) The ITO rejected the claim of the assessee.
(c) The AAC affirmed the order of the ITO.
(d) The Tribunal held that the assessee was an 'industrial company' as the various ingredients were subjected to different kinds of processing in the form of mixing, grinding, blending, heating, etc., and processing as contemplated by the definition was involved in the activity of the assessee.
(e) The following question was referred under s. 256(1) of the IT Act, 1961, at the behest of the CIT, Bombay :
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee is an 'industrial company' as defined in s. 2(7)(c) of Finance Act, 1973 ?"
(f) Their Lordships of the Division Bench of the Bombay High Court, in answering the question, held that the object of s. 2(7)(c) of Finance Act, 1973 was to give concession in the rate of Income-tax to manufacturing concerns. The concession was not intended to be given to trading concerns. The activity carried on by the assessee was a trading activity and hence the assessee was not an industrial company entitled to the concessional rate of tax.
(g) While so holding, the said Bench concurred with the basic approach adopted in Casino (P) Ltd. (supra) and Buhari Sons (P) Ltd. (supra).
(h) The Bench ultimately answered the question in the negative and in favour of the Revenue.
(iv)(a). In S. P. Jaiswal Estates (P) Ltd. vs. CIT , the question that came up for consideration was as to whether the assessee was running a hotel as an 'industrial company' within the meaning of s. 2(7)(c) of the Finance Act, 1982.
(b) Their Lordships of a Division Bench of the Calcutta High Court, in answering such a question, held that in the process of manufacturing eatables, food and drinks, the assessee-company did carry out a processing activity on different raw materials like vegetables, meat, fish, spices and so on for catering to the needs of the customers. The income from such activity was clearly seen to be more than 51 per cent, of the total income as assessed by the ITO. The assessee was an industrial company within the meaning of s. 2(7)(c) of Finance Act, 1982, and was accordingly entitled to the concessional rate of Income-tax.
(c) While so holding, the said Bench distinguished the decision in Casino (P) Ltd. (supra) and placed implicit reliance on a decision emerging from the said Calcutta Court in the case of CIT vs. Sky Room (P) Ltd. .
16. The scenario that emerges from the discussion as above is that there are two hues of views, as respects the question as to whether the preparation of eatables and foodstuffs in a hotel was an 'industrial company'. One hue of view is projected by Kerala and Bombay High Courts and this Court, in the sense of expressing an opinion that the activity of running a hotel is not an 'industrial company', while the other view projected by the High Court of Calcutta is that such an activity is an activity of an 'industrial company'.
17. Reliance was sought to be placed by learned counsel appearing for the assessee on the decision in the case of S. P. Jaiswal Estates (P) Ltd. (supra), while learned counsel representing the Revenue placed reliance on the decisions in the cases of Casino (P) Ltd., Buhari Sons (P) Ltd. and Berry's Hotels (P) Ltd. (supra).
18. Buhari Sons (P) Ltd. (supra) is undoubtedly a decision rendered by a Division Bench of this Court, which is toeing in line with Casino (P) Ltd., (supra) and running contra to the decision in S. P. Jaiswal Estates (P) Ltd. (supra). In such a situation, it goes without saying that the decision in the case of Buhari Sons (P) Ltd. (supra) rendered by a Division Bench of this Court is binding on us and the said decision is on all fours applicable to the facts of the instant case.
19. Reverting back to the factual matrix of the case on hand, the assessee's activity consists of preparing sweetmeats and biscuits, out of raw materials, such as flour, sugar etc. The various items of foodstuffs, as produced by the assessee, are mainly intended for trading and the conversion of raw materials into foodstuffs is only a 'process in trading' and the production or preparation of the foodstuffs is only incidental to trading. As such, the activity carried on by the assessee can, by no stretch of imagination, be stated to relate to 'manufacturing concerns' and if at all, they relate to activities relatable to 'trading concerns'. That is more the reason, why in the popular sense, we cannot construe the assessee as 'manufacturing goods'. In this view of the matter, the activity carried on by the assessee cannot at all be said to fall within the term 'industrial undertaking', as defined in the Explanation appended to s. 5(1)(xxxi) of WT Act.
20. Once such a position results in, it goes without saying that the assessee is not entitled to claim exemption under s. 5(1)(xxxii) of WT Act. The view of the Tribunal that the activity carried on by the assessee is one of 'manufacture or processing goods' and therefore, he is entitled to exemption under s. 5(1)(xxxii) of WT Act cannot at all be stated to be sustainable in law. Point No. 1 is answered accordingly.
21. In view of our findings on point No. 1, it goes without saying that the answer for point No. 2 does not at all arise for consideration, and it is answered accordingly.
22. The Tax Case (Reference) is thus disposed of. No costs.