Income Tax Appellate Tribunal - Mumbai
Vora-Food Specialities (P.) Ltd. vs Income-Tax Officer on 5 March, 1995
Equivalent citations: [1995]54ITD324(MUM)
ORDER
K.C. Singhal, Judicial Member
1. The only issue which has been raised in this appeal is whether assessee is entitled to investment allowance in respect of machineries installed for the purpose of preparing potato chips out of the potato.
2. The brief facts of the case are that the assessee claimed investment allowance in respect of plant and machinery installed and used for the purpose of manufacturing potato chips and tortilla chips. In the course of assessment proceedings, the Assessing Officer disallowed the claim of the assessee on the ground that the process involved did not amount to manufacture as it was merely preparing the food preparations. In support of his conclusion, he relied on the decision of the Kerala High Court in the case of CIT v. Casino P. Ltd [1973] 91 ITR 289. This order of the Assessing Officer has been confirmed by the CIT(A). Aggrieved by this order, assessee is in appeal before us.
3. Mr. J.D. Mistry, the learned counsel for the assessee, drew our attention to various processes involved in making potato chips which, inter alia, include cleaning, peeling, cutting, slicing, washing, drying, frying and salting, etc. The bone of contention of the assessee is that the process involved is the manufacturing process as the item produced is entirely different from the original item. He also drew our attention to various certificates and correspondence in support of his contention that the process undertaken by the assessee was of manufacturing process. Reference was made to the letter written by the Director General of Technical Development (Food & Fermentation Division) to the assessee in which it has been stated that application of the assessee was for manufacturing potato chips. Reference was also made to the letter written by Ministry of Commerce to the assessee in which subject has been mentioned as 'import of capital equipment for the manufacture of potato chips'. He also drew our attention to the fact that item produced by the assessee is an excisable item though the assessee has been exempted from the same. The learned counsel for the assessee has relied on the various judgments and decisions in support of his contentions which are as under :
(i) Empire Industries Ltd v. Union of India [1986] 162 ITR 846 (SC);
(ii) CIT v. Union Carbide India Ltd [1987] 165 ITR 550 (Cal.);
(iii) Talakshi Lalji & Co. v. ITO [1990] 34 ITD 216 (Ahd.); and
(iv) ITO v. A. Joseph Louis [1990] 33 ITD 485 (Mad.).
In view of the above decisions, the learned counsel finally concluded that potato chips and potato from which they were prepared are commercially known as different articles and, therefore, a new and different commodity is brought into existence in the process carried out by the assessee and, therefore, it was a case of manufacturing of goods and assessee was entitled to investment allowance under Section 32A of the Act.
4. On the other hand, Mr. A.P. Pawar, the learned Departmental Representative, argued that the assessee was just preparing the food articles and, therefore, the undertaking of the assessee could not be described as an industrial undertaking for the purpose of Section 32 A. In support of his contention, he heavily relied on the decision of the Kerala High Court in the case of Casino (P.) Ltd (supra) and the judgment of the Bombay High Court in the cases of CIT v. Berry's Hotels (P.) Ltd [1994] 207 ITR 615, Fariyas Hotels (P.)Ltd v. CIT[ 1995] 211 ITR 3 90 and also the judgment of the Karnataka High Court in the case of CIT v. Hotel Ayodya [1993] 201 ITR 1002.
5. Both the parties have been heard at length and the case laws cited by them have been considered. In order to claim investment allowance one of the essential requirement to be fulfilled is that the new machinery plant should have been installed and used in an industrial undertaking for the purpose of business of manufacture or production of an article or thing which is not specified in the Eleventh Schedule. The only question which is to be decided is whether the activity carried on by the assessee amounts to manufacture of goods or not. It is well settled law by now that every process is not manufacture. There must be a transformation in the sense that the item which is emerged out of the process must be essentially a new and different item from the original one. The word "manufacture" was the subject of consideration before the Hon'ble Supreme Court in the case of Union of lndia v. Delhi Cloth & General Mills AIR 1963 SC 791. The question before their Lordships was whether the process of converting the ground-nut oil into vanaspati amounted to manufacture or not. Their Lordships held that the process carried on by the assessee did not amount to manufacture after applying the following test which is quoted in their judgment at page 795 which is reproduced as under:
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. But something more is necessary and, there must be transformation; a new and different article must emerge having a distinctive name, character or use.
Their Lordships of the Supreme Court in an another case of Dy. CST v. Pio Food Packers [ 1980] 45 STC 63 (sic) had to consider this question again. In that case, the assessee used to purchase pineapples and then various processes were involved such as, washing then removing of inedible portions and skin slicing and adding some preservatives and finally packing the finished product. The question before their Lordships was whether the pineapple fruit was consumed in the manufacture of pineapple slices. Their Lordships at page 65 held as under :
Commonly manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another and, indeed, there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change or series of change takes the commodity to the point where commercially it can no longer be regarded as the commercial commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article, it is not possible to say that one commodity has been consumed in the manufacture of another.
On the basis of the above test, their Lordships held that there was no essential difference between the pineapple fruit and the canned pineapple slices as the dealer and the consumer regard both as pineapple.
Then again, the Hon'ble Supreme Court in the case of Empire Industries Ltd. (supra) had to consider the question as to whether the process of bleaching, dyeing and printing of grey cloth amounted to manufacture. Their Lordships answered the question in affirmative and held that such process amounted to manufacture as a different item emerged out of the process. This judgment was again reconsidered by a larger Bench of the Supreme Court of five Judges in the case of Ujagar Prints v. Union of India [ 1989] 179 ITR 317. Their Lordships approved the earlier judgment in the case of Empire Indst. Ltd. after considering the various Supreme Court judgments including the one already referred by us.
6. From the above judgments it is clear that a process can be said to be manufacturing process provided there is a transformation of the raw material into a new and distinct commodity. If there is no essential difference in the identity between the original commodity and the processed article, then it is difficult to say that the process carried on by the assessee was a manufacturing process. If we apply these tests to the facts of the present case, we are of the view that the process carried on by the assessee amounted to manufacturing process. The reason is that the original commodity, i.e., potato is completely lost in the process carried on by the assessee and the potato chips which emerge out of the process are commercially known as a new and different item. Both these items are normally sold in different shops and if a person asks for potato he will not be offered with the potato chips and vice versa. The use of both these items is also different. The raw potato is normally used for cooking purposes while the potato chips are normally used as snacks. Applying the principle of common parlance, it cannot be said that potato and potato chips are the same commodity. Therefore, in our opinion, assessee must succeed.
7. Before concluding, we would like to discuss the various authorities cited by the learned Departmental Representative, which in our opinion, are distinguishable. The revenue has heavily relied upon the judgment of the Kerala High Court in the case of Casino (P.) Ltd. (supra)which has been followed by the Bombay High Court in the cases of Fariyas Hotels (P.) Ltd. (supra) and Berry's Hotels (P.) Ltd. (supra). The question before the Kerala High Court was whether the activity of the assessee in preparing the articles of food from raw materials constitutes manufacturing or processing of goods within the meaning of Section 2(6)(d) of Finance Act, 1968 and whether the assessee was an industrial Company within the meaning of the definition contained in that section. Section 2(6)(d) of the Finance Act, 1968 was as under:
Section 2(6)(d): Industrial company means a company which is mainly 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 any mine.
Their Lordships were of the view that the question whether assessee was an industrial company or not within the meaning of the above definition was to be decided in the context of the definition. Their Lordships held that there was a distinction between the manufacturing concern and trading concern. It is the main object of the concern which is to be seen. If a concern is mainly a trading concern which may sometime engage in the production which is incidental to trading, then it cannot be called a manufacturing concern. On the contrary, if the main object of the concern is to manufacture, then it cannot be called a trading concern merely because it sells the goods manufactured by it. On the basis of this test, it was held by their Lordships that the hotel activity is mainly intended for trading and not for production or manufacture. The relevant portion of the judgment appearing at page 300 is reproduced below:
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 that 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 the conversion of the raw materials into foodstuffs is only a process in trading.
From the above paragraph it is clear that their Lordships adopted a test whether the main object of the undertaking was trading or manufacturing. Hotel industry was held to be a trading concern and conversion of raw material into foodstuff was only a process in trading. This was decided because the context required so as the definition of industrial company used the word "mainly". Their Lordships did not decide whether the process of preparing the food amounted to manufacture or not. On the contrary, it was observed by their Lordships at page 299 that the foodstuff produced in the hotels out of the raw material was commercially different. The following observations are noteworthy:
The assessee's contention that foodstuffs produced in its hotel using raw materials such as pulses, meat, wheat and the like are commercially different from such raw materials is a matter on which there cannot be any scope for controversy.
The above observations show that though the activity of preparing foodstuff was a manufacturing process, yet the hotel industry could not be called an industrial undertaking because the main object of the hotel activity was the trading activity and the manufacturing process was only incidental to the main activity of the hotel business. Therefore, this judgment cannot be of any help to the revenue in deciding the claim of the assessee under Section 32A. The Bombay High Court judgments relied upon by the revenue (supra) are based on the judgment of the Kerala High Court. Therefore, in our opinion, the ratio laid down in the judgments relied upon by the revenue cannot be applied to the present case.
8. The matter can be considered from another angle also. The Legislature itself has treated the hotel business differently from the industrial undertaking. The various sections, such as Section 80HH, Section 80-1, Section 80-IA and Section 80J refers to hotel business as well as industrial undertaking. This shows that industrial undertaking did not include hotel business. If the hotel business could be included within the meaning of industrial undertaking, then there was no need of including the hotel business separately in these sections. Since, we are not concerned in the present appeal with the hotel business, the authorities relied upon by the revenue cannot be pressed into service in deciding the issue before us.
9. In view of the above discussion, it is held that the activity carried on by the assessee amounts to manufacturing activity and the assessee is entitled to investment allowance under Section 32A.
10. In the result, appeal of the assessee is allowed.