Income Tax Appellate Tribunal - Hyderabad
Kanti Bros. vs Income-Tax Officer on 9 March, 1994
Equivalent citations: [1994]50ITD106(HYD)
ORDER
A. Venku Reddy, Judicial Member
1. Assessee is the appellant in ITA No. 173/Hyd/89, whereas the Revenue is the appellant in ITA No. 1232/Hyd/ 90. Both appeals relate to assessment year 1985-86. For the sake of convenience, these two appeals have been heard together for disposal by a common order.
2. Assessee's appeal arises out of the order dated 21-11-1988 made by the Commissioner of Income-tax, Guntui, under Section 263 of the Income-tax Act. Facts that led to the filing of this appeal are briefly as follows :
(a) Assessee is a registered firm, carrying on the business of manufacture and sale of refined oil. Assessee had earlier a unit to manufacture only groundnut oil, but assessee, later commenced a refinery unit in which not only the groundnut oil manufactured in the old unit, but also the groundnut oil purchased from outside, was refined and sold as 'refined oil. For the assessment year 1985-86, Assessing Officer allowed deductions under Section 80HH and Section 80-1 of the Income-tax Act, to the extent of Rs. 1,37,631 and Rs. 1,10,105 respectively to the assessee-firm, and completed the assessment under Section 143(3) of the Income-tax Act. On a scrutiny of the assessment records, the Commissioner of Income-tax found that this action of the ITO in allowing reliefs under Section 80HH and Section 80-1 is erroneous and is also prejudicial to the interests of the Revenue. Accordingly he issued a notice under Section 263 of the Income-tax Act, calling upon the assessee to show cause as to why the reliefs allowed earlier under Sections 80HH and 80-1 should not be withdrawn, as the activity of the assessee does not involve any manufacture or production of any article or thing, for the purposes of granting relief under Sections 80HH and 80-1. After considering the objections of the assessee, the Commissioner, by his order dated 21-11-1988, made under Section 263, has set aside the assessment made by the ITO for assessment year 1985-86, and directed the ITO to re-do the assessments, after disallowing the deductions under Sections 80HH and 80-1. The learned Commissioner, relying on the decision of the Supreme Court in the case of Thungabhadra Industries Ltd. v. CTO 11 STC 827 held that there is no manufacture involved, where groundnut oil is merely converted into refined oil, and that the assessee's activity of merely refining the groundnut oil cannot be considered to be a manufacture or production of an article or thing, for granting relief under Section 80HH and Section 80-1 of the Income-tax Act.
(b) Aggrieved by the said order of the Commissioner, assessee preferred the appeal ITA No. 173/Hyd/89.
3. After the Commissioner made the order under Section 263, the ITO, while giving effect to the said order, has re-done the assessment, withdrawing the reliefs that were granted earlier under Sections 80HH and 80-1. As against the said re-done assessment, which was in fact, an assessment made for giving effect to the order passed by the Commissioner under Section 263, assessee preferred an appeal before the CIT(A), Hyderabad. The learned Commissioner (Appeals) basing on the decision of the Kerala High Court in the case of CIT v. Marwell Sea Foods [1987] 166 ITR 624 came to the conclusion that conversion of raw groundnut oil into refined groundnut, oil also amounts to manufacture or production of an article or thing, qualifying for deductions contemplated under Sections 80HH and 80-1 of the Income-tax Act. Thus, he took a view different from the one that was taken by the Commissioner, who made the order under Section 263. Aggrieved by this order of the Commissioner (Appeals), the Revenue preferred the appeal ITA No. 1232/Hyd/90 contending inter alia that no appeal lies to the Commissioner of Income-tax (Appeals) on the order of the ITO passed in pursuance of the order of the Commissioner under Section 263; and that the learned Commissioner (Appeals) should have rejected the appeal on the ground that no appeal is maintainable.
4. Let us first consider the assessee's appeal, ITA No. 173/Hyd/89. The only substantial issue that arises for consideration in this appeal is whether the conversion of raw groundnut oil into refined oil amounts to manufacture or production of an article or thing, as comtemplated under Sections 80HH and 80-1 of the Income Tax Act, for allowing relief under the said provisions to the assessee. The benefit under Section 80HH is available to an industrial undertaking which manufactures or produces articles in a backward area. Likewise, benefit under Section 80-1 of the Income-tax Act is available to an industrial undertaking, which manufactures or produces any article or thing not being an article or thing specified in the Eleventh Schedule. There is no dispute that the industrial undertaking of the assessee is located in a backward area. Assessee started a refinery unit in which groundnut oil is converted into refined oil. The question that arises for consideration is whether the conversion of raw groundnut oil into refined oil is an activity involving manufacture or production of an article or thing, as contemplated under Sections 80HH and 80 I of the Income-tax Act.
5. Refining of groundnut oil results in neutralising the fat contents, bleaching and deodorising the groundnut oil. It has to be seen whether the process of removing the impurities and fat contents from the raw groundnut oil and deodorising it, amounts to manufacturing or producing an article or thing. In the case of Empire Industries Ltd. v. Union of India [19861 162 ITR 846, the Supreme Court quoted with approval the following passage giving the meaning of the word 'manufacture :
'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 distinctive name, character or use.
The said passage was extracted by the Supreme Court from Permanent Edition of Words and Phrases, Vol. 26. The case before the Supreme Court was one that arose under the provisions of Central Excises and Salt Act.
6. In Dy. CST v. Pio Food Packers [1980] 46 STC 63, the Supreme Court, in the context of Kerala General Sales Tax Act, 1963, laid down the following criteria to find out whether there was manufacture' or not :
There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved, in its manufacture. 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 a teach stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes take the commodity to the point where commercially it can no longer be regarded as the original commodity, but instead is recognized 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. Although it has undergone a degree of processing, it must be recognised as still retaining its original identity.
7. In Ujagar Prints v. Union of India [1989] 179 ITR 317 (SC) a case arising under the provisions of Central Excises and Salt Act, the Supreme Court, while considering the tests to be applied for ascertaining whether there is manufacture or not, observed as follows :
The prevalent and generally accepted test to ascertain that there is 'manufacture' is whether the change or the series of changes brought about by the processes take the commodity to the point where commercially it can no longer be regarded as the original commodity but it is, instead, recognised as a distinct and new article that has emerged as a result of the processes. The principles are clear. But difficulties arise in their application in individual cases....
Further, the Supreme Court held that there is in law no manufacture, unless as a result of some processes, a new and commercially distinct product with distinct use emerges; and that the idea of manufacture might imply change, but every change is not necessarily manufacture.
8. Thus, the test is to find out whether the change or series of changes brought about by the application of various processes, take the commodity to a point, where commercially it can no longer be regarded as the original commodity, but is recognised as a distinct and new article, that has emerged as a result of the processes. The end product must be distinct and commercially different from the original commodity. Mere processing of raw material by itself may not amount to manufacture or production of an article or thing. In Union of India v. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 791, a case arising out of the provisions of Central Excises and Salt Act, a contention was raised that 'manufacture' is complete as soon as by the application of one or more processes, the raw material undergoes some change. While repelling the said contention, the Supreme Court observed as follows :
...To say this, is to equate 'processing' to 'manufacture' and for this we can find no warrant in law. 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....
9. The main plank of the revenue's case is the decision of the Supreme Court in the case of Thungabhadra Industries Ltd. (supra) a case arising under the provisions of the Madras General Sales Tax (Turnover and Assessment) Rules, 1939. The question that arose before the Supreme Court in that case was whether hardened or hydrogenated groundnut oil, commonly called 'Vanaspati, is 'groundnut oil' within the meaning of Rule 18(2) of the Madras General Sales Tax Rules, 1939. The exemption or deduction from the Sales Turnover under Rule 18(2) of the said Rules, is on its terms, applicable only to the sale of the oil in the form in which it is when extracted out of kernel. When raw groundnut oil is converted into refined oil, there is no doubt processing, but this consists merely in removing from raw groundnut oil that constituent part of the raw oil which is not really oil. The elements removed in the refining process consist of free fatty acids, phosphotides and unsaponifiable matter. Even after the removal of the said non-oleic matter and other impurities, the oil continues to be groundnut oil and nothing more. For that reason, the Supreme Court in the aforementioned case of Thungabhadra Industries Ltd. (supra) observed that refined oil continues to be groundnut oil within the meaning of Rules 5(1) and 18(2) of the Madras General Sales Tax Rules, notwithstanding that such oil does not possess the characteristic colour, or taste, odour, etc. of the raw groundnut oil. Further, the Supreme Court held in that case that when the removal of impurities by a process of sedimentation does not render groundnut oil anytheless so, it follows that even the process of refining, by the application of chemical methods for removing impurities in the oil would not detract from the resulting oil being "groundnut oil" for the purpose of Rule 18(2). Further, the Supreme Court held that even hydrogenated oil (hardened oil or Vanaspati) also should be treated as groundnut oil for the purposes of Rule 18(2). In that connection, the Supreme Court observed as follows :
...To be groundnut oil, two conditions have to be satisfied. The oil in question must be from groundnut oil and secondly the commodity must be 'oil'. That the hydrogenated oil sold by the appellants was out of groundnut not being in dispute, the only point is whether it continues to be oil even after hydrogenation. Oil is a chemical compound of glycerine with fatty acids, or rather a glyceride of a mixture of fatty acids principally oleic, linoleic, stearic and palmiticthe proportion of the particular fat varying in the case of the oil from different oil seeds and it remains glyceride of fatty acids, even after the hardening process, though the relative proportion of the different types of fatty acids undergoes a slight change. In its essential nature, therefore, no change has occurred and it remains an oil a glyceride of fatty acids that it was when it issued out of the press.
Thus, the Supreme Court held in that case that hydrogenated oil serves the same purpose as a cooking medium, and has identical fatly value as refined groundnut oil; that hydrogenated oil still continues to be groundnut oil notwithstanding the processing which is merely for the purposes of rendering the oil more stable, thus improving its keeping qualities for those who desire to consume groundnut oil; and that even hydrogenated oil does not lose its basic character as groundnut oil.
10. Refined groundnut oil is derived by subjecting the raw groundnut oil to the processes of neutralisation, bleaching and deodorisation. By the said processes, the impurities are removed, consequent to which the oil becomes colourless and gets deodorised. However, it does not lose its basic character as groundnut oil. The groundnut oil as well as refined oil can both be used as cooking medium. They serve the same purpose. The processing of raw groundnut oil into refined oil cannot be equated to 'manufacture or production of an article or thing' within the meaning of Section 80HH and Section 80-1 of the Income-tax Act.
11. The learned Counsel for the assessee relied on the decision of the Madras High Court in the case of CIT v. M.R. Gopal [1965] 58 ITR 598, where the process employed in converting big boulders into small stones with the aid of machinery was held to be a manufacturing process. He also placed reliance on the decisions of the Kerala High Court in Harwell Sea Foods' case (supra) and CIT v. Relish Foods [1989] 180 ITR 454, wherein the Kerala High Court held that, the activity of processing, peeling and freezing of prawns and shrimps amounts to 'manufacture or production of an article or thing' within the meaning of Section 80HH of the Income-tax Act. He also placed reliance on the decision of the Orissa High Court in the case of CIT v. S.L. Agarwala & Co. (1992] 197 ITR 239, wherein it was held that the conversion of big iron ingots into small pieces is a manufacturing activity. Each case depends upon its own facts and circumstances. Simply because the activity of processing of prawns was held to be 'manufacture or production of an article or thing', it cannot be straightway said that conversion of raw groundnut oil into refined oil also should be treated as an activity of 'manufacture or production of an article or thing'.
12. We have before us, a direct decision of the Supreme Court in the case of Thungahhadra Industries Ltd. 's case (supra), directly dealing with a case of conversion of raw groundnut oil into refined oil; and also into hydrogenated oil. Though the said decision was rendered in the context of the Madras General Sales Tax (Turnover and Assessment) Rules, the principles laid down in the said decision on the aspect as to what amounts to "manufacture", equally apply to the facts on hand. Refined oil cannot be termed as a distinct and new article from the groundnut oil. It is not a distinct and commercially different one from the original commodity. In that view of the matter, it cannot be said that the conversion of raw groundnut oil into refined oil amounts to 'manufacture or production of an article or thing'. Hence, the deductions allowed by the Assessing Officer in the first instance under Section 80HH and Section 80-1 are erroneous. They are also prejudicial to the interests of Revenue. Hence, the learned Commissioner very rightly exercised his jurisdiction under Section 263 of the Income-tax Act, and made the impugned order. Both on merits as well as on jurisdiction, the impugned order is unassailable. Hence, we find no merit in the assessee's appeal.
13. In the view we have taken in the assessee's appeal that the assessee is not entitled to relief under Sections 80HH and 80-1 of the Income-tax Act, the Revenue's appeal should succeed. For the reasons given supra in the assessee's appeal, we hold that the view taken by the Commissioner (Appeals) that, the conversion of groundnut oil into refined oil amounts to 'manufacture or production of an article or thing' qualifying for deductions under Sections 80HH and 80-1 of the Act, is erroneous. Accordingly, the impugned order made by the Commissioner (Appeals) is set aside and that of the Assessing Officer giving effect to the order under Section 263 is restored.
14. In the result, ITA No. 173/Hyd/89 tiled by the assessee is dismissed, and ITA No. 1232/Hyd/90 filed by the Revenue is allowed.