Income Tax Appellate Tribunal - Bangalore
Kiran Tobacco Products (P.) Ltd. vs First Income-Tax Officer on 24 October, 1990
Equivalent citations: [1991]36ITD177(BANG)
ORDER
A.V. Balasubramanyam, Judicial Member
1. For convenience, these appeals, by the assessee, were consolidated for a common hearing. The appeals arise out of the assessments for the years 1984-85 and 1985-86.
2. The assessee is a Private Limited Company. It was stated to have carried on the business of manufacturing a commercial product called ' Jarda' or 'Jardi' from raw tobacco (angad) and, on that premise, reliefs under Sections 32A, 80HH and 80-I were claimed in the two years. In the assessment for 1985-86, there was a further claim that the assessee should be charged at a concessional rate treating it as an industrial company as defined in Section 2(8)(c) of the Finance Act of the relevant assessment year. The assessing officer declined all the reliefs on the reason that the assessee was not manufacturing or producing any article or thing.
3. In the assessment for 1984-85, there was a claim for deduction of Rs. 30,000 in respect of technical consultancy fees paid to M/s. Srirang Consultancy Services, Nasik. It would appear that proper evidence had not been laid before the Inspecting Asstt. Commissioner (asst.). In the first appeal, evidence was sought to be let in which the Commissioner (A) declined to allow. The disallowance was sustained.
4. On further appeal to the Tribunal, the assessee is pressing its claim which it had lost before the authorities below. In the appeal for 1984-85, there is a new ground reading that the assessee should be taxed at the rate applicable to an industrial company.
5. One must first know the processing operations conducted by the assessee on the raw tobacco with which it starts. Raw tobacco (angad) is stripped off the midrib by manual labour. It is then sand-screened to control the moisture content. The raw tobacco is fed into a vibratory feeder and it is conveyed into a pneumatic pick up duct where heavy stems and stones will drop down. In the pick up duct, the tobacco is lifted up by suction and discharged into first Tower Classifier. In this Tower Classifier, the heavier tobacco flakes are separated from lighter ones and left behind. The lighter flakes are carried by air into second Tower Classifier. Here, the tobacco dust and flakes are differentiated. Finally, the lamina is sent to a Sleeve Chamber where it is cut and graded to suit the requirement of beedi manufacturer. The pure tobacco flakes come out after the. dust is sucked out in the Dust Collecting Unit. The end-product is called 'Jarda' or 'Jardi'. For the above, the assessee charged 70 paise per kg. for making jardi, from angad and 55 paise for jarda.
6. The appellant's claim for various reliefs has to be examined in the light of the requirements of law. For the purposes of Section 80HH, it must be seen whether the assessee was engaged in the manufacture or production of an article or thing since the Income-tax Officer disputed only this aspect and it must be taken that other conditions in Clause (ii) stand fulfilled. The same comment applies equally to the claim under Section 80-1.
7. For investment allowance the machinery or plant should have been used for one of the purposes stated in Clause (b) of Section 32A(2). The case of the assessee is out of question from the point of Sub-clause (iii), for jarda or jardi is tobacco or tobacco preparation which are included in the 11th Schedule. So, the claim has to be considered only from the point of Clause (b)(ii) and, for the present, we observe that manufacture or production of an article or thing is one of the conditions to be satisfied.
8. To fit into the definition of industrial company in Section 2(8)(c) of the Finance Act, the assessee should be engaged in the business of manufacture or processing of goods.
9. Processing is not manufacturing and the two cannot be equated. If an article or thing is processed, it may, at some stage, lead to manufacturing. As we later on point out, it is subjecting goods to certain processes which would lead to production of a commercially new article that constitutes manufacture. So, processing is an intermediate stage to manufacture. There may be processing even without manufacturing. But if there is manufacture, then processing is implicit in itself.
10. A long line of decisions were cited by either side. The assessing officer also refers to some decisions relevant to the discussion. It may be useful to refer to them to understand the true principle. The passage from an American judgment quoted with approval by the Supreme Court in several decisions 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. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use.
In Anwarkhan Mehboob Co. v. State of Bombay [1960] 11 STC 698 (SC), a firm was purchasing tobacco in the State of Bombay and was dispatching the same to the State of Madhya Pradesh for being manufactured into beedies. But before such dispatch, the tobacco was subjected to a process leading to beedi patti, a commercially different article. The question was whether the tobacco was turned into a commercially different article called beedi patti. As their Lordships observed, anybody could go to the market and purchase the article known as raw tobacco or that he could also go and purchase the article known as beedi patti. This itself was sufficient, in their Lordships' view, to prove that the raw tobacco and beedi patti are commercially different articles. Their Lordships further found that by conversion the former identity of the article is destroyed and so there is a destruction of the substance.
11. The tests laid down by the Supreme Court to see whether an article is manufactured are stated in Idandas v. Anant Ramchandra Phadlce AIR 1982 SC 127 and the relevant portion of the judgment reads:-
1. That it must be proved that a certain commodity was produced ;
2. That the process of production must involve either labour or machinery;
3. That the end product which comes into existence after the manufacturing process is complete, should have a different name and should be put to a different use. In other words, the commodity should be so transformed so as to lose its original character.
A more illuminating point is the passage extracted with approval from the judgment of the Calcutta High Court in the case of Joyanti Hosiery Mills v. Upendra Chandra Das AIR 1946 Cal. 317 where B.K. Mukherjee, J. (as he then was) has stated:
To manufacture, according to its Dictionary meaning means 'to work up materials into forms suitable for use'. The word 'material' does not necessarily mean the original raw material for a finished article may have to go through several manufacturing processes before it is fit and made ready for the market. What is itself a manufactured commodity may constitute a 'material' for working it up into a different product. 'Thus, for example for the tanner, the material would be a raw hide, but the leather itself a manufactured article would constitute the material for the shoemaker's business and we cannot say that the show-makers are not manufacturers because they do not work on raw hides.
12. The Madras High Court considered a similar question in the case of CIT v. R. Narayanaswami Naicker & Sons [1984] 149 ITR 283. The assessee, in that case, was, with the help of machinery, ginning cotton as a result of which cotton and cotton seeds were separated. It was held that ginning process was a manufacturing process though before the manufacturing process the seeds might have been part of the raw cotton. Another decision of the Madras High Court rendered almost in identical context is Dinod Cashew Corpn. v. Dy. CTO [1986] 61 STC 1. A sales tax assessee was purchasing cashewnuts and later on sold cashew kernel. It was held that cashewnut was subjected to the required process, either manually or mechanically and the product which came out was by itself a different commercially recognised article which could be sold or exported in that form and that commercially cashew kernel is recognised as being different from cashewnut.
13. The Bombay High Court has in the case of Shree Mulchand Co. Ltd. v. CIT [1986] 162 ITR 764/24 Taxman 188 dealt with a case of an assessee who was receiving raw wool, processing the same as a result of which dirt, grease and other vegetable matter were eliminated and the wool dried in the sun, opened and blended uniformly for sale. The character of wool was held to have undergone a change as a result of the operations so as to bring about a new commercial commodity even though what was purchased and sold was wool itself. The assessee was, therefore, held to be a manufacturer entitled to be classified as an industrial company for purposes of concessional rate of tax.
14. The judgment of the Gujarat High Court in CIT v. Lakhtar Cotton Press Co. (P.) Ltd. [1983] 142 ITR 503 is also in point Here cotton received in bulk was subjected to ginning and mechanically pressed into small units and packed into commercially acceptable bales. It was held that loose cotton in bulk quantity with lighter density was, a result of pressing, converted into cotton bales and to that extent it underwent a change and, therefore, the company was entitled to be classified as industrial company for purposes of concessional rate of tax.
15. The business activity considered by the Cochin Bench of the Tribunal in the case of Indian Resins & Polymers v. ITO [1989] 31 ITD 75 was of a firm purchasing cashewnuts and subjecting the same to such drying and, thereafter, roasted and shells peeled off which resulted in cashew kernels. This was held to be a manufacturing activity.
16. We may now make a brief reference to the case laws cited by Shri Sreedhar, the learned departmental representative. In CIT v. Hindusthan Metal Refining Works (P.) Ltd. [1981] 128 ITR 472 (Cal.), the business was galvanizing metal and such a process of galvanizing was held to be not amounting to manufacture or production of a new article. In Cellulose Products of India Ltd. v. CIT [1977] 110 ITR 151 (Guj.), the company was set up to manufacture CMC, but in the relevant year (1961-62) it had produced only an intermediate product called cellulose pulp. Though this was commercially different product, the company had not produced the product for which the undertaking was set up. In such circumstances, the Gujarat High Court held that there was no production of the article. The case of Koshy' s (P.) Ltd. v. CIT [1984] 18 Taxman 481/[1985] 154 ITR 53 (Kar.) was cited and this was a case where the assessee was running a restaurant and it was held that the hotel does not ordinarily fall within the ambit of "industrial company". The Calcutta Bench of the Tribunal has in the case of ITO v. Apeejay (P.) Ltd. [1986] 19 ITD 1 considered a case of blending of tea and it was held that there was no manufacture or production of article or thing for purposes of Section 32A.
17. It must be noted that the cases cited for the revenue are eminently distinguishable on facts and are of no usefulness. What is essential in deciding the question is whether a process which results in alteration or change in article led to production of a commercially new article. To recall the fine summing up of Venkatachaliah, J., in the case of Ujagar Prints v. Union of India [1989] 179 ITR 317 (SC):
The prevalent and generally accepted test to ascertain whether there is 'manufacture' is to find whether the change or the series of changes brought about by the application of processes take the commodity to the point where, commercially, it can no longer be regarded as the original commodity but 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. There might be borderline cases where either conclusion with equal justification may be reached. Insistence on any shart or intrinsic distinction between 'processing' and 'manufacture', we are afraid, results in an over-simplification of both and tends to blur their interdependence in cases such as the present one.
18. Though the rule is well known, each case must be decided with reference to its facts. Fortunately, the present is not a borderline case and a firm conclusion is easily approachable. By subjecting tobacco to treatment beedi patti is produced. By ginning cotton, pure cotton is obtained or pressed cotton is produced. Raw wool subjected to processing to eliminate dirt, grease and other vegetable matter resulted in production of pure wool. Leather is said to be manufactured when raw hide is treated. In all these cases a different product in commercial realm is said to be produced. In the same strain, it is equally possible to say that 'Jarda' or 'Jardi' is produced or manufactured from raw-tobacco as a result of some manual or mechanical treatment, or both. Anybody could go to the market and purchase the article known as raw-tobacco and it is equally possible to go and purchase in the market an article called jarda or jardi. The physical property in raw-tobacco and jarda or jardi may be same. While raw-tobacco is unfit for beedi manufacture in the same condition, jarda or jardi is ready to be used in the beedi manufacture. In commercial parlance jarda or jardi is distinctively different from raw-tobacco.
19. For the above premises, we conclude that the assessee's business is one of manufacture or production of an article or thing.
20. The assessee's business undertaking is in a backward area and there is no dispute about it. Then, if the assessee is manufacturing or producing an article, it must be taken that all the conditions in Clause (2) of Section 80HH are fulfilled, for the assessing officer rejected the claim essentially on this reason. Some argument was advanced on behalf of the revenue to examine the case from the point of Explanation to Section 80HHA. The request is not proper since it is enacted only for the purpose of Section 80HHA. When once the conditions in Section 80HHA(2) are fulfilled, there is no need to examine the claim from any other standard. For identical reasons it must be held that the conditions in Section 80-I(2) are also fulfilled should this be a small scale undertaking; vide second proviso. For the purpose of Section 32A also the assessee should be a small scale industrial undertaking, for the manufactured product is one included in Eleventh Schedule. It was argued by Shri Sreedhar that the assessee had never claimed earlier that it was a small scale industrial undertaking. If on the material on record the assessee would fit into the definition of small scale industrial undertaking, there is no reason why the relief should be denied merely because the assessing officer does not make a reference to this. If the authorities below had considered the case only from the point of Section 32A(2)(ii) or Section 80-I(2)(iii). they could have straightaway rejected the claim stating that the article said to be produced is one listed in the Eleventh Schedule and there was no need to get into the wider area. Without making a reference to the Eleventh Schedule, the authorities below concluded that it is not an industrial undertaking engaged in the manufacture or production of an article or thing. So, this is not a case where the reliefs could be denied on the reason suggested for the revenue.
21. Record indicates some relevant facts. The assessee is having a mechanised tobacco processing plant which is even patented. It is registered as a small scale industrial unit by the Government of Karnataka as per the certificate issued on 15-7-1982. The most vital is the schedule of assets which formed part of the balance sheet as at 30-4-1983 which shows that the cost of the machinery employed, even as on 1-5-1982, was Rs. 4,04,220. The machinery purchased in 1983-84 was of the value of Rs. 1,03,453.50. It is certain that the aggregate value of the machinery and plant was below the limit placed in Explanation to Section 32A(2) or Explanation 3 to Section 80-1(2) read with Section 80HHA(8). For the foregoing, we hold that the assessee was entitled to the reliefs under Sections 32A, 80HHA and 80-1.
22. Since the assessee is found manufacturing an article it should be treated as an industrial company as defined in the Finance Act, not to say that even processing, which the assessee is certainly doing, may be sufficient to justify a claim for concessional rate of tax. In assessment year 1985-86 this point had been considered by the Commissioner (Appeals). It does not appear to us that this claim had been made for assessment year 1984-85 before the assessing officer. Even a ground in this behalf had not been taken in the first appeal of that year. For the first time, a ground is raised before us and Shri Sreedhar argued that this ground should not be entertained as it docs to arise out of the order of the first appellate authority. The rejoinder of Shri Khare, the learned representative of the assessee, was that the Tribunal would be within its jurisdiction to permit the assessee to raise a new ground, which it has sought not raise for the first time before the Tribunal, so long as there is no need for further investigation of facts and should the assessee be entitled to relief from the facts already on record. The submission of Shri Khare should be accepted in view of the decisions of the Bombay High Court in the case of CIT v. Hazarimal Nagji & Co. [1962] 46 ITR 1168 and CIT v. Gilbert & Barker Mfg. Co. [1978] 111 ITR 529 and the decision of the AP High Court in the case of CIT v. Gangappa Cables Ltd. [1979] 116 ITR 778. There is no need to elaborate further since the Special Bench of the Tribunal has in the case of Indo Java & Co. v. IAC [1989] 30 ITD 161 (Delhi) dealt with this aspect in detail and held that a new point could be agitated before the Tribunal, although not made before the Income-tax Officer or the Appellate Asstt. Commissioner. In the instant case, there is no need for any further inquiry and, in fact, on the basis of the findings recorded on other grounds validly raised, the new ground raised in the appeal for assessment year 1984-85 could also be disposed of. In conclusion, it is held that the assessee is entitled to concessional rate of tax for both the years being an industrial company within the meaning of Section 2(8)(c) of the Finance Act.
23. There is one more ground in the appeal for 1984-85 which relates to non-allowance of deduction of Rs. 30,000. This was fee paid to a technical consultancy company called M/s. Srirang Consultancy Services, Nasik. The Income-tax Officer disallowed the claim only for lack of evidence. In appeal, evidence was sought to be let in and the Commissioner (Appeals) did not entertain that. It was argued that on the basis of new evidence sought to be given the assessee's claim could be sustained. The Commissioner (Appeals) has dealt with this issue in a very technical manner. A claim should not be rejected merely on technicalities and ends of justice would have been served if additional evidence had been admitted by the Commissioner (Appeals). Reversing his order in this behalf, we hold that fresh evidence should be entertained. In the circumstances of this case, we deem it proper to restore this issue to the file of the Income-tax Officer with a direction that he shall consider the fresh evidence and record a finding with regard to the allowability of the claim for deduction of Rs. 30,000 after giving an opportunity of being heard to the assessee. This issue is accordingly remitted to the file of the Income-tax Officer.
24. For the above, the appeals by the assessee are allowed.