Income Tax Appellate Tribunal - Pune
M. B. Chemicals vs Deputy Commissioner Of Income Tax on 16 March, 2000
ORDER
B.L. Chhibber, A.M. March, 1999
1. This appeal by the assessee is directed against the order of the CIT(A) Nasik, relating to asst. yr. 1994-95. The assessee is a partnership firm and according to it, it 'manufactures' the following commodities :
(a) Candy sugar (Khadi Shakkar);
(b) P.G. sugar (Pharma Grade sugar);
(c) Bura sugar (by-product of sub-standard quality generated during the manufacturing of candy sugar and P.G. sugar);
(d) Pulverised sugar (used by pharmaceutical companies).
2. The assessee-firm also deals in trading of the sugar (used as input to manufacture the items mentioned above).
3. The assessee's factory is at Nilgavan Village, Old Ravalgaon Road, Malegaon, and the marketing is done from Malegaon office as well as Bombay office at 11, Vyapar Bhavan 40 P. Demelo Road, Bombay-9.
4. The first and main grievance of the assessee-firm is that the learned authorities below are not justified in holding that the assessee is not engaged in any manufacturing process and thereby disallowing the claim of the assessee under s. 80-I of the IT Act, 1961. Before the authorities below the assessee gave details of process involved in the manufacture of above sugar which are given as under :
"The main raw material is sugar purchase mostly from sugar co-operative mills. The sugar is mixed with water and melted in the filter unit. The filtered melt is transferred to the rotary belt where semi-finished goods in the form of seeds are added to the melt. The rotational processing in rotary pan results in crystallisation of the seeds which are then stored in crystaliser and then cured in centrifugal machine in which crystals are separated from the sugar liquid. Afterwards, the crystals are dried and graded on hopper and packed in bags for sale. The separated sugar liquid in recycled again the process above.
During the grading the crystals of desired size are separated for sale as candy sugar and remaining crystals of uneven size are recycled in the process as semi-finished goods (seeds).
The crystals of fine size are being sold as P.G. sugar.
The purity of sugar liquid goes down after 3 to 4 cycling and then the remaining impure sugar liquid is converted into Bura sugar by-product of substandard quality.
Pulvarised sugar : The sugar is grinded in the pulverized machine and graded to the desired mesh size, this results in improved quality of sugar of the desired mesh size."
5. Before the AO the assessee relied upon the decision in the case of CIT vs. East India Hotels Ltd. (1994) 209 ITR 854 (Cal) and CIT vs. M. R. Gopal (1965) 58 ITR 598 (Mad). The AO considered the submissions made by the assessee and elaborately discussing the manufacturing and processing and difference between processing and manufacturing activity came to the conclusion that the sugar candy which covers major portion of assessee's turnover is only a form of sugar and not any distinct commercial commodity. He, therefore, held that the process of making sugar candy did not amount to manufacture and disallowed the claim of the assessee under s. 80-I. While doing so, the AO relied upon the following decisions :
(1) Omprakash vs. CTO (1976) 38 STC 73 In that case it was held that camphor powder converted into camphor cubes by application of mechanical force or processing without addition or mixture of any other material amounts to processing.
(2) Chougule & Co. vs. Union of India (1981) 47 STC 124 (SC) In that case it was held by the Hon'ble apex Court that blending of ore by means of mechanical or handling plant does not constitute manufacture. In that case, the Hon'ble Court observed as follows :
The test i.e. required to be applied; whether the processing of original commodity brings into existence a commercially different and distinct commodity.
(3) General Trading Co. vs. CST (1983) 53 STC 101 In that case it was held that cutting of newsprint of odd size into smaller sizes was held not to be manufacturing.
(4) Universal Chemicals India (P) Ltd. vs. CST (1986) 62 STC 197 (MP) In that case it was held that cleaning and washing with certain chemicals and cutting into pieces of waste fibre was not manufacturing.
(5) Dy. CST vs. Pio Food Packers (1980) 46 STC 63 (SC) In that case the Hon'ble apex Court has laid down that where there is no essential difference in the identity or original commodity and processed articles, 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 regarded as still retaining the original identity."
6. Applying the test laid down by various Courts as mentioned above, the AO held that making of sugar candy with the help of plant and machinery does not result into manufacture of a commodity which is different from one which is fed into the plant for melting washing and seggregating different sizes and that the plant and machinery has been used by the assessee for the purpose of removing the impurities, cleaning and giving different sizes to the sugar and in the process original commodity continues to retain its substantial identity. Hence, according to the AO there is no transformation into a new and different article. The AO also relied upon the decision of the Vasanta & Co. vs. State of Madras (1963) 14 STC 696 to 701. In that case, the assessee was dealer in sugar and the question before the Hon'ble Court was whether sugar candy is different from sugar and exempt from payment of sales-tax. In that case, after considering various facts and circumstances of the case and the opinion of National Sugar Institute of Kanpur, it was held that sugar candy is purer form of sugar. The AO also relied upon the judgment of the Supreme Court in the case of State of Gujarat vs. Sakharwala Bros. 19 STC 30 (Page 24 to 31) where the question before the Hon'ble Court was whether patasha, harda and Illaichidana were product of sugar and not sugar as such in any form.
7. The Tribunal in that case had observed as follows :
"If chemical composition of the article is to be taken as guide in interpreting the entry 47 there is no doubt that patasha, harda and Illaichidana are mere different form of sugar as defined by the Central Excises and Sales-Tax Act, 1944. We were informed that small portion of hydrogen sulphide is passed through the sugar solution for bleaching purposes after which Patashas are prepared by splashing the solution on piece of wood which converts sugar into amorphosed sugar, the hardas are allowed to cool and Illaichidana prepared by rapidly passing the solution of appropriate thickness through a sieve so as to convert it into granulate lumps of sugar. But whatever the process, these articles are only forms of refined sugar with the requisite surcose content ........ after undergoing all the process the article continues to be sugar."
8. The above decision of the Tribunal was affirmed by the Gujarat High Court and subsequently by the Hon'ble Supreme Court. Accordingly, the AO disallowed the claim of deduction under s. 80-I of Rs. 14,73,700 i.e., 25 per cent of Rs. 58,94,800 being the income from alleged manufacturing activity of candy sugar. For the same reasons he also disallowed the additional deduction under s. 80-I of Rs. 97,750. The assessee appealed to the CIT(A).
9. Elaborate arguments were put forward before the CIT(A) and reliance was placed on a number of judicial pronouncements. The assessee also submitted various submissions vide its letters as detailed below :
(i) Written submissions dt. 25-4-1997 (ii) -do- 26-5-1997 (iii) -do- 9-6-1997 (iv) -do- 16-6-1997 (v) -do- 19-6-1997 (vi) -do- 11-8-1997 (vii) -do- 21-8-1997
9. After discussing the entire material placed before him and by further elaborating the decisions relied upon by the AO the CIT(A) confirmed the finding of the AO. Further relying upon the decision of the Maharashtra Sales-tax Tribunal in the case of Industrial Mineral and Chemicals vs. State of Maharashtra (1995) 12 MTJ 325, the learned CIT(A) held as under :
"It is admitted position that manufacture can be said to have taken place if the process results in creation of commodity having different identity, character and use. But where the commodity retains continuing substantial identity through process stage, it cannot be said that it has been manufactured. The Courts have further held that the nature, extent of process may vary from case to case with each process suffered the original commodity experiences a change, but it is only when a change or series of changes take the commodity to the point where commercially it can no longer be regarded as original commodity, but instead recognised as new distinct articles then a manufacture can be said to take place. But where, there is no essential different identity between the original commodity and processed article, it is not possible to say that one commodity has been consumed in the manufacture of other, although it has undergone a degree of process yet still retaining the original identity. In nutshell, it is to be seen by considering various factors where the process used by the assessee results in creation in a new commodity having distinctive name, character or use. Relying on various judgments, as mentioned in the assessment order, the AO has established that there is no essential difference between the original commodity and the new product and in the process, the new commodity i.e., sugar candy, P.G. sugar continue to retain substantial original identity and hence the new commodity is only a form of sugar and not a distinct commodity from the original commodity."
10. On the same reasoning as given, the CIT(A) also confirmed the additional deduction under s. 80-I amounting to Rs. 97,750 disallowed by the AO.
11. Aggrieved by the orders of the authorities below, the assessee is in appeal before us. Shri S. N. Inamdar, the learned counsel for the assessee, first of all explained the manufacturing process supported by photographs placed at p. 53-I of the paper book. He submitted that the assessee goes through a complicated process and at the end of the day what is obtained is candy sugar which has distinct commercial identity and distinct use. The commodity obtained is recognised as such i.e., distinct commodity by commercial circles. The commodity so obtained has a different use. There is a value addition to the commodity and further bura sugar is a by-product and that itself shows that after the whole process what emerges is a distinct commercial commodity. To explain further, he relied upon a certificate of Dr. Arvind Lali from UDCT, Bombay, in respect of manufacture (pp 41 and 42 of the paper book), the certificate from Vasantdada Sugar Institute regarding distinct chemical composition (p 53F of the paper book) and a note on manufacture of candy sugar (pp. 53G-53H). In proof that the end product is a distinct commercial commodity and has a distinct use, the learned counsel relied upon the certificate from customers (pp 53A-53E of the paper book). The learned counsel relying upon the above technical information submitted that the authorities below failed to apply the prime test to decide the issue i.e., distinct commercial identity and different use and erred in drawing an inference on the basis of illogical factors like chemical composition of the end products, nomenclature, appearance (retaining substantial original identity), etc. The learned counsel further submitted that the authorities below erred in making conflicting arguments in respect of the definition of manufacture under Bombay ST Act. At first instance, stressing that as the particular terms is not defined under the IT Act, the Department should be guided by the definition given under any other Act (sales-tax) and thereafter observing that as the definition of the term 'manufacture' under the Bombay sales-tax is very wide, there may be very absurd results and even the smallest change can come within the ambit of manufacture under Bombay ST Act. According to the learned counsel, the authorities below have made illogical application of the decision of Maharashtra Sales-tax Tribunal in the case of Industrial Mineral and Chemicals vs. State of Maharashtra (supra) wherein it had been decided that the activity of conversion of the copper sulphate powder into crystals is not manufacture. However, the learned counsel submitted that there is observation in judgment itself that "Thus all these certificates do not apparently make any distinction between both the commodities" i.e., copper sulphate powder and copper sulphate crystals. According to the learned counsel, this observation has been totally overlooked by the CIT(A) and he applied the judgment illogically. The learned counsel further submitted that the authorities below made illogical application of the different High Courts and Supreme Court judgments on manufacture like blending of tea, blending of ore, camphor cubes, etc. wherein the processes involved are simple and mechanical and the end products remain the same. However, in case of the assessee-firm, the process involved is chemical one i.e., crystalisation which cannot be done manually and the end products are commercially different having distinct uses. The learned counsel further submitted that the authorities below erred in relying upon the sales-tax cases i.e., Vasantha & Co. vs. State of Madras 14 STC 696 and State of Gujarat vs. Sakharwala Bros. (supra) wherein the issue was entry for the purpose of sales-tax and the same was decided on the basis of the chemical composition of input and output and the issues involved were not at all relating to whether the activity amounts to manufacture or not. According to the learned counsel, the authorities below totally overlooked the fact regarding excisability of the assessee firm's end products i.e., candy sugar, P.G. sugar, etc. manufactured out of sugar on the basis of erroneous presumption. In support of his contentions, the learned counsel relied upon the following authorities :
(a) CIT vs. Tata Locomotive and Engg. Co. Ltd. (1968) 68 ITR 325 (Bom) The word 'manufacture' has a wider and also a narrower connotation. Assembling motor vehicles from 'complete knocked down' packs imported from West Germany were held manufactured vehicles.
(b) CIT vs. Kum. Satya Setia (1983) 143 ITR 486 (MP) The Tribunal is the final fact-finding authority under the scheme of IT Act. It has discretion to take additional evidence.
(c) CIT vs. Tiecicon (P) Ltd. (1987) 168 ITR 744 (SC) Supplying cool, filtered and chilled air through air-conditioning apparatus is a manufacturing activity.
(d) CIT vs. East India Hotels Ltd. (1994) 209 ITR 854 (Cal) Catering unit of the assessee supplying eatables in bulk to the international airlines for consumption of the air passengers is entitled to deduction under s. 80-I.
(e) Empire Industries Ltd. & Anr. vs. Union of India & Ors. (1986) 162 ITR 846 (SC) Processes like bleaching, dyeing, printing, etymologically also meant manufacturing process.
(f) CIT vs. Sterling Foods (Goa) (1995) 213 ITR 851 (Bom) Prawns do not amount to manufacture or production of article. The learned counsel placed reliance for the proposition that a statutory enactment must ordinarily be construed according to the plain natural meaning of its language and no words should be added.
(g) Nishit Synthetics (P) Ltd. vs. ITO (1984) 18 TTJ (Ahd) 508 : (1984) 7 ITD 486 (Ahd) Converting flat yarn into twisted yarn under mechanical process with the aid of chemicals and the assessee is entitled to deduction under s. 80-I.
(h) ITO vs. General's New Tread (1985) 23 TTJ (Bang) 259 (SB) : (1995) 13 ITD 460 (Bang) (SB) Machinery employed in retreading of tyres was entitled to claim under s. 32A.
(i) ITO vs. Maddi Satyanarayana & Co. (P) Ltd. (1984) 8 ITD 249 (Hyd) Redried tobacco which was end product produced by assessee-company was commercially different from fluecured tobacco purchased by it from farmers and hence the assessee was entitled to relief under s. 80-I.
(j) Kiran Tobacco Products (P) Ltd. vs. ITO (1991) 36 ITD 177 (Bang) Manufacturing Jarda from raw tobacco in a backward area - assessee is entitled to relief under s. 32A.
(k) Vora Food Specialities (P) Ltd. vs. ITO (1996) 54 TTJ (Bom) 502 : (1995) 54 ITD 324 (Bom) Process of converting potatoes into potato chips did not amount to manufacture entitling the assessee to investment allowance in respect of machinery installed for that purpose under s. 32A.
(l) Nandan Textiles (P) Ltd. vs. Asstt. CIT (1997) 58 TTJ (Bom) 127 : (1997) 60 ITD 382 (Bom) Business of dyeing, bleaching and printing of unbleached grey cloth constituted manufacture or production of an article or thing and hence the assessee was entitled to claim under s. 32A.
12. The learned counsel further submitted that for the asst. yrs. 1993-94 and 1992-93 under same set of facts and circumstances, the AO had allowed the relief under s. 80-I. Lastly, the learned counsel submitted that the provisions of s. 80-I are beneficial provisions and the same should be construed liberally.
13. As regards the additional deduction under s. 80-I of Rs. 97,750, the learned counsel submitted that the same was not at all considered by the CIT(A) as he dismissed the appeal against the disallowance against the deduction under s. 80-I itself on account of illogical and unjustifiable grounds.
14. Shri Hari Krishan, the learned Departmental Representative, strongly supported the orders of the authorities below. He filed before us paper book containing 32 pages. Explaining the process undertaken by the assessee as given in the orders of the authorities below and further explained by the learned counsel for the assessee, the learned Departmental Representative submitted that from the same it was clear that the entire procedure only involves mixing of water with sugar, boiling, cleaning i.e., removing the Bura sugar and obtaining purer form of sugar in the desired size. The process of washing, cleaning and purifying an item and obtaining it in the desired size does not amount to manufacture. In support of this contention, he relied upon the decision of the Karnataka High Court in the case of V.M. Salgaoncar Bros. (P) Ltd. vs. CIT. He further relied upon the judgment in the case of K. M. Natrajan 48 STC 315 where the High Court had held that conversion of white ash into sacred ash by cleaning and adding perfumes does not amount to manufacture. He further relied upon the decision of the Supreme Court in the case of Harbilas Rai & Sons 21 STC 17 where it was held that boiling and cleaning of pig bristles with soap and other chemicals and arranging them according to their size to obtain cleaned bristles is not manufacture. He submitted that though the assessee is engaged in a process, but it is not a manufacturing process. According to the learned Departmental Representative manufacture implies a change, but every change is not manufacture. In support of this argument, he relied on the decision of the Supreme Court in the case of Delhi Cloth and General Mills Co. Ltd. AIR 1963 SC 791. The learned Departmental Representative submitted that in the case of the assessee, there is no transformation of sugar into anything else and even after converting into candy sugar it remained sugar only. No new and different article has emerged. The character of candy sugar is just the same as was the character of sugar on which the process of cleaning and purification was applied.
15. To the contention of the learned counsel that after the sugar is processed a new product by name i.e., candy sugar comes into existence, the learned Departmental Representative submitted that the word 'candy' in this case is only an adjective which qualifies the word 'sugar' and only indicates that candy sugar is another form of sugar. Even otherwise the Hon'ble Supreme Court in the case of State of Orissa vs. Titaghur Paper Mills 60 STC 230 quoted by Calcutta High Court in S.B. Cold Storage Industries (P) Ltd. vs. CIT (1987) 166 ITR 646 (Cal) at p. 654 has held that merely because certain articles are known by different names it does not mean that they are different commercial commodities, if in fact they are merely different forms of the same commodity. To the contention of the learned counsel that the provisions of s. 80-I are beneficial provisions and hence deserve to be liberally construed, the learned Departmental Representative submitted that it is not a sound principle of construction to interpret the expression used in one Act with reference to their user in another Act. For example, the definition of 'manufacture' under the Factories Act cannot be imported into s. 32A of the IT Act. In support of this contention, he relied on the following decisions :
(i) Mittal Ice & Cold Storage vs. CIT (1986) 159 ITR 18 (MP);
(ii) CIT vs. Buhari Sons (P) Ltd. (1983) 144 ITR 12 (Mad);
(iii) Dy. CIT vs. Nagarjuna Investment Trust Ltd. (1998) 62 TTJ (Hyd) (SB) 33 : (1998) 65 ITD 17 (Hyd) P. 58 (SB); and
(iv) 94 Taxman 159 (SC).
16. According to the learned Departmental Representative the Supreme Court in the case of Sakarwala Bros. (supra) has already clarified that sugar covers candy sugar and both these items can be put to same use as sugar. There is no need of favourable interpretation if there is no ambiguity. In support of this contention, the learned Departmental Representative relied upon the decision CIT vs. T. V. Sundaram Iyengar & Sons (1975) 101 ITR 764 (SC). To the contention of the learned counsel that the candy sugar is subject to excise duty, the learned Departmental Representative submitted that the mere fact that the assessee is paying excise duty on conversion of sugar into candy sugar will have no bearing on the interpretation whether or not the process is manufacturing. The excise duty levied on the assessee is for the act of converting sugar into candy sugar and not for the reasons that the activity involved is manufacturing. He further submitted that lacuna, if any, in excise law cannot be allowed to be exploited by the assessee to get a favourable order from the authorities implementing the income-tax law. To the contention of the learned counsel that in the earlier assessments deductions had been allowed under s. 80-I, the learned Departmental Representative submitted that the earlier two assessment years have been reopened under s. 147 of the IT Act, 1961, as mentioned by the AO in this letter placed at p. 1 of the Revenue's paper book and as such the position has not been allowed to settle by the Department and the ratio of the Hon'ble Supreme Court in the case of Radhaswami Satsang vs. CIT (1992) 193 ITR 321 (SC) and Bombay High Court in H. A. Shah & Co. vs. CIT/CEPT (1956) 30 ITR 618 (Bom) will not apply to that effect.
17. As regards the reliance by the learned counsel on the letters from its customers like Ranbaxy Lab. etc. that the user is different, the learned Departmental Representative submitted that it is the additional evidence and cannot be admitted unless an opportunity has been granted to the opposite party to rebut. He further submitted that the opinions of the different experts quoted by the learned counsel for the assessee were of no use to the assessee in view of the judgment of the Allahabad High Court in the case of CIT vs. Smt. Prem Kumari (1984) 146 ITR 191 (All), according to which "experts give only the opinion and do not decide the issue". Their comments are not binding on the Courts. He further relied upon the decision of Patna High Court in the case of Maharajadhiraj of Dharbhanga vs. CIT (1933) 1 ITR 206 (Pat) p. 210 where it was held that legal opinions are not admissible. It is to be discarded. The learned Departmental Representative further submitted that the dictionary meaning of 'sugar' also covers candy sugar. He drew our attention to such definition given on p. 2285 of Webster's Third New International Dictionary placed at p. 31 of the paper book. Candy sugar has been defined as "a sweet crystallizable substance that consists entirely or essentially of sucrose". In support of his contentions he further relied upon the following authorities :
CST vs. Bansilal Bhasin
(a) Illaichidana is nothing but a lump of sugar;
(b) Obtaining Illaichidana from sugar does not bring into existence a different commodity;
(c) Whether an item is in crystal form or otherwise will not alter its character Vasantha & Co. 14 STC 696 (Mad) Sugar includes candy sugar.
M. L. Abdul Malik & Co. 14 STC 214 (Mys.)
(a) Candy sugar is only a purer form of sugar;
(b) sugar includes candy sugar;
(c) to arrive at its conclusion the Hon'ble Court has considered the opinion of National Institute of Sugar, Kanpur, a Government Institute.
Sakarwala Bros 19 STC 24 (SC)
(a) The term sugar covers 'patasa', 'harda' and 'Illaichidana'
(b) 'Illaichidana', 'patasa' and 'harda' can be put to same use as sugar.
18. Where activities similar to that of assessee have been held to be not manufacture :
1. 51 STC 248 (Cal) Powdering of turmeric and pepper and 31 STC 628 into turmeric and pepper powder. (Ker)
2. 30 STC 57 (Mad) Burning of coal into cylinder
3. 35 STC 360 Obtaining rice from paddy
4. 16 ELT 356 Converting aluminium waste (scrap) into aluminium ingots;
5. (1989) 43 ELT 314 Obtaining coal briquettes from (Y) coal dust by mixing mollases in it.
6. 21 ELT 889 Purifying ammonium nitrate to obtain prilled ammonium nitrate.
7. 61 ELT 25 Obtaining butter from cream
8. 24 ELT 169 (SC) Making aluminium cans from aluminium slug.
9. AIR 1994 SC 106 Converting aluminium foils into paper back aluminium foils
10. 22 STC 187 (Bom) Mixing bettle leaves and bettle powder to form Pan Pattis
11. 12 MTJ 325 (1995) Conversion of copper sulphate powder into copper sulphate crystal
12. 20 STC 261 (KER) Making prawn pulp from raw prawns
13. 38 STC 286 (Bom) Activity of frying and spicing of plain cashews to obtain fried cashewnuts.
19. The learned Departmental Representative concluded that in view of the above authorities, it can safely be said that the assessee was not carrying on any manufacturing process; that the end product i.e., candy sugar was not distinct from raw material i.e., sugar and accordingly, the authorities below were justified in rejecting the assessee's claim under s. 80-I.
20. We have considered the rival submissions and perused the facts on record. In order to qualify for deduction under s. 80-I, the assessee must be an industrial undertaking and must 'manufacture' or produce articles or things," as held by the Hon'ble Bombay High Court in the case of CIT vs. Sterling Foods (supra). The three expressions 'processing', 'manufacture' and 'production' used in various statutes are not interchangeable expressions. Though often used in juxtaposition, they convey different concepts and refer to different activities. 'Processing' is a much wider concept. The nature and extent of processing may vary from case to case. Every process does not tantamount to 'manufacture'. It is only when the 'process' results in the emergence of a new and different article having a distinctive name, character or use, that 'manufacture' can be said to have taken place. Similarly, 'production' is wider than 'manufacture'. As a result, every production need not amount to manufacture, though every manufacture can be characterised as 'production'. On a careful reading of s. 80-I in the light of the scheme thereof and other provisions of the Act, it is clear that the legislature intended to extend the benefit of deduction under s. 80-I only to the 'industrial undertakings which manufacture or produce articles'. This section was not intended to be applied to industrial undertakings which are engaged in 'processing of goods' not amounting to manufacture or production of articles. Sugar is the be all and end all of assessee's process. The assessee starts with sugar and at the end of the day ends with the sugar though in a purer form. From the details of the processes involved as stated by the lower authorities and as further elaborated by the learned counsel for the assessee with the help of photographs, it is clear that the assessee is involved in a process but not in manufacturing process. What amounts to manufacture has been defined in paragraph from an American judgment which has been quoted by approval by various judgments of the Hon'ble Supreme Court as also in the case of Delhi Cloth and General Mills Co. Ltd. (supra). The paragraph quoted in para 14 on p. 795 of the report reads as follows :
"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 character, name and use."
21. In the case of the assessee before us, there is no transformation of sugar into anything else, and even after converting into candy sugar it remains sugar only. No new and different article has emerged. The character of candy sugar is just the same as was the character of sugar on which the process of cleaning and purification was applied. It may be seen that the emphasis is on transformation of the original commodity into something else. The emphasis is also on change in the character of original article and character does not mean the shape, colour and purity of a substance. When sugar is converted into candy sugar, there is no transformation, and there is no change in the character of sugar. It just remains sugar, though in a purer form.
22. The Hon'ble Supreme Court in the same para has held that 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. Further, the Hon'ble Supreme Court has clearly brought out that manufacture means not only to produce some change in the substance but to bring into existence a new substance. In the case of the assessee the substance remains the same i.e., sugar, there may have been any change in its colour or size or purity but essentially it is the same substance.
23. The Hon'ble Supreme Court in the case of Pio Food Packers (supra) has held that where a commodity retains a continuing substantial identity through the processing stage, one cannot say it has been manufactured. In the case of the assessee however, the commodity i.e., sugar has retained its substantial identity even after it has been converted into candy sugar. Its identity as sugar has not been lost. While considering whether conversion of pineapple fruit into pineapple slices amounted to manufacture, answering the question in the negative, the Hon'ble Supreme Court has made very important observations as follows :
"But where the commodity retains a continuing substantial identity through the processing stage we cannot say that it has been 'manufactured' .....
Although a degree of processing is involved in preparing pineapple slices from the original fruit, the commodity continues to possess its original identity, notwithstanding the removal of inedible portions, the slicing and thereafter canning it on adding sugar to preserve it. It is contended for the Revenue that pineapple slices have a higher price in the market than the original fruit and that implies that the slices constitute a different commercial commodity. The higher price, it seems to us, is occasioned only because of the labour put into making the fruit more readily consumable and because of the can employed to contain it. It is not as if the higher price is claimed because it is different commercial commodity. It is said that pineapple slices appeal to a different sector of the trade and that when a customer asks for a can of pineapple slices he has in mind something very different from fresh pineapple fruit. Here again, the distinction in the mind of the consumer arises not from any difference in the essential identity of the two, but is derived from the mere form in which the fruit is desired ......
There is no essential difference between pineapple fruit and the canned pineapple slices. The dealer and the consumer regard both as pineapple. The only difference is that the sliced pineapple is a presentation of fruit in a more convenient form and by reason of being canned it is capable of storage without spoiling. The additional sweetness in the canned pineapple arises from the sugar added as a preservative. On a total impression, it seems to us, the pineapple slices must be held to possess the same identity as the original pineapple fruit."
24. The above observations of the Hon'ble Supreme Court make it clear that conversion of sugar into candy sugar is not manufacture. Both the traders as well as the consumer would regard both sugar and candy sugar as sugar only. The only difference may be that sugar candy is a presentation of sugar in more convenient and purer form. Even when the consumer is purchasing the candy sugar he does not consider it any different from the substance sugar.
25. In the case of Tungabhadra Industries Ltd. 11 STC 827 the Hon'ble Supreme Court has decided that purification/refining of groundnut oil to obtain refined groundnut oil does not amount to manufacture. Since there is no change in the nature of the substance which remains groundnut oil even after purification. The important observations of the Hon'ble Supreme Court at p. 831 are reproduced below :
"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 constitute part of the raw oil which is not really oil. The elements removed in the refining process consist of free fatty acids, phosphoticides and unsaponfiable matter. After the removal of the this non-oleic matter thereafter the oil continues to be groundnut oil and nothing more. The matter removed from the raw groundnut oil not being oil cannot be used, after separation, as oil or for any purpose for which oil could be used. In other words, the processing consist in the non-oily content of the raw oil being separated and removed, rendering the only content of the oil 100 per cent. For this reason refined oil continues to be groundnut oil within the meaning of rr. 5(1)(k) and 18(2) notwithstanding that such oil does not possess the characteristic colour, or taste, odour etc. of the raw groundnut oil'.
26. The above observations make it clear that when any substance is purified/cleaned what is removed from it is not the substance in question, but something else. What is obtained after cleaning is the purer substance.
27. Accordingly, after cleaning/purification of the sugar by removing dust and brown sugar, which is a kind of impurity, what has been removed was not sugar but something else and candy sugar which has been obtained is only a purer form of the sugar i.e., the original substance. At page No. 833 the Hon'ble Supreme Court has held that process of removal of impurities does not render groundnut oil any the less. On the same analogy, we hold that the process of removal of impurities to obtain candy sugar does not render sugar any the less sugar. The Hon'ble Supreme Court has further held that even hydrogenation of oil does not amount to manufacture. At p. 835 the Hon'ble Supreme Court has held that there is no use to which the groundnut oil can be put for which the hydrogenated oil could not be used, nor is there any use to which the hydrogenated oil could be put for which the raw oil could not be used. Similar is the position as regard to sugar and sugar candy. It is a well known fact that various sugar mills in the country make sugar of different sizes with different purity but all kinds of sugar can be put to some purposes i.e., sweetening of other substance and some times even as base for various medicines more particularly in case of homeopathy medicines.
28. The Hon'ble Supreme Court in the case of Sterling Food's 63 STC 239 has observed that :
"the test which has to be applied for the purpose of determining whether a commodity subjected to processing retains its original character and identity is as to whether the processed commodity is regarded in the trade by those who deal in it as distinct in identity from the original commodity or it is regarded, commercially and in the trade, the same as the original commodity.
Applying the above test it was held that processed shrimps, prawns and lobsters are commercially regarded as the same commodity as raw shrimps, prawns and lobsters. When raw-shrimps, prawns and lobsters are subjected to the process of cutting of heads and tails, peeling, deveining, cleaning and freezing, they do not cease to be shrimps, prawns and lobsters and become another distinct commodity. They are still known as shrimps, prawns and lobsters. There is no essential difference between raw shrimps, prawns and lobsters and processed shrimps, prawns and lobsters are ready for table while raw shrimps, prawns and lobsters are not, but still both are in commercial parlance, shrimps, prawns and lobsters. It is undoubtedly true that processed shrimps and lobsters are the result of subjecting raw shrimps, prawns and lobsters to a certain degree of processing and even the original character and identity as shrimps, prawns and lobsters notwithstanding the entire processing and cleaning [Please see CIT vs. M/s. Sterling Foods (Goa) (1995) 213 ITR 851 (Bom) at p. 861], where the Bombay High Court has followed the Supreme Court's judgment".
29. The Hon'ble Supreme Court in the case of Harbilas Rai & Sons (supra) has held that boiling and cleaning of pig bristles with soap and other chemicals and arranging them according to their size to obtain cleaned bristles is not manufacture. Accordingly, we hold that applying the same test to the candy sugar, it is clear that there is no manufacturing as sugar retains its essential original character and identity after being cleaned and purified and having become candy sugar.
30. As regards the contention of the learned counsel for the assessee that after processing raw sugar the assessee gets candy sugar i.e., new name, it may be stated that the word 'candy' in this case is only an adjective which qualifies the word 'sugar' and only indicates that candy sugar is another from the sugar. Even otherwise, the Hon'ble Supreme Court in the case of Titaghur Paper Mills Co. (supra) quoted by the Calcutta High Court in S.B. Cold Storage Industries (P) Ltd. vs. CIT (supra) at p. 654 has held that merely because certain articles are known by different names it does not mean that they are different commercial commodities if in fact they are merely different forms of the same commodity. The Hon'ble Bombay High Court in the case of Dunken Coffee Manufacturing Co. case 34 STC 493 has held that mere change in the name of commodity will not amount to manufacture. Although in that particular case the activity of amalgamating coffee powder with chicory powder in equal proportion to obtain 'fresh coffee' was held to be a manufacture as there was a transformation of two inputs, yet the decision arrived was not based on the fact that the output had different name as French Coffee from the original product known as coffee.
31. Coming to the arguments of the learned counsel that the candy sugar is subjected to excise duty and is accordingly different from the raw sugar, we hold that mere fact that the assessee is paying excise duty on conversion of sugar into candy sugar will have no bearing on the interpretation whether or not the process is manufacturing. The excise duty levied on the assessee is for the act of converting sugar into candy sugar and not for the reasons that the activity involved is manufacturing. There is no finding by the excise department that the activity involved is manufacturing. Therefore, it does not call for any comments. Further, there is no rule that the process of obtaining an item which is excisable under Excise Act will certainly amount to manufacturing, just as there is no rule that the process of obtaining an item which is not excisable under excise law cannot amount to manufacture.
32. One of the arguments raised by the learned counsel was that in the earlier two assessment years the assessee had been allowed deduction under s. 80-I for the same process and hence the deduction under s. 80-I should be allowed in this year also. This argument cannot be accepted because the theory of res judicata does not apply to the income-tax proceedings. We further find that in earlier assessments in years in which the assessee had been allowed deduction have been reopened under s. 147 of the IT Act, and as such the position has not been allowed to be settled by the Department and the ratio of the Supreme Court in the case of Radhaswami Satsang (supra) and Bombay High Court in 30 ITR 618 (supra) will not apply to that effect. Moreover, deduction allowed in earlier years is no ground for allowing the same in latter years. It can be independently examined in next year as held in the case of Poona Dal Basan Mills case (ITA No. 654/Pn/1996, dt. 17th March, 1997, at p. 8).
33. As regards the contention of the learned counsel that the provisions of s. 80-I are of beneficial nature and accordingly should be interpreted liberally, we are of the view that after the decision of the Supreme Court in the case of CIT vs. N. C. Budharaja (1993) 204 ITR 412 (SC) the concept of adopting a liberal interpretation has been reconsidered and now as per the Supreme Court, the principle of adopting liberal interpretation which advances the purpose and object of beneficial provision cannot be carried to the extent of doing violence to the plain and simple language used in the enactment. It will not be reasonable or permissible for the Court to rewrite the section or substitute the words on its own for the actual words employed by the legislature in the name of giving effect to the supposed underlying object. The meaning of 'manufacture' and 'production of articles or things' would have to be considered in their ordinary, plain and natural meaning. When raw sugar is washed and cleaned and converted into candy sugar what is obtained is the sugar in purer form. Hence, it could be doing violence to the language if it is said that while sugar is being converted into candy sugar, in effect an article or thing is being manufactured or produced.
34. One star argument put by the learned counsel was that candy sugar is used by pharmaceutical companies and hence it's use is different from ordinary sugar. Reliance was placed on the letters procured from some pharmaceutical companies of the country. We do not find any merit in this argument. No doubt, pharmaceutical companies do purchase candy sugar from the assessee, but such companies also use the same for sugar coating of pills etc. or for sweetening the bitter medicines. So the predominant use of the product of the assessee is in the form of sugar itself and nothing else.
35. Coming to the cases relied upon by the learned counsel for the assessee, we are of the view that the same are distinguishable on facts. In fact, the cases on which we have relied are directly on the issue and squarely cover the issue raised in this appeal by the assessee. For the same reasons, the reliance placed by the learned counsel on the expert opinions is of no assistance to the assessee.
36. In the light of our above discussion, we uphold the findings of the authorities below and dismiss the ground raised by the assessee.
37. As regards the additional deduction under 80-I of Rs. 97,750 agitated separately in Gr. No. (1A), we confirm the finding of the authorities below for the reasons given supra in the main ground. Since the assessee is not entitled to deduction under s. 80-I because it is not carrying on any manufacturing process there is no question of allowing additional deduction under s. 80-I. Accordingly, ground No. (1A) is also rejected.
38. The next grievance of the assessee is that the learned CIT(A) is not justified in not allowing secret commission of Rs. 4,93,490. The assessee had claimed an amount of Rs. 4,93,490 as expenditure on account of secret commission. The AO during the course of assessment proceedings asked the assessee to furnish names and addresses of the persons to whom secret commission has been claimed to have been paid to verify the claim of the assessee. The assessee, in response to the same, failed to furnish the said details and instead relied on the following decisions :
(i) CIT vs. Goodlac Nerolac (1991) 188 ITR 1 (Bom);
(ii) CIT vs. Sigma Paint Ltd. (1991) 188 ITR 6 (Bom);
(iii) Dr. G. G. Joshi vs. CIT and
(iv) CIT vs. A. S. K. Rathinswamy Nadar (1995) 212 ITR 527 (Mad).
39. The AO observed that the assessee failed to establish the factum of trade practice of secret commission in the line of the business of the assessee and factum of payment of the so-called commission for the purposes of business and relying upon the judgment of the Bombay High Court in the case of Goodlac Nerolac vs. CIT (1982) 137 ITR 58 (Bom) rejected the claim of the assessee for want of verification. On appeal, the CIT(A) confirmed the finding of the AO observing as under :
"For any expenditure to be allowed under s. 37 it is not only necessary that expenditure should be incurred, it is also necessary that it should be incurred for the purpose of business. Both these are matters of facts and the AO is within his power to verify the same. In the case of the appellant, it has failed to prove that whether expenditure has been actually incurred or not on account of secret commission. Even if for the sake of argument it is to be accepted that the same has been paid, there is nothing to prove that the same has been incurred for the purpose of business.
In this regard I would like to quote the observation of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT (1980) 124 ITR 1 (SC).
"The businessmen are citizens of this country and the business they carry on affects the citizens of this country, any illegal payment made is ultimately passed on to the consumer public ...... It would be short-sighted and myopic to hold that the businessmen are entitled to conduct their business even contrary to law and that, so long as the payments are by them are justified by their business deductions, notwithstanding the fact that such payments are illegal or opposed to public policy, or have pernicious consequences to the nation's life as a whole. It is not open to a businessman to bribe a public official and say that the bribe was necessary and expedient in his business interest and therefore, the amount paid by way of bribe ought to be deducted as business expenditure under s. 37."
40. Shri S. N. Inamdar, the learned counsel for the assessee, reiterated the submissions made before the CIT(A) and further relied upon the four authorities cited by him before the AO and the CIT(A) as detailed in para 19 above. He submitted that while dealing with the public limited companies the business cannot be obtained without payment of secret commission. The practice is prevailing worldwide from top to bottom in every field. Even the ordinary person is facing the problem of secret commission every day in his routine life. Thus, in these circumstances to ask for further evidence to establish the payments and the practice prevailing which is bitter truth of day-to-day life is absolutely uncalled for. He submitted that the assessee has not maintained the names and addresses of the payees. But it was because the nature of the payments of secret commission being such that no documentary evidence could be produced; however, circumstantial evidence is clearly justifying the payment i.e., vertical jump in the income of the assessee-firm.
41. Shri Hari Krishan, the learned Departmental Representative, strongly supported the orders of the authorities below. He submitted that this is a new item of expenditure claimed for the first time during the year under appeal. In the past no such claim of secret commission was made though the assessee was carrying on the same kind of business. In the subsequent assessment year, the assessee had claimed secret commission but later on surrendered the same under the Voluntary Disclosure Scheme.
42. We have considered the rival submissions and perused the facts on record. The secret commission may be allowed provided the assessee furnishes the details of the same and also establishes the prevalance of such practice in the trade. From the combined reading of the orders of the authorities below, it is evident that the assessee could not establish such practice in its trade. The assessee has been carrying on the business in sugar and sugar products for the past so many years but no such commission was paid in the past. In the subsequent year such a claim has been surrendered under the Voluntary Disclosure Scheme. The cases relied upon by the learned counsel have been distinguished in a very detailed manner by the CIT(A) and we agree with his finding that the cases relied upon by the learned counsel for the assessee do not apply to the facts of the case of the assessee. Accordingly, we agree with the findings of the authorities below and decline to interfere. The ground raised by the assessee accordingly fails and the same is dismissed.
43. Ground No. 3 raised by the assessee reads as under :
"The learned CIT(A) erred in confirming the disallowance by the AO in respect of the entertainment expenditure on account of his failure to appreciate the facts on records and our submissions dt. 11th August, 1997, filed with him. The same being totally mechanical and in absence of any instructions by the CIT(A) to produce any evidence as he was satisfied with our explanation and never asked for anything more which is crystal clear from the records and therefore, the disallowance being illogical and unjustified, may please be allowed."
44. The assessee had claimed entertainment expenses to the tune of Rs. 32,564 as per audit report. The AO worked out the disallowance under s. 37(2) as under :
Total expenditure Rs. 32,564 Less : Admissible
10,000 & 50% of balance Rs. 22,564 11,182
-----------
Rs. 21,282 --------------
Inadmissible entertainment expenditure Rs. 11,282
--------------
45. The assessee appealed to the CIT(A) and submitted that the tea expenses for the factory and office were exclusively for staff purposes and it is not for the entertainment of visitors. The CIT(A) states "however, no evidence in support of its claim has been produced before the undersigned. Under the circumstances, it appears that the AO has correctly worked out the disallowances as per s. 37(2) of the IT Act, 1961." He accordingly upheld the disallowance of Rs. 11,282.
46. Shri S. N. Inamdar, the learned counsel for the assessee, submitted that he will be satisfied if 20 per cent of the total expenses incurred are allowed for the staff accompanying the visitors and then the disallowance under s. 37(2) may be computed. The learned Departmental Representative relied upon the authorities below.
47. After hearing both the parties, we direct the AO to allow 20 per cent of the total claim of the expenditure for staff who accompanied the visitors and on the balance disallowance under s. 37(2) may be computed as per the provisions of law. This ground accordingly succeeds in part.
48. Ground No. 4 reads as under :
"The learned CIT(A) though appreciated the assessee-firm's stand, but instead of deciding the issue at his end, remanded the same to the AO for reconsideration and therefore, requesting to allow the travelling expenses in toto."
49. At the time of hearing this ground was not pressed. Hence, the same is dismissed.
50. In the result, the appeal is allowed in part.
K. C. Singhal, J.M. 26th April, 1999
51. After going through the proposed order of my learned Brother carefully, I have not been able to persuade myself to agree with the conclusion reached by him in respect of the first issue discussed by him.
52. The only question for our consideration is whether the process of converting the ordinary sugar into candy sugar amounts to process of manufacturing. According to my learned Brother, this process is not a manufacturing process since there is no emergence of a new and different article out of the process carried on by assessee. He is of the considered view that sugar remains sugar though in a purer form even after the process since there is continuity of substantial identity. However, it is my considered view, for the reasons given hereafter, that candy sugar which is also called as "Misri" in north India and as "Khari Sakhar" in western part of India is different article from the ordinary sugar-as it known in general public and commercial circle. Hence, the process carried on by the assessee amounts to manufacturing process.
53. There is no dispute to the legal position that in the manufacturing process, there must be emergence of a new commodity different from the commodity subjected to the process. The article produced must have a distinctive name, character or use. If such an article is produced then, in my opinion, process has to be held as manufacturing process despite the fact that ingredient of the original commodity continues to remain in the new article. For this proposition, reasons would be given at the appropriate place in my order.
54. So, in my view, the real question is as to what test should be applied to determine whether article produced is different or not from the original commodity subject to process. Various tests have been applied by the Supreme Court from time to time. The most prevalent test is test of commercial parlance i.e., the sense in which the people in the trade dealing with the commodities think of such commodities. In this connection, reference can be made to the judgment of the Hon'ble Supreme Court in the case of Pio Food Packers, 46 STC 63. The test applied by the Supreme Court appears at p. 65 of the reports as under :
"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."
55. Applying the aforesaid test, the Court held at p. 66 as under :
"In the present case, there is no essential difference between pineapple fruit and the canned pineapple slices. The dealer and the consumer regard both as pineapple. The only difference is that the sliced pineapple is a presentation of fruit in a more convenient form and by reason of being canned it is capable of storage without spoiling. The additional sweetness in the canned pineapple arises from the sugar added as a preservative. On a total impression, it seems to us, the pineapple slices must be held to possess the same identity as the original pineapple fruit."
56. The test was again applied by the apex Court in the case of Sterling Foods 63 STC 239 and it was held that raw shrimps, prawns and lobsters continues to remain the same even after the process of cutting of heads and tails, peeling, deveining, cleaning and freezing. The only difference is that processed item becomes fit for table.
57. In the case of Coco Fibres 80 STC 249, the apex Court, applying the aforesaid test, held that coconut husk and coconut fibre made therefrom are commercially different items despite the fact that ingredients remained substantially the same. Further, in the case of Indo International Industries 47 STC 249, the Supreme Court applied the same test and held that clinical syringes, thermometers, lactometers, etc. were commercially different from "Glassware". It was observed by the Court that a general merchant dealing in glassware does not ordinarily deal in such articles which although made of glass are normally available in medical stores. Since in the trade community these articles were treated differently the Court decided the clinical syringes, thermometers and Lactometers, etc. were different articles from glassware.
58. The second test which has been often applied by the Hon'ble Supreme Court is the test of common parlance. This test has been applied where the articles are of daily use as household items. The first celebrated judgment is in the case of Ram Avtar Budhi Pershad 12 STC 286 (SC). It was held that where an article is of everyday use, meaning of it should be construed in the popular sense i.e., that sense in which people conversant with the subject-matter would attribute to it. Applying this principle it was held that the word "vegetables" would include those which are grown in a kitchen garden or in a farm and are used for the table. Consequently "betel leaves" were held to be different from "vegetables".
59. Applying this principle, it was held by the apex Court in the case of Ganesh Trading Co. 32 STC 623 that paddy and rice are different commodities. On the same principle, it was held again in the case of B. Raghunath Shetty 47 STC 369 SC that process of milling of paddy into rice amounts to process of manufacturing. Similarly, in the case of Sri Siddhi Vinayak Coconut & Co. 34 STC 103, larger Bench of five Judges held that watery coconut and dry coconut are different commodities.
60. The third test applied by the Hon'ble Supreme Court is the "Functional or user test." In the case of Atul Glass Industries, 63 STC 322, The apex Court at p. 327 held as under :
"The test commonly applied to such cases is : How is the product identified by the class or section of people dealing with or using the product ? That is a test which is attracted whenever the statute does not contain any definition. Porritts & Spencer (Asia) Ltd. vs. State of Haryana (1978) 42 STC 433 (SC). It is generally by its functional character that a product is so identified. In CST vs. Macneill & Barry Ltd. (1986) 61 STC 76 (SC) : (1985) 2 SCALE 1093 this Court expressed the view that ammonia paper and ferro paper, used for obtaining prints and sketches of site plans could not be described as paper as that word used in common parlance. On the same basis the Orissa High Court held in State of Orissa vs. Gestetner Duplicators (P) Ltd. (1974) 33 STC 333 that stencil paper could not be classified as paper for the purposes of the Orissa Sales-tax Act. It is a matter of common experience that the identity of an article is associated with its primary function. It is only logical that it should be so. When a consumer buys an article, he buys it because it performs a specific function for him. There is a mental association in the mind of the consumer between the article and the need it supplies in his life. It is the functional character of the article which identifies it in his mind. In the case of a glass mirror, the consumer recalls primarily the reflective function of the article more than anything else. It is a minor, an article which reflects images. It is referred to as a glass mirror only because the word "glass" is descriptive of the mirror in that glass has been used as a medium for manufacturing the mirror."
61. In the case of Vijay Laxmi Cashew Co. 100 STC 571, the Supreme Court, applying the aforesaid test held that cashewnut is different commodity from cashew kernel since use of both the items are different. Similarly in the case of State of A.P. vs. Modern Proteins Ltd. 95 STC 181 it has been held by the Supreme Court that groundnut de-oiled cake is different from the original commodity since use of the original commodity is for animal consumption while commodity produced is for human consumption. Wheat flour, Maida and Suji have been held to be different from wheat on the basis of its user is the case of Rajasthan Roller Flour Mills 91 STC 408 (SC). In the case of Tungbhadra Industries STC 827, the Supreme Court held that raw groundnut oil and refined or hydrogenated oil were the same item because both of these are used as cooking medium. The relevant observations appearing at p. 835 are reproduced as under :
"Hydrogenated oil services the same purpose as a cooking medium and has identical food value as refined groundnut oil. There is no use to which the groundnut oil can be put for which the hydrogenated oil could not be used, nor is there any use to which the hydrogenated oil could be put for which the raw oil could not be used. Similarly we consider that hydrogenated oil still continues to be "groundnut oil" notwithstanding the processing which is merely for the purpose of rendering the oil more stable thus improving its keeping qualities for those who desire to consume groundnut oil."
62. In the present case, the issue has to be decided keeping in view the above tests. However, before coming to merits of the case it would be useful to refer the following observations of the Full Bench of Kerala High Court in the case of N. Sundareswaran 91 STC 476 :
63. The common parlance test is pressed into service if the article is one in daily household use or is used by the common man. The commercial parlance test is called in aid while dealing with the construction of goods known to the merchant community and the consumers of those goods. In the substantial identity test what is material is whether a distinct articles as understood by the people who commonly deal with it, has come into being, i.e., in other words, whether in the market, it is regarded as a distinct article. It would be difficult for the Court to say that one test overrides the other or that any one of them is the dominant one. It will be for the Court to consider in each case the principle to be applied on an overall view of the matter and taking guidance from decided cases : (See pp. 493G, H. 495A, C, D).
64. In the present case the ordinary sugar which is subject to processing and candy sugar which is produced from the process are commodities of daily use by common man as well as in the business circle. The ordinary sugar is commonly known in north India as "Chini" and in western India i.e., Maharashtra and Gujarat as "Sakhar". On the other hand "Candy sugar" is well known as "Misri" in north India; as "Kharhi Sakhar" in western India and as "Diomond sugar" in South India. If any person goes in the market and ask for sugar, he will not be given "Candy sugar" or vice versa because both are well known by their distinctive names. Besides that the use of both the items is also different. The ordinary sugar is primarily used for sweetening the substance in the daily use e.g., for sweetening milk, tea and coffee, etc. It is also used for preparing sweet either at home or in the market by Halwais. But candy sugar is not used for such purposes. It's purpose is entirely different. It is primarily used by public in "Prasad" on the occasion of religious functions. It is also offered to guests after the meal to fresh the mouth and throat. In commercial circle, candy sugar is known as "Pharma sugar" and is used for coating the medicines. Such candy sugar is, therefore, also used by the pharmaceutical concerns. This is also evident from the fact that substantial sales has been made by the assessee to the pharmaceutical concerns and this fact is not in dispute. Various pharmaceutical companies like "Ranbaxy", "UCB Pharma", "Ajanta Pharma", "Abbort Laboratories" and other concerns have given the certificates to the effect that "Candy sugar" cannot be replaced by the ordinary sugar in the process carried on by them. Such certificates appear at pp. 53A to 53E in the paper books. Besides that Chief Sugar Technologist of Vasantdada Sugar Institute has given a certificate, after analysing the characteristics of both the items, to the effect that candy sugar is different from the ordinary plantation white sugar. This certificate appears at p. 53F of the paper book. It is also useful to note that 'Candy sugar' is an exciseable item under Central Excise Act. Excise duty is payable only on the manufacture of goods.
65. There are two direct decisions of High Courts wherein it has been held that 'Candy sugar' is different from ordinary sugar. The Madras High Court in the case of Nemichand Parasmal & Co. vs. Dy. CTO 55 STC 47 has held that expression "Sugar" will not include "Sugar candy" or "Diomond sugar". Similar view has been taken by Madhya Pradesh High Court in the case of Channulal Motilal vs. CST 16 STC 297 (MP). In this case "Misri and Patasha" have been held to be different from "Sugar". These decisions have been given by applying the test of common parlance.
66. In the proposed order, much emphasis has been laid on the fact that candy sugar is only the purer form of sugar and, therefore, no emergence of new commodity. According to him essential ingredients continue to remain the same. So the identity of the original commodity is not lost. With due respect, I am unable to agree with this approach. The only relevant criteria is whether the item produced out of a process is considered a different item from the original item or not. If the item produced is different from the original one in view of tests laid down by apex Court then such process has to be considered as manufacturing process. The reliance can be placed on the Supreme Court decision in the case of Coco Fibres (supra). In that case question before the Court was whether coconut husk and coconut fibres were different commodities. The process involved was as under :
"Green coconut husk is soaked in saltish sea water for days together and after decomposition, it is subjected to beating by mechanical or manual process and then fibre is extracted"
67. The Supreme Court took into consideration that such fibre was used for making ropes, matting, etc. and held that such fibre was commercially different from husk. After referring to the decision of Patna High Court 7 STC 626, it was held that it is not necessary that stuff or material of the original article must lose its character or identity. The relevant observation appearing at p. 252 are being extracted as below :
"The essential point to remember is that something is brought into the existence which is different from that originally existing, in the sense that the thing produced is by itself a commercial commodity and is capable as such of being sold or supplied. It is not necessary that the stuff of the material of the original article must lose its character or identity or it should become transformed in its basic and essential properties."
68. From the above observations of their Lordships, it is clear that if two commodities are held to be different then it is not necessary that original identity must be lost. This point was again emphasised by the Supreme Court. In the case of State of A.P. vs. Modern Proteins (supra). The Supreme Court after considering its various decisions including the decisions in the case of Coco Fibres (supra) held at p. 187 as under :
"It is true that the analyst report in this appeal does indicate that both deoiled cake and groundnut protein flour contain common properties but the use and purpose being different and distinct, they cannot be considered to be the same commodity. The groundnut protein flour is an edible protein food for human consumption and is a different commercially marketable entity and thereby is distinct from deoiled cake for animal feed though obtained in the course of same process at different stages. Both emerge into different and distinct commodities commercially known in common parlance for distinct and different use. Thereby groundnut protein flour did not remain part of the genus, i.e. deoiled cake, but became a new and different entity known in the commercial parlance."
69. In view of these two Supreme Court decisions, it cannot be said that there is no emergence of different item merely on the ground that properties of both the articles are the same. The only relevant point to consider is whether item produced is known as different item in the commercial or common parlance. Therefore, the claim of assessee cannot be rejected in the present case on the mere ground that properties of sugar continues to remain in the "Candy sugar".
70. The decision of Supreme Court in the case of State of Gujarat vs. Sakarwala Bros. 19 STC 30 heavily relied upon by the Revenue is quite distinguishable and does not help the Revenue. In that case, the question was whether "Sugar" as defined in entry 47 of Schedule 'A' of Bombay ST Act would include Patasha, Harda and Illaichidana. Entry 47 had adopted the meaning of sugar as defined in item No. 8 of First Schedule to the Central Excise Act which read as under :
"Sugar means any form of sugar containing more than 90 per cent of sucrose"
71. It is because of this definition, it was held by the apex Court that patasa, harda and illaichidana fell within the definition of sugar since these items contained more than 90 per cent of sucrose. The Court was never concerned with a question whether such item were different from the ordinary sugar in common parlance. This distinction has been considered by the Gujarat High Court in the same very case which is also reported at p. 24 of the same report. At p. 29, it has been observed as under :
"The learned Advocate-General is right when he says that the articles known as "patasa", "harda" and "illaichidana" bear a distinct and different name from sugar and are not commercially purchased or sold as sugar."
72. It is clear from the above observation that though patasha, harda, etc. were commercially different items from sugar, they were considered as sugar in view of special definition. Accordingly, we are of the view that said decision cannot be applied to the present case.
73. In view of the materials and case law discussed above, it is my considered view that "Candy sugar" is different and distinct commodity in view of the various tests laid down by the Hon'ble Supreme Court. Therefore, the process carried on by the assessee has to be held as manufacturing process. Consequently, the assessee will be entitled to deduction under s. 80-I of the IT Act, 1961.
ORDER UNDER S. 255(4) OF THE IT ACT, 1961 B.L. Chhibber, A.M. 28th April, 1999
74. As there is a difference of opinion between the Accountant Member and the Judicial Member, the matter is being referred to the President of the Income-tax appellate Tribunal with a request that the following question may be referred to a Third Member or to pass such orders as the President may desire :
"Whether, on the facts and in the circumstances of the case, the assessee is engaged in manufacturing process and thereby eligible for deduction under s. 80-I of the IT Act, 1961 ?"
M.V.R. Prasad, A.M. (AS THIRD MEMBER) :
16th February, 2000
75. As there is a difference of opinion between the learned Accountant Member and the learned Judicial Member, the matter has been referred to me by the Hon'ble President of the Tribunal under the provisions of s. 255(4) of the IT Act, 1961, and the question referred reads as follows :
"Whether, on the facts and in the circumstances of the case, the assessee is engaged in manufacturing process and thereby eligible for deduction under s. 80-I of the IT Act, 1961 ?"
76. The assessee-firm deals in sugar and also claimed to be carrying on a manufacturing activity which results in the production of the following commodities :
(a) Candy sugar
(b) P.G. sugar, i.e., Pharma grade.
(c) Pulverised sugar
(d) Bura sugar
77. The items at (a) to (c) are claimed to be used by pharmaceutical companies, whereas item at (d) above is a by-product of sub-standard quality developed during the manufacture of items at (a) to (c) above. Candy sugar is known by various names in different parts of India and is known as "Misri" in north India. The question posed is whether the processing of sugar by the assessee, which results mainly in the production of candy sugar, is a manufacturing activity within the meaning of s. 80-I of the IT Act. The learned Accountant Member has indicated the details of the process involved at para 2 of his order and it is not necessary to reproduce it again.
78. Before me, the learned counsel for the assessee has taken me through the photographs of the details of the processing involved and the photographs are at pp. 53-I to 53J. The photographs show melting section, filter section, pan station, centrifugal station, etc. and the processing takes place on three different floors of the factory building. The machines are quite sophisticated and the process of crystallization requires temperature, pressure and vacuum control and takes 14 to 24 hours depending upon the requisite size of crystal to be developed. The assessee has filed an undated certificate before the Revenue authorities from Dr. Arvind Lali, Reader in Chemical Engineering, Department of Chemical Technology, University of Bombay, and the certificate, which may be seen at pp. 41 and 42 of the assessee's paper book (APB) reads as follows :
"M.B. Chemicals have put up a unit for manufacture of specially sugar called 'Candy sugar'.
79. At the request of the company I have visited their plant at Nilgavan, taluk Malegaon, district Nasik. From the visit and inspection of the plant, the equipment and after studying the process I have to state the following :
1. The commercial sugar is the raw material used for making the 'Candy sugar', 'pharma grade sugar' and 'food grade icing sugar'.
2. 'Candy sugar' is a special form of sugar, which is in the form of large regular shaped crystals. These crystals are a result of careful pretreatment, purification and crystallisation process sequence.
3. The sequence of the elaborate processing involves operations like controlled temperature melting, purification operation, filtration, vaccum crytallization, centrifugation, drying and very careful grading (whereby product cuts not meeting the quality test are recycled after suitable treatment). The entire process is an operation involving intricate process and equipment design, and produces a totally different kind of crystalline sugar from the commercial starting sugar.
4. The product cut giving very small size crystals when suitably graded is the 'Pharma sugar' used by the pharmaceutical industry for use in drug formulations. 'Candy sugar' or 'Pharma sugar' when finely ground and mixed with food grade starch gives 'Icing sugar' used in food industry. Both these sugars are also manufactured by M.B. Chemicals at their plant and since they are further derived from Candy sugar, they too involve all the processing mentioned above and starting from the commercial sugar.
5. The result of the operations is also the by-product called 'Bura sugar', which in fact contains most of the impurities extracted from the commercial sugar.
6. Study of the plant and the process is convincing beyond doubt to state that M.B. Chemicals Ltd. plant at Nilgavan is a genuine manufacturing activity involving intricate processing, energy consumption and strict quality control."
80. It has also filed before the Revenue authorities a certificate from Vasantdada Sugar Institute, which may be seen at p. 53F of the APB, and it reads as follows :
"To whomsoever it may concern
1. This is to certify that M/s. M.B. Chemicals at Nilgavan in Malegaon Taluka of Nasik District, are manufacturing "Candy sugar" and Bura sugar.
2. The above mentioned products are produced using plantation white sugar as raw material by following melting, clarification and filtration of the melt and further crystallisation and centrifugation process sequence is being followed for final products; as such the unit is performing manufacturing activity.
3. The "Candy sugar" sample, supplied by M/s. M.B. Chemicals is analysed and tested for standard characteristics. The results of analysis of candy sugar are given here with commercial plantation white sugar standard specifications along with typical analysis of plantation white sugar.
------------------------------------------------------------------------
Characteristics Requirements Analysis Typical analysis
for plantation
of M.B.C.of plantation white white sugar as Candy
sugar produced by
per sugar sugar factories (IS : 5982-1970) ------------------------------------------------------------------------
1. Polarisation per cent (Min) 99.50 99.70 99.62
2. Water solubles 0.10 Nil 0.05 (Max) % by Wt.
3. Reducing 0.10 0.008 0.039 sugars (Max) % by Wt.
4. Specific 100.00 3.00 45.00 conductivity x 10 6t Max.
5. Sulphur dioxide 70.00 0.313 46 (Max.) PPM
6. Calcium oxide 30.00 1.538 19 (Max.) mg/100 gm.
7. Turbidity 15.00 4.165 8.11 (max.) % by Wt.
8. Colour in Not 8.000 150 ICUMSA units specified
The above analysis results indicate that candy sugar has different chemical properties than plantation white sugar.
So, the "Candy sugar" is a different commercial product than ordinary plantation white sugar."
The claim of the assessee is that the candy sugar produced by it is used by pharmaceutical companies and these companies cannot use ordinary grade sugar and in support of this claim, the learned counsel for the assessee has filed some certificates, a few of which are reproduced below :
4. One such certificate given by Ranbaxy Laboratories Ltd. may be seen at p. 53A of the APB and it reads as follows :
"This is to certify that we have been purchasing pharmaceutical grade sugar (P.G. sugar) from M/s. M.B. Chemicals since 1994.
Pharma sugar is a different commercial commodity than ordinary sugar. We purchase this as a raw material for our product. Ordinary commercial sugar cannot be used in place of pharma grade sugar.
For Ranbaxy Laboratories Ltd.
Sd/-
(S. Saxena) Asstt. Manager-Quality Assurance"
5. Certificate given by Ajanta Pharma Ltd. may be seen at p. 53BB of the APB and it reads as follows :
"To whomsoever it may concern We are regularly purchasing Candy sugar from M/s. M.B. Chemicals, Malegaon, which is used in our products.
The Candy sugar has different characteristics compared to ordinary sugar and therefore, the ordinary sugar cannot replace the candy sugar as input in our pharmaceutical product.
For Ajanta Pharma Ltd.
Sd/-
Ajay S. Doshi General Manager-Materials"
Certificate given by UCB Pharma Ltd. may be seen at p. 53C of the APB and it reads as follows :
"To whomsoever it may concern This is to certify that we have been purchasing candy sugar 'F' Grade (small candy) from M/s. M.B. Chemicals since 1991.
Candy sugar 'F' Grade (small candy) manufactured by M/s. M.B. Chemicals passes as per specifications and therefore, manufacturing our products we require candy sugar 'F' Grade (small candy) only. Ordinary sugar cannot be used as substitute to candy sugar 'F' Grade (small candy).
For UCB Pharma Ltd.
Sd/-
(A. M. Pimputkar) Manager-Purchase & Admn."
Place : Mumbai Dated : 17/7/1998 It is also claimed that for the purposes of levy of excise duty, candy sugar is treated as a different product from sugar and in support of this proposition, the assessee has filed a proforma of the registration certificate issued by the excise authorities, which may be seen at p. 37 of the APB. In this certificate dt. 7th June, 1994, it is shown that the assessee manufactures and sells candy sugar and the item falls under Tariff-17. In the application for registration, which is at pp. 38 to 40 of the APB, it is clearly mentioned that the registration was sought for manufacturing and selling of sugar candy in big crystal form (candy sugar) from duty paid sugar. The tariff classification is given as 1701.39.
81. Before me, the learned counsel for the assessee reiterated the claim that candy sugar is sold as candy sugar and it is used for certain purposes for which ordinary sugar cannot be used. It is used as "Prasad" in temples and for, religious ceremonies and for mouth freshening with 'Soumph' and is also used in pharmaceutical companies for sugar coating in some formulations. It is claimed that ordinary sugar cannot be used for these purposes. It is also claimed that sugar undergoes a chemical change during the processing. Bura sugar, the by-product, is used as a substitute for jaggery and with Ghee is used as a delicacy. It is also claimed that the end users consider candy sugar and Bura sugar as different from sugar and the excise authorities also levy excise duty on candy sugar even though candy sugar is produced out of duty paid sugar. The learned counsel for the assessee further mentioned that the learned Accountant Member has noticed the distinction between "production" and "manufacture" in para 10 of his order but did not take the distinction to its logical end and while arriving at the conclusion that the assessee is not engaged in manufacturing activity, ignored that distinction.
82. The learned counsel for the assessee also claimed that the order of the learned Judicial Member is on the correct lines because, inter alia, it is supported by two decisions of the High Courts which are cited by him. These are the following :
(1) Nemichand Parasmal & Co. vs. Dy. CTO 55 STC 47 (Mad); and (2) Channulal Motilal 16 STC 297 (MP).
83. In both these decisions, it was held that sugar candy or diamond sugar is different from ordinary sugar. So it is claimed that a commodity commercially different from the raw material is produced by the assessee and so its activity tantamounts to manufacture and so it is entitled for deduction under s. 80-I. The learned counsel for the assessee has also sought to distinguish the cases relied upon by the learned Accountant Member on the ground that in those cases a different commercial commodity in commercial terms does not come into existence.
84. The learned Departmental Representative, on the other hand, mentioned that candy sugar in nothing but sugar in crystal form. He explained that crystal is only a ball shaped particle of the substance from which it is formed. Candy sugar is sugar formed by boiling down sugar syrup. When water is heated, it takes more sugar than it does at room temperature and crystallization is a natural process. It is also claimed that the certificate given by Vasantdada Sugar Institute, which we have reproduced hereinabove, is misleading to the extent it mentions that there is a change in the chemical position of sugar when it is processed into candy sugar. In other words, it is claimed that all the changes mentioned in the certificate are only physical changes. It is also mentioned that expert evidence given by an associate is not reliable. He emphasised that a natural process like crystallization does not tantamount to a manufacture. He has also referred to various cases mentioned by the learned Accountant Member and sought support from them. He emphasised that sales-tax cases are not decisive of the matter because they construed a different legislative provision and the crucial test to be applied is whether the substance chemically speaking remains the same after processing or whether there is a change in the substance. It is mentioned that if one has to go by sales tax cases, the matter stands conclusively decided in favour of the Department by the decision of the apex Court in the case of The State of Gujarat vs. Sakarwala Bros. 19 STC 24. It is mentioned that in the present case, the product remains the same, the only difference being that of the finished product being in a purer form. It is also claimed that a different name per se does not mean a different product. It is also pleaded that every process on which excise duty is leviable is not a manufacturing process and so the fact that excise duty has been levied in the present case does not take the case of the assessee far. The learned Departmental Representative relied strongly on the decision of the Maharashtra Sales-tax Tribunal in the case of Industrial Mineral and Chemicals vs. State of Maharashtra (1995) 12 MTJ 325 wherein it was held that conversion of copper sulphate powder into copper sulphate crystal is not a manufacturing activity. Heavy reliance is also placed on the decision of the apex Court in the case of Tungabhadra Industries Ltd. 11 STC 827 wherein it was decided that purification/refining of groundnut oil to obtain refined groundnut oil does not amount to manufacture since there is no change in the nature of the substance. It is also pleaded that in the case of an exemption provision, if there is a doubt, the benefit of doubt has to be given to the State, in view of the decision of the apex Court in the case of Novopan India Ltd. vs. Collector of Central Excise and Customs (1994) 73 ELT 769.
85. In his rejoinder, the learned counsel for the assessee mentioned that even the Webster's Dictionary calls sugar candy a food product. He has also mentioned that the learned Judicial Member has distinguished the decision of the apex Court in the case of State of Gujarat vs. Sakarwala Bros. (supra) at p. 36 of his order. The question is not whether candy sugar is a different form of sugar, which undoubtedly it is, but whether it is a commercially different product or not. It is claimed that the process applied to comes to a different form, though of sugar itself, is a manufacturing process. He emphasised that if you go to a shop and ask for sugar, they give you sugar only and if you ask for candy sugar, for are given candy sugar only. In other words, it is claimed that candy sugar is a commercially different product from sugar and it is emphasised that the test of chemical change advocated by the learned Departmental Representative is totally different from the judicial dicta in the matter.
86. The question posed in the present reference is not easy to decide. Both the learned Accountant Member and the learned Judicial Member have stated their view with clarity and a bare reading of the two orders is sufficient to impress upon the reader the subtlety of the question posed. Having said this, I am of the view that I have to agree with the learned Judicial Member. There is no dispute about the test to be applied to decide whether a particular processing activity amounts to manufacture or not. The test has been laid down by the apex Court and various High Courts in unmistakable terms. The learned Accountant Member has extracted in para 10 at p. 15 of his order the following extract from the judgment of the apex Court in the case of Delhi Cloth and General Mills Co. Ltd. AIR 1963 SC 791 :
"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 character, name and use."
87. The test is whether the processing has resulted in a commercially different product or not. The test to be applied is clear but the problem arises in its application, as in the present case. I am of the view that on the basis of the evidence filed by the assessee before the Revenue authorities and the Tribunal, it has to be held that a commercially different commodity has come into existence. I have quoted hereinabove the certificates filed from various pharmaceutical laboratories and the certificates are indicative of the fact that candy sugar is a different commodity from sugar and that it is not only known by a different name but has also different uses and serves different purposes from ordinary grade sugar.
88. Sales-tax cases which hold that candy sugar is only a different form of sugar are, to my mind, distinguishable inasmuch as they were dealing with a different legislative provision. In the case of Vasantha & Co. vs. The State of Madras 14 STC 696, on which the learned Departmental Representative relied, it was held that sugar which was exempted from the levy of sales-tax by two notifications issued by the State Government did in the context in which the exemption was granted take in sugar candy also. The Hon'ble Madras High Court observed as follows :
"Having regard, therefore, to the underlying purpose of the issue of these notifications and that purpose being linked to that set out in the Central Act relating to the levy of additional excise duty, the State must necessarily have intended that exemption should cover sugar candy as well, and this is so, even apart from the question whether sugar as generally understood includes sugar candy within its scope or not."
89. It may be observed from the above remark that the decision is based on the notifications issued and the legislative provisions in the Central Excises and Salt Act. Item 8 in the schedule of the Central Act defines "sugar" thus :
"Sugar means any form of sugar containing more than 90 per cent, of sucrose."
90. It may be observed that the test laid down by the Central Act considered by the Hon'ble Madras High Court laid down a chemical test, i.e., surcose content being 90 per cent. In all the sales-tax cases where sugar candy is held to be a different form of sugar, it is this provision of the Central Act which was construed. It was also be observed that the Hon'ble Madras High Court specifically mentioned that this decision is not based on the test whether sugar as generally understood included sugar candy within its scope or not. So I am of the view that this decision is distinguishable and does not necessarily decide the issue against the assessee. The same is the position in the case of The State of Gujarat vs. Sakarwala Brothers (supra) decided by the apex Court. The head note of this decision reads as follows :
"Patasa, harda and illaichidana fall within the definition of "sugar" in entry 47 of Schedule A to the Bombay ST Act, 1959, and their sales are exempt from the payment of sales-tax. The word "sugar" in entry 47 is intended to include within its ambit all forms of sugar, that is to say, sugar of any shape or texture, colour or density and by whatever name it is called.
Decision of the Gujarat High Court affirmed."
91. Both the Hon'ble Gujarat High Court and the apex Court which affirmed the decision of the Hon'ble Gujarat High Court in this case have considered the difference between "variety" and "form" of a substance used in the legislative provisions. They have held that the words "any form" appearing in the relevant provision has been used in a sense distinct and different from "any variety". The observations of the Hon'ble Gujarat High Court are as follows :
"It was urged by the learned Advocate-General that the word "sugar" in entry 47 has been used in the same sense in which it is used in common parlance and that in common parlance, "patasa", "harda" and "illaichidana" are not commercially known as and cannot be asked for or obtained as sugar. The learned Advocate General is right when he says that the articles known as "patasa", "harda" and "illaichidana" bear a distinct and different name from sugar and are not commercially purchased or sold as sugar. The legislature, in entry 47, does not use the word sugar simpliciter. It has in terms stated that what is covered is sugar as defined in item No. 8 of the First Schedule to the Central Excises and Salt Act, 1944. When we turn to the definition appearing in the aforesaid item No. 8 that definition is not intended merely to cover sugar as known in common parlance. As stated by us earlier, it is intended to cover all forms of sugar. It is further intended to cover only sugar in any form which contains more than 90 per cent of sucrose. A definition which refers to the chemical contents of an article cannot be said to be a definition which is intended to cover the article as understood in common parlance. It is with a view to give a meaning different from that which the article bears in common parlance that a special definition has been given, and it is not possible for us to interpret the words used in entry 47 as only covering the term sugar as used in common parlance."
92. It may be observed from the above remarks that the decision of the Hon'ble Gujarat High Court turned on the artificial definition of "sugar", i.e., that its contents should be more than 90 per cent of sucrose, than on the test of a commercially different commodity. The apex Court has only approved the above ratio of the Hon'ble Gujarat High Court. It has also noticed the difference between the words "any form of sugar" and "any variety of sugar". It also applied the test of 90 per cent sucrose content. So this decision of the apex Court is, to my mind, distinguishable on facts, as held by the learned Judicial Member.
93. I am of the view that even the decision of the ST Tribunal in the case of M/s. Industrial Minerals & Chemicals vs. The State of Maharashtra (supra), dealing with the conversion of copper sulphate powder into copper sulphate crystal, is distinguishable. In para 12 of its order, the Tribunal observed as follows :
"12 ....... There are various certificates found in the DDQ file between pp. 107-117. There is nothing in these certificates which say that in common parlance both the commodities are known as two different commercial commodities ..........
Thus all these certificates do not apparently make any distinction between both the commodities ....."
94. It may be observed that in this case, the evidence produced by the assessee in terms of the various certificates filed did not show that copper sulphate powder was a commercially different commodity from copper sulphate crystal. The exact opposite is the position in the present case. The various certificates produced by the assessee from the pharmaceutical laboratories which I have extracted hereinabove show that candy sugar is a different commodity from sugar. The above conclusion is also supported by the decision of the Hon'ble Andhra Pradesh High Court in the case of Surana & Co. vs. The State of A.P. & Anr. 40 STC 192, wherein it was observed as follows :
"As rightly observed by Chinnappa Reddy, J., though the only component of 'sugar-candy' is 'sugar' in common parlance the expression 'sugar' and 'sugar-candy' are used to denote substances identifiable and distinct substances and if the expressions 'sugar' and 'sugar-candy' are understood as they are understood in common parlance and as they were apparently meant to be understood by the legislature, there would be no inconsistency whatever. He further observed that it is the duty of the Court to so interpret statutes as to avoid inconsistencies, if possible I agree with there observations. I hold that "sugar-candy" is liable to payment of sales-tax under the Act. Hence, I dismiss this appeal."
95. This view also finds support from the decision of the Hon'ble Madhya Pradesh High Court in the case of Channulal Motilal vs. CST (supra) in which it was observed as follows :
"3. In regard to the first question, the Government Advocate, who appeared for the Revenue, conceded that sugar is the only constituent of the products called "Batasa", "Chiranji". "Mishri", etc. The point, therefore, is whether these products which are wholly made of sugar, can be regarded as sugar within the meaning of Entry 41 of the list of goods exempted from tax as enumerated in Sch. I to the Act. The applicant's counsel, Shri R. S. Dabir forcefully urged that these products, which were made of sugar only, could not be regarded as anything other than sugar only because they were given other forms. In support of this view, the counsel drew our attention to Punamchand Dalichand vs. The State of Bombay, a decision of the Bombay ST Tribunal mentioned at p. 367 of S. V. Aiyar's Sales Tax Digest, Third Edition (1959). The view taken in that case was that if loaf sugar and sugar cubes were exempted, there was no reason why batasas ought not to be exempted also. Even apart from the consideration that the judgment of that case is not before us, we think that the view taken in that case is distinguishable as grounded on the wide meaning of the relevant entry 'sugar' as defined in Item No. 8 of the First Schedule to the Central Excise and Salt Act, 1944' in Schedule A to the Bombay ST Act, 1946. Sugar in the aforesaid Item No. 8 means 'any form of sugar containing more than ninety per cent of sucrose'. We are also of opinion that a word like sugar, which has not been defined in the Act and which is a word of everyday use must be understood in the sense in which it is understood in general usage. As Craies observed in its Statute Law, Sixth Edition, at p. 163, it must be construed in its popular sense meaning 'that sense which people conversant with the subject-matter with which the statute is dealing would attribute to it.' This rule of construction was accepted and applied by the Supreme Court in Ramavatar vs. Asstt STO and also in Planters Nut Chocolate Co. Ltd. vs. The King and CST, MP vs. Laddumal Jangilal. It is obvious that sugar as understood in the popular sense does not include products of sugar like 'batasa', 'Chiranji', 'Mishri', etc. So, in Jethmal Ramaswaroop vs. The State, Wanchoo, C.J. (as he then was) observed :
'Turning briefly to the merits of the case, we are of opinion that there is no force in the contentions raised by the applicants, Misri, Batasa, etc., are not merely sugar and the fact that sales-tax has been paid on sugar is no reason for not levying sales-tax on these articles made from sugar. Nor are we prepared to accept that they are Deshi sweetmeats. It world be impossible to attempt a definition of Deshi sweetmeats. But it is common knowledge that no one in this part of the country would consider Misri, Batasa or toys made of sugar, etc. Deshi sweetmeats. So they are not exempt under the Schedule'. (P. 277) In our view, products like 'Batasa', 'Chiranji' and 'Mishri' cannot be regarded as sugar within the meaning of Item No. 41 of Sch. I to the Act."
96. It may be observed that the Hon'ble Madhya Pradesh High Court has distinguished the other cases which have interpreted the entry "sugar" as defined in Item No. 8 of the First Schedule to the Central Excises and Salt Act, 1944, which refers to 90 per cent of sucrose content. There is no dispute before us that "mishri" referred to in the above judgment is the vernacular name for candy sugar. This decision is an authority for the proposition that those cases based on Central Excise entry are distinguishable and also for the proposition that in common parlance "mishri" or candy sugar cannot be regarded as sugar, and that the two are commercially different commodities.
97. The crux of the argument of the learned Departmental Representative before me has been that sugar candy have the same chemical composition, notwithstanding the certificate to the contrary obtained by the assessee from Vasantdada Sugar Institute, referred to hereinabove. I do not find much substance in this argument. Simply because the finished product has the same chemical composition as the raw material from which it is made, it does not follow that the process involved does not amount to manufacture. In order that the process to which an article is subjected should be a manufacturing process, it is not essential that the article must change its nature. It is enough if it becomes a different commercial article. This is the proposition laid down by the Hon'ble Allahabad High Court in the case of Badri Prasad Prabha Shanker & Anr. vs. CST 14 STC 208. It has been held by the Hon'ble Calcutta High Court in the case of North Bengal Stores Ltd. vs. Member, Board of Revenue 1 STC 157 as follows :
"A goldsmith manufactures ornaments out of gold, a cobbler manufactures boots out of leather, a carpenter manufactures a box out of wood and a tailor manufactures a suit out of cloth; even though gold remains gold, leather remains leather, wood remains wood and cloth remains cloth. When the ornaments, the books, the box and the suit are prepared, there is manufacturing, because the articles brought into existence are commercially different commodities."
98. In the light of the above, it is hardly a disqualification for the chemical content of candy sugar not to be different from sugar for the process involved to be categorised as manufacture. In the present case, in the light of evidence furnished before me, to which I have adverted in the earlier part of this order, it is clear that candy sugar is put to different uses from sugar and it is generally known as a different commercial commodity. Candy sugar is used by pharmaceutical companies and it has been ascertained in the course of the hearing that 45 per cent of the sales of candy sugar by the assessee have been effected to pharmaceutical companies. There is merit in the contention of the learned Departmental Representative that a decision under sales-tax or excise laws in favour of the assessee is not decisive of the matter for ascertaining whether the process involved amounts to manufacture or not. That is because the legislative provision under those laws need not be identical with the relevant provision under the IT Act. However, independently of the cases decided under the sales-tax or excise laws cited by both the parties before me, it appears that there is sufficient evidence on record to come to the conclusion that candy sugar is a commercially different commodity from sugar. This is also the observation of Their Lordships of the Hon'ble Madhya Pradesh High Court in the case of Channulal Motilal vs. CST (supra) and the Hon'ble Andhra Pradesh High Court in the case of Surana & Co. vs. The State of A.P. & Anr. (supra). Similar is the decision of the jurisdictional High Court in the case of CST vs. Indian Oil Corporation Ltd. 41 STC 471 cited by the learned counsel for the assessee before me in which it was held that mixing of methonol with distilled water in certain proportion and sale of it as "Methimix" for using it as power augmentation fluid in aeroplane engines during take-off amounts to manufacture. I also find other cases cited by the learned Departmental Representative like Dy. CIT vs. Pio Food Packer 46 STC 63 (SC) are distinguishable. In this case, the Hon'ble Supreme Court observed as follows :
"But where the commodity retains a continuing substantial identity through the processing stage we cannot say that it has been 'manufactured' ........
Although a degree of processing is involved in preparing pineapple slices from the original fruit, the commodity continues to possess its original identity, notwithstanding the removal of inedible portions, the slicing and thereafter canning it on sugar to preserve it. It is contended for the Revenue that pineapple slices have a higher price in the market than the original fruit and that implies that the slices constitute a different commercial commodity. The higher price, it seems to us, is occasioned only because of the labour put into making the fruit more readily consumable and because of the can employed to contain it. It is not as if the higher price is claimed because it is a different commercial commodity. It is said that pineapple slices appeal to a different sector of the trade and that when a customer asks for a can of pineapple slices he has in mind something very different from fresh pineapple fruit. Here again, the distinction in the mind of the consumer arises not from any difference in the essential identity of the two, but is derived from the mere form in which the fruit is desired ........
There is no essential difference between pineapple fruit and the canned pineapple slices. The dealer and the consumer regard both as pineapple. The only difference is that the sliced pineapple is a presentation of fruit in a more convenient from and by reason of being canned it is capable of storage without spoiling. The additional sweetness in the canned pineapple arises from the sugar added as a preservative. On a total impression, it seems to us, the pineapple slices must be held to possess the same identity as the original pineapple fruit."
99. It may be observed that the finding given is that the dealer and the consumer regard both the raw material and the finished product only as pineapple. In the case before me it appears to me that neither the consumer nor the dealer consider sugar and candy sugar only as sugar. As already mentioned hereinbefore, if the consumer asks for sugar, he does not get candy sugar from the dealer. If he asks for candy sugar, he does not get sugar either. In the case of Tungabhadra Industries Ltd. (supra), the Hon'ble Supreme Court has held that purification/refining of groundnut oil to obtain refined groundnut oil does not amount to manufacture. This is the authority on which the case of the Revenue hinges. The relevant observations of the apex Court from this case have been quoted both by the learned Accountant Member and the learned Judicial Member. The observations quoted by the learned Accountant Member are as follows :
"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 constitute part of the raw oil which is not really oil. The elements removed in the refining process consist of free fatty acids, phosphoticides and unsaponfiable matter. After the removal of this non-oleic matter thereafter the oil continues to be groundnut oil and nothing more. The matter removed from the raw groundnut oil not being oil cannot be used, after separation, as oil or for any purpose for which oil could be used. In other words, the processing consist in the non-oily content of the raw oil being separated and removed, rendering the only content of the oil 100 per cent. For this reason refined oil continues to be groundnut oil within the meaning of rr. 5(1)(k) and 18(2) notwithstanding that such oil does not possess the characteristic colour, or taste, odour, etc. of the raw groundnut oil."
100. The observations of the learned Judicial Member are as follows :
"Hydrogenated oil serves the same purpose as a cooking medium and has identical food value as refined groundnut oil. There is no use to which the groundnut oil can be put for which the hydrogenated oil could not be used, nor is there any use to which the hydrogenated oil could be put for which the raw oil could not be used. Similarly we consider that hydrogenated oil still continues to be "groundnut oil" notwithstanding the processing which is merely for the purpose of rendering the oil more stable thus improving its keeping qualities for those who desire to consume groundnut oil."
101. It may be observed that the finding of the apex Court is that both groundnut oil and hydrogenated oil are put to the same uses. That, to my mind, is not the case in the case of sugar and candy sugar. They are not put to the same uses and so I am of the view that the case is distinguishable on facts. Similar is the position with the other cases relied on by the learned Departmental Representative before me.
102. For the foregoing reasons, I agree with the view taken by the learned Judicial Member. The case will go before the Bench for an order to be passed in terms of s. 255(4) of the IT Act, 1961.
B.L. Chhibber, A.M. 16th March, 2000
103. The learned Accountant Member, Shri M. V. R. Prasad, sitting as Third Member, by his opinion dt. 16th February, 2000, has concurred with the view of the Judicial Member that the assessee is engaged in manufacturing process and thereby eligible for deduction under s. 80-I of the IT Act, 1961. In accordance with the majority view, the appeal is allowed.