Kerala High Court
Commissioner Of Income-Tax vs Kerala Rubber And Reclaims Ltd. on 28 October, 1996
Equivalent citations: [1997]228ITR683(KER)
JUDGMENT V.V. Kamat, J.
1. After hearing learned senior standing counsel for taxes and learned counsel for the assessee it is not disputed that in fact we are required to answer the following two questions and that too with reference to I. T. R. Nos. 38 of 1996 and 125 of 1996. They are as follows :
I. T. R. No. 38 of 1996 :
" Whether, on the facts and in the circumstances of the case, the assessee is entitled to investment allowance under Section 32A of the Income-tax Act ?"
I. T. R. No. 125 of 1996 :
" Whether, on the facts and in the circumstances of the case, the assessee is entitled to investment allowance under Section 80-I of the Income-tax Act ?"
2. It is clear and is also submitted to that effect that our answers to the above questions are really relevant so much so that it would result in I. T. R. No. 46 of 1993 being rendered infructuous as a result thereof. Even if it is so the following question expects our answer in I. T. R. No. 46 of 1993 :-
" Whether, on the facts and in the circumstances of the case, did the Tribunal correctly interpret entry 27 of the Eleventh Schedule to the Income-tax Act to hold that the assessee is entitled to investment allowance under Section 32A of the Income-tax Act, 1961 ?"
3. Our discussion, inspite of the above situation would also provide answer thereto.
4. These are all relating to the assessment year 1985-86 in the matter of the assessee, Kerala Rubber and Reclaims Ltd., a company in which the public are substantially interested. The return was filed on October 10, 1985. The assessee-company prepares rubber compounds for utilisation in rubber industries. The raw material used is rubber, carbon black, oils and chemicals. The end-product is in sheet form. The assessee contends that these sheet forms are the end-products, claimed benefit of Sections 32A and 80-I of the Income-tax Act, 1961. The Income-tax Officer relied upon item No. 27 of the Eleventh Schedule to hold that investment allowance under Section 32A of the Act could not be granted as a result of the above item of the Eleventh Schedule. He held that the activity that refers to the said item would also include any derivative of rubber. He also observed that the assessee-company does not manufacture any new article or thing which can be said to be substantially different from the new product.
5. Reading the assessment order it appears, however, that the Income-tax Officer followed the same reasoning bodily to deny the claim of deduction under Section 80-I of the Income-tax Act, 1961. This was by the order dated February 24, 1986.
6. The first appellate authority -- the Commissioner of Income-tax (Appeals) referred to entry No. 27 in the Eleventh Schedule which is to the following effect :
"Crown corks, or other fittings of cork, rubber, polyethylene or any other material."
7. The first appellate authority considered the submission that the product produced by the appellant is one which cannot be described as falling in this category of entry No. 27. It was held that the assessee's product could not be said to be included in the Eleventh Schedule which is one of the conditions for denial of investment allowance to an industrial undertaking. It was submitted before the first appellate authority that the Income-tax Officer was in error in observing that the assessee-company does not manufacture any new article or thing which can be stated to be substantially different from the new product. In this context it was submitted before the said appellate authority that the products manufactured by the assessee-company, namely, various types of rubber compounds are being used by tyre companies. It was submitted that the product manufactured by the assessee is entirely different from the raw materials which are used in the manufacturing process. It was also brought to the notice in the context that the Income-tax Officer did not consider as to in what manner the product could be considered to be an intermediary stage. In the process of reasoning, the first appellate authority has referred to the Full Bench decision of the Tribunal dated October 20, 1983. This was in the context of the claim under Section 80-I of the Act. The first appellate authority took the view that the rubber compound would not be an end-product in itself which can be classified as an article. It took the further view that the assessee would be entitled in regard to the claim for investment allowance under Section 32A of Act but would not be entitled in regard thereto under Section 80-I of the Act. The situation required both the Revenue as well as the assessee to approach the Income-tax Appellate Tribunal, Cochin Bench. Before the Tribunal on behalf of the assessee, it was submitted that the raw material used by the assessee is natural rubber and rubber is masticated for reduction of viscosity and to increase the plasticity. It was further submitted that this masticated rubber is then further mixed with carbon black, rubber processing oil and other rubber chemicals in "intermix" at 150C and high pressure. The intermix is a closed mixing mill operated with a big compressor and hydraulic power pack. It was further brought to the notice by way of submission in the context that the machine is driven by a 300 HP motor to enable the mixing to take place at a very high pressure and because of the high pressure and temperature, the rubber, carbon black, rubber processing oil and other rubber chemicals are masticated to form a homogeneous lump. It was submitted that this homogeneous lump is known as rubber compound. This rubber compound is then fed into an open mill by opening the drop door of the intermix. The material is again mixed in the rubber mixing mill for three to five minutes. The rubber mixing mill is driven by a 60 HP motor. The rubber compound is remilled and sheeted out into 3' by 6' length. After cooling and drying this rubber compound is taken from the cooling system and the compound is the final product produced by the assessee.
8. Therefore, it would be found that throughout the assessee contended that the rubber compound manufactured by them is the final product which is much more than the masticated rubber. The entire process would be found as spread over in paragraph 5 of the order of the Tribunal, as contended by the assessee in regard thereto.
9. The Tribunal has observed that the claim under Section 80-I came to be rejected at the hands of the first appellate authority also because it was held that the article--rubber compound--produced by the assessee is not an end-product but only an intermediate product.
10. The factual peculiarities are taken up by the Tribunal in paragraph 7 of its order. The Tribunal has tersely spread over the factual situation in the nature of a finding in the following manner :
"As far as the assessee is concerned what is obtained finally is an end-product. It goes straight to the parties who purchase it from the assessee for the production of tyres, etc. For the simple reason that the product of the assessee is utilised by some other companies like Apollo Tyres Ltd., etc., for producing their final produce, i.e., tyres, tubes, etc., it does not make the assessee's product an intermediate product. For example : for a paddy cultivator paddy is the final product. On his sale and purchase by mill owners paddy is converted into rice. But, for the mill owners rice is the final product. Even if rice is taken for consumption it is a raw material and intermediate product until it is boiled as cooked rice.".
11. In other words, after examining the process the Tribunal has held that what is manufactured by the assessee is rubber compound and is not in the nature of an intermediary product but is an end-product by itself. This end-product goes straight to the parties who purchase it from the assessee for the production of tyres, etc. The Tribunal has also emphasized that the simple reason that the product of the assessee is utilised by some other companies like Apollo Tyres, etc., for producing their final product, i.e., tyres, tubes, etc., would not make the assessee's product an intermediate product. The Tribunal has amply illustrated the situation by providing an example of a paddy cultivator in the context.
12. Therefore, the factual peculiarity as found from the findings in regard thereto would show that the product under the circumstances is not masticated rubber but a further process is in regard thereto. It is mixed with carbon black, rubber processing oil and other rubber chemicals in an intermix at 150C and at high pressure. The intermix is a closed mixing mill operated with a big compressor and hydraulic power pack. The machine is driven by a 300 HP motor to enable the mixing to take place at a very high pressure. It is because of the high pressure and temperature, the carbon black, rubber processing oil and other rubber chemicals get formed as a homogeneous lump. As far as the assessee is concerned it is known as they call it as rubber compound. This rubber compound is then fed into an open mill by opening of the drop door of the intermix. It is also driven by a 60 HP motor. Ultimately, as a result of the further remilling, the end-product is in the nature of sheets into pieces of 3' x 6' length. In other words, the process is not to be understood in the simplified situation of regarding the product as masticated rubber but it emerges as a result of further process in the context.
13. No wonder then that the Tribunal considered the two appeals before it, to hold on the basis of the above factual peculiarity. The Tribunal has held that the assessee used a 300 HP and 60 HP motors and further used carbon black, rubber processing oil and other rubber chemicals and mixed them at high temperature and finally getting a new product known as rubber compound. The Tribunal has gone to the extent of observing that by no stretch of imagination could it be said that the assessee's final product is not an article or thing manufactured or produced in an industrial undertaking. When the assessee became entitled to his claim for investment allowance under Section 32A of the Income-tax Act, 1961, on the basis of manufacture or production of any article or thing and there being no bar with regard thereto relating to item No. 27 of the Eleventh Schedule, in fact, his claim for deduction under Section 80-I of the Act was in the nature of a necessary sequitur.
14. Thus, the matter really should get concluded on the basis of the factual peculiarities, in a situation where there is a factual position that the article is not masticated rubber but is the result of a detailed process thereon making it to be rubber compound which is the final product of the assessee which is in fact sold to other companies manufacturing and producing rubber tyres, etc.
15. However, learned senior standing counsel brought to our notice the decision of this court, Superintendent of Central Excise v. Anchor Treads Pvt. Ltd, [1993] 65 ELT 480 (Ker) in regard to a situation as to whether masticated rubber is liable to excise duty under entry 40.01 of Chapter 40 of the Schedule to the Central Excise Tariff Act, 1985. In the process of factual analysis, the word "masticate" is understood in terms of its meaning in Webster's Third New International Dictionary. In the further process of reasoning two decisions of the apex court, Bhor Industries Ltd. v. Collector of Central Excise [1990] 184 ITR 129 ; [1989] 73 STC 145; [1989] AIR 1989 SC 1153 ; 40 ELT 280 (SC) and Collector of Central Excise v. Ambalal Sarabhai Enterprises P. Ltd. [1990] 185 ITR 87 ; [1990] 77 STC 190 ; [1989] 43 ELT 214, which are relied upon are considered in regard to the proposition that for levy of excise duty the first condition is that as a result of the manufacture goods must come into existence and in regard thereto actual sale in the market is not determinative but the article must be capable of being sold in the market and known in the market as goods. Reliance is placed on the factual material tendered on record in the nature of the affidavit of the respondents for a factual position that in regard to the process of masticated rubber no other materials are added to the rubber except a negligible quantity (0.1 per cent.) of peptiser, which is added only to hasten the softening and homogenising process. There is an additional material in the said affidavit which is taken into consideration by this court to emphasize the fact that there is no market anywhere in the world where masticated rubber can be bought or sold.
16. If this is the factual position that the commodity is masticated rubber simpliciter and in regard to that there is no market anywhere in the world where masticated rubber can be bought or sold, the situation would have been a closed door one. The situation is totally otherwise as we have found above from the findings of fact in regard thereto.
17. At the cost of repetition, we find that the article is not masticated rubber simpliciter. The article is rubber compound and it is the final product as far as the assessee before us is concerned. Further, the undisputed position is that this rubber compound is available in the nature of sheets in pieces of 3' x 6' length. Nothing is done by the assessee in regard thereto further and the article which is an end-product is sold and thereafter it is utilised by some other companies like Apollo Tyres, etc., in turn for producing their final products, i.e., tyres, tubes, etc. The factual peculiarities are that the rubber compound is not an intermediary product but the final product. Further, it is not the position that the article is not marketed in the world as to be found in the decisions cited before us by learned senior standing counsel for taxes. The assessee does nothing else further than to sell his article and it is purchased by many other companies for the purpose of manufacture and production of their final products such as tyres, tubes, etc. For the above reasons, the situation would not be governed by the decisions placed for our consideration by reason of totally different and opposite factual peculiarities.
18. For the above reasons we answer the questions as follows :
I. T. R. No. 46 of 1993 ;
The question is answered in the affirmative, against the Revenue and in favour of the assessee.
I. T. R. No, 38 of 1996 :
The question is answered in the affirmative, against the Revenue and in favour of the assessee. I. T. R. No. 125 of 1996 :
The question is answered in the affirmative, against the Revenue and in favour of the assessee.
19. A copy of the judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.