Income Tax Appellate Tribunal - Cochin
Indian Resins And Polymers vs Income-Tax Officer on 12 May, 1989
Equivalent citations: [1989]31ITD75(COCH)
ORDER
A. V. Balasubramanyam, Judicial Member
1. These cross-appeals arise out of the order of the CIT(A), dated 20-7-1988, passed in relation to assessment for the year 1983-84.
2. The assessee is a firm carrying on export business of cashew kernels and shell oil. Alleging that it is an industrial undertaking engaged in the manufacture or production of an article, two claims were made. One was for deduction under Section 80HH and the other was under Section 80J. Both were rejected by the Income-tax Officer almost for identical reasons. In appeal, the CIT(A) sustained the rejection in respect of the relief under Section 80HH. But the claim for 80J relief succeeded before the first appellate authority. The assessee is in appeal re-asserting its claim for relief under Section 80HH. The revenue has brought an appeal objecting to the relief allowed under Section 80J. Since the related facts are mostly common, the two appeals were consolidated for a common hearing.
3. Some relevant facts may be stated at the outset. Though the office of the assessee is in Quilon, the location of the industry is in a backward area and the CIT(A) mentions that there was no dispute about this. The assessee's business activity is like this: It purchases cashew nuts from various parties. These nuts are subjected to sun drying by the assessee itself. The articles arc given to another concern for getting the same roasted and shells peeled off. The assessee gets back the articles in that state and packs them up and ship as finished product. The finished product is called cashew kernels. This seems to be the state of affairs in which the manufacturing or production activity is carried on. The authorities below state that the assessee's activity was not one of manufacture or production of an article or thing. According to them it was a mere trading activity of purchasing and selling, for some of the important things such as roasting and dehusking are done by a third party.
4. Sri K.L. Kulathu, appearing for the assessee, placed great reliance upon the decision of the Madras High Court in the case of Dinod Cashew Corporation. v. Dy. CTO [1986] 61 STC 1. The petitioner therein exported cashew kernels after processing the raw cashew nuts purchased by it. The point was whether the cashew kernels exported and the raw cashew nuts purchased were commercially two different items. Though the question cropped up in the context of sales tax law, the logic explained in the judgment has all bearing to the appeals before us. The cashew nuts purchased were subjected to required process which ultimately resulted in cashew kernels. The two were said to be commercially different articles if the test of identity is to be applied. It follows that the new product is different from the article with which a start was made. It is a familiar principle that when a commercially new article is produced, either by a manual force or mechanical force or even by nature's own process, such as drying in sunlight, there is manufacture or processing of goods. If an authority is required, reference may be made to the decision of the Kerala High Court in the case of CIT v. Casino (P.) Ltd. [1973] 91 ITR 289 and this is what their Lordships have stated while considering the phrase "manufacture or processing of goods":
The term 'manufacture or processing of goods' has not been defined by the Finance Act, 1968. In its ordinary meaning 'manufacture' is a process which results in an alteration or change in the goods which are subjected to such manufacture. A Commercially new article is produced. The production may be by manual force, mechanical force or even by nature's own process such as drying by heat of the sun as in a salt pan. The real test is to see whether a commodity which in a commercial sense is different from the raw materials has resulted due to the manufacture. 'Processing' has in one sense a wider meaning than the term manufacture. But, in the context of the Finance Act, 1968, this does not appear to be the position. The Finance Act, 1968, gives certain benefits to industrial companies which satisfy certain requirements. The four categories of companies which are included in the term are those mainly engaged in the business of generation or distribution of electricity or any other form of power, or mainly engaged in the construction of ships or similarly engaged in mining, or in the manufacture or processing of goods. This indicates that the reference is to manufacturing concerns as against trading concerns.
In the Income-tax Act also the expression' 'manufacture or produce articles" found in Section 80HH(2) is not defined. The same comment applies to a similar expression found in Section 80J(4). Therefore, the ordinary meaning has to be given and if that is done, turning of raw cashew nuts into cashew kernels involves an activity of manufacture or production of an article.
5. The Hyderabad Bench of the Tribunal has in the case of Hermans Industries v. ITO [1987] 23 ITD 364 held that the activity of decortication of groundnuts into kernel should be held to be a manufacturing activity to be entitled to relief under Section 80HH.
6. Another point raised by the revenue was that the assessee did not own any plant or machinery and that it has no industrial undertaking, for the work of roasting and dehusking is got done by a third party. To repeat, the assessee dries the raw cashew nuts in sunlight. The ultimate packing is also done by the assessee. So part of the manufacturing activity is carried on by the assessee. It is true that the assessee gets the work of roasting and dehusking done by a third party. But it is under the direct supervision of the assessee. In this connection reliance was placed upon the decision of the Calcutta High Court in the case of Addl. CIT v. A. Mukherjee & Co. (P.) Ltd. [1978] 113 ITR 718. In this case, the assessee was a publisher of books. The assessee was getting the manuscript printed and bound by a third party and then selling it. No printing press had been owned by the assessee. But printing and binding were done under its direct supervision. Their Lordships held that the assessee was carrying on a manufacturing or processing activity. On the same analogy, the assessee, although a part of the work is got done by a third party, should be held to be manufacturing or producing cashew kernels out of raw. cashew nuts. It is not necessary that all the activities should be done by the assessee itself. Following the Calcutta High Court judgment we reject this point raised on behalf of the revenue.
7. Lastly, it was stated that the assessee did not fulfil the conditions under Section 80HH(2)(iv) inasmuch as it had only nine permanent workers. This is a case where the manufacturing process is carried on by the aid of power. Therefore it is enough if the assessee had employed ten or more workers. Though the assessee had employed nine workers on permanent basis, there were others who had been employed as casual workers. In fact, the accounts revealed that daily wages had been paid to several other workers the aggregate of which was Rs. 10,057. In fact, a deduction has also been granted by the Income-tax Officer as a business expenditure. There appears to be no dispute that the daily workers had been employed in addition to the nine workers on the permanent roll. The question is answered by the decision of the Karnataka High Court in the case of CIT v. K.G. Yediyurappa & Co. [1985] 152 ITR 152 wherein it is held that "worker", for the purpose of Section 80HH, may be either casual, permanent or even temporary. Such being the case, the conditions in Section 80HH(2)(iv) are clearly fulfilled because the assessee had employed many casual workers in addition to the nine persons on the permanent roll.
8. It was argued that the assessee might have engaged casual or temporary workers during the part of the year and that is not sufficient compliance of the law. In this connection the assessee referred to us the decision of the Bombay High Court in the case of CIT v. Harit Synthetic Fabrics (P.) Ltd. [1986] 162 ITR 640/26 Taxman 540 wherein a factory which commenced manufacturing activity with less than ten workmen but had more than ten workmen at the end of the year was sufficient compliance of law for the purpose of Section 80J(4)(iv). The same principle applies to Section 80HH(2)(iv) also. When the assessee is carrying on the drying work it should be employing casual workers for that purpose and there appears to be no reason to say that the condition in Section 80HH(2)(iv) is not fulfilled.
9. For the above reasons we hold that the assessee was entitled to relief under Section 80HH.
10. The CIT(A) has, following the decision of the Calcutta High Court in the case of A. Mukherjee & Co. (P.) Ltd. (supra), held that the assessee is a manufacturing concern and that it was entitled to the deduction under Section 80J. The condition in Section 80J(4)(iv) is similar to that found in Section 80HH(2)(iv). For both the reliefs the assessee should be engaged in the activity of manufacturing or production of an article. If the assessee was qualified to the relief under Section 80J there was no reason to say that the conditions for 80HH relief are not satisfied.
11. For the above reasons we are of the view that the assessee is entitled to relief under Section 80J.
12. In the result, the appeal by the assessee is allowed. The appeal by the revenue is dismissed.