Madras High Court
Commissioner Of Income-Tax vs Sacs Eagles Chicory on 28 October, 1998
Equivalent citations: [2000]241ITR319(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu
JUDGMENT R. Jayasimha Babu, J.
1. The question referred to us at the instance of the Revenue is as to "whether, on the facts and in the circumstances of the case, the assessee-firm is an industrial undertaking eligible for deduction under Sections 80HH, 80-I and 80) of the Income-tax Act, 1961 ?" The year of assessment is 1981-82.
2. The activity of the assessee has been described in the order of the Appellate Assistant Commissioner thus : "The assessee purchases chicory roots from farmers. These are dried up, roasted and ground and then sold in the form of powder." It had been contended by the assessee before the Income-tax Officer that the assessee has erected machinery for the purpose of roasting and grinding and, therefore, the assessee was engaged in processing and manufacturing chicory powder.
3. The Income-tax Officer and the Appellate Assistant Commissioner being of the view that the assessee was only engaged in trading activities and not manufacturing activities, denied the assessee's claim for relief under Sections 80HH, 80-I and 80J of the Act which required, inter alia, that the assessee be a manufacturer of goods or articles. The Tribunal, however, relying on the fact that the assessee had been registered as a small-scale industry and its claim for being treated as an industry had been accepted under the Wealth-tax Act and held that the assessee was engaged in the manufacture of chicory powder.
4. Learned counsel for the Revenue submitted that the view taken by the Tribunal is wholly untenable and contrary to law laid down by this court in the case of State of Tamil Nadu, represented by the Deputy Commissioner of Commercial Taxes v. Thiruvalargal Sarathy Chicory [1993] 3 MTCR 161. Dr. A. S. Anand, then Chief Justice of this court as he then was and who presided over the Bench, while dealing with the contention of the State that the preparation of chicory powder involves process of manufacture in which chicory roots are consumed, held thus (headnote) :
"By mere crushing the chicory roots into chicory powder it cannot be said that 'consumption' has taken place. When chicory roots are converted into powder by no stretch of imagination can it be said that the chicory roots had been 'consumed' in the manufacture of other goods for sale, as chicory powder is only a changed form of chicory roots purchased by the assessee."
5. Learned counsel for the assessee sought to distinguish that ruling on the ground that in that case, the court was only concerned with the meaning of the word "consume" occurring in Section 7A of the Tamil Nadu General Sales Tax Act and that the court did not consider the question as to whether the preparation of powder from chicory roots involved a process of manufacture. Counsel further submitted that the test for determining as to whether there is manufacture is to find out as to whether the goods that emerge as a result of the process are distinct and commercially different and that if that test is applied, it must be held that there is in this case a process of manufacture.
6. Learned counsel for the assessee placed reliance on the apex court in the case of Deputy CST, Board of Revenue (Taxes) v. Pio Food Packers [19803 46 STC 63 wherein the apex court held that slicing and packaging the pineapple did not amount to manufacture as the commodity remains pineapple before and after the process. That was also a case that arose under the Sales Tax Act and it was found by the court that pineapple fruit when processed into pineapple slices for the purpose of being sold in sealed cans, there is no consumption of the original pineapple fruit for the purpose of manufacture. The court observed that there was no difference between pineapple fruit and the pineapple slices and that the slices had the same identity as the original fruit.
7. Pathak J., as he then was, described the test to be applied for determining as to whether a commodity is consumed in the manufacture of another, thus (page 65) :
"The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be regarded as still retaining its original identity."
8. The test so laid down in the context of the provisions of the Sales Tax Act was adopted by the Supreme Court for determining the meaning of the word "manufacture" under the Income-tax Act also in the case of CIT v. N. C. Budharaja and Co. [1993] 204 ITR 412 (SC).
9. Counsel submitted that chicory powder is a commercially different article from chicory roots and that there was a change in identity and even though the chicory root may not be said to be consumed in the preparation of chicory powder, chicory powder being different from chicory root, there was a process of manufacture involved in making of chicory powder.
10. Counsel also referred to the decision of the apex court in the case of Ganesh Trading Co. v. State of Haryana [1973] 32 STC 623 wherein it was held that the paddy and rice were distinct commercial commodities for the purpose of the Sales Tax Act and that the rice could not be regarded merely as a different form of paddy. The decision of this court in the case of CIT v. R. Narayanaswami Naicker and Sons [1984] 149 ITR 283 was also referred to. In that case, the court held that the ginning process is also a manufacturing process, by which cotton and cotton seeds which are different commercial goods are separated. The case of CIT v. M. R. Gopal [1965] 58 ITR 598 of this court was also relied on wherein it was held that the process employed in converting boulders into small stones with the aid of machinery is a manufacturing process and the undertaking so engaged in such process was an industrial undertaking entitled to exemption under Section 15C of the Indian Income-tax Act, 1922.
11. Applying the test laid down in the case of Deputy CST v. Pio Food Packers if chicory roots retain their identity as chicory even after the process of converting chicory roots into powder it cannot be said that there is any process of manufacture. As observed by the apex court where there is no essential difference in identity between the original commodity and the processed article it would not be possible to say that the commodity has been consumed in the manufacture of another. Manufacturing thus, involves the consumption of one or more articles in order to produce a different article. Consumption is necessary in the process of manufacture and there can be no manufacture without consumption.
12. This court in the case of State of Tamil Nadu v. Tvl. Sarathy Chicory [1993] 3 MTCR 161 has held that chicory roots are not consumed when chicory powder is prepared. It is implicit in that finding that chicory roots and chicory powder have the common identity as chicory. The fact that processing is involved in obtaining chicory powder from chicory root does not inevitably lead to the conclusion that the process is one of manufacture. If the original identity is not lost even after the process, there is no manufacture.
13. The fact that the chicory powder is used for consumption in combination with coffee powder does not make the chicory powder any different in so far as its identity is concerned, as chicory. Chicory powder is chicory in powder form and nothing else. Mere change in the form of the same commodity does not necessarily involve change of identity. The pineapple fruit when plucked from the tree and even after it is cut into pineapple slices retains the same identity as pineapple, Chicory powder and chicory root have the common identity of being chicory. The change in the form to powder in the case of chicory and to slices in the case of pineapple does not result in a change of identity.
14. We are, therefore, unable to accept the argument persuasively put forth by learned counsel for the assessee that the term manufacture is very wide and that every article which has a commercial identity should be regarded as the result of the process of manufacture, if that article had suffered some process, before emerging in the form in which it is regarded as commercial commodity. The decision of this court in the case of State of Tamil Nadu v. Tvl. Sarathy Chicory [1993] 3 MTCR 161 has clearly held that there is no consumption of chicory root in the preparation of chicory powder.
15. We, therefore, answer the question referred to us in favour of the Revenue and against the assessee.