Orissa High Court
Commissioner Of Income-Tax vs S.L. Agarwala And Co. on 20 November, 1991
Equivalent citations: [1992]197ITR239(ORISSA)
Author: A. Pasayat
Bench: A. Pasayat
JUDGMENT A. Pasayat, J.
1. At the instance of the Revenue, the following question has been referred under Section 256(1) of the Income-tax Act, 1961 (for short" the Act"), by the Income-tax Appellate Tribunal, Cuttack Bench, Cuttack (for short, " the Tribunal"), for adjudication :
" Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the assessee's claim for investment allowance should be allowed ?"
The controversy lies within a very narrow compass. In its return of income for the assessment year 1980-81, M/s. S. L. Agarwala & Co., a partnership firm (hereinafter referred to as " the assessee"), claimed deduction under Section 32A of the Act on the footing that its machinery is used for the purpose of manufacture or production of articles and things. According to the assessee, it produces small iron pieces by conversion of big iron ingots into small pieces. For such activity, it installed a crane which lifted huge iron ingots with magnetic force and then hit them against another hard material as a result of which small pieces of iron came into existence. The original material, that is, the big iron ingot, is commercially and intrinsically separate and different from the small iron pieces manufactured. The plea of the assessee did not find favour with the Assessing Officer who held that there was no manufacture involved and, therefore, the conditions as prescribed in Section 32A are not satisfied. In appeal, the Appellate Assistant Commissioner held that the operation undertaken by the assessee is an operation of processing and did not involve manufacturing activities. In further appeal, the Tribunal held that disintegration of big boulders into small iron pieces amounted to manufacture. For coming to such conclusion, the Tribunal relied on a decision of the Madras High Court in CIT v. M. R. Gopal [1965] 58 ITR 598. The said decision was rendered with reference to the exemption granted under Section 15C of the Indian Income-tax Act, 1922. The Tribunal observed that the language used in Section 15C is similar to that of Section 32A(2) of the Act and, therefore, the use of crane to convert big iron ingots into small pieces of iron constituted a manufacturing activity, and the two products were commercially different, and the articles or things were produced by the assessee with the help of the crane in question. In view of this conclusion of the Tribunal, the Commissioner of Income-tax, Orissa, sought for a reference which was accepted by the Tribunal and the reference has been made to this court under Section 256(1) as indicated above.
2. " Investment allowance" is granted under Section 32A of the Act. Sub-section (1) requires that the machinery or plant (a) should be owned by the assessee, (b) should be wholly used for the purposes of the business carried on by him, and (c) should be the machinery or plant specified in Sub-section (2), i.e., it should be new machinery or plant installed in an industrial undertaking for the purposes of the business of manufacture or production of articles or things.
3. Whether a particular activity is the manufacturing activity or not is dependent upon several factors and no strait-jacket formula or general principle can be applied. Though manufacture implies a change, every change is not a manufacture. There must be a transformation of some kind and a new and different article must emerge having distinctive features.
4. The word " manufacture " used as a verb is generally understood to mean " 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. (See Union of India v. Delhi Cloth and General Mills Co, Ltd., AIR 1963 SC 791). Etymologically," manufacture" is a compound word from the Latin " manu" meaning " hand " and " facere " which means made. In its primary sense," manufacture " is the action or process of making by hand. In modern sense," manufacturing" is fashioning of a raw or wrought material by manual or mechanical manipulation, resulting in its transformation. The term " manufacture" is explained in Corpus Juris Secundum (Volume 55, page 685), as follows :
" In order to constitute manufacturing, the original material must undergo a transformation so that a new and different article or product emerges ; but what constitutes a new and different article is a question which has caused Considerable difficulty in the courts.
In determining whether an article is or is not a manufacture or whether a process or operation is or is not manufacturing, one of the important factors is the extent of the change that has been effected in the original material, since, while every change in an article is the result of treatment, labor and manipulation, every change is not manufacture ; something more is necessary and the application of labor must be carried out to such an extent that the article suffers a species of transformation and a new and different article emerges. This characteristic has been the subject of considerable discussion and the courts have experienced some difficulty in determining what constitutes a new and different article."
As observed by the Supreme Court in Aditya Mills Ltd. v. Union of India [1989] 73 STC 195 ; AIR 1988 SC 2237, manufacture is complete as soon as the raw material undergoes some change and a new substance or article is brought into existence. The new substance or article must have a distinct name, character or use. The new commodity must be a commercially separate and distinct commodity having its own character and use.
5. The word " manufacture" said Abbott C. J. in R v. Wheeler (R. V.) (2 B. & Aid. 349 ; 106 E.R. 392) (quoted in Stroud's Judicial Dictionary), "has been generally understood to denote, either a thing made which is useful for its own sake and vendible as such as a medicine, a stove, a telescope, and many others; ..."
6. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine can be called manufacture.
7. In Kher Stone Crusher v. General Manager, District Industries Centre [1990] 79 STC 149, the question that came up before the Full Bench of the Madhya Pradesh High Court was whether crushing of boulders into ballast, metal or "gitti" of specified shapes and sizes amounted to manufacture. The court observed that when bigger stones and boulders are cut and shaped into specified shapes and sizes in crushers for manufacture of ballast and metal, there is transformation of the stone and a new and different commercial article comes into existence. The end-product is the result of treatment, labour and manipulation and, therefore, such operation amounts to manufacture.
8. The Supreme Court in the case of Deputy Commissioner of Sales Tax v. Pio Food Packers [1980] 46 STC 63 ; AIR 1960 SC 1227, held that manufacture implies a change, but every change is not manufacture, though every change in an article is the result of treatment, labour and manipulation. Every change is not manufacture because something more than the treatment, labour or manipulation is necessary, i.e., there must be transformation ; a new and different article must emerge, " having a distinctive name, character or use". A similar observation was made by the American Supreme Court in Anheuser-Busch Brewing Association v. United States (52 L. Ed 356). The Supreme Court in Chowgule and Co. Pvt. Ltd. v. Union of India [1981] 47 STC 124 ; AIR 1981 SC 1014, held that (at page 130), " the test that is required to be applied is : does the processing of the original commodity bring into existence a commercially different and distinct commodity ?"
9. The Tribunal has recorded a finding of fact that a different and distinctive commercial commodity came into existence on account of the activity undertaken by the assessee. As indicated above, no strait-jacket formula or general principle can be applied to find out whether there is manufacture. In view of the categorical factual finding recorded by the Tribunal that a different and distinct commercial commodity came into existence, there is no scope for taking a different view while exercising a reference jurisdiction. Factual conclusions, unless shown to be perverse, without basis or material and/or resultant of non-application of mind, are not to be upset while deciding cases in the exercise of reference jurisdiction. It is not to be understood that, in each and every case where a big boulder or ingot is crushed, a different commercial article comes into existence. It would depend upon the facts involved. In the case at hand, we have affirmed the conclusion of the Tribunal, because it is a factual one and we are exercising a reference jurisdiction. We do not consider it to be a case where the conclusion is either perverse or not based on materials.
10. Our answer to the reference is in the affirmative, in favour of the assessee and against the Revenue. No costs.
S.K. Mohanty, J.
11. I agree.