Allahabad High Court
Commissioner Of Income-Tax vs Sultan And Sons Rice Mill on 5 November, 2004
Equivalent citations: (2005)193CTR(ALL)444, [2005]272ITR181(ALL)
Author: Prakash Krishna
Bench: Prakash Krishna
JUDGMENT Prakash Krishna, J.
1. The judgment of the court was delivered by Prakash Krishna J.-At the instance of the Revenue, the following question of law has been referred by the Income-tax Appellate Tribunal, Delhi, for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the assessee was entitled to relief under Sections 80J and 80HH for the assessment years 1976-77 and 1977-78 ?"
2. The assessee is a registered firm manufacturing rice and dealing in food grains. Its claim for relief under Sections 80J and 80HH of the Income-tax Act, 1961 (hereinafter referred to as "the Act") in respect of its rice manufacturing business was disallowed by the Income-tax Officer on the ground that the assessee did not employ ten or more workers in the manufacturing process and, therefore, it did not satisfy the conditions of Section 80J(4)(iv) and Section 80HH(2)(iv) of the Act. But the claim of the assessee was accepted by the Commissioner of Income-tax (Appeals) for the assessment year 1976-77 as well as by the Income-tax Appellate Tribunal.
3. The controversy in the present case centres round the question of the number of workers employed in the manufacturing process carried on by the industrial undertaking. Section 80J(4) of the Act reads as under :
"(4) This section applies to any industrial undertaking which fulfils all the following conditions, namely :
(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence ;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose ;
(iii) it manufactures or produces articles, or operates one or more cold storage plant or plants, in any part of India, and has begun or begins to manufacture or produce articles or to operate such plant or plants, at any time within the period of thirty-three years next following the 1st day of April, 1948, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking ;
(iv) in a case where the industrial undertaking manufactures or produces articles, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power."
4. The aforesaid sub-section lays down the conditions which an industrial undertaking has to fulfil in order to claim the benefit of Section 80J of the Act. In the present case it is not in dispute that the assessee-respondent does not fulfil the conditions Nos. (i), (ii) and (iii) of Section 80J of the Act. The claim was rejected by the Income-tax Officer only on the ground that in the rice mill of the assessee less than ten persons were employed as workers in the manufacturing process carried on with the aid of power. The Income-tax Officer relying on the definition of "manufacturer" as given in the Factories Act observed that the assessee's rice plant was automatic and to manufacture rice and rice bran, paddy was stored at one point of the machine and when the machine was started the paddy was sucked by the machine automatically and the rice and rice bran came out of the other end and to run the machine, the service of one mechanic and two labourers was needed as the whole process was automatic and, therefore, in the manufacturing process the number of persons employed never exceeded ten. The Appellate Assistant Commissioner as well as the Tribunal have accepted the contention of the assessee that the word "manufacturing process" should be given a wide interpretation. Ordinarily, it starts with the procurement of raw material and terminates with the production of the finished article. All the workers engaged throughout the process would be considered to be employed in the manufacturing process of rice and rice bran.
5. Ordinarily, the provision in a taxing statute granting incentive for promoting growth and development should be construed liberally. These provisions should be interpreted so as to advance the objective of the provision and not to frustrate it (Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 (SC)). The apex court in the case of Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195, while interpreting Section 15C of the old Indian Income-tax Act, 1922, which corresponds to Section 80J of the Act has observed that the principal object of the section is to encourage the setting up of new industrial undertakings by offering tax incentives within a period of 13 years from April 1, 1948. The section is an exemption section. After the country has gained independence in 1947 it is most essential to give a fillip to trade industries from all quarters. That seems to be the background for insertion of Section 15C of the Act, which corresponds to Section 80J of the Act.
6. At the juncture it is desirable to notice the findings recorded by the Tribunal, relevant to the issue involved in the present reference. Repelling the contention of the departmental representative the Tribunal found that the rice mill business is a seasonal business and, therefore, it is not necessary that all the workers should have been engaged or employed throughout the year. After taking into consideration the trading and profit and loss account for the year ended March 31, 1997, the Tribunal found that payments were made to the hulling labourers, chaukidar, mistri, helpers and munims. It found that all these persons are employed in the manufacturing process. The books of account also show details of persons who were engaged as palledar, hulling labour, bhoosi hatwai, fataknewala (women labour and paddy dryer). It has come to the conclusion that in a rice factory the labourers will be engaged as and when needed. It cannot be doubted that the palledar will be needed in the factory because they have to take bags inside the factory and they are also needed for putting paddy in the machine. Hulling labourers will be needed when work goes on and bhoosi has to be removed and cleaning has to be done before the paddy is put in the machine and the paddy has to be dried. No period of employment is required under Sections 80J and 80HH for employing the particular type of worker. On consideration of the material on record a finding has been written by the Tribunal that the assessee has employed more than ten workers in the factory and it is not necessary that all the workers should be paid for the entire period when the factory runs.
7. The question which now falls for determination is whether all the workers described above can be said to be employed in the manufacturing process of the industrial undertaking within the meaning of Sections 80HH(2)(iv) and 80J(4)(iv) of the Act. The Tribunal has answered it by placing reliance upon a judgment of the apex court reported in J.K. Cotton Spinning and Weaving Mill Co. v. Labour Appellate Tribunal of India [1963-64] 25 FJR 93 ; AIR 1964 SC 737. The apex court was considering the controversy in that case from a different angle with reference to the expression "employed in any industry occurring under the Industrial Disputes Act". The question involved therein was to the effect that the above expression would include persons employed in operations incidental to the main industry. The facts of that case do show that the persons malis (gardener) employed in the bungalow with attached garden in the colony of the mill were employed by the mill to look after these gardens and their conditions of service are determined by the mill. Their work was supervised and controlled by the mill and payment was made by the mill. In this background it was held that malis were included within the expression "employed in any industry" in the definition of "workmen" in Section 2(s) of the Industrial Disputes Act. The apex court was considering entirely a different controversy in that case, not involved in the present case. The interpretation by the Supreme Court on the expression "employed in any industry" will have hardly any bearing on the taxing statute like income-tax while construing Sections 80HH and 80J of the Act.
8. Learned counsel for the assessee submitted that in the absence of any definition of the word "worker" under the Income-tax Act, the court has to take its ordinary meaning, which may mean casual, permanent or temporary. Reliance was placed upon CIT v. K. G. Yediyurappa and Co. [1985] 152 ITR 152 (Karn) in support of the contention that the worker should include casual, permanent or temporary workers. Further reliance was placed upon CIT v. Harit Synthetics Fabrics P. Ltd. [1986] 162 ITR 640 (Bom). The Bombay High Court in the case has held that it is not requisite that a new industrial undertaking should have employed ten or more workers throughout the entire period in which relief was claimed. A reading of the provision requires that in order to qualify for the relief and satisfy the requirement, the undertaking must have employed ten or more workers substantially during the period in which relief was claimed. The theory of substantial compliance of the provision of Section 80J(4)(iv) of the Act was propounded in this case. The aforesaid judgment has been followed by the Bombay High Court in its subsequent judgment reported in CIT v. Ormerods (I.) (P.) Ltd. [1989] 176 ITR 470. It was held that in order to qualify for relief and satisfy the requirement of the provision ; the undertaking must have employed ten or more workers substantially during the period for which the relief was claimed. There could be no hard and fast rule by which one could determine whether there has been substantial compliance.
9. Learned counsel for the Department has placed reliance upon CIT v. N.C. Budharaja and Co. [1993] 204 ITR 412 (SC). The apex court in that case was considering the controversy as to whether construction of a dam can be regarded as manufacturing or production of article. It was held that construction of a dam does not amount to manufacture or production of article. It was further observed that the principle of adopting liberal interpretation which advances the purpose and object of the beneficent provision cannot be carried to the extent of doing violence to the plain and simple language used in the enactment. It would not be reasonable or permissible for the court to rewrite the section or substitute words of its own for the actual words employed by the Legislature in the name of giving effect to the supposed underlying object. The above rule does not [apply to] the case of the Department and it does not throw any light on the present controversy.
10. The provisions of Sections 80HH and 80J have been enacted with a view to encourage the establishment of new industrial undertakings and the object has been sought to be achieved by granting exemption or concession from tax on a certain portion of profits for the specified period. Sub-section (4) of Section 80J lays down the conditions which an industrial undertaking is required to fulfil to claim the benefit under Section 80J of the Act. Section 80J of the Act applies to the industrial undertaking and prescribes conditions qua industrial undertaking and to grant relief to the assessee. Section 80J(4)(iv) has to be interpreted in the light of other provisions of Section 80J. The emphasis under Section 80J is on the phrase "industrial undertaking manufacturers or produces articles" ten or more workers would be employed in the manufacturing process carried on by the industrial undertaking. The words "employs ten or more workers in the manufacturing process" normally would cover the entire process carried on by the industrial undertaking of converting the raw material into finished goods. The work of ten or more persons employed in the manufacturing process should be integrally connected with the manufacturing of rice. Their work should be reasonably connected with and be part of the manufacturing process of rice. The Income-tax Officer while holding that only two or three persons are required to run an automatic rice plant has interpreted the words "manufacturing process in a very narrow manner". The manufacturing process includes within its ambit that the raw material to be filled in the plant in such a shape and condition, which may be acceptable or can be fed in the plant. In the case of rice mill the palledars are required to bring paddy from the store or godown to the starting point of the plant. Drying of paddy is also necessary, as found by the Tribunal before putting the paddy in the plant. The workers are also required to clean the plant and remove bhoosi, husk, etc. The assessee claimed that the manufacturing process started after the point of purchase of paddy. Paddy is cleaned and dried and thereafter brought and put into the machine. The rice comes out of the machine along with broken rice thereafter. There is further cleaning of rice to make it fit for marketing. The finished product emerges only when it is marketable. All these activities are integral parts of the manufacturing process of rice. These activities have to be necessarily carried out to obtain the finished product, i.e., rice in marketable condition after removing the broken rice and cleaning it if it is necessary.
11. The apex court in the case of J.K. Cotton Spinning and Weaving Mills Co. Ltd. v. STO [1965] 16 STC 563, while interpreting the expression "in the manufacture of goods" in Section 8(3)(b) of the Central Sales Tax Act has held that normally it encompasses the entire process carried on by the dealer of converting the raw material into finished goods. We are conscious of the fact that the above expression was interpreted by the apex court in the context of the Central Sales Tax Act. But in our opinion the same interpretation can also be put to the expression "employed ten or more workers in the manufacturing process." Our view also finds support from the object and purpose of enactment of Sections 80HH and 80J of the Act. The section is intended to encourage setting up of new industry. It must be construed liberally in the broad commercial sense from the common sense (CIT v. Orient Paper Mills Ltd. [1974] 94 ITR 73 (Cal)). The expression "manufacturing process" should be interpreted in its ordinary sense and should not be confined or restricted to the actual manufacturing alone. The processes which are intimately connected with actual manufacturing process will also be within the aforesaid expression. The Tribunal, as a last fact-finding authority has found that the workers employed for bringing the paddy bags from outside and keeping it in the factory can also be called "workers employed in the manufacturing process" as the manufacturing process cannot be carried on unless paddy bags are available represents the correct view of law and is in consonance with the plain meaning of the word implied under Section 80J(4)(iv) of the Act. The apex court in the case of CIT v. Gwalior Rayon Silk Manufacturing Co. Ltd. [1992] 196 ITR 149 has held as follows with regard to the interpretation of statutes granting deduction, exemption, or relief to the taxpayer (headnote) :
"It is settled law that the expressions used in a taxing statute would ordinarily be understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative intention. It is equally settled law that, if the language is plain and unambiguous one can only look fairly at the language used and interpret it to give effect to the legislative intention. Nevertheless tax laws have to be interpreted reasonably and in consonance with justice adopting purposive approach. The contextual meaning has to be ascertained and given effect to. A provision for deduction, exemption or relief should be construed reasonably and in favour of the assessee."
12. It is said that a statute is best understood if we know the reason for it. The reason for a statute is the safest guide to its interpretation. The words of a statute take their colour from the reason for it. No provision in the statute and no word of the statute may be construed in isolation. Every provision and every word must be looked at generally before any provision or word is attempted to be construed. The setting and pattern are important. In Poppatlal Shah v. State of Madras [1953] 4 STC 188 ; AIR 1953 SC 274, the apex court has observed as follows (page 276) :
"It is a settled rule of construction that to ascertain the legislative intent, all the constituent parts of a statute are to be taken together and each word, phrase or sentence is to be considered in the light of the general purpose and object of the Act itself."
13. Further, the Supreme Court in the case of Federation of A.P. Chambers of Commerce and Industry v. State of A.P. [2001] 247 ITR 36, 39, This quotation appears in Modipon Ltd. v. CIT [2001] 247 ITR 40 (Delhi) at p. 45. has made the following observations :
"A taxing statute is to be strictly construed, In the illuminating words of Lord Wensleydale and reaffirmed by Lord Halsbury and Lord Simon, 'the subject is not to be taxed without clear words for that purpose ; and also that every Act of Parliament must be read according to the natural construction of its words' (see Micklethwait, In re [1855] 11 Ex. 452 ; Tennant v. Smith [1892] AC 150 (HL) and Saraswati Sugar Mills v. Haryana State Board, AIR 1992 SC 224). In a classic passage, Lord Cairns stated that 'if the person sought to be taxed comes within the letter of the law, he must be taxed however great the hardship may appear to the judicial mind to be' (see Partington v. Attorney-General [1869] LR 4 (HL) 100, referred to in J.K. Steel Ltd. v. Union of India, AIR 1970 SC 1173 and Ransom (Inspector of Taxes) v. Higgs [1974] 3 All ER 949 (HL))."
14. The Supreme Court in the decision reported in CIT v. J.H. Gotla [1985] 156 ITR 323 has observed as follows (headnote):
"If a strict and literal construction of the statute leads to an absurd result, i.e., a result not intended to be subserved by the object of the legislation ascertained from the scheme of the legislation, then, if another construction is possible apart from the strict literal construction, then, that construction should be preferred to the strict literal construction.
15. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational result."
16. What is even more significant is the observation of the court in this case wherein it was observed (headnote) :
"Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction."
17. In a subsequent decision reported in Saroj Aggarwal v. CIT [1985] 156 ITR 497 again the Supreme Court observed as follows (headnote) :
"Facts should be viewed in natural perspective, having regard to the compulsion of the circumstances of a case. Where it is possible to draw two inferences from the facts and where there is no evidence of any dishonest or improper motive on the part of the asscssee, it would be just and equitable to draw such inference in such a manner that would lead to equity and justice. Too hypertechnical or legalistic approach should be avoided in looking at a provision which must be equitably interpreted and justly administered."
18. We are of the view that the various processes starting from purchase of the raw material and till the sale of finished goods from an integral part of the manufacturing process and the workers and labourers employed in these processes are workers employed in the manufacturing process.
19. In view of the above discussion, the Tribunal has rightly interpreted the provision of law and there is no legal error in the order of the Tribunal. We, therefore, answer the question in the affirmative, i.e., against the Department and in favour of the assessee.