Madras High Court
The Commissioner Of Income-Tax vs M/S.Balaji Hotels & Enterprises Ltd on 30 July, 2007
Author: P.P.S.Janarthana Raja
Bench: D.Murugesan, P.P.S.Janarthana Raja
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 30.07.2007 CORAM : THE HONOURABLE MR.JUSTICE D.MURUGESAN AND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.1085 of 2007 The Commissioner of Income-tax, Nungambakkam High Road, Chennai-600 034. ..Appellant Vs. M/s.Balaji Hotels & Enterprises Ltd., New No.365, O.No.267, Anna Salai, Teynampet, Chennai-18. ..Respondent Appeal under Section 260A of the Income-tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Chennai Bench "A", Chennai in I.T.A. No.1348/Mds/2003 dated 04.08.2006 for the assessment year 1999-2000. For Appellant : Mrs.Pushya Sitaraman, Sr.Standing Counsel for Income-tax Department JUDGMENT
(Judgment of the Court was delivered by P.P.S.Janarthana Raja, J.) This appeal is filed under Section 260A of the Income Tax Act, 1961 by the Revenue, against the order of the Income Tax Appellate Tribunal, Chennai Bench "A", Chennai in I.T.A. No.1348/Mds/2003 dated 04.08.2006 raising the following substantial questions of law:-
"1. Whether on the facts and circumstances of the case, the Tribunal was right in holding that the assessee was entitled to deduction under section 80-IA for the assessment year 1999-2000?
2. Whether on the facts and circumstances of the case, the Tribunal was right in holding that the process of printing activity will amount to manufacture in order to quantify for the benefit under section 80-IA?
3. Whether on the facts and circumstances of the case, the Tribunal was right in not following the judgment in the case of Western India Pharmaceuticals Services (P) Ltd. reported in 230 ITR Page 96 wherein it was held by the Bombay High Court that the activity of printing manufactures name on Pharmaceuticals Capsules will not amount to manufacture?"
2. The facts leading to the above substantial questions of law are as under:
The assessee is a widely held Public Limited Company and is engaged in the construction and promotion of a five star Hotel Project. The hotel project has not commenced its business activity during the year. The assessee company, however, derived income from various other Units and Divisions by selling IMFL, Beer, Steel and Labels. The relevant assessment year is 1999-2000 and the corresponding accounting year ended on 31.03.1999. The assessee filed its Return of income on 30.12.1999, admitting income of Rs.3,07,55,690/-. The Return of income was processed under Section 143(1)(a) of the Income-tax Act ("Act" in short) on 31.03.2000. Later, notice was issued under Section 143(2) of the Act. During the year, the assessee reported an income of Rs.1,55,20,243/- from its Printing Unit at Pondicherry and claimed 100% deduction under Section 80-IA of the Act. The assessee furnished details pertaining to the machinery and raw materials and the process of printing labels. The Assessing Officer rejected the claim of the assessee on the ground that the assessee has not engaged in the manufacture or production of any article or thing, as contemplated under Section 80-IA(2)(iii) of the Act, which stood as on the relevant period, and completed the assessment under Section 143(3) of the Act, and also relied on this Court judgment in the case of Commissioner of Income-tax Vs. Sacs Eagles Chicory, [2000] 241 ITR 319 (Mad). Aggrieved by the order, the assessee filed an appeal to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) allowed the appeal and directed the Assessing Officer to recompute the deduction by allowing the deduction of Rs.1,55,20,243/- claimed under Section 80-IA of the Act. Aggrieved, the Revenue filed an appeal to the Income-tax Appellate Tribunal ("Tribunal" in short). The Tribunal dismissed the appeal holding that the assessee is entitled to the benefit of Section 80-IA of the Act on the ground that printing is a manufacturing process, by following the Gujarat High Court judgment in the case of Commissioner of Income-tax, Gujarat Vs. Ajay Printery Private Ltd. [1965] 58 ITR 811 (Guj). Hence the present tax case by the Revenue.
3. Learned Senior Standing Counsel appearing for the Revenue submitted that the assessee is not entitled to the relief under Section 80-IA of the Act as the labels were mainly pasted on bottles which were meant for IMFL trading activities. It is also further submitted that the assessee company involves certain amount of processing which does not result in the transformation of the original commodity and in this case there is no conversion which takes place and also no different end product emerges. Learned Senior Standing Counsel appearing for the Revenue relied on the decision of the Supreme Court in the case of Union of India and Others Vs. J.G. Glass Industries Ltd. and Others, (1998) 2 SCC 32 and the decision of the Bombay High Court in the case of Commissioner of Income-tax Vs. Western India Pharmaceutical Services Pvt. Ltd. [1998] 230 ITR 96 (Bom.) to support the contention.
4. Heard the counsel. The assessee derived income of Rs.1,55,20,243/- from its Printing Division situated at Sedarapet Industrial Estate, Pondicherry. The Commissioner, Villaianur Commune Panchayat, Pondicherry has issued the Licence in No.39/95/VCP on 25.4.1995 to the assessee company for manufacture of printed paper label. The Government of Pondicherry, Industries Department has issued a Certificate on 10.6.1996 to the effect that the assessee company is a medium scale unit set up at B-20 & 34, Industrial Estate, Sedarapet, Pondicherry for the manufacture of printed paper labels. Further, it has granted exemption from the payment of CST / PGST for a period of five years with effect from 19.01.1995. The Factory Inspectorate, Pondicherry has issued registration and licence to the assessee company to work as factory vide their letter in No.6247/4976 during February 1996. The Printing Unit of the assessee company is mainly engaged in the manufacture of printed paper labels. The assessee company uses paper, ink, fountain solution and varnish as raw materials and transforms them into printed labels, books and pamphlets, depending on the nature of the order. The raw materials mentioned above are converted into different and distinct commercial products. The word "manufacture" has not been defined in the Income-tax Act. The word "manufacture" has been defined in the Black's Law Dictionary (Eighth Edition) as under:-
"A thing that is made or built by a human being, as distinguished from something that is a product of nature; esp. any material form produced by a machine from an unshaped composition of matter. Manufactures are one of the statutory categories of inventions that can be patented. Examples of manufactures are chairs and tires."
The Supreme Court considered the scope of the words "manufacture" and "production" in the case of Commissioner of Income-tax Vs. N.C.Budharaja and Co. and Another, [1993] 204 ITR 412 (SC), and held as follows:-
"The words "manufacture" and "production" have received extensive judicial attention both under this Act as well as the Central Excises Act and the various sales tax laws. The word "production" has a wider connotation than the word "manufacture". While every manufacture can be characterised as production, every production need not amount to manufacture. The meaning of the expression "manufacture" was considered by this Court in Deputy CST v. Pio Food Packers [1980] 46 STC 63, among other decisions. In the said decision, the test evolved for determining whether manufacture can be said to have taken place is, whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity. Pathak J., as he then was, stated the test in the following words (at page 65):
"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."
The word "production" or "produce" when used in juxtaposition with the word "manufacture" takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the bye-products, intermediate products and residual products which emerge in the course of manufacture of goods."
In the case of Commissioner of Income-tax Vs. Tara Agencies, [2007] 292 ITR 444 (SC), the Supreme Court considered the scope, distinction and the meaning of the words "manufacture", "production" and "processing" by considering its various earlier decisions. In the present case, the assessee produces printed paper labels which is recognised in the trade as a new and distinct commodity. The raw materials required for producing these printed paper labels are paper rolls, inks, fountain solution and varnish. Out of these raw materials, the assessee produces new and different article, namely, labels. The raw materials and the end product are different and distinct and the end product was also sold to various parties and the entire sales were exempt from sales tax for a period of five years. The land allotted by the Pondicherry Industrial Estate is only for setting up a factory for manufacture of the printed labels. The relevant provision of the Act as on the relevant period reads as under:-
"80-IA. Deduction in respect of profits and gains from industrial undertakings, etc., in certain cases.-
(1) ...
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:-
(i) ...
(ii) ...
(iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India:
Provided that the condition in this clause shall, in relation to a small scale industrial undertaking or an industrial undertaking referred to in sub-clause (b) of clause (iv) which begins to manufacture or produce an article or thing during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March, 2000, apply as if the words "not being any article or thing specified in the list in the Eleventh Schedule" had been omitted;"
In this case, the assessee manufactures and produces labels and hence satisfies the conditions prescribed under the above provision. In the case of Commissioner of Income-tax, Gujarat Vs. Ajay Printery Private Ltd., cited supra, the Gujarat High Court held as follows:-
"Similarly, when a printer prints a book or a journal or a pamphlet or a balance-sheet, his basic or raw materials are paper and ink with which he, either by hand or by the aid of machinery, produces a different article. No one would say when he sells a book or supplies to his customers pamphlets or balance-sheets that the order which the customer had placed with him was an order for ink and paper, or that the printer, when he accepted that order, accepted the order for supplying paper and ink. The order was for the supply and sale of the pamphlet or the balance-sheet or share certificates, a commodity or an article quite different from the raw materials from which it is made and the use of which would be different from the use of the raw materials used in producing it. Even if the limited construction of the word "manufacture" were to be adopted, i.e, transformation and conversion of the materials into a different commodity the raw materials losing their identity, the article produced would still be a totally different article from the materials, namely, paper and ink, which are consumed in making it. The paper and ink which are used in the process of making pamphlets, balance-sheets or the book, by themselves would be of no value and cannot have apart from the contents a realisable value if sold as such materials. When they are used the only commodity which would have any commercial value would be the finished product, namely, the balance-sheet or the profit and loss account, the share certificate, the pamphlet, etc. Considering the consistent view that has been adopted by the various High Courts while deducing the meaning of the word "manufacture" or "manufacturer" and the object with which Explanation 2 has been inserted in section 23A of the Act, we are of the view that the business carried on by the respondent-company of printing balance-sheets, profit and loss accounts, dividend warrants, pamphlets, share certificates, etc., required by the textile mills referred to in the statement of the case and other textile mills would be a business which consists wholly of manufacture and, therefore, clause (ii) of Explanation 2 to section 23A would apply in the present case. The Calcutta case in Sati Prasanna v. Md. Fazal had a different problem and cannot apply. In our view the construction placed upon clause (ii) of Explanation 2 by the Tribunal was correct."
Having regard to the fact that the assessee has fulfilled the conditions prescribed under Sub-Section (2)(iii) to Section 80-IA of the Act, which stood as on the relevant period, and the principles enunciated in the High Court and Supreme Court judgments, cited supra, we are of the view that the printing process would constitute manufacturing activity. Learned Senior Standing Counsel appearing for the Revenue heavily relied on the Supreme Court decision in the case of Union of India and Others Vs. J.G. Glass Industries Ltd. and Others, cited supra, wherein it was held as follows:-
"On an analysis of the aforesaid rulings, a twofold test emerges for deciding whether the process is that of "manufacture". First, whether by the said process a different commercial commodity comes into existence or whether the identity of the original commodity ceases to exist; secondly, whether the commodity which was already in existence will serve no purpose but for the said process. In other words, whether the commodity already in existence will be of no commercial use but for the said process. In the present case, the plain bottles are themselves commercial commodities and can be sold and used as such. By the process of printing names or logos on the bottles, the basic character of the commodity does not change. They continue to be bottles. It cannot be said that but for the process of printing, the bottles will serve no purpose or are of no commercial use."
In that case, the bottles continue to be bottles and hence the basic character of the commodity does not change. But in the present case, new commodity emerges from the raw materials. Hence the said judgment has no relevance to the present case. The counsel also relied on the Bombay High Court judgment in the case of Commissioner of Income-tax Vs. Western India Pharmaceutical Services Pvt. Ltd. [1998] 230 ITR 96 (Bom.). In that case, the only business of the assessee was printing the manufacturers' names on pharmaceutical capsules and the issue was whether the said activity amounts to processing of goods within the meaning of the definition of "industrial company" as contained in Section 2 of the Finance Act, 1976, or not. After considering the arguments, the Bombay High Court held as follows:-
"On a careful perusal of the definition of "industrial company" and the context and setting in which the expression "manufacture or processing of goods" appears, we are of the clear opinion that printing of manufacturers' names on pharmaceutical capsules cannot be regarded as the business of processing goods within the meaning of clause (c) of sub section (9) of section 2 of the Finance Act, 1976, and a company engaged in such activity cannot be regarded as an "industrial company". In our view, by printing of manufacturers' names the pharmaceutical capsules cannot be regarded as processed. In fact, the pharmaceutical capsules do not undergo any "process" whatsoever in the course of printing of the manufacturer's name thereon. The capsules remain in the same condition. There is no alteration in the nature and character thereof. Moreover, the expression "processing" appears in the definition of "industrial company" with the expression "manufacture". The full expression is "engaged in the business of manufacture or processing of goods". The expression "processing" has not been defined. It is, therefore, to be interpreted in a practical and workable manner in the context and setting in which it appears. That can be done by applying the doctrine of noscitur a sociis by reference to the words, phrases or expressions associated with it, which in the instant case is "manufacture". So construed, for the purpose of the definition of "industrial company", one can be said to be engaged in the business of processing of goods only if as a result of the process undertaken by him, there is some alteration in the nature or character of the goods."
The facts involved in the above Bombay High Court judgment is entirely different from the facts involved in the present case. In that case, the Bombay High Court was of the view that printing manufacturers' names in the pharmaceutical capsules cannot be regarded as processed. In fact, the said capsules do not undergo any "process" whatsoever in the course of printing of the manufacturer's name thereon. The capsules remain in the same condition and also there is no alteration in the nature and character thereof. In view of the same, the Bombay High Court correctly held that it does not amount to processing. Hence this judgment will not help the case of the Revenue. In the present case, both the Commissioner of Income-tax (Appeals) as well as the Tribunal have given a concurrent finding that the assessee produces new, distinct and different commercial product and hence they were of the view that the printing process would constitute manufacturing activity. The findings given by both the authorities below are based on valid materials and evidence and the order of the Tribunal is not a perverse one. In the case of Commissioner of Income-tax Vs. P.Mohanakala [2007] 291 ITR 278 (SC), the Supreme Court held that whenever there is a concurrent finding by the authorities below, no interference should be called for by the High Court.
5. In view of the foregoing reasons, we do not find any error or illegality in the order of the Tribunal so as to warrant interference. Hence, no substantial questions of law arise for consideration of this Court and accordingly, the tax case is dismissed. No costs.
km To
1. The Assistant Registrar, Income-tax Appellate Tribunal, Bench "A' Chennai.
2. The Commissioner of Income-tax (Appeals) Central-II, Chennai.
3. The Deputy Commissioner of Income-tax Central Circle II(5), Chennai-34.