Indian Kanoon - Search engine for Indian Law

By The Bench

1. This is a Special Bench case involving the following important question of law :

"Whether, on the facts and circumstances of the case, blending and bottling of spirit would amount to manufacture or production process so as to be entitled to deduction under s. 80HH of the IT Act, 1961 ?"

2. For the asst. yrs. 1985-86 and 1986-87 the assessee-company claimed deduction under s. 80HH of the Act. The business of the assessee-company was to process the raw alcohol and selling the same with a new brand name such as Haywards Fine Whisky, Haywards Gold Medal Whisky and Haywards Doctor's Brandy. It is the claim of the assessee that it is carrying on business of manufacturing different brands of IMFL products and by the result of various processes involved, the end product is a totally new commercial commodity and hence, it is entitled to deduction under s. 80HH of the Act. The said claim of the assessee for the asst. yr. 1983-84 the Calcutta Bench of Tribunal has considered the same issue and decided in favour of the Revenue and against the assessee. But during the course of hearing of the appeals for the assessment years under consideration the learned authorised representative of the assessee brought to our notice the fact that the Madras Bench of Tribunal in the case of ITO vs. A. Joseph Louis (1990) 33 ITD 485 (Mad) has decided the identical issue in favour of the assessee and against the Revenue. In these circumstances, the issue was referred to the President, Tribunal for constitution of a Special Bench for deciding the same. The President accordingly constituted the Bench under s. 255(3) of the IT Act.

4. The learned standing counsel Sri M. P. Agarwal, on the other hand, submitted that by mere blending of spirit and bottling the same there is no change in the commodity and hence the process of blending does not amount to manufacture. Quality of the original remains the end products also. He also relied on the decision of Bombay High Court in the case of CIT vs. Sterling Foods (Goa) (1995) 213 ITR 851 (Bom) wherein their Lordships have held that processing of prawns does not amount to manufacture or production of article. The learned standing counsel further submitted that reliance placed by learned authorised representative of the assessee in the case of Dy. Commr. of ST vs. Pio Food Packers (supra) is against the assessee. In this connection it is submitted that mere change of name is not sufficient to say that it is manufacturing, there should be full transformation of original commodity but in the assessee's case there is no transformation. Some degree of change is necessary but in the assessee's case no such change has taken place. Alcohol in the form of potable spirit remains alcohol till it is bottled and marketed with addition of mineral water and some essence. This process at best can be said to be 'processing' and not 'manufacturing'. It is also stated that the change should be substantial and considerable in order to say that the original article or thing has lost its originality. This clearly shows that the same involves only processing and not manufacturing. In this connection it is stated that 'rectified spirit' and 'potable spirit' are two different things. The assessee purchases potable spirit as per the agreement with Rampur Distillery which has already manufactured. Potable spirit is consumable and rectified spirit is not fit for human consumption as it is. In potable spirit alcohol content is 35 per cent which can be consumed but in case of rectified spirit the alcohol content is 95 per cent which cannot be consumed as it is, as the same is harmful. Distinguishing the case of Madras Bench of Tribunal - ITO vs. A. Joseph Louis (supra) the learned standing counsel submitted that the said case is not at all at par with the facts of the present case. In the said case it was rectified spirit but in the case on hand it is potable spirit. In the case of (1990) 33 ITD 485 (Mad) (supra) it is case of arrack and in the present case it is potable spirit. If spirit, water and essence is added to potable spirit and bottled up which is called IMFL and is marketable after bottling, this can only be said to be 'processing' and not 'manufacturing' as the identity of alcohol remains same as it was before processing. Potable spirit is already manufactured. Whisky, brandy and rum are one and common thread which has intoxicating quality. The degree or taste, etc. will differ, but alcohol remains as alcohol. The assessee purchases potable spirit and by adding water, etc. as indicated above, produces whisky, brandy and rum by putting them through different processes. Therefore, there is no manufacturing involved in those activities.

(vi) CIT vs. Anjani Kumar & Co. (P) Ltd. (1997) 227 ITR 786 (Raj); and 244 ITR 45 (St).

7. Lastly the learned standing counsel while summarising the arguments submitted that the production of whisky, brandy and rum amounts to only processing and not manufacturing and, therefore, the benefits of s. 80HH are not available to the assessee.

8. We have considered the submissions of the parties, gone through the appellate order in the assessee's own case for the asst. yr. 1983-84 and the decision reported in (1990) 33 ITD 485 (Mad) (supra). We have also perused the case laws relied on by both the parties which have already been mentioned in the foregoing paragraphs. We may state here the fact which is not in dispute is that the assessee purchases potable spirit from Rampur Distilleries as per the agreement. This potable spirit is already manufactured and does not require any further manufacturing. Only some processing is required to produce IMFLS like brandy, whisky and rum, etc. by adding certain percentage of water, colour, essence and for safe marketing requires bottling. Generally manufacturing means consumption of one article for production of another. But in the instant case no article or thing is consumed for production of another. Alcohol remains alcohol. There is only reduction of degree of alcohol content because of addition of water to potable alcohol and stirring it. This action at best can be said to be processing and not manufacturing. There should also be transformation of article or thing if manufacturing is involved for the same. But in the instant case no such transformation has taken place as alcohol remains alcohol both in the beginning and after processing also. In case of manufacturing also article or thing should be distinct and separate. In the instant case no new product has come as a bye-product which can be said as distinct and separate from original one and alcohol remained alcohol with reduced content of alcohol because of addition of water. There is also no change in its basic identity. Generally in case of manufacturing there will be change which is considerable and substantial but in the instant case it is not so. Here we consider necessary to refer s. 80HH of the IT Act, 1961. In order to encourage industrial activity in backward areas, this section grants deduction to an assessee, whose total income includes any profits and gains derived from an industrial undertaking (other than a mining undertaking) or the business of a hotel in a notified backward area. Sec. 80HH(1) defines the word "derived" from an industrial undertaking. The meaning of the term "derived" has been construed to have a definite narrow and restrictive meaning compared to the word "attributable" or "referable to". The industrial undertaking must itself be the source of the profits and gains and it would not be sufficient if a commercial connection is established between the profits and gains earned and the industrial undertaking. From s. 80HH(2) of the Act it is clear that the Act has not given any definition of the expression "industrial undertaking". The requirement of s. 80HH(2) is that to be eligible, the industrial undertaking, should be one which is engaged in the manufacture or production of an article or thing. Therefore, the expression can be understood by looking upto the meaning as understood in common parlance or by making a reference to its definition in cognate legislation. In this connection we may mention the Supreme Court's decision in the case of N. C. Budharaja & Co. (supra) wherein their Lordships have held that construction of a 'dam' did not amount to production or manufacture of an article or thing. That the words used in the Act, take their colour from the context in which these are used. That the expression "manufacture" or "produce" are normally associated with movable articles or goods. That the words "articles" and "things" are used interchangeably. That these words never denote construction of a dam or building. That the word "article" in s. 80HH(2) cannot include, a dam, a bridge, a building, a road, a canal or so on.

13. The reduction process of converting rectified spirit into country liquor involves mixing of water and stirring. By adding water, the alcoholic content is reduced to 35 per cent v/v to make it country liquor. Adding of spices is optional. The technical term "the reduction of liquor" means the addition of water to bring liquor from higher strength to lower strength. Mere mixing of water makes rectified spirit country liquor. Rectified spirit is an intoxicating liquor and it retains that character even after adding water to make it country liquor. Even whiskies and brandies are not ordinarily consumed as such but only after mixing water or soda. Addition of water or soda does not change the character of whisky or brandy either. Alcohol remains alcohol. Manufactured rectified spirit is used for the purpose of obtaining country liquor or IMFLs. It may be mentioned that rectified spirit is not used for potable purposes.