Ita/144/2013 Of Commissioner Of Income Tax Chandigarh v. M/S Nawashahar Coop Sugar Mills Ltd

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH ITA No.144 of 2013(0&M)Date of decision: 12.8.2014 The Commissioner of Income Tax (IDS) Chandigarh Vs, .....- Appe M/s Nawanshahar Coop. Sugar Mills Limited, Nawanshahar ....mesponden CORAM: HON BLE MR. JUSTICK AJAY KUMAR MITTALHON BLE MR. JUSTICE FATEH DEEP SINGH Present: Mr. Yogesh Putney, Advocate for the appellant.Mr. S.K.Mukhi, Advocate for the respondent. Ajay Kumar Mittal,J.. 1]This order shall dispose of ITA Nos.144 to 147, 274, 275, 300and 301 of 2013 as according to the learned counsel for the parties, the factsinvolved in all the appeals tor the assessment years 2007-08, 2008-09,2009-10 and 2010-11 are similar and can be disposed of by one commonorder. However, the facts are being extracted from ITA No.144 of 2013. ) -ITA No.144 of 2013 has been preferred by the appellant underSection 260A of the Income Tax Act, 1961 (in short, “the Act”) against theconsolidated order dated 19.11.2012, Annexure A.3 passed by the IncomeTax Appellate Tribunal, Amritsar Bench, Amritsar (in short, “the Tribunal’) in ITA No.3 11(ASR)/2012, for the assessment year 2007-08. It was admitteon 24.2.2014 to consider following substantial questions of law:- “'1) Whether on the facts and circumstances of the case, thHon'ble [TAT is correct in law in holding that the sale ofbagasse 1s not covered under the definition of scrap as perexplanation (b) to Section 206C of the Income Tax Act, 19617 11) Whether on the facts and circumstances of the case, theHon'ble ITAT 1s right in law in holding that the assessee 1s nothable to collect tax at source under Section 206C(1) of theIncome Tax Act, 1961 in absence of declaration/certificate inForm No.27C in view of sub section (1A) to Section 206C ofthe Act?” 3. A few facts relevant for the decision of the controversy involved asnarrated in ITA No.144 of 2013 may be noticed. The assessee is acooperative society and is engaged in manufacturing of sugar. On29.12.2010, an inspection under section 133A of the Act was carried out atthe respondent Sugar mill. It was noticed by the Inspecting officer that therespondent assessee was selling molasses and bagasse generated during themanutacturing process to different persons without collecting tax at sourceunder section 206C of the Act. The assessee was given an opportunity toexplain how the provisions of Tax Collection at Source (TCS) were notapplicable. The assessee submitted that the provisions of TCS under section206C of the Act were not applicable on the sale of those two items 1.e.Molasses and bagasses since molasses generated during the manutacturing process could not be termed as scrap for the purpose of this section. It wasclaimed that this was the byproduct of the process of manufacture. Molasses was different from scrap as it was a distinct product produced during the ITA No.144 of 2013 (O&M) process could not be termed as scrap for the purpose of this section. It wasclaimed that this was the byproduct of the process of manufacture. Molasses was different from scrap as it was a distinct product produced during the ITA No.144 of 2013 (O&M) course of manufacture of sugar. In respect of bagasse, it was explained thatthe same was also used as bio fuel and renewable resource in themanufacture of pulp and paper products and building material and was notscrap. It was held that the material sold by the respondent assessee as wastewas not usable as such but required a number of processes before being ableto put to use. Therefore,the assessee was liable to collect tax at source onthe sale of molasses. In respect of bagasse, it was held that the same wasbeing sold to seller who used it for the manufacture of pulp, paper andbuilding material. Thus, the assessee was 1n default and liable to pay the taxinvolved to the credit of Central Government account. The Assessingofficer calculated the amount of default and also held the assessee to belable to pay interest till the date of the passing of the order vide order dated23.3.2011, Annexure A.1. Aggrieved by the order, the assessee filed appealbefore the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide orderdated 28.5.2012, Annexure A.2, the appeal was partly allowed. The CIT(A)upheld the action of the Assessing officer and also in charging interest undersection 206C (6) of the Act in respect of sale of molasses. However,inrespect of sale of bagasse by the assessee, the CIT(A) held that the assesseewas not liable to collect tax at source under section 206C(1) of the Act andconsequent demand of interest was also set aside. Not satisfied with theorder of CIT(A), the assessee as well as the revenue filed separate appealsbefore the Tribunal. Vide order dated 19.11.2012, Annexure A.3, the appealsof the revenue were dismissed whereas appeals filed by the assessee wereallowed. Hence the instant appeals by the revenue, 4. We have heard learned counsel for the parties and perused the ITA No.144 of 2013 (O&M) record. 5. In ITA Nos.274, 275, 300 and 301 of 2013, the primary issue 1swhether molasses would fall within the definition of ‘scrap’ or 'byproduct'’Similarly, in ITA Nos.144 to 147 of 2013, the point for adjudication iswhether bagasse 1s ‘scrap’ or will be treated as byproduct. 6. The question that arises for consideration 1s whether the molassesand bagasse sold by the assessee are scrap as per definition contained inExplanation (b) to section 206C of the Act so as to make it liable forcollection of tax at source on such sale under section 206C of the Act. 7. Learned counsel for the revenue contended that the assessee ismanufacturing sugar and two products are generated — molasses andbagasse. Section 206C of the Act has to be seen from the angle of the seller,Sugar mill is the seller. The two products are thus scrap for the sugar mill.The finding of the Assessing Officer had been confirmed by the CIT(A) thatmolasses is a scrap in ITA No.144 to 147 of 2013 whereas in other appealscontrary view was taken relating to bagasse. It was further submitted thatsection 206C(1A) of the Act was not complied with. 8. On the other hand, learned counsel for the assessee submitted thatthe bagasse and molasses were not scrap for the assessee. The same werebyproducts and therefore, provisions of Section 206C of the Act were notapplicable. The order passed by the Tribunal was supported by the learnedcounsel. Support was also drawn from the Sugarcane (Control) Order 1966(in short, “the Control Order’) issued by the department of Food, Ministryof Agriculture and Irrigation Government of India on 16.7.1966 to submitthat the molasses and bagasse are byproducts as 1s evident from Clause 3(f) of the Control Order, 9. After hearing learned counsel for the parties, we do not find anymerit in these appeals. 10. Before dealing with the issues involved, it would be appositeto refer to the relevant provisions:- 8. On the other hand, learned counsel for the assessee submitted thatthe bagasse and molasses were not scrap for the assessee. The same werebyproducts and therefore, provisions of Section 206C of the Act were notapplicable. The order passed by the Tribunal was supported by the learnedcounsel. Support was also drawn from the Sugarcane (Control) Order 1966(in short, “the Control Order’) issued by the department of Food, Ministryof Agriculture and Irrigation Government of India on 16.7.1966 to submitthat the molasses and bagasse are byproducts as 1s evident from Clause 3(f) of the Control Order, 9. After hearing learned counsel for the parties, we do not find anymerit in these appeals. 10. Before dealing with the issues involved, it would be appositeto refer to the relevant provisions:- “D2 06(1) Every person, being a seller shall, at the time ofdebiting of the amount payable by the buyer to the accountof the buyer or at the time of receipt of such amount fromthe said buyer in cash or by the issue of a cheque or draft orby any other mode, whichever is earlier, collect from thebuyer of any goods of the nature specified in column (2) ofthe Table below, a sum equal to the percentage, specified inthe corresponding entry in column (3) of the said Table, ofsuch amount as income-tax: TABLE Nature of GoodsPercenta.!1) Alcoholic liquorOne percent.forhumanCONnNSption114Tendu leavesFivepercenta2eln) Timber obtainedTwo and one half percentunder a forest leaseiv) Timber obtainedTwo and one half percentby any mode otherthan under a forestleasev) Any other forestTwo and one half percentproduce not beingtimber or tenduleavesva4ScrapOne percent Providedthat every person, being a seller shall at the time,during the period beginning on the Ist day of June, 2003and ending on the day immediately preceding the date onwhich the Taxation Laws (Amendment) Act, 2003 comes into force, of debiting of the amount payable by the buyerto the account of the buyer or of receipt of such amountfrom the said buyer 1n cash or by the issue of a cheque ordraft or by any other mode, whichever 1s earlier, collectfrom the buyer of any goods of the nature specified incolumn (2) of the Table as it stood immediately before theIst day of June, 2003, a sum equal to the percentage,specified in the corresponding entry in column (3) of thesaid Table, of such amount as income-tax in accordancewith the provisions of this section as they stoodimmediately before the Ist day of June, 2003.(1A) Notwithstanding anything contained in sub-section (1),no collection of tax shall be made in the case of a buyer,who is resident in India, 1f such buyer furnishes to theperson responsible for collecting tax, a declaration inwriting in duplicate in the prescribed for(and verified inthe prescribed manner to the effect that the goods referred toin column (2) of the aforesaid Table are to be utilised for thepurposes of manufacturing, processing or producing articlesor things and not for trading purposes. AR vAX AAI//////////Explanation — For the purposes of this section - (a)... (b) 'scrap' means waste and scrap from the manufacture ormechanical working of materials which 1s definitely notusable as such because of breakage, cutting up, wear andother reasons.......’ ll. Under Sub section (1) of Section 206C of the Act, the table given thereunder specifies the percentages to be collected at source by the seller inrespect of different commodities to which the section applies. The buyerwho 1is_ resident in India can give declaration in Form 27C to the seller tha AR vAX AAI//////////Explanation — For the purposes of this section - (a)... (b) 'scrap' means waste and scrap from the manufacture ormechanical working of materials which 1s definitely notusable as such because of breakage, cutting up, wear andother reasons.......’ ll. Under Sub section (1) of Section 206C of the Act, the table given thereunder specifies the percentages to be collected at source by the seller inrespect of different commodities to which the section applies. The buyerwho 1is_ resident in India can give declaration in Form 27C to the seller tha of manufacturing processing or producing articles or things and not fortrading purposes as per sub section (1A) and accordingly, the provisions ofsub section (1) shall not apply in that situation. According to Explanation(b) to section 206C of the Act, scrap means waste and scrap from themanufacture or mechanical working of materials which is definitely notusable as such because of breakage, cutting up, wear and other reasons,‘Scrap’ as per dictionary meaning is small piece, a payment or amount ofsomething especially one that 1s leftover after greater part has been usedwhereas ‘Waste’ is eliminated or discarded as no longer useful or required,In 21[St]Century dictionary, ‘by-product’ is described as anything produced inthe course of making another thing; secondary or incidental product andoften commercially important product that 1s formed at the same time as themain product during a chemical reaction or manufacturing process. In theabsence of any meaning assigned to ‘molasses’ under the Act, one has to fallback on the dictionary meaning. ‘Molasses’ is_ the thickest kind of treacle,left over at the very end of the process of refining raw sugar. It 1s producedas aresult of processing sugarcane into sugar when sugarcane Juice 1s boiledto obtain sugar. 12. Having noticed the dictionary meaning of ‘molasses’, it wouldbe expedient to advert to the uses for which molasses can be utilised. As perversion of the assessee, molasses can be used for the following purposes:- 2Uses of molasses Molasses can be used as the base material for fermentationinto rum. Molasses 1s commonly used in dark brewed beverages suchas stout and very heavy dark ales, Molasses 1s added to some brands of tobacco used forsmoking through a Middle Eastern water pipe (e.g.hookah,Shisha, narghile etc.). It 1s mixed into the tobacco withglycerin and flavorings; sometimes it 1s used with honey andother syrups or fully substituted by them, Blackstrap molasses may also be used as an ironsupplement for those who cannot tolerate the constipationassociated with other iron supplementation.Molasses 1s used as an additive in livestock feeds. Molasses is used in fishing groundbait. Chemical Molasses can be used as the carbon source for in situremediation of chlorinated hydrocarbons. Molasses is blended with magnesium chloride and used fordeicing. In Australia, molasses 1s fermented to produce ethanol foruse as an alternative fuel in motor vehicles. Industrial Molasses can be used as a chelating agent to remove rustwhere a resulted part stays a few weeks in a mixture of |part molasses and 10 parts water,Molasses can be used as a chelating agent to remove rustwhere a resulted part stays a few weeks in a mixture of |part molasses and 10 parts water, Molasses can be used as a minor component of mortar forbrickwork|Molasses can be used as a minor component of mortar forbrickwork| Ink rollers on printing presses were originally cast duringa mixture of molasses and glue.Ink rollers on printing presses were originally cast duringa mixture of molasses and glue. •Horticultural Molasses can be added to the soil of almost any plant topromote microbial activity.” Thus, keeping in view the definition and the uses of molasses, it cannot be termed as scrap or waste so as to fall under Explanation (b) of Section 206Cot the Act. 13. Similarly, "Bagasse' is the fibrous matter that remains after Molasses can be used as a minor component of mortar forbrickwork|Molasses can be used as a minor component of mortar forbrickwork| Ink rollers on printing presses were originally cast duringa mixture of molasses and glue.Ink rollers on printing presses were originally cast duringa mixture of molasses and glue. •Horticultural Molasses can be added to the soil of almost any plant topromote microbial activity.” Thus, keeping in view the definition and the uses of molasses, it cannot be termed as scrap or waste so as to fall under Explanation (b) of Section 206Cot the Act. 13. Similarly, "Bagasse' is the fibrous matter that remains after sugarcane 1s crushed to extract juice. The utility of 'Bagasse’ as enunciatedby the assessee 1s Summarized as under:- 6Bagasse Kuel Bagasse 1s often used as a primary fuel source for sugarmills; when burnt in boilers, it produces sufficient heatenergy to generate steam for making electricity whichfulfills all the needs of steam as well as power to operatethe sugar mill for manufacturing sugar which is mainproduct of the sugar mill.Bagasse 1s often used as a primary fuel source for sugarmills; when burnt in boilers, it produces sufficient heatenergy to generate steam for making electricity whichfulfills all the needs of steam as well as power to operatethe sugar mill for manufacturing sugar which is mainproduct of the sugar mill. Paper Around 5-10% of paper production worldwide 1sproduced from agricultural crops, valuing agriculturalpaper production at between $5 and $10 billion. One ofthe most notable of these is bagasse. Paper production 1sthe second largest revenue stream from bagasse. Thelargest 1s electricity cogeneration.Around 5-10% of paper production worldwide 1sproduced from agricultural crops, valuing agriculturalpaper production at between $5 and $10 billion. One ofthe most notable of these is bagasse. Paper production 1sthe second largest revenue stream from bagasse. Thelargest 1s electricity cogeneration. Other uses Bagasse 1s also made into cattle feed whereby it 1s mixedwith molasses. The resulting byproduct has been marketedin Australia as 'cow candy'.” The assessee had sold the bagasse to M/s ABC Paper Mills Limited forbeing used for the manufacture of pulp, paper and building materials. Thus,'Bagasse’ also would not satisfy the test of being scrap or waste underSection 206C of the Act. 14. The molasses and bagasse are byproducts of manutacturing|process. They are distinct products and are marketable as such. The valueand utility attached to these products is much more than describing them asmere waste or scrap. It 1s, thus, concluded that the 'molasses' and 'Bagasse’ ITA No.144 of 2013 (O&M) Act. Infact,it 1s a by-product as it has several uses noticed herein above.Clause 3(f) of the Control Order dated 16.7.1966 describes molasses andbagasse as by-product as under:- “3(f). the realization made from sale of by products viz.Molasses, bagasse and press mud or their imputed value.” 15. In so far as molasses 1s concerned, CIT(A) had concurred withthe Assessing Officer to hold that 1t was scrap and Section 206C of the Act was attracted. However, the Tribunal reversed the said findings as under:- ‘7. We have heard both the parties and perused the relevantmaterial available with us alongwith the orders passed by theRevenue Authorities as well as the documentary evidencefiled by the Id. counsel for the assessee. The issue underconsideration depends upon the interpretation of the meaningof scrap as it provided in Explanation (b) to Section 206C ofthe Act. For the sake of convenience, the same is reproducedas under: "Explanation - For the purposes of this section,- abh............... [(b) “‘scrap' means waste and scrap trom the manufacture ormechanical working of materials which is definitely notusable as such because of breakage, cutting up, wear andother reasons;” was attracted. However, the Tribunal reversed the said findings as under:- ‘7. We have heard both the parties and perused the relevantmaterial available with us alongwith the orders passed by theRevenue Authorities as well as the documentary evidencefiled by the Id. counsel for the assessee. The issue underconsideration depends upon the interpretation of the meaningof scrap as it provided in Explanation (b) to Section 206C ofthe Act. For the sake of convenience, the same is reproducedas under: "Explanation - For the purposes of this section,- abh............... [(b) “‘scrap' means waste and scrap trom the manufacture ormechanical working of materials which is definitely notusable as such because of breakage, cutting up, wear andother reasons;” 7.1. The Hon'ble Delhi High Court in the case of CIT vs,Deep Chand and others 257 ITR 756 relied upon the decisionof the Hon'ble Supreme Court 7 ITA No.327 to 330(Asr)/2012 in the case of Gurudevdatta VKSSS Maryadit vs. Stateof Maharashtra AIR [2001] SC, 1980 in which it was held as under: "It is a cardinal principle of interpretation of statute that thewords of a statute must be understood in their natural, ordinary or popular sense and construed according to theirgrammatical meaning, unless such construction leads to someabsurdity or unless there is something in the context or in theobject of the statute to suggest to the contrary. The goldenrule is that the words of a statute must prima facie be giventheir ordinary meaning. It is yet another rule of constructionthat when the words of the statute are clear, plain andunambiguous, then the courts are bound to give effect to thatmeaning, irrespective of the consequences. It is said that thewords themselves best declare the intention of the law-giver,The courts have adhered to the principle that efforts should bemade to give meaning to each and every word used by theLegislature and it is not a sound principle of construction tobrush aside words in a statute as being inapposite surpluses, ifthey can have a proper application in _ circumstancesconceivable within the contemplation of the statute." 7.2. By following the above decision, the Hon'ble HighiCourt held as under: "It is now a well settled principle of law that a literal meaningShould be attributed to a statute. The golden rule ofinterpretation should ordinarily be adhered to." 7.3. The ordinary meaning of scrap and waste, as have beenprovided in Oxford English Dictionary provides. (a) Scrap - Small piece or amount of something especially;one that is leftover after part has been used - materialdiscarded for reprocessing. (b) Waste - eliminated or discarded as no longer useful orrequired. 7.4. The ordinary meaning of scrap and waste thus has alsimilarity in words. Ordinarily, the word "AND" is used in aconjunctive sense. This word is used to connect clauses orsentences or to coordinate words in the same clauses. 7.5. The explanation to section 206C of the IT Act providesthe meaning of scrap means “waste and scrap" from themanufacture or mechanical working of material which is 7.3. The ordinary meaning of scrap and waste, as have beenprovided in Oxford English Dictionary provides. (a) Scrap - Small piece or amount of something especially;one that is leftover after part has been used - materialdiscarded for reprocessing. (b) Waste - eliminated or discarded as no longer useful orrequired. 7.4. The ordinary meaning of scrap and waste thus has alsimilarity in words. Ordinarily, the word "AND" is used in aconjunctive sense. This word is used to connect clauses orsentences or to coordinate words in the same clauses. 7.5. The explanation to section 206C of the IT Act providesthe meaning of scrap means “waste and scrap" from themanufacture or mechanical working of material which is definitely not usable as such because of breakage, cutting up,wear and other reasons. In the above definition the importantwords used in the definition of scrap are "waste and scrap" -"from manufacture" and “which is". The word "waste andscrap’ are one item. Thereafter, the word used is "from" themanufacture or mechanical working of material. It wouldmean that the waste and scrap being one item should arisefrom the manufacture or mechanical working of material. It is,therefore, necessary to read the words waste and scraptogether which are generated out of manufacturing process ofthe assessee. The words waste and scrap should have nexuswith the manufacturing or mechanical working of material.Thereafter, the word used in "which is" definitely not usable.The word "is" as used in this definition of the scrap meant forsingular item i.e. "waste and scrap". The word waste “whichis" denotes to singular item and thus the singular item wouldbe waste and scrap. The words waste and scrap thus cannot beread differently. 7.6. We have thoroughly gone through the findings of the Id.first appellate authority on the issue in dispute and we are ofthe view that the findings of the Id. first appellate authorityare not based on any material or evidence and the Molasseswould not form part of the definition as provided inExplanation (b) to section 206C of the Act. Thus, theExplanation has wrongly been applied in the case of theassessee because the assessee is engaged in the extraction ofsugar from sugar-cane and the sugar. Molasses is produced asby-product. It is obtained when sugarcane juice is boiled toobtain sugar. Molasses is by-product arise during theprocessing of sugarcane. It is not wastage and scrap asdiscussed in the foregoing paragraphs. 7.7. As regards the mechanical working of materials that theMolasses is obtained when the sugar is crystallized fromsugarcane juice after boiling and clarifying. The process ofcrystallization takes place when the sugarcane juice is saturated to such an extent that the sugarcane juice separatesinto sugar crystals and molasses and that is the stage wheremolasses and sugar crystals are separated, no mechanicalworking of materials is involved. 7.7. As regards the mechanical working of materials that theMolasses is obtained when the sugar is crystallized fromsugarcane juice after boiling and clarifying. The process ofcrystallization takes place when the sugarcane juice is saturated to such an extent that the sugarcane juice separatesinto sugar crystals and molasses and that is the stage wheremolasses and sugar crystals are separated, no mechanicalworking of materials is involved. 7.8. Keeping in view the aforesaid discussions alongwithvarious decisions rendered by the Hon'ble Supreme Court aswell as the Hon'ble High Courts, we are of the view thatMolasses is not a scrap as held by the Revenue Authorities inthe impugned orders. It is not waste or scrap and cannot beused as such. Thus it does not fall within the meaning of scrapas defined in Explanation (b) to section 206C of the Act.Therefore, the assessee cannot be held to be in default and isnot required to deduct tax under section 206C(6) of the Act onthe molasses and no interest could be charged under Section206(7) of the Act, as charged by the Revenue Authority in theimpugned order. As pointed out in the foregoing paragraphsthat the Id. first appellate authority has deleted the addition onaccount Bagasses itself in the impugned years, which hasbeen upheld by this Bench in the appeal filed by the Revenuevide order dated 19.11.2012 in assessee's own case in [TANos. 311 to 314(Asr)/2012 [ITO, (TDS)-1, Jalandhar vs. M/s.Nawanshhar Co-op. Sugar Mills Ltd.; Nawanshhar. The AOhas made the addition on account of Molasses on the similaranalogy as applicable on the sale of Bagasses but the Id., CIT(A) has wrongly made the addition in dispute by upholdingthe action of the AO in holding the assesse to be in defaultunder section 206C(6) of the Act in respect of sale ofMolasses. As per detailed discussions above, the definition offscrap clearly establishes that the Molasses is not a scrap. We,accordingly, cancel the impugned order on the issue in disputeby accepting the appeal filed by the assessee. Thus, the appealof the assessee 1s allowed.” 16. The CIT(A) after considering the matter, held that bagasse was al byproduct and not scrap or waste. It was noticed as under:- “15. As far as bagasse 1s concerned, | find that apart from theuse of bagasse for manufacturing paper by which use alone itwould fall in the same category as molasses for the reasonsdiscussed above, it is quite often and commonly used as a fuel,usually in the sugar mills themselves. The sugarcane fibrouswaste 1s initially moist after crushing, but most mills use themas fuel after drying. Hence, even though bagasse 1s 1n the natureof scrap and waste because of its nature, since it can be useddirectly as a fuel, I hold that it should not be considered asscrap for the purposes of section 206C of the Act.” The Tribunal concurred with the findings recorded by the CIT(A). 17. The Tribunal held that bagasse and molasses both are byproductsand not scrap or waste. We do not find any error or infirmity in the approachof the Tribunal. As a result, ‘molasses’ and 'bagasse' 1n the present case donot fall within the scope of scrap under the provisions of section 206C(1)and therefore no tax collected at source was required to be made by theassessee and in such a situation, demand of 1% of the sale price wasunjustified. Once sub section (1) of Section 206C was not applicable,equally sub section (1A) thereof would also have no applicability to thepresent case. 18. In view of the above, substantial questions are answered in|favour of the assessee 1n all the appeals and against the revenue, 19. Consequently, all the appeals stand dismissed. (Ajay Kumar Mittal)vudge August 12, 2014 ?.%? GURBAX SINGH (Fateh Deep Singh)Judge