Mr. S. R. Rivonkar, Advocate For The Revenue v. N.a. Britto, Jj

IN THE HIGH COURT OF BOMBAY AT GOA Income Tax Appeal No. 33/20 0 2 The Commissioner of Income Tax, having Office at Aayakar Bhavan, Patto Plaza, Panaji, Goa. ............ Appellant. V/s. 1. M/s. Sesa Goa (India) Ltd.Having Office at Rua de Ourem,Panaji, Goa. Having Office at Rua de Ourem,Panaji, Goa. 2. The Income Tax Appellate Tribunal,Panaji Bench, Aayakar Bhawan, Patto Plaza, Panaji, Goa. Panaji Bench, Aayakar Bhawan, Patto Plaza, Panaji, Goa. .......... Respondents. Mr. S. R. Rivonkar, Advocate for the Revenue. Mr. V. Frank, Advocate for the respondent Assessee. CORAM : R.M. LODHA & N.A. BRITTO, JJ. DATE : 23RD AUGUST, 2005. ORAL JUDGMENT : (Per R. M. LODHA, J.) This appeal under Section 260A of the Income Tax Act,1961 is at the instance of the Revenue. 2 2.The appeal has been admitted on the followingsubstantial questions of law : I. Whether on the facts and in the circumstancesthe ITAT was justified in holding that the assesseeis entitled for deduction on account of investmentallowance, by ignoring the fact that the assesseeis engaged only in processing activity and not inproduction and manufacturing of any article orthing, ignoring the decision of the Hon'bleSupreme Court in the case of "CIT V/s. N.C.Budharaja & Co" (204 ITR 412) ?the ITAT was justified in holding that the assesseeis entitled for deduction on account of investmentallowance, by ignoring the fact that the assesseeis engaged only in processing activity and not inproduction and manufacturing of any article orthing, ignoring the decision of the Hon'bleSupreme Court in the case of "CIT V/s. N.C.Budharaja & Co" (204 ITR 412) ? II. Whether on the facts and in the circumstances ofthe case the ITAT, was justified in allowing theclaim of the assessee of Rs.90,000 /- being feespaid to the Registrar of Companies for increasingthe authorised capital of the company for thepurpose of issuing bonus shares, based on thedecision of the Hon'ble Bombay High Court inthe case the ITAT, was justified in allowing theclaim of the assessee of Rs.90,000 /- being feespaid to the Registrar of Companies for increasingthe authorised capital of the company for thepurpose of issuing bonus shares, based on thedecision of the Hon'ble Bombay High Court in the case of "Bombay Burmah Trading Corp. v/s.CIT" (145 ITR 793), ignoring the decision of theHon'ble Supreme Court om the case of "PunjabState Development Corp. V/s. CIT" (225 ITR792) ?CIT" (145 ITR 793), ignoring the decision of theHon'ble Supreme Court om the case of "PunjabState Development Corp. V/s. CIT" (225 ITR792) ? III.Whether on the facts and in the circumstances ofthe case the ITAT was justified in directing togrant the depreciation of Rs.76,368 /- totallythe case the ITAT was justified in directing togrant the depreciation of Rs.76,368 /- totally ignoring explanation - 8 to Section 43(1) of theI.T. Act ?" 3.As regards the substantial question of law No.I, thelearned Counsel for the Revenue fairly conceded that in view of thedecision of this Court in the case of Commissioner of IncomeTax vs. Sesa Goa Ltd. 2004 ITR 126, he does not have anythingto say and as per the said decision, the said question has bedecided against the Revenue and in favour of the assessee. 4.In the case of Commissioner of Income Tax vs. Sesa Goa Ltd. (supra), the Division Bench considered the Judgment ofthe Apex Court in the case of CIT Vs. N.C. Budharaja and Co.[1993] 204 ITR 412 and Judgments of various High Courts whereinN. C. Budharaja and Co. were considered and observed thus: 3.As regards the substantial question of law No.I, thelearned Counsel for the Revenue fairly conceded that in view of thedecision of this Court in the case of Commissioner of IncomeTax vs. Sesa Goa Ltd. 2004 ITR 126, he does not have anythingto say and as per the said decision, the said question has bedecided against the Revenue and in favour of the assessee. 4.In the case of Commissioner of Income Tax vs. Sesa Goa Ltd. (supra), the Division Bench considered the Judgment ofthe Apex Court in the case of CIT Vs. N.C. Budharaja and Co.[1993] 204 ITR 412 and Judgments of various High Courts whereinN. C. Budharaja and Co. were considered and observed thus: “ The Apex Court in the case of CIT v. N.C.Budharaja and Co. [1993] 204 ITR 412, has againreiterated the expression 'manufacture' used inDeputy CST (Law) Board of Revenue (Taxes) v. PioFood Packers [1980] 46 STC 63 (SC). The apexcourt noted both the words `manufacture' and'production' have received extensive judicialattention both under the Income tax Act as well as the Central Sales Tax Act and various sales taxlaws. It further observed that the expressions'manufacture' and 'production' are normallyassociated with movable articles and goods, bigand small. We may now consider some of thejudgments of the High Courts relied upon by thelearned counsel for the purpose of finding outwhether extraction or raising of ore would amountto manufacture or production, considering theentire process from the stage of extraction till itsexport as it would be an integral part of thebusiness of mining. The first case we have beforeus is CIT v. Gogte Minerals (No.2) [1997] 225 ITR60 (Karn). It is no doubt true that in this case thetest as applied in case of CIT vs. N.C. Budharajaand Co. [1993] 204 ITR 412 (SC), was notconsidered. The case involved excavation of ironore. The Division Bench of the Karnataka HighCourt considering the issue, observed, that whatwas being considered was mining operation carriedout for excavation of iron ore and sequestering ofsome other materials. It involves a process andthere is complete transformation of material fromone form to another altogether and does notcontinue to be in same form, as we found in theearth before escavation. When such complicatedprocess is involved, it cannot be said that there isno manufacturing activity because what is brought in to existence is iron ore. Thus it must be statedthat the process involved is a manufacturingactivity. It may be noted that what the DivisionBench of Karnataka High Court observed was thatmere removing from the earth by itself is notmanufacture, but various processes which thereafter are applied would amount to manufacture.The next Judgment we have is the case of CIT v.Mysore Mineral Ltd. (No.1) [2001] 250 ITR 725(Karn). This was a case in respect of mining ofgranite. The Division Bench held that it wouldamount to manufacture relying on an earlierjudgment in the case of CIT v. Mysore Minerals[1994] 205 ITR 461 (Karn). The criticism againstthis judgment is that this judgment relied uponan earlier judgment in the case of Mysore Mineralswhich has been reversed by the Apex Court in CITv. Mysore Minerals Lt. [2001] 247 ITR 301, and assuch would not longer be a good law. Consideringthat aspect, we do not propose to consider the ratioof the said judgment. The next judgment reliedupon is Deputy CIT v. Mysore Minerals Ltd [2001]250 ITR 730 (Karn). In this case also what wasinvolved was mining of granite. The learnedDivision Bench of the Karnataka High Court reliedupon the judgment in CIT v. N.C. Budharaja andCo. [1993] 204 ITR 412 (SC) and explained anddistinguished it. In that case the process involved extracting granite and converting it into slabs,cutting and polishing them. This was held to be amanufacturing activity. In CIT v. Mysore MineralsLtd. [2001] 250 ITR 728 (Karn)., again the matterinvolved granite. The Division Bench observed thatit stands concluded in view of the Judgment in CITv. Mysore Mineral Ltd. [2001] 250 ITR 725 (Karn.). Therefore, if the tests as laid down in thejudgments of the apex court and considered in thevarious judgments of the High Courts and evenconsidering that various processes are involved,would mere extraction of iron ore from the earthamount to `manufacture'? In the instant case,considering the material on record, as noted by theapex court, iron ore is merely extracted by removingthe top soil. That by itself would not amount tomanufacture, if the tests considered by the apexcourt in its various judgments are applied. InChowgule and Co. Pvt. Ltd. v. Union of India[`1981] 41 STC 124 (SC), which was a case underthe Central Sales Tax Act and what was underconsideration was Section 8 and rule 13 of therules, the apex court held that even if the variousprocesses are applied, it is commercially the samearticle, namely, ore. The composition may change,the content may change, but as noted by the apexcourt, the ore extracted commercially continues tobe ore. It would, therefore, not be possible for us to 5. accept the contention that extraction of ore and thethe various processes which it undergoes until it issold amounts to `manufacture'. In our opinion, thevarious processes applied do not amount to`manufacture' and, consequently, it would bedifficult to hold that the extraction of ore amountsto manufacture." The Division Bench went on to observe further as follows : 5. accept the contention that extraction of ore and thethe various processes which it undergoes until it issold amounts to `manufacture'. In our opinion, thevarious processes applied do not amount to`manufacture' and, consequently, it would bedifficult to hold that the extraction of ore amountsto manufacture." The Division Bench went on to observe further as follows : “ The question there is whether extraction of oreand the various processes would involve`production'. The expression `production' again isno longer res integra, having been considered bythe apex Court in the case of CIT v. N.C. Budharajaand Co. [1993] 204 ITR 412. The apex Court notedin the said judgment that the word `production' or'produce when used in juxtaposition with the word`manufacture' takes in bringing into existence newgoods by a process which may or may not amountto manufacture. Three High Courts, at least, havetaken the view that the extraction of ore wouldamount to `production'. We first have the judgmentof the Andhra Pradesh High Court in CIT v.Singareni Colleries Co. Ltd. [1996] 221 ITR 48. ADivision Bench of the Andhra Pradesh High Courtwas considering the expression `production'. The Andhra Pradesh High Court noted the argumentof the Revenue against the finding of the Tribunalwhich had held that extracting coal or winningcoal from a coal mine is an article or thingproduced. The argument was then noted that thecontention of the Revenue that coal which isextracted from the mine is not an article or thing.What was contended is that winning or escavatingcoal is not an activity of production. The leanedDivision Bench then relied on the judgment in caseof CIT v. N.C. Budharaja and Co. [1993] 204 ITR412 (SC) and also placing reliance on Webster'sNew International Dictionary, for the word`produce', which is denied to mean `something thatis brought forth or yielded either naturally or as aresult of effort and work'. In shorter OxfordEnglish Dictionary, the meaning given is: `To bringforward, bring forth or out; to bring into being orexistence. In Black's Law Dictionary, theexpression `produce' is `To bring forward; to showor exhibit; to bring into view or notice; to bring tothe surface'. Considering the language used andalso placing reliance on the provisions of section35E of the Income- tax Act, the learned DivisionBench noted that `production of mineral' is used inthe allied provisions of the Act itself and it is adefinite point that Parliament employed theexpression `production' to the minerals extracted from underneath the surface. For all thosereasons, the learned Division Bench took the viewthat it amounted to `production'. Another learnedDivision Bench of the Delhi High Court in CIT v.Univmine (P.) Ltd. [1993] 202 ITR 825, observedthat mining of marble would amount to carrying onbusiness of production and for that purpose placedreliance on the case of Chrestien Mica IndustriesLtd. V. State of Bihar [1961] 12 STC 150 (SC),where the apex court held that the process ofmining mica is a process of production. We alsohave the judgment of another learned DivisionBench of the Culcutta High Court in the case of CITv. G.S. Atwal and Co. (GUA) [2002] 254 ITR 592.The Division Bench observed, taking intoconsideration the various contentions andjudgments which were involved, that winning ofcoal is `production'. The learned Division Benchconsidering the earlier judgment of ChakravarttiC.J., which was later on approved by the SupremeCourt, where the Culcutta High Court had takenthe view that winning of coal is no doubt`production'. From the dictionary meaning of what wouldamount to `production' and the judgments of theAndhra Pradesh High Court, Delhi High Court andthe Calcutta High Court, the question would bewhether the view taken by the Income- tax Appellate Tribunal can be upheld on the ground thatextraction or winning of ore would amount to`production'. Our attention had been invited toSection 32A to hold that considering items andgoods not included in the Eleventh Schedule, theywould be entitled to the benefit under section 32Aof the said Act. Our attention was also invited thatearlier under section 33 of the said Act, anassessee would have been entitled to the benefit ofdevelopment rebate, which is no longer available.Iron ore was specifically included in the FifthSchedule and, consequently, was entitled to thedevelopment rebate. The Act also contains internalevidence to show that the Legislature has treatedraw ore differently from processed ore. A DivisionBench of this court in CIT v. Emirates CommercialBank Ltd. [2003] 262 ITR 55 has given the benefiteven in respect of data processing done oncomputers. In other words, the legislation being abeneficial piece of legislation, an expandedmeaning should be so given and has to be given." 6.In view of the aforesaid decision with which we concur, it cannot be said that the extraction of ore would not amount to'production'. The assessee was, therefore, entitled for deductionon account of investment allowance. 6.In view of the aforesaid decision with which we concur, it cannot be said that the extraction of ore would not amount to'production'. The assessee was, therefore, entitled for deductionon account of investment allowance. 7. As regards the substantial question of law No.II, thelearned Counsel for the Revenue heavily relied upon the Judgmentof the Supreme Court in the case of Punjab State IndustrialDevelopment Corporation Limited v. Commissioner of IncomeTax, 225 ITR 792. In that case, the question before the ApexCourt was whether the amount of fee paid to the Registrar ofCompanies as filing fee for enhancement of capital was not revenueexpenditure ? The Supreme Court noticed the conflict of opinionsamongst various High Courts and on examination of these issuesheld that the fee paid to the Registrar for expansion of the capitalbase of the company was directly related to the capitalexpenditure incurred by the company and although incidentallythat would certainly help in the business of the company and mayalso help in profit making, it still retains the character of a capitalexpenditure since the expenditure was directly related to theexpansion of the capital base of the company. It may be noticedhere that the Supreme Court in Punjab State IndustrialDevelopment Corporation Limited v. Commissioner of IncomeTax (supra) also considered the Judgment of this Court inBombay Burmah Trading Corp. v/s. Commissioner of Income-tax [1984] 145 ITR 793. 8.The learned Counsel for the assessee, however,submitted that the Judgment of the Apex Court in the case ofPunjab State Industrial Development Corporation Limited v.Commissioner of Income Tax (supra) shall not be applicable, asin the present case the fee was paid to the Registrar of Companiesin connection with the issue of bonus shares and that fee cannotbe treated as capital expenditure, but would be allowable as beingof a revenue nature. In this connection, he placed reliance on theDivision Bench Judgment of this Court in the case of BombayBurmah Trading Corp. v/s. Commissioner of Income- tax(supra). 9.In our considered view, from the facts of this case, it isclear that the assessee claimed deduction of the expenses ofRs.90,000 /- paid to the Registrar of Companies for increasing theauthorised capital of the company for the purpose of issuing bonusshares. That was ult imatelyallowed by the Income- Tax AppellateTribunal. The fees of Rs.90,000 /- paid by the assessee to theRegistrar of Companies, was not an expenditure for the purpose ofissuing bonus shares but was for the purpose of increasing theauthorised capital of the company though for the purpose of issuing bonus shares. The decision of the Supreme Court in the case ofPunjab State Industrial Development Corporation Limited v.Commissioner of Income Tax (supra) is, thus, squarelyapplicable. The fee paid by the assessee to the Registrar of theCompanies for increasing the authorised capital of the company forthe purposes of issuing bonus shares is held to be capitalexpenditure. The substantial question of law No. II is, accordingly,decided in favour of the Revenue and against the assessee. bonus shares. The decision of the Supreme Court in the case ofPunjab State Industrial Development Corporation Limited v.Commissioner of Income Tax (supra) is, thus, squarelyapplicable. The fee paid by the assessee to the Registrar of theCompanies for increasing the authorised capital of the company forthe purposes of issuing bonus shares is held to be capitalexpenditure. The substantial question of law No. II is, accordingly,decided in favour of the Revenue and against the assessee. 10.As regards the substantial question of law No.III, thelearned Counsel for the Revenue could not dispute thatExplanation 8 appended to Section 43 relates to the amount paid oris payable by way of interest. In that event, the said provisionshall not be applicable where the exchange rate difference hadarises in relation to repayment of loan and not repayment ofinterest. In this situation, Section 43- A of the I.T. Act is directlyattracted. The finding of the Income- tax Appellate Tribunal on thisissue cannot be faulted. 11. We, accordingly, conclude thus : i) The substantial question of law No.I is decided against the Revenue and in favour of the assessee.(ii) The substantial question of law No.II is decided in favour of the Revenue and against the assessee. (iii) The substantial question of law No.III is decided in favour of the assessee and against the Revenue. 12. The appeal is disposed of in the aforesaid terms. No costs. R. M. LODHA, J. N.A. BRITTO, J. ssm.