Nahar Spinning Mills Limited v. The Commissioner Of Income Tax (Central), Ludhiana

IN THE HIGH COURT FOR THE STATES OF PUNJAB ANDHARYANA AT CHANDIGARH Date of decision: November 25, 2011.1.ITA No.183 of 2002 Nahar Spinning Mills Limited ... Appellant v. The Commissioner of Income Tax (Central), Ludhiana ... Respondent(s) 2.ITA No.132 of 2004 Nahar Spinning Mills Limited ... Appellant v. The Commissioner of Income Tax (Central), Ludhiana ... Respondent(s) CORAM: HON'BLE MR. JUSTICE HEMANT GUPTA HON'BLE MR. JUSTICE G.S. SANDHAWALIAPresent:Shri Sanjay Bansal, Senior Advocate withShri Robin Jarial, Advocate for the appellant.Shri Rajesh Katoch, Advocate for the respondent. Hemant Gupta, J. (Oral): This order shall dispose of ITA No.183 of 2002 and ITANo.132 of 2004 arising out of the assessment years 1990-91 and 1991-92from the separate orders of the Income Tax Appellate Tribunal dated31.5.2002 and 18.12.2003. Since the issue raised are common, the same arebeing taken up for hearing together. Learned counsel for the assessee fairly pointed out that most ofthe questions of law, such as in respect of cash compensatory allowance,trading profits, interest incomes, rental incomes and property income standdecided against the assessee in ITA No.46/Chandi/2002therefore, theassessee has sought the decision of this Court only on the followingquestion of law:- “Whether on the facts and in the circumstances of the case, thelearned Income Tax Appellate Tribunal was justified in holdingthat the assessee was not entitled to deduction under Sections80-I and 80-HHC of the Income Tax Act, 1961 in respect ofincome from dry cleaning charges?”learned Income Tax Appellate Tribunal was justified in holdingthat the assessee was not entitled to deduction under Sections80-I and 80-HHC of the Income Tax Act, 1961 in respect ofincome from dry cleaning charges?” The brief facts out of which the said question of law is stated to havearisen is that the assessee is an industrial undertaking engaged inmanufacturing and sale of cotton hosiery goods. The assessee has alsomade export sales. The Assessing Officer disallowed the followingdeductions as not falling under Section 80-1 of the Act:- v. CCA & Income from The Assessing Officer also deducted Rs.34,43,360 from the total income consisting of:- (i) interest income on advances to various firmsand companies while dealing with deduction under Section 80-1 to the tune of Rs.33,71,360/-; and (ii) rental income to the tune of Rs.72,000/-. The Commissioner of Income Tax set aside part of the orderpassed by the Assessing Officer whereas the finding recorded by theCommissioner of Income Tax are upheld by the Tribunal. The only issue raised by learned counsel for the assessee in thepresent appeals is that process of dry cleaning is a part of the manufacturingprocess and thus, the income derived from dry cleaning, job work of thethird parties, is also income derived from industrial undertaking havingdirect and proximate nexus with its manufacturing activities and, therefore,the assessee is entitled to deductions under Section 80-I of the Act. Sincethe said activity is in the process of export activity as well, therefore, theassessee is entitled to deduction under Section 80-HCC as well. Though thelearned Tribunal has referred to the decision of the Tribunal in the assessee'sown case for the year 1988-89 and 1989-90 but it is asserted by learnedcounsel for the assessee that the question of dry cleaning charges, as anincome derived from industrial undertaking, was not the issue raised anddecided. Similarly, in four other cases, i.e., in ITA No.2251/Chandi/92,assessment year 1991-92, Greatways, No.599/Chandi/94, assessment year1991-92, Eastman and No.1601/Chandi/93, assessment year 1990-91, NavBharat Knitwears and (2007)288 ITR 494, Nahar Exports & Chemicals v.CIT,the orders of the Income Tax Appellate Tribunal also do not deal withdry cleaning process as income derived from industrial undertaking. Wehave proceeded to examine the issue in the said background. Relevant provisions of Section 80-HCC and Section 80-I readas under:- “80HCC (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged inthe business of export out of India of any goods ormerchandise to which this section applies, there shall, inaccordance with and subject to the provisions of this section, beallowed, in computing the total income of the assessee, adeduction to the extent of profits, referred to in sub-section(1B), derived by the assessee from the export of such goods ormerchandise: 80-I (1) Where the gross total income of an assessee includesany profits and gains derived from an industrial undertaking ora ship or the business of a hotel or the business of repairs toocean-going vessels or other powered craft, to which thissection applies, there shall, in accordance with an subject to theprovisions of this section, be allowed, in computing the totalincome of the assessee, a deduction from such profits and gainsof an amount equal to twenty per cent thereof:” Firstly, we will examine the claim of the assessee for deduction under section 80-HCC. Learned counsel for the assessee has vehemently arguedthat by clause (baa) to the explanation to Section 80-HCC “profits ofbusiness” has been introduced by the Finance Act No.2 of 1991, its incomereceived from dry cleaning process is also an income in the export businessof the assessee, therefore, liable to be taken into consideration for the grantof the benefit under Section 80-HCC. But we do not find any merit in the said argument. The effect of clause (baa) to the explanation to Section 80-HCC was considered by aDivision Bench of this Court in ITA No.180 of 2002, decided on 3.2.2011, Commissioner of Income Tax v. Hansa Agencies Pvt. Ltd., ITA No.180 of2002. It was held that the interest income earned from surplus financewhich was for earning interest falling under the head 'income from othersources' would not be calculated for determining business of profits underSection 80-HCC. The assessee has also not claimed the receipt from drycleaning process as a part of the total turn over for the purpose ofcalculation of deductions under Section 80-HCC. Such claim is notdiscernible from any of the order of the authorities. Therefore, the argumentraised by learned counsel for the assessee that the receipt from dry cleaningprocess is also eligible for computation of deduction under Section 80-HCCis not acceptable. Learned counsel for the assessee has vehemently argued thatdry cleaning process is a part of the manufacturing activity and, thus, isincome derived by an industrial undertaking. It is contended that it is notnecessary that the assessee should earn such income in respect of the rawmaterial of the assessee alone but even if the assessee has undertaken suchjob of a third party, it is still part of the manufacturing process, therefore, itis an income derived from industrial undertaking and, thus entitled todeduction under Section 80-I of the Act. Reliance is placed upon an orderpassed by this Court in CIT v. Impel Forge and Allied Industries Ltd.(2009)183 Taxman 38 and also judgments of the Delhi High Court reported asNU-Look (P) Ltd. v. CIT(1957)157 ITR 25 and CIT V. Northern AromaticsLtd.(2005)196 CTR 479. Reliance was also placed upon the Full Benchjudgment of this Court reported as CIT v. Sovrin Knit Works, (1993)199ITR 679 wherein the question which arose was whether the process ofdyeing, furnishing, singeing would fall within the ambit of manufacturing or production of textiles as envisaged by Entry 23 of Schedule I of theIndustries (Development and Regulations) Act, 1951. It was found thatbleaching, dyeing and printing of grey cloth amounts to manufacture orproduction of an article or thing within the meaning of Section 32 of thesaid Act. Learned counsel for the assessee also placed reliance upon arecent judgment of the Hon'ble Supreme Court in (2010)320 ITR 665 (SC),Commissioner of Income Tax, Mumbai v. Emptee Poly-Yarn (P) Ltd.,wherein it was held that twisting and texturising of partially oriented yarn(POY) constitutes manufacturing in the context of POY into a textile yarn.Thus, it is argued that even though a new product has not come intoexistence with the process of dry cleaning but the process of dry cleaning isnecessary process before using the yarn for weaving, therefore, dry cleaningis a part of the manufacturing process and, thus, is income derived fromindustrial undertaking. On the other hand, learned counsel for the revenue relies uponthe Supreme Court judgment reported as (2001)251 ITR 323, Aspinwal &Co. Ltd. v. CIT, wherein it has been held that expression 'manufacturing' isto be given meaning as understood in common parlance, which means theproduction of articles for use from raw or prepared material by giving suchmaterial new forms, qualities or combinations whether by hand, labour ormachine. It is, thus, contended by the learned counsel for the revenue thatthe process of dry cleaning does not give rise to any new article or qualitiesin the product, therefore, dry cleaning cannot be treated to be a part ofmanufacturing process. Reference is also made to (2009)317 ITR 218 (SC),Liberty India v. CIT, wherein it has been held that Sections 80-IA and 80-IBhave a common scheme. The words “derived from” are narrower in connotation as compared to the words “attributable to”. By using theexpression “derived from”, the Parliament intended to cover sources notbeyond the first degree. That was a case where benefit/entitlement passscheme was declined as an income derived from an industrial undertaking.It is, thus, argued that process of dry cleaning is not a process falling in thefirst degree which may be considered for claiming deduction under Section80-I of the Act. Keeping in view the aforesaid pronouncements in the presentappeals, the assessee claimed dry cleaning receipt of Rs.36,074/- as incomederived from business income. While discussing the said claim, theTribunal stated to the following effect:- “16.2 ... We are unable to accept the submission of the learnedcounsel for the assessee that profits and gains from theindustrial undertaking would also cover and include thetrading profits, interest income, property income, rentalincome and income by way of dry cleaning charges as theseactivities are only incidental and do not have direct nexus withthe industrial undertaking. Even if it is held that such incomeis liable to tax under the head 'profits from business' but thesame are not profits derived from an industrial undertaking...”16.5 ... We hold that the CIT(A) was justified in not allowingdeduction u/s 80I in respect of trading profits, rental incomewhich also does not have a direct nexus with the industrialundertaking, dry cleaning charges and interest income. Weconfirm her order and dismiss the ground of the crossobjection filed by the assessee.” We have heard learned counsel for the parties at length. Wefind that the income derived from a job work or from a process by anindustrial undertaking, would be eligible for deduction under Section 80-Iof the Act is a question of fact keeping in view the nature of the process.The two Division Benches of the Delhi High Court in Northern Aromatics,NU Look (P) Ltd.and Impel Forge and Allied Industries Ltd., have found soin view of the facts of the case. But we find that the facts on record do notsuggest a finding that the process of dry cleaning undertaken by the assesseeis such which relates to a step in the manufacturing process. Though, in thecase of Emptee Poly-Yarn (P) Ltd. it has been held that texturising andtwisting of yarn constitute manufacturing, i.e., even without giving suchmaterials a new formation, qualities or combinations as observed in the caseof Aspinwal & Co. Ltd., but the fact remains that there are details availableas to what was being dry cleaned and whether the process of dry cleaning isa part of the manufacturing process. Therefore, in the facts of the case, we are unable to hold thatthe income of Rs.36,074/- received by the assessee is an income derivedfrom the industrial undertaking from the manufacturing process. Thus, wefind that the assessee is not entitled to deduction under Section 80-I as well. Consequently, the substantial question of law is answeredagainst the assessee and in favour of the revenue and the appeals aredismissed. [ Hemant Gupta ] Judge [ G.S. Sandhawalia ] Judge