Rc/3/1996 Of M/S Deccan Cements Ltd. Hyd v. The Commissioner Of Income Tax.hyd

HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SENGUPTAANDHON’BLE SRI JUSTICE K.C. BHANUR.C.No.3 of 1996 Date:09-10-2013 Between: M/s. Deccan Cements Ltd,Hyderabad. and ……. Applicant The Commissioner of Income Tax,Andhra Pradesh,Hyderabad. ……… Respondent HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SENGUPTAANDHON’BLE SRI JUSTICE K.C. BHANUR.C.No.3 of 1996 ORDER: (Per Hon’ble the Chief Justice Sri Kalyan Jyoti Sengupta) This case has been referred under Section 256 of the IncomeTax Act, 1961 (hereinafter referred to as ‘said Act’) by the learnedIncome Tax Appellate Tribunal, Hyderabad Bench, for opinion ofthis Court, on the following questions: 1. Whether on the facts and in the circumstances of the case,the Tribunal was correct in law in holding that theassessee can be said to be running two industrialundertakings one in respect of mining and other inrespect of manufacturing cement, although the companywas engaged in the business of manufacturing cementand mining of limestone was only as incidental activity?the Tribunal was correct in law in holding that theassessee can be said to be running two industrialundertakings one in respect of mining and other inrespect of manufacturing cement, although the companywas engaged in the business of manufacturing cementand mining of limestone was only as incidental activity? 2. Whether on the facts and in the circumstances of the case,the Tribunal was correct in law in holding that theassessee’s profits could be allocated between twoactivities/undertakings of the assessee, namely that ofmining and that of manufacturing cement? andthe Tribunal was correct in law in holding that theassessee’s profits could be allocated between twoactivities/undertakings of the assessee, namely that ofmining and that of manufacturing cement? and 3. Whether on the facts and in the circumstances of the case,the Tribunal was correct in law in holding that theassessee would be entitled to deduction under Section80HH only with respect to the profits attributable to themanufacture of cement and not with respect to profitsattributable to mining activity?the Tribunal was correct in law in holding that theassessee would be entitled to deduction under Section80HH only with respect to the profits attributable to themanufacture of cement and not with respect to profitsattributable to mining activity? 2. The short admitted fact, as it is found from the records, is as follows: The assessee-company has been carrying on business ofmanufacturing cement, and such manufacturing unit is situated in abackward area in the State of Andhra Pradesh. The assessee hasalso a mine having deposit of large quantity of lime. Hence, theassessee also carries on mining operation of the lime and the sameis used as a raw material in manufacturing cement. In this matter,the opinion of this Court is sought for in relation to the assessmentyear 1987-88. Before the Assessing Officer, the assessee-company claimed deduction under Section 80HH of the said Act asit is carrying on the business of manufacturing cement in thebackward area and has fulfilled all the conditions for gettingdeduction under the said section. The contention of the assessee-company is that it was not engaged simply in mining operation, butits main business was actually manufacturing of cement. Theproduct of the mining operation, being the raw material, is used formanufacturing cement. The Assessing Officer, however, did notallow such deduction on the ground that since the assessee- company has been carrying on business of mining operation, byvirtue of sub-section (10) of Section 80HH of the said Act, suchdeduction cannot be permitted. On appeal being taken to theCommissioner of Income Tax (Appeals), the contention of theassessee-company was accepted and directed for grant ofdeduction under Section 80HH of the said Act as it was found by theCommissioner of Income Tax (Appeals) that the assessee-companyhas been carrying on the business of manufacturing cement andthere is no embargo under Section 80HH to of the said Act to allowsuch deduction. The Revenue against the order of theCommissioner of Income Tax (Appeals) went in appeal to theTribunal. The Tribunal, after having noted its own earlier judgmentand order on the identical issue in the assessment years 1984-85and 1985-86, held that the assessee’s main business wasmanufacturing of cement, which is entitled to deduction underSection 80HH, and there was no absolute prohibition that if theindustrial undertaking is engaged in mining, then it would cease tobe entitled to claim the deduction in respect of items manufacturedor produced, which are entitled to deduction under Section 80HH,and that the assessee, in such a situation, can be said to have beenrunning two industrial undertakings, one in respect of mining andthe other in respect of manufacturing cement, and the profitsattributable to mining would not be entitled to deduction underSection 80HH, whereas profits attributable to manufacturing ofcement would enjoy the deduction and the profits could be allocated between the twoactivities/undertakings of the assessee. Following that order, theTribunal directed the Assessing Officer to determine the profitsattributable to manufacturing of cement and allow deduction with regard to that. 3. Mr. S. Ravi, learned senior counsel appearing for theassessee-company, submits that the Tribunal erred in holding thatthe assessee is having two separate business activities in divisionfor granting deduction under Section 80HH of the said Act. Hecontends that the learned Tribunal factually held that the mainbusiness activity of the assessee-company is manufacturing ofcement and the mining operation carried on by it is not meant forsale in the market and the same is used as a raw material inmanufacturing of cement. Therefore, the question of deriving profiton this mining operation does not and cannot arise. Had theassessee sold the product of mining operation in the market, thenprofit would have been derived from the mining activity. He furthercontends that the entire output of the mining operation of lime ischarged as a raw material for the manufacture of a different productthan the cement. Therefore, the entire profit derived frommanufacturing of cement should have been taken into considerationfor the purpose of granting deduction under Section 80HH of thesaid Act and a portion of the profit should not have been taken inorder to deprive the benefit of deduction as far as the miningoperation is concerned. He also submits that actually no profit is derived for miningoperation. He further submits that in order to hold the twomanufacturing activities as separate and distinct activities, theymust be independent in all senses and further on the conditions asmentioned in the said section. In support of his contention, he hasplaced reliance on two decisions of the Supreme Court in cases ofTEXTILE MACHINERY CORPN. LTD v. COMMISSIONER OF[1]INCOME-TAX WEST BENGALand LIBERTY INDIA v. COMMISSIONER OF INCOME-TAX[[2]]. He also submits that actually no profit is derived for miningoperation. He further submits that in order to hold the twomanufacturing activities as separate and distinct activities, theymust be independent in all senses and further on the conditions asmentioned in the said section. In support of his contention, he hasplaced reliance on two decisions of the Supreme Court in cases ofTEXTILE MACHINERY CORPN. LTD v. COMMISSIONER OF[1]INCOME-TAX WEST BENGALand LIBERTY INDIA v. COMMISSIONER OF INCOME-TAX[[2]]. 4. Mr. S.R. Ashok, learned senior counsel appearing forthe Revenue, submits that factually the assessee is carrying on twobusiness activities, one is mining operation and another ismanufacturing of cement, and both the units are always treated tobe separate and distinct business activities. He further submits thatit is immaterial whether the product arising out of the miningoperation is directly sold in the market or not, and that the assumedprofit can easily be ascertained. Such legal course of action ispermissible under the law. He submits that the raw materialextracted from mining operation for manufacturing cement hascertainly got its market value if it is purchased from open market andsuch market value has to be taken into consideration and the sameshall be treated as cost price of the raw material, and certainly thecost price must be much less than the market price, and therefore,the emerging difference price can be treated to be a profit. Thatapart, he contends that in the previous assessment years, namely1984-85 and 1985-86, the Tribunal factually held that the assesseehas been running two separate industrial undertakings and out ofrunning of the same, the profit must have been derived and thisfactual position was accepted by the assessee. In the relevantassessment years, it is not contended that the factual situation, asfar as running of two separate industrial undertakings is concerned,is different. He further submits that the words “derived from” arehaving a very restrictive meaning unlike the words “attributable to”. So the legislature has laid emphasis on the words “profit derivedfrom” and not “attributable to” and by virtue of sub-section (10) ofSection 80HH, it has been expressly prohibited for grantingdeduction in relation to the mining activity. To support above contention, he has referred to a decision of the Constitutional Benchof the Supreme Court in case of TATA IRON & STEEL CO. LTD v.[3]STATE OF BIHARand another decision in case of PANDIANCHEMICALS LTD v. COMMISSIONER OF [4]INCOME-TAX. 5. After hearing the learned counsel for the parties andafter taking note of the factual aspect of the matter and in order togive opinion on the questions referred to us, we think that thefollowing two points are required to be decided: 1.Whether the assessee’s mining operation of lime is separateand independent industrial activity from that of cementmanufacturing activity or not? andand independent industrial activity from that of cementmanufacturing activity or not? and 2.Whether because of the use of entire product of miningactivity as raw material in the manufacture of cement by theassessee, the mining operation looses its independentidentity so as to disentitle the benefit of deduction by virtue ofsub-section (10) of Section 80HH of the said Act or not.activity as raw material in the manufacture of cement by theassessee, the mining operation looses its independentidentity so as to disentitle the benefit of deduction by virtue ofsub-section (10) of Section 80HH of the said Act or not. 1.Whether the assessee’s mining operation of lime is separateand independent industrial activity from that of cementmanufacturing activity or not? andand independent industrial activity from that of cementmanufacturing activity or not? and 2.Whether because of the use of entire product of miningactivity as raw material in the manufacture of cement by theassessee, the mining operation looses its independentidentity so as to disentitle the benefit of deduction by virtue ofsub-section (10) of Section 80HH of the said Act or not.activity as raw material in the manufacture of cement by theassessee, the mining operation looses its independentidentity so as to disentitle the benefit of deduction by virtue ofsub-section (10) of Section 80HH of the said Act or not. 6. From the records we find, as has been rightly contendedby Mr. S.R. Ashok, that in the previous assessment years, namely1984-85 and 1985-86, the Tribunal found on fact that the assesseehas been running two industrial undertakings, one is mining of limeand another is manufacturing of cement. It is an admitted positionfurther that against the aforesaid findings, no appeal has beenpreferred. Hence, we have to proceed on the premise that themining activity of the assessee is distinct and independent from thecement manufacturing activity. Now the question remains iswhether the use of the entire product of lime, extracted from miningoperation for manufacturing of cement, looses its marketable valuein order to ascertain the profit or not. 7. The argument of Mr. S. Ravi is that a manufacturercannot trade with itself. Therefore, unless there is a factual sale inthe market, no profit can be derived from this mining operation. Inorder to derive the entire profit, the cement manufacturing unit has tobe taken into account and the product has to be sold in the marketand then the profit will be ascertained. We are of the view that thissubmission, at the first blush, sounds logic, but while keeping inview the matter, we find that this logic does not have any basis. It is the admitted position that lime is one of the raw materials inmanufacturing cement and in order to manufacture the finishedproducts, raw material is essential and the cost thereof is one of thefactors for cost price of the finished goods. Therefore, in themanufacturing activity of cement unit, the cost of the finished producthas to be ascertained and in that process, the cost of lime has alsoto be taken into consideration. In the case on hand, the lime, beinga raw material, is not procured from open market and it has got itsown indigenous supply. Therefore, the cost of the lime extractedfrom mining operation has to be ascertained from the cost price andit is found, while doing so, that the cost of lime of its own source(ordinarily it happens) is lesser than the market price. Therefore, thedifference between the cost price of indigenous source and themarket price is obviously the profit. Moreover, once lime is usedfrom its indigenous source to manufacture the finished products andby virtue of sale of such finished products if there is any profit, thenobviously that profit is also related to the mining operation. 8. The Constitutional Bench of the Supreme Court, in thecase of Tata Iron & Steel Co. Ltd (supra), almost on identical fact, at page 135, observed as follows: “It could not be disputed that factually the profit from the miningoperation and the winning of the mineral is imbedded in the profit realised from the sale of the end product. A simple illustration would demonstrate this. Let us assume thatthe cost of winning the ore is Rs.50 a ton and the market price ofsimilar ore which would have to be used in the absence of the oremined is Rs.60 per ton. There could not be any doubt that thisdifference of Rs.10 per ton of ore would be reflected in the profit orloss resulting from the sale of the steel.” At page-142 of the report, it is observed again as follows: 8. The Constitutional Bench of the Supreme Court, in thecase of Tata Iron & Steel Co. Ltd (supra), almost on identical fact, at page 135, observed as follows: “It could not be disputed that factually the profit from the miningoperation and the winning of the mineral is imbedded in the profit realised from the sale of the end product. A simple illustration would demonstrate this. Let us assume thatthe cost of winning the ore is Rs.50 a ton and the market price ofsimilar ore which would have to be used in the absence of the oremined is Rs.60 per ton. There could not be any doubt that thisdifference of Rs.10 per ton of ore would be reflected in the profit orloss resulting from the sale of the steel.” At page-142 of the report, it is observed again as follows: “As we have pointed out earlier, what we are concerned with inthese appeals is merely whether there could in law be an annualprofit from the mine in cases where the ore produced from themine is sold not as ore but is utilised as the raw material for themanufacture of other products which are sold. When once it isconceded, as it has to be, that in order that profit may result fromthe mining activity, it is not necessary that the ore should be thesubject of sale in the same condition as it was when it came outof the mine, but that, even if the won ore is subjected toprocesses to make it more useful or attractive to a buyer and thensold, there would be a profit, and that in the latter event theexpenses of processing would be a legitimate outgoing forcomputing the profit, it appears to us to follow that if the ore is soprocessed as to turn it into a different commodity and then soldthere would be no negation of the concept of “a profit” from themine, and the question would be only as regards the elimination ofthe further expenses involved and principles on which these couldbe ascertained.” 9. Thus it appears from the above authoritativepronouncement that the segregation of profit of two differentbusiness activities is permissible under law. It is an undisputedposition that Section 80HH of the said Act uses the words “profitderived from” and not “attributable to”. Therefore, what is the importof the words “derived from” has been explained by the SupremeCourt in the case of Liberty India (supra). Therein the SupremeCourt had made it clear that the connotation of the words “derivedfrom” is narrower as compared to that of the words “attributable to”. Hence, while reading the provision of Section 80HH of the said Act,the profit derived from the cement manufacturing activity isdeductable thereunder and not otherwise. 10. Similarly in the case of Pandian Chemicals Ltd (supra), the words “derived from” have been mentioned while dealing withSection 80HH of the said Act. Therein the Supreme Court, whilefollowing an old decision of the Privy Council in case of CIT v. RAJA [5]BAHADUR KAMAKHYA NARAYAN SINGH, and further thedecision of the Constitutional Bench of the Supreme Court in caseof 10. Similarly in the case of Pandian Chemicals Ltd (supra), the words “derived from” have been mentioned while dealing withSection 80HH of the said Act. Therein the Supreme Court, whilefollowing an old decision of the Privy Council in case of CIT v. RAJA [5]BAHADUR KAMAKHYA NARAYAN SINGH, and further thedecision of the Constitutional Bench of the Supreme Court in caseof [6]MRS. BACHA F. GUZDAR v. CIT, held that the words “derivedfrom” in Section 80HH of the said Act must be understood assomething which has a direct or immediate nexus with theassessee’s industrial undertaking. Thus the profit, which has beenderived in relation to the manufacturing activity of the cement, has tobe taken into consideration and not for other manufacturing activityparticularly for mining activity as the legislature has expresslyexcluded the mining activities from the purview of the deductabilitybenefits under Section 80HH of the said Act. It is the settledproposition of law that while interpreting the provision of a statute,this has to be considered literally as it appears, and it cannot begiven a purposive meaning. Hence, when the legislature hasexcluded the mining activity with the specific words, this has to beaccepted. The decision in case of Textile Machinery CorporationLtd (supra) cited by Mr. S. Ravi, has no manner of application as it isfound from fact that in the previous assessment years theassessee’s two business activities have been treated to be aseparate functional activity. In that case, the Supreme Court heldthat for the reconstruction of existing business, there must betransfer of the assets of the existing business to the new industrialundertaking. This judgment is really intended to cite for holding that the mining activity is a part and parcel of the cement manufacturing activity andit has got no independent functioning. In view of the earlier factfinding by the Tribunal, which has reached finality, this judgment isnot helpful in this case. Under the circumstances, while upholdingthe argument of Mr. S.R. Ashok and expressing our inability topersuade ourselves to accept the argument of Mr. S. Ravi, we hold that the assessee is having two independent industrialundertakings, one is mining activity and the other is cementmanufacturing activity. We are also of the opinion thatapportionment of the profit derived from cement manufacturingactivity can be apportioned in order to find the profit derived frommining activity. 11. Accordingly, we answer the questions in the manner asfollows: Question No.1: In the affirmative, in favour of the Revenue and against the assessee. Question No.2: In the affirmative, in favour of the Revenue and against the assessee. Question No.3: In the affirmative, in favour of the Revenue and against the assessee. _________________ K.J. SENGUPTA, CJ _________________ K.C.BHANU, J Note: L.R. copy to be marked: Yes [1][1997] 107 ITR 195[1997] 107 ITR 195 [2][2009] 317 ITR 218 (SC)[2009] 317 ITR 218 (SC) [3][1963] 48 ITR 123 [4][2003] 262 ITR 278[2003] 262 ITR 278 [5] [1948] 16 ITR 325 [6] [1955] 27 ITR 1 (SC)