Rc/62/1997 Of Commissioner Of Income Tax Visakhapatnam v. M/S Vizag Dist.milk Producers Co-Op.ltd

THE HON’BLE SRI JUSTICE V.V.S. RAOANDTHE HON’BLE SRI JUSTICE B.N. RAO NALLA REFERRED CASE No.62 OF 1997 ORDER:(Per Hon’ble Sri Justice V.V.S. Rao) The respondent (the assessee) is engaged in the business of processingmilk and manufacturing by-products like ghee, flavoured milk, butter milk, rosemilk and kova (hereafter referred to as milk products). In their return of incomefor the assessment year 1983-84, they claimed investment allowance ofRs.29,957/- on plant and machinery installed during the year relevant to theassessment year. The Income Tax Officer, Visakhapatnam, while assessingthe income under Section 143(3) of the Income Tax Act, 1961 (the Act) allowedthe deduction under Section 32A of the Act. The Commissioner of Income Tax,Visakhapatnam (CIT) suo moto undertook revision under Section 263 of the Act.By order dated 23.3.1988, the assessment was set-aside holding that theassessee is not entitled to any investment allowance for the year 1983-84. Being aggrieved, the assessee preferred an appeal before the Income TaxAppellate Tribunal, Hyderabad (the Appellate Tribunal). Following theassessee’s cases for assessment years 1981-82 and 1982-83 being I.T.Nos.924 and 925 of 1987, the Appellate Tribunal set aside the order of CIT. The Revenue filed an application under Section 256(1) of the Act forreferring the question to this Court. The application was rejected. The Revenue then filed ITC No.93 of 1994 before this Court. By an order dated 05.12.1998, this Courtdirected the Appellate Tribunal to refer the question for the opinion of this Court. Accordingly, the following question is referred to this Court. “Whether on the facts and in the circumstances of the case,the Appellate Tribunal is correct in holding that the assessee-firm isengaged in the business activity of manufacturing or producing articles or things and is entitled to investment allowance u/s.32A ofthe I.T. Act?” From a perusal of the order of the Assessing Officer and RevisionCommissioner, there cannot be any dispute that the assessee claimedinvestment allowance on plant and machinery used for manufacturing by-products of the milk. The Junior Counsel for the Department, however, submitsthat the assessee is not involved in the process of manufacturing, and therefore,they are not entitled for investment allowance under Section 32A of the Act. He [1]relies on Sacs Eagles Chicory v C.I.T., C.I.T. v N.C. Budharaja and Co.[[2]]and C.I.T.v Gem India Manufacturing Co.[[3]] The counsel for the assessee submits that the process of making milkproducts involve heating, boiling refrigeration, filteration etc., facilitated byspecially designed machinery and therefore, there is process of manufacturingundertaken by the assessee. He would rely on A. Hajee Abdul Sakoor & Co. v[5]State of Madras[[4]]Idandas v Anant Ramchandraand Aspinwal & Co. Ltd. v[6]CIT. Section 32A of the Act permits an assessee a deduction equal to 25%to the actual cost of the machinery by way of investment allowance. This is,however, subject to certain conditions as contemplated in sub-section (2)thereof. For ready reference, we quote hereunder Section 32A(1) and (2) of theAct. 32A. Investment allowance.-- (1) In respect of a ship or an aircraft ormachinery or plant specified in sub-section (2), which is owned by theassessee and is wholly used for the purposes of the business carried on byhim, there shall, in accordance with and subject to the provisions of thissection, be allowed a deduction, in respect of the previous year in which theship or aircraft was acquired or the machinery or plant was installed or, if theship, aircraft, machinery or plant is first put to use in the immediatelysucceeding previous year, then, in respect of that previous year, of a sum byway of investment allowance equal to twenty five percent of the actual cost ofthe ship, aircraft, machinery or plant to the assessee. (2) The ship or aircraft or machinery or plant referred to in sub-section(1) shall be the following, namely:- (2) The ship or aircraft or machinery or plant referred to in sub-section(1) shall be the following, namely:- (a) a new ship or new aircraft acquired after the 31[st] day of March,1976, by an assessee engaged in the business of operation of ships oraircraft; (b) any new machinery or plant installed after the 31[st] day ofMarch,1976,_ (i) for the purposes of business of generation or distribution of electricityor any other form of power; or (ii) in a small-scale industrial undertaking for the purposes of businessof manufacture or production of any article or thing; or (iii) in any other industrial undertaking for the purposes of business ofconstruction, manufacture or production of any article or thing, not being anarticle or thing specified in the list in the Eleventh Schedule:(proviso and explanation are omitted herein as not relevant). A plain reading of sub-section (2) of Section 32A of the Act would showthat the investment allowance on new machinery and plant would be availableonly when such machinery and plant, inter alia, are used for the purpose ofbusiness of manufacture or production of any article or thing, not being anarticle or thing specified in the list in the Eleventh Schedule. The machinerypurchased or plant installed, has to be used for the purpose of business ofmanufacture or production of any article. Then only the assessee would be eligible to claim investment allowance as a deduction. Having regard to theword “or” used in 32A (2) (ii) and (iii), if an assessee installed machinery andplant either for the business of manufacture or for the business of production ofany article, it would be qualified for claiming the investment allowance. I n Sacs Eagles Chicory, the Supreme Court held that preparation ofChicory powder from Chicory root does not involve the process of manufacture,enabling the assessee to claim the benefit under Sections 80 HH, 80-I, 80J. InN.C. Budharaja, it was held that the machinery used for making borewells wouldnot be eligible for investment allowance and in Gem India Manufacturing Co., theSupreme Court ruled that the activity of cutting and polishing uncut rawdiamonds would not involve in the process of manufacturing. These authorities,in our considered view, have no application to the issue before us. We arerequired to consider in this case as to whether the process of making milkproducts by the assessee, involves the business of manufacturing or thebusiness of production of articles or things? In A.Hajee Abdul Sakoor & Co., the petitioner was in the business of tannedand untanned hides and skins purchased from outside State of Madras, tanningthem in the said State and selling the tanned hides and skins. They wereassessed to sales tax under the Madras General Sales Tax Act, 1939 and Rule16 of the relevant Rules. The petitioner challenged Rule 16 as violating Article304 of Constitution of India. It was, inter alia, contended that when the dealerhimself purchased raw hides and skins, the levy of 2% tax is discriminatory. The plea was that the relevant provisions create discrimination between thecase of a local merchant selling locally processed hides and skins; and the casewhere dealer, who is the first seller in the State who purchases and sells onlydressed hides and skins outside the State. In his case he had not purchasedsuch hides and skins in the tanned condition, and therefore, not liable to beassessed under Section 2(1). The plea was rejected by the Supreme Court. Itwas held that: “………raw hides and skins and dressed hides and skins constitutedifferent commodities of merchandise and they could therefore be treated asdifferent goods for the purposes of the Act.” Idandas is a case, which arose out of a dispute between the landlord andtenant. The tenant using leased premises was engaged for the business ofrunning a flour mill and converting wheat into Atta. In the suit for evictionpursuant to quit notice, he contended that as the lease is for the purpose ofmanufacture, it could be terminated under Section 106 of the Transfer of “………raw hides and skins and dressed hides and skins constitutedifferent commodities of merchandise and they could therefore be treated asdifferent goods for the purposes of the Act.” Idandas is a case, which arose out of a dispute between the landlord andtenant. The tenant using leased premises was engaged for the business ofrunning a flour mill and converting wheat into Atta. In the suit for evictionpursuant to quit notice, he contended that as the lease is for the purpose ofmanufacture, it could be terminated under Section 106 of the Transfer of Property Act, 1982 only by giving six months’ notice. The trial Court as well asthe High Court found against the tenant holding that the lease was not formanufacturing purpose. The Supreme Court reversed the judgment of the High[7]Court. Referring to Allenburry Engineers Private Ltd., v Ramakrishna DalmiAllenburry Engineers Private Ltd., v Ramakrishna Dalmia the Court. Referring to Allenburry Engineers Private Ltd., v Ramakrishna DalmiAllenburry Engineers Private Ltd., v Ramakrishna Dalmia theCourt held that “manufacture” means making of articles or material by physicallabour or mechanical power. Change of article gives a new and different article,which is the result of manufacture. The relevant observations are as follow: Coming now to the tests laid down by this Court the position may besummarised as follows: 1. That it must be proved that a certain commodity was produced: 2. That the process of production must involve either labour or machinery;3. That the end product which comes into existence after themanufacturing process is complete, should have a different name and shouldbe put to a different use. In other words, the commodity should be sotransformed so as to lose its original character. In the instant case what happened was that wheat was transformed, bythe manufacturing process which involved both labour and machinery, intoflour. The commodity before manufacture was wheat which could not beconsumed by any human being but would be used only for cattles ormedicine or other similar purposes. The end product would be flour whichwas fit for human consumption and is used by all persons and its complexionhas been completely changed. The name of the commodity after the productcame into existence is Atta and not Gehun(wheat). Thus in the instant case,all the three tests have been fully satisfied. This being the position theirresistible inference and the inescapable conclusion would be that the presentlease was one for manufacturing purposes. In this view of the matter, thenotice of one month must be held to be invalid and suit for ejectment shouldhave failed on that ground. In Aspinwal, the question considered by the Supreme Court was whether the assessee’s activity of curing of coffee amounts to manufacturing forclaiming the relief under Section 32A of the Act. The question was answered in favour of the assessee observing as follows: The word “manufacture” has not been defined in the Act. In the absenceof a definition of the word “manufacture” it has to be given a meaning as isunderstood in common parlance. It is to be understood as meaning theproduction of articles for use from raw or prepared materials by giving suchmaterials new forms, qualities or combinations whether by hand labour ormachines. If the change made in the article results in a new and differentarticle then it would amount to a manufacturing activity. In the instant case, the CIT (A) recorded finding that the assesseeclaimed investment allowance on plant and machinery. There was no disputethat the assessee was engaged in the business of making products or things forwhich the raw material was milk. There is also no dispute that the assesseewas employing machinery for making milk products like ghee, flavoured milk, In the instant case, the CIT (A) recorded finding that the assesseeclaimed investment allowance on plant and machinery. There was no disputethat the assessee was engaged in the business of making products or things forwhich the raw material was milk. There is also no dispute that the assesseewas employing machinery for making milk products like ghee, flavoured milk, butter-milk, rose milk and kova. When once the milk was subjected to theprocess, in their factory, new products emerge which are altogether differentfrom milk itself. Therefore, it cannot be said that the assessee was not in thebusiness of manufacture or production of articles or things. The Reference,therefore, has to be answered in favour of the assessee. Accordingly, the question referred to this Court is answered in theaffirmative against the Revenue and in favour of the assessee. The Referred Case shall stand disposed of accordingly. There shall be noorder as to costs. _______________ (V.V.S. RAO,J) _____________________ (B.N. RAO NALLA, J) Date:13-12-2011 Note:LR.copy to be marked.(B/o)Stp [1](2002) 255 ITR 178[2](1993) 204 ITR 412[3](2001) 249 ITR 307[4]AIR 1964 SC 1729[5]AIR 1982 SC 127[6](2001) 7 SCC 525[7] AIR 1973 SC 425