The Commissioner Of Income-Tax, Coimbatore v. M/S. Vijay Granites P. Ltd., Anuparpalayam, Tiruppur

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 02/04/2004 CORAM THE HONOURABLE MR. JUSTICE A.S. VENKATACHALAMOORTHYANDTHE HONOURABLE MR. JUSTICE P.K. MISRA TAX CASE No.334 of 2001and TAX CASE NOs. 335 and 336 of 2001 The Commissioner of Income-tax,Coimbatore. .. Applicant in all cases -Vs- M/s. Vijay Granites P. Ltd.,Anuparpalayam, Tiruppur. .. Respondent in all cases Tax Case Reference arising out of I.T.A.Nos.3946/Mds/89 and 3147 & 3148/Mds/90 for the assessment years 1986-87 to 1988-89 at the instance of theRevenue. !For Applicant : Mr.K. SubramanianSenior Standing Counsel(Tax) For Respondent : Mr.P.P.S. Janarthana Raja :J U D G M E N T P.K. MISRA, J.The following questions have been referred to under Section 256(1) ofthe Income-tax Act, 1961 to the High Court :- � 1. Whether, on the facts and in the circumstances of the case, theAppellate Tribunal was right in law in upholding the finding of the CIT(Appeals) that the assessee was eligible for deduction under section 32A ofthe Income-tax Act, 1961 ? 2. Whether, on the facts and in the circumstances of the case, theAppellate Tribunal was right in law in upholding the order of the CIT(Appeals) reversing the order of the assessing officer that the cranes were tobe treated as transport vehicles and not plant and machinery eligible fordeduction under Section 32A ? 3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in upholding the order of the CIT(Appeals) reversing the order of the Assessing Officer that the assesseecompany was not eligible for deduction under section 80-I of the Income-taxAct ?� 2. The facts giving rise to the aforesaid reference are as follows :- The Assessee is a company engaged in the business of raising granitesfrom mines, polishing them and exporting them outside India. The assesseeapart from doing mining also purchases granite blocks and after subjectinggranite blocks to further processing, exports the polished granites. For theassessment years 1986-87 and 1987-88, the assessee claimed investmentallowance in respect of cranes and in respect of assessment year 1988-89, thecompany claimed allowance under Section 32AB of the Income Tax Act(hereinafter referred to as �the Act�). The Assessing Officer disallowed theclaim, firstly on the ground that cranes were transport vehicles and furtheron the ground that no manufacturing process was involved in cutting of thegranites and polishing them. On appeal, the appellate authority accepted thecontention of the assessee to the effect that the machinery was not atransport vehicle and the assessee was engaged in the manufacture orproduction of articles and was therefore entitled to deduction. On furtherappeal by the Department, the Appellate Tribunal confirmed the aforesaidconclusions. On the basis of the application filed under Section 256(1) ofthe Act, the questions already indicated have been referred to the High Court. 3. For applicability of Section 32A, it is required that the machinery or the plant should have been installed for the purpose ofmanufacture or production of any article or thing. Similarly for claimingdeduction under section 80-I, it is necessary that the industrial undertakingshould manufacture or produce any article or thing. 4. Learned counsel appearing for the Department has submitted 3. For applicability of Section 32A, it is required that the machinery or the plant should have been installed for the purpose ofmanufacture or production of any article or thing. Similarly for claimingdeduction under section 80-I, it is necessary that the industrial undertakingshould manufacture or produce any article or thing. 4. Learned counsel appearing for the Department has submitted that merely by subjecting the granites to the process of cutting and evenpolishing would not amount to manufacturing or producing any article or thing.Learned counsel appearing partment has placed reliance upon the decision ofthis Court reported in 246 ITR 737 ( COMMISSIONER OF INCOME-TAX v. GOMATESHGRANITES). In the said decision, the question referred to the High Court wasas to whether the activity in extracting granite from the hills and processingit by cutting rough edges before export amounted to manufacture or productionof articles or things. After referring to several decisions of the SupremeCourt and different High Courts, a Division Bench of this Court observed :� . . . The benefit under sections 80J and 80HH of the Income-taxAct can be availed of only if the assessee is able to prove that it is engagedeither in the manufacture or in the production of articles. Extraction ofgranite cannot be regarded as the result of any manufacturing activity.Manufacturing implies subjecting the raw material or other ingredients that gointo the making of the final product to a series of processes as a result ofwhich the input undergoes changes at different stages and ultimately emergesas a product with a distinct commercial identity of its own, and becoming capable of use for the purposes to which the inputs which went into the makingof the product by themselves could not have been as effectively used.Blasting of a granite block which is found on a natural formation involvesonly a process of cutting or removing part of a larger mass, and that activityof removing a part from the larger block or hill, though it involves skill,labour and effort and perhaps use of machinery as well, is not an activitywhich can properly be regarded as manufacture, even after the widest possiblemeaning is ascribed to that term. The granite hills are a natural bounty andmerely removing a portion of it does not involve a process of manufacture. Itis more properly to be regarded as mining. . . .� It was further held as follows :- � . . . The process involved in the work carried out by the assessee has already been set out. It does not indicate the existence ofprocess involving any complexity or the transformation of what was alreadyembedded in the larger mass into something new and different after thecompletion of the process. The granite block which is cut from the largerformation continues to remain granite only. The fact that labour and skill isrequired to remove the block from the larger mass by itself, cannot beregarded as amounting to production. Transporting the same cannot be regardedas production. Cutting a larger mass of granite with a view to obtain a blockof granite which without any further process of any significance-the onlything done by the assessee herein being just washing the block and cuttingrough edgesalso cannot be regarded as a process of production.� . . . � The test is not merely as to whether the thing in question has amarket. It is also necessary to establish that the thing in question is anarticle which is the result of the production or manufacture.� 5. Apparently the aforesaid decision is applicable to the . . . � The test is not merely as to whether the thing in question has amarket. It is also necessary to establish that the thing in question is anarticle which is the result of the production or manufacture.� 5. Apparently the aforesaid decision is applicable to the present case. However, the learned counsel for the assessee has submittedthat in the aforesaid decision, the Division Bench was conscious of the factthat the process of polishing may bring it within the expression �manufacture�or �production� and as such the aforesaid decision is not applicable. It isof course true that in the aforesaid Division Bench decision it was observed :� . . . This is not to say that the activity of cutting theextracted block to smaller sizes, polishing the same, and thereafter exportingthe polished slabs, would not amount to production. It is not necessary forus to express any opinion finally on that question as that question does notarise for our consideration in these cases.� From the aforesaid observation, it is apparent that the question whether theact of polishing would bring it within the meaning of � production� has beenleft open. 6. Learned counsel for the Department has placed reliance upon the decision of the Supreme Court reported in 249 ITR 307 (COMMISSIONEROF INCOME-TAX v. GEM INDIA MANUFACTURING CO.) In the aforesaid decision, thequestion was as follows :- � Whether, on the facts and in the circumstances of the case and in law, the Tribunal was right of confirming the order of the Commissioner ofIncome-tax (Appeals) holding that the assessee, engaged in cutting andpolishing of diamonds, amounts to manufacturing or production of goods and isentitled to deduction under section 80-I of the Income-tax Act, 1961 ?� The specific question, therefore, was whether the assessee in cuttingand polishing diamonds amounts to manufacture or production of goods. TheTribunal had taken the view that the benefit of deduction under Section 80-Iof the Act was available because in common parlance and commercial sense rawdiamonds are not the same as the cut diamonds. The view of the Tribunal hadbeen confirmed by the Bombay High Court. While allowing the appeal filed bythe Department, the Supreme Court observed : � . . . There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yieldsthe polished diamond, but that is not to say that the polished diamond is anew article or thing which is the result of manufacture or production. Thereis no material on record upon which such a conclusion can be reached. Theappeal is, therefore allowed. The order under challenge is set aside. Thequestion quoted above is answered in the negative and in favour of theRevenue.� 7. In 2003 (10) SCC 771 (COLLECTOR OF CENTRAL EXCISE, JAIPUR v. ASSOCIATED STONE INDUSTRIES (KOTA) LTD., KOTA, RAJASTHAN), the questionwas raised in the context of Section 2(f) and 3 of the Central Excise Act.The Supreme Court observed : � . . . It cannot be held that cutting, edging, trimming, polishing and other processes on the marble slabs amount to a process of manufacture asit does not bring in a distinct product.� (emphasis added) 8. In 262 ITR 417 (COMMISSIONER OF INCOME-TAX v. POOSHYA 7. In 2003 (10) SCC 771 (COLLECTOR OF CENTRAL EXCISE, JAIPUR v. ASSOCIATED STONE INDUSTRIES (KOTA) LTD., KOTA, RAJASTHAN), the questionwas raised in the context of Section 2(f) and 3 of the Central Excise Act.The Supreme Court observed : � . . . It cannot be held that cutting, edging, trimming, polishing and other processes on the marble slabs amount to a process of manufacture asit does not bring in a distinct product.� (emphasis added) 8. In 262 ITR 417 (COMMISSIONER OF INCOME-TAX v. POOSHYA EXPORTS P. LTD.,), the assessee was a company doing business of mining andquarrying granite stones and exporting them as finished goods. Beforeexporting those granite stones as per the specification of the customers, thestone underwent various types of manual and machinery processes such asremoval of over burden, location and drilling of the boulders, eschewing ofwaste, drilling of holes, lifting those granite blocks, dressing, shaping,sizing, colouring and giving uniform grains to those stones and the processalso involved removing of certain natural flaws such as air-pores, veins,cracks, etc.. Certain chemical impurities were also required to be removed inspecial manufacturing process. In other words, the process included theprocess of cutting as well as polishing of granites. While considering thequestion whether the assessee was entitled for the relief under Section 32A ofthe Act, the Division Bench of this Court observed :- � . . . As far as the first question is concerned, the counsel on either side accepted that the same has to be decided against the assessee andin favour of the Revenue in view of the judgments of this court in the case ofCIT v. Gomatesh Granites (2000)246 ITR 737 and in case of CIT v. BishalEnterprises (2001)247 ITR 484. Hence, the first question is answered in the It is of course true that the aforesaid observation was on the basis ofconcession of both sides. However, the concession appears to be well founded. 9. Learned counsel appearing for the assessee has howeverplaced strong reliance upon the decision of the Karnataka High Court in 250ITR 725 (COMMISSIONER OF INCOME-TAX v. MYSORE MINERALS LTD.) and the decisionof the Supreme Court in 251 ITR 323 (ASPINWALL AND CO. LTD. v. COMMISSIONEROF INCOME-TAX). In 250 ITR 725, it was observed that extracting granite fromquarry and cutting it to various sizes and polishing amounted to manufactureor production of any article or thing and the assessee is entitled to benefitunder Sections 32A and 80-I of the Act. For the aforesaid purpose, theKarnataka High Court relied upon an earlier decision of the Karnataka HighCourt reported in 2 05 ITR 461 (COMMISSIONER OF INCOME-TAX v. MYSORE MINERALSLIMITED). The said decision in turn had relied upon an earlier decision ofthe Karnataka High Court in 189 ITR 463 (SHANKAR CONSTRUCTION CO. v.COMMISSIONER OF INCOME-TAX). Such earlier decision of the Karnataka HighCourt had been overruled by the Supreme Court in 204 ITR 412 ( COMMISSIONER OFINCOME-TAX v. N.C. BUDHARAJA AND CO.). As a matter of fact, the DivisionBench of this Court in 246 ITR 737 (cited supra) had taken into account thedecision of the Karnataka High Court in 205 ITR 461 (cited supra) and had notagreed with such conclusion. 10. Learned counsel appearing for the assessee has placedstrong reliance upon the decision of the Supreme Court reported in 251 ITR 323(cited supra). In the said case, the question was whether the assessee�sactivity of curing coffee amounts to manufacturing, entitling the assessee tothe benefit under Section 32A of the Act. The Tribunal had come to theconclusion that the following nine process are involved in curing of coffee :-�(1) Receipt of coffee from the estates;(2) Storage of coffee in covered godowns;(3)Drying of coffee the required standards prescribed by thecoffee board in drying yards;(4) Hulling/pealing/polishing;(5) Grading of coffee mechanically;(6) Colour sorting;(7) Garbling and manual grading;(8) Out-turning of garbled coffee; and(9) Bulking�. 10. Learned counsel appearing for the assessee has placedstrong reliance upon the decision of the Supreme Court reported in 251 ITR 323(cited supra). In the said case, the question was whether the assessee�sactivity of curing coffee amounts to manufacturing, entitling the assessee tothe benefit under Section 32A of the Act. The Tribunal had come to theconclusion that the following nine process are involved in curing of coffee :-�(1) Receipt of coffee from the estates;(2) Storage of coffee in covered godowns;(3)Drying of coffee the required standards prescribed by thecoffee board in drying yards;(4) Hulling/pealing/polishing;(5) Grading of coffee mechanically;(6) Colour sorting;(7) Garbling and manual grading;(8) Out-turning of garbled coffee; and(9) Bulking�. The High Court had accepted the factual position, but came to the conclusionthat the processes did not show any kind of change or commercially a differentcommodity. While reversing the decision of the High Court, the Supreme Courtobserved as follows :- � . . . The word �manufacture� has not been defined in the Act. Inthe absence of a definition of the word �manufacture� it has to be given ameaning as is understood in common parlance. It is to be understood asmeaning the production of articles for use from raw or prepared materials bygiving such materials new forms, qualities or combinations whether by handlabour or machines. If the change made in the article results in a new and . . . . � Adverting to the facts of the present case, the assessee afterplucking or receiving the raw coffee berries makes it undergo nine processesto give it the shape of coffee beans. The net product is absolutely differentand separate from the input. The change made in the article results in a newand different article which is recognised in the trade as a new and distinctcommodity. The coffee beans have an independent identity distinct from theraw material from which it was manufactured. A distinct change comes about inthe finished product.� 11. Even though such decision may prima facie appear to be in support of the contention of the learned counsel for the assessee, on closerscrutiny, we are of the opinion that such decision is not applicable to thefacts and circumstances of the present case. As a matter of fact, theaforesaid decision has been distinguished subsequently by the Supreme Court in255 ITR 178 (SACS EAGLES CHICORY v. COMMISSIONER OF INCOME-TAX). 12. In view of the aforesaid discussion, we come to theconclusion that in the facts and circumstances of the case, the act of cuttingand polishing granite slabs before exporting them did not involve any processof manufacture or production to entitle the assessee the benefit under Section32A or 80-I. In view of the aforesaid conclusion, it is not necessary toconsider as to whether the machinery purchased by the assessee was a transportvehicle or not. 13. For the aforesaid reasons, three questions are decided inthe negative in favour of the Department and against the assessee. Index : YesInternet: Yes dpk To M/s. Vijay Granites P. Ltd.,Anuparpalayam, Tiruppur. �