2012 (10) TMI 620 - HC - Income Tax

Chilling of milk by keeping with ice to keep it at low temperature - Whether it involves a manufacturing process ? - disallowance of deduction u/s 80 HHA and 80-I considering assessee not an Industrial Undertaking - ITAT allowed the claim - Held that - The process undertaken by assessee is not simply chilling of the milk but involves various stages of straining, filtration for improving the appearance of the milk as also for reducing microbial counts and decrease in pathogen and substances which are injurious to health. The process of chilling involves, using surface milk chillers, which improve odour and the taste, free from undesirable flavours. The lowering of temperature prevents undesirable fermentation and provide better palatability to milk. Thus these activities result into restricted microbial growth and inactivation of enzymes. The next process is blending, which results in preservation of vitamins and nutrients with standard uniform contents of fat, which also improves flavour of the milk.All this process result into change in the physical and chemical properties of the milk as dairy milk, which can be consumed directly without any further processing. Thus it cannot be equated with simple processing of raw milk for the purpose of final consumption. The processes of treatment of milk amounts to manufacturing process, which may not change the final product but change its composition for improving its nutritional value, quality and marketability, for consumption. The milk, undergoing these process is commercially a distinct commodity known in the market as dairy milk, as compared to the raw milk purchased directly from the milk man - in favour of assessee.

Summary

Issues:
1. Whether chilling of milk by keeping it with ice to maintain a low temperature constitutes a manufacturing process?
2. Whether carrying on a dairy business qualifies as an Industrial Undertaking?
3. Whether the assessee is entitled to deductions under Section 80 HHA and Section 80-I of the Income Tax Act, 1961?

Analysis:

Issue 1: Chilling of Milk as Manufacturing Process
The appellant claimed deductions under Section 80 HHA and Section 80-I for establishing a manufacturing process of milk in rural areas. The Assessing Officer (AO) denied the deductions, stating that no manufacturing activities were carried out, and chilling of milk did not constitute a manufacturing activity. The CIT (Appeals) found in favor of the appellant, highlighting various processes involved in treating the milk, such as straining, filtration, chilling, separation, and blending, which altered the physical and chemical properties of the milk. The Tribunal agreed with the CIT (Appeals) that these activities amounted to an industrial process, making the appellant eligible for the deductions claimed.

Issue 2: Dairy Business as an Industrial Undertaking
The Tribunal observed that the appellant, engaged in a dairy business, collected milk from villagers and subjected it to chilling treatment before sale in the city. The process of chilling, along with cream extraction and separate sale of cream and skimmed milk, was considered an industrial activity. The Tribunal concluded that the appellant's operations qualified as an Industrial Undertaking, making them eligible for deductions under relevant sections of the Income Tax Act.

Issue 3: Entitlement to Deductions
The appellant's eligibility for deductions under Section 80 HHA and Section 80-I was contested by the revenue authority, arguing that no manufacturing activity was carried out, and chilling milk did not change its composition significantly. However, the Tribunal upheld the appellant's claim, emphasizing the transformative processes applied to the milk, resulting in a distinct commodity known as dairy milk. The Tribunal ruled in favor of the appellant, stating that the activities undertaken constituted a manufacturing process, enhancing the milk's nutritional value, quality, and marketability.

In conclusion, the High Court dismissed the Income Tax Appeals, affirming the Tribunal's decision in favor of the respondent assessee. The Court held that the processes applied to the milk, including chilling and other treatments, constituted a manufacturing process, making the appellant eligible for the deductions claimed under the Income Tax Act.