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TMI Blog1985 (6) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that a liability can be allowed in the year to which the liability related. Since in the present case the liability related to the assessment year 1975-76 it could not be allowed in 1977-78. The Commissioner (Appeals), however, held that the disallowance was not justified. The addition on this score was, therefore, deleted. This is challenged in the present departmental appeal. 3. The learned counsel for the department has pointed out that the assessee had made a claim of this amount for the assessment year 1975-76. The amount in question undisputedly related to the accounting year relevant to the assessment year 1975-76. On the basis of the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd.'s case, the claim was not allowable in the assessment year 1977-78. In support of his case reliance was placed in the decisions of the Kerala High Court in L.J. Patel Co. v. CIT [1974] 97 ITR 152 and CIT v. K.A. Karim Sons [1982] 133 ITR 515 (FB). According to the learned counsel, the decision in CIT v. North Arcot District Co-operative Spg. Mills Ltd. [1984] 148 ITR 406 (Mad.) cited for the other side related to interest on instalment payments-a case of contractual liability whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of individual items. The counsel has further relied on the decisions in CIT v. R. Shantilal Co. [1971] 82 ITR 214 (Cal.), Nathmal Tolaram's case, CIT v. Banwari Lal Madan Mohan [1977] 110 ITR 868 (All.) and Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1 (Delhi). The decisions in L.J. Patel Co. and K.A. Karim Sons' cases did not apply to the facts or the issues in the present case since the assessee did not even know about the liability in the first place and secondly the entire discussion was subject to the method of accounting followed by the assessee. 6. We have here an extreme case of the inconsistency the department has followed in dealing with the claim. For the assessment year 1975-76, when the assessee properly made a claim, the ITO rejected it. The assessee's learned counsel has urged that the ITO at that time clearly held the expenditure to be allowable for the assessment year 1977-78. Even so, when the assessment for 1977-78 came up, the same ITO held that the judicial decisions and the law as interpreted by the Supreme Court required the expenditure to be allowed in the earlier year and so it was not allowable in 1977-78. The learned counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cidentally it requires to be mentioned that the decision in Kedarnath Jute Mfg. Co. Ltd.'s case as rightly contended by the learned counsel for the assessee, only stressed the point that even though the expenditure is not debited to the profit and loss account, if it had already arisen the assessee could claim it. In that decision there is nothing to show that depending on other factors like complete ignorance of the existence of any liability or the method of accounting followed, the claim can be allowed only in that year. This view does not get support even from the other decisions referred to for the department. It would be strange for an assessee to think of a claim and debit it into the profit and loss account for a year when he does not even know of it. The decision in Kedarnath Jute Mfg. Co. Ltd.'s case and similar decisions refer to cases where there is a specific liability. If the assessee was under the honest impression that there was no purchase tax on goods to be exported he could certainly not have made an entry for 1975-76. The Supreme Court decision does not also require him to do so. We, therefore, uphold the order of the Commissioner (Appeals) on this point. 8. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that 'manufacture' implies that commercially a new product is brought into existence. Every change in an article is the result of treatment, labour and manipulation but every change is not 'manufacture'. In order to constitute 'manufacture' something more is necessary and the expending of labour must be carried to such an extent that the article suffers a series of transformations. A new and different article must emerge. Reference is made in this connection to the decisions in Dy. Commissioner, Sales Tax v. Pio Food Packers AIR 1980 SC 1227 and Chowgule Co. (P.) Ltd. v. Union of India AIR 1981 SC 1014. These decisions clearly establish that in manufacture the end product must be a commercial commodity different and distinct from the original item. The counsel has relied on the three tests for 'manufacture' elaborately discussed in Idandas v. Anant Ramchandra Phadke AIR 1982 SC 127. In the present case, there is no 'manufacture' as understood and clarified by these decisions. Reference is also made to the decisions in CIT v. Casino (P.) Ltd. [1973] 91 ITR 289 (Ker.), Singh Engg. Works (P.) Ltd. v. CIT [1979] 119 ITR 891 (All.), CIT v. Pressure Piling Co. (India) (P.) Ltd. [1980 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 80J, 33 and 32A of the Act it is pointed out that the words 'manufacture' and 'production' occur in the three sections 80J, 33 and 32A. The provisions of the Fifth Schedule of the Act are equally noticeable. In this connection special mention is made of Fifth Schedule wherein at entry 30 reference is made to 'processed (including frozen) fish and fish products'. The use of these expressions clearly indicates that the Legislature has understood frozen fish and fish products as something different from the previous existing commodity. The decision in Singh Engg. Works (P.) Ltd.'s case is of great significance in this context. Other decisions of the High Courts referred to also support his case. 13. On behalf of the interveners Naik Ice Cold Storage, Ratnagiri, Ratna Sea Foods, Ratnagiri and Gadhre Marine Products, Ratnagiri Shri Gadgil pointed out that in several decisions the Tribunal accepted the applicability of these reliefs in the case of fish industry. These assessees also caught fish with the help of boats and trawlers, got them converted into hardened slabs and exported them. The applicability of sections 32A and 80HH of the Act only has been in dispute in these cases, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material change to the final product from the raw materials. But all these decisions indicate that whether there is a manufacture or not depends on the facts of each case. A rule of thumb cannot be applied. The learned counsel has also pointed out that the decisions stress that it is not necessary in every case that the characteristics of the original material should change. It is not necessary that the material used in the process, production or manufacture should lose its basic property or get transformed itself. A complete transformation is not regarded as absolutely necessary. Stress is laid in this connection on the decisions in CIT v. Lakhtar Cotton Press Co. (P.) Ltd. [1983] 142 ITR 503 (Guj.) and North Bengal Stores Ltd. v. Member, Board of Revenue 1 STC 157 (Cal.). That the general principles evolved have to be applied to the particular facts is clear from the decisions in Lakhtar Cotton Press Co. (P.) Ltd.'s case and CIT v. Perfect Liners [1983] 142 ITR 654 (Mad.). The Tribunal decisions in Andhra Pradesh State Seeds Development Corpn. v. ITO [1983] 5 ITD 624 (Hyd.) and Nishit Synthetics (P.) Ltd. v. ITO [1984] 7 ITD 486 (Ahd.) are also of relevance. 15. Without prejud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act. The Sales tax Act, according to the learned counsel, does not require in fact any elaborate enquiry into the process of manufacture or production. On the contrary it gave the assessee certain exemptions and advantages in order to achieve certain policy objectives. The decisions reported in the context of the Sales Tax Act should, therefore, be appreciated against this background. The argument of the learned counsel in this context is that being an exemption-giving section the High Court and other authorities have interpreted the sales tax provisions in a liberal manner to help the assessee. The same interpretation should not be addressed or applied to different provisions under the Act to give just the reverse policy effect, namely, to deny the assessee a benefit that is clearly intended for him in the larger interest. 17. The learned counsel has in this connection referred to a series of decisions where the fact of 'production and manufacture' has been accepted, such as Debusking of rice-Laxmi Chand Badri Narain v. CST [1971] 27 STC 21 (MP), Boulders broken into metal-Kulkarni v. State 8. STC 294, Caning of furniture-Adarsh Furniture House v. CST [1973] Law Diary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 80J. The expression 'in a manufacturing process' also occurs in section 80HH. In short it is the case of the learned counsel that not only should the general principles and the general meaning of these expressions be applied to the facts of the case but a comprehensive and purposeful interpretation should be adopted consistent with the liberal and benevolent approach of the circulars of the CBDT. 19. The assessee-company is engaged in the business of catching fish, processing them and also in the export of marine products. It claimed relief under section 80J in respect of its business. Under section 80J where the gross total income of an assessee includes any profit and gains derived from any industrial undertaking or a ship or the business of a hotel to which that section applies, relief is granted by way of a deduction from such profits and gains. Sub-section (4) of section 80J lays down the conditions requisite for the grant of the relief and is as under: "(4) This section applies to any industrial undertaking which fulfils all the following conditions, namely:- (iii) it manufactures or produces articles, or operates one or more cold storage plant or plants, in any pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and weighed after arrival at the destination. VII. Beheading/Peeling : Depending upon the quality of shrimp, the shrimp is either beheaded leaving the shell on for HL (Headless) freezing or beheaded and peeled for PUD (Peeled Undeveined) freezing. VIII. Deveining : Operation of deveining done by removing the gut from the shrimp. IX. Icing and transportation : Shrimp mixed with crushed ice before transportation to freezing units. X. Washing, weighing and storing : At the receipt point for freezing, shrimp once again washed and weighed. If next operation is likely to be delayed, shrimp stored in tubs. XI. Grading : Shrimp graded in different species and sizes. Each lot washed and kept for further processing. XII. Washing, draining, weighing and filling : Each lot washed, water drained by using draining table, predetermined quantities weighed out into waxed cartons inner lined by a thin polythene sheet. Shrimp arranged in carton in slab form. Filled cartons arranged in metallic trays. Glazing water added to all the cartons arranged in the trays, coded clips of paper placed in each carton. Carton itself superscribed with name of the species, count and code as prescribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reading of section 80J would show that the relief is available to an assessee whose gross total income includes profits and gains derived from an industrial undertaking. The further condition laid down by section 80J(4) is that of manufacturing or producing articles. There could, therefore, be industrial undertakings not manufacturing or producing articles, which in view of the stipulation in sub-section (4) of section 80J will not be entitled to the relief. In view of the confused use of the expression 'industrial undertaking' with or without the further qualification of manufacturing or producing by the authorities below, it is perhaps necessary for us to go into the question as to whether the activity of the assessee in the present case constitutes an industrial undertaking in the first place. The further question is whether for the purpose of the exemption under section 80J, manufacturing or production of articles is involved. 21. Like 'manufacture' or 'production' an 'industrial undertaking' also does not seem to have been defined in this connection in the statute. Even so, any activity involved in transformation of one article into another or the processing of an article by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explained in this context. 24. The Chowgule Co. (P.) Ltd.'s case explained what is processing. Their Lordships of the Supreme Court held that though the blending of different qualities of ore possessing differing chemical and physical composition so as to produce ore of the contractual specifications cannot be said to involve the process of manufacture, since the ore that is produced cannot be regarded as a commercially new and distinct commodity from the ore of different specifications blended together, the operation of blending would amount to processing of ore. The strict question of manufacture or production or the distinction between them do not seem to have been dealt with in this case under section 8(3)(b) of the Central Sales Tax Act. 25. In Idandas' case the third of the cases, the Supreme Court laid down the test to determine whether a lease was granted for the purpose of 'manufacturing process'. The three tests laid down are that it must be proved that a certain commodity was produced, that the process of production must involve either labour or machinery and that the end product which comes into existence after the manufacturing process is complete, should have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e produced was totally different from the parts manufactured or involved therein 27. Analysing the decisions certain broad principles emerge. Some activity, work or processing is to be done on some material. The activity or work should result in the transformation of that material into something else. It is not necessary that the final material should be entirely different from the component parts. The component parts could even retain their individual identity in the whole article. The end article should be different from the article with which the activity or processing was started. A heavy dose of processing rarely leaves a commodity unchanged structurally and otherwise. As a corollary the principle emerge that an article subjected to an amount of processing would get gradually transformed and finally it could come to a stage where it is an entirely different article. Whether such a different article is produced at the final stage or an intervening stage would depend on the facts of each case. Where such a different article is produced in the interim there has already been the production or manufacture of an article and nothing in this context depends on whatever further proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo cannot even be said to be the same for the purposes of section 80J or the other sections of the Act in question. To do so would lead to as much an absurdity as to say that a live man is the same as the flesh of a man or a live goat is the same as meat. We have no doubt that even at this stage what was an animal alive or dead has become a mere edible material like meat or processed vegetable. This product is further subjected to both physical and chemical processes. It is subjected to heavy pressure and temperature below zero degree. The learned counsel for the department has explained all these processes as merely convenient modes adopted for reducing the volume and preserving. We do not think that this approach would be correct. Even though these results also incidentally arise, when a mass-like material is subjected to excessive pressure at below freezing point temperature and on the top of it when this is done after the addition of chemicals, one cannot be sure that the resulting product can in any way be the same as the original product. What internal transformation, chemical or physical, takes place has not been detailed before us but subjecting a pressured article to a tem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own goods. Where it does not take goods from others the whole integrated activity and the storage plant is fed by goods purchased and processed by the assessee, the entire business could be regarded as working a storage plant for profit. In the context of section 80J, we see no difference between a storage plant wherein the assessee puts others' goods and recovers rent and the other case where the assessee itself purchases goods, puts them in the storage plant and sells them. In both the cases, the cold storage plant is operated. The fact that in one case the rental from outsiders is the receipt of the storage plant rather than the difference between the purchase and the sale price of the assessee's own commodities, may not, in our view, make any difference. In other words, where the assessee operates its cold storage plant or plants and as an integrated part of such operation deals in its own commodities that itself would entitle the assessee to the relief under section 80J in respect of the entire activity. In the present case, in addition to the above, the assessee undisputedly processes material from the raw stage to a consumable one. We have, therefore, no hesitation in holdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cture, operating a cold storage plant, etc., rather than encouraging the production of an article like pineapple or prawns. The very object of the legislation in the present case, therefore, is certainly different if not even opposed to the objects of the sales tax enactments. It would, therefore, not be proper even to adopt the criteria considered in sales tax cases for the purpose of inter- preting the income-tax decisions. That this is so is clear from the specific items mentioned as items 28 and 30 in the Fifth Schedule on which emphasis has been laid by the Allahabad High Court in income-tax decisions. Apart from the position obtaining for sales tax purposes, and without going into the question of 'manufacture' or consumption in the manufacture of a commodity, the decision in the present appeal would rest on the clear case of production. We uphold the order of the Commissioner (Appeals) in this regard. 33. The last point in dispute relates to the grant of investment allowance under section 32A. This was denied to the assessee on the ground that the company is not an industrial undertaking manufacturing or producing an article. Our discussions in connection with the applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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