High Court Of Andhra Pradesh
Deccan Cements Ltd. Vs. CIT
Section : 80HH
Kalyan Jyoti Sengupta, Cj. And K.C. Bhanu, J.
Referred Case No. 3 Of 1996
October 9, 2013
ORDER
Kalyan Jyoti Sengupta, CJ. – This case has been referred under Section 256 of the Income Tax Act, 1961 (hereinafter referred to as ‘said Act’) by the learned Income Tax Appellate Tribunal, Hyderabad Bench, for opinion of this 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 the assessee can be said to be running two industrial undertakings one in respect of mining and other in respect of manufacturing cement, although the company was engaged in the business of manufacturing cement and 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 the assessee’s profits could be allocated between two activities/undertakings of the assessee, namely that of mining 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 the assessee would be entitled to deduction under Section 80HH only with respect to the profits attributable to the manufacture of cement and not with respect to profits attributable 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 of manufacturing cement, and such manufacturing unit is situated in a backward area in the State of Andhra Pradesh. The assessee has also a mine having deposit of large quantity of lime. Hence, the assessee also carries on mining operation of the lime and the same is used as a raw material in manufacturing cement. In this matter, the opinion of this Court is sought for in relation to the assessment year 1987-88. Before the Assessing Officer, the assessee-company claimed deduction under Section 80HH of the said Act as it is carrying on the business of manufacturing cement in the backward area and has fulfilled all the conditions for getting deduction under the said section. The contention of the assessee-company is that it was not engaged simply in mining operation, but its main business was actually manufacturing of cement. The product of the mining operation, being the raw material, is used for manufacturing cement. The Assessing Officer, however, did not allow such deduction on the ground that since the assessee- company has been carrying on business of mining operation, by virtue of sub- section (10) of Section 80HH of the said Act, such deduction cannot be permitted. On appeal being taken to the Commissioner of Income Tax (Appeals), the contention of the assessee-company was accepted and directed for grant of deduction under Section 80HH of the said Act as it was found by the Commissioner of Income Tax (Appeals) that the assessee-company has been carrying on the business of manufacturing cement and there is no embargo under Section 80HH to of the said Act to allow such deduction. The Revenue against the order of the Commissioner of Income Tax (Appeals) went in appeal to the Tribunal. The Tribunal, after having noted its own earlier judgment and order on the identical issue in the assessment years 1984-85 and 1985-86, held that the assessee’s main business was manufacturing of cement, which is entitled to deduction under Section 80HH, and there was no absolute prohibition that if the industrial undertaking is engaged in mining, then it would cease to be entitled to claim the deduction in respect of items manufactured or produced, which are entitled to deduction under Section 80HH, and that the assessee, in such a situation, can be said to have been running two industrial undertakings, one in respect of mining and the other in respect of manufacturing cement, and the profits attributable to mining would not be entitled to deduction under Section 80HH, whereas profits attributable to manufacturing of cement would enjoy the deduction and the profits could be allocated between the two activities/undertakings of the assessee. Following that order, the Tribunal directed the Assessing Officer to determine the profits attributable to manufacturing of cement and allow deduction with regard to that.
3. Mr. S. Ravi, learned senior counsel appearing for the assessee-company, submits that the Tribunal erred in holding that the assessee is having two separate business activities in division for granting deduction under Section 80HH of the said Act. He contends that the learned Tribunal factually held that the main business activity of the assessee-company is manufacturing of cement and the mining operation carried on by it is not meant for sale in the market and the same is used as a raw material in manufacturing of cement. Therefore, the question of deriving profit on this mining operation does not and cannot arise. Had the assessee sold the product of mining operation in the market, then profit would have been derived from the mining activity. He further contends that the entire output of the mining operation of lime is charged as a raw material for the manufacture of a different product than the cement. Therefore, the entire profit derived from manufacturing of cement should have been taken into consideration for the purpose of granting deduction under Section 80HH of the said Act and a portion of the profit should not have been taken in order to deprive the benefit of deduction as far as the mining operation is concerned.
He also submits that actually no profit is derived for mining operation. He further submits that in order to hold the two manufacturing activities as separate and distinct activities, they must be independent in all senses and further on the conditions as mentioned in the said section. In support of his contention, he has placed reliance on two decisions of the Supreme Court in cases of Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195 and Liberty India v. CIT [2009] 317 ITR 218/183 Taxman 349 (SC).
4. Mr. S.R. Ashok, learned senior counsel appearing for the Revenue, submits that factually the assessee is carrying on two business activities, one is mining operation and another is manufacturing of cement, and both the units are always treated to be separate and distinct business activities. He further submits that it is immaterial whether the product arising out of the mining operation is directly sold in the market or not, and that the assumed profit can easily be ascertained. Such legal course of action is permissible under the law. He submits that the raw material extracted from mining operation for manufacturing cement has certainly got its market value if it is purchased from open market and such market value has to be taken into consideration and the same shall be treated as cost price of the raw material, and certainly the cost price must be much less than the market price, and therefore, the emerging difference price can be treated to be a profit. That apart, he contends that in the previous assessment years, namely 1984-85 and 1985-86, the Tribunal factually held that the assessee has been running two separate industrial undertakings and out of running of the same, the profit must have been derived and this factual position was accepted by the assessee. In the relevant assessment years, it is not contended that the factual situation, as far as running of two separate industrial undertakings is concerned, is different. He further submits that the words “derived from” are having a very restrictive meaning unlike the words “attributable to”. So the legislature has laid emphasis on the words “profit derived from” and not “attributable to” and by virtue of sub-section (10) of Section 80HH, it has been expressly prohibited for granting deduction in relation to the mining activity. To support above contention, he has referred to a decision of the Constitutional Bench of the Supreme Court in case of Tata Iron & Steel Co. Ltd. v. State of Bihar [1963] 48 ITR 123 and another decision in case of Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 Taxman 539 (SC).
5. After hearing the learned counsel for the parties and after taking note of the factual aspect of the matter and in order to give opinion on the questions referred to us, we think that the following two points are required to be decided:
1. Whether the assessee’s mining operation of lime is separate and independent industrial activity from that of cement manufacturing activity or not? and
2. Whether because of the use of entire product of mining activity as raw material in the manufacture of cement by the assessee, the mining operation looses its independent identity so as to disentitle the benefit of deduction by virtue of sub-section (10) of Section 80HH of the said Act or not.
6. From the records we find, as has been rightly contended by Mr. S.R. Ashok, that in the previous assessment years, namely 1984-85 and 1985-86, the Tribunal found on fact that the assessee has been running two industrial undertakings, one is mining of lime and another is manufacturing of cement. It is an admitted position further that against the aforesaid findings, no appeal has been preferred. Hence, we have to proceed on the premise that the mining activity of the assessee is distinct and independent from the cement manufacturing activity. Now the question remains is whether the use of the entire product of lime, extracted from mining operation for manufacturing of cement, looses its marketable value in order to ascertain the profit or not.
7. The argument of Mr. S. Ravi is that a manufacturer cannot trade with itself. Therefore, unless there is a factual sale in the market, no profit can be derived from this mining operation. In order to derive the entire profit, the cement manufacturing unit has to be taken into account and the product has to be sold in the market and then the profit will be ascertained. We are of the view that this submission, at the first blush, sounds logic, but while keeping in view 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 in manufacturing cement and in order to manufacture the finished products, raw material is essential and the cost thereof is one of the factors for cost price of the finished goods. Therefore, in the manufacturing activity of cement unit, the cost of the finished product has to be ascertained and in that process, the cost of lime has also to be taken into consideration. In the case on hand, the lime, being a raw material, is not procured from open market and it has got its own indigenous supply. Therefore, the cost of the lime extracted from mining operation has to be ascertained from the cost price and it is found, while doing so, that the cost of lime of its own source (ordinarily it happens) is lesser than the market price. Therefore, the difference between the cost price of indigenous source and the market price is obviously the profit. Moreover, once lime is used from its indigenous source to manufacture the finished products and by virtue of sale of such finished products if there is any profit, then obviously that profit is also related to the mining operation.
8. The Constitutional Bench of the Supreme Court, in the case 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 mining operation 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 that the cost of winning the ore is Rs.50 a ton and the market price of similar ore which would have to be used in the absence of the ore mined is Rs.60 per ton. There could not be any doubt that this difference of Rs.10 per ton of ore would be reflected in the profit or loss 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 in these appeals is merely whether there could in law be an annual profit from the mine in cases where the ore produced from the mine is sold not as ore but is utilised as the raw material for the manufacture of other products which are sold. When once it is conceded, as it has to be, that in order that profit may result from the mining activity, it is not necessary that the ore should be the subject of sale in the same condition as it was when it came out of the mine, but that, even if the won ore is subjected to processes to make it more useful or attractive to a buyer and then sold, there would be a profit, and that in the latter event the expenses of processing would be a legitimate outgoing for computing the profit, it appears to us to follow that if the ore is so processed as to turn it into a different commodity and then sold there would be no negation of the concept of “a profit” from the mine, and the question would be only as regards the elimination of the further expenses involved and principles on which these could be ascertained.”
9. Thus it appears from the above authoritative pronouncement that the segregation of profit of two different business activities is permissible under law. It is an undisputed position that Section 80HH of the said Act uses the words “profit derived from” and not “attributable to”. Therefore, what is the import of the words “derived from” has been explained by the Supreme Court in the case of Liberty India (supra). Therein the Supreme Court had made it clear that the connotation of the words “derived from” 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 is deductable thereunder and not otherwise.
10. Similarly in the case of Pandian Chemicals Ltd. (supra), the words “derived from” have been mentioned while dealing with Section 80HH of the said Act. Therein the Supreme Court, while following an old decision of the Privy Council in case of CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325, and further the decision of the Constitutional Bench of the Supreme Court in case of Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 held that the words “derived from” in Section 80HH of the said Act must be understood as something which has a direct or immediate nexus with the assessee’s industrial undertaking. Thus the profit, which has been derived in relation to the manufacturing activity of the cement, has to be taken into consideration and not for other manufacturing activity particularly for mining activity as the legislature has expressly excluded the mining activities from the purview of the deductability benefits under Section 80HH of the said Act. It is the settled proposition of law that while interpreting the provision of a statute, this has to be considered literally as it appears, and it cannot be given a purposive meaning. Hence, when the legislature has excluded the mining activity with the specific words, this has to be accepted. The decision in case of Textile Machinery Corpn. Ltd. (supra) cited by Mr. S. Ravi, has no manner of application as it is found from fact that in the previous assessment years the assessee’s two business activities have been treated to be a separate functional activity. In that case, the Supreme Court held that for the reconstruction of existing business, there must be transfer of the assets of the existing business to the new industrial undertaking.
This judgment is really intended to cite for holding that the mining activity is a part and parcel of the cement manufacturing activity and it has got no independent functioning. In view of the earlier fact finding by the Tribunal, which has reached finality, this judgment is not helpful in this case. Under the circumstances, while upholding the argument of Mr. S.R. Ashok and expressing our inability to persuade ourselves to accept the argument of Mr. S. Ravi, we hold that the assessee is having two independent industrial undertakings, one is mining activity and the other is cement manufacturing activity. We are also of the opinion that apportionment of the profit derived from cement manufacturing activity can be apportioned in order to find the profit derived from mining activity.
11. Accordingly, we answer the questions in the manner as follows:
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.
[Citation : 360 ITR 444]
