High Court Of Andhra Pradesh
CIT Vs. O.R. Distilleries Ltd.
Assessment Years : 1985-86, 1986-87 And 1989-90
Section : 32A
V.V.S. Rao And B.N. Rao Nalla, JJ.
Referred Case Nos. 254 Of 1996 & 77 Of 1997
January 27, 2012
JUDGMENT
V. V. S. Rao, J. – These two Referred Cases can be disposed of by a common order as they arise out of the assessment of income tax of the same assessee, namely, M/s.O.R.Distilleries Ltd., Tirupathi.
2. In R.C.No.254 of 1996, the Income Tax Appellate Tribunal (ITAT) referred the following questions under Section 256(1) of the Income Tax Act, 1961 (the Act), for opinion of this Court.
“1.Whether on the facts and in the circumstances of the case, the ITAT is correct in holding that the article or thing, viz., alcohol including rectified spirit and denatured spirit manufactured by the assessee-company do not come under the ambit of Eleventh Schedule of the I.T. Act, 1961?”
2. Whether on the facts and in the circumstances of the case, the ITAT is correct in law in holding that the assessee company is entitled to investment allowance u/s.32A of the I.T. Act, 1961 for the asst. year 86-87?”
3. In R.C.No.77 of 1997 the ITAT referred the following two questions for the opinion of this Court.
“1. Whether on the facts and in the circumstances of the case, the ITAT is correct in holding that the article or thing, viz., alcohol including rectified spirit and de-natured spirit manufactured by the assessee-company do not come under the ambit of Eleventh Schedule of the I.T. Act?
2. Whether on the facts and in the circumstances of the case, the ITAT is correct in law in holding that the assessee-company is entitled to investment allowance u/s.32A of the I.T. Act, 1961 for the assessment year 1985-86, 1986-87 and 1989-90 and also deduction under Section 32AB for assessment year 1989-1990?”
Background facts
4. The assessee filed the return of income for 1986-1987 claiming net loss of Rs.16,54,000/-. By a subsequent return the loss was revised downward to Rs.16,09,450/-. The assessee claimed investment allowance which was allowed by the Income Tax Officer (ITO), Tirupati. The Commissioner of Income Tax (CIT), on scrutiny found that investment allowance cannot be allowed as the petitioner manufactured rectified spirit and denatured spirit and also sold arrack after diluting the rectified spirit. Therefore, in exercise of powers under Section 263 of the Act, the CIT revised the order on 26.02.1990, aggrieved by which, the assessee filed an appeal. The ITAT allowed the appeal holding that item 1 of Eleventh Schedule disqualifies manufacture of only potable liquor from claiming investment allowance and that the rectified spirit and denatured spirit do not come within the purview of item 1. Aggrieved by the order of the ITAT the Revenue sought reference of the two questions mentioned above, which is registered as R.C.No.254 of 1996 before this Court.
5. In pursuance of the order of the CIT under Section 263 of the Act, the ITO passed a consequential order under Section 143(3) of the Act, aggrieved by which, the assessee filed departmental appeal before the CIT (Appeals). His appeal was dismissed on 21.02.1992, aggrieved by which, the assessee filed an appeal before the ITAT which was allowed following ITA No.770 (Hyd)/90 (subject matter of R.C.No.254 of 1996). The Revenue again sought reference of the two questions mentioned above, which are the same issues in R.C.No.77 of 1997 pertaining to assessment years 1985-1986, 1986-1987 and 1989-1990.
Submissions
6. The Junior Standing Counsel for Income Tax would submit that Section 32A(2)(iii) read with item 1 of Eleventh Schedule of the Act does not enable the assessee to claim investment allowance as they are engaged in the manufacture and production of alcoholic spirits. According to her, item 1 of Eleventh Schedule includes any kind of alcoholic spirits including non-potable/potable alcoholic spirits. She relies on the speech of the Finance Minister while introducing the Finance (No.2) Bill, 1977, in the Parliament on 17.06.1977. Referring to Section 2(29) of the Andhra Pradesh Excise Act, 1968, and Rule 2(k) of the Andhra Pradesh Rectified Spirit Rules, 1971, she would urge that any alcohol would fall within the ambit of “alcoholic spirits” and therefore the petitioners manufacturing the rectified spirit and denatured spirit are not eligible to claim investment allowance.
7. The Counsel for the assessee would submit that the assessee cannot be denied the benefit under Section 32A of the Act on the ground that under compulsion they were manufacturing arrack which is potable. He would submit that item 1 of Eleventh Schedule has to be construed by applying the principles of Noscitur a Sociis and ejusdem generis. So construed, according to the Counsel, “alcoholic spirits” would only mean those alcoholic beverages which are fit for human consumption and potable. He relies on the decision of the Supreme Court in Siddeshwari Cotton Mills (P) Ltd. v Union of India [1989] 75 STC 75 (SC) and CIT v Sraya Industries (P.) Ltd. [2010] 328 ITR 29 (Delhi). The attention of this Court is drawn to the Circular dated 03.03.1978 of the Central Board of Direct Taxes (CBDT) in support of the contention that rectified spirit is not covered by the Eleventh Schedule of the Act.
Point for consideration
8. In the background facts and having regard to the rival consideration the question that would fall for consideration is whether alcohol including rectified/denatured spirit manufactured by the assessee company do not come under the ambit of the Eleventh Schedule of the Act.
The relevant provisions
“32A. Investment allowance – (1) In respect of a ship or an aircraft or machinery or plant specified in sub-section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty-five per cent of the actual cost of the ship, aircraft, machinery or plant to the assessee :
Provided that in respect of a ship or an aircraft or machinery or plant specified in sub-section (8B), this sub-section shall have effect as if for the words “twenty-five per cent”, the words “twenty per cent” had been substituted :
Provided further that no deduction shall be allowed under this section in respect of-
(a)Â any machinery or plant installed in any office premises or any residential accommodation, including any accommodation in the nature of a guest house ;
(b)Â any office appliances or road transport vehicles ;
(c)Â any ship, machinery or plant in respect of which the deduction by way of development rebate is allowable under Section 33 ; and
(d)Â any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any one previous year.
Explanation.-For the purposes of this sub-section, “actual cost” means the actual cost of the ship, aircraft, machinery or plant to the assessee as reduced by that part of such cost which has been met out of the amount released to the assessee under sub-section (6) of Section 32AB
(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 31st day of March, 1976, by an assessee engaged in the business of operation of ships or aircraft ;
(b)Â any new machinery or plant installed after the 31st day of March, 1976,-
(i)Â for the purposes of business of generation or distribution of electricity or any other form of power ; or
(ii)Â in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing ; or
(iii)Â in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing , not being an article or thing specified in the list in the Eleventh Schedule :
(Proviso and Explanation are omitted as not relevant.)
(emphasis supplied)
THE ELEVENTH SCHEDULE
See section 32A, section 32AB, section 80CC(3)(a)(i), section 80-I(2), section 80J(4) and section 88A(3)(a)(i)
LIST OF ARTICLES OR THINGS
1. Beer, wine and other alcoholic spirits.
(Items 2 to 28 are omitted as not relevant) “
Principles of interpretation
9. To understand the spirit of a statute, one has to understand its basic script. Literal or strict rule of interpretation is norm. It is golden rule to get at the intention from the language of the provision. If language or the phraseology employed by the legislation is precise and plain, it itself proclaims legislative intent in unequivocal terms, and the same must be given effect, regardless of its effect or hardship that may result (Chief Justice of Andhra Pradesh v L.V.A. Dixitulu [1979] 2 SCC 34 and Kehar Singh v State (Delhi Administration) AIR 1988 SC 1883. If literal or golden rule of interpretation yields vaguely absurd meaning, the rule can be ignored. Then statute has to undergo purposive interpretation, if necessary, using rules of harmonious construction and contextual interpretation. While so doing, the true or legal meaning of enactment is arrived at by reading a statute in the light of any discernible purpose or object, for which it is enacted (District Mining Officer v Tata Iron & Steel Company. [2001] 7 SCC 358, [Union of India v Hansoli Devi AIR 2002 SC 3240; and Promoters & Builders Association of Pune v Pune Municipal Corpn. [2007] 6 SCC 143.
10. It is more often than not; the legislative practice to provide machinery for enforcing a police law (regulating law) or taxing law. These ‘machinery provisions’ should always be construed in a manner as to make them workable, by applying the maxim ut res magis valeat quam pereat (liberal construction should be put so as to make statute workable). If any interpretation renders an Act or any of its core provisions unworkable, such interpretation should be avoided unless the legislative intention is clear and unambiguous (Saurabh Chaudri v Union of India [2003] 11 SCC 146, CIT v Lakshmi Machine Works [2007] 290 ITR 667 (SC) and K.P. Mohammed Salim v CIT [2008] 300 ITR 302 (SC).
11. In Tinsukhia Electric Supply Co. Ltd. v State of Assam [1989] 3 SCC 709, a Constitution Bench of Supreme Court held. (para 49 of AIR)
“The Courts strongly lean against any construction which tends to reduce a Statute to a futility. The provision of a Statute must be so construed as to make it effective and operative, on the principle “ut res majis valeat quam pereat”. It is, no doubt, true that if a Statute is absolutely vague and its language wholly intractable and absolutely meaningless, the Statute could be declared void for vagueness. This is not in judicial-review by testing the law for arbitrariness or unreasonableness under Art. 14; but what a Court of construction, dealing with the language of a Statute. does in order to ascertain from, and accord to, the Statute the meaning and purpose which the legislature intended for it. In Manchester Ship Canal Co. v. Manchester Racecourse Co., (1900) 2 Ch 352, Farwell, J. said :
“Unless the words were so absolutely senseless that I could do nothing at all with them, I should be bound to find some meaning and not to declare them void for uncertainty.” (See pages 360 and 361).
In Fawcett Properties v. Buckingham County Council, [1960] 3 All ER 503, Lord Denning approving the dictum of Farwell, J. said:
‘But when a Statute has some meaning, even though it is obscure, or several meanings, even though it is little to choose between them, the Courts have to say what meaning the Statute has to bear rather than reject it as a nullity.” (Vide page 516).
It is, therefore, the Court’s duty to make what it can of the Statute, knowing that the Statutes are meant to be operative and not inept and that nothing short of impossibility should allow a Court to declare a Statute unworkable. In Whitney v. Inland Revenue Commissioners, 1926 AC 37, Lord Dunedin said
‘A Statute is designed to be workable, and the interpretation thereof by a Court should be to secure that object, unless crucial omission or clear direction makes that end unattainable.” (vide page 52).
12. In Standard Chartered Bank v Directorate of Enforcement [2005] 125 Comp. Cas. 513 (SC), another Constitution Bench of Supreme Court considered the question whether a company or a corporation, being a juristic person, can be prosecuted for an offence for which mandatory punishment prescribed is imprisonment and fine. The majority of the Court ruled that a company has no immunity from prosecution, and that fine can be imposed for violating a penal provision. The dissenting opinion deals with the maxim ut res magis valeat quam pereat, as under. (para 72 of SCC) The maxim “ut res magis valeat quam pereat” is pressed into service to contend that the duty of the court is to construe the enactment in such a way so as to implement rather than defeat the legislative purpose. In our view, this maxim can be pressed into service only if it is permissible to extract another reasonable meaning from the plain words used in the statute. There is a further difficulty in accepting this principle as applicable to the case on hand. This principle might enable the court to resolve the difficulty in construing a statute so that an interpretation is put on the statute which will carry forward the intention of the statute. However, it is to be remembered that the interpretation put on the statute must be of determinative import in all cases. This maxim cannot enable the court to put a variant construction on the statute, which would vary with the circumstances of different cases. (emphasis supplied)
13. The general words in a statute must receive general construction. This is, however, subject to exception that if the subject matter of statute or the context in which the words are used so require, a restrictive meaning is permissible to the words to know the intention of the Legislature. When a restrictive meaning is given to general words, the two rules often applied are Noscitur a Sociis and ejusdem generis.
14. Noscitur a Sociis: Literally it means that the meaning of the word is to be judged by the company it keeps. When two or more words which are susceptible of analogous meaning are coupled together, they are understood to be used in their cognate sense. They take as it were their colour from each other, that is, the more general is restricted to a sense analogous to a less general (State of Bombay v Hospital Mazdoor Sabha, AIR 1960 SC 610). But, the rule cannot be used to make one of the associated words wholly redundant (Shriram Vinyl & Chemical Industries v Commissioner of Customs AIR 2001 SC 1283.
15. In Shriram Vinyl & Chemical Industries (supra) it was the case where the appellants assembled modernized furnaces partly using imported parts, partly indigenously procured parts and partly serviceable components/parts recovered from the dismantled furnaces in their factory, and claimed benefit of lower rate of duty on imported parts used in the assembly of the furnaces basing on Notification No.155/86-Cus dated 1st March, 1986. The same was denied by the appellate Collector of Customs on the ground that no new furnace emerges in the assembly operation undertaken by them. The Tribunal affirmed the order of Collector. Before the Supreme Court, the appellants contended that the notification did not require that a new article must come into existence, and the Revenue contended that the expression “assembly” was to take colour from the expression “initial setting up”, and therefore, without any new article coming into existence, the question of claiming benefit under the notification would not arise. Allowing the appeal, the Supreme Court observed as follows.
“The three expressions “initial setting up”, “assembly” and “manufacture” cannot be construed to mean same thing. It is evident from the notification that the expression “assembly” has been separated from the expression “initial setting up”. These expressions are intended to cover different situations… The language of the notification is clear and plain. The notification is to be construed reasonably and rationally and not in a manner which deprives the benefit thereof. The expression “assembly” in the context and setting in which it has been used cannot be construed to mean bringing into (sic existence) of a new article. This expression cannot be equated with the expression “manufacture”. If the construction as placed by the Tribunal is accepted, it would render the expression “assembly” in the notification redundant. The expression “assembly” has been used as opposed to dismantle. The notification does not contemplate denial of its benefit on the ground of reuse of certain parts and/or use of some indigenous parts with the imported parts.”
16. Ejusdem generis: Noscitur a Sociis is wider than the rule of ejusdem generis. When particular words pertaining to class, category or genus are followed by general words, they are construed as limited to things of the same kind as those specified. In Siddeshwari Cotton Mills (P) Ltd. (supra) the apex Court considered the principles in the following terms.
“The expression ejusdem generis—’of the same kind or nature’—signifies a principle of construction whereby words in a statute which are otherwise wide but are associated in the text with more limited words are, by implication, given a restricted operation and are limited to matters of the same class or genus as preceding them. If a list or string or family of genus-describing terms are followed by wider or residuary or sweeping-up words, then the verbal context and the linguistic implications of the preceding words limit the scope of such words.
The preceding words in the statutory provision which, under this particular rule of construction, control and limit the meaning of the subsequent words must represent a genus or a family which admits of a number of species or members. If there is only one species it cannot supply the idea of a genus.
In the present case the expressions “bleaching, mercerising, dyeing, printing, waterproofing, rubberising, shrink-proofing, organdie processing’ which precede the expression “or any other process” contemplate processes which impart a change of a lasting character to the fabric by either the addition of some chemical into the fabric or otherwise. “Any other process” in the section must share one or the other of these incidents. The expression “any other process” is used in the context of what constitutes manufacture in its extended meaning and the expression “unprocessed” in the exempting notification draws its meaning from that context. The principle of construction considered appropriate by the Tribunal in this case appears to us to be unsupportable in the context in which the expression “or any other process” has to be understood.”
17. The rule of ejusdem generis has to be applied with great caution. If the subjects of enumeration belong to a broad based genus as also to a narrower genus, there is no principle that the general words should be confined to the narrower genus. In Uttar Pradesh State Electricity Board v Hari Shankar Jain [1978] 4 SCC 16, the Supreme Court elucidated this principle as follows.
“The true scope of the rule of “ejusdem generis” is that words of a general nature following specific and particular words should be construed as limited to things which are of the same nature as those specified. But the rule is one which has to be “applied with caution and not pushed too far”. It is a rule which must be confined to narrow bounds so as not to unduly or unnecessarily limit general and comprehensive words. If a broad-based genus could consistently be discovered, there is no warrant to cut down general words to dwarf size. If giant it cannot be, dwarf it need not be.
Findings and reasons
18. Item 1 of the Eleventh Schedule reads, “Beer, wine and other alcoholic spirits”. The words “other alcoholic spirits” is grouped with the words “beer” and “wine”. Does it give any indication in interpreting item 1. It is well settled that though the words used by the Legislature are of general nature, the intention might be to give restrictive meaning. The general words are to be construed as limited to things of the same kind as those specified. The Counsel for the assessee would commend the interpretation to the Court which would have the effect of reading, “and other alcoholic spirits” as including only those which are fit for human consumption. The Revenue on the other hand would contend that having regard to the word “and” used between the “beer, wine …. other alcoholic spirits”, the principle of Noscitur a Sociis would not be applied nor applying the principle of ejusdem generis to narrow down the meaning of “alcoholic spirits”. It is no doubt true that ‘beer’ and ‘wine’ are certainly alcoholic spirits which are fit for human consumption. They are in other words potable alcoholic spirits. The same is not the case with rectified spirit or industrial alcohol. When item 1 of the Eleventh Schedule mentions “other alcoholic spirits” along with “beer” and “wine”, applying the principle of Noscitur a Sociis it has to be construed as the alcoholic spirits which are beverages fit for human consumption. Industrial alcohol or rectified spirit was not intended to be included within “other alcoholic spirits”. We are also supported in this regard by the speech of the Finance Minister while introducing the Finance (No.2) Bill, 1977, which reads as under ([1977] 107 ITR (St.) 65, 66):.
“With a view to stimulating industrial development and economic growth, I consider it desirable to widen the scope of the scheme of investment allowance introduced last year. That scheme has unfortunately not laid down any well- defined and clear criteria for selecting industries to which the benefit of the concession was to be extended. This made it difficult to explain to those claiming eligibility why some industries had been given the benefit, while it was denied to others. Since there is a need for encouraging generation of internal resources for financing investment, I consider it best to extend the scope of investment allowance to all industries except those which are engaged in the manufacture of specified low priority items such as cigarettes, cosmetics and alcoholic beverages. This measure will be of great benefit to the economy.”
19. Further, the CBDT letter, dated 03.03.1978, addressed to the President of the All India Alcohol-Based Industries Development Association clarified that, “industrial alcohol” is not covered by item 1 of the Eleventh Schedule of the Act. Even though the Finance Minister in his speech clarified, to extend the scope of investment allowance to all industries, it was sought to be denied the specified low priority items such as cigarettes, cosmetics and alcoholic beverages. Beverages are the liquids for drinking by the human beings. The rectified spirit or industrial alcohol is not liquid which can be consumed. Therefore, the speech of the Finance Minister does not in any manner help the Revenue. Indeed, the CBDT already clarified that industrial alcohol or rectified spirit is not covered by item 1 of the Eleventh Schedule.
20. In CIT v Sangrur Vanaspati Mills Ltd. [2009] 311 ITR 345 the Punjab and Haryana High Court while construing the word “soap” in Entry 4 of the Eleventh Schedule of the Act held that the word “soap” having been grouped with “toothpaste”, “dental cream”, “tooth powder”, the intention of the Parliament was to include only the “soap” meant for human hygiene, and therefore, the soap does not include washing soap. The Punjab and Haryana High Court applied the maxim of Noscitur a Sociis and held that any commodity mentioned in any entry gets its colour from the commodities or things mentioned either before or after the particular item for the purpose of assigning the same a correct meaning.
21. In CIT v. Sraya Industries (P.) Ltd. [2010] 328 ITR 29 the Delhi High Court while interpreting item 1 of the Eleventh Schedule of the Act agreed with the submission of the assessee that beer and wine are meant for human consumption and therefore the expression of “other alcoholic spirits” has to be interpreted as those alcoholic spirits meant for human consumption that would qualify to be included in Entry 1 of the Eleventh Schedule. Therein, the assessee was dealing with industrial spirit as well as Indian Made Foreign Liquor and country liquor. The Court, therefore, held that the assessee cannot be denied the investment allowance in respect of the plant and machinery installed for the purpose of manufacture of industrial alcohol even though such allowance cannot be allowed on the plant and machinery used for the purpose of manufacture of any items mentioned in Eleventh Schedule. We respectfully adopt the reasoning of the High Courts of Delhi, Punjab and Haryana.
22. The Counsel for the Revenue submits that though the assessee was licensed to manufacture rectified spirits and denatured spirits, they were manufacturing arrack and supplying the same to the Government; and arrack being potable alcoholic spirit fit for human consumption the assessee is not entitled to investment allowance. The submission is devoid of any merit. In ITA No.770/Hyd/90, which is subject matter of R.C.No.254 of 1996, the Tribunal considered this aspect, and observed as follows.
“…….Industrial alcohol/rectified spirit is not potable. Rectified spirit is basic raw material for potable liquors. Investment allowance claimed by the assessee and allowed by the ITO was only on the machinery used for the manufacture of rectified spirit which is not potable liquor like wine or beer which could fall within the scope and ambit of other alcoholic spirits appearing in item 1 of Eleventh Schedule. The main activity of the assessee company is the manufacture of rectified spirit. However, sometimes it was forced by the Govt. to convert the end product viz., spirit into arrack by diluting it with water. Mainly and essentially the appellant was licensed to manufacture rectified spirit and denatured spirit which are not potable. They are called industrial spirits. The learned representative of the assessee brought to our notice clarification dt.3.3.1978 issued by the Central Board of Direct Taxes to the effect that industrial alcohol is not covered by item 1 of the Eleventh Schedule of the I.T.Act. The said clarification dt.3.3.1978 was issued in F.No.2020/90/77-ITA-II, Govt. of India, Dept. of Revenue (CBDT). Considering the terms of the licence issued to the assessee and the nature of the product manufactured by it and also taking into consideration the aforementioned clarification issued by the CBDT, we are of the opinion that rectified spirit and denatured spirit which are not potable liquors and which are known as industrial spirits are not covered by item 1 of the Eleventh Schedule to the I.T.Act…”
23. There is no denial that the assessee was given licence to manufacture rectified/denatured spirit. They had no licence to manufacture beer, wine or arrack or any other alcoholic beverage. At the relevant time due to compulsion from the Government, the assessee was required to manufacture arrack and supply to the Government. The assessee claimed investment allowance in respect of the machinery purchased for the manufacture of rectified spirit and not the arrack. Respectfully following the reasoning in Sangrur Vanaspati Mills and Sraya Industries we hold that the assessee cannot be denied investment allowance.
24. The attention of this Court is invited to Section 32A(2A) of the Act, which reads as under.
“The deduction under sub-section (1) shall not be denied in respect of any machinery or plant installed and used mainly for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule, by reason only that such machinery or plant is also used for the purposes of business of construction, manufacture or production of any article or thing specified in the said list.”
25. Sub-section (2A) of Section 32A of the Act was inserted by the Finance (No.2) Act, 1977. According to the said provision an assessee shall not be denied investment allowance in respect of the machinery used mainly for the purpose of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule, even if such assessee uses the machinery for the purpose specified in the said list. Therefore, when the assessee was given licence for the manufacture of rectified/denatured spirit, even incidentally under compulsion manufactures arrack to supply to the Government, the assessee cannot be denied investment allowance.
26. In the result, for the above reasons, question Nos.1 and 2 in R.C.No.254 of 1996 and question Nos.1 and 2 in R.C.No.77 of 1997 are answered in the affirmative in favour of the assessee and against the Revenue.
27. The two Referred Cases shall stand disposed of accordingly. There shall be no order as to costs.
[Citation : 349 ITR 215]
