High Court Of Kerala
Cherian Varkey Construction Co. (P) Ltd. vs. Union Of India
Section 32(1)(iia)
Asst. Year 2006-07
K.Vinod Chandran & Ashok Menon, JJ.
ITA No. 15 of 2016
19th December, 2017
Counsel Appeared:
A. Kumar, P.J. Anilkumar & G. Mini (1748) for the Appellant. : P.K.R. Menon, Sr. Counsel, GOI (TAXES) & Jose Joseph, SC, for Income Tax for the Respondent.
VINOD CHANDRAN, J.:
The appellant, a construction company, is concerned with questions of law arising from the majority view of the Income Tax Appellate Tribunal. The bare facts to be noticed are as follows. The appellant for the assessment year 2006-07 procured three vehicles, specifically for the transport of Ready Mix Concrete (RMC) for use in their construction site, from their own manufacturing unit. The procurement of the vehicles were in the previous year to the assessment year. The appellant claimed additional depreciation, as available under Section 32 (1 )(iia), to the extent of 20% of the actual cost of such vehicles which, according to the assessee qualify as plant and machinery used in manufacture.
The claim was allowed by the Assessing Officer (A.O.), but later reopened on the ground of escapement of income from assessment, under Section 148. Notices were issued and assessment was completed declining the additional depreciation claimed under Section 32(1 ) (iia). The A.O. found that RMC is obtained by mere mixing and there is no manufacture involved. The additional depreciation under Section 32(1 )(iia) was only applicable to plant and machinery installed by an assessee, engaged in the business of manufacture or production of any article or a thing. The first appellate authority found that RMC is a product of manufacture. But, however, the vehicles are not eligible for the benefit under Section 32(1)(iia) for reason of not answering the description of plant and machinery and are only used for the purpose of transportation of RMC.
Before the Tribunal, there was a difference of opinion between the Judicial Member and the Accountant Member (for short ‘JM’ & ‘AM’ respectively); which was referred to a third member, again a JM, the Vice-President (VP), who concurred with the AM. At the first instance, the JM found that RMC is a product of manufacture following a decision of the Delhi Bench of the Tribunal. The JM also found that the vehicles would answer the description of plant and machinery and hence the purchase price, is entitled to be considered for additional depreciation. The AM held that making of RMC does not involve any manufacture and relied on the judgment of the Hon’ble Supreme Court in Commissioner of income Tax v. N.C.Budharaja & Co., [(1993) 204 iTR 412. The issue was referred to a third member and the third member agreed with the AM, to find that there is no manufacture involved in the making of RMC.
Though there is a question raised of re-assessment being on a mere change of opinion, it was not pressed when the matter was argued. The three questions raised before us, as available in the Income Tax Appeal are extracted herein below:
1) Whether on the facts and circumstances of the case, the Honourable Tribunal and authorities below erred in holding that there is no “manufacture†in the production of Ready Mix Concrete when the RMC itself is an excisable commodity/goods on which credit is also available for inputs?
2) Whether on the facts and circumstances of the case, the Honourable Tribunal and authorities below erred in holding that the appellant is not entitled for any additional depreciation under Section 32(1 )(iia) for the machinery used for manufacturing Ready Mix Concrete?
3) Whether on the facts and circumstances of the case, the Honourable Tribunal and authorities below erred in holding that the transit mixers, Tata trucks and Ashok
Leyland trucks are motor vehicles and the appellant is not entitled for any additional depreciation?
The learned Counsel appearing for the appellant submitted that the appellant though principally carrying on the business of construction, has also set up a manufacturing unit of RMC, the produce from which is consumed by the assessee in its construction activities and also sold outside. There cannot be dispute that the RMC is a sophisticated product of technological advancement, distinct from a mere concrete mix made at a construction site. The learned Counsel placed reliance on M/s Larsen & Toubro Ltd. v. Commissioner of Central Excise, Hyderabad, (2015) 15 SCC 455, to further buttress the argument. It is contented that N.C.Budharaja & Co. can be clearly distinguished in so far as the Hon’ble Supreme Court having only held that a dam or a building would not be an ‘article’ or ‘thing’, produced or manufactured. It is argued that the subject vehicles are involved in the process of manufacture, since the product cannot otherwise be transferred to the site. RMC has to be transferred to the construction site, in a state of agitation maintaining its semi-fluid form, to be poured into the structure, without permitting it to set and harden. This would qualify the vehicles to be plant and machinery involved in a manufacturing activity.
It is further argued that the second proviso excluding certain plant and machinery from depreciation, specifically excludes road transport vehicles by clause (C). The definition of road transport vehicle is clearly distinguishable from a construction equipment vehicle defined under Section 2(ca) of the Central Motor Vehicles Rules, 1989. Hence though transport vehicles do not qualify as plant and machinery, being specifically excluded; the exclusionary clause postulates inclusion within the definition, certain vehicles, such as the subject ones, which have a direct bearing on the manufacturing activity. RMC cannot be transported to the site and used in the construction site other than through these specially designed vehicles, which qualifies to be plant and machinery under Section 32(1 )(iia), asserts the assessee.
The learned Standing Counsel for Government of India (Taxes) would however point out that the assessee is principally engaged in the business of construction work and even if the assessee is involved in an additional manufacturing activity, it cannot qualify for exemption under Section 32(1 )(iia). The decision in N.C.Budharaja & Co. i s relied on to contend that construction activity cannot be termed to be a manufacture nor can any incidental manufacture fall within the claim for additional depreciation in so far as the construction activity itself not being an activity of manufacture or production, as has been categorically held by the Hon’ble Supreme Court. The learned Standing Counsel would also rely on the decisions of the Delhi High Court in CiTv. Minocha Brothers Ltd. [(1986) 160 iTR 134] & Bhagat Construction Co.Pvt.Ltd. v. Commissioner of income Tax, [(1998) 232 iTR 722].
At the outset, we are called upon to answer the question of law arising from the majority decision; whether the making of RMC can be termed to be manufacture and it qualifies as a thing or article. Both the Tribunal Members, who found that the product of RMC does not involve a manufacture, relied on N.C.Budharaja & Co. We have carefully gone through the decision and would specifically refer, initially, to the facts in the case from among the batch, which was decided first and the principle followed in the latter ones. Therein the question was the benefit provided under Section 80HH of the Income Tax Act, 1 961, which speaks of deduction in respect of profits and gains from newly established industrial undertakings and hotel business in backward areas. The assessee was carrying on the construction of a dam in a backward area. It was claimed that the assessee was carrying on an industrial undertaking and also involved in the manufacture and production of articles. The specific contention raised was that the construction work would also qualify to be termed as a manufacture.
The specific conditions to be fulfilled by an industrial undertaking for claiming deduction under Section 80HH were available under sub-section (2); on which, the dispute raised was only with respect to the assessee being involved in the manufacture or produce of articles. We have to notice that though there was an issue raised of the assessee not being an industrial undertaking, since the Revenue did not raise any arguments on that count, the Hon’ble Supreme Court proceeded on the basis that the assessee is an industrial undertaking coming within the definition as available under the Industrial Disputes Act, 1947. The question first specifically dealt with was, whether the construction of dam was a manufacture or not. Dilating upon the interpretations given to the terms ‘manufacture and production’, by courts, the time tested principle was reiterated in the following words: “The word ‘production’ has a wider connotation than the word ‘manufacture’. While every manufacture can be characterised as production, every production need not amount to manufacture.” The decision in Dy. CST v. Pio Food Packers, (1980) 46 STC 63 was extracted. It was found that manufacture is the end result of one or more processes through which a commodity is made to pass and after several stages of process it experiences a change and can be no longer regarded commercially as the original commodity. Instead, it would be recognised as a new and distinct article and only then manufacture can be said to take place.
In the aforecited case, as in the present one, the concern was not with the distinction regarding production and manufacture, but as to whether the end result is an article. The Hon’ble Supreme Court went on to consider the meaning of the term “article†as appearing in Section 80HH. It was found that by normal connotation, nobody would term a dam, a bridge, a building, a road or a canal, an article produced or manufactured. In this context, the assessee was held to be not eligible for the deduction under Section 80HH, since there is no manufacture or production of article involved. The same principle was applied to another assessee who was engaged in a specialised patented method of pressure piling, as foundation for buildings and other structures. The claim of that assessee, was under Section 84, which allowed a deduction in the profits and gains of business not exceeding 6% per annum on the capital employed, on satisfaction of the conditions in sub-section (2). One of the conditions was, similar to that in Section 80HH, the commencemenmt of manufacture or production of articles.
One other group of appeals were concerned with Section 32A, which permitted an investment allowance of 2 5% of the actual cost of machinery or plant, installed in the previous year. The issue arose on the condition “for the purpose of construction, manufacture or production of an article or thingâ€. The assessee was engaged again, in large scale construction work, especially of dams and canals and sought deduction on the plant and machinery erected at the construction site. The claim raised was also on the words additionally employed in Section 32A, distinct from Sections 84 & 80HH; ie: ‘construction’ in addition to manufacture and production and ‘thing’ in addition to article. The Court however on a deeper scrutiny; paricularly of the legislative history, found the additional words to be incapable of bringing within its ambit, construction works. Originally the provision allowed the deduction only to the things and articles specified in the Ninth Schedule, which included ships and all movable items. The word ‘construction’ was found to be appropriately used with reference to ships, which in common parlance are not treated to be produced or manufactured. A later amendment allowed the deduction to construction, manufacture or production of articles or things not specified in the Eleventh Schedule. Eleventh Schedule also contained only movables and did not include ships. A subsequent amendment specifically included ships and hence the provision retained the word ‘construction’, as aptly applicable to ship building was the finding. The scheme and context of the statute also supported the interpretation and hence it was held that even under Section 32A, construction of roads and buildings were not covered.
Even while respectfully bowing down to the dictum, we are of the opinion that there is a slight distinction in the present case. The assessee herein does not claim that its construction activity leads to a manufacture or production turning out an article or thing. The RMC used in the construction is a manufactured product is the specific contention taken by the assessee. We have to notice that in the case of N.C.Budharaja & Co. also, there was a contention that in the process of construction of dam, there were fixtures like gates, windows and door frames, which were made by the assessee themselves and hence there is a manufacture of an article or a thing. The above contention was answered in the following manner:
“It may be that the respondent is himself manufacturing some of the articles like gates, windows and doors which go into the construction of a dam but that makes little difference to the principle. The petitioner is not claiming the deduction provided by section 80HH on the value of the said manufactured articles but on the total value of the dam as such. In such a situation, it is immaterial whether the manufactured articles which go into the construction of a dam are manufactured by him or purchased by him from another person. We need not express any opinion on the question what would be the position if the respondent had claimed the benefit of section 80HH on the value of the articles manufactured or produced by him which articles have gone into/consumed in the construction of the dam. â€
The Hon’ble Supreme Court left open the issue, whether a deduction claimed on the value of the articles manufactured would be allowable as a deduction or not. Section 80HH allowed a deduction to the extent of twenty percent of the profits and gains derived from an industrial undertaking newly established in a backward area. To avail such exemption, there were conditions prescribed which inter alia included that the assessee commenced manufacture or production of articles, after and prior to specified dates. The assessee therein having claimed the deduction on the entire income on the construction of a dam, claiming it to be a manufacture or production, the Hon’ble Supreme Court found that it is not allowable since a dam cannot be termed an article. The mere fact that there was a manufacturing activity carried on, allied to the construction activity, would not enable the assessee to claim deduction under Section 80HH, since the deduction is of a percentage of the entire profits and gains and not limited to that of the manufacturing activity. in the other cases also the deduction was claimed on the ground of the construction of foundation of structures, dams and canals being covered under Section 84 & 32A respectively. This is the distinction we deduce in so far as the decision in N.C.Budharaja & Co. in the present case there is no question of the assessee claiming any deduction of a percentage of the entire profits and gains of the business. The income derived from the construction activity or the profits or gains is irrelevant in computing the depreciation available under Section 32(1 )(iia). The assessee does not also have a claim that the construction activity leads to a production or manufacture. The specific claim is that, one of the ingredients used in the construction being RMC, is manufactured by the assessee at its unit, which article or thing is captively consumed and also sold to third parties. The assessee claims depreciation, additionally permissible, @ 20% of the actual cost of plant and machinery procured, in the initial year of such purchase. The claim raised in the subject assessment year is with respect to the three vehicles purchased as capital assets in the previous year; an additional depreciation of 20% of the actual cost of such vehicles.
We come back to the question of whether the assessee principally engaged in construction activities can claim the benefit of an ancillary manufacturing activity. We are not able to countenance the argument of the Department that the principal activity of the petitioner being construction no additional depreciation can be permitted under Section 32(1 )(iia) of the Act; which we extract hereunder:
“32. Depreciation
(1)(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation, transmission or distribution of power, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii):â€
We cannot on a reading of the provision find that the additional depreciation permissible to the extent of 20% of the actual cost of plant and machinery, would be permissible only in the case of an assessee engaged principally in the business of manufacturing or production. We would be doing violence to the provision if we hold so since then we would be introducing the word ‘principally’ to read the provision as “an assessee engaged in the business principally of manufacture or production of any article or thingâ€. The dominant test has no application from the plain meaning of the words employed. Whatever be the business of the assessee, if the assessee is involved in a manufacture or production of articles or thing; then a claim under Section 32(1 )(iia) would be permissible to the extent allowed as depreciation.
Still, the question remains as to whether RMC can be considered to be an ‘article’ or ‘thing’ produced or manufactured. The JM, at the first instance, relied on the judgment of the Delhi Bench of the Tribunal, which we are told and as has been recorded by the Third Member, has been remanded by the jurisdictional High Court for fresh consideration on the specific issue of a manufacture or production arising, in the making of RMC. With respect to the said question, apposite would be reference to Larsen & Toubro Ltd. as cited by the learned Counsel for the appellant. The issue therein was with respect to an exemption notification, which exempted goods manufactured at the site of construction, for use in construction work. Concrete mix prepared at site was exempted under the notification and the assessee company which was manufacturing RMC at its construction site, for its own captive consumption, sought for the exemption as available to concrete mixed at site.
The assessee Larsen & Toubro Ltd., engaged in construction, had been manufacturing RMC in plants set up at their site. The assessee claimed exemption from excise duty in so far as the notification having provided such exemption to concrete mix. The essential contention of the asseseees was that whether it be conventionally mixed at site or produced as RMC, necessarily the end product would be the same and qualify for such exemption. The Hon’ble Supreme Court found that conventional concrete mix & RMC were treated differently by the Department, the latter classified under sub-heading 38.23 while the former, entitled to exemption under subheading 68.07. Circular dated 12-08-1996 issued by the Central Board of Excise and Customs, was referred to, wherein it was explained as to how RMC is manufactured. The explanation included a detailed description of the plant and machinery used, the manner in which the aggregates are weighed, batched by electrical controls and limit switches, cement from site is carried to the batching plant by a screw conveyor operated with automatic weighing guages and water fed through flow meters after subjecting such water to chemical analysis. The mixture so obtained is loaded on a transit mixer mounted on truck chassis, which is transported to the site and used immediately as concrete. The circular clarified that RMC stands within the ambit of the meaning of manufacture as envisaged under Section 2(f) of the Central Excise and Salt Act, 1944.
The argument of the Department in finding the process of ‘concrete mixing’, being distinguishable in so far as it being a crude activity in contradistinction with the sophisticated process by which RMC of a comparatively high quality is produced by reason of the technological advances of the industry was accepted. it was also held that there could be no exemption to the product since it is manufactured at site. in such circumstances, we are unable to agree with the majority view that there is no manufacture in the making of RMC, especially noticing that RMC is classified under Tarrif Entry 38.24 of the Excise Tariff Rules.
In this context, we also have to deal with Bhagat Construction Co. Pvt. Ltd., wherein the assessee had again been engaged in construction activity. The first contention, as available in page No.726, was that the payment rates as per the construction agreement was based on the strength of the concrete produced. The concrete used in the construction activity had to be processed and produced in accordance with certain grades or marks which provides the contents by weight so as to assure the proper strength. The payment would also depend upon the strength of the concrete, which on test, if fails, the assessee would be precluded from receiving the payments. The other contention was with respect to the plant and machinery used in the quarrying activities carried on to extract boulders and stones for the construction activity. The Division Bench, we find, has only considered the issue of quarrying in so far as the finding is thus:
“In the case at hand the assessee might be extracting minerals such as stones by carrying out mining operations, but the product of such mining operations is not the article or thing in which the assessee is dealing. The minerals produced by the assessee are consumed by him in the process of civil engineering works which is the business activity of the assessee. It cannot, therefore, be said that the assessee was an industrial undertaking for the purpose of producing the article or thing for which the machinery or plant was wholly used. â€
The Division Bench had also relied on N.C.Budharaja & Co. , which we have distinguished. The Division Bench decision of the Delhi High Court does not help us to resolve the issue whether making of RMC is an activity qualifying as a manufacture or production. Considering the high degree of precision and stringent quality control observed in the selection and processing of ingredients as also the specific entry in the Central Excise Tariff First Schedule -3824 50 10 : Concretes ready to use known as “Ready-mix Concrete (RMC)â€. We are of the opinion that though RMC does not have a shelf-life, the final mixture of stone, sand, cement and water in a semi-fluid state; transported to the construction site to be poured into the structure and allowed to set and harden into concrete is a thing or article manufactured.
We also notice that the Division Bench of the Delhi High Court had referred to another decision in CIT v Minocha Brothers (P) Ltd., [(1986) 160 ITR 134], wherein the Division Bench had laid down the ‘test of end product’ for the purpose of determining the nature of activity of the assessee. The assessee therein was also a contractor engaged in building construction and in the process of that work manufactured doors, windows, etc. The doors and windows were consumed in the building work itself and hence it was held that it could not be described as a manufacturing process in respect of those activities. The Delhi High Court held that the business could not be divided into two parts, (a) making windows and doors, and (b) construction, again for a claim under Section 80HH, wherein a percentage of the entire profits and gains was available for deduction. We would not think that this would apply in the provision we are called upon to interpret, as already held.
The next question is whether the transit mixers, Tata trucks and Ashok Leyland trucks purchased by the appellant are qualified for additional depreciation under Section 32(1 )(iia), which we notice was found in the affirmative by the JM at the first instance, but not considered by the AM or the third member; the Vice-President, who negatived the claim on the finding that the making of RMC is not a manufacture or production. We are of the opinion that the said question has to be considered afresh by the Tribunal looking into Section 30(1 )(iia) and the second proviso pointed out by the learned Counsel for the appellant.
On the above reasoning, we answer the first question extracted herein above in favour of the assessee and against the Revenue finding that RMC is an article obtained as a result of manufacture. The second question is also answered in favour of the assessee and against the Revenue in so far as finding the assessee, though engaged principally in the business of construction, is entitled to additional depreciation under Section 32(1 )(iia) for the plant and machinery used in the manufacturing activity being the production of RMC. We leave the question, whether the exemption itself is permissible on the actual cost of vehicles acquired by the assessee in the previous year, to be considered by the Tribunal. Whether the subject vehicles, in the nature of the process involved, qualify to be treated as plant and machinery will be decided by the Tribunal. The Income Tax Appeal is partly allowed and remanded for consideration of that specific question. The respective parties to suffer their costs.
[Citation : 406 ITR 281]
