High Court Of Madhya Pradesh
D.P. Agrawal vs. CIT
Sections 80HH, 80-I
Asst. Year 1994-95
Arun Mishra & N.S. Azad, JJ.
IT Appeal No. 24 of 2000
13th May, 2004
Counsel Appeared
H.S. Shrivastava with Sandesh Jain, for the Assessee : Rohit Arya with Ajit Ade, for the Revenue
JUDGMENT
Arun Mishra, J. :
2. The Tribunal has allowed the appeal filed by the CIT holding that deduction under s. 80HH and s. 80-I of IT Act, 1961 (hereinafter referred to as ‘the Act’) on the income arising from brass scrap obtained in the process of breaking and dismantling of guns is not an income derived from industrial undertaking of iron re-rolling and allowed the depreciation on truck at 25 per cent as against 40 per cent when the truck has been used for transporting the goods of others and hire charges amounting to Rs. 36,000 was received.
3. The assessee carries on the business of running a re-rolling mill wherein re-rolled products of iron and steel are manufactured. The assessee filed a return of income supported by an audit report from chartered accountant under s. 44AB of the Act. The income as per accounts has been accepted in the assessment. In the P&L a/c, a profit of Rs. 17,11,794 was shown to be included income from sale of brass scrap at Rs. 9,98,006. This was shown separately during the course of survey conducted at his place on 15th Jan., 1994 under s. 133A of the Act. The assessee had offered to pay tax on Rs. 10 lakhs in respect of the brass so obtained. During the course of assessment, the assessee was asked to explain surrender of Rs. 10 lakhs. It was submitted that he had purchased 182 HOW Carrier Guns from Central Ordnance Depot (COD), Jabalpur in auction vide letter dt. 30th June, 1993. In breaking and dismantling of the guns, brass scrap of 10.96 MT quantity was obtained and the balance was iron- scrap. It was contended that this activity was production of goods, hence, income from industrial undertaking. The value of the brass was estimated at Rs. 10 lakhs and offered for taxation at the time of survey, this was sold for Rs. 9,99,006.
4. The AO was not prepared to accept the amount of Rs. 10 lakhs as separate amount for comparison of gross amount, hence a reference was made to Dy. CIT under s. 144A of the Act. The Dy. CIT directed vide letter dt. 27th March, 1995 to accept the position explained by the assessee in respect of gross profit. Explanation (A/1) was submitted by assessee. The AO did not consider the income from sale of brass scrap as arising from industrial undertaking for purposes of allowing deduction under ss. 80HH and 80-I of the Act and allowed the claim only in respect of other income, though he accepted the profits as per accounts. Assessment order (A/2) was passed on 21st Feb., 1997.
5. On appeal being preferred against the assessment order, CIT(A) accepted that income from brass scrap arose out of industrial undertaking, i.e., the manufacturing business on which deduction under ss. 80HH and 80-I was allowable.
6. Revenue filed an appeal against the order of allowing the deduction under ss. 80HH and 80-I before Income-tax Appellate Tribunal (hereinafter referred to as ‘Tribunal’). Tribunal reversed the order (A/3) passed by CIT(A), accepted the Revenue plea that assessee had purchased guns and the income from brass scrap which could not be used for re-rolling, thus, was not entitled to deduction under ss. 80HH and 80-I of the Act.
7. This appeal has been admitted by this Court on the following substantial question of law : “Whether, in the facts and circumstances of the case, the Tribunal is justified in law in holding that the income from sale of brass scrap obtained by breaking and dismantling the guns is derived from industrial undertaking so as to attract provisions of ss. 80HH and 80-I of the IT Act?”
8. Shri H.S. Shrivastava, learned senior counsel appearing with Shri Sandesh Jain for appellant has submitted that the learned Tribunal has erred in law in disallowing the deduction under ss. 80HH and 80-I of the Act. The scrap was obtained by dismantling of discarded guns. Iron is used for the purpose of re-rolling. Brass was separated by dismantling of the guns by mechanical and manual process, thus, the same was a processing and process of manufacture. It was not necessary that brass obtained should have been further used in re-rolling mill. Thus, disallowance of the claim for deduction under ss. 80HH and 80-I of the Act is arbitrary and illegal. Shri Rohit Arya, learned senior counsel appearing with Shri Ajit Ade, for Revenue has submitted that brass obtained on dismantling of the guns cannot be said to be an income arising out of industrial unit. He has further submitted that there is no substantial change in the matter, “manufacture” implies a change, every change is not “manufacture”. Thus, it cannot be said that brass is an income from industrial undertaking, hence, no interference is called for in this appeal. Sec. 80HH of the Act provides deduction with respect to the “profits and gains derived from an industrial undertaking”. Deduction is permissible equal to 20 per cent of the profits and gains. Subs. (2) of s. 80HH provides for fulfilment of certain conditions for applicability of s. 80HH of the Act. Sub-s. (4) of s. 80HH provides the deduction shall be allowed in computing the total income in respect of each of the ten assessment years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or the business of the hotel starts functioning. Sub-s. (1) and sub-s. (4) of s. 80HH of the Act are quoted below : “80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas.—(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof. ******* (4) The deduction specified in sub-s. (1) shall be allowed in computing the total income in respect of each of the ten assessment years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or the business of the hotel starts functioning : Provided that, — (i) in the case of an industrial undertaking, which has begun to manufacture or produce articles, and (ii) in the case of the business of a hotel which has started functioning, after the 31st Dec., 1970, but before the 1st April, 1973, this sub-section shall have effect as if the reference to ten assessment years were a reference to ten assessment years as reduced by the number of assessment years which expired before the 1st April, 1974.”
11. Sec. 80-I of the Act also provides for deduction from profit and gains of an amount equal to 20 per cent thereof where the gross total income of an assessee includes any “profits and gains derived from an industrial undertaking” or a ship or the business of a hotel. Sub-s. (2) of s. 80-I of the Act provides the fulfilment of certain conditions for claiming deductions. Sub-s. (1) of s. 80-I is quoted below : “80-I Deduction in respect of profits and gains from industrial undertakings after a certain date, etc.—(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean going vessels or other powered craft to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof : Provided that in the case of an assessee, being a company, the provisions of this sub-section shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel as if for the words ‘twenty per cent’, the words ‘twenty-five per cent’ had been substituted.” What is of significance under ss. 80HH and 80-I of the Act is that deduction is allowable on the profits and gains arising out of industrial undertaking. Question for consideration is whether brass scrap can be said to be profit or gain arising out of industrial undertaking and as per process of manufacture. It is clear from explanation (A/1) filed under s. 133A of the Act by the assessee that assessee deals in steel scrap. It has been mentioned in para 1 of the explanation that “But in this year the assessee has purchased 182 HOW Carrier i.e. guns for Rs. 10,53,000 from COD, Jabalpur vide auction letter dt. 30th June, 1993.” It has been further mentioned in para 2 of the explanation (A/1) that “assessee was unaware of the fact that there is a brass scrap inside the guns. The brass scrap 10.96 MT was found which was valued at Rs. 10 lakhs, was offered for taxation at the time of survey. This fact was disclosed in the statement.” Para 1 and relevant portion of para 2 of reply (A/1) is quoted below : “1. The survey under s. 133A was conducted at assessee premises on 15th Jan., 1994. At the time of survey, the assessee has surrendered the value of brass scrap estimated at Rs. 10 lakhs. It may further be submitted that the assessee generally deals in steel scrap. But in this year the assessee has purchased 182 HOW/Carrier, i.e., guns for Rs. 10,53,000 from COD, Jabalpur vide auction letter dt. 30th June, 1993.”
2. That the assessee was unaware of the facts that there is brass scrap inside the guns.” It is clear from the reply that “appellant/assessee deals in the steel scrap” he was not aware that inside the guns, there was brass scrap which was removed; thus, it is clear from the reply that brass is not an ingredient used in the process of manufacture of industrial undertaking. Question is whether the purchase of guns by the petitioner containing the brass inside, which was removed by dismantling of the guns can be said to be in process of manufacture and income derived out of industrial undertaking. Assessee derived income from re-rolling work; assessee has shown total sale of Rs. 8,22,90,065; survey under s. 133A was conducted in the assessee’s premises on 15th Jan., 1994. At the time of survey assessee had surrendered a value of brass scrap estimated at Rs. 10 lakhs.
In our opinion the brass scrap had no direct nexus with the appellant’s industrial undertaking. Brass is not raw material connected with the manufacturing activity of industrial undertaking. It cannot be said that brass scrap is a profit or gain which directly flows, neither it has close connection with undertaking. By removal of brass scrap which is not useful for steel re-rolling work of industrial undertaking, no different distinct article comes, it is incidental as apparent from appellant’s reply (A/1).
The apex Court in CIT vs. Sterling Foods (1999) 153 CTR (SC) 439 : (1999) 4 SCC 98 has considered the question of profits, gains and deductions under s. 80HH of the Act. What is profit and gain derived from industrial undertaking. The apex Court has held that there must be, for the application of the words “derived from”, a “direct nexus” between the profits and gains with the industrial undertaking. In case nexus is not direct, only incidental, sale consideration therefrom cannot be held to constitute profits and gains derived from assessee’s industrial undertaking. Apex Court has held thus (p. 103) : “13. We do not think that the source of the import entitlements can be said to be the industrial undertakings of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words ‘derived from’, a direct nexus between the profits and gains of the industrial undertaking. In the instant case, the nexus is not direct but only incidental. The industrial undertaking exports processed seafood. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessee’s industrial undertaking.”
16. The apex Court in Pandian Chemicals Ltd. vs. CIT (2003) 183 CTR (SC) 99 : (2003) 5 SCC 590 has again considered the question of deduction under s. 80HH of the Act. The contention raised before the apex Court was that since without electricity, its industrial undertaking could not run and since the making of “deposit” with the State Electricity Board was a statutory precondition for supply of electricity, the “interest on such deposit” should be treated as income derived from the industrial undertaking. The apex Court held that although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with the Electricity Board cannot be said to flow directly from the industrial undertaking itself. There has to be close connection with the industrial undertaking itself. The apex Court has laid down thus : “6. The word ‘derived’ has been construed as far back as 1948 by the Privy Council in CIT vs. Raja Bahadur Kamakhaya Narayan Singh (1948) 16 ITR 325 (PC) when it said : ‘The word “derived” is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest, land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition.’ This definition was approved and reiterated in 1955 by a Constitution Bench of this Court in the decision of Mrs. Bacha F. Guzdar vs. CIT (1955) 27 ITR 1 (SC) : AIR 1955 SC 74, ITR at p. 7. It is clear, therefore, that the words ‘derived from’ in s. 80HH of the IT Act, 1961 must be understood as something which has direct or immediate nexus with the appellant’s industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with the Electricity Board cannot be said to flow directly from the industrial undertaking itself.
The learned counsel appearing on behalf of the appellant has referred to several decisions of Madras High Court in order to contend that the words ‘derived from’ could be construed to include situations where the income arose from something having a close connection with the industrial undertaking itself. All the decisions cited by the appellant have been considered by the Madras High Court in the case of Pandian Chemicals Ltd. (1998) 147 CTR (Mad) 5 : (1998) 233 ITR 497 (Mad). We see no reason to disagree with the reasoning given by the High Court in Pandian Chemicals Ltd. (supra) with respect to those decisions to hold that they do not in any way allow the word ‘derived’ in s. 80HH to be construed in the manner contended by the appellant.”
17. Apex Court in CIT vs. Relish Foods (1999) 152 CTR (SC) 500 : (1999) 3 SCC 167 has considered the question of exemption under s. 80HH of the Act to industrial undertakings engaged in “manufacture” or “production”. The apex Court has held that mere buying of shrimps, peeling and freezing them did not entitle the assessee to exemption under s. 80HH. When raw shrimps and prawns are subjected to the process of cutting of heads and tails, peeling, deveining, cleaning and freezing, they do not cease to be shrimps and prawns and become other distinct commodities. The apex Court has approved the decision of Supreme Court in Sterling Foods vs. State of Karnataka “6. Apart therefrom, there is the judgment of this Court in Sterling Foods vs. State of Karnataka (1986) 3 SCC 469 where it has been held that processed or frozen shrimps and prawns are commercially regarded as the same commodity as raw shrimps and prawns. When raw shrimps and prawns are subjected to the process of cutting of heads and tails, peeling, deveining, cleaning and freezing, they do not cease to be shrimps and prawns and become other distinct commodities. There is no essential difference between raw shrimps and prawns and processed or frozen shrimps and prawns. In common parlance, they remain known as shrimps and prawns. This judgment in Sterling Foods (supra) has been rightly applied by the Bombay High Court, in the case of CIT vs. Sterling Foods (Goa) (1995) 127 CTR (Bom) 30 : (1995) 213 ITR 851 (Bom) to a claim under s. 80HH of the IT Act and it has been held that the activity of processing of prawns is not an activity of manufacture or production.” (p. 169) The claim of assessee under s. 80HH of the Act was rejected in Relish Foods’s case (supra).
18. In CIT vs. Gem India Mfg. Co. (2002) 172 CTR (SC) 615 : (2001) 10 SCC 733 the apex Court has held that when raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a raw article or thing which is the result of manufacture or production. Therefore, the apex Court has held that activity of assessee engaged in cutting and polishing of diamond amounted to manufacture or production of goods and on that basis, assessee was not entitled to deduction under s. 80-I of the Act. The apex Court has considered the question thus : “4. The High Court, as aforesaid, concluded that the case was covered by its decision in the case of CIT vs. London Star Diamond Co. (I) Ltd. (1995) 124 CTR (Bom) 109 : (1995) 213 ITR 517 (Bom). It was not pointed out to the High Court that the question in that case was whether the assessee was an industrial company within the meaning of s. 2(8) of the Finance Act, 1975 and that, in answering that question, the High Court had held that raw diamonds and cut and polished diamonds were different and distinct marketable commodities having different uses; therefore, a company engaged in cutting and polishing raw diamonds for the purpose of export was engaged in the ‘processing of goods’ to convert them into marketable form. The question that the High Court and we are here concerned with, is whether, in cutting and polishing diamonds, the assessee manufactures or produces articles or things. 5. There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a raw article or thing which is the result of manufacture or production. There is no material on the record upon which such a conclusion can be reached.”
19. In CIT vs. N.C. Budharaja & Co. (1993) 114 CTR (SC) 420 : AIR 1993 SC 2529, the apex Court has considered the words ‘production’ or ‘produce’ when used in juxtaposition with the word ‘manufacture’ takes in bringing into existence new goods by a process which may or may not amount to manufacture. The apex Court has held that when a dam is constructed, it is not manufactured or produced. The apex Court has held that though s. 80HH is intended to encourage establishment of industrial undertakings in backward areas, liberal interpretation which advances the purpose and object has to be adopted, same cannot be carried to the extent of doing violence to the plain and simple language used in the enactment. The apex Court has held thus : “8. The word ‘production’ or ‘produce’ when used in juxtaposition with the word ‘manufacture’ takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods. The next word to be considered is ‘articles’ occurring in the said clause. What does it mean ? The word is not defined in the Act or the Rules. It must, therefore, be understood in its normal connotation—The sense in which it is understood in commercial world. It is equally well to keep in mind the context since a word takes its colour from the context. The word ‘articles’ is preceded by words ‘it has begun or begins to manufacture or produce.’ Can we say that the word ‘articles’ in the said clause comprehends and takes within its ambit a dam, a bridge, a building, a road, a canal and so on ? We find it difficult to say so. Would any person who has constructed a dam say that he has manufactured an article or that he has produced an article ? Obviously not. If a dam is an article, so would be a bridge, a road, an underground canal and a multi-storied building. To say that all of them fall within the meaning of word ‘articles’ is to overstrain the language beyond its normal and ordinary meaning. It is equally difficult to say that the process of constructing a dam is a process of manufacture or a process of production. It is true that a dam is composed of several articles; it is composed of stones, concrete, cement, steel and other manufactured articles like gates, sluices, etc. But to say that the end product, the dam, is an article is to be unfaithful to the normal connotation of the word. A dam is constructed; it is not manufactured or produced. The expressions ‘manufacture’ and ‘produce’ are normally associated with movables articles and goods, big and small—but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road or a building. The decisions of the Bombay High Court in CIT vs. N.U.C. (P) Ltd. (1980) 126 ITR 377 (Bom) and in CIT vs. Shah Construction Co. Ltd. (1982) 30 CTR (Bom) 245 : 1983 Tax L.R. 243 relied upon by Sri Murthy are no doubt not decisions rendered under s. 80HH or under s. 84—they arose under the relevant Finance Acts, the question being whether the assessees were industrial companies—they do contain observations which tend to support to stand of the Revenue.
13. It is submitted by the counsel for the respondent-assessee that, since s. 80HH is intended to encourage establishment of industrial undertakings in backward areas for the reason that such establishment leads to development of that area besides providing employment, we must adopt a liberal interpretation which advanced the purpose and object underlying the provision. The said principle, however, cannot be carried to the extent of doing violence to the plain and simple language used in the enactment. It would not be reasonable or permissible for the Court to rewrite the section or substitute words of its own for the actual words employed by the legislature in the name of giving effect to the supposed underlying object. After all, the underlying object of any provision has to be gathered on a reasonable interpretation of the language employed by the legislature.” (pp. 2534 & 2535) In Indian Poultry vs. CIT (1997) 138 CTR (MP) 382 : (1998) 230 ITR 909 (MP), a Division Bench of this Court has considered the meaning of “manufacture” for the purpose of ss. 80HH and 80-I of the Act. The assessee- company carried on business of rearing chicks to broilers by applying scientific process and technology. The chicks are reared for few days thereafter they become broilers. This Court held that even if the chicks which develop into broilers and they are dressed and sold in the market, they still continue to be chicks only. Therefore, there is no substantial change in the matter. “Manufacture” implies a change, but every change is not manufacture and yet every change in an article is the result of treatment, labour and manipulation and does not necessarily mean that on account of certain treatment and manipulation, a new identity has come to be acquired. Hence, it was held that it was not an income for industrial undertaking entitled to deduction under ss. 80HH and 80-I of the Act. In CIT vs. Buildwell Assam (P) Ltd. (1996) 220 ITR 577 (Gau), a Division Bench of Gauhati High Court has held that assessee was entitled to get rebate under s. 80HH of the Act only to the extent of any profits or gains derived from an industrial undertaking, and if the assessee carried on some other business no deduction was available on such profits and gains, therefore, deduction under s. 80HH was disallowed. Shri H.S. Shrivastava, learned senior counsel for appellant has placed reliance on a decision of Division Bench of this Court in Girdharilal Nannelal vs. CST (1971) 27 STC 316 (MP). This Court considered the question under M.P. General Sales-tax Act, 1958 of the process of manufacture. In the context of the facts, taxing authority came to the conclusion that Yelmele Cotton Company had purchased raw cotton for purposes of manufacture and converted it into ginned, pressed and packed cotton capable of being used in mills and thus the company was engaged in a process of manufacture and had purchased the cotton for consumption, they charged the assessee at a rate applicable to sales for consumption. The process of converting the raw cotton into marketable cotton is a process of manufacture. The ratio has no application to the instant case as the business of appellant/assessee is of re-rolling of steel scrap, brass is not the material remotely connected with the process of re-rolling of steel scrap in which the appellant/assessee is involved.
22. Learned counsel for appellant has further relied upon a decision of the apex Court in Chowgule & Co. (P) Ltd. vs. Union of India (1981) 47 STC 124 (SC). The question involved was whether blending of ore in the course of loading it into the ship through the mechanical ore handling plant constituted manufacture or processing of ore ? The meaning of the word “processing” has been considered by the apex Court. It was held that when chemical and physical compositions of each kind of ore which goes into the blending is changed, there can be no doubt that the operation of blending would amount to “processing”. The apex Court has held thus : “The point arises for consideration under the first question is as to whether blending of ore in the course of loading it into the ship through the mechanical ore handling plant constituted manufacture or processing of ore. Now it is well-settled as a result of several decisions of this Court, the latest being the decision given on 9th May, 1980, in Civil Appeal No. 2398 of 1978, Dy. CST vs. Pio Food Packers (1980) 46 STC 63 (SC) that the test for determining whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity, but is recognised in the trade as a new and distinct commodity. This Court speaking through one of us (Pathak, J.) pointed out : “Commonly” manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place.” The test that is required to be applied; does the processing of the original commodity bring into existence a commercially different and distinct commodity ? On an application of this test, it is clear that the blending of different quantities 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. What is produced as a result of blending is commercially the same article, namely, ore, though with different specifications than the ore which is blended and hence it cannot be said that any process of manufacture is involved in blending of ore.
It still remains to consider whether the ore blended in the course of loading through the mechanical ore handling plant can be said to undergo processing when it is blended. The answer to this question depends upon what is the true meaning and connotation of the word “processing” in s. 8 (3)(b) and r. 13. This word has not been defined in the Act and it must, therefore, be interpreted according to its plain natural meaning. Webster’s Dictionary gives the following meaning of the word “process” : “to subject to some special process or treatment, to subject (especially raw material) to a process of manufacture, development or preparation for the market, etc., to convert into marketable form as livestock by slaughtering, grain by milling, cotton by spinning, milk by pasteurising, fruits and vegetables by sorting and repacking.” Where, therefore, any commodity is subjected to a process or treatment with a view to its “development or preparation for the market”, as, for example, by sorting and repacking fruits and vegetables, it would amount to processing of the commodity within the meaning of s. 8(3)(b) and r. 13. The nature and extent of processing may vary from case to case; in one case the processing may be slight and in another it may be extensive; but with each process suffered, the commodity would experience a change. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. The nature and extent of the change is not material. It may be that camphor powder may just be compressed into camphor cubes by application of mechanical force or pressure without addition or admixture of any other material and yet the operation would amount to processing of camphor powder as held by the Calcutta High Court in Om Prakas Gupta vs. CCT (1965) 16 STC 935 (Cal). What is necessary in order to characterise an operation as “processing” is that the commodity must, as a result of the operation, experience some change. Here, in the present case, diverse quantities of ore possessing different chemical and physical compositions are blended together to produce ore of the requisite chemical and physical compositions demanded by the foreign purchaser and obviously as a result of this blending, the quantities of ore mixed together in the course of loading through the mechanical ore handling plant experience change in their respective chemical and physical compositions, because what is produced by such blending is ore of a different chemical and physical composition. When the chemical and physical composition of each kind of ore which goes into the blending is changed, there can be no doubt that the operation of blending would amount to “processing” of ore within the meaning of s. 8(3)(b) and r. 13. It is no doubt true that the blending of ore of diverse physical and chemical compositions is carried out by the simple act of physically mixing different quantities of such ore on the conveyor-belt of the mechanical ore handling plant. But to our mind, it is immaterial as to how the blending is done and what process is utilised for the purpose of blending. What is material to consider is whether the different quantities of ore which are blended together in the course of loading through the mechanical ore handling plant undergo any change in their physical and chemical compositions as a result of blending and so far as this aspect of the question is concerned, it is impossible to argue that they do not suffer any change in their respective chemical and physical composition.”
When the ratio of the above decision is applied to the instant case, no sustenance is provided to the cause espoused by the appellant/assessee. Composition of brass scrap is not at all changed, that is only removed as that is not useful to the assessee for the activity of manufacturing which he is carrying on of steel re-rolling. Brass is not by- product in the process of manufacture. There is no nexus with brass and steel re-rolling.
Learned counsel has further relied upon a decision of the apex Court in CST vs. Rewa Coalfield Ltd. (1999) 32 VKN 538 (SC). Question which arose for consideration was that what can be treated as raw material consumed in the process of manufacture. The assessee operated a coal mine. The apex Court has held that kerosene oil was required for lanterns for illumination purposes and not as a fuel to power any machine. Hence, it could not be treated as raw material consumed in the process of manufacture. Dry cells, torches and cells and electrical bulbs were held not to be qualified to be articles consumed in the process of manufacture or consumed in the mining of the coal. They may be used for purposes incidental to the mining, but are not integral thereto. So far as drilling bits are concerned, it was held that they are consumed in the mining of the coal, to that extent the assessee’s submission was upheld. In the instant case, brass is not at all put in the process of manufacture of steel re-rolling. It is not a raw material at all for the process of re-rolling in which the assessee is involved. It was purely incidental that brass was found inside guns which were purchased in that year.
Learned counsel for the appellant has also relied on decision of Allahabad High Court in CWT vs. Syed Amzad Ali (1993) 113 CTR (All) 387 : (1993) 202 ITR 19 (All). The word “processing” in the context of WT Act has been considered. It has been held that if a commodity is subjected to an operation, with a view to developing it or making it marketable and if, by such operation, the commodity experiences a change and brings about the result sought to be achieved from the operation carried on it or in regard to it, then such operation would amount to processing. The assessee-firm purchased tobacco leaves which were subjected to the operation of crushing and separating stems and dust therefrom. Such operation would amount to processing under the s. 5 (1)(xxxii) of the WT Act, 1957. The ratio of decision is not attracted as iron and brass by the very nature have no connection, they are different ores. It was only a fortuitous circumstance that, in the relevant assessment year, the assessee had purchased the guns without the knowledge that brass scrap was inside which was separated as mentioned in explanation (A/1) by assessee. It
Learned counsel for appellant has further relied upon a decision of Bombay High Court in Ship Scrap Traders vs. CIT (2001) 168 CTR (Bom) 489 : (2001) 251 ITR 806 (Bom) wherein Division Bench has considered the question of deduction under s. 80HHA and s. 80-I of the Act, and the meaning of “industrial undertaking”, “manufacture” and “produce”. It has been held that ship breaking needs expertise and results in production of articles, same amounts to manufacture. Assessee engaged in ship breaking is entitled to special deduction under ss. 80HHA and 80-I of the Act. The ratio of the case has different field to operate as in the instant case dismantling of the guns is not an activity of assessee. Only incidentally the guns were purchased in the relevant year for the purpose of re-rolling as per explanation (A/1) of assessee. In our opinion, there is no direct nexus in the activity of separation of brass scrap from the guns which were purchased for utilization in re-rolling of steel scrap. In the activity of ship breaking, several articles were obtained; viz., ferrous metal, non-ferrous metals which includes brass. The meaning of the word “manufacture” has been considered which implies a change but every change is not manufacture. There must be a transformation of kind and a new different item should have been emerged having different features. Word “manufacture” does not mean merely some change in the substance, but the expression “manufacture” has in ordinary acceptation a wide connotation : it means making of articles or material commercially different from the basic components, by physical labour or mechanical process. The word “production” has a wider connotation than “manufacture”. Scrap iron and steel which were obtained by the assessee by dismantling and breaking up of the ship must be regarded as a different commercial commodity from the ship itself, and hence the activity would amount to manufacture. The goods manufactured would be scrap iron and steel obtained or manufactured by the dismantling and making up of the ship, and the goods used in the manufacture of this scrap iron and steel would be the ship itself. Thereafter commercial commodities were obtained, as such it was held to be a process of manufacture. In the instant case, guns may have several components, sometime brass or some other articles which may not be connected at all with the manufacturing process of an industrial undertaking of steel re-rolling. There was nexus in the above case of scrap to the process of dismantling of the ship which was the main activity of assessee which nexus is not available in the instant case. Hence, decision renders no support to the submission advanced.
Learned counsel for the assessee has further relied upon decision of the apex Court in Chillies Exports House Ltd. vs. CIT (1997) 140 CTR (SC) 1 : (1997) 225 ITR 814 (SC). The apex Court has considered the meaning of “industrial company”, “processing” and “fumigation”, series of activities were undertaken including fumigation. The apex Court has held that whether the effect of various activities including “fumigation” is the processing required proper evaluation from technical persons so as to ascertain whether various activities carried on by the assessee to render the chillies purchased locally as one of the export quality can be termed as “carrying on the business of processing of goods.” The decision is distinguishable as the main activity of processing of chillies was itself to be considered whether it was processing. The question involved was different. Chillies itself was the product marketable for the purpose of export which required fumigation and matter was remitted to the High Court for reconsideration of question in accordance with law. Learned counsel for appellant has further relied upon decision of the apex Court in B.P. Oil Mills Ltd. vs. Sales Tax Tribunal (1999) 32 VKN 337 (SC). The apex Court has considered the definition of “manufacture” in s. 2(e-1) of the U.P. Trade Tax Act. The apex Court has held that when any commodity is subjected to a process or treatment with a view to its development or preparation for the market, it would amount to processing. In each process suffered, the commodity would experience a change; process to which the crude oil is subjected to make it refined oil, brings the latter within the meaning of the expression “goods manufactured” in s. 3 of the Act. The apex Court has held that there is radical change when crude oil undergoes change as marketable refined oil.
Learned counsel has further relied upon a decision of the apex Court in CCE vs. Orient Paper Mills (1990) 77 STC 203 (SC). The apex Court has considered the question of raw material or component part under Central Excise Rules, 1944. The apex Court has held that excise duty is a duty on manufacture. Manufacture is the process or activity which brings into existence new, identifiable and distinct goods. Anything required to make the goods marketable, must form part of the manufacture and any raw material or any material used for the same would be a component part for the end-product. As already mentioned above, brass is not a raw material for the steel re- rolling and cannot be said to be component part for the main product. The decision is not attracted to the facts of the instant case as brass cannot be said to be having any nexus with the activity in which assessee’s industrial undertaking is involved.
In our opinion, there is no nexus with the brass scrap obtained on dismantling of the guns to the main activity of the appellant of steel re-rolling. Gun is not the essential raw material of appellants’ industrial unit, in any case brass is not at all connected with the steel re-rolling. Thus, separation of brass cannot be said to be in the process of manufacture or a product or by-product of the activity of the assessee’s industrial undertaking. There is no direct nexus with the separation of the brass from the guns to the main activity. Thus, considering the provisions of ss. 80HH and 80-I of the Act, it cannot be said to be profit and gain derived from industrial undertaking. Thus, deductions on profits and gains under ss. 80HH and 80-I of the Act are not admissible and have been rightly disallowed by the Tribunal.
Resultantly, the appeal sans merit, same is hereby dismissed. Parties to bear their own costs as incurred of this appeal.
[Citation : 272 ITR 118]
