High Court Of Madras
India Cine Agencies vs. CIT
Sections 32A, 80-I
Asst. Year 1986-87, 1987-88
R. Jayasimha Babu & K. Raviraja Pandian, JJ.
TC Nos. 429 & 430 of 1997
1st October, 2002
Counsel Appeared
P.P.S. Janardhanaraja, for the Applicant : T.C.A. Ramanujam, for the Respondent
JUDGMENT
K. Raviraja Pandian, J. :
The common question of law referred to for the opinion of this Court is as follows : “1 .Whether, on the facts and in the circumstances of the case, the Tribunal was correct in not granting deduction under s. 32A of the IT Act for the asst. yr. 1986-87 and deduction under s. 80-I for asst. yr. 1987-88?”
2. The assessment years are 1986-87 and 1987-88. The assessee is a dealer in photographic colour papers. It imported photographic colour papers in jumbo rolls. The width of the said paper is 1.511 metres and the length of the same ranges from 3,100 meters to 3,250 meters. After importation in jumbo rolls, the assessee cut the same into photographic flats and rolls of the desired size in a dark air-conditioned humidity controlled dust proof room with the help of slitting machine. The assessee sells the photographic colour papers to the dealers in the form of small rolls or cut sizes. The photographic paper wound as smaller rolls are of the size ranging from 3.5″ x 275’/575’/775’ to 2.0″ x 275’. Likewise, the cut size are also of different measurements ranging from 34″ x 54″ to 30″ x 40″. The number of cut sheets ranges from 10 to 200 sheets per packet. The assessee’s case is that it is entitled to both investment allowance under s. 32A and deduction in respect of profit and gains under s. 80-I of the IT Act on the ground that the activities involved in reducing the size of the jumbo photographic papers into desired size with the help of slitting machine would amount to manufacturing and processing. The AO negatived assessee’s claim on the ground that cutting or slitting of jumbo rolls into flat and small rolls did not amount to either manufacture or production of an article. On appeal, the CIT (A) accepted the assessee’s contention and found that the assessee is entitled to both investment allowance under s. 32A and also deduction under s. 80-I and directed the Dy. CIT to allow investment allowance for the asst. yr. 1986-87 and the deduction under s. 80-I for the asst. yr. 1987-88 since the same was claimed only for that year. Feeling aggrieved, the Revenue carried the matter on appeal to the Tribunal. The Tribunal on consideration held that the assessee is not entitled to either the investment allowance under s. 32A or the deduction under s. 80-I of the Act. Hence, the reference pursuant to the orders made in TCP Nos. 131 and 132 of 1996 at the instance of the assessee.
The learned counsel Mr. Janardhanaraja appearing for the assessee has contended that the activity of the assessee is after importation, the photographic colour papers are stored in air-conditioned godown; the jumbo rolls are lifted mechanically with the help of forklift to the slitting room and thereafter the jumbo rolls are loaded on the computerised automatic slitting machine with the help of overhead hoist and tilt table. The slitting machine converts the jumbo rolls into small marketable size papers. The slitting machine winds the slitted rolls on to the cores and the wound slit rolls are then removed and packed in photo grade polythene covers and sealed. The whole process is required to be done in dark air-conditioned humidity controlled dust proof room. Thus the conversation of jumbo rolls into small marketable rolls or flats amounts to manufacturing and processing and as such the assessee is entitled to the investment allowance as well as deduction under the above said two provisions of the Act. For that purpose, he heavily relied on the decision of the Supreme Court in Aspinwall & Co. Ltd vs. CIT (2001) 170 CTR (SC) 68 : (2001) 251 ITR 323 (SC), wherein the process of manufacturing coffee beans from raw berries has been held to be a manufacturing activity. The learned counsel appearing for the respondent Mr. Ramanujam has contended that the activity of the assessee is nothing but reducing the size of the bigger photographic paper into small rolls and flats so as to cater to the needs of the assessee’s customers, which process does not involve any manufacturing activity and he relied on the decision of the Supreme Court in CIT vs. Gem India Mfg. Co. (2002) 172 CTR (SC) 615 : (2001) 249 ITR 307 (SC), wherein the Supreme Court has held that in the absence of any material to show that polished diamond is a new article or thing which is the result of manufacture or production, subjecting raw uncut diamonds to a process of cutting and polishing, which yields the polished diamond, cannot be said to amount to manufacture or production of an article or thing, for the purpose of obtaining the deduction under s. 80-I of the IT Act.
We heard the learned counsel appearing on either side and perused the materials on record. Sec. 32A provides for investment allowance in respect of a ship or an aircraft or machinery or plant specified in sub-s. (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. Sub-s. (2) of s. 32A to which a reference is made in sub-s. (1) provides as follows : “(2) The ship or aircraft or machinery or plant referred to in sub-s. (1) shall be the following, namely : (a) ***** (b) any new machinery or plant installed after the 31st March, 1976,— (i) for the purposes of business of generation or distribution of electricity or any other form of power; or (ii) in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing; or (iii) 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.”
8. As stated above, the assessee’s case is that it is entitled to investment allowance and also deduction under s. 80I of the Act on the ground that the activities involved in cutting jumbo rolls into smaller rolls or cut sizes, is manufacturing activity. A cursory reading of the above provision would indicate that the plant and machinery should be used by an industrial undertaking for the purpose of business of manufacture or production of any article or thing, as stated in s. 32A(2)(b) (ii) of the IT Act. As set out in the statement of the case, the assessee is not a manufacturer, but only a dealer in photographic colour paper, who imports manufactured or produced photographic colour paper for the purpose of sale. In the facts and circumstances of the case as narrated above, we will have to see whether the activity of the assessee would amount to manufacture or production so as to entitle him to the benefit under ss. 32A and 80-I of the Act.
9. The words “manufacture” and “production” have not been defined in the Act. In the case of CIT vs. N.C. Budharaja & Co. (1993) 114 CTR (SC) 420 : (1993) 204 ITR 412 (SC), the Supreme Court while considering whether the construction of dam would amount to manufacture within the meaning of s. 80HH of the IT Act has observed as follows : “… The words ‘manufacture’ and ‘production’ have received extensive judicial attention both under this Act as well as the Central Excises Act and the various sales-tax laws. 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 meaning of the expression ‘manufacture’ was considered by this Court in Dy. CST vs. Pio Food Packers (1980) 46 STC 63 (SC), among other decisions. In the said decision, the test evolved 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. Pathak J., as he then was, stated the test in the following words: 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 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 byproducts, intermediate products and residual products which emerge in the course of manufacture of goods…”
10. The Supreme Court in the above case while rejecting the submission of the counsel for the assessee that 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 and in that context, a liberal interpretation, which advances the purpose and object underlying the provision, should be adopted, has held that: “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.”
11. The case of Gem India Mfg. Co. (supra) on which reliance has been placed by the counsel for the Revenue considered the question as to ‘whether on the facts and in the circumstances of the case and in law, the Tribunal was right in confirming the order of the CIT(A) holding that the assessee, engaged in cutting and polishing of diamonds, amounts to manufacturing or production of goods and is entitled to deduction under s. 80-I of the IT Act, 1961?, and held that: “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 new article or thing which is the result of manufacture or production.”
12. Sterling Foods vs. State of Karnataka (1986) 63 STC 239 (SC) was a case of export of lobsters. In that case, the appellants purchased shrimps, prawns and lobsters locally for complying with orders for export and they cut the heads and tails of the shrimps, prawns and lobsters and then they were subjected to peeling, deveining and cleaning and freezing before being exported in cartons. The Supreme Court held that: “… by reason of processing of the goods after their purchase, there was no change in their identity and that, in fact, commercially they were to be regarded as the original goods.”
13. In the case of CIT vs. Madurai Pandian Engg. Corpn. Ltd. (2001) 169 CTR (Mad) 354 : (1999) 239 ITR 375 (Mad), the Division Bench of this Court, while considering the question whether the retreading of old tyres would amount to manufacture or production and the assessee is entitled to the relief under ss. 80HH and 80J of the IT Act, 1961 has held as follows : “As pointed out by the apex Court, the word ‘production’ or ‘produce’ has been used in the s. 80HH of the IT Act, 1961, in juxtaposition with the word ‘manufacture’ and it would take in bringing into existence new goods by a process which may or may not amount to manufacture. The article referred to in the section, therefore, has reference to new articles and brought into existence by a process of manufacture or by any other mode, which can be regarded as production. The resultant article whether it is by manufacture or by way of production must be a new article. The term ‘new’ is not found in the section. It must be held to be implicit in the word ‘manufacture’. Having regard to the fact that the word ‘production’ or the word ‘produce’ is used in juxtaposition with the word ‘manufacture’ these terms also must be regarded as referring to production, which brings into existence a new article…” The Court further held : “…The tyre continues to be a tyre throughout and when it is worn out, it may be either discarded or its life renewed by retreading, so that it is made serviceable for some more time. The commodity at all stages is the tyre. There is no change in the character of that commodity. A different and distinct commodity cannot be said to have come into existence as a result of the retreading.” The activity of retreading of a worn out tyre by fixing the tread on the worn out tyre by certain process, which is converse to the activity involved in the present case, wherein a bigger article is cut into small articles, was held to be not a manufacturing activity. The civil appeal against the judgment was dismissed by a three Judges Bench of the apex Court, after holding that there was no merit in the appeal. That decision is reported as Tamil Nadu State Transport Corpn. Ltd. vs. CIT (2002) 172 CTR (SC) 230 : (2001) 252 ITR 883 (SC).
14. The case relied on by the learned counsel viz., Aspinwall & Co. Ltd.‘s case (supra) in order to sustain his case that the activity of the petitioner involves a manufacturing and processing activity, is a case in which the assessee had a coffee curing plant. In relation to machinery installed for curing of the coffee, the assessee claimed investment allowance under s. 32A of the IT Act for the asst. yrs. 1980-81 and 1983-84. The Tribunal found that nine processes were involved in curing coffee and to deal with the nine processes, the assessee had a factory area where godowns for storage of uncured/clean coffee, coffee drying yards, machine rooms, garbling sheds, etc., were located. The Tribunal held that in this process the assessee was involved in an activity of manufacturing the coffee beans from the raw material plucked from the plant, and that, therefore, the assessee was entitled to investment allowance on the machinery installed for curing coffee. On a reference, the High Court held that the assessee was not entitled to the allowance as the activity of the assessee was not either manufacture or production. On appeal to the Supreme Court, the Supreme Court held that the assessee after plucking or receiving the raw coffee berries made them undergo nine processes to give them the shape of coffee beans. The final product was absolutely different and separate from the input. The change made in the article resulted in a new and different article, which was recognised in the trade is a new and distinct commodity. The coffee beans had an independent identity from the raw material from which they were produced. Conversion of a raw berry into the coffee beans was a manufacturing activity. While holding so, the Supreme Court held as follows : “The word ‘manufacture’ has not been defined in the IT Act. In the absence of a definition, the word ‘manufacture’ has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to manufacturing activity.”In that case, by means of the nine processes as found by the Tribunal, there was conversion of the raw berry into the coffee beans, which are commercially two different commodities and that activity has been considered by the Supreme Court as a manufacturing activity. But in the case on hand, the activities discussed above clearly show that the jumbo photographic colour papers were only slitted into small rolls and sheets of required sizes. The slitted small photographic colour paper or a small flat colour paper is not a commodity different from the jumbo roll of photographic colour paper. The marketability might be different.
15. On the facts of the present case, the assessee by the use of slitting machine slitted the jumbo photographic colour paper into smaller rolls and cut size flats of the desired size. By this activity, no manufacturing process has been done by the assessee. The assessee imported already manufactured colour papers, which has been now reduced in size according to the needs of the assessee’s customers. The original goods as well as the size reduced goods by slitting are all one and the same, i.e., they are photographic colour paper. No new commercial commodity emerged out of the activity carried on, on the original goods—jumbo rolls, which could be considered as a manufacturing activity at the hands of the assessee. The assessee is only trading in photographic colour papers as a wholesaler and slitted the already manufactured and produced photographic paper into required size to suit the requirement of its customers and in easily marketable sizes. Therefore, the slitting of the bigger roll into marketable smaller rolls or sizes is an integral part of the trading activity of the assessee. In the above said process, neither manufacture nor production is involved nor a new product emerges even though the goods are handled by forklift and hoist and slitted by computerised slitting machine and which process is required to be done in a dark air-conditioned humidity controlled dust proof room.
16. In view of the above discussion with particular reference to the activity carried on by the assessee, and in the light of the decisions above referred to, we are of the considered view that on the facts and circumstances of this case, the assessee cannot be regarded as being engaged in the business of manufacture or production of an article or thing. The question is answered in favour of the Revenue and against the assessee.
[Citation : 261 ITR 491]
