High Court Of Madras
CIT vs. Taj Fire Works Industries
Sections 80HH, 80-I
Asst. Years 1988-89, 1989-90
P.D. Dinakaran & P.P.S. Janarthana Raja, JJ.
Tax Case (Appeal) Nos. 72 & 73 of 2003
13th June, 2006
Counsel Appeared
J. Narayanasamy, for the Appellant : T.N. Seetharaman, for the Respondent
JUDGMENT
P.D. Dinakaran, J. :
The question of law, of course, very interesting to hear and decide, raised in these appeals is : “Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the assessee is an industrial undertaking eligible for the benefit of s. 80HH and s. 80-I of the IT Act ?” The above two appeals, both preferred by the Revenue, are relating to the asst. yrs. 1988-89 and 1989-90.
2. The assessee is engaged in the business of fire works on job work basis for labour charges out of the raw materials supplied by its customer, viz., Sri Kaleeswari Fire Works. In the assessment for the asst. yrs. 1988-89 and 1989-90, the AO, inter alia, disallowed the claim made by the assessee for deduction under ss. 80HH and 80-I on the ground that the assessee is only a labour contractor and not an industrial undertaking eligible for the benefit of ss. 80HH and 80-I of the Act.
3. Aggrieved by the assessment order, the assessee filed appeals before the CIT(A), who held that there is no need for the assessee to be a manufacturer in his own right and even a job worker, or a person who uses the customer’s raw material would qualify for being termed as an industrial undertaking, supported by the decision of this Court in C. Kadarkarai vs. CWT (1988) 74 CTR (Mad) 137 : (1989) 176 ITR 121 (Mad). The CIT(A), by order dt. 2nd Feb., 1993, regarding the AO’s view that the assessee was a unit created by the splitting up of the business of Sri Kaleeswari Fire Works, held that there is nothing on record to indicate such a presumption.
4. Aggrieved by the order dt. 2nd Feb., 1993 of the CIT(A), the Revenue took out further appeals before the Tribunal, which by order dt. 15th Nov., 2002, dismissed the same agreeing with the decision of the CIT(A). Hence, these appeals.
5.1 Mr. J. Narayanasamy, learned standing counsel appearing for the Revenue, precisely contends that the CIT(A) as well as the Tribunal erred in holding that the assessee is an ‘eligible industrial undertaking’ to avail the benefit of ss. 80HH and 80-I of the IT Act.
5.2 It is further contended that the assessee, being a job worker, is not entitled to the benefit, because the assessee, being a job worker, is receiving only labour charges and thereby, loses the character of a manufacturer, much less, a real manufacturer, who, according to the Revenue, is only Sri Kaleeswari Fire Works under the facts and circumstances of the case, since it pays the duty, which would go to show that the assessee would not be treated as an industrial undertaking.
6.1 On the other hand, Mr. Seetharaman, learned counsel appearing for the respondent/assessee, inviting our attention to the decision rendered by this Court in C. Kadarkarai vs. CWT (supra) and the decision rendered by the Gujarat High Court in CIT vs. Prabhudas Kishordas Tobacco Products (2006) 201 CTR (Guj) 312 : (2006) 282 ITR 568 (Guj), submits that the assessee does not lose the character of the manufacturer merely because he is engaging labourers for labour contract, as he is producing the end product, viz., crackers, by using the raw materials furnished by Sri Kaleeswari Fire Works. In other words, it is contended that merely because the raw materials are obtained from outsider, the assessee, who produces the new product, viz., crackers, by engaging labourers as labour contract, it cannot be said that he is not manufacturing a new product.
6.2 The further contention of Mr. Seetharaman, learned counsel, is that merely because Sri Kaleeswari Fire Works pays the duty, it would not disentitle the assessee to claim the benefit of ss. 80HH and 80-I, as the assessee by itself has produced the new product, viz., crackers, out of the raw materials furnished by Sri Kaleeswari Fire Works and thus, satisfies the ingredients of the terms ‘manufacture’ and ‘industrial undertaking’, for having engaged 200 labourers.
7. In the light of the above rival contentions and in order to decide the questions raised, we are obliged to render a finding on the following points: (i) Whether the assessee is a manufacturer; (ii) Whether the assessee satisfies the ingredients of an industrial undertaking to claim the benefit of ss. 80HH and 80-I; (iii) Whether the assessee loses the character of manufacturer merely because it has engaged coolies under a labour contract to produce the end product, viz., crackers and for having obtained raw materials from Sri Kaleeswari Fire Works, who pays the duty; and finally (iv) Whether the payment of duty by Sri Kaleeswari Fire Works will disentitle the assessee to claim the benefit of ss. 80HH and 80-I of the Act.
8. Before proceeding further, it is apt to refer the relevant portions of ss. 80HH and 80-I of the IT Act, as prevailed during the asst. yrs. 1988-89 and 1989-90, which read as follows : “80HH. Deduction in respect of profits and gains from newly established industrial undertaking or hotel business in backward areas.—(1) …. (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely : (i) it has begun or begins to manufacture or produce articles after the 31st day of December, 1970, in any backward area; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence in any backward area; Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in s. 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose in any backward area; (iv) it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.” ….. “80-I. Deduction in respect of profits and gains from industrial undertaking after a certain date, etc.—(1) …. (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely : (i) it is not formed by the splitting up, or the reconstruction, of a business already in existence; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India, and begins to manufacture or produce articles or things or to operate such plant or plants, at any time within the period of nine years next following the 31st day of March, 1981, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking; (iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in the manufacturing process carried on without the aid of power : Provided that the condition in cl. (i) shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in s. 33B, in the circumstances and within the period specified in that section :
Provided further that the condition in cl. (iii) shall, in relation to a small-scale industrial undertaking, apply as if the words ‘not being any article or thing specified in the list in the Eleventh Schedule’ had been omitted.”
9.1 In the context of ss. 80HH and 80-I of the Act, the Gujarat High Court, in CIT vs. Prabhudas Kishordas Tobacco Products (supra), whereunder the assessee purchased tendu leaves and got them rolled into bidis by contract workers, the bidis being a distinct product different from tendu leaves, after referring to the following decisions of the apex Court as well as its own decisions, namely, (i) Anwarkhan Mehboob Co. vs. State of Bombay (1961) 11 STC 698; (ii) Bangalore Water Supply & Sewerage Board vs. A. Rajappa AIR 1978 SC 548; (iii) CIT vs. J.B. Kharwar & Sons (1986) 57 CTR (Guj) 9 : (1987) 163 ITR 394 (Guj); (iv) CIT vs. Sirdal Food (P) Ltd. (2006) 200 CTR (Guj) 135 : (2006) 282 ITR 563 (Guj); (v) CIT vs. V.B. Narania & Co. (2001) 171 CTR (Guj) 416 : (2001) 252 ITR 884 (Guj); (vi) CWT vs. Mohinibai Kanaiyalal (1999) 157 CTR (Guj) 298 : (1999) 240 ITR 636 (Guj); and (vii) CWT vs. Mubarak Ali Khan (1980) 123 ITR 101 (All), held as follows : “The test is whether the outside agency works directly under the supervision and control of the assessee, it being immaterial whether the processing is done by the workers employed by the assessee at a place outside the premises of the assessee. In relation to the additional reason given by the AO for denying relief under s. 80-I of the Act, both the CIT(A) and the Tribunal had found that, for the purposes of determining whether a unit is a small-scale industrial undertaking or not, while ascertaining the monetary limit laid down in the provision, all assets of the business were not to be taken into consideration. The Tribunal was justified in treating the activities carried on by the assessee as amounting to manufacture of bidis, entitling the assessee of relief under ss. 80HH and 80-I.”
In the said decision, it was further held as follows : “The tests to ascertain whether an activity amounts to manufacture or production of an article or thing have been laid down and reiterated by various decisions of the apex Court and this High Court. Broadly, the requirement is that the raw material must be, in the first instance, subjected to a process of such a nature that it cannot be termed to be the same as the end-product after the raw material undergoes the process of manufacture. In other words, the goods purchased as raw material should go in as inputs in the process of manufacture and the result must be manufacture of other goods. The article produced must be regarded by the trade as a new and distinct article having an identity of its own, an independent market after the commodity is subjected to the process of manufacture. The nature and extent of the process would vary from case to case, and in a given case, there may be only one stage of processing, while in another case, there may be several stages of processing, and perhaps, a different kind of process at every stage. That with every process, the commodity would experience a change, but ultimately, it is only when the change, or a series of changes, bring about a result so as to produce a new and distinct article, that it can be said that the commodity used as raw material has been consumed in the manufacture of the end-product. To put it differently, the final product does not retain the identity of the raw material after it has undergone the process or processes of manufacture.”
9.2 That apart, it is also relevant to rely on the decision of the apex Court in Hindustan Poles Corporation vs. CCE AIR 2006 SCW 1685, wherein it is held as follows : “27. A Constitution Bench of this Court in Union of India vs. Delhi Cloth & General Mill Co. Ltd. AIR 1963 SC 791, had attempted to decide the meaning of expression ‘manufacture’. The Court held that ‘manufacture’ which is liable to excise duty under the Central Excise and Salt Act, 1944, must therefore be the ‘bringing into existence of a new substance known to the market.’ In another Constitution Bench of this Court in Devi Dass Gopal Krishnan & Ors. vs. The State of Punjab & Ors. Sales-tax Cases XX (1967) 430 : AIR 1967 SC 1895, the Court relied on the dictionary meaning of ‘manufacture’ and according to Court ‘manufacture’ means ‘transform or fashion raw materials into a changed form for use’. The Court observed that if by a process a different identity comes into existence then it can be said to be‘manufacture’. In Empire Industries Ltd. vs. Union of India AIR 1986 SC 662, it was observed that manufacture is complete as soon as by the application of one or more processes, the raw material undergoes some change. If a new substance is brought into existence or if a new or different article having a distinct name, character or use result from particular process, such process or processes would amount to manufacture. Whether in a particular case manufacture has resulted by process or not would depend on the facts and circumstances of the particular case. A Constitution Bench of this Court in Ujagar Prints & Anr. vs. Union of India & Ors. AIR 1989 SC 516 followed the earlier decision in Empire Industries Ltd. vs. Union of India (supra). While following the earlier judgment it was held that if there should come into existence a new article with distinct character and use as a result of the process, the essential condition justifying manufacture of good is satisfied. This Court in CST & Anr. vs.
Jagannath Cotton Co. & Anr. (1995) 5 SCC 527 mentioned that manufacture in its ordinary connotation, signifies emergence of new and different goods as understood in relevant commercial circles.”
9.3 Applying the above ratio, we do not have any hesitation to hold that the assessee is a manufacturer eligible to claim the benefit of ss. 80HH and 80-I. However, the issue does not come to an end, as the assessee must also be an industrial undertaking to claim deduction under ss. 80HH and 80-I, even though he is a manufacturer, as held above.
10.1 Mr. J. Narayanasamy, learned standing counsel, contended that the assessee is not an industrial undertaking because he is only a labour contractor engaging coolies for converting the raw materials supplied by Sri Kaleeswari Fire Works into crackers by paying labour charges to the coolies and therefore, the assessee cannot be construed as an industrial undertaking.
10.2 This identical question came up for consideration before this Court in Kadarkarai vs. CWT (supra), whereunder the assessee was carrying on a business in printing and he undertook the job work such as printing of inland letters, labels, notebooks, fancy wrappers, wedding cards, etc. with his offset printing machine. In addition to that, he also purchased raw materials like paper and cardboard and converted them into inland letters, note books, labels, etc. and sold the same. But, the exemption claimed by the assessee under s. 5(1)(xxxi) of the WT Act, was denied by the respondent therein on the ground that the assessee was doing only cooly printing and therefore, the business which he was carrying on was not an industrial undertaking entitled to exemption and this Court, after analysing the ratios laid down in CIT vs. Ajay Printery (P) Ltd. (1965) 58 ITR 811 (Guj), CIT vs. Commercial Laws of India (P) Ltd. (1977) 107 ITR 822 (Mad), CWT vs. K. Lakshmi (1983) 36 CTR (Mad) 1 : (1983) 142 ITR 656 (Mad) and CIT vs. J.B. Kharwar & Sons (1986) 57 CTR (Guj) 9 : (1987) 163 ITR 394 (Guj), held that the assessee manufactures the end-products by himself or by engaging labourers under labour contract by purchasing raw materials or the customers supplying the raw materials and therefore, the words ‘manufacture’ and ‘process’, to confer the benefit of ss. 5(1)(xxxi), should be given liberal interpretation. In CIT vs. N.C. Budharaja & Co. (1993) 114 CTR (SC) 420 : (1993) 204 ITR 412 (SC), the apex Court has held that while deciding on the entitlement of the benefit under ss. 80HH and 80-I, which being a beneficient object, a liberal interpretation, of course without doing any violation to the plain language, is to be given and thus, held that the assessee was an industrial undertaking eligible to claim the benefit of ss. 80HH and 80-I of the Act.
10.3 In the instant case, it is not in dispute that the assessee has only been supplied with the raw materials from Sri Kaleeswari Fire Works and of course, he has engaged coolies, viz., 200 labourers to produce the end product of crackers, thus satisfies the test of manufacturer by producing the new material, namely, crackers and also satisfies the test of industrial undertaking, as the assessee has involved in systematic activity, organised by co-operation between employer and employee, viz., 200 labourers, and for the production and distribution of goods, viz., new product, crackers. If that be so, the contentions advanced by Mr. J. Narayanasamy, learned standing counsel, that the assessee is not entitled for the benefit of ss. 80HH and 80-I, as he has not possessed plant and machinery and that the payment of duty by Sri Kaleeswari Fire Works would also disentitle the assessee to claim the benefit of ss. 80HH and 80-I, are alien to the interpretation contemplated for the purpose of conferring the benefit of ss. 80HH and 80-I of the Act.
11. In view of the above, we are satisfied that the CIT(A) and the Tribunal having fully satisfied that the assessee is entitled for the benefit of ss. 80HH and 80-I, being a manufacturer and an industrial undertaking, have conferred the benefit. In that view of the matter, we answer the question of law raised in these appeals in the affirmative, against the Revenue. The tax case appeals are, accordingly, dismissed.
[Citation : 288 ITR 92]
