IT: Process of making milk products, i.e., ghee, butter milk, flavoured milk etc., from milk amount to manufacture and, therefore, plant and machinery used for such process are eligible for investment allowance
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[2013] 40 taxmann.com 71 (Andhra Pradesh)
HIGH COURT OF ANDHRA PRADESH
Commissioner of Income-tax
v.
Vizag District Milk Producers Co-op. Union Ltd.*
V.V.S. RAO AND B.N. RAO NALLA, JJ.
REFERRED CASE NO. 62 OF 1997
DECEMBER 13, 2011
Section 32A of the Income-tax Act, 1961 - Investment allowance [Manufacture] - Assessment year 1983-84 - Assessee-firm, engaged in business of processing milk and manufacturing milk products (i.e., butter milk, ghee etc.), claimed investment allowance on plant and machinery used for manufacturing milk products - Whether when once milk was subjected to specified process, in assessee's factory, new products emerged which were altogether different from milk itself, it could not be said that assessee was not in business of manufacture or production of articles or things - Held, yes - Whether, therefore, assessee was eligible for investment allowance - Held, yes [Paras 13 & 14] [In favour of assessee]
CASE REVIEW
Sacs Eagles Chicory v. CIT [2002] 255 ITR 178/123 Taxman 221 (SC); CIT v. N.C. Budharaja & Co. [1993] 204 ITR 412/70 Taxman 312 (SC)and CIT v. Gem India Mfg. Co. [2001] 249 ITR 307/117 Taxman 368 (SC) (para 8) distinguished.
CASES REFERRED TO
Sacs Eagles Chicory v. CIT [2002] 255 ITR 178/123 Taxman 221 (SC) (para 4), CIT v. N.C. Budharaja & Co. [1993] 204 ITR 412/70 Taxman 312 (SC) (para 4), CIT v. Gem India Mfg. Co. [2001] 249 ITR 307/117 Taxman 368 (SC) (para 4), A. Hajee Abdul Shakoor & Co. v. State of Madras AIR 1964 SC 1729 (para 5), Idandas v. Anant Ramchandra Phadke AIR 1982 SC 127 (para 5), Aspinwall & Co. Ltd. v. CIT [2001] 251 ITR 323/118 Taxman 771 (SC) (para 5) and Allenbury Engineers (P.) Ltd. v. Ram Krishna Dalmia AIR 1973 SC 425 (para 10).
S.R. Ashok for the Appellant. K.V. Simhadri for the Respondent.
JUDGMENT
V. V. S. Rao, J. - The respondent (the assessee) is engaged in the business of processing milk and manufacturing by-products like ghee, flavoured milk, butter milk, rose milk and kova (hereafter referred to as milk products). In their return of income for the assessment year 1983-84, they claimed investment allowance of Rs. 29,957 on plant and machinery installed during the year relevant to the assessment year. The Income-tax Officer, Visakhapatnam, while assessing the income under section 143(3) of the Income-tax Act, 1961 (the Act) allowed the deduction under section 32A of the Act. The Commissioner of Income-tax, Visakhapatnam (CIT) suo motu undertook revision under section 263 of the Act. By order dated March 23, 1988, the assessment was set aside holding that the assessee is not entitled to any investment allowance for the year 1983-84. Being aggrieved, the assessee preferred an appeal before the Income-tax Appellate Tribunal, Hyderabad (the Appellate Tribunal). Following the assessee's cases for the assessment years 1981-82 and 1982-83 being I. T. Nos. 924 and 925 of 1987, the Appellate Tribunal set aside the order of Commissioner of Income-tax.
2. The Revenue filed an application under section 256(1) of the Act for referring the question to this court.
3. The application was rejected. The Revenue then filed ITC No. 93 of 1994 before this court. By an order dated December 5, 1998, this court directed the Appellate Tribunal to refer the question for the opinion of this court. Accordingly, the following question is referred to this court.
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in holding that the assessee-firm is engaged in the business activity of manufacturing or producing articles or things and is entitled to investment allowance under section 32A of the Income-tax Act ?"
4. From a perusal of the order of the Assessing Officer and the revision Commissioner, there cannot be any dispute that the assessee claimed investment allowance on plant and machinery used for manufacturing by-products of the milk. The junior counsel for the Department, however, submits that the assessee is not involved in the process of manufacturing, and therefore, they are not entitled for investment allowance under section 32A of the Act. He relies on Sacs Eagles Chicory v. CIT [2002] 255 ITR 178/123 Taxman 221 (SC) ; CIT v. N.C. Budharaja & Co. [1993] 204 ITR 412/70 Taxman 312 (SC) and CIT v. Gem India Mfg. Co. [2001] 249 ITR 307/117 Taxman 368 (SC).
5. The counsel for the assessee submits that the process of making milk products involve heating, boiling refrigeration, filtration, etc., facilitated by specially designed machinery and, therefore, there is process of manufacturing undertaken by the assessee. He would rely on A. Hajee Abdul Shakoor & Co. v. State of Madras AIR 1964 SC 1729, Idandas v. Anant Ramchandra Phadke AIR 1982 SC 127 and Aspinwall & Co. Ltd. v. CIT [2001] 251 ITR 323/118 Taxman 771 (SC).
6. Section 32A of the Act permits an assessee a deduction equal to 25 per cent. to the actual cost of the machinery by way of investment allowance. This is, however, subject to certain conditions as contemplated in sub-section (2) thereof. For ready reference, we quote hereunder section 32A(1) and (2) of the Act.
"32A. Investment allowance.-(1) In respect of a ship or an aircraft or machinery or plant specified in sub-section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty five per cent. of the actual cost of the ship, aircraft, machinery or plant to the assessee.
(2) The ship or aircraft or machinery or plant referred to in sub-section (1) shall be the following, namely :
| (a) | a new ship or new aircraft acquired after the 31st day of March, 1976, by an assessee engaged in the business of operation of ships or aircraft ; | |
| (b) | any new machinery or plant installed after the 31st day of 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 : |
(proviso and the Explanation are omitted herein as not relevant)."
7. A plain reading of sub-section (2) of section 32A of the Act would show that the investment allowance on new machinery and plant would be available only when such machinery and plant, inter alia, are used for the purpose of business of manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule. The machinery purchased or plant installed, has to be used for the purpose of business of manufacture or production of any article. Then only the assessee would be eligible to claim investment allowance as a deduction. Having regard to the word "or" used in section 32A(2)(ii) and (iii), if an assessee installed machinery and plant either for the business of manufacture or for the business of production of any article, it would be qualified for claiming the investment allowance.
8. In Sacs Eagles Chicory (supra) the Supreme Court held that preparation of chicory powder from chicory root does not involve the process of manufacture, enabling the assessee to claim the benefit under sections 80HH, 80-I, 80J. In N. C. Budharaja & Co. (supra) it was held that the machinery used for making borewells would not be eligible for investment allowance and in Gem India Mfg. Co. (supra) the Supreme Court ruled that the activity of cutting and polishing uncut raw diamonds would not involve in the process of manufacturing. These authorities, in our considered view, have no application to the issue before us. We are required to consider in this case as to whether the process of making milk products by the assessee, involves the business of manufacturing or the business of production of articles or things ?
9. In A. Hajee Abdul Shakoor & Co. (supra) the petitioner was in the business of tanned and untanned hides and skins purchased from outside State of Madras, tanning them in the said State and selling the tanned hides and skins. They were assessed to sales tax under the Madras General Sales Tax Act, 1939, and rule 16 of the relevant Rules. The petitioner challenged rule 16 as violating article 304 of the Constitution of India. It was, inter alia, contended that when the dealer himself purchased raw hides and skins, the levy of 2 per cent. tax is discriminatory. The plea was that the relevant provisions create discrimination between the case of a local merchant selling locally processed hides and skins ; and the case where the dealer, who is the first seller in the State who purchases and sells only dressed hides and skins outside the State. In his case, he had not purchased such hides and skins in the tanned condition, and, therefore, not liable to be assessed under section 2(1). The plea was rejected by the Supreme Court. It was held that :
". . . raw hides and skins and dressed hides and skins constitute different commodities of merchandise and they could, therefore, be treated as different goods for the purposes of the Act."
10. Idandas (supra) is a case, which arose out of a dispute between the landlord and the tenant. The tenant using leased premises was engaged for the business of running a flour mill and converting wheat into atta. In the suit for eviction pursuant to quit notice, he contended that as the lease is for the purpose of manufacture, it could be terminated under section 106 of the Transfer of Property Act, 1882, only by giving six months' notice. The trial court as well as the High Court found against the tenant holding that the lease was not for manufacturing purpose. The Supreme Court reversed the judgment of the High Court. Referring to Allenbury Engineers (P.) Ltd. v. Ram Krishna Dalmia AIR 1973 SC 425 the court held that "manufacture" means making of articles or material by physical labour or mechanical power. Change of article gives a new and different article, which is the result of manufacture.
11. The relevant observations are as follow :
Coming now to the tests laid down by this court the position may be summarised as follows :
| 1. | That it must be proved that a certain commodity was produced. | |
| 2. | That the process of production must involve either labour or machinery. | |
| 3. | That the end product which comes into existence after the manufacturing process is complete, should have a different name and should be put to a different use. In other words, the commodity should be so transformed so as to lose its original character. |
In the instant case, what happened was that wheat was transformed, by the manufacturing process which involved both labour and machinery, into flour. The commodity before manufacture was wheat which could not be consumed by any human being but would be used only for cattles or medicine or other similar purposes. The end product would be flour which was fit for human consumption and is used by all persons and its complexion has been completely changed. The name of the commodity after the product came into existence is atta and not gehun (wheat). Thus, in the instant case, all the three tests have been fully satisfied. This being the position the irresistible inference and the inescapable conclusion would be that the present lease was one for manufacturing purposes. In this view of the matter, the notice of one month must be held to be invalid and suit for ejectment should have failed on that ground.
12. In Aspinwall & Co. (supra) the question considered by the Supreme Court was whether the assessee's activity of curing of coffee amounts to manufacturing for claiming the relief under section 32A of the Act. The question was answered in favour of the assessee observing as follows (page 327 of 251 ITR) :
"The word 'manufacture' has not been defined in the Act. In the absence of a definition of the word 'manufacture' it 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 a manufacturing activity."
13. In the instant case, the Commissioner of Income-tax recorded a finding that the assessee claimed investment allowance on plant and machinery. There was no dispute that the assessee was engaged in the business of making products or things for which the raw material was milk. There is also no dispute that the assessee was employing machinery for making milk products like ghee, flavoured milk, butter milk, rose milk and kova. When once the milk was subjected to the process, in their factory, new products emerge which are altogether different from milk itself. Therefore, it cannot be said that the assessee was not in the business of manufacture or production of articles or things. The Reference, therefore, has to be answered in favour of the assessee.
14. Accordingly, the question referred to this court is answered in the affirmative against the Revenue and in favour of the assessee.
15. The referred case shall stand disposed of accordingly. There shall be no order as to costs.
USPRegards
Prarthana Jalan
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