COMMISSIONER OF INCOME TAX vs ASPINWALL and CO. LTD.

K. S. PARIPOORNAN, J. :

At the instance of the Revenue, the Tribunal, Cochin Bench, has referred the following two questions of law for the decision of this Court :

"1. Whether, on the facts and in the circumstances of the case, the amount contributed by the assessee to the unrecognised Executive Staff Provident Fund is an allowable deduction ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that the assessees activity of curing coffee amounts to manufacturing and the assessee is entitled to relief under s. 32A of the IT Act ?"

The respondent/assessee is a public limited company. It is engaged in the business of coffee curing, shipping and allied businesses. We are concerned with the asst. yr. 1978-79, for which the accounting period ended on 31st December, 1977. For the asst. yr. 1978-79, the assessee claimed a deduction of Rs. 47,549, being contribution to an unrecognised Executive Staff Provident Fund. Since the fund was not a recognised one, the ITO disallowed the deduction. In appeal, the CIT(A) directed the ITO to allow the deduction. The Tribunal, following its decision in the case of the very same assessee for the earlier year (1977-78) held that it is an admissible deduction. The assessee had also claimed investment allowance of Rs. 12,417 in respect of machinery installed by the assessee for curing of coffee. The ITO held that investment allowance under s. 32A of the Act is admissible only in relation to machineries or plants installed in a small scale industrial undertaking for the purpose of business of manufacturing or production of any article or thing. It is difficult to conceive the process of curing coffee as a process involving manufacture or production and disallowed the allowance. In appeal, the CIT(A), by order dt. 15th February, 1984, held that this issue has been decided in favour of the assessee by the Tribunal and deleted the disallowance. The ITO was directed to allow the investment allowance in respect of machinery installed in its coffee curing works. In further appeal before the Tribunal, the Tribunal, after adverting to the rival pleas of the Revenue and the assessee in paragraphs 7 and 8 of its order dt. 6th October, 1988, concluded in paragraph 9 thus :

"9. We have considered the rival submissions. Curing of coffee, as we understand, involves removal of foreign matters and passing the coffee seeds through peeling machines for removing husk from the coffee without hampering its size and quality and keeping the silver skin of coffee, grading it and classifying the seeds. The Supreme Court and the Kerala High Court held that cutting of the heads and tails of prawns, lobsters and shrimps, peeling, deveining, cleaning and after freeying, exporting them did not amount to manufacturing activity. These cases are decided under the Sales-tax Act and after considering the processes involved in that activity. There is no decision of any High Court brought to our notice in the case of coffee curing. However, the decision of the Tribunal in the case of Bharathi Coffee Curing Works is directly on the issue of coffee curing. For the sake of consistency, we follow the decision of the Bangalore Bench and hold that the assessees activity of curing coffee amounts to manufacturing and the assessee is entitled to relief under s. 32A."

The Tribunal allowed the relief to the assessee under s. 32A of the Act. It is thereafter, at the instance of the Revenue, the questions of law formulated hereinabove have been referred to this Court for decision, by the Tribunal.

We heard counsel.

It is common ground that the answer to question No. 1 is governed by the earlier Bench decision of this Court in the case of the very same assessee and the decision is reported in Commissioner of Income Tax Vs. Aspinwall and Co. (Travancore) Ltd., . In the said case, this Court held that contribution to unrecognised Executive Staff Provident Fund, in the case of the very same assessee, is an allowable deduction. In the light of the aforesaid Bench decision of this Court, we answer question No. 1 in the affirmative - against the Revenue and in favour of the assessee.

Counsel on both sides invited us to a catena of decisions, for the purpose of deciding whether curing coffee amounts to manufacture. Sec. 32A(1) and 32(2)(b) of the IT Act, 1961 are relevant in this context. They are as follows :

"32A. Investment allowance - (1) 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 asked 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 :

Provided that no deduction shall be allowed under this section in respect of -

(1) .....

(2) The ship or aircraft or machinery or plat referred to in sub-s.(1) shall be the following, namely :

.....

.......

.....

(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."

The word "manufacture" has been considered by the Supreme Court of India and the High Courts in innumerable decisions in the context of the Central Excises and Salt Act, Sales-tax Act, Income Tax Act, etc.

Counsel for the assessee submitted that the word manufacture should receive an interpretation consistent with the object and purpose of the particular statute. It was argued that the word manufacture in s. 32A of the IT Act should be geared to a machine and its utility in the context of investment allowance and the test is on the user. The following decisions were cited :

Union of India (UOI) Vs. Delhi Cloth and General Mills,

South Bihar Sugar Mills Ltd., etc. Vs. Union of India (UOI) and Others,

Allenbury Engineers Pvt. Ltd. Vs. Ramkrishna Dalmia and Others,

Empire Industries Limited and Others Vs. Union of India and Others,

Commr. of Sales-tax vs. Harbilas Rai & Sons 21 STC 17

State of Karnataka vs. Raghurama Shetty 47 STC 369

Venkatachalam vs. State of Madras (1974) 45 FJR 288

Singh Engineering Works Pvt. Ltd. Vs. Commissioner of Income Tax,

Sampath Iyengars Law of Income Tax, Vol. 2, 8th Edition-pages 1665 and 1757.

On the other hand, counsel for the Revenue brought to our notice the following decisions :

COMMISSIONER OF Income Tax, MADRAS Vs. DIWAN BAHADUR S. L. MATHIAS.,

THE COMMISSIONER OF Income Tax, MADRAS Vs. KATRAGADDA MADHUSUDHANA RAO AND OTHERS.,

A.T. Parthasarathiah and Bros. Vs. Commissioner of Income Tax, Mysore,

Commissioner of Income Tax Vs. Woodland Estates Ltd.,

Delhi Cold Storage Pvt. Ltd. Vs. Commissioner of Income Tax, New Delhi, .

The Revenues plea is that any process done to render the commodity marketable or more marketable cannot spell in the realm of manufacture. We should at once say that the decisions referred to us by both the parties were rendered in different contexts while considering different legislations. It is doubtful whether any general principle applicable to all cases can be gleaned from the said decisions. The Constitution Bench of the Supreme Court had reviewed the decisions in the context of Central Excises and Salt Act. In those decisions, the Supreme Court has referred with approval the decisions rendered under the Sales-tax legislations. In particular, the general concept of the word manufacture has been highlighted at least in a few decisions. We shall deal with the landmark decisions of the Supreme Court on the subject. The three cases which we shall refer (illustrative and not exhaustive) arose under the Central Excises and Salt Act, 1944. In Union of India vs. Delhi Cloth & General Mills (supra), a Constitution Bench of the Supreme Court, in paragraph 14 of the judgment, quoted the following passage of general application from the book Permanent Edition of Words & Phrases, vol. 26 :

"Manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use."

A later decision of the Supreme Court in Empire Industries Ltd. vs. Union of India (supra) has exhaustively surveyed the case law on the subject and has highlighted the principles discernible therefrom. A Constitution Bench of the Supreme Court in a recent decision in Ujagar Prints vs . Union of India : [1989]179ITR317(SC) has approved the decision in Empire Industries Ltd. case (supra) and, after a critical analysis of the various aspects arising in the matter, delivering the judgment on behalf of the majority, Venkitachaliah, J. (present CJI) at page 511 of the report (paragraph 42), stated the law thus :

"42. The prevalent and generally accepted test to ascertain that there is manufacture is whether the change or the series of changes brought about by the application of processes take the commodity to the point where, commercially, it can no longer be regarded as the original commodity but is, instead, recognised as a distinct and new article that has emerged as a result of the processes. The principles are clear. But difficulties arise in their application in individual cases. There might be borderline cases where either conclusion with equal justification be reached. Insistence on any sharp or intrinsic distinction between processing and manufacture, we are afraid, results in an oversimplification of both and tends to blur their interdependence in cases such as the present one."

The decision of this Court construing the word manufacture arising under the Finance Act (IT Act) is the one reported in Commissioner of Income Tax Vs. Casino (Pvt.) Ltd., . We do not think that we should deal with all the decided cases on the subject.

It was vehemently contended by counsel for the assessee that the question as to whether the plant or machinery is installed for the purpose of business of manufacture or production is a finding on a question of fact. The Tribunal, in this case, has categorically held that the activity of curing coffee amounts to manufacture and so the assessee is entitled to the relief under s. 32A of the Act. The plea was that the said finding being one of fact, no question of law arises for consideration in this case. Strong reliance was placed on the decision of the Supreme Court in Commissioner of Income Tax, Bombay Vs. Tiecicon Pvt. Ltd., . In that case, the question was whether the assessee was an industrial company as defined in s. 2(6)(d) of the Finance Act, 1968 and s. 2(6)(c) of the Finance Acts of 1969 and 1970. The Tribunal, in that case, held that the assessee was an industrial company as defined in the Finance Act as meaning a company which, among other things, is mainly engaged in the manufacture or processing of goods. The Tribunal rejected the application filed by the assessee for reference under s. 256(1) of the IT Act wherein the question was, "whether the assessee-company was industrial company in terms of the definition ?" The High Court dismissed the application filed by the Revenue under s. 256(2) of the Act. In the appeal filed before the Supreme Court, it was held that the Tribunal and the High Court were right in holding that the question is one of fact. The Supreme Court rejected the appeal filed by the Revenue. This decision was very much relied on by counsel for the assessee to contend that no question of law arises for consideration in this case.

On the other hand, counsel for the Revenue submitted the question itself is worded to the effect as to "whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that the assessees activity of curing coffee amounts to manufacturing and the assessee is entitled to relief under s. 32A of the IT Act ?" Though innumerable decisions were cited before us by counsel appearing on either side, we are of the view that the Tribunal has not disposed of the above matter in a proper and legal way.

A perusal of the order of the Tribunal dt. 6th October, 1988, particularly paragraph 8 and 9 thereof, gives the impression that the Tribunal was swayed by the decision of the Bangalore Bench in the case of case of Bharathi Coffee Curing Works vs. First ITO (1979) 2 Taxman 484, wherein it was held that the activity of curing coffee amounts to manufacturing activity and the assessee was entitled to relief under s. 32(1)(vi), the requirements of which are the same as under s. 32A of the Act. In our opinion, the Tribunal had made a short circuit of the entire matter. It was not considered as to whether curing of coffee amounts to manufacture or production within the meaning of s. 32A of the Act entitling the assessee to the relief under s. 32A of the Act. The Tribunal no doubt held thus :

"Curing of coffee, as we understand, involves removal of foreign matters and passing the coffee seeds through peeling machines for removing husk from the coffee without hampering its size and quality and keeping the silver skin of coffee, grading it and classifying the seeds."

After stating the above, the Tribunal stated that there is no decision of any High Court brought to their notice in the case of coffee curing and since the decision in the case of Bharathi Coffee Curing Works is directly on the issue of coffee curing for the sake of consistency, they will follow the decision of the Bangalore Bench and hold that the activity of curing coffee amounts to manufacturing and the assessee is entitled to the relief under s. 32A of the Act. In our opinion, the decision of the Tribunal (Bangalore Bench) in the case of Bharathi Coffee Curing Works (supra) turned on its facts and the materials that were available before the Tribunal in that case to reach a conclusion that curing of coffee amounts to manufacturing activity, are not available in this case. We shall examine the decision in Bharathi Coffee Curing Works vs. First ITO (supra) in detail.

In Bharathi Coffee Curing Works case (supra), the activity of the assessee was coffee curing. A note was submitted by the assessee explaining the activities of the assessees coffee curing works. The said note was to the following effect :

"We are agents of the Coffee Board. We receive coffee from the planters and it has to be cured as per the standard fixed by the Coffee Board. After the coffee is received from the planters, the coffee should be taken for curing after it is properly dried as per standard weight fixed by the Coffee Board.

The machinery used for curing will be about 20 in numbers from the initial stage to the final products. Even though the finished product is treated as only coffee, the characteristic of the raw coffee is different from that of the finished product.

The curing operation will start from the winnowing of the coffee to remove foreign matters with the help of winnowers and magnets. Coffee will be passed through limprima which helps to keep the silver skin of coffee, with proper pressing. From limprima, raw coffee will pass through peeler which play an important role in producing the qualify coffee. Peeler will act by removing husk from the coffee without hampering its size and quality and quantity. From the peeler, coffee will pass through proper elevators to catadors. Catadors will remove a part of the husk and remove part of the triages. From catador through elevator, coffee passes into the graders which remove unpeeled coffee. From graders, it will pass through bigger graders where different products of coffee are separated according to the standard prescribed by the Coffee Board. We segregate A, B, PB, Triage, Blacks/Bits, Browns coffee separately using proper machinery graders. It involves very technical and precise graders to achieve proper quality of the above grades.

Pea-berry coffee is an unique quality in coffee which has special aroma. Pea-berry separator is a machine which is used to bifurcate pea-berry coffee from other coffees.

Hence, highly precise machineries play a very important part to produce a quality coffee to the market.

After using the above machinery and female force for grading, coffee will be ready for marketing."

The statements made in the above note were not challenged by the Departmental Representative, though opportunity was given therefor. The Tribunal processed on the basis that what is said in the note is done by the assessee its curing works to the coffee received by it from the planters. After referring to the decision of the Supreme Court in Paramjit Singh and Others Vs. Ram Rakha and Others, , decision of the Punjab & Haryana High Court in Ganesh Trading Co. vs. State of Haryana AIR 1971 P&H 26, decision of the Madras High Court in Commissioner of Income Tax, Madras Vs. M.R. Gopal, , decision of the Gujarat High Court in CIT vs. Ajay Printery Co. Pvt. Ltd. (1965) 58 ITR 511 and the decision of the Bombay High Court in Commissioner of Income Tax, Bombay City I Vs. Tata Locomotive and Engineering Co. Ltd., , the Tribunal stated thus, in paragraph 6 of its order :

"6. Applying these ruling to the activity of the assessee, it is, in our opinion, quite clear that the assessee is engaged in the manufacturing or production of goods. If dehusking the paddy for removing the husk is a process of manufacture, then dehusking the coffee by removing the husk by peeler, as is clear from the note extracted above, would be a process of manufacturing. That apart, as is stated in the note, there are about 20 machines involved in the curing of coffee and what is done by the assessee is not merely a processing activity but is a manufacturing process."

So, it is evident from the above, that the details regarding the activities done by the assessee for curing coffee were available and that the Tribunal adverted to the said activities and also stated that there are 20 machines involved in the curing of coffee and so the activity is a manufacturing process. The conclusion that the assessee was engaged in a manufacturing process entitling it to the initial depreciation under s. 32(1)(vi) of the IT Act, was arrived at by the Tribunal after adverting to the basic and necessary facts in detail. Unfortunately, in this case no material is available on that score. As stated in paragraph 10 supra, the Tribunal in a broad sweep stated that "curing of coffee involves removal of foreign matters and passing the coffee seeds through peeling machines for removing husk from the coffee without hampering its size and quality and keeping the silver skin of coffee, grading it and classifying the seeds."

The above factual detail was not followed; nor was the decision rendered on the basis of the above fact; the Tribunal simply followed the decision of the Bangalore Bench of the Tribunal without going into the details as to whether any manufacturing process or activity was involved and without entering a finding on that aspect. We should say that as the final fact finding authority the Tribunal had a duty to examine the matter in great detail, analyse the relevant facts and enter a positive finding as to whether any manufacturing activity or process is involved in curing coffee. The Tribunal has failed to do so. The order of the Tribunal perfunctory. It is not in accordance with law.

Therefore, we are not in a position to properly and satisfactorily answer question No. 2 referred to this Court. We decline to answer question No. 2, but we direct the Tribunal to restore the appeal to file and decide the matter in accordance with law and in the light of the observations contained herein. The parties may be given sufficient opportunity to place all relevant materials before the appeal is disposed of.

The reference is disposed of as above.