Commissioner of Income Tax vs Forbes Ewart and Figgis P. Ltd.

K.K. Usha, J.—These references arise out of a common order of the Income Tax Appellate Tribunal, Cochin Bench, in I. T. A. Nos. 534 and 535/Coch. of 1987 and 234/Coch. of 1988. The relevant assessment years are 1982-83, 1983-84 and 1984-85. Following is the common question referred for the opinion of this court u/s 256(2) of the Income Tax Act, 1961 :

''''Whether, on the facts and in the circumstances of the case, the asses-see is entitled to investment allowance u/s 32A of the Income Tax Act, 1961 ?"

The relevant facts are as follows : The assessee is a closely held company deriving income from its business as tea brokers. The assessee is also a partner in two firms, namely, (1) Forbes (Tea Brokers), Coimbatore, and (2) Forbes and Company (Tea Brokers), Coonoor, which are also engaged in the business of tea auction. The assessee has a rubber mixing mill at Ettumanoor which is used for grinding, masticating and mixing rubber for others on job work basis with raw materials supplied by tyre manufacturers. The assessee claimed investment allowance u/s 32A of the Income Tax Act, in respect of the abovementioned machinery. The assessing authority rejected the claim for the reason that since the assessee is using the machinery for job work, it cannot be said that the assessee is engaged in the production or manufacture of any article or thing and, therefore, not entitled for any investment allowance on the plant and machinery installed in the rubber mixing mill. On appeal by the assessee, the Commissioner of Income Tax (Appeals) took the view that merely because the assessee''s plant and machinery were used for doing job works of others, it cannot be said that it was not entitled to get investment allowance. The Commissioner of Income Tax (Appeals) further held that the assessee was manufacturing or producing a commercially different product, namely, masticated rubber and, therefore, it was engaged in the manufacture or production of an article or thing. Since the assessee has complied with all the provisions of Section 32A, it was held that the claim of the assessee for investment allowance cannot be rejected.

Aggrieved by the order passed by the Commissioner of Income Tax (Appeals), the Revenue filed appeals before the Tribunal. The Tribunal affirmed the view taken by the Commissioner of Income Tax (Appeals) that investment allowance cannot be denied on the ground that the assessee was doing only job work for others and was not itself engaged in the business of manufacturing or production of an article. The Tribunal also held that masticated rubber is a product commercially different from natural rubber. Merely because masticated rubber is used as an intermediate product in the manufacture of tyres it cannot be said that the assessee was disentitled to investment allowance u/s 32A. According to the Tribunal, as far as the assessee is concerned, the masticated rubber produced by it was a final product. It was in this background, the common question referred to above, was sought to be referred before this court at the instance of the Revenue.

In Commissioner of Income Tax Vs. Kerala Rubber and Reclaims Ltd., , a Bench of this court had occasion to consider the question whether an assessee manufacturing rubber compound for utilisation in rubber industries, is entitled to investment allowance u/s 32A. This court decided in favour of the claim of the assessee. In the above case, the assessee had contended that the rubber compound manufactured by it is much more than masticated rubber and the finding of the Tribunal, after examining the process, was also that what was manufactured by the assessee was rubber compound. The Bench took the view that when the product is a rubber compound and not masticated rubber simpliciter, it is a final product as far as the assessee is concerned and, therefore, the Tribunal was justified in granting the claim u/s 32A.

When these references came up for hearing on an earlier occasion, reliance was placed by learned counsel for the Revenue on the above observation of this court in Commissioner of Income Tax Vs. Kerala Rubber and Reclaims Ltd., that the claim u/s 32A may not be available, if what is produced by the assessee is only masticated rubber and contended that in the present case also, the assessee is producing only masticated rubber and, therefore, not entitled to the claim u/s 32A. It was under these circumstances, this court, by order dated October 23, 1997, directed the Tribunal to draw up and send a supplementary statement of facts explaining the process carried on by the assessee with reference to the machinery used, chemicals, if any, added and the actual method of the process, after giving opportunity to both sides. Pursuant thereto, the Tribunal has forwarded supplementary statement of case on July 14, 1998. Details of the process are given as follows :

"The raw materials used in the mixing of rubber in the assessee''s rubber mill are the following :

(i) Sheet rubber from natural rubber ;

(ii) Synthetic rubber ;

(iii) Carbon black ;

(iv) Process oil ;

(v) Chemicals--zinc oxide, stearic acid, renacit, wax, etc.

The process of mastication is done in two stages. Stage I : The rubber supplied by the customers is masticated in the open mill along with renacit--chemical provided by the customer and crushed into pulp form or roller form. After cooling, this is carried for processing at second stage.

Stage II : The rubber rolls obtained after first stage operations are loaded into the intermix mill along with synthetic rubber. With the rubber, carbon, process oil and chemicals are added as per the instructions of the customers. Chemicals normally used are zinc oxide, stearic acid renacit, wax, etc. It is reported that the mixing proportion and the kind of chemicals used are known to the customer only who is supplying the same at the time of mixing. This mixture is heated to a temperature of 150�C to 160�C. The input is thoroughly mixed and after mixing, the same is transmitted into a roller and converted into sheet form. This is then cut into suitable sizes as directed by the customers. This is the product obtained after processing and used in the manufacture of tyre.

All the raw materials required for the processing are supplied by the customers and the mixing of rubber and chemicals is done on their directions. The proportion, quantity and quality are at the discretion of the customers and not normally disclosed to the assessee. The assessee makes use of the machinery and also engages their own labour for doing the processing work at the instance of the customers. The assessee then charges the customers for the process on the basis of the time involved and the thickness of the sheet-rubber. The main machinery used in the process is roll mixing mill. This finds use in the first stage and this is operated with electric power though the feeding of raw materials is done manually. There is then the machinery known as ''intermix'' used in the second stage. This is also operated with electric power. Cooling of the machinery is done automatically with the help of a water-pump connected to the machinery."

On going through the details of the process as explained in the supplementary statement, we find that the process is the same as the one which was carried on by the assessee whose case was considered by this court in Commissioner of Income Tax Vs. Kerala Rubber and Reclaims Ltd., . We may also note that the case of the assessee before the assessing authority was that it was manufacturing a rubber compound and not merely masticating rubber. We are in full agreement with the view taken by the Bench in Commissioner of Income Tax Vs. Kerala Rubber and Reclaims Ltd., that the rubber compound manufactured by the assessee is a final product as far as the assessee is concerned and merely because the above compound is used for the manufacture "of tyres, etc., the assessee cannot be denied the claim u/s 32A. A Bench of this court had occasion to consider in Deputy Commissioner (Law) v. MRF Ltd. [1998] 109 STC 306 KER ; KLJ Tax Cases 148, the question whether compounded rubber manufactured by an assessee under the Kerala General Sales Tax Act, 1963, is finished rubber product entitling the assessee to concessional rate of tax on rubber purchased for its production as per a notification issued by the Government. It was held that even an intermediary product can be a finished product, if it has got its own distinct market and, therefore, the compounded rubber which is used for the manufacture of tyres, etc., was to be held a finished product as far as the assessee was concerned. The Revenue has not been able to bring to our notice any other decision on this issue which has taken a different view from Commissioner of Income Tax Vs. Kerala Rubber and Reclaims Ltd., .

In the light of the above, we answer the common question referred in the affirmative, in favour of the assessee and against the Revenue.

A copy of this judgment, under the seal of this court and the signature of the Registrar, shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.