Commissioner of Income Tax vs Kanam Latex Industries (P.) Ltd.

K.S. Paripoornan, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal 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 assessee is entitled to the deduction u/s 80J of the Income Tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to the deduction u/s 80HH of the Income Tax Act, 1961 ?"

The respondent which is a private limited company is an assessee to Income Tax. We are concerned with the assessment year 1980-81. The business of the company is centrifuging rubber latex. The assessee claimed that the business involves manufacture or production of articles and things and so, the company is entitled to deduction u/s 80J as well as u/s 80HH in respect of a unit working at Nagercoil in Kanyakumari district, which has been declared as a backward area. The Income Tax Officer rejected the said plea. He held that the assessee does not carry on manufacturing operations nor does it produce any article. In his view, the assessee only makes the latex more concentrated. The reliefs claimed under Sections 80J and 80HH were denied. In appeal, the Commissioner of Income Tax (Appeals) confirmed the said decision. He took the view that, for the assessment year 1977-78, the claim for deduction u/s 80HH was considered by the Tribunal and it was held that the assessee was not engaged in any manufacturing operations. He further held that the assessee did not purchase latex and did not sell any manufactured article. The income of the assessee was earned by hiring out their machinery to others for piece works. The assessee was not engaged in any manufacturing operations for which deduction could be claimed. With regard to the relief u/s 80J, the Commissioner of Income Tax (Appeals) held that the assessee had not employed, on an average, ten persons and so, the assessee was not entitled to the relief u/s 80J also.

The assessee took up the matter in appeal before the Income Tax Appellate Tribunal. It was urged that the centrifugal machinery, which is intended for the purpose of preparing preserved concentrated natural latex, belonged to the planters. The preserved latex is prepared out of the natural latex that is brought by the planters and the assessee put it through the centrifuge and obtained what has been described as ammonia preserved concentrated natural rubber latex. Centrifuge latex is commercially a product different from normal latex. Placing reliance on a notification of the Central Government-No. 189 of 1983 dated July 8, 1983--the assessee pleaded that the Government of India had considered the preserved latex, latex concentrated, etc., as manufactured goods. The Tribunal, after adverting to the above notification of the Central Government, held that the Government had proclaimed that the assessee was a manufacturer and that the said notification has to be applied with equal force to the Income Tax Act also. It was held that the assessee is entitled to deduction under Sections 80J and 80HH. The plea of the assessee was accepted. It is thereafter, at the instance of the Revenue, that the two questions of law formulated hereinabove have been referred for the decision of this court.

We heard senior counsel for the Revenue, Mr. P.K.R. Menon, and also counsel for the respondent-assessee, Mr. P.G.K. Warriar.

The only short question that arises for consideration is whether any production or manufacture is involved in subjecting the natural rubber latex to the centrifugal operation for obtaining preserved latex so as to entitle the assessee to the benefit of Sections 80) and 80HH of the Income Tax Act, 1961. It is common ground that, when an identical matter arose for consideration in the assessment years 1977-78 and 1978-79, the Income Tax Appellate Tribunal, by order dated December 23, 1983, held that in spite of the changes that are effected by the process of centrifuging, the end product cannot be considered to be materially different from the raw material, the natural latex. The end product is still a colloidal solution of rubber, but only with a higher concentration of rubber and greater stability. The Tribunal also held that commercially no different product was produced and no production or manufacture is involved in subjecting the natural rubber latex to the centrifugal operation after obtaining preserved latex. When the appeal for the instant year came up before the Appellate Tribunal, great reliance was placed on the aforesaid decision of the Appellate Tribunal by the Revenue.

We perused the order of the Appellate Tribunal dated May 28, 1987. The Appellate Tribunal distinguished the earlier decision rendered for the years 1977-78 and 1978-79 in Income Tax Applications Nos. 187 and 188/(Coch) of 1982 dated December 23, 1983. The Appellate Tribunal held that the notification dated July 8, 1983 (No. 189 of 1983), considered the latex concentrate, preserved latex, etc., as manufactured goods and this notification was not brought to the notice of the Tribunal when it decided the appeal for the years 1977-78 and 1978-79. According to the Appellate Tribunal, the notification makes all the difference and, after discussing certain decisions, the Tribunal took the view that, by means of centrifuging process, normal latex is converted into preserved latex which is entirely a different commercial product. On a perusal of the order of the Appellate Tribunal, we get the impression that it was influenced largely, in taking the said view, by the notification of the Government of India dated July 8, 1983, passed under the Central Excises and Salt Act and practically taking the view that the said notification concludes that preserved latex is an item produced by the manufacturer and so the assessee will be entitled to deduction under Sections 80J and 80HH. We are of the view that the Appellate Tribunal over-emphasised the effect and impact of the notification of the Government of India (No. 189 of 1983) dated July 8, 1983, and completely under-rated or diluted the legal effect and impact of the earlier decision of the Tribunal in Income Tax Applications Nos. 187 and 188/(Coch) of 1982 dated December 23, 1983. The earlier decision of the Appellate Tribunal and also the notification of the Government of India under the Central Excises and Salt Act have got only relevance. Neither the one nor the other will conclude the matter. The essential question that will fall to be considered is whether when normal or natural latex is converted into preserved latex by centrifuging process, any manufacturing process is involved or a new commodity produced. A finding on this is essential. Such a finding can be entered only on the basis of evidence. Technical and scientific evidence can be gathered from competent persons or after understanding the process from standard books or literature ; one has to appreciate the facts. That has not been done by the Appellate Tribunal in the instant case, nor has any definite finding been entered that by manufacture or production, a new and different article has come into being. These defects are fatal. Moreover, the test to ascertain or find out whether there is manufacture or production has not been adverted to or applied in the instant case. Constitution Benches of the Supreme Court had occasion to consider the matter in very many decisions. One of the earliest decisions is Union of India (UOI) Vs. Delhi Cloth and General Mills, . One of the latest decisions is Ujagar Prints v. Union of India : [1989]179ITR317(SC) . Venkatachaliah J., as he then was, after reviewing the earlier decision on the subject, held at page 341 of the report thus :

"The prevalent and generally accepted test to ascertain whether there is ''manufacture'' is to find 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 may be reached. Insistence on any sharp or intrinsic distinction between ''processing'' and ''manufacture'', we are afraid, results in an over simplification of both and tends to blur their interdependence in cases such as the present one. ..."

The above crucial test was not borne in mind by the Tribunal when it decided the appeal in this case.

For the above reasons, we are of the view that the Appellate Tribunal has not rendered the decision in accordance with law. There has been no proper advertence to the relevant materials. The Tribunal has not posed the correct question. The proper test governing the matter, as held by the Supreme Court, was not adverted to. On the other hand, the Tribunal over-emphasised the effect of the notification promulgated by the Government of India under the Central Excises and Salt Act and completely under-estimated and diluted the legal effect of its earlier decision in Income Tax Applications Nos. 187 and 188/(Coch) of 1982 dated December 23, 1983. The approach to the question is totally faulty. The resultant conclusion is tainted. We hold that the decision of the Appellate Tribunal is not in accordance with law. In the above circumstances, we decline to answer the questions referred to this court by the Appellate Tribunal at the instance of the Revenue. We direct the Income Tax Appellate Tribunal, Cochin Bench, to restore the appeal to file and decide the matter afresh in accordance with law. The reference is disposed of as above.

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, forthwith.