Commissioner of Income Tax vs Mount Shivalik Breweries Ltd.

Ajay Kumar Mittal, J.—This order shall dispose of IT Ref. Nos. 22 and 128 of 1997 and IT Appeal No. 86 of 2000 as common questions of law and facts- are involved therein. Being identical matters, the facts are being extracted from IT Ref. No. 22 of 1997.

On the directions of this Court vide orders dated 15-5-1996 in ITC Nos. 61 to 63 of 1995, the Income Tax Appellate Tribunal, Chandigarh Bench (in short "the Tribunal") has referred the following question of law arising out of its order dated 29-3-1994 in ITA Nos. 463 to 465/Chd/1988, for the assessment years 1983-84 to 1985-86 for its opinion:

Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the Assessee was eligible for investment allowance u/s 32A and to the deduction u/s 80-I of the Act in regard to its new industrial unit set up at Chandigarh?

Facts as narrated in the statement of case may be noticed relating to assessment year 1983-84. The Assessee filed its return for assessment year 1983-84 on 29-9-1983 declaring net income of Rs. 49,61,320. The said return was filed late by two months. The Assessee is manufacturing country liquor and beer. The assessing officer passed assessment order on 30-8-1985 allowing investment allowance at Rs. 2,11,867. The claim of the Assessee for deduction u/s 80-I was disallowed. The Assessee filed an application before the assessing officer u/s 154 and made three claims, i.e. with regard to the disallowance of interest u/s 40A(5); disallowance on account of rest-house expenses; and deduction u/s 80-I of the Act. The assessing officer vide order dated 10-12-1985 allowed the said application and deleted the disallowance on account of rest-house expenses to the tune of Rs. 67,250 besides allowing deduction of Rs. 27,824 u/s 80-I of the Act. Accordingly, the revised income was computed at Rs. 50,32,830.

The Commissioner of income tax (in short "the CIT") in exercise of power u/s 263 of the Act issued a notice dated 30-12-1986 seeking to withdraw investment allowance of Rs. 2,11,067 and deduction u/s 80-I amounting to Rs. 27,824 which was allowed in the assessment order. The CIT held that the undertaking of the Assessee was not engaged in the manufacturing process and, therefore, Assessee was not entitled to investment allowance u/s 32A and deduction u/s 80-I of the Act.

On appeal by the Assessee, the Tribunal set aside the order of the CIT and upheld that of the assessing officer. Hence, the reference at the instance of the revenue.

We have heard learned Counsel for the parties and have perused the record.

Learned Counsel for the revenue submitted that the Tribunal had erred in allowing the claim of the Assessee for investment allowance u/s 32A and deduction u/s 80-I of the Act by holding it to be anew industrial unit within the meaning of the aforesaid provision. According to the learned Counsel, there was no manufacturing or production in the spirit bottling plant and Indian made foreign liquor and, therefore, no allowance/deduction under Sections 32A and 80-I could be allowed to the Assessee. It was further submitted that the item fell under Schedule XI of the Act and on that account also the aforesaid deductions were not admissible to the Assessee.

Controverting the aforesaid submissions, learned Counsel for the Assessee relied upon the judgment of Madras High Court in CIT v. Vinhros & Co. (2008) 6 DTR (Mad) 25 and argued that the Assessee was engaged in the manufacture of Indian made foreign liquor and was blending and preparing rectified spirit before it could be fit for human consumption.... It was, thus, contended that the Assessee was manufacturing or producing Indian made foreign liquor on which allowance/deduction under Sections 32A and 80-I could not be denied. Learned Counsel laid emphasis on the finding recorded by the Tribunal that the Assessee was a small-scale industry and, therefore, the exclusion clause under Schedule XI could not be applied even if the item manufactured by the Assessee was included in Schedule XI as the said Schedule did not apply in the case of small-scale industry.

We have given our thoughtful consideration to the rival contentions and find merit in the submission made by learned Counsel for the Assessee.

The Tribunal while allowing the appeal of the Assessee had in para 18 of its judgment concluded that the Assessee was engaged in the manufacturing activity entitling Assessee deduction u/s 80-I and allowance u/s 32A of the Act. The relevant observations read thus:

Now we come to the contention as to whether the Assessee was engaged in a manufacturing activity or not. This question has to be decided on the facts of each case. The basic test, however, is the one laid down by Justice Pathak in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam Vs. Pio Food Packers, , a relevant extract from which has been reproduced by the Supreme Court in the case of Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, , which is to the following effect:

Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place.

The test really is whether after applying certain processes the commodity which is ultimately produced is in market parlance a different commodity from the original commodity or not. The original commodity in the present case is rectified spirit. Certain processes are done by the Assessee at Chandigarh and that rectified spirit is converted into rum, whisky and brandy. In the market parlance, rectified spirit is not the same thing as rum, brandy or whisky. A customer going to the market and demanding rectified spirit will not be given rum, whisky or brandy and vice versa. We have, therefore, no hesitation to hold that the Assessee company was engaged in the manufacturing activity to relief under Sections 32A and 80-I of the Act. The case law relied on by the learned Counsel for the Assessee supports its case.

Similar issue arose before Madras High Court in Vinbros & Co.''s case (supra). The court dealing with a case of Assessee who was blending and bottling Indian made foreign liquor (IMFL) had held the same to be engaged in manufacture for the purpose of claiming deduction u/s 80-IB of the Act. It was observed that the Assessee had engaged itself in the manufacturing or producing, of an article or thing by the act of blending and it just does not add water and sells the final product. The Assessee had to add several items to make it fit for human consumption.

The High Court while concluding it to be manufacture upheld the findings of the Tribunal in paras 10 and 11 which read thus:

The Tribunal referred to the decision of the Supreme Court in the case of ASPINWALL and CO. LTD. Vs. Commissioner of Income Tax, , with regard to the concept of what would amount to manufacture. It referred to the decision in the case of Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam Vs. Pio Food Packers, wherein it was observed that the test for determination whether manufacture can be said to have taken place is whether the commodity which is subject to the process of manufacture can no longer be regarded as the original commodity, but it is recognized in the trade as a new and distinct commodity. It was observed at p. 65 in Dy. CST v. Pio Food Packers (supra) as follows:

Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place.

Following the same, the Tribunal held that what was purchased by the Assessee was not a potable one and but for the blending, the commodity could not have become a saleable commodity. Consequently, the raw materials, even though are not manufactured by the Assessee, yet there is nexus of the process by blending to make it a saleable commodity totally different from that of the original obtained. The Tribunal also referred to the decision of this Court in Commissioner of Income Tax-III Vs. Premier Tobacco Packers Pvt. Ltd., and the decision of the Supreme Court in the case of Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, and held that the Assessee was entitled to the relief u/s 80-IB being small-scale industry engaged in the production of IMFL from rectified spirit. The Tribunal also pointed out that the end product is totally different and is commercially different commodity than the major input rectified spirit, which is not fit for human consumption. Hence, the changes made to the original product result in a new different commodity, which is recognized as to in the trade.

In view of the above, it is held that the Tribunal had rightly concluded that the Assessee was engaged in the manufacturing activity.

Further, adverting to the issue relating to inclusion of the product of the Assessee in Schedule XI of the Act, suffice it to notice that it could not be controverted by the learned Counsel for the revenue that the Assessee was determined to be small-scale industrial undertaking as has been recorded by the CIT. In the light of the aforesaid finding, keeping in view second proviso to Clause (iii) of Sub-section (2) of Section 80-I and Sub-clause (ii) of Clause (b) of Sub-section (2) of Section 32A of the Act, the benefit of Sections 80-I and 32A could not be denied to the Assessee.

Accordingly, the question of law is answered against the revenue and in favour of the Assessee.

The reference stands disposed of.