Commissioner of Income Tax vs Pankaj Jain Prop. Aagam Food Industries

This appeal challenges order dated 25th April, 2005 passed by the income tax Appellate Tribunal, Amritsar Bench (ITAT) in ITA No. 495

(Asr.)/2004 holding respondent-assessee entitled to deduction u/s 80-IB of the income tax Act. The assessee is engaged in preparation of bread at

Gangyal, Jammu under the name and style of Aagam Food Industries. It is registered with the Directorate of Industries, holding a power licence of

104 HP, as an industry. The unit is installed in industrial area and has employed more than ten workers for making bread.

The assessee showed profits of Rs. 16,06,870 and claimed deduction u/s 80-IB of the income tax Act on the plea that he was converting raw

food materials like maida, sugar, yeast, oil into bread and was, in this way, manufacturing and producing a new product.

The Assessing Officer (AO), however, disallowed the deduction claimed by the assessee, by placing reliance on the Supreme Court judgment in

The Indian Hotels Company Ltd. and Others Vs. The Income Tax Officer, Mumbai and Others, , holding as under:

Keeping in view the above facts, it is held assessee does not qualify for deduction u/s 80-IB of the Act as it is neither manufacturing or producing

any article or thing which is a pre-requisite for any assessee to claim the deduction. Accordingly, the deduction claimed by the assessee to the

extent of Rs. 16,06,870 is hereby withdrawn and added back to the income of the assessee. Penalty proceedings u/s 271(1)(c) of the Act for

furnishing inaccurate particulars of income are being initiated on this account.

The respondent-assessee took an appeal against this before the Commissioner of income tax (Appeals) [CIT(A)], distinguishing the Supreme

Court judgment (supra) and explaining the process of (sic) material like maida, yeast, etc., into bread. But the CIT(A) also followed the view taken

by the Assessing Officer and disallowed the deduction in the following terms:

... After considering the case law relied upon by the Assessing Officer, referred to above and also after considering the objection of the appellant's

counsel carefully, I am constrained to hold that the appellant's activity in converting the raw foodstuff's, i.e., maida, sugar, yeast, etc., into bread

can at best be said to be an activity of processing of food and not that of manufacture of food. Even if appellant's contention regarding use of

machinery at various stages of production is taken into consideration, still the appellant's case remains to be that of food processor and not that of

manufacturer of food. The above finding is in consonance with the decision of the Hon'ble Supreme Court in the case of Indian Hotels Co. Ltd.

(supra) as well as the decision of Hon'ble Madras High Court in the case of P. Devasahayan (supra). Further, once the activity of processing of

baking, packing, etc., of bread is over, it does not make any difference whether after such processing the goods are sold through the sales/delivery

net work or directly or indirectly to the customers. In view of the above, the Assessing Officer was justified in rejecting the appellant's claim of

deduction u/s 80-IB amounting to Rs. 16,06,870 and, therefore, this issue is decided against the appellant....

The assessee, thereafter, carried the matter to the income tax Appellate Tribunal (ITAT) and the Tribunal reversed the orders passed by the

Assessing Officer and CTT(A), distinguishing the Supreme Court judgment in Indian Hotels Co. Ltd.'s case (supra) and held as under:

Considering the above discussion and the decision of the Hon'ble jurisdictional J&K High Court and the principles laid down by the Hon'ble

Supreme Court mentioned above, we are of the view that the assessee was manufacturing bread which is a new and distinct commodity having

distinct name, character and use and, therefore, the assessee is industrial undertaking within the meaning of section 80-IB of the income tax Act.

The assessee is, therefore, entitled for deduction u/s 80-IB of the Act. We, accordingly, set aside the orders of the authorities below and allow the

appeal of the assessee.

The revenue has now filed this appeal calling in question the impugned order dated 25th April, 2005 passed by the Tribunal.

The case set up is the same, viz., that conversion of maida, sugar, yeast, etc., into bread was not a manufacturing activity but was a processing

activity and, therefore, the respondent-assessee was not entitled to deduction u/s 80-IB of the Act.

The core issue that falls for determination is whether the making of bread by the respondent-assessee from maida, sugar and other ingredients

amounted to manufacturing of bread or processing of bread and whether the assessee was an industrial undertaking?

Since the benefit is claimed u/s 80-IB, it becomes necessary to reproduce the relevant part of this section which reads:

Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings.--(1) Where the

gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11)(such business

being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in

computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of

assessment years as specified in this section.

This provision permits a deduction in respect of profits and gains from certain industrial undertakings on satisfying the requirements/conditions

laid down therein. Shorn of details and broadly it provides for deduction of profits and gains made by an industrial undertaking if it manufactures or

produces a new article or thing. Since it is not any body's case here that the unit of respondent-assessee was hit by any other condition laid down

by this section, therefore, the whole controversy turns on whether it was engaged in manufacture or production of an article or a thing and whether

it was an industrial undertaking?

Dealing with whether it was engaged in the activity of manufacture or production of bread, it need be hardly pointed out that word'

manufacture 'has invited wide interpretation from time to time. Its dictionary meaning is ""to transform or fashion raw materials into a changed form

for use"". In common parlance, it means production of articles from raw materials like giving these raw materials new forms, qualities, properties or

combinations whether by hand or by a mechanical process. It is generally understood as meaning to bring into existence a new substance, implying

a change which change is brought about by treatment, labour and manipulations.

The Supreme Court had the occasion to interpret this word 'manufacture' in several of its judgments. In CIT v. N.C. Budharaja & Co. [1993]

204 ITR 4121, it held that the test for determining whether manufacture can be said to have taken place is whether the commodity which is

subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct

commodity. Similarly, in Kores India Ltd., Chennai Vs. Commissioner of Central Excise, Chennai, , it was held that cutting jumbo rolls of

typewriter/telex paper into smaller rolls amounts to manufacture since distinctly identifiable article having distinct name, function and use has arisen.

Even in Indian Hotels Co. Ltd.'s case (supra), the Supreme Court interpreted the word 'manufacture' to mean, production of a new article or

bringing into existence some new commodity by an industrial undertaking as distinct from the processing activity. It laid down thus:

...The word 'manufacture' has various shades of meaning but unless defined under the Act it is to be interpreted in the context of the object and the

language used in the sections. In the context of the provisions which deal with grant of investment allowance or deduction u/s 80J it is apparent that

it is used to mean production of a new article or bringing into existence some new commodity by an industrial undertaking. It would not be

applicable in cases where only processing activity is carried out. Further, such production activity must be by an industrial undertaking and not by

the assessee having mainly trading activity. In case of a hotel business there is no question of manufacturing or producing pulses, wheat, rice, meat

or such other items but what is done is - from such raw materials eatable foodstuff is prepared. The foodstuff prepared by cooking or by any other

process from raw materials such as cereals, pulses, vegetables, meat or the like cannot be regarded as commercially distinct commodity and it

cannot be held that such foodstuff is manufactured or produced....

Whether conversion of maida, sugar, yeast, etc., into bread amounts to manufacturing and production of bread in terms of section 80-IB is the

question.

The process admittedly envisages nine steps whereby maida, sugar, yeast and other ingredients are processed and put to pass through various

stages of mechanical process with the aid of power, like mixing, rounding, proving, moulding, fermenting, baking, cooling, slicing, etc. If the test laid

down by the Supreme Court in its various judgments was applied to this process, we are left with no doubt that this was a manufacturing process

and the assessee was manufacturing bread and not processing it, because the whole process of conversion of the raw material undoubtedly leads

to production of a new thing, i.e., the bread in place of the original ingredients like maida, sugar, yeast, etc. The raw material before processing is

altogether different and after its conversion, its nature, character and use undergoes a total change leading to the production of a new thing - bread.

Therefore, it cannot be said that unbacked materials, i.e., maida, sugar, yeast, etc., retain their character even after conversion into a bread,

involving processing only.

Whether the assessee's unit was an industrial undertaking does not pose much of the problem. The words 'industrial undertaking' as defined in

section 33B means any undertaking, which is mostly engaged in generation or distribution of electricity or any other form of power or in the

construction of ships or in the manufacture or processing of goods or in mining. As has been noticed earlier, the assessee's unit stands already

registered with the Directorate of Industries holding power licence and is also registered under the Factories Act and, therefore, there is thus no

doubt that it was an industrial undertaking within the meaning of section 80-IB of the Act engaged in the manufacture activity and, therefore, was

satisfying the requirements of the relevant provision, entitling it to the deduction of the profits in terms of section 80-IB (supra).

The only question that remains to be seen is whether the reliance placed by the AO and the CIT on the Supreme Court judgment in Indian

Hotels Co. Ltd.'s case (supra) was in order.

We have gone through this judgment which was dealing with the claim of investment allowance u/s 80J of the income tax Act.

In this case, the Company, which was running a flight kitchen had claimed benefit of section 80J on the plea that it was a separate industrial

undertaking as different from Hotel which it was running and that it was engaged in manufacture of food packages on a large, organised and

mechanised basis for the use of various international airlines and, therefore, was entitled to get the benefit of section 80J (investment allowance).

The Supreme Court overruled this plea that it was a separate industrial undertaking within the meaning of the relevant provisions or that it was

engaged in manufacturing or production of food packages and, on the contrary, held that it was engaged in processing and trading. What appears

to be noted is that this judgment of the Supreme Court was limited to the flight kitchen operated by the Indian Hotels Co. Ltd. and no other

activity, and it was in that context that the Court held:

... for getting benefit of deduction or investment allowance, the requirement is-the assessee-company must be engaged in the business of

manufacture or production of any article or thing. In a case of preparing food packages or selling the same or preparing foodstuffs for serving in the

hotel there is no question of manufacture or production. The raw material is at the most processed so as to make it eatable. The word

'manufacture' has various shades of meaning but unless defined under the Act it is to be interpreted in the context of the object and the language

used in the sections. In the context of the provisions which deal with grant of investment allowance rebate or deduction u/s 80J it is apparent that it

is used to mean production of a new article or bringing into existence some new commodity by an industrial undertaking. It would not be applicable

in cases where only processing activity is carried out. Further, such production activity must be by an industrial undertaking and not by the assessee

having mainly trading activity....

******

In our view, the same would be the position with regard to the foodstuff served or sold by the hotels. The foodstuff prepared by cooking or by any

other process from raw materials such as cereals, pluses, vegetables, meat or the like cannot be regarded as commercially distinct commodity and

it cannot be held that such foodstuff is manufactured or produced."" (p. 544)

A careful reading of this judgment would show that it had several distinguishing features, which were not attracted in the present case. For

example, it was dealing with a flight kitchen which was being run along with hotel and was ancillary to the hotel business and this is why it was not

held to be a separate industrial undertaking within the meaning of section 80J. Similarly, the Supreme Court found that the Hotel Co. Ltd. was

engaged in the business of trading activity and not in any industrial activity as such, and was preparing foodstuff for consumption which did not

result in the manufacture or production of any new article or thing because all food packages prepared in the flight kitchen involved only the activity

of processing and not manufacturing, and original eatables retained their nature and character, and were not transformed into a new product.

It was in that context that the Court quoted from a decision of the Supreme Court of United States in East Texas Motor Freight Lines v.

Frozen Food Express 100 L.Ed. 917, which read as under:

'...there is hardly less difference between cotton in the field and cotton at the gin or in the bale or between cottonseed in the field and cottonseed at

the gin, than between a chicken in the pen and one that is dressed. The ginned and baled cotton and the cottonseed, as well as the dressed

chicken, have gone through a processing stage. But neither has been 'manufactured' in the normal sense of the word.'"" (p. 545)

Viewed thus, we have no doubt that both Assessing Officer and CIT had placed wrong reliance on the Supreme Court judgment (supra) and

the view taken on that consequently becomes unsustainable.

We, accordingly, hold that the respondent-assessee was an industrial undertaking engaged in the manufacture and production of bread and

was thus entitled to the benefit of deduction u/s 80-IB of the Act. This appeal accordingly fails and the order passed by the ITAT dated 25-4-

2005 is affirmed.