COMMISSIONER OF INCOME TAX vs SACS EAGLES CHICORY

Jayasimha Babu, J.

The question referred to us at the instance of the revenue is as to'' whether, on the facts and in the circumstances of the case, the assessee-firm is

an industrial undertaking eligible for deduction under sections 80HH, 80-I and 80J of the Income Tax Act, 1961 ?''The year of assessment is

1981-82.

The activity of the assessee has been described in the order of the Appellate Assistant Commissioner thus. `The assessee purchases chicory

roots from farmers. These are dried up, roasted and grinded and then sold in the form of powder. It had been contended by the assessee before

the Income Tax Officer that the assessee has erected machineries for the purpose of roasting and grinding and, therefore, the assessee was

engaged in processing and manufacturing of chicory powder.

The Income Tax Officer and the Appellate Assistant Commissioner being of the view that the assessee was only engaged in trading activities and

not manufacturing activities, denied the assessee''s claim for relief under sections 80HH, 80-I and 80J which required, inter alia, that the assessee

be a manufacture of goods or articles. The Tribunal, however, relying on the fact that the assessee had been registered as a small-scale industry

and its claim for being treated as an industry had been accepted under the Wealth Tax Act, 1957 held that the assessee was engaged in the

manufacture of chicory powder.

The learned counsel for the revenue submitted that the view taken by the Tribunal is wholly untenable and contrary to law laid down by this

court in the case of the State of Tamil Nadu represented by the Dy. CCT v. Thiruvalargal Sarathy Chicory Ariyamangalam 1993 (3) MTCR 161 .

Hon''ble Dr. A.S. Anand, then Chief Justice of this court as he then was and who presided over the Bench while dealing with the contention of the

State that the preparation of chicory powder involves process manufacturing in which chicory roots are consumed - held thus:

By mere crushing the chicory roots into chicory powder it cannot be said that ''consumption'' has taken place. When chicory roots are converted

into powder, by no stretch of imagination can it be said that the chicory roots had been ''consumed'' in the manufacture of other goods for sale as

chicory powder is only a changed form of chicory roots purchased by the assessee.

The learned counsel for the assessee sought to distinguish that ruling on the ground that in that case, the court was only concerned with the

meaning of the word ''consume'' occurring in section 7A of the Tamil Nadu General Sales Tax Act and that the Court did not consider the question

as to whether the preparation of powder from chicory roots involved a process of manufacture. The counsel further submitted that the test for

determining as to whether there is manufacture is to find out as to whether the goods that emerge as a result of process are distinct and

commercially different and that if that test is applied, it must be held that there is in this case process of manufacture.

The learned counsel for the assessee placed reliance of the Apex Court in the case of Deputy Commissioner of Sales Tax (Law), Board of

Revenue (Taxes), Ernakulam Vs. Pio Food Packers, , wherein the Apex Court held that the slicing and packaging the pineapple did not amount to

manufacture as the commodity remains as a pineapple before and after the process. That was also a case that arose under the Sales Tax Act and it

was found by the court that pineapple fruit when processed into pineapple slices for the purpose of being sold in sealed cans, there is no

consumption of the original pineapple fruit for the purpose of manufacture. The court observed that there was no difference between pineapple fruit

and the pineapple slices and that the slices had the same identity as the original fruit.

Pathak, J. as he then was described the test to be applied for determining as to whether a commodity is consumed in the manufacture of

another, thus:

. . The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the

commodity involved in its manufacture. 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.... 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 recognised as a new and distinct article that a

manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article,

it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it

must be regarded as still retaining its original identity.

The test so laid down in the context of the provisions of the Sales Tax Act was adopted by the Supreme Court for determining the meaning of

the word ''manufacture'' under the Act also in the case of Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company

and Others, .

The counsel submitted that chicory powder is a commercially different article from chicory roots and that there was a change in identity even

though the chicory root may not be said to be consumed in the preparation of chicory powder. Chicory powder being different from chicory root,

there was a process of manufacture involved in making of chicory powder.

The counsel also referred to the decision of the Apex Court in the case of Ganesh Trading Co., Karnal Vs. State of Haryana and Another, ,

wherein it was held that the paddy and rice were distinct commercial commodities for the purpose of Sales Tax Act and that the rice could not be

regarded merely as different form of paddy. The decision of this court in the case of CIT v. R. Narayanaswami Naicker & Sons (1985) 149 ITR

283 was also referred to. In that case, the Court held that ginning process is also a manufacturing process, by which cotton and cotton seeds which

are different commercial goods are separated. The case of Commissioner of Income Tax, Madras Vs. M.R. Gopal, of this court was also relied on

wherein it was held that the process employed in converting boulders into small stones with the aid of machinery is a manufacturing process and the

undertaking so engaged in such process was an industrial undertaking entitled to exemption u/s 15C of the Indian Income Tax Act, 1922.

Applying the test laid down in the case of Pio Food Packers (supra), if chicory roots retain their identity as chicory even after the process of

converting chicory roots into powder, it cannot be said that there is any process of manufacture. As observed by the Apex Court, where there is

no essential difference in identity between the original commodity and the processed article, it would not be possible to say that the commodity has

been consumed in the manufacture of another. Manufacturing, thus, involves the consumption of one or more articles in order to produce a

different article. Consumption is necessary in the process of manufacture and there can be no manufacture without consumption.

This court in the case of Thiruvalargal Sarathy Chicory Ariyamangalam (supra) has held that chicory roots are not consumed when chicory

powder is prepared. It is implicit in that finding that chicory roots and chicory powder have the common identity as chicory. The fact that

processing is involved in obtaining chicory powder from chicory root does not inevitably lead to the conclusion that the process is one of the

manufacture. If the original identity is not lost even after the process, there is no manufacture.

The fact that the chicory powder is used for consumption in combination with coffee powder does not make the chicory powder any different

insofar as its identify is concerned as chicory. Chicory powder is chicory in powder form and nothing else. Mere change in the form of the same

commodity does not necessarily involve change of identity. The pineapple fruit when plucked from the tree and even after it is cut into pineapple

slices retains the same identity as pineapple. Chicory powder and chicory root have the common identity of being chicory. The change in the form

to powder in the case of chicory and to slices in the case of pineapple does not result in a change of identity.

We are, therefore, unable to accept the argument persuasively put forth by the learned counsel for the assessee that the term ''manufacture'' is

very wide and that every article which has a commercial identity should be regarded as the result of the process of manufacture, if that article had

suffered some process, before emerging in the form in which it is regarded as commercial commodity. The decision of this court in the case of

Thiruvalargal Sarathy Chicory Ariyamangalam (supra) has clearly held that there is no consumption of chicory root in the preparation of chicory

powder.

We, therefore, answer the question referred to us in favour of the revenue and against the assessee.