1993-VIL-658-CAL-DT

CALCUTTA HIGH COURT

IT REFERENCE NO. 34 OF 1987

Date: 09.07.1993

COMMISSIONER OF INCOME-TAX

Vs

MERCANTILE CONSTRUCTION CO.

For The Applicant : A.C. Moitra
For The Respondent : R.N. Bajoria and J.P. Khaitan

BENCH

AJIT K. SENGUPTA AND BHAGABATI PROSAD BANERJEE, JJ.

JUDGMENT

Sengupta, J. - In this reference under section 256(1) of the Income-tax Act, 1961 ('the Act'), the following questions of law have been referred to this Court for the assessment year 1981-82 :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing investment allowance under section 32A(2)(b)( iii) of the Income-tax Act, 1961, in respect of machinery let out on rent and used in excavation of coal by the assessee?

2. Whether, on the facts and in the circumstances of the case, and in view of Explanation 2 of section 139(8) of the Act, the Tribunal was justified in observing thatExplanation 2 could not be invoked when no tax was payable by a registered firm on the basis of its completed assessment?"

2. The facts leading to this reference are that the assessee is a partnership firm assessed in the status of registered firm under the provision of the Act. The business of the assessee, inter alia, was raising of coal in Badjna Colliery and Marulidih Colliery belonging to Eastern Coalfields Ltd. At the said collieries open cast mining of coal was undertaken. The assessee employed new machinery like Bulldozers, Compressors, Drills, Dumpers, Scrappers, Shovels and other heavy earthmoving machinery for the said mining job. The agent of the said collieries also gave a certificate to the effect that the assessee was engaged in the mining job. The work of the assessee consisted, inter alia, of cutting earth, drilling and blasting stones, removing the overheads, removing the coal and transporting such coal and dumping it at the coal yard. The entire work was undertaken by the assessee itself with its own machinery and workmen. The assessee was paid for the various jobs at the rates stipulated in the contract. All the machinery for the job was operated by the assessee. None of the said machinery was made over by the assessee to the collieries. The assessee employed its own staff and labourers for working the said machinery and raising the coal.

2. The assesee claimed before the ITO that new machinery was purchased and used for the said mining job and it was entitled to investment allowance under section 32A of the Act. The ITO disallowed the said claim on the ground that the assessee was not an industrial undertaking since it was merely letting the machinery on hire and it was immaterial how such machinery was used. The certificate of the agent of the colliery was ignored by the ITO on the ground that it was of a general nature. The ITO further held that:

"... the mere fact of being engaged in removing over burden and extraction of coal for others would not make the assessee-firm an industrial undertaking."

By the said order or assessment, the assessee was granted refund of the excess tax paid by it over the assessed tax. However, since the return was filed late, the ITO levied interest under section 139(8) of the Act by calculating the tax payable on the basis that the assessee was an unregistered firm by invoking Explanation 2 to section 139.

Against the said order of the ITO, an appeal was preferred by the assessee. In such appeal, the Commissioner (Appeals) held that the assessee was entitled to the investment allowance on the machinery as claimed. He held:

"It is not that the assessee was carrying on the business or hire and purchase in respect of the machinery. It was not even leasing of the machinery on hire ...

It is not that the heavy earthmoving machinery were let on hire to the coal mines to be handled by them. The machinery was operated by the employees of the assessee's firm itself... Since the work performed by the assessee was removal of over-burden for the extraction of coal - it squarely came within the purview of section 32A(2)(iii ) for production of an article not specified in the list in the 11th Schedule."

4. The ITO was directed to allow investment allowance.

5. The Commissioner (Appeals) further held that no interest could be claimed under section 139 for the late filing of the return since the assessee had paid more than the assessed tax and had, in fact, obtained the refund.

6. The ITO preferred an appeal before the Tribunal which upheld the order of the Commissioner (Appeals) on both the points.

7. We have heard the rival submissions. It was reiterated on behalf of the revenue that the assessee was not engaged in any manufacture or production while raising coal and removing earth, stones and coal within a short distance. It was also the revenue's contention that winning coal could not be any process of manufacturing or producing thing. The coal was already there in the earth and bringing out on the surface makes no difference. It was further contended that the assessee's activity was in the nature of transporting coal from one place to another. Even if raising coal could be treated as a processing, that would not amount to production or manufacture of an article or thing.

8. Mr. R.N. Bajoria, the learned counsel for the assessee, referred to the decision of a Division Bench of this Court in Aluminium Corpn. of India Ltd. v. Coal Board AIR 1959 Cal. 222 approved by the Supreme Court in Empire Industries Ltd. v. Union of India [1986] 162 ITR 846 where it has been held that raising of coal even if it did not amount to manufacture was certainly production of an article. Of course, the decision in Aluminium Corpn. of India Ltd. 's case (supra) was in a different context but the principle bears on the present issue. There the question was whether duty of excise could be imposed under the Coalmines (Conservation and Safety) Act, 1952 on coal raised and despatched from a colliery since according to the assessee in Aluminium Corpn. of India Ltd. 's case (supra) the coal was neither manufactured nor produced being a natural product. There this contention did not find favour with the Division Bench. Mr. Chakravarti, speaking for the Bench observed :

"... It is said coal produces itself and raising of coal from mine cannot be said to be its production. This argument does not appear to me to be correct although coal is undoubtedly a natural product. The operation required to bring it up to the surface and to make it marketable or even usable is so elaborate and extensive that to speak of the mining and the condition of coal as its production is wholly appropriate. It is not required that the goods should be manufactured in the sense that raw material should be used to turn out something altogether different. But it is still required that they should be produced in the sense that some human activity should be spent on them and they should be subject to some production in order that they may be brought to the state in which they may become fit for consumption."

The decision was approved by the Supreme Court in the case of Empire Industries Ltd. (supra) where the Supreme Court observed :

"... If that aspect of the matter is kept in mind, then expenditure of human skill and material have been used in the processing and it may not be that the raw material was first transformed but over the transformed material, further transformation was done by human labour and skill making it fit for human consumption." (p. 871)

9. The fact that coal is an article which is produced would be evident from the provisions of the Act itself. In the Act from time to time provisions have been made for allowance of development rebate or investment allowance, the basic nature of such allowance being the same. An assessee can avail of investment allowance or development rebate depending upon the assessment year involved. In section 33(1)(b)(B)(i ) the plant and machinery referred to is-

"... for the purposes of business of construction, manufacture or production of anyone or more of the articles or things specified in the list in the Fifth Schedule,"

In the list of the Fifth Schedule, item No. (3) is-

"(3) Coal, lignite, iron ore, bauxite, manganese ore, dolomite, limestone, magnesite and mineral oil."

All the above items are minerals. It is, thus, absolutely clear that the Act treats the raising of coal or other minerals as manufacture or production of an article or thing. Exactly the same language, as in section 33(1)(b)(B)( i) has been used in section 32A(2)(b)(iii) which falls for consideration herein namely :-

"... for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule."

It is not in dispute that coal is not specified in the Eleventh Schedule to the Act.

10. Under the Central Excises and Salt Act, 1944 duty of excise is levied "on all excisable goods other than sale which are produced or manufactured in India". Coal and also other minerals are excisable goods, (See item No. 11 of Schedule to the 1944 Act for coal: Heading No. 27 of Chapter 27 of Central Excise Tariff Act, 1985 for coal). In the various other enactments some of which are listed herein below cess is imposed on the production of minerals and in all such Acts the charge is on the basis that such minerals are produced :

(1) Iron ore Mines, Manganese ore Mines and Chrome ore Mines, Labour Welfare Cess Act, 1976.

(2) Mica Mines Labour Welfare Fund Act, 1946.

(3) Coal Mines (Conservation and Development) Act, 1974.

(4) Limestone and Dolomite Mines Labour Welfare Fund Act, 1972.

(5) Mineral Products (Additional Duties of Excise and Customs) Act, 1958.

11. The decision of this Court in the case of S.B. Cold Storage Industries (P.) Ltd. v. CIT [1987] 166 ITR 646 1 relied upon by the revenue does not support its contentions. In that case the decisions of this Court in the case of Aluminium Corpn. of India (supra) and of the Supreme Court in the case of Empire Industries Ltd. (supra) were considered at page 651. The issue involved in that case was whether the storage of potatoes in cold storage amounted to production of an article. It was held that in the cold storage potatoes were only being preserved and there might be processing of such potatoes but there was no production. The relevant extracts are set out herein below:

"... The object of putting the goods in cold storage is mainly to preserve their original condition and not to produce anything new. By such preservation, no new article is brought into existence. It also cannot be said that by reason of such processing, something which was not marketable to start with becomes marketable. It is nobody's case that the potatoes before they were put in the cold storage were not marketable. Further, it cannot be said that as a result of such processing, the potatoes become fit for consumption. To start with, potatoes are fit for consumption and after the period of storage, they remain fit for consumption." (p. 654)

It would, thus, be seen that the said decision in fact approved the view taken in the decisions cited on behalf of the assessee, inter alia, Aluminium Corpn. of India Ltd. 's case (supra) .

12. In the instant case, coal was not there to start with. With human skill and labour it had to be raised from the mines and made fit for consumption or for marketing. Such process of raising the coal amounts to production of the coal. It is, therefore, not correct to say that coal is not produced.

13. The assessee relies upon the decision of the Andhra Pradesh High Court in the case of CIT v. Super Drillers [1988] 174 ITR 640 2. In this case the question arose as to whether investment allowance can be allowed in respect of machinery employed for drilling wells for tapping underground water. It was held that investment allowance was allowable. This case is the direct authority supporting the assessee's claim for investment allowance. It was held :

"... The revenue contends that the assessee cannot be regarded as an industrial undertaking for the purpose of business of construction, manufacture or production of any article or thing. It is pointed out that all that the assessee did is to drill and drilling operations do not result in the manufacture or production of any article or thing. It is, therefore, claimed that the assessee is not entitled to the deduction on account of investment allowance under section 32A. The Tribunal allowed the assessee's claim. We are in agreement with the Tribunal's conclusion. There can be no dispute about the fact that the drilling equipment is used by the assessee for the purpose of business carried on by it in order to bring to the surface underground water. It should be borne in mind that water deposits lie hidden under the ground and the purpose of operating the equipment to go into the ground is to produce water lying hidden under the ground. It would be wrong to think that drilling operations do not result in the production of any article or thing. Drilling operations do result in the production of underground water for use on the surface of the ground and in that sense, it must be held that the assessee is an industrial undertaking for the purpose of production of underground water for use on the surface of the ground. In our opinion, the requirements of section 32A(2)(b)( iii) are fully satisfied and the assessee is entitled to claim deduction on account of investment allowance." (p. 644)

The other contention of the revenue was that there was letting out of the machinery and as such there was no industrial undertaking engaged in the production of any article or thing. It is submitted that this submission is also not correct. The machinery was not let out. The possession of the machinery was always with the assessee. The assessee worked the machinery with its own staff and labour. The condition precedent for hiring (which is a contract of bailment) is that possession must be transferred to hirer. Further, the assessee is required to do blasting, remove over burdens, expose coal, remove such coal and stack the same. These are all mining operations. The fact that the assessee is not the owner of the mineral is immaterial for determining whether the assessee is an industrial undertaking engaged in the production of an article or thing. The point may be illustrated by taking the cases of an oil mill producing oil from the seeds supplied by customers; a jeweller preparing ornaments from the gold supplied by the customer; a tailor making dress from the cloth supplied by the customer. In all these cases, it cannot be disputed that the oil mill, the jeweller or the tailor are engaged in the respective businesses of manufacture of oil, gold ornaments and dresses. Even if the work is undertaken as a job work, it does not in any way affect the nature of the undertaking or the activity undertaken by it. Reliance in this behalf is also placed on the decision of Madras High Court in the case of Unity Tools v. CIT [1990] 185 ITR 1 3. In the above decision, the Madras High Court rejected the contention of the revenue that the assessee was not entitled to development rebate since it produced goods out of raw materials supplied by the customer. It was held :

"... Thus, irrespective of the ownership in the raw materials or the end products, if the assessee had carried on its business of turning out automobile ancillaries and supplying them by manufacturing such automobile ancillaries with the aid of the machinery owned by it, though with the raw materials of another, the assessee would be entitled to the benefit of higher development rebate. We may also observe that the emphasis should be laid on the user of the machinery owned by the assessee for the purpose of its business resulting in the manufacture of one of the items falling under the Fifth Schedule to the Act and not the ownership either in the raw materials or in the end products" (p. 5)

14. Even in a case where the commercial asset is exploited by letting out the same, even then investment allowance cannot be denied. Reliance in this behalf has been placed on the decisions of this Court in CIT v . Steel Rolling Mills of Hindustan (P.) Ltd. [1987] 164 ITR 6334 and CIT v. Hindusthan Aluminium Corpn. Ltd. [1989] 176 ITR 206 5. InSteel Rolling Mills of Hindusthan (P.) Lad's case (supra) it was held that the assessee was entitled to development rebate on L.P. Gas cylinders since it was carrying on the business of hiring out gas cylinders. In Hindusthan Aluminium Corpn. Ltd 's case (supra) it was held that development rebate was to be allowed on radar equipment which had been let out partly. The principle laid down was :

"... An asset may be exploited by the owner to its best advantage and he may do so either by using it himself or by letting it to someone else. So far as the assessee in the instant case is concerned, it has used the radar equipment to the extent possible for its own use. Instead of keeping it idle when the assessee was not using the same, the assessee allowed the other companies to get the benefit and advantage of the radar equipment for some consideration. If the nature of the commercial asset is such that it is capable of being exploited by more than one, and if such an asset is temporarily put out of use or let out to another person for his use, such asset does not cease to be a commercial asset of the assessee's business. The yield of income through such asset is the profit of the business irrespective of the manner in which that asset is exploited by the assessee. In our view, the radar equipment, a commercial asset, was exploited by the assessee wholly for its business even though some benefit or advantage was extended to other companies for a consideration." (p. 214)

For the foregoing reasons, the first question is answered in the affirmative and in favour of the assessee.

The second question relates to the levy of interest under section 139(8). The question is concluded by the decision of the Supreme Court in the case of Ganesh Dass Sreeram v.ITO [1988] 169 ITR 221 6. There the Supreme Court observed as follows :

"Before we part with these appeals, we think we should clarify one situation, namely, where the advance tax duly paid covers the entire amount of tax assessed, there is no question of charging the registered firm with interest even though the return is filed by it beyond the time allowed, regard being had to the fact that payment of interest is only compensatory in nature. As the entire amount of tax is paid by way of advance tax, the question of payment of any compensation does not arise." (p. 230)

In the instant case, the assessee was granted refund of the excess tax paid by it over the assessed tax. The question is whether the advance tax duly paid by the assessee covers the amount of tax assessed. In that event, as laid down by the Supreme Court, there is no question of charging the registered firm with interest, even though the return was filed by it beyond the time allowed.

15. For the foregoing reasons we decline to answer the second question and remand the matter to the Tribunal to ascertain the correct facts and dispose of the issue accordingly.

16. There will be no order as to costs.

Banerjee, J. - I agree.

 

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