1990-VIL-97-ITAT-

Equivalent Citation: ITD 033, 485,

Income Tax Appellate Tribunal MADRAS

Date: 22.01.1990

INCOME-TAX OFFICER.

Vs

A. JOSEPH LOUIS.

BENCH

Member(s)  : T. V. RAJAGOPALA RAO., R. RANGAYYA.

JUDGMENT

Per Shri R. Rangayya, Accountant Member --- These two appeals filed by the Revenue arise out of the common order passed by the Commissioner of Income-tax (A) for the asst. years 1983-84 and 1984-85.

2. The assessee is stated to be engaged in the manufacture of arrack and its sale. For the purpose of manufacture of arrack, the assessee had installed certain machinery and plant during the accounting years relevant to the asst. years 1983-84 and 1984-85. He claimed investment allowance in respect of the machinery and plant installed by him in his business as well as deductions under sections 80-I and 80HH of the Income-tax Act, 1961. Though the industries manufacturing alcoholic spirits are not entitled to investment allowance because they are included in the 11th Schedule, such prohibition does not extend to small scale industries involving such business activity. It is accepted by the Department that the assessee is a small scale industrial undertaking and so the prohibition under 11th Schedule does not apply to him. The assessee's claim was that he purchases rectified spirit from the State Government, gets it tested for its ethyl alcohol content, specific gravity, miscibility with water and for other purposes. After satisfying himself that the rectified spirit is useful for arrack blending, it is mixed with water in certain vats and air compressors. The mixing of rectified spirit with water is done in certain specified proportions in order to get arrack of specified strength. This blending is made in the vats where the arrack is allowed to cure about 72 hours, during the course of which it gets fermented. The resultant product is tested, bottled, packed and sold by the assessee exclusively to a Government organization.

3. The assessee's contention before the ITO was that it was an industrial undertaking manufacturing arrack and as such is entitled to investment allowance and other deductions under sections 80-I and 80HH. This claim of the assessee was rejected by the ITO on the ground that mere mixing of rectified spirit with water does not involve any manufacturing activity, so as to result in a totally new product. For coming to the above decision, he followed the decision of the Kerala High Court in the case of CIT v. Casino (P.) Ltd. [1973] 91 ITR 289. On appeal, the CIT(A) upheld the assessee's claim. He considered that the various processes involved in the conversion of rectified spirit into arrack by blending, with treated water, amounted to a manufacturing activity, as it brings forth a commercially new product. He accordingly accepted the assessee's claim for reliefs under the above sections.

4. Aggrieved with the above decision of the CIT(A), the Revenue is in appeal before us. It is contended by the learned Departmental Representative that the CIT(A) is not correct in holding that the assessee is an industrial undertaking manufacturing arrack, which is entitled to investment allowance under section 32A and deductions under sections 80-I and 80HH. The claim of the Department is that the preparation of arrack by blending of water with rectified spirit cannot be called a manufacturing activity so as to entitle the assessee to the above benefits. "Arrack", according to the learned Departmental Representative, is only a modified version of rectified spirit and not a different and distinct commodity and the material with which the commodity was so manufactured did not lose its identity. Reliance was sought to be placed on the following decisions :

Tungabhadra Industries Ltd. v. CTO [1978] 11 STC 827 (SC)

Chowgale & Co. Ltd. v. Union of India [1981] 47 STC 214 (SC)

Mittal Ice & Cold Storage v. CIT [1986] 159 ITR 18 (MP)

CIT v. Buhari Sons (P.) Ltd. [1983] 144 ITR 12 (Mad.)

Koshy's (P.) Ltd. v. CIT [1985] 154 ITR 53 (Kar.)

G.A. Renderian Ltd. v. CIT [1984] 145 ITR 387 (Cal.) and

CIT v. Hindusthan Metal Refining Works (P.) Ltd. [1981] 128 ITR 472 (Cal.)

5. Shri K. Srinivasan, the learned counsel for the assessee, on the other hand, relies on the decision of the Bombay High Court in the case of CST v. Indian Oil Corpn. Ltd. [1978] 41 STC 471. According to him, the other cases sought to be relied upon by the learned Departmental Representative are not to the point and are easily distinguishable.

6. We have heard the rival submissions. The only question to be decided in this case is whether the assessee could be said to be a manufacturer of arrack and whether the assessee's activity of producing arrack involves any manufacturing activity. The words "manufacture or production" are not defined in the Income-tax Act. It is well settled that when any Act does not define a word used in that Act, the Legislature must be taken to have used that word in its ordinary dictionary meaning. In common parlance, the words 'make', 'manufacture' and 'produce' are all used as synonyms and they relate to the turning out of finished products by the shaping or combination of raw material or parts. Examining the assessee's case with reference to the above test, it will be clear that the assessee's activity of making arrack from out of rectified spirit amounts to a manufacturing activity. The assessee purchases rectified spirit which is said to be unfit for human consumption from a Government Department. Various tests are carried out to find out its ethyl alcohol content, etc. The water that is to be mixed with rectified spirit is known as treated water, which is used for blending of arrack. The water is tested from time to time by sending it to Water Analysis Laboratory, King Institute, Guindy in the container supplied by them to satisfy whether it is fit for blending with rectified spirit. The water is treated with 'sodium hydrochloride' and then with 'alum'. This is filtered and again treated with chlorine. This is again filtered and hardness of the water is removed. In the next process chemicals like iron and manganese are removed to make water fit for blending. The above processes are technically known as Soda-Injection, Acid-Injection, Acid-Rince, Soda-Rince, Final-Rince and service. It is only after undergoing the above operations, the water is classified as treated water. The tested rectified spirit and treated water are blended in a specified proportion to give the assessee a specified alcoholic content. Immediately after the blending heavy heat is generated and this is warded off by pumping air through the perforated M.S. tubes by the air compressors, which gives the strength to the arrack. The resultant product, namely arrack, is fit for human consumption. This is sold exclusively to TASMAC, a body created by the Tamilnadu Government.

7. The above activity by which arrack is produced, in our opinion, amounts to a manufacturing activity.

8. The Bombay High Court in the case of Indian Oil Corpn. Ltd. had an occasion to consider a somewhat similar issue. In that case the assessee was manufacturing a chemical known as 'Methimix' by mixing methonol with given proportions of distilled water. The assessee in that case purchased methonol from a registered dealer, mixed it with distilled water in certain proportions, tested the mixture in the laboratory and sold it under a definite name 'Methimix' for the specific purpose of using it as power augmentation fluid mainly in aeroplane engines for the purpose of take off. The Bombay High Court held that a new commercial commodity, viz., Methimix, had been brought into existence by the activity of mixing methonol with distilled water and, therefore, the activity of mixing methonol with distilled water carried out by the assessee amounted to manufacture within the meaning of section 2(17) of the Bombay Sales-tax Act. The Court noticed that clause (17) of section 2 of the Bombay Sales-tax Act gives a very wide definition of the word 'manufacture', which includes processing, treating, or adapting any goods. While holding that the activity of the assessee came within the extended definition of the word 'manufacture' the Court went further to examine whether even in the absence of such extended definition, the assessee's activity could be considered as a manufacturing activity. The Court held that for an activity to amount to manufacture, it must result in a different commercial article or commodity and it must not be the commodity which is commercially the same as it was before the activity was applied to it. The assessee's contention in that case was that even after methonol was mixed with distilled water, the article still remained the same, namely, a mixture containing methonol and distilled water and hence it could not be said that any new commercial commodity had been brought into being by the activity of mixing methonol and distilled water carried out by the assessee. This view was rejected by the High Court and it was held that the mixing is done in exact proportions and the mixture is used for a specific purpose, viz. as power augmentation fluid mainly used in aeroplane engines for the purpose of take-off. The mixture is sold under a definite name, viz. Methimix. In the circumstances, the Court held that it is beyond dispute that a new commercial commodity, viz. Methimix, has been brought into existence by the activity of mixing methonol with distilled water carried out by the assessee and the said activity of mixing methonol with distilled water did amount to manufacture.

9. In our opinion, the facts of the present case are more or less similar to those obtaining in the aforesaid Bombay High Court decision. We, therefore, hold that the assessee's activity of mixing rectified spirit with treated water which brought about a totally new commercial commodity known as 'arrack' which is used for human consumption amounted to 'manufacture'. In the circumstances we agree with the first appellate authority that the assessee is entitled to reliefs under sections 32A, 80-I and 80HH of the Income-tax Act, 1961.

10. The various decisions sought to be relied upon on behalf of the Department, in our opinion, are clearly distinguishable. In the case of Tungabhadra Industries Ltd., the question before the Supreme Court was whether groundnut oil which was a raw material for Hydrogenated Ground nut oil remained the same even after the said hydrogenation. The question whether it involved manufacturing activity or not was not before the Court.

11. In the case of Chowgule & Co. Ltd., the assessee who was carrying on the business of mining iron-ore mixed better quality of ores with inferior quality of ores in order to obtain ores of specified iron content. The question before the Court was whether such a mixing of ores amounted to manufacturing activity. The Court held that before and after such mixing the ore remained to be iron ore and there was no change in the nature of commodity. As such it was held that the processes followed by the assessee did not amount to manufacturing activity.

12. Similarly the question in the case of Mittal Ice & Cold Storage was whether the assessee could be said to be manufacturing any article or thing when it permitted a third party to use the cold storage plant. The Court held that it did not involve any manufacturing process.

13. In the case of Buhari Sons (P.) Ltd., the Madras High Court had held that preparation of eatables cannot be taken to be manufacture of goods.

14. In the case of G.A. Renderian Ltd., the Calcutta High Court held that blending different varieties of tea involved processing and did not involve any manufacturing activity and so the assessee was not entitled to be treated as an industrial undertaking.

15. In the case of Hindusthan Metal Refining Works (P.) Ltd., the Calcutta High Court had held that the business carried on by the assessee in galvanising metal on behalf of its customers did not involve manufacture or production of any article and so the assessee was not an industrial undertaking engaged in manufacture and production of articles.

16. In the case of Koshy's (P.) Ltd., the Karnataka High Court had held that a restaurant by and large is a trading concern and the object of the restaurant is not to manufacture or process goods for the purpose of sale.

17. Thus it can be seen that all the cases sought to be relied upon by the Revenue are clearly distinguishable as they do not deal with an issue similar to the one which is present in the present case.

18. In the result, we are of the opinion that the first appellate authority is correct in holding that the assessee is entitled to the benefits of sections 32A, 80-I and 80HH of the Act. His order is accordingly affirmed and the Revenue's appeals are dismissed

 

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