2016-VIL-986-ITAT-CHN
Income Tax Appellate Tribunal COCHIN
I.T.A. No.25/Coch/2014
Date: 20.03.2016
M/s . CHERIAN VARKEY CONSTRUCTION CO. (P) LTD.
Vs
THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1 (1) , KOCHI
For The Assessee : Shri R. Krishna Iyer, CA
For The Revenue : Shri K.K. John, Sr. DR and Shri M. Anil Kumar, CIT(DR)
BENCH
SHRI D.MANMOHAN, VICE PRESIDENT
JUDGMENT
U/S. 255(4) OF THE INCOME TAX ACT, 1961
Per D. Manmohan, Vice President:
On account of difference of opinion between the Ld. Judicial Member and the Ld. Accountant Member with regard to allowability of additional depreciation on the machinery used by the assessee, the following question was framed and forwarded to the Hon’ble President u/s. 255(4) of the I.T. Act for nominating Third Member to decide the issue:
“Whether in the facts and circumstances of the case, when the assessee is engaged itself in manufacture and sale of readymix concrete, whether the production of readymix concrete amounts to manufacture and hence the assessee would be entitled for deprecation as claimed in respect of the machinery used?
2. As could be noticed from the assessment order, the assessee is engaged in construction activity. It claimed additional depreciation on new plant and machinery amounting to Rs. 24,59,505/- on the ground that the new plant and machinery comprising of Transit Mixer, Tata Trucks and Ashok Leyland Trucks were utilised for manufacturing of readymix concrete. The case of the Assessing Officer is that they are road transport vehicles and hence, not eligible for additional depreciation. The case of the assessee was that the transit mixer and other vehicles are suitably adopted to mount the mixer and intended for use for a specific purpose and they are defined as ‘construction equipment vehicles’ under Central Motor Vehicle Rules; Hence they have to be considered as ‘non transport vehicles’. The Assessing Officer, however, was of the opinion that merely because the Transit Mixer, Tata Trucks and Ashok Leyland Trucks are adopted to suit a specific purpose, it would not alter the basic character of the vehicle as road transport vehicle. He further observed that readymix concrete is the outcome of mixing only and it cannot be considered as manufacturing activity and the final product which is known as ‘readymix concrete (RMC)’ is a mixture of sand, cement, metal, water etc.
3. The CIT(A), having confirmed the findings of the Assessing Officer, the assessee is in appeal before this Tribunal.
4. The Ld. Judicial Member observed that the assessee is producing readymix concrete and transporting the same to the construction site to be used by the builders in the construction of buildings etc. An identical issue was considered by the ITAT, Delhi Bench in the case of YFC Projects (P) Ltd. vs. Dy. CIT (2010) 134 TTJ (Del) 167 wherein the Delhi Bench of the ITAT referred to the decision of the Hon’ble Supreme Court in the case of N.C.Budharaja & Co. (1993) 204 ITR 412 (SC) and observed that manufacture implies a change but every change may not amount to manufacture, but every change of an article is the result of treatment, labour and manipulation. When the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new distinct article, then it can be said that manufacture has taken place. To put it differently, the test to determine whether a particular activity amounts to “manufacture” is (a) whether new and different articles or goods emerge with distinctive name, use and character, (b) whether the transformation into a new commodity is commercially known as a distinct and separate commodity having its own character, use and name, (c) whether it is the result of a process or several processes. In the background of ratio laid down by various Courts, including the observations made by the Apex Court in the case of N.C. Budharaja & Co. (cited supra), the ITAT, Delhi Bench observed that the production of RMC is a manufacturing activity as it has to be carried out in an organized manner with the help of heavy machinery and computer. Its activity is not as simple as mixing of sand, cement etc. by a labourer on the right side. Though, in the common parlance, sometimes it does not sound logic to say that mixing of RMC is a manufacturing activity but if we look at the activity carried out by the assessee from the point of an expert, who has laid down BIS standards, then it would indicate that it is a complicated affair. The mixing of four products in prescribed ratio would result in a different identifiable product which cannot be reconverted to its original shape. The Bench, therefore, observed that the activity carried out by the assessee is a manufacturing activity.
5. By placing reliance on the above findings of the ITAT, Delhi Bench, the Ld. Judicial Member observed that the machinery used for preparing readymix concrete is entitled for additional depreciation.
6. The Ld. Judicial Member also observed that in the instant case, they are not merely engaged in the construction of building. Vide para 9, the Ld. Judicial Member observed that readymix concrete is also supplied to the person engaged in the construction of building and this factual aspect was not disputed by the revenue. Though construction of a building, road, dam etc., may not come within the meaning of expression “manufacture” of an article or thing, the Ld. Judicial Member chose to follow the decision of the ITAT, Delhi Bench in the case of YFC Projects (P) Ltd. (cited supra) to hold that the assessee is entitled for additional depreciation.
7. With regard to the question whether the transit mixer, Tata truck or Ashok Leyland truck are plant and machinery, the Ld. Judicial Member observed that specialized chamber is mounted on the transit mixer, Tata truck or Ashok Leyland truck for transporting readymix concrete and hence, it falls within the meaning of expression “plant and machinery”, within the meaning of section 32 of the Act.
8. The Ld. Accountant Member was of the opinion that the nature of the assessee’s business, by no stretch of imagination be termed as manufacturing or production of any article or thing in view of the decision of the Hon’ble Supreme Court in the case of N.C. Budharaja & Co.(cited supra). The Hon’ble Supreme Court observed that the expressions “manufacture” and “produce” are normally associated with movables – articles and goods, but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road or a building.
9. The Ld. Accountant Member relied upon the decision of the Hon’ble Delhi High Court in the case of Bhagat Construction Co. (P) Ltd. 232 ITR 722 wherein the assessee company derived income from construction work including mining work for extracting stones to be used in construction. In the backdrop of the facts of the case, the Court observed that though the assessee might be extracting minerals, such as stones,by carrying out mining operations but the byproduct of such mining operations was not the article or thing in which the assessee was dealing, since the assessee was consuming the minerals in the process of civil engineering works which was the main business activity of the assessee; The by-product of such manufacturing activity would be consumed by the assessee in its building work.
10. Similarly, the Ld. Accountant Member relied on the decision of Hon’ble Delhi High Court in the case of CIT vs. Minocha Brothers (P) Ltd., 160 ITR 134 wherein the Court observed that the assessee-company while in the process of doing construction work, was engaged in crafting doors, windows, RCC slabs and so on which did not amount to manufacturing activity.
11. The ld. Accountant Member made an observation that the assessee having engaged in construction activity, it cannot be treated as business of manufacture or production of any article or thing. Other activities of mixing of various products in the process of construction business are neither the end product nor can they be treated as manufacturing or production of any article or thing.
12. The Ld. Accountant Member relied on the decision of the ITAT, Delhi Bench in the case of BSC & CIV, Delhi vs. ACIY (I.T.A. Nos. 1217/Del/2011and 1752/Del/2011 vide its order dated 15-05-2012) wherein the claim of additional depreciation on plant and machinery and tipper was rejected on the ground that the assessee was engaged in road construction contract and manufacture and production of concrete mix. Hence, the Ld. Accountant Member held that the assessee is not entitled to the claim of additional depreciation u/s. 32(1)(iia) on Transmit Mixer, Tata Trucks and Ashok Leyland Trucks.
13. The main issue that arises for my consideration is whether preparation of ‘ready mix concrete’ amounts to manufacture or production of an article or thing. If it amounts to manufacture, automatically the assessee would become entitled for additional depreciation. Under these circumstances, the Division Bench requested the Hon’ble President for nominating Third Member to decide the limited issue as to whether the assessee’s production of readymix concrete amounts to manufacture.
14. The Ld. Counsel appearing for the assessee relied upon the order passed by the Ld. Judicial Member and the ratio laid down by the ITAT, Delhi Bench in the case of YFC Projects (P) Ltd. to submit that production of readymix concrete involves a scientific process and hence it amounts to manufacture or production of article or thing. He further submitted that in the instant case, the assessee not only used it for captive consumption but also supplied readymix concrete to others. However, the assessment order passed by the Assessing officer, CIT(A) and the orders passed by the ITAT do not indicate as to whether the assessee carried on the business of sale of readymix concrete. The Ld. Counsel for the assessee submitted that it is available on record but when asked to point out, the Ld. Counsel could not place any material to buttress his contention that it was in fact selling readymix concrete. It appears that the arguments placed before the CIT(A) as well as the Tribunal, was mainly on the ground that the preparation of readymix concrete involves a scientific process by which new product emerges which can be considered as manufacturing activity and therefore, the Transit Mixer, Tata truck and Ashok Leyland Truck on which mixer is mounted should be treated as plant and machinery utilised for manufacture and hence, they should not be considered as road transport vehicles in which event the assessee would be entitled to additional depreciation. When the assessee was specifically asked to point out what is the specialized scientific process involved for production of ready mix concrete, the Ld. Counsel submitted that he is only a Chartered Accountant and is not aware of the procedure. At the same time, he submitted that in the case of YFC Projects (P) Ltd, the Delhi Bench observed that it involves mixing of cement, sand, water etc. and the product is mixed with chemical known as admixture. The final product after mixing, has to be used within four hours of its mixing. This intermediate product or final product is altogether a different product, from the material out of which it was produced and it is known as RMC which is distinct from the raw material. The Bench also observed that the raw material once mixed cannot be reconverted into its original shape and also stated that the expression “manufacture” has to be understood in the ‘common parlance’ and any change in the article which results in a new and different article would amount to manufacturing activity. RMC of different categories under different grades are made according to the requirement of the buyer and when it is mixed with water, it cannot be converted back into raw material, i.e., once RMC is prepared, it cannot be segregated into sand, cement, water, etc. Thus the assessee can be said to be engaged in construction activity.
15. It may noticed that the order passed by the Delhi Bench was set side by the Hon’ble Delhi High Court and the ITAT in its order dated 23rd January 2015 observed that in the light of the decision of the Apex Court in the case of N.C. Budharaja & Co., the matter has been restored by Delhi High Court to the file of the Tribunal to ascertain whether RMC was sold to outside parties or not. When the Ld. Counsel submitted that common parlance test has to be applied to understand the expression ‘manufacture’, the Bench pointed out that under the common parlance, readymix concrete is ordinarily prepared by a mason who is not a qualified engineer and it is never treated as manufacturing activity; Similarly, the Hon’ble Kerala High Court, in the case of CIT vs. Casino (Pvt) Ltd. 91 ITR 289, observed that conversion of raw material into ‘food’ in a hotel cannot be considered as manufacture or production of food materials, though, once the food is prepared, it cannot be converted into water, oil, salt, vegetables etc. The Ld. Counsel merely submitted that he relies on the order passed by ITAT, Delhi Bench which in turn was followed by the Judicial Member. Though, he has filed a paper book consisting of certain case law decided under Central Excise and other allied laws, he was not aware as to under which section the judgment was rendered. Unless the assessee places before the Bench the phraseology used in the section which was the subject matter of consideration and compares with the section which is under consideration before us, it is not possible to take into consideration any case law under different enactments. When it was pointed out to the Ld. A/R, he did not go into the said case law. However, he referred to the decision of the Hon’ble Supreme Court in the case of India Cine agencies vs. CIT (308 ITR 98) wherein the Bench observed that conversion of jumbo rolls of photographic films into small rolls in desired sizes, amounts to ‘production’ and also the decision of the Madras High court in the case of CIT vs. Shriram Transport Finance Co. Ltd., 254 ITR 543 wherein it was held that mobile crane was not a road transport vehicle. He also relied upon the following decision in support of his contention that mobile crane is not road transport vehicle (225 ITR 573) (Patna) ( 258 ITR 448) (Mad.) and (281 ITR 297) (Guj.).
16. It deserves to be noticed that the point of difference which was referred to for my consideration is limited i.e., ‘ whether the preparation of ready mix concrete amounts to manufacture or production of article or thing’. Hence the case law, as to whether the mobile crane is a road transport vehicle or not, is not the subject matter in dispute and hence, it is not necessary to go into that aspect. Thus the case law which is relevant in this context, from the point of view of Ld. A/R, is the decision of the ITAT, Delhi Bench which was relied upon by the Ld. Judicial Member, and the judgment of Apex Court in the case of India Cine agencies vs. CIT (cited supra) in which the Bench referred to the decision of N.C. Budharaja, 204 ITR 412 and observed that the word “production” has a wider connotation than the word “manufacture”. While every manufacture can be characterized as production, every production need not amount to ‘manufacture’. The word “production: or “produce” when used in juxtaposition with the word “manufacture”, takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods. The Court approved the observations of the earlier decision of the Apex Court in the case of NC. Budharaja & Co. (cited supra).
17. In the case of N.C. Budharaja & Co., the Court observed (in page 434 of the report) that only movable objects can be considered as ‘article’. Thus “production” has wider connotation than the word “manufacture”. When the product itself cannot be considered as manufacture, then intermediate product, in my considered opinion, cannot be considered as manufacture or production of an article or thing. Such intermediate product should emerge in the course of manufacturing process, as observed by the Apex Court in the case of N.C. Budharaj & Co. (cited supra).
18. The Ld. DR submitted that the Hon’ble Delhi High Court in the case of CIT vs,. Minocha Brothers (P) Ltd., 160 ITR 134 observed that manufacture of doors, windows for a building is not qualified as manufacture of article or thing because the real activity of the assessee was to construct buildings which are not goods. Here also, the RMC is used for the purpose of construction of buildings, dams, roads, canals etc. and since the end product would not be classified as a new . article or thing, the output in the form of readymix concrete which is an intermediate product, cannot be considered as manufacturing activity. Similarly in the case of Bhagat Construction Co.(P) Ltd., 232 ITR 722, the Delhi High Court observed that merely because the assessee is extracting minerals, it does not amount to manufacture if they are consumed in the process of civil engineering works. The Hon’ble Bombay High Court has taken a similar view with regard to making frames, slabs etc. in the business of construction and repair of buildings (CIT vs. NUC (P) Ltd, 126 ITR 377). He further submitted that the decision in the case of YFC Projects Pvt. Ltd. (cited supra) was rendered on 24.9.2007 and the same was set aside by the Hon’ble Delhi High Court and thus, a fresh order came to be passed in 2015 by the ITAT whereas the ITAT, Delhi ‘A’ Bench, in the case of BSC & CIV vs. ACIT (I.T.A. Nos. 1217/Del/2011 and 1752/Del/2011 dated 15-05-2012), considered the same issue exhaustively, running into 90 pages, and at pgs. 81 to 83, the Bench observed that the main ingredients for readymix concrete is aggregate, bitumen mix whereby a new intermediate product emerges and in fact reference was made to the decision of the ITAT Delhi Bench in the case of YFC Projects Ltd. (cited supra) while holding that such process does not amount to manufacture. The Tribunal, by relying upon the decision of the Apex Court in the case of N.C. Budharaja (cited supra), observed that if the assessee’s end product does not amount to production of new article or thing, benefit cannot be extended to any intermediatary product. In other words, when the construction of building, etc. would not amount to manufacture, the intermediate product also cannot be treated as manufacturing activity.
19. The Ld. Departmental Representative submitted that the onus is upon the assessee to prove as to whether if any scientific process is involved in preparing readymix concrete; He contended that it can also be done by an ordinary mason and in the common parlance and the commercial parlance, it cannot be treated as manufacture or production of article or thing since it would be utilised for construction of building, roads etc. In the instant case, the assessee has not furnished any material at any stage of the proceedings to prove that it was solely engaged in processing of readymix concrete and sale thereof without captive consumption. He thus relied upon the order passed by the Ld. Accountant Member.
20. I have heard the rival submissions and perused the record. It is common knowledge that an uneducated mason does the work of preparation of readymix concrete for construction of houses and it is never treated as manufacturing activity either in the common parlance or in the commercial parlance. The readymix concrete can be produced in huge volume with the help of machines with less manpower but merely because there is increase in volume, it cannot automatically be treated as manufacturing activity. At any rate, the end product is only an intermediate product which is used for construction of buildings, roads, dams etc. and when the end product is not considered as manufacturing activity, then it is difficult to hold that the intermediate product can be classified as manufacture or production of article or thing.
21. The Ld. Judicial Member, while following the decision of the ITAT, Delhi Bench in the case of YFC Projects (P) Ltd. (cited supra), might have taken note of the observations of the said Bench that once it is mixed with cement, water, etc., it cannot be segregated and hence it amounts to manufacturing activity. Even for preparation of food, such as idli etc, once the item is prepared or mixed, it cannot be segregated and brought back to its original shape and merely on that count, it cannot be treated as manufacturing activity. The Hon’ble Kerala High Court in the case of CIT vs. Casino (Pvt) Ltd. 91 ITR 289 observed that while considering the taxing statute, the real test is to ascertain whether the commodity either in common parlance or commercial parlance can be treated as a manufactured product. In the ordinary sense, the production of food materials in a hotel cannot be treated as manufacture. In the same way, the production of ready mix concrete, in the common parlance or commercial parlance cannot be treated as manufacturing activity; As rightly observed by the Hon’ble Supreme Court in the case of N.C. Budharaja & Co. (cited supra) a statute cannot always be construed with dictionary in one hand and the statute in the other hand. (pg. 204 ITR 434). Regard must also be had to the scheme, context and to the leglislative history of the provision. Having regard to the ratio laid down by the Hon’ble Apex Court, bearing in mind the fact that the end product should amount to manufacture or production of an article or thing, the readymix concrete manufactured by the assessee, which is also engaged in the construction activity, cannot be said to be a manufacturing activity.
22. I, therefore, answer the question in the negative and in favour of the Revenue by holding that the assessee is not entitled for additional depreciation in respect of machinery used since production of readymix concrete would not amount to manufacture of article or thing.
23 The matter may now be placed before the Division Bench which has to decide the matter according to the majority view.
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