JUDGMENT
K.S. Paripoornan, J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal, Cochin Bench, has referred the following two questions of law for the decision of this court :
“1. Whether, on the facts and in the circumstances of the case, the amount contributed by the assessee to the unrecognised executive staff provident fund is an allowable deduction ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that the assessee’s activity of curing coffee amounts to manufacturing and the assessee is entitled to relief under Section 32A of the Income-tax Act ?”
2. The respondent/assessee is a public limited company. It is engaged in the business of coffee curing, shipping and allied businesses. We are concerned with the assessment year 1978-79, for which the accounting period ended on December 31, 1977. For the assessment year 1978-79, the assessee claimed deduction of Rs. 47,549 being contribution to an unrecognised executive staff provident fund. Since the fund was not a recognised one, the Income-tax Officer disallowed the deduction. In appeal, the Commissioner of Income-tax (Appeals) directed the Income-tax Officer to allow the deduction. The Appellate Tribunal, following its decision in the case of the very same assessee for the earlier year (1977-78), held that it is an admissible deduction. The assessee had also claimed investment allowance of Rs. 12,417 in respect of machinery installed by the assessee for curing of coffee. The Income-tax Officer held that investment allowance under Section 32A of the Act is admissible only in relation to machinery or plant installed in a small-scale industrial undertaking for
the purpose of the business of manufacture or production of any article or thing and that it is difficult to conceive the process of curing coffee as a process involving manufacture or production and the Income-tax Officer disallowed the allowance. In appeal, the Commissioner of Income-tax (Appeals), by order dated February 15, 1984, held that this issue has been decided in favour of the assessee by the Income-tax Appellate Tribunal and deleted the disallowance. The Income-tax Officer was directed to allow the investment allowance in respect of the machinery installed in its coffee curing works. In further appeal before the Income-tax Appellate Tribunal, the Appellate Tribunal, after adverting to the rival pleas of the Revenue and the assessee in paragraphs 7 and 8 of its order dated October 6, 1988, concluded in paragraph 9 thus :
“9. We have considered the rival submissions. Curing of coffee, as we understand it, involves removal of foreign matter and passing the coffee seeds through peeling machines for removing the husk from the coffee without hampering its size and quality and keeping the silver skin of coffee, grading it and classifying the seeds. The Supreme Court and the Kerala High Court held that cutting off the heads and tails of prawns, lobsters and shrimps, peeling, deveining, cleaning and after freezing exporting them did not amount to manufacturing activity. These cases are decided under the Sales Tax Act and after considering the processes involved in that activity. There is no decision of any High Court brought to our notice in the case of coffee curing. However, the decision of the Tribunal in the case of Bharathi Coffee Curing Works is directly on the issue of coffee curing. For the sake of consistency, we follow the decision of the Bangalore Bench and hold that the assessee’s activity of curing coffee amounts to manufacturing and the assessee is entitled to relief under Section 32A.”
3. The Tribunal allowed relief to the assessee under Section 32A of the Act. It is thereafter at the instance of the Revenue that the questions of law formulated hereinabove have been referred to this court for decision by the Income-tax Appellate Tribunal.
4. We heard counsel.
5. It is common ground that the answer to question No. 1 is governed by the earlier Bench decision of this court in the case of the very same assessee and the decision in CIT v. Aspinwall and Co. (Travancore) Ltd. [1992] 194 ITR 739. In the said case, this court held that contribution to an unrecognised executive staff provident fund, in the case of the very same assessee, is an allowable deduction. In the light of the aforesaid
Bench decision of this court, we answer question No. 1 in the affirmative, against the Revenue and in favour of the assessee.
6. Counsel on both sides invited us to a catena of decisions for the purpose of deciding whether curing of coffee amounts to manufacture. Sections 32A(1) and 32A(2)(b) of the Income-tax Act, 1961, are relevant in this context. They are as follows :
“32A. Investment allowance.–(1) In respect of a ship or an aircraft or machinery or plant specified in Sub-section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty-five per cent. of the actual cost of the ship, aircraft, machinery or plant to the assessee :
Provided that no deduction shall be allowed under this section in respect of– ….
(2) The ship or aircraft or machinery or plant referred to in Sub-section (1) shall be the following, namely :–….
(b) any new machinery or plant installed after the 31st day of March, 1976,-
(i) for the purposes of business of generation or distribution of electricity or any other form of power ; or
(ii) in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing ; or
(iii) in any other industrial undertaking 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 in the Eleventh Schedule.”
7. The word “manufacture” has been considered by the Supreme Court of India and the High Courts in innumerable decisions in the context of the Central Excises and Salt Act, the Sales Tax Act, the Income-tax Act, etc.
8. Counsel for the assessee submitted that the word “manufacture” should receive an interpretation consistent with the object and purpose of the particular statute. It was argued that the word “manufacture” in
Section 32A of the Income-tax Act should be geared to a machine and its utility in the context of “investment allowance” and the test is on the user. The following decisions were cited :
1. Union of India v. Delhi Cloth and General Mills Co. Ltd., AIR 1963 SC 791 ; 2. South Bihar Sugar Mill Ltd. v. Union of India, AIR 1968 SC 922 ; 3. Allenbury Engineers P. Ltd. v. Shri Ram Krishna Dalmia, AIR 1973 SC 425 ; 4. Empire Industries Ltd. v. Union of India [1986] 162 ITR 846 (SC) ; 5. CST v. Harbilas Rai and Sons [1968] 21 STC 17 (SC); 6. State of Karnataha v. B. Raghurama Shetty [1981] 47 STC 369 (SC) ; 7. Venkatachalam (A.) v. State of Madras [1974] 45 FJR 288 (Mad) ; 8. Singh Engineering Works Pvt. Ltd. v. CIT [1979] 119 ITR 891 (All) ; 9. Sampath Iyengar’s Law of Income Tax, Vol. 2, eighth edition, pages 1665 and 1757.
9. On the other hand, counsel for the Revenue brought to our notice
the following decisions :
1. CIT v. Mathias (S. L.) (Diwan Bahadur) [1937] 5 ITR 435 (Mad) [FB] ; 2. CIT v. Katragadda Madhusudhana Row [1944] 12 ITR 1 (Mad) ; 3. Parthasarathiah (A. T.) and Bros. v. CIT [1963] 48 ITR 830 (Mys); 4. CIT v. Woodland Estates Ltd. [1965] 58 ITR 612 (Ker) ; 5. Delhi Cold Storage P. Ltd. v. CIT [1991] 191 ITR 656 (SC).
10. The Revenue’s plea is that any process done to render the commodity marketable or more marketable cannot fall in the realm of manufacture. We should at once say that the decisions referred to us by both the parties were rendered in different contexts while considering different legislations. It is doubtful whether any general principle applicable to all cases can be gleaned from the said decisions. The Constitution Bench of the Supreme Court had reviewed the decisions in the context of the Central Excises and Salt Act. In those decisions, the Supreme Court has referred with approval to the decisions rendered under the sales tax legislations. In particular, the general concept of the word “manufacture” has been highlighted at least in a few decisions. We shall deal with the landmark decisions of the Supreme Court on the subject. The three cases to which we shall refer (illustrative and not exhaustive) arose under the Central Excises and Salt Act, 1944. In Union of India v. Delhi Cloth and General Mills Co. Ltd., AIR 1963 SC 791, a Constitution Bench of the Supreme Court, in paragraph 14 of the judgment, quoted the following passage of general application from the book Permanent Edition of Words and Phrases, Vol. 26 (at page 795) :
“‘Manufacture’ implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation ; a new and different article must emerge having a distinctive name, character or use.”
11. A later decision of the Supreme Court in Empire Industries Ltd. v. Union of India [1986] 162 ITR 846 has exhaustively surveyed the case-law on the subject and has highlighted the principles discernible therefrom. A Constitution Bench of the Supreme Court in a recent decision in Ujagar Prints v. Union of India [1989] 179 ITR 317 ; [1989] 3 SCC 488, has approved the decision in Empire Industries Ltd.’s case [1986] 162 ITR 846 (SC); AIR 1986 SC 662 and, after a critical analysis of the various aspects arising in the matter, delivering the judgment on behalf of the majority, Venkatachaliah J. (present C. J. I.), at page 511 of the report (paragraph 42), stated the law thus (at page 341 of 179 ITR) :
“42. The prevalent and generally accepted test to ascertain that there is ‘manufacture’ is whether the change or the series of changes brought about by the application of processes take the commodity to the point where, commercially, it can no longer be regarded as the original commodity but is, instead, recognised as a distinct and new article that has emerged as a result of the processes. The principles are clear. But difficulties arise in their application in individual cases. There might be borderline cases where either conclusion with equal justification may be reached. Insistence on any sharp or intrinsic distinction between ‘processing’ and ‘manufacture’, we are afraid, results in an oversimplification of both and tends to blur their interdependence in cases such as the present one.”
12. The decision of this court construing the word “manufacture” arising under the Finance Act (Income-tax Act) is the one reported in CIT v. Casino (Pvt.) Ltd. [1973] 91 ITR 289 (Ker). We do not think that we should deal with all the decided cases on the subject.
13. It was vehemently contended by counsel for the assessee that the question as to whether the plant or machinery is installed for the purpose of business of manufacture or production is a finding on a question of fact. The Appellate Tribunal, in this case, has categorically held that the activity of curing coffee amounts to manufacture and so the assessee is entitled to the relief under Section 32A of the Act. The plea was that the said finding being one of fact, no question of law arises for consideration in this case. Strong reliance was placed on the decision of the Supreme Court in CIT v. Tiecicon P. Ltd. [1987] 168 ITR 744. In that case, the question was whether the assessee was an “industrial company” as defined in Section 2(6)(d) of the Finance Act, 1968, and Section 2(6)(c) of the Finance Acts of 1969 and 1970. The Appellate Tribunal, in that case, held that the assessee was an “industrial company” as defined in the Finance Act as meaning a company which, among other things, is mainly engaged in the manufacture or processing of goods. The Income-tax Appellate Tribunal rejected the application filed by the Revenue for reference under Section 256(1) of the Income-tax Act, wherein the question was “whether the assessee-company was an ‘industrial company’ in terms of the definition.” The High Court also dismissed the application filed by the Revenue under Section 256(2) of the Act. In the appeal filed before the Supreme Court, it was held that the Income-tax Appellate Tribunal and the High Court were right in holding that the question is one of fact. The Supreme Court rejected the appeal filed by the Revenue. This decision was very much relied on by counsel for the assessee to contend that no question of law arises for consideration in this case.
14. On the other hand, counsel for the Revenue submitted that the question itself is worded to the effect as to “whether, on the facts and in the circumstances of the case, the Tribunal is right in law arid fact in holding that the assessee’s activity of curing coffee amounts to manufacturing and that the assessee is entitled to relief under Section 32A of the Income-tax Act ?” Though innumerable decisions were cited before us by counsel appearing on either side, we are of the view that the Appellate Tribunal has not disposed of the above matter in a proper and legal way.
15. A perusal of the order of the Appellate Tribunal dated October 6, 1988, particularly paragraphs 8 and 9 thereof, gives the impression that the Appellate Tribunal was swayed by the decision of the Bangalore Bench in the case of Bharathi Coffee Curing Works v. First ITO [1979] 2 Taxman 482, wherein it was held that the activity of curing coffee amounts to manufacturing activity and the assessee was entitled to relief under Section 32(1)(vi), the requirements of which are the same as Section 32A of the Act. In our opinion, the Appellate Tribunal had made a shortcircuit of the entire matter. It was not considered as to whether curing of coffee amounts to manufacture or production within the meaning of Section 32A of the Act entitling the assessee to the relief under Section 52A of the Act. The Tribunal, no doubt, held thus :
“Curing of coffee, as we understand, involves removal of foreign matter and passing the coffee seeds through peeling machines for removing
the husk from the coffee without hampering its size and quality and keeping the silver skin of coffee, grading it and classifying the seeds.”
16. After stating the above, the Tribunal stated that there is no decision of any High Court brought to their notice in the case of coffee curing and since the decision in the case of Bharathi Coffee Curing Works is directly on the issue of coffee curing, for the sake of consistency, they will follow the decision of the Bangalore Bench and hold that the activity of curing coffee amounts to manufacturing and the assessee is entitled to the relief under Section 32A of the Act. In our opinion, the decision of the Income-tax Appellate Tribunal (Bangalore Bench) in the case of Bharathi Coffee Curing Works [1979] 2 Taxman 482, turned on its own facts and the materials that were available before the Tribunal in that case to reach the conclusion that curing of coffee amounts to manufacturing activity are not available in this case. We shall examine the decision in Bharathi Coffee Curing Works v. First ITO [1979] 2 Taxman 482 in detail.
17. In Bharathi Coffee Curing Works’ case [1979] 2 Taxman 482, the activity of the assessee was coffee curing. A note was submitted by the assessee explaining the activities of the assessee’s coffee curing works. The said note was to the following effect (at page 483) :
“We are agents of the Coffee Board. We receive coffee from the planters and it has to be cured as per the standard fixed by the Coffee Board. After the coffee is received from the planters, the coffee should be taken for curing after it is properly dried as per standard weight fixed by the Coffee Board.
The machinery used for curing will be about 20 in numbers from the initial stage to the final product. Even though the finished product is treated as only ‘coffee’, the characteristics of the raw coffee is different from that of the finished product.
The curing operation will start from the winnowing of the coffee to remove foreign matter with the help of winnowers and magnets. Coffee will be passed through limprima which helps to keep the silver skin of coffee, with proper pressing. From limprima raw coffee will pass through peeler which play an important role in producing the quality coffee. Peeler will act by removing husk from the coffee without hampering its size and quality and quantity. From the peeler, coffee will pass through proper elevators to catadors. Catadors will remove a part of the husk and remove part of the triages. From catador through elevator, coffee passes into the graders which remove unpeeled coffee. From graders, it will pass through bigger graders where different products of coffee are separated according to the standard prescribed by the Coffee Board. We segregate A, B, PB, triage, blacks/bits, browns coffee separately using proper machinery graders. It involves very technical and precise graders to achieve proper quality of the above grades.
Peaberry coffee is an unique quality in coffee which has special aroma. Peaberry separator is a machine which is used to bifurcate Pea-berry coffee from other coffees.
Hence, highly precise machinery play a very important part to produce quality coffee to the market.
After using the above machinery and female force for grading, coffee will be ready for marketing.”
18. The statements made in the above note were not challenged by the Departmental representative, though opportunity was given therefor. The Appellate Tribunal proceeded on the basis that what is said in the note is done by the assessee in its curing works to the coffee received by it from the planters. After referring to the decision of the Supreme Court in State of Punjab v. Chandu Lal Kishori Lal, AIR 1969 SC 1073, the decision of the Punjab and Haryana High Court in Ganesh Trading Co. v. State of Haryana, AIR 1971 P & H 26 ; [1971] 27 STC 340, the decision of the Madras High Court in CIT v. M.R. Gopal [1965] 58 ITR 598, the decision of the Gujarat High Court in CIT v. Ajay Printery Co. Pvt. Ltd. [1965] 58 ITR 811 and the decision of the Bombay High Court in CIT v. Tata Locomotive and Engineering Co. Ltd. [1968] 68 ITR 325, the Appellate Tribunal stated thus in paragraph 6 of its order (at page 484) :
“6. Applying these rulings to the activity of the assessee, it is, in our opinion, quite clear that the assessee is engaged in the manufacturing or production of goods. If dehusking the paddy for removing the husk is a process of manufacture, then dehusking coffee by removing the husk by peeler, as is clear from the note extracted above, would be a process of manufacturing. That apart, as is stated in the note, there are about 20 machines involved in the curing of coffee and what is done by the assessee is not merely a processing activity but is a manufacturing process.”
19. So, it is evident from the above that the details regarding the activities done by the assessee for curing coffee were available and that the Tribunal adverted to the said activities and also stated that there are 20 machines involved in the curing of coffee and so the activity is a manufacturing
process. The conclusion that the assessee was engaged in a manufacturing process entitling it to the initial depreciation under Section 32(1)(vi) of the Income-tax Act was arrived at by the Tribunal after adverting to the basic and necessary facts in detail. Unfortunately, in this case, no material is available on that score. As stated in paragraph 8 (at page 360), the Tribunal, in a broad sweep, stated that “curing of coffee involves removal of foreign matter and passing the coffee seeds through peeling machines for removing the husk from the coffee without hampering its size and quality and keeping the silver skin of coffee, grading it and classifying the seeds”.
20. The above factual details were not followed nor was the decision rendered on the basis of the above fact. The Appellate Tribunal simply followed the decision of the Bangalore Bench of the Tribunal without going into the details as to whether any manufacturing process or activity was involved and without entering a finding on that aspect. We should say that as the final fact-finding authority the Appellate Tribunal had a duty to examine the matter in great detail, analyse the relevant facts and enter a positive finding as to whether any manufacturing activity or process is involved in curing coffee. The Appellate Tribunal has failed to do so. The order of the Appellate Tribunal is perfunctory. It is not in accordance with law.
21. Therefore, we are not in a position to properly and satisfactorily answer question No. 2 referred to this court. We decline to answer question No. 2, but we direct the Appellate Tribunal to restore the appeal to file and decide the matter in accordance with law and in the light of the observations contained herein. The parties may be given sufficient opportunity to place all relevant materials before the appeal is disposed of.
22. The reference is disposed of as above.
23. A copy of this judgment, under the seal of this court and the signature of the Registrar, shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.