ORDER
K.P.T. Thangal, J.M.
1. This appeal “by the Revenue and the cross-objection by the assessee pertain to the asst. yr. 1994-95. Ground Nos. 2.1 to 2.6 urged by the Revenue is directed against the order of the CIT(A) disallowing interest payments made by the assessee on borrowed funds utilised for the purpose of-
(a) investment in subsidiary company,
(b) investment in Munnar land property,
(c) advancing money for car purchase and
(e) loan given to M/s Choice Foundation which was running a school at Ernakulam.
2. Assessee filed the return disclosing Nil income for the year under consideration, the same was processed under Section 143(1)(a). Subsequently, the return was processed under Section 143(3).
3. Assessee is a company in which public are not substantially interested. Assessee had a construction wing and the same was transferred to a wholly-owned subsidiary company known as Choice Estate & Construction Co. Ltd. by virtue of a resolution dt. 8th June, 1993. Assessee also derives income from its Sea Food Division, Shipping Division and Software Division besides income from interest on deposits, dividends, profit on sale of investments, rent, vehicle hire charges, etc.
Investment in subsidiary company : On scrutiny of the books of account the AO noticed that the assessee was conducting business operation through borrowed funds from banks. Assessee was availing different types of loans like export packing credit, term loan, transit loan, IDBI term loan, industrial finance loans, etc. from SBI, SBT, etc. Interest paid to the banks amounted to Rs. 2,01,51,741 in addition to service charges paid to IDBI, M.G. Road, Ernakulam, of Rs. 2,94,000. It was also noticed that an amount of Rs. 92,50,016 has been diverted out of EPC loan availed from SBI, Cochin, for the purpose of acquiring equity shares in a company named Geo Marine Exports (P) Ltd, Apart from the export packing credit loans, there were no funds available with the assessee, noted the AO, for investing in the shares of M/s Geo Marine Exports (P) Ltd. Since no other funds other than the interest-bearing funds taken for business purposes
were available with the assesses, the AO disallowed proportionate interest while framing the assessment order. Assessee appealed to the first appellate authority.
4. It was contended before the first appellate authority that the shares were acquired due to business exigency in order to acquire additional seafood processing capacity. The Kerala State Industrial Development Corporation which advanced loans to M/s Geo Marine Exports (P) Ltd. felt that this company was not in a position to carry on business and hence requested the assessee, a company with a standing, to take over the factory building of M/s Geo Marine Exports (P) Ltd. Further, it was submitted that with the acquisition of the above factory, the processing capacity of the assessee would be increased by 20 tones per day. For setting up a factory like the one that was acquired by getting the shares, the assessee, in any case, should spend more than double the amount for which the assessee acquired the shares of M/s Geo Marine Exports (P) Ltd. Accepting the above contention, the first appellate authority allowed the claim of the assessee and deleted the impugned addition. Revenue is in appeal before the Tribunal.
5. Relying upon the decision of the Gujarat High Court in the case of Sarahhai Sons (P) Ltd. v. CIT (1993) 201 ITR 464 (Guj), the senior Departmental Representative submitted that acquisition of shares was with the aim of getting control over the company and hence the interest paid to the shareholders on outstanding amount of purchase price is not an allowable expenditure. On the other hand, the learned representative of the assessee submitted that the investment in subsidiary company was only to increase business. Factory of the subsidiary company was taken on lease, and the sales considerably increased. Hence, the investment is for business and no interest thereon can be disallowed as the money was used for business purposes. For the above proposition, he relied on the decision of the Madras High Court in the case of Indian Commerce and Industries Co. Ltd. v. CIT (1995) 213 ITR 533 (Mad).
6. Considering the rival submissions and on going through the orders of the Revenue authorities as well as the decisions cited by both sides, we are of the view that the issue has to go in favour of the assessee. The facts in the case relied on by the learned senior Departmental Representative (supra) are distinguishable. Here, the acquisition of shares was with the motive of getting control of the company. There were two rival groups. The shareholders desired one group should control the company so as to make it profitable or viable as compared to the other group. On the other hand, we find that in the decision of the Madras High Court in the case of Indian Commerce & Industries Co. Ltd. (supra) it has been held that if the purchase of the shares in the company was intended for the purpose of increasing the business of the assessee, the expenditure should be treated as business expenditure and that the disallowance, on that ground, of the interest cannot be upheld. Here, it is also to be noted that KSIDC, which advanced loans to M/s Geo Marine Exports (P) Ltd. with which the assessee was also having transactions, advised the assessee to take over M/s Geo Marine Exports (P) Ltd. It is to be noted that assessee’s processing capacity was increased highly. Therefore, the first
appellate authority was right in allowing the claim of the assessee considering the reason that if the assessee was to establish such a wing of the factory, the actual investment cost would have been almost double. In view of the above, we are in agreement with the order of the first appellate authority on this point. This ground of the Revenue, therefore, fails.
7. Investment in Munnar landed property : The CIT(A) deleted the disallowance of interest on borrowed funds that were utilised for purchase of landed property in Munnar. According to the Revenue, the acquisition of the landed property could not be said to be for the purpose of assessee’s business. Hence, CIT(A) was not justified in treating it as business expenditure.
8. At the time of framing the assessment, the AO noticed that during the accounting period, the assessee had invested Rs. 7 lakhs in a property at Munnar. The source was also noted as from the loans provided by the banks. Hence, he disallowed the claim of interest made by the assessee. Before the first appellate authority, it was contended that the assessee was carrying on business of construction activity and the purchase of landed property at Munnar was for construction purposes. Hence, he agreed with the assessee and deleted the addition made by the AO in this regard.
9. Before us, the learned Departmental Representative supported the order of the AO. On the other hand, the learned counsel for the assessee submitted, relying upon the decision of the Hon’ble Supreme Court in the case of CIT v. Rajendra Prasad Mody (1978) 115 ITR 519 (SC), that earning of income from an investment made for the purpose of business is not essential so as to allow the claim of the assessee. The property in question was acquired by the assessee with an intention to attract tourists as per its tourism project and thus enlarge its operational activities. Subsequently, assessee dropped its tourism project, and instead the assessee itself used the property.
10. The fact that the land was purchased for construction of buildings and that originally assessee was also in the line of construction business was not disputed. After the purchase of the property, it was decided that the land was not to be utilised for construction work, but the company as such should use it for its own purposes. It is also to be noted that no investment was made during the year under consideration. At the point of time of making the investment, assessee was in the line of construction business and it was for business purposes that the investment was made. Hence, we are of the view that the reasoning of the first appellate authority stands to reason. This ground of the Revenue also fails.
11. Car advance : At the time of framing the assessment order, the AO noticed that there was a car advance to the tune of Rs. 26,55,000 paid for acquiring a foreign car for the managing director of the company. As on 31st March, 1994, he also found that the registration of the car was not transferred in the name of the company. The above amount was disallowed by the AO as the expenditure was not for business purposes and was for acquiring asset not needed for business purpose.
12. It was submitted before the CIT(A) that during the subsequent year the car was transferred in the name of the company, and the car was being used for the purpose of transporting foreign buyers. Hence, it was contended that the
car was used for business purposes. It was also stated that it was only due to certain difficulties in getting registration during the year that the amount was shown as an advance. Accepting the above contention of the assessee, the first appellate authority deleted the addition made on this count.
13. Before us, the learned Departmental Representative submitted that it was merely an advance and it was advanced to the managing director, not in the capacity of managing director but in his individual capacity. It was also not shown as a car advance. It was submitted that it was a personal loan, and the CIT(A) was not justified in accepting it. Learned counsel for the assessee, on the other hand, supported the order of the first appellate authority and reiterated the submissions made before the Revenue authorities and also contended that the mere fact that the registration of the vehicle was not transferred in assessee’s name did not deprive the assessee of the right to claim the ownership and depreciation. For the above proposition, he relied on the decision of the Calcutta High Court in CIT v. Salkia Transport Associates (1983) 143 ITR 39 (Cal) and the decision of the Bombay High Court in CIT v. Dilip Singh Sardarsingh Bagga (1993) 201 ITR 995 (Bom).
14. We considered this matter carefully. There is no dispute about the basis facts of the issue such as that the money was advanced to the managing director of the assessee-company to purchase the foreign car, that the car was actually purchased and that the car was used for the purpose of the business of the assessee-company especially for receiving the foreign buyers. The visits of the foreign buyers are very important for the assessee-company as the main business of the assessee is export business. Therefore, even if the registration of the car was in the name of the managing director of the assessee-company, the car was virtually used for the purpose of the business of the assessee-company, Later on, the registration was transferred to the name of the assessee-company itself. Therefore, for the interim period also one has to hold that the de facto owner of the car was the assessee-company even though for the technical matter of Motor Vehicles Act the registration was in the name of the managing director of the assessee-company. We are of the view that such a technicality should not fetter the legitimate claim of the assessee regarding the expenditure made out for acquiring and running the foreign car meant for the purpose of the assessee-company. There cannot be a case that the advance was given to the managing director of the assessee-company in his personal capacity. Because this proposition would not stand in the face of the fact that the motor car was used for the purpose of the business of the assessee-company. Moreover, the managing director of the assessee-company is not a stranger altogether. He is the most important personnel of the assessee-company who steers the business of the assessee-company. Therefore, one cannot hold that the motor car could not be considered as the car of the assessee-company simply for the reason that the registration of the car was taken in the name of the managing director of the assessee-company. In the context of depreciation allowance the Courts have consistently taken the view that what is to be looked into is the de facto ownership of the asset rather than the de jure ownership of the asset. The Hon’ble Calcutta High Court in the case of Salkia Transport Associates (supra) and Nagpur Bench of the Bombay High Court in the case of Dilip Singh Sardarsingh Bagga (supra) have held that in the
case of motor vehicles, depreciation should be allowed to the beneficial owners of the vehicles even though the registration for the purpose of Motor Vehicles Act would be made in the names of others. If the ratio of these decisions is applied in this case, one has to say that the foreign motor car was virtually owned by the assessee-company and used by it for its business, and therefore, the assessee-company should be in a position to claim the expenditure incurred in acquiring and running the said motor. In this view of the matter, we hold that the assessee-company is entitled to claim the interest expenditure relating to the acquisition of the foreign car. We confirm the order of the CIT(A) and reject the ground raised by the Revenue.
15. Amount lent to M/s Choice Foundation : The AO while framing the assessment, found that the assessee had given loans to M/s Choice Foundation to the tune of Rs. 1,21,72,536 for the purpose of investing in the land and buildings of Choice School which is a separate business enterprise of the managing director. He, therefore, disallowed the interest payment on the above amount. On, appeal, the first appellate authority allowed the claim of the assessee on the following lines :
“11. The appellant company is involved in the business of construction, shipping and sea food. During the account period, the appellant had made advance of Rs. 1,21,72,536 to a charitable organisation called Choice Foundation in which the appellant is a corporate member. By the above advance, the appellant got wide publicity among general public, especially among the parent of pupils studying in Choice School. This had resulted in selling the flats promoted by the appellat adjacent to Choice School within a short period. Such response was possible even without spending any amount for the publicity of the above construction venture. If the appellant advertises the above venture, such expenditure will be an allowable deduction while arriving at the taxable income of the appellant. It was only due to the tremendous amount of goodwill amount, had certainly boosted the business of the appellant. Hence, the AO is not correct in concluding that the loan advanced to a charitable organisation is diversion of funds for non-business purposes. The proportionate disallowance of interest is deleted under this head.”
16. Relying upon the decision of the Supreme Court in the case of Madhav P. Jatia v. CIT (1979) 118 ITR 200 (SC), the learned Departmental Representative submitted that amount claimed by the assessee as donation to educational institutions cannot be allowed. The learned counsel for the assessee submitted that originally the company started construction of the school when it was carrying on the construction division and the school was in the area where the flats were constructed. This was started with a view to improve the saleability of the buildings constructed, and as such, the cost is allowable as a revenue deduction, in the light of the decision of the Allahabad High Court in the case of CIT v. Development Trust (1992) 198 ITR 766 (All). Assessee’s counsel further submitted that when the construction was transferred, the company continued with the construction of the school as it was felt that the school would be beneficial to the children of the assessee’s employees. The children of the employees are given priority in
admission in the school. Under similar circumstances, in the following cases, the expenditure on schools has been held to be business expenditure, assessee’s counsel submitted :
(i) Mysore Kirlosker Ltd. v. CIT (1987) 166 ITR 836 (Kar);
(ii) ITAT v. B. Hill & Co. (P) Ltd. (1983) 142 ITR 185 (All);
(iii) Palani Andavar Mills Ltd. v. CIT (1977) 110 ITR 742 (Mad);
(iv) CIT v. Vazir Sultan Tabacco Co. Ltd. (1988) 169 ITR 139 (AP);
(v) CIT v. Mysore Cements Ltd. (1990) 183 ITR 367 (Kar); and
(vi) CIT v. Bharat Commerce & Industries Ltd. (1990) 184 ITR 90 (Del).
Assessee’s counsel submitted that in the instant case, the assessee-company has merely lent interest-free monies. Hence, the loan is also for the purpose of business and the interest on borrowing cannot be disallowed.
17. We have considered the rival submissions and gone through the orders of the Revenue authorities as well as the decisions cited by both sides. Firstly, coming to the decision relied on by the Revenue reported in (1979) 118 ITR 200 (SC) (supra), we find that it is distinguishable on facts. In this case, assessee borrowed money for making donations to educational institutions and claimed that money was borrowed in order to save her income-earning assets, viz., the shares which she would otherwise have had to sell. Out of the total amount of Rs. 10 lakhs promised to be donated for setting up an engineering college, assessee paid Rs. 5.5 lakhs. Remaining Rs. 4.5 lakhs was with the assessee and interest thereon was to be deposited with the college. Assessee claimed that she borrowed the sum of Rs. 5.5 lakhs in order to preserve her business assets and hence interest thereon was deductible, and regarding the balance amount of Rs. 4.5 lakhs, it was claimed in the hands of the assessee as a trust property, and interest accruing thereon was also deductible. The claim was rejected by the High Court and it was confirmed by the Supreme Court. The facts in the above case are thus distinguishable from the facts of the case before. On the other hand, we see that the decisions relied on by the assessee’s counsel in the case of Development Trust (P) Ltd. (supra) is directly on the point. In this case, the assessee engaged in the promotion of residential colonies claimed deduction of the expenses incurred in the construction of a school and the same was allowed by the Tribunal. Tribunal’s view was confirmed by the High Court holding that since the construction of the school building had been made with a view to persuading buyers to purchase plots in the colony promoted by the assessee, the expenditure incurred is liable to be allowed. In view of the above, we have no reason to take a contrary view from that of the first appellate authority. This ground of the Revenue also fails.
18. The learned counsel for the assessee submitted that interest on borrowings cannot be disallowed merely because of charging of reduced rate of interest or
failure to charge interest on lending or investment for the purpose of the business. For the above proposition he relied on the decision of the Bombay High Court in the case of CIT v. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom). Further relying on the decision of the Hon’ble Supreme Court in the case of Rajendra Prasad Mody (supra) assessee’s counsel has submitted that interest cannot be disallowed merely because the investment has not earned any income. He further submitted that the company was having sufficient funds and the reserves and the profit for the year before depreciation and after tax was to the tune of Rs. 238 lakhs. Hence, the lending and investment should be deemed to be out of interest-free funds. For the above proposition, he also relied on the decision of the Madras High Court in the case of CIT v. Hotel Savera (1999) 239 ITR 795 (Mad) and also the decision of the Calcutta High Court in the case of Woolcombers India Ltd. v. CIT (1982) 134 ITR 219 (Cal). He further added that the average interest for the company was only 12 per cent whereas there were borrowings for specific activity like term loans, foreign bills discounting, etc. These loans could be used only for the purpose for which they were granted and hence could not be allocated as being used for investments. Therefore, the learned counsel for the assessee sumed up that interest and bank charges amounting to Rs. 1,29,00,000 on account of these borrowings cannot be allocated to investments for non-business purposes. He further submitted that in any event, the entirety of the funds for investments cannot be treated as having been purely out of interest-bearing borrowed funds only.
19. We have considered the above submissions and gone through the decisions cited above. The decision reported in (1969) 74 ITR 723 (Bom) (supra) does not fit into the case of the assessee. That was a case where it was contended that had the assessee collected the outstanding due to it, it was not necessary to borrow interest-bearing funds. Thus, the facts in the above case are not similar to those in the instant case. The decisions relied on by the learned counsel in the cases reported in (1999) 239 ITR 759 (Mad) and (1981) 134 ITR 219 (Cal) (supra), in support of his argument that when the company was having sufficient funds, the lending and investment should be deemed to be out of interest-free funds, do not apply in the instant case of the assessee, as facts are distinguishable.
20. In the result, the grounds 2.1 to 2.6 raised by the Revenue in its appeal are rejected.
21. The next ground urged by the Revenue is directed against the order of the CIT(A) allowing assessee’s claim under Section 80-I. The case of the Revenue is that the decision relied on by the first appellate authority in CIT v. Poyilakada Fisheries (P) Ltd. (1992) 196 ITR 722 (Ker) and CIT v. Poyilakkada Fisheries (P) Ltd. (1991)197 ITR 85 (Ker) have not become final. It is also the case of the Revenue that the first appellate authority should have followed the ratio of the decision of Hon’ble Supreme Court in the case of Sterling Foods v. State of Karnataka 63 STC 239 and the decision of the Bombay High Court in CIT v. Sterling Foods (Goa) (1995) 213 ITR 851 (Bom).
22. Assessee claimed deduction under Section 80-I in respect of sea-food products manufactured in its I.Q.F plants at Nellore and Cochin. It was the case of the assessee that the I.Q.F processing involves cooking/blanching of the product as well as glazing and freezing and other chemical treatment for preservation and it is a totally different form of processing from the conventional form of sea-food processing called ‘block freezing’. The AO disallowed the claim of the assessee in the light of the decision of the Bombay High Court in the case of CIT v. Sterling Seafoods (supra) in which the Hon’ble High Court held that “by subjecting of prawns to processing for the purpose of export, they do not lose their original character. No new commodity or article emerges as a result of such processing.” The AO held that the above observations clearly apply to the case of the assessee. Since IQF is only a process by which prawns are subjected to instant deep freezing for the purpose of exports, the original identity of prawns is not lost and, therefore, he held that there is no production or manufacture of a new article or thing so as to claim the deduction under Section 80-I. Assessee went in appeal before the CIT(A). The CIT(A) vide para 27 of his order, allowed the assessee’s claim on the following lines :.
“27. I have considered the facts of the case and the arguments of the learned representative. The first ground on which the AO has denied deduction under Section 80-I is that the appellant is not deriving any independent income from IQF units so as to consider such income for deduction claimed. The AO has come to such a conclusion without appreciating the facts. The Hon’ble Kerala High Court in its decisions in 196 ITR 722 and 197 ITR 85 has held that processing of fish amounts to production of articles. Therefore, the entire quantity of fish processed by the appellant in its IQF Units and the profits and gams derived from the business of such goods is entitled for deduction under Section 80-I. The second argument of the AO that the appellant is not manufacturing or producing any article or thing is also devoid of merits in view of the above, mentioned Kerala High Court decision. Therefore, the appellant is entitled to deduction under Section 80-I as discussed above.”
Aggrieved by the above order, Revenue is in appeal.
23. The learned Departmental Representative, relying on the decision of the Hon’ble Supreme Court in the case of CIT v. Relish Food (1999) 237 ITR 59 (SC) and the decision of the Bombay High Court in the case of Sterling Foods (P) Ltd. (supra), submitted that processing of prawns/fish does not amount to manufacture or production of an article or thing and, therefore, assessee is not entitled to the special deduction under Section 80-I. Supporting the order of the AO, learned Departmental Representative submitted that the assessee was not deriving any independent income as such from IQF unit so as to come within the scope of Section 80-I. He submitted’ that income was earned from exports and not from operating IQF plant. Further supporting the order of the AO, learned senior Departmental Representative submitted that the assessee is not engaged in the manufacture or production of any article or thing in the light of the criteria laid down by the Bombay High Court in the case of Sterling Foods (supra). He submitted that IQF is only a process by which the prawns are subjected to instant deep freezing for export. By this process the original identity of the prawns is not lost. Therefore, there is
no production or manufacture of any new article or thing, and hence, there cannot be any claim for deduction under Section 80-I. Relying on the decision of the Kerala High Court in CIT v. Casino (P) Ltd. (1973) 91 ITR 289 (Ker), learned Departmental Representative submitted that in this case the Hon’ble High Court held that the activity carried on in preparing articles of food from raw materials in a hotel would not constitute “manufacture or processing of goods” within the meaning of Section 2(6)(d) of the Finance Act, 1968. A company which carries on such activity will not fall within the definition of an “industrial company” under that provision. Hence, the Departmental Representative submitted that the above decision is squarely applicable in the instant case of the assessee. He also relied on the decision referred to at p. 606 (i.e., CST v. Hervilas Rai & Sons 21 STC 17 in CIT v. West India Steel Co. Ltd. (1976) 108 ITR 601 (Ker) (FB). In 21 STC 17, notwithstanding the fact that the assessee bought bristles plucked by Kanjars from pigs, boiled them, washed them with soap and other chemicals, sorted them out according to their sizes and colours, tied them in separated bundles of different sizes and despatched them to foreign countries for sale, it was held that the sale did not involve a manufacturing process. If that be so, the learned senior Departmental Representative submitted that the activity undertaken by the assessee does not amount to processing.
The learned Departmental Representative also invited our attention to the decision of the Kerala High Court in CIT v. Oceanic Products Exporting Co. (1996) 219 ITR 293 (Ker). In this case, the Hon’ble High Court held that processing of fish by peeling, deveining and cleaning and thereafter preserving it by using chlorine water and certain approved chemicals and then pressing it into a slab in the freezer and then packing in suitable containers does not amount to manufacture so as to enable to assessee to claim rebate under Section 2(5)(a)(ii) of the Finance Act, 1966.
24. The learned representative of the assessee submitted that the decision of the Supreme Court in the case of Relish Foods (supra) and the decision of the Kerala High Court in the case of Poyilakada Fisheries (P) Ltd. (2000) 241 ITR 195 (Ker) cannot be applied in the instant case as the facts are clearly distinguishable. The decision in the case of Relish Foods went against the assessee as there was no description of what processing the assessee did to shrimps, and, therefore, they have taken the observation of the Supreme Court in Sterling Foods’ case (supra). In 63 STC 239 it was clearly mentioned that raw shrimps and prawns were subjected to the process of cutting the heads, tails, peeling, deviling, cleaning and freezing. In view of the above, the Supreme Court held that the finished products continued to retain the same character of shrimps, and as such there was no difference in commercial sense between the input and the output. Similar is that basis of the decision of the Kerala High Court in the case of Poyilakkada Fisheries (P) Ltd. (supra). But in the instant case, assessee’s representative submitted, assessee is engaged in the manufacturing process called ‘IQF process’ which is entirely different from the process adopted in the above two cases before the Supreme Court and the Kerala High Court. In the process taken up by the assessee, chemicals are added and shrimps are cooked and as a result, shrimps completely lose their identity and character and the end product is totally
different from the input, and they are commercially different. Whereas the input cannot be consumed by the individual, the output from the assessee’s unit is directly marketed to the individuals in USA and other places. In fact, the output from the factories like Relish Food (supra), Sterling Foods and other companies whose cases have been decided by the Supreme Court and the Kerala High Court, are exported and are subjected to further manufacturing process abroad as is being done by the assessee, and in the instant case, this further process is done by the assessee here itself. In the case of the assessee, the final product of those companies are put through further processing during which the product completely changes its identity and characteristics.
The Hon’ble High Court in the case of Jalna Seeds Process & Refrigeration Co, Ltd (2000) 246 ITR 156 (Bom) upheld the order of the Tribunal wherein the Tribunal held that a different commodity emerged after the raw seeds underwent the different stages of processing on the ground that the net result of the processing was that the raw seeds which can be consumed by human beings and animals, after being subjected to the process, are no longer edible and can be used only for cultivation. In other words, even if the raw seeds remained almost the same, but after the processing, the seeds were no more fit for human consumption but fit only for cultivation. The High Court held approving the view taken by the Tribunal that this processing amounts to manufacturing. While so holding, the Hon’ble High Court has also negatived the contention of the Revenue placing reliance on the decision of the apex Court in the case of Relish Foods (supra). The Hon’ble High Court distinguished the decision relied on by the Revenue in the case of Relish Foods on the ground that in that case even after doing the process like cutting of head and tale, peeling, etc. of the shrimps the final output did not become a different commodity. But in the case before their Lordships of the High Court, it was held that “the various stages indicate that the raw seeds which could be the subject-matter of human consumption, after undergoing the various process stages, ceased to be edible and the said seeds could only be used for cultivation”. In the circumstances, their Lordships concurred with the view of the Tribunal that a different commodity emerged after the raw seeds underwent the different stages of processing. Their Lordships also noted the decision of the Hon’ble Supreme Court in the case of State of Rajasthan v. Rajasthan Agricultural Input Dealers Association AIR 1996 SC 2179 : (1996) 5 SCC 479. In the case before the Bombay High Court, the different stages which the raw seeds underwent have been enumerated on pp. 156 and 157. The same is reproduced below :
“In the manufacturing process, raw seeds undergo various stages to make them marketable. Stage one involves conveyance of the raw seeds through an elevator into the seed pre-cleaner. Stage two requires the seeds to come out of the pre-cleaner and into a machine which separates the stones from the seeds. Stage three involves fine cleaning of the seeds. Stage four involves the said seeds to go through the gravity separator machine which difurcates the seeds according to specific weight. Stage five deals with post-processing and certain tests to be carried out like physical testing, physiological testing and genetic testing. Stage six deals with assessing the intensity of a suitable dosage and seed treatment. It also involves use of chemicals whereas stage seven, which is
the last stage, deals with the treated seeds which are weighed in an automatic weighing machine. The net result of the seven stages through which the raw seeds go is that the raw seeds which can be consumed by human beings and animals, after being subjected to the process, are no longer edible and can be used only for cultivation.”
25. Relying on the decision of the Supreme Court in the case of Aspinwall & Co. Ltd. v. CIT (2001) 251 ITR 323 (SC), the learned representative of the assessee submitted that curing of coffee by converting berries into coffee beans amounted to manufacturing. In fact, curing of coffee by converting berries into coffee beans is a very simple process; activities involved in that process are merely de-husking, grading, blocking, etc. The apex Court held that even that process is a manufacturing process and sufficient for the purpose of Section 80-I. He also relied on the decision of the Allahabad High Court in Renusagar Power Company Ltd. v. ITO (1979) 120 ITR 352 (All) Madras High Court in CIT v. EID Party (India) Ltd. (1996) 218 ITR 713 (Mad) and of the Bombay High Court reported in CIT v. Jalna Seeds Processing & Refrigeration Co. Ltd. (2000) 246 ITR 156 (Bom) in these cases it has been held that conversion of raw seeds into marketable seeds involving polishing, gravity separation, segregation according to character, etc. is a manufacturing process. According to the assessee’s representative, what the assessee does in the instant case is much more. In the case reported in (2000) 246 ITR 156 (Bom) (supra), the Bombay High Court distinguished the decision of the Supreme Court in the case of Relish Foods (supra) stating that the Supreme Court found that the end product and the input were the same. It was because of this finding that the decisions went against the assessees, submitted assessee’s representative. It is not so in the instant case of the assessee. Further, relying on the decision of the Kerala High Court in the case of CIT v. Kannam Latex Industries (P) Ltd. (1996) 221 ITR 17 (Ker), it was submitted that segregation of later by centrifugation process is a manufacturing activity. Again relying on the decision of the Madras High Court in the case of CIT v. Tamil Nadu Heat Treatment and Fettling Services (P). Ltd. (1999) 238 ITR 529 (Mad) wherein it was held that heat treatment which changes the qualitative character of the forgins, even though there is no change in the physical characteristics, is a manufacturing activity, assessee’s learned representative concluded that the process adopted by the assessee is a unique one. Our attention was brought to the certificate issued by the Central Institute of Fisheries Technology certifying that the assessee’s process involves change of the characteristics of the shrimps and the output is different from the input. Our attention as also brought to a certificate dt. 4th April, 2002, issued by the Marine Products Export Development Authority which is at p. 7 of the assessee’s paper book. This certificate stages that “Individually Quick Frozen (IQF) cooked shrimp is a processed and preserved product made out of raw shrimp and both are commercially different”. The learned representative of the assessee summed up that the entire operation of the process that was undertaken by the assessee has to pass through 15 different stages which are as under :
1. The raw material is cleaned and segregated according to the variety.
2. The shrimps are beheaded by removing the head, peeled by taking off the shell and deveined by removing the gut for PD (peeled and deveined) freezing.
3. Shrimps are graded according to sizes in each variety.
4. Each lot is washed, water drained by using draining table, predetermined quantities weighed out into waxed cartons inner lined by a thin polythene sheet. Shrimp arranged in carton in slab form. Filled cartons arranged in metallic trays. Glaxing water is added to all the cartons arranged in the trays, coded slips of paper placed in each carton. Cartons itself superscribed with name of the species, count and code as prescribed by Export Inspection Agency for identification.
5. Trays containing slabs loaded into freezers, Vertical compressive force applied for positive contact of the plates with the material. In this process, the material gets freezed at minus 40 degrees PH.
6. Block frozen cases are kept in the cold store and for IQF (Individually Quick Frozen) processing the required number of cases are taken out and the slabs are put for thawing.
7. The shrimps are then subjected to chemical treatment with STPP (sodium tri-polyphosphate), Salt, colour and water and the mixture is strirred continuously for four hours inside a stirring machine.
8. After that, the shrimps are taken out and drained and they are passed through the dewatering elevator to the cooker
9. Inside the cooker the shrimps are blanched/cooked.
10. The blanched shrimps are dumped into chilled water for cooling and are drained and passed through Infeed Shaker for separating each shrimp from others.
11. The shrimps are then passed through the IQF (Individually Quick Frozen) freezer where each shrimp is individually forzen at 28 degree C. The technique employed is flow freezing and due to the fast freezing there is marked improvement in the quality of frozen product in terms of freshness, flavour and texture. Moreover, the speed of freezing inhibits bacterial growth and also prevents dehydration. Therefore, IQF products are preferred in international market over products frozen under conventional methods.
12. The next stage is glazing and it harden the shrimps and gives it a glazed texture.
13. The shrimps are then passed through the glaze-freezer and finally they enter the packing machine. Here, the shrimps are weighed and packed in corrugated master cartons.
14. Packing master cartons are properly stacked in the frozen storage, where the temperature is constantly maintained at 18 degree C.
15. Finally frozen cargo is loaded into the refrigerated containers for shipment.
Assessee’s learned counsel submitted that in all the above cases decided either by the High Court or by the apex Court including the case of Relish Foods (supra), the processing ends with slabs loaded into freezers, whereas IQF process commences from stage 6 and this process changes the entire character
of sea-foods. When the material is passed through this process, it gets cooked also in other words, it is ready to serve on the table. Inviting our attention to the decision of the apex Court in the case of Aspinwall & Co. Ltd. (supra) the learned counsel submitted that if the process of manufacturing coffee beans from raw berries amounts to manufacture, then in respect of the processing of fish/prawns in assessee’s IQF plant, which is a far advanced processing, assessee is entitled to the benefit under Section 80-I of the IT Act. Learned counsel for the assessee submitted that IQF machinery itself costs about Rs. 7 crores. Thus, he concluded that the order of the first appellate authority is liable to be upheld.
26. Hearing the rival submissions and on going through the orders of the Revenue authorities as well as the decisions relied on by both sides, we are of the view that the order of the first appellate authority is liable to be upheld. The learned senior Departmental Representative relied on the decisions in the cases of Relish Foods (supra) and Sterling Foods (P) Ltd. (supra) do not further the Revenue’s case. The decision in the case of Relish Foods was rendered by their Lordships of the apex Court as the assessee could not present in detail what the assessee did to the shrimps other than peeling and freezing them. It was in these circumstances that their Lordships held that “there was no detailed description of what the assessee did to the shrimps it bought other than the bald statement that it pealed and froze them. Processed or frozen shrimps and prawns are commercially regarded as the same commodity as raw shrimps and prawns. When raw shrimps and prawns are subjected to the process of cutting of heads and tails, peeling, deveining, cleaning and freezing they do not cease to be shrimps and prawns and do not become other distinct commodities. There is no essential difference between raw shrimps and prawns and processed or frozen shrimps. Assessee’s plea for remanding the matter was turned down for the reason that the assessment year involved in that case was 1977-78 and their Lordships were hearing the matter almost after two decades. Hence, the decision of the apex Court in the case of Relish Foods does not lay down and general principles as such, contended the learned Departmental Representative. In the case of Sterling Foods (supra), the Hon’ble Bombay High Court followed the decision of the apex Court in the case of Sterling Foods v. State of Karnataka (supra). Coming to the decisions relied on by the senior Departmental Representative in the case of Casino (P) Ltd. (supra) and West India Steel Co. Ltd. (supra) they prima facie support the case of the Revenue. The learned Departmental Representative does not rely on the decision in 108 ITR 601, but tries to get support from the case discussed therein i.e.. CST v. Harvilas Rai & Sons (supra). In this case, it was the case of the assessee who bought bristles plucked by Kanjars from pigs, boiled them, washed them with soap and other chemicals, sorted them out according to their sizes and colours, tied them in separate bundles of different sizes and despatched them to foreign countries for sale. The Court held that the sale did not involve a manufacturing process. In the case of Casino (P) Ltd. (supra) it was held that manufacturing or processing of goods i.e., conversion of raw materials into food in hotel does not amount to manufacture because it will be too difficult to swallow the meaning of manufacturing of good stuff in a hotel. In the case of Poyilakkoda Fisheries (P) Ltd. (supra) Their Lordships followed the decisions in the cases of Sterling
Foods and Relish Foods (supra). Coming to the facts in the instant case of the assessee, the stages of processing and the change brought about by such process are more than what was the issue before their Lordships of the High Courts and the Supreme Court. Here, the case of the assessee is that in the cases decided by the High Courts and the Supreme Court, referred to above, the processing ended with stage 5 as enumerated in para 25 above whereas in the case of the assessee the processing consists of 15 stages, a stated in para 25 above. At the 7th stage, shrimps are subjected to chemical treatment with STPP (sodium tri-polyphosphate), salt, colour and water and the mixture is stirred continuously for four hours inside a stirring machine. After that, the shrimps are taken out and drained and they are passed through the dewatering elevator to the cooker. Inside the cooker the shrimps are blanched/cooked and then the blanched shrimps are dumped into chilled water for cooling and are drained and passed through infeed shaker for separating each shrimp from others. Such shrimps are then passed through the IQF (Individually Quick Frozen) Freezer where each shrimp is individually forzen at 28 degree C. Keeping in mind the above system of processing, let us now come to the decision in the case of Aspinwall & Co. Ltd. (supra) which is the latest decision of the Supreme Court as to what amounts to ‘manufacturing’. The issue before their Lordships of the apex Court was whether curing of coffee i.e., process of manufacturing coffee beans from raw berries, amounts to manufacturing activity or not. Their Lordships discussed each stage of the process involved in curing coffee. The same is reproduced below for easy reference :
“It was noticed that the Tribunal had inspected the factory premises to have a first-hand knowledge of the operations carried on by the assessee-company. The inspection was made by the Tribunal in the presence of both the parties through their representatives. The factual observation of the Tribunal as a result of the inspection found that the following nine processes are involved in curing of coffee :
(1) Receipt of coffee from the estates;
(2) Storage of coffee in covered godowns;
(3) Drying of coffee to the required standards prescribed by the coffee board in drying yards;
(4) Hulling/pealing/polishing;
(5) Grading of coffee mechanically;
(6) Colour sorting;
(7) Garbling and manual grading;
(8) Out-turning of garbled coffee; and
(9) Bulking.
The Tribunal also found that to deal with the nine processes, the assessee has the factory area where godowns for storage of uncured/clear coffee, coffee drying yards, machine rooms, garbling sheds, etc. are located.
Curing operations start with the drying of coffee in the drying yards in bright sun light. Then comes the stage of hulling. It means, the outer husk of the coffee bean has to be carefully removed, if necessary, by mechanical operations
to obtain coffee seeds which can further be processed. The Tribunal found that in the hulling process pre-cleaning, destoning, elimination husk, separation of unhulled beans and polishing is done. Thereafter gradation is done. The process of gradation requires separation of good coffee for the purpose of grading by a process of what is known as garbling/manual grading. At times, the process of gradation is done by the mechanical means as well. After grading the polishing is done on the basis of grading. The Tribunal held that in this process the assessee was involved in the activity of manufacturing the coffee beans from the raw material plucked from the plant.”
After discussing the issue, their Lordships differed from the opinion of the Hon’ble High Court and upheld the decision of the Tribunal wherein the Tribunal held that the above process amounts to a manufacturing activity.
27. Now coming to the process undertaken by the assessee, if we analyse it as given at pp. 16 & 17 above, we are nearer to the truth if we hold that it amounts to manufacturing. It is true, the Hon’ble High Court of Kerala held in the case of Casino (P) Ltd. (supra) that “It would not be appropriate in the ordinary sense to refer to the production of food materials in a hotel as manufacture. The activity carried on in preparing articles of food from raw materials in a hotel would not constitute “manufacture or processing of goods” within the meaning of Section 2(6)(d) of the Finance Act, 1968. A company which carries on such activity will not fall within the definition of an “industrial company” under that provision.” The decision rendered by the Kerala High Court in the above case was in a particular circumstance on the basis of the facts. Assessee was a hotel. They were preparing foods from raw materials. On the basis of such preparation, the hotel claimed that they are manufacturing foods and they are an industrial undertaking and this claim was negatived by their Lordships. But, it is very difficult to equate a fish processing industry with the preparation of food items in a hotel.
28. In the instant case of the assessee it is to be noted that the assessee has imported machinery worth Rs. 7 crores for the processing undertaken by the assessee. This machinery is used for the assessee’s processing. Hence, it is difficult to hold that the processing undertaken by the assessee is only cutting of heads and tales, peeling, deveining, cleaning and then freezing the shrimps assessee is doing more than the above in its processing. As enumerated at pp. 16 & 17 above at the 7th stage, the shrimps are subjected to chemical treatment with STPP (sodium tri-polyphosphate), salt, colour and water and the mixture is stirred continuously for four hours inside a stirring machine. Shrimps are then taken out for dewatering. In the next stage, the shrimps are put in a cooker where they are blanched/cooked and after drying them, they are frozen at 28 degree C, In IQF Freezer before packing. In the circumstances, it cannot be said that the processing done by the assessee is merely cleaning of fish and putting it is a freezer. In the case of Aspinwall & Co. Ltd. (supra) at p. 328 of the report, the Hon’ble Supreme Court has referred to its decision in Dy. CST v. Pio Food Packers (1980) 46 STC 65 wherein the Court while determining as to what would amount to a manufacturing activity, held that the test for determination whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer
be regarded as the original commodity, but is recognised in the trade as a new and distinct commodity. It was also observed at p. 65 as under :
“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 served stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity, experiences a change. 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 a new and distinct article that a manufacture can be said to take place.”
Adverting to the facts in the case of Aspinwall & Co. Ltd. the assessee after plucking or receiving the raw coffee berries makes it undergo nine processes to give it the shape of coffee beans. Their Lordships held that the net product was absolutely different and separate from the input. The change made in the article results, in a new and different article which is recognised in the trade as a new and distinct commodity. Their Lordships observed that coffee beans have an independent identity distinct from the raw material from which is was manufactured. A distinct change comes about in the finished product, held their Lordships. Their Lordships rejected the contention of the Revenue that “the assessee was doing only the processing work and was not involved in the manufacture and producing of a new article cannot be accepted. The process is a manufacturing process when it brings out a complete transformation in the original article so as to produce a commercially different article or commodity. That process itself may consist of several processes. The different processes are integrally connected which results in the production of a commercially different article. If a commercially different article or commodity results after processing, then it would be a manufacturing activity. The assessee after processing the raw berries converts them into coffee beans which is a commercially different commodity. Conversion of the raw berry into coffee beans would be a manufacturing activity”.
If we compare the processing that the assessee has undertaken in the process of making the food fit for human consumption, we have to hold that the process done by the assessee before us amounts to manufacture for the reason that the fish which was not fit for human consumption after the entire process is semi-cooked and can be served. The meat which was hot fit for human consumption can now be consumed without further processing. In the case CIT v. Jalna Seeds Processing & Refrigeration Co. Ltd. (supra), the Hon’ble Bombay High Court held that the raw seeds which can be consumed by human beings and animals, after being subjected to the process, are no longer edible and can be used only for cultivation.
The High Court held that this process amounts to manufacture. If that be so, the processing which makes something which is not fit for human consumption at the input stage makes it fit for human consumption logically amounts to manufacture. If the above tests are applied in the instant case of the assessee, we are of the view that after going through the process enumerated at pp. 16 & 17 above, the raw material i.e., fish has undergone a
change. Though the name fish survives, it cannot be said that the input and the output are the same. The above finding is also supported by the certificate issued by the Marine Products Export Development Authority. The certificate reads as under :
“Ref. : 10/8/PSI/2001/MS-HO
4th Jan., 2001
TO WHOMSOEVER IT MAY CONCERN
This is to certify that Individually Quick Frozen (IQF) cooked shrimp is a processed and preserved product made out of raw shrimp and both are commercially different.
Sd/-
(D.B. PRASAD)
Director (Marketing)”
The processed shrimps and the raw shrimps are not one and the same. The processed shrimps in the instant case have undergone changes because of the different stages of processing as enumerated on pp. 16 & 17 above. So, it will be a too simplistic way of telling that there is no difference between the raw shrimps and the processed shrimps or they are one and the same. It is something like telling that an infant is also a man. It is true, as human species, both child and man are one and the same; but the changes that have taken place both physically and mentally cannot be lost sight of, nor can be ignored. In these circumstances, we have no hesitation in holding that the process undertaken by the assessee amounts to manufacture, and the assessee is entitled to the benefit under Section 80-I as rightly held by the first appellate authority. Accordingly, this ground of the Revenue fails.
28.1. The ground raised in the assessee’s cross-objection is directed against the disallowance of proportionate interest in respect of money advanced for various other activities enumerated in ground 2.1 of Revenue’s appeal. We have decided the issue while dealing with the Revenue’s appeal hereinabove. As a result, the cross-objection has become infructuous and it is dismissed as such.
29. In the result, both the Revenue’s appeal and the assessee’s cross-objection are dismissed.