ORDER
G. Santhanam, Accountant Member
1. In all these appeals, the only point at dispute is whether the machineries employed in the manufacture of beer come in contact with corrosive chemicals so as to be entitled to higher rate of depreciation.
2. The assessee is a limited company engaged in the manufacture and sale of beer. The assessee claimed depreciation at 15% on machinery coming into contact with beer which was said to be corrosive in nature. In the absence of evidence to substantiate the claim set up by the assessee, the Income-tax Officer restricted the allowance to 10% only. Before the Commissioner of Income-tax (Appeals), it was claimed that beer itself is acidic and corrosive. The CIT( Appeals) held that even if it were to be so, corrosion would take place only at the stage of fermentation and storage. For purposes of claiming higher rate of depreciation, it was his view that the chemicals used should form an ingredient in the process of manufacture and such ingredients should be corrosive in nature and not the product itself. Hence, in view of the decision of the Punjab and Haryana High Court in CJT v. Saraswati Industrial Syndicate Ltd. [1982] 136ITR 758, he rejected the assessee’s claim.
3. Sri C.V.K. Prasad, learned counsel for the assessee, submitted that there are several machineries involved in the manufacture of beer. The raw material itself, which is an extract of barley malt, is diluted and treated with water in the first stage of the manufacture. At the second stage sugar and ‘hops’ are added and this mixture is corrosive in nature. He also explained the manufacturing process by referring to the Flow Chart at page 8 of the paper book, and submitted that acidity is also corrosive in nature and hence the assessee was entitled to higher rate of depreciation. It was his further submission that carbon dioxide is ejected and carbonated at CO2 Receiver and thus the raw material in several stages of the manufacture comes into contact with corrosive chemicals as a result of which the machineries also come into contact with corrosive chemicals. He sought to distinguish the decision of the Punjab and Haryana High Court cited supra on the ground that in that case it is only at the final stage of the manufacture some acid was mixed for filtration and special leave of appeal to the assessee was granted against that judgment in 130 ITR statute 30. In the assessee’s case, the raw material itself is corrosive in nature and it passes through several machineries and acquires more and more corrosive traits in the course of manufacture before it emerges into consumable beer. To a question from the Bench as to whether the beer itself is corrosive, he submitted that in the final stages of its manufacture, the corrosive nature disappears, but not in the earlier stages of production, and that if beer is corrosive in nature, it would be unfit for human consumption.
4. Sri M.L. Kuppuswamy, learned Senior Departmental Representative, relied on die decision of the Punjab and Haryana High Court. He submitted that die words “corrosive chemicals” employed in entry 2B(7) of para 3 of Part I of Appendix I to Income-tax Rules, 1962, contemplated only tree chemicals which are introduced as a separate ingredient and do not refer to non-free chemicals of corrosive element. As the beer is meant for human consumption, it cannot retain its corrosive character as most of its effect would have been lost and thus the case is on a par with the one decided by the Punjab and Haryana High Court
5. Having found that the authorities below have not examined the machine functions and the nature of machineries employed, whether any corrosive chemicals were used in the manufacture and if so at what stage of the manufacture they came into contact with the machineries, the Tribunal felt that it was a fit case for an on-the-spot inspection of the machineries to collect evidence on the above points. Accordingly, an inspection of the factory premises was arranged and the Bench along with the assessee’s counsel and the departmental representative, visited the factory premises, inspected the machineries and also recorded statement from the production-in-charge giving an opportunity to the departmental representative assisted by Sri L. Bhushi Reddy B.Sc., Government Chemical Examiner for Excise, Kakinada, to cross-examine the witnesses produced on behalf of the assessee. Their statements are on record.
6. A copy of the flow chart is annexure to this order. Sri Ravindranath in his deposition stated that the raw material is an extract of Barley malt which contains Maltose and traces of organic acids like lactic acid with a PH value of approximately 5 and the dilution is made to bring down its specific gravity to about 1040, i.e., approximate 10% solution, and the Malt Extraction Dilution gadget is made of aluminium of 5 m thickness. At the MV cum Boiling Copper, the second stage in the process, the diluted solution is boiled continuously. The vessel is jacketed and insulated. The temperature of the steam is 120°C. Boiling is done here for imparting the bitterness and the characteristic aroma from Hops and also to remove coagulable proteins from Malt Extract. While boiling is done, lactic acid and chemicals like calcium chloride, sodium chloride and gypsum are added to bring down the PH of the solution to about 5.2 which is ideal for precipitation of the proteins and these chemicals are added to give the mineral constituent later required for fermentation. To a question as to from which stage exactly the acidity starts in the process of manufacture of beer, the answer was: “It starts right from Malt Extract Dilution Tank” (Q. 12 and the answer thereto). Malt Extraction Dilution Tank, which is the first stage of manufacture, has been changed twice in a period of 5 years and Boiling Copper was repaired twice in five years. The third machine is Hops Strainer which separates the spent Hops from the liquid and the liquid at this stage is known as Wort. Wort is acidic in nature with a PH value of 5 to 5.2 with traces of organic acids like lactic acid. The fourth machine is known as Whirlpool and its function is to get a high whirling motion of the Wort and the clear Wort will be drawn out. The Whirlpool is made of aluminium of 10m thickness and was not replaced during 10 years. Plate Heat Exchanger is the fifth machine used to cool the Wort from approximately 100°C to 7.5°C by a counter current of water and chilled brine. Brine means a solution of 12-15% sodium chloride i.e., common salt The Starting Tank, which is the sixth in order, will hold the Wort for about 12 to 18 hours and is made of mild steel of 8m gauge. It is sand blasted inside and epoxy coated in order to remove rust and to have an even surface. The epoxy coating is done to prevent the liquid coming into contact with the metal. Next come the fermenters which are made of mild steel. They are jacketed through which chilled brine passes to keep the fermenting Wort cool at 10°C. These tanks are insulated with Thermocol and plastered with cement to minimise heat loss and the fermentation is an exothermic reaction whereby the fermentable sugars present in the Wort are converted into alcohol and carbon dioxide by yeast. The end-product from the fermentation tank is called beer.
7. When the fermentation is over, the beer is cooled to 0°C to allow the yeast to settle down at the bottom of the fermenters and the young beer is transferred into storage tanks maintained at 0°C. There are 17 such storage tanks. They are made of mild steel of 8m gauge and the chemical properties of the young beer are alcohol, captured carbon dioxide which is self-generated during fermentation and organic acids like lactic acid and traces of acetic acid. To a question as to what are the chemical properties of beer which are corrosive in nature, the answer was as follows:
The carbon dioxide contained and the PH itself, which would be too low – between 3.9 and 4.3, are corrosive.
To another question about the percentage of acid in the beer, the answer was “only 0.1%”. The beer stored in the tanks will be filtered only as and when required. The function of the Keiselghur Filter, the ninth machine in order, is to remove the suspended matters like yeast and proteins from the beer. The Final Filter, another machine, filters the beer coming out of the Keiselghur Filter to make it free from micro-organisms. At Bright Beer Tank, the polished final beer is stored into which the carbon dioxide collected and compressed from the fermentation stage is injected back to give the thirst quenching property and also to expel any captured air which might spoil the life of the beer. From the Bright Beer Tank, the beer goes to the bottling machine. The Washing Machine is intended to wash the bottles and sterilise them with a 3% hot solution of caustic soda and other detergents like soda ash, tri-sodium phosphate, sodium metasilicate etc. The beer is bottled in the Filler and in the Pasteuriser, the filled bottles are pasteurised, a process by which the spoilage organisms are killed by slowly heating the beer to about 62°C, holding the beer at this temperature for about 20 minutes and then slowly cooling back to room temperature. To a question up to what stage there can be corrosion in the machinery, the answer was that there will be possible corrosion only up to the pasteurisation stage.
8. The cross-examination was done by Sri P. Radhakrishna Murty, learned departmental representative. To a question whether there are standards scientifically recognised as definitely corrosive in relation to different metals having regard to their capacity for resistance to corrosion, the answer was that the deponent was not aware of any standards having been prescribed for different metals, but anything less than PH7 tends to corrode. To another question as to which specific parts of the plant and machinery are exposed to corrosion, or from what point or stage of process onwards corrosion starts, the deponent stated that “All parts of the machinery come in contact with the corrosive substance during the process. But, the degree of corrosion varies from machinery to machinery. To maximum corrosion is effected from the Malt Extraction Dilution Tank to the Pasteuriser whereas the stainless steel parts are less prone to corrosion.” Question 3 and the answer thereto in the cross-examination are as follows:
Q. In the above deposition, you stated that only 0.1% of the beer constitutes acid portion. When we inspected the machinery, we also found that special processes and gadgets are used like epoxy coating, to reduce or avoid corrosion. Do you still consider that the whole plant and machinery is exposed to corrosion.
A. The corrosion is not entirely due to the acid content in beer. It is the buffering and the PH which tend to corrode metals. For instance, water is not having any acid content in it, even then it tends to corrode mild steel quickly. As regards the; preventive measures taken to reduce the corrosion. I agree that the epoxy coating inside the fermenters and the storage tanks would prevent the beer inside corroding the metal from inside. At the same time, the tanks are jacketed through which chilled salt solution is passing which is highly corrosive and it tends to corrode the tanks from outside which cannot be prevented by any such measures, as it will reduce the heat transfer. The thermocol lining is done not to prevent the corrosion but for preventing heat loss.
9. We have thus described the functions of the several machineries, the raw material contained and the change it undergoes in the process of manufacture into beer. From an analysis of the above features, we are inclined to hold that though the raw material, viz., Barley Malt Extract, which is used in the first stage of the manufacture, contains traces of organic acids with a PH value of approximately 5: we have been told, and it is not controverted, that PH7 is said to be neutral and less than 7 is acidic and tends to corrode. The PH value of barley malt extract is approximately 5 at the first stage of the manufacture. At boiling stage lactic acid and some chemicals are added. When the raw material is at the Hops strainer stage, it transforms into Wort with a PH value of 5 to 5.2. In fact, at the Starting Tank, epoxy coating is done in order to prevent the liquid coming in contact with the metal and thus to avert corrosion, but then the tanks are jacketed through which chilled brine is allowed to pass and such brine is highly corrosive and the tanks get corroded from outside which cannot be prevented by any protective measures. Brine is a solution of 12-14% of sodium chloride or common salt and it is circulated through the jacket in fermenters where the conversion of the Wort into alcohol and carbon dioxide by yeast takes place. As for the chemical properties of beer which are corrosive in nature, it has been stated that carbon dioxide and the PH itself, which is between 3.9 to 4.3, are corrosive. So, from a review of the nature of the raw material and the chemicals used, we hold that the raw material undergoes chemical changes, and certain chemicals are added in the course of manufacture with the result that the machineries come in contact with corrosive chemicals, but that is not the case with the following machineries, viz., Pasteuriser (item No. 16) CO2 Receiver (item No. 11), Compressor (item No. 12), Washing Machine (item No. 14), Labelling Machine (item No. 15) and Packing Machine (item No. 16). All other machineries come in contact with corrosive chemicals either in the form of raw material or the transformation it undergoes in the process of manufacture of beer and also the addition of certain chemicals described here to before. Thus, we hold that except for the machineries indicated above, the assessee is entitled to higher rate of depreciation in respect of other machineries.
10. In the case decided by the Punjab and Haryana High Court (cited supra), it was argued that sugarcane juice, which comes in contact with the machinery, contains lime and sulphuric acid which are corrosive in nature and, therefore, the was entitled to higher rate of depreciation. However, the High Court found as a matter of fact that lime and sulphuric acid were mixed with the sugarcane juice only to filter and purify the juice but by their mixture the juice itself was not convened into a chemical. Sri Kuppuswamy submitted, on an analogous reasoning, that the beer, though it contains certain acidity and chemical properties, by itself it does not become a corrosive chemical as otherwise it would be unfit for human consumption. We are unable to subscribe to this point of view. The opinion of Sri Jaipal Singh Datta3.Sc.,B.Sc. (Mech. Engg.), Dipllng-Brewery (West Berlin), dated 10-7-1984, furnished by the assessee in the paper book, is as follows:
‘Certified that Beer is Corrosive’. PH – PH value of Beer ranges from 3.0 to 4.8 (1) the PH of Hydrochloric Acid or Sulphuric Acid is Approx. 2.0, Liquid having PH less than 7.0 is acidic and more than 7.0 is Alkaline. The lower is PH more is the corrosiveness. Any liquid having a PH less than 7 tends to be corrosive. As beer is acidic in nature it is corrosive, Beer drops falling continuously on plain R.C.C. floor converts it into rough and porous. Beer is never consumed in iron or copper or metal glasses.
Moreover Beer contains carbon dioxide gas which forms solution of Carbonic acid. Beer contains lactic acid, Acetic Acid, Amino acids etc., known as organic acids. Due to all these acids PH of beer is low. (2) which makes beer corrosive …(3) Apart from above, above buffer solution containing volatile compounds make it more corrosive (4)…
Considering the above facts, it proves beyond doubt that beer is corrosive in nature.
This opinion is based on:
(1) Indian Standard Specification for Beer I.S.A. 3865 – 1966 page 5
(2) “Arbeits Borsahriften Sur Che lcech braidechnischan Betricbecentrelle” by Karl Silbereisen and Hans Joachim Beiling 1963 page 116-Why PH of Beer is less.
(3) Malting and brewing science by J.S. Hoough, D. E. Briggn and R. Stevens -1971 page 616 etc.
Even though beer is corrosive in nature as stated above, vis-a-vis the metals with which it comes in contact, the same cannot be said when the beer undergoes digestion involving chemical reactions and changes and, therefore, the beer, though corrosive in nature, could still be found to be fit for human consumption. Besides, the assessee based its claim on the nature of the machinery employed and the raw material used and the chemical changes it undergoes and the chemicals added in the course of manufacture of beer which is the end-product. From the on-the-spot inspection of the machineries and the evidence collected by us in the course of such inspection, we are satisfied that the assessee’s case is on a differnt footing from the facts of the case before their Lordships of the Punjab and Haryana High Court. In this view of the matter, we reject die contention of the learned departmental representative.
11. In the light of the foregoing discussion, we direct the Income-tax Officer to allow depreciation at 15% on machineries other than those on which only the normal rate of depreciation will be available as indicated by us in para 9.
12. The appeals were finally heard on 12-8-1988. Subsequent to that, the revenue has filed an application for the admission of additional evidence in the form of an opinion given by the Government Chemical Examiner for Excise through his letter dated 14-6-1988 received by the department on 26-6-1988. The Government Examiner was present at the time of our inspection of the factory on 11-6-1988 along with Sri P. Radhakrishna Murty, learned departmental representative. The Government Examiner did not choose to cross-examine the deponent, nor did he choose to give any evidence before us. His opinion was also received by the Tribunal only after the final hearing of the case. In the circumstances, we are constrained to decline to admit this additional evidence.
13. In the result, the appeals are partly allowed.