JUDGMENT
B.A. Khan, Actg. C.J.
1. This appeal challenges order dt. 25th April, 2005, passed by the Income-tax Appellate Tribunal, Amritsar Bench (Tribunal), in ITA No. 495/Asr/2004 [reported as Pankaj Jam v. ITO (2005) 97 TTJ (Asr) 28–Ed.] holding respondent -assessee entitled to deduction under Section 80IB of the IT Act.
2. The assessee is engaged in preparation of bread at Gangyal, Jammu, under the name and style of Aagam Food Industries. It is registered with the Directorate of Industries, holding a power license of 104 HP, as an industry. The unit is installed in industrial area and has employed more than ten workers for making bread.
3. The assessee showed profits of Rs. 16,06,870 and claimed deduction under Section 80IB of the IT Act on the plea that he was converting raw food materials like maida, sugar, yeast, oil into bread and was, in this way, manufacturing and producing a new product.
The AO, however, disallowed the deduction claimed by the assessee, by placing reliance on the Supreme Court judgment in Indian Hotels Co. Ltd. and Ors. v. ITO and Ors. , holding as under:
Keeping in view the above facts, it is (held) assessee does not qualify for deduction under Section 80IB of the Act as it is neither manufacturing or producing any article or thing which is a pre-requisite for any assessee to claim the deduction. Accordingly, the deduction claimed by the assessee to the extent of Rs. 16,06,870 is hereby withdrawn and added back to the income of the assessee. Penalty proceedings under Section 271(1)(c) of the Act for furnishing inaccurate particulars of income are being initiated on this account.
4. The respondent-assessee took an appeal against this before the Commissioner of Income-tax (Appeals) [CIT(A)], distinguishing the Supreme Court judgment (supra) and explaining the process of converting the raw material like maida, yeast, etc. into bread. But the CIT(A) also followed the view taken by the AO and disallowed the deduction in the following terms:
… After considering the case law relied upon by the AO referred to above and also after considering the objection of the appellant’s counsel carefully, I am constrained to hold that the appellant’s activity in converting the raw foodstuffs i.e., maida, sugar, yeast, etc. into bread can at best be said to be an activity of processing of food and not that of manufacture of food. Even if appellant’s contention regarding use of machinery at various stages of production is taken into consideration, still the appellant’s case remains to be that of food processor and not that of manufacturer of food. The above finding is in consonance with the decision of the Hon’ble Supreme Court in the case of Indian Hotels Co. Ltd. and Ors. v. ITO and Ors. as well as the decision of Hon’ble Madras High Court in the case of CIT v. P. Devasahayam . Further, once the activity of processing of baking, packing, etc. of bread is over, it does not make any difference whether after such processing the goods are sold through the sales/delivery network or directly or indirectly to the customers. In view of the above, the AO was justified in rejecting the appellant’s claim of deduction under Section 80IB amounting to Rs. 16,06,870 and, therefore, this issue is decided against the appellant…
5. The assessee, thereafter, carried the matter to the Tribunal and the Tribunal reversed the orders passed by the AO and CIT(A), distinguishing the Supreme Court judgment in Indian Hotels Co. Ltd. case (supra) and held as under:
Considering the above discussion and the decision of the Hon’ble jurisdictional Jammu & Kashmir High Court and the principles laid down by the Hon’ble Supreme Court mentioned above, we are of the view that the assessee was manufacturing bread which is a new and distinct commodity having distinct name, character and use and, therefore, the assessee is an industrial undertaking within the meaning of Section 80IB of the IT Act. The assessee is, therefore, entitled for deduction under Section 80IB of the Act. We accordingly, set aside the orders of the authorities below and allow the appeal of the assessee.
6. The Revenue has now filed this appeal calling in question the impugned order dt. 25th April, 2005, passed by the Tribunal.
7. The case set up is the same, viz., that conversion of maida, sugar, yeast, etc. into bread was not a manufacturing activity but was a processing activity and, therefore, the respondent-assessee was not entitled to deduction under Section 80IB of the Act.
8. The core issue that falls for determination is whether the making of bread by the respondent-assessee from maida, sugar and other ingredients amounted to manufacturing of bread or processing of bread and whether the assessee was an industrial undertaking ?
9. Since the benefit is claimed under Section 80IB, it becomes necessary to reproduce the relevant part of this section which reads:
80-IB. Deduction in respect, of profits and gains from certain industrial undertakings other than infrastructure development undertakings.–(1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in Sub-section (3) to (11) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section.
This provision permits a deduction in respect of profits and gains from certain industrial undertakings on satisfying the requirements/conditions laid down therein. Shorn of details and broadly it provides for deduction of profits and gains made by an industrial undertaking if it manufactures or produces a new article or thing. Since it is not anybody’s case here that the unit of respondent-assessee was hit by any other condition laid down by this section, therefore the whole controversy turns on whether it was engaged in manufacture or production of an article or a thing and whether it was an industrial undertaking ?
10. Dealing with whether it was engaged in the activity of manufacture or production of bread, it need be hardly pointed out that word ‘manufacture’ has invited wide interpretation from time-to-time. Its dictionary meaning is “to transform or fashion raw materials into a changed form for use”. In common parlance, it means production of articles from raw materials like giving these raw materials new forms, qualities, properties or combinations whether by hand or by a mechanical process. It is generally understood as meaning to bring into existence a new substance, implying a change which change is brought about by treatment, labour and manipulations.
11. The Supreme Court had the occasion to interpret this word ‘manufacture’ in several of its judgments. In CIT v. N.C. Budharaja & Co. and Anr. , it held that the test for determining 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. Similarly, in Kores India Ltd. v. CCE , it was held that cutting jumbo rolls of typewriter/telex paper into smaller rolls amounts to manufacture since distinctly identifiable article having distinct name, function and use has arisen.
12. Even in Indian Hotels Co. Ltd. case (supra), the Supreme Court interpreted the word ‘manufacture’ to mean production of a new article or bringing into existence some new commodity by an industrial undertaking as distinct from the processing activity. It laid down thus:
…The word ‘manufacture’ has various shades of meaning but unless defined under the Act it is to be interpreted in the context of the object and the language used in the sections. In the context of the provisions which deal with grant of investment allowance or deduction under Section 80J it is apparent that it is used to mean production of a new article or bringing into existence some new commodity by an industrial undertaking. It would not be applicable in cases where only processing activity is carried out. Further, such production activity must be by an industrial undertaking and not by the assessee having mainly trading activity. In case of a hotel business there is no question of manufacturing or producing pulses, wheat, rice, meat or such other items but what is done is, from such raw materials eatable foodstuff is prepared. The foodstuff prepared by cooking or by any other process from raw materials such as cereals, pulses, vegetables, meat or the like cannot be regarded as commercially distinct commodity and it cannot be held that such foodstuff is manufactured or produced….
13. Whether conversion of maida, sugar, yeast, etc. into bread amounts to manufacturing and production of bread in terms of Section 80IB is the question.
14. The process admittedly envisages nine steps whereby maida, sugar, yeast and other ingredients are processed and put to pass through various stages of mechanical process with the aid of power, like mixing, rounding, proving, moulding, fermenting, baking, cooling, slicing, etc. If the test laid down by the Supreme Court in its various judgments was applied to this process, we are left with no doubt that this was a manufacturing process and the assessee was manufacturing bread and not processing it, because the whole process of conversion of the raw material undoubtedly leads to production of a new thing, i.e., the bread in place of the original ingredients like maida, sugar, yeast, etc. The raw material before processing is altogether different and after its conversion, its nature, character and use undergoes a total change leading to the production of a new thing-bread. Therefore, it cannot be said that unbaked materials i.e., maida, sugar, yeast, etc. retain their character even after conversion into a bread, involving processing only.
15. Whether the assessee’s unit was an industrial undertaking does not pose much of the problem. The word ‘industrial undertaking’ as defined in Section 33B means any undertaking, which is mostly engaged in generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. As has been noticed earlier, the assessee’s unit stands already registered with the Directorate of Industries holding power license and is also registered under the Factories Act and, therefore, there is thus no doubt that it was an industrial undertaking within the meaning of Section 80IB of the Act engaged in the manufacture activity and, therefore, was satisfying the requirements of the relevant provision, entitling it to the deduction of the profits in terms of Section 80IB (supra).
16. The only question that remains to be seen is whether the reliance placed by the AO and the CIT(A) on the Supreme Court judgment in Indian Hotels Co. Ltd. (supra) was in order.
17. We have gone through this judgment which was dealing with the claim of investment allowance and deduction under Section 80J of the IT Act.
In this case, the company, which was running a flight kitchen had claimed benefit of Section 80J on the plea that it was a separate industrial undertaking as different from hotel which it was running and that it was engaged in manufacture of food packages on a large, organised and mechanised basis for the use of various international airlines and, therefore, was entitled to get the benefit of Section 80J (and) investment allowance. The Supreme Court overruled this plea that it was a separate industrial undertaking within the meaning of the relevant provisions or that it was engaged in manufacturing or production of food packages and, on the contrary, held that it was engaged in processing and trading. What appears to be noted is that this judgment of the Supreme Court was limited to the flight kitchen operated by the Indian Hotels Co. Ltd. and no other activity, and it was in that context that the Court held:
… For getting benefit of deduction of investment allowance, the requirement is–assessee-company must be engaged in the business of manufacture or production of any article or thing. In case of preparing food packages or selling the same or preparing foodstuffs for serving in the hotel there is no question of manufacture or production. The raw material is at the most processed so as to make it, eatable. The word ‘manufacture’ has various shades of meaning but unless defined under the Act it is to be interpreted in the context of the object and the language used in the sections. In the context of the provisions which deal with grant of investment rebate or deduction under Section 80J it is apparent that it is used to mean production of a new article or bringing into existence some new commodity by an industrial undertaking. It would not be applicable in cases where only processing activity is earned out. Further, such production activity must be by an industrial undertaking and not by the assessee having mainly trading activity…. In our view, same would be the position with regard to the foodstuff served or sold by the hotels. The foodstuff prepared by cooking or by any other process from raw materials such as cereals, pulses, vegetables, meat or the like cannot be regarded as commercially distinct commodity and it cannot be held that such foodstuff is manufactured or produced.
18. A careful reading of this judgment would show that it had several distinguishing features, which were not attracted in the present case. For example, it was dealing with a flight kitchen which was being run along with hotel and was ancillary to the hotel business and that is why it was not held to be a separate industrial undertaking within the meaning of Section 80J. Similarly, the Supreme Court found that the Indian Hotels Co. Ltd. was engaged in the business of trading activity and not in any industrial activity as such, and was preparing foodstuff for consumption which did not result in the manufacture or production of any new article or thing because all food packages prepared in the flight kitchen involved only the activity of processing and not manufacturing, and original eatables retained their nature and character, and were not transformed into a new product.
It was in that context that the Court quoted from a decision of the Supreme Court of United States in East Texas Motor Freight Lines v. Frozen Food Express 100 L. Ed. 917, which reads as under:
…them is hardly less difference between cotton in the field and cotton at the gin or in the bale or between cottonseed in the field and cottonseed at the gin, than between a chicken in the pan and one that is dressed. The ginned and baled cotton and the cottonseed, as well as the dressed chicken, have gone through a processing stage. But neither has been manufactured in the normal sense of the word.
19. Viewed thus, we have no doubt that both AO and CIT(A) had placed wrong reliance on the Supreme Court judgment (supra) and the view taken on that consequently becomes unsustainable.
20. We, accordingly, hold that the respondent-assessee was an industrial undertaking engaged in the manufacture and production of bread and was thus entitled to the benefit of deduction under Section 80IB of the Act.
This appeal accordingly fails and the order passed by the Tribunal, dt. 25th April, 2005, is affirmed.
