REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.8036 OF 2009
(Arising out of S.L.P.(C) No.9812/2008)
Income Tax Officer, Udaipur ...Appellant(s)
Versus
M/s Arihant Tiles & Marbles (P) Ltd. ...Respondent(s)
W I T H
CIVIL APPEAL NOS.8037 TO 8044 OF 2009
(Arising out of S.L.P.(C) Nos.1685, 1691, 2577, 3711, 5283,
16674, 20789 & 20619 of 2009)
J U D G M E N T
S.H. KAPADIA, J.
Leave granted.
In this batch of Civil Appeals, a common question
of law which arises for determination is: whether
conversion of marble blocks by sawing into slabs and
tiles and polishing amounts to “manufacture or
production of article or thing” so as to make the
respondent(s)-assessee(s) entitled to the benefit of
Section 80IA of the Income Tax Act, 1961, as it stood at
the material time.
The lead matter is Civil Appeal arising out of
S.L.P.(C) No.9812/2008 in the case of Income Tax
Officer, Udaipur Vs. M/s. Arihant Tiles & Marbles (P)
Ltd.
The assessee, during the relevant Assessment Year
2001-2002, was engaged in the business of
manufacture/production of polished slabs and tiles which
the assessee exported (partly). The prime condition for
allowing deduction under Section 80IA, as it stood at
the material time, was that industrial undertakings
should manufacture or produce any article or thing, not
being any article or thing specified in the list in
Eleventh Schedule of the Income Tax Act, 1961.
The question before us is: whether on facts and
circumstances of the case(s) the activities undertaken
by the respondent(s) herein would fall within the
meaning of the words “manufacture or production” in
Section 80IA of the 1961 Act?
To answer the above issue, it is necessary to
reproduce the details of stepwise activities undertaken
by the assessee(s) which read as follows:-
“i) Marble blocks excavated/extracted
by the mine owners being in raw
uneven shapes have to be properly
sorted out and marked;
ii) Such blocks are then processed on
single blade/wire saw machines
using advanced technology to square
them by separating waster material;
iii) Squared up blocks are sawed for
making slabs by using the gang saw
machine or single/multi block
cutter machine;
iv) The sawn slabs are further
reinforced by way of filling cracks
by epoxy resins and fibre netting;
v) The slabs are polished on polishing
machine; the slabs are further edge
cut into required dimensions/tiles
as per market requirement in
prefect angles by edge cutting
machine and multi disc cutter
machines;
vi) Polished slabs and tiles are buffed
by shiner.”
In addition to the above activities, it may also be
noted that the assessee(s) has been consistently
regarded as a manufacturer/producer by various
Government Departments and Agencies. The above
processes undertaken by the respondent(s) have been
treated as manufacture under the Excise Act and allied
tax laws.
At the outset, we may point out that in numerous
judgments of this Court, it has been consistently held
that the word “production” is wider in its scope as
compared to the word “manufacture”. Further, Parliament
itself has taken note of the ground reality and has
amended the provisions of the Income Tax Act, 1961 by
inserting Section 2(29BA) vide Finance Act, 2009, with
effect from 1st April, 2009.
We quote herein-below the relevant provisions of
Section 2(29BA) as also the relevant provisions of
Section 80IA(2)(iii) of the Income Tax Act, 1961.
“2(29BA) “manufacture” with its
grammatical variations, means a
change in a non-living physical
object or article or thing,-
(a) resulting in transformation of
the object or article or thing
into a new and distinct object
or article or thing having a
different name, character and
use; or
(b) bringing into existence of a
new and distinct object or
article or thing with a
different chemical composition
or integral structure;”
“80IA(2) (iii) it manufactures or produces
any article or thing, not being any article
or thing specified in the list in the
Eleventh Schedule, or operates one or more
cold storage plant or plants, in any part
of India.”
The Authorities below rejected the contention of
the assessee(s) that its activities of polishing slabs
and making of tiles from marble blocks constituted
“manufacture” or “production” under Section 80IA of the
Income Tax Act. There was difference of opinion in this
connection between the Members of the ITAT. However, by
the impugned judgment, the High Court has accepted the
contention of the assessee(s) holding that in the
present case, polished slabs and tiles stood
manufactured/produced from the marble blocks and,
consequently, each of the assessee was entitled to the
benefit of deduction under Section 80IA. Hence, these
Civil Appeals have been filed by the Department.
Incidentally, it may be noted that some of the
assessees before us are also job workers duly registered
under the provisions of the Excise Act/Rules framed
thereunder. It may also be clarified that in these
cases, we are concerned with assessees who are basically
factory owners and not mine owners. This distinction is
of some relevance when we analyse the various judgments
cited before us fairly by the learned counsel on behalf
of the Department.
The main judgment on which the Department has
placed reliance is the judgment of this Court in Lucky
Minmat Pvt. Ltd. Vs. Commissioner of Income Tax, Jaipur,
reported in (2001) 9 SCC 669. In that case, the
following question came up for consideration before the
Tribunal:
“Whether on the facts and in the
circumstances of the case, the Tribunal was
justified in holding that business activity of
the assessee was in the nature of manufacturing
or production so as to be entitled for relief
under Section 80HH of the Income Tax Act,
1961.”
The assessee in that case had the business of mining of
limestones and marble blocks which thereafter were cut
and sized before being sold in the market. It was held
by this Court that the assessee was essentially in the
business of mining of limestone. It was held that the
activity of excavation will not constitute manufacture
or production. It was further held that even the
activity of cutting and sizing of marble blocks after
excavation would not come within the ambit of expression
‘manufacture’ or ‘production’. In the circumstances,
this Court held that the assessee was not entitled to
the benefit of Section 80HH of the Income Tax Act.
However, this Court distinguished the judgment of the
Rajasthan High Court in the case of CIT vs. Best
Chemical and Lime Stone Industries Pvt. Ltd., reported
in 210 ITR 883 (Raj.). In that case, M/s Best Chemical
was engaged in the business of extracting limestone and
its sale thereafter after converting it into lime and
limedust or concrete which was held to be an activity of
manufacture or production. The activity of conversion
into lime and limedust, according to this Court, in the
case of Lucky Minmat Pvt. Ltd. (supra) certainly
constituted a manufacturing process. It was clarified
in the said case that mere mining of limestone and
marble and cutting the same before it was sold will not
constitute “manufacture” or “production” but conversion
into lime and limedust could constitute the activity of
manufacturing or production. This distinction has not
been taken into account by the Department while
rejecting the claim of the assessee(s) for deduction
under Section 80IA of the Income Tax Act, 1961.
There is one more judgment of which Shri
Bhattacharya, learned Additional Solicitor General,
appearing on behalf of the Department, has placed
reliance. That is the judgment of this Court in
Rajasthan State Electricity Board Vs. Associated
Industries & Anr., reported in AIR 2000 SC 2382. In
that case, the only question that arose for
consideration was whether pumping out water from the
mines came within the meaning of the word manufacture,
production, processing or repair of goods so as to claim
exemption from duty under Notifications issued under
Section 3(3) of the Rajasthan Electricity Duty Act,
1962. In that case, the first respondent was a
registered public limited company, engaged in
excavating stones from collieries and thereafter cutting
and polishing them into slabs. The Rajasthan State
Government levied excise duty under the provisions of
the Act. A Notification dated 23rd March, 1962 was
issued by the State under Section 3(3) of the Act
granting exemption from tax on the energy consumed by a
consumer in any industry in the manufacture, production,
processing or repair of goods and by or in respect of
any mine as defined in the Indian Mines Act, 1923. This
notification was later on superseded on 2nd March, 1963
by which electricity duty came to be remitted in certain
cases. One more notification was issued on 1st November,
1965 once again superseding earlier notifications. By
clause (c) of the said notification, the State of
Rajasthan reduced the duty on the energy consumed in
industries, other than those mentioned in clause (a) of
the notification which are in the manufacture,
production, processing or repair of goods.
The basic controversy which arose for
determination in the said case was whether the activity
of pumping out water from the mines came within the
meaning of the words “manufacture”, “production”,
“processing or repair of goods”. While disposing of
the matter, this Court, vide paragraphs 1 and 10, stated
that the specific case of the company was that the
electrical energy was consumed for pumping out water
from mines to make mines ready for mining activity.
This aspect is very important. It needs to be
highlighted that the case of the company was that
pumping out water from mines to make the mines ready
for mining activity came within the ambit of the term
“manufacture”. This argument was rejected by this
Court, after examining various judgments of this Court
on the connotation of the word “manufacture”. In our
view, the judgment of this Court in Rajasthan State
Electricity Board has no application to the facts of the
present case. Even if one reads paragraph 17 of the
said judgment in the light of paragraphs 1 and 10, it is
very clear that the only activity which came up for
consideration before this Court in the case of Rajasthan
Electricity Board (supra) was the activity of pumping
out water from a mine in order to make the mine
functional. In the present case, we are not considered
with such activity. Therefore, in our view the judgment
of this Court in Rajasthan Electricity Board (supra) has
no application to the facts of the present case.
In the case of Aman Marble Industries Pvt. Ltd.
vs. Collector of Central Excise, reported in 157 ELT 393
(SC), the question that arose for consideration was
whether cutting of marble blocks into marble slabs
amounted to manufacture for the purposes of Central
Excise Act. At the outset, we may point out that in the
present case, we are not only concerned with the word
“manufacture”, but we are also concerned with the
connotation of the word “production” in Section 80IA of
the Income Tax Act, 1961, which, as stated herein-above,
has a wider meaning as compared to the word
“manufacture”. Further, when one refers to the word
“production”, it means manufacture plus something in
addition thereto. The word “production” was not under
consideration before this Court in the case of Aman
Marble Industries Pvt. Ltd. (supra). Be that as it may,
in that case, it was held that “cutting” of marble
blocks into slabs per se did not amount to
“manufacture”. This conclusion was based on the
observations made by this court in the case of Rajasthan
State Electricity Board (supra). In our view, the
judgment of this Court in Aman Marble Industries Pvt.
Ltd.(supra) also has no application to the facts of the
present case. One of the most important reasons for
saying so is that in all such cases, particularly under
the Excise law, the Court has to go by the facts of each
case. In each case one has to examine the nature of the
activity undertaken by an assessee. Mere extraction of
stones may not constitute manufacture. Similarly, after
extraction, if marble blocks are cut into slabs per se
will not amount to the activity of manufacture.
In the present case, we have extracted in detail
the process undertaken by each of the respondents before
us. In the present case, we are not concerned only with
cutting of marble blocks into slabs. In the present
case we are also concerned with the activity of
polishing and ultimate conversion of blocks into
polished slabs and tiles. What we find from the process
indicated herein-above is that there are various stages
through which the blocks have to go through before they
become polished slabs and tiles. In the circumstances,
we are of the view that on the facts of the cases in
hand, there is certainly an activity which will come in
the category of “manufacture” or “production” under
Section 80IA of the Income Tax Act. As stated herein-
above, the judgment of this Court in Aman Marble
Industries Pvt. Ltd. was not required to construe the
word “production” in addition to the word “manufacture”.
One has to examine the scheme of the Act also while
deciding the question as to whether the activity
constitutes manufacture or production. Therefore,
looking to the nature of the activity stepwise, we are
of the view that the subject activity certainly
constitutes “manufacture or production” in terms of
Section 80IA. In this connection, our view is also
fortified by the following judgments of this Court which
have been fairly pointed out to us by learned counsel
appearing for the Department.
In the case of Commissioner of Income Tax vs.
Sesa Goa Ltd., reported in 271 ITR 331 (SC), the meaning
of the word “production” came up for consideration. The
question which came before this Court was whether the
ITAT was justified in holding that the assessee was
entitled to deduction under Section 32A of the Income
Tax Act, 1961, in respect of machinery used in mining
activity ignoring the fact that the assessee was engaged
in extraction and processing of iron ore, not amounting
to manufacture or production of any article or thing.
The High Court in that case, while dismissing the appeal
preferred by the Revenue, held that extraction and
processing of iron ore did not amount to “manufacture”.
However, it came to the conclusion that extraction of
iron ore and the various processes would involve
“production” within the meaning of Section
32A(2)(b)(iii) of the Income Tax Act, 1961 and
consequently, the assessee was entitled to the benefit
of investment allowance under Section 32A of the Income
Tax Act. In that matter, it was argued on behalf of the
Revenue that extraction and processing of iron ore did
not produce any new product whereas it was argued on
behalf of the assessee that it did produce a distinct
new product. The view expressed by the High Court that
the activity in question constituted “production” has
been affirmed by this Court in Sesa Goa’s case saying
that the High Court’s opinion was unimpeachable. It was
held by this Court that the word “production” is wider
in ambit and it has a wider connotation than the word
“manufacture”. It was held that while every manufacture
can constitute production, every production did not
amount to manufacture.
In our view, applying the tests laid down by this
Court in Sesa Goa’s case (supra) and applying it to the
activities undertaken by the respondents herein,
reproduced herein-above), it is clear that the said
activities would come within the meaning of the word
“production”.
One more aspect needs to be highlighted. By the
said judgment, this Court affirmed the decision of the
Karnataka High Court in the case of Commissioner of
Income Tax vs. Mysore Minerals Ltd, (2001) 250 ITR 725
(Kar).
In the case of Commissioner of Income Tax Vs.
N.C. Budharaja & Co., reported in 204 ITR 412 (SC), the
question which arose for determination before this Court
was whether construction of a dam to store water
(reservoir) can be characterised as amounting to
manufacturing or producing an article. It was held that
the word “manufacture” and the word “production” have
received extensive judicial attention both under the
Income Tax as well as under the Central Excise and the
Sales Tax laws. The test for determining whether
“manufacture” can be said to have taken place is whether
the commodity, which is subjected to a process can no
longer be regarded as the original commodity but is
recognised in trade as a new and distinct commodity.
The word “production”, when used in juxtaposition with
the word “manufacture”, takes in bringing into existence
new goods by a process which may or may not amount to
manufacture. The word “production” takes in all the
byproducts, intermediate products and residual products
which emerge in the course of manufacture of goods.
Applying the above tests laid down by this Court
in Budharaja’s case (supra) to the facts of the present
cases, we are of the view that blocks converted into
polished slabs and tiles after undergoing the process
indicated above certainly results in emergence of a new
and distinct commodity. The original block does not
remain the marble block, it becomes a slab or tile. In
the circumstances, not only there is manufacture but
also an activity which is something beyond manufacture
and which brings a new product into existence and,
therefore, on the facts of these cases, we are of the
view that the High Court was right in coming to the
conclusion that the activity undertaken by the
respondents-assessees did constitute manufacture or
production in terms of Section 80IA of the Income Tax
Act, 1961.
Before concluding, we would like to make one
observation. If the contention of the Department is to
be accepted, namely that the activity undertaken by the
respondents herein is not a manufacture, then, it would
have serious revenue consequences. As stated above,
each of the respondents is paying excise duty, some of
the respondents are job workers and the activity
undertaken by them has been recognised by various
Government Authorities as manufacture. To say that the
activity will not amount to manufacture or production
under Section 80IA will have disastrous consequences,
particularly in view of the fact that the assessees in
all the cases would plead that they were not liable to
pay excise duty, sales tax etc. because the activity did
not constitute manufacture. Keeping in mind the above
factors, we are of the view that in the present cases,
the activity undertaken by each of the respondents
constitutes manufacture or production and, therefore,
they would be entitled to the benefit of Section 80IA of
the Income Tax Act, 1961.
For the afore-stated reasons, Civil Appeals
filed by the Department stand dismissed with no order as
to costs.
………………J.
(S.H. KAPADIA)
………………J.
(J.M. PANCHAL)
………………J.
(H.L. DATTU)
New Delhi,
December 02, 2009.