ORDER
Bhavnesh Saini, J.M.
1. This appeal by the assesses is directed against the order of the CIT(A), Jammu, headquarters at Amritsar, dt. 9th Sept., 2004, for the asst. yr. 2001-02 on the following ground :
“The CIT(A) is not justified in holding that the appellant was not entitled to deduction of Rs. 16,06,870 claimed under Section 80-IB of the IT Act on the alleged ground that the activity of the appellant of making bread is that of food processor and not that of manufacturers of food processor and not that of manufacturer of food. The CIT(A) is unjustified in confirming the action of AO by relying on the Hon’ble Supreme Court judgment in the case of Indian Hotels Co. Ltd. and Ors. v. ITO and Ors. as well as the decision of the Hon’ble Madras High Court in the case of CWT v. P. Devasahayam. Both these cases have wrongly been applied on the appellant as he is not a trader in manufacturer. The appellant is a manufacturing concern exclusively deriving profits and gains from manufacturing of bread by transforming maid a along with other materials through a mechanized process with the aid of labour and power and marketing the end product as a commodity different from raw material. The appellant is covered by the definition of industrial undertaking given in Explanation to Section 33B of the IT Act, 1961, and thus very much eligible for claiming deduction under Section 80-IB.”
It is stay granted appeal.
2. The facts of the case are that the assessee is engaged in preparation of bread at Gangyal, Jammu, under the name and style of M/s Aagam Food Industries. The assessee has shown profit of Rs. 16,06,870 from this unit which has been claimed as a deduction under Section 80-IB of the IT Act. The AO found that the assessee is simply converting raw food items like Maida, sugar, oil and yeast into bread. According to the AO, in this way, no new product is manufactured or produced. The foodstuff prepared by way of cooking or by any other process including baking, etc. from raw material such as cereal, pulses, vegetables, meat and the like cannot be regarded as a commercially distinct commodity and it cannot be held that such foodstuff is manufactured or produced. The AO relied upon the decision of the Hon’ble Supreme Court in the case of Indian Hotels Co. Ltd. and Ors. v. ITO and Ors. . The assessee was directed to submit the reply as to why the deduction claimed under Section 80-IB of the Act be not disallowed. The assessee, in reply thereto, submitted that the decision of the Hon’ble Supreme Court in the case of Indian Hotels Co. Ltd. (supra) is entirely different as in that case the assessee was having chain of hotels whereas in the case the unit is running an industrial undertaking registered with the D.I.C., Jammu. It was also explained that in the above case, the assessee was operating a flight kitchen which was ancillary to its business of hotel and not industrial undertaking, whereas in the present appeal, the unit of the assessee is purely an industrial undertaking having proper manufacturing process involved and proper sale network in which the bread is supplied to whole of the market. It was also explained that in the judgment delivered by the Hon’ble Supreme Court above, the business of the assessee was that of hotel which is a trading activity and not of an industrial undertaking, whereas in the present appeal it is neither a hotel nor a trading activity. The AO also referred to the judgment of the Hon’ble Madras High Court in the matter of CWT v. P. Devasahayam. The assessee in reply to the reference of the aforesaid judgment submitted that the above judgment is in connection with the wealth-tax matter. It was also pleaded before the AO that in this case it was held that if the assessee’s activity falls within the definition of industrial undertaking then definitely the assessee is entitled to exemption. It was also explained that in the above case, foodstuff, as produced by the assessee, are mainly intended for trading and the conversion of raw material into foodstuff is only a process in trading and production and preparation of foodstuff is only incidental to trading which means that the main activity of the assessee was trading. On the contrary, in the present case, the assessee is only dealing with the manufacturing activity having installed a proper plant and machinery with complete manufacturing process registered with Industries Department. The AO, however, did not consider the submissions of the assessee favourably and relying upon the decision of the Hon’ble Supreme Court in the matter of Indian Hotels Co. Ltd. (supra) and decision of the Hon’ble Madras High Court in the matter of CWT v. P. Devasahayam (supra), held that the preparation of the bread from items as done by the assessee is in no way manufacture or processing and hence the profit is in noway qualified for deduction under Section 80-IB of the IT Act. According to the AO, the assessee does not qualify for deduction under Section 80-IB of the Act as it is neither a manufacturer or producing any article which is prerequisite for any assessee to claim deduction. Accordingly, deduction claimed by the assessee to the extent of Rs. 16,06,870 was withdrawn and added back to the income of the assessee.
3. The addition was challenged before the CIT(A) and it was submitted that the AO is not justified in withdrawing the deduction claimed by the assessee rightly and correctly under Section 80-IA as the assessee is registered with the Directorate of Industries holding power licence of 104 HP as an industry, which has been further increased by 10 HP. It was also explained that the assessee is registered under the Factories Act and has installed unit in industrial area, and that it was not formed by splitting or the reconstruction of a business already in existence. It was also submitted that it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. It was also submitted that the assessee began to produce breads during the financial year 1998-99 which period is covered by the Act. It was also submitted that the assessee employed more than 10 workers in the manufacturing process with the aid of power. It was also submitted that the AO has not disputed about the conditions satisfied by the assessee as laid down under Section 80-IA of the Act. It was also submitted that the decisions relied upon by the AO are clearly distinguishable on facts. Therefore, reliance placed by the AO on such decisions is not proper. It was also explained that in the cases relied upon by the AO, the denial of industrial activity was limited for hotel/traders and not to the industries. It was also explained that an industrial undertaking and trading activities are entirely different. The assessee explained various reasons to clarify that the cases relied upon by the AO are clearly distinguishable. The assessee also referred to the definition of industrial undertaking as defined in Explanation to Section 33B of the IT Act. The assessee also explained the process of manufacture of breads in its unit as under:
Step
I. Maida is refined through mechanised process and is put to mixture bowl alongwith desired contents of sugar, oil/fats, yeast, salt, preservatives alongwith improver/cake mix.
II. The water is chilled through chilling plant and then filtered through filteration plant/water batching plant.
III. The desired quantity of water through the batching plant is transferred to mixture bowl, thereafter, the bowl is attached to mixing plant for proper mixing which is done automatically in a stipulated duration of time and the bowl gets detached automatically.
IV. The material as stated in Step III is put into dividing plant and cut it into pieces automatically.
V. The pieces are automatically transferred to rounder plant.
VI. From rounder plant the material goes to first proover and then to moulder plant, then through conveyors, it is transferred to various moulds which are oiled.
VII. Through trolley the moulds are taken to steam chamber plant for final prooving fermentation, then transferred to oven plant for baking, VIII. Thereafter, depaning is done manually and the bread so manufactured is taken to cooling tunnel in the trolleys.
IX. Finally, after slicing the beads which is done through high speed slicer plant, the breads are packed through semi-mechanised process. Thereafter, put into crates for distribution in the market.
4. The assessee also filed photocopies of the plant to show the manufacturing process. It was also explained that all the processes which are totally mechanised with the aid of power and with the involvement of labour, raw material, viz., maida, sugar, yeast, oil/fat, salt, preservatives with improver/cake mix is transformed through process of mixing, dividing, founding, prooving, moulding, fermenting, baking, cooling, slicing, packing into bread loaf having distinct name, character and use. It was further explained that the test which is required to apply is “Does the processing of the original commodity bring into existence a commercially different and distinct article.”
5. The assessee explained that through the aforesaid process mentioned above, the end-product as a commodity is different from the raw material and, therefore, covered by the definition of industrial undertaking. The CIT(A) considering the various processes of the assessee and submissions and considering the case law relied upon by the AO, rejected the appeal of the assessee. The finding of the CIT(A) in para 4.1 is reproduced as under :
“4.1 The central issue involved in this case is whether the appellant is entitled to deduction under Section 80-IB amounting to Rs. 16,06,870 as claimed by the appellant in its return of income which was rejected by the AO on the ground that the appellant is not engaged in the manufacture of any article or thing as required under Section 80-IB. The appellant in this case is engaged in the making of bread and sale thereof. During the year under consideration, it declared profit of Rs. 16,06,870 which was claimed as a deduction under Section 80-IB. The AO rejected the appellant’s contention in this regard relying on the decision of 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 CWT v. P. Devasahayam. Aggrieved by this finding, the appellant has filed this appeal and during the appellate proceedings, detailed submissions have been made alongwith photographs of the entire range of machinery used for processing/making of bread out of Maida, sugar, yeast, etc. The appellant has also explained in detail the various stages of production of the bread from the point where the water is mixed with the Maida and other ingredients and thereafter mixing is done; it is followed up by dividing of dough, further process of moulding placing of the raw material into the chambers, heating of the oven and thereafter cooling of the bread in the tunnel including the process of slicing of the bread as well as packing, etc. Detailed submissions have been made by the appellant in which with the help of photographs of the machinery and other processes involved, the appellant has tried to prove that it is engaged in the business of manufacture of bread through a large number of machineries involved and with the help of labourers and consumption of power in the process of making of bread. I have also take note of the appellant’s contention in respect of the decision of the Hon’ble Supreme Court in the case of Indian Hotels Co. Ltd. and Ors. (supra) as well as the decision of the Hon’ble Madras High Court in the case of P. Devasahayam (supra). I have also taken note of the various arguments put forward by the AO in the assessment order in order to substantiate his finding that the appellant cannot be said to be engaged in the business of manufacture of bread. It is noticed that the AO while doing so has extensively relied on decision of the Hon’ble Supreme Court in the case of Indian Hotels Co. Ltd. and Ors. (supra) as well as, decision of the Hon’ble Madras High Court in the case of P. Devasahayam (supra). After considering the rival submissions, I am of the opinion that the issue that requires to be decided here is whether the appellant’s case can be said to be covered in Clause (iii) of Sub-section (2) of Section 80-IB which requires that one of the conditions for availing the said deduction is that the assessee should be engaged in the manufacture or production of any article or thing not being an article or thing specified in the list in XIth Schedule. The word ‘manufacture’ or ‘production’ has received extensive judicial interpretation both under the IT Act as well as Central Excise Act and also under various sales-tax laws. It is well-settled law that the word ‘production’ or ‘produce’ is used in juxtaposition with the word ‘manufacture’ and takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in of the bye-products, intermediate products and industrial products which emerge in the course of manufacturing of goods. Further, the terms “manufacture or process” have also been the subject-matter of judicial review and it has almost become well-settled that the term ‘process’ has a wider meaning than the term ‘manufacture’. Buyers carrying on the activity of processing will fall within the purview of Section 206C(1) of the IT Act. Though sawing of the logs of timber into different sizes may not fall within the meaning of the term manufacture, a view could be taken that it constitutes processing. But, mere cutting of timber into smaller sizes to make its marketability and packing easy would not constitute processing. The broad distinction between the manufacture and process is that the manufacture involves bringing into existence of a new product. A product which is of a different chemical and whose integral structure is different. Processing could be said to be doing specific acts to something for changing its shape or sizes. In the appellant’s case, it has to be decided whether the making of the bread from Maida, sugar, yeast and other ingredients amounts to manufacture of bread or it only amounts to processing of food. In this context, observation of the Hon’ble Supreme Court in the case of Indian Hotels Co. Ltd. and Ors. (supra) is relevant which is reproduced hereunder for facility of reference :
… there 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 pen and one that is dressed. The ginned and baled cotton and the cottonseed, as well as the dressed chicken, have gone a processing stage. But, neither has been manufactured in the normal sense of the word.
In our view, the 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 material such as cereal, pulses, vegetables, meat or the like cannot be regarded as a commercially distinct commodity and it cannot be held that such foodstuff is manufactured or produced.
Therefore, the Hon’ble Supreme Court in the above case held that the flight kitchen operated by the assessee–Indian Hotels Co. Ltd. and Ors. (supra) is not entitled to get the benefit of deduction under Section 80-J. In view of the finding referred to above of the Hon’ble Supreme Court in the above case law, it is seen that the facts of this case are similar to the facts involved in that case. It is true that in the case of Indian Hotels Co. Ltd. and Ors. (supra), the main business of the appellant was running of a hotel and the appellant was in addition to the business of running of hotel and involved in operating a flight kitchen, i.e., providing food to the air passengers in the aircraft. Incidentally in that case, the Hon’ble Supreme Court in that case also considered the use of machinery, which has been emphasised by the appellant in this case and even after considering the same, it was held that the preparation of food does not amount to manufacture of any article or thing. Further, it is seen that the decision of Hon’ble Madras High Court in the case of CWT v. P. Devasahayam (supra) is also applicable to the facts of the case because in that case, the appellant was engaged in the making of biscuits/sweets and in the appellant’s case, it is engaged in the process of making bread. In the Madras case, referred to above, it has been clearly held that since the activity of preparing or producing the biscuits cannot construe that the assessee is manufacturing goods and that the preparation of foodstuffs is only a process in trading and the same is only incidental to trading. After considering the case law relied upon by the AO, referred to above and also after considering the objections 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 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. (supra) as well as the decision of Hon’ble Madras High Court in the case of P. Devasahayam (supra). 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 80-IB amounting to Rs. 16,06,870 and, therefore, this issue is decided against the appellant. It may be further mentioned that in this case, Section 80-IB is the relevant section and not Section 80-IA because w.e.f. Ist April, 2000, Section 80-IA, as it existed then, has been replaced by a new Section. 80-IA dealing with cases/concerns engaged in the infrastructure business while Section 80-IB deals with the cases of other industrial undertakings. Hence, the AO has correctly applied the provisions of Section 80-IB in this case and since the appellant is not engaged in infrastructure business, the provisions of Section 80-IA are not applicable to the appellant’s case.”
6. The assessee is in appeal. We have heard the learned Representatives of both the parties and gone through the observations of the authorities below.
7. The learned Counsel for the assessee reiterated the same submissions made before the authorities below and submitted that it was third year of manufacturing and in earlier years, the claim was not disputed as a return was processed under Section 143(1)(a). He has further submitted that the assessee started production on 18th Oct., 1998, and registered with the District Industries Centre, Jammu, and has sanction of H.P. power load for industrial purpose. He has further submitted that the assessee also registered with the Chief Inspectors of Factories. He has filed copy of process of manufacturing of bread in the unit, which is reproduced above and he has also filed photocopies of various processes done in the unit of the assessee to manufacture and produce the bread. The learned Counsel for the assessee referred to the definition of industrial undertaking as was referred to in Section 80-IA(12) prior to the year 2000 and submitted that the definition of “Industrial undertaking” as defined in Explanation to Section 33B is applicable in this case which defined ‘Industrial undertaking’ means any undertaking which is mainly engaged in the business of 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. He has referred to the 14th Schedule of the IT Act and referred to Item 3 therein and submitted that in the North-Eastern States the manufacturing and producing of the bread is also considered as industrial manufacturing or producing. He has further submitted that the assessee is not a trader and goods are sold through sales/delivery network to customers and the case law relied upon by the authorities below are clearly distinguishable and as such the claim of the assessee was not properly considered by the authorities below. He has further submitted that considering the various processes of the assessee for manufacturing and producing the bread from raw material a distinct commodity is manufactured and produced having distinct nature and character. Therefore, the assessee is an industrial undertaking for manufacturing and producing the bread. He has further submitted that the claim of the assessee was justified and as such the deduction should have been granted by the authorities below. He has further submitted that the assessee has satisfied all the conditions laid down under Section 80-IB of the IT Act and substantially the same has not been disputed by the AO, therefore, the assessee is entitled for deduction being industrial undertaking.
8. On the other hand, the learned Departmental Representative submitted that the definition as provided under Section 80-IA is not extended to Section 80-IB of the IT Act. He has further submitted that the assessee is not producing any article and it is only a processor of food, therefore, case law relied upon by the authorities below for denial deduction to the assessee are clearly applicable to the case of the assessee. The learned Departmental Representative also relied upon the orders of the authorities below that appeal of the assessee may be dismissed.
9. We have considered the rival submissions and material available on record and the findings of the authorities below.
10. Section 80-IB of the IT Act provides deduction in respect of profits and gains from certain industrial undertakings other than infrastructural development undertakings. In Sub-section (2), briefly, following conditions have to be satisfied for application of this section to any industrial undertaking :
(i) it is not formed by splitting up, or the reconstruction of a business already in existence :
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose:
(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 :
(iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.
11. There is no dispute as regards facts of the case and we also do not find any serious dispute as regards to the above conditions fulfilled by the assessee as the assessee has specifically submitted that the assessee was registered with the Directorate of Industries holding power licence of 140 H.P. as an industry and unit is installed in industrial area and was not formed by splitting up, or the reconstruction of the business already in existence. It was also not formed by transfer to a new business of machinery or plant previously used for any purpose. It did not manufacture or produce the article or thing, not being any article or thing specified in the list in the Eleventh Schedule. As per submission of the learned Counsel for assessee, this schedule is not applicable being unit located in backward area. The assessee employed more than 10 workers in the manufacturing process with the aid of power. It is also not in dispute that the assessee started manufacturing/producing breads during the financial year 1998-99 which period is covered by the aforesaid section. The point to be decided in this case is whether the making of the bread by the assessee from Maida, sugar and other ingredients amounts to manufacture of the breads and that whether the assessee is an industrial undertaking.
12. As is mentioned above, there is no dispute that the assessee is registered with the Directorate of Industries holding power licence for industry and is also registered under the Factories Act and that its unit is installed in industrial area. The assessee has explained the process of manufacturing of breads in his unit and has explained nine steps of the manufacturing of breads which is reproduced above. These processes for the manufacture have been supported by the photographs of the machinery and other processes carried out in the factory of the assessee. Copies of the photographs are also filed in the paper book, which are stated to have been filed before the authorities below also. The CIT(A) did not consider the definition of industrial undertaking provided in Section 80-IA(12) of the IT Act which was applicable prior to 1st April, 2000, merely on the ground that the provisions of Section 80-IB are applicable and that the assessee is not engaged in infrastructure business. We may specify that prior to the amendment of Section 80-IA, the earlier Section 80-IA was dealing with the deduction in respect of profits and gains from industrial undertaking, etc. in certain cases. However, by making the amendment in the IT Act w.e.f. 1st April, 2000, Section 80-IA was inserted in respect of the industrial undertaking or industry engaged in infrastructure developments, etc., and Section 80-IB was in respect of the deduction claimed in respect of certain industrial undertakings other than infrastructure developments. Therefore, mainly Section 80-IA was divided into two parts dealing with different industrial undertakings. Section 80-IA as was applicable earlier has referred to in Clause (12) the definition of industrial undertaking which shall have the meaning assigned in Explanation to Section 33B. There is no amendment to such definition. The Explanation to Section 33B provides, “industrial undertaking” means “any undertaking which is mainly engaged in the business of 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.” Therefore, the industrial undertaking for the purpose of this appeal would include the undertakings manufacturing or processing of goods. The word ‘manufacture’ has not been defined in the IT Act. The Income-tax Law by Chaturvedi and Pithisaria defines it (manufacture) as “the production of articles for use from raw or prepared materials by giving these materials new forms, qualities, properties or combinations, whether by hand labour or machinery, also anything made for use from raw or prepared materials”. The expression “manufacture” has in ordinary acceptance a wide connotation; it means making of articles or material commercially different from the basic components, by physical labour or mechanical process, and a manufacturer is a person by whom, or under whose direction or control the articles or materials are made. The word ‘manufacture’ used as verb is generally understood to means as bringing into existence a new substance and does not mean merely to produce some change in a substance. “Manufacture” implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But, something more is necessary and there must be transformation and a new and different article must emerge having a distinctive name, character or use. Manufacture, in its ordinary connotation, signifies emergence of new and different goods as understood in relevant commercial circles.
13. The jurisdictional Jammu and Kashmir High Court in the matter of CIT v. Abdul Ahad Najar considered the reference application on the question, whether the undertaking of the assessee constituted an industrial undertaking within the meaning of Section 80J(4) of the IT Act. In this case, the assessee claimed that the assessee fulfilled all the conditions of a newly established industrial undertaking within the meaning of Section 80J of the Act since it was engaged in the manufacture and production of articles. The case of the assessee was that the planks sawn out of logs and articles produced therefrom were different in shape from logs. The assessee relied upon the order of the AAC who has held that the assessee who derived income from forest exploitation was an industrial undertaking engaged in the manufacture and production of articles and was entitled for deduction. However, the AO did not accept the contention of the assessee as according to him this unit of the assessee did not manufacture or produce articles. The ITO held that the process of converting trees into logs did not involve much sawing operations as after felling the trees it had been cut into logs and sold as such. The ITO further observed that the process of sawing of logs into planks also did not involve any manufacture of articles. The ITO also held that manufacturing process could not be carried out by bare hands and the manufacturing process could be completed with the aid of its own machinery. The claim of the assessee was accordingly rejected. The matter was carried to the AAC, who held that the use of machinery was not indispensable to a manufacturing process and even for the conversion of the standing trees into logs, labour was required as something is converted into something else, viz., logs. He was of the view that the logs could be said to be a new product emerging out of manufacturing process. He accordingly held that the assessee was entitled to deduction under Section 80J of the IT Act. The Tribunal confirmed the order of the AAC and also referred to Board’s circular. The matter was then considered by the jurisdictional High Court on these facts. The Hon’ble High Court, considering the above facts and submissions of the parties, was of the view that in order to claim relief the industrial undertaking must manufacture or produce articles and these conditions are precedent. The Hon’ble High Court observed that admittedly, the assessee cut trees in the forest, converted them not only into logs but also into planks and other articles for the purpose of sale. The production of planks and other articles during the year constituted 60 per cent of the total production of the assessee. There can be no dispute about the fact that logs and planks are articles. The Hon’ble High Court further observed that the uncontroverted factual position is that the assessee did not purchase logs and planks, etc. As a forest lessee, his business was to cut standing trees and to extract timber and convert the same into form of logs, planks, etc. for the purpose of sale. The logs and planks are never known as trees. They are undoubtedly different from standing trees. A common man who likes to purchase logs or planks would not purchase a standing tree. The Hon’ble High Court accordingly held manufacturing process carried on manually would also be manufacturing process. It is clear from the above that the activity of the forest lessees of extraction of timber from the forest and conversion of the same into logs, planks, etc. is a manufacturing process. The Hon’ble High Court on the question of manufacturing further held as under:
“Otherwise also, it is clear that the activity undertaken by the assessee clearly amounts to manufacture and production of articles. The expressions ‘manufacture’ and ‘produce’ have not been defined in the IT Act. The dictionary meaning of ‘manufacture’ is ‘transform or fashion new materials into a changed form for use’. In common parlance, manufacture means production of articles from raw or prepared materials by giving these materials new forms, qualities, properties or combinations, whether by hand labour or by mechanical process. In other words, it means making of articles or materials commercially different from the basic components by physical labour or mechanical process. In its ordinary connotation, manufacture signifies emergence of new and different goods as understood in relevant commercial circles. So far as the meaning of the word ‘produce’ is concerned, though the word ‘produce’ has a wider connotation than the word manufacture, when used in juxtaposition with the word ‘manufacture’, it takes in bringing into existence new goods by a process which may not amount to manufacture. The activity of extraction of wood by the assessee from the forest by falling the trees and converting the same into logs, planks, sleepers and other articles, undoubtedly, falls within the definition of ‘manufacture’.”
14. The Hon’ble Supreme Court in the matter of CIT v. N.C. Budhaiaja and Co. and Anr. , considering the same question of law held, “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.”
15. The Hon’ble Supreme Court in the matter of Kores India Ltd. v. CCE Chennai held that the cutting of jumbo rolls of typewriter/telex paper into smaller rolls amounts to manufacture since distinct identifiable article, having distinct name, function and use has arisen.
16. Considering the explanation of the assessee and various manufacturing processes explained and reproduced above, we are of the opinion that the bread manufactured/produced by manufacturing unit of the assessee falls within the definition of manufacture for claiming deduction under Section 80-IB. We, on consideration of the principles decided by the jurisdictional High Court in the matter of Abdul Ahad Najar (supra), decisions of the Hon’ble Supreme Court in the matters of N.C. Budhaiaja and Co. (supra) and Kores India Ltd. (supra) are of the view that the bread so manufactured or produced can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity. The assessee has explained nine steps of manufacturing reproduced in para 3 of this order through which the raw materials, i.e., Maida, sugar and other ingredients are processed being original commodity and have to pass through various manufacturing processes through mechanised process with the aid of power like mixing, deciding, rounding, prooving, moulding, fermenting, baking, cooling, slicing, etc., and thus the bread so manufactured or produced would have distinct name, character and use. The name of the raw material originally is Maida, sugar, oil, and other preservatives before process and after processes, it would become bread. Therefore, it is commercially distinct commodity with a distinct name. The bread is used for human consumption but these raw materials cannot be used as such. The unbaked raw material as such is different in character and after process of manufacturing, the bread so produced is edible and tasteful. Likewise, there is no use of raw material before processing but after processing and manufacturing, the bread is used as eatable. Therefore, raw material before process and after manufacture and process is different in nature, character and use. Therefore, after manufacturing a new and distinct commodity is manufactured and produced by the assessee,. namely, bread. We may also mention that amongst other conditions for claiming deduction, under Section 80-16(2), in Clause (iii) it has been stated as under :
“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 word “produce” tantamounts to processing of goods. In fact, the word “manufacture” or “produce” in this section shall have to be read independently and separately, otherwise, only the word “manufacture” could have been stated in Section 80-IB(2)(iii) and not “produce”. The learned Counsel for the assessee also referred to 14th Schedule in the sub-para (3), the production of the bread for North-Eastern States is considered as industrial manufacturing or producing in the IT Act. Therefore, such definition could be favourably taken into consideration while considering the case of the assessee as regards industrial undertaking manufacturing the bread. The authorities below have rejected the claim of the assessee by following the decision of the Hon’ble Supreme Court in the matter of Indian Hotels Co. Ltd, and Ors. (supra). In this case, the assessee was having chain of hotels and operation of flight kitchen was ancillary to its business of hotel and not an industrial undertaking. In this case, the business of the assessee is that of hotel, which was found to be a trading activity. Therefore, the foodstuff sold by the assessee hotel was not considered to be an industrial undertaking. However, in the present appeal, the assessee is running an industrial undertaking registered with the Director of Industries. Therefore, the facts are clearly distinguished. The authorities below also relied upon the decision of the Hon’ble Madras High Court in the matter of CWT v. P. Devasahayam (supra) in which the case under WT Act was considered and assessee’s activity consists of preparing sweetmeats and biscuits out of raw material, which was mainly intended in trading in a stall and the preparation of foodstuffs was incidental to trading and, therefore, it was not considered to be an industrial undertaking. However, in the present appeal, the assessee is dealing with the manufacturing activity having installed a proper plant and machinery with complete manufacturing process, registered with the Industries Department in which bread is supplied to whole of market through proper sale network as explained. The main object of the assessee is manufacture. The case law as are relied upon by the authorities below are, therefore, clearly distinguishable. Although the decision of Hon’ble Madras High Court in the case of P. Devasahayam (supra) is distinguishable on facts, yet some of the observations are reproduced as under which clarify the distinction between manufacturing concern and trading concern :
“We have already referred to the definition of ‘industrial company’. It is possible to read in the context of the definition that the reference is to the manufacturing activity. We can easily draw a distinction between manufacturing concerns and trading concerns. It is true that any manufacturing concern must also normally engage in trading activity in the sense; it must also sell. But, for the reason alone, it does not become a trading concern, as the main object of the concern is manufacture and the sale of the goods manufactured is incidental. There may be trading concerns which may sometimes engage in production which is incidental to trading. It nevertheless will continue to be a trading concern. A hotel, according to us, is one such as it is mainly intended for trading and not for production or manufacture.”
17. Considering the above discussion and the decision of the Hon’ble jurisdictional Jammu and 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 80-IB of the IT Act. The assessee is, therefore, entitled for deduction under Section 80-IB of the Act. We accordingly set aside the orders of the authorities below and allow the appeal of the assessee.
18. As a result, the appeal of the assessee is allowed.
