ORDER
R.P. Garg, A.M.
1. This is an appeal by the assessee against the order of the Dy. CIT(A) for asst. yr. 1990-91. The only dispute in this appeal is against disallowance of the assessee’s claim for deduction of Rs. 17,611 under s. 80HH and Rs. 14,089 under s. 80-I of the IT Act, 1961.
2. The assessee is a registered firm. It owns a cotton press which is run on hire. It also does trading in cosmetics. In regard to its business income from cotton press, the assessee claimed deduction under ss. 80HH and 80-I on the ground that the activity comprises sorting of different varieties of cotton, pressing the cotton into bales of standard weight, covering it with hessian cloth and tightening it by iron hoops. By this process, according to the assessee, the life of the fibre is extended and the cotton obtained is qualitatively different from the raw material. It was also claimed that pressed bales have different characteristics when compared to loose cotton and thus, there being the process of converting loose cotton into processed bales, the assessee is entitled to deduction under ss. 80HH and 80-I. The ITO did not agree. According to him, the deduction is available to an industrial undertaking which manufactures or produces articles or things and the processing operation is not covered by these sections. He observed that no ginning was done by the assessee and it only pressed ginned lint relating to others into small bales and charged a fixed rate for each bale. In this process, he ascertained, some grading is done in that some yellow cotton and oil-stained lint lying mixed here and there is removed before putting the lint into the press. This, according to him, could at best be termed as processing. It could not come under the activity of manufacturing or producing. Lint is pressed and the same lint is obtained in a compressed form. This, according to him, is done to facilitate storing and transporting. Bales as such have no utility. The lint has to be taken out again and used as raw material for spinning. In these circumstances, he held that no new product has come into existence by the operations carried on by the assessee. He, therefore, held that the assessee is not manufacturing or producing any article and hence, it is not entitled to deduction under ss. 80HH and 80-I.
3. Before the Dy. CIT(A), the assessee relied upon the decision of the Bombay High Court in the case of CIT vs. Ahmed A. Fazalbhoy P. Ltd. (1991) 189 ITR 663 (Bom), wherein it was held that in order to characterise an operation as ‘Processing’, the commodity must, as a result of the operation, experience some change and that the nature and extent of change is not material. The Dy. CIT(A) held that the case cited was of cold storage, that on account of cold storage, bacterial growth is arrested as otherwise the commodity would decay in the natural process within a few days, and that the goods which would have deteriorated are kept in their original form which amounts to a qualitative change. She held :
“(iv) In the instant case there is no qualitative change in the cotton. Loose cotton is simply bundled and pressed into a bale which does not mean a qualitative change.
(v) Sorting, pressing and baling do not fall within the purview of either manufacture, production or processing.
(vi) Bales cannot be utilised independently, as they constitute raw material for spinning and other activities relating to cloth manufacture, etc.
(vii) In essence, there is no change in the raw material that has been packed, i.e., between loose cotton and baled cotton.”
4. The learned counsel for the assessee, Sri T. Venkatappa, referring to the decision of the Gujarat High Court in the case of CIT vs. Lakhtar Cotton Press Co. (P) Ltd. (1983) 142 ITR 503 (Guj), contended that it was a processing within the meaning of s. 2(7)(c) of the Finance Act, 1974, for the purpose of concessional rate to an industrial undertaking engaged in manufacture or processing of goods. As to when ‘processing’ amounts to ‘manufacture’, he cited the decisions of the Kerala High Court in the cases of CIT vs. Marwell Sea Foods (1987) 166 ITR 624 (Ker), CIT vs. Relish Foods (1989) 180 ITR 454 (Ker) and CIT vs. Poyilakkada Fisheries Pvt. Ltd. (1992) 197 ITR 85 (Ker), and of the Madras High Court in the case of CIT vs. Orient Marine Products Pvt. Ltd. (1995) 214 ITR 44 (Mad), wherein processing of prawns, etc. was held to be manufacture. He also referred to the decision of the Andhra Pradesh High Court in the case of Omkarmal Agarwal vs. CIT (1968) 67 ITR 329 (AP), wherein separating of lint from raw kapas was held to be a manufacturing process. He also referred to the decisions in CIT vs. Perfect Liners (1983) 142 ITR 654 (Mad), State of Punjab vs. Chandu Lal Kishori Lal (1970) 25 STC 52 (SC), CIT vs. Baraka Overseas Traders (1993) 201 ITR 827 (Kar), and Tarai Development Corpn. vs. CIT (1979) 120 ITR 342 (All). He thus submitted that the assessee is entitled to deduction under ss. 80HH and 80-I.
5. The learned Departmental Representative supported the order of the departmental authorities. He submitted that the activity carried on by the assessee is only processing but not manufacture. There is no change effected in the commodity; no new thing is made by the processing. It is cotton lint before and after processing. He referred to the decision of the Supreme Court in AIR 1988 SC 1164.
6. We have heard the parties and considered their rival submissions. Sec. 80HH provides for a deduction in respect of profits and gains from a newly established industrial undertaking or hotel in backward area. It reads as under :
“80HH. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, 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 twenty per cent thereof.
(2) This section applies to any industrial undertaking which fulfills all the following conditions, namely :
(i) it has begun or begins to manufacture or produce articles after the 31st day of Dec., 1979, but before the 1st day of April, 1990, in any backward area;
… … …”
(Rest is not extracted being not relevant for our decision)
Sec. 80-I, on the other hand, allowed deduction in respect of profits or gains from industrial undertakings after a certain date. It reads as under :
“80-I. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft, to which this section applies, 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 twenty per cent thereof :
... ... ... ... (2) This section applies to any industrial undertaking which fulfills all the following conditions, namely : (i)... ... (ii)... ...
(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 storages plant or plants, in any part of India, and begins to manufacture or produce articles or things or to operate such plant or plants, at any time within the period of ten years next following the 31st day of March, 1981, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking;
… … … … …”
On a close reading of these two provisions, it is evident that these two deductions are allowed against profits and gains derived from an industrial undertaking and that industrial undertaking must be one engaged in the manufacture or production of an ‘article’ in s. 80HH and ‘article’ or ‘thing’ in s. 80-I.
7. What is ‘manufacture’ is not defined in the IT Act. According to dictionary, the term ‘manufacture’ means a process which results in an alteration or change in the goods which are subjected to the process of manufacture leading to the production of a commercially new article. In the case of Union of India vs. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 791, the word ‘manufacture’ came up for consideration of their Lordships of the Supreme Court and it was observed in that case as under :
“The word ‘manufacture’ used as a verb is generally understood to mean as ‘bringing into existence a new substance’ and does not mean merely ‘to produce some change in a substance’ however minor in consequence the change may be….”
It has again come up for consideration before their Lordships of the Supreme Court in the case of Empire industries Ltd. vs. Union of India (1986) 162 ITR 846 (SC), wherein the following passage quoted in Permanent Edition of Words and Phrases, Vol. 26, from an American judgment, was quoted with approval :
“‘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; a new and different article must emerge having a distinctive name, character or use.”
8. In the case of Ujagar Prints vs. Union of India (1989) 179 ITR 317 (SC), the Supreme Court observed as under :
“The prevalent and generally accepted test to ascertain that there is ‘manufacture’ is whether the change or the series of changes brought about by the processes take the commodity to the point where commercially it can no longer be regarded as the original commodity but it is, instead, recognised as a distinct and new article that has emerged as a result of the process.”
9. In the case of Empire Industries Ltd. (supra), the Supreme Court, in the context of Central Excises & Salt Act, held that to constitute ‘manufacture’, it is not necessary that one should absolutely make out a new thing, because “it is well settled that one cannot absolutely make a thing by hand in the sense that nobody can create matter by hand, it is the transformation of a matter into something else and that something else is a question of degree, whether that something else is a different commercial commodity having its distinct character, use and name commercially known as such. From that point of view, it is a question depending upon the facts and circumstances of the case”.
10. Looking at the issue in the light of the aforesaid decisions, can it, in the circumstances of the case, be said that when loose cotton is packed and baled, it is transformed into altogether a different commodity in the commercial sense ? In our opinion, it cannot. It is cotton when it is loose and remains cotton even after it is baled. There is no change in its use. To be used, the cotton has again to be loosened and brought back to the state of loose cotton.
11. In CIT vs. Lakhtar Cotton Press Co. (Pvt.) Ltd. (supra), relied upon by the learned counsel of the assessee, the issue was in the context of an industrial undertaking within the meaning of s. 2(7)(c) of the Finance Act, 1973, whereunder ‘industrial company’ means “a company which is mainly engaged….. in the manufacture or processing of goods….”. The assessee in that case received cotton in bulk having lighter density which was sprinkled with water and through a mechanical device pressed into small units of convenient sizes and then packed into bales, because cotton packed in bales was commercially acceptable as merchants found it convenient to store cotton in that form because unpressed cotton would require considerable storing space which might ultimately prove uneconomical to the traders dealing in or using cotton. The assessee-company claimed that pressing of cotton fell within the expression “processing of goods” within the meaning of s. 2(7)(c) of the Finance Act, 1973, and that therefore, it was an “industrial company” entitled to the concessional rate of tax. Their Lordships of the Gujarat High Court held :
“Loose cotton in bulk quantity with lighter density was, as a result of pressing, converted into cotton bales and to that extent it underwent a change and, therefore, the assessee-company fell within the definition of an ‘industrial company’ because it processed cotton into cotton bales and was entitled to the concessional rate of tax within the meaning of ss. 2(7)(c) and 2(8)(c) of the Finance Acts, 1973 and 1974, respectively.”
The question as to whether it amounts to ‘manufacture’ or not was not the subject-matter of consideration before the Gujarat High Court. The issue therein was whether the pressing of cotton amounted to processing of goods and not whether it amounts to manufacture.
12. The decision of the Allahabad High Court in the case of CWT vs. Chandra Prakash Agarwal (1987) 166 ITR 643 (All), was also in the context of the term ‘industrial undertaking’ used in the Explanation to s. 5(1)(xxxi) of the WT Act which defines the term to mean “an industrial undertaking 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”. In that case, it was found that the matter stood covered by the decision of the Allahabad High Court in the case of Addl. CIT vs. Farrukhabad Cold Storage (P) Ltd. (1977) 107 ITR 816 (All), wherein the Division Bench held that the term ‘processing of goods’ as used in s. 2(7)(d) of the Finance Act, 1973, need not be of such a nature as to result in the manufacture of goods. All that is required is that the goods must be adapted for a particular purpose. Both the words ‘manufacture’ and ‘processing’ have been used in s. 2(7)(d), thus indicating that the legislature drew a distinction between an activity which led to the manufacture of goods and that which fell short of manufacture, and could be described as processing of goods.
13. The distinction between ‘processing’ and ‘manufacture’ also came up before the Supreme Court in the case of Dy. Commr. of ST vs. Pio Food Packers (1980) 46 STC 63 (SC), and it was explained that commonly manufacture is the end result of one or more processes through which the original commodity is made to pass and that the nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps different kinds of processing at each stage. The Supreme Court observed :
“With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity, but instead is recognised as a new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article, it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be recognised as still retaining its original identity.”
In that case, the Supreme Court referred to leading American cases. One was Anheuser-Busch Brewing Association vs. United States (1907) 207 US 556, wherein it was observed :
“At some point processing and manufacturing will merge. But where the commodity retains a continuing substantial identity through the processing stage we cannot say that it has been ‘manufactured.”
Another decision was in the case of East Texas Motor Freight Lines vs. Frozen Food Express (1955) 351 US 49, wherein it was held that ‘processing of chickens’ in order to make them marketable, did not turn them from agricultural commodities into manufactured commodities. It was observed :
“Killing, dressing and freezing a chicken is certainly a change in the commodity. But it is no more a drastic change than the change which takes place in milk from pasteurizing, homogenizing, adding vitamin concentrates, standardising and bottling.”
There was, it was held, no difference between the chicken in the pan and the one that was dressed.
14. The decision of the Supreme Court in the case of Thungabhadra Industries Ltd. vs. CTO 11 STC 827 (SC), is also worth noting. The question that arose in that case was whether hardened or hydrogenated groundnut oil could still be called groundnut oil. In that context, the Supreme Court held that even after hardening process, though the relative proportion of the different types of fatty acids undergoes a slight change, in its essential nature it undergoes no change and it remains oil. It was, therefore, held that the process utilised did not bring into existence a new product.
15. In the case of Sterling Foods vs. State of Karnataka (1986) 63 STC 239 (SC), the matter again came up for consideration. There the assessee purchased shrimps, prawns and lobsters locally and cut the heads and tails of the shrimps, prawns and lobsters and then subjected them to peeling, deveining and cleaning and freezing. It was held that by reason of the processing of the goods after their purchase there was no change in their identity and that, in fact, commercially they were to be regarded as the original goods from which they were processed. The original goods were only made ready for the table.
16. Again, in the case of Dy. Commr. of ST vs. Shiphy International (1988) 69 STC 325 (SC), it was held that when fresh frog legs were subjected to a process wherein the skin was removed and the goods were then washed and freezed, there was no distinct change in the character or substantial identity of the goods. In Commr. of ST vs. Harbilas Rai & Sons (1968) 21 STC 17 (SC), bristles plucked from pigs, boiled, washed with soap and chemicals and sorted out in bundles according to their size and colour, were regarded as remaining the same commercial commodity, namely, pig bristles.
17. In view of the decisions of the Supreme Court referred to above, the cases relied upon by the learned counsel of the assessee, with regard to processing of prawns, cutting, freezing, etc. treated as manufacture and amounting to production of an article, viz., (1987) 166 ITR 624 (Ker), (1989) 180 ITR 454 (Ker), (1992) 197 ITR 85 (Ker) : (1995) 214 ITR 44 (Mad) (supra) etc., are of no help to the assessee. No entry regarding processing of cotton into bales appears in either of the Schedules to the IT Act in the manner in which processing of prawns, cutting, freezing, etc. appear. So also the decision of the Delhi Bench of the Tribunal in the case of IAC vs. Varishtha Udyog Ltd. (1990) 34 ITD 10 (Del), wherein twisting of yarn was held to be manufacture, will not advance the case of the assessee. Similar would be the position with regard to the decision of the Karnataka High Court in (1993) 201 ITR 827 (Kar) (supra).
18. It may also be mentioned that in Tarai Development Corporation (supra) and CIT vs. Union Carbide India Ltd. (1987) 165 ITR 550 (Cal), ‘processed seeds’ and ‘processed fish including frozen fish products’ were held to be entitled to development rebate because of their enumeration in items 28 and 30 of Schedule V of the IT Act, 1961, and that logic was extended to granting of deduction under s. 80J to the assessees in those cases. These decisions also cannot be applied to the present case.
19. On a consideration of the facts and circumstances appearing in the present case, we are of the opinion that the activity carried on by the assessee in sorting out different varieties of cotton, pressing the cotton into bales, covering it with hessian cloth and tightening it by means of iron hoops, packing and converting them into cotton bales may be a process, but it does not amount to ‘manufacture’ or ‘production’ of any different commodity, if the test of common and commercial parlance is applied, nor a different commodity commercially if the substantial identity test laid down by the Supreme Court in the cases of Pio Food Packers and Sterling Foods (supra) are applied. We, therefore, do not see any merit in the claim of the assessee for deduction under s. 80HH and s. 80-I of the IT Act. We accordingly uphold the order of the Dy. CIT(A).
20. In the result, the appeal is dismissed.
