ORDER
Shamim Yahya, A.M.
1. These appeals by the assessee are directed against the common order of CIT(A) dt. 17th Aug., 2006 and pertain to asst. yrs. 2003-04 and 2004-05. Since the issues are related, these appeals are being disposed of by this common order.
2. One common issue raised in these appeals pertains to denial of assessee’s claim of relief under Section 80-IB.
3. The facts of the case are briefly stated as under:
In this case, the assessee is a firm registered as a small-scale industry. It set up a second unit, unit II to manufacture and bottle Indian manufactured [sic-made] foreign liquor at Pondicherry. The assessee made claim under Section 80-IB in respect of the profits and gains derived from the second unit.
The first year of assessment for the new unit was the year 2000-01 and the assessee claimed relief under Section 80-IB in respect of the income from the new industrial undertaking. This was allowed by the assessing authority. For the asst. yr. 2001-02, the assessee claimed relief under Section 80-IB. While considering the aforesaid relief in the assessment under Section 143(3), the assessing authority allowed the same.
The assessee filed returns for the subsequent assessment years. The relief was granted for the asst. yrs. 2001-02 and 2002-03. While this was so, the CIT invoking his powers under Section 263 has revised the assessment for the year 2001-02. The proceedings under Section 263 were initiated on two grounds:
(i) That the undertaking was not new and was only an expansion of the existing unit and hence not entitled to relief under Section 80-IB;
(ii) That the activity does not constitute “manufacture” and hence the undertaking is not eligible for the said relief.
However, while passing the order under Section 263, the CIT accepted the position that the undertaking was new and held that the assessee had produced evidence to establish the undertaking is new and hence the said objection will not survive.
With regard to the second objection, he concluded that the activity carried on by the assessee does not constitute “manufacture” insofar as there is no manufacture of an article different from the input. In view of the CIT, the raw material used by the assessee for the manufacture as well as the finished product was alcohol and hence there is no manufacturing activity involved, entitling the assessee to relief under Section 80-IB. In arriving at the above conclusion the CIT relied heavily on a decision of the Special Bench of the Tribunal in the case of Shaw Scott Distilleries (P) Ltd. v. Asstt. CIT (2001) 70 TTJ (Cal)(SB) 321 : (2002) 255 ITR 15 (Cal)(SB)(AT).
Adopting the reasoning of CIT as aforesaid, the AO denied benefit of Section 80-IB for asst. yrs. 2003-04 and 2004-05, which are in appeal before us.
4. Upon assessee’s appeal, the learned CIT(A) upheld the AO’s action by placing reliance upon the decision of a Special Bench of the Tribunal in Shaw Scott Distilleries (P) Ltd. v. Asstt. CIT (supra) and the learned CIT(A) further referred to the order under Section 263 of the IT Act by the CIT for the asst. yr. 2001-02.
5. Before us, the assessee’s submissions are summarized as under:
The process of blending requires special environment and use of expensive equipment with skilled labour. Apart from alcohol, even water, which is produced in-house, has to be not only potable, but also suitable for the purpose. The other materials are rectified spirit, extra neutral alcohol, malt spirit, grape spirit, caramel, sugar dissolvent etc. to be used at a particular temperature and filtered through special filtration and such other processes. The qualitative difference between the initial raw material and the final product is significant. It is stated that all raw materials, used in this business are unfit for and cannot be consumed by human beings in the form in which they are acquired and used as inputs but have to undergo manufacturing process before they become products ready for consumption and sale. The industrial unit has been certified as a small-scale industry by the Industries Department. The installed capacity has also been similarly certified. It is functioning under Factories Act. The assessee has got considerable work force. The process of manufacture is subject to excise and registered with the Pondicherry Government for this purpose.
(i) The CIT has accepted the unit as new unit and hence the parameters set out under Section 80-IB are satisfied in this regard;
(ii) Apart from what the CIT has noticed, it is relevant to submit that
(a) the new unit is located at a place more than 10 kms. away from the old unit;
(b) totally new plant and machinery have been installed in the new unit;
(c) the new unit has obtained separate licenses for its activity;
(d) the new unit is totally identifiable apart from the old unit;
(e) no plant or machinery used in the old unit have been brought or installed in the new unit.
(iii) The activity constitutes “manufacture”:
(a) The activity is covered by a license which specifically mentions that it is “manufacture”;
(b) The input is “rectified spirit” which undergoes various processes to achieve the final output viz. “TMFL”;
(c) “Rectified spirit” which is the input is not potable, while ‘TMFL” is potable. Thus, this output is a product totally different from input and is commercially identifiable as a separate product.
(d) The decision in the case of Shaw Scott Distilleries v. Asstt. CIT (supra) proceeded on different footing and the said decision would not apply in the instant case.
(e) The Supreme Court as well as the Tribunal have recognized the distinction between the “rectified spirit” which is not potable and potable spirit, viz., “IMFL”.
The learned Counsel of the assessee further placed reliance upon the following case laws:
(i) Bihar Distilleries and Anr. v. Union of India and Ors. ;
(ii) HO v. A. Joseph Louis (1990) 33 ITD 485 (Mad);
(iii) CIT v. Jamal Photo Industries (2006) 203 CTR (Mad) 256 : (2006) (12)(1) IT Law 380;
(iv) CIT v. Mount Shivalik Breweries Ltd. ;
(v) CIT v. J.B. Kharwar & Sons ;
(vi) Aspinwall & Co. Ltd. v. CIT ;
(vii) CIT v. Oswal Woollen Mills Ltd (2002) 175 CTR (P&H) 184 : (2002) 257 LTR 737 (P&H);
(viii) CIT v. Tamil Nadu Heat Treatment & Fetting Services (P) Ltd. ;
(ix) CIT v. Rampur Distillery & Chemical Co. Ltd. ;
(x) CIT v. Sultan & Sons Rice Mills ;
(xi) CIT v. Premier Tobacco Packers (P) Ltd. ;
(xii) CIT v. Pankaj Jam (2006) 200 CTR (J&K) 11 : (2006) 9 (1) ITCL 129 (J&K)
6. The learned Counsel of the assessee also submitted paper book showing photographs detailing the manufacturing process. The learned Departmental Representative placed reliance upon the order of the authorities below and the Special Bench decision in the case of Shaw Scott cited supra. On the last hearing, the Departmental Representative did not appear but filed written submissions. In the submissions the above has been reiterated and it has been further stated that where the statute is (dear and unambiguous, no attempt should be made to interpolate it. Apart from the above decision of Hon’ble apex Court in Dy CST v. Pio Food Packers was also quoted for elaboration on manufacture.
7. We have carefully considered the rival contentions and perused the relevant records. Section 80-IB of the IT Act provides deduction in respect of profits and gains from certain industrial undertakings other than infrastructure 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 fining, 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.
8. Upon a careful reading of the above, in our opinion, in this case for claiming relief under the aforesaid section the assessee has to satisfy two broad conditions:
(i) Firstly, the assessee has to produce evidence to establish that it is a new undertaking as envisaged under the Act; and
(ii) Secondly, that it manufactures or produces any article or thing not being any article or thing (sic).
9. As regards the issue whether it is a new unit or not, we find that under Section 263 for asst. yr. 2001-02 the learned CIT, vide order dt. 2nd March, 2006, had decided the issue in favour of the assessee holding as under:
As concerns the first point whether the new unit in respect of which deduction has been claimed under Section 80-IB was result of any expansion of the existing unit is concerned, I have already stated that the assessee has produced evidence of additional license for capacity addition in course of this proceeding. It thus satisfies the condition under the said section that the new undertaking has not been formed by splitting up or reconstruction of the existing business. The order of the AO is thus not erroneous to this extent. It is also a small-scale undertaking and the requirement that it should not manufacture or produce any article or thing listed in the Eleventh Schedule to the Act does not apply to it. The assessee also satisfies two other conditions that it is not formed by the transfer to a new business of machinery or plant previously used for any purpose and that the new undertaking which is run with the aid of power employs ten or more workers in the process engaged by it.
10. The above order under Section 263 was relied upon by the learned CIT(A) in this case and he has not given any independent reasoning on the issue of new industrial undertaking; hence the inference being that Revenue has accepted the plea that the assessee satisfies the condition of the unit being a new industrial undertaking as envisaged by the Act.
11. Now, the only question, which remains to be adjudicated, is whether the assessee can be said to be manufacturing or producing any article or thing as envisaged under the Act. At the threshold, it is noted that the assessee is a small-scale undertaking. Hence, the limitation placed by the Eleventh Schedule to the Act does not apply.
12. Upon a careful consideration of the issue we find that the Revenue is basically relying upon the decision of the Special Bench of this Tribunal in Shaw Scott’s case cited supra, when the Tribunal, for the purposes of relief under Section 80HH was considering a related issue. In this regard it is the submission of the learned Counsel of the assessee that the CIT, while taking the view that the assessee is not eligible for relief under Section 80-IB, relied on the decision in Shaw Scott Distilleries (P) Ltd. case (supra), without noticing that the facts in that case are totally different.
13. The submission in brief is as under:
We may in this connection submit that the facts in Shaw Scott Distilleries case are totally different and distinct from those of the assessee’s case. The Tribunal has consistently noted while recounting the facts, that the assessee had purchased ‘potable spirit’ from Rampur Distilleries as per the agreement and that the potable spirit is already manufactured and does not require any manufacturing and some processing was required to produce IMFL like Brandy, Whisky, Rum by adding certain percentage of water colour, essence and for safe marketing requires bottling. It is on the basis of this fact that the Tribunal came to the conclusion that there was no manufacturing process involved. In other words, the assessee in that case started from potable spirit. In the assessee’s case the input is rectified spirit, which is not potable liquor. Both Tribunal and the Supreme Court have categorically held that rectified spirit is not potable liquor.
In the case of Bihar Distilleries & Mr. v. Union of India and Ors. , the Supreme Court has highlighted the difference between rectified spirit which is non-potable and IMFL which is potable. The Supreme Court has also noticed that Indian made foreign liquor (IMFL) is manufactured using rectified spirit/ethyl alcohol as raw material (see p. 1215).
The Supreme Court has also noticed that, while non-potable spirit falls within the Union List under the Seventh Schedule to the Constitution of India, potable liquor falls within the purview of the State. Thus, the distinction between rectified spirit as non-potable and IMFL as potable liquor has been noticed and highlighted by the Supreme Court. The Supreme Court referred with approval to its earlier decision in Synthetics & Chemicals Ltd. v. State of Uttar Pradesh [See para 24 (p. 1217)]. What was purchased by Shaw Scott Distilleries, as seen from the facts in that case, is potable spirit which obviously was rectified spirit already converted by Rampur Distilleries into potable spirit and supplied by Rampur Distilleries to the assessee in that case for processing into IMFL. This basic and fundamental difference in facts have been ignored by the assessing authority, while following the decision in Shaw Scott Distilleries case.
14. In our opinion the aforesaid brings out cogent differences in the facts of this case and that relied upon by the Revenue. We further observe that Hon’ble Allahabad High Court in the case of CIT v. Rampur Distillery & Chemical Co. Ltd. (supra) has held that since the term ‘rectified spirit’ is not mentioned in the 1st item of Eleventh Schedule “beer, wine and other alcoholic spirits” the same cannot be equated therewith and assessee engaged in production of rectified spirit is entitled for deduction of investment allowance for investment in plant and machinery. From the above, it is apparent that in Hon’ble High Court’s view ‘rectified spirit’ is quite different from Whisky, Brandy, Rum etc. being IMFL which are all potable.
15. From the aforesaid, inference can be made that ‘rectified spirit’ on the one hand and “beer, wine and other alcoholic spirits” on the other hand are quite different and conversion of ‘rectified spirit’ into beer, wine and other alcoholic spirits brings into existence a totally different commodity.
16. The Hon’ble apex Court while determining what would amount to ‘manufacture’ has expounded in the case of Bongaigaon Refinery & Petrochemicals Ltd. v. CIT [sic–Aspinwall & Co. Ltd. v. CLT] (supra) as under: “This Court while determining as to what would amount to a manufacturing activity held in Dy. CST v. Pio Food Packers : that the test for determination whether manufacture can be said to have taken place is whether commodity which is subject to the process of manufacture can no longer be regarded as the original commodity, but is recognized in the trade as a new and distinct commodity. It was observed (p. 65): ‘Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. 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’.”
17. Adverting to the facts to the present case the assessee after obtaining rectified spirit which is not potable and other materials, processed them to obtain IMFL. The raw material including rectified spirit are not fit for consumption by human beings but the end product IMFL is potable and is so recognised in the trade.
18. Here, it will also be worthwhile to refer to the following expositions from the Hon’ble apex Court and Hon’ble jurisdictional High Court;
(i) The Hon’ble Supreme Court in the matter of Kores India Ltd. v. CCE 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.
(ii) The Hon’ble apex Court in the case of Aspinwall & Co. Ltd. v. CIT (supra) had held as under:
The word ‘manufacture’ has not been defined in the IT Act. In the absence of a definition, the word ‘manufacture’ has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to manufacturing activity.
The Supreme Court in the decision cited supra, held : that the assessee after plucking or receiving the raw coffee berries made them undergo nine processes to give them the shape of coffee beans. The final produce was absolutely different and separate from the input. The change made in the article resulted in a new and different article which was recognised in the trade as a new and distinct commodity. The coffee beans had an independent identity from the raw material from which they were produced. Conversion of the raw berry into coffee beans was a manufacturing activity. The assessee was, therefore, entitled to the investment allowance under Section 32A.
(iii) Hon’ble jurisdictional High Court has referred to that decision in the case of CIT v. Premier Tobacco Packers (P) Ltd. (supra) and held that:
Though the assessee was doing only processing work and was not involved in manufacture, the process is a manufacturing process when it brings out a complete transformation in the original article so as to produce a commercially different article or commodity. That process itself may consist of several processes. The different processes are integrally connected which results in the production of a commercially different article. If a commercially different article or commodity results after processing then it would be a manufacturing activity. The assessee after thrashing and redrying, which is called as Virginia flue-cured tobacco (VFT) in commercial parlance, converts them into lamina and N.R. Stems, etc. The end product is used in the manufacture of cigarettes and the raw materials, namely, Virginia flue-cured tobacco (VFT) could not be used directly in the manufacture of cigarettes. The assessee after processing the raw Virginia flue-cured tobacco converts them into tobacco which is a commercially different commodity. Conversion of the Virginia flue-cured tobacco into tobacco would be manufacturing activity.
19. We also note that in Section 80HH, with respect to which the Shaw Scott decision (supra) itself was delivered no mention of Eleventh Schedule is there, while in Section 80-IB mention of Eleventh Schedule is there. The Act itself envisages that manufacture or production is involved to bring about items referred in Eleventh Schedule and so small-scale industries engaged in manufacture or production of those articles are eligible for relief under Section 80-IB by the reverse inference.
20. We may also mention that amongst other conditions for claiming deduction under Section 80-IB(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”.
21. Hon’ble apex Court in the case of CIT v. N.C. Budharaja & Co. and Anr. Etc. has expounded the word “production” as under:
The word ‘Production’ has a wider connotation than the word ‘manufacture’. While every manufacture can be characterised as production, every production need not amount to manufacture. The word ‘production’ or ‘produce’, 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. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods.
22. From the above discussion, it is abundantly clear that the assessee is entitled to relief under Section 80-IB being a small-scale industry engaged in production of IMFL from rectified spirit. The end product IMFL is quite distinct and is a commercially different article than the major input rectified spirit, which is not fit for human consumption. That the changes made in input results in a new and different article which is recognised in the trade as such. The same also has judicial recognition, as seen in paras 13 and 14 above from expositions of Hon’ble apex Court and Hon’ble Allahabad High Court cited above. Section 80-IB itself envisages as such by way of reference to Eleventh Schedule in Section 80-IB(iii). Hence, in our considered opinion, it has to be concluded that the assessee in this case satisfies the requirement, that it manufactures or produces an article or thing for the purposes of Section 80-IB of the Act.
23. However, it will not be out of place to refer to the Hon’ble apex Court decision CIT v. Podar Cements Ltd. and Anr. that construction beneficial to the assessee should be adopted in case of ambiguity and Mysore Minerals Ltd. v. CIT that in interpretation of taxing statute, interpretation beneficial to the assessee should be adopted.
24. In view of the aforesaid discussion, we hold that the assessee is entitled to relief under Section 80-IB. As such, we set aside the orders of lower authorities on this issue and decide the issue in favour of the assessee.
25. In ITA No. 2020/Mad/2006 for asst. yr. 2004-05, the assessee has raised a further issue that the learned CIT(A) has omitted to consider the specific ground relating to the disallowance of sales promotion expenses, which was specifically raised before him.
26. Upon a careful consideration of the above, we find that assessee has raised a valid ground. In ground No. ‘e’ raised before the learned CIT(A), the aforesaid issue has been raised. But the learned CIT(A) has omitted to adjudicate the same in his appellate order. Hence, in the interest of justice, we remit this issue to the files of learned CIT(A) to give a speaking order on the issue raised. The assessee should be given adequate opportunity of being heard. We make it clear that we have not decided the issue on merits in any manner whatsoever. It will be open to the assessee to raise whatever points on this issue before the CIT(A) as he may be advised and as he may be entitled in law.
27. In the result, the assessee’s appeal in ITA No. 2019/Mad/2006 is allowed and ITA No. 2020/Mad/2006 is allowed for statistical purposes.