M/S BHOLE BABA MILK FOOD INDUSTRIES DHOLPUR,AGRA vs. J.C.I.T., RANGE -4, AGRA

Per Dr. M.L. Meena, A.M.:

This appeal by the assessee is directed against the order of the ld.

Commissioner of Income Tax(A)-II, Agra dated 28.02.2014 wherein the

assessee has challenged the action of the CIT(A) in confirming disallowance

of deduction of Rs. 62, 35, 937 claimed by the assessee u/s 80 IB of the Act,

out of net profit on the trading goods of Dholpur Unit.

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The Assessing Officer (In short ‘the AO’) has recomputed the deduction 2. claimed u/s 80IB of the Act, by separating income earned from insurance, Interest, rent, brokerage & commission and net profit of trading good from Dholpur Trading Unit of Rs. 10, 800/-, 8,99,049/-, 8,35,440,18,35,262/- and Rs. 62,35,637/- respectively. Accordingly, the AO has computed deduction u/s 80 IB at Rs. 1,20,99,129/- as against the revised deduction of Rs. 1,46,51,327/- computed by the assessee during the assessment proceeding instead of Rs. 1,75, 51,043/- claimed in the return of income.

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3.1. The CIT(A) has reproduced in para 5.2 in page no. 5 to 9 of the of the impugned order, the AO’s remand report dated 17.10.2013 being furnished in compliance to the CIT(A)’s letter dated 07.10.2013, on the submissions of the assessee that disallowance of deduction u/s 80 IB is not justified on the profits derived on trading goods. In para 6 of the remand report, AO noted that as per the auditor reports, Annexure ‘A’, quantitative trading results for the year under consideration and the has not disputed the same except stating that after purchase of ghee and skimmed milk powder, they were processed by removing moisture and guthle. The AO concluded I remand report that merely by removing moisture and guthle, the purchased ghee and skimmed milk powder do not get converted into a new commercial product.

3.2 Thereafter, the CIT(A) confront the Assessee and the AO to the remand report in hearing held on 22.10.2013 and noted discussion and observations vide para 5.3,5.4 and 5.5 from page No. 11 to14. He has given finding in para 5.6 to 5.9 on page No. 15 to 20. The relevant material part of the finding of the CIT(A)’s is summarized hereunder:

5.1 After considering the written submission of the Ld. AR filed on 07.10.2013 claiming that the goods have been purchased by the assessee for reprocessing and repacking and then their sales have been made under

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the brand name of the company and therefore, there is no trading sale, the AO has been asked vide my letter A. No. 128/CIT(A)-ll/JCIT-4/Agra/2012- 13/995 dated 10.10.2013 to provide supporting information / details on the basis of which, the conclusion has been drawn that the assessee (appellant) is engaged in trading of goods along with carrying out its manufacturing activities.

5.2 In compliance to my letter dated 10.10.2013, report has been submitted by the JCIT, Range-4 (who passed the impugned order) vide his letter dated 17.10.2013 and the same is reproduced as under: -

"2. The remand report is being called for on the submission made by assessee that the disallowance of deduction u/s 80IB is not justified on profits derived from trading of goods. The assessee has claimed that the goods so purchased were reprocessed and repacked and then their sales have been made under the brand name of the company and therefore, there is no trading sales done by assessee and all the sales are manufacturing sales. The remand report is also called for to explain the basis for computation of trading sales made in the assessment order on proportionate basis. 3. Sri R.M. Singhal, Advocate attended and submitted his written reply dated 17.10.2013 which is reproduced as under- "2. On the last date of hearing the appellant was asked to furnish basis for claiming deduction u/s 8018 of the Income Tax Act, 1961. in this connection, it is submitted that the appellant is engaged in manufacturing of Desi Ghee and otheritems of milk products. As already stated that the Ld. Assessing Officer has disallowed net profit on trading goods ofDholpur Unit amounting to Rs.62,35,937/- while calculating deduction allowable under the provisions of section 80IB of the Income Tax Act. The aforesaid amount was a part

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of profit earned from Dholpur Unit and had rightly been claimed by the appellant as a deduction u/s 80IB of the Income Tax Act, 1961. 3. In this connection, it is submitted that the facts of the case of the appellant are similar to those available in the following case laws and therefore, the appellant relied upon these case laws:- (i) CIT Vs. Vinbros& Co. (2012) 210 Taxman 252/254 CTR 110/79 DTR 43 (SC). (ii) CIT Vs. Vinbros& Co. (2009) 177 Taxman 217 (Mad) (High Court), (Judgmentof Madras High Court) (Hi) India Cine Agencies Vs. Dy. CIT (2012) 210 Taxman 253 (SC). S. 80IB : Deduction - Industrial undertakings - Manufacture - Blending and bottling of Indian Manufactured Foreign liquor (IMFL), would amount to 'manufacture' for the purpose of deduction 80IB. The question before the Apex Court was whether blending and batting of Indian Manufactured Foreign Liquor (IMPL), would amount to -'manufacture' for purpose of claiming deduction under section 80IB, the Court answered the question in favour of assesses and civil appeal of the department was dismissed. (A, Y. 2003-04, 2004-05). S. 801 : Deduction - Industrial undertaking - Manufacture - Cutting of jumbo rolls of photographic films in to smaller marketable sizes would constitute 'manufacture' for purpose of deduction under section 801. The question before the Civil Court was whether cutting of jumbo rolls of photographic films in to smaller marketable sizes would constitute 'manufacture' under section 801. the Apex Court following the ratio in Indian Cine Agencies Vs. CIT (2009) 308 ITR 98 (SC), held that the activity will amount to manufacture; accordingly, civil appeal of the assessee was allowed (A. Y. 1988-89). 4. In this connection, it is further submitted that Mumbai High Court in the case of CIT Vs. Beta Cosmetics P 31-683 (2012) 43-8 BCAJ (Bom) (High Court), held that assessee is engaged in the business of production of perfumed hair oil using coconut oil and mineral oil as per the requirement

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of Hindustan Lever Ltd. The assessee claimed the deduction under section 80IB. The Assessing Officer rejected the claim. In appeal before the Tribunal the Tribunal allowed the claim of assessee. On appeal by revenue the court following (he ratio of Supreme Court in CCE Vs. Zandu Pharmaceutical Works Ltd. (2006) 12 SCC 453, wherein, it has ' been held mat addition of perfume to coconut oil to produce perfumed oil constitute a manufacturing process hence, decision of Tribunal holding that the assessee is engaged in manufacturing activity is justified. The appeal of revenue was dismissed (A. Y. ITA No. 5779 of 2010 dated 30.11.2011). 5. It is, therefore, submitted that in the above mentioned cases deduction u/$ 8018 has been granted by the Hon'ble Apex Court and the HighCourts respectively. As already stated that the appellant is engaged in the manufacturing of desee ghee. As a matter of fact the appellant us fid to purchase rough daseeghee from other traders to be manufactured at the premises of the factory of the appellant in order to bring it up to the level of standard desee ghee to be sold under the brand name of the appellant company, thus, it is submitted that since the facts of the present case are absolutely identical to those given in the aforesaid cases there does not appear to be any reason or basis for disallowing the claim of the appellant under the provisions of section 801B of the Income TaxAct, 1961. 6. That it may again be submitted here that the Ld. Assessing Officer has erred in law and on facts in disallowing net profit on trading goods comprising of SMP and unfinished and rough desee ghee containing guthia etc. The SMP (skimmed milk powder) comes in jute bags and it contain moisture etc. This moisture makes the SMP quite harder and is not at all eatable. Thus, the appellant company has to reprocess it by removing moisture etc. to give it a shape of very fine powder and good in taste. The appellant company has also to manufacture it up to the level and quality of the company to be sold under the brand name of the company, similar type of treatment is given to the unfinished rough desee ghee consists of guthia etc., The guthia is made of cream. Such unfinished rough desee ghee consisting of guthia is put in the machinery for melting it at a certain degree in order to make it upto the required quality and standard prescribed for the tasty daanedaar ghee sold by the company. Thereafter, the same is packed in various , sizes of pouch and tins and then it is sold under the brand name of the company. Thus, the reprocessing and

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repacking of the material is converted into a distinct shape absolutely different from the original one purchased in the shape of trading . goods. Thus, the total amount of Rs. 62,35,937/- was spent in acquiring the above mentioned articles which was liable to be allowed within the provisions of section 80IB of the Income Tax Act, 1961 because it was part of profit earned from Dholpur Unit and was not liable to be disallowed for the purpose of calculating the deduction u/s 80IB of the Income Tax Act, 1961. 7. It may further be submitted that the assessee company had purchased the aforesaid items of the goods from other concern for reprocessing and repacking and then the sale of these commodities was made by the assessee company under the brand name of the company. Therefore, the said commodity is covered within the definition of manufacturing activities and on the sale of these commodities deduction u/s 80IB has rightly been claimed by the assessee appellant. It may also be submitted that original commodities purchased from another concern has experienced a series of change and took the commodities to the point where commercially it can no longer be regarded as original commodities and are recognized as nevs commodities absolutely distinct from the original one. Therefore, the case of appellant is that a new commercial product being quite distinct and different from the product taken from other concern has emerged out and therefore, it is a case of manufacturing of new product. Hence, in the present case deduction u/s 80IB should not be disallowed only on the ground that the product of other concern has been used a raw material by the appellant concern. In case the product is a distinct commercial product different from the raw material used by the assessee, the claim of the appellant deserves to be allowed. 8. It is further submitted that the assessee company has similar type of ' machinery v/nero raw material is put for manufacturing and finished goods is prepared for its sale in the market. The commodity which is produced by the company has its special taste and quality, the manufactured goods cannot be compared with any other trading goods. Therefore, a special product ismanufactured and it cannot be separated for deduction claimed u/s 80IB of the Income Tax Act, 1961. 9. It is also submitted that the Ld. Assessing Officer has taken the trading profit on estimated basis without giving any basis or reason. Therefore, the action of the Assessing Officer cannot be said to be correct

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in the eyes of the law and the ' estimated trading profit taken by the Ld. Assessing Officer is unjust, unlawful and cannot be regarded as correct. The action of the Ld. Assessing Officer in taking estimated trading profit deserves to be cancelled. 10. In view of the above mentioned facts, it is requested that the disallowance made by the Ld. Assessing Officer for Rs. 62,53,927A for working out the deduction u/s 80!B of the Income Tax Act, 1961 deserves to be cancelled and the said amount of Rs.62,53,937/- be taken into account for purpose of allowing deduction u/s 80IB of the Income Tax Act, 1961." 4. In so far as the computation of profits of Rs.6235937/- from trading goods is concerned, Ld. AR although submitted that the trading profit is estimated without giving any basis, but when it was pointed out that the basis is given in the assessment order as per Note 2 on page No. 5 & 6 and he was also requested that in case there is any submission regarding the correctness of such computation, the same may be pointed out, Ld. AR could not make any submission on such query. Even otherwise, the computation of profits from sale of trading in assessment order is made as per working given in Note no. 2 at page 6 and 7 of the assessment order. The quantity of trading goods being Ghee and skimmed milk powder is given as per para B(c)(i) of the notes forming part of accounts given by the auditor, the copy of which is enclosed herewith as per Annexure 'A'. As per column 'g' of the table given in the enclosure, the quantity and value of purchase of Ghee and skimmed milk is given. The consolidated quantity and value of sale is given and therefore, the sale of trading stock of Ghee and skimmed milk is computed on pro~rata basis of quantity of trading goods sold vis-a-vis the total quantity and value of goods sold. Since, the assessee has not maintained records for separate sale of trading and manufactured goods, therefore, the above method is only reasonable as well as feasible method for computation. The Ld. AR has submitted that the assessee company purchased] 'rough Deshi Ghee (Guthlewala ghee) and it was processed and turned into standard quality of Deshi Ghee. Similarly, it is submitted that the skimmed milk powder purchased by the company also contained moisture and get I solidify (guthlewala). The company gets it processed by removing moisture and turning it into fine milk powder. It has been submitted that the Deshi ghee as well as skimmed milk powder is then repacked in to the desired

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packets. On the basis, of such submissions, Ld. AR argued that the assessee has undertaken manufacture and production of Deshi ghee and skimmed milk powder purchased from the outside parties and therefore, the profits derived from sales therefore is eligible for deduction u/s 80IB. It has been argued that the reprocessing done after purchase of Ghee and slimmed milk powder resulted into manufacturing a new commercial productbeing quite distinct and different from the product purchased by the company and therefore, it is a case manufacturing of new product. 6. The submission made by the Ld. AR is not correct. The auditor, as per annexure 'A', has given complete details of quantity and value of opening stock, production, purchase, turnover and closing stock of various raw material and finished goods including ghee and skimmed milk powder. The quantity of goods manufactured is given as per column 'f of the table and the quantity of goods purchased is given as per column 'g' of the table. The quantity of ghee produced is shown at 8146871 Kg. and the quantity of Ghee purchased is shown at 1065079 Kg. Similarly, the quantity of skimmed milk powder produced is shown at 12240341 Kg. and the quantity of skimmed milk powder purchased is shown at 1754685 Kg. Thus, the quantity of trading stock of ghee and skimmed milk powder is reported by the auditor himself. The assessee has not disputed that the company has purchased above products. The company has simply stated that after purchasing the ghee and skimmed milk powder, they were processed by removing moisture and guthle and therefore, the ghee and skimmed milk powder after such reprocessing turn into a new commercial product being different from the product originally purchased. The argument given by Ld. AR does not stand to reason. Merely by removing the moisture and guthle the ghee and skimmed milk powder purchased by the assessee do not get converted into a new commercial product Both the products remain the same after the alleged processing made by the assessee. It is also noticed that the assessee has not shown any reprocessing being above on such product. In view of this, the profit arrived from sale of such products cannot be held to be profit from manufacturing of production of any article or things. The case law relied upon by the assessee are not applicable in his case. The facts of these case were different form the facts of the case or the assessee.” In view of foregoing facts, the order of AO may kindly be upheld on above issue." In the above remand report, the AO gave reference of the Audit Report in which production of quantity of Ghee and Skimmed milk and purchase of Ghee

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and Skimmed milk is shown separately and therefore, as per the Auditor Report, the AO concluded that along with manufacturing Ghee and Skimmed milk, the assessee is also purchasing Ghee and Skimmed milk separately and then selling them, which amounted to trading of goods and therefore, he concluded that the assessee is also doing trading of Ghee and Skimmed milk and computed the profit of the assessee from trading of goods out of total sale on prorata basis as given in note 2 of theassessment order. For a ready reference, "Notes Forming Part of Accounts" relating to turnover are given as under:- ;

"Capacities production turnover and stocks of goods manufactured quantitative information in respects of goods manufactured & so/d (as certified by the management). Product Manufactured: Ghee, Skimmed milk powder & milk (condensed full cream). Installed capacity: 12 lacs Itrs of standard per day Current Year Quantity (in kgs.) 18,26,76,221 Value (in Rs. Lacs) 32,448.845 Raw Material Consumed (Milk) Finished Goods (Qty. in Kgs & value in Rs. Lacs) Product (0 Production (g) Pu chase (h) Turnover (e) Opening (0 Leakage f (j) Closing Stock Stock pilferage / shortage/ free sample

5952995 5952995 Milk (CFC) 0.000 0.000 0.000 0.000 1415.51 Milk (CFC) 0.00 0.00 0.00 0.00 0.00 758970.888 8146871.692 1065079.290 7039089.088 2930852.862 Ghee 979.920 16091.67 6441.72 Ghee 1366.15 1940.52

1364785.100 12240341.700 1754685.000 13653486.500 1706018.000 307.300 Skimmed milk 1542.21 1845.29 16731.51 2279.11 Skimmed milk Total 2123755.983 26340203.392 2819764.290 26645570.588 1287.220 4636870.862 (Qty)

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2908.355 3785.80 34238.70 8720.825 Total (Rs.) 0.000 0 Electric Unit 0.000 4189103.00 4189103.00 0.000 Electric (Rs.) 0.00 0.00 151.562 0.00

Grand Total 2908.355 0.000 3785.803 34390.261 0,000 8720.825 Stock in Process:- Current Year Quantify (in kgs.) amount (Rs. In lacs) Milk Fat (Ghee) 495400 1065.11 Milk Solid not fat (SNF/SMP) 78000 1040.06" From above quantitative details provided by the auditor, it is quite clear that the assessee is doing production of Ghee and Skimmed milk from Raw Material being purchased as "Milk" and apart from doing production of Ghee and Skimmed milk from Raw Milk, it is also purchasing Ghee and Skimmed milk and selling them in its brand name. The AO has considered such purchase and sale of Ghee and Skimmed milk astrading of goods because he did not agree with the argument of the Ld. AR that merely by removing the moisture and gutahle, the Ghree and Skimmed milk powder purchased would get converted into a new commercial product. Therefore, he made computation of profit earned on trading of goods on prorata basis as given in Note 2 of the computation given in the assessment order and the same is reproduced as under:-

"Net Profit of Dholpur unit of Trading Goocte;- (A) Sale Value of Trading Goods -. (1) Value of Ghee Sales of Trading Goods 16091.67x1065074 = (Sales Rs. In lacs) x (Trading Purchases in Kg.) = Rs.24,34,81,788/- 7039089 (Total Ghee Sales in Kg.) (2) Value ofSMP Sales of Trading Goods 16731.51 x 1754685 = (Sales Rs. In lacs) x (Trading Purchases in KQ.) = Rs.21.50,25,888/- 13653486 (Total SMP Sales in Kg.) Total Sales value of Trading Goods = Rs.45,35,07,67'6/- (B) Total Sales of Dholpur Unit Total Sales as per books Rs.343,90,26,143.75 . Less: Sales of Wind Mill . Rs. 1,51,56.161.00

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Rs>342,38,69,982.00 .... .... - (C) Net Profit of Dholpur undertaking Rs.4,65,66,368.00 Net Profit on trading goods of Dholpur unit = C x A B = 45,85,07,676.00x4,65,66,368.00 = Rs. 62,35,93 7/- 342,38,69,982.00"

5.3 The above remand report of the AO i.e. JCIT Range-4, who passed the impugned order has been discussed in the hearing held on 22.10.2013 attended by the JCIT Range-4 and the Ld, AR. In this hearing, after discussion with rival parties, it emerged that the main dispute is about the process involved that is being applied on the Ghee and Skimmed milk purchased by the assessee from the market to make them a new commercial marketable product. The AO rejected the earlier explanation of the Ld. AR of removing gutahle from Ghee and moisture from Skimmed milk would convert them in a new commercial product. In this regard, the Ld. AR has also informed that the purchased goods are also being mixed with certain chemicals and essence to convert them to Ghee and Skimmed milk of the brand sold by the company and hence, in view of the Ld, AR, the process involved is akin to manufacturing. Therefore, he pleaded that deduction u/s 80IB should be allowed on \ purchased goods also. Against the above arguments of the Ld. AR, the AO contended that the purchased Ghee and Skimmed Milk are being sold only after extracting moisture and removing guthale and hence, the process is akin to only cleaning process and not any manufacturing process and no deduction u/s 80IB should be allowed. In order to resolve this dispute, the Ld. AR has been asked to show the production from Raw Material and purchased goods separately giving the details of production process involved in producing Ghee and Skimmed Milk from Raw Milk and production process involved in making Ghee and Skimmed milk of the brand being sold by the assessee from these goods purchased from market. He has also been asked to give the details of chemical and essence being added during manufacturing process to make the Ghee and Skimmed Milk suitable for the brand being sold by the assessee.

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During discussion, it has also been found that sale made out of purchase of ' Ghee and Skimmed Milk is being shown as trading in the return filed to the Trade Tax Department but the same sale is being shown as out of manufacturing to the Income Tax Department. The Ld. AR has been asked to explain the reason for giving different treatment to sates made by the assessee in the returns filed to both departments, if these sales are of same type. 5.4 In response to the above queries raised in the hearing held on 22.10.2013, reply of the assessee (appellant) through its Ld. AR is filed on 30,10.2013 as under:- "2. On the last date of hearing i.e. on 22.10.2013, the appeal was -. partly heard and various information / details, as per order sheet entry dated 22.10.2013, were required. In response to the aforesaid query our submission on each of the points raised therein is as under- 3. That we have already submitted details of trading andmanufacturing goods to the concerned Assessing Officer during the course of assessment proceedings and it may also be submitted that the figures mentioned by the Assessing Officer in respect of calculation of trading and manufacturing goods is not a matter of dispute at any stage. It is further submitted that the trading goods shown to have been purchased by theappellant has been utilized in the manufacturing and reprocessing of desee ghee and SMP to be sold by the company under it brand name by putting it in pouches and tins of various sizes. It may also be submitted here that the raw material purchased and trading goods, ghee and SMP are put in the machines and these items are mixed together and thereafter good quality of desee ghee and SMP is manufactured which arc sold in the market. The assesses has already submitted proof for claiming deduction u/s 80IB of the Income Tax Act, on the goods manufactured by the appellant company. It may also be submitted that the facts of the present case are absolutely similar to those given in the case laws mentioned in our earlier reply submitted during the course of assessment proceedings. The same are being reproduced as under:- "In this connection, it /.s further submitted that Mumbai High Court in the cose of CIT Vs. Beta Cosmetics, P 31 683 (2012) 43-B BCAJ (Bom) (High Court), held that assesses is engaged in the business of production of perfumed hair oil using coconut oil and mineral oil as per the requirement of Hindustan Lever Ltd. The assesses claimed the deduction under section 80IB. The assessing officer rejected the claim. In appeal before the Tribunal the Tribunal allowed the claim of assesses. On appeal by revenue the Court following the ratio of Supreme Court in CCE Vs. Zondu Pharmaceutical

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Works Ltd. (2006) 12 SCC 453, wherein it has been held that addition of perfume to coconut oil to produce perfumed oil constitute a manufacturing process, hence decision of Tribunal holding that the assesses is engaged in manufacturing activity is justified. The appeal of revenue was dismissed. (A.Y. ITA No. 5779 of 2010 dated 30.11.2011)." 4. That as regards treatment of Trade Tax Department to our goods it is submitted that equal treatment is given by the Trade Tax Department on trading goods and manufactured goods. Therefore, there is no dispute on the levy of trade tax on the trading goods as well as manufactured goods. 5. That the aforesaid reply be treated as final submission by the appellant and appeal may be decided on the basis of our written submission submitted from time to time."

After going through the above reply, I find that none of the details regarding production process involved in manufacturing of Ghee and Skimmed Milk from Raw Material as "milk" and also manufactured from the Ghee and Skimmed milk purchased from the marked have been furnished. It is only stated that the Skimmed Milk and Ghee purchased as trading goods were put in pouches and tins of various sizes to be sold by the assessee company in its brand name and a case law in the case of CIT Vs. Seta Cosmetic P 31-683 (2012) 43-3 BCAJ (Bom) of Bombay High Court has been referred to support his argument that such type of packing under a particular brand name would amount to manufacturing and hence, such sale would be eligiblefor deduction u/s 80IB. As the reply submitted by the Ld. AR has been found to be incomplete, a letter F. No. 128/CIT(A)-ll/Agra/JCIT /R-4/Agra/2012-13/1970 dated 03.02.2014 has been written to the assessee. This letter is reproduced for a readyreference:- "Please refer to your written submission filed in Dak on 30thOctober, 2013 in justification of deduction claimed by you u/s 80IB which was not allowed by the AO on the profit earned on account of trading of goods to the extent of Rs.62,35,937/-. , . . 2. With respect to the above disallowance made by the AO in the impugned assessment order, it has been claimed by you that the trading goods purchased by you was further processed before selling them in the market and hence the profit earned on such sales is also eligible for deduction u/s 80IB in view of the decision of Mumbai High Court in the case of CIT vs Beta Cosmetics. In order to examine the suitability of this case law being applied in your case, you are required to explain the full details of the

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processing of goods done by you after they were purchased. In this regard necessary details were also called from you in the hearing held with your Authorized Representative on 22.10.2013 but so for these details have not been submitted. Therefore, in absence of your explanations about giving the details of the processing done by you on trading goods (Ghee and Skimmed Milk), it is not possible to find out whether any additional raw material such as chemical or essence was added in the trading goods before they were sold in the market as was the facts in the case of CIT vs Beta Cosmetics. Therefore, you are required to provide details of processing done by you with respect to these goods to examine about the applicability of case law CIT vs. Beta Cosmetics in your case. 2.1 With regard to your declaration in Trade Tax Department with respect to sale made by you out of manufacturing goods and trading goods, it has been submitted in your letter filed on 3tfn October, 2013 that equal treatment is given by the Trade Tax Department on trading goods and manufacturing goods and, therefore, there is no dispute on the levy of Trade Tax on the trading goods as well as manufacturing goods. In order to examine the above contention, you are required to furnish the copy of returned fifed by you to the Trade Tax Department for the year under consideration showing your declaration for trading goods as well as manufacturing goods. – 2.2 In this appeal, only issue to be decided vs about providing of deduction u/s 30/B on certain goods which have been pointed out by the auditor in the audit report as trading goods as per the finding given by the AO in the impugned assessment order. This issue could not be decided so far because the requisite details as called from you could not be submitted so far Therefore, you are required to furnish these details as mentioned in para no. 2 of this notice and also as required to be submitted in the hearing with your Authorized Representative on 22.10.2013. The next date of hearing in the case is fixed on 21.02.2014. You are required either to appear personally or send your Authorized Representative along with the details as called for in this notice so that hearing of this appeal can be completed otherwise this appeal v/ould be decided on 21.02.2014 on the basis of the submissions so far made by you considering that you have nothing to submit further." 5.5 In response to my above letter, the assessee (appellant) filed his reply on 24.02.2014 and the same is reproduced as under: - "Please refer to your notice issued u/s 250(1) of the Income Tax Act, 1961 bearing F. No. 128/CIT(A)-l!/Agra/JCIT/R-4/Agra/2012-13, on the above noted subject. 2. In this connection, it is submitted that the assessee had claimed deduction u/s BOIB of the Income Tax Act, 1961 amounting to

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Rs.6235937/-. The assessee was engaged in manufacturing of Desl Ghee and other items of milk products. The Assessing Officer has disallowed net profit on trading goods ofDholpur Unit amounting to Rs.62,35,937/-. 3. That in our earlier replies we have already stated that the assessee having purchased roughtdesee ghee from other traders had to remanufacture it at the premises ofassessee's factory in order to bring it up to the level of standard desee ghee and thereafter, it was to be sold under the brand name of the assessee company, further, we have a/so given reason for claiming deduction u/s 80IB that after purchasing the unfinished and rough desee ghee (Guthlewala ghee) from other concern the same is processed and converted into DaanedaarTaralShudhdesee ghee and then it is packed in different sizes of pouches and tins and thereafter, it is sold under the brand name of the company, therefore, under these circumstances, the profit earned on such goods is a part of the Dholpur Unit which has rightly been claimed as exemption under the provisions of section 80IB of the Income Tax Act, 1961. 4. Under these circumstances, it is requested that the claim of the assessee u/s 8013 Is quite genuine and deserves to be allowed. However, if any other material or documentary evidence is required the same may also 5e communicated for compliance."

5.6 I have considered the rival submissions put up before me during the appeal proceeding. From the details given by the Auditors and also found by the AO during assessment proceeding, the assessee (appellant) is manufacturing Deshee Ghee and Skimmed Milk from Raw Milk and also purchasing Deshee Ghee and Skimmed milkfrom market separately and then these products purchased from market are also packed in pouches and tin after some cleaning process .and sold in the market under the brand name of the company along with its manufactured products. With respect to such purchase of goods from the market, it has been explained that guthale is removed from Ghee and moisture is removed from Skimmed Milk before, they are repacked in pouches and tins bearing brand of the company. As per the AO, such removal of guthale from Ghee and moisture from Skimmed Milk is akin to cleaning process and not manufacturing process. In order to rationalize his claim of manufacturing done from the Ghee and Skimmed milk purchased from the market, the Ld. AR claimed that to make these Ghee and Skimmed milk suitable for the brand of the company, chemical and

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essence are also added but no details with regard to such process and details of adding of any chemical and essence in this process, has been furnished even after calling for such details repeatedly. Therefore, the only conclusion that can be drawn is that the Ghee and Skimmed Milk purchased from market is only being repacked after some cleaning process of removing guthale from ghee and moisture from Skimmed milk but no manufacturing process is involved in which raw material gets converted into some different new commercial product. Here input and " output product is same. Only after doing some cleaning process, it is repacked in pouches and tins. Sales of such goods are also being shown as trading sale of goods in the return filed to the Trade Tax Department. When the Ld. AR has been asked to give separate details of manufacturing process involved, using raw material as Raw Milk and using raw material as Ghee and Skimmed Milk, purchased from the market, it has been replied that they have already submitted details of trading and manufacturing goods to the concerned Assessing Officer during the course of assessment proceeding and further stated that it may also be submitted that the figures mentioned by the Assessing Officer in respect of calculation of trading and manufacturing goods is not a matter of dispute. However, on checking the details filed with the assessing officer, it has been found that only quantitative details of trading and manufacturing of goods were filed but details of showing the process of manufacturing from the trading goods was not filed. Therefore, now the question to be decided is whether repacking of trading goods after a cleaning process can be called as manufacturing. It is well settled that where the change or series of changes brought about by the applications of process, take the commodity to the point where, commercially, it can no longer be regarded as original commodity but is, instead recognized as a distinct and new article that has emerged as a result of the process, it would amount to manufacture of an article or thing. Reference in this respect may be made to the decision of the Supreme Court in the case of Ujagar Prints Vs. Union

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of India (1989) 3 SCO 488. At the same time, it is also well settled that the word "manufacture" implies a change but every change in the raw material is not manufacture. There must be such a transformation that a new and different article must emerges having a distinct name, character or use. Reference may be made in this respect to the decision of the Supreme Court in the case of Tungbhadra Industries Ltd. Vs. Commercial Tax Officer AIR 1961 SC412. Now, under section 2(29BA) of the Income Tax Act, the word "manufacture" has been defined. This section has been introduced w.e.f. 01.04.2009. This definition is as under:- "[(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."

5.7 Now, applying the above definition of manufacture as laid down in the decision of the Hon'ble Supreme Court and also incorporated under the Income Tax Act w.e.f. 01.04.2009, I find that in the present appeal in case of trading goods, the purchased material is Deshee Ghee and Skimmed Milk and the material sold is also Deshee Ghee and Skimmed Milk. The only difference is that before selling, guthaie from Deshee Ghee and moisture from Skimmed Milk has been removed and they are packed in pouches and tins having brand name of company. No other processing done on trading goods before thers sale has been explained. Therefore, purchased goods as well sold goods remained to be Deshee Ghee and Skimmed Milk in respect of trading goods and no new product has come into existence with a different chemical composition or having different name, character and use Therefore, the DesheaGhea and Skimmed Milk sold after purchasing from the market and repackingthem after removing guthale from Deshee Ghee and moisture from Skimmed milk would not amount to manufacture, if the above definition of manufacture is applied. 5.8 The Supreme Court in the case of Sterling

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Foods Vs. State of Karnataka [1986] 3 SCO 469 held that Shrims, prawns and lobsters, even after undergoing process of peeling, deveining, cleaning freezing and packing, retain their original identity and do not become different commodities. The Madras High Court in the ease of State of 7am// Nadu Vs. Indodan Milk Products (1980) 45 STC 498 has held that dehydration of milk to obtain condensed milk does not amount to manufacture. Subjecting raw uncut diamonds to process of cutting and polishing, which yields polished diamond, has been held to be not amounting to 'manufacture', in the case of C/r Vs. Gem India Mfg. Co. (2001) 249ITR 307 by the Supreme Court. In another decision of Madras High Court in case CIT Vs. Sri Meenakshi Asphalts reported In (2004) 136 TAXMAN 170 (MAD), earlier decision of Hon'ble ITAT Madras in which it held making of blown bitumen by process of heating waste scrap bitumen as manufacturing for the purpose of deduction u/s 80HH, has been reversed by holding the above process as not manufacturing because heating to scrap bitumen has only resulted in separation of oil and water from bitumen and no new product has emerged from the process employed by the assessee. What was bitumen, continued to be bitumen but with lesser quantity of oil and moisture. The purposes for which, it can be used are only the purposes for which the use of bitumen is appropriate. Similar to the above case law in the present case also, for the Deshee Ghee and Skimmed Milk sold out of Desnee Ghee and Skimmed Milk purchased from the market, what was Deshee Ghee and Skimmed Milk continued to be Deshee Ghee and Skimmed Milk but with lesser quantity of guthale in Deshee Ghee and lesser quantity of moisture in Skimmed Milk and no new product has emerged from the process employed by the assessee. Since the output product is not different than the input product and the purpose for which input product can be used, arc only the purpose for which the output product can be used, the Deshee Ghee and Skimmed Milk purchased from the marked cannot ba said to be sold out of manufactured Dashee Ghee and Skimmed Milk. Therefore, suchsales have been shown by the assessee (appellant) to the Trade

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Tax Department as trading sale and hence, for such sale, the assessee (appellant) would not be entitled for deduction u/s 80IB as held by the AO In the assessment order. In the case law of CIT Vs. Beta Cosmetics ITA No. 5759 of 2010 dated 30.11.2011, of Bombay High Court, the output product was made as perfumed hair oil using coconut oil and mineral oil and hence, chemical composition of the oil made to be used for hair has changed from that of pure coconut oil due to adding of mineral oil and perfume and hence, output product can be used only for hair while pure coconut oil can be used for cooking as well as for hair also. Since output perfumed hair oil has been found to be distinct and different than the input coconut oil, the Bombay High Court has held the perfumed hair oil as produced by manufacturing process and eligible for deduction u/s 80IB. After referring to the above case law, the Ld. AR argued in the hearing that while making Deshee Ghee and Skimmed Milk out of purchased Deshee Ghee and Skimmed Milk, some chemical and essence are mixed to make them suitable for the brand of Ghee and Skimmed Milk being marketed by the assessee company but despite giving several opportunities, no such details of .the process of mixing of chemical and essence in the purchased Deshee Ghee and Skimmed Milk could be furnished and hence, the assessee failed to show that facts of his case are similar to the facts of the case of CIT Vs. Beta Cosmetics (supra), Therefore, this case law has not been found to be applicable in case of the assessee (appellant). 5.9 I have found that the facts of the case of the assessee are more nearer to the facts of the case of CIT Vs. Shri Meenakshi Asphalt (supra) discussed in previous sub-para in which, the Hon'ble Madras High Court held that heating of the scrap bitumen in order to obtain solid bitumen, by causing moisture and oil in the scrap bitumen to evaporate or separated, cannot amount to a process of manufacturing. Similarly removing of guthale from Deshee Ghee and moisture from Skimmed Milk cannot amount to a process of manufacturing. Therefore, I hold that the AO is correct in his decision not allowing deduction u/s 80IB on such

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sale made by the assessse (appellant) out of purchased Deshee Ghee and Skimmed Milk. Since there is no dispute in respect of calculation of trading and manufacturinggoods, I confirm the decision of the AO disallowing net profit on trading goods of Dholpur unit amounting to Rs.62,35,937/- while calculating deduction u/s 80IB and hence deduction u/s 80IB computed by the AO at Rs. 1,20,99.937/- is confirmed and accordingly, Ground No. 4 is dismissed.

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Ghee That the assessee company purchases the raw ghee from the open market. In this ghee, there is moisture as well as Gutla, it is raw ghee. After purchase of this ghee, the assessee company first churn it so that the impurities could be removed and the Gutla are dissolved in the ghee. Thereafter this ghee is heated on a particular temperature so that further impurities may be removed. Thereafter this ghee is kept for 48 hours in a fix temperature of 18 degree so that the granules may emerge. Then this ghee is packet in packets of various sizes for sale in the market. Thus, after purchasing of raw ghee and getting it packed in different sizes of packets, there after 2-3 processes undertaken, as stated above. Thus, as after purchasing of raw ghee and then processing it, as stated above, it only becomes saleable in the market. Thus, the assessee is entitled for the deduction under Section 80(IB)(3) of the Income Tax Act having getting it in manufacturing process before its sale. Skimmed Milk; That there is also process involved in selling of skimmed milk. The assessee company purchases the raw skimmed milk wherein there is moisture and also the skimmed milk is not clean powder as per the standard of the assessee company brand. After its purchase, for some time it is spread so that the humidity could be removed. Thereafter it is mixed with the skimmed milk which is being manufactured by the assessee company so that the quality of the skimmed milk purchased from the market could be improved and thereafter both skimmed milk (manufactured by the assessee company and purchased from the market) are passed through the drier so that the humidity could be fully removed. After passing through the drier, this skimmed milk is checked in the laboratory with standard parameter and then sent for packing. Thus, there is process after purchasing of skimmed milk from market and the assessee is entitled for deduction under Section 80 (IB)(3) of the Income Tax Act; and that as required by the order of Sales Tax department are not available with the assessee being the matter is very old one. Thanking you, Submitted Sd/-

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(Rajendra Sharma) Advocate Counsel for the Appellant Dated: July 19, 2019.

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the word "manufacture" implies a change but every change in the raw material is not manufacture. There must be such a transformation that a new and different article must emerges having a distinct name, character or use. Reference may be made in this respect to the decision of the Supreme Court in the case of Tungbhadra Industries Ltd. Vs. Commercial Tax Officer AIR 1961 SC412.

7.1 The word "manufacture" has been defined under section 2(29BA) of the Income Tax Act. This section has been introduced w.e.f. 01.04.2009. This definition is as under:- "[(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."

7.2 Now, applying the above definition of manufacture as laid down in the decision of the Hon'ble Supreme Court and also incorporated under the Income Tax Act w.e.f. 01.04.2009, we find that in the present appeal in case of trading goods, the purchased material is Deshee Ghee and Skimmed Milk and the material sold is also Deshee Ghee and Skimmed Milk. The only difference is that before selling, guthaie from Deshee Ghee and moisture from Skimmed Milk has been removed and they are packed in pouches and tins having brand name of company. No other processing done on trading goods before theirs sale has been explained. Therefore, purchased goods as well sold goods remained to be Deshee Ghee and Skimmed Milk in respect of trading goods and no new product has come into existence with a different chemical composition or having different name, character and use Therefore, the DesheaGhea and Skimmed Milk sold after purchasing from the market and repacking them after removing guthale from Deshee Ghee and moisture from Skimmed milk would not amount to manufacture, if the above definition of manufacture is applied.

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7.3 The Supreme Court in the case of Sterling Foods Vs. State of Karnataka [1986] 3 SCO 469 held that Shrims, prawns and lobsters, even after undergoing process of peeling, deveining, cleaning freezing and packing, retain their original identity and do not become different commodities.The Madras High Court in the ease of State of Tamil Nadu Vs. Indodan Milk Products (1980) 45 STC 498 has held that dehydration of milk to obtain condensed milk does not amount to manufacture.Subjecting raw uncut diamonds to process of cutting and polishing, which yields polished diamond, has been held to be not amounting to 'manufacture', in the case of C/r Vs. Gem India Mfg. Co. (2001) 249ITR 307 by the Supreme Court.

7.4 In another decision of Madras High Court in case CIT Vs. Sri Meenakshi Asphalts reported In (2004) 136 TAXMAN 170 (MAD), earlier decision of Hon'ble ITAT Madras in which it held making of blown bitumen by process of heating waste scrap bitumen as manufacturing for the purpose of deduction u/s 80HH, has been reversed by holding the above process as not manufacturing because heating to scrap bitumen has only resulted in separation of oil and water from bitumen and no new product has emerged from the process employed by the assessee. What was bitumen, continued to be bitumen but with lesser quantity of oil and moisture. The purposes for which, it can be used are only the purposes for which the use of bitumen is appropriate. Similar to the above case law in the present case also, for the Deshee Ghee and Skimmed Milk sold out of Desnee Ghee and Skimmed Milk purchased from the market, what was Deshee Ghee and Skimmed Milk continued to be Deshee Ghee and Skimmed Milk but with lesser quantity of guthale in Deshee Ghee and lesser quantity of moisture in Skimmed Milk and no new product has emerged from the process employed by the assessee. Since the output product is not different than the input product and the purpose for which input product can be used, arc only the purpose for which the output product can be used, the Deshee Ghee and Skimmed Milk purchased from the marked cannot ba said to be sold out of manufactured Dashee Ghee and Skimmed Milk. Therefore, such sales have been shown by the assessee (appellant) to the Trade Tax Department as

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trading sale and hence, for such sale, the assessee (appellant) would not be entitled for deduction u/s 80IB as held by the AO in the assessment order and accordingly, the ld. CIT(A) was justified in confirming the addition in articulative manner..

7.5 In the case law of CIT Vs. Beta Cosmetics ITA No. 5759 of 2010 dated 30.11.2011, of Bombay High Court, the output product was made as perfumed hair oil using coconut oil and mineral oil and hence, chemical composition of the oil made to be used for hair has changed from that of pure coconut oil due to adding of mineral oil and perfume and hence, output product can be used only for hair while pure coconut oil can be used for cooking as well as for hair also. Since output perfumed hair oil has been found to be distinct and different than the input coconut oil, the Bombay High Court has held the perfumed hair oil as produced by manufacturing process and eligible for deduction u/s 80IB. After referring to the above case law, the Ld. AR argued in the hearing that while making Deshee Ghee and Skimmed Milk out of purchased Deshee Ghee and Skimmed Milk, some chemical and essence are mixed to make them suitable for the brand of Ghee and Skimmed Milk being marketed by the assessee company but despite giving several opportunities, no such details of the process of mixing of chemical and essence in the purchased Deshee Ghee and Skimmed Milk could be furnished and hence, the assessee failed to demonstrate before us the facts of its case are similar to the facts of the case of CIT Vs. Beta Cosmetics (supra), Therefore, this case law has not been found to be applicable in case of the assessee (appellant). 7.6 We are inclined to agree with the observation of the ld.CIT(A) that the facts of the case of the assessee are more nearer to the facts of the case of CIT Vs. Shri Meenakshi Asphalt (supra) discussed in previous sub-para in which, the Hon'ble Madras High Court held that heating of the scrap bitumen in order to obtain solid bitumen, by causing moisture and oil in the scrap bitumen to evaporate or separated, cannot amount to a process of manufacturing. Similarly removing of guthale from Deshee Ghee and moisture from Skimmed Milk cannot amount to a process of manufacturing. Therefore, we appreciate the finding of the ld.CIT(A) in holding hold that

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the AO is correct in his decision not allowing deduction u/s 80IB on such sale made by the assessee (appellant) out of purchased Deshee Ghee and Skimmed Milk. Since there is no dispute in respect of calculation of trading and manufacturing goods, we confirm the decision of the ld. CIT(A)in upholding AO’s disallowing net profit on trading goods of Dholpur unit amounting to Rs.62,35,937/- while calculating deduction u/s 80IB and hence deduction u/s 80IB computed by the AO at Rs. 1,20,99.937/- is confirmed. and accordingly, All the grounds are rejected.

Sd/- Sd/- (Laliet Kumar) (Dr. M.L. Meena) JUDICIAL MEMBER ACCOUNTANT MEMBER *AKV* Copy forwarded to: 1. Assessee 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT Sr. Private Secretary, ITAT, Agra