COMMISSIONER vs. MS SHIV RAM

IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA

I.T.A No. 21 of 2008.

Date of decision: 9.12.2009

Commissioner of Income Tax, Shimla

…. Appellant

Versus

M/s.Shiv Ram Veg Food Industries.

….. Respondent

Coram:

The Hon’ble Mr. Justice Deepak Gupta, J.

The Hon’ble Mr.Justice V.K.Ahuja, J. Whether approved for reporting? No For the appellant: Mrs. Vandana Kuthiala, Advocate.

For the respondent: Mr.Vishal Mohan, Advocate. _____________________________________________________ Deepak Gupta, J.(Oral) The appeal was admitted on the following identical questions of law: “i) Whether on the facts and in the circumstances of the case, the Hon’ble Tribunal was right in law in holding that converting limestone into limestone powder was a manufacturing activity and income derived from such activity was thus eligible for deduction u/s 80IB of the Income Tax Act, 1961?

2 ii) Whether on the facts and in the circumstances of the case, the Hon’ble Tribunal was right in relying on the judgment of Hon’ble Supreme Court in the case of M/s.Lucky Minmat Pvt. Ltd. vs. CIT(2000) 245 ITR 830 wherein only an observation has been made by the Hon’ble Court to the effect that conversion into lime and lime dust or concrete by stone crushers could be considered to be a manufacturing process without considering the subsequent decision and not relying on the decision of the Hon’ble Supreme Court in the case of M/s. Sacs Eagle Chicory vs. CIT(2000) 255 ITR 178(SC) wherein it has been held that mere crushing of chicory roots into chicory powder cannot be a manufacturing process?

The basic question which arises is whether the process of converting limestone into limestone powder is a manufacturing activity within the meaning of Section 80IA and 80IB of the Income Tax Act, 1961. In Black’s Law Dictionary (5th Edition), the work “manufacture” has been defined as, “the process or operation of making goods or any material produced by

3 hand, by machinery or by other agency; by the hand, by machinery, or by art. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine”.

In M/s.Sterling Foods v. State of Karnataka and another, 1986 (3) SCC 469, the question for determination before the Apex Court was whether shrimps, prawns and lobsters subjected to processing like cutting of heads and tails, peeling, deveining, cleaning and freezing cease to be the same commodity or become a different commodity. The Apex Court held as follows:-

4 other places including far-off countries in the world. There can therefore be no doubt that processed or frozen shrimps, prawns and lobsters are not a new and distinct commodity but they retain the same character and identity as the original shrimps, prawns and lobsters.”

This judgment was followed by the Apex Court in Commissioner of Income Tax v. Relish Foods, 1999(237), 59 wherein the same definition was applied to the provisions of the Income Tax Act. A Division Bench of the Madras High Court in Commissioner of Income Tax v. Sacs Eagles Chicory, 2000 (241) ITR 319 dealt with the issue as to what is ‘manufacture’. In the case before the Madras High Court, chicory roots were being roasted and then changed it into powder form. The question was whether this amounted to manufacture within the meaning of Income Tax Act. The Madras High Court held as follows:- “The fact that the chicory powder is used for consumption in combination with coffee powder does not make the chicory powder any different in so far as its identity is concerned, as chicory. Chicory powder is chicory in powder form and nothing else. Mere change in the form of the same commodity does not necessarily involve change of identity. The pineapple fruit when plucked from the tree and even after it is cut into pineapple slices retains the same identity as pineapple. Chicory powder and chicory root have the common identity of being chicory. The change in the form to powder in the case of chicory and to slices in the case of pineapple does not result in a change of identity.”

It would be pertinent to mention here that this decision of the Madras High Court was upheld by the

5 Apex Court in Sacs Eagles Chicory v. Commissioner of Income Tax, 2002 (255)ITR 178.

In Indian Hotels Co.Ltd. and others v. Income Tax Officer and others, 2000 (245) ITR 538, the Apex Court again dealt with the question as to what is the meaning to be given to the word ‘manufacture’. The Apex Court held that the processing of raw food items such as pulses, cereals, vegetables, meat etc. into edible items in the kitchen cannot be said to be process of manufacture.

In Commissioner of Income Tax v. Gem India Manufacturing Co., 2001 (249) ITR 307, the question before the Apex Court was whether the process of cutting, polishing raw diamond amounts to manufacture and produces new articles or things. The Apex Court held as follows:- “The question that the High Court and we are here concerned with is whether, in cutting and polishing diamonds, the assessee manufactures or produces articles or things. There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. There is no material on the record upon which such a conclusion can be reached.”

A three Judge Bench of the Apex Court in Aspinwall and Co. Ltd. v Commissioner of Income Tax 2001 (251) ITR 323, considered the question whether the

6 process of manufacturing coffee beans from raw berries amounts to manufacture. The Apex Court after making reference to the Encyclopedia Britannica held that coffee is a beverage made from roasted seeds (beans) of the coffee plant and found that the process of coffee into roasted coffee went through nine processes. Firstly the coffee was dried in the sunlight. Then the outer husk of the coffee been was removed, if necessary, by mechanical operation. The coffee seeds were then extracted and polishing was done. Thereafter, gradation was done where the good coffee was separated by mechanical as well as manual grading. The Court held that net product is absolutely different and separate from the input. The Apex Court held as follows:-

“Adverting to facts of the present case, the assessee after plucking or receiving the raw coffee berries makes it undergo nine processes to give it the shape of coffee beans. The net product is absolutely different and separate from the input. The change made in the article results in a new and different article which is recognized in the trade as a new and distinct commodity. The coffee beans have an independent identity distinct from raw material from which it was manufactured. A distinct change comes about in the finished product.

The submission of the learned counsel for the Revenue that the assessee was doing only the processing work and was not involved in the manufacture and producing of a new article cannot be accepted. 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 result in the production of a commercially different article. If a commercially different article or commodity results after

7 processing then it would be a manufacturing activity. The assessee after processing the raw berries converts them into coffee beans which is commercially different commodity. Conversion of the raw berry into coffee beans would be a manufacturing activity.”

Sh.Vishal Mohan, learned counsel for the assessee has placed reliance on the judgment of the Apex Court in Lucky Minmat Pvt. Ltd. Vs. Commissioner of Income Tax, 2000 (245) ITR 830 wherein the Apex Court has held as follows:- “The conversion into lime and lime dust or concrete by stone crushers could legitimately be considered to be a manufacturing process while the mere mining of limestone and marble and cutting the same before it was sold in the market could not be so considered.”

According to Mrs.Vandana Kuthiala, learned counsel for the revenue, this observation is only obiter dicta and is not the ratio of the decision and the question whether an activity amounts to manufacture or not is to be decided in the facts of each case. As far as conversion of limestone into limestone powder is concerned, The Apex Court has clearly held that the conversion into lime and lime dust or concrete by stone crushers can legitimately be considered to be a manufacturing process while the mere mining of limestone and marble and cutting the same would not be so considered. The observation of the Supreme Court cannot be termed to be ‘obiter dicta’ since the Supreme

8 Court has held that the process of conversion of limestone into lime and lime dust is a manufacturing process. Therefore, there is no merit in the contention of the revenue. Accordingly, both the questions are answered in favour of the assessee and against the revenue. The appeal is dismissed accordingly. No order as to costs.

( Deepak Gupta )

Judge

December 9, 2009

(V.K.Ahuja) (m)

Judge