COMMISSIONER INCOME TAX V. MS SHREE TRIVENI FOODS

ITA/51/2009

AI Insights

The case involves multiple appeals by the Commissioner of Income Tax against M/s Shree Triveni Foods concerning the denial of deductions under Section 80IB of the Income Tax Act for various assessment years. The primary legal issues revolved around whether the process of converting gram Dal into Besan amounted to manufacturing, whether profits from such manufacturing were eligible for deductions under Section 80IB(4), and whether the employment of ten or more workers in the manufacturing process met the requirements of Section 80IB(2)(iv). The Income Tax Appellate Tribunal had previously ruled in favor of the respondent, which was contested by the Commissioner in the High Court.

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 719245 (HC-HIMACHAL_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 23-04-2015
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax vs. Sacs Eagles Chicory, Mrs. Poonam Arora vs. Income Tax Officer, Commissioner of Income Tax vs. Pawan Aggarwal, Commissioner of Income Tax vs. M/s Indus Cosmeceuticals, Idandas vs. Anant Ram Chandra Phadke, Commissioner of Income Tax vs. Sree Senha Valli Textiles P. Ltd., Commissioner of Income Tax vs. Taluja Enterprises (P.) Ltd., M/s Amrit Rubber Industries vs. Commissioner of Income Tax
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: VISHAL MOHAN; ADITYA SOOD
• Assessee Lawyers: VINAY KUTHIALA; VANDANA KUTHIALA
• Keywords: Deduction; Manufacture; Section 80IB; Conversion of gram Dal into Besan
• Section: 32; 80IB(4); 80IB(2)(iv)

Judgement Text

"IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA ITA No.43 of 2009 alongwith ITAs No.44,45,46, 49 and 51 of 2009. Judgment reserved on : 07.04.2015. Date of decision: April 23, 2015. 1. ITA No.43 of 2009. Commissioner of Income Tax .….Appellant. Versus M/s Shree Triveni Foods …..Respondent. 2. ITA No.44 of 2009. Commissioner of Income Tax .….Appellant. Versus M/s Shree Triveni Foods …..Respondent. 3. ITA No.45 of 2009. Commissioner of Income Tax .….Appellant. Versus M/s Shree Triveni Foods …..Respondent. 4. ITA No.46 of 2009. Commissioner of Income Tax .….Appellant. Versus M/s Shree Triveni Foods …..Respondent. 5. ITA No.49 of 2009. Commissioner of Income Tax .….Appellant. Versus M/s Shree Triveni Foods …..Respondent. 6. ITA No.51 of 2009. Commissioner of Income Tax .….Appellant. Versus M/s Shree Triveni Foods …..Respondent. 2 Coram The Hon’ble Mr. Justice Mansoor Ahmad Mir, Chief Justice. The Hon’ble Mr. Justice Tarlok Singh Chauhan, Judge. Whether approved for reporting?1Yes For the Appellant : Mr. Vinay Kuthiala, Senior Advocate with Ms.Vandana Kuthiala, Advocate, in all the appeals. For the Respondent : Mr.Vishal Mohan, Advocate and Mr.Aditya Sood, Advocate, in all the appeals. Tarlok Singh Chauhan, Judge. The following substantial questions of law are common in all the appeals:- “1. Whether the conversion of gram Dal into Besan powder, by a process of mere roasting and grinding, amounts to manufacture and consequently, whether the profits derived from this process are eligible for deduction under Section 80IB(4) of the Income Tax Act? 2. Whether the profits eligible for deduction under Section 80IB (4) of the Income Tax Act are necessarily to be computed after allowing depreciation under Section 32? Whereas, the following question of law is common in ITA No.49 and 51 of 2009:- ITA No.49 of 2009. “3. Whether the condition of ten or more workers to be employed in the manufacturing process, as specified in section 80IB(2)(iv) could be said to be complied with, especially when ten or more workers were actually engaged on only 73 days during the entire year.” Though the same question arises for determination in ITA No.51 of 2009, however, the same has been framed differently and reads thus:- Whether the reporters of the local papers may be allowed to see the Judgment? 3 ITA No.51 of 2009. “Whether the mandate of section 80IB(2)(iv) is complied with even if 10 or more workers are employed for only 73 days in a year?” The aforesaid substantial questions of law would hereinafter be referred to as questions No.1 to 3. Question No.1. 2. The assessee is engaged in manufacturing of various food products like soya nuggests, besan, vermicelli and instant daliya. It commenced commercial production on 19.03.1999 as per the certificate granted by the Department of Industries. 3. For the assessment year 2000-01 to 2004-05, the assessee filed returns of income claiming the entire profits as deduction under Section 80IB of the Income Tax Act, 1961, (for short the ‘Act’). For the assessment year 2003-04, the assessee filed return of income declaring total income at nil after claiming deduction under Section 80IB at `33.11 lacs. Subsequently, the assessment made for the assessment year 2001-02 was set aside by the CIT vide order dated 04.03.2005 under Section 263 of the Act in which the CIT held that the Assessing Officer had wrongly allowed deduction under Section 80IB. While regular assessment proceedings for assessment year 2001-02 were started, assessment proceedings under Section 147 were initiated for assessment year 2000-01 and 2002-03. Regular assessment was also made for assessment year 2003-04 and 2004-05. Assessment for the assessment year 2003-04 in this case was completed under Section 143(3) on 30.03.2006. In all these five assessments the claim of deduction under Section 80IB was disallowed on various grounds including the ground that the process of making daliya and besan did not amount to manufacture. 4 4. The Assessing Officer also held in the assessment that though the assessee had not claimed depreciation in assessment year 2000-01 and 2001-02, the same should be allowed while computing the eligible profits and the depreciation allowable alongwith WDV to be carried forward in each of the years was recomputed in the assessments made. 5. Appeal filed by the assessee before the CIT (A) was dismissed vide order dated 17.10.2007 passed in Appeal No.IT/81/2006- 07/SML. The CIT (A) held that in all the years the making of daliya and besan did not amount to manufacture and it also held that the assessee should be allowed depreciation even if it had not claimed the same. 6. The assessee filed appeal before the ITAT, who allowed the same by holding that all the necessary conditions for grant of deduction under Section 80IB were satisfied. On the issue of manufacturing, the ITAT relied its own decision in the case of Indus Cosmeceuticals which related to manufacture of herbal heena powder from heena leaves and was held to be a manufacturing activity. This decision in turn has already been upheld by this Court in a bunch of appeals, the lead case being ITA No.28 of 2009, titled as Commissioner of Income Tax, Shimla versus M/s Indus Cosmeceuticals, decided on 18.11.2014. We have heard the learned counsel for the parties and have gone through the records. 7. The learned counsel for the revenue has vehemently argued that unlike heena which undergoes various processes like d rying, mixing and grinding etc., no such process is undertaken for converting gram Dal into Besan except the process of grinding. Therefore, these activities do 5 not amount to manufacture and the assessee, therefore, is not entitled to the deduction under Section 80IB. 8. In support o f his contention, he has relied upon judgment of Madras High Court in Commissioner of Income-Tax vs. Sacs Eagles Chicory [2000] 241 I.T.R. 319 as affirmed by the Hon’ble Supreme Court vide judgment reported in [2002] 255 I.T.R. 178 titled Sacs Eagles Chicory vs. Commissioner of Income Tax and a judgment of this Court in ITA No. 27 of 2005 titled Mrs. Poonam Arora vs. Income Tax Officer and others, decided on 14.10.2009. 9. In Sacs Eagles Chicory case (supra), the Madras High Court was dealing with the case, wherein chicory roots were being converted into chicory powder by simply grinding them and on such basis it was held that there was no manufacturing activity. Notably the judgment of the Madras High Court was challenged by the assessee before the Hon’ble Supreme Court in case reported as Sacs Eagles Chicory (supra), wherein the Hon’ble Supreme Court observed as under:- “The question to be considered reads thus (see [2000] 241 ITR 319, 320): Whether, on the facts and in the circumstances of the case, the assessee- firm is an industrial undertaking eligible for deduction under Sections 80HH, 80-I and 80-J of the Income Tax Act, 1961? \" All that is on record in regard to the \"process\" that the assessee carries on is stated in the order of the Appellate Assistant Commissioner of Income Tax thus: \"But if an analysis of the activity of making powder from the chicory roots is made, it will be found out that there are only two processes in making the powder from chicory roots: (i) roots are roasted, and (ii) after that they are powdered.” We have asked learned counsel for the assessee whether there is anything else that describes the process. 6 There is apparently nothing else. If that is the only process, it does not satisfy the test laid down by this Court in Aspinwall and Co. Ltd. v. CIT [2001] 251 ITR 323.” 10. In so far as Poonam Arora case (supra) is concerned, this Court had categorically come to the conclusion that mere process of roasting of raw groundnut seeds into groundnut did not amount to manufacture as no new and distinct product came into existence. 11. Now, in case the facts of the present case are seen, the ITAT after considering its own observations in the case of M/s Indus Cosmeceuticals held the activity of converting Besan from gram Dal amounted to manufacture by according the following reasons:- “If the facts of the aforesaid case, cases relied upon therein are kept in juxtaposition with the facts of the present appeal, we have found that for manufacturing the end products, the assessee is doing a systemic activity with the help of manpower and machine. The raw product like soya atta, besan are mixed in pre determined quantity, and after mixing with other items these are mixed with the help of manpower and machine, thereafter mixed with liquid & different shapes are given and thereafter after drying process, it is packed, the end product is commercially known differently. Similar is the situation for vermicelli. For producing instant dalia, the whole process is well known. There is no denying the fact that use of end product is altogether different and it is known differently in commercial world. Even otherwise, the shape and size and use is altogether different from its raw material and also known differently in the commercial world, therefore, it can be said that it is an manufacturing activity.” 12. Indisputably, the word ‘manufacture’ was not defined under the Act and came to be introduced, for the first time, by insertion of Section 2 (29BA) of the Finance (No.2) Act, 2009, introduced with effect from 01.04.2009 which reads as follows:- “29BA – “manufacture”, with its grammatical variations, means a change in a non-living physical object or article or thing, - 7 (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.” Though, this amendment was introduced only with effect from 01.04.2009 while we are dealing with the assessments prior to 01.04.2009, yet the same would be of relevance since the definition itself apart from being based on the dictionary meaning has embodied in itself the meaning as had been assigned to the word by various judicial pronouncements. 13. What amounts to manufacture has been dealt with in detail by this Court in Commissioner of Income Tax versus Pawan Aggarwal 2014 (3) HLR 1981 and thereafter elaborately discussed in ITA No.28 of 2009 titled Commissioner of Income Tax versus M/s Indus Cosmeceuticals. However, we need not fall back only upon these decisions to answer the question in view of the judgment of the Hon’ble Supreme Court in Idandas versus Anant Ram Chandra Phadke (dead) by L.Rs., AIR 1982 SC 127 which is far more closer to the issue involved in this lis. Therein the question before the Hon’ble Supreme Court related to a lease under Section 106 of the Transfer of Property Act and the precise question was as to whether the lease was for a manufacturing process. The following tests for determining whether a lease for running flour mill had been granted for the purpose of manufacturing process were culled out:- “1. That it must be proved that a certain commodity was produced; 2. That the process of production must involve either labour or machinery; 3. That the end product which comes into existence after the manufacturing process is complete, should have a different 8 name and should be put to different use. In other words, the commodity should be so transformed so as to lose its original character.” 14. It was thereafter held that wheat was transformed into flour by the manufacturing process which involved both labour and machinery. The commodity before manufacture was wheat which could not be consumed by any human being but would be used only for cattle or medicines or similar other purposes. Thereafter, in order to come to the conclusion that the conversion of wheat into wheat flour amounted to manufacturing process, the Hon’ble Supreme Court recorded following reasons:- “11. In the instant case what happened was that wheat was transformed, by the manufacturing process which involved both labour and machinery, into flour. The commodity before manufacture was wheat which could not be consumed by any human being but would be used only for cattle or medicine or other similar purposes. The end product would be flour which was fit for human consumption and is used by all persons and its complexion has been completely changed. The name of the commodity after the product came into existence is Atta and not Gehun (wheat). Thus in the instant case all the three tests have been fully satisfied. This being the position the irresistible inference and the inescapable conclusion would be that the present lease was one for manufacturing purposes. In this view of the matter, the notice of one month must be held to be invalid and suit for ejectment should have failed on that ground.” 15. Applying the aforesaid tests to the instant case, it can conveniently be held that converting gram Dal into Besan will amount to manufacturing process because: i) gram Dal loses its shape and identification as in the case of wheat which is converted into flour; ii) the end product i.e. Besan can be said to be different from that of gram Dal. It is through process of labour and machinery that Besan is produced; 9 iii) Gram Dal and Besan are treated as different commercial products. 16. Indisputably, gram Dal also undergoes same process for being converted into Besan which is undergone by the wheat for manufacturing wheat flour. In view of the aforesaid, it can safely be concluded that conversion of gram Dal into Besan amounts to manufacture and consequently the assessee is entitled to the deduction under Section 80IB(4) of the Income Tax Act. Question No.2. 17. Section 80IB (4) of the Act reads thus:- “Deduction in respect of profits and gains from certain industrial undertaking other than infrastructure development undertaking. 80-IB. (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-section (3) to [(11), (11A) and (11B)] (such business being hereinafter referred to as the eligible business), there shall, i n 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 such percentage and for such number of assessment years as specified in this section. (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:- (i)……….. (ii)……….. (iii)………. (iv)………. (3)………… (i)…………. (ii)………… (4) The amount of deduction in the case of an industrial undertaking in an industrially backward State specified in the Eighth Schedule shall be hundred per cent of the profits and gains derived from such industrial undertaking for five assessment years beginning with the initial assessment year and thereafter twenty-five per cent (or thirty percent where the assessee is a 10 company) of the profits and gains derived from such industrial undertaking: Provided that the total period of deduction does not exceed ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) subject to fulfilment of the condition that it begins to manufacture or produce articles or things or to operate its cold storage plant or plants during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March [2004]. Provided further that in the case of such industries in the North-Eastern Region, as may be notified by the Central Government, the amount of deduction shall be hundred per cent of profits and gains for a period of ten assessment years, and the total period of deduction shall in such a case not exceed ten assessment years: Provided also that no deduction under this sub-section shall be allowed for the assessment year beginning on the 1 st day of April, 2004 or any subsequent year to any undertaking or enterprise referred to in sub-section(2) of section 80-IC:] Provided also that in the case of an industrial undertaking in the State of Jammu and Kashmir, the provisions of the first proviso shall have effect as if for the figures, letters and words “31st day of March, 2004”, the figures, letters and words “31st day of March, [2012) had been substituted: Provided also that no deduction under this sub-section shall be allowed to an industrial undertaking in the State of Jammu and Kashmir which is engaged in the manufacture or production of any article or thing specified in Part C of the Thirteenth Schedule.]” 18. It is vehemently argued by learned counsel for the revenue that, no doubt, the allowance of depreciation was made mandatory under explanation 5 to Section 32(i) (ii) with effect from the assessment year 2002-03. However, the profits eligible for deduction under Chapter VIA including Section 80IB can only be computed after allowing all deductions under Sections 29 to 43A as all these Sections in this Chapter comprise 11 of independent codes of computation. Therefore, the eligible profits in the instant cases were required to be computed yearwise after deducting depreciation and the written down value of assets carried forward in the subsequent years would then change accordingly. The net result would then be that when profits of assessee become taxable in a subsequent year, the claim of depreciation in those years would stand reduced. 19. It is not i n dispute that the allowance of depreciation was made mandatory only with effect from the assessment year 2002-03 and it is the case of the revenue that assessee has not established its business for the other assessment years. The contention on behalf of the assessee is that the assessee had not claimed any deprecation on fixed assets in the books of accounts s o as to claim higher deduction under Section 80IB. The revenue never disputed this claim of the assessee and failed to establish that the interest of the revenue has been adversely affected. 20. As per the admitted case of the revenue itself, the assessee was entitled to depreciation allowance only from April 1, 2002 and, therefore, amendment did not apply to the earlier years. For coming to such conclusion, we may conveniently rely upon the Division Bench judgment of the Madras High Court in Commissioner of Income Tax versus Sree Senha Valli Textiles P. Ltd., [2003] 259 I.T.R. 77 wherein it was held as under:- “The question referred to us at the instance of the revenue is, \"Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in upholding the order of the Commissioner (Appeals) holding that the depreciation should not be allowed to the assessee since he has 12 specifically withdrawn the claim for depreciation by filing revised return?\" The assessment year is 1988-89. The Supreme Court in the case of CIT v. Mahendra Mills (2000) 243 ITR 56, has held that if the revised return filed by the assessee is a valid r eturn and the assessee has withdrawn the claim for depreciation that it had made in the original return, then the assessment based on the revised return without considering the claim for depreciation would be a proper assessment. The court observed that the privilege of claiming depreciation cannot be converted into a disadvantage, and the option cannot become an obligation. Though after that judgment was rendered by the Apex Court, Explanation 5 was inserted in section 32(1) of the Income Tax Act, 1961, by the Finance Act 2001, with effect from April 1, 2002, declaring that \"for the removal of doubts\" the provisions of sub-section (1) will apply whether or not the assessee claims deduction in respect of depreciation in computing his total income, that Explanation cannot be regarded as taking away the effect of the judgment of the Supreme Court for the years prior to the date of introduction of the Explanation. The law declared by the Supreme Court cannot be regarded as having merely raised doubts. The interpretation of the relevant provisions of the Act by the Apex Court settles the law, and unless the subsequent amendment to the statute is expressly given retrospective effect, the law laid down by the Apex Court will remain the binding law for the period prior to the amendment. The newly added Explanation takes effect only on and from April 1, 2002, and will not be applicable for prior years.” 21. In view of the aforesaid discussion, it is held that the profits eligible for deduction under Section 80IB (4) of the Act though are necessarily to be computed after allowing depreciation under Section 32 of the Act, but the same would apply only from April 1, 2002, when the amendment came into force and will not apply to earlier years. Question No.3. 22. Section 80IB (2) (iv) of the Act reads thus:- 13 “Deduction in respect of profits and gains from certain industrial undertaking other than infrastructure development undertaking. 80-IB. (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-section (3) to [(11), (11A) and (11B)] (such business being hereinafter referred to as the eligible business), 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 such percentage and for such number of assessment years as specified in this section. (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:- (i)……. (ii)…….. (iii)……. (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.” 23. A bare perusal of Section 80IB (2) (iv) would show that for claiming deduction under this sub-section an industrial undertaking is required to employ 10 or more workers in a manufacturing process carried on with the aid of power. The Assessing Officer came to the conclusion that the assessee had not employed 10 or more workers in the manufacturing process though at a given time the assessee was having more than 10 workers out of whom four employees had been engaged in the two trucks owned by the assessee i.e. two drivers, two cleaners and in case these four workers were excluded, then the assessee at all given times had employed 6 to 9 w orkers. Though in the reply, the assessee disputed the fact that the drivers and cleaners were not included in the employees list, but then this reply was not found 14 acceptable by the Assessing Officer because the assessee did not deny having two trucks which were used to transport the goods to the premises of customers. Moreover, no receipts have been shown in P & L Account. It was concluded that obviously the trucks could not run without the drivers/conductors/helpers and in absence of any separate driver/cleaner, only inference that could be drawn was that it was the employees shown to be engaged in the manufacturing process who had infact been employed as drivers/conductors/helpers with the trucks. These findings were arrived at after perusing the records which had been produced before the Assessing Officer. 24. The Commissioner of Income Tax affirmed these findings, however, when the matter reached in ITAT, the findings recorded by both the learned authorities below were set aside on the ground that for getting relief under Section 80IB, there must be substantial compliance whereby an undertaking must have employed 10 or more workers substantially during the period for which the claim was made and further that there was no hard and fast rule by which one could determine whether there has been substantial compliance because it is for the authority and the Court to decide based on the facts before it. 25. Similar question regarding substantial compliance fell for consideration before this Bench in ITA No.28 of 2009 in case titled Commissioner of Income Tax versus M/s Indus Cosmeceuticals (supra) wherein this Court held as under:- “7…….Further even the finding that there was substantial compliance when there were 13 employees entered in the attendance register is absolutely erroneous in teeth of the findings recorded by A.O. against which findings there was no contradiction or rebuttal on behalf of the assessee. 15 8. In M/s Amrit Rubber Industries vs. Commissioner of Income Tax, ITA Nos. 32 of 2004 and 33 of 2004 decided on 30.9.2010, this court was dealing with the interpretation of section 80IA(2) (v), which reads as follows:- “(v) 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.” Therein, in one of the appeals, the assessee had employed ten or more workers only for two months, while in the other case only for six months and this court held that this could not be deemed to fulfill the requirements of section as the employment had to be for a substantial part of a year. It was held as follows:- “3. It is not disputed before us that in one of the appeal, ten or more workers were employed only for two months and in the other, only for six months. This cannot be deemed to fulfill the requirements of the aforesaid clause of Section 80-IA. The employment has to be for a substantial part of a year and employment for two months and six months cannot be termed to be employment for a substantial part of the year. 4. In this regard, we may make reference to the judgment of Delhi High Court in Commissioner of Income Tax versus Taluja Enterprises (P.) Ltd., (2001) 250 ITR 675 , wherein the Division Bench held as follows: “In order to qualify for relief under section 80J (4) (iv) of the Income Tax Act, 1961, substantial compliance with the requirement that the new industrial undertaking must have employed in the manufacturing process carried on with the aid of power ten or more workers, is all that is required. The undertaking must have employed ten or more workers substantially during the period for which relief is claimed. There can be no hard and fast rule by which one can determine whether there has been substantial compliance. It is for the authority or the court to so decide based upon the facts before it.” 16 5. It may be true that substantial part does not mean the entire year, but employment for 1/6th of the year or half of the year can under no circumstance be termed to be employment for a substantial part of the year.” 26. Once, it is established that the assessee had not employed 10 or more workers during the substantial part of the year, we are left with no other option but to answer the question in favour of the revenue and against the assessee. 27. Resultantly, questions No.1 and 2 are answered in favour of the assessee while question No.3 is answered in favour of the revenue. Accordingly, all the appeals are disposed of in the aforesaid terms leaving the parties to bear their own costs. The Registry is directed to place a copy of this judgment on the files of connected matters. (Mansoor Ahmad Mir), Chief Justice. ( Tarlok Singh Chauhan), April 23, 2015. Judge. (krt) "