Cherian Varkey Construction Co.(P) Ltd, Cochin V. The ACIT, Cochin

ITA 25/COCH/2014

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 2014 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 3 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-05-2015
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Assessment Year: 2006-2007
• Appeal Filed On: 26-01-2014
• Court: TRIBUNAL
• Department Lawyers: K.K. JOHN
• Keywords: Reopening of assessment; Depreciation; Additional depreciation; Difference of opinion; Set aside
• Section: 32; 147; 32(1)(iia); 80HH; 255(4)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “THIRD MEMBER’ COCHIN BENCH, COCHIN BEFORE SHRI D.MANMOHAN, VICE PRESIDENT I.T.A. No.25/Coch/2014 Assessment Year : 2006-07 M/s. Cherian Varkey Construction Co. ( P) Ltd., Alpha Plaza, K.P. Vallon Road, Kadavanthara, Kochi-682 020 Vs. The Assistant Commissioner of Income-tax, Circle-1(1), Kochi. (Assessee-Appellant) (Revenue-Respondent) Assessee by Shri R. Krishna Iyer, CA Revenue by Shri K.K. John, Sr. DR and Shri M. Anil Kumar, CIT(DR) Date of hearing 20/03/2015 O R D E R U/S. 255(4) OF THE INCOME TAX ACT, 1961 Per D. Manmohan, Vice President: On account of difference of opinion between the Ld. Judicial Member and the Ld. Accountant Member with regard to allowability of additional depreciation on the machinery used by the assessee, the following question was framed and forwarded to the Hon’ble President u/s. 255(4) of the I.T. Act for nominating Third Member to decide the issue: “Whether in the facts and circumstances of the case, when the assessee is engaged itself in manufacture and sale of readymix concrete, whether the production of readymix concrete amounts to manufacture and hence the assessee would be entitled for deprecation as claimed in respect of the machinery used? I.T.A. No.25/Coch/2014 2 2. As could be noticed from the assessment order, the assessee is engaged in construction activity. It claimed additional depreciation on new plant and machinery amounting to Rs.24,59,505/- on the ground that the new plant and machinery comprising of Transit Mixer, Tata Trucks and Ashok Leyland Trucks were utilised for manufacturing of readymix concrete. The case of the Assessing Officer is that they are road transport vehicles and hence, not eligible for additional depreciation. The case of the assessee was that the transit mixer and other vehicles are suitably adopted to mount the mixer and intended for use for a specific purpose and they are defined as ‘construction equipment vehicles’ under Central Motor Vehicle Rules; Hence they have to be considered as ‘non transport vehicles’. The Assessing Officer, however, was of the opinion that merely because the Transit Mixer, Tata Trucks and Ashok Leyland Trucks are adopted to suit a specific purpose, it would not alter the basic character of the vehicle as road transport vehicle. He further observed that readymix concrete is the outcome of mixing only and it cannot be considered as manufacturing activity and the final product which is known as ‘readymix concrete (RMC)’ is a mixture of sand, cement, metal, water etc. 3. The CIT(A), having confirmed the findings of the Assessing Officer, the assessee is in appeal before this Tribunal. I.T.A. No.25/Coch/2014 3 4. The Ld. Judicial Member observed that the assessee is producing readymix concrete and transporting the same to the construction site to be used by the builders in the construction of buildings etc. An identical issue was considered by the ITAT, Delhi Bench in the case of YFC Projects (P) Ltd. vs. Dy. CIT (2010) 134 TTJ (Del) 167 wherein the Delhi Bench of the ITAT referred to the decision of the Hon’ble Supreme Court in the case of N.C.Budharaja & Co. (1993) 204 ITR 412 (SC) and observed that manufacture implies a change but every change may not amount to manufacture, but every change of an article is the result of treatment, labour and manipulation. When the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new distinct article, then it can be said that manufacture has taken place. To put it differently, the test to determine whether a particular activity amounts to “manufacture” is (a) whether new and different articles or goods emerge with distinctive name, use and character, (b) whether the transformation into a new commodity is commercially known as a distinct and separate commodity having its own character, use and name, (c) whether it is the result of a process or several processes. In the background of ratio laid down by various Courts, including the observations made by the Apex Court in the case of N.C. Budharaja & Co. (cited supra), the ITAT, Delhi Bench observed that the production of RMC is a manufacturing activity as it has to be carried out in an organized manner with the help of heavy machinery and computer. Its activity is not as simple as I.T.A. No.25/Coch/2014 4 mixing of sand, cement etc. by a labourer on the right side. Though, in the common parlance, sometimes it does not sound logic to say that mixing of RMC is a manufacturing activity but if we look at the activity carried out by the assessee from the point of an expert, who has laid down BIS standards, then it would indicate that it is a complicated affair. The mixing of four products in prescribed ratio would result in a different identifiable product which cannot be reconverted to its original shape. The Bench, therefore, observed that the activity carried out by the assessee is a manufacturing activity. 5. By placing reliance on the above findings of the ITAT, Delhi Bench, the Ld. Judicial Member observed that the machinery used for preparing readymix concrete is entitled for additional depreciation. 6. The Ld. Judicial Member also observed that in the instant case, they are not merely engaged in the construction of building. Vide para 9, the Ld. Judicial Member observed that readymix concrete is also supplied to the person engaged in the construction of building and this factual aspect was not disputed by the revenue. Though construction of a building, road, dam etc., may not come within the meaning of expression “manufacture” of an article or thing, the Ld. Judicial Member chose to follow the decision of the ITAT, Delhi Bench in the case of YFC Projects (P) Ltd. (cited supra) to hold that the assessee is entitled for additional depreciation. I.T.A. No.25/Coch/2014 5 7. With regard to the question whether the transit mixer, Tata truck or Ashok Leyland truck are plant and machinery, the Ld. Judicial Member observed that specialized chamber is mounted on the transit mixer, Tata truck or Ashok Leyland truck for transporting readymix concrete and hence, it falls within the meaning of expression “plant and machinery”, within the meaning of section 32 of the Act. 8. The Ld. Accountant Member was of the opinion that the nature of the assessee’s business, by no stretch of imagination be termed as manufacturing or production of any article or thing in view of the decision of the Hon’ble Supreme Court in the case of N.C. Budharaja & Co.(cited supra). The Hon’ble Supreme Court observed that the expressions “manufacture” and “produce” are normally associated with movables – articles and goods, but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road or a building. 9. The Ld. Accountant Member relied upon the decision of the Hon’ble Delhi High Court in the case of Bhagat Construction Co. (P) Ltd. 232 ITR 722 wherein the assessee company derived income from construction work including mining work for extracting stones to be used in construction. In the backdrop of the facts of the case, the Court observed that though the assessee might be I.T.A. No.25/Coch/2014 6 extracting minerals, such as stones,by carrying out mining operations but the by- product of such mining operations was not the article or thing in which the assessee was dealing, since the assessee was consuming the minerals in the process of civil engineering works which was the main business activity of the assessee; The by-product of such manufacturing activity would be consumed by the assessee in its building work. 10. Similarly, the Ld. Accountant Member relied on the decision of Hon’ble Delhi High Court in the case of CIT vs. Minocha Brothers (P) Ltd., 160 ITR 134 wherein the Court observed that the assessee-company while in the process of doing construction work, was engaged in crafting doors, windows, RCC slabs and so on which did not amount to manufacturing activity. 11. The ld. Accountant Member made an observation that the assessee having engaged in construction activity, it cannot be treated as business of manufacture or production of any article or thing. Other activities of mixing of various products in the process of construction business are neither the end product nor can they be treated as manufacturing or production of any article or thing. 12. The Ld. Accountant Member relied on the decision of the ITAT, Delhi Bench in the case of BSC & CIV, Delhi vs. ACIY (I.T.A. Nos. 1217/Del/2011and I.T.A. No.25/Coch/2014 7 1752/Del/2011 vide its order dated 15-05-2012) wherein the claim of additional depreciation on plant and machinery and tipper was rejected on the ground that the assessee was engaged in road construction contract and manufacture and production of concrete mix. Hence, the Ld. Accountant Member held that the assessee is not entitled to the claim of additional depreciation u/s. 32(1)(iia) on Transmit Mixer, Tata Trucks and Ashok Leyland Trucks. 13. The main issue that arises for my consideration is whether preparation of ‘ready mix concrete’ amounts to manufacture or production of an article or thing. If it amounts to manufacture, automatically the assessee would become entitled for additional depreciation. Under these circumstances, the Division Bench requested the Hon’ble President for nominating Third Member to decide the limited issue as to whether the assessee’s production of readymix concrete amounts to manufacture. 14. The Ld. Counsel appearing for the assessee relied upon the order passed by the Ld. Judicial Member and the ratio laid down by the ITAT, Delhi Bench in the case of YFC Projects (P) Ltd. to submit that production of readymix concrete involves a scientific process and hence it amounts to manufacture or production of article or thing. He further submitted that in the instant case, the assessee not only used it for captive consumption but also supplied readymix concrete to others. However, the assessment order passed by the Assessing officer, CIT(A) I.T.A. No.25/Coch/2014 8 and the orders passed by the ITAT do not indicate as to whether the assessee carried on the business of sale of readymix concrete. The Ld. Counsel for the assessee submitted that it is available on record but when asked to point out, the Ld. Counsel could not place any material to buttress his contention that it was in fact selling readymix concrete. It appears that the arguments placed before the CIT(A) as well as the Tribunal, was mainly on the ground that the preparation of readymix concrete involves a scientific process by which new product emerges which can be considered as manufacturing activity and therefore, the Transit Mixer, Tata truck and Ashok Leyland Truck on which mixer is mounted should be treated as plant and machinery utilised for manufacture and hence, they should not be considered as road transport vehicles in which event the assessee would be entitled to additional depreciation. When the assessee was specifically asked to point out what is the specialized scientific process involved for production of ready mix concrete, the Ld. Counsel submitted that he is only a Chartered Accountant and is not aware of the procedure. At the same time, he submitted that in the case of YFC Projects (P) Ltd, the Delhi Bench observed that it involves mixing of cement, sand, water etc. and the product is mixed with chemical known as admixture. The final product after mixing, has to be used within four hours of its mixing. This intermediate product or final product is altogether a different product, from the material out of which it was produced and it is known as RMC which is distinct from the raw material. The Bench also observed that the raw material once mixed cannot be I.T.A. No.25/Coch/2014 9 reconverted into its original shape and also stated that the expression “manufacture” has to be understood in the ‘common parlance’ and any change in the article which results in a new and different article would amount to manufacturing activity. RMC of different categories under different grades are made according to the requirement of the buyer and when it is mixed with water, it cannot be converted back into raw material, i.e., once RMC is prepared, it cannot be segregated into sand, cement, water, etc. Thus the assessee can be said to be engaged in construction activity. 15. It may noticed that the order passed by the Delhi Bench was set side by the Hon’ble Delhi High Court and the ITAT in its order dated 23 rd January 2015 observed that in the light of the decision of the Apex Court in the case of N.C. Budharaja & Co., the matter has been restored by Delhi High Court to the file of the Tribunal to ascertain whether RMC was sold to outside parties or not. When the Ld. Counsel submitted that common parlance test has to be applied to understand the expression ‘manufacture’, the Bench pointed out that under the common parlance, readymix concrete is ordinarily prepared by a mason who is not a qualified engineer and it is never treated as manufacturing activity; Similarly, the Hon’ble Kerala High Court, in the case of CIT vs. Casino (Pvt) Ltd. 91 ITR 289, observed that conversion of raw material into ‘food’ in a hotel cannot be considered as manufacture or production of food materials, though, once the food is prepared, it cannot be converted into water, oil, salt, vegetables I.T.A. No.25/Coch/2014 10 etc. The Ld. Counsel merely submitted that he relies on the order passed by ITAT, Delhi Bench which in turn was followed by the Judicial Member. Though, he has filed a paper book consisting of certain case law decided under Central Excise and other allied laws, he was not aware as to under which section the judgment was rendered. Unless the assessee places before the Bench the phraseology used in the section which was the subject matter of consideration and compares with the section which is under consideration before us, it is not possible to take into consideration any case law under different enactments. When it was pointed out to the Ld. A/R, he did not go into the said case law. However, he referred to the decision of the Hon’ble Supreme Court in the case of India Cine agencies vs. CIT (308 ITR 98) wherein the Bench observed that conversion of jumbo rolls of photographic films into small rolls in desired sizes, amounts to ‘production’ and also the decision of the Madras High court in the case of CIT vs. Shriram Transport Finance Co. Ltd., 254 ITR 543 wherein it was held that mobile crane was not a road transport vehicle. He also relied upon the following decision in support of his contention that mobile crane is not road transport vehicle (225 ITR 573) (Patna) ( 258 ITR 448) (Mad.) and (281 ITR 297) (Guj.). 16. It deserves to be noticed that the point of difference which was referred to for my consideration is limited i.e., ‘ whether the preparation of ready mix concrete amounts to manufacture or production of article or thing’. Hence the I.T.A. No.25/Coch/2014 11 case law, as to whether the mobile crane is a road transport vehicle or not, is not the subject matter in dispute and hence, it is not necessary to go into that aspect. Thus the case law which is relevant in this context, from the point of view of Ld. A/R, is the decision of the ITAT, Delhi Bench which was relied upon by the Ld. Judicial Member, and the judgment of Apex Court in the case of India Cine agencies vs. CIT (cited supra) in which the Bench referred to the decision of N.C. Budharaja, 204 ITR 412 and observed that the word “production” has a wider connotation than the word “manufacture”. While every manufacture can be characterized 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. The Court approved the observations of the earlier decision of the Apex Court in the case of NC. Budharaja & Co. (cited supra). 17. In the case of N.C. Budharaja & Co., the Court observed (in page 434 of the report) that only movable objects can be considered as ‘article’. Thus “production” has wider connotation than the word “manufacture”. When the product itself cannot be considered as manufacture, then intermediate product, in my considered opinion, cannot be considered as manufacture or production of I.T.A. No.25/Coch/2014 12 an article or thing. Such intermediate product should emerge in the course of manufacturing process, as observed by the Apex Court in the case of N.C. Budharaj & Co. (cited supra). 18. The Ld. DR submitted that the Hon’ble Delhi High Court in the case of CIT vs,. Minocha Brothers (P) Ltd., 160 ITR 134 observed that manufacture of doors, windows for a building is not qualified as manufacture of article or thing because the real activity of the assessee was to construct buildings which are not goods. Here also, the RMC is used for the purpose of construction of buildings, dams, roads, canals etc. and since the end product would not be classified as a new . article or thing, the output in the form of readymix concrete which is an intermediate product, cannot be considered as manufacturing activity. Similarly in the case of Bhagat Construction Co.(P) Ltd., 232 ITR 722, the Delhi High Court observed that merely because the assessee is extracting minerals, it does not amount to manufacture if they are consumed in the process of civil engineering works. The Hon’ble Bombay High Court has taken a similar view with regard to making frames, slabs etc. in the business of construction and repair of buildings (CIT vs. NUC (P) Ltd, 126 ITR 377). He further submitted that the decision in the case of YFC Projects Pvt. Ltd. (cited supra) was rendered on 24.9.2007 and the same was set aside by the Hon’ble Delhi High Court and thus, a fresh order came to be passed in 2015 by the ITAT whereas the ITAT, Delhi ‘A’ Bench, in the case of BSC & CIV vs. ACIT (I.T.A. Nos. 1217/Del/2011 and 1752/Del/2011 I.T.A. No.25/Coch/2014 13 dated 15-05-2012), considered the same issue exhaustively, running into 90 pages, and at pgs. 81 to 83, the Bench observed that the main ingredients for readymix concrete is aggregate, bitumen mix whereby a new intermediate product emerges and in fact reference was made to the decision of the ITAT Delhi Bench in the case of YFC Projects Ltd. (cited supra) while holding that such process does not amount to manufacture. The Tribunal, by relying upon the decision of the Apex Court in the case of N.C. Budharaja (cited supra), observed that if the assessee’s end product does not amount to production of new article or thing, benefit cannot be extended to any intermediatary product. In other words, when the construction of building, etc. would not amount to manufacture, the intermediate product also cannot be treated as manufacturing activity. 19. The Ld. Departmental Representative submitted that the onus is upon the assessee to prove as to whether if any scientific process is involved in preparing readymix concrete; He contended that it can also be done by an ordinary mason and in the common parlance and the commercial parlance, it cannot be treated as manufacture or production of article or thing since it would be utilised for construction of building, roads etc. In the instant case, the assessee has not furnished any material at any stage of the proceedings to prove that it was solely engaged in processing of readymix concrete and sale thereof without captive consumption. He thus relied upon the order passed by the Ld. Accountant Member. I.T.A. No.25/Coch/2014 14 20. I have heard the rival submissions and perused the record. It is common knowledge that an uneducated mason does the work of preparation of readymix concrete for construction of houses and it is never treated as manufacturing activity either in the common parlance or in the commercial parlance. The readymix concrete can be produced in huge volume with the help of machines with less manpower but merely because there is increase in volume, it cannot automatically be treated as manufacturing activity. At any rate, the end product is only an intermediate product which is used for construction of buildings, roads, dams etc. and when the end product is not considered as manufacturing activity, then it is difficult to hold that the intermediate product can be classified as manufacture or production of article or thing. 21. The Ld. Judicial Member, while following the decision of the ITAT, Delhi Bench in the case of YFC Projects (P) Ltd. (cited supra), might have taken note of the observations of the said Bench that once it is mixed with cement, water, etc., it cannot be segregated and hence it amounts to manufacturing activity. Even for preparation of food, such as idli etc, once the item is prepared or mixed, it cannot be segregated and brought back to its original shape and merely on that count, it cannot be treated as manufacturing activity. The Hon’ble Kerala High Court in the case of CIT vs. Casino (Pvt) Ltd. 91 ITR 289 observed that while considering the taxing statute, the real test is to ascertain whether the I.T.A. No.25/Coch/2014 15 commodity either in common parlance or commercial parlance can be treated as a manufactured product. In the ordinary sense, the production of food materials in a hotel cannot be treated as manufacture. In the same way, the production of ready mix concrete, in the common parlance or commercial parlance cannot be treated as manufacturing activity; As rightly observed by the Hon’ble Supreme Court in the case of N.C. Budharaja & Co. (cited supra) a statute cannot always be construed with dictionary in one hand and the statute in the other hand. (pg. 204 ITR 434). Regard must also be had to the scheme, context and to the leglislative history of the provision. Having regard to the ratio laid down by the Hon’ble Apex Court, bearing in mind the fact that the end product should amount to manufacture or production of an article or thing, the readymix concrete manufactured by the assessee, which is also engaged in the construction activity, cannot be said to be a manufacturing activity. 22. I, therefore, answer the question in the negative and in favour of the Revenue by holding that the assessee is not entitled for additional depreciation in respect of machinery used since production of readymix concrete would not amount to manufacture of article or thing. I.T.A. No.25/Coch/2014 16 23 The matter may now be placed before the Division Bench which has to decide the matter according to the majority view. sd/- (D.MANMOHAN) VICE PRESIDENT Place: Kochi Dated: 21st March, 2015 GJ Copy to: 1. Assessee. 2. Revenue. 3. CIT 4. CIT(A)The Commissioner of Income-tax, 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order (ASSISTANT REGISTRAR) I.T.A.T., Cochin I.T.A. No.25/Coch/2014 17 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN Before S/Shri V.DURGA RAO, J.M AND B.R.BASKARAN, A.M. I.T.A. No.25/Coch/2014 Assessment Year : 2006-07 M/s. Cherian Varkey Construction Co. ( P) Ltd., Alpha Plaza, K.P. Vallon Road, Kadavanthara, Kochi-682 020 Vs. The Assistant Commissioner of Income-tax, Circle-1(1), Kochi. (Assessee-Appellant) (Revenue-Respondent) Assessee by None Revenue by Shri K.K. John, Sr. DR and Shri M. Anil Kumar, CIT(DR) Date of hearing 07/05/2015 Date of pronouncement 07/05/2015 O R D E R Per B.R. BASKARAN, AM: 1. Since there was a difference of opinion between the two Members constituting the Division Bench of ITAT, Cochin, the matter was referred to the Third Member by the Hon’ble President u/s. 255(4) of the Act to decide following question:- “Whether in the facts and circumstances of the case, when the assessee is engaged itself in manufacture and sale of readymix concrete, whether the production of readymix concrete amounts I.T.A. No.25/Coch/2014 18 to manufacture and hence the assessee would be entitled for depreciation as claimed in respect of the machinery used? 2. The Hon’ble Third member has agreed with the view taken by the Hon’ble Accountant Member. Accordingly, as per the majority view, the above said issue is decided against the assessee and in favour of the revenue. 3. In the result, the appeal filed by the assessee is dismissed. Pronounced in the open court on this 7 th day of May, 2015. sd/- sd/- (V. DURGA RAO) (B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Place: Kochi Dated: 7th May, 2015 GJ Copy to: 1. M/s. Cherian Varkey Construction Co. (P) Ltd., Alpha Plaza, K.P. Vallon Road, Kadavanthara, Kochi-682 020. 2. The Assistant Commissioner of Income-tax, Circle-1(1), Kochi. 3. The Commissioner of Income-tax (Appeals)-II, Kochi. 4. The Commissioner of Income-tax, Kochi. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order ASSISTANT REGISTRAR ITAT, COCHIN I.T.A. No.25/Coch/2014 19 Re: Cherian Varkey Construction, Cochin vs. ACIT, Cir.1(1),Kochi in I.T.A. No. 25/Coch/2014 for A.Y. 2006-07. I have gone through the order and after careful perusal of the same, I am unable to concur with the reasoning and conclusion of the Ld. Judicial Member in respect of certain issues proposed in the order. Hence, I propose to write my separate order for reasons given hereunder: 2. The first issue in this appeal is with regard to re-opening of the assessment u/s. 147 of the I.T. Act. On this issue, I am in full agreement with the findings of the CIT(A) and also the concurrent findings given by the Ld. JM. This ground is rejected. 3. Now coming to the additional depreciation on Transmit Mixer, Tata Trucks and Ashok Leyland Trucks used for manufacture of readymix concrete, I am not in agreement with the findings of the Ld. JM. As such, I am giving separate findings on this issue. 4. In the present case, the assessee who is engaged in contract work and manufacturing and trading in readymix concrete (RMC) and sheathing pipes and construction of residential units, claimed additional depreciation on Transmit Mixer, Tata Trucks and Ashok I.T.A. No.25/Coch/2014 20 Leyland Trucks, which is carrying the readymix concrete. According to the Ld. AR, the Transmit Mixer, Tata Trucks and Ashok Leyland Trucks, which are plant and machineries and therefore eligible for additional depreciation as the Transmit Mixer Truck is intended for use on the road for a specific purpose and they have been defined as construction equipment vehicle and not transport vehicle. 5. On the other hand, the Ld. DR submitted before us that the readymix concrete is the outcome of mixing only and not of manufacture. Hence, it is to be treated as vehicle in the category of road transport vehicle and not as plant and machinery utilized for manufacturing process and therefore, additional depreciation cannot be granted. 6. I have carefully gone through the submissions of both the parties and also perused the material on record including the assessment order and the order of the CIT(A). The nature of the assessee’s business by no stretch of imagination can be termed as manufacturing or production of any article or thing, which has been held in the case of N C Budharaja & Co. supra, by the Hon’ble Supreme Court. “The words 'manufacture' and 'production' have received extensive judicial attention both under the Income-tax Act as well as Central I.T.A. No.25/Coch/2014 21 Excise Act and the various sales tax laws. 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 byproducts, intermediate products and residual products which emerge in the course of manufacture of goods. Further, the word 'article' is not defined in the Act or the Rules. It must, therefore, be understood in its normal connotation - the sense in which it is understood in commercial world. The word 'articles' in section 80HH is preceded by words 'it has begun or begins to manufacture or produce'. The word 'articles' occurring in section 80HH(2)(i) does not comprehend and take within its ambit a dam, a bridge and so on. If a dam is an article, so would be a bridge, a road, an underground canal and a multi-storeyed building. To say that all of them fall within the meaning of word 'articles' is to overstrain the language beyond its normal and ordinary meaning. It is equally difficult to say that the process of constructing a dam is a process of manufacture or a process of production. It is true that a dam is composed of several articles, viz., stones, concrete, cement, etc. But to say that the endproduct, the dam, is an article is to be unfaithful to the normal connotation of the word. A dam is constructed; it is not manufactured or produced. The expressions 'manufacture' and 'produce' are normally associated with movables - articles and goods, big and small - but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road or a building. Further, the principle of liberal construction as contended by the assessee could not be carried to the extent of doing violence to the plain and simple language used in the enactment. It would not be reasonable or permissible for the Court to rewrite the section or substitute words of its own for the actual words employed by the Legislature in the name of giving effect to the supposed underlying object. After all, the underlying object of any provision has to be gathered on a reasonable interpretation of the language employed by the Legislature. I.T.A. No.25/Coch/2014 22 Therefore, the activity of construction of a dam could not be characterised as manufacture or producing of article or articles, as the case may be, within the meaning of section 80HH(2)(i ).” 6.1 Apropos plea about the intermediary product being a new commodity Hon’ble Supreme Court in N C Budharaja, has rejected such plea. What cannot be claimed directly cannot be claimed indirectly. Issue whether the crushing of stones and mixing it up with the Bitumen for the purpose of construction can be called an activity of production is answered by Hon’ble Bombay High Court in the case of CIT vs N. U. C. Ltd. 126 ITR 377. Here assessee was carrying on the business of building, constructing, erecting, planting, executing etc., building, structures, factories etc. In the process and for the purpose of the said construction and repairs of buildings, it manufactured windows, doors, frames, concrete beams and slabs, Hon’ble High Court held that : 1. The assessee manufactured windows, door frames, concrete slabs and beams for the purpose of particular building under construction or repair and not independently. These were not manufactured for sale in the market as such but for use in its own work of construction of buildings. Its business was a complete whole and there was no scope of artificially dividing its business into two parts— one of manufacture of window and door frames, etc., and the other of construction and repairs of buildings for which the said manufacture was done. The Tribunal was, therefore, wrong in treating the window and other door frames, concrete slabs and beams as goods like any other goods which were independently manufactured and sold in the market. I.T.A. No.25/Coch/2014 23 2. The Tribunal failed to consider whether the assessee fell within the special definition of "industrial company" as per section 2(7)(d) of the Finance Act, 1966 relevant in the instant case. According to this definition "industrial company" is one which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. The words "construction", "manufacture" and "processing" have all been used but "construction" has been used only in the case of ships indicating thereby that any other type of construction would not fall within this definition. The assessee, carrying on business of construction and/or repair of buildings, was, therefore, not an "industrial company". 3. There was nothing on record to show separately the income derived by the asses see from its so called different activities of constructing buildings and manufacturing frames. Further, it was not carrying on the said activity independently or of, other wise than in the process of, the construction of the buildings. Thus, there was no merit in the assessee's claim that the CBDT's Circular No. 103 [ F. No. 166/1/73-IT(A-I)], dated 17-2-1973 extended the meaning of "industrial company" as defined in section 2( 7)(d) and since its income derived from manufacture of window and door frames, etc., constituted a large portion of its total income, it fell within the said definition. 6.3 Identical issue came up before Hon’ble Delhi High Court held in the case of Bhagat Construction Co. (P) Ltd. 232 ITR 722. In that case, the assessee company derived income from construction work including mining work for extracting stones to be used in construction. Hon’ble High Court observed as under: “The Supreme Court in the case of CIT v. N.C. Budharaja & Co. [1997] 204 ITR 412/ 70 Taxman 312 held that the expressions ‘manufactured’ and ‘produced’ are normally associated with the moveables - articles and goods big and small—but they are never employed to denote the construction activity of the nature involved I.T.A. No.25/Coch/2014 24 in the construction of a dam or for that matter, a bridge, a road or a building. In the instant case, the assessee might be extracting minerals such as stones by carrying out mining operations but the product of such mining operations was not the article or thing in which the assessee was dealing. The minerals produced by the assessee were consumed by him in the process of civil engineering works which was the business activity of the assessee. It could not, therefore, be said that the assessee was an industrial undertaking for the purpose of producing a article or thing for which the machinery or plant was wholly used. The main business of the assessee would have to be determined. Whether it was a construction business and any step involved in that construction business was only ancillary to the construction activity of the assessee or production of any goods was itself the main business activity of the assessee? An assessee may be engaged in the activity of building work as a contractor and in the process of completing that work some manufacture may be done at interim stages. The product of such manufacturing activity would not result in the production of goods but the product of such activity would be consumed by the assessee in its building work. In that case, the assessee would not be a producer but a consumer, for at the end of its business activity, it would be producing not any goods or articles but only constructing a building. The statement of law in the case of CIT v. Minocha Bros. (P.) Ltd. [1986] 160 ITR 134/ 26 Taxman 648 which was binding, is that inasmuch as the assessee is a manufacturer of buildings or constructor of buildings, an intermediary stage should not be taken to convert the assessee into a manufacturer of goods. A transitory or evanescent product like an R.C.C. block or a door is only a step towards making the whole building.” 6.4 Similar issue came up before the Delhi High Court in the case of CIT Vs Minocha Bros. (P) Ltd. 160 ITR 134. The assessee company was engaged in the business of construction of building and it claimed that various manufacturing processes I.T.A. No.25/Coch/2014 25 were involved in the construction of buildings and hence it was an industrial company. Hon’ble Delhi High Court has held in this case as under: “In the instant case, the assessee-company did building work as a contractor and in the process of that work some manufacture had to be done, like the manufacture of doors, windows, R.C.C. slabs and so on. These activities could be said to result in the manufacture of goods, but they were really part of the building work. On the other hand, to give a meaningful purpose to the Act, it must be understood that the definition is to operate in respect of companies which are industrial companies in the proper sense, that is, they must be manufacturing or processing goods. However, in this case, the assessee consumed doors, windows and bricks in making buildings. Hence, the assessee could not be described as a manufacturer or processor in respect of this activity.” This decision is affirmed by Hon’ble Supreme Court in 204 ITR 628. 6.6 It is thus clear that since assessee’s business is contract work and manufacturing and trading in readymix concrete (RMC) and sheathing pipes, it cannot be said that assessee is involved in the business of manufacture or production of any article or thing. Other activities of mixing up of various products in the process of construction business are neither the end product nor can they be called as manufacturing/production of any article or thing. In the case of CIT Vs Ansal Prop. & Indus. Overseas Projects, 9 taxmann.com 294, Hon’ble Delhi High Court has held that: ‘An assessee who is engaged in building construction activity would not be treated as industrial undertaking.” I.T.A. No.25/Coch/2014 26 7. It is pertinent to mention herein that a similar issue considered by the Delhi Bench of the Tribunal in the case of BSC & CIV, Delhi vs. ACIT in I.T.A. Nos. 1217/Del/2011 and 1752/Del/2011 vide its order dated 15-05-2012, rejected the claim of additional depreciation on plant and machinery and tipper respectively, though the assessee was engaged in road construction contract and manufacture and production of concrete mix. 8. Thus, the assessee’s additional depreciation under section 32(1)(iia) on Transmit Mixer, Tata Trucks and Ashok Leyland Trucks has rightly been rejected in reassessment, therefore, the appeal deserves to be rejected. 9. In the result, the appeal filed by the assessee is dismissed. sd/- (CHANDRA POOJARI) ACCOUNTANT MEMBER Place: Kochi Date: 08-12-2014 I.T.A. No.25/Coch/2014 27 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN Before Shri N.R.S. Ganesan (JM) and Shri Chandra Poojari (AM) I.T.A No. 25/Coch/2014 (Assessment year 2006-07) Cherian Varkey Construction vs The A.C.I.T., Cir.1(1) Co (P) Lt, 95, Panampilly Nagar Kochi Cochin 682 036 PAN : AABCC8393A (Appellant) (Respondent) Appellant by : Shri R Krishna Iyer Respondent by : Shri K.K. John Date of hearing : 29-10-2014 Date of pronouncement : -11-2014 O R D E R Per N.R.S. Ganesan (JM) This appeal of the assessee is directed against the order of the CIT(A)-II, Kochi dated 23-11-2013 and pertains to assessment year 2006-07. 2. The first issue arises for consideration is reopening of the assessment u/s 147 of the Act. I.T.A. No.25/Coch/2014 28 3. Shri R Krishna Iyer, the ld.representative for the assesee submitted that the assessee is engaged in manufacturing and trading of ready mix concrete. In the original assessment made u/s 143(3), the assessee has produced all the books of account. The assessing officer, after examining the material available on record allowed the claim of the assessee with regard to additional depreciation claimed on the machinery used for manufacturing ready mix concrete and the equipment used for transport of ready mix concrete. However, the assessing officer found that there was an escapement of income in respect of additional depreciation granted on the machinery used for manufacture and transport of ready mix concrete. According notice was issued. According to the ld.representative, no new material came into possession of the assessing officer subsequent to completion of assessment u/s 143(3) of the Act. Therefore, the re-assessment is due to change of opinion. The ld.representative placed his reliance on various judgments of the High Courts and the decision of this Tribunal. The ld.representative placed his reliance on the judgment of the Delhi High Court in CIT vs Goetze (India) Ltd vs CIT (2010) 321 ITR 431 (Del) and the judgment of the Full Bench of the Delhi High Court in the case of CIT vs Kelvinator of India Ltd (now known as Whirpool of India Ltd) (2002) 256 ITR 1 (Del). I.T.A. No.25/Coch/2014 29 4. On the contrary, Shri K.K. John, the ld.DR submitted that additional depreciation is eligible only in respect of machinery used for production of an article or thing. According to the ld.DR, manufacturing ready mix concrete is not manufacture of article or thing. Therefore, the assessee is not entitled for additional depreciation. Hence, the depreciation which was allowed contrary to the provisions of the Act has to be withdrawn. Therefore, to that extent, there was an excess allowance granted to the assessee. Hence, this is escapement of income within the meaning of section 147 of the Act. Therefore, according to the ld.DR, the assessment has been reopened rightly. 5. We have considered the rival submissions and also perused the material available on record. The assessing officer came to the conclusion that an excess allowance was granted u/s 32(1)(iia). Therefore, in view of Explanation 2(c)(iii) of section 147 the assessment was reopened. Hence, the assessing officer is justified in reopening the assessment within the period of four years. This Tribunal is of the considered opinion that the CIT(A) has rightly upheld the reopening of assessment u/s 147 of the Act. I.T.A. No.25/Coch/2014 30 6. Now coming to the additional depreciation in respect of machinery used for manufacture of ready mix concrete the ld.representative for the assessee submitted that the assessee is entitled for additional depreciation on the transit mixer, Tata truck and Ashok Leyland truck. The assessing officer, according to the ld.representative, rejected the claim of the assessee on the ground that transit mixer, Tata Truck, Ashok Leyland truck are intended for use on the road for transport of the ready mix concrete. Therefore, they will not alter the basic character of the vehicle as road transport vehicle. The ld.representative placed his reliance on the decision of the Delhi Bench of this Tribunal in YFC Projects (P) Ltd vs Dy.CIT (2010) 134 TTJ (Del) 167, copy of which is available on record, the ld.representative submitted that production of readymix concrete amounts to manufacture or production of goods or article. In fact, according to the ld.representative, the Delhi Bench of this Tribunal allowed the claim of the assessee by placing reliance on the judgment of the Apex Court in India cine Agencies vs CIT (2009) 308 ITR 98 (SC). According to the ld.representative, in view of the decision of the co-ordinate bench of this Tribunal, the assessee is entitled for additional depreciation. I.T.A. No.25/Coch/2014 31 7. On the contrary, Shri K.K. John, the ld.DR submitted that the assessee is admittedly producing readymix concrete and transporting he same to the construction site. It is not an article or thing as found in section 32(1)(iia) of the Act. Unless and until the assessee uses the plant and machinery for production of article or things, according to the ld.DR, the assessee is not entitled for any additional depreciation. The ld.DR submitted that production of readymix concrete for use in the construction industry cannot be construed as production of article or thing. Therefore, the CIT(A) has rightly confirmed the disallowance made by the assessing officer. 8. We have considered the rival submissions and also perused the material available on record. Admittedly, the assesee is producing readymix concrete and transporting the same to the construction site to be used by the builders in the construction of building, etc. This issue was considered by the Delhi Bench of this Tribunal in YFC Projects (P) Ltd (supra). After considering various case laws on the subject, the Delhi Bench of this Tribunal observed as follows: I.T.A. No.25/Coch/2014 32 “6. We have considered the rival contentions and gone through the records carefully. Hon’ble Supreme Court in the case of India Cine Agencies (supra) has considered various judgments of Hon’ble High Court as well of Hon’ble Supreme Court, while construing the meaning of expression, manufacture and production. Hon’ble Court has also considered the judgment in the case of N.C. Budharaja & Co (1993) 204 ITR 412 (SC) which has been relied upon by the AO. The Hon’ble Court has considered the dictionary meaning of expression “manufacture” as well as how this term has been construed and expounded by the Courts in various judgments. The authoritative observations of the Hon’ble Court are worth to note for understanding the meaning of word “manufacture”: “2. As noted above, the core issue is whether the activity undertaken was manufacture or production. 3. In Black’s Law Dictionary (5 th edition), the word, the ‘manufacture’ has been defined as, ‘the process or operation of making goods or any material produced by 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’. Thus, by a process of manufacture something is produced and brought into existence which is different from that, out of which it is made in the sense that the thing produced is by itself a commercial commodity capable of being sold or supplied. The material from which the thing or product is manufactured may necessarily lose its identity or may become transformed into the basic or essential properties.- Dy.CST (Law), Board of Revenue (Taxes) vs. Coco Fibres (1992) Supp. (1) SCC 290. I.T.A. No.25/Coch/2014 33 4. Manufacture implies a change but every change is not manufacture, yet every change of an article is the result of treatment, labour and manipulation. Naturally, manufacture is the end- result of one or more processes through which the original commodities are made to pass. The nature and extent of processing may vary from one case to another. There may be several stages of processing, different kind of processing at each stage. With each process suffered, the original commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed to it or in regard to it, such operation would amount to processing of the commodity. But it is only when the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. Process in manufacture or in relation to manufacture implies not only the production but also various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected that the manufactured product emerges. Therefore, each step towards such production would be a process, in relation to the manufacture. Where any particular process is so integrally connected with the ultimate production of goods that but for that process processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture.- CCE vs. Rajasthan State Chemical Works 91991) 4 SCC 473. 5. ‘Manufacture’ is a transformation of an article, which is commercially different from the one, which is converted. The essence of manufacture is the change of one object to another for the purpose of making it marketable. The essential point, thus, is that in manufacture something is I.T.A. No.25/Coch/2014 34 brought into existence, which is different from that which originally existed in the sense that the thing produced is by itself a commercially different commodity whereas in the case of processing it is not necessary to produced a commercially different article. – Saraswati Sugar Mills vs. Haryana State Board (1992) 1 SCC 418. 6. The prevalent and generally accepted test to ascertain that there is ‘manufacture’ is whether the change or the series of changes brought about by the application of processes take the commodity to the point where, commercially, it can no longer be regarded as the original commodity but is, instead, recognized as a distinct and new article that has emerged as a result of the process. There might be borderline cases where either conclusion with equal justification can be reached. Insistence on any sharp or intrinsic distinction between ‘processing and manufacture’, results in an oversimplification of both and tends to blur their interdependence – Ujagar Prints vs Union of Indi (1989) 75 CTR (SC) 1 : (1989) 3 SCC 488. 7. To put it differently, the test to determine whether a particular activity amounts to ‘manufacture’ or not is : Do new and different goods emerge having distinctive name, use and character. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether it be the result of one process or several process ‘manufacture’ takes place and liability to duty is attracted. Etymotologically the word ‘manufacture’ properly construed would doubtless cover the transformation. It is the transformation of a matter into something else and that some else is a question of degree, whether that something else is a different commercial commodity having its distinct character, use and name and commercially known as such from that point of I.T.A. No.25/Coch/2014 35 view, is a question depending upon the facts and circumstances of the case Empire Industries Ltd vs. Union of India (1985) 3 SCC 314.” 7. In the light of above judgment, if we examine the activity of the assesee than it would reveal that preparation of RMC is not as simple as construed by the learned CIT(A). The assessee has been carrying out this activity in an organized manner with the help of heavy machinery and computer. Its activity is not as simple as mixing of sand, cement, etc., by a labourer on the right side. Though in the common parlance, sometimes it does not sound logic to say that mixing of RMC is a manufacturing activity but if we look into this activity carried out by the assessee from the point of an expert who has laid down BIS standards placed on the paper book then it would indicate that it is a complicated affair. The mixing of four products in prescribed ratio would result in a different identifiable product which cannot be reconverted to its original shape. Hon’ble Supreme Court in the case of India Cine Agencies (supra) has considered cutting of jumbo film rolls into small piece of films as a manufacturing activity. If we analyse the facts of assessee’s case, s per the ratios of Hon’ble Supreme Court’s decision then its case is on a better footing. Therefore, we are of the opinion that learned Revenue authorities have erred in holding that assessee is not carrying out any manufacturing activity. We allow the first issue raised by the assesee as pleaded in grounds Nos.3 to 5. We direct the AO to allow additional depreciation on machinery used for the production of ready mixed concrete.” In view of the above finding of the Delhi Bench of this Tribunal, the machinery used for production of ready mix concrete is entitled for additional depreciation. I.T.A. No.25/Coch/2014 36 9. One more question may arise for consideration is whether construction of a building would amount to manufacture of an article or thing? In this case it is not the case of the assessee that they are engaged in construction of the building. It manufacturing readymix concrete and supplying the same to the person engaged in the construction of building. This factual aspect is not disputed by the revenue. The Apex Court in the case of N.C. Budharaja (supra) had an occasion to examine the issue elaborately. The Apex Court found that the sub clause (iii) of cause (b) of sub section 2 of section 32A does not comprehend within its ambit construction of a dam, a bridge, a building, a road, a canal and other similar constructions. Therefore, construction of a building or road or dam may not come within the meaning of manufacturing of an article or thing. The expressions “manufacture” and “produce” are normally associated with movable articles and goods. The Apex Court also further found that if the articles like gates, windows and doors which go into the construction of a dam but that makes little difference to the principle. In such a situation it is immaterial whether manufactured article which goes to the construction of dam are manufactured by him or purchased by him. In fact, the Apex Court observed as follows at pages 424 and 425 of the ITR: I.T.A. No.25/Coch/2014 37 “ It may be that the respondent is himself manufacturing some of the articles like gates, windows and doors which go into the construction of a dam but that makes little difference to the principle. The petitioner is not claiming the deduction provided by section 80HH on the value of the said manufactured articles but on the total value of the dam as such. In such a situation, it is immaterial whether the manufactured articles which go into the construction of a dam are manufactured by him or purchased by him from another person. We need not express any opinion on the question what would be the position if the respondent had claimed the benefit of section 80HH on the value of the articles manufactured or produced by him which articles have gone into consumed in the construction of the dam.” 10. In view of the above observations of the Apex Court an article which goes into the construction of a dam or building may not be a construction itself. Since the Apex Court left the issue open without expressing opinion in respect of article which goes into the construction of a dam, building, etc, this Tribunal is of the considered opinion that the decision of the Delhi Bench of this Tribunal in the case of YFC Projects (P) Ltd (supra) has to be followed. By following the decision of the Delhi Bench of this Tribunal, this Tribunal is of the considered opinion that the assessee is entitled for additional depreciation. 11. The next question falls for consideration is whether the transit mixer, Tata truck or Ashok Leyland truck are plant and machinery? I.T.A. No.25/Coch/2014 38 In fact, transit mixer, Tata truck and Ashok Leyland trucks are fixed with a specialized chamber for transport of ready mix concrete sto the plant / site of customer. The assessee has to necessarily keep the process of mixing in transit and delay the period of setting the concrete, till it is used / landed in the place oif construction. This specialized chamber is mounted on the Tata truck or Ashok Leyland truck and it cannot be separated or used independently. In other words, it is a composite plant / machinery used for manufacture and transport of readymix concrete. Therefore, the transit mixer, Tata truck or Ashok Leyland truck fitted with specialized chamber for transporting the ready made mixer is plant / machinery within the meaning of section 32 of the Act. 12. The next question arises for consideration is the written down value. According to the ld.representative for the assessee, the depreciation granted has to be reduced from the written down value. This Tribunal is of the considered opinion that when the assessee is entitled for additional depreciation, the additional depreciation has to be reduced from the written down value of the plant and machinery. 13. In view of the above, the appeal of the assessee is partly allowed. I.T.A. No.25/Coch/2014 39 Order pronounced in the open court on this _____November, 2014. Under separate order sd/- (Chandra Poojari) (N.R.S. Ganesan) ACCOUNTANT MEMBER JUDICIAL MEMBER Cochin, Dt : November, 2014 pk/- copy to: 1. Cherian Varkey Construction Co (P) Ltd, 95, Panampilly Nagar, Cochin-682 036 2. The ACIT, Cir.1(1), Kochi 3. The Commissioner of Income-tax, Kochi 4. The Commissioner of Income-tax(A)-II, Kochi 5. The DR (True copy) By order Asstt. Registrar, Income-tax Appellate Tribunal, Cochin Bench I.T.A. No.25/Coch/2014 40