Commissioner of Income Tax vs Kay Charan (P.) Ltd.

B.P. Jeevan Reddy, C.J.—The Tribunal has stated the following question u/s 256(1) of the income tax Act, 1961 (''the Act''): Whether, on the facts and in the circumstances of the case, the appellate Tribunal is legally justified in holding that the assessee produces Iron and Steel (Metal) and, therefore, it was entitled for a higher development rebate as provided u/s 33(1)(b) of the Act?

The assessee is a private limited company engaged in manufacture and sale of mild-steel rods (M.S. Rods). The record before us does not set out or clarify the actual process of manufacturing the said article. All that it shows is that the company manufactures M.S. Rods. For the assessment year 1973-74, the assessee claimed development rebate at 25 percent on extension or addition of plant and machinery made in the previous year relevant to the said assessment year, u/s 33(1)(b)(B)(i)(b) of the Apt. The ITO did not accept the said claim and allowed development rebate at the ordinary rate of 15 percent provided by section 33(1)(b)(B)(iv)(b). The ITO was of the view that the assessee was manufacturing M.S. rods, and not ''Iron and steel (metal)''. On appeal, however, the AAC agreed with the assessee and allowed development rebate at 25 per cent. The matter was carried by the department in further appeal to the Tribunal, which agreed with the AAC. The question is whether the assessee is entitled to the rebate at the higher rate, as claimed by it, or at the ordinary rate allowed by the ITO.

Section 33 provides for development rebate. Clause (a) of sub-section (1) provides that in respect of new machinery or plant owned by the assessee and wholly used for the purposes of the business carried on by him, he shall be allowed as deduction, in respect of the previous year in which the machinery or plant was installed, a sum specified in clause (b) by way of development rebate. Clause (b) prescribes different rates of rebate in different situations. Clause (b) has again two sub-clauses (A) and (B). We are only concerned herein with sub-clause (B). Sub-clause (B) has again four items (i) to (iv). It would be appropriate to set out items (i) and (iv) of sub-clause (B) of clause (b) of sub-section (1) of section 33:

Development rebate.--(1)(a) ** ** **

(b) The sum referred to in clause (a) shall be--

(A)** ** **

(B) in the case of machinery or plant,--

(i) where the machinery or plant is installed for the purposes of business or construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule,--

(a) thirty-five percent of the actual cost of the machinery or plant to the assessee, where it is installed before the 1st day of April, 1970, and

(b) twenty-five percent of such cost, where it is installed after the 31st day of March, 1970;

(ii) and (iii)******

(iv) in any other case, --

(a) twenty percent of the actual cost of the machinery or plant to the assessee, where it is installed before the 1st day of April, 1970, and

(b) fifteen percent of such cost, where it is installed after the 31st day of March, 1970.

The Fifth Schedule to the Act referred to in section 33(1)(b)(B)(i) contains as many as (33) items of articles and things, item (1) reads as follows:

(1) Iron and steel (metal), ferroalloys and special steels.

Item (11) of the said Schedule reads:

(11) Steel castings and forgings and malleable iron and steel castings.

The assessee claims that M.S. rods manufactured by it fall within item (1) of the Fifth Schedule and, because the machinery in question was installed after 31-3-1970, it is entitled to development rebate at the rate of 25 percent u/s 33(1)(b)(B)(i)(b), whereas the ITO says that M.S. rods do not fall under item (1) of the Fifth Schedule and, therefore, the assessee is entitled only to the ordinary rebate at the rate of 15 percent as provided in section 33(1)(b)(B)(iv)(b). The assessee''s contention, which has been accepted by the Tribunal, is that M.S. rods manufactured by the assessee fall within the expression ''iron and steel (metal)''. We find it difficult to agree with the Tribunal. M.S. rods manufactured by the assessee are, undoubtedly, made of steel. But the question is whether they can be called ''iron and steel (metal)''. The item does not read ''iron and steel''; it reads ''iron and steel (metal)''. The use of the qualifying word ''metal'' cannot be without a meaning. It means iron and steel in its metal form, i.e., in its primary shape. It cannot include articles or things made of iron or steel. If all the products of steel are included within the said words, then item (11) of the Fifth Schedule would become unnecessary and meaningless. Item (11), as already set out hereinbefore, refers to ''Steel castings and forgings and malleable iron and steel castings''. Steel castings and forgings would naturally be included within the expression ''iron and steel (metal)'', according to the assessee''s contention. If it were so, the Legislature would not have put them under a separate heading. In our opinion, therefore, the ''iron and steel (metal)'' refers to iron and steel in their original form and shape like billets, ingots, slabs, etc. This is the view taken by the Calcutta High Court in Indian Steel and Wire Products Ltd. Vs. Commissioner of Income Tax, . It has been rightly pointed out by the said Court, following the decision of the Supreme Court in State of Madhya Bharat v. Hiralal [1966] 17 STC 313 and the decision of the Gujarat High Court in Vaiswaner Trading Co. v. State of Gujarat [1964] 15 STC 586, that:

... iron and steel can be treated up to a certain stage as raw material which can take many shapes and forms like billets, slabs, ingots, etc. But there comes a stage where by further processing or manufacture it ceases to be a raw material and enters into the category of a finished product. The items in question have to be construed from this point of view. The assessee after obtaining iron and steel in the form of raw material or metal is manufacturing wire rods. It is the raw material or metal which comes under item 1 and not the finished product.

The heading of the Schedule is'' List of articles and things''. Therefore, in item (1) iron and steel (metal) is to be considered separately as a thing or an article but articles made or produced from such a ''thing'' or an ''article'' ought not to come within the same item." (p. 815)

The Court also contrasted the language used in item (1) with that used in item (11) of the Fifth Schedule and pointed out that wire rods (concerned in mat case) are commercial products made out of iron and steel and in their popular or commercial sense, they must be treated as articles different from ''iron and steel (metal)''. A large number of cases are referred to in the said decision in support of this conclusion. We agree with this view.

We may in this connection refer to a decision of the Supreme Court in Hindustan Aluminium Corporation Ltd. Vs. State of Uttar Pradesh and Another, . It was a case arising under the U.P. Sales Tax Act, 1948 and the question before the Court was whether aluminium rolled products and extrusions are ''metals'' within the meaning of the notification dated 30-5-1975 issued by the State of U.P. u/s 3A (2A) of the Sales Tax Act. Item (1) of the Schedule appended thereto, which prescribed a lower rate of tax, read. "All kinds of minerals, ores, metals and alloys except those included in any other notification issued under the Act". The assessee''s contention was that the goods manufactured by the (aluminium rolled products and extrusions) fell within the expression ''metals'' and are, therefore, entitled to the benefit of lower rate of tax. Dealing with the said contention, the Supreme Court observed:

Section 3A of the U.P. Sales Tax Act empowers the State Government to prescribe, by notification, the rate, and the point, at which the tax may be imposed on the sale of a commodity. A consideration of the notifications issued from time to time will show that the expression ''metal'' has been generally employed to refer to the metal in its primary sense. The reference is to the metal in the form in which it is marketable as a primary commodity. Subsequent forms evolved from the primary form and constituting distinct commodities marketable as such must be regarded as new commercial commodities. The notification No. ST-2631/X-902 (64-50 of November 21, 19S2), for example, sets forth two clauses:

(a) Copper, tin nickel, or zinc or any alloy, containing any of these metals only, and

(b) Scrap, meant for melting, and sheets including circles meant for making brassware, and containing only any or all of the said metals, viz., copper, tin, nickel and zinc.

It is clear that while clause (a) makes specific reference to certain metals, clause (b) separately sets forth the products which emerge as a result of processing the original metal. Clause (b) speaks of sheets including circles meant for making brassware, and containing only any or all of the metals specified in clause (a). A sheet of copper only or tin only or nickel only or zinc only is regarded as belonging to a distinct entry in the notification from copper, tin, nickel or zinc in its unfabricated form" (p. 1651)

Though the said case arose under the Sales Tax Act, we are of the opinion that the reasoning behind the said observations is relevant to the question arising before us. As we have pointed out hereinabove, the Parliament has treated ''iron and steel (metal)'' mentioned in item (1) of the Fifth Schedule to the Act, as different articles or things from ''steel castings and forgings'' mentioned in item (11) of the said Schedule.

It is, however, brought to our notice that certain High Courts have taken a contrary view. A division of the Kerala High Court in COMMISSIONER OF Income Tax, KERALA Vs. MITTAL STEEL RE-ROLLING AND ALLIED INDUSTRIES (P.) LTD., and a Full Bench of that High Court in Commissioner of Income Tax Vs. West India Steel Co. Ltd., have held that ''M.S. rods and steel sections'' manufactured by the assessees concerned therein fall within the expression ''iron and steel (metal)'' occurring in item (1) of the Fifth Schedule. The Full Bench took the view that "M.S. rods and steel sections are not anything different from iron and steel". For this proposition, it relied upon the decision of the Supreme Court in Hirala''s case (supra) but that was not a case arising under the income tax Act and much less dealing with entries of the nature above-mentioned in the Fifth Schedule to the Act. The question posed by the Full Bench was in the following terms:

... So the question is whether the finished article can be said to be something basically different from iron and steel" (p. 606)

and was answered by it by saying, ''They are not''. These decisions were followed by the Madras High Court in Addl. Commissioner of Income Tax Vs. Trichy Steel Rolling Mills Ltd., where it expressly differed with the view taken by the Calcutta High Court aforementioned. The Punjab High Court in COMMISSIONER OF Income Tax, PATIALA Vs. KRISHNA COPPER AND STEEL ROLLING MILLS., also took the view that iron rods manufactured from out of scrap metal fall within item (1) of the Fifth Schedule. In this decision, however, there is no reference to any other decision of the High Court or the Supreme Court. The said conclusion was arrived at mainly influenced by a letter of the Board addressed to Secretary, Bharat Chamber of Commerce, Calcutta, opining that the words ''aluminium, copper, lead and zinc (metals)'' mentioned in item (2) of the Fifth Schedule include ''the manufacture of aluminium (metal), both from bauxite as well as from aluminium scrap''. The Court held that what is said about item (2) holds equally good with respect to item (1). For the reasons given above, we respectfully disagree with the view taken by the Kerala, Madras and Punjab & Haryana High Courts. In the result, the question referred is answered in the negative, i.e., in favour of the revenue and against the assessee.