Commissioner of Income Tax vs Senapathy Whiteley Ltd.

K. Jagannatha Shetty, J.—This is a reference u/s 256(1) of the income tax Act, 1961 (''the Act''). The Tribunal has referred the following question: Whether, on the facts and in the circumstances of the case, the Tribunal is correct in deciding that the insulation board to be used only in electrical industry manufactured by the assessee comes within item 18 of the Ninth Schedule to the income tax Act, 1961?

The assessee is a company carrying on business in manufacture of electrical insulation boards, insulating press boards and multiple press paper used for the insulation purposes in transformers, motor, etc. These products go by the trade name ''Kheddahide''. In the assessment year 1975-76, the company while filing a return of income of Rs. 30,21,630 made a claim for initial depreciation u/s 32(1)(vi) of the Act relating to additions to plant and machinery after 31-5-1974 in the business of manufacturing insulation boards. This claim was based on the ground that the products manufactured fall under item 18 of the Ninth Schedule to the Act. Item 18 the of Ninth Schedule reads:

Paper, pulp and newsprint.

The ITO denied the claim of the assessee on the ground that the product manufactured did not fall under the above item.

The assessee appealed to the AAC, who also negatived the claim of the assessee. But the assessee obtained relief in second appeal preferred to the Tribunal. The Tribunal after noticing the various raw materials used in the manufacture of the products in question and the general use of those products in trade circles, came to the conclusion that the products manufactured by the assessee fall within item 18 of the Ninth Schedule.

The sole question, therefore, is, whether the insulation boards, which the assessee is manufacturing under the trade name ''Kheddahide'' could be called paper within the purview of item 18 of the Ninth Schedule.

For a proper answer to the question, it is better that we set out the facts found by the Tribunal. They are as follows:

That raw materials used are jute rags, tailor cuttings, semi-bleached and bleached, bamboo and pinewood pulps. After sorting rags are chopped into small pieces, cooked in the digester and then washed. The next step is that the washed material is pulped in the conventional Hollander Dealers, wood-pulp is broken up in the hydropulper and also made into pulp to the required consistency in the beaters and refiners. This pulp is stored in the storage chests and drawn on to the machine.

The Tribunal has found that the raw material used and the process of manufacture adopted are similar to those in paper industry. The Tribunal has also found that the products manufactured by the assessee come under the Paper Directory of the Directorate General of Technical Development, Government of India. It has further found that the excise duty levied and licence issued to the assessee are under the Central Excise and Salt Tax Act, 1944, under the item ''paper and paper boards''. In this view of the matter the Tribunal upheld the claim of the assessee.

There is no dispute on the facts found by the Tribunal.

In State of UP v. Kores (India) Ltd. [1977] 39 STC 8, the Supreme Court observed that the word ''paper'' which has not been defined has to be understood in its popular and commercial sense with reference to the context in which it occurs. The Supreme Court after referring to the dictionary meaning of the word ''paper'', observed:

...it is clear that in popular parlance, the word ''paper'' is understood as meaning a substance which is used for bearing, writing, or printing, or for packing, or for drawing on, or for decorating, or covering the walls...." (p. 11)

In Commissioner of Income Tax Vs. Straw-Board Mfg. Co. Ltd., the Punjab and Haryana High Court after examining the process of manufacture of straw-board and paper held that straw-board is a paper. One of the reasons in support of the conclusion given by their Lordships was that the process of manufacture of straw-board is identical with the process of manufacture of paper. This view has been accepted as correct by the Madhya Pradesh High Court in CIT v. Ratlam Straw-Board Mills (P.) Ltd. [1981] 132 ITR 700 and the Gujarat High Court in ARVIND BOARDS and PAPER PRODUCTS LTD Vs. COMMISSIONER OF Income Tax, GUJARAT-IV.,

The learned counsel for the assessee has produced before us some pieces of insulation boards manufactured by the assessee. They are thin sheets akin to the thin file board or paper board. The National Test House, Alipore, Calcutta, which is a Government of India Test House, after examining similar samples of insulation boards manufactured by the assessee, has certified that the samples manufactured by the assessee may generally be classified as press papers of electrical trade grade. On the basis of the said certificate, the Central Excise authorities are levying excise duty at the same rate as leviable on paper. The industry of the assessee and like industries are being handled under the Paper Directory of the Directorate General of Technical Development, Government of India.

From these circumstances, it is clear that the product manufactured by the assessee are similar to paper. The most relevant circumstance is the classification for the purpose of the levy of excise duty under the Central Excise and Salt Tax Act. That levy is based on the test certificate issued by the National Test House, which has classified the products of electrical trade grade. One department of the Central Government has, thus, classified the product in question as ''paper'' and we fail to understand why another department of the same Government should hold otherwise without any compelling reason.

It is well settled principle that even if two interpretations are possible, one in favour of the revenue and other in favour of the assessee, the interpretation which is favourable to the subject must be adopted. We are, therefore, of the view that the Tribunal was justified in allowing the claim of the assessee. We do not see any illegality in the conclusion reached by the Tribunal. There is no compelling reason to take a different view. In the result, we answer the question in the affirmative and against the revenue.