Commissioner of Income Tax vs S.S.M. Finishing Centre

Ratnam, J.—In this tax case reference u/s 256(1) of the income tax Act, 1961 (''the Act''), at the instance of the revenue, the following questions of law have been referred to this Court for its opinion:

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee was entitled to higher rate of development rebate as provided in section 33(1)(b)(B)(i) of the income tax Act, 1961, in respect of the machinery used by it in its business?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the operations carried on by the assessee would amount to manufacture of textiles as specified in item 32 of the Fifth Schedule ?"

The assessee is a registered firm. In respect of the assessment year 1974 - 75 , in the course of the assessment proceedings, it claimed development rebate at the higher rate of 25 per cent in accordance with the provisions of section 33(1)(b)(B)(i) of the Act, as, according to it, it installed machinery and plant for the purpose of manufacture and production of an article or thing falling under item 32 in the Fifth Schedule to the Act. The ITO took the view that the operations carried on by the assessee did not amount to manufacture of any textile item and he, therefore, rejected the claim of the assessee for higher development rebate, but confined it to 15 per cent. On appeal by the assessee before the AAC relying upon the decision of the Tribunal in IT Appeal No. 1915 (Mad.) of 1973-74 dated 12-12-1975, for the assessment year 1970-71, in respect of the same assessee, the claim of the assessee for higher rate of development rebate u/s 33(1)(b)(B)(i) was accepted. On further appeal by the revenue before the Tribunal, the Tribunal also took the view that the claim of the assessee would be covered by the decision of the Tribunal referred to earlier and in that view, dismissed the departmental appeal. That is how the questions of law set out earlier have come up before us.

We may immediately point out that the decision of the Tribunal in IT Appeal No. 1915 (Mad.) of 1973-74 dated 12-12-1975 formed the subject-matter of a reference, at the instance of the revenue, in Tax Case No. 407 of 1979, where the two identical questions as set out in the earlier part of this judgment came to be referred for the opinion of this Court and that reference was answered in favour of the revenue, as per the decision in Commissioner of Income Tax Vs. S.S.M. Finishing Centre, Taking note of the operations carried on by assessee on the grey cloth manufactured or produced by others and purchased by the assessee, it was found that the assessee did not manufacture the cloth, but merely expended its labour on the cloth manufactured by others by carrying on some operations and that the end-product was not in any manner different from the feed-in-material. It was also further found that the operations carried on by the assessee were not directed towards the manufacture or production of textiles in that such operations did not bring into existence textile material, cloth or fabric contemplated u/s 33(1)(b)(B)(i) read with item 32 of the Fifth Schedule. In so answering the reference, the nature of the operations carried on by the assessee on the cloth purchased by it from others and the resultant product after the operations carried on by the assessee were taken into account to hold that even after the carrying on of the operations, no new or distinct or different commodity from the feed-in-material was produced by the assessee, but it had remained the same as before and, therefore, the assessee cannot claim the benefit of higher development rebate u/s 33(1)(b)(B)(i) read with item 32 of the Fifth Schedule. In this case, it is not the stand of the assessee that different operations had been carried out or that by the use of the plant and machinery installed by it, textiles had been manufactured by it. In other words, the nature of the operations carried on by the assessee even during the accounting period relevant to the assessment year 1974-75 had remained just what it was during the prior assessment year 1970-71 and there is no dispute regarding this. Ordinarily, therefore, the decision in S.S.M. Finishing Centre (supra) would govern this reference as well. However, the learned counsel for the assessee strongly relied upon the decision of the Supreme Court in Ujagar Prints v. Union of India [1989] 179 ITR 317 and contended that process like the ones carried on by the assessee on grey cloth purchased by it from others would also amount to ''manufacture'' and, therefore, the decision in S.SM. Finishing Center''s case (supra) would not have any application. On the other hand, the learned counsel for the revenue submitted that Ujagar Prints'' case (supra) concerned itself with the validity of the extended or expanded definition of ''manufacture'' occurring in section 2(f) of the Central Excises and Salt Act, 1944, amended by the Central Excises and Salt and Additional Duties of Excise (Amendment) Act, 1980, and in the absence of any definition of ''manufacture'' in the Act, that expression has to be interpreted and understood as a word of ordinary import connoting bringing into existence a new and different article, having a distinct name and character and since that was not done by the assessee, it was not entitled to claim the benefit of higher development rebate. We now proceed to examine the question whether the decision in Ujagar Prints'' case (supra) could be pressed into service by the assessee to avail the benefit of higher development rebate as a manufacturer or producer of textiles falling under item 32 of the Fifth Schedule. The decision in Ujagar Prints'' case (supra) came to be rendered by a larger Bench of five Judges owing to certain doubts raised about the correctness of the decision in Empire Industries Limited and Others Vs. Union of India and Others, by the referring order in Ujagar Prints Vs. Union of India (UOI), . The question that was debated before and decided by the Supreme Court in Ujagar Prints Vs. Union of India (UOI), related to the validity of the levy of excise duty under tariff items 19 and 22 of the Schedule to the Central Excises and Salt Act, as amended by the Central Excises and Salt and Additional Duties of Excise (Amendment) Act, treating certain processes like bleaching, mercerising, dyeing, printing, water proofing, rubberising, etc., as ''manufacture''. One of the questions decided by the Supreme Court was, whether the processes of bleaching, dyeing, printing, sizing, etc., carried on in respect of cotton or man-made grey fabric amounted to ''manufacture'' for purposes and within the meaning of section 2(f), prior to the amendment of said section 2(f) by section 2 of the Amendment Act, and whether the decision in Empire Industries Ltd.''s case (supra) holding that these operations amounted to ''manufacture'' was wrongly decided and required reconsideration. In considering and deciding the question referred to above, the Supreme Court, after referring to the definition of the expression ''manufacture'' occurring in section 2(f), proceeded to advert to the test generally applied for ascertaining whether there is ''manufacture''. In this context, the Supreme Court reiterated the principles applicable by observing that the test is to find whether the change or series of changes brought about by the application of the processes take the commodity to a point where commercially it can no longer be regarded as the original commodity but is, instead, recognised as a distinct and new article that has emerged as a result of the processes. After laying down this general test, the Supreme Court, while affirming that the principles are clear, but that difficulty arises only in their application in individual cases, stated that the various processes, by the application of which a commercially different commodity emerged, would fall within the expression ''manufacture'' u/s 2(f) even as unamended. It is, thus, seen that the Supreme Court, while reiterating the general test applicable, had found with reference to the definition of the expression ''manufacture'' occurring in section 2(f), that the operations carried on by the processors would fall within the definition of ''manufacture'', as it stood even prior to the amendment, as, by the very definition in section 2(f) ''manufacture'' included any incidental or ancillary process. Ultimately, the Supreme Court concluded that its earlier decision in Empire Industries Ltd.''s case (supra) was rightly decided. It is, thus, seen that the decision of the Supreme Court in Ujagar Prints Vs. Union of India (UOI), turned upon the interpretation of the word ''manufacture'' as defined in section 2(f), as it stood before and after its expansion with reference to items 19 and 22 of the First Schedule by the Amending Act, 1980, to include incidental and ancillary processes of the kind enumerated, in relation to items 19 and 22 of the First Schedule also as falling within the scope of the expression ''manufacture''. It is common ground that under the Act, there is no definition of the expression ''manufacture'' or ''produce''. It, therefore, follows that those expressions have to be understood as words of ordinary import to mean to bring into being or existence a product falling under item 32 of the Fifth Schedule. What is significant is that even in Ujagar Prints Vs. Union of India (UOI), the Supreme Court has approved of the generally applied test of the emergence of a distinct and a new article as a result of the application of the processes. Applying that test to the facts of this case, it is seen that the assessee has not made out that a commercially different and distinct product emerged as a result of the application of the processes by it to the cloth purchased by it from other manufacturers. We may also point out that the decision in Ujagar Prints Vs. Union of India (UOI), proceeded on a consideration of the definition of the word ''manufacture'' as it occurred in the Central Excises and Salt Act, and its expansion later with reference to items 19 and 22 of the First Schedule by the provisions of section 2 of the Amending Act. We are, therefore, unable to agree with the contention urged by the learned counsel for the assessee that in view of the decision in Ujagar Prints Vs. Union of India (UOI), the claim of the assessee for the assessment year 1974-75 would stand on a footing different from that for the assessment year 1970-71. We may also point out that in the record of the proceedings, there is nothing whatever to indicate that as a result of the processes employed by the assessee on the cloth purchased by it but manufactured by others, a new and commercially different article or commodity as a result of the transformation of the components, had emerged and under those circumstances, the assessee cannot claim to have manufactured or produced textiles falling within item 32 of the Fifth Schedule. We may also incidentally observe that there are some provisions in the Act which contemplate certain processes and in such cases they have been clearly and explicitly indicated in unmistakable terms, as for instance, in section 109(1A) of the Act, but in the absence of any indication in the language employed under the relevant provisions that processes like the ones carried on by the assessee would also fall within the expression ''manufacture'' or ''produce'', the assessee cannot claim a higher development rebate. We are, therefore, of the view that the decision in Ujagar Prints Vs. Union of India (UOI), is of no assistance in advancing the case of the assessee. We may also point out that in CIT v. S.SM. Sizing Centre [1985] 155 ITR 782/ 20 Taxman 248 (Mad.) and CIT v. Veena Textiles (P.) Ltd. [1984] 19 Taxman 86 /[1985] 155 ITR 794 (Mad.) with reference to the carrying on of certain operations like warping, sizing, bleaching, etc., on materials not manufactured by the assessee, it has been held that the assessee cannot claim that there was any activity of manufacture or production carried on by it as to justify the allowance of higher development rebate. Following S.SM. Finishing Center''s case (supra) we answer the questions referred to us in the negative and against the assessee. The revenue will be entitled to the cost of this reference. Counsel''s fee Rs. 500.