Motors and Diesels P. Ltd. vs Commissioner of Income Tax

Satish Chandra, J.—This Court vide order dated December 6, 1993 (under Section 256(2) of the Income Tax Act) in I. T. A. No. 252 of 1993 has directed the Tribunal to draw up the statement of case and refer the following questions for the court''s opinion for the assessment years 1983-84 and 1984-85 (R. A. No. 407(Alld.)/1992 and R. A. No. 10 (Alld.)/1993). For the assessment year 1985-86, the Tribunal has referred the same questions u/s 256(1) of the Income Tax Act for opinion of this Court:

Is the Appellate Tribunal legally correct in holding that producing cold chilled air in the cold storage of the assessee does not amount to production or a thing within the meaning of the said expression in Section 32A of the Income Tax Act, 1961 ?

Is the Appellate Tribunal legally correct in refusing to accept that refrigerated condition can be brought in existence only by making or causing it to be produced ?

The facts and circumstances are identical for the three assessment years hence all the references are being disposed of by this consolidated order for the sake of convenience.

Brief facts of the case are that the assessee deriving income from a cold storage. For the assessment years under consideration, the assessee has claimed investment allowance u/s 32A of the Income Tax Act (hereinafter referred to as "the Act"), by stating that the assessee is producing chilled air in the cold storage, which amounted to "production of a thing.

However, the lower authorities have not accepted the claim of the assessee. The Tribunal also disallowed the claim by observing that the cold storage was not an industrial undertaking.

With this background, Sri Ravi Kant, learned Counsel for the assessee, stated that the assessee is producing chilled air, which is intermediate product. It is not necessary that the product must be initially a new product as per the law laid down in Commissioner of Income Tax Vs. Sesa Goa Ltd., he read out its headnote, which runs as under:

It is not necessary that the mined ore must be a commercially new product for the purpose of Section 32A. Other provisions of the Act, such as, Section 33(1)(b)(B) and Section 35E, show that mining of ore is treated as ''production''.

He further submitted that 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 by-products, intermediate products and residual products which emerge in the course of manufacture of goods.

He further relied upon the ratio laid down by the Gujarat High Court in Commissioner of Income Tax Vs. Suresh Amin Family Trust, where it was observed that the assessee was entitled to investment allowance on the expenditure incurred for the equipment. He continues to rely on the ratio laid down in the case of Karnataka Pawn Brokers Assn. and Others, Etc. Vs. State of Karnataka and Others, Etc., where it was observed that any activity incidental or ancillary to the main business will also come within the definition of "business" under the Sales Tax Act.

He also cited the ratio laid down in the case of B.R. Enterprises Vs. State of U.P. and Others, where the lottery, trade or business was defined from the words "trade and commerce". He further cited the ratio laid down by the hon''ble Supreme Court in the case of Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, where the words and phrases, manufacture, production or produce, article were defined. He read out the headnote, which runs as under:

Particularly in view of the legislative history of the relevant provisions and the context, it is not possible to read the word ''construction'' in Section 32A(2)(b)(iii) as referring to construction of dams, bridges, buildings, roads or canals. In the former Sub-clause (ii) and the present Sub-clause (iii) of Section 32A(2)(b) as well as in Schedules IX and XI, the words ''articles'' and ''things'' are used interchangeably. In the scheme and context of the provision, it would not be right to isolate the word ''thing7, ascertain its meaning with reference to the law lexicons, and attach to it a meaning which it was never intended to bear.

He continues to cite the ratio laid down in the case of General Contracts Co. v. CIT [2006] 287 ITR 416, where the investment allowance was allowed on new machine or plant, if it is used in any other industrial undertaking for the purpose of business of construction, manufacture or production of any article or thing.

Lastly, he relied upon the ratio in the case of Commissioner of Income Tax-I Vs. Upasana Finance Limited, , where depreciation was allowed on the printing cylinders, sintex shipper ice box, MS Bins etc., as each asset is a plant.

With the above mentioned case law, the learned Counsel for the assessee submitted that the chilled air is an intermediate product. It may not have independently marketable value, but investment allowance will have to be allowed, as already prayed. To conclude, the learned Counsel for the assessee, Sri Ravi Kant, made a request that the investment allowance may kindly be allowed for the assessment years under consideration.

On the other hand, Sri A.N. Mahajan, learned Counsel for the Department, relied upon the orders of lower authorities as well as the Tribunal. He submitted that this Court in the case of R. K. Arya Cold Storage & General Mills v. CIT [2005] 148 Taxman 467, observed that the investment allowance u/s 32A of the Act cannot be allowed on cold storage in respect of plant and machinery installed for running the business of cold storage, as it is not engaged in the business of manufacture or processing any new articles. He further relied the ratio laid down in the case of CIT v. S.R. Cold Storage [2005] 145 Taxman 220 (All), where the investment allowance u/s 32A of the Act was not allowed on cold storage. Sri A.N. Mahajan continues to discuss the ratio laid down in the case of Ram Prakash Agarwal v. CIT [2004] 141 Taxman 562 (All), where it was observed that cold storage is only meant for processing of goods and not for manufacturing of goods and, therefore, the assessee running a cold storage would not be entitled to investment allowance u/s 32A nor for deduction under Sections 80J and 80HH.

To counter it, Sri Ravi Kant, learned Counsel for the assessee, relied upon the ratio laid down in the case of Commissioner of Income Tax, Bombay Vs. Tiecicon Pvt. Ltd., where the air-conditioning apparatus was considered as industrial company.

We have heard learned Counsel for the parties and have gone through the arguments advanced and also perused the case law cited by them.

It may be mentioned that the assessee is running a cold storage and had claimed that it was an industrial undertaking. By producing chilled air, the assessee claims investment allowance u/s 32A of the Act. In the similar case, the claim of the assessee was denied in the case of Commissioner of Income Tax Vs. Kothiwala Cold Storage, where it was observed that no manufacture or production of any article or thing was involved in the cold storage. Hence, the assessee was not entitled to investment allowance u/s 32A of the Act. Further the Punjab and Haryana High Court in the case of Commissioner of Income Tax Vs. Kissan Friends Ice Factory and Cold Storage, observed that (headnote):

A perusal of Clause (b)(iii) of Section 32A(2) of the Income Tax Act, 1961, makes it clear that a machinery or plant is eligible for investment allowance when installed for the purposes of any specified business. It is necessary that the assessee must be running an industrial undertaking and must be engaged in the business of manufacture or production of any article or thing. Such article or thing should be one other than that specified in the list in the Eleventh Schedule to the Act. An assessee may be an industrial undertaking but that does not by itself make the assessee eligible for this allowance unless the plant and machinery are installed for the purposes of manufacture or production of an article or thing. The word thing would mean a property as distinguished from a person. The conditions to be fulfilled under Clause (b)(iii) of Section 32A(2) are : (i) a new plant or machinery is installed in an industrial undertaking; (ii) it is for the purposes of business of manufacture or production; and (iii) it should manufacture or produce any article or thing, not being an article or thing specified in the Eleventh Schedule. An assessee should, therefore, establish that it was an industrial undertaking and was engaged in the business of manufacture or production of any article or thing.

Needless to mention that the air-conditioning plants are different from the cold storage. Hence, the ratio laid down in the case of Commissioner of Income Tax, Bombay Vs. Tiecicon Pvt. Ltd., is not applicable, as in that case the claim was allowed only on air-conditioning apparatus.

In the instant case, the assessee is not selling chilled air. In fact, the chilled air is required to maintain the temperature for healthy preservation of the items stored in the cold storage.

The hon''ble Supreme Court in the case of Delhi Cold Storage Pvt. Ltd. Vs. Commissioner of Income Tax, New Delhi, observed that in common parlance, "processing", is understood as an action which brings forth some change or alteration of the goods or material subjected to the act of processing by observing that (headnote):

In a cold storage, vegetables, fruits and several other articles which require preservation by refrigeration are stored. While, as a result of long storage, scientific examination might indicate loss of moisture content, that is not sufficient for holding that the stored articles have undergone a ''process'' within the meaning of Section 2(7)(c) of the Finance Act, 1973.

Held accordingly, that the appellant-company running a cold storage was not an ''industrial company'' for the purpose of Section 2(7)(c) of the Finance Act, 1973, and Schedule I thereto and was not entitled to concessional rate of tax thereunder.

The abovementioned ratio was followed by various High Courts as already discussed above. The term "processing" has wide amplitude and has various aspects and meanings but had understood as an action which brings forth some change or alteration of the goods or material, which is subjected to the act of processing. The dictionary meaning of the term in the instant case is not very different from this meaning in one sense, while various other meanings of wider amplitude are also available. The word "processing" involves bringing into existence a different substance from what the material was at the commencement of the process.

In the instant case, the assessee is running cold storage, which preserves the vegetables, fruits and several other articles. While as a result of long storage, scientific examination might indicate loss of moisture content that is not sufficient for holding that the stored articles have undergone a process. The assessee is not engaged in processing or manufacturing. When it is so, then we find no infirmity in the order of the Tribunal, who rightly denied the claim of investment allowance. Therefore, we answer both the questions in the affirmative in favour of the Revenue and against the assessee.