D.A. Mehta, J.
1. The Tribunal, Ahmedabad Bench 'A', has referred the following question under Section 256(1) of the IT Act, 1961 (the Act), at the instance of the CIT :
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is entitled to grant of investment allowance in respect of plant and machinery installed and put to use in the year under consideration for the manufacture of various products like bread, biscuits and cakes
2. The assessment year is 1988-89 and the relevant accounting period is year ended on 31st May, 1987. The assessee claimed investment allowance of Rs. 1,30,037. However, the AO disallowed the same holding that running a bakery and preparation of food articles does not constitute manufacture or production. He also recorded that the statutory reserve had not been created by the assessee. The assessee carried the matter in appeal before CIT(A), who vide order dt. 20th Nov., 1989 confirmed the assessment order on the limited ground of non-creation of statutory reserve in the year under consideration.
3. The assessee carried the matter in appeal before the Tribunal who allowed the claim of the assessee. It has been found by the Tribunal that the assessee is running a semi-automatic plant for the manufacture of various types of bread, biscuits and cakes. That it has employed about 25 workers in the manufacturing process. That plant and machinery worth Rs. 5,20,291 have been installed and put to use from 23rd Aug., 1986. It is further found by the Tribunal that it is an undisputed fact that the raw materials such as flour, ghee, sugar are used in the process of manufacturing or production of articles like bread, biscuits and cakes. The said items are produced by employing a mechanical device in the form of sophisticated semi-automatic plant. That the product so obtained is a different commercial commodity as compared to raw materials used in the process of producing the finished products. That all other conditions required for grant of investment allowance under Section 32A of the Act stand satisfied.
4. In relation to creation of reserve, it has been found by the Tribunal that the statutory reserve has been created in the immediately succeeding year viz., asst. yr. 1989-90 which amounts to sufficient compliance of the relevant provisions and the clarification issued by the CBDT in Circular No. 259, dt. 11th July, 1979 r/w Circular No. 305, dt. 12th June, 1981, as well as amendment to Section 32A(4)(ii) of the Act by Finance Act, 1990, with retrospective effect from 1st April, 1976. The Tribunal, therefore, granted investment allowance to the assessee.
5. Mr. T.U. Bhatt on behalf of Mr. B.B. Naik, learned standing counsel for the applicant-Revenue, submitted that whether the assessee is carrying on business of manufacturing or producing articles or things has to be considered for the purpose of deciding whether the assessee is entitled to investment allowance. He submitted that an assessee who is carrying on trading business cannot be termed to be an assessee fulfilling the condition necessary for grant of investment allowance. According to him, raw materials were edible items which remained so after processing by the assessee and hence it did not fulfil the relevant test laid down by the apex Court in the case of Dy. CST v. Pio Food Packers : 1980(6)ELT343(SC) . He, therefore, urged that the order of the Tribunal was erroneous and the reference be answered in favour of the Revenue.
6. Though served, there is no appearance on behalf of the respondent-assessee.
7. It is an accepted fact that for the year under consideration, the assessee had filed the return of loss and even after various disallowance the assessment has resulted into total loss of Rs. 4,77,782. In this connection, non-creation of reserve cannot be treated as ground for disallowance of claim of investment allowance if the assessee is able to establish that in the year of profit it has created statutory reserve. In the present case, it has been found as a matter of fact by the Tribunal that in asst. yr. 1989-90 the assessee has created statutory reserve and hence the said ground for rejecting the claim of investment allowance would not survive. The AO himself has recorded that the assessee-company has been incorporated w.e.f. 1st March, 1985 under the Companies Act, 1956, and carries on business as bakers of bread, biscuits and cakes under the name and style of Busy Bakers at Baroda. That the business has commenced from 23rd Aug., 1986. Therefore, it is an undisputed fact that the assessee is not a trader. The only question that survives thereafter is as to whether it can be stated that the assessee has satisfied the condition of Section 32A(1) read with Section 32A(2)(b)(ii) of the Act. It has been found by the Tribunal that all other conditions prescribed by this section are satisfied and the only dispute between the parties is as to whether the assessee is carrying on business of manufacture or production of an article or thing specified in the list in the Eleventh Schedule.
8. In the case of Dy. CST v. Pio Food Packers (supra), the following tests have been formulated by the apex Court :
The goods purchased should be consumed, the consumption should be in the process of manufacture, and the result must be the manufacture of other goods. There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. Commonly manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article, it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it, must be regarded as still retaining its original identity.
9. Applying the aforesaid tests which are positive and negative in character, can it be stated that the activity which is carried on by the assessee is such that the raw material which undergoes a process retains its original identity The assessee uses flour, ghee, sugar, etc. to prepare/produce bread, biscuits and cakes, etc. The end product which is obtained after the raw materials are processed/consumed is an article which is regarded in the trade, by those who deal in it, as being distinct in identity from the commodity involved in its manufacture. In other words, the produced goods are never known or sold to the customer/consumer as flour, ghee or sugar. The nature and extent of the processing is of such magnitude that the change which occurs results in different commodity commercially and is recognised as a new and distinct article. The inputs can no longer be identified as such and the produced article or thing has essentially a different identity vis-a-vis inputs. These are the findings recorded by the Tribunal and in the circumstances, it is not possible to state that the Tribunal has committed any error.
10. The question is answered in the affirmative i.e., in favour of the assessee and against the Revenue.
11. The reference stands disposed of accordingly. There shall be no order as to costs.