1. These two appeals, one by the department and the other by the assessee, are heard together and disposed of by this common order for the sake of convenience.
2. We first take up the departmental appeal. The first ground in this appeal states that the Commissioner (Appeals) did not give an opportunity of being heard to the ITO and so the order of the Commissioner (Appeals) was bad, illegal and void. Shri S.K. Lahiri, the learned representative for the department, explained before us that the ground means that the ITO was not given an opportunity of being heard by the Commissioner (Appeals) before he finalised the appeal. However, he was not able to establish before us that the ITO was not indeed informed about the hearing of the appeal by the Commissioner (Appeals) in spite of the normal practice of the department to call for the records of the ITO and let him know the date of hearing of the appeal so that the ITO could be present at the time of hearing if he so chose.
Under the circumstances, we do not find any merit in this purely technical ground which was not substantiated. Consequently, we reject this ground.
3. The next ground states that the Commissioner (Appeals) erred in holding that blending of tea amounts to manufacturing or processing.
Shri S.K. Lahiri explained before us that the word 'processing' has been typed in the ground of appeal due to inadvertence and the same may be ignored. He stated that the Commissioner (Appeals) has held that blending of tea amounts to manufacturing both for the purpose of allowances under Sections 32A and 80J of the Income-tax Act, 1961 ('the Act'). He stated that the Commissioner (Appeals) has not held that blending of tea is an activity of processing of goods because that activity is not relevant for the purpose of Sections 32A and 80J. He urged before us that the aforesaid ground might be understood in that sense. Then, he referred to the nature of the business carried on by the assessee which was to buy different types of tea from the market, blend them in different proportions, pack the blended tea and then sell the same. He stated that the assessee was not manufacturing or producing any article or thing. All that the assessee was doing was to buy tea which was a finished product from the market, mix them, pack them and then sell them. The input of the assessee's business was tea and the output of the assessee also remained tea even though the tea sold by the assessee might be having a different flavour than the tea bought by it. According to him, that activity of the assessee did not make the product sold by the assessee a new product manufactured or produced by the assessee. He stated that the language of Sections 32A and 80J requires that the assessee should manufacture or produce an article or thing or is a cold storage. The language either in Section 32A or 80J does not speak of processing of goods. The assessee is admittedly not a cold storage. Hence, in order to be eligible for the relief under Section 32A or 80J, it must manufacture or produce an article or thing. This essential condition has not been fulfilled in the case of the assessee and so it was not entitled to the relief under either of the aforesaid two sections. He pointed out that the assessee relied on the decision in the case of CIT v. Radha Nagar Cold Storage (P.) Ltd. [1980] 126 ITR 66 (Cal.). But that case applies only to a cold storage. Apart from that, all that it was decided in that reported case is that the act of cold storage is an act of processing of goods and so a cold storage can be regarded as an industrial company engaged in the processing of goods and is entitled to be taxed at the lower rate of tax under the relevant Finance Act. That was not a case which empowered all blended tea to be regarded as manufacture or production of an article or thing and so the Commissioner (Appeals) erred in allowing relief under Sections 32A and 80J relying on the aforesaid case. In this connection he referred to the decision in the case of CIT v. Hindusthan Metal Refining Works (P.) Ltd. [1981] 128 ITR 472 wherein, at page 475, the Hon'ble Calcutta High Court has explained the meaning of the word 'manufacture'. It is laid down therein that the words 'manufacture' and 'produce' applied to bringing into existence something which was different from its components. In that case, the assessee was engaged in galvanisation of iron sheets which involved giving zinc coating on the iron or steel in order to protect it from rust. It was held that the activity did not amount to manufacture or production. Shri S.K. Lahiri stated before us that in the case before us also the thing bought by the assessee was tea and the thing sold by the assessee was also tea and so the assessee was not engaged in the manufacture or production of any article or thing.
4. Dr. D. Pal, the learned representative for the assessee, on the other hand, supported the order of the Commissioner (Appeals). He referred to the decision in the case of Chrestien Mica Industries Ltd. v. State of Bihar [1961] 12 STC 150 (SC). He took us through the said decision wherein it has been decided that the process of mining mica is a process of production within the meaning of the Bihar Sales Tax Act, 1947. In particular, he invited our attention to the following concluding remarks appearing therein : Neither of the words 'production' or 'manufacture' is defined in the Bihar Sales Tax Act. But according to Oxford English Dictionary 'production' means amongst other things that which is produced ; a thing that results from any action, process or effort, a product; a product of human activity or effort.
It is obvious that what is described in the report above quoted would fall within the dictionary meaning of the word 'production'.
It is unnecessary to decide what the word 'manufacture' means. As what was sold was mica produced in Bihar by the appellant, the answer to the question would be in the affirmative and therefore in favour of the State.(p. 153) Dr. D. Pal stated before us that in that case the assessee was merely splitting mica into different sizes and yet the assessee was held to be producing a thing in Bihar. On the same analogy, he urged that the assessee before us who was engaged in blending tea and selling them after blending and packing should also be held to be engaged in producing a thing. According to him, the tea sold by the assessee is different from the tea which it bought and blended together. Next, he referred to the decision in the case of Chowgule & Co. v. Union of India [1981] 47 STC 124 (SC). In this case, the assessee was engaged in mining iron ore and selling it after brushing, washing and screening and blending it. It was held in this case that the ore produced by the assessee could not be regarded as a commercially new and distinct commodity from the ore of the different specifications blended together. What was produced as a result of blending was commercially the same article, viz., ore though with different specifications than the ore which was blended and it could not be said that any production or manufacture was involved in blending of the ore. However, the blending of ore amounted to processing of the ore within the meaning of Central Sales Tax Act, 1952. Dr. D. Pal referred to this case for the proposition that blending of ores amounted to processing of goods. He took us through this decision. In paragraph 7 of this decision, the Supreme Court referred to the decision of the Bombay High Court in the case of Nilgiri Ceylon Tea Supplying Co. v. State of Bombay [1959] 10 STC 500 and did not agree with the decision of the High Court in the case before the Bombay High Court, the assessee, like the assessee before us, purchased different types of tea, blended them and sold them. The High Court held that no processing was involved in the activity carried on by that assessee so that the assessee did not get the benefit under Section 8 of the Bombay Sales Tax Act, 1953. The Supreme Court overruled the said decision and held that the assessee was engaged in the processing of tea. The Supreme Court has categorically stated therein that in Nilgiri Ceylon Tea Supplying Co.'s case (supra), as decided by the Bombay High Court, it did not lay down the correct law. When different brands of tea were mixed producing a different tea mixture of a different kind and quality, there was plainly and indubitably processing of different brands of tea. The point to note at this stage is that blending of tea has been held by the Hon'ble Supreme Court in that case as amounting to processing only.
Next, he referred to the decision in the case of G.A. Renderian Ltd. v.CIT [1984] 145 ITR 387 in which it has been held by the Calcutta High Court that the business of purchasing tea of different qualities, blending the same by mixing one type with another and selling it is an operation of processing and so it was entitled to the lower rate of tax under the relevant Finance Act which speaks of processing in addition to manufacture or production. Finally, Dr. D. Pal referred to the decision in the case of Tarai Development Corpn. v. CIT [1979] 120 ITR 342 (All.). In this case, it was held that an undertaking engaged in processing of seeds is an industrial undertaking and the income derived by it is entitled to relief under Section 80J because item 28 of the Fifth Schedule of the Act refers to processing of seeds and Section 33(1 )(b)(B) of the Act refers to manufacture or production of any one or more of the articles or things specified in the Fifth Schedule. Dr.
D. Pal explained that Section 33 speaks of manufacture or production and refers to the Fifth Schedule which includes three items consisting of processing seeds and fish. Hence, processing should be regarded as included in production. Hence, he urged that the assessee before us, which was evidently engaged in processing, was also engaged in the production of goods.
5. Shri S.K. Lahiri replied that the cases of Chrestien Mica Industries Ltd. (supra) and Chowgule & Co. (supra) do not apply to the facts of the present case. Firstly, because they were mining concerns and, secondly, because they were held to be engaged in processing of goods.
Apart from the above, the question involved there was relevant under the appropriate Sales Tax Act and not under Section 32A or 80J. On the contrary, he relied on the decision in the case of Nilgiri Ceylon Tea Supplying Co. (supra) as discussed in the case of Chowgule & Co.
(supra) and the case of G.A. Renderian Ltd. (supra) for the proposition that the Supreme Court as well as the Calcutta High Court have clearly held the operation of blending tea to be an activity of processing only. Since processing is not mentioned either in Section 32A or 80J, mere processing would not entitle an assessee to those reliefs.
Regarding Tarai Development Corpn.'s case (supra), he stated that the Legislature has specifically given relief under Section 33 for only two types of processing activities, viz., processing of seeds and fish.
That reported case was one of processing of seeds. He urged that the ratio of the said case could not be extended to in processing other than seed or fish.
6. We have considered the contentions of both the parties as well as the facts on record. We find force in the contention raised for the revenue. Both the cases of Chrestien Mica Industries Ltd. (supra) and Chowgule & Co. (supra) were engaged in mining activities. The activities begun from digging the soil, winning ore, sorting them out, etc. All these activities are parts of one integrated activity. It is in this context that the aforesaid decisions were given. In fact, in the latter case of Chowgule & Co. (supra), the Supreme Court has clearly stated that mining activities amounted to processing only. In the same judgment, it has overruled the decision of the Bombay High Court in the case of Nilgiri Ceylon Tea Supplying Co. (supra) and held that blending of tea amounts to processing only. This is a direct authority on the issue before us which has been decided against the assessee. Similarly, the Hon'ble High Court at Calcutta in the case of G.A. Renderian Ltd. (supra) has also decided that blending of tea amounts only to processing. This is also a direct authority on the issue before us which has been decided against the assessee. So far as the case of Tarai Development Corpn. (supra) is concerned, we find that the said reported case was one dealing with processing of seeds which has been specifically mentioned in item 28 of the Fifth Schedule. We agree with the learned representative for the department that what has been specifically granted by the statute to particular items of goods cannot be extended to all other items of goods. In this connection, we find support for our conclusion from item 26 of the Fifth Schedule which speaks of tea and not processing of tea. Had the intention been otherwise, processing of tea would have been included in the Fifth Schedule along with processing of seeds and fish. The other cases relied on by Dr. D. Pal are cases of processing only. There is no dispute about the fact that Section 32A and Section 80J allow relief only if the assessee is engaged in the manufacture or production of article or thing and not when it is engaged only in the processing of goods. Respectfully, following the aforesaid authorities and for the above reasons, we uphold the contention of the revenue, reverse the order of the Commissioner (Appeals), restore the decision of the ITO on this point and allow this ground.
7. The last ground in this departmental appeal states that the Commissioner (Appeals) erred in holding that the assessee is entitled to deduction under Section 80J even though the machines of the new unit were not in existence on the first day of the relevant previous year.
The ITO had given an additional reason for not allowing relief under Section 80J. He has stated that the aforesaid machines were not in existence on the first day of the relevant previous year. The Commissioner (Appeals) had observed that it was not necessary because Section 80J speaks of the computation period and not the first day of the previous year. We have heard Shri S.K. Lahiri and Dr. D. Pal in this connection. We find that Explanation 2 to Section 80J(1A) defines computation period as the period for which the profits of the new unit are to be computed. Hence, we agree with the Commissioner (Appeals) that the assessee was entitled to relief even though the machines were not in existence on the first day of the relevant previous year provided the other conditions prescribed under the law are satisfied.
As we have already held that the conditions of manufacture or production of a thing or article is not satisfied, we do not give any direction in favour of the assessee.
8. We now come to the assessee's appeal. The first dispute in this appeal is covered by the first four grounds. It states that the Commissioner (Appeals) should have allowed the assessee's claim for exclusion of cash subsidy received from the Government, from the total income of the assessee. We have heard both the sides in the matter. We find that this very issue came up for consideration before the Tribunal in the earlier year. In paragraph 6 of their order in IT Appeal No.2028 (Cal.) of 1984, dated 10-2-1986 for the assessment year 1979-80, the Tribunal has considered the issue and has set aside the matter for fresh consideration and decision by the ITO. We have gone through the aforesaid order of the Tribunal and we are in respectful agreement with the same. The facts and circumstances of the year under consideration remained unchanged. Hence, we vacate the decision of the Commissioner (Appeals) as well as the ITO on this point and restore the matter to the file of the ITO with a direction to dispose of the same afresh in accordance with law and the directions of the Tribunal in the order referred to above after giving a reasonable opportunity of being heard to the assessee.
9. The remaining six grounds in this appeal relate to the assessee's claim for deduction of a sum of Rs. 95,747 as bad debts. From the details filed before us by Shri A.K. Roy Choudhury, the learned representative for the assessee, we find that the assessee advanced a sum of Rs. 44,000 on 30-7-1969 to a person for purchasing a flat. As no flat was delivered to the assessee nor the amount was returned to the assessee, interest was charged year after year from 1969-70 to 1976 77.
This interest amounted in all to Rs. 51,746. Those amounts of interest had been taxed year after year in the hands of the assessee as shown by it under the head 'Income from other sources'. The total of the principal and interest came to Rs, 95,747. The assessee wrote off this amount as bad debt and claimed as a deduction from its total income.
The ITO rejected the claim of the assessee on the ground that the assessee did not take any steps for the recovery of the debt. On appeal, the Commissioner (Appeals) confirmed the disallowance after considering the written submission of the assessee filed before him.
Reliance was placed by the assessee on the case of Jethabhai Hirji and Jethabhai Ramdas v. CIT [1979] 120 ITR 792 (Bom.) for the proposition that the assessee need not prove to the satisfaction of the ITO that a debt has become bad. It was also urged that the assessee was engaged in the business of real estates and so it was a trade debt. The Commissioner (Appeals) rejected the claim of the assessee on the ground that there was no evidence to show that the assessee was doing business in buying and selling flats. Further, no legal steps were taken to recover the amount. Hence, he dismissed this ground.
10. We have heard Shri A.K. Roy Choudhury who urged that the assessee's claim should have been allowed. We have also heard Shri S.K. Lahiri who supported the disallowance. We have considered the contentions of both the parties as well as the facts on record. We find no evidence on record to show that the assessee was engaged in buying and selling of flats. This amount was never taxed in the past. Hence, this did not constitute a trade debt and the question of allowing it as a bad debt does not arise. We have also considered as to whether the amount could be allowed as a trading loss. But we do not find any reason to arrive at that conclusion. Admittedly, the interest amount was assessed under the head 'Income from other sources' which clearly indicates that the amount was a loan and so it was an investment on the capital account.
Thus, the loss, if any, has occurred on the capital account. Again, the assessee has not taken any steps to recover the debt. Above all, it has not been shown as to how the loss arose during the previous year under consideration. Under the circumstances, we are unable to interfere with the finding of the revenue authorities.
11. In the result, the departmental appeal is partly allowed while the assessee's appeal may be treated as partly allowed for the statistical purposes.