These appeals for the asst. yr. 1985-86, one by the assessee and the other by the Department, originate from order of the CIT(A), Ernakulam.
Therefore, we dispose of the appeals by this consolidated order for the sake of convenience.
2. The appeal by the assessee is delayed by five days. In its affidavit the assessee affirms that the order of the CIT(A) in the companys appeal No. 4-EKM-1/CIT/86-87 for the asst. yr. 1985-86 was received by the assessees office on 9th March, 1987. The date of communication of the order was inadvertently typed in the form of appeal to the Appellate Tribunal as 23rd Feb., 1987 which is the date of the order.
In these circumstances, the assessee prayed for condonation of the delay in filing the appeal. We are satisfied with the reasons stated in the affidavit and condoned the delay and admit the appeal to file.
3. The assessee company prepares rubber compounds for utilisation in rubber industries. The components used by the assessee include carbon black, oil and chemicals. The end product is in sheet form. The assessee claimed investment allowance under S. 80-I. The claim was rejected by the ITO on the ground that the Item No. 27 of Eleventh Schedule excludes these items being derivatives rubber in nature.
Besides the ITO opined that the assessee-company does not manufacture any new article or thing which can be said to be said to be substantially different from the raw product. He further held that the product of the assessee is also not an end product but it is only an intermediary stage and therefore the claim of investment allowance cannot be allowed in the case of the assessee. The total claim of the assessee under this head was Rs. 9,24,516.
4. Aggrieved by the disallowance, the assessee went in appeal before the first appellate authority. The assessee contended before the first appellate authority that the product produced by the assessee is one which cannot be described as falling in item 27 of Eleventh Schedule.
The CIT(A), however, rejected the claim off the assessee observing as under : "It may be stated here that the present S. 80-I has been introduced w.e.f. 1st April, 1981 and is applicable to asst. yr. 1981-82 and subsequent years. The earlier tax concession under S. 80J would be confined to new industrial undertakings, etc. which went into production before 1st April, 1981. New industrial undertakings, etc.
commencing production on or after 1st April, 1981 would be eligible for tax concession under the new S. 80-I, it was further stated by the ITAT, Delhi Bench in their above decision that the entire emphasis in the provision of Ss. 80J and 80HH is on the manufacture or production of articles, and the words "processing of goods" which is an intermediary activity before final manufacture are missing in the stipulation. Therefore, it is clear that the emphasis in 80J is not on the activity itself but on the ultimate production or manufacture of articles. It was held by the Gujarat High Court in Cellulose Products of India vs. CIT (1977) 110 ITR 151 (Guj) that the articles for this purpose should only mean the end product and not intermediate product.
Looked at from this point of view, the product manufactured by the appellant viz., rubber compounds would not be an end product in itself which can be classified as an article. Accordingly, in my view whereas the appellant would be entitled for its claim for investment allowance but it would not be entitled for the deduction under S. 80-I".
It is against this order, the assessee is in appeal before the Tribunal.
5. The assessees representative submitted that the raw material used by the assessee are natural rubber and rubber is masticated for reduction of viscosity and to increase the plasticity. This masticated rubber is then mixed with carbon black, rubber processing oil and other rubber chemicals in Intermix at 150 C and a high pressure. The intermix is a closed mixing mill operated with a big compressor and hydraulic power pack. The machine is driven by a 300 HP motor to enable the mixing take place at a very high pressure. Because of the high pressure and temperature, the rubber, carbon black, rubber processing oil and other rubber chemicals are masticated and become a homogeneous lump. This is known as rubber compound. This rubber compound is then fed into an open mill opening of the drop door of the intermix. The material again mixed in the rubber mixing mill for three to five minutes. The rubber mixing mill is driven by a 60 HP motor. The rubber compound is remilled and sheeted out into pieces of 3' to 6' length. After cooling and drying this rubber compound is taken from the cooling system and this compound is the final product produced by the assessee.
6. The main reason for the rejection of the claim for deduction under S. 80-I was that the article produced by the assessee is not an end product but only an intermediate product. Therefore, following the decision of the Gujarat High Court in the case of Cellulose Products of India vs. CIT (supra) the CIT(A) rejected the claim of the assessee.
7. After hearing the learned Representative of the assessee we are of the opinion that the conclusion arrived at by the ITO and the confirmation of the same by the CIT(A) that the assessees end product is only an intermediate article is not at all justified. As far as the assessee is concerned what is obtained what is obtained finally is an end product. It goes straight to the parties who purchase it from the assessee for the production of tyres, etc. For the simple reason that the product of the assessee is utilised by some other companies like Apollo Tyres Ltd., etc. for producing their final products, i.e., tyres, tubes, etc., it does not make the assessees product an intermediate product. For example : for a paddy cultivator paddy is the final product. On its sale and purchase by mill owners paddy is converted into rice. Rice is also in that sense an intermediate product. But, for the mill owners rice is the final product. Even if rice is taken for consumption it is raw material and intermediate product until it is boiled as cooked rice. We are, therefore, of the opinion that the order of the ITO rejecting the claim of the assessee for deduction under S. 80-I and the confirmation of the same by the first appellate authority is not justified. In the result, for the reasons stated hereinabove, we set aside the orders of the Revenue authorities on this issue and allow the appeal of the assessee.
8. Coming to the appeal by the Revenue, the Revenue is aggrieved by the order of the first appellate authority directing the ITO to allow investment allowance to the assessee. The stand of the Department is that the assessee is not producing any new article or thing by a process which qualifies the assessee to claim investment allowance under S. 32A(2) (b) (iii) of the IT Act, 1961. The said section reads as under : "32A(2) (b) any new machinery or plant installed after the 31st day of March, 1976, - (iii) In any other industrial undertaking for the purpose of business of construction, manufacture or production of any article or thing not being an article or thing specified in the list in the Eleventh Schedule".
While dealing with the appeal of the assessee, we have held that the case of the assessee does not fall within the ambit of item No. 27 of Eleventh Schedule. The product the assessee in supplying in the market is not crown corks, or other fittings of cork, or other fittings of rubber, or other fitting of polyethylen or any other fitting material.
The rubber compound produced by the assessee is produced by a long drawn process using carbon black, rubber processing oil and other rubber chemicals and subjecting the natural rubber to various processes at different stages as set out in para. 5 above. The further stand of the Department that the assessee does not manufacture or produce an article or thing also cannot be accepted as a valid plea. The assessee, as we have clearly held while dealing with the appeal of the assessee, uses a 300 HP and 60 HP motors and uses carbon black, rubber processing oil and other chemicals and mixes them at high temperature and finally gets a new product known as rubber compound. By no stretch of imagination it could be said that the assessees final product is not an article or thing manufactured or produced in an industrial undertaking.
In the case of CIT vs. Ajay Printery Pvt. Ltd. (1965) 58 ITR 811 (Guj), it was held by their Lordships of the Gujarat High Court that the production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations whether by hand labour or machine, would be manufacture. In the case of CIT vs.
N. C. Budharaja & Co. (1980) 121 ITR 212 (Ori) their Lordships of the Orissa High Court has held that all manufacturing activities are industrial activities but all industrial activities do not necessarily involve manufacture. If the above two decisions are considered in the context of the production of rubber sheet by the assessee after a long process, the activity of the assessee would fall within the ambit of industrial undertaking engaged in the business of production or manufacture of an article or thing. In the result, we are of the opinion that the appeal by the Department on this ground is without merit and the same is rejected.
9. In the result, the appeal by the assessee is allowed and the appeal by the Department is dismissed.