1. These departmental appeals, which are directed against the common order dated 13-11-1990 of the CIT (A) III, Madras relating to the assessment years 1986-87 and 1987-88, were heard together and are disposed of by a common order.
2. Issue No. 1: Disallowance of interest under Section 40A(2) of the Income-tax Act.
In the course of the assessment proceedings relating to the assessment year 1986-87, the Assessing Officer found that the assessee had paid an aggregate amount of Rs. 8,85,158 as and by way of interest to one Orwo Films Eastern Unit, a sister concern of the assessee. The Assessing Officer further found that on the money borrowed by it from others the assessee had paid interest at the rate of 18% per annum. Applying the said rate of interest to the money borrowed by the assessee from the said concern, the Assessing Officer found that the interest payable worked out to Rs. 6,55,725. Relying on the said circumstances, the Assessing Officer came to the conclusion that interest at a rate higher than 1896 per annum had come to be paid by the assessee to the said concern because it was the sister concern of the assessee. According to the Assessing Officer, payment of interest at a rate higher than 18% per annum was not justified. Invoking the provisions of Section 40A(2), therefore, the Assessing Officer disallowed a sum of Rs. 2,29,433.
3. In the assessment for the assessment year 1987-88 too, for the same reasons, invoking the provisions of the said section, the Assessing Officer disallowed a sum of Rs. 3,78,910 out of the interest paid by the assessee to its sister concern, namely (a) Orwo Films Eastern Unit and (b) Meena Cine Agencies.
4. The said issue was one of the subject-matters of the appeals filed by the assessee before the CIT (A). The assessee's case before the CIT (A) was that interest at the rate of 24% came to be paid not because the said two entities were the sister concerns of the assessee, but because the said entities themselves had borrowed money at the rate of 24% and had in turn advanced money to the assessee from out of such borrowals. In this regard, it was also highlighted that in the case of Meena Cine Agencies, the assessee had paid interest at the rate of only 15% on the money advanced by the said sister concern out of its own funds. In this connection, the assessee produced a certificate to the said effect from one T.A. Venkatachari, Chartered Accountant of Venkatachari & Co.
5. The said arguments found favour with the CIT (A), who allowed the assessee's claim. In this regard, he was particularly impelled by the consideration that while advancing money to the assessee from out of the money borrowed by them, the said sister concerns had charged the assessee interest at the rate at which they had themselves borrowed money from outsiders.
6. On hearing both the sides, we consider that the CIT (A) cannot be faulted for the line taken by him. Of course, the learned Departmental Representative sought to argue faintly that the Chartered Accountant's certificate was produced by the assessee for the first time before the CIT (A). As we see it, this contention lacks force. First, the Department has not brought on record any evidence to contradict the assessee's version that it paid interest at the higher rate of 24% to its sister concerns because they had in turn borrowed money at the higher rate of 24% and accommodated the assessee from out of such borrowed funds. Secondly, the CIT (A), a senior official of the department, had gone into this question and had given a clear finding that this was not a case of diversion of the assessee's income to its sister concerns. This finding of fact, needless to say, has not been controverted by the department. We may here add that the Kerala High Court case of Anandji Shah v. CIT [1990] 51 Taxman 29 referred to and relied upon by the learned Departmental Representative is distinguishable, because there the decision turned on the particular facts of the case. Hence that case cannot avail the Department.
7. In view of the foregoing, therefore, we decline to interfere in the matter and dismiss the related grounds.
The assessee imports photographic colour paper from Mitsubishi of Japan and sells them locally. During the previous year relevant to the assessment year 1986-87 the assessee had started a factory which the assessee has styled "Industrial Wing" to convert imported jumbo rolls into rolls of marketable sizes. The outlay on machinery was Rs. 24,23,380 and that on the factory Rs. 11,98,660. The assessee claimed investment allowance on the plant and machinery installed in the said new factory on the ground that the assessee was manufacturing or producing goods within the meaning of Section 32A of the Act. In the assessment for the assessment year 1987-88 it claimed deduction under Section 80-1 of the Act in relation to the income of the said unit on the same ground.
The Assessing Officer negatived both the aforesaid claims of the assessee for two reasons. First, "buying things in bulk and repacking them into marketable size is not an industrial activity involving construction, manufacture or production of any article". According to the Assessing Officer, if the assessee's claim was allowed "then every trader who buys dhal or rice (in bulk) and repacks them into small packets would also claim investment allowance".
Secondly, "the article which the assessee is supposed to be producing is covered by item No. 10 of the Eleventh Schedule viz. Photographic apparatus and goods".
9. Predictably, the said two issues were the subject matters of the appeals filed by the assessee before the first appellate authority.
In support of the assessee's claims the following points were made before the CIT (A) :-- (i) The jumbo rolls of photographic colour papers are imported from Japan in temperature-controlled containers, and stored in the air-conditioned godown of the assessee.
(ii) The rolls are then lifted mechanically with the help of fork-lift and taken to the slitting room.
(iii) With the help of overhead-hoist and tilt table, the jumbo rolls are loaded into a computerised automatic slitting machine.
(iv) The slitting machine converts the jumbo rolls into smaller marketable rolls and cut-sizes.
(v) The job of winding the slit photographic paper on the cores is also done by the slitting machine.
(vi) The smaller rolls and cut-sizes thus obtained are then removed and packed in photograde polythene covers and sealed.
(vii) The process is conducted in dark, air-conditioned, humidity-controlled, dust-proof factory.
(viii) An experienced mechanical engineer is incharge of the slitting and packing operations.
In support of the assessee's claim reliance was placed on the decision of the Madras High Court in the case of CIT v. M.R. Gopal [l965] 58 ITR It was also contended before the CIT (A) on behalf of the assessee that the assessee being a small scale industry, the Eleventh Schedule to the Income-tax Act is not applicable to it.
10. The CIT (A) allowed the assessee's claim. In this regard, he was impelled by the following considerations :-- (i) The assessee had "to use a highly computerised specific machine and air-conditioned dark factory for this job of film slitting".
(ii) The Assessing Officer was not justified in coming to the conclusion that the assessee-company was not engaged in production/ manufacture of an article or thing. "The word 'manufacture' has a wider as well as a narrower connotation. In its wider sense it simply means to make, or fabricate, or bring into existence an article or a product either by physical labour or by aid of power.
In its narrower shade the expression implies transforming raw materials into a different commercial commodity or a finished product which has an entity by itself, but this does not mean that the materials with which the commodity is manufactured must lose their identity. In any case, the expressions 'manufacture' and 'produce' apply to the bringing into existence of something which is different from its components. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations is manufacture.
In this regard he referred to and relied upon the following reported cases: (iii) "... The computerised slitting process and packing of photographic paper under controlled conditions, etc., is certainly a process whereby the appellant is producing a marketable material in a new form for sale.
(iv) In any event, the Eleventh Schedule to the Act is not applicable since the industrial undertaking of the assessee is a small scale industrial undertaking.
In view of the foregoing, therefore, the CIT (A) allowed the aforesaid two claims of the assessee.
11. Supporting the orders passed by the Assessing Officer, the learned Departmental Representative strongly contended that all that the assessee had done in this case was to cut imported jumbo rolls of photographic colour paper into standard marketable sizes. Therefore, the case before us is not one of production or manufacture.
Consequently, neither investment allowance nor deduction under Section 80-1 is available to the assessee. The CIT (A) was, therefore, not justified in allowing the assessee's claim on the said two counts.
12. On his part, Shri K.R. Ramamani, the learned counsel for the assessee, strongly supported the impugned common order of the CIT (A) on this issue. In this regard, besides relying on the Madras case of M.R. Gopal (supra)- which was relied upon before the CIT (A) on behalf of the assessee- the learned counsel also relied on the decision of the Supreme Court in the case of CIT v. Krishna Copper & Steel Rolling Mills [1992] 193 ITR 281. He also relied upon the decision of the CEGAT, Special Bench 'B-1', New Delhi in the case of Dipen Textiles (P.) Ltd. v. Collector of Central Excise 1992 (62) ELT 430 (Tribunal) in support of the proposition that slitting and cutting of jumbo rolls of photographic paper into marketable sizes amounts to manufacture.
According to him, the said case is directly to the point, inasmuch as there it has been held that slitting and cutting of jumbo rolls of Video Magnetic Tapes into Pancakes amounts to manufacture.
13. We have looked into the facts of the case. We have considered the rival submissions.
14. At the outset we may notice the operations done by the assessee.
The assessee imports photographic colour paper in giant size jumbo rolls. The width of the photographic paper is 1.511 mtrs., while the length ranges from 3100 mtrs. to 3250 mtrs. Depending upon the length of the photographic paper contained in it, each jumbo roll may weigh anything between 1230 kgs. to 1280 kgs. The assessee sells photographic papers to the dealers in the form of either smaller rolls or cut-sizes.
The photographic paper wound on smaller rolls are of the sizes ranging from 3.5" X 275'/575'/775/ to 20" X 275'. Similarly, cut sizes also have different measurements ranging from 3 1/2 X 51/2" to 30" X 40".
Again, the number of cut sheets per packet ranges from 10 sheets per packet to 200 sheets, depending upon the measurement of the cut sizes.
We have already seen how the jumbo rolls are cut into smaller rolls or, as the case may be, cut sizes of the specifications mentioned supra.
15. The assessee's case is that it is entitled to investment allowance as also to deduction under Section 80-1 of the Act, because the operations involved in cutting jumbo rolls into smaller rolls/cut sizes are manufacturing activity.
16. The validity of this claim needs to be examined in the light of the provisions of Section 32A/80-I of the Income-tax Act.
17. As respects investment allowance, Sub-section (1) of Section 32A provides, inter alia, that in respect of machinery and plant specified in Sub-section (2) owned by the assessee and wholly used for the purpose of the business carried on by him, he shall be allowed a deduction in respect of the previous year in which the machinery or plant was installed of a sum equal to 25% of the actual cost of the machinery or plant by way of investment allowance. In so far as it is relevant to the purpose on hand, Sub-section (2) reads as under: (2) The...machinery or plant referred to in Sub-section (1) shall be the following, namely: (b) any new machinery or plant installed after the 31st day of March, 1976.-- (ii) in a small scale industrial undertaking for the purposes of business of manufacture or production of any article or thing.
(iii) in any other industrial undertaking for the purposes 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.
A plain reading of the said provisions will indicate that the focus of Section 32A is on the machinery or plant used for purposes of business of manufacture or production of any article or thing. The words "manufacture" and "production" have not been defined in the Act, but have received extensive judicial attention not only under the Income-tax Act but also under the Central Excise Act and the various sales-tax laws.
As has been pointed out by the Supreme Court in the case of CIT v. N.C.Budharaja & Co. [1993] 204 ITR 412, 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.
In the case of Dy. CST v. Pio Food Packers [1980] 46 STC 63, the Supreme Court laid down the following tests for determining whether in a particular case manufacture can be said to have taken place. To quote the words of Pathak J., as he then was : 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.
After noticing the said tests, the Supreme Court, in the case of N.C.Budharaja & Co. (supra) went on to state : 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.
18. Now the question is whether, on the facts and in the circumstances of the case before us, the assessee could be regarded as being engaged in a business of manufacture or production of an article or thing.
There is no gainsaying the fact that the smaller marketable rolls and cut-sizes answer the description of articles or things, but nothing turns on that. It is necessary to see whether the assessee manufactures or produces the said articles or things.
19. Now, the photographic colour paper had already been manufactured by Mitsubishi of Japan. Obviously, therefore, the assessee cannot be regarded as having either manufactured or produced photographic colour paper as such. In fairness to the assessee, that is not its case. Its case is that the cutting or slitting of jumbo rolls into marketable smaller rolls/ cut sizes is a manufacturing or production activity. We are unable to agree. We should not lose sight of the fact that the assessee is a trader-obviously a wholesale trader at that. When it was exporting photographic colour paper in jumbo rolls, the Japanese manufacturer was obviously impelled by the considerations of cost and convenience. And when the assessee imported such jumbo rolls, it was impelled, again, by the same considerations. But its clients are dealers who require photographic colour papers to be supplied to them in easily marketable shapes, sizes and quantities. Therefore, the cutting or slitting of jumbo rolls into marketable smaller rolls/cut sizes is an integral part of the trading activity of the assessee.
Neither manufacture or production is involved in the operations carried out by it, even though having regard to the photosensitive material handed by it, the assessee had to carry out the operations with the aid and assistance of machinery and in an air-conditioned factory.
20. It could possibly be argued that the marketable small rolls/cut sizes are commercially different from the jumbo rolls, because jumbo rolls as such cannot be sold. Such an argument, as we see it, lacks force. True, a retail dealer in photographic goods will buy from the wholesale dealer only marketable smaller rolls/cut sizes. But that does not mean that the jumbo rolls could not themselves be sold as such by, say, an all-India or regional Selling Agent of Mitsubishi to other wholesale dealers for ultimate sale to retailers. Therefore, the mere fact that the retailer properly so called has no use for jumbo rolls does not mean either that the jumbo rolls cannot invariably be sold as such or that the cutting or slitting of jumbo rolls into marketable smaller rolls/cut sizes amounts to manufacture or production.
21. In view of the foregoing, therefore, we hold that the assessee before us cannot be treated as a manufacturer or producer of the goods in question within the meaning of Section 32A(1) read with Section 32A(1)(b)(iii) of the Income-tax Act, 1961.
22. This brings us on to the question whether the assessee's case will fall under Section 32A(1) of the Act read with Section 32A(2)(ii) of the Act on the ground that it is "a small scale industrial undertaking" established "for the purpose of business of manufacture or production of any article or thing". For the reasons mentioned in the preceding paragraphs, even on the footing that the assessee is a small scale industrial undertaking, the assessee cannot be regarded as being engaged in the business of manufacture or production of any article or thing.
23. It could perhaps be argued that the assessee could be treated as a small scale industrial undertaking because the operation of cutting jumbo rolls into smaller marketable rolls/ctit sizes is an activity amounting to processing of goods. This argument naturally draws support from the definition of an 'industrial company' contained in Section 2(6)(d) of the Finance Act, 1968, which talks of processing of goods.
Apart from the obvious fact that the definition given in a totally different context cannot avail the assessee, there is the further fact that neither Section 32A nor Section 80-1 talks of 'processing of goods'. Again, the cutting and slitting operations cannot be regarded as processing of goods.
24. The words 'process' and 'processing' have not been defined in the Income-tax Act, 1961, but have been judicially interpreted. From the Supreme Court case of Delhi Cold Storage (P.) Ltd. v. CIT [1991] 191 ITR 656 the following legal position emerges : (ii) Yet the word does not have the widest significance of "anything done to the goods or materials".
(iii) Processing involves bringing into existence a different substance from what the material was at the commencement of the process.
In view of the foregoing, therefore, the assessee cannot be treated as being engaged in processing of goods. Consequently it is not entitled to investment allowance under Section 32A of the Act.
25. By the same token, the assessee is also not entitled to deduction under Section 80-1 of the Act. We hold accordingly.
26. Before taking leave of the case we may notice closely the decision of the CEGAT, Special Bench 'B-1', New Delhi in the case of Dipen Textiles (P.) Ltd (supra) referred to and relied upon by the learned counsel for the assessee.
Now, that case came to be handed down by the CEGAT in the context of a different enactment, namely Central Excise Tariff Act, 1985.
27. At the outset we may point out that it is the well known rule of construction that in construing a word in an Act caution is necessary in adopting the meaning ascribed to the word in other Acts. In Macbeth v. Chislett (1910) AC 220 it was observed by the House of Lords as follows : It would be adding a new terror in the construction of Acts of Parliament if we were required to limit a word to an unnatural sense because in some Act, which is not incorporated or referred to, such an interpretation is given to it for the purposes of that Act alone.
In Adamson v. Melbourne Board of Works AIR 1929 PC 181, 183 the Privy Council said: ... it is always unsatisfactory and generally unsafe to seek the meaning of words used in an Act of Parliament in the definition clauses of other statutes dealing with matters more or less cognate....In D.N. Banerji v. P.R. Mukherjee AIR 1953 SC 58, 60 the Supreme Court said : Though the definition may be more or less the same in two different statutes, still the objects to be achieved not only as set out in preamble but also as gatherable from the antecedent history of the legislation may be widely different. The same words may mean one thing in one context and another in a different context. This is the reason why decisions on the meaning of particular words or collection of words found in other statutes are scarcely of much value when we have to deal with a specific statute of our own; they may be helpful but they cannot be taken as guides or precedents.
If a word has a certain meaning in one statute or if a situation is followed by certain consequences under one statute, it does not follow that the word will have the same meaning in another statute or that the situation will be followed by the same consequences under the other statute. Regard must be had to the context, the intention of the Legislature and the object sought to be achieved by the two statutes.
28. We, therefore, approach the matter keeping in mind the foregoing words of caution.
29. In the said case the question was whether slitting and cutting of jumbo rolls of video magnetic tapes into pancakes amounted to manufacture Within the meaning of sub-heading 8523.13 of Central Excise Tariff Act, 1985. Relying, inter alia, on the Madras case of Computer Graphics (P.) Ltd. v. Union of India 1991 (52) ELT 491 the Judicial Member held that no manufacturing activity was involved. The Technical Member held that manufacturing activity was involved in that case. It is significant to note that he came to the said conclusion on the basis of the principle that if the Legislature has treated a process of an article to be a manufacture, it is not open to contend that the process is not manufacture. According to him, the relevant provisions of the Central Excise Tariff Act, 1985 has clearly treated the slitting and cutting of jumbo rolls of video magnetic tapes into pancakes as a process amounting to manufacture. Thus he went by the legislative intent.
30. Two points are here noteworthy. First, in the said case the decision went on the basis of the legislative intent of a totally different statute. Secondly, as pointed out by the Judicial Member, the jurisdictional High Court itself has held, no doubt in the context of the provisions of that state which came up for consideration before it, that cutting jumbo roll films into smaller sizes in the form of rolls or in the form of flaps cannot be held to amount to manufacturing process. There the High Court was concerned with Tariff Entry 37.01 and 37.02, dealing with two different resultant products of manufacture.
The Madras High Court held that if a person manufactures photographic film rolls, such manufacturing process would attract levy of duty under Tariff Entry 37.02. If another person manufactures photographic flats and films, then the manufacturing process would attract Tariff Entry 37.01. But if photographic flats and films are not manufactured at all, but only made out of jumbo rolls by cutting them into smaller sizes, no manufacturing process is involved, and Tariff Entry 37.01 and 37.02 cannot avail the Department to contend that there is a manufacturing process.
31. We fail to see how the said decision of the CEGAT could possibly avail the assessee before us. As we see it, in the context of the claim for investment allowance and deduction under Section 80-1 of the Income-tax Act which is now before us, a reference to the said CEGAT decision merely highlights the terror cautioned against by the House of Lords in the case of Macbeth (supra).
32. The decision of the Supreme Court in the case of Krishna Copper & Steel Rolling Mills (supra) referred to and relied upon by the learned counsel is also distinguishable on facts and hence cannot avail the assessee.
33. In view of the foregoing, therefore, we hold that the assessee is not entitled either to investment allowance under Section 32A of the Act or to deduction under Section 80-1 of the Act.
34. In the result, both the appeals by the Department are allowed in part.