The only issue arising out of this appeal is whether the activity carried on by the assessee amounts to manufacture so as to entitle it for deduction under section 80-I of Income Tax Act, 1961.
The assessee is a dealer in tendu leaves. It claimed deduction under section 80-I in the revised return filed by it and the said claim was allowed by the assessing officer vide order dated 19-2-1992. The case record was examined by the Commissioner, who after examining the same was of the view that the activity of obtaining green tendu leaves and making the same fit for use in manufacture of bidis could not be considered as an activity of manufacture or production. Accordingly, he issued a show cause notice under section 263, dated 28-7-1993 as to why the claim under section 80-I should not be rejected since the activity carried on by it did not amount to manufacture or production. The assessee through his tax consultant, filed written submissions stating that the word 'manufacture' has not been defined in the Income Tax Act and therefore, the issue has to be considered with the help of decision of courts rendered under various sales-tax legislations. In this connection, he relied on the decision of Supreme Court reported as Anwarkhan Mehboob Co. v. State of Bombay 11 STC 698, A. Hajee Abdul Shukoor & Co. v. State of Madras (1964) 15 STC 719 (SC), the State of Madras v. Swasthik Tobacco Factory (1966) 17 STC 316 (SC) and Ganesh Trading Co. v. State of Haryana, 32 STC 623. The process carried on by the assessee was stated as under : When we take the forest the manufacturing process is started at the very initial stage by us as under : (a) The bidi leaves shrubs are pruned at a particular height which is commonly known as katai. For the work of pruning labourers are employed. The work of katai is normally done in the months of February and March.
(b) The process of pruning is carried on to get good quality and bigger sized bidi leaves. Pruning also helps in increasing the quantity of bidi leaves.
(c) In the months of April & May, the green tendu leaves become ripe for plucking. In forest areas at many places, labourers are not available, hence we transport the labourers in the forest for tendu leaves season. These labourers along with the local population, mainly consisting of Advassis, pluck the tendu leaves from the Forest.
(d) After the green tendu leaves are plucked, the labourers make them into bundles of around 50 leaves. The plucking charges are paid to labourers on the number of bundles. When the labourers make the tendu leaves bundle, they make the bundle in a particular way which facilitates proper drying.
(e) The bundles of leaves are green in colour when they are plucked.
These green leaves are not fit for making bidis for following reasons: 1 . Green leaves do not burn properly as it has higher content of moisture.
2. Green colour leaves are not acceptable as wrapping material for manufacture of bidis.
3. Green leaves, if stored, without processing decay and also catch fungus and turn into black colour and become unfit for use.
For the above reasons, it is necessary to do processing of green leaves as given hereunder.
(f) Green leaves bundles are to be spread on open grounds. The purpose is to dry them in controlled conditions. For drying, ovens can also be used, but in summer months, due to the tremendous heat of the Sun, the green leaves are dried by natural sunlight. This is nothing, but to make best use of solar energy of summer months. These bundles must be frequently turned from one side to another so that all the leaves get uniform drying. They are also kept vertical, so that the sterns are also properly dried and hot air passes through the bundle.
(g) After drying the bidi leaves in the controlled conditions as above for 8-10 days, the tendu leaves become completely dry. The characteristics of green leaves change as under : (ii) The chlorophyll which gives green colour to leaves is removed and the leaves become of light brown colour.
(iii) The dried leaves bundle cannot be packed, as the dry leaves crack while packing and cracked leaves cannot be used for bidi making. Hence the dried leaves bundles are watered by sprinkling. As a result of this controlled sprinkling of water the leaves again become slightly moist and soft within a few hours. This facilitates packing without cracking the leaves. These bundles are then bagged into gunny bags.
(iv) The next process involved is of removal of moisture from the packed bags. If this moisture is not removed, the bidi leaves bundles will decay and the whole bundle will be spoiled within few days and become unfit for any use.
(v) For removing the moisture from the packed bags, a special procedure is followed. Small portion of the bag is opened from the side and the bags are kept in open for few days. After the moisture is completely evaporated and checked by the Supervisors, the open portion is stuck and these bags are transported to the Godowns. All the bags must reach the godown before the onset of the Monsoon.
(vi) Due to carrying out of the above operations, the tendu leaves become a unique wrapping material. The tendu leaves absorb moistures only to certain level and absorption of moisture makes the bidi leaves pliable for manufacture of bidis. The bidi leaves also gives out the moisture easily when they are kept in open for drying without losing its shape and colour. The entire operation has been perfected with experience of last many decades.
(vii) The light brown colour of bidi leaves gives a specific identity to the bidis." However, the submissions of assessee did not find favour with the Commissioner as he was of the view that no manufacturing process was involved in converting wet leaves into dry leaves inasmuch as no new different commodity emerged out of the process. In support of his conclusion, he relied on various decisions reported as Mohanlal Vishram v. CST (1969) 24 STC 101 (MP), Delhi Cold Storage (P) Ltd. v. CIT (1991) 191 ITR 656 (SC), J.B. Advani & Co. (P.) Ltd. v. CIT (1992) 193 ITR 781 (Bom) and Koshys (P) Ltd. v. CIT (1985) 154 ITR 53 (Karn).
Accordingly, it was held by him that order of the assessing officer was erroneous and prejudicial to the interest of revenue and consequently, cancelled the assessment order with the direction to withdraw the relief granted under section 80-I. Aggrieved by the same, the assessee is in appeal before the Tribunal.
The learned counsel for the assessee has assailed the order of Commissioner under section 263 by contending that process carried on by the assessee does amount to manufacture inasmuch as the final commodity emerged out of the process is different commodity inasmuch as green leaves cannot be used for making bidis while the final product is used as a raw-material for making the bidis. He took us through the entire activity carried on by the assessee which is quoted in extenso in the order of the Commissioner at page 2 and 3. According to him, special treatment is given to green leaves by which, the entire moisture is removed and also the chlorophyll which gives the green colour to leaves is removed and ultimately, it is turned to brown colour. Thereafter, it is packed and in this process, it is watered by sprinkling so that such leaves remain soft and are not cracked. Again, they are dried and moisture is completely removed so that it becomes fit for making bidis.
Thus, entirely a different item emerges out of the process. In the course of hearing, it was admitted by him that two High Courts namely Patna and Madhya Pradesh have taken the contrary view in the cases North Koel Kendu Leaves & Mahulam Leaves v. Union of India (1997) 228 ITR 630 (Pat). However, he tried to distinguish the same since such decisions are rendered while interpreting a different section 206C. In support of his contention, he also relied on the decision of Tribunal Nagpur Bench in the case of Jayeshkumar Ambubhai Patel dated 25-7-1996, copy of which has been placed on the file.
On the other hand. the learned senior Departmental Representative has strongly supported the order of Commissioner by contending that process carried on by the assessee is a natural process carried on to preserve the tendu leaves from decaying and making them fit for marketing.
According to him, the tendu leaves continue to remain tendu leaves and no different commercial item emerges out of the process carried on by the assessee. In support of his contention, he relied on various decisions reported as CIT v. Venkateswara Hatcheries (P) Ltd. (1999) 237 ITR 174 (SC), Empire Industries Ltd. v. Union of India (1986) 162 ITR 846 (SC), Ujagar Prints v. Union of India (1989) 179 ITR 317 (SC), CIT v. Sterling Foods (Goa) (1995) 213 ITR 851 (Bom), Gondia Bidi Leaves Contractors Association v. Union of India (1998) 229 ITR 388 (Bom) and CIT v. Ashwinkumar Gordhanbhai Bros. (P) Ltd. (1994) 122 CTR (Guj) 164.
Rival submissions of the parties have been considered carefully. The question for consideration centers around to the meaning of the word 'manufacture'. Though various tests and guidelines have been laid down by the Supreme Court in various cases from time to time, but the application of the same has always been found to be difficult on the facts of the case. The leading judgment on this issue is of the Supreme Court in the case of Union of India v. Delhi Cloth and General Mills Co. Ltd. AIR 1963 SC 791, decided by larger Bench of five Judges wherein the following observations were made at pages 794 and 795 : "According to the learned counsel 'manufacturing' is complete as soon as by the application of one or more processes, the raw material undergones some change. To say this is to equate 'processing' to 'manufacture' and for this we can find no warrant in law. The word 'manufacture' used as a verb is generally understood to mean as 'bringing into existence a new substance' and does not mean merely to produce some change in a substance', however minor in consequence the change may be. This distinction is well brought about in a passage thus quoted in Permanent Edition of Words and phrases. Vol. 26, from an American Judgment. The passage runs thus : 'Manufacture' implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use." The aforesaid observations have been quoted with approval by another Bench of five Judges of Supreme Court in the case of Ujagar Prints (supra). These observations clearly indicate that there is a distinction between the words 'process' and 'manufacture'. By every process, item processed undergoes some change, but every change does not amount to manufacture. There must be emergence of new substance having distinctive name, character or use. If by a process, the commodity retains a continuing substantial identity, then it cannot be said that manufacturing has taken place.
Considering the aforesaid legal position, we are of the view that in the present case, the process carried on by the assessee does not amount to manufacture. There is no material or evidence that green tendu leaves has any market. Further, the only use of tendu leaves is to use the same in making of bidis. Facts of the present case also show that forests are taken on contract by assessee and then, shrubs are subjected to pruning and thereafter, the tendu leaves are plucked from such shrubs. After that such leaves are put in bundles and then subject to process of drying in a particular manner. In this process, moisture is completely removed and the colour of leaves is changed from green to brown. Since dry leaves may crack while packing, these are watered by sprinkling for making them soft, so that the proper packing may be done. Again, the moisture is removed to avoid any decay. So, by these processes, the green tendu leaves become fit for use in making of bidis. The entire process, in our opinion, is carried out for making the green leaves fit for the market and the final product continues to have a substantial identity. The commodity continues to remain as tendu leaves throughout. Therefore, it is difficult to accept the contention of the learned counsel for the assessee that process carried on by the assessee amounts to manufacture.
In this connection, it is useful to refer to the judgment of the Supreme Court in the case of CST v. D.S. Bist (1979) 44 STC 392 wherein on similar facts, though slightly in a different context, it was held that processing of green tea leaves into dry leaves did not amount to manufacture. In that case, the grower of tea leaves carried on the process of withering in shadow, crushing by hand or foot, roasting, covering by wet sheets for generating fermentation, grading with sieves and finally roasting with charcoal for obtaining suitable flavour and colours. The assessee was exigible to sales-tax since in the opinion of the assessing officer, the process carded on by the assessee converted the green tea leaves into different item and therefore, the final product ceased to be agricultural produce. However, according to the assessee, the final product continued to remain agricultural produce and therefore, sale thereof was not exigible to sales-tax. The matter was ultimately reached Supreme Court which held that all the processes applied by the assessee were necessary for the purpose of saving tea leaves from pershing and making them fit for transporting and marketing them. In this connection, the following observations of Justice Pathak at page 399 are noteworthy : "The question before us is whether, after the tea-leaf had been put through the process of withering, crushing, roasting and fermentation, it continued to be agricultural produce. If the Calcutta High Court can be said to have laid down that as a result of those processes the tealeaf ceased to be agricultural produce, I am unable to agree with it. To my mind, the tea-leaf remained what it always was. It was tea-leaf when selected and plucked, and it continued to be tea-leaf when after the process of withering, crushing and roasting it was sold in the market. The process applied was intended to bring out its potential qualities of flavour and colour. The potential inhered in the tea-leaf from the outset when still a leaf on the tea bush. the potential surfaced in the tea-leaf when the mechanical processes of withering, crushing and roasting, fermenting by covering with wet sheets and roasting again were applied. The tea-leaf was made fit for human consumption by subjecting it to those processes. At no stage, did it change its essential substance. It remained a tea-leaf throughout.
In its basic nature, it continued to be agricultural produce." The aforesaid observations have been quoted by us in support of the inference drawn by us in this case to the effect that the tendu leaves continue to remain as tendu leaves substantially and the process carried on by the assessee is necessary for making them fit for marketing. Thus, our view stands fortified by the aforesaid judgment.
Our views are further fortified by the decision of Madhya Pradesh High Court in the case of Natwarlal v. Union of India (1998) 233 ITR 490 and by the decision of Patna High Court in the case of North Koel Kendu Leaves and Mahulam Leaves (supra) wherein it has been held on identical facts that collection of tendu leaves, pruning, prevention of deceases, plucking of green leaves, drying the same by solar energy, classification of leaves and putting them in bags etc., did not amount to activity of processing. These are direct decisions on the issue before us. Therefore, the decision of Tribunal Nagpur Bench in the case of Jayeshkumar Ambubhai Patel relied on by the learned counsel for the assessee would not help the assessee. The other decisions of Supreme Court in the case of Dy. CST v. Pio-Food Packers (1980) 46 STC 63, in the case of Chowgule & Co. (P.) Ltd 47 STC 124 and IX in the case of Tungabhadra Industries, 11 STC 827 also IX supports our view. Lastly, we would like to refer to the Supreme Court decision in the case of CST v. Harbilas Rai & Sons (1968) 21 STC 17. In that case, the assessee bought pig bristols plucked by kanjars, boiled them in water, washed them with soap and other chemicals, sorted them out according to size and colours and tied them into bundles for exporting the same to other countries. The question for consideration was whether the sale by assessee was of manufactured goods. It was held by the Apex Court that such activity did not amount to manufacture.
In view of the above discussion and various case-laws referred to by us, it is held that activity carried on by assessee did not amount to manufacture and therefore, the assessee is not entitled for deduction under section 80-I. Consequently, the order of Commissioner under section 263 is upheld.