1. This is a Special Bench case involving the following important question of law : "Whether on the facts and circumstances of the ease, blending and bottling of spirit would amount to manufacture or production process so as to be entitled to deduction under Section 80HH of the Income-tax Act, 1961?" 2. For the assessment years 1985:86 & 1986-87 the assessee-company claimed deduction under Section 80HH of the Act. The business of the assessec-company was to process the raw alcohol and selling the same with a new brand name such as Haywards Fine Whisky, Haywards Gold Medal Whisky and Haywards Doctor's Brandy. It is the claim of the assessee that it is carrying on business of manufacturing different brands of IMFL products and by the result of various processes involved, the end product is a totally new commercial commodity and hence, it is entitled to deduction under Section 80HH of the Act. The said claim of the assessee for the assessment year 1983-84 the Calcutta Bench of ITAT has considered the same issue and decided in favour of the Revenue and against the assessee. But during the course of hearing of the appeals for the assessment years under consideration the learned AR of the assessee brought to our notice the fact that the Madras Bench of ITAT in the case of ITO v. A. Joseph Louis [1990] 33 ITD 485 has decided the identical issue in favour of the assessee and against the Revenue. In these circumstances, the issue was referred to the President, ITAT for constitution of a special bench for deciding the same. The President accordingly constituted the Bench under Section 255(3) of the Income-tax Act.
3. The appeals were fixed for hearing on 4-7-2000 but on that day they were adjourned and posted for hearing on 7-7-2000 on which date they were fully heard. During the course of hearing of the appeals, the learned AR of the assessee submitted that the spirit supplied by Rampur Distillery is totally a different product and the same is processed as various levels which has to pass ISI tests and organoleptic test and after the entire process is over, the final production that emerges has got a different brand name such as - Haywards Fine Whisky, Haywards Gold Medal Whisky and Haywards Doctor's Whisky. The assessee with the help of spirit supplied by Rampur Distillery blends them and adding essence bottles them. This amounts 'manufacturing' and, therefore, is entitled to deduction under Section 80HH of the Act. It is the contention of the learned AR of the assessee that production of potable liquor involves dilution of the alcohol which is the raw material with demineralised water to prepare an admixture of alcohol and the same has to be properly blended with the right amount of essence and colouring substance by which an entirely new product emerges which has got a different name in the market. Hence, the manufacturing process involved in the blending of alcohol amounts to manufacturing activity. He has also relied on the decision of Hon'blc Supreme Court in the case of CIT v. N.C Budharaja & Co. [1993] 204 ITR 412/70 Taxman 312 wherein their Lordships have reproduced the observation of the Supreme Court in the case of Dy. CIT v. Pio Food Packers [1980] 46 STC 63 in which it was held that 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 distinct article that a manufacture can be said to take place.
The learned AR of the assessec relied on the decision of Karnataka High Court in the case of CIT v. Baraka Overseas Traders [1993] 201 ITR 827/67 Taxman 188 where their Lordships have held that processing of marine products and beef amounts to production of article. He also relied on the decision of Bombay High Court in the case of CIT v, Yavatmal Co-operative Ginning & Pressing Factory Lid. [1993] 203 ITR 874 wherein their Lordships have held that cotton seed is a commodity separate and distinct from cotton and, therefore, ginning of cotton amounts to manufacture or production of an article. He has also adverted to our attention the decision of the ITAT Madras Bench in the case of A. Joseph Louis (supra) wherein a similar issue has been considered and the Tribunal has held that blending of rectified spirit with (reated water amounted to manufacturing activity. The learned AR of the assessee further contended that the ITAT, Calcutta Bench decision in the assessee's own case for the assessment year 1983-84 is distinguishable inasmuch as the judgment of Hon'ble High Court in the case of Apeejay (P.) Ltd. v. CIT [IT Reference No, 171 of 1987] is with regard to the blending of different types of tea wherein their Lordships have held that it does not amount to manufacture or production of articles or things. In the case of S. P. Jaiswal Estates (P.) Ltd. v. CIT (No. 2) [1994] 209 ITR 307 (Cal.) their Lordships have held that manufacture or production of food articles in a hotel docs not amount to manufacture. The AR of the assessee further submitted that the Assessing Officer has relied on the decision of the Hon'ble Calcutta High Court in the case of G.A. Renderian Ltd. v. CIT[1984] 145 ITR 387 wherein their Lordships have held that blending of different qualities of tea constitutes processing. The learned AR of the assessec contended that the above said case is distinguishable inasmuch as the issue that whether bleeding of different qualities of tea in different proportion would bring into existence a new product was not the subject-matter before their Lordships. He also submitted that in the case of S.P. Jaiswal Estates (P.) Ltd. (supra) their Lordships have held lhat preparation of food articles amounts to manufacture but since such manufacture of production of goods lhat might be incidental, cannot turn the business of a hotel into a business of manufacturing or processing articles or things and hence the hotel does not-qualify for the benefit of section 32A of the Act. It is, therefore, the case of the assessee that the decision of the Tribunal in the assessce's own case for the earlier years requires reconsideration inasmuch as the Tribunal has followed the decision of Hon'ble High Court where the facts were different whereas on similar issue, the Madras Tribunal in the case of A. Joseph Louis (supra) has considered the matter in more detail and held that blending of rectified spirits amounts to manufacturing activity.
4. The Learned Standing Counsel Sri M.P. Agarwal, on the other hand, submitted that by mere blending of spirit and bottling the same there is no change in the commodity and hence the process of blending docs not amount to manufacture. Quality of the original remains the end products also. He also relied on the decision of Bombay High Court in the case of CIT v. Sterling Foods (Goa) [1995] 213 ITR 851/79 Taxman 381 wherein their Lordships have held that processing of Prawns does not amount to manufacture or production of article. The learned Standing Counsel further submitted that reliance placed by learned AR of the assessee in the case of Pio Food Packers (supra) is against the assessee. In this connection it is submitted that mere change of name is not sufficient to say that it is manufacturing, there should be full transformation of original commodity but in the assessee's case there is no transformation. Some degree of change is necessary but in the assessee's case no such change has taken place. Alcohol in the form of potable spirit remains alcohol till it is bottled and marketed with addition of mineral water and some essence. This process at best can be said to be 'processing' and not 'manufacturing'. It is also stated that the change should be substantial and considerable in order to say that the original article or thing has lost its originality. This clearly shows that the same involves only processing and not manufacturing. In this connection it is stated that 'rectified spirit' and 'potable spirit' are two different things. The assessee purchases potable spirit as per the agreement with Rampur distillery which has already manufactured. Potable spirit is consumable and rectified spirit is not fit for human consumption as it is. In potable spirit alcohol content is 35% which can be consumed but in case of rectified spirit the alcohol content is 95% which cannot be consumed as it is as the same is harmful. Distinguishing the case of Madras Bench of A. Joseph Louis' case (surpa) the learned Standing Counsel submitted that the said case is not at all at par with the facts of the present case. In the said case it was rectified spirit but in the case on hand it is potable spirit. In the case of A. Joseph Louis (supra) it is case of arrack and in the present case it is potable spirit. If spirit, water and essence is added to potable spirit and bottled up which is called IMFL and is marketable after bottling, this can only be said to be 'processing' and not 'manufacturing' as the identity of alcohol remains same as it was before processing. Potable spirit is already manufactured. Whisky, Brandy and Rum are one and common thread which has intoxicating quality. The degree of taste etc. will differ, but alcohol remains as alcohol. The assessee purchases potable spirit and by adding water etc.
as indicated above, produces whisky, brandy and rum by putting them through different processes. Therefore, there is no manufacturing involved in those activities.
5. The learned Standing Counsel further submitted that most of enactments on which Courts have decided and the learned AR of the assessee relied on, arc not same. The language in those Acts and sections is different. They are not akin to the language in Section 80HH of the Income-tax Act and, therefore, the cases relied on by the learned AR of the assessee cannot be applied to the facts of the present case. Hence they are not applicable and arc distinguishable.
The learned Standing Counsel further submitted that for deciding the issue it is essential that items manufactured also is main factor for deciding the issue of this nature. In the instant case, as already stated earlier, only mineral water and some essence are added for production of whisky, brandy and mm out of potable spirit. In the case on hand the change is not substantial, they are only pheripherial and superficial and, therefore, the activity involved is only processing and no manufacturing aclivity is involved. The learned Standing Counsel further submitted that the cases of CITv. S.P. Jaiswal Estates (P.) Ltd. [1992] 196 ITR 179 (Cal); 5.P. Jaiswal Estates (P.) Ltd. v. CIT (No. 2) [1994] 209 ITR 307 (Cal.) and CITv. S.P. Jaiswal Estates (P.) Ltd. [1995] 214 ITR 448 (Cal.) cannot be taken for deciding the issue in the present appeal as the said case has been referred to larger Benches which is evident from S.P. Jaiswal Estates (P.) Ltd. v.CIT[1995] 216 ITR 145 (Cal.) and the decision of larger Bench is awaited. It is further submitted that in this view of the matter the decisions of other High Courts will prevail and in this connection the learned Standing Counsel relied on the cases of CITv. Casino (P.) Ltd. [1973] 91 ITR 289 (Ker.); CITv. Abad Hotels India (P.) Ltd [2000] 241 ITR 15/108 Taxman 299 (Ken); Adayar Gate Hotels Ltd. v. CIT[2000] 241 ITR 279/108 Taxman 293 (Mad.) and CITv. Vrin-davan Hotels (P.) Ltd. [1999] 238 ITR 224 (Ker.) wherein various courts have held that the activities for production in ihe abovementioned cases does not amount to manufacturing.
6. The learned Standing Counsel has also cited certain cases to show trends of decisions of the Courts regarding processing and manufacturing and they are as under : CITv. Bharath Sea Foods [1999] 237 ITR 46/103 Taxman 420 (Ker.) (FB); CITv. Relish Foods [1999] 237 ITR 59/103 Taxman 392 (SC); CITv. Venkateswara Hatcheries (P.) Ltd. [1999] 237 ITR 174/ 103 Taxman 503 (SC); CITv. Hindus than Metal Refining Works (P.) Ltd. [1981] 128 ITR 472/6 Taxman 245 (Cal.); CITv. Lucky Mineral (P.) Ltd [1997] 226 ITR 245/[1996] 87 Taxman 215 (Raj.); CITv. Anjani Kumar & Co. (P.) Lid [1997] 227 ITR 786 (Raj.) 244 ITR 45 (Statutes) Lastly the learned Standing Counsel while summarising the arguments submitted that the production of whisky, brandy and rum amounts to only processing and not manufacturing and, therefore, the benefits of Section 80HH are not available to the assessee.
7. We have considered the submissions of the parties, gone through the appellate order in the assessee's own case for the assessment year 1983-84 and the decision A. Joseph Louis's case (supra). We have also perused the case laws relied on by both the parties which have already been mentioned in the foregoing paragraphs. We may stale here the fact which is not in dispute is that the assessee purchases potable spirit from Rampur Distilleries as per the agreement. This potable spirit is already manufactured and does not require any further manufacturing.
Only some processing is required to produce IMFLs like brandy, whisky and rum etc. by adding certain percentage of water, colour, essence and for safe marketing requires bottling. Generally manufacturing means consumption of one article for production of another. But in the instant case no article or thing is consumed for production of another.
Alcohol remains alcohol. There is only reduction of degree of alcohol content because of addition of water to potable alcohol and stirring it. This action at best can be said to be processing and not manufacturing. There should also be transformation of article or thing if manufacturing is involved for the same. But in the instant case no such transformation has taken place as alcohol remains alcohol both in the beginning and after processing also. In case of manufacturing also article or thing should be distinct and separate. In the instant case no new product has come as a bye-product which can be said as distinct and separate from original one and alcohol remained alcohol with reduced content of alcohol because of addition of water. There is also no change in its basic identity. Generally in case of manufacturing there will be change which is considerable and substantial but in the instant case it is not so. Here we consider necessary to refer Section 80HH of the Income-tax Act, 1961. In order to encourage industrial activity in backward areas, this section grants deduction to an assessee, whose total income includes any profits and gains derived from an industrial undertaking (other than a mining undertaking) or the business of a hotel in a notified backward area. Section 80GG(I) defines the word "derived" from an industrial undertaking. The meaning of the term "derived" has been construed to have a definite narrow and restrictive meaning compared to the word "attributable" or "referable to". The industrial undertaking must itself be the source of the profits and gains and it would not be sufficient if a commercial connection is established between the profits and gains earned and the industrial undertaking. From Section 80HH(2) of the Act it is clear that the Act has not given any definition of the expression "industrial undertaking". The requirement of Section 80HH(2) is that to be eligible, the industrial undertaking, should be one which is engaged in the manufacture or production of an article or thing. Therefore, the expression can be understood by looking upto the meaning as understood in common parlance or by making a reference to its definition in cognate legislation. In this connection we may mention the Supreme Court's decision in the case of N.C. Bhudharaj & Co. (supra) wherein their Lordships have held that construction of a 'dam' did not amount to produclion or manufacture of an article or thing. That the words used in ihe Act, take their colour from the context in which these are used. That the expression "manufacture" or "produce" are normally associated with movable articles or goods. That the words "article" and "things" are used interchargeably. That these words never denote construction of a dam or building. That the word "article" in Section 80HH(2) cannot include, a dam, a bridge, a building, a road, a canal or so on.
8. Similarly in the case of Sterling Foods (Goa) (supra) it was held that the expressions "manufacture" and "production" used in the Act are to be understood in the context these have been used. These words used in different taxing statutes are not interchangeable. Every "process" does not mean "manufacture" unless the processing results in produclion of an article having a distinctive character, name, use and value. As regards reliance of the assessee in the cases of Empire Industries Ltd. v. Onion of India [1986] 162 ITR 846 (SC); Yavatmal Co-operative Ginning & Pressing Factory Ltd. (supra) and Ujagar Prints v. Union of India [1989] 179 ITR 317 (SC) these cases are not applicable to the facts of the present case as the facts in the abovementioncd cases are relating to bleaching, dyeing and printing etc. In the said cases the above processes were held to be manufacturing but in the case of the assessee the facts are entirely different as the assessee produces IMFLs wherein manufacturing is not involved and only processing is involved. As regards Calcutta High Court's decision in the case of Hindusthan Metal Refinding Works (P.) Ltd. (supra) we may mention that there it was galvanization and not manufacturing of any article or thing but in the case of the assessee it is production of IMFLs.
Therefore, the said case is not applicable to the facts of the present case. As regards the decision in the case of CIT v. Indian Resins & Polymers [1999] 235 ITR 5 (Ker.) their Lordships have held that the conversion of raw cashew nuts into cashew kernels would be a manufacturing or processing activity and that the assessee was an industrial undertaking entitled to deduction under Sections 80HH and 80J of the Act. The facts of this case and the facts in the case before us are entirely different. Therefore, the ratio cannot be applicable to this case. In the case of CIT v. Tamilnadu Heat Treatment & Petting Services (P.) Ltd. (No. 2) [1999] 238 ITR 540 (Mad.) their Lordships have held that the activity carried on by the assessee, namely, the business of receiving from its client untreated crankshafts, forgings, castings etc. and subjecting them to heat treatment, in order to toughen them to the requisite standards so that they could be sold in the market is a manufacturing activity, entitling it to claim the deductions, as contemplated under Sections 80HH and 80-I of the Income-tax Act, 1961. The facts of this case and the acts of the assessee before us are also entirely different. In the case of Casino (P.) Ltd (supra) it was held that a hotel is mainly a trading concern.
It would not be appropriate in the ordinary sense to refer to the production of food materials in a hotel as manufacture. The activity carried on in preparing articles of food from raw materials in a hotel would not constitute "manufacture or processing of goods" within the meaning of Section 2(6)(d) of the Finance Act, 1968. A company which carries on such activity will not fall within the definition of an "industrial company" under that provision. The decisions of Kerala High Court in the case of Abad Hotels India (P.) Lid (supra) and Madras High Court in the case of Adayar Gate Hotels Ltd. (supra) arc tn the line with Casino (P.) Ltd.'s case (supra). The learned Standing Counsel refers to the trends of the decisions which arc not discussed here as they only indicate the trends and does not directly on the issue which is before us. Therefore, they are not discussed here in detail.
9. As regards the decision of Madras Bench of ITAT in the case of A.Joseph Louis (supra) we may mention that the assessee a small scale industry was engaged in the production of arrack and its sale. In the said case the Tribunal held that the various processes and blending amounted to 'manufacturing activity' and that the assessee was entitled for deduction under Section 80HH of the Act. In the said case the decision of Madras Bench of ITAT was on the production of arrack and not IMFL. In the case of the assessee the production is IMFL. In both the decisions of Madras ITAT and Calcutta ITAT in the case of the assessee, involves processing and not manufacturing. As regards the decision of Calcutta High Court in the case of G.A. Rendarian Ltd. (supra) their Lordships have held that the assessee who carried on business of purchasing lea of different qualities, blending the same by mixing one type with another and selling it, claimed that it was an industrial company and entitled lo concessional rate of lax. This case cannot be applied to the facts of the present case as in this case there was blending of lea only but in case of the assessee it was production of alcohol. Therefore, the ratio of the decision cannot be applied to the facts of the present case.
10. Lastly for deciding the issue before us we refer to two Supreme Court's decisions which have clearly brought out what is 'processing' and what is 'manufacturing'. The said two cases are : 1. Hihar Distillery v. Union of India [Writ Petition (c) No. 322 of 1966 dated 29-1-1997] In the first mentioned case their Lordships of Hon'ble Supreme Court have held and observed that the expression "intoxicating liquors" means and refers to only potable liquors and that potability is determined by the standards specified by ISI i.e. alcohol content not exceeding 43% v/v. The Court further held that "rectified spirit", "ethyl alcohol" and "industrial alcohol" which is of 95% and above purity, cannot be treated as a potable liquor as the same is harmful and injurious to health if taken as it is. The undeniable fact is that rectified spirit is converted into country liquor just by adding water. It is also the basic substance from which IMFLs are made by mixing with water, essence etc. and then bottled them and consumed. The rectified spirit, of course, is wholly and exclusively industrial alcohol.
11. The reduction process of converting rectifies spirit into country liquor involves mixing of water and stirring. By adding water, the alcoholic content is reduced to 35% v/v to make it country liquor.
Adding of spices is optional. The technical term "the reduction of liquor" means the addition of water to bring liquor from higher strength to lower strength. Mere mixing of water makes rectified spirit country liquor. Rectified spirit is an intoxicating liquor and it retains that character even after adding water to make it country liquor. Even whiskies and brandies are not ordinarily consumed as such but only after mixing water or soda. Addition of water or soda does not change the character of whisky or brandy either. Alcohol remains alcohol. Manufactured rectified spirit is used for the purpose of obtaining country liquor or IMFLs. It may be mentioned that rectified spirit is not used for potable purposes.
12. In the case of Pio Food Packers (supra) their Lordships have held that "manufacturing" normally involves consumption of a particular commodity in the process of manufacturing of another commodity, 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".
13. In the-instant case the above findings and observations of the Supreme Court are clearly applicable. In the case on hand the alcohol in the beginning and after processing also remains alcohol. No distinct article or thing has been produced. Aleoho! remains alcohol throughout the processing stage till it is marketed. There is no difference between potable spirit and whisky or brandy except in the process of production, water and certain, essences have been added to them.
Therefore, as already noted above, it may be staled that although it has undergone a degree of processing, it must be regarded as still retaining its original identity. The original commodity is alcohol and the commodity produced has also remained alcohol. Therefore, it can be said that no commodity is consumed in the manufacture of another in the instant case. Therefore, we may slate in the present case that there is no essential difference between the potable spirit and the bottled IMFLs. The dealer and the consumer regard both as alcohol. The only difference is that in potable spirit some water and essences are added and bottled up nicely to make it presentable for marketing. Therefore the above discussion clearly shows that the bottled IMFLs and potable spirit must be held to possess the same characters identity as the original before its bottling.
14. The Supreme Court has also held in Para-8 of its order which is as follows : "While on the point, we may refer to East Texas Motor Freight Lines v. Frozen Vood Express [1955] 100 Led 917, where the U.S. Supreme Court held that dressed and frozen chicken was not a commercially distinct article from the original chicken. It was pointed out - 'killing, dressed and freezing a chicken is certainly a change in the commodity. But it is no more drastic a change than the change which takes place in milk from pasteurizing, homogenizing, adding vitamin concentrates, standardising and bottling'." It was also observed by the Supreme Court in Para-9 of its order which is as under: ".....there is hardly less difference between cotton in the field and cotton at the gin or in the bale or between cotton-seed in the field and cotton seed at the gin, than between a chicken in the pen and one that is dressed. The ginned and baled cotton and the cottonseed as well as the dressed chicken, have gone through a processing stage. But neither has been "manufactured" In the normal sense of the word." "Referring to Anheuser-Busch Brewing Association v. United Stales [1907] 52 Led 336 at p. 338 the Court said : "Manufacture implies a change but every change is not manufacture, and yet every change in an article is the result of treatment, labour and manipulation. But something more is necessary ..... There must be transformation; a new and different article must emerge, "having a distinctive name, character or use".
"At some point processing and manufacturing will merge. But where the commodity retains a continuing substantial identity through the processing stage we cannot say that it has been "manufactured".
15. These observations of the-Supreme Court clearly and fully applies to the facts of the case before us. Although the degree of processing is involved in preparing the IMFLs from potable spirit, the commodity continues to possess its original identity notwithstanding the addition of water, essence etc. in certain proportions. In view of the above discussions, and considering totality of the facts and circumstances of the case, we hold that the activities of the assessee does not involve any manufacturing but only processing. Therefore, the assessce is not entitled to the benefit of Section 80HH of the Income-tax Act.