| SooperKanoon Citation | sooperkanoon.com/71803 |
| Court | Income Tax Appellate Tribunal ITAT Amritsar |
| Decided On | Oct-24-2001 |
| Judge | H Karwa, N Saini |
| Reported in | (2002)83ITD179(Asr.) |
| Appellant | Dr. Daljit Singh Eye Hospital (P) |
| Respondent | Deputy Commissioner of Income Tax |
2. The only grievance of the assessee is that the learned CIT(A) wrongly confirmed the disallowance of deduction under Section 80-1.
3. The facts of the case in brief are that the assessee is a private limited company and during the year under consideration was carrying on the profession of a nursing home which provided medical treatment to patients with all kinds of eye problems. The assessee claimed deduction under Section 80-1 to the extent of Rs. 12,75,222. In the income-tax audit report annexed to income-tax return, it was mentioned that the assessee-company was an industrial undertaking. The AO asked the assessee to substantiate its claim under Section 80-1. In response to that the assessee submitted as under : "That the assessee has made a claim for allowance of deduction under Section 80-1. The assessee-company gets lenses manufactured from others, according to its own. specifications and such lenses are exclusively manufactured for the assessee-company. Lenses so purchased are chemically treated : (a) The lenses are immersed in a solution of 20 per cent sodium hydroxide solution. This process continues for 24 hours. The temperature of the solution is kept around 35 degrees centigrade.
(b) The lenses, so treated, are passed through another chemical solution of certain strength. The temperature of this solution is kept at 90 degrees centigrade. This process is done for a minimum period of 10 minutes.
(c) After removal of the lenses from the boiling solution it is tested with other reagents for determination of PH. If the PH is higher than 6.5 to 7.0, it is again treated.
(d) It is then immersed in another solution to preserve it's PH level and to maintain it's readiness for intraocular implantation to give eyesight to the patient." It was also claimed by the assessee that the words "processing is covered by the terms manufacture." The reliance was also placed on various cases law. The AO did not accept the claim of the assessee for the following reasons : (a) The assessee-company was a consumer of lenses for its own use, the utilisation process involved various activities like opening of cartoon, tearing off of the polythene cover and before putting to implantation in eye, treating the same as per standard medical directions (e.g., printed directions on the container). Such activity was at par with activities like sterlizing a syringe before administering the injection to a patient, boiling the dressing or scissors and knife before starting an operation, etc. It would be too far-stretching of imagination to treat them as manufacturing or processing activities in commercial sense for the purpose of the provisions of Section 80-1.
(b) The activity of manufacturing and processing added the commercial value and in that way it was value addition exercise. In the instant case, the immersion of lenses in chemical solution to arrive at corrected PH value would not make the processed lenses a marketable item of higher value because the moment they were repacked and resold, the process of immersion in the chemical solution had again to be repeated (immediately before eye implanting the same) at the end use point of surgical activity at any other operation theatre.
(c) The process against which Section 80-1 deduction was being claimed, was merely an essential pre-surgical activity and not processing in terms of commercial value addition industrial activity.
(d) The industrial undertaking was essentially an activity of the business, as the assessee was not carrying out any business, therefore, it would be most difficult to say that the assessee was an industrial undertaking.
In view of the above reasons, the AO rejected the claim of the assessee under s. 80-1.
4. In the first appeal before the learned CIT(A) it was pleaded that the claim of the assessee was not accepted by the AO on the ground that the assessee was not an industrial undertaking, although the assessee was entitled for the said deduction. For that contention, the reliance was placed on the following case laws : (1) Empire Industries Ltd. v. Union of India (1986) 162 1TR 846 (SC); (2) Ujagai Prints v. Union of India & Ors. (1989) 179 ITR 317 (SC); and It was claimed before the learned CIT(A), that the word 'manufacture included processing', therefore, the processing of the lense for implantation in the eye for recovery of lost eye sight to the patient was covered under Section 80-1. It was further argued that it was not necessary that the assessee should have manufactured the article itself. It could get the article manufactured by a third party under its supervision, direction and control. The rival contention of the AO was that the manufacturing or processing should have been done in an article or thing in the commercial sense. After considering the rival contentions, the learned CIT(A) justified the stand taken by the AO by observing as under: "14. So far deduction under Section 80-1 is concerned, the appellant's contentions do not convince. The benefit under Section 80-1 of the Act is admissible if the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a shipping or the business of a hotel subject to certain conditions to be fulfilled. The appellant's contention is that the appellant was an industrial undertaking whereas the learned AO has emphasised the fact that an industrial undertaking entitled to such a deduction must manufacture or produce. The learned counsel opined that as manufacturing 'included 'processing' as held by the apex Court, the processing of the lenses or implantation in the human eye is eligible for such a deduction. I am unable to accept this contention. There is no doubt that manufacturing may include certain processes, but, all processes cannot be termed as 'manufacture'. The word 'manufacture' is generally understood to mean as 'bringing into existence a new substance' and does not mean merely 'to produce some change in the substance'. The distinction in the two terms manufacturing and processing becomes evident from a passage quoted by the highest Court in the case of Empire Industries Ltd. v. Union of India in the following words : '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.' 15. From the abovenoted para, it becomes evident that if a new substance is brought into existence or if a new or different article having a distinctive name, character or use results from particular processes, such process or processes would mean to manufacture. In the case of the appellant, the process undertaken could not be treated as 'manufacture'. In support of my view, I would like to refer to the decision of Supreme Court in the case of CST v. Harbilas Rai & Sons 21 STC 17. In this case it was held that the word 'manufacture' has various shades of meaning and if the goods to which some labour is applied remain essentially the same commercial article, it cannot be said that the final product is the result of manufacture. In that case, the assessee has a dealer in pig bristles, albought bristles, boiled them and washed them with soap and other chemicals, sorted them out according to their sizes and colours and tied them in separate bundles and sold them. It was held that the bristles were not manufactured goods. Similarly, in this case, the lenses manufactured by somebody else, are immersed in different solutions and are passed through chemicals for the purpose of making them ready for implantation, but they remain the same commercial articles without any change. I, therefore, hold that the stand taken by the AO is justified. The appellant is not entitled to deduction under Section 80-1 of the Act." 5. Being aggrieved, the assessee is in appeal before the Tribunal. The learned authorised representative reiterated the arguments placed before the authorities below and also submitted that the assessee got the lenses manufactured from M/s Bio Lense, Amritsar, with its own specifications and designs and the lenses were got manufactured under the personal supervision of Dr. Daljit Singh. It was stressed that the lenses so manufactured were treated chemically and the process employed by the assessee made those lenses/eligible to be used in the eyes of the patients and without applying various processes, the lenses were not worth using for implantation in the eyes. The learned authorised representative further argued that etymologically, the word 'manufacturer' includes 'processing'. Therefore, the assessee was eligible for the deduction under Section 80-1. He relied on the decisions of various Courts viz : (i) Empire Industries Ltd. v. Union of India (supra); (ii) Ujagar Prints (supra); and (iii) CIT v. Sovrin Knit Works (supra).
The learned authorised representative further submitted that it was not necessary for the assessee to get the lenses manufactured by its own.
It was sufficient for claiming deduction under Section 80-1 to get the things manufactured by third party. The reliance was placed on the following judgments : (3) CIT v. Anglo French Drug Co. (Easter) Ltd. (1991) 191 ITR 92 (Bom).
According to the learned authorised representative the whole process employed by the assessee amounted to manufacturing and processing of thing and the claim of the assessee was within the law. He further relied on the following judgments : (1) CIT v. Peerless Consultancy Services (P) Ltd. : (1990) 186 ITR 608 (Cal); (2) Empire Industries Ltd. and Anr. v. Union of India and Ors.
(supra); (6) CIT v. Tamil Nadu Heat Treatment & Petting Services (P) Ltd. (1999) 238 ITR 529 (Mad); and (7) MB. Chemicals v. Dy. CIT (2001) 70 TTJ (Pune)(TM) 278 : (2001) 76 TTD 1 (Pune)(TM) The learned authorised representative concluded his arguments by saying that the assessee being an industrial undertaking processed lenses, and the manufacturing includes the processing, so there was no justification in disallowing the claim of the assessee under Section 80-1. Accordingly, he prayed to set aside the order of the learned CIT(A).
6. In his rival submissions, the learned Departmental Representative supported the orders of the authorities below and also submitted that the assessee-company was incorporated on 24th Dec., 1990, vide certificate of incorporation in F.No. IR-16-10936 and no claim whatever was made by the assessee for deduction under Section 80-1 of the IT Act either in the statement of taxable income or in the return of income for the asst. yr. 1991-92.
The assessee first time claimed deduction under Section 80-1 for the asst. yr. 1992-93. The similar claim was also made for the asst. yr.
1993-94 but from the asst. yr. 1994-95 to till date no claim whatsoever has been filed by the assessee in respect of deduction under Section 80-1 which shows that the assessee was not sure for the deduction under Section 80-1 which is otherwise available for a period of 8 years. The learned Departmental Representative further stated that the assessee claimed the deduction under Section 80-1 only for the asst. yrs.
1992-93 and 1993-94 but not for the initial asst. yr. 1991-92 and also succeeding assessment years i.e. 1994-95 onwards. The learned Departmental Representative emphasised that the assessee itself not considered eligible for deduction in the initial assessment year as well as in the succeeding assessment years then how it can be presumed that it was eligible only for two assessment years i.e., 1992-93 and 1993-94. He further argued that if the assessee was not an industrial undertaking for the asst. yr. 1991-92 and 1994-95 onwards then how it was an industrial undertaking for the asst, yrs. 1992-93 and 1993-94 only. The learned Departmental Representative vehemently argued that any industrial undertaking is eligible for deduction under Section 80-1 if it manufactures or produces any article or thing. In the instant case, the assessee neither manufactured nor produced any article or thing so it was not eligible for the deduction under Section 80-1 and the AO was right in disallowing the claim of the assessee in accordance with law and subsequently the learned CIT(A) was justified in upholding the view of the AO. He, therefore, prayed to uphold the order of the learned CIT(A).
It was further argued that the case law relied upon by the assessee are distinguishable as the facts discussed therein are different from the facts of the case under consideration. He, therefore, prayed to uphold the order of the learned CIT(A).
7. We have heard both the parties at length and carefully gone through the material referred to along with various judgments cited. In the instant case, the assessee claimed itself an industrial undertaking on the basis that a specific process was employed on the lenses which were implanted in the eyes of the various patients. According to the assessee, the deduction under Section 80-1 is allowable to an industrial undertaking to manufacture the articles or things. According to the assessee the word 'manufacture' includes 'process' also. The view taken by the Department was that the assessee neither manufactured nor produced the articles or things. So the claim of the assessee was rejected.
The deduction in respect of profits and gains from an industrial undertaking is allowed under Section 80-1 which states as under : "80-1(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel (for the business of repairs to ocean-going vessels or other powered craft), to which this, section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof." The deduction can only be allowed if the industrial undertaking fulfils the following conditions laid down in Section 80-1(2) namely : (i) it is not formed by the splitting up, or the reconstruction, of a business already in existence; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India, and begins to manufacture or produce articles or things or to operate such plant or plants at any time within the period of ten years next following the 31st day of March, 1981, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking; (iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employees ten or more workers in a manufacturing process carried on without the aid of power." In the instant case, the assessee failed to establish that any article or thing was manufactured or produced by it. The only claim of the assessee was that it processed lenses and the word 'process' is included in the manufacturing. In the instant case, it is crystal clear that no change occurred in the lenses after applying the various processes. So it cannot be said that any new article or thing emerged by applying various processes by the assessee. Accordingly we are of the view that no deduction under Section 80-1 was allowable to the assessee as the conditions laid down in Section 80-I(2)(iii) were not fulfilled. The observations of the Hon'ble Supreme Court in the case of Ujagai Prints' v. Union of India and Ors. (supra) relied upon by the learned authorised representative were that: "The processes of bleaching, dyeing, printing, sizing, shrink-proofing, waterproofing, rubberising and organdie processing carried on in respect of cotton or man-made grey fabric amount to 'manufacture' for the purpose and within the meaning of Section 2(f) of the Central Excises and Salt Act, 1944, even prior to the amendment of the section by Section (2) of the Central Excises and Salt and Additional Duties of Excise (Amendment) Act, 1980. The view expressed in Empire Industries Ltd. v. Union of India (1986) 162 ITR 846 (SC) that such processes were not so alien or foreign to the concept of "manufacture" that they could not come within that concept is correct." From the above observations, it is clear that the issue before the Hon'ble Supreme Court was related to the excise duty and not related to the deductions under Section 80-1 of the IT Act. Therefore, the facts of the present case cannot be equated with that of the cases relied on by the learned authorised representative. In the case of CIT v. Sovrin Knit Woiks (supra), the issue before the Full Bench of the Hon'ble Punjab & Haryana High Court was related to the development rebate (sic) under Section 32A of the Act and the observations appearing at p. 685 were following : "We now find that, following the judgment of the Supreme Court in Empire Industries Ltd. v. Union of India (1986) 162 ITR 846 (SC), the Tribunal, in Dy. CIT v. Lalit Fabrics (P) Ltd. (1992) 198 ITR (AT) 190 (Chd), has also taken the same view, namely, that bleaching, dyeing and printing of grey cloth amount to manufacture or production of an article or thing within the meaning of Section 32A of the Act.
Such, thus, now being the settled state of the law, we are, with respect, constrained to hold that the view expressed in Niemla Textile Finishing Mills (P) Ltd. v. CIT (1985) 152 ITR 429 (P&H)(FB), that a company engaged in dyeing, printing, singeing or otherwise finishing or processing of fabrics would not fall within entry 23 of the First Schedule nor would it be entitled to claim advantage of the provisions of Section 280ZB of the Act, does not lay down the correct law and this judgment has consequently to be overruled. These processes must clearly be held to fall within the meaning of "manufacture and production" in terms of item No. (32) of the Fifth Schedule to the Act and hence also under entry 23 of the First Schedule of the Industries (Development and Regulation) Act, 1951." From the above, it is clear that in the aforesaid case bleaching, dyeing and printing of grey cloth was considered as manufacture or production or article or thing within the meaning of Section 32A of the Act.
But the issue involved in the instant case is not of bleaching, dyeing and printing of grey cloth and moreover, the process claimed by the assessee cannot be equated with the dyeing, printing and singeing.
Hence, the facts of the present case can also not to be equated with that of M/s Sovrin Knit Works (supra).
Similarly, in the case of CIT v. Peerless Consultancy Services (P) Ltd. (supra), the Hon'ble Calcutta High Court discussed the word 'process' used in the definition of industrial company within the meaning of Section 2(7)(c) of the Finance Act, 1981,.and never discussed Section 80-1 which is involved in the present case.
In the case of Nil-Look (P) Ltd. v. CIT (supra), the Hon'ble Delhi High Court held that : "When the assessee made readymade garments it used its own cloth to make the clothes or garments and in the case of its customers who brought their own cloth, the assessee did the same thing by making garments for the customers but out of customer's cloth : there was essentially no difference in the two activities. The making of clothes or garments to the order of the customers was also manufacturing or processing of goods." From the above, it would be clear that the issue involved was different from the issue involved in the present case.
In the case of Tarai Development Corporation v. CIT (supra), the issue involved was related to the processing of seeds and it was the observation of the Hon'ble Allahabad High Court that "the processed seeds found place at item 28 of the 5th Schedule for the purposes of Section 33. Accordingly 'processed seeds' was thus treated as an article which was obtained by the process of manufacture or production for the purposes of Section 80J." But the learned authorised representative could not produce any evidence to show that the 'process' of lenses was included in the 5th Schedule as discussed in the aforesaid case, Therefore, the case relied upon by the learned authorised representative is distinguishable.
In the case of CIT v. Tamil Nadu Heat Treatment and Petting Services (P) Ltd. (supra), it was held by the Hon'ble Madras High Court that : "the process of heat treatment to crankshafts, etc. was absolutely essential for rendering them marketable. Automobile parts, as crankshafts need to be subjected to 'heat treatment to increase tensile strength. The raw untreated crankshafts and the like can never be used in an automobile industry. Thus, in the, crankshafts subjected to the process of heat treatment, etc. a qualitative change is effected, to be fit for use in automobiles, although there is no physical change in them. Therefore, the activities of the assessee in relation to raw or untreated crankshafts being subjected to heat treatment, etc. is a 'manufacturing activity' entitling the assessee to claim 'investment allowance' under Section 32A of the Act." From the above, it is clear that in the aforesaid case, the process of heat treatment to crankshafts, etc. was absolutely essential for rendering them marketable, as crankshafts need to be subjected to heat treatment to increase the wear and tear resistance to remove the inordinate stress and increase tensile strength. But in the instant case, lenses were marketable even before applying the processes by the assessee, therefore, the case law relied upon by the assessee is distinguishable.
In the case of MB. Chemicals v. Dy. CIT (supra), the Hon'ble Tribunal Pune Bench (TM) held that "candy sugar is a different commodity from sugar and the process carried on by the assessee to produce candy sugar from sugar was manufacturing as the article change its nature." But in the instant case, there is no evidence that after applying the various processes, the lenses used by the assessee change its nature. Hence, the case law relied on by the learned authorised representative is distinguishable.
The Hon'ble Supreme Court in the case of Indian Poultry v. CIT (2001) 250 ITR 664 (SC) observed as under : "From the decision of the High Court [see (1998) 230 ITR 909) to the effect that rearing chicken to broilers did not amount to manufacture and, therefore, the assessee, which carried on the business of rearing chicks to broilers by applying scientific process and technology, was not entitled to the special deduction under Section 80HH of the IT Act, 1961, the assessee preferred an appeal to the Supreme Court. The Supreme Court dismissed the appeal." The Hon'ble Supreme Court in the aforesaid case laid down the ratio that by applying scientific process and technology was not entitled to the special deduction under Section 80HH and 80-1 of the IT Act, 1961.
In the present case also, the assessee applied scientific process and technology but by applying those processes, the nature of the lense did not change. Hence, it can safely be said that no manufacturing activity was involved in the present case.
The Hon'ble Bombay High Court in the case of Shiv Scrap Traders & Am.
v. CIT (2001) 251 ITR 806 (Bom), observed as under : "The IT Act does not define the expression 'industrial undertaking'.
Therefore, reference to its definition in similar enactments or adoption of its ordinary meaning in inevitable. Considering the object of the enactment of Sections 80HHA and 80-1, the said expression will have to be construed liberally in a broader commercial sense keeping its object in mind. The concept of industrial undertaking need not necessarily be confined to manufacture and production of articles and even in the absence of either of them there could be an industrial undertaking. The expression 'manufacture' has in ordinary acceptation a wide connotation. It means the making of articles, or material commercially different from the basic components, by physical labour or mechanical process. However, the word 'manufacture1 appears in the company of the word 'production' which has a wider connotation than the word 'manufacture'. 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 not amount to manufacture. The associated words are indicative of the mind of the legislature. Where a word is doubtful or ambiguous in nature the meaning has to be ascertained by considering the company in which it is found and the meaning of the word associated with it." From the above observations of the Hon'ble Bombay High Court, it is clear that while claiming deduction under Section 80-1 of the IT Act, 1961, the industrial undertaking must produce an article or thing commercially different from the basic components, but in the instant case, nothing different form the basic components, i.e., lenses, emerged out by the application of the process by the assessee.
'Similarly, in the recent judgment in the case of CIT v. Gem India Manufacturing Co. (2001) 249 ITR 307 (SC), the Hon'ble Supreme Court has expressed a view that raw diamond and cut and polished diamonds were not different/distinct marketable commodity having different uses; therefore, a company engaged in cutting and polishing raw diamonds for the purpose of export was not engaged in the processing of goods to convert them into marketable form and was not eligible for deduction under Section 80-1. Therefore, we are of the opinion that the processes employed by the assessee on lense could not be considered as manufacturing activity. In the present case after the processes, input and output remained the same i.e., the thing obtained after the process was lense which was not different from the lense put to various processes. It is also worth mentioning that for the purpose of manufacturing, a new product will have to come into existence as per the ratio laid down by the Hon'ble Supreme Court in the case of CIT v.Venkateswara. Hatcheries (P) Ltd. & Ors. (1999) 237 ITR 174 (SC) and CIT v. Relish Foods (1999) 237 ITR 59 (SC). in another excise case of J.J. Glass Industries v. Union of India (1992) 62 ELT 292 the Hon'ble Supreme Court dealt with a issue where the company was engaged in the process of screen printing of empty glass bottles. The Hon'ble Supreme Court observed that "if the product could serve a purpose even without printing and there is no change in the commercial product after the printing is carried out, the process cannot be said one of the manufacture." The benefit under Section 80-1 is available where the industrial undertaking manufactures or produces an article or thing commercially different from original component. But in the instant case, the assessee-company neither manufactured nor produced any new article or thing, therefore, considering the totality of the facts and circumstances of the present case and in the light of the above discussions, we are of the view that the assessee was not entitled for the deduction under Section 80-1 and the learned CIT(A) rightly confirmed the view of the AO in not allowing the deduction under Section 80-1. Accordingly, we decline to interfere with the order of the learned CIT(A) and the same is hereby upheld.Before parting with this case, we may add here that the assessee had taken the plea that the lenses were being manufactured by M/s Bio Lenses, Amritsar, as per the design and specification given by the assessee. However, there is no material on record to support this contention of the assessee. It seems that the assessee has taken this plea without any supporting evidence.