Bookmark
PDF
Share
CaseIQ

Commissioner Of Income-Tax v. Kay Charan Pvt. Ltd.

Allahabad High Court

Feb 15, 1991

Judgment

Subsequent
References

CaseIQ

Important Paras

Please sign up to view Important Paras.

Smart Summary (Beta)

Structured Summary of the Legal Opinion

Factual and Procedural Background

The assessee is a private limited company engaged in the manufacture and sale of mild-steel rods (M.S. rods). For the assessment year 1973-74 the assessee claimed a development rebate at 25% on additions to plant and machinery made in the relevant previous year under section 33(1)(b)(B)(i)(b) of the Income-tax Act, 1961. The Income-tax Officer disallowed the higher rate and allowed the ordinary rebate at 15% under section 33(1)(b)(B)(iv)(b), taking the view that the assessee was manufacturing M.S. rods and not “iron and steel (metal)”. On appeal the Appellate Assistant Commissioner allowed the higher 25% rebate. The Department appealed to the Income-tax Appellate Tribunal which agreed with the Appellate Assistant Commissioner. The Tribunal framed, under section 256(1) of the Income-tax Act, the question whether the Tribunal was legally justified in holding that the assessee produces “iron and steel (metal)” and therefore was entitled to the higher development rebate. This Court heard the reference and answered the question.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the assessee’s manufacture of M.S. rods constitutes production of “iron and steel (metal)” within item No. (1) of the Fifth Schedule to the Income-tax Act and, consequently, whether the assessee is entitled to development rebate at the higher rate of 25% under section 33(1)(b)(B)(i)(b) instead of the ordinary rate of 15% under section 33(1)(b)(B)(iv)(b).

Arguments of the Parties

Assessee's Arguments

The assessee contended that the M.S. rods manufactured by it fall within item No. (1) of the Fifth Schedule which reads “Iron and steel (metal), ferro-alloys and special steels.”
On that basis, and because the machinery was installed after 31st March 1970, the assessee claimed entitlement to the higher development rebate of 25% under section 33(1)(b)(B)(i)(b).
The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal accepted this contention and allowed the rebate at 25%.

Revenue / Income-tax Officer's Arguments

The Income-tax Officer maintained that M.S. rods are not “iron and steel (metal)” within the meaning of item No. (1) of the Fifth Schedule, and therefore only the ordinary rebate at 15% under section 33(1)(b)(B)(iv)(b) should be allowed.
The Department carried the matter in appeal, challenging the Tribunal’s acceptance of the assessee’s contention.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Indian Steel and Wire Products Ltd. v. CIT [1977] 108 ITR 802 (Calcutta High Court)	Held that the phrase “iron and steel (metal)” in the Schedule refers to iron and steel in raw/primary form (billets, ingots, slabs) and does not include finished commercial products such as wire rods.	This Court adopted and relied on the Calcutta High Court’s view that the expression covers primary metal and not finished products; the Calcutta decision is described as taking the view consistent with the present Court’s reasoning.
State of Madhya Bharat v. Hiralal [1966] 17 STC 313; AIR 1966 SC 1546 (Supreme Court)	Authority relied upon by the Calcutta High Court for distinguishing raw metal from finished products—recognition that metal may be raw material up to a stage but further processing converts it into a finished product.	The Calcutta High Court followed this Supreme Court authority; this Court noted that the Calcutta decision followed the Supreme Court’s reasoning and endorsed that approach in construing the Schedule entry.
Vaiswaner Trading Co. v. State of Gujarat [1964] 15 STC 586 (Gujarat High Court)	Used alongside State of Madhya Bharat to support the distinction between primary metal and finished articles.	This Court cited the Vaiswaner decision as part of the line of authority that treats “iron and steel (metal)” as raw metal rather than finished products.
Hindustan Aluminium Corporation Ltd. v. State of U.P. (1981) 3 SCC 578; AIR 1981 SC 1649; 48 STC 411 (Supreme Court)	Considered the meaning of “metal” in a sales-tax notification and observed that “metal” is generally used to refer to metal in its primary sense; products evolved from primary form are distinct commercial commodities.	This Court treated the Supreme Court’s observations as relevant and persuasive by analogy, applying the same reasoning to interpret “iron and steel (metal)” in the Income-tax Fifth Schedule.
CIT v. Mittal Steel Re-rolling and Allied Industries (P.) Ltd. [1977] 108 ITR 207 (Kerala High Court, Division Bench)	Held that M.S. rods and steel sections manufactured by the assessee fall within “iron and steel (metal)” in item No. (1) of the Fifth Schedule.	The present Court recorded this contrary view and expressly disagreed with it.
CIT v. West India Steel Co. Ltd. [1977] 108 ITR 601 (Kerala High Court, Full Bench)	Full Bench held that “M.S. rods and steel sections are not anything different from iron and steel” and so fall within item No. (1).	The present Court noted the Full Bench decision and expressly disagreed with the Full Bench’s reasoning.
Addl. CIT v. Trichy Steel Rolling Mills Ltd. [1979] 118 ITR 39 (Madras High Court)	Followed the Kerala High Court view and held that finished steel products fall within “iron and steel (metal)”.	The present Court observed that the Madras High Court expressly differed from the Calcutta view and stated its respectful disagreement with the Madras decision.
CIT v. Krishna Copper and Steel Rolling Mills [1979] 119 ITR 256 (Punjab & Haryana High Court)	Held that iron rods manufactured from scrap metal fall within item No. (1) of the Fifth Schedule; the decision was influenced by a letter from the Central Board of Direct Taxes.	The present Court recorded this view and stated its respectful disagreement with the Punjab & Haryana High Court’s conclusion and reasoning.

Court's Reasoning and Analysis

The Court proceeded by textual and contextual construction of item No. (1) of the Fifth Schedule and the relevant rates under section 33(1)(b)(B)(i) and (iv). The analytical steps in the Court's reasoning were:

Textual focus on the exact phrase used in item No. (1): “Iron and steel (metal)”. The Court emphasized the presence of the qualifying word “metal” and held that its use cannot be meaningless.
The Court interpreted “iron and steel (metal)” to mean iron and steel in their metal or primary form—that is, in original/primary shapes such as billets, ingots, slabs—rather than finished articles made from those metals.
The Court applied the canon against rendering other schedule items otiose: if all steel products were treated as “iron and steel (metal)”, then item No. (ii) (“Steel castings and forgings and malleable iron and steel castings”) would be unnecessary and meaningless. This supported a narrower reading of item No. (1).
The Court adopted and relied upon the view taken by the Calcutta High Court in Indian Steel and Wire Products Ltd. v. CIT, which treated the raw metal and finished products as distinct entries for schedule construction. The Calcutta High Court's reasoning was noted to have followed the Supreme Court’s decision in State of Madhya Bharat v. Hiralal and the Gujarat High Court in Vaiswaner.
The Court considered the Supreme Court’s decision in Hindustan Aluminium Corporation Ltd. v. State of U.P., which explained that “metal” generally refers to metal in its primary, marketable form and that subsequent processed forms are distinct commercial commodities. Although that case arose under the Sales Tax Act, the Court found the reasoning relevant and persuasive by analogy for interpreting the Income-tax Schedule.
The Court reviewed contrary High Court authorities (Kerala, Madras, Punjab & Haryana) that had adopted a broader meaning (treating finished steel products like M.S. rods as “iron and steel (metal)”), but the Court explained why it respectfully disagreed with those decisions—mainly because they failed to give effect to the distinct schedule entries and the textual qualifier “metal”, and in some instances relied on administrative correspondence rather than statutory context.
On this textual, contextual and precedential basis the Court concluded that M.S. rods are finished commercial products made from steel and do not fall within item No. (1) as “iron and steel (metal)” in their primary form.

Holding and Implications

Holding: The question referred by the Income-tax Appellate Tribunal is answered in the negative — i.e., in favour of the Revenue and against the assessee.

Implications:

Direct effect on the parties: The assessee is not entitled to development rebate at the higher rate of 25% under section 33(1)(b)(B)(i)(b) for the machinery in question because the products manufactured (M.S. rods) do not fall within item No. (1) “iron and steel (metal)” of the Fifth Schedule; accordingly, the ordinary rebate at 15% as provided under section 33(1)(b)(B)(iv)(b) is the applicable rate.
Broader guidance in the opinion: The Court adopted an interpretation that “iron and steel (metal)” denotes iron and steel in primary metal form and rejected contrary High Court decisions that had treated finished steel products as falling under the same entry. The Court relied on prior authority (including a Calcutta High Court decision and a Supreme Court decision on the meaning of “metal” in a related statutory context) to support this interpretation.

Note: This summary is prepared strictly from the content of the provided opinion and does not introduce information beyond what is contained in that text.

Show all summary ...

B.P Jeevan Reddy, C.J:— The Income-tax Appellate Tribunal has stated the following question under section 256(1) of the Income-tax Act, 1961:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is legally justified in holding that the assessee produces iron and steel (metal) and, therefore, it was entitled for a higher development rebate as provided under section 33(1)(b) of the Act?”

2. The assessee is a private limited company engaged in manufacture and sale of mild-steel rods (M.S rods). (The record before us does not set out or clarify the actual process of manufacturing the said article. All that it shows is that the company manufactures M.S Rods). For the assessment year 1973-74, the assessee claimed development rebate at 25% on extension or addition of plant and machinery made in the previous year relevant to the said assessment year, under section 33(1)(b)(B)(i)(b) of the Income-tax Act. The Income-tax Officer did not accept the said claim and allowed development rebate at the ordinary rate of 15% as provided in section 33(1)(b)(B)(iv)(b). The Income-tax Officer was of the view that the assessee was manufacturing M.S rods, and not “iron and steel (metal)”. On appeal however, the Appellate Assistant Commissioner agreed with the assessee and allowed development rebate at 25%. The matter was carried by the Department in further appeal to the Tribunal which agreed with the Appellate Assistant Commissioner. The question is whether the assessee is entitled to the rebate at the higher rate, as claimed by it, or at the ordinary rate allowed by the Income-tax Officer.

3. Section 33 of the Act provides for development rebate. Clause (a) of sub-section (1) provides that in respect of new machinery or plant owned by the assessee and wholly used for the purposes 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, a sum specified in clause (b) by way of development rebate. Clause (b) prescribes different rates of rebate in different situations. Clause (b) has again two sub-clauses (A) and (B). We are concerned herein only with sub-clause (B). Sub-clause (B) has again four sub-divisions (i), (ii), (iii) and (iv). It would be appropriate to set out sub-division (i) and sub-division (iv) of sub-clause (B) of clause (b) of sub-section (1) of section 33:

“(b) The sum referred to in clause (a) shall be… (B) in the case of machinery or plant,—

(i) where the machinery or plant is installed for the purpose of business of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule,—

(a) thirty-five per cent of the actual cost of the machinery or plant to the assessee, where it is installed before the 1st day of April, 1970, and

(b) twenty-five per cent of such cost, where it is installed after the 31st day of March, 1970

(iv) in any other case,—

(a) twenty per cent of the actual cost of the machinery or plant to the assessee, where it is installed before the 1st day of April 1970, and

(b) fifteen per cent of such cost, where it is installed after the 31st day of March, 1970.”

4. The Fifth Schedule to the Act referred to in section 33(1)(b)(B)(i) contains as many as 33 items of articles and things. Item No. (1) reads as follows:—

“(i) Iron and steel (metal), ferro-alloys and special steels.”

Item (ii) of the said Schedule reads:

(ii) Steel castings and forgings and malleable iron and steel castings.”

5. The assessee claims that M.S rods manufactured by it fall within item No. (1) of the Fifth Schedule and, because the machinery in question was installed after March 31, 1970, it is entitled to development rebate at the rate of 25% under section 33(1)(b)(B)(i)(b), whereas the Income-tax Officer says that M.S rods do not fall under item No. (1) of the Fifth Schedule and, therefore, the assessee is entitled only to the ordinary rebate at the rate of 15% as provided in section 33(1)(b)(B)(iv)(b). The asses-see's contention which has been accepted by the Tribunal is that M.S rods manufactured by the assessee fall within the expression “Iron and steel (metal)”. We find it difficult to agree with the Tribunal. M.S rods manufactured by the assessee are, undoubtedly, made of steel. But the question is whether they can be called “iron and steel (metal)”. The item does not read “iron and steel”, it reads “iron and steel (metal)”. The use of the qualifying word “metal” cannot be without a meaning. It means iron and steel in its metal form, i.e, in its primary shape. It cannot include articles or things made of iron or steel. If all the products of steel are included within the said words, then item No. (ii) of the Fifth Schedule would become unnecessary and meaningless. Item No. (ii), as already set out hereinbefore, refers to “steel castings and forgings and malleable iron and steel castings”. Steel castings and forgings would naturally be included within the expression “iron and steel (metal)”, according to the assessee's contention. If it were so, the Legislature would not have put them under a separate heading. In our opinion, therefore, the “iron and steel (metal)” refers to iron and steel in their original form and shape like billets, ingots, slabs, etc. This is the view taken by the Calcutta High Court in Indian Steel and Wire Products Ltd. v. CIT [1977] 108 ITR 802 (Cal). It has been rightly pointed out by the said court, following the decision of the Supreme Court in State of Madhya Bharat v. Hiralal [1966] 17 STC 313 : AIR 1966 SC 1546 and the decision of the Gujarat High Court in Vaiswaner Trading Co. v. State of Gujarat [1964] 15 STC 586 (Guj), that (at p. 815):

“Iron and steel can be treated up to a certain stage as raw material which can take many shapes and forms like billets, slabs, ingots, etc. But there comes a stage when by further processing or manufacture it ceases to be a raw material and enters into the category of a finished product. The items in question have to be construed from this point of view. The assessee after obtaining iron and steel in the form of raw material or metal is manufacturing wire rods. It is the raw material or metal which comes under item I and not the finished product.

The heading of the Schedule is ‘list of articles and things’. Therefore, item 1 iron and steel (metal) is to be considered separately as a thing or an article but articles made or produced from such a “thing” or an “article” ought not to come within the same item.”.

6. The court also contrasted the language used in item No. (1) with that used in item No. (ii) of the Fifth Schedule and pointed out that wire rods (concerned in that case) are commercial products made out of iron and steel and in their popular or commercial sense, they must be treated as articles different from “iron and steel (metal)”. A large number of cases are referred to in the said decision in support of this conclusion. We agree with this view.

7. We may, in this connection, refer to a decision of the Supreme Court in Hindustan Aluminium Corporation Ltd. v. State of U.P, (1981) 3 SCC 578 : AIR 1981 SC 1649 : 48 STC 411. It was a case arising under the U.P Sales Tax Act and the question before the court was whether aluminium rolled products and extrusions are “metals” within the meaning of the notification dated May 30, 1975, issued by the State of U.P under section 3A(2) of the Sales Tax Act. Item No. 1 of the Schedule appended thereto, which prescribed a lower rate of tax, read “All kinds of minerals, ores, metals and alloys except those included in any other notification issued under the Act”. The assessee's contention was that the goods manufactured by it (aluminium rolled products and extrusions) fell within the expression “metals” and are, therefore, entitled to the benefit of lower rate of tax. Dealing with the said contention, the Supreme Court observed (p. 1651 of AIR 1981 SC):

“Section 3A of the U.P Sales Tax Act empowers the State Government to prescribe, by notification, the rate and the point, at which the tax may be imposed on the sale of a commodity. A consideration of the notification issued from time to time will show that the expression ‘metal’ has been generally employed to refer to the metal in its primary sense. The reference is to the metal in the form in which it is marketable as a primary commodity. Subsequent forms evolved from the primary form and constituting distinct commodities marketable as such must be regarded as new commercial commodities. The notification No. ST-2631.X-902(64)-50 of November 21, 1952, for example, sets forth two clauses.

(a) Copper, tin, nickel, or zinc or any alloy, containing any of these metals only, and

(b) Scrap, meant for melting, and sheets including circles meant for making brassware, and containing only any or all of the said metals, viz., copper, tin, nickel and zinc.

8. It is clear that while clause (a) makes specific reference to certain metals, clause (b) separately sets forth the products which emerge as a result of processing the original metal. Clause (b) speaks of sheets, including circles meant for making brassware and containing only any or all of the metals specified in clause (a). A sheet of copper only or tin only or nickel only or zinc only is regarded as belonging to a distinct entry in the notification from copper, tin, nickel or zinc in its unfabricated form.”

9. Though the said case arose under the Sales Tax Act, we are of the opinion that the reasoning behind the said observations is relevant to the question arising before us. As we have pointed out hereinabove, Parliament has treated “iron and steel (metal)” mentioned in item No. (1) of the Fifth Schedule to the Income-tax Act, as different articles or things from “steel castings and forgings” mentioned in item No. (ii) of the said Schedule.

10. It is, however, brought to our notice that certain High Courts have taken a contrary view. A Division Bench of the Kerala High Court in CIT v. Mittal Steel Re-rolling and Allied Industries (P.) Ltd. [1977] 108 ITR 207 and a Full Bench of that High Court in CIT v. West India Steel Co. Ltd. [1977] 108 ITR 601 have held that “M.S rods and steel sections” manufactured by the assessee concerned therein fall within the expression “iron and steel (metal)” occurring in item No. (1) of the Fifth Schedule. The Full Bench took the view that “M.S rods and steel sections are not anything different from iron and steel.” For this proposition, it relied upon the decision of the Supreme Court in State of Madhya Bharat v. Hiralal [1966] 17 STC 313, but that was not a case arising under the Income-tax Act and much less dealing with entries of the nature abovementioned in the Fifth Schedule to the Act. The question posed by the Full Bench was in the following terms:

“So the question is whether the finished article can be said to be something basically different from iron and steel.”

and was answered by it by saying, “They are not”. These decisions were followed by the Madras High Court in Addl. CIT v. Trichy Steel Rolling Mills Ltd. [1979] 118 ITR 39, where it expressly differed from the view taken by the Calcutta High Court aforementioned. The Punjab and Haryana High Court in CIT v. Krishna Copper and Steel Rolling Mills [1979] 119 ITR 256 also took the view that iron rods manufactured from out of scrap metal fall within item No. (1) of the Fifth Schedule. In this decision, however, there is no reference to any other decision of the High Court or the Supreme Court. The said conclusion was arrived at mainly influenced by a letter of the Central Board of Direct Taxes addressed to the Secretary, Bharat Chamber of Commerce, Calcutta, opining that the words “aluminium, copper, lead and zinc (metals)” mentioned in item No. (2) of the Fifth Schedule include “the manufacture of aluminium (metal) both from bauxite as well as from aluminium scrap”. The court held that what is said about item No. (2) holds good equally with respect to item No. (1). For the reasons given above, we respectfully disagree with the view taken by the Kerala, Madras and Punjab and Haryana High Courts.

11. In the result, the question referred is answered in the negative, i.e, in favour of Revenue and against the assessee.