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  • For the Appellant: C. Kodanad Rao, Deoki Nandan Agrawal, K.M.L. Majele, S.R. Ashok, Advocates.
Judges
  • M.N Rao
  • T.N.C Rangarajan, JJ.
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Attorney(S)
  • For the Appellant: C. Kodanad Rao, Deoki Nandan Agrawal, K.M.L. Majele, S.R. Ashok, Advocates.
Judges
  • M.N Rao
  • T.N.C Rangarajan, JJ.
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Smart Summary

Structured Summary of the Opinion (T.N.C. Rangarajan, J.)

Factual and Procedural Background

The assessee is a company engaged in the business of printing and processing of cinematographic films. For the assessment year 1984-85 (previous year ended 30 June 1983) the assessment was declared as "N.A" (not assessable) with a net loss of Rs. 94,175 and unabsorbed depreciation carried forward of Rs. 4,65,918. The assessee did not claim investment allowance in that assessment year and subsequently applied for rectification, seeking investment allowance for electrical installations, voltage stabilisers and air-conditioning plant used in its business; the rectification application was rejected by the assessing authority on the ground that there was no mistake apparent from the record.

For the assessment years 1986-87 and 1988-89 the assessee similarly claimed investment allowance in respect of the same machinery. The Income-tax Officer rejected those claims on the ground that the items did not form part of "plant and machinery" for the purpose and that the business activity fell within item No. 9 of the Eleventh Schedule (cinematograph films and projectors), an item not entitled to investment allowance. The Commissioner of Income-tax confirmed the Income-tax Officer's decisions on appeal, and also upheld the rejection of rectification for 1984-85.

On further appeal the Appellate Tribunal held that the assessee's activities (processing exposed cinematographic film and making positive prints) were not the manufacture of cinematograph films as specified in item No. 9, and that the processing amounted to manufacture because an article different from the raw material was produced (positive prints). The Tribunal allowed investment allowance and, with reference to 1984-85, observed that the assessee could carry forward the allowance since there were no profits that year.

The Revenue raised multiple questions and applied (ITC No. 50 of 1996) for direction to refer certain questions that the Appellate Tribunal had not referred. The Court noted that the issues actually boiled down to two central questions and reframed them for answer. The Court answered both reframed questions in favour of the assessee and dismissed the income-tax case.

Legal Issues Presented

  1. Whether the assessee was entitled to investment allowance under section 32A of the Income-tax Act, 1961, in respect of electrical installations, air-conditioning plant and voltage stabiliser installed in its laboratory on the ground that the assessee was not engaged in the manufacture of cinematograph films as specified in item No. 9 of the Eleventh Schedule to the Act?
  2. Whether the assessee was entitled to make a claim for investment allowance for the assessment year 1984-85 by way of a rectification application after the assessment was closed as "N.A"?

Arguments of the Parties

Revenue (learned standing counsel)

  • Submitted that the phrase "cinematograph film" must be understood with reference to the legislation on the subject, and that by that approach the end product of the assessee's business was a cinematograph film; therefore the assessee was not entitled to investment allowance under section 32A because item No. 9 of the Eleventh Schedule excluded cinematograph films.

Assessee

  • Argued that "cinematograph film" should be given its common parlance meaning (raw film) and could not refer to processes performed on the raw film as inputs; specifically, the assessee contended that the manufacture of the motion picture ended with exposing the raw film (producing the negative) and that subsequent processing (production of positive prints from negatives) lay outside the scope of the expression "cinematograph film" as used in the Eleventh Schedule.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner of Income-Tax v. Prasad Productions P. Ltd. [1989] 179 ITR 147 (Madras High Court) The distinction between production of a film and the subsequent stage of exhibition — positive prints are for exhibition and constitute a stage after completion of production. The Court relied on the observation that production and exhibition are distinct stages and held that making positive prints is a stage subsequent to production, supporting the view that preparing positive prints is not the production of a cinematograph film for the purposes of item No. 9.
CIT v. N.C. Buddharaja and Co. [1993] 204 ITR 412 (Supreme Court) Articulated the test for whether "manufacture" has taken place: whether the commodity subjected to the process can no longer be regarded as the original commodity but is recognised in trade as a new and distinct commodity. The Court applied the test and agreed with the Tribunal that the processes carried out by the assessee produced positive prints that are a new and distinct commodity (different from raw film), thereby upholding that those processes amounted to manufacture/production for the purposes of investment allowance.
Chokshi Metal Refinery v. CIT [1977] 107 ITR 63 (Gujarat High Court) Held that the Central Board of Direct Taxes had cast responsibility on the Income-tax Officer to draw the assessee's attention to reliefs omitted by the assessee and that such an omission was not a bar to making a claim in the year in which there was profit. The Court noted and relied on the observations as support for permitting the assessee to claim the investment allowance (or carry it forward) despite the earlier omission, in the context of the rectification/omission issue for 1984-85.
CIT v. Manmohan Das [1966] 59 ITR 699 (Supreme Court) Established that a decision by the Assessing Officer in the first year's assessment that the assessee cannot carry forward a loss is not binding on computation of taxable income in a subsequent year in which there is a profit. The Court invoked this principle to hold that the Assessing Officer's earlier completion of assessment as "N.A" did not prevent the assessee from claiming/carrying forward investment allowance in a subsequent year when the allowance became relevant.

Court's Reasoning and Analysis

The Court proceeded step-by-step from statutory text, dictionary and related legislation to determine the meaning of "cinematograph film" and whether the assessee's activities fell within the exclusion under section 32A(2)(b)(iii) (item No. 9 of the Eleventh Schedule).

  1. Statutory framework: The Court explained that section 32A grants investment allowance (25% of cost of new machinery or plant) for machinery installed in an industrial undertaking engaged in construction, manufacture or production of any article or thing not specified in the Eleventh Schedule; subsection (2)(b)(iii) excludes machinery used for articles listed in the Eleventh Schedule (item No. 9 then being "cinematograph films and projectors"). Sub-section (3) allows carry forward of unabsorbed investment allowance where income is nil or less than the allowance.
  2. Meaning of "cinematograph film": The Court examined dictionary meaning and definitions in the Cinematograph Act (section 2(c)) and the Copyright Act (section 2(f)), concluding that both popular and technical meanings refer to a film containing picture (and sound) fit for exhibition — commonly a "feature film".
  3. Distinction between production and subsequent stages: The Court accepted the view (and quoted the Madras High Court) that production (which culminates in a cinematograph film/negative) and exhibition (positive prints for exhibition) are distinct stages; positive prints are intended for exhibition and constitute a stage after completion of production.
  4. Application to assessee's activities: The Court reasoned that producing the negative (developing exposed raw film) is part of the production of a cinematograph film; however, making positive prints from the negative is a duplication process where the cinematograph film (negative) is the raw material — the Court characterized making positive prints as an independent duplication activity and not the production of a cinematograph film for the purposes of item No. 9.
  5. Legislative intent and contemporaneous material: The Court referred to the Finance (No. 2) Bill, 1977 memorandum and the later removal of "cinematograph films" from item No. 9 by the Finance Bill, 1988 (with accompanying memorandum) and the Income-tax Rules' depreciation table. These materials indicated that the term envisaged films produced for exhibition (recording, developing and printing machinery) and supported the interpretation that production ends with making the negative/master.
  6. Application of the "manufacture" test: The Court applied the Supreme Court's test (N.C. Buddharaja) — whether the process produces a commodity that is new and distinct in trade. It agreed with the Tribunal that positive prints are a new and distinct commodity (positive prints are different from raw film), and so the processes carried out by the assessee could amount to manufacture/production for purposes of investment allowance.
  7. On the rectification/omission issue for 1984-85: The Court accepted the Tribunal's reasoning that because the assessment for 1984-85 was completed as "N.A" with no profits, the investment allowance claim was for computation and carry forward purposes and that the omission to claim could be rectified. The Court relied on Chokshi Metal Refinery and Manmohan Das authorities to support that an omission is not a bar to later claiming when profit arises and that an earlier AO decision is not binding for subsequent computation.
  8. Plant and machinery objection: The Court rejected the Revenue's implicit objection that items such as voltage stabiliser, electrical equipment and air-conditioner were not plant and machinery, noting that depreciation had been granted treating them as plant and machinery and therefore the Tribunal's allowance of investment allowance in respect of them must be upheld.
  9. Conclusion on reframed questions: Combining the above, the Court concluded that the assessee was entitled to investment allowance in respect of the listed machinery because the assessee's principal business (making positive prints) was not the production of cinematograph films as excluded by item No. 9, and that the rectification claim for 1984-85 was permissible in the circumstances.

Holding and Implications

Holding: The Court answered both reframed questions in the affirmative — in favour of the assessee and against the Revenue — and dismissed the income-tax case.

Implications:

  • The direct effect is that the Appellate Tribunal's order granting investment allowance in respect of electrical installations, air-conditioning plant and voltage stabiliser (used in the assessee's laboratory for making positive prints) is upheld.
  • The rectification claim for the assessment year 1984-85 (where the assessment stood as "N.A") to compute and carry forward the admissible investment allowance is permitted in the circumstances described in the opinion.
  • The Court declined to direct the Appellate Tribunal to refer the other, more numerous questions originally raised by the Revenue because the Court reframed and resolved the two central issues. No broader sweeping precedent beyond the Court's statutory and textual analysis is announced in this opinion for purposes beyond the parties (the decision is confined to the facts and statutory interpretation as dealt with in the opinion).

This summary is based exclusively on the text of the provided opinion. No information beyond that text has been added.

Show full summary ...

    Commissioner Of Income-Tax v. Prasad Film Laboratories P. Ltd.

    T.N.C Rangarajan, J.:— The admitted facts stated in this case are as follows:

    2. The assessee is a company engaged in the business of printing and processing of cinematographic films. The Appellate Tribunal has found that the actual process carried out by the company was to develop exposed cinematographic film and make positive prints which are ready for exhibition. In the proceedings for the assessment year 1984-85 corresponding to the previous year ended on June 30, 1983, the assessee did not claim any investment allowance. The assessment was declared as “N.A” (not assessable) determining the net loss at Rs. 94,175 and carrying forward unabsorbed depreciation of Rs. 4,65,918. The assessee thereafter filed an application for rectifying the assessment stating that by inadvertence it had omitted to claim investment allowance on electrical installations, voltage stabilisers, and air-conditioning plant used in the said business of developing and processing the cinematographic film and it should be allowed. This claim was rejected on the ground that there was no mistake apparent from the record. Simultaneously, for the assessment years 1986-87 and 1988-89, the assessee made claims for grant of investment allowance in respect of the same machinery. The Income-tax Officer, while making the assessment for those assessment years, rejected the claim on the ground that the said items do not form part of plant and machinery and the business activity falls within item No. 9 of the Eleventh Schedule being an item not entitled to investment allowance. This decision was confirmed on appeal by the Commissioner of Income-tax who rejected all the appeals and for the assessment year 1984-85 not only on-this ground but also on the ground that there was no mistake apparent from the record.

    3. When all the three assessments came up on further appeal to the Appellate Tribunal, the Appellate Tribunal held that what was ineligible is only the manufacture of cinematographic film, which according to the Tribunal, could not refer to the processing of exposed cinematographic film. The Tribunal also held such processing amounted to manufacture because the assessee produced an article which was different from the raw material. With reference to the assessment year 1984-85, the Appellate Tribunal also found that there being no profits in that year the assessee could always claim the deduction in the subsequent year and the matter of computing the admissible investment allowance was only an omission which could be rectified.

    4. The Revenue raised the following questions:

    Assessment year 1986-87:

    “1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in relying on the decision of the Income-tax Appellate Tribunal, Madras, in the case of Prasad Productions Pvt. Ltd. in ITA Nos. 1831 and 1832.Mds./84, dated May 29, 1985, wherein it was held that a feature film was different from a cinematograph film, particularly when the feature film is covered under the Cinematograph Act?

    2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in allowing investment allowance to the assessee particularly when it was covered by items Nos. 9 and 10 of the Eleventh Schedule to the Income-tax Act, 1961?

    3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in concluding the processing of colour films used in cinema through hypo solution which absorbs the silver content of the film and drying, etc., amounts to manufacture and the ratio of the Supreme Court's decision in the case of N.C Buddharaja and Co. [1993] 204 ITR 412, is not applicable to the facts of the case?

    4. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in directing allowance of investment allowance on voltage stabiliser, electrical equipment, projector and air-conditioner treating them as plant and machinery in the assessee's business of processing of colour films, even though cinematograph films and projectors are included under item No. 9 of the Eleventh Schedule to the Income-tax Act, 1961?”

    Assessment, years 1984-85 and 1988-89:

    “1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in holding that there was a mistake apparent from the record in the order of the Assessing Officer-for the assessment year 1984-85 and thus allowing investment allowance?

    2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in relying on the decision of the Gujarat High Court in the case of Choksi Metal Refinery v. CIT[1977] 107 ITR 65, in allowing the assessee's appeals particularly when the facts of the above case were distinguishable?

    3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in relying on the decision of the Income-tax Appellate Tribunal, Madras, in the case of Prasad Productions P. Ltd., in ITA Nos. 1831 and 1832.Mds./84, dated May 29, 1985, wherein it was held that a feature film was different from a cinematograph film particularly when the feature film is covered under the Cinematograph Act?

    4. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in allowing investment allowance to the assessee particularly when it was covered by items Nos. 9 and 10 of the Eleventh Schedule to the Income-tax Act, 1961?

    5. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in concluding that processing of colour films used in cinema through hypo solution which absorbs the silver content of the film and drying, etc., amounts to manufacture and the ratio of the Supreme Court's decision in the case of N.C Buddharaja and Co. [1993] 204 ITR 412, is not applicable to the facts of the case?

    6. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in directing allowance of investment allowance on voltage stabiliser, electrical equipment, projector and air-conditioner treating them as plant and machinery in the assessee's business of processing of colour films, even though cinematograph films and projectors are included under item No. 9 of the Eleventh Schedule to the Income-tax Act, 1961?”

    5. The Appellate Tribunal, however, referred only the following questions:

    For all the three years:

    “1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in relying on the decision of the Income-tax Appellate Tribunal, Madras, in the case of Prasad Productions P. Ltd. in ITA Nos. 1831 and 1832.Mds of 1984, dated May 29, 1985, wherein it was held that a feature film was different from a cinematograph film, particularly when the feature film is covered under the Cinematograph Act?

    2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in directing allowance of investment allowance on voltage stabiliser, electrical equipment, projector and air-conditioner treating them as plant and machinery in the assessee's business of processing of colour films, even though cinematograph films and projectors are included under item No. 9 of the Eleventh Schedule to the Income-tax Act, 1961?”

    Only for the assessment year 1984-85:

    “1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in holding that there was a mistake apparent from record in the order of the Assessing Officer for the assessment year 1984-85 and thus allowing investment allowance?”

    Only for the assessment year 1988-89:

    “1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in upholding the allowance of unabsorbed investment allowance pertaining to the assessment years 1984-85 and 1985-86 brought forward and claimed by the assessee during the assessment year 1988-89?”

    6. The Revenue has therefore filed ITC No. 50 of 1996 for a direction to refer the questions which have not been referred by the Appellate Tribunal. We find that in reference applications questions are generally not properly framed by the Revenue and while referring the matter also the issues are not properly focussed by reframing the questions. When the questions raised are repetitious, and similar to the grounds of appeal the Appellate Tribunal refers to one or two of them and leaves off the rest as in the present case, while the Revenue insists on the other questions being also referred. In this exercise, both sides as well as the Appellate Tribunal overlook the need to focus the issues. A perusal of the facts narrated above will indicate that only two issues actually arise in the case, namely; whether item No. 9 of Schedule XI of the Income-tax Act is a bar to the claim of the assessee for investment allowance, and whether for the assessment year 1984-85, the assessee could make a claim by way of a rectification application.

    7. In the circumstances, we are of the opinion that the Appellate Tribunal ought to have reframed the questions and referred the case. We, therefore, reframe the questions in the following manner before we answer the issues.

    “1. Whether, on the facts and in the circumstances of the case, the assessee was entitled to investment allowance under section 32A of the Income-tax Act, 1961, in respect of electrical installations, air-conditioning plant and voltage stabiliser installed in its laboratory on the ground that the assessee was not engaged in the manufacture of cinematograph films as specified in item No. 9 of the Eleventh Schedule to the Act?

    2. Whether, on the facts and in the circumstances of the case, the assessee was entitled to make a claim for investment allowance for the assessment year 1984-85 by way of rectification application after the assessment was closed as N.A?”

    8. With reference to the first question, it was argued by learned standing counsel that the word ‘cinematograph film’ must be understood with reference to the legislation on that subject and in that approach it would be found that the end product of the assessee's business was cinematograph film and, therefore, the assessee was not entitled to the investment allowance. On the other hand, it was contended on behalf of the assessee that the words ‘cinematograph film’ should be given the meaning in common parlance as ‘raw film’ which is required to be manufactured and it could not refer to certain processes taking place with the raw film itself as the input. It was further submitted that even if cinematograph film is understood as the motion picture, manufacture of that motion picture ended with exposing the raw film and the processing that take place after that particularly with reference to the production of positive prints from the negative will be outside the scope of that expression.

    9. Section 32A provides for the grant of investment allowance as a deduction of an amount equal to 25 per cent, of the actual cost of the new machinery or plant in respect of the previous year in which the machinery or plant was acquired or first put to use. Sub-section (2)(b)(iii) provides that the said machinery or plant shall be that installed in any industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule. At the relevant time item No. 9 of the Eleventh Schedule was ‘cinematograph films and projectors’. Subsection (3) of section 32A provides for carrying forward unabsorbed investment allowance where the income of the previous year is either nil or less than the admissible investment allowance.

    10. A reading of these provisions indicate that an assessee will not be entitled to investment allowance if it is engaged in the business, of manufacture or production of cinematograph film.

    11. It is well established that the words used in the statute dealing with the matters relating to the general public are presumed to have been used in their popular sense, that is, according to the common understanding. But this doctrine is not applicable to the technical words which are used only in their technical sense. In any case, the meaning of those words unless there is anything contrary in the context can be ascertained from the legislation relating to that subject itself. In the present case, we find that the meaning of cinematograph film remains the same both in the popular sense as well as in the technical sense. Chambers' Twentieth Century Dictionary defines cinematograph as an apparatus for projecting a series of instantaneous photographs so as to give a moving representation of a scene, with or without reproduction of sound. A film is defined as a sheet or ribbon of celluloid or the like prepared with such a coating for ordinary photographs or for instantaneous photographs for projection by cinematograph: a motion picture, or connected series of motion pictures setting forth a story.

    12. Entry 60 in List I of the Seventh Schedule to the Constitution of India is “sanctioning of cinematograph films for exhibition”. Under this entry, the Cinematograph Act has been enacted. Section 2(c) defines cinematograph as follows:

    Section 2(c):

    “Cinematograph includes any apparatus for the representation of moving pictures or series of pictures.”

    13. Section 2(dd) of the Act defines film as follows:

    “Films means a cinematograph film”.

    14. Similarly, the Copyright Act defines “cinematograph film” in section 2(f) as follows:

    “‘cinematograph film’ includes the sound track, if any, and ‘cinematograph’ shall be construed as including any work produced by any process analogous to cinematography.”

    15. A comparison of these definitions with the dictionary meaning indicate that both in common parlance and in technical language the words “cinematograph film” refer to a film containing picture and sound fit for exhibition and which is generally referred to as feature film in the field of entertainment. Such cinematograph films are produced by exposing raw films and developing the same to yield a negative. The positive prints are thereafter made by using the negative film as the base, for the purpose of exhibition of the picture through a projector.

    16. In considering the scope of the restriction contained in section 32A(2)(b)(iii), we have to consider whether the process by which the assessee makes positive prints from the negative could be taken as part of manufacture or production of a cinematograph film. There is no doubt that the production of a negative, by exposing the raw film and recording the pictures and sound track thereon would amount to the production of a cinematograph film. That process should also include developing the exposed film to have the negative or the master film. But when the positive prints are made from the master negative, as pointed out by the Appellate Tribunal, the cinematograph film which was already produced is the raw material and, therefore, it cannot be said that there is a production of a cinematograph film inasmuch as such cinematograph film was already produced with reference to the negative, and the making of the positive film is only a process of duplication.

    17. We may also look at this matter from the point of view of legislative intent. Para 22 of the memorandum explaining the provisions of the Finance (No. 2) Bill of 1977 (see [1977] 107 ITR (St.) 175), which introduced section 32A states that the exclusion of certain items from the operation of section 32A is on the basis of articles and things of low priority (see [1978] 111 ITR (St.) 20). We find that the words “Cinematograph film” were omitted from item No. 9 of Schedule XI by the Finance Bill, 1988. The memorandum explaining this states “the item that falls under the head ‘cinematograph films’ cater to the priority needs of the country in various vital fields like medicine, communication and education. It is, therefore, proposed to exclude cinematograph films from the non-priority list of articles or things from the Eleventh Schedule. ‘Projectors’ would continue to be included as an item in the Schedule.” (See [1988] 170 ITR (St.) 176, 183).

    18. This also indicates that the words “cinematograph film” referred to exposed and developed negative film containing pictures and sound track used for preparation of positive prints which can be exhibited. Since such films which are called feature films in the field of entertainment may also be educative and technical, it was removed from the low priority category. A reference to the depreciation table in the Income-tax Rules shows that this was the film that was envisaged because of item “C” in category III of Part I which states as follows:

    “Cinematograph films — Machinery used in the production and exhibition of cinematograph films (N.E.S.A)—

    (a) Recording equipment, reproducing equipment, developing machines, printing machines, editing machines, synchronisers and studio lights except bulbs.”

    19. All the machinery referred to therein are such as are necessary for producing the film in the sense of incorporating the pictures and sound track on to the raw film. Once such an incorporation of the pictures and sound track on the raw film is over, the production of the cinematograph film is completed. The Madras High Court in the case of Commissioner Of Income-Tax v. Prasad Productions P. Ltd. [1989] 179 ITR 147, 156 observed as follows:

    “The purpose of obtaining positive prints is to exhibit the film produced which is a stage after the completion of the production. In any given case, a person carrying on business in the production of feature films may produce a film, but for a variety of reasons, he may not be in a position to exhibit it by obtaining positive prints. Having produced a film, the person carrying on the business of production of feature films may either keep them without exhibition or even part with them without making arrangements for their exhibition. It cannot, therefore, be assumed that in all cases of production of a film, the producer must necessarily obtain the positive prints of the film as well. In other words, if a person carries on the business of production of films, he may not only produce the films but also prepare the positive prints for the purpose of exhibition or he may not take steps for the exhibition of the film having produced it. The production and exhibition of a feature film constitute two distinct and separate stages and while the former would take in all activities which culminate in the production of a feature film, the latter contemplates a stage subsequent to the completion of the production of the film, viz., exhibition of the film produced.”

    20. We are of the opinion that the process of making positive prints from the negative so made is an independent activity which cannot be called production of a cinematograph film but rather falls in the category of a duplication process. Though the raw film may again be used for making the prints, the base material is the negative and not the scene and sounds recorded with the equipment such as those referred to in the depreciation table.

    21. Even though the development of an exposed film to produce a negative could be an ultimate step in the production of a cinematograph film, the Appellate Tribunal has taken the view that that process could not be regarded as part of the production of the cinematograph film because as far as the assessee, who is undertaking that process is concerned, the raw material is the exposed film and not a raw film. This view is somewhat debatable because, as we have observed earlier, the production of the cinematograph film would be complete with the making of the negative and developing the exposed film is part of that process and cannot be separated from it. However, sub-section (2)(a) of section 32A provides that if an assessee is engaged mainly in the business of production of an article not included in Schedule VII, it shall not be denied the allowance only because the machinery installed is also utilised in the production of an article in Schedule XI. In the present case, it is stated that the main business of the assessee is to make the positive prints from negative prints, and, therefore, the fact that occasionally exposed films are also developed will not disqualify the assessee from claiming the allowance.

    22. The Revenue took another objection to the claim of the assessee stating that the processing of cinematograph film for obtaining positive prints cannot be regarded as manufacture or production of an article as it amounted only to the processing of an article which remains a cinematograph film before and after the process was carried out. The Supreme Court has repeatedly held that the test for determining whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity (see CIT v. N.C Budharaja and Co. [1993] 204 ITR 412 (SC)). The Supreme Court also observed that the word “production” has a wider connotation and takes in bringing into existence new goods by a process which may or may not amount to manufacture. Applying these tests, the Tribunal had found that by the processes carried out by the assessee, the raw films without images and sound, have been converted into films with images and sounds, which is certainly a new and distinct commodity well known in the trade as positive prints quite different from raw film. We, therefore, uphold the decision of the Tribunal overruling this objection. The other objection which is implicit in the questions raised was that voltage stabiliser, electrical equipment and air-conditioner could not be treated as plant and machinery. But this objection has only to be stated to be rejected because admittedly these items have been granted depreciation treating them as plant and machinery actually used in the business of the assessee. Since the assessee has been found to be engaged in the business of manufacture or production of an article which does not fall within the scope of item No. 9 of Schedule XI, we have to uphold the order of the Tribunal granting investment allowance in respect thereof. Our answer to the first question as reframed by us is in the affirmative and in favour of the assessee and against the Revenue.

    23. With regard to the second question, as the Appellate Tribunal has found that for the assessment year 1984-85, the assessment was completed as “N.A” and since the assessee did not have profit in that year, the investment allowance had to be computed only for the purpose of being carried forward. Therefore, the rectification was sought only to make good the omission to make a claim for investment allowance. The Appellate Tribunal also noted the observations of the Gujarat High Court in Chokshi Metal Refinery v. CIT [1977] 107 ITR 63, which held that the Central Board of Direct Taxes itself had cast the responsibility on the Income-tax Officer to draw the attention of the assessee to the relief to which the assessee was clearly entitled but which the assessee had omitted to claim. That omission also was not a bar to the assessee making the claim in the year in which there was a profit because the Supreme Court has held in CIT v. Manmohan Das [1966] 59 ITR 699, that a decision by the Assessing Officer who deals with the first year's assessment that the assessee cannot carry forward the loss to the next year is not binding on the assessee in the computation of the taxable income for the subsequent year in which there is a profit. We are, therefore, of the opinion that this objection of the Revenue is frivolous. This question is accordingly answered in the affirmative, in favour of the assessee and against the Revenue.

    24. In view of our answers to the two questions as reframed by us, we see no reason to direct the Tribunal to refer the questions which were not referred by the Tribunal. The income-tax case is, therefore, dismissed.

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    Comments

    Commissioner Of Income-Tax v. Prasad Film Laboratories P. Ltd.
    (Nov 14, 1996)