- Bookmark
- Share
- CaseIQ
Commissioner Of Income-Tax v. Yavatmal Co-Operative Ginning And Pressing Factory Limited.
Case Summary — Reference under Section 256(1) of the Income-tax Act, 1961
Factual and Procedural Background
This is a reference under section 256(1) of the Income-tax Act, 1961, made by the Income-tax Appellate Tribunal at the instance of the Commissioner of Income-tax. The relevant assessment years are 1980–81 and 1982–83.
The assessee is a co-operative society running a ginning factory. For assessment year 1980–81 the assessee claimed an investment allowance under section 32A amounting to Rs. 29,340 for new machinery installed for the ginning factory and also claimed a deduction under section 80HH amounting to Rs. 42,906. For assessment year 1982–83 the assessee again claimed deduction under section 80HH for its new ginning unit.
The Income-tax Officer rejected the claims under both section 32A and section 80HH. The Appellate Assistant Commissioner of Income-tax confirmed the rejection on the ground that the machinery was installed for ginning cotton which did not involve manufacture or production of any article. The assessee appealed to the Income-tax Appellate Tribunal, which concluded that ginning and pressing of raw cotton amounted to manufacture and allowed the deductions under both section 32A and section 80HH. The Commissioner of Income-tax caused a reference to this Court raising three questions of law.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in holding that the ginning of cotton amounts to manufacture?
- Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in granting deduction under section 80HH to the assessee? (The reference originally stated section 80HHA but was modified to section 80HH.)
- Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in granting deduction in respect of investment allowance to the assessee for the assessment years 1980–81 and 1982–83 (under section 32A)?
Arguments of the Parties
Revenue's Arguments (Income-tax Officer / Appellate Assistant Commissioner)
- The machinery in question was installed for the purpose of ginning cotton and that ginning did not involve manufacture or production of any article; therefore the claims under sections 32A and 80HH were not allowable.
Assessee's Position
- The assessee claimed entitlement to investment allowance under section 32A for new machinery installed for the ginning factory and to deduction under section 80HH for the newly established ginning unit. (The Tribunal accepted that ginning and pressing amount to manufacture.)
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| State of Punjab v. Chandu Lal Kishori Lal, [1970] 25 STC 52 (Supreme Court) | The Supreme Court held that the ginning process is a manufacturing process; it also held that cotton seeds separated by ginning are a distinct commercial commodity and that, while "cotton ginned or unginned" is treated as a single declared good for the Central Sales Tax Act, that treatment is confined to that Act's context. | The Court relied on this authority to support the conclusion that ginning amounts to manufacture and that cotton seeds are a distinct product of the ginning process; this authority was used to validate the Tribunal's view that the assessee's activities constituted manufacture for purposes of sections 32A and 80HH. |
| State of Punjab v. Seth Ganpat Ram Cotton Ginning and Pressing Factory, [1989] 74 STC 1 (Supreme Court) | The Supreme Court referred with approval to the earlier conclusion that cotton seeds emerge from a manufacturing process applied to unginned cotton and that the seeds so separated are not part of the cotton itself. | The Court noted this later decision as reinforcing the principle that ginning produces distinct commercial articles (ginned cotton and cotton seeds) and used it to support the conclusion that ginning is manufacture for tax-benefit purposes. |
Court's Reasoning and Analysis
The Court began with a textual analysis of the statutory provisions at issue. Section 32A, as then worded, grants investment allowance for new machinery or plant "installed ... in an industrial undertaking for the purposes of business of manufacture or production of any article or thing." Section 80HH applies to industrial undertakings that "begin to manufacture or produce articles" (and the ten-year deduction period runs from the year in which the undertaking begins to manufacture or produce articles). From these provisions the Court concluded that both benefits are available only to undertakings engaged in manufacture or production of some article.
The Court emphasized that mere installation of new machinery in an industrial undertaking is not sufficient; the industrial undertaking must be engaged in manufacture or production of an article or thing. If an undertaking merely carries out processing of goods without manufacturing an article, the statutory conditions would not be satisfied.
To determine whether ginning constituted manufacture, the Court considered an authoritative technical description of the ginning process (Encyclopaedia Britannica), which described mechanical separation of cotton fibre from seed, subsequent cleaning, and pressing of lint into bales; the separated seeds are processed further for by-products. From that technical description the Court found that ginning produces distinct outputs: "ginned cotton" and "cotton seeds."
The Court then applied relevant judicial authority. It cited State of Punjab v. Chandu Lal Kishori Lal in which the Supreme Court explicitly held that ginning is a manufacturing process and recognized that cotton seeds separated by ginning are a distinct commercial commodity; it also noted the limited context in which the Central Sales Tax Act treats ginned and unginned cotton as a single declared good. The later decision in State of Punjab v. Seth Ganpat Ram Cotton Ginning and Pressing Factory was noted as referring with approval to the same principle regarding the distinctness of cotton seeds.
Combining the statutory text (which predicates the benefits on manufacture/production of articles) with the technical description of ginning and the cited precedents, the Court concluded that ginning results in manufacture or production of articles and therefore fulfills the condition precedent for allowances under section 32A and deductions under section 80HH.
Holding and Implications
Holding: The three questions referred are answered in the affirmative and in favour of the assessee. In particular, the Court held that ginning of cotton amounts to manufacture and that the Tribunal was correct in granting investment allowance under section 32A and deduction under section 80HH in respect of plant and machinery installed for that purpose.
Immediate implications: The Tribunal's allowance of investment allowance under section 32A (claimed at Rs. 29,340 for 1980–81) and the deduction under section 80HH (claimed at Rs. 42,906 for 1980–81 and claims for 1982–83) were upheld. The direct effect is that the assessee is entitled to the tax benefits as determined by the Tribunal. The Court made no order as to costs.
Broader implications: The opinion rests on established authorities and statutory interpretation; it affirms that ginning produces distinct commercial articles (ginned cotton and cotton seeds) and that activities yielding such products satisfy the statutory requirement of "manufacture or production" for the purposes of sections 32A and 80HH. The opinion does not indicate that it is laying down a novel general principle beyond applying and reaffirming the cited precedents.
End of summary — prepared strictly from the content of the provided opinion.
Dr. B.P Saraf, J.:— This is a reference under section 256(1) of the Income-tax Act, 1961, made by the Income-tax Appellate Tribunal at the instance of the Commissioner of Income-tax. The relevant assessment years are 1980–81 and 1982–83. The following questions of law have been referred to this court:
“1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in holding that the ginning of cotton amounts to manufacture?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in granting deduction under section 80HHA to the assessee?
3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in granting deduction in respect of investment allowance to the assessee for the assessment years 1980–81 and 1982–83?”
2. The reference to section 80HHA in question No. 2 appears to be wrong. It should be section 80HH. This question, therefore, is modified accordingly.
3. The assessee is a co-operative society. It runs a ginning factory. In the assessment year 1980–81, it claimed investment allowance under section 32A of the Income-tax Act, 1961, amounting to Rs. 29,340 in respect of certain new machinery installed by it during the relevant previous year for the purpose of its ginning factory. It also claimed deduction under section 80HH of the Act. The claim on this account amounted to Rs. 42,906. In the assessment year 1982–83 also, the assessee claimed deduction under section 80HH for its new ginning unit. The claims for deduction, both under sections 32A and 80HH, were rejected by the Income-tax Officer. The rejection of the claim under section 32A was confirmed on appeal by the Appellate Assistant Commissioner of Income-tax on the ground that the machinery in question was installed for the purpose of ginning cotton which did not involve manufacture or production of any article. The rejection of the claim under section 80HH was also upheld. The assessee appealed to the Income-tax Appellate Tribunal. The Tribunal considered the claim of the assessee both under section 32A and section 80HH of the Act. It came to the conclusion that ginning and pressing of raw cotton by the assessee amounted to manufacture and, as such, the assessee was entitled to deduction from the taxable income, both under section 32A as well as section 80HH. At the instance of the Commissioner, the Tribunal has made this reference to this court for opinion. The real controversy for determination in this case is whether the assessee who runs a ginning factory is entitled to the benefit of investment allowance under section 32A and deduction under section 80HH of the Act in respect of the machinery installed by it for the purpose of use in its factory.
4. Section 32A of the Act deals with investment allowance. This section, as it stood at the relevant time, provides, inter alia, as follows:
“32A. Investment allowance.— (1) In respect of…. machinery or plant specified in sub-section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which…. the machinery or plant was installed……….of a sum by way of investment allowance equal to twenty-five per cent, of the actual cost of the ship, aircraft, machinery or plant to the assessee ……….
(2) The…. machinery or plant referred to in sub-section (1) shall be the following, namely:— ….
(b) any new machinery or plant installed after the 31st day of March, 1976,-……
(ii) in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing; or
(iii) in any other 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….”
(emphasis* supplied).
5. Section 80HH provides for deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas. This section, as it stood at the relevant time, inter alia, provides:
“80HH. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, 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.
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:—
(i) it has begun or begins to manufacture or produce articles after the 31st day of December, 1970, in any backward area;…….
(4) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of each of the ten assessment years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles.…”
(emphasis supplied).
6. From a careful reading of the aforesaid two sections, it is clear that the benefit of allowance or deduction under this section is available only to industries which are engaged in the manufacture of any article or thing.
7. Under section 32A, investment allowance is available in respect of machinery or plant “installed in an industrial undertaking for the purpose of manufacture or production of any article or thing”. Hence, to get the benefit of investment allowance under section 32A, it is not enough that certain new machinery or plant is installed in an industrial undertaking. What is further required is that such installation is for the purpose of manufacture or production of any article or thing. The nature of the industrial undertaking is relevant for determining its eligibility for allowance. If the industrial undertaking is not engaged in any business of manufacturing of any article or thing but simply needs the machinery or plant for the purposes of processing certain goods dealt with by it, the requirements of the section would not be fulfilled and the industrial undertaking would not be entitled to investment allowance in respect of such machinery or plant installed by it.
8. Similarly, from a reading of the various sub-sections of section 80HH, it is clear that the industrial undertaking must be engaged in the manufacture or production of some article. Such a condition is evident from sub-section (2) as well as sub-section (4). Sub-section (2) provides that this section shall apply to any industrial undertaking which, inter alia, fulfils the condition that “it has begun or begins to manufacture or produce articles after December 31, 1970”. Sub-section (4) further substantiates this interpretation when it provides that the deduction under sub-section (1) shall be allowed in computing the total income in respect of the ten assessment years beginning with the assessment year relevant to “the previous year in which the industrial undertaking begins to manufacture or produce articles”. Manufacture or production of articles by the industrial undertaking is thus a condition precedent for grant of deduction under section 80HH as well as the starting point for computing the period of ten assessment years for which the benefit of deduction shall be available.
9. In view of the legal position set out above, there cannot be any doubt in regard to the proposition that the benefit of investment allowance under section 32A and deduction under section 80HH are available to such industrial undertakings only which are engaged in the business of manufacturing or producing articles.
10. The question that arises in this case, therefore, is whether the assessee which is running a ginning factory fulfils this requirement of these two sections. In other words, whether the business of ginning cotton can be said to be a business of manufacturing or producing any article. Ginning is the process of separating cotton seeds from the fibre. The process of ginning has been described in the Encyclopaedia Britannica, 15th edition (?), Volume 7, at page 274 as follows:
“In modern ginning plants the gin stand is one unit in a series of machines. The modern roller gin, incorporating the basic principles of earlier versions, consists of a series of toothed circular saws projecting between the slits in a series of metal ribs. The revolving saws catch the fibres in their teeth, and the limited clearance between the saw blade and the rib plate allows only the plucked fibres to pass through the slits, leaving the seeds behind. The lint is then removed from the gin by air blast or by a large cylinder brush. Some gins are equipped with lint cleaners that further clean the cotton after it has been removed from the seed.
11. Because mechanical harvesting may pick up considerable leaf, twigs, boll, burrs, and plant trash, improved machines have been developed to perform extensive drying and cleaning before ginning, and to clean the lint after the seed is separated from the fibres. The separated lint is conveyed to pressing boxes, where it is pressed into bales of approximately 500 pounds (225 kilograms) each. The seeds are shipped to crushing mills where they are processed to obtain various by-products.”
12. From the aforesaid description of the process of ginning, it is evident that “ginning” is a manufacturing process. The products that emerge out of this process are “ginned cotton” and “cotton seeds”.
13. In State of Punjab v. Chandu Lal Kishori Lal, [1970] 25 STC 52, the Supreme Court had occasion to consider whether ginning of cotton is a manufacturing process. Referring to the process of ginning, the Supreme Court observed (at page 56):
“In our opinion, the appellants are right in their contention that the ginning process is a manufacturing process.”
14. The Supreme Court in this case was also required to consider whether the ginned cotton, unginned cotton and cotton seeds were distinct commercial commodities or they were one and the same commodity, namely, “cotton”. This consideration, however, was in the context and setting of sections 14 and 15 of the Central Sales Tax Act, 1956. Under section 14 of the Central Sales Tax Act, “cotton ginned or unginned” is treated as a single commodity, under one item of declared goods. In such context, the Supreme Court held that the Legislature, for the purposes of that Act, having treated “cotton ginned or unginned” as a single commodity or as a single species of declared goods; they cannot be held to be two distinct commodities for that purpose by a process of interpretation. However, so far as cotton seeds are concerned, the Supreme Court categorically said that it is a distinct commercial commodity. It was observed (at page 56):
“It is true that cotton in its unginned state contains cotton seeds. But it is by a manufacturing process that the cotton and the seed are separated and it is not correct to say that the seeds so separated are cotton itself or part of the cotton. They are two distinct commercial goods though before the manufacturing process, the seeds might have been a part of the cotton itself. There is hence no warrant for the contention that cotton seed is not different from cotton.”
15. This decision of the Supreme Court makes it abundantly clear that “cotton” and “cotton seeds” are two distinct commercial commodities. In fact, even “ginned” and “unginned” cotton have been held to be a single commodity in view of the same being treated as such by the Legislature under section 14 of the Central Sales Tax Act. This decision, in this case, did not lay down as a general proposition of law that ginned and unginned cotton are for all purposes one and the same commodity. This decision was referred with approval by the Supreme Court in a later decision in the case of State of Punjab v. Seth Ganpat Ram Cotton Ginning and Pressing Factory, [1989] 74 STC 1 and it was reiterated that cotton seeds emerge upon a manufacturing process applied to the unginned cotton whereby the cotton and the seeds are separated and that the seeds so separated could not be identified as part of the cotton itself. In view of the aforesaid pronouncements of the Supreme Court, it is clear that the process of ginning cotton results in the manufacture or production of articles like “ginned cotton” and “cotton seeds”. It is also settled that “cotton seed” is a commodity separate and distinct from cotton. That being so, it has to be held that the ginning of cotton amounts to manufacture of an article and the Tribunal was correct in granting investment allowance under section 32A and deduction under section 80HH in respect of plant and machinery installed for that purpose.
16. In the light of the foregoing discussion, all the three questions referred to us are answered in the affirmative and in favour of the assessee. Under the facts and circumstances of the case, we make no order as to costs.
Alert