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  • S. Marimuthu, JJ.
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Smart Summary

High Court Opinion Summary — Reference from Income-tax Appellate Tribunal (Cochin Bench)

Factual and Procedural Background

(All information below is taken from the provided opinion.)

The reference arises from a common order of the Income-tax Appellate Tribunal, Cochin Bench, in I.T.A. Nos. 719 (Coch.) of 1988 and 726 (Coch.) of 1988 for the assessment year 1983–84. The Revenue referred three questions to this Court arising from the Tribunal's decision.

The assessee is a firm engaged in the export of cashew kernels and cashew shell oil. The assessee purchased raw cashew nuts, dried them in sunlight, and then entrusted the processing (roasting and dehusking) to Mineral Cashew Company (P.) Ltd. The processed kernels were returned to the assessee's unit for packing and export; cashew shell oil was also extracted and exported.

The assessee claimed deductions under section 80HH and section 80J of the Income-tax Act, 1961. The assessing authority rejected both claims on the view that the assessee did not manufacture or produce the cashew kernels and was merely a trader. On appeal, the Commissioner of Income-tax (Appeals) held that the assessee was carrying on manufacturing activity and allowed the claim under section 80J but denied section 80HH relief because the assessee did not satisfy clause (iv) of section 80HH(2). Both the assessee and the Revenue appealed to the Tribunal. The Tribunal allowed the claims under both sections 80HH and 80J, finding that the assessee carried out part of the manufacturing activity directly and supervised the remainder performed by a third party. The Revenue challenged the Tribunal's finding before this Court by way of a reference.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to exemption under section 80HH of the Income-tax Act, 1961?
  2. Whether, on the facts and in the circumstances of the case, the assessee is entitled to exemption under section 80J of the Income-tax Act?
  3. Whether, on the facts and in the circumstances of the case, the assessee derived any profit and gain from an ‘industrial undertaking’ to claim the benefit of sections 80HH and 80J?

Arguments of the Parties

Revenue's Arguments

  • The Tribunal did not specifically consider whether the assessee was an “industrial undertaking”; the phrase is not defined in the Income-tax Act, 1961, and, according to the Revenue, it must mean something more than a unit engaged merely in manufacture or processing of goods.
  • The assessing officer's position—that the assessee was not engaged in manufacture or production but only acted as a trader because processing was done by a third party—was advanced to deny the deductions.
  • The Revenue pointed out that the assessee did not own plant or machinery and got the work of roasting and dehusking done by a third party.
  • It was submitted (in light of the Supreme Court decision in Chillies Exports House Ltd.) that even where the entire manufacturing is done by an outside agency, the assessee might still obtain the benefit if the relevant test is satisfied; the Court observed it was not necessary to decide that wider point in the present case because the Tribunal found part of the process was done directly by the assessee.

Assessee's Arguments

  • The assessing authority's own reasoning showed it denied relief solely because it considered the assessee not to be engaged in manufacture or production; once the Tribunal found the assessee was engaged in manufacture/production, the Revenue could not contend that additional attributes beyond manufacture were necessary to be an “industrial undertaking”.
  • The first appellate authority (CIT(A)) had already concluded that the assessee satisfied the test of an “industrial undertaking”; denial under section 80HH was only on account of failure to satisfy clause (iv) of section 80HH(2).
  • Precedents support the proposition that conversion of raw cashew into cashew kernels constitutes manufacturing or processing, and that substantial parts of processing being performed by third parties under the assessee's supervision does not preclude the assessee from being treated as engaged in manufacture or processing.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Addl. CIT v. A. Mukherjee and Co. (P.) Ltd., [1978] 113 ITR 718 (Cal.) Supports that processing of raw cashew into cashew kernels amounts to manufacture/processing. The Tribunal placed reliance on this decision in concluding that processing raw cashew into kernels is a manufacturing activity.
CIT v. Casino (Pvt.) Ltd., [1973] 91 ITR 289 (Ker.) Authority for the proposition that processing can amount to manufacture or processing of goods. The Tribunal relied on this Court's decision to support the view that processing raw cashew into kernels is manufacturing/processing.
Commissioner of Income-Tax v. Rajmohan Cashews (P.) Ltd., [1990] 185 ITR 472 (Ker.) Holds that an assessee is to be treated as engaged in manufacture/processing even though a major portion of processing is done by outside agencies, when done under the assessee's supervision. The Court cited this decision as a similar authority and noted that it had taken the view that supervised outsourcing of major processing does not defeat characterisation as manufacture/processing.
Chillies Exports House Ltd. v. Commissioner of Income Tax, [1997] 225 ITR 814 (SC) Affirmed the view that supervised outsourcing of processing can still permit treatment as engaged in manufacture/processing. The Court observed that the view in Rajmohan (and the Calcutta High Court decision) was affirmed by the Supreme Court in this case; the Court referred to this as supportive authority.
Vijaya-laxmi Cashew Co. v. Deputy CTO, [1996] 100 STC 571 Holds that conversion of raw cashew into cashew kernels is a manufacturing or processing activity. The Court recorded that the Supreme Court in this case has finally taken the view that conversion of raw cashew into kernels is manufacturing/processing; the point supported the Tribunal's conclusion.

Court's Reasoning and Analysis

The Court examined whether the assessee qualified as an "industrial undertaking" and whether it carried on manufacturing or production so as to claim deductions under sections 80HH and 80J.

  1. The Tribunal had found as a factual matter that the assessee performed part of the manufacturing process directly (drying the raw cashew in sunlight and packing) and that the major processing steps (roasting and dehusking) were performed by a third party under the assessee's direct supervision. The Court noted that the Tribunal specifically addressed the question whether the assessee owned an industrial undertaking.
  2. The Court reviewed relevant authorities relied upon by the Tribunal and the parties. It noted precedents holding that conversion of raw cashew into cashew kernels constitutes manufacturing or processing and that an assessee remains engaged in manufacturing even where a substantial part of the processing is performed by outside agencies under the assessee's supervision.
  3. The Court observed that although the Income-tax Act, 1961, does not define “industrial undertaking,” an analogous definition exists in the Wealth-tax Act, 1957, which describes an industrial undertaking as one engaged in the manufacture or processing of goods (among other activities). The Court found nothing in the language of sections 80HH or 80J that suggested a different meaning of “industrial undertaking” in the Income-tax Act when the unit is engaged in manufacture or production.
  4. Taking the statutory language and the conditions in sub-section (2) of section 80HH into account, the Court concluded that a unit manufacturing or producing articles can be treated as an industrial undertaking without any additional qualification beyond manufacture/production.
  5. The Court further observed that because the Tribunal had specifically found part of the manufacturing process was done directly by the assessee, it was unnecessary to decide the broader question whether an assessee that gets the entire manufacturing done by outside agencies (with no part done directly) could nevertheless qualify.
  6. On these bases, the Court held that the Tribunal's factual and legal conclusion—that the assessee was entitled to deductions under sections 80HH and 80J—was justified.

Holding and Implications

Holding: The Court held that the Tribunal was justified in concluding that the assessee was entitled to deduction under sections 80HH and 80J of the Income-tax Act, 1961. The questions referred were answered in the affirmative in favour of the assessee and against the Revenue.

Implications: The direct effect of the decision is that the assessee's claims for deductions under section 80HH and section 80J are upheld. The Court relied upon existing authorities to interpret “industrial undertaking” to include units engaged in manufacture or processing where part of the work is directly performed by the assessee and other parts are performed under its supervision. The opinion does not purport to set a new broad precedent on whether an assessee that gets the entire manufacturing done externally (with no direct processing by the assessee) would always qualify; the Court expressly did not decide that wider point because the Tribunal found part of the process was performed directly by the assessee.

Procedural note: A copy of the judgment was to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, under the seal of the Court and with the Registrar's signature (as directed in the opinion).

Show full summary ...

    Commissioner Of Income-Tax v. Indian Resins And Polymers.

    K.K Usha, C.J:— This reference, at the instance of the Revenue, arises from a common order of the Income-tax Appellate Tribunal, Cochin Bench, in I.T.A Nos. 719 (Coch.) of 1988 and 726 (Coch.) of 1988. The relevant assessment year is 1983–84. The following are the questions referred for the opinion of this court:

    “1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to exemption under section 80HH of the Income-tax Act, 1961?

    2. Whether, on the facts and in the circumstances of the case, the assessee is entitled to exemption under section 80J of the Income-tax Act?

    3. Whether, on the facts and in the circumstances of the case, the assessee derived any profit and gain from an ‘industrial undertaking’ to claim the benefit of sections 80HH and 80J?”

    2. The facts relevant are as follows: The assessee is a firm carrying on the business in export of cashew kernels and shell oils. Claiming that it owns an industrial undertaking engaged in the manufacture or production of an article or thing, it put forward a claim for deduction under section 80HH and under section 80J of the Income-tax Act. The assessing authority rejected the claim. On appeal, the Commissioner of Income-tax (Appeals) upheld the claim under section 80J but rejected the relief sought under section 80HH. The assessee as well as the Revenue filed appeals before the Tribunal as I.T.A Nos. 719 of 1988 and 726 of 1988, respectively. The Tribunal took the view that the assessee was entitled to deduction under section 80HH as well as section 80J of the Income-tax Act. It is the above finding, that is being challenged by the Revenue before this court. The assessee purchased raw cashew nuts and after drying the same, it was entrusted with Mineral Cashew Company (P.) Ltd., for processing. The processed cashew kernels were brought back to the assessee's unit and it was packed and exported. The assessee is also extracting oil from the cashew shell and exporting the same. The assessing authority took the view that the assessee does not manufacture or produce the cashew kernels, it plays only the role of a trader and, therefore, is not entitled to claim deduction as per section 80HH. The assessee's claim under section 80J was also declined by the assessing authority taking the view that the assessee is not carrying on any activity of manufacture or production of any article.

    3. When it came to the Commissioner of Income-tax (Appeals), it was held that the assessee is carrying on manufacturing activity. But, since the assessee had not satisfied the conditions contained under clause (iv) of section 80HH(2) of the Income-tax Act, it was found not entitled to claim deduction under section 80HH. As far as its claim under section 80J is concerned, the first appellate authority, finding that the assessee was carrying on manufacturing activity, allowed the claim. In coming to the above conclusion, the first appellate authority found that the mere fact that the assessee did not directly process the cashew kernels, will not be a reason to find that it was not carrying on manufacturing activity. The reason given by the Income-tax Officer for rejecting the claim under section 80J was not thus acceptable to the first appellate authority.

    4. The Tribunal has entered a factual finding that part of the manufacturing activity was carried on by the assessee, since drying the raw cashew in sunlight and ultimate packing were done by the assessee. Even though the assessee got the work of roasting and dehusking done by the third party, it was found by the Tribunal that such work was being done under the direct supervision of the assessee. Reliance was placed by the Tribunal on the decision of the Calcutta High Court in Addl. CIT v. A. Mukherjee and Co. (P.) Ltd., [1978] 113 ITR 718. In coming to the conclusion that processing of raw cashew into cashew kernels would amount to a manufacture or processing of goods, the Tribunal relied on a decision of this court in CIT v. Casino (Pvt.) Ltd., [1973] 91 ITR 289. In view of the above finding, the contention raised by the Revenue in its appeal against the grant of benefit to the assessee under section 80J was rejected. The view taken by the first appellate authority was affirmed. As far as the claim regarding deduction under section 80HH was concerned, the Tribunal took the view that the assessee had satisfied the condition contained under clause (iv) of section 80HH(2) of the Income-tax Act. According to the Tribunal, apart from the permanent workers, the other workers who were employed either on a casual or temporary basis were also to be taken into consideration to examine whether the assessee had satisfied the condition contained under clause (iv). Thus, the claim under section 80HH was also allowed in favour of the assessee.

    5. Learned standing counsel for the Revenue submits that the Tribunal has not considered the specific question whether the assessee was an industrial undertaking. There is no definition of the term “industrial undertaking” under the Income-tax Act, 1961. But, according to learned standing counsel for the Revenue, it must be something more than a unit engaged in manufacture or processing of goods. On the other hand, learned counsel for the assessee would point out that the assessing authority itself had proceeded on the basis that the assessee was not entitled to claim deduction under sections 80HH and 80J only for the reason that it was not engaged in manufacture or production of goods. Once the above finding is upset by the Tribunal, the Revenue cannot be heard to contend that something more than manufacture or production of goods is necessary to hold that the assessee owns an “industrial undertaking”. Learned counsel pointed out that even the first appellate authority came to the conclusion that the assessee satisfied the test of an “industrial undertaking”, and it was denied the benefit under section 80HH only for the reason that it did not satisfy clause (iv) of section 80HH(2).

    6. We find no merit in the contention raised on behalf of the Revenue. The question whether the assessee did own an industrial undertaking was specifically considered by the Tribunal in paragraph 6 of its order in the following manner:

    “Another point raised by the Revenue was that the assessee did not own any plant or machinery and that it has no industrial undertaking, for the work of roasting and dehusking is got done by a third party.”

    7. The Tribunal then proceeded to find that part of the manufacturing activity is carried on by the assessee directly and the other part was done through a third party, but under the direct supervision of the assessee. In Commissioner Of Income-Tax v. Rajmohan Cashews (P.) Ltd., [1990] 185 ITR 472, this court had occasion to consider a similar question, namely, whether an assessee engaged in the business of converting raw cashew into edible cashew kernels and getting the major portion of its work of processing done by outside agencies on its behalf, would come within the definition of “industrial company” under section 2(6)(c) of the Finance Act, 1972. The term “industrial company” was defined under clause (c) as follows:

    “(c) ‘industrial company’ means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining.”

    8. This court took the view that the assessee therein would be treated as engaged in the business of manufacture or processing of goods, even though a major portion of the processing was being got done through other agencies under its supervision. Learned counsel for the assessee pointed out that the above view taken by this court as also the Calcutta High Court relied on by the Tribunal, was affirmed by the Supreme Court in Chillies Exports House Ltd. v. Commissioner Of Income Tax, [1997] 225 ITR 814. It was also pointed out that the Supreme Court has finally taken the view in Vijaya-laxmi Cashew Co. v. Deputy CTO, [1996] 100 STC 571 that conversion of raw cashew into cashew kernels would be a manufacturing or processing activity.

    9. It is true that there is no definition of the term “industrial undertaking” in the Income-tax Act, 1961. But, it is defined under the Wealth-tax Act, 1957. The Explanation to section 5(1)(xxxi) of the Wealth-tax Act defines the term as an undertaking engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. There is nothing in the language of section 80HH or section 80J which would suggest that a different meaning is contemplated for the term “industrial undertaking”, when it relates to a unit engaged in manufacture or production. On the other hand, the conditions to be fulfilled by the industrial undertaking as provided under sub-section (2) would indicate that a unit which is manufacturing or producing articles can be treated as an industrial undertaking without any further qualification. Therefore, we find no merit in the contention raised by the Revenue that in order to be an industrial undertaking, it should be something more than an undertaking where manufacturing or production is carried on.

    10. It is further submitted by learned counsel for the Revenue (?) that in the light of the decision of the Supreme Court in Chillies Exports House Ltd. v. Commissioner Of Income Tax, [1997] 225 ITR 814, even an assessee which gets the entire manufacturing or production done through an outside agency can get the benefit of an industrial undertaking, if it is held that in order to be an industrial undertaking, what is necessary is that the assessee is carrying on manufacture or production of an article. We do not think that it is necessary for us to consider such a contention in this case since the finding of the Tribunal is that part of the manufacturing process is directly done by the assessee. In all the three cases, namely, CIT (Addl.) v. A. Mukherjee and Co. (P.) Ltd., [1978] 113 ITR 718 (Cal); Commissioner Of Income-Tax v. Rajmohan Cashews (P.) Ltd., [1990] 185 ITR 472 (Ker) and Chillies Exports House Ltd. v. CTT, [1997] 225 ITR 814 (SC), the assessee was found carrying on part of the manufacturing process directly.

    11. In the light of the above discussion, we hold that the Tribunal was fully justified in taking the view that the assessee was entitled to deduction under sections 80HH and 80J of the Income-tax Act, 1961. We, therefore, answer all the questions in the affirmative, in favour of the assessee and against the Revenue.

    12. A copy of this judgment under the seal of this court and the signature of the Registrar, shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

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    Comments

    Commissioner Of Income-Tax v. Indian Resins And Polymers.
    (Aug 6, 1997)