1. The controversy here is with regard to the rate at which the assessee, Ludhiana Steel Rolling Mills, is entitled to development rebate under Section 33(1)(b)(B)(i)(b) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), namely, whether it should be 15% or 25% ?
2. The business of the assessee-firm consists of rerolling of iron scrap, manufacture of mild steel rounds, square bars and also the manufacture and sale of machinery like lathes, blowers, surface grinders, drills, etc. The assessee is undoubtedly entitled to development rebate at the rate of 15% but if it is held that what it manufactures falls within the ambit of item No. (1) of Schedule V to the Act, the development rebate that the assessee would be entitled to would be not 15% but 25%.
3. The Income-tax Officer rejected the assessee's claim for development rebate at the rate of 25% of the cost of the new plant and machinery under Section 33(1)(b)(B)(i)(b) of the Act, holding that the articles it manufactured were not covered by item No. (1) of the Fifth Schedule to the Act. This order was later upheld in appeal by the Appellate Assistant Commissioner. The Tribunal, however, took a contrary view and held that the assessee was engaged in the manufacture of iron and steel within the meaning of item No. (1) of the list in the Fifth Schedule to the Act and was thus entitled to development rebate at the rate of 25%. This is what has now led to the following question being referred for the opinion of this court:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee is entitled to development rebate at 25% within the meaning of Section 33(1)(b)(B)(i)(b) of the Income-tax Act, 1961 ?"
4. Item No. (1) of the Fifth Schedule of the Act reads as under :
"Iron and steel (metal), ferro-alloys and special steels".
5. The stand of the Revenue with regard to the question posed rests upon the judgment of the High Court of Calcutta in Indian Steel and Wire Products Ltd. v. CIT [ 1977] 108 ITR 802, where the question arose as to whether wire rods come within the expression "iron and steel (metal)" as per item No. (1) of the Fifth Schedule to the Act. The court held that up to a certain stage, iron and steel can be treated 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 finished products and it cannot then come within this item. Wire rods were thus held to be beyond the scope of item No. (1) of the Fifth Schedule to the Act.
6. A Full Bench of the High Court of Kerala in CIT v. West India Steel Co. Ltd. [1977] 108 ITR 601, however, taken a somewhat different view. The case there concerned an assessee engaged in the business of converting mild steel billets and mild steel ingots into mild steel rods and steel sections. To decide whether the articles produced were "iron and steel (metal)" as per item No. (1) of the Fifth Schedule, the test laid down was (at p. 606) :
"If iron and steel bars or other raw material has been used for making an article, which is known and accepted in common parlance or in the commercial world as a specific article different from iron and steel and that article can no more be treated or understood basically as iron and steel, that article cannot be termed 'iron and steel (metal)'. To illustrate, if iron is used for manufacture of shovels or pickaxes, no one would understand, treat or name the shovels or pickaxes as iron and steel. So, the question is whether the finished article can be said to be something basically different from iron and steel."
7. Applying this test, it was held that articles manufactured by the asses-see entitled it to the higher development rebate under Section 33(1) of the Act. A similar view taken by the High Court of Kerala earlier in CIT v. Mittal Steel Re-rolling and Allied Industries (P.) Ltd. [1977] 108 ITR 207 was approved.
8. Next to be noted is CIT v. Fitwell Caps Private Ltd. [1986] 159 ITR 454 (Kar), where the judgment of the Full Bench in West India Steel Co. Ltd.'s case [1977] 108 ITR 601 (Ker) was followed and applying the test laid down therein, it was held that aluminium caps manufactured from aluminium metal did not come within item No. (1) of the Fifth Schedule to the Act.
9. With respect, the view in West India Steel Co.'s case [1977] 108 ITR 601 (Ker), is indeed to be preferred and applying it to the facts here, it must be held that the assessee is entitled to the higher development rebate of 25% with regard to the manufacture of mild steel rounds and square bars. It is, however, clarified that this higher development rebate cannot be claimed in respect of the sale and manufacture of machinery like lathes, blowers, surface grinders and drills. With this qualification, the reference is answered in the affirmative, in favour of the assessee and against the Revenue.
10. This reference is disposed of accordingly. There will, however, be no order as to costs.