IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA I.T.A No. 27 of 2005 alongwith ITA No.28 of 2005. Reserved on: 6.10.2009 Date of decision: 14.10.2009 ITA No.27 of 2005 Mrs.Poonam Arora …. Appellant Versus Income Tax Officer and others. ….. Respondents ITA No.28 of 2005 Mr.Parveen Kumar …. Appeallant Versus Income Tax Officer and others. ….. Respondents Coram: The Hon’ble Mr. Justice Deepak Gupta, J. The Hon’ble Mr.Justice V.K.Ahuja, J. Whether approved for reporting? Yes For the appellant: Mr. K.D.Sood, Advocate (in both the appeals). For the respondents: Mr.Vinay Kuthiala, Advocate (in both the appeals). _____________________________________________________ Deepak Gupta, J. These two appeals are being disposed of by this common judgment as the following identical questions of law are involved in both the appeals: 2 “i) Whether in the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the manufacturing of “roasted groundnut” from “groundnut seed” was not by a manufacturing process but was the same salable commodity with variation in demand. ii) Whether the assumption of the Income Tax Appellate Tribunal that the appellant was a trading unit and not a manufacturing unit within the meaning of Section 80IA (80IB after the amendment of 2000-2001) is sustainable in law and is in complete disregard to the binding interpretation given by the Hon’ble Supreme Court in the case (2001) 251 ITR 323 Aspinwal & Company Ltd. Versus Commissioner of Income Tax . iii) Whether in the facts and circumstances of the case, the ITO, Nurpur and the Income Tax Appellate Tribunal were justified in levying interest and initiate penalty proceedings when the assessment of the previous years had been accepted and there was no reason to believe that deductions claimed by the assessee were inadmissible. iv) Whether the findings of the Income Tax Appellate Tribunal are vitiated for want of reasons and non-consideration of the 3 material placed before the authorities and for want of speaking order.” The basic question which arises is whether the process of roasting groundnut amounts to manufacture within the meaning of Section 80IA and 80IB of the Income Tax Act. The parties have cited a number of decisions before us on this aspect. In Black’s Law Dictionary (5th Edition), the work “manufacture” has been defined as, “the process or operation of making goods or any material produced by hand, by machinery or by other agency; by the hand, by machinery, or by art. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine”. In M/s.Sterling Foods v. State of Karnataka and another, 1986 (3) SCC 469, the question for determination before the Apex Court was whether shrimps, prawns and lobsters subjected to processing like cutting of heads and tails, peeling, deveining, cleaning and freezing cease to be the same commodity or become a different commodity. The Apex Court held as follows:- 4 6. It is clear on an application of this test that processed or frozen shrimps, prawns and lobsters are commercially regarded the same commodity as raw shrimps, prawns and lobsters. When raw shrimps, prawns and lobsters are subjected to the process of cutting of heads and tails, peeling, deveining, cleaning and freezing, they do not cease to be shrimps, prawns and lobsters and become another distinct commodity. They are in common parlance known as shrimps, prawns and lobsters. There is no essential difference between raw shrimps, prawns and lobsters and processed or frozen shrimps, prawns and lobsters. The dealer and the consumer regard both as shrimps, prawns and lobsters. The only difference is that processed shrimps, prawns and lobsters are ready for the table while raw shrimps, prawns and lobsters are not, but still both are, in commercial parlance, shrimps, prawns and lobsters. It is undoubtedly true that processed shrimps, prawns and lobsters are the result of subjecting raw shrimps, prawns and lobsters to a certain degree of processing but even so they continue to possess their original character and identity as shrimps, prawns and lobsters, notwithstanding the removal of heads and tails, peeling, deveining and cleaning which are necessary for making them fit for the table. Equally it makes no difference in character or identity when shrimps, prawns and lobsters are frozen for the purpose of preservation and transfer to other places including far-off countries in the world. There can therefore be no doubt that processed or frozen shrimps, prawns and lobsters are not a new and distinct commodity but they retain the same character and identity as the original shrimps, prawns and lobsters.” This judgment was followed by the Apex Court in Commissioner of Income Tax v. Relish Foods, 1999(237), 59 wherein the same definition was applied to the provisions of the Income Tax Act. A Division Bench of the Madras High Court in Commissioner of Income Tax v. Sacs Eagles Chicory, 2000 (241) ITR 319 dealt with the issue as to what is ‘manufacture’. In the case before the Madras High Court, chicory roots were being roasted and then 5 changed it into powder form. The question was whether this amounted to manufacture within the meaning of Income Tax Act. The Madras High Court held as follows:- “The fact that the chicory powder is used for consumption in combination with coffee powder does not make the chicory powder any different in so far as its identity is concerned, as chicory. Chicory powder is chicory in powder form and nothing else. Mere change in the form of the same commodity does not necessarily involve change of identity. The pineapple fruit when plucked from the tree and even after it is cut into pineapple slices retains the same identity as pineapple. Chicory powder and chicory root have the common identity of being chicory. The change in the form to powder in the case of chicory and to slices in the case of pineapple does not result in a change of identity.” It would be pertinent to mention here that this decision of the Madras High Court was upheld by the Apex Court in Sacs Eagles Chicory v. Commissioner of Income Tax, 2002 (255)ITR 178. In Indian Hotels Co.Ltd. and others v. Income Tax Officer and others, 2000 (245) ITR 538, the Apex Court again dealt with the question as to what is the meaning to be given to the word ‘manufacture’. The Apex Court held that the processing of raw food items such as pulses, cereals, vegetables, meat etc. into edible items in the kitchen cannot be said to be process of manufacture. In Commissioner of Income Tax v. Gem India Manufacturing Co., 2001 (249) ITR 307, the question before the Apex Court was whether the process of cutting, polishing raw diamond amounts to manufacture and 6 produces new articles or things. The Apex Court held as follows:- “The question that the High Court and we are here concerned with is whether, in cutting and polishing diamonds, the assessee manufactures or produces articles or things. There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. There is no material on the record upon which such a conclusion can be reached.” A three Judge Bench of the Apex Court in Aspinwall and Co. Ltd. v Commissioner of Income Tax 2001 (251) ITR 323, considered the question whether the process of manufacturing coffee beans from raw berries amounts to manufacture. The Apex Court after making reference to the Encyclopedia Britannica held that coffee is a beverage made from roasted seeds (beans) of the coffee plant and found that the process of coffee into roasted coffee went through nine processes. Firstly the coffee was dried in the sunlight. Then the outer husk of the coffee been was removed, if necessary, by mechanical operation. The coffee seeds were then extracted and polishing was done. Thereafter, gradation was done where the good coffee was separated by mechanical as well as manual grading. The Court held 7 that net product is absolutely different and separate from the input. The Apex Court held as follows:- “Adverting to facts of the present case, the assessee after plucking or receiving the raw coffee berries makes it undergo nine processes to give it the shape of coffee beans. The net product is absolutely different and separate from the input. The change made in the article results in a new and different article which is recognized in the trade as a new and distinct commodity. The coffee beans have an independent identity distinct from raw material from which it was manufactured. A distinct change comes about in the finished product. The submission of the learned counsel for the Revenue that the assessee was doing only the processing work and was not involved in the manufacture and producing of a new article cannot be accepted. The process is a manufacturing process when it brings out a complete transformation in the original article so as to produce a commercially different article or commodity. That process itself may consist of several processes. The different processes are integrally connected which result in the production of a commercially different article. If a commercially different article or commodity results after processing then it would be a manufacturing activity. The assessee after processing the raw berries converts them into coffee beans which is commercially different commodity. Conversion of the raw berry into coffee beans would be a manufacturing activity.” Sh.K.D.Sood, learned counsel for the appellant has placed reliance on the latest judgment of the Apex Court in Computer Graphics Ltd. v. Commissioner of Income Tax, 2009 (308) ITR 98 wherein the Apex Court has made reference to a large number of earlier decisions and held that in Section 80-I, the word ‘manufacture’ had been used in juxtaposition with the word ‘produce’ and came to the conclusion that if by the process of production something is produced and brought into 8 existence which is different from that, out of which it is made, in the sense that the thing produced is by itself a commercial commodity capable of being sold or supplied, the same will amount to manufacture. After considering all the aforesaid judgments, it is apparent that during ‘manufacture’ a new material should be produced. It is contended on behalf of the assessee that in the present case a new commodity is produced in as much as roasted groundnut is totally different from unprocessed groundnut. Whereas the unprocessed groundnut can be utilized for production of oil, roasted groundnut cannot be used for such a purpose and is only used as an edible item as a dry-fruit. We cannot accept this contention. In Sterling Foods’ supra, the Apex Court clearly held that even after shrimps, prawns and lobsters were subjected to processing like cutting of heads and tails, peeling, deveining, cleaning and freezing and those became edible items, this did not change the identity of the items and they retained their character and identity as shrimps, prawns and lobsters. Similarly in Sacs Eagles Chicory’s case, the process of roasting and grounding the chicory roots was not held to amount to manufacture. The conversion of 9 raw material into food was not held to be manufacture in Indian Hotels case. In Aspinwall’s case, the coffee powder was made from the raw beans. The raw beans are inedible and coffee beverage cannot be made out of the raw beans. After going through nine processes, the coffee beans were converted into roasted coffee beans from which coffee can be produced. In our considered view, this judgment does not apply to the facts of the present case. In the said case, the roasted coffee beans are a totally different item and the original raw coffee berries lost their identity and character and changed into roasted coffee beans. In Computer Graphics’ case, the Apex Court was dealing with a matter in which jumbo film rolls were converted into smaller film rolls. Indisputably the jumbo film rolls could not be used in cameras. They are cut and splied into requisite sizes making them useable in cameras. This was held to be manufacture. The film rolls now produced have a totally different identity from the jumbo rolls which could not be used in cameras. Coming to the case in hand, groundnut is an edible item even without roasting. After roasting, it 10 remains an edible item. It is still called groundnut. Just by adding salt or roasting groundnut, it cannot be said that the process of manufacture has taken place. The groundnut has not lost its original identity or character. It continues to remain a groundnut. Merely because oil cannot be taken out of the roasted groundnut does not mean that an entirely new product has come into existence. The process of roasting groundnut is an extremely simple process. According to the assessee, the raw groundnut is put into machines which are in the shape of moving drums. These drums are attached to ‘Bhatties’ and the groundnut is roasted. Thereafter, the groundnut is sieved and the net product is packed into gullible packs of different sizes. In our view, this process is only of roasting and is even less cumbersome than the process applied to shrimps, prawns and lobsters in Sterling Foods’ case and the process of roasting and powdering chicory roots in Sacs Eagles Chicory’s case. In view of the above discussion, we are of the considered view that the process of roasting the raw groundnut seed into roasted groundnut does not bring into being a new and distinct product and, therefore, does not amount to manufacture and the assessee is, 11 therefore, not entitled to the benefit of Sections 80IA or 80IB of the Income Tax Act. Consequently, all the questions are answered in favour of the revenue and against the assessee. ( Deepak Gupta ) Judge October 14, 2009 (V.K.Ahuja) (m) Judge