Income-tax---

----Reference---New industrial undertaking---New industrial undertaking in a backward area--Special deduction---Meaning of "manufacture" ---Rubber-- Finding by Tribunal that process of making centrifugal latex amounted to manufacture and that assessee was entitled to special deduction under Ss.80-J & 80-HH--Tribunal going into the question and examining the matter in detail at the instance of High Court---Finding of Tribunal was a finding of fact---No question of law arises---Indian Income Tax Act, 1961, Ss.80-J, 80- HH & 256.

The prevalent and generally accepted test to ascertain whether there is "manufacture" is to find out whether a change or the series of changes brought about by the application of processes to the commodity, are such where commercially, it can no longer be regarded as the original commodity, but is, instead recognised as a distinct and new Article that has emerged as a result of the processes:

Held, dismissing the application for reference, that the Tribunal had found that centrifuged latex was produced by subjecting normal field latex collected from rubber plantations to centrifugal forces. Reference was made to the properties highlighted in the context by the Rubber Board to show the distinction between centrifuged latex and the normal field latex. It was emphasized that the chemical changes which went to make the natural field latex a marketable intermediary product known as centrifuged latex were a process by itself. The Tribunal had recorded conclusive findings on the material placed on record and detailed submissions in regard thereto, which was as a result of an earlier order of the Court passed specifically for the said purpose. The Tribunal had found that there was a process of centrifuging and as a result a different commodity capable of being put to a totally different use emerged. Consequently, the Tribunal held that the assessee was engaged in the manufacture or production of an article or thing and thereby became entitled to deduction under sections 80-J and 80-HH of the Income Tax Act, 1961. This was a finding of fact. No question of law arose from it.

Empire Industries Ltd. v. Union of India (1986) 162 ITR 846; (1987) 64 STC 42 (SC) and Ujagar Prints v. Union of India (1989) 179 ITR 317 and (1989) 74 STC 401 (SC) applied.

CIT v. Kanam Latex Industries (P.) Ltd. (1993) 203 ITR 542 (Ker.); CIT v. Marwell Sea Foods (1987) 166 ITR 624 (Ker); CIT v. N.C. Budharaja & Co. (1993) 204 ITR 412 (SC); CIT v. Poyilakkada Fisheries (P.) Ltd. (1992) 197 ITR 85 (Ker.); CIT v. Woodland Estates Ltd. (1965) 58 ITR 612 (Ker.); Meenachil Rubber Marketing and Processing Cooperative Society Ltd. v. CIT (1992) 193 ITR 108 (Ker.) Tungabhadra Industries Ltd. v. CTO (1960) 11 STC 827 (SC); Vijay Textile v. Union of India (1979) 4 ELT(J) 181 and (1980) Tax LIZ 1766 (Guj.) ref.

N.R.K. Nair for Petitioner.

Joseph Markose and Joseph Kodianthara for Respondent.

JUDGMENT

V.V. KAMAT, J.---These are the three petitions of the Department against the order of the Income Tax Appellate Tribunal, Cochin Bench Annexure "E", refusing to make reference to this Court as per their applications. The three petitions relate to different assessment years, but the question being the same, they are taken up for hearing and decision in a consolidated- manner and likewise are being decided by this.

Kanam Latex Industries (P.) Ltd. is a company described as a closely held company deriving income from the business of centrifuging rubber latex. In the computation statement, deduction under sections 80-J and 80-HH of the Income Tax Act, 1961, is claimed on the ground that it being an industrial undertaking manufacturing or producing articles- centrifuging rubber latex, the benefits of these statutory provisions are available to them.

The Assessing Officer Annexure "A", by order, dated August 29, 1983, rejected their claim and this was also further confirmed by the Commissioner of Income-tax (Appeals), Ernakulam Annexure "B", by order, dated March 16, 1984. In reaching this conclusion, the two authorities relied on the position that for the earlier years the claim was declined as one of the grounds for denying the claim.

The assessee-company carried appeals to the income-tax Appellate Tribunal. It was urged before the Tribunal that a notification, dated July 8, 1983, No. 189 of 1983, considered the latex concentrate, preserved latex, etc., as manufactured goods and which was not considered as it was not placed before the Tribunal when matters relating to the previous years 1977-78 and 1978-79 were taken up for consideration. It was urged that the notification made all the difference which would change the situation to such an extent that it would entirely be a different and independent commercial product. It was urged for consideration and the Tribunal accepted the effect of the notification held it to be an entirely different commercial product. At that time, the Revenue took up the matter to this Court with regard to the two questions:

"(1) Whether, on the facts and in the circumstances of the case, the assessee is entitled to the deduction under section 80-J of the Income Tax Act, 1961?

(2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to the deduction under section 80-HH of the Income Tax Act, 1961?"

This Court took up the matter and decided by judgment, dated February 22, 1993 CIT v. Kanam Latex Industries (P.) Ltd. (1993) 203 ITR 542 and observed broadly in the following manner---it was held that the decision of the Tribunal was largely influenced by the notification, dated July 8, 1983, which was actual passed under the Central Excises and Salt Act concluding the situation that preserved latex is an item produced by the manufacturer entitling the assessee to claim deduction under sections 80-J and 80-HH of the Income Tax Act. This Court observing that there was an over-emphasis on the notification in question ignored the legal effect and impact of the earlier decisions. It is observed that the essential question that was required to be considered was whether when normal and natural latex is converted into preserved latex by centrifuging process any manufacturing process is involved or a new commodity is produced. This Court considered this finding as really essential and vital and found that in the instant case, a definite finding was necessary to be recorded that by manufacture or production whether a new and a different commodity came into existence. This Court also observed that this test to ascertain and find out factually not having been adverted to or focused in the proper perspective remitted the matter by declining to answer the questions referred as reproduced hereinbefore.

It is thereafter the Income-tax Appellate Tribunal by the judgment (Annexure "C") took up the question in the light of the earlier judgment of this Court.

On a detailed consideration of the question, the Tribunal considered the question as to whether centrifuged latex has got different standards and thereby would have to be considered to be totally different from the normal field latex. To illustrate the situation, the Tribunal referred to the standard treatise--Hand book of Natural Rubber Production in India, published by the Rubber Research Institute of India, Rubber Board, Kottayam, and the submissions made by the Departmental Representative in the light of the contents thereof.

In the process, the Tribunal considered the various stages. The Tribunal considered processing into preserved field latex observing the method of preservation by ammonia application. In the process of understanding the situation, the Tribunal also considered the method of preserving latex concentrates, to mean the removal of a substantial quantity of serum from field latex, for the purpose of making latex richer in rubber content. After considering, the Tribunal has considered the process of centrifuging and has explained the real principle of centrifuging in the process. It is observed that the process is basically the same as that of creaming, requiring replacement of gravitational force bringing about separation of rubber particles by a process commonly known as creaming. It is also taken into consideration that the process gets subjected to strong centrifugal force which is in fact several thousand times faster than the normal gravitational force. With emphasis it is observed that the efficiency of this centrifuging process depends on certain important factors such as feed rate, angular velocity of the machine and length of the regulating screws as factors going to make up the ultimate efficiency of the centrifuging process:

The Tribunal then takes up for consideration the stage in the process when the field latex is really centrifuged in the light of the efficiency standard and expectations. It is recorded that the process leaves a small proportion of rubber commonly known as skim latex in the process and there is a method of recovery by spontaneous coagulation. Skimmed rubber is for requirements of high hardness normally used in soling compounds by using skim rubber.

In the process of further analysis and understanding the question, the Tribunal has laid emphasis to certain factors, which are important in the process under the caption "factory design". With regard to this aspect necessary particulars such as requirement of desirable water supply in the process, requirement of the location of the factory at a central place in the estate and there should be roads leading to it from various parts of the estate are emphasised as necessities, together with the need to have latex and skim storage tanks of mild steel or concrete. Water and power requirements have also been taken into consideration. The Tribunal has been particular enough to note down the machines which are require to be used in typical centrifuging plants. The machines referred to are such as tanker, field latex storage tanks, centrifuging machines, concentrate storage tanks, drum filling, etc., in paragraph 5 of the order of the Tribunal.

After referring to the entire requirements to describe the process, it is observed that centrifuged latex is produced by subjecting normal field latex collected from rubber plantations to centrifugal forces. For that purpose, it is required' to pass through the latex centrifuging machine, getting separated into two layers, the first containing 60 to 62 per cent. rubber content and the other only containing 5 to 10 per cent. rubber content. The first one is known as centrifugally concentrated latex or in common parlance simply centrifuged latex, the other one known as skim latex. The one is different from the other in many respects, apart from the ranges in regard thereto and these aspects are also specified by the Tribunal in necessary details.

To emphasis the difference between the two it is observed that normal field latex cannot be used under certain products requiring high quality of rubber. Such products are also specified by the Tribunal emphasising in regard thereto that the ideal raw material for them is centrifugally concentrated latex.

In this manner, after analysing the entire process, the Tribunal records that although the centrifuged latex and the normal field latex on the other containing the same hydrocarbon, there is a lot of difference in their physical nature. It is observed that qualitative changes distinguish the centrifuged latex wholly from the normal latex. Reference is also made to the properties highlighted in the context by the Rubber Board to show the distinction between centrifuged latex and the normal field latex. It is emphasised that the natural field rubber is not possible to be used straightaway for manufacture and it is the process known as centrifuging process ultimately in the production of an intermediary product as centrifuged latex. What is common is the latex part thereof, however, making the two distinct and separate from each other. It is emphasised that the chemical changes which go to make the natural field latex a marketable intermediary product known as centrifuged latex is a process by itself.

After seeing the factual position and distinctly recording the required findings in regard thereto the Tribunal proceeds to consider the legal position and in the process refers to the reported decisions of CIT v. Marwell See Foods (1987) 166 ITR 624 (Ker); CIT v. Poyilkkada Fisheries (P.) Ltd: (1992) 197 ITR 85 (Ker); and Ujagar Prints v. Union of India (1989) 179 ITR 317 (SC) in the context. This was to conclude that by the process of centrifuging a different commodity that is capable of being put to a totally different use from the natural latex emerges and the process has to be described as a process of manufacture or alternatively as a process of production. Consequently, the Tribunal held that the assessee is engaged in the manufacture or production of an article or thing and thereby becomes entitled to deduction under sections 80-J and 80-HH of the Income Tax Act, 1961. The applications of the Department under section 256(1) of the Income Tax Act, 1961, for reference to this Court are rejected by the impugned order, dated June 22, 1994, by the Income-tax Appellate Tribunal holding that by the process of centrifuging a different commodity that is capable of being put to a total use as that from the natural latex emerges and following the decision of the Supreme Court Ujagar Prints case (1989) 179 ITR 317, the process has to be considered to have resulted in manufacture or production. With this reasoning the applications of the Department are rejected.

Considering the careful, cautious and detailed discussion of the factual situation referred to above with necessary details, it will have to be held that the Tribunal has recorded conclusive findings on the material placed on record and detailed submissions in regard thereto, which was as a result of an earlier orders of this Court passed specifically for the said purpose, in all respects of the situation, we will have to proceed further on the basis of this factual situation. In this proceeding under section 256(2) of the Income Tax Act, 1961, the factual situation would be that there is a process of centrifuging as a result of which a different commodity capable of being put to a totally different use emerges and this centrifuged latex becomes a necessary product for industries manufacturing surgical gloves, condoms and articles referred to in the process. We will also have to assume that centrifuged latex gets a distinct market of its own unlike the natural latex which has no market by reason of its not being a product that can be used for further process, unless it is processed further as discussed hereinbefore.

To consider the situation, we will have to consider three decisions of the Supreme Court Empire Industries Ltd. v. Union of India (1986) 162 ITR 846; Ujagar Prints v. Union of India (1989) 179 ITR 317; and CIT v. N.C. Budharaja & Co. (1993) 204 ITR 412 answering what is needed.

In fact the question gets a direct answer in the very first case of Empire Industries Ltd. (1986) 162 ITR 846, where the Supreme Court had an occasion to consider the judgment of the Gujarat High Court in Vijay Textile v. Union of India (1979) 4 ELT(J) 181 together with the Central Ordinance No. 12 of 1979, later replaced by the Central Excises and Salt and Additional Duties of Excise Amendment Act, 1980. The petitioner-company was an independent processing unit engaged in job activities of dyeing, printing and finishing of man-made/cotton fabrics. The factual peculiarities show that the fabrics received for processing were in a fully manufactured and saleable condition by themselves, which were known in the context of their commercial description as "grey fabrics". They were also commonly known as unprocessed fabrics. As such grey fabrics had been cleared by the manufacturer after payment of the excise duty and in fact, the petitioner did not carry out any spinning or weaving of the fabrics because the machinery could only be used for the process of dyeing, printing, etc. The question was as to whether this could be understood process of dyeing, printing and finishing as manufacture under section 2(f) of the Central Excises and Salt Act sought to be amended by the Amendment Act referred to above. In regard to this, it is observed that the word "manufacture" as known in section 2(f) of the Act is defined as including any process incidental or ancillary to the completion of a manufactured product. Earlier decisions are also taken into consideration in the process of understanding the inter relationship of meaning of manufacture and production inter se. It is taken into consideration in the process of reasoning that there are several criteria for determining whether a commodity is consumed in the manufacture of another, and the generally prevalent test is whether the article produced is regarded in the trade, by those who deal with it, as distinct in identity from the commodity involved, in its ultimate manufacture. It is taken into consideration that commonly manufacture should be considered as the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing vary from one case to another and there may be several stages of processing and perhaps a different processing at each stage. Even then, although as a result of the degrees of-processing, a change is perceptible, it requires to be regarded that even in the process the original identity cannot be said to have been Lost. At the same time, a taxable event has to be understood. The moment there is a transformation into a new commodity commercially known as distinct and separate commodity having its own character, use and name, whether it will be the result of one process or several processes, a situation is required to be appreciated that it is manufacture and production in the relevant context. It is also considered that an etymological approach to understand the process of manufacture, doubtless covering the transformation if properly construed. It is observed that the question as to whether actually there is manufacture or not would ultimately receive an answer with a commercial outlook alone in contradistinction with other aspects.

It would be seen and that too on a careful reading of the subsequent Constitution Bench decision of the Supreme Court in Ujagar Prints' case (1989) 179 ITR 317 that the judgment of the Gujarat High Court in Vijay Textile's case (1979) 4 ELT (J) 181 created certain situations, making out a case for the Constitution Bench to consider the question in the context.

In fact at page 336 of the report, it is so observed that in fact, when the judgment in Empire Industries' case (1986) 162 ITR 846 (SC) has decided the question, the Constitution Bench thought that it should examine the submissions on the point as the matter is referred to a larger Bench. It is to be noted, as emphasised even earlier that

the question is concluded by the pronouncement in Empire Industries' case (1986) 162 ITR 846 (SC) and is sought to be reagitated before the Constitution Bench.

Independently, therefore, the Constitution Bench has taken up for consideration and as the declaration of law in regard thereto has observed that the prevalent and generally accepted test to ascertain whether there is "manufacture" is to find out whether a change or the series of changes brought about by the application processes take the commodity to the point, where, commercially, it can no longer be regarded as the original commodity, but is, instead recognised as a distinct and new article that has emerged as a result of the processes. It is observed that the principles are clear, but difficulties arise in their application to individual cases. A caution [s also floating on record that there might be borderline cases where either conclusion with equal justification may be reached and, therefore, insistence on any sharp and intrinsic distinction between "processing" and "manufacture" would result in blurring the vision in the context of missing the real emphasis on commerciality of the intermediary product.

Thus, it would be clear that it is the mandate of the Constitution Bench that it is the emergence of a product commercially different even in the process leading to the ultimate product that has to be understood as a crucial test, whether it is in regard to the levy of excise, whether it is in regard to the tax event concerned or whether it is in the nature of a claim for deduction as a result thereof. It is observed that, if, as in Empire Industries case (1986) 162 ITR 846 (SC), undergoing various processes what emerges is a commercially different commodity with its own price structure, custom and other commercial incidents it would be partaking of the characteristics of manufacture, including incidental or ancillary processes in the direction of the final product.

Even in the third decision of the Supreme Court in the case of N.C. Budharaja & Co. (1993) 204 ITR 412, the contention that was raised was whether the construction of a dam by the firm of contractors, the assessees therein, could be considered as manufacture or production also in regard to a similar claim for deduction. The same principles, without any deviation in regard thereto are applied to find out whether the construction of a dam by a contractor would have to be understood as manufacture or production in the context.

It is observed in the context of considering the relationship between. the word "manufacture" and the word "production", the word "production" has a wider connotation than the word "manufacture". Illustratively, it is observed that every manufacture can be characterised as production but not vice versa. To appreciate the discussion, these words are understood in the process of logical relationship of the genus and species inter se. In fact, N.C. Budharaja & Co.'s case (1993) 204 ITR 412 (SC) is on regard to the approach of interpretation to declare that the principle of adopting a liberal interpretation which advances the purpose and object of a beneficial provision cannot be carried to the extent of doing violence to the plain and simple language used in the enactment and it is further observed that it would not be reasonable and permissible to rewrite the section or substitute words of its own for the actual words employed by the Legislature in the name of giving effect to the supposed underlying object. This was in the process of understanding the contention as to whether the construction of a dam could be understood as manufacture or production as is required in the context.

Going through the said decision, it is seen as to whether the word undertaken by the assessee as a contractor for the construction of a dam could be characterised as an industrial undertaking s without any record or expression of any opinion in regard thereto. Learned senior counsel for the Department strenuously urged that ultimately it will have to be understood as to whether the product which is in the process would still lose characteristic as an agricultural product in the context. In other words, learned counsel submitted that natural field latex getting the nomenclature as a result of the process of centrifuging that would be known as centrifuging latex would still continue to share all characteristics of an agricultural product and in that context further contended that if even the process of centrifuging would not change the characteristic of latex, it would not then be difficult to argue as a process that the deductions sought to be claimed under section 80-J or under section 80-HH of the Act, could not even be thought to be granted if centrifuged latex continues to be known as an agricultural product. In fact placing reliance on the two decisions of this Court, learned counsel submitted that what is required to be seen is the way in which even the processed article is known and if it is known by the same nomenclature there would be no question of any deduction.

Reliance is placed on the decision of this Court in CIT v. Woodland Estates Ltd. (1965) 58 ITR 612 (Ker). The matter related to the sale of latex after its conversion into what is known as sole crepe and the question was whether the income derived therefrom would be agricultural income. It is seen after going through the judgment that the process of conversion of ordinarily latex into sole crepe was a process ordinary employed by a cultivator to render the produce raised fit to be taken to market. It has to be noted that this Court felt the necessity of a fuller investigation and a caution was felt necessary that the decision should not form judicial crescent. The judgment is so reported under the factual peculiarities. Learned counsel laid emphasis to convey to us that there are several grades of rubber known to the rubber manufacturers and all are known to be agricultural products in the context. In fact, it is pointed out from the said judgment that the sole crepe is understood to be a mere variety of crepe rubber and not a manufactured article: In fact, the question that was required to be answered in Woodland Estates' case (1965) 58 ITR 612 (Ker) was whether the process of conversion of latex into sole crepe is a process employed by the cultivator of rubber to make the produce marketable and on the basis thereof on the assumption, it is observed that even though the process makes it fit for marketing the rubber is still a produce from land. Reliance is placed on the earlier decisions.

In our judgment the position is neatly covered by the decision of the Constitution Bench in the Ujagar Prints' case (1989) 1 79 ITR 317 (SC) laying emphasis on the commerciality as the determination factor for the purpose of a claim for deduction in the context. In fact the Constitution Bench has declared the law as to what is to be understood as manufacture and production whether it is in the context of levy of tax, grant of deduction or even otherwise. The Constitution Bench itself has observed that the problem is of application. It is not possible to consider the decisions cited for the above reasons. Learned counsel placed reliance on yet another decision of this Court in Meenachil Rubber Marketing and Processing Cooperative Society Ltd. v. CIT (1992) 193 ITR 108 (Ker). It must be stated that they have gone through the entire judgment anxiously to find out whether the decision of the Constitution Bench to Ujagar Prints Union of India (1989) 179 ITR 317 (SC) was present and presented far consideration. This is in view of the position that if there is a judgment of the Constitution Bench it would not be possible for us to think otherwise in the situation. Meenachil Rubber Marketing's case (1992) 193 1TR 108. (Ker) was of the cooperative society as the assessee engaged in marketing of agricultural produce and peculiarly a society purchasing raw latex from its members for the purpose of processing leading to the emergence of centrifugal latex as a result thereof. The societies also claimed exemption under section P-n-P of the Income Tax Act, 1961, which was urged and considered as art aspect to a situation of vital national activity in the interest of rural economy. The, Court thought that the term marketing has to be construed in a manner, which would achieve this benevolent purpose of exemption rather than applying the settled rules of construction. In spite of this situation, the indication pointed in 1Jj agar Prints' case (1989) 179 ITR 317 (SC), does not appear to have been laced for consideration in any manner as is crystalised in Ujagar Prints' case (1989) 179 ITR 317 (SC) It is observed that the assessee purchased the raw latex from its members and processing made by the assessee by the centrifugal method was only to preserve the latex so as to enable it to effect a proper sale. Apart from the ever-binding legal effect of the Constitutional Bench observation leaving the situation only to be applied to the factual matrix before us, in our judgment it would be more than difficult for us, in the light of the material on record as discussed above with regard to the process, that the centrifugal method is only to preserve latex so as to enable it to effect a proper sale. On the basis of the factual material on record it is not possible to accept even the factual conclusions except stating that the factual conclusions would have to be understood only in the context of the factual matrix before the Court then. Learned senior counsel wanted us to refer to the decision in Tungabhadra Industries Ltd. v. CTO (1960) 11 STC 827 (SC) again an earlier decision of the Constitution Bench. It related to the question as to whether hydrogenated groundnut oil (commonly called Vanaspati) would have been understood as groundnut oil within the meaning of rule 18(2) of the Madras General Sales Tax (Turnover and Assessment) Rules, 1939. This is not the question before us and the decision cited does not provide any answer, which is provided by the subsequent Constitution Bench referred to above. In this context, it is necessary to specify that even in Ujagar Prints' case (1989) 179 ITR 317 (SC) this decision is taken care of at page 338. The result of our discussion is that there is no ground to interfere in the decision of the Tribunal. Three original petitions stand dismissed. Order accordingly.

M.B.A./1350/FCOrder accordingly.